Merger mania fueled by accounting rules that can make a bad deal look good
Rather than sit back and cheer the next big deal, investors would do better to dust off their green eyeshades. That’s because in addition to the operational risks of mergers, “loosey-goosey” acquisition accounting rules allow acquirers to make their purchases look like winners – even if they’re not, Forbes staff writer Daniel Fisher noted.
“In all the areas of accounting this is the one that gives management teams the most discretion,” said Matt Van Winkle, a former PwC employee who is now research director of Voyant Advisors, a San Diego firm that identifies overvalued companies for short-sellers, according to the article.
Postacquisition adjustments allowed by US Generally Accepted Accounting Principles (GAAP) enable acquirers to rebook revenue the acquired company has already reported. Such tricks lead Wall Street sell-side analysts to consider some big acquirers cheap, when, if “you look at the actual cash flow they’re generating, they look very expensive,” Van Winkle said, according to the article.
“Moreover, non-GAAP metrics (additional presentations in earnings reports) can lull investors into thinking each purchase is making the parent more valuable by, for example, stripping out integration cost – a major and real cost of growth through acquisition,” Fisher wrote.
GOP floats contempt charge for IRS chief
Republican lawmakers on the House Oversight Committee broached the idea of holding IRS Commissioner John Koskinen in contempt yesterday, accusing the agency of stonewalling their requests for e-mails and other documents that would help their investigation into the IRS targeting controversy, Bernie Becker of The Hillwrote.
Oversight Committee Chairman Darrell Issa (R-CA) called Koskinen’s efforts at complying with the committee’s requests “dismal by my standard,” as Republicans pressed the IRS chief for more than four years worth of e-mails from Lois Lerner, the former agency official at the center of the controversy.
Koskinen eventually agreed to comply with the request, but insisted the agency has already handed over all the e-mails relevant to congressional investigations.
“What part of all don’t you and the IRS understand?” Representative Jim Jordan (R-OH) asked Koskinen about Lerner’s e-mails, according to the article. “We don’t care what you think is irrelevant.”
Testifying for the first time before the Oversight Committee as IRS chief, Koskinen brushed aside the mentions of contempt, and insisted that other congressional committees had found the Lerner e-mail trove sufficient.
Asked by Representative Mark Meadows (R-NC) when Congress should hold him and the IRS in contempt, Koskinen retorted: “I think the timeline is when you think you can actually sustain that in court,” according to the article.
Becker also reported yesterday that the House counsel’s office has ruled that Republicans can move to hold Lerner in contempt, according to a memo released by Issa’s office on Wednesday. Click here to read more.
Taxes won’t kill Bitcoin, but tax reporting might
From a business perspective, the most important aspect of Tuesday’s IRS guidance on Bitcoin may be buried in the plumbing, Victor Fleischer, a law professor at the University of San Diego, wrote in a blog for the New York Times on March 26.
Payments made using virtual currency are now clearly subject to the same information and backup withholding requirements as other property transactions, he noted.
“Suppose you are self-employed, and you hire a virtual assistant in the Philippines to help manage your administrative tasks, and that person accepts payment in Bitcoin. Under the IRS guidance, you have to obtain a taxpayer identification number from the assistant, just as if you were paying the person in dollars,” Fleischer wrote.
“To the extent that Bitcoin’s success depends on anonymity and on avoiding the burden of government regulation, this IRS guidance is an unwelcome blow,” he continued. “Bitcoin users are not accustomed to telling their counterparties who they are, let alone what their Social Security number is.”
Democratic tax credit bill aids poor, cuts corporate breaks
Senate Budget Committee Chairwoman Patty Murray (D-WA) introduced legislation yesterday that would expand the Earned Income Tax Credit (EITC) for the working poor as requested by President Obama, proposing to pay for it by closing two tax breaks that aid corporations, Reutersreported.
Murray's bill, known as the 21st Century Worker Tax Cut Act, would increase the maximum EITC for childless workers to about $1,400 from $487 currently and reduce the childless worker eligibility age for the credit from 25 to 21, according to the article.
It also would create a new tax deduction for low-to-middle income families with two incomes and at least one child, allowing a 20 percent deduction on the secondary earner's income. This would also help increase EITC benefits by reducing earned income for purposes of calculating the credit.
The expanded low-income tax credits in Murray's bill would cost $144.9 billion over 10 years, which would be paid for by closing widely criticized tax breaks for corporations and executives.
These include subjecting stock options paid to executives to a $1 million annual cash compensation limit per employee for corporate tax deductions, as well as making changes aimed at deterring companies from shifting US profits to offshore tax haven countries such as Bermuda and the Cayman Islands.
Student loan debt deal comes with tax catch
Millions of taxpayers struggling with student loan debt are being pitched with what may seem like a dream come true this tax season: lower monthly payments and a chance to see a chunk of their debt disappear. But there’s a catch, according to Kelsey Snell of Politico – the potential for a huge tax bill down the road.
The departments of Treasury and Education are using tax time to promote the opportunity for a borrower to have his or her entire debt repaid after 20 or 25 years, Snell wrote yesterday. The agencies are partnering with TurboTax to advertise the deal.
However, consumer advocates worry that the tax-time pairing fails to fully disclose that the debt forgiveness counts as income and will likely lead to a bill from the IRS, the article stated. Another criticism of the program is that because there are limits on the amount of repayment, it encourages never-ending tuition hikes. And the tax bill is based on the original loan amount.
One example, calculated by the New America Foundation, shows a veterinarian graduating with $190,000 in debt, eventually paying off just $131,000 of that and winding up with a whopping $60,000 tax bill at the end of it all.
“Renting money has a cost,” said Jason Delisle, an education policy expert at New America, according to the article. “If you’re renting it from the federal government, it still has a cost.”
Accounting for startups: Why cash is king
Ryan Buckley, cofounder and COO of Scripted.com, wrote an article yesterday for Huffington Post on why every entrepreneur, at some point, should learn basic accounting.
“When you first start a business, it's easy. You make a website, you market it, and then you wait. You might eventually put up advertising or start charging visitors to use your website. The checks clear, the credit cards settle, and then you have cash. You buy stuff for your business, and then you have expenses. In the case of normal mom-and-pop corner shops, you watch cash closely so there's always enough to cover expenses. Around Silicon Valley, unprofitability is the name of the game, but let's ignore that for now,” he wrote.
“The thing you need to understand is exactly what ‘revenue’ means,” Buckley continued. “It's a word that gets tossed around a lot, but for accountants, it has a very specific definition. Revenue can only be reported when it is earned. Earned means a buyer accepted your service or product, and you've invoiced for it. If you invoice or collect payment in advance of delivery, that's called ‘deferred revenue,’ but we'll save that for another article.”
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- Last-minute small business tax tips for procrastinators (Bloomberg Businessweek)
- New analysis of Senator Baucus’s tax reform plan (Tax Foundation)
- Enough with the tax extenders (US News and World Report)
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- No accounting: The state’s tax board is free of tax professionals (SF Weekly)
- Activist investors often leak their plans to a favored few (Wall Street Journal)
- US banks enjoy ‘too-big-to-fail’ advantage: Fed study (Reuters)
- Dodd-Frank army skips to K Street (The Hill)