FASB's Plan Could Mean ‘Major Hit’ to Earnings

Update: 7-28-04 - second paragraph: Multinational corporations may be looking at a big increase in reported liabilities and a deep cut to profits if a change in deferred-tax accounting is adopted by the Financial Accounting Standards Board.

The FASB staff is expected on Tuesday to recommend further study of the feasibility of requiring companies to book a liability for taxes payable on profits earned and held overseas, the Wall Street Journal reported. Increasing companies’ reserves for tax liabilities, which would be a result of the requirement, would chip away at earnings. The Financial Accounting Standards Board on Wednesday voted narrowly to move forward with an examination of whether it is practical to require companies to book a liability for taxes they potentially owe on profits earned and held overseas.

Currently, U.S. tax law says earnings of a foreign subsidiary that are reinvested abroad are not taxed, unless the profits are reinvested as dividends or realized by the U.S. parent company when it sells the subsidiary, according to the Journal. Companies also are not required to hold reserves for "unremitted" foreign earnings or profits headed for permanent reinvestment abroad.

Robert Willens, a tax and accounting expert at Lehman Brothers Inc., said such a rule change would result in "a major hit to earnings." That’s because most U.S. companies with operations abroad set up a deferred-tax account for profits earned in foreign counties unless they have specific plans to bring the money back to the U.S.

Analysts at Bear Stearns & Co. have reported that companies in the Standard & Poor’s 500-stock index reported $518 billion in "unrepatriated" foreign profits as of the end of 2003.

The FASB proposal was brought about by an effort to harmonize U.S. rules with international standards. At the same time, Congress is considering a bill that would allow U.S. companies with foreign operations to bring profits back to the U.S. at a tax rate of 5.25 percent, versus the current 35 percent. Even so, some multinationals say they would still not be inclined to bring home profits.

The FASB proposal is not receiving much support so far. Figuring the amount of tax payable on earnings held in different countries with different tax laws would be difficult, multinationals say. "There is a fair amount of opposition to the change," said FASB member Michael Crooch.

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