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.

You may like these other stories...

It's not a reality—yet—but accounting software is poised to eliminate accountants. We are at a tipping point for many similar professions: online education replacing professors, legal software replacing...
Inversions: Loophole Is the ProblemJacob J. Lew, the U.S. Treasury Secretary, published an opinion piece in the Wall Street Journal that "the system has become full of inefficiencies and special-interest loopholes. That...
School tax breaks get House support as Democrats objectRichard Rubin of Bloomberg reported that the House of Representatives on Thursday voted to expand and simplify tax breaks for education as Republicans continue to pass...

Upcoming CPE Webinars

Jul 31
In this session Excel expert David Ringstrom helps beginners get up to speed in Microsoft Excel. However, even experienced Excel users will learn some new tricks, particularly when David discusses under-utilized aspects of Excel.
Aug 5
This webcast will focus on accounting and disclosure policies for various types of consolidations and business combinations.
Aug 20
In this session we'll review best practices for how to generate interest in your firm’s services.
Aug 21
Meet budgets and client expectations using project management skills geared toward the unique challenges faced by CPAs. Kristen Rampe will share how knowing the keys to structuring and executing a successful project can make the difference between success and repeated failures.