Financial Reporting; Cost Burdens Expected to Grow with New Accounting & Tax Rules

Public and private companies of all sizes expect to face a heavier burden in reporting their tax liabilities, both to the Internal Revenue Service (IRS) and to their shareholders, according to a Grant Thornton LLP survey of senior financial executives. Executives indicate that at the heart of the increased burden lie significant changes aimed at increasing transparency and disclosure.


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“The new tax rules are creating a greater corporate obligation to methodically determine the amount of tax benefits that can be recognized for financial statement purposes. They also highlight the changed relationship between companies and their auditors,” Dean Jorgensen, National Managing Partner of Grant Thornton’s National Tax office, notes in a prepared statement. “Under the new rules, the auditors will be focused on verifying the numbers and making sure the companies have the proper internal controls in place to support their initial estimates and subsequent changes in such estimates.”

Of the senior financial executives surveyed, more than 40 percent expect the additional Schedule M-3 requirements to significantly or moderately affect the time and expense required to complete their federal tax return. The Schedule M-3 reconciles a company’s financial and tax accounting systems in significantly greater detail than the old schedule M-1.

The new interpretation under Statement of Financial Accounting Standards No. 109, which the Financial Accounting Standards Board (FASB) is not expecting to be effective until January 1, 2007, also increase the corporate costs of accounting for income taxes. SFAS No. 109 pertains to the financial statement recognition and measurement of tax benefits arising from uncertain tax positions. Survey results indicate that 63 percent of companies are already receiving occasional or frequent requests from their outside auditors for more documentation regarding their income tax reporting. Consistent with one of the ancillary objectives of the FASB new rules, the enhanced documentation of each uncertain tax position will presumably mitigate concerns that companies in the past may have used tax reserves to manage earnings.

Additionally, financial accounting changes under FAS123(R) and tax law changes under Section 409A, affect how companies account for stock options and deferred compensation. As a result of these new accounting and tax rules, 26 percent of companies are changing their equity compensation arrangements.

The survey was commissioned by Grant Thornton LLP and conducted during February and March 2006. Responses were received from 122 chief financial officers (CFOs) and senior comptrollers at public and private companies with revenues ranging from less that $50 million, to more than $2 billion.

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