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Bramwell’s Lunch Beat: Poll Finds Companies Unsure of Rev Rec Rules’ Full Impact

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Nov 25th 2014
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Microsoft sues IRS for details of probe on internal transactions
Dan Levine of Reutersreported that Microsoft sued the IRS on Monday, seeking information about a law firm hired by US tax authorities in a review of how the software company books sales between subsidiaries.

The lawsuit, filed in a District of Columbia federal court, says the IRS entered into a contract this year with Quinn Emanuel Urquhart & Sullivan, which specializes in litigation. The agency is paying Quinn Emanuel more than $2 million in connection with its examination of Microsoft Corp.’s tax returns between 2004 and 2009, the court filing said.

Microsoft’s lawsuit said the IRS had not fulfilled a Freedom of Information request seeking the complete Quinn Emanuel contract and other documents, Levine wrote. “Government agencies, funded by citizens, have an obligation of transparency under the Freedom of Information Act,” Microsoft said in a statement.

Multinational corporations value goods and services moving across international borders from one of their units to another. These cash transfers frequently reduce a corporation’s global tax costs. The IRS has scrutinized technology companies, including Microsoft and Amazon.com Inc., over how they account for such transfer pricing, according to the article.

Survey: Companies still gauging impact of new revenue recognition rules
While 54 percent of companies are familiar with the new revenue recognition standard issued by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) in May, they are still struggling with assessing the full impact of the new guidance, particularly related to its implications for their financial reporting, processes, and systems, according to a new report from PwC and the Financial Executives Research Foundation.

Of the 174 companies that were surveyed for the report, The New Revenue Recognition Standard: Are You Prepared for Change, 87 percent noted they expect to make at least some changes to their internal controls because of the new rules; however, fewer companies expect to make changes to their business models. In addition, 47 percent of respondents expect a material impact to their income statement and/or balance sheet, while 53 percent do not.

The survey responses also indicate that disclosures is the No. 1 area expected to result in the largest increase in operational effort.

“Although the new standard will affect certain industries more than others, all organizations will feel some impact,” Farhad Zaman, PwC deals partner, said in a written statement. “Companies do not know what the implementation journey fully looks like yet in terms of implementation processes, costs, timing, contract reviews, IT and systems, operations, quantification, and reporting. The 2017 effective date for the new revenue recognition standard may seem far off, but those most affected by the change should start preparing now.”

Companies generally have two options to adopt the standard: a full retrospective implementation requiring a recast of comparative periods presented back to 2015, or a modified retrospective implementation, which generally requires the adoption of the standard prospectively on the effective date in 2017.

According to the report, only 29 percent of companies said they would be prepared to implement the full retrospective method by 2017; 25 percent said they would not be prepared. Also, 12 percent of respondents expect to use the full retrospective method, while 12 percent expect to use the modified retrospective method.

Twenty-eight percent of companies said they would be more likely to adopt the full retrospective method if the FASB and the IASB provided one extra year to adopt the standard, while 18 percent said they would give up the modified retrospective method in exchange for an additional year to adopt the standard.

Some companies, including AT&T Inc. and Verizon Communications Inc., have written letters to the FASB asking for a delay in the effective date, saying they don’t have enough time to revamp their systems and processes to put the new rules into effect, according to a recent Wall Street Journalarticle.

The FASB plans to reach out to companies and other parties affected by its new revenue recognition rules and will assess next year whether a delay is warranted.

Zaman said the impact of the new standard on systems, processes, and controls means that companies need to get started on the transition effort well in advance of the effective date, especially if they choose to apply the standard retrospectively. “The time is now for companies to re-evaluate their business processes and systems underlying the revenue cycle,” he added.

The report also found that 77 percent of companies expect to make changes in their IT systems to adopt the standard, while 23 percent said they expect to make no changes.

Casey’s General Stores to revise financials on ethanol accounting
Casey’s General Stores Inc. said it would revise its financial statements dating back to 2012 and pay about $31.5 million in taxes to settle an accounting error tied to an ethanol excise tax, Maria Armental of the Wall Street Journalwrote on Monday.

Officials at the convenience store operator said they discovered during a routine federal tax examination that the excise tax on ethanol had been improperly handled after a federal credit for blending ethanol and gasoline expired on Dec. 31, 2011. Casey’s failed to record the proper federal excise taxes for blended ethanol gallons from Jan. 1, 2012, through July 31. Casey’s, which makes most of its revenue from gasoline sales, voluntarily reported the error, it said.

The company said it has since strengthened its oversight and excise tax accounting controls, centralizing the process under its tax department and adding two reviews by senior members of management, Armental wrote.

Advisory work may cloud audit integrity, PCAOB member says
Kimberly S. Johnson of the Wall Street Journal’s CFO Journalwrote on Monday that the rise of nonaudit services offered by accounting firms could threaten the quality and integrity of independent audits, according to a key member of the Public Company Accounting Oversight Board (PCAOB).

Although the US Securities and Exchange Commission has limits on the kinds of consulting and advisory work audit firms can perform for their clients, that line may be blurring with services such as tax consulting, said Steven Harris, chair of the PCAOB’s investor advisory group.

“Investors are concerned that the firms may not maintain their public watchdog, total independence, and complete fidelity to the public trust responsibilities,” Harris said Monday at the Practising Law Institute’s 12th Annual Directors’ Institute on Corporate Governance in New York, according to the article.

The rise of advisory services is generally considered to have changed the culture and tone at the top of audit firms, Johnson wrote. Revenue from nonaudit services at the Big Four audit firms rose $14 billion to $65 billion between 2009 and 2013. Revenues from audit services rose $3 billion during the same period, Harris said.

However, the PCAOB has no plans to issue guidance on nonaudit practices, Harris said, adding that the matter was beyond the group’s jurisdiction, according to the article.

Tax-break extension plan in Congress is irresponsible, Lew says
US Treasury Secretary Jacob Lew called a potential agreement to revive and extend lapsed tax breaks “fiscally irresponsible,” casting uncertainty over year-end negotiations in Congress, Richard Rubin and Kathleen Hunter of Bloombergwrote on Monday.

Lew was responding to talks between Republicans and Democrats that would make permanent a few of the tax breaks that expired at the end of 2013 and extend others through 2015. Lawmakers are discussing a package that could increase the US budget deficit by more than $400 billion over a decade.

Lawmakers have been trying to reach a deal that includes some permanent extensions of breaks for businesses, such as the research tax credit, along with some for individuals, such as expansions of the child tax credit and earned income tax credit that are backed by the Obama administration, Rubin and Hunter wrote. The precise contours of a deal haven’t been set, and staff members from both parties are negotiating the deal.

“An extender package that makes permanent expiring business provisions without addressing tax credits for working families is the wrong approach, at the expense of middle-class families,” Lew said in a statement on Monday. “Any deal on tax extenders must ensure that the economic benefits are broadly shared.”

A collapse of the bipartisan talks may send both parties to their fallback positions, with House Republicans urging an extension only through 2014 and Senate Democrats seeking an extension through 2015, according to the article.

Stryker weighs tax inversion bid for UK’s Smith & Nephew
Bloombergreported on Monday that Stryker Corp. is examining a bid for $16 billion medical-device manufacturer Smith & Nephew PLC as a standstill period that prevents it from making an offer nears its end, according to sources.

The Kalamazoo, Michigan-based producer of surgical implants is discussing the financing of a deal and its potential antitrust hurdles with advisers, the sources said, asking not to be identified because the discussions are private. Smith & Nephew, based in London, and its advisers are aware of Stryker’s interest, though the US company could still decide against a bid, according to the article by Manuel Baigorri, Matthew Campbell, and Dinesh Nair of Bloomberg.

Stryker is considering structuring the transaction as a so-called tax inversion, allowing it to move its legal address to the lower-tax United Kingdom, sources said. Still, the US firm sees strong strategic reasons to pursue a combination aside from tax advantages, and an inversion wouldn’t be essential to make the deal work.

In May of this year, Stryker made a commitment under UK takeover rules to not pursue a takeover of Smith & Nephew for six months, after the Financial Times reported it was working on a bid. That standstill period expires this week, after which the US firm is free to make offers, according to the Bloomberg article.

Cruz wants tax break for soldiers exposed to Ebola
Ramsey Cox of The Hillwrote on Monday that Sen. Ted Cruz (R-TX) wants tax breaks for US troops fighting the Ebola outbreak in West Africa.

Cruz introduced S. 2965, the Operation United Assistance Tax Exclusion Act, which would extend an existing tax break for soldiers in combat zones to those who undergo a 21-day quarantine.

“Once our armed forces are placed in harm’s way, Congress and the commander in chief have a responsibility to support them and to provide security for the families who remain behind while they face danger,” Cruz said, according to the article. “The morbidity rate of Ebola poses a substantial danger to those who have been sent to combat it and, for the first time, this risk extends beyond the battlefield and directly threatens the safety of their families.”

Toomey: Repeal ‘tax hike’ on the sick
Cox also reported on Monday for The Hill that Sen. Pat Toomey (R-PA) said Obamacare raises taxes on “people battling severe illness.”

“Today, sick taxpayers can deduct fewer medical expenses than just four years ago,” Toomey said, according to the article.

Toomey introduced S. 2962, the Medical Expense Deduction Act, which would allow consumers to deduct medical expenses that exceeded 7.5 percent of their income, Cox wrote. Under Obamacare, that cap was raised to 10 percent.

“Raising this tax on individuals with high medical bills and middle-class families providing long-term care for a dependent disproportionally affects lower- and middle-income people,” Toomey said. “My legislation would repeal this tax hike on struggling families and people battling severe illness.”

IRS releases data on 2011 corporate depreciation
The IRS released the following tax statistics on Tuesday:

2011 Corporation Depreciation Data: A table presenting depreciation and amortization reported by corporations on Form 4562 for tax year 2011 is now available. Data are classified by NAICS industrial sector and include the number of corporate income tax returns claiming depreciation and the respective amounts. The data exclude depreciation amounts reported on Forms 1120-REIT, 1120-RIC, and 1120-S.

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