Tax reporting vs. financial reporting
BY EDWARD R. JENKINS JR.
No, that’s not a typo. I am referring to the
“tax GAAP,” an increasing difficulty in establishing and maintaining best practices regarding tax accruals arising from the headlong
collision of taxation and financial reporting.
The pace of change in tax law and financial
reporting has left the business of tax accruals
a mess. Some companies try to migrate to
software that integrates with general ledger
systems and tax returns, but software vendors
are struggling with the pace of change too.
Some vendors have added financial reporting
to remain competitive, but it certainly adds to
their challenges. Many companies continue
to rely on tax provision templates and general
ledger downloads, but those “offline” processes are difficult to keep current, and even
more difficult to audit. Throw in the constant
changes in state income and franchise taxes,
and the goal of a stable system seems like a
Let’s face it: Some companies continue to
struggle with creating FASB Accounting Standards Codification 740 tax provisions. The
reason is not rocket science: It is because of
the dynamic status of tax law, the ever-chang-ing nature of reporting and auditing, and the
constantly shifting business environment and
economy. It’s tough to set up best practices
when the system is constantly in flux.
Beware the tax GAAP.
Frequent changes in reporting rules have created chaos
The pace of federal legislation that affects taxation has been breathtaking over the past few
years. The states have been busy too, with a
plethora of legislation and tax-framing court
cases. Don’t forget foreign tax laws if your clients or company have foreign investments.
Numerous regulations also have been issued
(or sometimes worse, not issued) that imple-
Edward R. Jenkins Jr., CPA, is managing
member of Jenkins & Co. LLC in Spring
Grove, Pa., an instructor of business at
Pennsylvania State University — York, and
a member of the Pennsylvania CPA Journal
Editorial Board. Reach him at erj2@psu.
edu. Reprinted with permission from the
Pennsylvania CPA Journal, a publication of
the Pennsylvania Institute of CPAs.
ment and interpret legislation. Forms have
been created with their related instructions;
case law is still evolving with respect to earlier
laws; and there is even talk of repealing laws
When organizations are operating with
lean staffing to reflect the challenging economy, accommodating that pace of change is
nearly impossible. In addition to the general
tumult of the tax environment, a few developments deserve special attention.
Consider Internal Revenue Service access
to tax provision work papers. The IRS has always had access to the tax reconciliation work
papers that reconcile the differences between
balances in the financial statements and
those on the tax return. The IRS had maintained a policy of restraint with respect to
tax accrual papers, except in certain circumstances. That policy of restraint seemingly
has changed. In IRS Announcement 2010-09,
the IRS said that it had the right to compel
the production of taxpayer risk assessments
and reserve amounts, citing United States v.
Arthur Young and a series of cases up to U.S.
v. Textron Inc.
Also consider the migration from the “
realistic possibility” standard to the “more
likely than not” standard for recording tax
positions. American Institute of CPAs Statement of Standards of Tax Services No. 1 previously relied on the one-in-three likelihood
embodied in the realistic-possibility standard. For tax return purposes, IRC Section
6662(d)( 2)(B) used a “substantial authority”
standard that roughly correlated to 40 percent
likely to be sustained. FASB Interpretation
No. 48 initiated the “more likely than not”
(greater than 50 percent) likelihood of being
sustained for financial reporting purposes.
That standard was low-hanging fruit for Congress, so IRC Section 6694 was modified to
uphold the more-likely-than-not standard
(Small Business and Work Opportunity Tax
Act of 2007), and then back to the substantial authority standard (Tax Extenders and
Alternative Minimum Tax Relief Act of 2008)
to harmonize the tax preparer standard with
the taxpayer standard.
If you combine a road map like that im-
posed by FIN 48/ASC 740 with legal precedent
established under case law, the inevitable
happens — Schedule UTP. IRS Announce-
ment 2010-9 stated that the IRS intended
to continue its restraint toward tax accrual
work papers, but it indicated a requirement to
disclose uncertain tax positions on Schedule
U TP. Once the IRS imposes these disclosures,
states surely will follow suit, perhaps with
some specific states requiring documenta-
tion on positions.
GASB UPDATES ‘BLENDED’
NORWALK, CONN. — The Governmental
Accounting Standards Board has issued
revisions to its financial reporting entity
standards to better account for business-type activities at government-run institutions such as state universities.
Statement No. 61, The Financial
Reporting Entity: Omnibus, is designed
to improve reporting for governmental
entities by amending the requirements of
Statements Nos. 14 and 34, which were
issued in 1991 and 1999, respectively.
The new standards aim to improve the
information presented about the financial reporting entity, which comprises a
primary government and related entities
or component units. The amendments
to the criteria for including component
units allow statement users to better assess the accountability of elected officials
by ensuring that the reporting entity
includes only organizations for which the
officials are financially accountable or that
the government determines would be
misleading to exclude.
In addition, the statement amends the
criteria for blending — that is, reporting
component units as if they were part of
the primary government — in certain
circumstances. The amendments to the
criteria for blending will help ensure that
the primary government includes only
those component units that are so intertwined with the primary government that
they are essentially the same as the primary government, and will clarify which
component units have that characteristic.
For primary governments that are busi-ness-type activities reporting in a single
column (for example, a state university),
the new guidance for reporting blended
component units will require condensed
combining information to be included in
the notes to the financial statements.
Lastly, the new requirements for
reporting equity interests in component
units help ensure that the primary government’s statements do not understate
financial position and provide for more
consistent and understandable display of
those equity interests.
Statement 61 is effective for periods
beginning after June 15, 2012.