Is the application of ASC 740-10 akin to being Partially Pregnant?
Donald Trump and Bernie Sanders are challenging the way national politics is done in America. May I challenge just a small piece of the way business is done in America.
ASC 740-10 (formerly FIN 48) may be well-intentioned, but if the logic is sound, why is the application incomplete?
For those of you who don’t hold your breath waiting for the next accounting pronouncement, ASC 740-10 is the provision that requires companies to book a liability for income taxes based on the assumption that the government knows everything that the company knows about the company’s activities.
Sounds noble, right?
I’m not so sure. Here’s why… by example.
We have a client whose management team doesn’t believe they owe an amount of tax to a foreign government. We disagree, suggesting the government will challenge the company’s position. The client recognizes that their financial statement auditors will be the short-term arbiter.
How does this play out? Most likely, the client and the auditor will split the baby and reflect in the audited financial statements an agreed upon foreign income tax liability somewhere in the middle. They will document that they fully comply with ASC 740-10.
Two years from now, the foreign government will examine the client’s position and most likely propose an assessment greater than the recorded liability. The client will engage counsel, either an accounting firm or a law firm, to defend their position. After significant effort, a settlement will be reached. The company will likely owe tax somewhere between the originally accrued liability and the amount assessed by the government.
But, the professional fees paid to the accounting firm and/or the law firm may be significant. My question is simple. If the company had to estimate and accrue the tax, why weren’t they required to estimate and accrue the professional fees, which in some cases may dwarf the ultimate tax settlement?
Could politics be the answer? Are the bodies overseeing the accounting rules impacted in any way by the firms providing the consulting? Would there be a greater outcry by American industry if they had to accrue the professional fees along with the tax liability? If the objective is to properly report the liability, the tax and all reasonably determined related costs should be accrued.