Financial Executives Expect Increased Reporting Pressures & Costs Owing To New Accounting And Tax Rules In 2006

Kristi Grgeta
December 3, 2007 — 1,318 views  
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Public and private companies of all sizes expect to face a heavier burden in reporting their tax liabilities, both to the IRS and to their shareholders, according to a Grant Thornton LLP survey of senior financial executives. Significant changes aimed at increasing transparency and disclosure are seen by these executives as being at the heart of that increased burden.

One such change is the Internal Revenue Service's new Schedule M-3 requirements. 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.

In another change, the Financial Accounting Standards Board (FASB) is expected to soon issue a new interpretation under Statement of Financial Accounting Standards No. 109, which pertains to the financial statement recognition and measurement of tax benefits arising from uncertain tax positions. In issuing the original Exposure Draft, the FASB acknowledged that the new interpretation may increase the corporate costs of accounting for income taxes. Although the final interpretation hasn't been issued and will not be effective until January 1, 2007 for a calendar year company, more than three out of five companies (63 percent) 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.

"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," notes Dean Jorgensen, National Managing Partner of Grant Thornton's National Tax Office. "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."

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, more than one-quarter (26 percent) of companies are changing their equity compensation arrangements.

About The Survey
Commissioned by Grant Thornton LLP, the survey was conducted during February and March 2006, with responses from 122 CFOs and senior comptrollers at public and private companies with revenues ranging from less than $50 million to more than $2 billion.

About Grant Thornton
Grant Thornton LLP is the U.S. member firm of Grant Thornton International, one of the six global accounting, tax and business advisory organizations. Through member firms in 112 countries, including 50 offices in the United States, the partners and employees of Grant Thornton member firms provide personalized attention and the highest quality service to public and private clients around the globe. Visit Grant Thornton LLP at www.GrantThornton.com.

Kristi Grgeta

Grant Thornton LLP