In-house company accountants and lawyers responsible for implementing the accounting rules for income taxes that form a part of the company's financial statements support the SEC staff's plan to incorporate IFRS into the US financial reporting system. In a letter to the SEC, the Tax Executives Institute said that the staff outlined a pragmatic approach, based on both endorsement and convergence, which is consistent with the broad goal of using a single set of high quality accounting standards for financial reporting purposes, which will allow a comparison of financial statements of U.S. companies with that of non-U.S. companies. In the view of the tax executives, consistency in global financial reporting standards is critical to creating a single set of financial statements, and all efforts should be undertaken to achieve that objective. Tax professionals deal with accounting principles in two significant ways. First, FASB accounting standards undergird the books and records that serve as the starting point for US tax compliance. Second, tax executives are responsible for the implementation of the specific rules for accounting for income taxes that form a part of the financial statements and required disclosures. The Institute supports the SEC staff framework for three main reasons. First, U.S. GAAP is retained as the statutory basis for financial reporting and is the vehicle for incorporating IFRS. By retaining U.S. GAAP as the framework within which IFRS will be integrated, reasoned the tax executives, the need to modify numerous tax regulations and agreements with tax authorities referencing U.S. GAAP will be reduced. Second, the FASB is retained as the U.S. standard setter to facilitate the incorporation of IFRS into U.S. GAAP. Third, implementation is to be effected on a gradual basis, which will temper the significant resource, education, and implementation challenges attending a wide-ranging regulatory shift. Given the FASB's participation in the IASB's standard-setting process, the FASB should be in a position to readily endorse, and integrate into U.S. GAAP the vast majority of the IASB's modifications to IFRS. There may be instances, however, in which the FASB decides to modify or not follow IFRS. TEI concurs with the Staff Paper that those situations should be rare, and that any variations from IFRS should be carefully and deliberately scrutinized through a transparent and comprehensive process Incorporating standards that are not currently the subject of existing projects or other IASB agenda items, so-called Category 3 standards, should be accorded particular attention. Whether these standards are incorporated simultaneously or more gradually into U.S. GAAP, TEI urged the use of a clear timeline for adopting Category 3 standards in order to allow companies to plan ahead for the implementation. Allowing adequate lead time becomes especially critical if a determination is made that Category 3 IFRSs would be incorporated into U.S. GAAP simultaneously rather than gradually. Although the Work Plan does not provide an extensive discussion of a potential timeline for incorporation, TEI says that a five-to seven-year timeline is realistic In an earlier letter on the SEC's roadmap to IFRS, the Institute said that, given the historical linkage between financial information prepared in accordance with U.S. GAAP and the calculation of U.S. federal tax income, it is also essential that the taxing authorities charged with developing and implementing transitions from U.S. GAAP to IFRS be central players in this process The move toward a single set of accounting rules implicates the rights and responsibilities of many stakeholders beyond investors and issuers, including tax authorities and regulators, emphasized the Institute, and their views should be considered as the process moves forward. This would include Treasury and the Internal Revenue Service as stakeholders because the U.S. corporate tax base is currently inextricably linked to the calculation of income under U.S. GAAP. State tax systems will similarly be affected because the calculation of state taxable income generally begins with federal taxable income. Thus, unless the views of federal and state tax authorities are appropriately considered, U.S. GAAP may remain important for U.S. tax purposes, thereby diminishing benefits promised from the adoption of global standards. When calculating taxable income for U.S. federal tax purposes, companies are bound by the methods of accounting that they have chosen. If taxpayers wish to change those methods of accounting, they must first request permission from the IRS. For example, if a corporation elects to use the LIFO method of accounting for inventory on its corporate income tax return but later desires to change to FIFO, that corporation must continue to use LIFO until it requests and receives permission from the IRS to make the change. Most U.S. corporations have historically begun their calculations of U.S. federal taxable income using financial information prepared in accordance with U.S. GAAP. Consequently, in the view of the Institute, those companies have established methods of accounting for tax purposes that align in most instances with U.S. GAAP. According to the tax executives, a change from U.S. GAAP to IFRS would constitute a change to those methods of accounting for each item of income or expense whose treatment differs between the two financial reporting systems. Corporate taxpayers would need to file a separate request with the IRS to make each change. Without IRS permission, existing law would require taxpayers to continue calculating taxable income for U.S. purposes under U.S. GAAP, which is the method of accounting" currently used, while simultaneously keeping their books according to IFRS for purposes of financial reporting.
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