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U.S. GAAP and Related Administrative Requirements for the International Tax Practitioner (Portfolio 6845)

Be a trusted advisor to your clients with Bloomberg BNA Tax Portfolios. In this Portfolio, our expert authors analyze the pertinent U.S. generally accepted accounting principles (GAAP) as is relevant to the international tax practitioner. 

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DESCRIPTION

The U.S. GAAP and Related Administrative Requirements for the International Tax Practitioner Portfolio is intended to assist both U.S. and foreign-based multinational corporations that prepare financial statements in accordance with U.S. accounting principles.

The Portfolio provides an overview of major topics in accounting for income taxes under U.S. GAAP relating to the measurement of income tax expense and the establishment of deferred tax assets and liabilities. The discussion focuses on general rules establishing deferred taxes on basic differences that arise due to differing financial statement and tax accounting rules and specific exceptions to the general rule of comprehensive deferred tax accounting which are available with regard to certain foreign subsidiaries. Attention is also directed to other specific issues common to multinationals such as accounting rules related to mergers and acquisitions, foreign currency remeasurement and translation, accounting for hedges and derivative instruments, and stock option and related compensation issues.


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AUTHORS

Bloomberg BNA Portfolios are written by leading tax professionals who set the standard as leaders in their fields. The U.S. GAAP and Related Administrative Requirements for the International Tax Practitioner Portfolio was authored by the following attorneys.  

FRED F. MURRAY, J.D., CPA

Fred F. Murray, is a Managing Director, Tax Practice Policy and Quality, at Grant Thornton LLP and a member of the firm's accounting for taxes technical team.

His experience includes public law and accounting practice, government service as Deputy Assistant Attorney General in the Tax Division at the Department of Justice and as a Special Counsel to the Chief Counsel for the Internal Revenue Service, where he was involved in drafting of legislation and testimony, legislative investigations, and other Congressional matters, litigation, and in regulations, revenue rulings and other agency guidance. Fred also served as Vice President for Tax Policy at the National Foreign Trade Council and General Counsel and Director of Tax Affairs at the Tax Executives Institute.

He is a member of the US Internal Revenue Service Advisory Council (formerly Commissioner's Advisory Group); former Advisor to the International Tax Working Group of the United States Senate Finance Committee; and a former member, Commissioner's Advisory Council, Department of Taxation and Finance, State of New York. He is a Council Director of the American Bar Association Section of Taxation, and Last Retiring Chair, Administrative Practice Committee, and Chair, Subcommittee on Tax Treaties and Competent Authority Matters, U.S. Activities of Foreigners & Tax Treaties Committee, and member, Foreign Activities of US Taxpayers, Government Relations and Government Submissions Committees of the Section. He is a prior Chair of the Federal Bar Association Tax Section and again its Chair-Elect. He is an elected Fellow of the American College of Tax Counsel, an Elected Member of the American Law Institute, a member of the American Institute of Certified Public Accountants, and a member of the Bloomberg BNA U.S. International Advisory Board.

He serves as an adjunct member of the faculty at Georgetown University Law Center where he teaches courses on international taxation and accounting for income taxes, corporate governance, securities law and other issues for corporate tax advisors. He also lectures at the New York University School of Law. Previously, Fred Murray was also an adjunct professor at the University of Texas School of Law, Rice University Jesse H. Jones Graduate School of Management, and the University of Houston Law Center. 

Credentials / Fred receive his B.A., Rice University and J.D. University of Texas at Austin. He is an attorney (District of Columbia, Maryland, New York, and Texas (Board Certified in Tax Law, Texas Board of Legal Specialization), and various federal courts) and C.P.A. (Maryland and Texas).


TABLE OF CONTENTS

Portfolio 6845-1st: U.S. GAAP and Related Administrative Requirements for the International Tax Practitioner

Portfolio Description

Authors

Technical Advisors

Description

Detailed Analysis

I. Introduction

Introductory Material

A. Relevance of U.S. GAAP to Multinational Corporations

B. The Body of U.S. GAAP

1. Prefatory Note About Accounting Pronouncements and Their Authoritative Value

2. Accounting Principles Versus Auditing Standards

3. U.S. GAAP and U.S. Standards Setters

a. The United States Securities and Exchange Commission (SEC)

b. The Financial Accounting Standards Board (FASB) and Other Private Sector Standards Setters

c. Emerging Issues Task Force

(1) Purpose and Authority of Body

(2) Composition of EITF

(3) Requesting a Ruling

4. The GAAP Hierarchy Prior to the FASB Codification

C. International Accounting Standards

1. International Accounting Standards Setters

2. Use of IFRS by Foreign Enterprises in the U.S. and by U.S. Enterprises

a. Requirements Relating to Reconciliation of IFRS-Based Statements to U.S. GAAP

b. Possible Use of IFRS by U.S. Enterprises

3. Convergence of U.S. GAAP and International Accounting Standards

a. General Differences in U.S. and International Standards

II. Accounting for Income Taxes

Introductory Material

A. Prior Methods of Accounting for Income Taxes

1. APB 11 (Superseded)

2. FAS 96 (Superseded)

B. Current U.S. GAAP

1. ASC 740: Accounting for Income Taxes

a. Objective of ASC 740

b. Basic Principles of ASC 740

(1) Balance Sheet Approach

(2) Book/Tax Differences

(3) Exceptions to Comprehensive Deferred Tax Accounting

c. Deferred Tax Assets and Liabilities

(1) Definition

(2) Measurement

(a) Applicable Tax Rates

(b) Future Events

(3) Valuation Allowance

(a) The “More Likely than Not” Standard

(b) Sources of Income

(4) Foreign Subsidiaries

(5) Tax Holidays

d. Interim Financial Statements

(1) Conceptual Approach

(2) Change in Valuation Allowance

(3) Change in Tax Law

(4) Exception for Net-of-Tax Items

2. Guidance on Uncertain Tax Positions (Former FIN 48: Accounting for Uncertainty in Income Taxes)

a. Objective of Guidance on Uncertain Tax Positions (Former FIN 48)

(1) Comparability of Financial Statements

(2) Transparency to Investors

b. Information Revealed by the Public Company Filings so Far

c. The Rules and Developing Practices Around Them

(1) Application to Public and Private Entities

(2) What the Rules Do — How They Are Applied

(a) Tax Position Determined by Unit of Account

(b) Two-Step Analysis

(i) Recognition of the Benefit

(ii) Measurement of the Benefit

(c) Interest and Penalties

(d) Changes Brought by New Information and Subsequent Events

(e) Issues in Applying the Guidance on Uncertain Tax Positions to Private Entities (Including Partnerships, Subchapter S Corporations, Other Pass-throughs, and Tax-Exempt Organizations)

(i) Related Entities

(ii) ASC Update 2009-06: Board Implementation Decisions and Changes

d. Public Disclosures of Tax Positions

(1) Financial Statement Presentation

(2) Changes Occurring and Reported in Interim Periods

(3) Footnote Disclosures and MD& A

(a) Tabular Reconciliation

(b) Unrecognized Tax Benefits That Affect the Effective Tax Rate

(c) Interest and Penalties Recognized in the Financial Statements

(d) Twelve-Month Look-Forward

(e) Tax Years Subject to Examination

(f) Disclosures at Adoption, and in MD& A Contractual Obligations Table for Public Companies

(g) Reduced Disclosure Requirements for Nonpublic Enterprises

(4) SEC Response

e. A Recap of Suggested Current Actions for Companies

f. Evolving IRS Interest in Tax Accruals and Published Financial Statement Information

(1) Schedule M-3

(2) Uncertain Tax Positions in the Financial Statements

(3) Policies of Other Governments

g. IRS Schedule — UTP Statement — Disclosures of Uncertain Tax Positions on Tax Returns

(1) Who Is Covered?

(2) Tax Positions that Must Be Reported

(3) What Must Be Reported (Part I and Part II of Schedule UTP)

(4) Concise Description of the Position (Part III of Schedule UTP)

(a) Sample Concise Description Language — Acquisition Costs

(b) Sample Concise Description Language — Partnership Distribution

(c) Sample Concise Description Language — Allocating Costs Incurred to Clean Up Environmental Contamination Under §Â  263A

(5) Transition and Years Affected

(6) Potential Penalties

(7) Potential Implications

3. Accounting for Other Tax Return Exposure Items

a. Background

b. ASC 450 Rules for Contingent Liabilities

c. Risk of Assessment by Tax Authorities

d. Possible Changes to ASC 450 and 805 (FAS 5 and FAS 141(R))Disclosures of Contingencies

(1) 2008 Exposure Draft

(2) 2010 ASU Moves the New Rules a Step Closer

4. Other Relevant GAAP Pronouncements

a. The Indefinite Reversal Criteria: Accounting for Income Taxes — Special Areas

(1) Background of the Indefinite Reversal Criteria

(2) Scope of Exception

(3) Potential Application

(a)Flexibility in Operation of the Indefinite Reversal Criteria

(b)Mechanics if Exception Is Not Applicable

(c)Application to Foreign Multinational Corporations

(4)Special Issues

(a)Interaction of the Indefinite Reversal Criteria with Disregarded Entities

(b)Measuring Deferred Taxes in Multiple Jurisdictions

(c)Excess Tax Basis in Investment

b. ASC 810: Consolidated Financial Statements

C. Common International Tax Issues

1. Inside Basis Differences at Foreign Sub Level

2. Operational Difficulties in Applying ASC 740

D. Significant Differences Between U.S. GAAP and IFRS on Presentation of Taxes

III. Accounting for Mergers and Acquisitions

A. Accounting for Holdings in Equity and Debt Securities

1. Accounting for “Investments”

2. Accounting Under the Equity Method

3. Consolidation Accounting

B. Earlier Guidance On Business Combinations (Now Superseded)

1. Accounting for Business Combinations Prior to December 15, 2008 — FAS 141 (Superseded)

a. FAS 141: Eliminated the Pooling-of-Interests Method

b. Mechanics of Purchase Accounting (Pre-ASC 805 and FAS 141R)

(1) Calculation of Purchase Price

(2) Residual Method of Computing Goodwill

(3) Intangible Assets

(4) Deferred Taxes

(5) “Push-Down” Accounting

2. Pooling-of-Interests Accounting for Business Combinations Prior to July 1, 2001—APB 16 (Superseded)

C. Acquisition Method—ASC 805 (Former FAS 141R)

D. Impact of § 338 Elections for Foreign Targets

1. Basic Operation of § 338

a. General Use of § 338

b. Use of § 338(h)(10)Election

2. Impact of § 338 Elections for Foreign Targets

a. In General

b. Foreign Tax Credits

(1) Purchaser

(2) Seller

E. Internal Restructurings

1. Branch Recapture Tax

2. ASC 810-10-45 (Formerly ARB 51)

F. Post-Acquisition Deferred Tax Adjustments

1. Resolution of Uncertainties

2. Post-Acquisition Tax Law Changes

3. Subsequent Discrete Events

G. Changes to Accounting for Taxes in Business Combinations

1. Change in GAAP for Valuation Allowance

2. Indemnification Assets

IV. Foreign Currency Translation

A. Background

B. Basic Principles of ASC 830, Foreign Currency Matters

1. Functional Currency

2. Translation v. Remeasurement

C. Local Foreign Currency Is Functional Currency

D. Reporting Currency Is Functional Currency

E. Other Issues

1. Indexing Tax Basis

2. Highly Inflationary Economies

V. Special Tax Accounting Issues

A. Hedges and Derivative Instruments

1. ASC 815, Derivative Instruments and Hedging Activities

a. Hedge Effectiveness

b. Fair Value Hedges

c. Cash Flow Hedges

d. Foreign Currency Net Investment Hedges

2. Tax Rules for Derivatives

a. Timing

(1) Realization

(2) Mark-to-Market

(3) Deferral

b. Character

c. International Issues

(1) Foreign Currency (§ 988)

(2) Subpart F

3. FASB Issues Proposals to Amend FAS 133/ASC 815 Accounting for Financial Instruments and Hedging Activities

a. Exposure Draft on FAS 133 Amendments

b. Proposed ASU on Accounting for Financial Instruments

B. Share-Based Payments and Related Compensation Issues

1. Tax Treatment of Stock Based Compensation

a. Incentive Stock Options

b. Nonstatutory Stock Options

c. Other Stock Awards

2. Accounting for Stock Based Compensation

a. Overview of ASC 718

b. Definition of Employee

c. Compensation Cost

(1) In General

(2) Modifications of Awards of Instruments

d. Classification of Instruments as Equity or Liability Instruments

(1) Awards with Repurchase Features

(2) Awards Indexed to Conditions Other than Market, Performance, or Service Conditions

(3) Awards with Exercise Price Is Denominated in a Foreign Currency

(4) Classification Based on Substantive Terms of Award

(5) Broker-Assisted Cashless Exercise

(6) Satisfaction of Tax Withholding Provisions

(7) Classification of Awards Outside of Permanent Equity in Temporary Equity

(8) Accounting for Dividends Paid to Holders of Liability Awards

e. Computation of Fair Value of Equity and Liability Instruments

f. SEC Executive Compensation Disclosure Rules

(1) Compensation Discussion and Analysis (CD& A)

(2) Compensation Committee Report

(3) Compensation Tables

(4) Director Compensation Table

(5) Other Required Information

(a) Enhanced Option Disclosures

(b) Named Executive Officers

(c) Item 402 Information Relating to Spin-offs, Mergers, and IPOs

(d) Modified Form 8-K Disclosure Requirements

(6) Effective Dates and Application

g. Computing Earnings Per Share and Other Financial Statement Reporting Issues

3. Accounting for Book/Tax Differences

a. Identifying and Measuring Excess Tax Benefits in Foreign Jurisdictions

b. Effects of a Net Operating Loss Carryforward

c. Determining the APIC Pool

(1) Computation of the APIC Pool

(2) FSP 123(R)-3 — Alternative Method of Computing the APIC Pool

(3) Subsequent Accounting

(4) Comparison with the “Paragraph 81 Method”

(5) Effective Date and Transition

(6) Tax Effects of Awards that Are Vested or Partially Vested on Adoption

(7) Tax Effects of Incentive Stock Options

(8) Interim Period Effects

4. International Aspects

a. Intercompany Services and Cost Sharing Arrangements

b. Multinational Context

VI. Interactions with Sarbanes-Oxley Act of 2002, Public Company Accounting Oversight Board Rules and Standards, U.S. Securities Laws, Workpapers and Document Protection, and Other Rules Affecting Tax Practice

A. Filings with the U.S. Securities and Exchange Commission

B. Overview of Sarbanes-Oxley Act of 2002

1. The Public Company Accounting Oversight Board (PCAOB)

a. PCAOB Rules and Standards

b. PCAOB Inspections and Investigations

c. GAAP Defined by Sarbanes-Oxley and the SEC

2. Auditor Independence

3. Corporate Responsibility

a. Enhanced Audit Committee Procedures

b. Section 302 Certifications of Accounting and Internal Control Matters

c. Fraudulent Manipulation of Audits

d. Disgorgement of Officer Equity Compensation and Stock Sale Profits

e. Officers and Directors May Be Barred from Holding Similar Office

4. Enhanced Financial Disclosures

a. Auditor Proposed Adjustments to Statements

b. Off-Balance Sheet Transactions

c. Pro Forma Financial Information

d. Enhanced Conflict of Interest Provisions

e. Management Assessment of Internal Controls

f. Code of Ethics for Senior Financial Officers

g. Enhanced Review of Periodic Disclosures by Issuers

h. Real-Time Disclosures

5. Analyst Conflicts of Interest

6. Commission Resources and Authority

7. Studies and Reports

8. Corporate and Criminal Fraud Accountability

a. Retention of Documents, Correspondence, and Files

b. Enhanced Criminal Penalties for Securities Law Violations

c. Whistleblower Duties and Protections

9. White-Collar Crime Penalty Enhancements

10. Corporate Tax Returns

11. Corporate Fraud and Accountability

C. Section 404 Internal Controls Reviews and Certification

a. Framework for Evaluating Internal Controls

b. SEC Rules for Sarbanes-Oxley § 404

c. Internal Controls for the Tax Department

(1) Operational Definitions

(a) Internal Control

(b) Control Deficiency

(c) Significant Deficiency

(d) Material Weakness

(2)Tax Department Process

D. Audit Committees and Other New Corporate Governance Standards

1. Oversight of Audit and Other Financial Matters

2. Audit Committee Independence

3. Preapproval of Audit and Nonaudit Services

E. Whistleblower Protections (and Duties)

1. Background

2. Rules of Professional Responsibility for Attorneys — Mandatory “Up-the-Ladder” Reporting

a. Covered Attorneys

b. Up-the-Ladder Reporting Process

c. Qualified Legal Compliance Committee

d. Reporting to External Parties — “Noisy Withdrawal”

e. Consequences of Failure to Report

F. Selection of Outside Counsel and Tax Advisors

1. Tax Services

2. Specifically Prohibited Services

a. Bookkeeping or Other Services Related to the Accounting Records or Financial Statements of the Audit Client

b. Financial Information Systems Design and Implementation

c. Appraisal or Valuation Services, Fairness Opinions, or Contribution-in-Kind Reports

d. Actuarial Services

e. Internal Audit Outsourcing Services

f. Management Functions or Human Resources Services

g. Broker-Dealer, Investment Advisor, or Investment Banking Services

h. Legal Services and Expert Services Unrelated to the Audit

i. Any Other Service that the PCAOB Determines, by Regulation, Is Impermissible

G. Document Retention Rules, Workpapers and Opinions, Attorney-Client and Attorney Work Product Privileges, and Other Aspects

1. Document Retention Rules

a. Sources of Law and Nature of Remedies

(1) Federal and State Rules of Practice

(2) Civil Sanctions for Spoliation

(3) Torts of Spoliation and Malpractice

(4) Federal and State Criminal Statutes Pertaining to Obstruction of Justice

b. Sarbanes-Oxley and SEC Rules

(1) Destruction, Alteration, or Falsification of Records in Federal Investigations and Bankruptcy

(2) Destruction of Corporate Audit Records

(a) Records that Must Be Retained

(b) Workpapers Defined

(c) Records that Need Not Be Retained

(d) PCAOB Standards on Audit Documentation

c. Document Retention Policies Remain an Important “Best Practice”

(1) When the Duty to Preserve Arises

(2) What Evidence Must Be Preserved

2. Attorney-Client, Attorney Work Product, and Other Privileges and Defenses to Production of Information

a. Attorney-Client Privilege

b. Work Product Doctrine

(1) Kovel Doctrine

(2) What Is Litigation?

c. Tax Return Preparation

d. Tax Advisor Privilege — § 7525

e. Waiver Problems

f. Other Problems

(1) Tax Opinions

(2) Bills and Invoices

(3) Audit or Tax Return Work Papers Not Protected

H. Standards and Penalties Applicable to Tax Advisors and Tax Positions and the Failure to Provide Information Regarding Tax Shelters and Reportable Transactions

1. Circular 230 Requirements of Due Diligence

2. Accuracy-Related Penalties Related to Tax Positions

a. Tax Return Preparers and Advisors

(1) What Is a Tax Position?

(2) Small Business and Work Opportunity Tax Act of 2007

(a) Set New Standard: More-Likely-Than-Not (MLTN)

(b) Increased First and Second-Tier Penalties

(c) Who Is a Tax Return Preparer Subject to the Rules of § 6694?

(d) Signing and Nonsigning Tax Return Preparers

(e) Required Standards Under the Amended Provisions

(f) Transitional Relief from Preparer Penalty Under § 6694 and Interim Guidance — Notices 2007-54, 2008-11, 2008-12, and 2008-13

(3) Tax Extenders and Alternative Minimum Tax Relief Act of 2008

(a) Reasonableness of Tax Return Positions Under § 6694(a)

(b) No Change in § 6694(b)Penalty for Understatement Due to Willful or Reckless Conduct

(c) Effect of the Tax Extenders Act of 2008 on Applicability of Notices 2007-54, 2008-11, and 2008-13

(4) The Final § 6694 Regulations and Notice 2009-05

(a) Determining Who Is to Be Assessed a Penalty

(b) How Is the Penalty Determined?

(c) When Must the Requirements Be Met?

(d) The Post-2008 Rules: What Is Required?

(i) Definition of RBMLTN Standard

(ii) Definition of Substantial Authority

(iii) Definition of Reasonable Basis

(iv) Reliance on Information Provided By Others in Formulating a Conclusion

(v) Adequate Disclosure in Relation to the Standards

(vi) Tax Shelters (as Defined in § 6662(d)(2)(C)(ii))or Reportable Transactions to Which § 6662A Applies

(vii) Interim Penalty Compliance Rules for Tax Shelter Transactions

(viii) Multi-Year Issues Involving Verification of Information on Previously Filed Returns

(e) Lists of Returns, Forms and Other Documents from Rev. Proc. 2009-11

b. Avoiding the Taxpayer § 6662(d)Penalty

(1) Non-Tax Shelter Positions

(2) Tax Shelter Positions

3. Failure to Provide Information Regarding Tax Shelters and Reportable Transactions

a. Tax Shelter Registration and Disclosures Prior to October 22, 2004

(1) Duty to Register, Keep, and Provide Information

(2) Definition of a Tax Shelter

(3) Consequences of Failures to Comply with the Tax Shelter Registration Requirements

(a) Failure to Register a Tax Shelter

(b) Failure to Furnish a Tax Shelter Identification Number

(c) Failure to Include Tax Shelter Identification Number on Return

(d) Failure to Maintain Required Investor Lists

b. The 2000 Regulations

(1)Listed Transactions

(2)Confidential Transactions

(3)Transactions with Contractual Protection

(4)Loss Transactions

(5)Transactions with a Significant Book-Tax Difference

(6)Transactions Involving a Brief Asset Holding Period

(7)Effective Dates of the 2000 Regulations

c. Material Advisors and Disclosure of Reportable Transactions After AJCA (Post-2004)

(1) New 2006 Proposed and 2007 Final Regulations on Reportable Transactions

(a) Reportable Transactions Defined

(i) Listed Transactions

(ii) Confidential Transactions

(iii) Contractual Protection Indemnity

(iv) Loss Transactions

(A) Participation

(B) Loss Thresholds

(C) Loss Carrybacks, Carryovers, and Adjustments

(D) Angel List — Excluded Losses

(v) Transactions of Interest

(vi) Patented Transactions

(b) Other Changes in the Classification of Reportable Transactions

(c) Reportable Transaction Disclosure Requirements

(2) Duties of Material Advisors

(a) Disclosure Returns

(b) List Maintenance Requirements

(3) Reportable Transactions Involving Tax-Exempt Entities

d. Penalty Considerations

(1) Failure to Furnish Information Regarding Reportable Transactions — § 6707 Penalty

(2) Penalty for Failure to Include Reportable Transaction Information with Return — § 6707A

(3) Failure to Maintain Lists of Advisees with Respect to Reportable Transactions — § 6708

(4) Promoting Abusive Tax Shelters — § 6700

(5) Imposition of Accuracy-Related Penalty on Understatements with Respect to Reportable Transactions — § 6662A

(a) In General

(b) The Reasonable Cause Defense

(6) Penalty Disclosures to the SEC

(7) Extension of the Statute of Limitations


WORKING PAPERS

Working Papers

Table of Worksheets

Worksheet 1 Significant Differences between U.S. GAAP and IFRS

Worksheet 2 Grant Thornton IFRS/U.S. GAAP Comparison

Worksheet 3 Sample Certifications to SEC Form 10-K (from Chevron 2006 Annual Report)

Worksheet 4 Lists of Returns, Forms, and Other Documents from Rev. Proc. 2009-11, 2009-3 I.R.B. 313

Bibliography

Articles and Other Reference Materials