tax executives workshop 5-7 may 2013file/federa… · irs circular 230 disclosure any us tax advice...

Federal tax update

Tax Executives Workshop5-7 May 2013y

IRS Circular 230 disclosure

Any US tax advice contained herein was not intended or written to be used, and cannot be used, for the purpose , , p pof avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisionslaw provisions.

These slides are for educational purposes only and are not intended, and should not be relied upon, as accounting advice.

Tax Executives Workshop

Disclaimer

► Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young LLP is a client serving member firm of Ernst & YoungErnst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US.

► This presentation is © 2013 Ernst & Young LLP. All rights reserved. No part of this document may be reproduced transmitted or otherwise distributed in anythis document may be reproduced, transmitted or otherwise distributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying or using any information storage and retrieval system, without written permission from Ernst & Young LLP. Any reproduction, transmission or distribution of this form or any of the material herein is prohibited and is in violation of US and international law. Ernst & Young LLP expressly disclaims any liability in connection with use of this presentation or its contents by any third partyof this presentation or its contents by any third party.

► Views expressed in this presentation are not necessarily those of Ernst & Young LLP.


Presenters

Joan SchumakerErnst & Young LLP

Brandon CarltonErnst & Young LLPErnst & Young LLP

New York, [email protected]

Ernst & Young LLPWashington, [email protected]


Agenda

►CBS case and basis restoration► Final tangible property regulations ► a ta g b e p ope ty egu at o s►Recent accounting methods trends and guidance► Financial accounting developments► Income tax accounting challenges►Auditing environment► Tax legislation and regulatory guidance update


CBS case and basis restoration

CBS case and basis restoration

► Applies to US exporters who claimed benefits under the extraterritorial income (ETI) regime (which generally applied toextraterritorial income (ETI) regime (which generally applied to 2001–2006 tax years)

► P t ti l f d t it f i t l t d t► Potential refund opportunity for prior open tax years related to fixed asset disposals

► Potential financial reporting benefit (DTA)

► Supported by recent court case CBS Corp and Subsidiaries v► Supported by recent court case, CBS Corp. and Subsidiaries v. US,109 AFTR 2d 2012-2105 (11 May 2012)


Final tangible property regulations

Implementation optionsNotice 2012-73

2012 tax year 2014 tax year2013 tax year Sept 2015

Implementation final

2012 tax year options

Contin e pre temporar


C ti t


I l t ti f thContinue pre-temporary regulation methods

Early implementation of a section(s) of the

temporary regulation

Continue pre-temporary regulation methods

Early implementation of a section(s) of the

temporary regulation

Implementation of the final regulations

► Flexibility to implement the regulations used phased approach

Early implementation of a section(s) of the final regulations*

Early implementation of a section(s) of the final regulations*

► Flexibility to implement the regulations used phased approach► Delayed effective date allows time for thoughtful implementation approach to build new rules into

systems and/or change policies so you can be live on January 1 ► Allows time to explore planning opportunities► Final regulations implementation complete in 2014 tax year


*The government has stated that it intends to allow early implementation of the final regulations

Timeline for complianceCalendar year-end taxpayer

Compliance►What will change? – policies, systems, processes

and controls►Most efficient compliance

Planning►Strategically staging implementation from 2012-2014►Leveraging the rules to accelerate deductions and

generate cash

Key considerations

y p y

►Most efficient compliance►Process simplifications going forward►Unicap and cost recovery

generate cash► Integration of earnings and profits planning?

Typical timeframe2013 20152014

A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S

Implementation deadline for 2014

15 September 2014 extended due date for

2014 tax return

Spring–Summer 2013

Expected release of final and re-proposed regulations and

transition guidance

ASC 740 second or third

1 January 2014Final effective date

Book de minimis policy must be in writing by 1 January

Other policies and/or data tracking


15 September 2014 extended due date for 2013 tax return

Tax department available to work on implementation

Tax department busy – tax provision, tax returns, holidays and vacation

quarter event

Finalize tax provision effect

Other policies and/or data tracking you would like to have in place

need to be live for 2014 tax return


15 September 2013 extended due


15 September 2013 extended due date for 2012 tax return

High-level vision of the temporary regulations

Materials andsupplies Acquisitions Improvements Depreciation

and dispositions

§1.162-3T §1.263(a)-2T §1.263(a)-3T §§1.168(i)-1T,-7T,-8T§1.263(a)-1T§ ( )

► Definition of materials and supplies

► Three categories of deductibility:

► Capitalized costs include costs that facilitate acquisition of property ► Whether and which test

for real property

► Unit of property generally all functionally interdependent property except for:► Buildings

► Dispositions► General rules ► Required to recognize

disposition of structural components

► Incidental ► Non-incidental► Rotable spare parts

► Election to deduct under de minimis rule

► May expense employee comp. and overhead

► De minimis rule: follow audited financial statement expensing up to ceiling

► Plant property► Leased property

► Improvement defined:► Betterment► Restoration

► Reasonable identification methods

► Allowed vs. allowable issue

► Election to capitalize and depreciate

(applied to each regarded entity)► Greater of:

► 0.1% of tax gross receipts

► 2.0% of book

► New or different use

► Safe harbor for routine maintenance on property other than buildings

► General asset accounts ► Flexibility to recognize

(or not) dispositions of assets

► Annual election► One-time retroactive

depreciation/ amortization

► Election to capitalize and depreciate

► Safe harbor for certain regulated entities

► No plan of rehabilitation

election


► Remember: coordination with section 263A required for most changes; several “sleeper” elections

Recent accounting method trends and guidanceg

Top accounting method changes

Favorable changes Exposure items► Depreciation

► Ordinary and necessary business expenses

► Unicap (§263A)

► Bonus accrual and vacation accrualbusiness expenses

► Software-development costs

► Deferral of advance payments

accrual

► Revenue recognition

► Expense recognition► Deferral of advance payments

► Disputed income

► Prepaid expenses

► Expense recognition

► Improperly obtained method changes

► Prepaid expenses

► Incurred but not recorded/ workers’ comp.

► Improperly implemented method changes


Financial accounting changes

FASB and IASB joint convergence projects timeline

FASB and IASB Joint Convergence Projects ► Investment companies – Standard expected Q2 2013► Leases – Exposure draft expected Q2 2013► Fi i l i t t► Financial instruments –

► FASB Exposure draft on impairment issued in Q4 2012, comment period ends Q2 2013

► Exposure draft on classification and measurement issued February & April 2013; comment period ends Q2 2013

►Consolidation policy – Standard expected Q2 2013►Revenue recognition – Standard expected Q2 2013► Insurance contracts – Exposure draft expected Q2 2013


EITF 13-B Low Income Housing Credits

► Issue: Accounting for a limited partnership investment in a qualified affordable housing project

► Summary proposed Accounting Standards Update (ASU) ► Ease conditions in ASC 323-740-25-1 to use the effective yield method (i.e.,

recognizing the entity’s portion of both the Low Income Housing Tax Credits (LIHTC) and the earnings or losses of the investment net as a component of(LIHTC) and the earnings or losses of the investment net as a component of income taxes in cont. ops)

► Accounting policy to use effective yield method if new proposed conditions are met

► Status► Proposed ASU issued 17 April 2013► Comment deadline 17 June 2013

► Proposed transition► Retrospective application► Early adoption would be permitted – Only upon issuance of final standard

► Other


► Comments requested on expansion to other tax benefit/credit investments

EITF 13-C Presentation of a liability for an unrecognized tax benefit g

► Issue: Presentation of a liability for an unrecognized tax benefit (UTB) when a net operating loss (NOL) or tax credit carryforward exists (i.e.,when a net operating loss (NOL) or tax credit carryforward exists (i.e., gross or net on balance sheet)

► Summary of proposed Accounting Standards Update (ASU) ► An UTB would be presented as a reduction of a deferred tax asset (DTA)► An UTB would be presented as a reduction of a deferred tax asset (DTA)

when settlement in this manner is available under the tax law (i.e., net presentation)

► Status► Status► Proposed ASU was issued 21 February 2013► Comment deadline ended 22 April 2013

► Proposed transition► Proposed transition► Retrospective application► Early adoption is permitted – Only upon issuance of final standard


Financial Accounting Foundation Review of ASC 740

► The Financial Accounting Foundation (FAF) announced during February a post-implementation review of FAS 109, issued in y p p ,1992

► Reasons cited► Complex for stakeholders to understand► Complex for stakeholders to understand► A number of constituents and the FASB advisory groups have indicated

this is an area that can be improved► Income tax accounting is source of deficiencies, errors and restatements

► Post-implementation review process ► Obtain stakeholder input► Comments and surveys not available to the publicy p► Timetable for report

► Longer-term implications uncertain


Tax accounting challenges

Income tax accounting restatements

►While specific causes vary, a significant portion of recent restatements related to income taxes fall into the followingrestatements related to income taxes fall into the following categories:► Inappropriate evaluation of the realizability of deferred tax assets

(DTA )(DTAs)► Incorrect identification or calculation of tax basis, resulting in

inappropriate measurement of deferred tax assets and liabilities ► Income tax accounting errors associated with intercompany

transactions ► Incorrect application of intra-period allocation rulespp p► Improper accounting for outside basis differences


Income tax accounting restatementsRealizability of deferred tax assets

►Restatements generally occurred due to errors in assessing the four sources of taxable incomeassessing the four sources of taxable income

►Examples include:Inappropriately considering a projection of future taxable income to► Inappropriately considering a projection of future taxable income to be a tax planning strategy

► Evaluating deferred tax assets for realizability on a net vs. gross basis

► Inappropriate consideration of taxable temporary differences (e.g., taxable temporary differences related to indefinite-lived intangibles) p y g )as a source of future taxable income


Income tax accounting restatementsTax basis

►Maintaining a detailed and accurate record of the tax basis of all assets and liabilities including those without a bookof all assets and liabilities, including those without a book basis, is an essential starting point in accounting for income taxes

►Restatements have been caused by not properly identifying a tax basis or attribute or not appropriately recording and tracking the tax basis or attribute inrecording and tracking the tax basis or attribute in subsequent periods ► Requires technical understanding of tax law

► Often for multiple taxing jurisdictions

► May be simple or complex


Income tax accounting restatementsIntercompany transfers

► Exception to general provisions in ASC 740

A t ti ld t fit b t ffili t d titi th t► Assets are sometimes sold at a profit between affiliated entities that are consolidated for financial reporting purposes, but file separate income tax returns

S ll ’ t b k ll fl t fit l l d l t d► Seller’s separate books generally reflect profit or loss on sale and related income tax effect of that profit or loss

► Buyer’s separate books (and tax basis) generally reflect the assets at the intercompany transfer priceintercompany transfer price

► Consolidation entries that eliminate intercompany profit also will eliminate the related tax expense (benefit)

► Record any income taxes paid by the seller as a prepaid tax► Record any income taxes paid by the seller as a prepaid tax

► Restatements have been caused by failure to track intercompany transactions and related income tax effects


Income tax accounting restatementsIntra-period allocation

►Restatements have been caused by failure to allocate income tax expense correctly in accordance with the intraincome tax expense correctly in accordance with the intra-period allocation rules

►Examples include:►Examples include:► Failure to apply the exception in ASC 740-20-45-7

► Failure to consider interaction of exception in ASC 740-20-45-7 with pthe interim reporting rules in calculating the EAETR

► Inappropriate “backward tracing” to prior annual periods of effects of changes in defereds and related valuation allowanceschanges in defereds and related valuation allowances


Income tax accounting restatementsOutside basis differences

►The ASC 740-30 (indefinite reinvestment) exception for undistributed earnings of foreign subsidiaries and foreignundistributed earnings of foreign subsidiaries and foreign corporate joint ventures does not apply to 50% or less owned investees that are not corporate joint ventures as defined by ASC 323

►Restatements have been caused by companies inappropriately applying the indefinite reinvestmentinappropriately applying the indefinite reinvestment assertion to foreign equity method investments and by failure to consider certain sub-part F activities of these i t tinvestments


SEC areas of focuscomment letters and other observations► Compliance with income tax disclosure requirements

► Focus on undistributed foreign earnings indefinitely reinvested

► Realizability of deferred tax assets, including timing of release of valuation allowances, use of similar assumptions and projections of future income to assess realizability of deferred tax assets and assess ylong-lived assets for impairment ► Inadequate or overly general disclosures

► Uncertain tax position disclosures► Uncertain tax position disclosures► Transparency of the effect of foreign earnings on effective tax rate► Treatment of foreign earnings and amounts indefinitely reinvested

► Amounts of cash and liquid investments held by foreign subsidiaries and amounts that could be repatriated without tax cost

► Address liquidity in the U.S.


Auditing environment

PCAOB standard-setting update

►PCAOB standards setting priorities include:► Possible revisions to the Auditor’s Reporting Model► Possible revisions to the Auditor s Reporting Model► Audit transparency: identification of the engagement partner

►PCAOB concept release on auditor independence (August 2011) ► PCAOB is currently considering next steps relating to mandatory► PCAOB is currently considering next steps relating to mandatory

audit firm rotation

► The SEC approved new PCAOB guidance on auditor and► The SEC approved new PCAOB guidance on auditor and audit committee communications – effective for periods beginning on or after 15 December 2012


European developments on audit policy

► Netherlands audit changes approved Dec 2012► Mandatory audit rotation after 8 yrs effective 1 Jan 2016y y

► Applies to public interest entities (PIEs) ► Netherlands-based entities with securities listed on EU exchange

► Two-year cooling off periody g p► Ban on non-audit services for “organizations of public interest”

► Significant restrictions on providing non-audit services to audit clients came into effect 1 January 2013 (2 year grandfather clause for services in

t t t 31 D b 2012)contract at 31 December 2012)

► UK Financial Reporting Council changes to UK Corporate Governance Code issued Sept. 2012► FTSE 350 companies should put external audit contract out to tender

at least every 10 years► Transition generally upon next change in audit partner


Tax legislation and regulatory guidance updatep

Tax legislation and regulatory guidance update g p

► Legislative B d i ti t d d th h 2013► Bonus depreciation extended through 2013

► Continued proposal of LIFO/lower of cost or market repealp

► New Unicap (§263A) proposal

IRS/T id j t► IRS/Treasury guidance projects► Current projects► Anticipated timing► Anticipated timing

►Other hot topics


tax executives workshop 5-7 may 2013file/federa… · irs circular 230 disclosure any us tax advice...

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