Reporting tax liabilities to the Internal Revenue Service and to shareholders is becoming more costly and time-consuming due to new requirements of the IRS and the Financial Accounting Standards Board, according to a survey of finance executives.
Accounting firm Grant Thornton, which conducted the survey in February and March, gathered responses from 122 chief financial officers and senior comptrollers at public and private companies with revenues from less than $50 million to more than $2 billion.
One change that respondents said will add to their burden is FASB’s new interpretation of Statement 109, Accounting for Income Taxes, which is expected to clarify criteria for the recognition of tax benefits on financial statements and to require greater documentation of uncertain tax positions. Although a final interpretation is not expected until June 30, with an effective date of January 1, 2007, fully 63 percent of respondents said that their outside auditor has already made occasional or frequent requests for additional documentation for income tax reporting.
“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,” commented Dean Jorgensen, a Grant Thornton national managing partner, in a statement.
From the IRS, new Schedule M-3 requirements will reconcile a company’s financial and tax accounting systems in significantly greater detail than the old Schedule M-1. More than 40 percent of respondents expect that complying with Schedule M-3 will moderately or significantly affect the time and expense required to complete their federal return.
Stock options and other deferred compensation, already drawing considerable scrutiny, stand to be affected by financial-accounting changes under FAS 123R and tax-law changes under Section 409A. Some 26 percent of respondents said that their companies are changing their equity compensation arrangements as a result of those new requirements.