AICPA Comments to Financial Accounting Standards Board on Possible Concerns With FASB 109 and Foreign Sales Corporation/Extraterritorial Income Regime (FSC/ETI) Legislative Proposals 

    Published June 21, 2005

    These AICPA comments submitted June 4, 2004 to the Financial Accounting Standards Board concern the accounting treatment of the 2004 proposed ETI replacement legislation. This letter discusses the AICPA analysis of the accounting issues related to provisions in S. 1637, the "Jumpstart Our Business Strength (JOBS) Act," and H.R. 2896, the "American Jobs Creation Act of 2003."


    June 4, 2004


    Mr. Robert Herz
    Financial Accounting Standards Board
    401 Merritt 7

    P.O. Box 5116
    Norwalk, CT06856


    Dear Mr. Herz:


    The AICPA Accounting Standards Planning Subcommittee (PSC) would like to bring an emerging accounting issue, which was identified by the AICPA's Tax Division, to your attention. In addition, we request that the FASB provide timely guidance on this emerging issue.


    Two alternative pieces of pending federal tax legislation are currently under consideration as options for replacing the Foreign Sales Corporation (FSC) tax regime and the FSC Repeal and Exterritorial Income Exclusion Act of 2000, both of which were found by the World Trade Organization to constitute prohibited export subsidies under the relevant trade agreements. The first of these bills is S. 1637, the "Jumpstart Our Business Strength (JOBS) Act," which was passed by the Senate on May 11, 2004. The second is H.R. 2896, the "American Jobs Creation Act of 2003," coming from the

    House Ways
    and Means Committee.


    S. 1637 would, among other things, provide a new tax deduction that, when fully phased in, would reduce a taxpayer's taxable income by up to 9 percent of qualified production activities income. 1 H.R. 2896, when fully phased in, would, among other things, provide that the corporate tax rate applicable to qualified production activities income 2 may not exceed 32 percent (that is, up to a 3-percentage point tax rate reduction). S. 1637 and H.R. 2896 may have approximately the same effect in reducing the federal tax burden on qualifying income of certain corporate taxpayers. However, the financial statement effects of the two proposals under U.S. generally accepted accounting principles are unclear and may be significantly different.


    S. 1637 may create what is referred to in FASB Statement No. 109, Accounting for Income Taxes, as a "special deduction." Paragraph 231 of Statement No. 109 states that "The tax benefit of statutory depletion and other types of special deductions such as those for Blue Cross-Blue Shield and small life insurance companies in future years should not be anticipated for purposes of offsetting a deferred tax liability for taxable temporary differences at the end of the current year." Paragraph 232 continues by stating that "the tax benefit of special deductions ordinarily is recognized no earlier than the year in which those special deductions are deductible on the tax return." However, whether S. 1637 would create a special deduction is unclear because Statement No. 109 does not define "special deduction."


    The financial statement treatment of the effects of H.R. 2896 also may be unclear. Paragraph 18 of FASB Statement No. 109 states, "The objective is to measure a deferred tax liability or asset using the enacted tax rate(s) expected to apply to taxable income in the periods in which the deferred tax liability or asset is expected to be settled or realized." Paragraph 18 continues by stating that "Other provisions of enacted tax laws should be considered when determining the tax rate to apply to certain types of temporary differences and carryforwards (for example, the tax law may provide for different tax rates on ordinary income and capital gains)." And paragraph 27 of FASB Statement No. 109 states: "Deferred tax liabilities and assets shall be adjusted for the effect of a change in tax laws or rates. The effect shall be included in income from continuing operations for the period that includes the enactment date." However, the accounting treatment for the effects of H.R. 2896 may be unclear under Statement No. 109, and the determination of the future tax effects on temporary differences may be complex, because the rate change would apply only to a specifically defined category of activities.


    Issues that may be appropriate for the Board or FASB staff to address include:


    ·          Would the provisions of S. 1637 create a "special deduction" that should be accounted for in accordance with the provisions of paragraphs 231 and 232 of Statement No. 109, or should the effects of S. 1637 be treated as tax rate reduction in accordance with paragraphs 18 and 27 of Statement No. 109 if the impact is to reduce the federal income tax burden on certain qualifying income?

    ·          Would the provisions of H.R. 2896 be treated as a tax rate reduction in accordance with paragraphs 18 and 27 of Statement No. 109?

    ·          Should the financial reporting impact of the provisions of the two proposed bills be the same if both bills may have approximately the same effect in reducing the federal tax burden on certain qualifying income? (There may be situations in which the impact of the proposed bills is not the same due to certain differences in the provisions of the proposed legislation.)


    The PSC encourages the Board to provide timely guidance on the financial reporting effects of this legislation. The PSC notes that, particularly if a bill is enacted late in a financial reporting quarter, a lack of guidance in place could result in significant practice problems. Furthermore, the PSC believes that legislators considering the merits of these bills may be interested in the potential financial statement implications of this important legislation in order to understand the specific impact of the alternative provisions being considered by the House and Senate.


    The AICPA would be pleased to offer any assistance to the FASB that may be useful to the Board in providing guidance on these issues. Representatives of our Tax Division and the PSC who participated in discussions concerning the potential financial statement implications of the bills would be pleased to meet with the Board or FASB staff to discuss these issues in more detail.




    Mark M. Bielstein, Chair
    Accounting Standards Executive Committee

    1. As described in S. 1637, the term "qualified production activities income" means an amount equal to the portion of the modified taxable income of the taxpayer that is attributable to domestic production activities. The term "modified taxable income" means taxable income computed without regard to the new deduction. The portion of the modified taxable income that is attributable to domestic production activities is so much of the modified taxable income for the taxable year as does not exceed the taxpayer's domestic production gross receipts for such taxable year, reduced by the sum of the costs of goods sold that are allocable to such receipts, other deductions, expenses, or losses directly allocable to such receipts, and a proper share of other deductions, expenses, and losses that are not directly allocable to such receipts or another class of income. In general, the term "domestic production gross receipts" means the gross receipts of the taxpayer that are derived from any sale, exchange, or other disposition of, or any lease, rental, or license of, qualifying production property that was manufactured, produced, grown, or extracted in whole or in significant part by the taxpayer within the United States.

    2. There are certain relatively minor differences between the Senate and House definitions of "qualified production activities income."

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