IASC Board Says No to Adopting FASB Financial Instruments Rules; Core Standards Will Be Delayed

The International Accounting Standards Committee board of directors rejected a proposal by the IASC executive committee and its secretary-general, Sir Bryan Carsberg, to adopt the Financial Accounting Standards Board's rules on financial instruments reporting, including the FASB standard on derivatives disclosure.

It was originally thought that, by adopting the FASB standards, the IASC would be able to meet its goal of completing a core set of standards by March 1998. The IASC had reached an agreement with the International Organization of Securities Commissions (IOSCO) in 1995 to complete core standards IOSCO could endorse for crossborder offerings and listings by March. The IASC now is hoping to have final rules on financial instruments completed in November.

The IASC board decided that adopting the FASB standards, even on an interim basis, would undermine the IASC's established due-process procedures. The board also said integrating the style of FASB standards with that of international accounting standards would be difficult. Instead, the board will prepare a new exposure draft based on the main elements of the FASB standard that could be exposed for comment by April.

According to an IASC release, the board believes the best long-term approach to improving worldwide financial instruments reporting is to join with other national standard setters to develop an "integrated and harmonized international accounting standard for financial instruments." The board agreed to expeditious review of this issue to complete the project in 1998.

New Report on Measuring Long-Lived Assets

The Financial Accounting Standards Board and members of a group of international standard setters, G4+1, published a special report to promote harmonization in the application of recoverable amount tests or impairment tests. G4+1 members consist of the boards and senior staff of the standard-setting bodies of Australia, Canada, New Zealand, the United Kingdom and the United States.

In March 1995, the FASB issued Statement no. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of , and the International Accounting Standards Committee and the United Kindgom have published their own proposed standards. There are significant differences among the final and proposed standards for recoverable amount tests. Entities use those tests to determine whether the carrying amounts of assets are recoverable from the net cash inflows they are expected to generate.

The differences in standards have been a source of debate among the G4+1 standard setters, and the group prepared the special report, International Review of Accounting Standards Specifying a Recoverable Amount Test for Long-Lived Assets , to promote the development of new and improved standards that are similar among the participating countries.

A copy of the report is available for $11.50 by calling the FASB order department at 203-847-0700, ext. 555.

©1998 AICPA

Bigger Pieces of the Audit Pie

Before the Big 8 mergers of 1989, no firm controlled more than 16% of the audit market for publicly traded companies. After the mergers, this percentage increased to 19%. If the proposed mergers of Ernst & Young with KPMG Peat Marwick and of Coopers & Lybrand with Price Waterhouse take place, the largest firm will handle 34% of all public company audits. Note, however, that in the last decade the share of the other firms has hardly changed.

Source: Research from Jeff L. Payne, CPA, PhD, assistant professor, University of Mississippi, and Morris H. Stocks, CPA, PhD, associate professor, University of Mississippi. Data compiled from Standard & Poor's Compustat for NYSE, Amex and NASDAQ.

Online Network for Students

Many universities already have 24-hour libraries for students' convenience. But now, students also can turn to a 24-hour online resource: AccountingNet has opened a Web site especially for students at http://www.accountingstudents.com . The site offers daily headline news on accounting and other issues; job listings; a monthly column covering subjects such as resume advice and interview tips; and a "Study Break" section for fun. Students can link to a discussion forum where both novices and experienced accountants can exchange ideas. For example, a student posted a query on how to land a job with a big firm. A small-firm CPA responded in detail about the advantages of working for a smaller firm and suggested the student widen her job search.

Also included on the student pages is information on a $3,000 scholarship that AccountingNet, Great Plains Software and IBM are offering. Applications, which can be downloaded, are due by March 15.

Still more information
Another resource for students is AICPA Online (http://www.aicpa.org), which has a wealth of information, including discussion forums, and is open to the general public. The Institute itself does not provide "official" answers to posted forum queries, but experienced CPAs frequently offer opinions.

©1998 AICPA

The Governmental Accounting Standards Board issued a final statement on reporting for deferred compensation plans adopted under provisions of Internal Revenue Code section 457. GASB Statement no. 32, Accounting and Financial Reporting for Internal Revenue Code Section 457 Deferred Compensation Plans , is effective for periods beginning after December 31, 1998.

Section 457 enables state and local governments to establish deferred compensation plans for their employees. Before August 20, 1996, section 457 plans had to be reported in the financial statements of the government entity that sponsored the plan even if the plan's assets were administered by a third party. GASB Statement no. 2, Financial Reporting of Deferred Compensation Plans Adopted under the Provisions of Internal Revenue Code 457 , established guidelines for reporting on section 457 plans. On August 20, 1996, section 457 provisions were amended to require all plan assets and income be held in trust for the benefit of participants and beneficiaries. The amounts deferred by employees or related income on those amounts were no longer "owned" by the government entities.

GASB Statement no. 32 should reduce confusion about accounting and reporting for revised IRC section 457 plans. It rescinds Statement no. 2, replacing much of the guidance there by expanding the scope of GASB Statement no. 31, Accounting and Financial Reporting for Certain Investments and for External Investment Pools , to include debt and equity investments of such plans.

Copies of Statement no. 32 are available for $10.50 each by calling the GASB order department at 203-847-0700, ext. 555.

On October 13, 1997, the American Institute of CPAs accounting and review services committee (ARSC) voted to withdraw Proposed Statement on Standards for Accounting and Review Services (SSARS), Assembly of Financial Statements for Internal Use Only , and concluded that CPAs should not be permitted to issue plain-paper financial statements. After years of debate, these committee decisions may seem to put an end to a contentious issue, but the problems plain-paper was supposed to address remain. (See " SSARS Hearing Yields No New Answers ," JofA, Nov.97) "Even the CPAs who didn't want plain-paper statements realized this," ARSC chairwoman Wanda Lorenz told the Journal . "The committee is starting with a clean slate."

According to Lorenz, ARSC may now expose for comment a draft statement the committee had approved but was holding until the plain paper issue was resolved. This statement covers CPAs who serve as controllers-for-hire for companies. "Those CPAs effectively become part of management and could find themselves reporting on their own assertions." She hopes the statement will clarify various controllership issues.

The committee also is considering drafting amendments or interpretations to SSARS that cover applicability and submissions, including the so-called inadvertent compilation. "When the AICPA first issued SSARS, firms and companies used computer processing services or an in-house mainframe for their accounting needs. Now, PCs have changed the accounting environment." She cited one CPA who received financial statements from clients on disks, posted and adjusted items and sent them back. "She didn't realize you needed to do a compilation on the information on those disks. The medium doesn't matter."

At Journal press time, the committee was planning to meet again in December 1997.

Deducting Costs of Flights on Corporate Jets
The Internal Revenue Service has disallowed a company's deductions for the costs of using its aircraft to transport a company officer/shareholder and spouse to and from vacation sites in the United States (technical advice memorandum (TAM) 9715001). The IRS views such travel as entertainment that is nondeductible under Internal Revenue Code section 274; therefore, the company's deductions are limited to the amounts it treated as compensation to the officer.

Ninety percent of the company's use of the aircraft was for business purposes. With respect to the vacation flights, the company fully complied with income and payroll tax rules for personal flights, using the 1985 special valuation rules of section 1.61-21(g) to determine the amounts to be treated as compensation.

For more than a decade, taxpayers have assumed that the personal use of a corporate jet will not jeopardize deductions if the special valuation rules are properly followed. The IRS, however, says that while the section 274 disallowance rules may preserve the deduction for the compensation that is imputed, the rules are otherwise unaffected by the company's compliance with the special valuation rules. Therefore, the excess of the expenses incurred—dollar for dollar—over the value imputed to the employee is nondeductible.

Observation: According to the TAM, the personal flights clearly are the type of entertainment expenses Congress targeted with the enactment of the section 274. Thus the expenses should be subject to disallowance provisions regardless of the special valuation rules. Many taxpayers will argue that the 1985 compromise settled both the income and the deduction issues, and that the IRS should not be pursuing a disallowance theory inconsistent with the compromise.

It is possible that the IRS will search for other ways to disallow deductions for costs that have some relationship to fringe benefits when there is a difference between costs incurred and the value imputed to the employee. This could include company cars and spousal travel.

It would be better for such new interpretations of the tax law to be presented in proposed regulations that alert taxpayers prospectively than to be introduced as part of an IRS audit, where the application is retroactive.

—Tracy Hollingsworth, Esq., staff director of tax councils at Manufacturers Alliance, Arlington, Virginia.

Individual

Accounting Fees Limited
According to Internal Revenue Code section 7430, if the Internal Revenue Service loses its case against a taxpayer in a tax dispute in which its position was not substantially justified, that taxpayer is entitled to recover reasonable administrative and litigation costs. However, section 7430(c)(1)(B) (iii) limits the recovery of attorney fees to $110 an hour (adjusted for inflation) unless a special factor, such as the limited availability of qualified attorneys for a particular proceeding, justifies a higher rate.

In a recent Tax Court case, Robert T. Cozean v. Commissioner (109 TC no. 10), the IRS issued a $700,000 deficiency notice to a taxpayer stating that various items of income had not been reported and that certain deductions had been denied. Two weeks before the trial, the IRS conceded and settled the case. The taxpayer then filed a motion for award of litigation costs in order to recover his attorney's fees of $250 an hour and related accounting fees of $170 an hour. The taxpayer argued that these rates were reasonable because the number of attorneys qualified to handle such a case was limited. The IRS argued that the taxpayer's recovery should be limited to the statutory cap because no special factors existed.

The court ruled in favor of the government. It cited Pierce v. Underwood (487 U.S. 552, 1988) in which the U.S. Supreme Court ruled that in order to qualify for special factor treatment and recover more than the statutory limit, a taxpayer must prove that his attorney possesses a distinctive knowledge or a specialized skill needed in that particular case. In other words, limited availability of attorneys in a particular field or geographical area does not create a special factor. For special factor status to be considered, the attorney must possess some nonlegal or technical ability other than his or her tax expertise.

For example, recoveries in excess of the statutory amount might be allowed when an attorney specializes in the law of other countries and/or is literate in foreign languages.

The court cautioned that factors such as novelty and difficulty of the issues, the undesirability of the case, the work and ability of counsel, the results obtained and the customary fees and awards in other cases should not be considered in determining whether an upward adjustment of the hourly rate is warranted.

Observation: In Cozean , the taxpayer's CPA was authorized to practice before the IRS and the Tax Court. Such CPAs should advise their clients that section 7430 (c)(3) subjects accounting fees to the same limitations as legal fees and, in the absence of a special factor, are subject to the statutory cap.

—Michael Lynch, CPA, Esq., associate professor of accounting at Bryant College, Smithfield, Rhode Island.

Line Items

Rating the Enforcers


• According to Internal Revenue Service fact sheet 97-25, the IRS will try to change the public's perception that an agent's performance rating is based on collections by (1) no longer ranking its district offices, (2) suspending the distribution of any goals relating to revenue production in its field offices, (3) no longer including penalty amounts in its statistical results on revenue collected and (4) asking the General Accounting Office to certify that enforcement results are not used in employee performance reviews.

  Payoff for Tattlers
  

• The IRS is authorized to pay rewards to informants for information that leads to the detection and punishment of any person violating the Internal Revenue Code. According to a new temporary regulation (TD 8737), the reward ceiling has been raised to 15% from 10% of the recovered money.

  Till Death Are You Liable
  

• In fact sheet 97-13, the IRS discusses the meaning of joint and several liability in relation to married couples who elect to file joint federal income tax returns. The IRS points out that liability continues even after a separation or divorce and has established uniform procedures to notify one spouse of activity against the other while safeguarding the privacy rights of both.

  Yes, This Is John Doe
  

• IRS employees must identify themselves by name when dealing with the public. However, if an employee believes that using only a last name is insufficient protection from harassment, that employee may register a pseudonym. According to IRS fact sheet 97-17, approximately 350 pseudonyms are registered.

  Not Out of the Hat
  

• According to fact sheet 97-21, the primary method of selecting returns for audit is the computer selection program known as the discriminate function system.

  —Michael Lynch, CPA, Esq., associate professor of accounting at Bryant College, Smithfield, Rhode Island.

©1998 AICPA

Minority Issues at Forefront

The American Institute of CPAs board of directors approved a diversity commitment statement drafted by the minority initiatives committee. The committee hopes that the statement will become a model for CPA firms and for businesses where CPAs work. "That's how we believe the statement will become important," committee chairwoman Brenda S. Birkett told the Journal . "The AICPA can do only so much itself—the goal is to have some impact on the membership." The statement came out of discussions committee members had while creating a strategic plan, which the board of directors approved in 1997.

Along with the statement, the committee is pursuing related diversity actions, including

AICPA Diversity Commitment Statement

The American Institute of CPAs is committed to being recognized as the premier national professional organization. To achieve this status, it must lead in encouraging, valuing and fostering diversity in its membership and in the workforce. We have taken the decision to reaffirm the importance of diversifying our profession and promoting workforce diversity by making these objectives among the AICPA's highest priorities. Therefore, in principle and in practice, the AICPA will identify, recognize and support strategies and efforts within the organization and profession that are dedicated to achieving the AICPA's diversity objectives. The AICPA will begin by increasing its efforts to continue to recruit and maintain a diverse professional staff. In addition, it will continue to actively recruit and maintain diverse membership on all AICPA committees. The AICPA encourages all state CPA societies and related organizations to adopt similar diversity statements.

• Participating on an AICPA cross-functional team to determine the necessity of diversity training.
• Working with those responsible for AICPA committee appointments to ensure committees reflect the diversity of the membership.
• Encouraging state CPA societies to adopt similar statements.
• Helping AICPA staff attract a more diverse group of speakers at Institute-sponsored conferences.

"We want to bring diversity to the forefront, so people won't just say, 'That's nice,' and put the issue on the shelf and forget about it," said Birkett. The statement is reprinted on the right.

The business press was still publishing news stories on the proposed merger between Coopers & Lybrand and Price Waterhouse (see " And Then There Were Five ," JofA, Dec.97) when Ernst & Young and KPMG Peat Marwick seized the headlines with their own merger plans, which would create an even larger firm. The resulting E&Y/KPMG firm would have

• More than $18 billion in revenues.
• Close to 13,000 partners.
• Philip Laskawy, Ernst & Young's chairman and chief executive officer, as chairman.
• Stephen G. Butler, KPMG's chairman and CEO, as CEO.

Although the pundits did not specifically predict this latest merger when C&L and PW made their announcement, Gary J. Previts, professor of accountancy at the Weatherhead School of Management, Case Western Reserve University, Cleveland, and J. Curt Mingle, a member of Clifton, Gunderson LLC, in Ephraim, Wisconsin, both had told the Journal in last month's article that they were expecting more high-level mergers.

"I believe the mergers may cause some of the smaller companies to leave the Big Four and thus give us and similar firms a chance to bring them in as clients," said Lawrence M. Zagarola, a partner of J. H. Cohn in Roseland, New Jersey. Cohn has about 38 partners. William E. Fingland, Jr., a partner of Baird, Kurtz & Dobson, a 119-partner firm in Springfield, Missouri, is also looking for clients. "We hope that certain kinds of clients, that don't want an even bigger firm, will look for an alternative." Even McGladrey & Pullen, one of the largest second-tier firms with 380 partners, sees its relatively smaller size as an advantage. "These mergers—designed to better serve large multinational clients—make it obvious to middle-market clients that they are not part of the Big Four client base," said LeRoy E. Martin, a partner in Bloomington, Minnesota. "Such companies will look to group B firms for the services they need."

But the real competition may be for staff. Cohn, BKD and M&P expected senior managers and partners to leave the newly merged firms; even personnel not actually forced out may find the resulting firms not to their liking. "Amazingly, a lot of really good people who would not be casualties of a merger feel they're going to be and start looking around," said Martin.

Cohn, BKD and M&P have no current plans to merge with other firms. However, Zagarola said second-tier firms would continue to merge, even without the impetus of Big Six mergers. Martin said after the flurry of mergers in the mid-1980s and early 1990s most group B firms had found comfortable regional or industry niches and were not expecting to consolidate further. Fingland echoed this, saying, "I don't see how mergers in firms our size would help our clients. The Big Six apparently believe they have to be larger to perform their consulting services. But I never heard of a Big Six client saying, 'You have to be even larger to serve us.'"

The American Institute of CPAs tax division presented the Arthur J. Dixon Memorial Award, the profession's highest tax award, to Richard D. Thorsen, a former managing partner of Charles Bailly & Co. Michael E. Mares, chairman of the AICPA tax executive committee, presented the award at the Institute's annual fall tax conference.

Thorsen has had a distinguished international career, working extensively in Russia and the former Soviet Union since 1967. He assisted in the privatization of a Siberian bank, provided consultation to a private brick factory in southern Russia and devised and installed a computerized accounting system for a loghome builder in St. Petersburg. Although retired from Bailly, Thorsen, also a certified valuation analyst, continues to provide litigation, business valuation and tax consulting services.

Thorsen has been a member of about 20 AICPA committees, including the tax and professional ethics executive committees. He has served on the AICPA council and board of directors and was a member of the Internal Revenue Commissioner's Advisory Group. Locally, Thorsen was president of the Minnesota Society of CPAs and chairman of the Minnesota State Board of Accountancy.

The award was established in 1982 to memorialize Arthur J. Dixon, a former chairman of the tax executive committee with a long record of service to the tax division.

©1998 AICPA

F Y I

Short takes, notes and items of interest

©1998 AICPA

Philip L. Defliese, 1974-75 chairman of the American Institute of CPAs and former chairman and managing partner of Coopers & Lybrand, died in October at the age of 82. Defliese was long at the center of accounting standards: In the early 1970s, he was chairman of the AICPA Accounting Principles Board—the Financial Accounting Standards Board's immediate predecessor—a position he called "the most thankless job in the entire accounting profession." He was a founding member of the Governmental Accounting Standards Board and also served on the AICPA auditing standards board. After his retirement from C&L, he was a professor at Columbia University's graduate school of business.

Defliese received the AICPA Gold Medal for Distinguished Service to the Profession in 1972 and was inducted into the Accounting Hall of Fame in 1987. In 1995, the Public Oversight Board presented him with the John J. McCloy Award. Current C&L Chairman Nicholas G. Moore said Defliese "had made tremendous contributions to the accounting profession and had a major impact on moving the firm forward."