Journal of Accountancy

Letters

Watching Your Weighted Average

By Richard Hardesty

november 2008

Thank you for your great article, “Currency Translation Adjustments” (July 08, page 42). I used it as a learning opportunity for our International Accounting group.

I have one question on a calculation on page 46 in the right-hand column toward the bottom: “To examine a situation where the dollar has strengthened, the FX rates shown in Exhibit 5 may be used in Exhibit 4. This should result in a debit balance in CTA of $64,850 in OCI. The strengthening of the dollar reduces net income by $3,900, a 6% reduction in net income reported from the subsidiary.” [Emphasis added]

In substituting the Exhibit 5 weighted average rate of 0.0093 for the weaker dollar weighted average rate of 0.0096 in Exhibit 4, the net income from operations changes from $62,400 to $60,450, a decline of $1,950 or 3%. The only way I see of reducing net income by $3,900 (6%) to $58,500 is by using a weighted average rate of 0.0090 (6,500,000FC 0.0090 $58,500).

How did the authors arrive at the $3,900 reduction in net income using a weighted average rate of 0.0093 (the one used in Exhibit 5)?

Many thanks for this powerful article.

Richard Hardesty, CPA
Seattle

Authors’ Reply: We were excited to hear that others are using this as a discussion tool. We apologize if the sentence wasn’t clear. If you leave all of the other rates the same in Exhibit 5 and change the weighted average rate in B22 to match the historical rate of 0.0099 $/Foreign Currency, the income would have been $64,350 as shown below.

                     In Foreign
                      currency    FX Rate    In US $
Net Income    6,500,000    0.0093       60,450     Per the worksheet
Net Income    6,500,000    0.0093       64,350     If the $ had not weakened
Decrease in                                      (3,900)
earnings

The effect on income can be defined different ways. Some companies, like McDonald’s, discuss results in terms of constant currency and use prior-year average rates.

We hope this better explains what we meant.

Susan M. Sorensen, CPA, Ph.D.,
and Donald L. Kyle, CPA, Ph.D.
Houston

Letters

Safe From the IRS but Not Necessarily From the State

By Mark N. Schlueter

november 2008

My comments relate to Stephen Huggard’s article titled “Voluntary Disclosure to the IRS: A Viable Option” (March 08, page 40). This article was very well written and right on point. Huggard makes an excellent final comment in the article stating that, “As long as the taxpayer is careful, he or she likely will wind up poorer but still free, which definitely beats poorer and in jail.“

What is required by a client to stay out of jail is a voluntary disclosure and payment of back taxes, interest and penalties to the Criminal Division of the IRS. The key to avoiding prison for most major tax crimes is access to large amounts of cash. Huggard is exactly correct that the IRS would gladly accept cash without having to conduct an investigation rather than devoting resources to putting a taxpayer in jail. The taxpayer avoids both prison and the stigma of a criminal conviction on his record. This is a win-win for both the taxpayer and the IRS.

The way to stay out of jail for a crime such as tax evasion is to make a voluntary disclosure to the IRS before getting caught. In other words, a taxpayer who does not make a voluntary disclosure and is caught may be convicted and sentenced for past crimes. A taxpayer who makes a voluntary disclosure of past crimes and pays the unpaid taxes and penalties will not be charged with a crime. What seems to be forgotten is that a crime was committed in the first place.

Now let’s take a look at a taxpayer, “Ken,” of North Carolina. Ken pleaded guilty on May 23, 2008, to one count of failure to pay the N.C. state individual income tax. Ken received a 45-day suspended sentence and was placed on 24 months unsupervised probation. In addition, Ken must pay $155 per month for 23 months in restitution.

Ken’s real crime was that he obviously did not have any cash. He could have been guilty of tax evasion amounting to millions of dollars and still would not have been convicted of anything. By voluntarily disclosing a liability to the IRS and paying the taxes and penalties, a taxpayer can remain free without a criminal record. Ken, on the other hand, may still end up in jail for his meager crime if he is unable to pay the state of North Carolina its $155 each month.

There is definitely a major disconnect between the IRS and the states. The IRS appears to be willing to forgive criminal activities while the states attempt to make an example out of minor offenses.

Mark N. Schlueter, CPA
Greensboro, N.C.

Author’s Reply: I am not familiar with the facts of “Ken’s” case, but I would be surprised if he was prosecuted criminally simply because he could not pay. Almost certainly he committed some act of deception toward the state. Tax prosecutions are generally based upon some willful misconduct by the defendant. At the same time, Mr. Schlueter makes a broader, valid point. Whenever you are dealing with the IRS criminal investigators, it is wise to keep the state folks in mind, especially if you live in a state with an active state criminal tax enforcement effort.

Stephen G. Huggard, Esq.
Boston

Letters

LTC Insurance Has Potential as Wealth Management Strategy, Too

By Susan J. Bruno

november 2008

Thank you for your very informative article, “Long-Term Care Insurance and Tax Planning” (Aug. 08, page 44). As a CPA/PFS, I believe that every financial adviser should help their clients make an informed decision regarding long-term care insurance, given the ever-escalating cost of long-term care. We have found time and time again that the main goal of our older clients is to ensure that they are never a burden on their family, especially a financial burden.

I would suggest involving the family members, and even if they choose not to purchase the coverage, at least they all made the decision with their eyes wide open. This can be an expensive purchase, especially if made later in life, but the cost of not transferring this risk may be more expensive, and likely one that may fall not only on the aging client, but also on the entire family.

Transferring this risk is why most people buy long-term care insurance, but there are other motivating factors for the least likely long-term care buyer: the ultra high-net-worth individual. These factors are wealth replacement and estate tax reduction. There is an increasing trend for the very wealthy, who can likely afford not only the coverage but also the best of care in their later years, to purchase long-term care policies. And many are purchasing policies with almost double the premium by adding the benefit of a return of premium rider. After all, the worst-case scenario is the opportunity cost on a relatively small amount of their funds.

And here’s the twist: Although they are the insured party, they are not the owners of the policies. Instead, the benefit and/or return of premium will be going to their children or a trust for their children’s or grandchildren’s benefit, outside of the aging client’s taxable estate! Yes, there are gift and income tax considerations, but this strategy is certainly worthy of exploration!

Susan J. Bruno, CPA/PFS
Rowayton, Conn.

Letters

141(R)'s Effect on Goodwill

By Chesley H. Erickson

november 2008

In reading your article, “A New Day for Business Combinations,” (June 08, page 34) I had some questions regarding [FASB] statement 141(R). A client purchases a company for $20 million. The company has $10 million of tangible assets, mainly cash, receivables and some property. The purchase is highly leveraged and results in debt of about the same as the purchase price.

I believe currently it would result in about $10 million of goodwill. Do you see any differences from current standards on recording this after 141(R)?

Chesley H. Erickson, CPA
Salt Lake City

Author’s Reply: Yes, potentially a lot of difference. The flowchart in the article identifies a number of places where different amounts will be attributed to the acquired company’s assets and liabilities, which would in turn impact the amount of goodwill.

For example, acquisition-related expenses will not be added to the cost of goodwill. Any in-process R&D is recognized as an asset and carried forward. In addition, various contingencies may surround the acquired company’s assets and liabilities, and some contingent consideration may be looming. These items are all recorded in the process of booking the transaction. Thus, the value of goodwill could be substantially different, depending on the facts and circumstances.

Another point in your example is the source of the funding. It doesn’t matter what form is used—cash, debt or equity—the measure of the goodwill is based on the difference between the fair value of all the other assets and assumed liabilities and the fair value of the consideration paid to acquire the company. Thanks for asking.

Paul B.W. Miller, CPA
Colorado Springs, Colo.

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