To FEI Member:
The annual Congressional budget cycle provides a window into the priorities Congress will tackle over the next year. FEI’s national technical committees have been hard at work reviewing the budgetary proposals, and the Committee on Taxation recently sent a letter offering comments on the budget to Congressional leadership. You can find more details about this years’ budget below.
Briefly, our letter strongly urged that any major tax policy changes be addressed in the context of a broader tax reform effort, in which a significant corporate tax rate reduction is also considered. The letter read: “During this period of economic struggle, as businesses seek enhanced access to capital, increased liquidity and renewed job growth, hundreds of billions of dollars in business tax increases will impede economic recovery.” As a result, we seek to work cooperatively to find a solution that does not challenge the competitiveness of U.S. businesses.
Aside from the budget, there are many other areas where you can get involved on national issues affecting financial executives. We hope you enjoy reading this edition of the IOU newsletter to explore those opportunities. If you have any comments or suggestions on the newsletter, please send them to Cady North, manager of Government Affairs for FEI, at email@example.com or by phone at 202-626-7803. To manage your subscriptions, please visit the FEI Web site.
Ron Dickel, Chairman, FEI Committee on Taxation
Congressional Budget Offers Insight into Policy Priorities
In February of each year, the president presents a budget to Congress. Congress then has until May 15 to set budgetary levels before the Appropriations Committees can begin work on approving funding for government agencies and programs for the next year. Besides spending levels, by virtue, the budget generally includes information about Congressional priorities for the year; it is not, however, a binding agreement. This year’s budget was significant because it was President Barack Obama’s first attempt to enact budgetary policies that would set the stage for his significant plans to reform the health care system and create policies to address climate change, reform the international tax code and reform education.
Obama’s 10-year Budget Blueprint was first proposed on Feb. 26. Two months later, on April 29, Congress was able to agree to a finalized 5-year budget, which set funding levels on all government programs and included instructions to “fast track” both health care and education spending programs. Now that the budget has been passed, Congress will begin work on legislation that will enact policies and programs set forth in the budget.
By “fast tracking” certain provisions, Congress has the authority to pass legislation with only 50 votes in the Senate through a procedural mechanism called budget reconciliation. Specifically, Congress will have to enact a piece of legislation that reduces the deficit by $1 billion by October 15. While the budget indicates a strong preference for health care and education reforms, ultimately any piece of legislation, which reduces the deficit by $1 billion over five years, will suffice. Congressional leadership contends that the fast track option will only be used as a fallback, if reform legislation cannot be passed through regular (60-vote) procedures by October 15.
Aside, from these provisions, the budget includes insight into what Congress will consider as baseline figures for tax policy that will be enacted in legislation throughout the year. Financial executives have expressed concern over many of the tax provisions included, especially when proposed outside of comprehensive tax reform. Below are specific tax provisions set in the budget that could be enacted later this year:
¨ Permanent extension of the 2001 and 2003 tax cuts for individuals earning less than $250,000.
¨ Permanent extension of 2009 estate tax policy (45% rate with a $3.5 million exemption).
¨ A three-year extension of individual alternative minimum tax (AMT) relief.
¨ A two-year extension of expiring tax provisions.
¨ Requires the House to pass a bill that would enact the pay-as-you-go (PAYGO) rule into law before it could pass legislation to extend any middle class tax-cut policies – without offsets – including estate tax relief or AMT relief.
Additionally, on Mon., May 4, President Obama released additional details on his plan to reform the international tax code, creating increases in business taxes. He proposed several reforms, many of which cause great concern to business, especially to U.S. multinational firms:
¨ Eliminating ”check the box” rules;
¨ Limiting deferral;
¨ Restricting foreign tax credits;
¨ Providing new penalties for tax havens;
¨ Hiring 800 new IRS enforcement employees; and
¨ Permanently extending the research and development tax credit.
In response, several senators from both sides of the aisle expressed caution to act on such major reforms outside the context of broader tax reform. One argument is that some of the proposed reforms will hurt the competitiveness of U.S. companies and raise taxes during a time of economic uncertainty. The fact that a permanent extension of the R&D credit was offered as a sweetener was not enough to sway some Congressional members.
What We’re Doing
FEI has actively tracked the progress of the budget this year. The Committee on Taxation sent a comment letter to Congressional leadership on March 27. FEI staff continues to bring up budget-related tax issues to raise awareness during meetings with members of Congress and their staffs. Congressional members continue to reach out to FEI staff on these and other issues.
IFRS Roadmap Creates Divergent Viewpoints
At the end of April, comment letters were due on the U.S. Securities and Exchange Commission’s Roadmap for the potential use of International Financial Reporting Standards (IFRS) by U.S. registrants. As FEI has engaged financial executives across industries, mixed views on IFRS were found. Some members would like to focus on creating convergence of U.S. GAAP and IFRS indefinitely, with little or no support for an eventual mandated adoption of IFRS. Others are for IFRS adoption but request a definitive adoption date.
In order to strike a compromise, several comment letters FEI helped draft advised that the SEC should evaluate mandatory adoption and announce a decision in 2011, including an effective date if determined to move ahead, and prior to that date, focus on convergence. In announcing an adoption date in 2011, the SEC may need to extend the initial adoption date beyond 2014 as proposed, since adoption will require significant company resources and time.
Highlights of the FEI-submitted comment letters to the SEC include:
¨ Member companies agree that there are benefits from the development and use of a single set of globally accepted accounting standards.
¨ A concrete adoption date for IFRS is critical to engaging business in the process.
¨ The date certain must consider the timing of implementation, as companies will need adequate time to carefully consider the impact to their corporations, make the necessary changes for implementation, execute on a plan and provide required historical data.
¨ Support for the SEC’s call for a study on the implications of implementing IFRS for investors and other market participants.
¨ The letter also advised the SEC to form a broad-based Advisory Committee, comprising representatives of all stakeholders in the process, to provide recommendations for a path forward.
What We’re Doing
FEI’s Committee on Corporate Reporting and Committee on Taxation as well as the Corporate Roundtable on International Financial Reporting (CRIFR), of which FEI is a member, sent comment letters on the proposed IFRS Roadmap. CRIFR has held more than 50 meetings and provided a forum for more than 75 financial executives.
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Focus on Accounting
Progress has been made on several accounting and reporting related issues: Financial Statement Presentation, Fair-Value Accounting and FAS 140/FIN 46R and updates on PCAOB can also be found below.
Financial Statement Presentation
In April, FEI’s Committee on Corporate Reporting and Committee on Private Companies-Standards Subcommittee, submitted comment letters to FASB and the International Accounting Standards Board on the two board’s joint Discussion Paper on Financial Statement Presentation.
The FEI committees questioned the cost-benefit of the proposal, noted concern with proposing such far-reaching changes to the financial statements at this time (i.e., when companies are facing other pressing challenges during the economic crisis and investors are looking for stability.) Comments also addressed the proposal for a direct cash flow statement and for further disaggregation. See the CCR letter and CPC letter.
In early April, FASB released guidance on fair value in inactive markets, other-than-temporary impairment (OTTI), and disclosures. (See FEI summary). This guidance was expedited by FASB in response to a request at a House Financial Services Committee hearing in March.
On April 27, Rep. Spencer Bachus (D-Ala.), ranking committee member on the House Financial Services Committee, sent a letter to Committee Chairman Rep. Barney Frank (D-Mass.), asking that the committee conduct a hearing to review the usefulness of the guidance issued by FASB and related guidance issued in April by the Public Company Accounting Oversight Board (PCAOB).
FAS 140/FIN 46R
FASB issued Exposure Drafts last fall that propose to amend FAS 140, Transfers of Financial Assets, and FIN 46R, Consolidation of Variable Interest Entities. The amendments are expected to require companies to place certain securitizations and certain other asset transfers back on the balance sheet (particularly those transactions, such as certain mortgage loans, which were securitized using a Qualified Special Purpose Entity (QSPE) structure). In total, some estimates show trillions of dollars could be put back on balance sheets, particularly in mortgage securitizations.
FASB has been redeliberating the proposed amendments to FAS 140 and FIN 46R in consideration of comment letters received and input from FASB roundtables and other outreach. FEI’s Committee on Corporate Reporting filed a comment letter on the proposals last fall. FASB currently anticipates issuing the final amendments to FAS 140 and FIN 46R by the end of the second quarter, 2009.
FEI’s Committee on Corporate Reporting (CCR) sent a comment letter to the PCAOB in April on PCAOB’s proposed standard on Engagement Quality Review (EQR). The letter, signed by CCR Chair Arnold Hanish, supports the PCAOB’s efforts to adopt a comprehensive standard on EQR, and commends PCAOB for proposing a revised standard.
However, the FEI CCR letter also provides two suggestions for PCAOB to consider in its deliberations toward issuing a final standard:
(1) Although CCR supports the change from ”knows or should know” to ”due professional care” in the revised proposal, the intent of that change, says FEI CCR, could be contradicted by wording on p. 24 of the Release; and
(2) The documentation requirements in paragraph 19c of the proposal “are too prescriptive and would drive an excessive amount of documentation that is not necessary to further the objective of well-performed EQRs in quality audits.”
Separately, on April 21, PCAOB released Staff Audit Practice Alert No. 4, Auditor Considerations Regarding Fair Value Measurements, Disclosures, and Other-Than-Temporary Impairments.
PCAOB also recently announced that Martin Baumann has been named chief auditor. Baumann previously served as director of PCAOB’s Office of Research and Analysis.
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¨ Congress plans to adopt a series of regulatory reforms, which will affect many areas related to financial executives — starting with the creation of a 10-member Select Committee to investigate the economic crisis and provide recommendations on Financial Regulation Reform. FEI’s Working Group on Financial Regulation Reform was formed this month to increase awareness of Financial Regulation Reform proposals, provide a forum for companies of all sizes and funding models to share information, and facilitate commenting on policy proposals as they move through the legislative process. FEI’s working group is also considering publishing its own set of policy recommendations for reform.
¨ Calling all Treasurers: FEI is seeking to provide more value to FEI’s treasurers by reinstating the FEI committee devoted to treasury issues. The Committee on Corporate Treasury will have its first conference telephone call on Mon., May 11 at 10 a.m. EST. Though the list will likely grow, issues the committee will address initially may include: working capital, risk management and credit rating agencies. If you are interested in joining this committee, please contact Serena Dávila at firstname.lastname@example.org or 202.626.7809.
¨ Opportunities for Private Companies: In order to improve the value for FEI’s private company members, FEI will offer a series of webcasts devoted to topics of specific interest to private company members. The first of this series will take place on June 9 at 12 noon and is free to FEI members. “What’s New with FASB,” a webcast, will address recent developments on going concern, subsequent events, new fair-value standards and more. See FEI’s webcast page for more information.
¨ FEI Reaches Out: The majority of the policies and proposals that have been debated by the 111th Congress have been extremely complex, and there are many in congressional offices that are unfamiliar with these complex business and finance issues. FEI’s staff and technical committees have ramped up their efforts to educate policymakers and regulators on behalf of FEI members through dozens of meetings with those in the Congressional offices. Moreover, FEI has developed strategic relationships with dozens of other professional associations and organizations to study how these policy proposals will impact businesses. Among the groups that FEI is working with: the Business Roundtable, National Association of Manufacturers and the U.S. Chamber of Commerce. To learn more about these efforts please contact the Advocacy and Accounting staff.
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ON OUR RADAR
Health Care: President Obama and Congress plan to overhaul our nation’s health care system this year, which will undoubtedly have an impact on financial executives. A record of five congressional committees will be working on the health care reform measure. The Senate Finance Committee seems to be taking the lead and has held two of its three roundtable discussions with industry leaders. The final roundtable, expected to be held on May 12, will focus on financing comprehensive health care reform. Sen. Max Baucus (D-Mont.), Senate Finance committee chairman, recently released more details about his recommended policy options. His proposal addresses payment reform, health care infrastructure investments, Medicare Advantage and public-program integrity. The Senate Finance Committee is expected to move at a fast pace and advance legislation on health care later this fall.
FEI’s advocacy efforts include the activities of its national technical committees as well as those of its government-relations staff located at 1825 K Street, in Washington, D.C. The Advocacy and Accounting Policy department staff in New Jersey and Washington, D.C., are involved in information gathering and dissemination on a range of public-policy issues affecting financial executives such as: corporate taxation, accounting and financial reporting, pensions and health care; government contracting, the federal budget and international trade. For more information, contact our staff.
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