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					Accountants One
Tax Clinic – FAS 109
           BDO Seidman, LLP
           Presenters:
           Katherine Morris
           Tax Partner
           Southeast Regional Leader of
           Accounting for Income Tax Team


           Mark Siegel
           State and Local Tax Senior
           Manager
6/24/09
With you today…
BDO Seidman, LLP speakers:
         Katherine Morris                      Mark Siegel
         Tax Partner, Southeast Regional       Office State and Local Tax
         Leader of Accounting for Income       Practice Leader
         Tax Team
                                                  T: 404 979 7188
           T: 404 979 7182
                                                  E: msiegel@bdo.com
           E: kmorris@bdo.com




                                           2
Disclaimer
•To ensure compliance with Treasury Department regulations, we wish
 to inform you that any tax advice that may be contained in this
 communication (including any attachments) is not intended or written
 to be used, and cannot be used, for the purpose of (i) avoiding tax-
 related penalties under the Internal Revenue Service Code or
 applicable state or local tax law provisions or (ii) promoting,
 marketing, or recommending to another party any tax-related matters
 addressed herein.

•Material discussed in this presentation is meant to provide general
 information and should not be acted on without professional advice
 tailored to your firm’s individual needs.




                                3
Today’s Agenda
• Accounting for Income Taxes FAS 109 – Hot Topics
• Multistate Tax Update
• Q&A




                          4
Accounting for Income Taxes FAS 109 – Hot
Topics
  • Valuation Allowances
  • 141R
  • Interperiod Accounting
  • Intraperiod Accounting
  • Balance Sheet Presentation – FAS 109.41
  • APB Opinion 23
  • IFRS – IAS 12
  • Asset Retirement Obligations – FAS 143
  • Assessing Errors
                           5
Valuation Allowances




                       6
Valuation Allowance - Issues


• Timing of when can release – when income begins or
  when history of earnings established?

• SEC will ask: What was the triggering event which
  resulted in the change in the valuation allowance?

• Use a reasonable method
   • Generally, must be specifically identified and recognized
     based on tax return ordering
   • If cannot be identified, then prorate



                               7
Valuation Allowance – Support Triggering
Events and Needs for Changes
• Issue
   • Companies not documenting underlying support of positive and
     negative evidence
   • Companies receiving comments from SEC with no
     contemporaneous support for need for / release of VA

• Guidance
   • The deferred tax asset (DTA) should be reduced by a valuation
     allowance if, based on the weight of all available evidence, it is
     more likely than not (>50%) that some portion or all of the DTA
     will not be realized.

• Take Away
   • Management must contemporaneously examine and support
     changes in valuation allowances


                                8
Valuation Allowance: DTL from Indefinite Lived
Intangibles cannot be considered in VA
• Background
   • Company‟s net DTLs against DTAs; however, indefinite-lived
     intangibles and goodwill are not amortized under FAS 142

• Guidance
   • One of the four sources of income evaluated in determining the
     valuation allowance is reversing taxable temporary differences.
   • Only taxable temporary differences that can be offset by the existing
     reversing deductible temporary differences, NOLs or credits may be
     considered a source of income to eliminate the need for a valuation
     allowance


• Take Away
   • DTL from indefinite-lived intangibles cannot be used as a source of
     income for valuation allowance

                                  9
Valuation Allowance: EXAMPLE of
Indefinite-Lived Intangibles DTL
• Example:
   • Loss Co. has substantial NOLs with a full VA
   • Included in the tax loss for the year is $1,000 of tax amortization
     related to goodwill not expensed for book purposes
   • There are no other book/tax differences
   • The tax rate is 40%
• Provision = $400
   • Current provision = $0
   • Deferred provision = $400 (to establish the DTL for the basis
     difference in goodwill)
       • The indefinite-lived asset taxable temporary difference cannot be
         considered as a source of income to reduce the valuation
         allowance

                                  10
Valuation Allowance – No Netting of DTAs and
DTLs from Different Jurisdictions
• Issue
   • The reversal of taxable temporary difference cannot be offset by a
     reversing deductible temporary differences, NOLs or credits in
     another jurisdiction


• Example
   • Canadian DTA = $100; related to Canadian NOLs with full VA
   • US Parent DTL = $(100), relating to depreciation on U.S. assets

       UK DTA                        $100
       UK - Valuation Allowance      (100)
       US DTL                        (100)
                Consolidated DTL    $(100)

       • The US taxable temporary difference cannot be considered as a
         source of income to reduce the UK valuation allowance

                                   11
Valuation Allowance: Overview


• FAS 109.21
  • The deferred tax asset should be reduced by a valuation
    allowance if, based on the weight of all available evidence, it
    is more likely than not (>50%) that some portion or all of the
    deferred tax asset will not be realized.
  • Reduces the deferred tax asset to the amount that is more
    likely than not to be realized




                              12
Valuation Allowance: Evidence


• Evidence to be considered             • Negative Evidence
   • Future reversals of taxable           • A history of operating losses
     temporary differences                   or tax credit carryforwards
   • Future taxable income                   expiring unused
     exclusive of reversing                • Losses expected in early
     temporary differences and               future years
     carryforwards                         • Unsettled circumstances that
   • Taxable income in carryback             if unfavorably resolved would
     years if permitted                      adversely effect future
   • Tax planning strategies                 operations and profit level

       • Must Be Prudent and
         Feasible




                                   13
Valuation Allowance: Positive Evidence

• Examples of Positive Evidence
   • Existing contracts or firm sales backlog that would produce
     more than enough taxable income to realize the deferred tax
     assets
   • An excess of appreciated asset value over the tax basis of the
     entity‟s net assets in an amount sufficient to realize the
     deferred tax assets
   • Strong earnings history exclusive of the loss that generated
     the asset with evidence indicating that the loss is an
     aberration rather than a continuing condition
       • Some say at least 2 years of earnings




                                14
141R




       15
FAS 141R – Effective for years after 12/15/2008

• Effective Date and Transition
   • Effective at the beginning of the first annual period beginning
     on or after December 15, 2008.
       • 1/1/09 for calendar YE taxpayers
       • Early adoption NOT permitted



• Significant changes:
   • More of a “pure” fair value model
   • All assets and liabilities will be individually measured at FV
     without adding transaction costs and restructuring costs
   • Impacts deferred taxes significantly


                                16
FAS 141(R)

• Measurement Period
  • Initial accounting for business combination is incomplete by end of
    reporting period
  • The measurement period shall not exceed a year from the
    acquisition date
  • Allows retrospective adjustments accounted for under acquisition
    accounting (i.e. goodwill)
      • New knowledge about facts and circumstances that existed as of the
        acquisition date




                                17
141R:
Roadmap to FAS 109 / FAS 141R / FIN 48

• Determine the tax structure of the transaction
   • Taxable versus Non-taxable Transactions
• Calculate the bases in the net assets acquired
   • GAAP bases versus Tax bases
• Categorize bases differences as Temporary or Permanent,
  and measure bases differences
   • Consider contingent consideration
• Identify and account for Uncertain Tax Positions




                              18
141R:
Determine the tax structure of the transaction

• Taxable versus Non-taxable Transactions
   • Generally, asset acquisitions are “taxable” transactions and stock
     acquisitions are “non-taxable” acquisitions.
       • Query: if special elections made and/or if local law allows for
         adjustments to tax bases.
• Taxable status of the parties to transaction
   • Flow through entities (partnerships)




                                   19
141R:
GAAP bases versus Tax bases

• Calculate the bases in the net assets acquired:
   • GAAP – Recorded at Fair Value
   • Tax - In taxable transaction assets and liabilities recorded at fair
     value
       • Consider possible book/tax differences in allocation of purchase price
       • Consider impact of local jurisdictional law
   • Tax – In non-taxable transaction carryover of inside bases
       • Consider special elections as well as separate jurisdictions (e.g. 338
         election for state only).




                                   20
141R:
Categorize and measure bases differences

• Recognition of deferred taxes required for most bases
  differences
• Tax basis is computed pursuant to FIN 48
• Tax basis balance sheet
   • Can be helpful if there is a large number of basis differences
• Identifying tax basis to book basis for appropriate
  comparison of basis
   • Book identifiable intangibles versus tax “goodwill”




                                21
141R:
Goodwill and Deferred Taxes

• Components
   • Component 1: lesser of book or tax goodwill
   • Component 2: remainder (either book or tax)


• Component 2: Book Goodwill (Day-1 Acctng)
   • Book goodwill basis > tax goodwill basis
   • No deferred liability recorded
       • i.e. No gross-up of the book goodwill




                                  22
141R:
Goodwill and Deferred Taxes

• Component 2: Tax Goodwill (Day-1 Accounting)
   • Deferred taxes recorded via iterative calculation
       • (tax rate/(1-tax rate))* Orig. Temp Diff = DTA
   • Modify formula if the recording of the DTA exceeds original book
     goodwill (i.e. “bargain purchase gain”) and/or if full/partial valuation
     allowance required on acquired DTAs




                                   23
Excess Tax Deductible Goodwill impacts
goodwill at acquisition
 •   FAS 109/141                              •   After 141(R)
       • Impacts goodwill when tax                   • Impacts goodwill computation at
         benefit realized                               acquisition
       • Excess tax benefit is recognized            • Recognize DTA on acquisition date, to
         in the year realized on the return             increase the FV assigned to the
         as an offset to book goodwill                  acquired net assets and decrease
         associated with the acquisition                financial reporting goodwill
                                                     • DTA calculation:
                                                            • (Tax Rate/(1-Tax Rate)
                                                            • X (multiplied by)
                                                            • Preliminary Temporary Difference
                                                            • =DTA
                                                     • “Preliminary Temporary Difference” =
                                                        excess of tax goodwill over book
                                                        goodwill
                                                     • Resulting DTA would first reduce book
                                                        goodwill to zero
                                                     • Any additional DTA results in a bargain
                                                        purchase


                                         24
Acquisition related costs not capitalized in FV of
assets
 • FAS 109/141                          •   After 141(R)
    • Uncertainty related to                  • Not part of the FV that is
      treatment when immediate                  transferred in the acquisition
      recognition occurs
                                              • Expensed for books as incurred
    • Costs incurred that are
                                              • Deferred tax asset should only
      deductible for tax purposes
                                                be recognized if the expense
      currently but are treated as
                                                would be deductible for tax even
      part of the cost/purchase
                                                if the transaction does not occur
      price allocation for financial
      reporting purposes                      • If taxable transaction then the
                                                deferred tax asset remains
    • Recognition as a component
      of the acquisition                      • If the DTA is amortizable, do not
                                                consider as part of the
                                                Tier1/Tier2 costs analysis for
                                                goodwill




                                   25
Record DTA for Assumed Vested Options

 • FAS 109/141                       •   After 141(R)
    • No DTA recorded at the               • Record DTA at the time of
      time of the business                   the business combination
      combination                            for share based
    • Benefit of the deduction for           replacement awards
      tax purposes should be               • Excess benefit or shortfalls
      recognized as an                       are recorded in APIC
      adjustment to the purchase
      price to the extent of fair
      value for book purposes
    • Excess benefit is recorded
      in APIC




                                26
141R:
FIN 48 – Acquired Uncertain Tax Positions

• Day 1: Recognition and Measurement
   • Two-step process
   • Other Issues
      • Offsetting benefits (FTC, federally effected state, etc.)
      • Indemnifications
• Day 2:
   • Pre/Post Measurement Period
   • Pre-FAS 141R acquisitions
      • Previously under EITF 93-7 (no measurement period)




                                   27
FAS 141R – Adjustments to tax related
contingencies depend on measurement date
 •     FAS 109/141                                •    After 141(R)
       Adjust goodwill                                   • Adjustments (i.e. true-ups) are
       1. Adjust goodwill related to the                    permitted to goodwill recorded
          acquisition                                       at purchase accounting within
                                                            measurement period *
       2. Then any non-current                           • Adjustments after the
          intangible assets related to                      measurement period are
          the acquisition;                                  recognized in P&L statement
                                                         • Any adjustment based on new
                                                            information is an adjustment to
       3. Lastly adjust income tax                          the income statement
          expense



     This rule applies to all acquisitions even if they were prior to the effective date of 141R
     * Measurement period is the announcement date to the close date, not to extend beyond
     one year.



                                             28
Changes in Acquired’s Valuation Allowance depend
on measurement period
 SAFS 109, Paragraph 30
 • FAS 141 / 109.30                                 • After 141(R)
 Tax benefits recognized are applied,               Adjust goodwill within Measurement
 in order:                                             period *:
       1. Reduce to zero any goodwill               • Adjust Goodwill: Tax benefits
          related to the acquisition;                  recognized subsequent to the
                                                       acquisition but within the
       2. Reduce to zero other non-                    measurement period are applied to
          current intangible assets                    reduce to zero any goodwill related to
          related to the acquisition;                  the acquisition.
       3. Reduce income tax
          expense                                   Adjust P&L after Measurement period:
                                                    • P&L: Tax benefits realized after the
                                                       first year reduce income tax expense
  The changes to Paragraph 30 apply to all acquisitions even if they were prior to the effective date of
  141R
  * Measurement period is the announcement date to the close date,
  not to extend beyond one year.

                                             29
Changes to Acquiror’s Valuation Allowance Impact
P&L

 • FAS 109/141                  •   After 141(R)
    • Changes impact goodwill         • Changes impact P&L -
      -currently considered a            acquisition-related changes
      component of the                   in Acquiror‟s pre-existing
      acquisition allocation             valuation allowance are
                                         reflected in income




                           30
FIN 48




         31
FIN 48: Overview

• Companies must evaluate
  all tax positions for all
  open years and all
  jurisdictions
• Two Step Process:
  • Recognition
     • The confidence level of the tax
       position must be “more likely
       than not” of being sustained in                Measurement?
       an audit to record the benefit
                                         Possible Outcome   Cumulative Probability
       of the position.
                                              $ 100                  5%
  • Measurement
                                               $ 60                 55%
     • If a position is recognizable,          $ 20                 95%
       the amount recognized must
       be the largest amount of tax
       benefit that is greater than
       50% likely of being realized.32
FIN 48: Nonpublic Company Deferral


• On October 1, 2008, the FASB proposed to defer the
  effective date of FIN 48 for nonpublic companies until
  years beginning after December 15, 2008.




                          33
FIN 48: Change in Tax Reserves connected to
Business Combinations Impact Goodwill
• Issue
  • Acquired company has tax reserves related to uncertain tax positions
    that have been claimed in the past.
      • These acquisitions often are settled outside the general “one year
        window” for making purchase accounting adjustments.
• Guidance
  • Income tax uncertainties existing at the time or arising in conjunction
    with an acquisition accounted for under FAS 109 rather than FAS
    141 (EITF 93-7) or FAS 141R
  • As tax reserves adjusted, the increase or decrease in the tax reserve
    applied to goodwill, then identifiable intangibles, then P&L
  • Interest on the final settlement with the tax authorities accrued after
    the date of the acquisition should not adjust goodwill

• Take Away
  • Change in tax reserves connected to business combinations are
    offset against goodwill, but, interest accruing after
    acquisitions does not
                                   34
FIN 48: Disclosure Considerations


• Watch for:
   • Improper netting of amounts that cross tax jurisdictions
       • Examples:
           • Federal exposures and state benefits
           • Transfer pricing exposures and benefits from different
             jurisdictions
   • Attempts to restate prior periods




                               35
FIN 48: No Netting of State and Foreign UTBs

• Issue:
   • How should State and Foreign Unrecognized Tax Benefits
     (UTBs) be reflected in the financials?


• Application:
   • When UTBs create a federal tax benefit, record state and
     foreign tax GROSS; show the federal tax benefit as a DTA
      • Gross in the footnote disclosure
      • Net in the ETR computation




                               36
FIN 48: No Netting of Cross-Border Transfer
Pricing Issues
• Issue
   • Multinational companies may have used historical blended
     foreign tax rate; examples:
       • R&D labs may be located in one country
       • Manufacturing plants in other countries


• Guidance
   • Present tax positions separately at a level no higher than a
     jurisdictional level

• Take Away
   • Cannot net jurisdictional exposures; cannot offset a transfer
     pricing exposure in one jurisdiction with related tax
     benefits from another


                                37
FIN 48: Recognize Benefits for Prior Year Tax
Refunds
• Issue
   • Does a company need to consider refund claims as well as
     liabilities?

• Guidance
   • FIN 48 applies to refund claims
   • Recognize and measure benefits using the FIN 48 criteria, not
     as a contingent gain under FAS 5

• Take Away
   • Consider the impact of refund claims on retained earnings at
     the time of adoption and on income tax expense/benefit in
     future periods


                              38
FIN 48: Timing of Audit Settlement of Tax
Positions
• Issue
   • When is an uncertain tax position “settled”?

• Application
   • FSP FIN 48-1, “Definition of Settlement in FASB Interpretation
     No. 48,” issued May 2007

• Guidance:
   • Position must be effectively settled and meet 3 conditions
       • Completion of exam
       • Company does not intend to appeal/litigate
       • Remote likelihood that taxing authority would examine/re-examine
         tax position

• Take Away
   • Even though FIN 48-1 issued in 2007, uncertainty and disputes
     around “settlement” still exists; support positions taken

                                39
FIN 48: Settlement Limited to Examined Return
Year(s)

• Issue
   • Company completes an exam and fails to identify an uncertain
     tax position in that year‟s tax return


• Application
   • Settlement is limited to the year or years settled

• Take Away
   • Settlement provides no new evidence about the technical
     merits of similar tax positions in other years‟ tax returns




                               40
FIN 48: Support Share-Based Compensation /
APIC Pool under FAS 123R
• Issue
   • Should FAS 123R be considered in FIN 48 review?
• Guidance
   • Under FAS 123R, tax benefits from stock based compensation
     deductions are not recognized until they reduce income taxes payable
• Application
   • Companies that grant stock-based compensation may realize tax
     benefits
   • Consider share based compensation in FIN 48 review
   • Consider “windfall” tax benefits FAS 123R.82
   • Recognize benefits, if appropriate
• Take Away
   • “Windfall” benefits should not be recognized until they actually reduce
     income taxes payable


                                  41
FIN 48 - Valuation Allowance on DTAs not a
substitute for FIN 48
• Issues
   • Companies fully valued DTAs with VA and did not show tax benefits
   • Companies did not examine tax issues because had full VA on DTAs


• Guidance
   • DTAs should be established for all deductible temporary differences,
     NOLs and Credits
   • A valuation allowance may be required if future realization is in doubt due
     to insufficient future taxable income


• Take Away
   • A valuation allowance is not a substitute for derecognizing a deferred tax
     asset that has not met the recognition criterion (Clarified by FIN 48)



                                 42
Interim Reporting




                    43
FIN 18
Interim Reporting
• Background
   • With the downturn in the economy, we have seen unusual items
       • discops, asset impairments, asset retirement obligations, etc.


• Issue
   • Does the event impact the effective tax rate for the quarter/interim
     period report?

• General Rule
   • Compute the interim period tax by applying the estimated annual
     effective tax rate (ETR) to the year to date income (or loss) from
     continuing operations.
   • Revise the estimated annual ETR at the end of each interim period
     based upon the best current estimate of the annual ETR.



                                    44
FIN 18
Interim Reporting
• Discrete Events
   • Exclude events that occur during the quarter which do not
     relate to continuing operations
   • Recognize in the period in which they occur
   • Examples:
      • Settlement of a tax audit related to prior years
      • Change in tax law which requires retro-active adjustments that
        fall out of the current year (i.e. re-enactment of R&D credit).




                                 45
FIN 18
Interim Reporting
• Discontinued Operations
   • Extraordinary items and Discontinued Operations are
     disclosed net of tax in the year end financial statements and in
     the interim financials.




                               46
FIN 18 Interim Reporting –
Discrete Events or Not?
• Examples:
   • Discrete:
      • A law change occurs whereby the R&D credit is refreshed
        allowing the company to calculate credit on Qualified Research
        expenditures that occurred the last 6 months of the prior year
        and the first 6 months of the current year.
      • Company settles a tax audit from prior years resulting in a $600
        assessment, the company had previously reserved for $400.

   • Continuing Operations:
      • Company hires additional employees in Q3 and grants ISO‟s
        forcing an adjustment to FAS 123R expense for the year.
      • Company releases valuation allowance based on current years‟
        earnings.
      • Goodwill/intangible impairment recorded in a quarter, as long as:
          • infrequent, not related to discontinued operations or treated
            as an extraordinary item

                                  47
Intraperiod Accounting




                         48
Intraperiod Tax Allocation

• Income tax expense (or benefit) allocated to:
   • continuing operations
   • discontinued operations
   • extraordinary items
   • other comprehensive income
   • cumulative effect of accounting changes
   • other charges or credits recorded directly to S/H equity

• Allocation referred to as intraperiod tax allocation




                               49
FAS 115: Record deferreds for unrealized losses
on securities recorded in OCI

• Issue
  • We expect unrealized losses on securities to be recorded in
    Q4 2008 under FAS 115
  • How are the tax effects of recognition of unrealized gains and
    losses on available-for-sale securities that are included in OCI
    (i.e., in S/H equity) reflected?


• Take Away:
  • Results in temporary differences until disposition
  • Include in OCI net of related income tax effects
  • Record deferreds for tax impact



                              50
FAS 115


• Background
  • FAS 115, Accounting for Certain Investments in Debt and
    Equity Securities, applies to
     • Accounting and reporting for investments in marketable equity
       securities with readily determinable FMV
     • All investments in debt securities
     • Recognizes investments as trading or available-for-sale




                                51
FAS 115 - EXAMPLE

• Facts:
     • Security XYZ, par value $100,000 purchased on 6/30/2007 and
       classified as available for sale. At 12/31/2007 the security‟s FMV is
       $110,000 – unrealized gain of $10,000. Assume tax rate = 35%.


• Entries:
     • DEBIT: Available-for-sale securities     $10,000
     •  CREDIT: OCI                                             $10,000

     • DEBIT: OCI                                      $3,500
     •  CREDIT: Deferred tax liability *                        $3,500


•   * Note: Deferred taxes would not be provided if the unrealized book
    gain/loss for tax will result in a tax capital gain/loss which is not
    anticipated to be realized.


                                    52
FAS 109.140 – Tax Expense Allocation

• Issue
  • How is tax expense allocated between continuing and
    discontinued operations when there is a loss from continuing
    operations and a gain from discontinued operations?

• Guidance
  • Exception to general intraperiod tax allocations under FAS
    109
      • Consider extraordinary gain in the current-year when allocating a
        current-year loss tax benefit
  • All items (e.g., extraordinary items, discontinued operations,
    etc.) should be considered in determining the amount of tax
    benefit resulting from a continuing operations loss


                                53
FAS 109.140 EXAMPLE

• Example:
  • Company XYZ has loss from continuing operations of
    $100,000 and income from discontinued operations of
    $180,000. Assume an income tax rate of 40% and no
    temporary differences.
     Pretax loss – Continuing Ops        $(100,000)
     Pretax income – DiscOps              180,000
       Net Pretax income                   80,000
       Effective tax rate:                    40%
     Income tax expense                    32,000
     Less: Continuing Ops tax benefits     (40,000)
     Tax expense – DiscOps               $ 72,000



                               54
Balance Sheet Presentation




                      55
Balance Sheet Presentation
FAS 109, Par. 41
• Background:
   • Provision preparers sometimes net current and noncurrent
     deferreds together and do not prorate valuation allowance
     between current and noncurrent deferreds correctly.
   • It is expected that many companies will record valuation
     allowances for the first time or have a change in the VA


• Issue:
   • Improper allocation may cause a debt covenant to be
     incorrect or materially misstate current versus noncurrent
     assets and liabilities
   • Valuation allowance should be presented against current
     DTAs and noncurrent DTAs


                              56
Balance Sheet Presentation
FAS 109, Par. 41
• Guidance: Classified Balance Sheet
   • Balance sheet presentation required to be shown on a
     current/noncurrent basis
   • Classify based on the expected reversal date of the temporary
     difference (FAS 37), Balance sheet Classification of Deferred
     Income Taxes.
   • Valuation allowance for a particular tax jurisdiction shall be
     allocated between current and noncurrent deferred tax assets
     for that tax jurisdiction on a pro-rata basis
   • Net DTA and DTL of the same jurisdiction
   • No netting of DTAs and DTLs, valuation allowances from
     different jurisdictions



                              57
NET CURRENT ASSETS & LIABILITIES, FAS 109,
Par. 41 Example

• Facts:
   • The Company has $500 net operating loss (NOL) and a
     valuation allowance on 25% of deferred tax asset (DTA) for
     the NOL.
   • The Company also has a deductible temporary difference of
     $200 for allowance for bad debt.
   • The blended tax rate is 40% and there is positive evidence
     that the Company will utilize $100 of the net operating loss
     carryforward next year.




                               58
FAS 109 Par. 41 Example

                                   Gross          Tax Effected
                                  DTA/(DTL)           40%        Current     Noncurrent

Allowance for bad debts                200              80           80             -
Net operating losses                   500             200           40           160
Total                                  700             280         120            160
Valuation allowance (25% of NOL)                       (50)        (20)           (30)
                                                       230         100            130




Note: The classification of the valuation allowance is NOT based on the item to which it relates.
      The valuation allowance is allocated on a prorata basis between current and noncurrent
      deferred tax assets for the relevant tax jurisdiction (FAS 109 Par. 152)




                                             59
APB 23 Reporting Position




                 60
APB 23 Reporting Position
• What is the APB 23 exception?
  • A deferred tax liability is not recognized (for outside basis differences)
    unless it becomes apparent that those temporary differences will
    reverse in the foreseeable future (i.e., the repatriation of foreign
    earnings)
  • Applies solely to basis difference in the shares of stock of CFC, that is,
    the „outside basis‟ difference, not to the internal assets/liabilities of the
    CFC. The internal basis differences of the CFC must always be
    accrued (if material)
  • Unrepatriated earnings give rise to outside basis differences (earnings
    increase book basis, not tax)




                                     61
APB 23 Reporting Position

• APB 23 Exception vs. Election?
  • Not an election
  • Exception applies if the specific facts and circumstances
    warrant
  • Based on a company‟s ability and intent to control the reversal
    of a taxable temporary difference (i.e. the outside basis
    difference in the stock of CFC due to unrepatriated earnings)
  • Not an all or nothing exception - can apply to a portion of E&P




                               62
APB 23 Reporting Position

• Consistency Issues Between APB 23 Exception & Other
  Deferred Tax Positions
  • Future reversals of basis differences where the APB 23
    Exception is in place cannot be considered when determining the
    net deferred tax balances and the resulting need for a valuation
    allowance
  • Future earnings that may result when dividends are paid or the
    foreign subsidiary is sold or liquidated cannot be considered to
    the extent that the APB 23 exception was in place for those
    earnings




                                63
APB 23 Reporting Position
• At any point when this assertion cannot be asserted, those
  earnings are no longer eligible for the exception
• Companies should not move in and out of this exceptions,
  however, significant events can trigger a change if warranted
• When a parent no longer qualifies for the exception, deferred
  taxes must be provided in the period the determination
  changes.The change should be reflected as a discrete event
• In summary, treatment of tax consequences when the APB 23
  Exception is in place must be consistently applied




                                64
IFRS: Convergence of
FAS109 and IAS12




                       65
Global Market Challenges


•   Need for high quality, comparable Information
•   Markets seeking new investors
•   Costs
•   Common, globally understood accounting language
•   Convergence….but, what does convergence mean




                          66
IFRS – Where in the World




                     67
10 Largest Capital Markets

                 Accounting Standards   Year of
   Market
                        Applied         Adoption
   US                  US GAAP           TBD
   Japan           Converting to IFRS    2011
   UK                    IFRS            2005
   France                IFRS            2005
   Canada          Converting to IFRS    2005
   Germany               IFRS            2005
   Hong Kong             IFRS            2005
   Spain                 IFRS            2005
   Switzerland     IFRS or US GAAP       2005
   Australia             IFRS            2005



                        68
What Are the IFRS’s?


• 29 International Accounting Standards (IASs)

• 8 International Financial Reporting Standards (IFRSs)




                          69
IFRS – Impact on Income Taxes


• Classification of deferred taxes
• Uncertain tax positions
• Calculation of deferred tax on share based payments




                            70
Income Taxes - Comparison

 U.S. GAAP                             IFRS
 • Deferred income taxes are           • All deferred income taxes are
    classified according to the           classified as long-term.
    underlying tax attribute.          • There is no FIN 48 equivalent
 • FIN 48 provides guidance               under IFRS, although the tax
    on the accounting and                 consequences of events should
    disclosure of uncertain tax           follow the manner in which an
    positions.                            entity expects the tax position
                                          to be resolved. Use of the
                                          cumulative probability model
                                          required by U.S. GAAP is not
                                          supported by IFRS.




                                  71
FAS 109 v. IAS 12 - FIN 48

• IAS 12 - Uncertain tax positions
    • Applies a probability weighted average approach to all tax positions
    • No recognition threshold before measurement
    • Positions evaluated regardless of whether or not they meet the more-
      likely-than-not standard.
    • No “highly certain” concept in IAS 12.
    • All positions required to be analyzed under IAS 12.
• No specific guidance on unrecognized tax positions (UTP‟s) and
  the accounting treatment provided by FIN 48.
    • Observation: Adoption of IAS 12 would eliminate FIN 48 rules unless
      FIN 48 is separately adopted.
• IAS 12 does not address the treatment of interest and penalties.
    • It is expected that this will be dealt with in the exposure document.


                                  72
FAS 109 v. IAS 12 – FIN 18 Interim Tax Reporting

• Note: Interim period tax accounting is not addressed in either
  FAS 109 or IAS 12.
    • U. S. GAAP: APB 28 and FIN 18 control
    • IFRS: IAS 34 controls


• Similarities:
    • Same general principle for determining income tax expense in
      interim periods
    • Both allow for applying an interim rate using something other than an
      estimated tax rate if the facts and circumstances warranted

• Differences:
    • IAS rules would require the calculation of an annual effective rate by
      jurisdiction, rather than an overall rate for a company



                                   73
FAS 109 v. IAS 12 - SFAS 123(R)

• SFAS 123(R)                       • IAS 12
   • US GAAP allows DTAs to be         •  Would require tax expense
     written off against APIC            in each period in which an
     rather than expensed in             award is outstanding to
     certain circumstances.              reflect the deduction
                                         anticipated based on current
   • U.S. tax law: allowable tax         stock price.
     deductions are measured as        • No presumption that the tax
     the intrinsic value of an           deduction resulting from a
     award.                              share-based payment award
                                         will be at least equal to the
                                         initial fair value of the award,
                                         therefore, tax deficiencies as
                                         described in GAAP do not
                                         arise.



                               74
A Comparison of FAS 109 and IAS 12
- Other issues
•   Valuation Allowance
     •   IAS 12, it must be “probable” that the asset will be realized, a different
         meaning than used in U.S. GAAP.
          • Probable defined as “more-likely-than-not”.
•   Disclosures
     •   More expansive under IAS 12, where would require listing the expiration
         of temporary differences other than, credits, etc.
     •   Definition of the term “temporary differences” not yet clarified for
         purposes of determining their expiration period.
•   Tax Holidays
     •   Not yet addressed in IAS 12
•   Not yet determined:
     •   Whether or not adoption of IAS 12 would be done with “Fresh Start”
         application
     •   Meaning of the term “foreseeable future”
          • APB 23 - different interpretations based on paragraph
            31 vs. paragraph 34.


                                         75
IFRS - Background

• Since 1930‟s U.S businesses have followed U.S. Generally
  Accepted Accounting Principles (U.S. GAAP)
   • NOTE: FASB was formed in 1973 (other similar bodies exist around
     the world.

• As markets became more global, there was on-going efforts to
  attempt to standardize accounting throughout the world –
  however, the gold standard remained U.S. GAAP.
• International Accounting Standards Committee (IASC) was also
  formed in 1973 to work towards harmonizing global accounting
  standards.
• The purpose of the IASC was to develop standards to serve as
  model for national standard setters.



                                76
IFRS - Creation of IASB

• The International Accounting Standards Board (IASB) replaced the
  IASC and was created in 2001 with a mission to develop a single
  set of standards, named, “IFRS” which could be used across
  borders.
• Today, more than 100 countries use IFRS including Australia and
  the U.K. Other countries are following shortly including: Israel
  (2008), Chile and Korea (2009), Brazil (2010) and Canada (2011).
• Compared to U.S. GAAP, IFRS tends to be more principle driven,
  while U.S. GAAP is more rules driven. This change will require a
  change in the mind-set for U.S. trained accountants and preparers.
   • Adds more judgment to the mix
   • Less comparability



                              77
IFRS in the United States


• In 2002, the IASB and FASB began the process of
  convergence – a plan to reduce differences between
  U.S. GAAP and IFRS.

• The Securities and Exchange Commission (SEC) has
  been an active participant in this process.

• NOTE: In 2007, the SEC permitted foreign private
  issuers to file IFRS statements (as issued by the
  IASB) WITHOUT a reconciliation to U.S. GAAP.




                         78
IFRS for U.S. Registrants (and Other Companies)
•   In August 2008, the SEC announced a roadmap to begin to permit
    registrants to file statements under IFRS.
•   Gives certain selected registrants the option to file IFRS statements for
    periods ending on or after December 15, 2009. To be eligible, a
    company must:
         • Be one of the 20 largest companies in the world (measured by market
           capitalization) in its industry and
         • IFRS must be the set of accounting standards used most often by those
           20 companies.
•   The SEC estimates about 110 U.S. companies would be eligible to early
    adopt IFRS.
•   SEC will determine in 2011 whether it is in the public interest and would
    enhance investor protection to proceed with rulemaking to require US
    domestic reporting companies to use IFRS beginning in 2014
•   Would mandate conversion for the certain filers for years ending after
    December 15, 2014 with other filers to follow in the
    subsequent years.
                                     79
IFRS - Impact on Adoption for U.S. Registrants

• The road map outlined by the SEC is a critical path.
• It highlights the importance for U.S companies to
  consider their plans for eventual adoption of IFRS.
• In planning for adoption, there are a number of areas
  for CFO‟s and controllers to consider.
• IFRS will also potentially impact entities that are not
  registrants.
•      NOTE: IFRS is not contemplated for use on
       governmental or “public” sector entities



                           80
IFRS – Effective Dates

• When US Domestic Reporting Companies Would be
  Required to Adopt if SEC proceeds with rulemaking in
  2011:
   • Large accelerated filers:
       • Fiscal years ending on or after December 15, 2014
   • Accelerated filers:
       • Fiscal years ending on or after December 15, 2015
   • Non-accelerated filers, including smaller reporting companies:
       • Fiscal years ending on or after December 15, 2016




                                 81
Asset Retirement Obligations (ARO) - FAS 143

Katherine Morris




                   82
FAS 143 – Provide Deferred Taxes on ARO

• Issue:
   • ARO is recorded for discops, retirements, spin-offs, etc.


• General Rule:
   • An entity is required to recognize a liability for the FV of a conditional
     asset retirement obligation when incurred if the liability‟s FV can be
     reasonably estimated
   • An entity records the offset to the liability as a write-up in the asset
   • Deferred taxes must be provided


• Take Away:
   • Uncertainty about the timing and (or) method of settlement of a
     conditional asset retirement obligation should be considered when
     computing deferred taxes


                                   83
FAS 143 - ARO

• Book Treatment
  • DEBIT: Long Lived Asset value is increased by amount of the ARO
     • The company does not have tax basis in the increase in the Long Lived
       Asset value
     • Creates a DTL upon creation, which decreases over time


  • CREDIT: Asset Retirement Obligation (recorded as a liability)
     • ARO is amortized using a systematic and rational method over the
       useful life
     • The company does not have tax basis in the ARO
     • Creates a deferred tax asset upon creation, which decreases
       over time
     • Consider the need for a valuation allowance on the DTA



                              84
FAS 143 - ARO

• Background:
  • Asset Retirement Obligation (ARO) defined:
      • A legal obligation to perform an asset retirement activity in which
        the timing and (or) method of settlement are conditional based
        on a future event that may or may not be within the control of the
        entity.
  • Obligations associated with retirements of tangible long-lived
    assets and the associated asset retirement costs.
  • Examples:
      • Legal obligations associated with the retirement of long-lived
        assets that result from an acquisition
      • Construction, development and (or) the normal operation of a
        long-lived asset, except for certain obligations of lessees


                                 85
Assessing Errors




                   86
Assessing Errors

• Issues:
   • Is it an error?
   • Are the financial statements materially misstated?

• Guidance:
   • SEC Filers:
       • SAB 108
            • Errors: Identify and quantify errors that have not been corrected

       • SAB 99
            • Materiality: Evaluate whether the effects of those errors are
              material

   • All Filers of GAAP Financials
       • FAS 154
            • Evaluation accounting changes and error correction


                                     87
SAB 108
Quantify Effects of Prior Year Errors

• SAB 108 Overview
  •   Consider effects of prior year errors on current year F/S
  •   May require significant adjustments
  •   Effective for years ending after 11/15/06
  •   Use both the “iron curtain” and the “rollover” approaches to
      evaluate errors


• Take away:
  • If the adjustment would be material under either approach, the
    error should be corrected




                               88
SAB 108
Dual Approach Required
• Rollover Approach
   • Focuses on the income statement
   • Error is the amount by which the current year income is
     misstated
   • May result in the accumulation of significant errors in the
     balance sheet

• Iron Curtain Approach
   • Focuses on the magnitude of the error in the current balance
     sheet
   • If a prior year error is corrected in the current year, does not
     consider the current year financial statements to be misstated
   • May not prevent significant misstatements of income


                               89
SAB 108
Implementing the Correction

• If you correct an error that was immaterial in prior
  years but is material to the current year:
   • Restate prior year financial statements
   • No need to amend prior filings




                              90
SAB 99 – Materiality

• Issues:
   • Registrants use narrow concepts of materiality to avoid
     making adjustments to the financial statements.
   • Adjustments are made (or not made) to help a company meet
     or exceed analysts‟ consensus earnings estimates.


• Results:
   • SEC staff issued SAB 99, Materiality, to provide guidance on
     assessing materiality and disclosing immaterial intentional
     misstatements.




                              91
SAB 99 – Materiality
Assessing Materiality
• Quantitative (e.g., 5% of net income) and qualitative
  analysis required
• Sample quantitative criteria:
   • Does the misstatement arises from a “hard” (i.e., known) or
     “soft” (i.e., estimated or projected) error?
   • Does misstatement mask earnings trends?
   • Does the misstatement hide a failure to meet analysts‟
     consensus estimates and, would even a small error cause a
     significant stock market reaction based on past patterns of
     market performance?
   • Does the misstatement changes a loss into income or vice
     versa?


                              92
SAB 99 – Materiality
Assessing Materiality

• Sample quantitative criteria – continued:
   • Does the misstatement concern a reportable segment which
     is identified as significant to the current and future business?
   • Does the misstatement affects compliance with regulatory
     requirements, loan covenants or other contractual provisions?
   • Does the misstatement increase management‟s
     compensation?
   • Does the misstatement conceals an unlawful transaction?




                                93
SAB 99 – Materiality
Aggregating and Netting Misstatements

• Evaluating misstatements:
   • Consider individually (i.e., in relation to individual line items,
     sub-totals and totals) and in the aggregate
   • Do not offset one line item (e.g., revenues) by misstatements
     of other line items (e.g., G&A expenses).
   • Exercise care when considering offset of “hard” errors with
     “soft” errors
   • Consider the affect of prior period/current and future
     misstatements




                                 94
SAB 99 – Materiality
Immaterial Intentional Misstatements

• Intentional immaterial misstatements are not
  permitted.

• Because an intentional misstatement may be an illegal
  act, it should be reported to the client‟s audit
  committee regardless of whether it is offset by other
  misstatements.




                          95
FAS 154
Accounting Changes and Error Corrections

• FAS 154 Overview:
  • Replaced APB 20 and FAS 3
  • Applies to:
      • All voluntary changes in accounting principle
      • Changes required by pronouncements where no specific
        transition provisions are included
  • Requires retrospective application to prior periods for changes
    in accounting principle unless impracticable to determine
    either period-specific effects or the cumulative effect of
    change.
  • Effective for accounting changes made in fiscal years
    beginning after 12/15/2005


                                96
FAS 154
Accounting Changes

• Restatement: defined as the revising of previously
  issued F/S to reflect the correction of an error.




                          97
FAS 154
Accounting Changes
• Retrospective application
   • Applies a different accounting principle to prior accounting
     periods as if that principle had always been used
   • Requires:
       • Cumulative effect of change on periods prior to those presented
         reflected as of beginning of first period presented
       • Any offsetting adjustments made to opening balance of RE
       • F/S for each individual prior period presented adjusted to reflect
         period-specific effects of applying the new accounting principle
   • Limited to “direct effects” of change (including income tax
     effects)
       • Indirect effects (e.g., change in nondiscretionary profit-sharing
         payments) should be recognized in period of accounting change


                                  98
Questions?




             99
Multistate Tax Update
June 2009

Mark Siegel



               100
                        AGENDA
•   Current State Environment
•   Common Themes
•   Various State Law Changes/Proposals
•   Tax Amnesty Programs
•   Unclaimed Property




                          101
         CURRENT STATE ENVIRONMENT
• Almost all the states have significant budget shortfalls.
• As a result they are looking for ways to raise tax revenue
  without political fall out.
• States are also cutting back on spending and cutting
  programs where possible.
• States are focusing on unclaimed property to raise
  revenue.




                          102
             MID-FY2009 BUDGET GAP ($)
•   Alabama: $1.1 billion
•   Georgia: $2.2 billion
•   Florida: $2.3 billion
•   Mississippi: $175 million
•   North Carolina: $2 billion
•   South Carolina: $871 million




                           103
       MID-FY 2009 BUDGET GAP (% of General Fund)

•   Alabama: 12.75%
•   Florida: 9%
•   Georgia: 10.3%
•   Mississippi: 3.4%
•   North Carolina: 9.3%
•   South Carolina: 12.7%




                            104
            FY10 Projected BUDGET GAP ($)
•   Alabama: (unavailable)
•   Florida: $5.8 billion
•   Georgia: $3.1 billion
•   Mississippi: $87 million
•   North Carolina: $3.3 billion
•   South Carolina: $725 million




                           105
                   COMMON THEMES
•   Single sales factor
•   Nexus threshold
•   Combined reporting
•   Voluntary disclosure programs
•   Amnesty programs
•   New/expanded credits




                           106
  State Tax Law
Changes/Proposals




     107
                      ALABAMA
                VFJ Ventures v. Surtees
• Alabama required VFJ to add back related party royalties.
• Taxpayer challenged the addback statute on constitutional
  grounds and won at the trial court level.
• Alabama Court of Civil Appeals decided against the
  taxpayer and the Alabama Supreme Court affirmed.
• VFJ appealed to the U.S. Supreme Court. This request
  was denied on April 27, 2009.
• Alabama‟s addback statute remains good law and
  taxpayers should evaluate the exceptions based on their
  unique facts.




                         108
                   CALIFORNIA
         New Rules Effective January 1, 2011
• Single sales factor election
• Economic nexus: sales into state=doing business
• Finnegan rule for sales of combined groups
• Cost of performance rule goes away for sourcing sales of
  services, sales of services will be soured based on where
  the benefit is received.
• Gross receipts from investment transactions excluded from
  sales factor.




                        109
                    CALIFORNIA
       Large Corporate Understatement Penalty
• California imposes a 20% penalty on a taxpayer with a
  California corporate franchise tax or income tax
  understatement in excess of $1 million.
• Applicable to taxable years beginning after 2002.
• The penalty was challenged on various grounds.
• A California superior court ruled that the penalty is
  constitutional




                        110
                    CALIFORNIA
            Voluntary Disclosure Program
• The FTB is authorized to enter into VDAs with taxpayers who
  have never filed or been contacted by the state and allow
  taxpayers to pay prior liability.
• Interest Parties Meeting April 1, 2009:
    Speed of review
    Look back period
    Multi-tiered organizations
    Streamlined approach
• Practitioner‟s comments to be considered.




                        111
                     CALIFORNIA
                Nonresident Withholding
• March 17, 2009 meeting: increased focus on nonresident
  withholding.
• Withholding agents required to withhold 7% of CA source
  income paid or distributed to nonresidents for payments greater
  than $1,500 in a calendar year.
• Withholding rate may be reduced if it results in substantial over-
  withholding.
• Withholding requirement may be waived if agent has history of
  filing returns and making payments timely.




                          112
                       CALIFORNIA
                   Assignment of Credits
• For taxable years beginning after July 1, 2008, members of combined
  groups can assign certain credits to other members.
• Eligible credits include those:
    Earned in a taxable year beginning after July 1, 2008
    Earned in a taxable year beginning prior to July 1, 2008 that is
     carried forward
• An assigned credit may be applied by assignee in a taxable year
  beginning on or after January 1, 2010.
• The Alt Min tax credits excluded.
• Form 3544 must be filed to make irrevocable credit assignment, 1 form
  for each credit being assigned.




                           113
  21
                       CALIFORNIA
       General Mills, et al. v. Franchise Tax Board
• A food processing company must include proceeds from
  commodity futures transactions in its sales factor denominator.
• The futures transactions were engaged in for valid business
  purpose which was to be profitable from its business activities.
• For taxable years beginning on or after January 1, 2011,
  California may no longer permit inclusion of gross receipts from
  futures transactions in the sales factor denominator.




  21

                          114
                      DELAWARE
    Ford Motor Co. v. Delaware Director of Revenue
• Delaware imposes a wholesalers‟ gross receipts tax on 100% of
  receipts derived from wholesale sales of vehicles delivered in
  Delaware.
• Ford is challenging this tax on constitutional grounds because
  almost all of the related activity such as title passage, does not
  take place in Delaware.
• Petition for review was filed with the U.S. Supreme Court on May
  13, 2009.




  21
                          115
                      FLORIDA
Proposed Legislation: Combined Reporting & Throwout

  • Florida currently allows taxpayers to elect to file on a
    consolidated basis. This is a pre-apportionment return that
    includes all members of the federal consolidated group.
    Legislation was introduced in both the Florida House and
    Senate that would require combined reporting for a “water‟s
    edge” group.
  • In addition to implementing combined reporting, HB
    1247/SB 2270 would require taxpayers to apply the
    “throwout” rule in computing their Florida sales factor.




                        116
                   GEORGIA
              Changes to Tax Credits

• Georgia has changed the application of the following credits:
   - Business operating in less developed areas
   - Retraining
   - Qualified research expenses
   - Based year port traffic
   - Establishing headquarters in Georgia




                      117
                      NEW YORK
                    MCT Mobility Tax
• Applicable on and after March 1, 2009, employers operating in
  the New York Metropolitan Commuter Transportation District
  (MCTD) are subject to a tax of .34% of payroll for employees
  located in the MCTD.
• Applies to employers required to withhold New York State
  income tax from wages and individuals with self-employment
  earnings allocated to the MCTD in excess of $10,000 for the
  year.
• Tax must be paid on a quarterly basis.




                         118
                   NORTH CAROLINA
            Sales/Use Tax on Online Retailers
• S.B. 487 was introduced to the North Carolina Senate on
  March 9, 2009 that could increase the number of online
  retailers required to collect and remit sales/use tax.
• Similar to the 2008 “Amazon” law enacted in New York, there
  will be a rebuttable presumption that an online retailer has
  nexus if an in-state company refers customers to the retailer by
  a link on a website.
• The presumption would only apply if the online retailers gross
  receipts to customer in the state exceed $10,000.




                          119
Tax Amnesty Programs




        120
      STATE TAX AMNESTY PROGRAMS

•   Alabama: February 1 through May 15, 2009
•   Arizona: May 1 through June 1, 2009
•   Connecticut: May 1 through June 25, 2009
•   Hawaii: May 27 through June 26, 2009
•   Maryland: September 1 through October 30, 2009
•   New Jersey: May 1 through June 15, 2009
•   Vermont: Prior to October 2, 2009 (TBD)




                      121
                  TAX AMNESTY PROGRAMS
                      CONSIDERATIONS
•   Application period
•   Look back period
•   Eligibility
•   Exposure/liability
•   Applicable taxes
•   Penalties/interest rates




                               122
                  NEW JERSEY
       CHANGES TO VOLUNTARY DISCLOSURES
• The New Jersey DOT will honor terms for VDAs negotiated
  prior to 5/4/09 if closed by 6/15/09.
• After 6/15/09, VDA terms will be more stringent including:
    7 year look-back instead of current 4 years
    No deferred payment plans will be allowed
    VDA program not available to residents for Gross Income
     Taxes, any taxpayer who has received a nexus survey or
     otherwise has been contacted
    5% penalty is imposed for failure to take advantage of Tax
     Amnesty Program ending 6/15/09.
    5% penalty will also be imposed in all instances for late
     payment


                         123
Unclaimed Property




      124
Property collected in Fiscal 2006, in millions

                       Amount Ret urned t o           T ot al held                  Amount Ret urned t o T ot al held
             St at e   Collect ed Owners               by st at e         St at e   Collect ed Owners     by st at e
           Ala.         $66.60         $22.90          $265.0          Mont .           $4.6             $1.3        $27.5
           Alaska          6.4            3.1            50.0          Nev.             32.2              7.2        197.0
           Ariz.          69.7           17.7           469.8          N.H.             10.0              4.4         80.0
           Ark.           16.0            7.3           100.0          N.J.            227.0             82.0       2,000.0
           Calif.        656.0          292.0          5,100.0         N.M.             16.5              2.7         87.1
           Colo.          52.6           14.2           300.0          N.Y.            509.0            151.0       7,000.0
           Conn.          71.1           26.0           675.0          N.C.             98.9             24.0        525.0
           Del.          325.0           n.a.          2,400.0         N.D.              3.4              2.0         28.0
           D.C.          244.6           13.9           244.6          Neb.             12.9             10.2         74.0
           Fla           354.7          101.5          1,300.0         Ohio            210.2             64.4       1,000.0
           Ga             36.1            8.9           684.0          Okla.            39.0             12.4        175.0
           Hawaii         15.0            5.1           156.3          Ore.             35.0              9.0        219.0
           Idaho          n.a.            2.5            54.0          P a.            150.0            200.0       1,000.0
           Ill.          226.2           83.0          1,660.0         R.I.             26.7             10.9        168.0
           Ind.           50.0           54.7           325.0          S.C.             24.7              8.7        183.0
           Iowa           15.6           12.7           170.0          S.D.              7.4              2.2         25.5
           Kan.           18.3           11.5           181.5          T enn.           40.2             20.7        285.1
           Ky.            45.0            8.7             2.0          T exas          448.2            106.0       1,500.0
           La.            48.3           15.6           330.4          Ut ah            22.7              8.9        130.0
           Maine          25.1           10.4           122.4          Vt .              7.0              4.5         39.0
           Md.           140.5           50.9           550.0          Va.              73.7             37.9        753.6
           Mass          121.6           46.9          1,459.3         Wash.            93.7             34.6        540.0
           Mich.         159.8           43.2          1,100.0         W.Va.             9.3             11.0        101.0
           Minn.         112.7           24.8           271.0          Wis.             35.6             19.4        324.0
           Miss.          26.4            9.9            50.0          Wyo.              4.5              1.4         22.3
           Mo.            59.2           21.8           474.8          Total           5,105.0           1,746.3   $34,979.1



                Sources: National Association of Unclaimed Property Administrators; State of Delaware



                                               125
Unclaimed Property Introduction
 • All 50 states and the District of Columbia have enacted unclaimed property laws.

 • The purpose of unclaimed property laws is to ensure the protection of abandoned property until the
   rightful owner is located. Moreover, states use any derivative funds earned on such property for the
   public good.

 • Unclaimed property is not considered a tax.

 • States actively pursue unclaimed property as an additional source of revenue for the state, which avoids
   raising taxes.

 • States‟ Unclaimed property laws apply to all entity types, including:
     •   Corporations;
     •   S Corporations;
     •   Partnerships; and
     •   Limited Liability Companies




                                          126
Unclaimed Property Introduction
    • Since Unclaimed Property is not considered a tax, the following state and local tax concepts do not
      apply to unclaimed property:

       •   “Nexus” Standards – typically do not affect a state’s ability to reach unclaimed
           property of a holder. Thus, Delaware can require a holder located in Illinois to
           report unclaimed property to Delaware (assuming all the elements are satisfied
           and Delaware is entitled to the unclaimed property) even if the holder has no
           business or nexus in Delaware.

       •   Statute of Limitations – most states have enacted specific statutes under their
           escheat laws to preclude the effect of any statute of limitations provisions with
           respect to auditing holders for potential escheatable property and to pursue
           enforcement in a court of law to recover escheat funds.

    • Financial Statement Presentation is typically not representative of unclaimed property exposure.

    • Unclaimed property holders should evaluate its accounting reserves for unclaimed property on a
      periodic basis. Legitimate unclaimed property is a valid GAAP liability and should be properly
      accrued for on the financial statements.




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Definitions
   “OWNER”

     • A person who has legal or equitable interest in the unclaimed
       property. The term can also be understood as the rightful owner
       or actual owner. Other examples, include:

        •   Employees
        •   Customers
        •   Vendors
        •   Creditors
        •   Shareholders
        •   Apparent owner (based on books and records)




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Definitions
   “HOLDER”

     • Any entity who is in possession of property belonging to another
       or is indebted to another on an obligation.

   “CUSTODIAN”

     • An individual or entity that holds property until it is delivered to
       the rightful owner.

     • States acts as custodian of the unclaimed property remitted by
       the holder and holds the property in custody until it is claimed
       by the owner.




                                 129
Definitions

 “UNCLAIMED PROPERTY”


    •   Generally intangible personal property for which there has been no owner
        activity for a specified period of time (“dormancy period”).

    •   Examples of unclaimed property:


         •   Uncashed payroll or commission checks;
         •   Uncashed payable/vendor checks;
         •   Gift certificates/Gift cards;
         •   Customer merchandise credits, layaways, deposits, refunds or
             rebates;
         •   Overpayments/unidentified remittances;
         •   Suspense accounts; and
         •   Unused/outstanding benefits (non-ERISA).


                                     130
Definitions

   “DORMANCY PERIOD”


     •   A state prescribed period that begins from the date of creation of the
         property type (e.g., issuance date for checks) and ends on a certain
         legislatively defined date (e.g., typically 1-5 years) measures a period of
         time for which property that incurs no activity




                                       131
Elements of Unclaimed Property

   • In general, all property must satisfy the following four elements before it can be classified as
     unclaimed property:


       •   The property must be intangible

       •   There must be a fixed and certain legal obligation of the holder to the
           owner

       •   The property must remain unclaimed by the owner for the dormancy
           period

       •   The apparent owner of the property cannot be located




                                             132
Sourcing Rules

  • The Supreme Court of the United States in Texas v. New Jersey, established the following
    unclaimed property sourcing rule:


      •   First, to the state of the rightful owner’s last known address, if known or

      •   Second, to the state of the holder’s incorporation (commercial domicile for
          unincorporated entities).

  • Although not sanctioned by the Court, some states have adopted a “transactional or throwback
    rule”, which provides that if both the state of the owner‟s last known address and the state of the
    holder‟s incorporation decline or fail to exercise jurisdiction over the unclaimed property, then the
    state where the transactions giving rise to such property occurred has the right to claim property.




                                               133
B2B Transactions: Exemptions
  • “B2B Exemptions”

  • In general, business-to-business (“B2B”) exemptions typically apply to credit
    balances (e.g., accounts receivables credit balances) issued in the ordinary course
    of the issuer’s business that have remained unclaimed by the owner for more than
    the statutory dormancy period. As a result, such credit balances are not subject to
    escheat.

  • Many states recognize the exception in accordance with the intent of unclaimed
    property laws. More specifically, the states that provide such an exemption do so
    under the belief that unclaimed property laws were designed to protect consumers,
    not credit balances arising from transactions between businesses.




                                     134
Exemptions

 • Business to Business
    • Currently, 13 states provide an unclaimed property exemption for liabilities
      arising between business holders (e. g., vendors and customers).

    • B2B exemptions vary by state but generally fall into one of two categories:
       • Pure business to business, or
       • Dependent on an ongoing business relationship between the Holder
         and Owner


    • Gift Cards
       • Currently, 32 states exempt gift cards or gift certificates from the
         purview of their escheat laws. The following states currently provide
         unclaimed property exemptions for unredeemed gift card balances:



                                  135
VDA Programs Overview

  • Many states formally or informally offer holders of unclaimed
    property the opportunity to participate in the states‟ VDA or
    amnesty program so long as certain requirements are satisfied,
    including:

    • Holder has not been previously contacted by the state
      regarding unclaimed property matters; and

    • Holder comes forward (often times anonymously in the
      beginning) in good faith to report unreported unclaimed
      property liabilities.




                             136
VDA Program Advantages

  Advantages
  • Reduced look back period;
  • Typically eliminates penalty and/or interest;
  • Closure of all prior periods and voluntary disclosure period
    (however, the state typically retains the right to audit the
    voluntary disclosure for a period of time from the date of
    execution of the voluntary disclosure); and
  • Increased control over the methodologies utilized and positions
    taken.




                              137
VDA Program Disadvantages

   Disadvantages
   • Coming forward could expose other related entities to an
     unclaimed property audit;
   • States typically allow six months to complete the self review
     process, extensions are available on a case by case basis; and
   • Payment of agreed upon liability is generally expected within
     30 days of demand.




                              138
Audit Overview

• States have turned to unclaimed property laws as a source of
  revenue that avoids increases in taxes. As such, most states
  either use their own audit staff or hire third party audit firms to
  conduct unclaimed property audits.
• Since unclaimed property applies to all holders, unclaimed
  property audits have expanded to include more entities,
  including Fortune 1000 companies.
• Audits can be very intrusive and time consuming processes.
• Audit look-back periods typically range between 5 and 20
  years.
• Penalties and interest can be substantial.
• Importance of Securing end of audit “Closing Agreements”




                                   139
Audit Triggers


• Failure to file unclaimed property reports
   • in state of incorporation
   • in jurisdictions where holder has a large presence
• Filing only negative reports
• First time filer
• Recent mergers, acquisitions, re-organizations and re-incorporations
• Company or Industry in the news
• Claiming unclaimed property
• Random Selection




                              140
Types of Audits

 • State Audits
    • Single State Audits
    • Joint State Audits
       • States cooperating with one another
       • State auditor conducting an audit on behalf of another state

 • State contracted audits
    • Kelmar Associates, LLC
    • ACS UPCH – Affiliated Computer Services‟ Unclaimed Property
      Clearing House
    • ASUS – Audit Services, U.S., LLC
    • APEX – Abandoned Property Experts LLC

                              141
Common Audit Issues

 • The most common issues surrounding the unclaimed property
   audit include:

   • Lack of supporting documentation;

   • Insufficient human resources to complete audit requests;

   • Difficulty ascertaining proper audit approach; and

   • Dispute over sampling and testing methodologies.




                           142
Audit Best Practices
  •   Upon notification of a pending audit, a holder should consider the following:

       • If audit is initiated by a contract auditor:
           •   Confirm auditor‟s authorization to conduct the audit
           •   Determine states included in audit
           •   Request agreement/contract between each state and contract auditor

       • Confidentiality Agreement
           •   Request confidentiality agreements from the third-party auditor and/or state(s).
           •   Review states‟ statutory guidance on confidentiality

       • Obtaining advocate to manage audit process
           •   Act as liaison between third-party auditor and/or state and holder
           •   Negotiate terms of audit, including look-back period, types of property to be audited,
               audit methodologies
           •   Advise holder of rights and responsibilities under unclaimed property statutes




                                                  143
Questions?



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