You can read more about the event here.

Doing so could enhance the ability of both the FASB and the regulators to fulfill our critical mandates. We can continue to work with independence and an unwavering dedication to market transparency; at the same time the bank regulators can utilize their authority to take whatever actions are required to keep the financial system stable and healthy.

Well, bank regulations aren’t the only ones that might be coupled to financial reporting standards.  But it wasn’t until I saw this week’s reporting on the health-care related charges that I started thinking about tax-GAAP coupling again.

HBS Professor Mihir Disai is a fan of greater coupling of GAAP and tax law, as he discussed in his 2007 testimony to Congress:

Imagine if you were allowed to represent your income to the IRS on your 1040 in one way and on your credit application to your mortgage lender in another way. In a moment of weakness, you might account for your income favorably to your prospective lender and not so favorably to the IRS. You might find yourself coming up with all kinds of curious rationalizations for why something is an expense for the tax authorities but not an expense to the lender. You don’t have this opportunity and for good reason. Your lender can rely on the 1040 they review when deciding whether you are credit-worthy because you would not overly inflate your earnings given your desire to minimize taxes. Similarly, tax authorities can rely on the use of the 1040 for other purposes to limit the degree of income understatement given your need for capital. The uniformity with which you are forced to characterize your economic situation provides a natural limit on opportunistic behavior.

So, should we do this the easy way, and simply tax book income?  Lil Mills, our speaker for the next roundtable, has a different perspective on the benefits of taxing book income:

Proponents of taxing book income anticipate substantial gains in simplicity. However, because financial accounting and tax law serve two separate purposes, some argue that requiring strict conformity is a poor solution to replace accounting and tax enforcement. Mandatory conformity between book and tax accounting would limit the ability and effectiveness of Congress to reward or punish particular taxpayer behavior or to give tax favored treatment to particular business activities. Accounting rule changes would affect tax revenue independent of congressional action. Finally, using book income as the tax base could have unintended consequences in the capital markets by influencing the reporting decisions of firms.

This only hints at the problem, in my view.  Can you imagine the lobbying that would surround financial reporting standards if decisions on whether to recognize or disclose an item affected tax liability?  Join us for Tuesday’s roundtable and weigh in!

Doing so could enhance the ability of both the FASB and the regulators to fulfill our critical mandates. We can continue to work with independence and an unwavering dedication to market transparency; at the same time the bank regulators can utilize their authority to take whatever actions are required to keep the financial system stable and healthy.

Well, bank regulations aren’t the only ones that might be coupled to financial reporting standards.  But it wasn’t until I saw this week’s reporting on the health-care related charges that I started thinking about tax-GAAP coupling again.

HBS Professor Mihir Disai is a fan of greater coupling of GAAP and tax law, as he discussed in his 2007 testimony to Congress:

Imagine if you were allowed to represent your income to the IRS on your 1040 in one way and on your credit application to your mortgage lender in another way. In a moment of weakness, you might account for your income favorably to your prospective lender and not so favorably to the IRS. You might find yourself coming up with all kinds of curious rationalizations for why something is an expense for the tax authorities but not an expense to the lender. You don’t have this opportunity and for good reason. Your lender can rely on the 1040 they review when deciding whether you are credit-worthy because you would not overly inflate your earnings given your desire to minimize taxes. Similarly, tax authorities can rely on the use of the 1040 for other purposes to limit the degree of income understatement given your need for capital. The uniformity with which you are forced to characterize your economic situation provides a natural limit on opportunistic behavior.

So, should we do this the easy way, and simply tax book income?  Lil Mills, our speaker for the next roundtable, has a different perspective on the benefits of taxing book income:

Proponents of taxing book income anticipate substantial gains in simplicity. However, because financial accounting and tax law serve two separate purposes, some argue that requiring strict conformity is a poor solution to replace accounting and tax enforcement. Mandatory conformity between book and tax accounting would limit the ability and effectiveness of Congress to reward or punish particular taxpayer behavior or to give tax favored treatment to particular business activities. Accounting rule changes would affect tax revenue independent of congressional action. Finally, using book income as the tax base could have unintended consequences in the capital markets by influencing the reporting decisions of firms.

This only hints at the problem, in my view.  Can you imagine the lobbying that would surround financial reporting standards if decisions on whether to recognize or disclose an item affected tax liability?  Join us for Tuesday’s roundtable and weigh in!

If you assumed that accounting standards wouldn’t get sucked into the highly charged health care debate, you guessed wrong! From the New York Times

An association representing 300 large corporations urged President Obama and Congress on Monday to repeal a provision of the health care overhaul that prompted AT&T, Caterpillar and other companies to announce substantial charges for the current quarter….

AT&T announced last week that it was taking a $1 billion charge because of the provision. Deere & Company announced a $150 million charge, Caterpillar a $100 million charge, and 3M a $90 million charge.

Many companies said they were taking these charges now, before the current quarter ended, to comply with accounting rules. But some corporate critics asserted that the companies’ rapid response to the health legislation was aimed at pressing the administration to repeal the provision….

Henry A. Waxman, a California Democrat who is chairman of the House Energy and Commerce Committee, criticized the charges by the companies, asserting that the health reform would save companies more money than it cost them.

Mr. Waxman sent AT&T, Caterpillar and Deere a sharp letter, questioning the charges and saying he wanted top officials from those companies to testify at an April 21 hearing he has scheduled on the issue.

Mr. Waxman and Bart Stupak, a Michigan Democrat who is chairman of the House Commerce Committee’s subcommittee on oversight and investigations, wrote to AT&T’s chairman, Randall L. Stephenson, “The new law is designed to expand coverage and bring down costs, so your assertions are a matter of concern.”

Their letter said AT&T’s moves “appear to conflict with independent analyses,” including a finding by the Business Roundtable, an association of chief executives, that health care reform would reduce insurance cost trends for businesses by more than $3,000 for each employee over the next 10 years.

Responding to such criticism, Mr. Klein said: “These announcements are required under accounting rules, and we should all expect more of such announcements in coming days and weeks. We’re very troubled that these announcements have been challenged by officials in Obama administration and Congress.”

The fuss is driven by the complexities of financial reporting for tax liabilities and changes in the law, a topic that UT Austin’s Lillian Mills has been studying in details for some time.  She will be discussing why the signing of the law generated such large charge-offs, and more generally discussing her research on how financial reporting interact with tax and other tax laws.

She will also talk about her research on FIN48, her experiences conducting policy-oriented research as one of the handful of accountants with access to IRS data (a nice parallel to FASRI), and the extent to which tax law and financial reporting standards are “coupled.”  Coupling of financial reporting standards and bank regulation has been a very hot topic at FASRI, so the parallels and contrasts should be interesting.

Join us at 4pm ET, Tuesday April 6th, in Second Life or on the web.  See you there!

* UPDATE: You can watch the archived video of this Round Table event here.