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New Financial FASB - Fallout?

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    New Financial FASB - Fallout?

    I have recently been made aware of FASB 606 - FASBs are from the CPA world and not necessarily made with the intention of influencing taxes.

    This one essentially was made with the intent of removing "empty" sales and costs from the reporting of profits. "Empty" meaning sales from "in-and-out" transactions where the purpose of the seller is to little more than collect commissions. Examples are drop-shipments and other untouched goods/services, where the company never takes title to the goods, or if they do, title is only momentary or instantaneous.

    The best explanation is an example: Beefo, LTD sells processed meat from packing houses to Kroger, Safeway, etc. Beefo has no warehousing or transportation facilities, and arranges for the transfer of meat from the packers to the grocers, via drop shipments or direct pickup. Over the course of a year, Beefo pays out $10MM to the meat packers, and bills out a 10% markup to the grocers. Conventionally, Beefo reports $11MM in sales and $10MM in Cost of Goods sold, carrying no inventory. After $600,000 in expenses, Beefo has a $400,000 profit before taxes. (It is important to note that if Beefo carries any inventory, involved in transport, or warehousing the FASB probably doesn't apply to them)

    Under this new FASB, it seems the new reporting would show only the commissions (margin) as Revenue, $1 MM, and with $600,000 in expenses, the same $400,000 is reported as pre-tax profit. Sounds simple enough, although the measurement of key ratios may be somewhat viewed under a different perspective. IRS shouldn't have a problem.

    However, what happens to taxing authorities who have set the standards upon gross receipts? Although sales to the public probably do not fall under the FASB, most states define sales as "gross receipts". Especially in the areas of state entity taxation, they will not stand idly by while some companies start reporting a whopping reduction in their sales. Many sales set their "privilege" taxes upon gross receipts. Most states also depend on gross receipts when taxing an out-of-state entity. In the example, Beefo pays a privilege tax based on sales of $10MM, and this will be reduced to only $1MM. They won't like this, and have the political and legislative force to preserve their definitions.

    From the FASB, looks like it is phased in by 2016-17. Opinions??

    #2
    Revenue Recognition Standards

    If you're asking about the new revenue recognition standards, it's on my summer study list as I have many clients in the construction industry and it will be affecting them.

    Here is a link to an article in the JOA regarding how or whether the IRS will be changing rules on revenue recognition to conform to the new standards:

    The IRS asked for comments on how taxpayers’ accounting methods should be affected by the new financial accounting revenue recognition standards that have been issued by FASB and the IASB.

    Comment


      #3
      Very interesting. Would this apply to real estate firms who may receive the gross commissions from closing companies on the sale of properties, but who have to split them with other companies participating in the sale? This is commonplace in the real estate industry. The company paid is usually the one with the listing. It is rare that two different checks are drawn at closing. The link specifically names "those deriving income in the provision of services." So this would mean deducting the amounts paid to other companies up front, reducing gross income for purposes of gross receipts tax. I know of one company who has been doing this for years already. This would be different, I think, from the situation where all commissions are due to one company, and the company pays its own agent, keeping its contract percentage. Standard practice in that case is to claim all income, and deduct the expense to the agent.

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        #4
        As I see it

        Burke, I believe our esteemed Arizona colleague, Ms Hoffman, drifted into a broad topic of Revenue Recognition (which has been going on for some time), rather than addressing the specifics of FASB606.

        Not absolutely sure how FASB606 would address your question, but I think it would reduce gross receipts by split commissions. My take on it is that it wants to eliminate temporary in-and-out costs along with the top line. I think it is clear that there is no intent to reduced bottom-line income.

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          #5
          Exactly. It only makes sense, and these situations should not enter into the gross receipts tax calculations, because it winds up being taxed twice on the same transaction.

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