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??
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??
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