{"id":88896,"date":"2025-02-15T03:03:04","date_gmt":"2025-02-15T03:03:04","guid":{"rendered":"https:\/\/peraltafinancing.com\/accounting\/gaap-and-the-federal-budget-deficit\/"},"modified":"2025-02-15T03:03:04","modified_gmt":"2025-02-15T03:03:04","slug":"gaap-and-the-federal-budget-deficit","status":"publish","type":"post","link":"https:\/\/fivemor.com\/?p=88896","title":{"rendered":"GAAP and the Federal Budget Deficit"},"content":{"rendered":"<p> <br \/>\n<\/p>\n<div itemprop=\"text\">\n<p>The accounting topic of the season is income taxes. \u00a0But, as the nation contemplates what Congress could end up passing, I want to talk about how one under-the-radar amendment to financial accounting standards has been quietly adding to the federal budget deficit for two decades and counting.<\/p>\n<p>The amendment I speak of came into existence as EITF 96-15,\u00a0<em>Accounting for the Effects of Changes in Foreign Currency Exchange Rates on Foreign-Currency-Denominated Available-for-Sale Debt Securities<\/em>. \u00a0One of the touchstone issues of the current tax debates (such as they are) is that U.S. companies with foreign subsidiaries are reluctant to repatriate earnings from their foreign operations if there is a U.S. tax to be paid. The <em>raison d\u2019\u00eatre<\/em>\u00a0of this\u00a0EITF is nothing more or less than to give those companies one less reason to repatriate those infamous foreign earnings; to just let the cash pile up overseas and deprive the U.S. government of taxes owed.<\/p>\n<p>EITF 96-5 helps companies figure out how best to park their money outside of the U.S. \u00a0A tempting alternative is to invest it in marketable securities issued by other companies based in the U.S. That way, at least, the money is invested in dollars, which limits the economic \u2014 as opposed to accounting \u2014 exposure to currency fluctuations.\u00a0 However, as I\u2019m about to explain, without the provisions of EITF 96-5, managers obsessed with their reported earnings might shy away from that choice, even if it is the best thing to do from an economic standpoint.<\/p>\n<p><span style=\"text-decoration: underline;\">How the Accounting Loophole Works<\/span><\/p>\n<p>FAS 52 (codified as ASC 830) is overall very generous to issuers, but it is relatively demanding in the area of \u201cforeign currency transactions,\u201d which, simply stated, are monetary assets and liabilities \u2014 i.e., cash, receivables and payables \u2014 denominated in a currency other than the foreign entity\u2019s \u201cfunctional currency.\u201d Normally, the effect of translating assets and liabilities from the subsidiary\u2019s functional currency to dollars gets thrown into other compressive income (OCI) without affecting net income. An exception is that the translation of \u201cforeign currency transactions\u201d must be reflected in net income. I have written about this in a previous post,\u00a0<a href=\"https:\/\/accountingonion.com\/2007\/09\/fas-52-take-two.html\">here<\/a>. \u00a0Note also that, even though the monetary versus non-monetary distinction can significantly affect the accounting for foreign operations, the FASB has provided no official definitions.\u00a0 That turns out to be very helpful to the EITF as it works its magic for issuers.<\/p>\n<p>The formal question addressed in EITF 96-15 is whether a marketable debt security designated as \u201cavailable-for-sale\u201d is a foreign currency transaction. <em>Notice that the EITF is not questioning whether marketable debt securities designated as \u201ctrading,\u201d or as \u201cheld-to-maturity\u201d are foreign currency transactions \u2013 but only those debt securities that are arbitrarily and capriciously designated by management to be AFS.<\/em> Knowing only that should tell you that the fix was in before the first word of \u201cdebate\u201d among the cheerleaders for issuer interests had been uttered.<\/p>\n<p>What sounds like a serious question is but an absurdity.\u00a0 An AFS marketable <em>debt<\/em> security is still at bottom a receivable.\u00a0 Perhaps, marketability may be a consideration in determining the appropriate accounting treatment, but some arbitrary AFS designation doesn\u2019t change its basic nature as a receivable.\u00a0 FAS 52 is crystal clear as to the treatment of a receivable: it\u2019s a foreign currency transaction.<\/p>\n<p><em>Yet, the EITF found a way to arrive at the opposite conclusion.<\/em> By an alchemy that can only be fully appreciated by those ordained as accounting policy makers, the EITF stated that in their view, a marketable debt security arbitrarily designated as AFS<em>, <\/em>could not be a \u201cmonetary item.\u201d \u00a0(It\u2019s like the old accounting joke: \u00a0two plus two can be anything you want it to be.) \u00a0 By that twisted logic, an AFS marketable debt security, <em>unlike every other kind of receivable<\/em>, is not a foreign currency transaction.<\/p>\n<p>Eureka! The formula for turning copper into gold! \u00a0Waive the AFS magic wand over any marketable receivable, and presto change-o, you no longer have to worry about income statement exposure.<\/p>\n<p>Back to the proposed income tax legislation of the present, much of the debate concerns its effect on the federal budget deficit. I want Congress and the public to know that if EITF 96-15 were rescinded, it would unambiguously work to lower it: managers would be more inclined to repatriate the cash if they couldn\u2019t reduce the accounting exposure to foreign exchange movements while it is overseas. \u00a0This will sound like heresy to supporters of the FASB and EITF, but I would be happy to see Congress enact a law that does just that.<\/p>\n<\/div>\n\n","protected":false},"excerpt":{"rendered":"<p>The accounting topic of the season is income taxes. \u00a0But, as the nation contemplates what Congress could end up passing, I want to talk about how one under-the-radar amendment to financial accounting standards has been quietly adding to the federal budget deficit for two decades and counting. The amendment I speak of came into existence [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[11759],"tags":[4995,11451,11558,43307],"dealstore":[],"offerexpiration":[],"class_list":["post-88896","post","type-post","status-publish","format-standard","hentry","category-accounting","tag-budget","tag-deficit","tag-federal","tag-gaap"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.4 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>GAAP and the Federal Budget Deficit - Som2ny Network<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/fivemor.com\/?p=88896\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"GAAP and the Federal Budget Deficit - Som2ny Network\" \/>\n<meta property=\"og:description\" content=\"The accounting topic of the season is income taxes. \u00a0But, as the nation contemplates what Congress could end up passing, I want to talk about how one under-the-radar amendment to financial accounting standards has been quietly adding to the federal budget deficit for two decades and counting. 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