TEI files comments on IAS 12: July 27, 2004.

• Position: Tax Executives Institute, International Accounting Standard

On July 27, 2004, Tax Executives Institute sent the following letter on IAS 12, Deferred Tax Accounting for Intercompany Profits in Inventory, to Sir David Tweedie, Chairman of the Inaternational Accounting Standards Board. The comments were prepared uner the auspices of TEI's Federal Tax and International Tax Committees, whose chairs are Neil D. Traubenberg of Storage Technology Corporation and Bruce R. Maggin of IBM Corporation. Contributing materially to the development of the comments were Janice L. Lucchesi of Akzo Noble Inc., Jeffrey J. Lonsdale of Lamar Hunt Family Companies, Anthony J. Maggiore of Richemont International SA, Alan B. Richer of General Electric Company, and James P. Silvestri of Cognizant Technology Solutions.

On behalf of the Tax Executives Institute, I am pleased to submit the following comments regarding deferred tax accounting for intercompany profits in inventory. Although the International Accounting Standards Board (IASB) has addressed this aspect of deferred tax accounting in the past and confirmed its adherence to International Accounting Standard (IAS) 12, Income Taxes, we understand that a review of the standard is underway. TEI is concerned about the financial statement distortions that in some instances may be caused by IAS 12.

To improve the comparability and transparency of financial reporting, TEI recommends the IASB consider converging IAS 12 with Financial Accounting Standard (FAS) Statement 109, Accounting for Income Tax, of the U.S. Generally Accepted Accounting Principles (GAAP). Such an approach would be consistent with the October 2002 memorandum of understanding issued by the IASB and FASB committing to moving toward convergence. Until that convergence is accomplished, the IASB should consider modifying IAS 12 to compute deferred tax for intercompany profits in inventory using the tax rate applicable in the jurisdiction of the seller. Our concerns are illustrated with an example based upon the experience of multinational companies that manufacture and sell products in multiple jurisdictions having different tax rates.

1. Background

   Founded in 1944 as a non-profit organization in the United States to serve the professional needs of business tax professionals, TEI now has an international scope with 53 chapters spread throughout North America and Europe. Our 5,400 members represent 2,800 of the largest companies in the United States, Canada, and Europe. The majority of TEI members work for...