Installment Method of Accrual Accounting

Strategic Finance, May, 2000 by Stephen Barlas

CONGRESS IS FEVERISHLY WORKing to roll back, either partially or wholly, a corporate accounting change authorized in 1999. The change eliminated use of the installment method of recognizing income from the sale of assets for taxpayers using the accrual method of accounting. The change was made at the urging of the Clinton administration, whose Treasury Department argued that use of the installment method for accrual "accounters" allowed those businesses to essentially use a cash method. Elimination of the installment method was included as a provision in the Ticket to Work and Work Incentives Improvement Act of 1999. It went into effect on December 17, 1999.

The business outcry began immediately. The problem is that elimination of the installment method makes it hard for corporations, especially for Chapter S and C corporations, to sell their businesses. Forcing them to pay taxes up front, in one shot, upon the sale of their business, causes a cash flow problem and also soaks up some of the money the seller would have used to help the buyer finance the deal. That means the buyer has to come up with a much bigger down payment, which in turn shrinks the universe of potential buyers and deflates the value of the business to be sold on an average of 8%, according to the U.S. Chamber of Commerce.

Joseph Mikrut, tax legislative counsel at the Treasury Department, now says the Clinton administration realizes it made an error. Mikrut won't get behind the bill (H.R. 3594) that restores the installment method to accrual accounting users. That bill was included in the Small Business Tax Fairness Act that passed the House in March. Mikrut says, however, the Treasury Department is open to some kind of compromise.

Stock Options in Base Pay

A bipartisan bill introduced in late March makes it clear that companies don't have to include the appreciated value of stock options in the base pay of hourly workers when figuring out their overtime pay. The legislation, which is backed by the Clinton administration, came on the heels of House hearings in February that aired a Labor Department advisory opinion issued in February 1999. That opinion was ignored for one year before business groups found out about it and raised an uproar. The opinion, written to an unnamed company, said stock options had to be figured into base pay for hourly workers. At the February hearings of the House Education and the Workforce Committee, T. Michael Kerr, administrator of the Labor Department's wage and hour division, said that the February 1999 letter simply addressed the specific situation of one business. The ruling didn't make a general statement on whether all stock option programs do or should affect the regular (base) rate of pay, nor was it intended to do so. "A ch ange in the facts presented in the request could have resulted in a different response," he added. But business groups weren't mollified. Negotiations ensued, leading to the March 28 legislative proposal, which should easily slide through Congress.

The Latest Congressional Criticism of FASB

The latest congressional blast at the Financial Accounting Standards Board (FASB) comes from Sen. Phil Gramm (R.-Texas), chairman of the Senate Banking Committee. He's unhappy with FASB's project on business combinations and intangible assets, the core of which is a proposal to eliminate the "pooling of interests" method of accounting for corporate mergers. That would force companies to use "purchase" accounting. Gramm said, "The problem as I see it with purchase accounting, and the reason that companies generally don't like it, is it requires you to do something that does not comport with reality, and that is it requires you to write off goodwill."

Gramm is particularly indignant that FASB has used the argument that eliminating pooling would save SEC staff time because the SEC has to "pre-qualify" companies who want to use pooling. "The last thing on earth we need is to have this thing driven by a concern about a government agency and whether there is a demand on its people's time to make decisions' Gramm added.

Added Time to Comply with SAB 101

The SEC is giving companies extra time to comply with Staff Accounting Bulletin 101, which was originally supposed to be used by companies for first-quarter financial statements filed after December 16, 1999. SAB 101 provides guidance on the recognition, presentation, and disclosure of revenue in financial statements filed with the Commission. Registrants with fiscal years beginning between December 16, 1999, and March 15, 2000, now have the option of implementing SAB 101 in the second quarter of their fiscal year.