Obscure Accounting Rules Can’t Be Ignored

While your closest contact to conflict minerals may have been watching the movie Blood Diamonds, the U.S. government wants assurances that your company isn’t directly or indirectly contributing to the current humanitarian crisis in the Congo region.

A section of the Dodd Frank Act is designed to prohibit the purchase of conflict minerals such as tin, tantalum, tungsten and gold (“3TG”), that are “helping to finance conflict characterized by extreme levels of violence in the eastern Democratic Republic of the Congo, particularly sexual- and gender-based violence, and contributing to an emergency humanitarian situation therein…,” according to the 2010 law.

Modeled after a certification scheme for “conflict diamonds” often referred to as the Kimberly Process, the Dodd Frank provision requires businesses to demonstrate that the 3TG minerals they are using did not come from illegal sources in the Democratic Republic of the Congo and adjoining countries.

What does that have to do with operating a TV station or other media property in Anywhere, USA?

“The law requires that any company using these conflict minerals, which may be found in video camera, circuit boards and many other electronics devices, comply with the requirement to disclose the sources of these materials,” explains Jack Ingram, managing director of KPMG’s Atlanta office.

Ingram, who moderated a session on forthcoming accounting changes at MFM/BCCA’s Media Finance Focus 2012 conference last month, advised attendees that the SEC expects the new requirement will affect at least half of all registrants. In fact, 63 companies, including Apple and Intel, have already furnished documentation verifying their products are conflict mineral-free, according to Ingram.

With major manufacturers such as Panasonic and Sony getting out ahead of the reporting requirements, companies using their products will be able to incorporate these documents in meeting their reporting requirements. “But the real challenge arises with anyone in your supply chain that isn’t a public company and therefore hasn’t developed these disclosures. In these instances, you will need to do your own supply chain analysis and reporting,” Ingram observed.

This new accounting rule is just one of several that will either be finalized in 2012 or could require companies to incorporate data from 2012 once they are fully implemented.

Another accounting change with “onerous performance obligations,” warns Landen Williams, a director in KMPG’s Accounting Advisory Services Group, involves the way we currently treat lease agreements, including agreements involving intellectual property. 

Two accounting organizations, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB), are in the process of converging their two sets of accounting standards. As part of this process the companies have proposed changes to lease agreements that will have a very material impact on the balance sheets for U.S. businesses that currently adhere to FASB’s Generally Accepted Accounting Principles (GAAP) for lease accounting. 

Essentially, the proposed change will require companies to re-classify operating lease agreements, which provide greater flexibility with reporting lease income and expenses over a longer period of time, to IASB’s IFRS (International Financial Reporting Standards) financial lease rules. The IFRS rules are generally consistent with the way we currently treat capital leases; they require reporting both a “right of use” asset and the corresponding “obligation to pay rent” liability. Not only does this new treatment have the potential to alter an organization’s balance sheet, it may also negatively impact ratios such as return on assets (“ROA”) and debt ratio balance. These ratio changes could have an impact on company borrowing. 

Because this method for treating lease agreements is greatly affected by such factors as the term of the lease and whether or not a company is treated as custodian of the lease, KPMG’s Williams recommends that companies consider these implications when crafting or renewing their lease agreements. In addition, with the likelihood that many U.S. media companies will need to reclassify their content license agreements, they will need to ensure that their accounting systems are ready to manage the new requirements.

In addition to anticipating these types of upcoming changes to accounting rules, financial managers are also finding that their accounting systems must be prepared to address the latest challenges from federal and state agencies that are looking to collect revenue through stricter enforcement of their existing laws. 

These efforts include the ways states are monitoring employee travel in order to collect personal income taxes from employees who reside in other states. For example, New York and several other states use a 14-day trigger for requiring employees who are temporarily residing in their state to pay personal income tax on the portion of their salaries earned during the period they were both residing and working for their employer while in that particular state. While employees are required to pay any personal income tax that is owed to a particular state, employers can be fined for not withholding taxes and reporting the income.

It has become increasingly common for states such as New York and Connecticut — and countries such as Canada — to contact employers about these requirements according to Judith Nygard, a Partner in Deloitte Tax LLP in Chicago.

Nygard, who is also Leader of the firm’s Global Talent and Performance practice, and Pattie Wilkie, senior manager for Deloitte Tax out of the firm’s Atlanta office, shared this information during a panel they presented at Media Finance Focus 2012. Nygard and Wilkie suggested that accounting and HR departments work with travel agencies and other sources that can help them to identify situations that will trigger state income tax requirements and assist employees in understanding and complying with the tax laws. 

As all of the accounting experts observed, there can be damages to a company’s reputation as well as financial penalties when violations to these types of laws occur.

I hope that bringing them to your attention will prompt you will check with your company’s accounting, tax and legal experts concerning the status of these rules and your role in helping to ensure compliance with them.  Regardless of our personal views concerning these types of laws, none of us — or the reputable brands we represent — want to be penalized or castigated for a violation we could have easily avoided with the right financial planning and tools.

Mary M. Collins is president and CEO of the Media Financial Management Association and its BCCA subsidiary. Her column appears in TVNewsCheck every other week.You can read her earlier columns here.