Volume 13, No. 12

 

Untaxed Foreign Earnings: Endangered Profit Pump?  Analysts and investors view firms through different prisms of profitability; anyone making a significant investment is concerned with the source of the firm's earnings. Do they originate in a particular segment? Or is there a particular segment that sops up the profitability? How will the different segments perform in the current economic environment - or the one expected to occur? There's one view that analysts and investors usually don't see. Firms following U.S. generally accepted accounting principles do not record deferred income taxes on certain foreign profits because of an obscure exception in a tax accounting standard. Those untaxed foreign profits pile up year after year, and can stoke earnings growth handsomely. As the FASB plows forward with its goal of converging U.S. accounting standards with international standards, this exception might be eliminated - and so will an ersatz growth source and potential earnings management tool.

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