The Fallout from FAS 133: Should Congress Change Tax Law to Match New Accounting Standards?

Abstract:     
Last June, the private Financial Accounting Standards Board implemented a new standard that requires companies that compile balance sheets to show changes in a derivative's value as an asset or loss, even if the derivative remains in an open position. This new standard radically conflicts with U.S. tax law, which largely leaves derivatives unreported on tax returns. Given this difference, lawmakers may now wonder if they should change tax law to require reporting of all derivates and other fair value financial assessments. Critics of such a change will argue that it radically departs from the current structure. But, despite this difficulty, the change would bring such advantages as simplifying tax law, unifying accounting practices, and - perhaps most importantly - closing a number of tax loopholes that creative accountants use to shelter clients' assets.

JEL Classifications: M41, M44, H25, H26

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