Five Things Non-Accountants Should Know About Accounting Christopher J. Ohmes Partner Ernst & Young Washington, D.C.

1 Five Things Non-Accountants Should Know About Accounting 1. Everybody thinks everybody else’s data is good data.  Understanding the strengths and weaknesses of data sources is important.

2 Five Things Non-Accountants Should Know About Accounting 2. The financial accounting rules countenance a certain amount of imprecision. Tax rules favor objectivity and administrability.  The M-3 appears to begin from the presumption that there is only one way to determine book income  More than one method of accounting can be acceptable within a particular industry.  Companies may take different views as to how much time and energy to apply to the controlling and reporting of certain expenditures. This judgment influences precision.

3 Five Things Non-Accountants Should Know About Accounting 3. Tax accounting methods are often derived from financial accounting practices.  The starting point for determining taxable income is the method of accounting used by a taxpayer in keeping its books.  The clear reflection of income requirement can be satisfied by looking to generally accepted accounting principles. The clear reflection of income requirement is imposed by statute on all tax accounting methods.

4 Five Things Non-Accountants Should Know About Accounting 4. The newly adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), seeks to impose more structure around the reporting rules associated with accounting for income taxes.  A large volume of new tax information will be available once FIN 48 is implemented.  While FIN 48 will achieve more uniformity, numerous judgment will be made to arrive at the disclosures.

5 Five Things Non-Accountants Should Know About Accounting 5. The basis upon which financial information is generated may differ from the manner in which information is reported to the IRS.  Companies need to have the flexibility to accumulate financial information in the most useful way, and to alter accounting practices as business exigencies require.  Taxing authorities should avoid the temptation to rely on book income because once they start down that path they will want to dictate the manner in which book income is determined.  Tax laws today not only measure income, they incorporate economic and social policy and they reflect political considerations (e.g. lobbying). For example, some transactions that involve an economic accretion to wealth, but that also involve continuity of investment, are not taxed.