eNews June 30, 2011

June 30, 2011



News Briefs

  1. LIFO/FIFO Debate Returns in Debt Ceiling, Spending Negotiations
  2. Obama White House, Congressional Leaders Agree on Trade Agreements Amid New Rift
  3. Greece Approves Austerity Plan as Athens Burns
  4. Bankruptcy Roundup: Tribune, Los Angeles Dodgers
  5. Hearing in Finance Committee Takes Aim at Nation's Tax Gap
  6. Federal Contracting to Small Business Increasing...Or is It?

 

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LIFO/FIFO Debate Returns in Debt Ceiling, Spending Negotiations

The Obama Administration has proposed ending the "last in, first out" (LIFO) accounting method as a part of ongoing debt ceiling and spending negotiations.

Ending LIFO would generate revenue to the tune of $400 billion over the next decade and potentially simplify the tax code while leveling the playing field for manufacturers. The administration argued that a switch could be an integral part of deficit reduction measures that Republicans are demanding before increasing the federal debt ceiling, which governs the legal amount that the country can borrow to meet its obligations. If the debt ceiling is not increased, the United States would default on its debt for the first time in history, and many economists believe the country would be plunged back into recession.

Despite the revenue such a change would generate, GOP lawmakers were quick to attack the proposal, saying that it amounted to little more than a tax increase on job creators. Several other business associations, most notably the National Association of Manufacturers (NAM), have similarly rejected prior attempts to make changes to the LIFO method, since abandoning this accounting practice would heavily increase their tax liability.

LIFO accounting addresses how a company values its inventory; it assumes that the last items placed in inventory are the first ones to be sold, hence "last in, first out." Since prices typically increase over time due to inflation, the result under LIFO is that the most expensive goods are being sold first, which thereby results in lower inventory values on a balance sheet. This translates into lower earnings, since the cost of the goods being sold is higher, and eventually ends in lower taxes for the company in question.

Under the latest proposal, LIFO would be replaced with its counterpart, FIFO, which stands for "first in, first out." In this accounting method, the oldest and least expensive goods are the first sold, resulting in higher earnings but also higher taxes, which is where the federal revenue would be generated.

Although the primary allure of replacing LIFO with FIFO is the tax revenue, switching to FIFO would also more closely align U.S. generally accepted accounting principles (GAAP) with International Financial Reporting Standards (IFRS), which dictate that the FIFO method is the only way to value a company's inventory. The process of merging GAAP and IFRS is already underway, and has been so for several years, with governing bodies in the U.S. and Europe aiming for convergence sometime this decade. While lawmakers are currently uncomfortable with anything that could be described as a tax increase, public companies may inevitably have to face a move from LIFO to FIFO whether they want it or not.

Jacob Barron, NACM staff writer

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Obama White House, Congressional Leaders Agree on Trade Agreements Amid New Rift

Tell us if you've heard this one before: three long-delayed free trade agreements (FTAs) finally appear ready for congressional votes this summer. Key congressional lawmakers from both sides of the aisle and the Obama Administration reported Tuesday that they have forged a deal to put the FTAs up for House and Senate floor votes. However, a late inclusion from President Barack Obama in the form of a renewed assistance program could threaten the deal's safe passage.

A push by several Democrats to include an extension of the Trade Adjustment Assistance program, designed to provide aid and unemployment benefits for workers negatively affected by increased foreign competition, was apparently a sticking point for some in getting the FTAs to a vote. Though many hard-line Republicans are said to oppose this, key GOP figures compromised on the issue this week. Lawmakers including Senate Finance Committee Ranking Member Orrin Hatch (R-UT) warn that the decision to attach the assistance program onto the FTA vote could jeopardize some GOP support despite its longtime interest in passing the trade pacts, especially one with fast-emerging South Korea.

Last December, the U.S. and South Korea forged what has become the expected final version of its deal, which was originally crafted at the behest of the Bush Administration in April 2007, mainly to address objections raised by the now on-board U.S. auto industry. Obama, working toward a stated goal of doubling exports within the next five years, has continually stated that he hopes to sign the pact, if passed by Congress, into law by July. It should be the first of the three to be signed into law, if any are.

In April, President Obama and Colombian President Juan Manuel Santos reached an agreement on labor improvements, such as rights of those who unionize and labor workers' safety in once crime-plagued Colombia, long seen as a significant stumbling block to completing the FTA. The framework of the Colombian FTA was forged in 2006. Also negotiated at that time was the framework of an FTA with Panama. That FTA is lagging behind the two others in progress at present, but it remains no less likely to pass through Congress and Obama's desk eventually—short of a GOP revolt over the last-minute workers assistance program inclusion.

Brian Shappell, NACM staff writer

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Greece Approves Austerity Plan as Athens Burns

Greek lawmakers officially approved an austerity plan yesterday, as rioters clashed violently with police just outside of parliament.

A barely-there majority of Greece's 300-member parliament voted in favor of a five-year package that will include spending cuts to public services and tax increases. It will also, perhaps most importantly, meet the terms demanded by the European Union (EU), European Central Bank (ECB) and International Monetary Fund (IMF) as preconditions before allowing Greece access to $17 billion it will need in lending to survive the summer. Work on a second bailout will also begin again, now that the austerity plan has been approved.

A second vote on the implementation of the country's $112 billion package of cuts, taxes and asset sales is scheduled to be held today.

Meanwhile, protests raged in Athens as Greek citizens took to the streets to express virulent distaste for further cuts in government programs, public sector wages and pensions that will come as a result of the plan's approval. Strikes have also been used by many unions, including the public sector union that represents 500,000 of the country's civil servants and another two-million-strong union that represents private sector workers. A 48-hour general strike also affected the country's transit system, effectively paralyzing the nation and its citizens.

Others, namely the EU, applauded the move, despite the fact that Greece largely didn't have a choice; failing to approve the plan would essentially meant a default for the country and further troubles for the euro zone.

"With today's approval by the Greek Parliament of the revised economic program, the country has taken an important step forward along the necessary path of fiscal consolidation and growth-enhancing structural reform. But it has also taken a vital step back—from the very grave scenario of default," said European Commission President José Manuel Durão Barroso and European Council President Herman Van Rompuy in a joint statement following the plan's approval. "This was a vote of national responsibility."

Barroso and Van Rompuy also stressed the importance of today's implementation vote. Many observers have noted that despite the austerity agreement, Greece, and by extension the EU, is not out of the woods yet, and sticking points are expected to arise in today's negotiations. "The eyes of Europe will again be turned towards Athens as parliamentarians are called upon to approve the implementing measures for the program," said Barroso and Van Rompuy. "A second positive vote would pave the way for the Euro group to make a decision this Sunday on the disbursement of the next tranche of financial assistance. It would also allow for work to proceed rapidly on a second package of financial assistance, enabling the country to move forward and restoring hope to the Greek people."

Jacob Barron, NACM staff writer

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Bankruptcy Roundup: Tribune, Los Angeles Dodgers

The mess that is the bankruptcy reorganization of the Tribune Co. continues to drag on in the U.S. Bankruptcy Court in Delaware.

In the latest development this week, U.S. Bankruptcy Judge Kevin Carey announced that he planned to spend much of the next month looking at possible resolutions that will allow the publisher, responsible for one of the most significant bankruptcy filings in U.S. media history, to exit its lengthy bankruptcy reorganization. However, Carey didn't commit to a hard-and-fast date for a decision. Moreover, Carey strongly urged two groups of creditors, divided between whether to settle with or sue those said to be at fault regarding the Tribune bankruptcy, to come to an agreement out of court. The judge intimated he might not give either plan the green light without some type of consensual agreement.

Carey also approved a formal request by a group of Tribune noteholders to consolidate several ongoing lawsuits into one suit against a group of lenders that funded the ill-fated buyout of Tribune, which saw a brief yet disastrous run under Sam Zell. The noteholders have fought Tribune's emergence from bankruptcy, saying it would make its efforts to sue more difficult.

Efforts last year by Tribune Co.—publisher of the Los Angeles Times, Baltimore Sun and Chicago Tribune, among other media holdings—to exit bankruptcy crumbled amid an organized effort from lower-level creditors to scuttle deals it negotiated primarily with higher-ranked lenders. Many creditors cried foul over what appeared to be a deal that would have left the smaller stakeholders with little to nothing. As such, no less than four bankruptcy reorganization plans were officially floated in the Tribune case. One included a settlement between the debt-saddled publisher and a group of bridge loan providers, spearheaded by JPMorgan, cleared the way for one of the competing, creditor-based reorganization proposals to be dropped. Two of four proposals already went by the wayside.

Also in U.S. Bankruptcy Court is the bizarre case of the Los Angeles Dodgers Major League Baseball franchise. Faced with the specter of failing to meet the team's payroll obligations and losing control of the team to Major League Baseball or his estranged wife, Dodgers owner Frank McCourt's last-ditch effort keep the team came in the form of a Chapter 11 bankruptcy filing this week.

McCourt, who has been characterized as a reckless spender by Major League Baseball, among others, received a $150 million debtor-in-possession loan to allow him to continue running the team's daily operations for now. The bailout is coming from a hedge fund owned by JPMorgan Chase & Co. and is tied to an interest rate more than double that involved in the Borders bankruptcy. Major League Baseball officials quickly challenged the plan and offered its own plan that gives the league some control over the franchise. McCourt, who has been involved in a nasty and public divorce, could also face a challenge from his estranged wife, Jamie McCourt. McCourt's move toward bankruptcy protection also could potentially allow McCourt to pursue a television deal involving Dodgers game broadcasts that the league previously rejected.

Brian Shappell, NACM staff writer

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Hearing in Finance Committee Takes Aim at Nation's Tax Gap

$345 billion.

That's the amount of tax money legally owed but left uncollected by the U.S. each year. Simply referred to as the "tax gap," this reserve of unavailable revenue has become a hot topic again on Capitol Hill as lawmakers continue to seek ways to reduce the nation's deficit without spending much to do so.

The tax gap, however, doesn't exist merely because of tax cheats and impropriety. The cumbersome nature of the nation's tax code also contributes to the gap, and at a recent hearing in the Senate Finance Committee, lawmakers sought ways to simplify U.S. tax requirements in order to increase tax compliance and hopefully reduce the amount of money that the government is technically owed but is also forced to do without.

"The tax code has grown far too complex, and it's becoming much too difficult for honest Americans to calculate and pay their tax bill," said Sen. Max Baucus (D-MT), chairman of the Finance Committee, whose jurisdiction includes tax law. "We should make determining a taxpayer's responsibility as easy as possible so we are able to collect more of the $345 billion in taxes that are owed but unpaid each year. Especially in these tough economic times, $345 billion is far too much to waste."

"A simpler tax code will ease the burden of compliance on honest Americans and help them meet their responsibilities," he added.

According to the Internal Revenue Service, taxpayers and businesses spend more than six billion hours each year complying with their tax responsibilities. If these hours were dedicated to a specific industry, it would be one of the largest in the U.S., employing more than three million full-time employees, according to the IRS' Taxpayer Advocate.

Baucus asked about what it would take to reach a 90% voluntary compliance rate by 2017, setting an unofficial timeline for the IRS and Congress to simplify the tax code and collect more revenue.

Previously, lawmakers have sought to address the tax gap by imposing a 3% withholding tax on most government contracts between businesses and local, state and federal government entities. The measure was enacted with the Tax Increase Prevention and Reconciliation Act in 2006, but its implementation has been delayed twice, first until 2012, and then again until 2013. NACM has opposed the measure since its inception and continues to lobby for a full repeal.

Jacob Barron, NACM staff writer

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Federal Contracting to Small Business Increasing...Or is It?

A report unveiled by the federal government late last week illustrates that nearly 23% of all federal contracting dollars last year went to small business, said the U.S. Small Business Administration (SBA). However, one trade association characterized the findings as misleading, if not insulting.

The new federal "Scorecard" on small business contracts for FY2010 included statistical findings that nearly $100 billion, 22.7% of all federal contracting dollars, went to small businesses. SBA says, combined with findings from 2009, it is the largest two-year increase in contracts being routed to small businesses to date. The federal government's goal for 2010 was 23%.

SBA said the progress was largely attributable to an "administration-wide commitment to collaboration and transparency."

"Never before has the White House itself taken such a direct leadership role on this issue. Every quarter, we've met with President [Barack] Obama's Senior Advisor Valerie Jarrett and top leaders from each agency to report on the progress they're making," said SBA's Joe Jordan.

However, the American Small Business League (ASBL) effectively is claiming to see right through said transparency. In fact, the ASBL alleges that 61 of the top 100 recipients of the so-called small business federal contracts in 2010 were, in reality, large firms. The association calls the Obama Administration's assertions "dramatically inflated" and alleges some of the "small business" recipients in FY2010 included Lockheed Martin, AT&T and Hewlett-Packard.

"The SBA claims the government nearly hit its small business goal and yet the government's own data indicates it awarded no more than 5% of federal work to small businesses," said ASBL President Lloyd Chapman. "The SBA's most recent claims are just more misleading smoke and mirrors...It is time for the Obama Administration to stop misleading the public and start actually working to end billions of dollars in fraud and abuse in small business contracting programs. Ending this abuse would be a more effective economic stimulus than anything proposed by the Obama Administration to date."

Brian Shappell, NACM staff writer

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