US lawmakers cautious about cash method of accounting
Switching to accrual accounting would be severely damaging to businesses, US lawmakers have warned in a letter calling for the preservation of the cash method of accounting.
The letter, signed by a bipartisan majority of the US House of Representatives, urges the House leadership to retain cash accounting for tax purposes and echoes concerns raised by the Senate last month about reforms to the federal tax code that would require many businesses to change their method of accounting.
US institute AICPA is leading opposition to congressional efforts to mandate the use of accrual accounting for businesses that exceed $10m (£6.2m) in annual gross receipts and partnered with state CPA societies and firms to gain the support of Capitol Hill.
“Those who use the cash method of accounting include many of our local job creators and professionals including accountants, architects, attorneys, dentists, engineers, farmers, physicians and financial service professionals,” the legislators explained in an 11 September letter to speaker John Boehner and other members of the House leadership. “Importantly, the cash method of accounting is the foundation upon which these businesses have built their business models for decades.”
The House letter explained that the cash method of accounting is a simple method in which income is recognised when it is collected. By comparison, the accrual method of accounting recognises income when a service is performed, regardless of when cash is collected.
“If forced to pay taxes before income is received, as would be required under the accrual method, less money would be available to small businesses for growth and job creation,” the lawmakers wrote. “Additionally, cash flow management becomes far more complex as a result, and will likely trigger the need for additional outside financing. These factors alone would have a significant negative impact on our local economies.”
AICPA president and CEO Barry Melancon added that the “accrual accounting mandate is bad tax policy that should be abandoned by the House and Senate”.
Cash accounting within the public sector is also viewed negatively.
The problem, Choudhury explained, is that cash accounting doesn’t provide a “comprehensive, comparable or transparent” picture of governments’ true financial health.
“It doesn’t take into account long-term obligations,” Choudhury said. “The sovereign debt crisis revealed the shortcomings of governments’ fiscal positions.” Choudhury added that cash-based accounting “contributed” to financial problems in Greece and Portugal, which involved concealing debts and deficits.
Source: accountancyage
