Case 5-5 Tax Inversion (a GVV case) Jamie Keller was pleased with his new job position as director of international consolidation for Gamma Enterprises. Gamma Enterprises was a consolidation of high-tech gaming companies, with subsidiaries of Alpha, Beta, Gamma, Delta, and Epsilon. This past year Gamma had completed a tax inversion with Epsilon, which is headquartered in Ireland, becoming the parent company. Gamma was the oldest company of the group and the only subsidiary with material inventory.

Jamie was preparing for a meeting with Jason Day, the CFO of the group, as well as the senior manager on the audit of Gamma. The discussion was planning for the year-end and issues with the tax inversion and consolidation with Epsilon as the parent company.

Jamie and Jason were in the conference room when Thomas Stein, the senior auditor, arrived. Jamie was surprised as Thomas was an accounting classmate from State University.

“Thomas, what a surprise! I did not know that we would be working together on the annual financial statements. Long time, no see,” Jamie said.

“Yes, it’s good to see you. We did many a team project together in school. Congratulations on your new position. Jason told me what a great job you were doing.”

Jason cleared his throat and said, “I see we all know each other. Let’s get started as I think there are a lot of year-end issues with this tax inversion. First, the company will keep the corporate physical headquarters here in Philadelphia, but many of the governance meetings will be at Epsilon headquarters in Dublin, Ireland. Jamie, I need you to prepare a study for the board to consider at the next meeting as to whether all the subsidiaries should change to IFRS for the consolidation or not. Thomas, can you briefly explain the issues with such a change?”

“Under IFRS most assets will be revalued to fair market values. That will increase the values on the balance sheet. The biggest drawback will be the taxes the company will owe with changing from LIFO to weighted average for Gamma’s inventory,” Thomas began.

“Hold on, a minute,” Jason jumped in. “This tax inversion is to be a tax savings or tax-neutral situation, particularly this year when the stockholders are expecting profits. The U. S. government has allowed LIFO inventory for tax and financial reporting purposes so that is what Gamma is going to do.”

Jamie asked, “Are you suggesting that Gamma continue using U. S. GAAP while the other subsidiaries change to the IFRS basis? If I remember correctly from school, a company must pick one financial reporting format and follow the principles in those standards. Besides, LIFO is not acceptable under IFRS.”

“I don’t see why it is a big deal to use IFRS for all but Gamma’s inventory, Jason said. Thomas, what do you think?”

“I’m sure something can be worked out,” Thomas replied.

The discussion changed to other issues. After the meeting, Jamie and Thomas went to lunch to catch up on old times. At lunch, Jamie commented, “Thomas, do you really mean to let Jason and Gamma Enterprises pick and choose which accounting standards to follow, using a mixed-bag approach?”

“No, you were right, Jamie. However, I could see that the issue was upsetting Jason. It may take time to convince him.”

“I was just surprised that you seemed open to it at all. Aren’t the auditors suppose to be the watchdogs of business?”

“Jamie, I am up for partner this next year. I need to keep Gamma as a happy client. The pressure to keep revenues coming into the accounting firm is a big weight on my shoulders.”

“Well, just don’t forget your values.”

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Questions

Assume you are Thomas’s position and know that you have to let Jason know the correct way to convert to IFRS accounting.

What will be the objections or pushback from Jason?

What would you say next? What data and other information do you need to make your point and counteract the reasons and rationalizations you will likely have to address?

Consider whether Jamie and Thomas could work together to convince Jason (and the board) to change accounting methods. Identify the stakeholders in this case and their interests in addressing the following questions.

What are the main arguments you are trying to counter? That is, what are the reasons and rationalizations you need to address?

What is at stake for the key parties, including those who disagree with you?

What levers can you use to influence those who disagree with you?

What is your most powerful and persuasive response to the reasons and rationalizations you need to address? To whom should the argument be made? When and in what context?