Auditor Interpretation of Loss-Related Tax Rule Affects Homebuilders

New York–A major auditor’s re-interpretation of bank loan tax treatments could offer homebuilders a new way of handling its assets, the Financial Times reported Friday.The debate involves accounting firm Ernst & Young’s new interpretation of the accounting rule FAS 109, which determines how to treat tax assets when a company sees an overall income loss for three consecutive years. An auditor will apply tests during the loss period to determine whether the company can handle its total tax asset and to reduce the amount of income taxes when the company is again profitable. If the auditor decides the company will not realize its full tax asset amount because it will most likely not see a profit for three years, the auditor can make a company reduce the size of its tax asset.In early December, the New York-headquartered Ernst & Young distributed its FAS 109 statement to homebuilders, informing clients that the three-year loss period would contain the two previous years and one year of forecasting, removing 2005–which was extremely profitable–from the total.Ernst & Young auditors made KB Home and Hovnanian Enterprises cut their tax assets by making a valuation allowance, which became a non-cash, after-tax charge to their net income, the Times said. Since retained earnings set shareholder equity, the change can mean a big difference to investors.Trying to determine growth for the next year will be difficult for auditors and homebuilders battling a decline in housing starts and prices. Income received in the current year from jobs booked in 2007 will also not apply because homebuilders often count income as work is reserved, said Kathleen McEligot, a tax partner at Deloitte & Touche.The change could affect a number of homebuilders. Standard Pacific, Tousa and WCI Communities also use Ernst and Young.