IC-DISC and GAAP

Hi All, I dont know if any of you work with manufacturing clients who sell products overseas. And they have created an IC-DISC company for the tax benefit of paying dividend income versus ordinary income on foreign sales/income. My question relates to an S corp for example with one owner who pays the commission to the IS-DISC, which is also owned 100% by the same owner. We are preparing a compilation report, with no notes. The compilation report is for the S corp, and it pays around 100k in commission to the IC-DISC. Do we back out the commissions from the compilation to show more income because this expense is going to the same owner because it is IC-DISC income? Any thoughts here. Thank you.

You may need to consolidate this arrangement, in which case the intercompany income would be eliminated.
Look at the rules around VIEs and see if the IC-DISC falls under those rules.

I don't work in this area. Hopefully, that is helpful.

What does your GAAP research resource tell you? I wouldn't prepare any financial statement work without a good research resource.

GAAP most often, in my experience, requires consolidating the two entities because of the overlapping control and the fact that the IC-DISC only has one contract, and is completely reliant on the operating corporation to send profits its way.

You could always scope out the IC-DISC in the compilation report....I didn't know those were still around...I will have to look at that.

But the points are good points about VIE. This is just a conceptual entity for a tax strategy, I think this gets consolidated, and the revenue and commission eliminated if you want to do a proper USGAAP statement.

These VIE rules are always aggrevating....owner has building in LLC....VIE analysis...pffffft. But I can tell you that SEC and technical wonks take this very seriously in their funny little worlds. Licenses have been lost over failure to consolidate an entity. But usually the "oversight" was related to other bad behavior.

Can you recommend a training for IC-DISCs?

Compilation with no notes is not GAAP obviously. The compilation report doesn't do a god job on this but you can include ONE note disclosure to address the issue with the other company.

When in doubt, disclose it.