Business Context and Reporting Period
This Form 8-K is a current report filed by Dillard's, Inc. on October 6, 2011. The filing discloses a change in the Company's independent registered public accounting firm and details a significant accounting disagreement with the outgoing firm regarding a tax election related to a Real Estate Investment Trust (REIT) transaction.
Key Financial Metrics
The filing does not provide standard financial performance metrics such as revenue, profit, cash flow, or debt levels for the reporting period. The only specific financial figure disclosed relates to a potential accounting adjustment:
- Potential Income Tax Benefit: Management estimates that the elimination of a valuation allowance related to a capital loss carryforward would result in an immediate income tax benefit of approximately $135 million, though the Company believes this should be deferred.
Material Changes and Accounting Disagreement
The primary material change is the dismissal of PricewaterhouseCoopers LLP (PwC) and the engagement of KPMG LLP as the independent registered public accounting firm for the fiscal year ending January 28, 2012. This decision follows a competitive selection process.
A material disagreement exists between the Company and PwC regarding the accounting treatment of a tax election made in connection with the formation of a wholly-owned REIT subsidiary in January 2011:
- PwC's Position: Believes the intent to make the tax election creates taxable income that should eliminate the valuation allowance on the capital loss carryforward. PwC argues this elimination should be recognized immediately in the Consolidated Statement of Operations.
- Management's Position: Believes the transaction is intercompany and that gains on such transactions are forbidden under consolidation requirements. Management argues the tax benefit should be deferred and recognized in future periods as the increased tax basis of the properties produces depreciation or basis deductions.
The Company obtained a Closing Agreement with the IRS in September 2011 confirming the availability of the tax election, which increases the tax basis of the transferred properties to their fair values.
Outlook, Risks, and Contingencies
Regulatory Guidance: The Company intends to seek guidance from the staff of the Securities and Exchange Commission (SEC) regarding the appropriate accounting for the REIT transaction and the associated tax election.
Auditor Consultation: During the audit firm selection process, the Company consulted with KPMG and other firms. KPMG indicated that a complete review is necessary and that both the Company's and PwC's views warrant consideration.
Historical Impact: The Company notes that prior filings (Form 10-K for fiscal 2011 and Forms 10-Q for the first two quarters of 2011) were not directly impacted by this matter because the Company did not expect to make the tax election at those times.
Key Facts for Investor Verification
- Verify the outcome of the Company's request for guidance from the SEC staff regarding the accounting treatment of the REIT tax election.
- Monitor future financial statements to determine if the $135 million estimated tax benefit is recognized immediately or deferred as management proposes.
- Review the letter from PwC (Exhibit 16) to confirm their stance on the disagreement and the absence of other reportable events.
- Confirm the final filing of the tax return for the fiscal year ended January 29, 2011, which includes the tax election.