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C249 CRITICAL LEARNING OBJECTIVES

memorize.ai (lvl 286)

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Section 1

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Identify the key differences in the procedures for accounting changes and error analysis under GAAP and IFRS.

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6 years ago

Date created

Mar 1, 2020

Cards (10)

Section 1

(10 cards)

Identify the key differences in the procedures for accounting changes and error analysis under GAAP and IFRS.

Front

1) Difference in reporting error correction in prior periods. Both require restatement but GAAP is an ABSOLUTE STANDARD with no exception. 2) IFRS: impracticality exceptions applies to changes in accounting principles and to correction of errors. GAAP: this exception applies only to accounting principles. 3) IFRS: does not specifically address accounting and reporting for indirect effects of changes in accounting principles. GAAP: has a detailed guidance on reporting indirect effects.

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Account for each of the three categories of debt securities.

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- Held to maturity: recorded on the balance sheet at amortized costs. - Trading: bought and held primarily for the short run to generate income on short-term price changes. These securities are recorded on the balance sheet at fair values. Any unrealized holding gains or losses related to changes in fair values of trading debt securities are recorded in the income statement. - Available for sale: all other securities not classified as held to maturity or trading securities represent available for sale debt securities. These securities are recorded on the balance sheet at fair values. Any unrealized holding gains or losses related to changes in fair values of available for sale debt securities are recorded in other comprehensive income until such securities are sold.

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Account for correction of errors in a financial statement.

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As soon as it's discovered, an error must be corrected by a proper entry in the accounts and reported in the financial statements. The profession requires that a correction of an error in previously issued financial statements be treated as PRIOR PERIOD ADJUSTMENT, be recorded in the year in which the error was discovered, and be reported in the FS as an adjustment (net or tax) to the beginning balance of retained earnings. If comparative statement are presented, the prior period statement affected should be restated to correct the error. The disclosure need to be repeated in the FS of subsequent periods.

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Identify examples of fair value disclosures.

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Back

Explain how a temporary difference results in future deductible amounts.

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An accrued warranty expense that is paid for and is deductible for tax purposes in a period later than the period in which it is recognized for book purposes will result in future deductible amounts. A deferred tax asset is to be recognized for the deferred tax consequences of the warranty expense and related warranty liability already reflected in the FS. The recording of the deferred tax asset causes the total income expense to be LESS than the amount of income tax payable for the period in which the warranty expense is recognized for book purposes. The future deductible amounts will occur in the periods the related warranty liability for book purposes is settles and the expenditure are reported as expense for tax purposes. These future deductible amounts decrease taxable income in the later periods in which they occur.

Back

Identify key differences in the accounting for income taxes under GAAP and IFRS.

Front

1. Under IFRS deferred taxes are always listed current. Under GAAP the classification of the deferred tax is based on the underlying asset of liability. 2. IFRS uses affirmative judgment and recognizes the deferred tax up to the amount that will probably be realized. Under GAAP the impairment approach is used 3. IFRS uses the enacted tax rate or substantially enacted tax rate. GAAP must use the enacted tax rate. 4. Tax effects under IFRS are reported in equity. GAAP credits the tax effect to income. 5. GAAP requires companies to assess the likelihood of uncertain tax positions being sustainable upon audit. IFRS requires that all potential liabilities must be recognized. IFRS also uses an expected value approach to measure the tax liability

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What is a deferred tax liability?

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A deferred tax liability represents the increase in taxes payable in future years as a result of taxable temporary differences existing at the end of the current year. It is a difference between Income Tax Expense and Income Tax Payable (Income Tax Expense - Income Tax Payable = Deferred Tax Liability (Asset)

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Account for inter-period tax allocation.

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Accounting for deferred taxes involves the following steps. (1) Calculate taxable income and income taxes payable for the year. (2) Compute deferred income taxes at the end of the year. (3) Determine deferred tax expense (benefit) and make the journal entry to record income taxes. (4) Classify deferred tax assets and liabilities as current or noncurrent in the financial statements.

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Describe the basic principles of the asset-liability method.

Front

Is the most consistent method for accounting for income taxes Objectives a. recognize the amount of taxes payable or refundable for the current year b. recognize deferred tax liabilities and assets for the future tax consequences of events that have been recognized in the financial statements or tax returns

Back

Account for transfer of investment securities between categories.

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o Transfer of a security between categories of investments shall be accounted for at fair value as the sale and repurchase of the transferred security. o The security's unrealized holding gain or loss at the time of transfer shall be accounted for as follows: a. For a security transferred from the trading category, the unrealized holding gain or loss at the date of the transfer will have already been recognized in earnings and shall not be reversed. b. For a security transferred into the trading category, the unrealized holding gain or loss at the date of the transfer shall be recognized in earnings immediately. c. For a debt security transferred into the available-for- sale category from the held-to-maturity category, the unrealized holding gain or loss at the date of the transfer shall be reported in other comprehensive income. d. For a debt security transferred into the held-to-maturity category from the available-for-sale category, the unrealized holding gain or loss at the date of the transfer shall continue to be reported in a separate component of shareholders' equity, such as other comprehensive income, but shall be amortized over the remaining life of the security as an adjustment of yield in a manner consistent with the amortization of any premium or discount.

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