Financial Accounting and Reporting

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Net income earned by the investee is not a proper basis for recognizing income from the investment by the investor. The investor earns net income only when the investee declares cash dividends. Significant influence may be indicated in several ways. Examples include representation on the board of directors, participation in policy-making processes, material intercompany transactions, interchange of managerial personnel, or technological dependency. Another important consideration is the extent of ownership by an investor in relation to the concentration of other shareholdings. Under the equity method, the investor and the investee acknowledge a substantive economic relationship. The investor’s proportionate share o the earnings (losses) of the investee periodically increases (decreases) the investment’s carrying amount. All dividends received by the investor from the investee also decreases the investment’s carrying amount. Using dividends as a basis for recognizing income fails to report properly the economics of the situation. When one corporation acquires a voting interest of more than 50 percent in another corporation, it is said to have a controlling interest. In such a relationship, the investor corporation is referred to as the parent and the investee corporation as the subsidiary. When the parent treats the subsidiary as an investment, the parent generally prepares consolidated financial statements. We have identified the basic issues involved in accounting for investments in debt and equity securities. In addition, the following issues relate to the accounting for investments: 1. Impairment of value → A company should evaluate every held-for-collection investments, at each reporting date, to determine if it has suffered impairment – a loss in value such that the fair value of the investment is below its carrying value. If the company determines that an investment is impaired, it writes down the amortized cost basis of the individual security to reflect this loss in value. If an investment is impaired, the company should measure the loss due to the impairment. This impairment loss is calculated as the difference between the carrying amount plus accrued interest and the expected future cash flows discounted at the investment’s historical effectiveinterest rate. 2. Transfers between categories Chapter 19 – Accounting for Income Taxes Pretax financial income is a financial reporting item. It also is often referred to as income before taxes, income for financial reporting purposes, or income for book purposes. Taxable income is a tax accounting term. It indicates the amount used to compute income taxes payable. Companies determine taxable income according to the tax regulations. Income taxes provide money to support government operations. A temporary difference is the difference between the tax basis of an asset or liability and its reported amount in the financial statements, which will result in taxable amounts or deductible amounts in future years. Taxable amounts increase taxable income in future years. Deductible amounts decrease taxable income in future years. A deferred tax liability is the deferred tax consequences attributable to taxable temporary differences. In other words, a deferred tax liability represents the increase in tax payable in future years as a result of taxable temporary differences existing at the end of the current year. Current tax expense → the amount of income taxes payable for the period. Deferred tax expense is the increase in the deferred tax liability balance from the beginning to the end of the accounting period. One objective of accounting for income taxes is to recognize the amount of taxes payable or 38
efundable for the current year. A second objective is to recognize deferred tax liabilities and assets for the future tax consequences of events already recognized in the financial statements or tax returns. A deferred tax asset is the deferred tax consequence attributable to deductible temporary differences. In other words, a deferred tax asset represents the increase in taxes refundable (or saved) in future years as a result of deductible temporary differences existing at the end of the current year. The deferred tax benefit results from the increase in the deferred tax asset from the beginning to the end of the accounting period. Numerous items create differences between pre-tax financial income and taxable income. For purposes of accounting recognition, these differences are of two types: (1) temporary, and (2) permanent. Taxable temporary difference are temporary differences that will result in taxable amounts in future years when the related assets are recovered. Deductible temporary differences are temporary differences that will result in deductible amounts in future years, when the related book liabilities are settled. An originating temporary difference is the initial difference between the book basis and the tax basis of an asset or liability, regardless of whether the tax basis of the asset or liability exceeds or is exceeded by the book basis of the asset or liability. A reversing difference occurs when eliminating a temporary difference that originated in prior periods and then removing the related tax effect from the deferred tax account. Some differences between taxable income and pre-tax financial income are permanent. Permanent differences result from items that (1) enter into pre-tax financial income but never into taxable income, or (2) enter into taxable income but never into pre-tax financial income. Since permanent differences affect only the period in which they occur, they do not give rise to future taxable or deductible amounts. As a result, companies recognize no deferred tax consequences. The effective tax rate → dividing total income tax expense for the period by pre-tax financial income. What happens if tax rates are expected to change in the future? In this case, a company should use the substantially enacted tax rate expected to apply. Therefore, a company must consider presently enacted changes in the tax rate that become effective for a particular future years when determining the tax rate to apply to existing temporary differences. A net operating loss (NOL) occurs for tax purposes in a year when tax-deductible expenses exceed taxable revenues. Companies accomplish this income-averaging provision through the carryback and carryforward of net operating losses. Under this provision, a company pays no income taxes for a year in which it incurs a net operating loss. Through use of a loss carryback, a company may carry the net operating loss back two years and receive refunds for income taxes paid in those years. The company must apply the loss to the earlier year first and then to the second year. It may carry forward any loss remaining after the two-year carryback up to 20 years to offset future taxable income. A company may forgo the loss carryback and use only the loss carryforward option, offsetting future taxable income for up to 20 years. The IASB believes that the asset-liability method is the most consistent method for accounting for income taxes. One objective of this approach is to recognize the amount of taxes payable or refundable for the current year. A second objective is to recognize deferred tax liabilities and 39
Page 1 and 2: Financial Accounting and Reporting
Page 3 and 4: Chapter 1 - Financial Reporting and
Page 5 and 6: Considering the economic consequenc
Page 7 and 8: The monetary unit assumption means
Page 9 and 10: evenues results in a debit (decreas
Page 11 and 12: evenue generated. As indicated, a d
Page 13 and 14: that a company cannot record object
Page 15 and 16: 1. Determine the net cash provided
Page 17 and 18: services sold. Notes receivable are
Page 19 and 20: common type is a sale to a factor.
Page 21 and 22: a purchase discount lost account. I
Page 23 and 24: weighted-average accumulated expend
Page 25 and 26: depreciation charge based on a decr
Page 27 and 28: assets. The rate of return a compan
Page 29 and 30: Many costs have characteristics sim
Page 31 and 32: 1. The time period in which the und
Page 33 and 34: any call premium and expense of rea
Page 35 and 36: When a company issues shares, it sh
Page 37: orrowed money or issuing preference
Page 41 and 42: exercisable. Determining the presen
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Financial Accounting and Reporting

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