Fair Value Measurement: What’s New? Teaching Note

As the international economic landscape has become increasingly integrated, the argument for the development of uniform global accounting standards now exists. In an effort to achieve this objective, the Financial Accounting Standards Board, as part of the ongoing Convergence Project with the International Accounting Standards Board, released groundbreaking accounting standards, FAS157 & FAS159, in 2006 and 2007, respectively. Modeled after an international accounting standard, these standards pertain to the use of fair value accounting (FVA), and are the first of their kind as they provide a definition of FVA and an option to expand its use to certain financial instruments. While FVA has been argued to enhance financial reporting, there has also been significant controversy as to its application and ambiguity. The focus of this teaching note is to discuss FVA’s application to assets and liabilities, and to present the various effects that the election of the FV Option may have on an entity’s financial statements

Fair Value Accounting: Affect on the Auditing Profession

During this period of global markets, multinational corporations are demanding financial accounting standards with enhanced uniformity. In an effort to achieve this objective, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have been working together on the Convergence Project, aiming to develop accounting standards that closely correlate with international financial reporting standards. In September 2006 and February 2007, the FASB issued two key fair value accounting (FVA) standards which focused on providing guidelines for fair value measurement (through a classification hierarchy), expanding disclosure requirements, and also allowing business entities to increase FVA\u27s application. However, the recent financial crisis has placed increased scrutiny on estimates derived under FVA. Consequently, a spotlight has been placed on the auditing profession, as the effectiveness of an auditor\u27s ability to test estimates derived under FVA has been questioned due to numerous firms approaching collapse in the midst of the credit crisis. Thus, the purpose of this paper is to present the challenges auditors face when auditing FV estimates, and to discuss the profession\u27s capability of adapting to FVA in the future

Interpreting Financial Results

The article discusses three accounting changes issued by the Financial Accounting Standards Board (FSAB). The Statement of Financial Accounting Standards (SFAS) No. 158 Employers\u27 Accounting for Defined Benefit Pension and Other Retirement Plans and the SFAS No. 160 Noncontrolling Interests in Consolidated Financial Statements are mentioned. Financial Interpretation 48 Accounting for Uncertainty in Income Taxes, an Interpretation of FSAB Statement No. 109 is mentioned. The takeaway? Financial analysts, investors, and creditors need to carefully interpret ratios and measures, including debt to equity, liabilities to equity, and return on equity. Financial ratios used in loan covenants should be clearly designed and defined, and, in some cases, equity may be more meaningfully defined as adjusted for certain changes in other comprehensive income

Restatement VS Revision: A Case Study

There had been many recent cases of restatements of financial statements by US Corporations. Recently an article in the Wall Street Journal mentioned restatements by Bank of America, Nike and Alphabet among the 663 companies that filed financial revisions or restatements last year. Interestingly the frequency of these errors has more than doubled since 2002, when the Sarbanes-Oxley corporate governance law was enacted, partly to increase managerial accountability. We will also examine what are the differences between restatements and revisions. We will examine what are the most common mistakes. Over half of last year\u27s corrections involved debt and equity, cash flows or taxes. Many of these issues are also major differences between US GAAP and IFRS, making comparison with international firms even more difficult. We will try to explain why a firm chooses a restatement or revision to announce the correction of errors

Liberating Trapped Cash: A Case Study of Trapped Cash at Apple and Microsoft

The topic of trapped cash, or cash permanently reinvested overseas to avoid tax upon repatriation, has become a hot topic in accounting, finance and policy circles over the past two years. This case study analyzes the activities of two major technology firms, Microsoft and Apple, to liberate enormous holdings of trapped cash. The case prompts a discussion of the topic of trapped cash, stakeholder considerations and tools available to manage cash balances held outside the United States. The focus is to examine the strategies available and those selected by Microsoft and Apple to meet or at least appease stakeholder demands while freeing trapped cash

Court of Federal Claims Upholds Additional SUI Credit

The article discusses the decision in a tax court case that plaintiffs in consolidated tax refund cases were entitled to an additional state unemployment insurance (SUI) credit against their Federal Unemployment Tax Act (FUTA) tax liabilities for years 1991-1996. The dispute in the tax court case of E.P. Talent Services LP was addressed in a year 2004 Court of Federal Claims decision. It was ruled that the SUI credit is capped at over five percent of the taxpayer\u27s total FUTA wage base

Medical Deduction Allowed for In-Home Personal Use

The Tax Court held that payments made to an elderly woman\u27s providers of personal care that she required due to her diminished capacity qualified as long-term-care services and were therefore deductible under IRC § 213(d)(1)(C). Lillian Baral was diagnosed with dementia by her physician in 2004. The court agreed with Baral\u27s estate that the amounts paid to the caregivers for their services were deductible as qualified long-term-care services. Baral was chronically ill, and the care was medically necessary to protect her from threats to her health and safety, as determined by her physician. The court also held the amounts paid for physicians were qualified medical expenses

The Big Four: A Study of The Compatibility of Accounting and Consulting Practices within A Professional Services Firm in the United States

The Big Four audits approximately 99% of the market capitalization of companies traded on the New York Stock Exchange (NYSE) and the National Association of Securities Dealers Automated Quotations (NASDAQ) that are included in the Fortune 500. The purpose of our study is to provide data driven analysis about 1) the relationship between audit quality and permissible non-audit consulting/advisory providers to audit clients by the auditor and 2) the impact on audit quality of providing consulting/advisory services to non-audit clients of the Big Four. Evidence will be presented to demonstrate that as consulting/ advisory service revenue has increased, audit quality has also increased. Audit independence has been safeguarded

10 Good Reasons Why LLCs Should Not Elect to Be S Corporations

Since 2004, the IRS has administratively made S elections for limited liability companies (LLCs) very easy. An LLC that is otherwise eligible to be an S corporation that is classified as a partnership or a disregarded entity can simultaneously elect to be classified as both a corporation and an S corporation by timely filing Form 2553, Election by a Small Business Corporation, without the need to also file Form 8832, Entity Classification Election. The Treasury regulations treat the one-stop-shop rule as a deemed election under the entity classification regulations

Post-JGTRRA Dividend Planning

The JGTRRA reduced the tax rate on dividends for individuals and lowered the accumulated earnings and personal holding company taxes for corporations until 2008. This article reviews some of the planning techniques corporations and shareholders can use to take advantage of the temporarily lower rates. One of the key provisions of the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA), if not the prime emphasis of the legislation, is Section 302\u27s reduction in the individual tax rate on corporate dividends received to 15% (5% for individuals in the 15% and 10% brackets). In an emerging trend, the lower tax rates on dividends will sunset in 2008. This six-year window affords some interesting planning opportunities for both C and S closely held corporations that want to reduce their accumulated earnings and profits (E&P).This article discusses some of the dividend planning opportunities under the JGTRRA for closely held corporations and their shareholders