FAR_SECTION 6 Flashcards
GAAP classifies contingencies as
Probable- likely to occur
Reasonably possible- More than remote, but less than likely
Remote-slight chance of occuring
Under IFRS, probable is defined as
more likely than NOT to occur(50%)
Under IFRS, possible is defined as
may but probably will NOT occurt
Provision for a loss contingency s/b accrued by a charge to income if
it is probable
The amount of loss can be reasonably estimated
in the event that a range of probable losses is given, GAAP requires that the best estimate of
the loss be accrued
If NOT amount in the range is a better estimate that any other amount within the range
the minimum amount in the range s/b accrued
Loss is Reasonably Possible =
Disclosure is required
Loss is Remote
Ignore
Disclosure s/b made for “guarantee type” remote loss contingencies such as
D.O.G
- Debt of others guaranteed
- Obligations of commercial banks under standby letter of credit
- Guarantees to repurchase recievables(or related property) that have been sold or assigned
Gain contingencies =
Wait
Adequate disclosure shall be mand of contingencies that might result in
Gains
Contingencies that might result in gains usually are not reflected in the accounts because
to do so may cause recognition of revenue prior to its realization
Loss is Probable and Can be Reasonably Estimated =
Record JE
An agreement in which the employer provides employees with defined or estimated retirement benefits in exchange for current or past services
Pension Plan
Concerned with how the sponsor company
accounts for the plan
Refers to the sponsor company making contributions to the pension plan
Funding
Pay-As-You-Go and Terminal Funding are
Cash basis methods and NOT GAAP
Factors considered when calculating contributions to the plan include
- Employees’ length of service
2. Compensation amounts
Defined Contribution Plan and Defined Benefit Plan are
GAAP methods
Actuarial PV of benefits attributed by a formula based on current and past compensation levels
Accumulated Benefit Obligation(ABO)
Income tax expense-current is found by determining the amount of income that is
actually taxable this year
expense cannot be deducted for income tax purposes until -
actually incurred
Secnario:Baxter collected 5 percent of the cash this year ($100,000 out of $2 million). Thus, only 5 percent of the profit is
taxable in the current year.
SENARIO:Baxter collected 5 percent of the cash this year ($100,000 out of $2 million). What percentage will be collected in the future
The other 95 percent will not be taxable until the cash is eventually collected in the future (Deferred Income Tax liability)
A deferred income tax asset means that a company has a
tax benefit in the future.
Depreciation expense and the installment sales method usually create
deferred income tax liabilities
Bad debt expense and warranty expense are both temporary differences but both normally create
deferred income tax assets
Bad debt expense and warranty expense are both temporary differences
the expense is recognized immediately for financial reporting purposes but is deferred in connection with the companys income taxes
Installment sales method, revenues are recognized immediately for financial reporting purposes but the tax impact is
delayed until cash is collected -
Some level of uncertainty of the sustainability of a particular tax position taken by a company
Uncertain Tax positions
Who requires a more-likely than-not level of confidence before reflecting a tax benefit in an entity’s financial statements
GAAP
A filing position that an enterprise has taken or expects to take on its tax return
Tax position
What are the two step approach in Uncertain Tax positions
- Recognition of the Tax benefit
2. Measurement of the Tax benefit
Uncertain Tax positions,
Recognition of the Tax Benefit is based on
the expected outcome in the court of last resort
Uncertain Tax positions, Measurement of the Tax Benefit is based on
the expected outcome in a settlement with the taxing authority
