Accounting and Auditing Research Tools and Strategies, 10th Edition , Thomas R Weirich , Thomas C Pe by Ace Test Banks

Accounting and Auditing Research Tools and Strategies, 10th Edition By Thomas R. Weirich ,Thomas C. Pearson, Natalie Tatiana Churyk

Email: Richard@qwconsultancy.com

Accounting & Auditing Research: Tools and Strategies 10th Edition SOLUTIONS MANUAL Thomas R. Weirich, PhD, CPA Thomas Pearson, LL.M., J.D., CPA Natalie T. Churyk, PhD, CPA

CHAPTER 1 INTRODUCTION TO APPLIED PROFESSIONAL RESEARCH Discussion Questions 1. Research in general involves the investigation and analysis of an issue in question. The researcher usually applies reasonable and reflective thinking to develop an answer to the issue or problem at hand. Research requires a clear definition of the problem, using professional databases to search the authoritative literature, reviewing and evaluating the data collected, drawing conclusions and communicating your rsults. 2. Accounting, auditing, or tax research involve a systematic and logical investigation of an issue or problem using the accountant’s professional judgment. Furthermore, accountants approach this problem using critical-thinking skills to obtain and document evidence underlying a conclusion relating to an issue or problem currently confronting the accountant or auditor. 3. Accounting, auditing, or tax research are necessary in order to determine the proper recording, classification, and disclosure of economic events; to determine compliance with authoritative pronouncements; or to determine the preferability of alternative accounting procedures. 4. The objective of accounting, auditing, or tax research is a systematic investigation of an issue or problem utilizing the researcher’s professional judgment to arrive at appropriate and timely conclusions regarding the issues at hand. 5. Research plays an important role within an accounting firm or department. It is critical for the accountant/auditor to be able to find and locate applicable authoritative pronouncements and to ascertain their current status. Given the number and diversity of clients served, public accounting firms constantly engage in research on a wide array of accounting, auditing, or tax issues. This 1 © Weirich, Pearson, and Churyk

research process is usually conducted by the local office staff, selected local or regional "research specialists," and/or the executive office research personnel. 6. The functions of a multi-office CPA firm's Policy Committee are to evaluate significant accounting and auditing issues and establish firm-wide policies on these issues. Its Executive Subcommittee handles daily ongoing policy (i.e., lower-level) decisions for the firm as a whole. 7. Some basic questions that the researcher must address in performing, accounting, auditing, or tax research include: Do I have the knowledge to do the research?; What is authoritative literature?; Does authoritative literature address the issue?; If authoritative literature does exist, where can I find it?; If there exist more than one alternative of authoritative support, which one do I use?; If authoritative literature does not exist, what do I do?; What professional databases do I use? 8. Theoretical (pure or basic) research involves investigating questions that, while interesting, have little or no present, practical applications; while applied research involves investigating issues of immediate, practical importance. 9. Some of the characteristics that a practitioner-researcher should possess include inquisitiveness, open-mindedness, patience, thoroughness, and perseverance. 10. The “Research Navigation Guide” serves as a tool in navigating through the authoritative literature. The guide helps to focus or narrow one’s research when utilizing various databases like the FASB’s Codification System. One would first focus on a functional area like “Financial Accounting”. Once the functional area is identified then focus on the broad categorization of the topic such as “Revenue”. This is followed by focusing on the subtopic that allows for further segregation of the issue “Software Revenue”. The final step would be to focus on the section or nature of the content of the issue which is often a recognition, measurement, or disclosure issue such as “Recognition of Software Revenue”. 11. While a priori (before the fact) research refers to research before the client actually enters into the (proposed) transaction, a posteriori (after the fact) research refers to research relating to past or completed economic transactions. For planning purposes, the practitioner would rather be involved with a priori research to work with the client to develop a correct solution rather than attempting to correct a completed transaction. 12. The California court decision stresses that "well-informed" accountants are expected to master "standard research techniques" (or face severe malpractice claims). 13. The research process "adds value" to an accounting firm’s services, since today's complex business transactions and proliferation of new authoritative pronouncements mandates that the firm efficiently and effectively conduct such research for their clients. 14. Some economic consequences to the standard-setting process of performing research include the impact of such pronouncements to investors and creditors resource allocation decisions in © Weirich, Pearson, and Churyk

today's (competitive) capital markets, and the cost/benefit analysis of the issuance of a new standard. 15. Since the accounting and auditing literature is organized with a keyword indexing system, listing keywords in step one of the research process will aid the researcher in locating the authoritative literature in an efficient and effective manner. Failure to describe the keywords in sufficient detail can cause one to overlook important sources. 16. The five steps involved in the research process include: identifying the (research) issue, collecting the (appropriate) evidence, evaluating the results and identifying alternative solutions, developing (appropriate) conclusions, and communicating the results to the interested parties. 17. Research can support or refute a biased alternative by gathering evidence that is either unbiased or slanted toward the alternative being researched. Since the researcher should be unbiased in evaluating the various alternatives, the process often requires a (detailed and logical) analysis of complex and detailed accounting issues--thereby requiring "critical thinking" skills. 18. Problem distillation entails "refining" and "restating" the research issue from general to sufficiently specific terms, in order not to waste time investigating irrelevant items. 19. The skills tested on the CPA exam include: understanding, analysis, judgment, communication, research, and synthesis. 20. A research memorandum should contain such attributes as selecting objective and unbiased words; a grammatically correct and well-spelled, clear statement of the issue researched; a statement of the facts; a brief and precise discussion of the issue; and a straightforward conclusion based upon supported and identified authoritative literature. The researcher should avoid making such common errors as excessive discussion of the issues and facts, excessive citations to authoritative sources, avoidance of presenting a conclusion, and including irrelevant information. 21. Critical-thinking skills (e.g., understanding a variety of contents and circumstances and applying various accounting, auditing, and business principles to help solve the problem under review) helps the researcher effectively and efficiently gather relevant facts, synthesize and evaluate alternatives, and develop alternative solutions. 22. The SEC stressed the importance of accountants performing effective research, claiming that this CPA's deficiency constituted a lack of exercising "due professional care." 23. Although this question is raised in Chapter 1, it is not directly answered until a later chapter. However, in Chapter 1 it briefly discusses that when authoritative literature does not exist on a specific issue, the practitioner would normally develop a theoretical solution based on logic or analogous authortitaive literature. In a later chapter we will focus on this question in detail © Weirich, Pearson, and Churyk

whereby one utilizes the “FASB’s Conceptual Framework” and other authoritative literature by analogy to solve the problem. 24. The standard setter for accounting standards for federal government entities is the Federal Accounting Standards Advisory Board (FASAB). The PCAOB does not set accounting standards, but auditing standards. 25. Since you are conducting accounting research for a public company (Microsoft), the researcher would utilize the standards of the FASB located on the FASB Codification database which is tshe fous of Chapter 4. This database also includes the authoritative stnadards of the AICPA. GAO and PCAOB standars are suditing standards, not accounting standards. 26. Qualitiative analytics focuses on non-quantitiative data such as videos, pictures, or an enity’s e-mails. Wheras quantiative analysis focuses on the analysis of numberical data suchas trends of dollar sales and focusing on the outliers. 27. Data analytics is considered a process of inspecting, cleansing, transforming, and modeling data with the goal of discovering useful information, suggesting conclusions, and supporting decision-making. 28. Examples of structured data would be data found in excel spreadsheets. Examples of unstructured data would include pictures, videos, or Twitter feeds. Exercises 1. Current Quality Control stdandards of the PCAOB include: QC 20- System of QC for a CPA Firm’s Accounting & Auditing Practice. QC 30- Monitoring a CPA Firm’s Accounting & Auditing Practice QC 40- ateh personnel Managaement Element of a Firm’s QC Conpetencies. 2. The IASB is the independent, accounting standard setting body that issues international financial reporting standards (IFRS) which are discussed in Chapter 5. 3. Standards may vary due to new issued standards. Recent IAASB standards listed on 1/10/2020 include: ISA 315-Identifying & Assessing Risks of Material Misstatements. ISA 540-Auditing Accounting Estimates & Related Disclosures. 4. One can filter by topic area and therefore various publications will be listed.

CHAPTER 2 CRITICAL THINKING and EFFECTIVE WRITING SKILLS FOR THE PROFESSIONAL ACCOUNTANT Discussion Questions: 1. Critical thinking has many definitions. One definition is as follows: Critical thinking involves a process of (more deeply) understanding, evaluating, and judging the underlying issues under investigation. 2. The highest level of thinking according to Bloom’s taxonomy entails the "evaluation” of a statement (based upon definite criteria) for a given purpose. 3. In Bloom’s taxonomy, comprehension (or grasping the meaning of a statement) entails the ability of restating the item into the researcher’s own words without changing the statement's meaning--thereby entailing a higher order skill than merely paraphrasing it. 4. While critical thinking involves a process of (more deeply) understanding, evaluating and judging the underlying issues under investigation, professional skepticism entails an attitude of examining and recognizing emotional-laden, and explicit and hidden assumptions “behind” each question. 5. The qualities that lie behind rethinking include: a willingness to say that you don’t know the answer, an openness to alternatives, an interest in the ideas of others, thoughtfulness, a desire to discover what others have done and thought, an insistence on getting the best evidence, and an openness to one’s own intuition. 6. The three levels of thought by the Illinois Renewal Institute include: Recall--the lowest level, where one defines, describes, lists, recites or selects; Process--the second level, where one compares, contrasts, classifies, sorts, and analyzes; and Application--the highest level, where one evaluates, imagines, judges, and hypothesizes. 7. The AICPA’s list of effective writing characteristics include a coherent organization, conciseness, clarity, use of standard English, responsiveness to the requirements of the question, and appropriateness for the reader. The editing skills include conciseness, clarity, and the use of standard English. The composing skills include organization, responsiveness, and appropriateness. 8. Per SEC Rule # 33-7380, six principles of clear writing include using: a. Active voice; b. Short sentences; c. Everyday language; d. Tabular presentation of complex material; © Weirich, Pearson, and Churyk

e. f.

No legal jargon; and No multiple negatives.

9. Plain English writing does not mean deleting complex information. Rather, it presents documents in an orderly and clear fashion so the reader can better understand it. 10. The elements of plain English include: Know your audience; know what material information needs to be disclosed; use clear writing techniques; and design and structure the document for ease of readability. 11. The active voice uses strong, direct verbs. The subject of the sentence performs the action described by the verb. An example: “ I will respond to the client’s memo.” The passive voice is where the action is done to somebody or something by another agent. The passive voice often uses the words “be" or "been.” An example: “No one has been authorized to respond to the client’s memo.” 12. Special concerns of using e-mails include the need to develop strong writing skills as one attempts to state his or her thoughts as concisely as possible; and strong technological skills in the security of the transmission of the communication. 13. The different types of client letters include: transmittal letters that merely transmit information; status update letters that reminds the client about a situation by providing an update to the issue; action request letter requests action; and an opinion letter summarizes the situation very briefly. 14. A memo to the file documents the reasoning for one’s conclusion that might be related to a research issue. A client letter normally does not document the details of the research process. 15. A tax memo is often unique in that it usually includes the reasoning for the law or authorities used, as well as the application of the law or authorities to the client’s set of facts. The memo would include the following areas: Facts, Issues, Conclusion, and Reasoning. Chapter 7 will provide greater details as to tax issues and memos. 16. In Bloom’s Revised Taxonomy, Understanding includes “explaining ideas or concepts”, interpreting, summarizing, paraphrasing, classifying, or explaining. Evaluating includes “Justifying decision or course of action” checking, hypothesizing, critiquing, experimenting, judging.

Exercises: 1. The solution to this logic problem is the following: © Weirich, Pearson, and Churyk

House 1

House 2

House 3

House 4

House 5

Color

Yellow

Blue

Red

White

Green

Country

America

Russia

England

Spain

Japan

Sport

Football

Table Tennis Hockey

Basketball

Baseball

Drink

Water

Tea

Milk

Orange Juice Coffee

Pet

Fox

Horse

Hamster

Dog

Monkey

Allison is the eldest. A= Allison, M= Mary, J= Jennifer, X=eldest If M = 1/2 X, J= A +M +1/2 X If A is eldest: A=X, J= X =1/2 X =3/2 X and Jennefer receives the highest points, and Mary as youngest receives the least points. If J is the eldest: J=X, J=A +1/2 X, A= 1/2 X, Allison and Mary receive the same number of points. However, the youngest receives the least points, so J cannot be the eldest.

3. The eight elements of reasoning as to the question of when assets need to be classified as current assets are as follows: a. Purpose—the purpose is to respond to the client’s request for information. b. Issue—the issue is to provide a specific response to the question, "When do assets need to be classified as current assets?" c. Information—the information for this issue would include the authoritative accounting literature. d. Concepts—the concepts would include the concepts (definition) of an asset, and the classification between current and long-term assets. e. Assumptions—the assumption to classify an asset as current is that it will be used up, or consumed within one year or the operating cycle, whichever is longer. f. Interpretations or inference—the interpretation requires one to determine from the evidence whether the asset will be used up or converted into cash. g. Implications or Consequences—If an asset is not properly classified, the analysis of the financial statements (i.e., current ratio) would be misleading. h. Solution—An asset should be classified as a current asset when it will be converted into cash, or consumed in operations within one year or the operating cycle, whichever is longer ( ASC 210-45-3). 4.

The eight elements of reasoning for the question of when a contingent liability should be booked are as follows:

a. Purpose—the purpose is to respond to the client’s request for information. b. Issue—the issue is to provide a specific response to the question, "When should a contingent liability be recorded?" c. Information—the information for this issue would include the authoritative accounting literature. d. Concepts—the concepts would include the concepts (definition) of a contingent liability, and when to record a liability. e. Assumptions—the assumption to record a contingent liability would be that the dollar amount can be estimated and the liability is probable in occurrence. f. Interpretations or inference—the interpretation requires one to evaluate the probability of occurrence and whether the amount can be reasonably estimated. g. Implications—If a contingent liability meeting the requirements of FASB No. 5 is not recorded, then the financial statements are misstated. h. Solution—a contingent liability should be recorded if it meets the two criteria of ASC 450-20-25-1—probable and the amount can be reasonably estimated. 5.

Correct punctuation: a. A general ledger contains all the assets, liabilities, and owners’ equity accounts. b. The purpose of a trial balance is to prove that debits equal credits, but this does not prove that all transactions have been recorded. c. The current assets section of the balance sheet contains items such as cash, accounts receivable, and prepaid expenses; and the current liabilities section contains items such as accounts payable, notes payable, and short-term debt. d. The auditing exam was to begin at 2:00 p.m., but the professor’s car broke down, so we didn’t begin until 2:30 p.m. e. Did William ask, “ How can we finish the audit tonight because Linda said, ‘We have twenty hours of work left to do’”?

6. Examples of the sentences rewritten: a. Original sentence; For good reasons, the secretary may grant extensions of time in 30-day increments for filing of the lease and all required bonds, provided that additional extensions requests are submitted and approved before the expiration of the original 30 days or the previously granted extension. + rewritten: We may extend the time you have to file the lease and required bonds. Each extension will be for a 30-day period. To get an extension, you must write us giving the reasons that you need more time. We must receive your extension request in time to approve it before your current deadline or extension expires. b. Original sentence: © Weirich, Pearson, and Churyk

If the State agency finds that an individual has received a payment to which the individual was not entitled, whether or not the payment was due to the individual’s fault or misrepresentation, the individual shall be liable to repay to the State the total sum of the payment to which the individual was not entitled. rewritten: If the State agency finds that you received a payment that you weren’t entitled to, you must pay the entire sum back. c. Original sentence: Universities differ greatly in style, with some being located on out of town campuses in parkland, others having buildings scattered about parts of city centers and others being at various points between these two extremes. rewritten: Universities differ greatly in style. Some are located on out of town campuses in parkland. Others have buildings scattered about parts of city centers. Others are at various points between these two extremes. 7.

Multiple Negatives sentence rewritten: Original sentence: No termination will be approved unless the administrator reviews the application and finds that it is not lacking any requisite materials. Rewritten: Termination will be approved if the administrator finds the application to contain all requisite materials.

Active Voice sentences rewritten: a. Original sentence: The fraud was reported by the employee. Rewritten sentence: The employee reported the fraud. b. Original sentence: The book was enjoyed by me because the seven fraud investigation techniques were described so well by the author. Rewritten sentence: I enjoyed the book because the author described the seven fraud investigation techniques so well.

9. By keeping $20, the bellboy changed the auditors’ rate to $270 ($250 actual + $20 stolen). The $20 should have been subtracted from the $270 rather than added! The $300 is composed of the $250 cost, the $30 refund, and the $20 stolen. 10. This question involves critical thinking that will vary between students and therefore does not have a right answer. Keys issues has future value and owned by the entity. 11. Some potential answers to the given questions include: An asset “stays” as an asset as long as it generates future cash inflows to the company. Thus, an obsolete machine that continually requires much labor and other maintenance costs to keep operating could well be considered a liability—especially if cheaper technologies have arisen. While financial statements may not report certain assets and liabilities, such as human resources (employees), or the benefits of high employee morale, the more critical question is if the presented financial statements provide useful information to decision makers: i.e., can such decision makers make more informed decisions when they use such statements than they would have if these statements were unavailable? (Part 2) Similarly, financial statements that present assets at historical costs—rather than at fair market values—should provide more meaningful information than not reporting statements that follow GAAP. Moreover, the objectivity of assets reported at historical costs usually supersedes those presented at current value. 12. A liability should normally be first reported when the entity can reasonably measure the expected cash outflows associated with a financial transaction or event (and stop recognizing such liabilities when the entity can no longer meet these “reasonably measurable” criteria). For example, a firm experiencing potential environmental remediation liabilities should recognize such liabilities when it ascertains a reasonable value of the amount of such damages. SFAS No. 5 discusses this matter further. 13.

A primary advantage of using a contra-accumulated depreciation—rather than as a direct reduction to the associated fixed asset account—includes keeping better track of the original cost of the acquired asset. Disclosing both the original and accumulated (depreciation) components of a fixed asset informs the financial statement reader of what part of such assets have “expired.” Moreover, directly reducing the “used” portion of fixed assets will eventually bring such assets (i.e., at the end of their depreciable lives— unless some salvage value exists) to a ‘zero value,” while these assets actually exist.

14.

a) The professor received his PhD from the University of Illinois, and he continued teaching there after he was finished with the program. b) The general ledger does not balance. It must balance before we leave.

c) Did Robert say, “Can this item be classified as an asset?” d) Susan’s investigation didn’t discover any fraud but there’s new evidence that might keep the investigation going. e) Dear Mr. Smith, 15.

a) The auditor said, “We must have these work papers completed by tomorrow.” b)When do we have to file our taxes? c) Is the conference in Dallas or Austin, Texas?

CHAPTER 3 THE ENVIRONMENT OF ACCOUNTING RESEARCH Discussion Questions 1. The development of accounting standards is influenced by such environmental considerations as the requirements of federal, state, and local government, and other regulatory bodies; influence of various tax laws on the financial reporting process; practices or problems of certain specialized industries (such as the motion picture or the oil and gas industries); inconsistencies in practice; disagreements among accountants, business executives, and others as to the objectives of financial statements; and influence of professional organizations. 2. A primary reason for the establishment of accounting standards appears to be in response to the increasing needs of various financial statement users--including investors, lenders, and governmental entities; the increasing complexity of business enterprises and their underlying economic events and accounting transactions; and the increasing requests of government agencies, legislative bodies, and professional organizations to respond to this demand. 3. The SEC divisions include: Corporation Finance, Enforcement, Investment Management Trading and Markets, and Economic Risk and Analysis. 4.The responsibilities of the Division of Corporation Finance include reviewing financial statement disclosures (e.g., registration statements, annual and quarterly filings, annual reports, and proxy materials) of all public companies at least once every three years; providing administrative interpretations of various securities acts as well as recommending regulations; and providing guidance to current and prospective registrants.

5. The two actions that Enforcement takes when authorized by the Commission are: (1) files a civil action in federal court seeking a remedy or sanction or (2) brings administrative actions such as cease and desist orders. 6. The FASB uses "due process" in developing its Standards, including identifying the problem or issue and considering legal or SEC pressures; deciding whether to consider the issue; establishing a task force to study the problem; having its research staff investigate the issues; issuing a discussion memo to interested parties; holding public hearings and request written comments on the issue; analyzing the results of the investigation, mail and hearings; if action is appropriate, issuing an exposure draft (a preliminary ASU); requesting additional comments on the exposure draft and holding further public hearings; after analyzing the public response, issuing a final ASU. 7. The FASB's conceptual framework project is a long-term project that should help describe concepts and relationships that underlie financial accounting standards and address such issues as the following: the elements of financial statements and their recognition, measurement, and display; capital maintenance; unit of measure criteria for distinguishing information to be included in financial statements from that which should be provided by other means of financial reporting; and criteria to evaluate and select accounting information (qualitative characteristics). This project can help practitioners develop theoretical justification for resolving issues that contain no authoritative citations. 8. Statements of Financial Accounting Concepts (SFAC) are not authoritative because FASB did not use full due process in the original project. 9. Some authoritative publications of the AICPA include: ARBs and APB Opinions (and nonauthoritative Statements of Position and Issues Papers). 10. If content is within the Codification, it is authoritative. 11. A typical Accounting Standards Update (ASU) will contain the following; A summary of the key provisions leading to the update, specific amendments to the Codification along with implementation guidance, basis for the Board’s decisions (including background information), and amendments to the XBRL Taxonomy. 12. No, ASU’s are not authoritative in their own right. ASUs contain Codification update instructions and that becomes authoritative once incorporated into the Codification. 13. The groups/bodies that issue ASUs are the FASB, the EITF, and the PCC. The issuing groups is listed parenthetically after the title of the standard. See ASU 2020-01 below as an example. Update 2020-01—Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)—Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 (a consensus of the FASB Emerging Issues Task Force) © Weirich, Pearson, and Churyk

The instructor could expand the question to ask how the ASUs are issued with a solution of: ASUs are issued in sequential order by the FASB, the EITF, and the PCC. Thus, they encompass FASB standards, emerging issue standards, and private company standards. ASU’s are issued in the format of “year-sequential update number” (For example, 2017-2 is the second standard issued in 2017) and are labeled by the body creating the standard (FASB, EITF, or PCC). 14. The purpose of GASB is to set financial accounting and reporting standards for the public sector as the FASB does for all private entities. The public should have an interest in governmental financial reporting because of the large value of assets managed by governmental entities. The financial community can also be affected by financial crisis in municipal units, such as the infamous crisis in New York, Cleveland, and Orange County. 15. Generally Accepted Accounting Principles (GAAP) constitutes "a technical accounting term which encompasses the conventions, rules, and procedures necessary to define accepted accounting practice at a particular time." GAAP also changes in response to changes in the business environment, and alternative principles for similar transactions may be considered equally acceptable. 16. A critical implication of authoritative support relative to GAAP for the researcher includes that he or she should seek to find the highest available level of support. Primary authoritative support should be reviewed first; however, if no primary sources are found, the researcher would then drop down and review any available secondary support. 17. In conducting efficient research, the researcher should begin by reviewing primary sources that have the highest level of authority in the GAAP hierarchy prior to July 1, 2009 and the FASB Accounting Standards CodificationTM (The Codification) subsequent to July 1, 2009. 18. Promulgated accounting standards frequently impact economic behavior, since decision makers frequently engage in certain transactions in order to "report" better financial statements. For example, companies adopting the provisions of FASB ASC 740-10-35-4 (Changes in tax laws or rates) could "transfer" part of their Deferred Tax Liability from a liability on the balance sheet to revenue on the income statement, as income tax rates fall; the reverse would occur as income tax rates rise. 19. Primary authoritative support differs from secondary authoritative support in that the former one provides sufficient authoritative support for including a particular accounting principle within GAAP. However, secondary authoritative support includes sources that support inclusion within GAAP, but individually do not constitute authoritative support. 20. The formation of the GASB caused the following two governmental organizations to be added to the list of Financial Accounting Foundation sponsors: the Government Finance Officers Association (GFOA) and the National Association of State Auditors, Treasurers, and Controllers.

21. Answers will vary. Rules-bases accounting provides specific rules or “bright-lines” for the accountant to follow while preparing financial statements. Principles based accounting does not provide these specific rules, thereby relying on professional judgment. An advantage to having rules is that there will be no question as to how to apply or interpret the standard. The disadvantage to having rules for all standards is that the volumes of literature are ever expanding and when standard setters leave anything open to interpretation, they are inundated with questions on how to apply the standard. Another disadvantage to “rules” is that not every company fits a certain mold. With that in mind, companies not fitting the rule must as for an exception or another application to be permitted. 22. FASB is addressing the “standards overload” issue by implementing a framework that emphasizes issuing standards that focus more on objectives than detailed rules. In addition, another project aims at improving the quality of the cost-benefit analysis performed on proposed standards, reducing the costs of new standards without decreasing the benefits. Overall, the FASB’s goal is to make accounting standards that are easier to understand and apply. 23. The Private Company Council (PCC). It was created in 2012 to recommend guidance for private business entities. 24. PCC Decision-Making Framework: Framework identified five areas of difference between private and public entities: a. number of primary users and their access to management b. primary user investment strategies c. ownership and capital structure d. accounting resources e. new financial guidance education 25. The seven FASB board members are elected by the FAF. They serve 5 year terms and are eligible for one additional 5-year term. Practice Exercises on Standard Setters 1. The eight elements of reasoning for this question would include: a. b. c. d. e. f.

Purpose—the purpose is to respond to the client’s request for information. Issue—the issue is the proper accounting for R&D according to U.S. GAAP and International Accounting Standards. Information—the information sources one would utilize are U.S. authoritative literature and International Accounting Standards. Concepts—the concept would include the capitalization or expensing of R&D. Assumptions—the assumptions would be that in order to capitalize R&D there exists future economic benefits. Interpretations or Inferences—the interpretation is that R&D costs have future economic benefit in order for Daimler to capitalize such costs. Also, one must

g. h.

conclude whether U.S. GAAP or International Accounting Standards are more appropriate if there exists a conflict. Implications or consequences—if R&D costs are not properly recorded, the financial statements are considered misleading. Solution—the solution according to US GAAP—FASB No. 2—is to expense R&D costs.

2. As of 2/26/2020 the Board members were Russell G. Golden, James L. Kroeker, Christine Ann Botosan, Gary R. Buesser, Susan M. Cosper, Marsha L. Hunt,, Harold Schroeder. 3. This answer will change as new standards are issued. As of 02/26/2020 the FASB’s three most recent issued exposure drafts were: a. 02/10/20 Proposed Accounting Standards Update—Not-for-Profit Entities (Topic 958): Presentation and Disclosures by Not-for-Profit Entities for Contributed Nonfinancial Assets b. 11/26/19 Proposed Accounting Standards Update—Codification Improvements c. 11/12/19 Proposed Accounting Standards Update—Derivatives and Hedging (Topic 815): Codification Improvements to Hedge Accounting 4. GASB’s Concept Statements include (summaries will vary by student) : a. Concepts Statement No. 6 - Measurement of Elements of Financial Statements (Issued 03/14) b. Concepts Statement No. 5 - Service Efforts and Accomplishments Reporting—an amendment of GASB Concepts Statement No. 2 (Issued 11/08) c. Concepts Statement No. 4 - Elements of Financial Statements (Issued 06/07) d. Concepts Statement No. 3 - Communication Methods in General Purpose External Financial Reports That Contain Basic Financial Statements (Issued 04/05) e. Concepts Statement No. 2 - Service Efforts and Accomplishments Reporting—as amended by GASB Concepts Statements No. 3 and 5 (Issued 11/08) f. Concepts Statement No. 2 - Service Efforts and Accomplishments Reporting (Issued 04/94) g. Concepts Statement No. 1 - Objectives of Financial Reporting (Issued 05/87) 5. This answer will change as new standards are issued. As of 02/26/2020, the GASB’s two most recently issued exposure drafts were; © Weirich, Pearson, and Churyk

a. Communication Methods in General Purpose External Financial Reports That Contain Basic Financial Statements: Notes to Financial Statements—an amendment of GASB Concepts Statement No. 3 b. Implementation Guidance Update—2020 6a. This answer will change as new standards are issued. As of 02/26/2020, the two most recently issued FASB Statements were: a. Update 2020-02—Financial Instruments—Credit Losses (Topic 326) and Leases (Topic 842)—Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842) (SEC Update) Update 2020-01—Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)—Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 (a consensus of the FASB Emerging Issues Task Force) 6b. As of February 26, 2020, the following PCC ASUs have been issued: a. Update 2016-03—Intangibles—Goodwill and Other (Topic 350), Business Combinations (Topic 805), Consolidation (Topic 810), Derivatives and Hedging (Topic 815): Effective Date and Transition Guidance (a consensus of the Private Company Council) b. Update No. 2014-18—Business Combinations (Topic 805): Accounting for Identifiable Intangible Assets in a Business Combination (a consensus of the Private Company Council) c. Update No. 2014-07—Consolidation (Topic 810): Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements (a consensus of the Private Company Council) d. Update No. 2014-03—Derivatives and Hedging (Topic 815): Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps—Simplified Hedge Accounting Approach (a consensus of the Private Company Council) e. Update No. 2014-02—Intangibles—Goodwill and Other (Topic 350): Accounting for Goodwill (a consensus of the Private Company Council) 7. The primary function of the Financial Accounting Standards Advisory Council (FASAC) is as follows: Has advisory role in the process of establishing and improving financial accounting and reporting. FASAC works closely with the FASB in an advisory capacity to ensure that the views of its members are constantly and effectively communicated to the FASB. The FASAC is charged with responsibility of consulting with the FASB on major technical and non-technical issues and all other projects the FASB works on. 8. As of 02/26/2020 © Weirich, Pearson, and Churyk

a. The two most recently issued SEC proposed rules include: 1. 34-88216 Feb. 14, 2020 Market Data Infrastructure and 2. BHCA-8 Jan. 30, 2020 Proposed Revisions to Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships With, Hedge Funds and Private Equity Funds b. The Trading and Suspensions lists recent SEC trading suspensions. 9. As of 02/26/2020 the three most recently issued comment letters from the FEI to the FASB include: a. CCR Responds to FASB’s Invitation to Comment Identifiable Intangible Assets and Subsequent Accounting for Goodwill - Comment Letter | 10/29/2019 b. CCR Responds to the SEC’s Proposed Modernization of Regulation S-K Items 101, 103, and 105- Comment Letter | 10/22/2019 c. CCR Responds to FASB’s Proposed Rate Reform Relief -Comment Letter | 10/7/2019 10. As of 02/26/2020 the FinREC issued the following three most recent letters to the FASB: a.

October 19, 2019 - FinREC comment letter on FASB's July 31, 2019 Exposure Draft: Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40) b. October 3, 2019 comment letter on FASB Invitation to Comment (ITC), “Identifiable Intangible Assets and Subsequent Accounting for Goodwill.” c. July 15, 2019 - FinREC comment letter on FASB's May 14, 2019, Exposure Draft, Income Taxes (Topic 740)— Simplifying the Accounting for Income Taxes 11. As of 02/26/2020, three upcoming conferences of the IIA include: a. General Audit Management Conference in Las Vegas, NV; March 16-18. 2020 b. IIA International Conference in Miami, FL; July 20-22, 2020 c. Governance, Risk and Control Conference in Austin, TX; August 17-19, 2020

CHAPTER 4 FINANCIAL ACCOUNTING RESEARCH TOOLS Discussion Questions 1. The advantages of commercial databases, compared to free internet sources, include the providing of a more comprehensive document retrieval system, having better search capabilities, and making an effort to seek out reliable sources of information. © Weirich, Pearson, and Churyk

2. Some tools to help in using a database include the use of connector terms, database directories, different products within the database, and the use of full text searches or citation searches. 3. The typical search process in a database entails: a. Define the specific information needed. b. Determine the sources to search. c. Develop a search inquiry using keywords and sometimes connectors and limitations. d. Select how to view the search results, such as full text or just the citations. e. Print or download the relevant documents. 4. The challenges to accounting research include the issue of finding all relevant authoritative sources, and the fact that in certain cases there are no clear cut answers to the issue or problem. Professional judgment is required for problems that do not have apparent answers. 5. The four major topical FASB Codification topical guidance areas are: presentation, financial statement accounts, broad transactions, and industries. 6. The topical area “financial statements accounts” is further refined into subtopics: assets, liabilities, equity, revenues, and expenses. 7. An Original Pronouncements link can be found in “Pre-Codification Standards” located in the left navigation panel (Note: this link brings you outside of the Codification). Original standards can also be accessed from the FASB website. 8. The Codification is authoritative U.S. GAAP. For user convenience, it contains limited SEC content. 9. Secondary sources are used to help the researcher find an answer to a problem that has no primary authoritative support. Secondary sources need to be combined with other secondary sources to help support a conclusion. 10. a. Authoritative GAAP sources are found in the Codification and can originate from ASUs and prior to ASUs, from: the FASB (statements, interpretations, technical bulletins, staff implementations guides, SFAS 138 examples); Emerging Issues Task Force abstracts and Topic D; Derivative Implementation Group Issues; Accounting Principle Board opinions; Accounting Research Bulletins; accounting interpretations; items issued by the AICPA (Statements of Position, audit and accounting guides, practice bulletins, technical inquiry services). b. Non-authoritative GAAP is any item not in the Codification and includes items such as notable industry practice, APB statements, AICPA issue papers, FASB concept statements, international accounting standards, textbooks, journal articles and monographs.

11. The SEC accounting authorities are different than GAAP because they follow the traditional legal hierarchy and are generally found under Title 17 of the United States Code. They are found at the SEC’s website and in legal databases such as Westlaw and LexisNexis. They can also be found in the electronic code of Federal Regulations (eCFR). 12. The Codification has limited SEC authority for user convenience. The FASB, via the Codification, has no authority over SEC content. 13. EDGAR is different from other research tools because it uses an XBRL format that and viewer that allow the researcher to extract desirable information for analysis directly from filings without having to retype. This removes human error in data extraction and retyping. 14. Three common SEC forms include (answers can vary): a. SEC 10-K: Public company annual report. Includes MD&A, select financial data, and audit opinions. Must be audited by independent external auditors. b. SEC 8-K: Used by a public company to notify investors of material events. Must be filed within 5 days. Material events include change of executive management, entering/cancelling contracts, change of auditor, etc. c. SEC 10Q: Quarterly financial statements. Need not be subject to an audit, but a review. 15. Three common SEC regulations include (answers can vary): a. Reg S-K: Prescribes the requirements for information presented outside the financial statements required under Reg S-X b. Reg Fair Disclosure: Requires that all publicly traded companies simultaneously disclose material information to all investors c. Reg G: Disclosure requirements related to non-GAAP Financial measures Exercises 1. Answers will vary slightly. The five research steps discussed in the chapter are: 1. define what information is needed 2. determine the sources to search 3. use appropriate search methods 4. view the results and 5. communicate the search results. 1. We know the information needed – due diligence review of a company. 2. Since that is related to auditing, use the AICPA database to locate the information. 3. perform a keyword search of “due diligence”. 4. after reviewing the results 5. communicate in a memo to the client. 2.

The five research steps are 1. Define the information needed – Natalie Churyk’s suggestions for mastering the computerized CPA exam; 2 – the sources to search – the internet would be a viable option or a commercial database such as ABI Inform or EBSCO known for locating articles; 3- key word search using the author and key words from the topic would be appropriate; 4 – results from the internet – typing in “Natalie Churyk mastering the cpa exam” resulted in 257 hits. There appears to be two articles by Natalie Churyk – Mastering the Technology, and The Computer-Based CPA Exam: Hints for Managing the Exam Technology. The first is a quick synopsis on exam pitfalls while

the latter is an inclusive article on the computerized CPA exam. At this point, it may be helpful to circle back to the client to see exactly what the client is looking for (total exam, or just exam pitfalls). 5. Assuming the client is concerned with pitfalls communicate to the client in a memo the following regarding Mastering the Technology by Natalie T Churyk and Katrina L Mantzke: timing out at the front end, automatic shutdown, no going back to completed testlets, budgeting time for all testlets and simulations, the “Microsoft like” but not Microsoft software and how to use it, potential blind spots and other known exam problems. 3. The first three subtopics within the general topic of Presentation are: 205 – Presentation of Financial Statements, 210 – Balance Sheet, and 215 – Statement of Shareholders Equity. 4. One possible search strategy is to highlight Broad Transactions, 815-Derivtives and Hedging, 10 - Overall , 55 – Implementation Guidance and Illustrations. 5. Cash a. GLOSSARY TERM USAGESEE TOPIC(S)210, 230, 305, 860, 942 Consistent with common usage, cash includes not only currency on hand but demand deposits with banks or other financial institutions. Cash also includes other kinds of accounts that have the general characteristics of demand deposits in that the customer may deposit additional funds at any time and also effectively may withdraw funds at any time without prior notice or penalty. All charges and credits to those accounts are cash receipts or payments to both the entity owning the account and the bank holding it. For example, a bank's granting of a loan by crediting the proceeds to a customer's demand deposit account is a cash payment by the bank and a cash receipt of the customer when the entry is made. b. SFAS 95 6.

Answers will vary. Chosen - Film Production Interest Costs 926-835-25-1 An entity shall account for interest costs related to the production of a film in accordance with Subtopic 835-20.

7. Answers may vary. Keywords – Not-for-profit revenue a. 958 Not-for-Profit Entities > 605 Revenue Recognition > 55 Implementation Guidance and Illustrations Example 19: Contribution to a Museum ... are not met. NFP I recognizes the revenue as the barriers are overcome, which is upon meeting the specific requirements as NFP I builds the new wing. The likelihood of meeting a milestone is not a consideration when assessing whether © Weirich, Pearson, and Churyk

the contribution is deemed conditional. b. 958 Not-for-Profit Entities > 605 Revenue Recognition > 55 Implementation Guidance and Illustrations Example 20: Contribution to a Homeless Shelter ... advance liability and will then recognize $75,000 as donor-restricted revenue when at least 5,000 meals are served because the purpose of the grant is narrower than the overall purpose of NFP J. The likelihood of providing the meals is not a consideration when assessing whether the contribution is ... c. 958 Not-for-Profit Entities > 605 Revenue Recognition > 55 Implementation Guidance and Illustrations Example 16: Contribution to a Hospital (P) June 16, 2018; (N) December 16, 2018 958-10-65-2 NFP DD determines that this contribution is not conditional because it does not include a right of return (or similar language) of the assets that have been transferred upfront. NFP DD concludes that it should recognize the revenue upon receipt ... 8. Use the topical categories in the left navigation panel to identify the capitalization of interest code section (topic, subtopic). 835-20 Capitalization of interest 9. Capitalization of interest is required when getting an asset ready for its intended use. 835-20-10-1 states that the objectives of capitalizing interest is to obtain a measure of acquisition cost that more closely reflects an entity's total investment in the asset and to charge a cost that relates to the acquisition of a resource that will benefit future periods against the revenues of the periods benefited. 835-20-10-2 states that failure to capitalize interest cost associated with the acquisition of qualifying assets improperly reduces reported earnings during the period of acquisition and increases reported earnings in later periods. 10. Codification code references a. 310 b. 505 c. 460 © Weirich, Pearson, and Churyk

d. 830 e. 720 f. 842 g. 440 h. 606 i. 815 j. 97x k. 350 11. Find Use the Codification to find the guidance for (there are additional acceptable answers, the most common are listed below): a. Prepaid advertising 340-20; 340-10-05 (these are direct response advertising which is different than prepaid paid advertising in general); 210-10-45-1; 310-10-05-04 a. Reclassification of long term debt. 470-10-45-14; 470-10-45-2, 470-10-45-12a or b, 470-10-45-13 b. Accelerated depreciation 360-10-35-7 (only answer) c. Range of an estimated loss contingency 450-20-05-5; 450-20-30-1 d. Reporting period 270-10; 270-10-05-1; 270-10-50-1 e. Factoring of receivable with recourse 860-10-05-15; 860-20-55-24 Students often cite the following but it is incorrect since this cites without recourse – 310-10-05-6 12. Use the Codification to find the guidance for: a. What does it discuss? FASB Interpretation 36 discusses the accounting for exploration costs by oil and gas producing companies. Its rationale is that an unsuccessful company will end up capitalizing the costs. b. How did you find the authority? Click on pre-codification standards which will link the user to the FAS website c. The authority affects the gas and oil producing industry. d. The major organizational parts of that authority are Status, Summary, Introduction, Interpretation, Effective Date and Transition, and the Appendix 13. Cost to be recognized as research and development 730-10-25-2 Five types of cost associated with R &D activities: (1) Material, Equipment, and Facilities; (2) Personnel; (3) Purchased intangible; (4) contract services; (5) Indirect costs. a. The salaries of the research staff designing new products can be classified as the personnel cost related with R&D activities thus can be expensed as R&D costs. 730-10-25-2 b. The commissions paid to sales staff marketing new products is a selling expense, so it does not qualify. 730-10-15-4 © Weirich, Pearson, and Churyk

14. Use the master glossary for the following question. a. Master glossary “C” - An existing condition, situation, or set of circumstances involving uncertainty as to possible gain (a gain contingency) or loss (a loss contingency) to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur. b. Master glossary “c” c. Contingent losses will be recorded when it is probable that a liability has been incurred at the date of the financial statements and the amount of the loss can be reasonably estimated. d. 450-20-25 15. Post-retirement benefits other than pensions is located in 715-60. There are 11 sections from 00 status to 75 XBRL elements. Each section has multiple subsections. 16. Left click on Master Glossary in left navigation panel. Left click on the letter “P”. Scroll down to “postretirement benefits.” Hyperlink to 715-60-50, link to disclosure 715-60-50-2 This Subsection provides guidance on disclosures regarding the effect of the Medicare subsidy. This Subsection also provides guidance on the disclosures about the effects of the subsidy for an employer that sponsors a postretirement health care benefit plan that provides prescription drug coverage but for which the employer has not yet been able to determine actuarial equivalency. 715-60-50-3 In interim and annual financial statements for the first period in which an employer includes the effects of the subsidy in measuring the accumulated postretirement benefit obligation and the first period in which an employer includes the effects of the subsidy in measuring net periodic postretirement benefit cost, it shall disclose all of the following: •

a. The reduction in the accumulated postretirement benefit obligation for the subsidy related to benefits attributed to past service.

•

b. The effect of the subsidy on the measurement of net periodic postretirement benefit cost for the current period. That effect includes any amortization of the actuarial gain in (a) of this paragraph as a component of the net amortization called for by paragraphs 715-60-35-29 through 35-30, the reduction in current period service cost due to the subsidy, and the resulting reduction in interest cost on the accumulated postretirement benefit obligation as a result of the subsidy.

•

c. Any other disclosures required by paragraph 715-20-50-1(r).

715-60-50-4 For purposes of the disclosures required by paragraph 715-20-50-1(a) and 715-20-50-1(f), an employer shall disclose gross benefit payments (paid and expected, respectively), including prescription drug benefits, and separately the gross amount of the subsidy receipts (received and expected, respectively). © Weirich, Pearson, and Churyk

715-60-50-5 [Paragraph not used] 715-60-50-6 Until an employer is able to determine whether benefits provided by its plan are actuarially equivalent, it shall disclose both of the following in financial statements for interim or annual periods: •

a. The existence of the Medicare Prescription Drug, Improvement, and Modernization Act

•

b. That measures of the accumulated postretirement benefit obligation or net periodic postretirement benefit cost do not reflect any amount associated with the subsidy because the employer is unable to conclude whether the benefits provided by the plan are actuarially equivalent to Medicare Part D under the Act.

17. Preferred stock has debt characteristics ( a and b) It should be accounted for as follows: Mandatorily Redeemable Preferred Stock Not Accounted for as a Liability 810-10-40-2 Section 480-10-25 does not require mandatorily redeemable preferred stock to be accounted for as a liability under certain conditions. If such conditions apply and the mandatorily redeemable preferred stock is not accounted for as a liability, then the entity's acquisition of a subsidiary's mandatorily redeemable preferred stock shall be accounted for as a capital stock transaction. Accordingly, the consolidated entity would not recognize in its income statement any gain or loss from the acquisition of the subsidiary's preferred stock. In the consolidated financial statements, the dividends on a subsidiary's preferred stock, whether mandatorily redeemable or not, would be included in noncontrolling interest as a charge against income. > > Mandatorily Redeemable Preferred Stock Accounted for as a Liability 810-10-40-2A Section 480-10-25 requires mandatorily redeemable preferred stock to be accounted for as a liability under certain conditions. If mandatorily redeemable preferred stock is accounted for as a liability, then any amounts paid or to be paid to holders of those contracts in excess of the initial measurement amount are reflected as interest cost and not as noncontrolling interest charge. Topic 860 specifies whether a liability has been extinguished and Subtopic 47050 requires that the parent recognize a gain or loss upon extinguishment of the subsidiary's liability for mandatorily redeemable preferred shares for any difference between the carrying amount and the redemption amount. 480-10-S99-1 The following is the text of CFRR 211: Redeemable Preferred Stock. •

[.01 General : ASR 268: [CFRR 211, paragraph .01, sequence 1] ]

[On July 27, 1979, the Commission amended Regulation S-X to modify the financial statement presentation of preferred stocks subject to mandatory redemption requirements or whose redemption is outside the control of the issuer. 24 © Weirich, Pearson, and Churyk

The rules adopted do not impact reporting practices of registrants not having such securities outstanding. Registrants having such securities outstanding are required to present separately, in balance sheets, amounts applicable to the following three general classes of securities: (i) preferred stocks subject to mandatory redemption requirements or whose redemption is outside the control of the issuer; (ii) preferred stocks which are not redeemable or are redeemable solely at the option of the issuer; and (iii) common stocks. A general heading, "Stockholders' Equity," is not to be used and presentation of a combined total for equity securities, inclusive of redeemable preferred stocks, is prohibited. In addition, the rules require disclosure of redemption terms, five-year maturity data, and changes in redeemable preferred stocks in a separate note to the financial statements captioned "Redeemable Preferred Stocks." [CFRR 211, paragraph .01, sequence 2] ] [The Commission believes that redeemable preferred stocks are significantly different from conventional equity capital. Such securities have characteristics similar to debt and should, in the opinion of the Commission, be distinguished from permanent capital. The Commission believes that traditional financial reporting practices do not provide the most meaningful presentation of the financial obligations attached to these types of securities and that improvement in the financial statement presentation of redeemable preferred stocks is necessary. [CFRR 211, paragraph .01, sequence 5] ] 18. (ASC) 440-10-50-1 requires disclosure of unused letters of credit. They are commitments and should not be reported as a liability in the financial statements. 19. SEC Forms a. 10-K: Annual report pursuant to Sections 13 & 15(d) b. 10-Q: Quarterly report under Section 13 & 15(d) c. 11-K: Annual report of employee stock purchase, savings & similar plans d. 18-K: Annual Report for foreign governments & political subdivisions e. 20-F: Annual & transition report of foreign private issuers f. 40-F: Annual reports filed by Canadian issuers g. 8-K: Current reporting filing h. S-1: General form of registration statement i. 6-K: Current report of foreign issuer j. 17-H: Risk assessment for broker and dealers © Weirich, Pearson, and Churyk

k. F3: Registration statement for securities of certain foreign private issuers 20. Rule 10b-5 discusses the issue of the “Employment of Manipulative and Deceptive Devises.” SAB 99 provided the views of the SEC staff that exclusive reliance on certain quantitative benchmarks to assess materiality in preparing financial statements and performing audits of those financial statements is inappropriate; misstatements are not immaterial simply because they fall beneath a numerical threshold. 21. The Chief Accountant for the SEC is the principal adviser to the SEC Commission on accounting and auditing matters. The Office of the Chief Accountant also works closely with domestic and international private-sector accounting and auditing standards-setting bodies to monitor the application of accounting standards and financial disclosure requirements. Prepare your client to handle a SEC investigation through internal reviews, self-reporting, correcting problems, and cooperating with the SEC staff. 22. The seven methods to search with SEC’s EDGAR include: company or fund name, ticker symbol, central index key, file number, state, country, or SIC. 23. This answer will vary. On the SEC website – the EDGAR System allows the user to hyperlink to the section desired whereas the report on the company website is static and one must scroll down to the section desired. 24. The SEC has issues with and asks for more information relating to: management’s discussion, product performance, gross margin, fair value measurements, and segment information. 25. Go to the SEC website (www.sec.gov). a. 7 AAER’s were issued as of 02/26/2020 b. JPMorgan provided valuable positions within its firm to relatives and friends of key executives of its clients, prospective clients, and Asian government officials. This violates the FCPA. Many of their clients were also state-owned entities. JPMorgan was fined $72,000,000 in criminal fines. JPMorgan also paid a grand total of $130,591,405 in disgorgement fees. 26. Go to the Electronic Code of Federal Regulations (www.ecfr.gov). a. Part 210 b According to Section 239.11, this form shall be used for first time registration under the Securities Act of 1933. As for the consolidated balance sheet item, according to Section 210.3-01, There shall be filed, for the registrant and its subsidiaries consolidated, audited balance sheets as of the end of each of the two most recent fiscal years. If the registrant has been in existence for less than one fiscal year, there shall be filed an audited balance sheet as of a date within 135 days of the date of filing the registration statement. © Weirich, Pearson, and Churyk

27. Interim financial reporting a. Section 210.8-03 or Section 210.10-01 b. 270-10-s99-1 28. LIFO reserves do need to be disclosed per Section 210.5-02 Balance Sheet 6 (04) c 29. Go to the Deloitte Foundation website (www.deloitte.com). Download a Trueblood Case involving a joint venture or partnership. Write a sentence summarizing the issue in the case. Use the Codification database to find the authorities providing the answer to the issue presented. Identify those authorities. a. Case 16-6 “Closely Associated Cars” The issue in this case is that a a joint venture (JV) was formed, and we need to determine if this JV is a variable interest entity (VIE), and who should consolidate JV. According to ASC 810-10-20, “Variable Interest Entity refers to a legal entity subject to consolidation according to the provisions of the Variable interest subsections of subtopic 810-10.” 30. Accessing the Journal of Accounting Education V49, the two educational cases appearing in this volume are: a. Home Technology Innovations, Inc.: Transitioning to the new leasing standard “This case entails determining the expected financial statement impacts and related reporting requirements associated with the newly-promulgated leasing standard. The dataset includes financial statements, disclosures, and related supporting data for Home Technology Innovations, Inc. (a fictional, privatelyheld firm). You will determine financial statement effects of capitalizing existing operating lease obligations, evaluate the likelihood of exercising lease renewal options and calculate the impacts on lease capitalization calculations, research and prepare journal entries necessary to transition to the new leasing standards under both U.S. GAAP and IFRS, research and analyze the accounting for lease complexities, and apply broader business concepts in making recommendations. Instructors can select from combinations of case requirements so that the case can be used in financial accounting courses from the intermediate through the graduate level.” b. A risk based approach to large datasets: Analysis of time series data for a large merchandising firm “This instructional case is designed to examine one approach to the analysis of large datasets using Excel software. The company annual revenue results spanned over 10 years of data for 879 functional units. Inventory counts for the company indicated higher inventory values than accounting records, running counter to the expected shrinkage, estimated at 3% of sales. As a member of the internal audit division, you are asked to examine the large database to identify stores where the 27 © Weirich, Pearson, and Churyk

consistencies seemed largest and apply the COSO ERM risk framework to report risk. The impact and likelihood of two specific risks are examined and measured: financial statement overstatement and overpayment of commissions. Using actual internal audit work papers in place at a Fortune 500 company, the results are reported. Case questions are designed to help you think about the relationship between revenues in consecutive time periods, evaluate different forecasting models, and apply the forecasting models. Completing the risk matrix using results gives a hands-on approach to risk analysis. Completing the case questions also provides a basis for analysis that could be applied in other large datasets likely to be encountered in a continuous auditing environment.”

Knowledge Busters 1. Topic: Revenue Recognition a. Only $1 million in additional sales should be recorded this year. The two remaining customer sale transactions should not be recorded as sales until next year. The SEC believed that the normal business practice for Medical Devices is to have a signed agreement and therefore persuasive evidence of a sale arrangement would not occur until Medical Devices receives the signed agreements. Since ASC 606 became effective, the SEC removed their guidance because it has been incorporated into the Codification ASC 606-10-25-2. “A contract is an agreement between two or more parties that creates enforceable rights and obligations. Enforceability of the rights and obligations in a contract is a matter of law. Contracts can be written, oral, or implied by an entity’s customary business practices. The practices and processes for establishing contracts with customers vary across legal jurisdictions, industries, and entities. In addition, they may vary within an entity (for example, they may depend on the class of customer or the nature of the promised goods or services). An entity shall consider those practices and processes in determining whether and when an agreement with a customer creates enforceable rights and obligations.” 2. Topic: Repurchase of Loans a. ASC 310-30-15 requires that if a seller repurchases the asset at a price greater than fair value, the seller should record the asset at its fair value and record a loss for the difference between the purchase price and the fair value. 3. Topic: Debt Classification a. ASC 470-10-45-11 states that current liabilities shall include any long-term debt that are or will be callable by the creditor either because the debtor’s violation of a debt provision agreement which makes the debt callable or because the violation, if not cured within a specified grace period will make the debt callable. However, since the violation was cured in the second year and not called, the debt should be classified as long-term in year 2’s financial statements. The debt should not be reclassified to long-term in year 1 based upon the set of facts. 28 © Weirich, Pearson, and Churyk

4. Topic: Allowance Account a. ASC 310-10-35-7 states that “the conditions under which receivables exist usually involve some degree of uncertainty about their collectability, in which case a contingency exists…” b. ASC 450-20-25-2 would require the establishment of an allowance account if both of the following conditions exist: i. Information available prior to issuance of the financial statements indicates that it is probable that an asset has been impaired, and ii. The amount of the loss can be reasonably estimated c. If both of the aforementioned conditions are met, no allowance account is necessary. 5. Topic: Membership Dues a. Since the entity is a not-for-profit organization, ASC 958-605-25-2 requires that such dues be recognized as contributions and recorded as revenue when received as no services are exchanged for the dues. However, if services were received the dues would be recognized as revenue over the period of membership (ASC 958-605-25-1) This passage was transferred to ASC606 in 2018 but ASC 958-605-55-8 through 11 addresses this issue and these ASCs have not been superseded by ASC 606. 6. Topic: Stock Dividend a. ASC 260-10-55-12 requires that the computations of basic and diluted EPS be adjusted retroactively for all periods presented to reflect a change in capital structure due to the 3% stock dividend. 7. Topic: Inventory Valuation a. ASC 330-10-35-3 states that inventories should be valued the lower of cost or market with the excess of market disclosed. Furthermore, ASC 330-10-35-15 states that an exception to the lower of cost or market rule to record precious metals at market does not apply to National since the diamonds will be used in manufacturing process rather than being held for immediate sale. Therefore, the diamonds should be valued at cost in this case which is lower than market. 8. Topic: Insurance Contracts a. Since this is an insurance company, ASC 944-Fincial Services- Insurance is the appropriate reference. Specifically, 944-20-20 (Glossary) provides the definition for the two types of accounting that Matt is dealing with. 9. Topic: Current Assets a. ASC 210-10-45-4 states that the concept of current assets can exclude such items as follows: a) Cash and claims to cash that are restricted as to withdrawal or use for other than current operations, are designated for expenditure in the acquisition or construction of noncurrent assets, or are © Weirich, Pearson, and Churyk

segregated for the liquidation of long-term debts. Therefore, the deposit for the purchase of the equipment should be classified as a noncurrent asset even though the purchase is within one year. 10. Topic: Treasury Stock a. ASC 505-30-30-4 states the following: “Transactions do arise, however, in which a reacquisition of an entity’s stock may take place at prices different from routine transactions in the open market. For example, to obtain the desired number of shares in a tender offer to all or most shareholders, the offer may need to be at a price in excess of the current market price. In addition, a block of shares representing a controlling interest will generally trade at a price in excess of market, and a large block of shares may trade at a price above or below the current market price depending on whether the buyer or seller initiates the transaction. An entity’s reacquisition of its shares in those circumstances is solely a treasury stock transaction properly accounted for at the purchase price of the treasury shares. Therefore, in the absence of the receipt of states or unstated consideration in addition to the capital stock, the entire purchase price shall be accounted for as the cost of treasury shares.” 11. Topic: Inventory a. ASC 330-10-30-1 states in part that, “As applied to inventories, cost means in principle the sum of the applicable expenditures and charges directly or indirectly incurred in bringing an article to its existing condition and location.” Therefore, warehousing costs would be considered a selling expense and not to be allocated to the inventory on hand. 12. Topic: Interest Capitalization a. ASC 835-20-30-3 states that “the amount capitalized in an accounting period shall be determined by applying the capitalization rate to the average amount of accumulated expenditures for the asset during the period.” b. Further, ASC 835-20-35-3 state that “The compounding of capitalized interest is conceptually consistent with the conclusion that interest on expenditures for the asset is a cost of acquiring the asset”. c. Therefore, the rate should be applied to the average of all the accumulated expenditures. 13. Topic: Research and Development Costs a. ASC 730-10-25 states that “R&D costs should be expensed when incurred”. There is no justification to capitalize the costs because the business is to be sold. 14. Topic: Cash Flow Statement a. ASC 230-10-15-3 states: A business entity or not-for-profit entity that provides a set of financial statements that reports both financial position and results of operations shall also provide a statement of cash flows for each period for which © Weirich, Pearson, and Churyk

results of operations are provided. Therefore, if a balance sheet is presented, a statement of cash flows should be presented for both current and prior periods if income statements are presented for such periods. 15. Topic. Cash Flow Statement a. The amount that will be shown on the statement of cash flows is the two accounts with the positive balances. ASC 230-10-45-4, "The total amounts of cash and cash equivalents at the beginning and end of the period shall be the same amounts as similarly titled line items or subtotals shown in the statements of financial position . . ." The net change in overdrafts during the period is a financing activity. 16. Topic: Inventory a. The portion of the slow-moving inventory not reasonably expected to be realized in cash during the client's normal operating cycle should be classified as a longterm asset in the company's classified balance sheet. ASC 310-10-45-9 states that the term current assets is used to designate cash and other assets or resources commonly identified as those that are reasonably expected to be realized in cash or sold or consumed during the normal operating cycle of the business. 17. Topic: Data Analytics and Finance Charges a. Not an acceptable policy. FASB 310-20 states the interest (actuarial) method should be used to account for interest income. Also, ASC 310-2-35-2 requires that certain discount loans acquisition costs be deferred and treated as yield adjustments. 18. Topic: Consolidated versus Combined Financial Statements ASC 810-10-05-6 permits combined financial statements in certain situations in which consolidated financial statements are not required. However, ASC 810-10-25-38 states that “an entity shall consolidate a variable interest entity if that entity has a variable interest (or combination of variable interests) that will absorb a majority of the variable interest entity’s expected losses, receive a majority of the variable interest entity’s expected residual returns, or both.” Furthermore, the starting point for the preparation of combined financial statements is two or more sets of financial statements that are prepared in accordance with GAAP; in the case of a primary beneficiary of a VIE, financial statements prepared in accordance with GAAP would be consolidated financial statements. 19. Topic: Dividend The assets and related dividend income should be recorded at fair value. ASC 845-10-301 states that in general, accounting for nonmonetary transactions should be based on the fair values of the assets (or services) involved which is the same basis as that used in monetary transactions and that a nonmonetary asset received in a nonreciprocal transfer should be recorded at the fair value of the asset received. ASC 505, Equity, discusses © Weirich, Pearson, and Churyk

accounting for stock dividends by the recipient; however, the scope of that pronouncement specifically excludes distributions of a different class of shares from that owned. 20. Topic: Foreign Currency Transaction Gains/Losses No. According to FASB ASC glossary, foreign currency transactions are transactions whose terms are denominated in a currency other than the entity’s functional currency. Foreign currency transactions arise when a reporting entity does any of the following: a. Buys or sells on credit goods or services whose prices are denominated in foreign currency b. Borrows or lends funds and the amounts payable or receivable are denominated in foreign currency c. Is a party to an unperformed forward exchange contract d. For other reasons, acquires or disposes of assets, or incurs or settles liabilities denominated in foreign currency. ASC 830-20-05-2 - Foreign currency transactions may produce receivables or payables that are fixed in terms of the amount of foreign currency that will be received or paid. ASC 830-20-35-1 - A change in exchange rates between the functional currency and the currency in which a transaction is denominated increases or decreases the expected amount of functional currency cash flows upon settlement of the transaction. That increase or decrease in expected functional currency cash flows is a foreign currency transaction gain or loss that generally shall be included in determining net income for the period in which the exchange rate changes. Thus, even though the loan was obtained to construct the building, the transaction gains and losses are not part of the cost of the building, but are a result of the change in the exchange rate and are included in income each period in which the exchange rate fluctuates. 21. Topic: Industry – Real Estate ASC 970-323 recommends that the equity method be used to account for investments in corporate or noncorporate real estate ventures. ASC 323-10-35- 19 through 22 state, in part: An investor's share of losses of an investee may equal or exceed the carrying amount of an investment accounted for by the equity method plus advances made by the investor. The investor ordinarily shall discontinue applying the equity method if the investment (and net advances) is reduced to zero and shall not provide for additional losses unless the investor has guaranteed obligations of the investee or is otherwise committed to provide further financial support for the investee. An investor shall, however, provide for additional losses if the imminent return to profitable operations by an investee appears to be assured. For example, a material, nonrecurring loss of an isolated nature may reduce an investment below zero even though the underlying profitable operating pattern of an investee is unimpaired. If the investee subsequently reports net income, the investor shall resume applying the equity method only after its share of that net income equals the share of net losses not recognized during the period the equity method was suspended. © Weirich, Pearson, and Churyk

Accordingly, the investor should reflect its investment at a zero amount and disclose in a note to the financial statements the amount of its share of investee losses in excess of the zero amount. 22. Topic: SEC Reporting Requirements a. Form 8-K requires issuers that are subject to the reporting requirements of Section 13(a) and Section 15(d) of the Exchange Act to file required reports on Form 8KL within four business days of a triggering event. The two triggering events in this case are the resignations of the two board members and the accounting firm. According to Item 4.01 “Changes in Registrant’s Certifying Accountant” and Item 5.02 “Departure of Directors or Principal Officers”, Clever is required to file a Form 8-K with the SEC. 23. Topic: Revenue Recognition SAB 116 rescinds prior SABS (104 and 101) on this topic (Persuasive evidence of an arrangement) and the guidance can now be found in ASC 606-10-25-2. Document Review Simulation 2. Complete the underlined information a. Original text: buildings; 40 years or less and equipment: 20 years or less b. Totaled: $2,035 million.

CHAPTER 5 THE ENVIRONMENT OF INTERNATIONAL RESEARCH Discussion Questions 1. The predecessor committee to the IASB was the IASC. The standards are called IASs. As of February 27, 2020, it shows that 41 were issued (IAS 41) and there are only 25 still in use. 2. The process/procedure to establish an IASB standard is now aggregated into 4 major steps. a. Agenda consultation - Before a potential agenda item is set, the IASB receives input from working groups within the IASB, the Interpretations Committee, and the Advisory Committee. The IASB considers the potential agenda item’s relevance, existing accounting guidance, the possibility of increased convergence, the potential quality of any proposed standard, and the resources needed to examine the potential agenda item. b. Research programme - The IASB plans the research project to determine whether to work with other accounting standard setters, such as forming working groups comprised of staff and/or members from the various standard-setting bodies. The IASB’s working groups are chaired by the Director of Technical Activities or © Weirich, Pearson, and Churyk

Director of Research. Developing and publishing a discussion paper is not a mandatory stage, but the action is usually taken to obtain early feedback from constituents. If the discussion paper is omitted, the IASB will explain why. Typically, a discussion paper includes an examination of the topic, the alternative accounting treatments, the standard setters’ views, and an invitation for comment. If another standard setter initiated the discussion paper, the IASB requires a simple majority vote before publication. If the IASB or one of its working groups initiated the research, the discussion paper is published because all IASB sessions are public. Analysis is performed on the comment letters received during the usual 120-day comment period, and the results are posted to the IASB Web site. c. Standard-setting programme - Developing and publishing the exposure draft (ED) is mandatory and is based on IASB staff research, discussion paper comments, Advisory Council input, working groups, and other standard-setter input. Before the ED is issued for comment, a ballot takes place requiring approval by a supermajority (nine if the Board has 15 or fewer members, and 10 if the Board has 16 members) of IASB members. ED periods are usually 120 days or longer for major projects; if a matter is urgent, the ED period is 30 days. Once comments are received, they are summarized and posted to the IASB website. The IASB then decides whether to draft an IFRS or publish a second ED. If the IFRS is drafted, the IFRIC reviews the draft before it goes to the IASB for a vote. A version of the IFRS draft is also posted for paid subscribers. An IFRS is issued only after any outstanding issues are resolved and the IASB members have voted in favor of the standard. d. Maintenance programme - The IASB and its staff periodically hold meetings with constituents with respect to implementation guidance and any unforeseen standard shortcomings. The IFRS Foundation promotes educational seminars and events to ensure proper application of the IFRS. Additionally, post-implementation review occurs a few years after a standard is in use to assess whether or not the standard is achieving its objective. 3.

The IASB’s Conceptual Framework (the Framework) establishes objectives and concepts for the development of accounting standards. The Board uses the Framework in the development of future standards. The Framework should also assist users and preparers/practitioners and researchers in applying and interpreting standards and financial statements. For instance, preparers and researchers may need to look to the Framework in the absence of a published standard, and auditors may want to ensure clients’ financial statements are in compliance with the IFRS to form an opinion on those statements. However, occasionally, a conflict arises between the Framework and previously issued IASs or IFRS. In conflict situations, the standards override the Framework.

Although the Framework should be used to assist users, the standards override the Framework.

No, the IASB cannot enforce the use of its standards. Each country or organizations of countries can enforce use of IFRS. For instance, the EU requires use of IFRS in all member states and has set up various bodies (CESR and ESC) to help with consistency.

The Norwalk agreement was the first Memorandum of Understanding (MOU) between the IASB and FASB, whereby they agreed to work on both short- and long-term projects removing differences (convergence) between IFRS and U.S. GAAP and to continue coordinating activities.

7. The Work Plan was the process the SEC intended to follow in order to make an IFRS adoption determination. The final staff paper related to the work plan was issued in 2012. 8. Though the SEC has drafted a Work Plan to adopt IFRS, their final staff paper issued in 2012 does not address when, if, or how IFRS should be adopted in the US. Essentially, the decision is still open and the SEC did not make a solid decision on the Work Plan or IFRS adoption. 9. The CESR (no longer exists), ESMA and the EOC. 10. a.

Although each IFRSs is equal, there is a hierarchy when choosing between standards; Apply specific IFRSs and consider relevant implementation guidance. If specific IFRSs do not apply, choose the relevant and reliable accounting policy from the listed sources in the following order: b. Apply other IFRSs that involve similar or related issues. c. Apply the IFRS Framework. d. Apply pronouncements of other standard-setting bodies that are consistent with the IFRS Framework.

11.

The researcher should look to the hierarchy. If an answer cannot be found within IFRS a researcher could look to pronouncements of other stand-setting bodies as long as those pronouncements are consistent with IFRS.

12. All IFRS are authoritative; however, there exists a hierarchy within the standards, as described in DQ 10. 13.

The main objectives of the IFRS Foundation are to develop a single set of global, high-quality standards; promote the use of those standards; consider its constituents (small to large and stable to emerging); and initiate convergence of IFRS with other national accounting standards.

14.

Funding of the Foundation and the IASB is mostly voluntary and comes from organizations as well as various countries.

15. The SEC has expressed three conditions for accepting international accounting standards for all public companies: © Weirich, Pearson, and Churyk

a. IASB standards should include a core set of accounting pronouncements that constitute a comprehensive, generally accepted basis of accounting. b. IASB standards must have high quality, result in comparability and transparency, and provide for full disclosure. c. Rigorous interpretations and applications must exist for IASB standards. Exercises 1.

Answers will change as new projects are examined. As of February 27, 2020, three active projects include the following: a. 2019 Comprehensive Review of the IFRS for SMEs Standard b. Accounting Policies and Accounting Estimates (Amendments to IAS 8) c. Amendments to IFRS 17 Insurance Contracts

2. Very few modifications occurred. The EU carved out IAS 39. Saudi Arabia added disclosures. 3. Answers will change as time passes. As of February 27, 2020, two featured news pieces include: a. Getting to grips with IFRS 16? No time to waste. b. IFRS news archive 4.

5. 6.

The working committees of the IOSCO are: the Executive Committee, the Growth and Emerging Markets Committee, the Affiliate Members Consultative Committee, the Policy Committees and Task Forces, Regional Committees, to name a few. As of February 27, 2020 there are twenty-seven member states. As of February 27, 2020, three active projects include and three completed projects include: a. Fees b. Role and Mindset Expected of Professional Accountants c. Rollout of Revised and Restructured Code d. Inducements e. Structure of the Code f. Safeguards and their Applicability Pertaining to Non-Assurance Services (NAS)

Using eIFRS 7. a. b. c. d. e.

IFRS 15 IFRS 7 IFRS 2 IAS 19 IFRS 11, para 24 or IAS 28

f. g. h. i. j. 8.

IAS 41 IAS 33 IAS 23 IFRS 8 IAS 20

Enter e-IFRS, click on IFRS 1, introduction. a. IFRS 1 replaced SIC-8 First-time Application of IASs as the Primary Basis of Accounting. b. Paragraph 4 of the Introduction requires an entity to comply with all IFRS effective at the end of its first reporting period by ensuring all assets and liabilities are in conformity. If not, they cannot be recognized.

9. As of February 27, 2020, twenty-three IFRICs have been issued, although not all are still active. 10. Answers will vary slightly depending upon which IAS/IFRS and IFRIC/SIC are chosen. a. .IFRS 7: Objective, Scope, Classes of financial instruments and level of disclosure, significance of financial instruments for financial position and performance, Nature and Extent of Risk, Effective date, withdrawal of IAS 30, Appendices, Approval of the Board, Basis for Conclusions, and Implementation Guidance. a. IFRIC 4: References, Background, Scope, Issues, Consensus, Effective Date, Transition, Appendix, Illustrative Examples, and Basis for conclusions. b. Yes, for the most part, both standards contain information about the standard, what it covers, how to apply it, the Board approval, and why the Board came to its decision. 11. e-IFRS research a. IFRIC 12 b. SIC 7 c. IFRS 8 d. IAS 32 para 33; many student will cite IFRS 2 but that discusses using a company’s shares for payment, not the general accounting for treasury shares e. IAS41 12. Impairment test for long-lived asset a. IAS 36 b. Perused the list of standards until an “Impairment” standard was spotted. c. The accountant would take into account internal and external factors such as damage, obsolescence, adverse market conditions, and/or reduced cash flows. If the indicators are present, then the asset’s recoverable amount needs to be calculated. If the recoverable amount is less than its carrying amount, impairment has occurred. © Weirich, Pearson, and Churyk

13. IAS 1 paragraphs 72-73 requires the company to have enacted the refinancing of shortterm debt as of the balance sheet date in order to reclassify it as long-term. 14. No, IFRS avoids so called “bright lines” tests. IFRS 16 describes that classification depends upon the substance of the transaction, rather than the contract. 15. IFRS 15, para 20 suggests that some modifications are accounted for as separate contracts . 16. Use the glossary: a. Contingent liability definition - A possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity; or a present obligation that arises from past events but is not recognized because: it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation; or the amount of the obligation cannot be measured with sufficient reliability. b. IAS 37 para 10 17. Materiality definition a. Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements. b. IAS 1 para 7, IAS 8 para 5, and glossary 18. According to IAS 38 paragraph 54, no intangible asset arising from the research phase of an internal project shall be recognized on the balance sheet. Once the project enters the development phase (paragraph 57), then you can recognize the cost on the balance sheet. An intangible asset arising from development (or from the development phase of an internal project) shall be recognised if, and only if, an entity can demonstrate all of the following: (a) the technical feasibility of completing the intangible asset so that it will be available for use or sale. (b) its intention to complete the intangible asset and use or sell it. (c) its ability to use or sell the intangible asset. (d) how the intangible asset will generate probable future economic benefits. Among other things, the entity can demonstrate the existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset. (e) the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset. (f) its ability to measure reliably the expenditure attributable to the intangible asset during its development. Knowledge Busters © Weirich, Pearson, and Churyk

Topic: Asset Retirement Obligations a. ASC 410-20-25-5 states that upon initial recognition of a liability for an ARO, the entity shall capitalize an asset retirement cost by increasing the carrying amount of the related long-term asset. b. IAS #16 para. 18 states that an entity shall apply IAS #2- Inventories to the costs of obligations for dismantling, removing and restoring the site on which an item is located

Topic: First-Time Adopters of IFRS a. IFRS #1, First-time Adoption of International Financial Reporting Standards, sets forth the transitional requirements and exemptions available on the first-time adoption of IFRS. Paragraphs 6-12 provide details as to the recognition and measurement requirements. Specifically, the entity shall prepare and present an opening IFRS statement of financial position at the date of transition to IFRS. Also, the entity shall use the same accounting policies in its opening IFRS statement of financial position and throughout tall periods presented in its first IFRS financial statements. (pars 6 & 7).

Topic: Business Acquisition a. According to IFRS 3 Business Combinations paragraph 18, the measurement principle states that the acquirer shall measure identifiable assets acquired and liabilities assumed at their acquisition date fair values (IFRS 3 para 37). The journal entry for this acquisition is as follows: Accounts Receivable 20,000 Building 200,000 Goodwill 73,000 Accounts Payable 18,000 Bonds Payable 125,000 Cash 150,000

Topic: IFRS versus U.S. GAAP Comparison (secondary source/support) There are too many to list as summaries and this will change over time. Examples of secondary sources are PWC’s, “IFRS and U.S. GAAP similarities and differences” https://www.pwc.com/us/en/cfodirect/publications/accounting-guides/ifrs-and-us-gaapsimilarities-and-differences.html and EY’s, U.S. GAAP versus IFRS” at https://www.ey.com/Publication/vwLUAssets/IFRSBasics_00901181US_23February2018/$FILE/IFRSBasics_00901-181US_23February2018.pdf

5. Topic: Consolidation – Accounting Policies Per IFRS 10 para. 19 - A parent shall prepare consolidated financial statements using uniform accounting policies for like transactions and other events in similar circumstances. Thus, since the Parent reports in FIFO, the amount appearing in in the Consolidated financial statements should be the 4 FIFO amounts 6900 pounds (2000 + 1200 + 1500 + 2200). © Weirich, Pearson, and Churyk

CHAPTER 6 OTHER RESEARCH DATABASES AND TOOLS Discussion Questions

1. The five steps for database research are: 1. Identifying the issues or problems to research. 2. Collecting evidence from data, authorities, and other sources. 3. Evaluating the research results and various alternatives. 4. Developing a conclusion, and 5. Communicating a well-reasoned, documented memo. 2. Six major publishers of financial information should include he four largest global companies Pearson, RELX Group, Thomson Reuters, and Wolters Kluwer. Students should mention two other major publishers of financial information, such as Dun & Bradstreet, Wiley, or ProQuest. 3. CCH Accounting Research Manager includes complete authoritative U.S. accounting standards and international financial reporting standards, auditing standards, AICPA Audit and Accounting Guides for various industries, as well as AICPA technical practice aids, as well as insightful interpretations. 4. Research for governmental accounting depends on whether one is researching state and local government accounting (use GASB’s governmental accounting standards in GARS Online) or federal government accounting (use FASAB’s handbook). 5. Advantages of S&P’s Capital IQ can include researching many private companies or acquring bond information. 6. Use Mergent Online when seeking industry comparisons, researching foreign companies, or when it’s the best available financial research database. 7. Examine an analyst report in order to acquire a more comprehensive review of a company than financial ratio comparisons. Analysts closely examine other parts of the SEC filings on a company, such as financial statement footnotes and management discussion and analysis. They can analyze the implications of new developments in the company, such as a change in management or the release of a major new product. 8. The Audit Analytics database provides an online database useful for tracking and analyzing public company disclosures related to audit, compliance, corporate activities, and federal litigation. 9. Use the Factiva database when looking for business and financial information from the financial press, such as The Wall Street Journal and The Financial Times. 10. D&B Hoover’s seeks to provide objective information, instead of relying on what a company’s corporate staff might issue.

11. ABI/Inform Global includes international professional publications, academic journals, and trade magazines. Business Source Premier is used to access periodicals, peer-reviewed journals, trade generals, general business magazines, and other reports. 12. Conducting international business research is assisted by going to the website GlobalEDGE. Its Reference Desk has a Global Resource Directory which organizes research categories by Multi-Country, Statistical Data Sources, Rankings, Organizations, and Publications. 13. Opinions will differ on the best database to find information on Cargill. Students should provide reasoning to support their opinion. 14. The Guidestar database provides access to federal tax returns of almost 2,000,000 tax-exempt organizations.

15. Before hiring a local construction company to remodel one’s house, one should acquire data about that company having problems from various databases. The most important database to check is PACER to determine what legal activities the company has had in either bankruptcy court or federal court. Additionally, a state court database is likely to exist, although it might provide only skeleton information. The state might also have a database related to complaints against contractors. Because settlements might involve withdrawing the complaint, this database is probably not as reliable as legal databases. 16. Financial ratios found in Nexis Uni database are found by selecting Companies and then Company Dossier. Search for the particular company of interest. A snapshot of the company appears, but more information, such as the financial ratios are accessible by selecting financial information, probably on the left side of the screen. Scroll down after the presentation of the financial statements to view the ratios. 17. Nexis Uni database provides only a small subset of information compared to the Lexis Advance database. 18. Advantages of using a new emerging legal database include using new technologies, such as various data analytic abilities in the database. Disadvantages include the possibility that an emerging database is discontinued because it is bought out or not as extensive as other databases. EXERCISES 1.

The FASAB calls its exposure drafts “documents for comments.” In early 2020, one such document was on the deferral of the effective date on SFFAS 54 on Leases. Another document was on amendments to SFFAS 5, Accounting for Liabilities of the Federal Government.

A completed GASB project in 2020 was the Disclosure Framework in the Conceptual Framework. That information is listed under the tab for “Projects.”

Accounting Standards Update (ASU) No. 2019-09, Insurance and ASU No. 2018- 12, Financial Services—Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, which made targeted amendments to improve, simplify, and enhance the financial reporting requirements for long duration contracts issued by insurance entities. This is available on the FASB’s website, as well as databases using FASB issuances.

Two statistical sources for business are from government agencies and trade associations.

5. Alexander & Baldwin operates primarily as a real estate company; however, its major operations also include Transportation and Agribusiness. The company is engaged in ocean freight transportation, property development and management in Hawaii and on the U.S. mainland, and producing sugar cane and coffee in Hawaii. Competitors found in a database will depend on the database used. Warning: the competitors selected by a database are usually not divided by different major lines of business. 6. Students should find a recent cyber fraud case. For example, in 2019, in a case released by the U.S. Attorney’s Office in the Northern District of Georgia, 24 individuals were arrested because of a large-scale money laundering scheme that utilized multiple forms of cyber fraud such as romance fraud scams, retirement account scams and business email compromise schemes in order to steal over $30 million from those victimized. In 2018, the SEC issued a report that public companies should consider cyber threats when implementing internal accounting controls. 7. The Mergent Online database provides several useful financial ratios, such as the profitability ratios, liquidity ratios, ratio for debt management and asset management, as well as cash flow per share and book value per share data. Different subscriptions to Mergent Online may include more ratios. S&P Capital IQ provides many of the same financial ratios as Mergent Online and more detail ratios such as the growth over prior year. However, many find Mergent Online database is easier to read and it provides 15 years of financial ratios, whereas S&P Capital IQ only provides up to five years.

8. GASB Concept Statement No. 6 is entitled “measurement of elements of financial statements.” It addresses both measurement approaches and measurement attributes. It was issued in March 2014. As of February 2020, no subsequent modification has occurred. 9. Interpretation 9 of Federal Financial Accounting Standards discusses “Cleanup Cost Liabilities Involving Multiple Component Reporting Entities: An Interpretation of SFFAS 5 & SFFAS 6 (PDF).” Interpretation 9 was created in August 2019, to provide “clarification and guidance regarding cleanup cost liabilities...” 10. TDH Holdings, Inc. has major products primarily in pet foods. Its headquarters is located in China. The stock was volatile in 2019 because it received a delisting from NASDAQ because it was not complying with the listing rules. 11. In 2003, 19 year-old Elizabeth Holmes founded Theranos. The company operated as a blood-testing business. It was valued at $9 billion at that time as a privately held company not traded on any stock exchange. In 2015, The Wall Street Journal published an investigation of Theranos claiming the company wasn’t using its own blood analysis machines to do many of the tests and not all lab test results were accurate. In 2016, Theranos laid off 340 employees and exited the business of running a laboratory. See © Weirich, Pearson, and Churyk

Mathew Herper, “The Decline and Fall of Elizabeth Holmes and Theranos,” Forbes, Oct. 8, 2016. In 2018, SEC charged Theranos with massive fraud. Her criminal trial is scheduled for summer of 2020. 12. IBM’s first footnote explains its significant accounting principles. The SEC website with its EDGAR database provides various financial reports and it required several clicks to get to the IBM’s 10-K. It is not always easy to find the notes to financial statements or a specific part of the financial statements due to its length as a single web page in the actual 10-K. Advantages of commercial databases over the SEC’s EDGAR database are most noticeable in providing ratios and analysis. The SEC’s EDGAR database provides only the raw financial statements. However, disadvantages of commercial databases include that they often do not provide all of the information from the SEC filings by the company. For example, most commercial databases will not provide footnotes or other non-financial information contained in the 10K filing. 13. Journal of Accountancy, published by the AICPA, has many articles using the keyword "derivatives.” As of early 2020, the most recent example was written by Tysiac, K. (2017). “New FASB Standard Aims to Simplify Hedge Accounting,” Journal of Accountancy. The article explained that “Accounting Standards Update No. 201712, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, was created to: •

Better align accounting rules with a company’s risk management activities.

•

Better reflect the economic results of hedging in the financial statements.

•

Simplify hedge accounting treatment.”

14. Chevron’s annual report (10-K) filed with the SEC describes include some discussions relating to the company’s environmental liability, such as in the discussion of legal proceedings. Federal laws in the United States affecting environmental liability disclosure include the Clean Air Act Amendments of 1990 and others. Legal proceedings concerning any federal law shall be disclosed and described if they meet certain criteria such as if a governmental authority is party to a proceeding and it involves possible monetary sanctions. 17 CFR section 229.103 paragraph 5. A google search can also find a list of archived GAAP on the accounting for environmental liabilities. This includes SFAS No. 5, Accounting and Reporting for Loss Contingencies, SEC Staff Accounting Bulletin 92, regarding “accounting and disclosure obligations for contingent environmental liabilities.” 15. Uber, originally known as UberCab, was founded in 2009 as a black-car service. It became popular by offering affordably priced ride services and allowing users to request rides via their smartphone. Uber began service in 2010 in San Francisco. It operates in over 60 countries. © Weirich, Pearson, and Churyk

Uber’s business model was based on the ideas of a tech company having drivers as independent contractors. However, lawsuits against Uber, particularly in California and Massachusetts called into question whether Uber drivers are really employees. Uber paid $100 million to settle the California and Massachusetts lawsuits in 2016. Other legal issues arose as Uber’s rapid expansion resulted in disregard for various state and local laws. Uber contractors have been charged with sexually assaulting customers. In 2017, Uber was sued by Alphabet (parent company of Google) for allegedly stealing self-driving technology. 16. Students might find several different answers of finding a recent article from the Journal of Accountancy that discusses “money laundering,” such as Sarah Ovaska-Few’s article in 2019 entitled "Keeping an eye out for money mules." Often, articles with the search term in the title may provide the most relevant articles, but one should check more recent articles with slightly different names to remain current with the topic. 17. Students may have various answers to examining an analyst report on Ford Motor Company, depending on the database and analyst report used. The answer should identify who wrote the report, outline the major contents of that analyst report, and identify where the student found the analyst report. For example, Emmanuel Rosner wrote an analyst report entitled “Ford: Making Sense of 4Q Results and 2020 Guidance.” 18. Students are asked to identify the accounting and business databases at their university’s particular library and to prepare a few PowerPoint slides to explain and illustrate one such database. 19. GAAP Concept Statement No. 5 is Recognition and Measurement in Financial Statements of Business Enterprises. The purpose of financial reporting is to communicate information to those outside an entity. It addresses criteria for an items’ recognition in financial statements and or notes and the objective of financial reporting. The Concept Statement was last modified in 2008. 20. AICPA’s Audit and Accounting Manual is found at HF5667. This book provides advice and examples for performing an audit. AICPA reference books are accessible in the AICPA’s online subscription database or for purchase at the AICPA Store. KNOWLEDGE BUSTERS 1.

In 2019, Bristol-Myers Squibb acquired Celgene to create a biopharma company in a deal valued at $74 billion. Bristol Meyer’s stock sank after the announcement, while the target stock rose in value.

2. S&P Capital IQ NetAdvantage can provide profitability ratios for Wells Fargo for the 5-year period from 2015, as shown in the chart below. In 2020, WF agreed to pay a $3 billion penalty to the SEC. © Weirich, Pearson, and Churyk

For the Fiscal Period Ending Dec. 31st of each year

2015

2016

2017

2018

2019

Return on Assets %

1.3%

1.2%

1.0%

Return on Equity %

12.3%

11.2%

11.0%

11.3%

10.4%

Return on Common Equity %

12.7%

11.7%

11.4%

11.6%

10.5%

Wells Fargo lost its reputation because some of its bankers had created millions of accounts in the names of its clients without their permission, due to sales pressure Wells Fargo’s return on assets (ROA) and return on equity (ROE) have been decreasing since 2015, after the scandal. In 2020, Wells Fargo was fined $3 billion for the fake accounts. 3. General Electric has its worst performing year in 2017, of the three years analyzed from 2017-2019. In 2017, all of its profitability ratios held negative values versus in 2018 when only its return on equity and return on common equity were negative and in 2019 when only is return on common equity had a negative value of (0.4%). In terms of revenue growth, GE has actually experienced negative values in each of those fiscal years. With regards to overall financial health, the company has consistently maintained a total asset turnover of 0.3 for the last 3 years and has had a current ratio between 1.92.3, indicating that they are well enabled to cover their current liabilities utilizing their current assets. The company is highly leveraged by debt and has continued to increase this leverage. In 2017, the company’s debt to equity ratio was 175.0% which increased to 314.9% by the end of 2019. 4. In 2019, the chair of GE’s audit committee was Leslie F. Seidman. She was a FASB board member. Harry M. Markopolos, a former securities industry executive and a forensic accounting and financial fraud investigator, released a 175-page whistleblower report which accused GE of nearly $40 billion in accounting fraud tied to its insurance business. Previously, Makapolis helped expose the $64 billion ponzi scheme by Bernie Madoff. 5. As of early 2020, GE was the eighth largest power company with revenue at $38.5 billion. Competitors provided by the students by depend on the database or website used. For example, students might identify three larger power companies, such as State Grid Power Corporation in China, Enel in Italy, and EDF in France. 6. The North American Industry Classification System (NAICS) Code for property and casualty insurance is 524126. after googling for NAICS codes and using the WebSite www.census.gov/eos/www/naics, the Code is found by drilling down on finance and insurance. © Weirich, Pearson, and Churyk

7. Students must access an overview of the Korean company Samsung’s products and then explain the significance of its Galaxy Note 7 line of products. The Galaxy Note 7 was discontinued due to customer safety concerns regarding the device overheating and exploding. Customers were encouraged to backup their data, switch off their device, and replace the device. Samsung product information and information regarding Galaxy Note 7 is available on Samsung’s website. Databases can then help find relevant articles on the problem. 8. State Farm Group insurance is a private company, owned by policyholders who purchase insurance. Therefore, there is minimal financial information available on the EDGAR database. State Farm is ranked as the largest Auto and Homeowners insurer in the United States. Students summarize key financial ratios and compare them with those provided on State Farm’s website. 9. One can go to the SEC website page for Accounting and Auditing Enforcement Releases (AAER) and search for documents containing the term “revenue recognition” to find two recent Accounting and Auditing Enforcement Releases (AAER) that address revenue recognition, such as AAER No. 3860 from February 24, 2017 (discussing a CPA firm which failed to follow PCAOB or GAAS standards in conducting its audits). 10. The SEC brought a civil action against Samuel and Charles Wyly alleging various securities law violations. The Wyly brothers established a group of offshore trusts and subsidiaries to trade shares of public companies, of which a Wyly was on the board, and failed to disclose their ownership of the companies. The jury issued a verdict on 9 out of the 10 claims, including securities fraud under section 10(b) of the 1934 act and several other violations. Therefore, the Wyly brothers had to disgorge their trading profits connected with the violations. 11. The Blackstone Group’s stock price in 2019 ranged from just under $33 to in excess of $64. Information on the Blackstone Group was more readily available than most private equity firms because this Limited Partnership is publicly traded on the NYSE as one of the largest private equity firms. 12. Using data analytics, auditors can examine larger external data sets much faster than previously. Recent advances have improved the interfaces between the client and auditor data systems and improved various interfaces that facilitate data extraction. Now during the risk assessment stage of an audit, data is analyzed for understanding processes and controls. Many analyses are applied more widely. For example, risks highlighted might enable auditors to drill down in further detail as part of an audit’s substantive testing. See ICEAW, Data Analytics for External Auditors: International Auditing Perspectives, part of the International Auditing perspective series, 2016. CHAPTER 7 TAX RESEARCH FOR COMPLIANCE AND TAX PLANNING © Weirich, Pearson, and Churyk

Discussion Questions 1. Three types of tax reforms made in the Taxpayer First Act of 2019 are establishing an IRS independent office of appeals, improve IRS service, and expand taxpayer rights in various areas. 2. Tax planning concepts include (1) changing to a more favorable tax jurisdiction, (2) avoiding or postponing income recognition, (3) controlling the character or classification of income, (4) spreading income among related taxpayers, (5) selecting investments with the tax consequences in mind, (6) changing the timing for tax purposes, and (7) maximizing specialized deductions or tax credits. Students were asked to provide five tax planning concepts. 3. The difference between tax evasion, tax avoidance, and abusive tax avoidance is the means used to minimize one’s taxes. Tax evasion consists of illegal acts. Tax avoidance seeks to minimize taxes legally. “Abusive tax avoidance” represents attempts to intentionally misapply the tax laws. However, in Europe tax avoidance often carries a negative connotation,unlike in the United States. 4. Tax research goals vary depending on the type of tax research. Policy-oriented research has the objective of providing new information that will help policy-makers make appropriate tax law. Application oriented tax research addresses existing tax law, with the objective of determining its impact for a given factual situation. 5. Challenges in tax research include identifying the relevant facts, constructing the precise legal issues for those given facts, searching for relevant legal authorities, selecting the correct legal authorities, and applying the law properly for the particular set of facts. 6. Tax compliance engagements prepare tax returns. Usually these are closed-fact engagements because all the facts have already occurred. In tax litigation the facts have also already occurred. Lawyers handle a tax case in court. 6. One difference between a treasury regulation and a revenue ruling is whether the authority has general or specific application. Treasury regulations interpret and clarify the statutory law. Revenue rulings apply the law to a specific set of facts. Another difference is the strength of the authority. Treasury regulations are stronger authority than revenue rulings. 7. The term “precedent” for tax research means that the legal principle announced in a court case will apply to future cases. 8. In a non-acquiescence, the IRS will not follow a court’s decision in other cases. 9. IRB is the weekly publication by the IRS that includes revenue rulings and revenue procedures. The CB (Cumulative Bulletin) is a semi-annual publication that reorganizes these sources based on the relevant Code section that the revenue ruling interpreted. © Weirich, Pearson, and Churyk

10. The IRS generates tax forms, notices, and private letter rulings, and other documents. 11. Advise the client to go to federal district court if the precedent in the Tax Court is adverse to the client. 12. To find relevant cases in Checkpoint, the best way is to use the annotations tab within a tax service. Annotations usually provide one sentence summaries of cases, organized by issue around a Code section. Using the citator is another way to find relevant cases, after first finding one case on point. Alternatively, some researchers will look at Explanations in a tax service, focusing on the footnote sources for the relevant explanations. 13. AFTR and USTC reprint all tax cases, except those from the Tax Court. 14. Tax Court regular decisions announce something new in the law, while Tax Court Memorandum decisions are merely applying existing law to a different set of facts. 15. The federal court system is diagrammed below: United States Supreme Court (the highest level court) 12 regional Circuit Courts of Appeal Court of Appeals for the Federal Circuit Tax Court 94 District Courts (includes 5 in territories) Court of Federal Claims 16. The basic steps of tax research include: Identify and refine the tax problem; Locate relevant tax authorities; Apply the authorities; Arrive at a defensible solution; and Communicate the results to the taxpayer. 17. A memo includes sections on the facts, issues, conclusion, and analysis (which includes discussion of the law and its application, sometimes under separate sub-headings). 18. Answers will vary for three websites that one should regularly. One website is IRS’ website which has tax forms and publications, information for different taxpayers, and tax statistics. Some might list another relevant governmental website, such as a state departments of taxation. Professional associations often provide helpful information, such as the American Institute of CPAs (AICPA). Large accounting firms and tax publishers or software providers usually provide some value. There are also some specialized directories, such Tax and Accounting Sites Directory which has links for tax topics, tax forms, and many other tax and accounting concerns. 19. The reasoning or analysis is sometimes divided into separate sections on discussion of the law and then its application. Discussion of the law should include briefly explaining relevant Code provisions, regulations, and cases. In the application each source discussed should get referenced as to exactly how it applies to the given set of facts. Thus, the application integrates the law and the facts, instead of leaving that work to the reader’s interpretation. © Weirich, Pearson, and Churyk

20. Professional tax work is changing because of changes in technology. Especially as data analytics has become more common, technology has helped to improve accuracy of results and reduced errors. Tax accountants are usually now more involved in giving tax and business advice, as well as performing future tax planning. EXERCISES 1. Primary research authorities in this problem are (b) Tax Court memorandum decisions, (c) Revenue Procedures, and (e) Temporary Treasury Regulations and. Secondary sources in the problem are the (a) tax services and (d) IRS publications. Although some publishers consider anything produced by the government as a primary source, such as IRS publications, the better answer is that if a document has no legal authority, then consider it as a secondary source. 2. Students identify the topic or general content of the following provisions: a. §62(a)(2): Adjusted gross income defined is gross income less trade and business deductions, including those of employees. b. §162(e)(4): Trade or business expenses are denied for the costs of influencing legislation c. §262(b): No deduction for personal, living, and family expenses, including basic phone expenses. d. §482: Allocation of income and deductions among taxpayers (transfer pricing) e. §501(c)(7): Exempt organizations includes clubs for pleasure, recreation, and other nonprofitable purposes, where substantially all of the activities of which are for such purposes and no part of the net earnings of which inures to the benefit of any private shareholder. f. §751(a)(flush language): Unrealized receivables and inventory items sold or exchanged in a partnership interest are not a capital asset. g. §6702(a): Frivolous tax returns are subject to a civil penalty. 3. Students identify the content of each of the following Internal Revenue Code divisions: a. Subtitle A – Income Taxes §§1-1563 b. Subtitle A, Chapter 2 – Tax on Self-Employment income §§1401-1403 c. Subtitle A, Chapter 1, Subchapter C – Corporate Distributions and Adjustments (Corporate Tax) §§301-385 d. Subtitle A, Chapter 1, Subchapter K, part 1 – Tax treatment of Partners and Partnerships (Partnership Tax), determination of tax liability §§701-709 e. Subtitle A, Chapter 1, Subchapter S – Tax Treatment of S Corporations and their Shareholders §§1361-1379 © Weirich, Pearson, and Churyk

f. Subtitle A, Chapter 6 – Consolidated Returns §§1501-1563 g. Subtitle D – Miscellaneous Excise Taxes §§4001-5000 4. Students list the major Code sections for the following topics (best to use table of contents research method for large topics): a. Estate taxes: Sections 2001-2210 b. Capital gains: Sections 1201-1298, 1(h) c. Stock dividends: Section 306 is the primary section. (One can find additional sections using the index approach, such as Sec. 243–247.) d. Business energy credits: Section 48 e. Passive losses: Section 469 f. Depreciation: Sections 167 and 168 g. Substantial understatement penalty: Section 6662 5. Students list the topics of the following IRS Publications: a. Pub 15: (Circular E), Employer's Tax Guide b. Pub 225: Farmer’s Tax Guide c. Pub 504: Divorced or Separated Individuals d. Pub 535: Business Expenses e. Pub 901: U.S. Tax Treaties f. Pub 925: Passive Activity and At-Risk Rules g. Pub 946: How To Depreciate Property 6. Students identify the topics of the following federal tax forms: a. 990: Return of Organization Exempt From Income Tax; helps describe the nature of the organization, their expenses and amount received. b. 1040A: U.S. Individual Income Tax Return; helps to calculate your adjusted gross income and the amount of tax you owe or amount that will be refunded to you. c. 1065: U.S. Return of Partnership Income; this return reports their income, gains and losses, deductions, credits, etc. d. 1099-OID: Original Issue Discount; this is used to document long-term debt instruments that are issued for a price less than the stated redemption price at maturity. e. 1120EZ - U.S Corporation Income Tax Return © Weirich, Pearson, and Churyk

f. Schedule SE: Self-Employment Tax; helps to determine the amount of tax if one works for yourself. g. Form W-2: Wage and Tax Statement; filed for each employee for whom income, Social Security or Medicare tax was withheld and helps to identify total annual wages. 7. Students identify the topic of the following Treasury Regulations, Revenue Rulings, and Revenue Procedures: a. 26 C.F.R. sec. 601.601(d)(2)(iii): The purpose of publishing revenue rulings and revenue procedures. Reg § 601.601. b. Reg. § 301.6333-1: Production of books. c. 26 CFR Part 514.5: Patent and copyright royalties and film rentals. d. Treas. Reg. 1.482-7(b)(1)(iii): Methods to determine taxable income in connection with a cost sharing arrangement: Divisional interests e. Temp. Reg. § 1.956-1T(e)(5): Shareholder's pro rata share of the average of the amounts of United States property held by a controlled foreign corporation: Exclusion for certain recourse obligations f. Rev. Proc. 89–14, 1989–1 C.B. 814 - This revenue procedure supersedes Rev. Proc. 86-15, 1986-1 C.B. 544, and restates the objectives and standards for publication of revenue rulings and revenue procedures, interpreting code section 7805 – Rules and Regulations g. Rev. Rul. 2015-25, 2015-49 I.R.B. 695 - Part I. Rulings and Decisions under the Internal Revenue Code of 1986. 8. a. Section 61(a)(4) provides that interest is part of gross income. b. Section 166(d) defines nonbusiness debts. c. Section 1222(7) defines “net long-term capital gains.” NOTE: Most Code sections have a letter as a subsection. However, the handful of sections currently existing thate were written before the 1954 Codification, such as section 1222 continue to lack subsections. d. Section 121(a) excludes gain from sale of principal residence in many cases. 9. Students must access a tax research database and answer the following questions; then repeat the problem using a different tax research database and compare the ease of use of the database: a. Although one would expect a keyword search of “active trade or business” to pull up regulations interpreting code section 162 on a trade or business, it actually pulls up regulations interpreting various other code sections, such as: Reg. §1.195-1 Election to amortize start-up expenditures. Prop. Reg. §1.1.298-2 Rules for certain corporations changing businesses.

b. When conducting a keyword search of “tuition credit” in the Internal Revenue Bulletin/Cumulative Bulletin, the exact phrase will not appear in the code any document. However, a search without the quotes will show the most recent Revenue Rulings, as of early 2020 as 1) Rev. Rul. 2010-27, 2010-45 IRB 620. 2) Rev. Rul. 76-167, 1976-1 CB 329. 3) Rev. Rul. 73-255, 1973-1 CB 54. Given the limited relevance of these keyword search results to a likely problem, encourage students to try using alternative search approaches within the database. 10. “Reportable transactions are listed transactions, confidential transactions, transactions with contractual protection, loss transactions, and transactions of interest.” Reg. § 1.6011-4(b). IRS Form 8886 is the “Reportable Transaction Disclosure Statement.” 11. The U.S. Treasury Department estimates the four largest tax expenditures for 2020 are: o Exclusion of employer contributions for medical insurance premiums and medical care ($3,104,400 million) o

Exclusion of net imputed rental income ($1,643,790 million)

Defined contribution employer plans ($1,296,880 million)

Capital gains (except agriculture, timber, iron ore, and coal) ($1,227,330 million) 12. A deduction for traveling expenses while away from home in the pursuit of a trade or business exists under Section 162(a)(2). This deduction includes amounts expended for meals and lodging other than amounts which are lavish or extravagant under the circumstances. o

Section 274 has several subsections that disallow certain travel expenses. Subsection 274(c) disallows certain foreign travel expenses. Subsection 274(h) disallows certain foreign convention travel expenses. Section 274(m) provides additional limitations on travel expenses. Subsection 274(n) has a 50% limitation on the deduction for meals and entertainment, which also applies to travel expenses. Note: Disallowance provisions are in Part IX (Items Not Deductible) – Sections 261–291. Students sometimes mistakenly identify Section 62(b)(2) as a disallowance provision, when it actually determines how much of a deduction qualifies as an “above the line ” deduction in determining AGI. 13. Section 6662(b)(2) provides a penalty for a substantial understatement of income tax. The penalty applies if any part of the required income tax is attributable to a substantial understatement, as defined in Section 6662(d). The penalty is an amount equal to 20 percent of such understatement. 14. Section 105(a) includes in gross income amounts received by an employee through accident or health insurance for personal injuries or sickness to the extent such amounts (1) are attributable to contributions by the employer which were not includible in the gross income of the employee, or (2) are paid by the employer. Students must also describe the process by which 52 © Weirich, Pearson, and Churyk

they found the answer. 15. a. Section 101 has 9 Regulations (including 2 Proposed Regulations); the last Regulation is Prop. Reg. § 1.101-8. b. Section 183 has 6 Regulations (including one proposed and one reserved); the last Regulation is Reg. § 1.183-4. c. Section 385 has 7 Regulations (including two proposed and 2 temporary); the last Regulation is Reg. § 1.385-4T. 16. Section 183 addresses activities not engaged in for profit. Reg. § 1.183-2 interprets the term “activity not engaged in for profit.” It provides nine factors to consider in determining whether an activity was engaged in for profit: (1) Manner in which the taxpayer carries on the activity; (2) The expertise of the taxpayer or his advisors; (3) The time and effort expended by the taxpayer in carrying on the activity; (4) Expectation that assets used in activity may appreciate in value; (5) The success of the taxpayer in carrying on other similar or dissimilar activities; (6) The taxpayer's history of income or losses with respect to the activity; (7) The amount of occasional profits, if any, which are earned; (8) The financial status of the taxpayer; (9) Elements of personal pleasure or recreation. 17. Reg. § 1.162-5(a). 18. Reg § 1.6038A-1 (General requirements and definitions) provides rules for foreignowned U.S. corporations and foreign corporations engaged in a trade or business within the United States (reporting corporations)? IRS form 5472 is for a reporting corporation required to file a return that relates to reportable transactions with a related party. 19. Same-sex marriage was recognized in an estate tax case by the U.S. Supreme Court in United States v. Windsor, 570 U.S. 744, 133 S. Ct. 2675, 111 AFTR 2385 (2013). The Court ruled that the Defense of Marriage Act unconstitutionally violated the Fifth Amendment's Due Process Clause by denying equal protection to same-sex couples who were lawfully married in their state. 20. Rev. Rul. 2016-15, 2016-26 IRB 1060, delves into code section 108(c)(3)(A) to determine what is qualified real property for purposes of income from discharge of indebtedness. This revenue ruling was issued June 10, 2016. 21. Revenue Procedure 2016-11, 2016-2 IRB 274, provides inflation adjustments for various civil penalties. Relevant code sections include 6651, 6652, 6695, 6698, 6699, 6721, and 6722. The revenue procedure was dated 12/17/15. The IRS will apply the penalties, rather than having taxpayer self-report them, so finding relevant tax forms are not needed.

Rev. Proc. 2017-3, 2017-1 IRB 130, identifies issues on which the Internal Revenue Service (the “Service”) will not issue letter rulings or determination letters. Relevant code sections include: 45, 48, 61, 79, 83, 101, 115, 117, 119, 121, 129, 141, 170, 216, 265, 302, 306, 351, 355, 368, 403, 414, 448, 451, 457A, 501, 507, 641, 664, 761, 1014, 1362, 1502, 2702, 3401, 6050P, 7701, and 9815. This revenue procedure was dated Dec. 29, 2016. 22. A Circuit Court of Appeals decision is precedent for taxpayers residing within that court’s jurisdiction. Because the Tax Court must follow the relevant appellate court, the taxpayer within that circuit court of appeal should not go to Tax Court. Instead, the taxpayer must pay the amount in dispute and sue for a refund in district court. A district court’s decision from another part of the country is not precedent. Thus, advise the tapayet to go to the U.S. Court of Federal Claims. 23. Advise the client that an aticle is not a source of legal authority, but it may provide some perspectives for the case. A revenue ruling is issued by the IRS to provide an interpretation of the tax law. However, a revenue ruling does not carry the same legal force as treasury regulations. The IRS may revoke or modify the revenue ruling by subsequent rulings or treasury regulations. 24. Rev. Rul. 2013-17, 2013-11 IRB 608, ruled that for federal tax purposes, the terms “spouse,” “husband and wife,” “husband,” and “wife” include an individual married to a person of the same sex, if the individuals are lawfully married under state law, and the term “marriage” includes such a marriage between individuals of the same sex. 25. Three issues existed in Brinks Gilson & Leone, T.C. Memo 2016-20. First, whether taxpayer was liable for the accuracy related penalty under section 6662(b)(1) on the under payment of tax relared to deducting year end bonuses that were non-deductible dividends. Second, whether section 83(a) dealing with property for services supported taxpayer’s position that all amounts paid to shareholder attorneys qualified as compensation for services. Third, whether under substance over form principles, stock held by shareholder attorneys qualified as debt, so that the year-end bonus portion non-deductible as compensation were deductible as interest. The court held taxpayer was liable for the penalty because the taxpayer did not have substantial authority for deducting the year end bonuses. Section 83 did not apply. The court also held stock held by shareholder attorneys did not qualify as debt, but were nondeductible dividends by the corporation. 26. “Material advisor” is defined in section 6111(b)(1)(A). A list of reportable transactions is needed. “Reportable transactions are listed transactions, confidential transactions, transactions with contractual protection, loss transactions, and transactions of interest. “ Reg. § 1.6011-4(b). 27. Students find an example of data analytics in tax. For example, “predictive analytics” in tax integrates data from different sources (such as enterprise resource planning or point of sales systems) to predict future tax consequences based on statistical relationships found in historical data.

28. a. Possibly remind students how to find tax materials for your state. A helpful website is www.taxsites.com. Foe example, a copy of Hawaii’s state tax return is at www.state.hi.us/tax/2016/n11.pdf. b. A copy of Publication 597—“Information on the United States–Canada Income Tax Treaty,” is on the IRS’ website is at www.irs.gov/pub/irs-pdf/p597.pdf. c. Based on the joint committee of taxation hearings in early 2020, proposed legislation is likely to develop in various areas, such as expiring tax provisions and corporate tax liabilities. 29. Note because the problem involves a state tax case, Checkpoint is not the most helpful database to find the case. Students can google or use Nexis Uni to find information on the case. Colorado attempted to address “use tax” non-compliance by enacting a state law that imposed notice and reporting obligations on retailers that did not collect a sales tax. Direct Mktg. Ass’n v. Brohl, 814 F.3d 1129 (10th Cir. 2016). Plaintiff ("DMA") was a group of businesses and organizations that marketed products via catalogs, advertisements, broadcast media, and the Internet. DMA challenged Colorado’s law as violating the federal Commerce Clause, arguing that it unconstitutionally discriminates against and unduly burdens interstate commerce. The district court permanently stopped enforcement of Colorado’s reporting requirements. However, the Tenth Circuit reversed holding that the district court lacked jurisdiction. KNOWLEDGE BUSTERS 1. None of the expenses paid by Minsu’s family for his Disney Training Program, prior to his becoming a Rock Star, are deductible. They are nondeductible personal expenses. Sec. 262(a). “Expenses of taking special courses or training … in seeking employment … are not deductible.” Reg. § 1.212-1(f). 2. Section 6707(b)(1) provides a $50,000 penalty for failure to furnish information regarding reportable transactions, except tht listed transactions incur a penalty the larger of of $200,000 or 50% of the gross income derived from the services related to the listed transaction. If the omission is intentional, the penalty percentage is increased to 75%. “Reportable transactions are listed transactions, confidential transactions, transactions with contractual protection, loss transactions, and transactions of interest.” Reg. § 1.60114(b). IRS Form 8886 is the “Reportable Transaction Disclosure Statement.” 3. Preliminary key issues include: (1) Can a cardiologist deduct the loss from the sale of his personal residence when relocating to a new business location? (2) Is the reimbursement for the loss on selling one’s house included in gross income? (3) Does the tax consequences for the reimbursement depend upon whether one takes a deduction?

Refine each issue more precisely by adding within the issue the key terms and reference to the most relevant Code provision (section, subsection, paragraph – as much detail as possible). 4. Sally cannot deduct the cost of her tax courses as a business expenses while earning a law degree. Section 162(a) provides a deduction for trade or business expenses. An individual’s educational expenses from a program of study which will lead one to qualify in a new trade or business are nondeductible business expenses. Reg. § 1.162-5(b)(3). The disallowance of the deduction applies even if the education maintains or improves skills required for employment or meets the express requirements of the individual's employer. Earning a law degree will enable Sally to qualify for a new trade or business, regardless of whether she wants to enter that trade or business. 5. Yes, it’s possible to claim a $3,000 deduction. The loan extended to the roommates qualifies as a nonbusiness debt. Sec. 166(d). When the nonbusiness debt becomes worthless, the resulting loss is considered a short-term capital loss. Capital losses are deductible by $3,000 per tax year, beyond offsetting capital gains in the taxable year. 6. In Ballard v. Comm., 544 U.S. 40 (2005), the main issue was whether the Tax Court must disclose its use of reports from special trial judges. The Supreme Court held the Tax Court’s historic practice of not revealing such a report violated the Court’s procedures. The Supreme Court reversed and remanded the case back to the Seventh Circuit Court of Appeals. 7. a. A Tax Court regular decision which discussed whether hair transplants are deductible medical expenses was Mattes v. Commissioner, 77 TC 650 (1981). b. The Tax Court held the hair transplant operation was a specific medical treatment, so the cost of the hair transplants qualified as a deductible medical expense under Sec. 213(e). c. Hair transplant is now regarded as cosmetic surgery and such cost does not qualify as a medical expense. “Medical care” does not include cosmetic surgery, unless the surgery is to correct a deformity arising from birth, an accident, or disfiguring disease. Section 213(d)(9)(A). 8. Revenue Ruling 2013-17, 2013-38 IRB 201, defined a married couple after same-sex marriage was recognized in an estate tax case by the U.S. Supreme Court. Essentially, terms that previously applied exclusively to persons of opposite sex will apply to individuals married to person of same sex if marriage is lawful under state law. However, Treas. Reg. 301.7701-18 now defines spouse, husband and wife, husband, wife, and marriage. 9. The following is a brief memo explaining the tax consequences of a football scholarship. Tax File Memorandum July 30, 2017 From: Student’s Name Subject: Athletic Scholarship © Weirich, Pearson, and Churyk

Facts: Best Friend received a full scholarship from the University of Colorado at Boulder for playing college football. The scholarship covered tuition, dorm room and meal costs there. Issue: Whether a scholarship received for playing on a college sports team is excludable as a qualified scholarship under sec. 117(b)? Conclusion: An athletic scholarship is excludable to the extent of other qualified scholarships. Reasoning: A qualified scholarship is excluded. Sec. 117(a). The exclusion covers qualified tuition and related expenses for fees, books, supplies, and equipment. Sec. 117(b)(2). Gross income includes compensation for services. Sec. 61(a)(1). Amounts paid as compensation for services is not considered a scholarship. Reg. § 1.117-4. Athletic scholarships awarded by a university primarily to assist the recipients in pursuing their studies are excludable. Rev. Rul. 77-263, 1977-2 CB 47. The amounts received for the dorm room and meals are gross income. Reg. § 1.117-5(c)(1) flush language. 10. The following is a brief memo explaining the tax consequences of swapping services within the family. Tax File Memorandum January 30, 20XX From: YYY Subject: Personal services within the family Facts: Older sister Sara agreed to tutor her younger sister in math for about a month. Older sister usually charges her clients $500 for similar services. Younger sister usually charges $100 for tax research services. Issue: Whether services provided between siblings are excludable as gifts under sec. 102(a)? Conclusion: The value of the services between family members are excludable as gifts. Reasoning: Except as provided, gross income includes compensation for services. Sec. 61(a)(1). Gross income includes income realized in any form, including services. Reg. § 1.61-1(a). However, sec. 102(a) states that gross income does not include value of property acquired by gift. The Supreme Court defined as gift in Commissioner v. Duberstein, 363 U.S. 278 (1960), as essentially coming from true love and affection. The family context of the sisters suggests real love and affection for a gift excludable under sec. 102(a). 11. Sven should not recognize anything from the extinguishment of the debt. First, Section 108(a)(1) excludes the amount of the discharge of a qualified farmer indebtedness. Whereas, Myrtle recognizes a $20,000 gain from transferring her gardening property, based James J. Gehl, 102 T.C. 74 (1994), the excess of the fair market value of the property over its basis.

12. Students apply their knowledge of researching tax law, to finding authorities in other areas of the United States Code: a. 15 U.S.C., chapter 2B, section 78j-1(b)(1) –Required response to audit discoveries in the auditor’s investigation and report to management. b. 26 U.S.C., subtitle f, chapter 73, section 7101 – Bonds and their form c. 31 U.S.C., subtitle B, chapter X - Financial Crimes Enforcement Network, Department of the Treasury c. Title 9, chapter 3, section 304 - Recognition and enforcement of foreign arbitral decisions and awards; reciprocity d. Title 11, chapter 13 – Adjustment of Debits of an Individual with Regular Income e. Title 18, chapter 31, section 664 - Theft or embezzlement from employee benefit plan f. Title 31, chapter 95, section 9503 – Government Pension Plan Protection: Reports about Government pension plans

CHAPTER 8 ASSURANCE SERVICES AND AUDITING RESEARCH

Discussion Questions 1. An assurance service engagement entails independent professionals (i.e., usually CPAs or those working for CPA firms) working to improve the quality of information, or its content for decision-makers. 2. An attest engagement entails a professional service where a practitioner is engaged to issue or issues a written communication that expresses a conclusion about the reliability of a written assertion that is the responsibility of another party. An audit would be an example of an attest engagement since the auditor is issuing a written audit report on the client’s financial statements. 3. Besides performing financial statement audits, the CPA practitioner can perform attestation, review, and prospective financial information engagements. 4. Unlike auditing standards, attestation standards add assurance to information other that historical financial statements. Attestation standards are an extension to the auditing standards. 5. The guidelines used to encompass accounting and review services consist of the AICPA’s Statements on Standards for Accounting and Review Services (SSARS). 6. Unlike auditing standards, which provide measures of the quality of performance, audit procedures refer to the steps the auditor should perform in the engagement. Furthermore, while auditing standards remain identical for all audits (e.g., maintaining the CPA’s independence), © Weirich, Pearson, and Churyk

auditing procedures change, depending on the nature and type of entity under audit and the complexity of the engagement. 7. Statements on Auditing Standards serve as the primary authoritative support in conducting an audit which also supplement and interpret the Principles. Interpretations further explain the SASs. 8. The term “must” indicates an unconditional requirement which means that the auditor must comply with the standard. The term “should” means that the auditor is also required to comply with the standard, but in rare cases may depart if they document the justification for the departure. 9. Rules based strandards are very detailed and descriptive that often leads to a checklist mentality. Whereas principles based standards often require the use of prodfessional judgment that provides more latitude in applying professional judgement and procedures. 10. Compilation- A service that provides in the form of financial statements information that is the representation of management without any assurance on the staatements. Review- A service of inquiry and analytical procedures that provide the accountant with a reasonable basis for expressing limited assurance on the statements. 11. The PCAOB stands for the Public Company Accounting Oversight Board that was created by the Sarbanes/Oxley Act of 2002 to establish auditing and related attestation, quality control, ethics, and independence standards to by used by registered public accounting firms. 12.The three categories of professional responsibilities include: 1) Unconditional responsibility 2) Presumptively manadatory responsibility 3) Responsibility to consider 13. The Single Audit Act incorporates the concept of an entity-wide financial and compliance "single audit," rather than various federal agencies conducting separate financial and compliance audits. The Act requires an annual audit of any state or local government unit that has received $100,000 or more in Federal financial assistance. 14. Primary auditing guidelines in the public sector include the General Accounting Office's "Yellow Book," the Office of Management and Budget's Single Audit Act, and the AICPA’s Attestation Standards, GAAS, and applicable Audit Guides. 15 The importance of the Code of Professional Conduct is that it outlines a minimum, mandatory and enforceable level of conduct in performing audits. 16. The Conceptual Framework (Threats and Sageguards) is utilized when there is no specific guidance in the Code to address a particular issue. A member would be considered to be in © Weirich, Pearson, and Churyk

violation of a rule if the member cannot demonstrate that safeguards were applied that eliminated or reduced significant threats to an acceptable level. 17. The Accounting Principles Rule requires that the audior must determine that the financial statements are in accordance with GAAP in order to render an unqualified/unmodified audit opinion. 18. Accounting and auditing research helps practitioners comply with the Accounting Principles Rule of the AICPA’s Code of Professional Conduct as a critical means of ascertaining if management has adhered to GAAP in the preparation of financial statements. 19. Professional judgment plays a critical role the accountant/auditor's daily activities, since the provisions of the Accounting Principles Rule-1.320 allows the auditor to be associated with financial statements that depart significantly from GAAP only under "unusual circumstances." The standard requests auditors to exercise professional judgment in justifying the position that adherence to a promulgated principle would be regarded, generally by reasonable men, as producing a misleading result. 20. Professioanl skepticism is a mental attitude that includes a questioning mind set. The auditor should always be alert to various conditions that may indicate potential misstatements due to error or fraud, and gather and evaluate the evidence obtained. 21.The authoritative auditing literature that has general applicability includes Auditing Principles, SASs, Auditing Interpretations, AICPA Code of Professional Conduct, for non-public company audits, and the PCAOB Standards for audits of public companies. 22 Some guidelines available to help the accountant serve nonpublic clients include provision' of the U.S. Comptroller General's Standards for Audits of Governmental Organizations. Programs. Activities, and Functions, GAO's revised Government Auditing Standards and U.S. Single Audit Act. 23. The authoritative body that exists to develop international auditing standards is the International Auditing & Assurance Standards Board (IAASB). Exercises 1.

ISA 500 (redrafted) Audit Evidence ISA 505 (revised & redrafted) External Confirmaations

The eight elements of reasoning include the following: a. Purpose—the purpose is to respond to the request by the client. b. Issue—the issue before the practitioner is what type of service engagement this is, which will direct the report to issue.

c. d. e. f. g. h.

Information—the information to review would entail the assurance services standards, and in particular the consulting literature. Concepts—the main concept to consider is the idea of the reliability of electronic commerce activities. Assumptions—if the client is following proper electronic commerce practices and has implemented proper controls, it can be assumed that its activities are reliable. Interpretation or Inference—since this assurance service falls under the domain of consulting services, the practitioner would follow consulting standards in conducting the review and reporting on the reliability of the activities. Implications or consequences—if activities are not reliable, the practitioner will so state in the report. Solution—The report by the practitioner would either state that the client’s electronic commerce activities are reliable, or not reliable, depending on his or her review.

3. AU-C Section 505-.06-.16 explains the use of the positive and negative confirmation forms. 4. Section 100 under Valuation Services describes the following exampes of valuation engagements: transactions for acquitions or mergers, litigation services, or planning oriented engagements. 5.The Standard provides general principles for engagements in the preparation of financial statements, compliation engagements, and requirements and guidance fo review engagements. 6. Varies depending upon the date researched. 7.Four types of PFP services include: Cash flow planning, Retirement planning, Investment planning, and Education planning. 8.A member can receive disciplinary action without a hearing in the following cases: A crime punishable by imprisonment, failure to file any income tax return, or preparing and filing a false tax return. 9.Type of Engagement: Attestation Engagement, Related standard- AT section 201-AgreedUpon Procedures Engagement. 10.An adverse opinion is appropriate “when in the auditor’s judgement the financial statements taken as a whole are not presented fairly in conformity with GAAP”. Professional Standard Section: AU-C 705.09. 1. An adverse opinion is appropriate “when in the auditor’s judgement the financial statements taken as a whole are not presented fairly in conformity with GAAP”. Professional Standard Section: AU-C 705.09. 2. Various answers are acceptable due to date searched. © Weirich, Pearson, and Churyk

Knowledge Busters Case 1-a. . AU-C Section 930.29 provides the guidance on review interim financial information. The following is an example of a review report AU-C 930.A57:

AU-C Section 930.A57---A Review Report on Interim Financial Statements: Independent Auditor's Review Report Appropriate Addressee: Report on the Financial Statements We have reviewed the accompanying [describe the interim financial information or statements reviewed] of ABC Company and subsidiaries as of September 30, 20X1, and for the three-month and nine-month periods then ended. Management's Responsibility The Company's management is responsible for the preparation and fair presentation of the interim financial information in accordance with [identify the applicable financial reporting framework; for example, accounting principles generally accepted in the United States of America]; this responsibility includes the design, implementation, and maintenance of internal control sufficient to provide a reasonable basis for the preparation and fair presentation of interim financial information in accordance with [identify the applicable financial reporting framework; for example, accounting principles generally accepted in the United States of America. Auditor's Responsibility Our responsibility is to conduct our review in accordance with auditing standards generally accepted in the United States of America applicable to reviews of interim financial information. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial information. Accordingly, we do not express such an opinion. Conclusion 62 © Weirich, Pearson, and Churyk

Based on our review, we are not aware of any material modifications that should be made to the accompanying interim financial information for it to be in accordance with [ identify the applicable financial reporting framework; for example, accounting principles generally accepted in the United States of America]. [Auditor's signature][Auditor's city and state][Date of the auditor's report] 1-b.. AU-C Section 600.A60 and Exhibit A provide information when part of the audit is conducted by other independent auditors (group audits) and provides the following example of appropriate reporting by the principal auditor indicating the division of responsibility when he makes reference to the audit of the other auditor follows: Independent Auditor's Report Appropriate Addressee: Report on the Consolidated Financial Statements We have audited the accompanying consolidated financial statements of ABC Company and its subsidiaries, which comprise the consolidated balance sheets as of December 31, 20X1 and 20X0, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for the years then ended, and the related notes to the financial statements. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We did not audit the financial statements of B Company, a wholly-owned subsidiary, which statements reflect total assets constituting 20 percent and 22 percent, respectively, of consolidated total assets at December 31, 20X1 and 20X0, and total revenues constituting 18 percent and 20 percent, respectively, of consolidated total revenues for the years then ended. Those statements were audited by other auditors, whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for B Company, is based solely on the report of the other auditors. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the © Weirich, Pearson, and Churyk

audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control.2 Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion ln our opinion, based on our audit and the report of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ABC Company and its subsidiaries as of December 31,20X1 and 20X0, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Auditor's signature][Auditor*s city and state][Date of the auditor's report]

Case 2: Paragraph .06 of AU-C section 200 states GAAS require the auditor to obtrain reasonable assurance about whether the financial statements are free of material misstatements. If substantially all of the entity’s evidence has been destroyed and the auditor is unable to complete aaudit procedures a disclaimer of opinion should be issued. Data Analytics Cases: Case 1: Utilizing a data analytics software like Tableau discussed in chapter 10 which is free to faculty and students, one would attempt to analyze PO names and address with employee names and addresses for matches. According to AU-C 560.02, the resolution of this issue appears to constitute a subsequent event which is evidence of a condition that existed at the balance sheet datae, but sicne no transaction in fact ocurred which involved the client, it is no necessary todisclose in the financial stteements. © Weirich, Pearson, and Churyk

Case 2: a) Paragraph 11 and A25 of AU-C Section 501, addresses the auditor’s responsibility to obtain sufficient appropriate audit evidence regarding the condition, which includes identifying obsolete, damaged, or aging inventory. b) based on the auditing standards, the auditor needs to obtain sufficient audit evidence as to the extent of obsolete inventory. Using data analytics software like Tableau discussed in Chapter 10, the auditor could determine the usage rate of the various types of inventory. The usage rate can indicate the estimated future supply of the items needed which may indicate obsolete inventory.

CHAPTER 9 REFINING THE RESEARCH PROCESS Answers to Discussion Questions 1. The focus of accounting, auditing, and tax research includes determining appropriate alternative principles, locating relevant authorities for those alternatives, and using professional judgment in applying the authorities and accounting principles for solving the problem. 2. The three part approach used to identify the precise problem or issue is as follows: 1) Preliminary problem identification, 2) Problem analysis, and 3) Refined statement of the problem. 3. Two common ways to search a database to collect evidence are keyword search within the database and drill-down search through the table of contents. Merely using a google search to find relevant Web sites and other accounting or tax resources is not a comprehensive search. 4. Keywords are used to evaluate and collect evidence to locate relevant authorities. Sometimes, a diagram can help the researcher in conducting and documenting an efficient literature search. The researcher also can review a list of keywords identified from the statement of the problem for relevant citations, cross-references to other helpful terms (whether broader, narrower, or related terms) and examine these additional terms for potential citations. 5. To determine accounting alternatives one should brainstorm the alternatives and verify their reasonableness. It is often helpful to consult colleagues within the firm, particularly those with more professional experience. 6. The purpose of a research memorandum is to document and communicate the research and conclusions in a concise and clear way with all supporting reasoning. 7. The researcher should document the research process with the following information: a) A statement of the problem and relevant facts. b) References to legal and/or authoritative literature used, along with a brief explanation of the relevant parts of the law or authorities. c) A description of alternative procedures considered and the authoritative support for each alternative. 65 © Weirich, Pearson, and Churyk

d) An explanation of why why the recommended principle or procedure was selected and other alternatives were not selected. 8. Some basic ways of remaining current with the authoritative literature are developing a checklist, preparing some summaries of new pronouncements, reading of periodicals, reviewing accounting newsletters, and absorbing news information on relevant websites. 9. Complexities in international practice raise more questions about whether laws are enforced and professional standards are similarly applied. 10. Skills needed for the CPA Exam include knowledge, application, and analysis skills, as well as communication skills and technological skills. Answers to Exercises 1. Reg. S-K item 306 (17 CFR 229.306) explains that the audit committee must state whether the audit committee (1) has reviewed and discussed the audited financial statements with management; (2) has discussed with the independent auditors the required matters (update the reg. to AS 1301 – communications with audit committees); (3) has received the written disclosures and the letter from the independent accountants and has discussed with the independent accountant the independent accountant's independence; and (4) recommended to the Board of Directors to include the audited financial statements in the company's Annual Report on Form 10-K. See SEC Rel. 34-42266 (2000). 2. SEC Accounting and Auditing Enforcement Release No. 3029 (Aug. 4, 2009) discussed charging General Electric with accounting fraud. 3. A tax treaty exists between the United States and Japan with respect to taxes on income. The treaty was signed in 1971 and was modified in 2003. 4. FASB ASC 280-10-05-3 requires using a “management approach [to segment reporting] … based on the way that management organizes the segments within the public entity for making operating decisions and assessing performance. Segment reporting under international accounting is under IFRS 8 (a summary is provided at www.iasplus.com/en/standards/ifrs/ifrs8). 5. Australia has the Australian Accounting Standards Board, a government agency for setting accounting standards. The Australian Securities and Investments Commission (ASIC) provides supervisory oversight of auditors and public accounting firms.The Australian Taxation Office administers the country’s tax system. 6. FASB’s disclosure project is intended to make financial statement disclosures more effective, coordinated, and less redundant. The goal is to communicate the information that is most important to users of each entitys financial statements. As of mid-2017, the project is focused on fair value measurement, defined benefit plans, income taxes, inventory, and interim reporting. EXERCISES on GE © Weirich, Pearson, and Churyk

7. Students describe the history of GE’s insurance business. They provide at least two reliable sources with proper citations. 8. Three significant differences between GAAP and SAP (statutory accounting principles) are (1) target group; (2) main objective; and (3) emphasis on the balance sheet. Target Group difference: While GAAP was developed with investors and creditors in mind, SAP was developed with regulators and insurance policyholders in mind. The three core concepts of SAP are conservatism, consistency, and recognition. Conservatism is described as protecting policyholders. (NAIC, 2014). Main objective: While GAAP seeks to provide financial statement users with decision-useful information to assess financial performance, SAP seeks to protect policyholders by ensuring that the financial condition of insurance companies is regulated. Solvency regulation for SAP requires a statutory surplus is required (assets exceeding liabilities) to demonstrate sufficient reserves to cover issued policies. (NAIC, 2019). Balance Sheet emphasis: While GAAP focuses more on the income statement, SAP focuses more on the balance sheet. This is because the financial condition of an insurer is usually examined at a point in time rather than over time, and solvency is determined by analyzing the balance sheet SAP, the timing of revenue and expense recognition is “mismatched” because of the over-riding concept of conservatism. National Association of Insurance Commissioners (NAIC). (2019). Statutory Accounting Principles. Retrieved from https://content.naic.org/cipr_topics/topic_statutory_accounting_principles.htm National Association of Insurance Commissioners (NAIC). (2014). Financial Analysis Handbook – 2013 Annual / 2014 Quarterly. Retrieved from https://www.naic.org/prod_serv/FAH-ZU-14.pdf National Association of Insurance Commissioners (NAIC). (2007). Health Reserves Guidance Manual. Retrieved from https://www.naic.org/documents/prod_serv_supplementary_hrg_op.pdf 9. Students explain how reserves are calculated for a health insurance business. For example, the three main types of reserves that are calculated for health insurance businesses are claim, contract, and premium deficiency. Claim reserves are “a measurement of a reporting entity’s contractual obligation to pay benefits, as of a specified date” (NAIC, 2007). Claim reserves should be created when a future obligation to pay a claim is incurred. The case reserve method calculation can be done by subtracting the paid claim amount from the eventual claim amount, using historical trends © Weirich, Pearson, and Churyk

of similar claims, or using an estimate developed by a claim examiner. This method is more practical for smaller lines of business. Contract reserves are created when part of the premiums received for policies will be directed toward paying for claim costs in future years. This is usually the case for LTC insurance. Actuarial techniques and assumptions are employed to determine the reserve amount, which is based on the “net premium value”. This value is determined by calculating the amount of the present value of future claim obligations that exceeds the present value of future premiums (NAIC, 2014). Premium deficiency reserves are required when the current reserve amount is not enough to cover the future claim obligations. Variations exist between states on this calculation in several areas including the time period to use, contract assumptions, the level of claim reserves available in the time period being considered, and what constitutes a “block of business” that the reserve needs to be calculated for (NAIC, 2014). 10. Students find and summarize a recent analyst report on GE. For example, an analyst report acquired from NetAdvantage in early 2020 is Scarola, Colin. “Stock Report | General Electric Company.” CFRA, S&P Global Market Intelligence. February 22, 2020. 11. In 2019, GE sold GE’s biopharma business for over $20 billion. Additionally, GE sought to save over $5 billion from cutting pension benefits. GE also cut its dividend payments to shareholders. 12. Students summarize the most important information on GE’s health care business for a potential investor to know in 2019. Although GE stopped selling new LTC policies after 2008, the company still had 274,000 policies in force. To cover the expected insurance claims (i.e., liabilities) associated with these policies, GE expected to contribute about $14.5 billion additional capital over the next seven years to their long-term care statutory insurance claim reserves. In a 2019 report by accounting fraud investigator Harry Markopolos alleged GE was under-reserved by $29 billion. 13. The MD&A section of GE’s 2018 10-K provides summary information about the financial performance of its operating segments. All eight of GE’s operating segments were profitable except for the “Power” segment. GE’s Capital segment has continuously incurred substantial losses since 2016. 14. In late 2017, GE announced its intention to sell over $20 billion of assets over the next year or two. In 2018, GE sold a healthcare technology unit to Veritas Capital for over $1 billion in cash. In 2019, GE sold its biopharma business to Danaher Corp for over $20 billion dollars. Additionally, it also sold approximately $3 billion shares in oilfield services provider Baker Hughes. GE also sold its aircraft-financing business to Apollo Global Management LLC for over $3 billion. The sales are expected to stabilize the balance sheet in the long term by reducing leverage, paying down more debt than previously anticipated, and strengthening the balance sheet. © Weirich, Pearson, and Churyk

15. GE’s effective consolidated income tax rate for 2018 was (2.9)%, according to its 2018 10-K. GE explained that the change in tax rates from 2017 to 2018 was due to the passage of the Tax Cuts Act in 2017. 16. In 2019, GE stock performed well. GE’s stock performance is explained by GE’s actions to cut costs and sell assets, as well as the rising stock market that year. In March 2020, the Covid Pandemic led to a steep decline in the stock market and GE performance. KNOWLEDGE BUSTERS 1. Issues: 1. Whether financial statement disclosures of two segments are needed when one industry has two businesses with different financial trends in order to avoid misleading financial statement users under IFRS 8? 2. Whether an annual write-down of goodwill and its impairment is necessary under IAS 36 for a foreign company’s American subsidiary’s acquisition of a company with continued losses? Conclusions: 1. A write-down of goodwill of an acquired entity with continuous losses is required under both U.S. GAAP and IFRS. 2. The financial statement disclosure of only two industries when one industry has two businesses with different financial trends is misleading and needs revising. Authorities on segment disclosure: Segment disclosure reporting is required of public companies in their annual financial statements. IFRS 8.2. The objective of segment disclosure is to provide users of financial statements with information about the business’s different types of business activities and various economic environments. IFRS 8.1. Operating segments earn revenues and expenses, have results regularly reviewed by management, and have discrete types of financial information. IFRS 8.5. Recognize an operating segment if the revenue is 10 percent or more of the combined revenues or assets are 10 percent or more of the combined assets. IFRS 8.13. Disclosure of segment information must include nonfinancial general information such as how the entity identified its operating segments and the types of products and services from which each reportable segment derives its revenues. IFRS 8.22. Required financial information includes the reported segment profit or loss, segment assets, the basis of measurement. IFRS 8.21. Authorities on goodwill: Goodwill is an intangible asset that often arises from a business combination. It is a separate line item in the statement of financial position. Goodwill is not amortizable because it has an indefinite useful life. © Weirich, Pearson, and Churyk

Potential impairment of goodwill in each reporting unit requires annual testing. IAS 36.10. The impairment is generally measured by comparing the fair value to the recoverable amount. IAS 36.105. Impairment losses are first allocated to goodwill and then pro rata to other assets. They are recognized in the income statement. IAS 36.104. The segment from which the business arose must disclose the loss. IAS 36.129. Application of Authorities: Sony should report separate information about each operating segment that met any of the 10 percent quantitative thresholds. IFRS 8.13. Sony should disclose segmental information for Sony Music and Sony Pictures, providing information about their reported segment profit or loss. IFRS 8.21. Other information for Sony to report includes the types of products from which each reportable segment derives its revenues, any reconciliations needed of the total segment revenues, and interim period information. IFRS 8.22. Because the amount assigned to goodwill acquired was significant in relation to the total cost of acquiring Sony Pictures, Sony must disclose the following information for goodwill in the notes to Sony Entertainment’s financial statements: (1) the total amount of goodwill and the expected amount deductible for tax purposes and (2) the amount of goodwill by reportable segment. IAS 36.104. 2. List of Relevant Authorities on Independence: 17 CFR §210.2-01 (Reg. S-X, Rule 2-01) PCAOB AS 1005.03 (AU-C §§ 220.13) and AS 2101 (AU-C § 311) SEC’s AAER-2859 (Aug. 5, 2008) AICPA Code of Professional Conduct, ET sec. 1.200.001, 1.265.020, and 0.400.26 Issue: Is the independence of an audit partner of a CPA firm impaired if the partner invests in a side business with a public company audit client under 17 CFR §210.2-01 (Reg. S-X) ? Conclusion: An auditor’s independence is impaired if either the auditor invests in a side business with an audit client since the audit client has the ability to exercise significant influence over the side business or the auditor has a material joint closely held investment with an audit client. Reasoning: The SEC will not recognize an auditor as independent if the auditor cannot exercise objective and impartial judgment during an engagement. A qualified auditor must have independence from their audit clients in both fact and appearance. An auditor’s independence is considered impaired if the auditor has a material investment in an entity over which the audit client has the ability to exercise significant influence. 17 CFR (Code of Federal Regulations) §210.201. © Weirich, Pearson, and Churyk

An accounting firm’s independence includes its mental attitude and any covered person under PCAOB, AS § 1005.01 (cf. AICPA, AU-C §220.01). The auditor must be free from any obligation to or interest in the client, its management, or its owners so that the general public recognizes the auditor as independent. PCAOB, AS § 1005.03 (cf. AICPA, AU-C § 220.13). Auditor includes all engagement team members. PCAOB, AS § 2101, FN 2 (AICPA, AU-C § 300.05). PCAOB Rule 3520 states, “a registered public accounting firm and its associated persons must be independent of the firm's audit client throughout the audit and professional engagement period.” SEC Accounting and Auditing Enforcement Release #2859 concerned independenceimpairing business relationships. Ernst & Young (E&Y) was ordered to pay disgorgement of $2.4 million plus interest due to an independence-impairing business relationship between E&Y and a member of the board of directors for three E&Y audit clients. They collaborated in creating audio CDs called “The Ernst & Young Thought Leaders Series.” The SEC ordered two E&Y partners to cease and desist. The AICPA’s Code of Professional Conduct (Code) requires independence in the performance of professional services provided by its members. Code ET sec. 1.200.001. An auditor’s independence is considered impaired if the auditor has a material joint closely held investment with the audit client. Code ET sec. 1.265.020. A “joint closely held investment” is defined as “an investment in an entity or a property by the member and client (or the client’s officers or directors or any owner who has the ability to exercise significant influence over the client) that enables them to control the entity or property.” Code ET sec. 0.400.26. Similarly, according to AICPA Code ET Section 55 of the AICPA Professional Code of Conduct, auditors are required to “maintain objectivity and be free of conflicts of interest in discharging professional responsibilities.” Application of Relevant Authorities: If the audit partner of a CPA firm holds an investment in a computer side business with a member of the board of directors of a public company of an audit client, his or her independence is considered impaired. In this situation, the audit client has significant influence over the investment, therefore, the auditor is not independent. 17 CFR §210.2-01 (Reg. S-X, Rule 2-01). Even if the audit partner in question does not engage in direct audit services, if the firm has only two audit partners, then, 17 CFR §210.2-01(f)(11) [Reg. S-X, Rule 2-01(f)(11)] classifies the second partner as a covered person, as he may perform second partner review. A similar situation exists if the lead partner of the audit client practices in the same office as the audit partner. Therefore, the auditor in question may be a covered person. PCAOB, AS § 2101.

In addition, as a covered person the audit partner has a direct business relationship with client’s director, it indicates that this direct business relationship impairs the independence of an auditor with respect to the audit client in pursuant to 17 CFR §210.2-01 [Reg. S-X, Rule 2-01(c)(3)]. An auditor must not have any obligation to or interest in its owners (including directors) so that the general public recognizes the auditor as independent. Because the audit partner has a business interest with the director of the audit client, who has the power to influence the audit client, the general public may perceive that this business relationship is not independent. PCAOB, AS § 1005.03. The audit partner and the member of board of director’s business relationship is similar to the business relationship described in AAER #2859. If the SEC finds that the joint investment in the computer side business is independence-impairing, then the audit partner must cease and desist from causing any future securities violations and lose the right to practice as an accountant before the SEC. It is also likely that the CPA firm will have to pay disgorgement and interest. Investing in a business with a board member of an audit client causes the two parties to have a joint closely held investment. AICPA Code ET sec. 1.265.020. A joint closely held investment between the audit partner and the board member of the audit client impairs the audit firm’s independence since the audit partner’s CPA Firm is performing professional services for the board member’s company. The investment in the computer business, a material joint closely held investment with the audit client, also impairs an auditor’s independence. As both the audit partner and the director invest in the computer business, they control the business when they engage in a joint closely held investment. AICPA Code ET sec. 0.400.26. This impairs the independence of the accounting firm as the covered member and the director held business and financial interest in the computer business. 3. Facts: Midwest Realty classified its lease commitments as operating leases. The lease agreement was standard and not cancelable. The agreement required the lessee to make the monthly payments over 10 years and offered the lessee a five- year renewable option. Midwest Realty was bound by the lease agreements on all the offices. Midwest Realty, Inc. has the obligation to make the lease payments on the vacant offices; Midwest Inc. will incur a loss because it has not generated any revenue on the remaining six vacant offices.The loss is contingent upon whether Midwest company can sublease the remaining six offices to others. Midwest’s loss is reasonably estimated and it is possible. Issue: © Weirich, Pearson, and Churyk

Whether lease payments for vacant operating leases are recognized as a loss in the current period or recorded as an expense in the year paid under ASC 842-20-25-8? Conclusion: Since Midwest Realty is confident that the remaining payment for the six leases will be made, under ASC 842-20-25-8, the remaining cost of an operating lease for which the right-of-use asset has not been impaired consists of the following: (a) the total lease payments (including those paid and those not yet paid), reflecting any adjustment to that total amount ; (b) the total initial direct costs attributable to the lease; (c) minus the periodic lease cost recognized in prior periods. There is no need to record a loss. Instead, Midwest Realty can continue recording the lease payments an expenses. Authorities (Keyword/ Citation Diagram): Leases Operating leases ASC 840-20-50-1 ACS 842-20-35-4 Property Impairment Lessees are required to recognize a right-of-use asset and a lease liability for all leases, including operating leases. ASC 842-20-50. With few exceptions, capitalize all leases. Comment: many real estate transactions that are not a sale under ASC 840 now qualify for sale and leaseback accounting under ASC 842. Because Southern Realty is not making any changes to their lease payments as of this accounting period; they should not remeasure the lease liability and should not adjust the right-of-use asset that is their lease commitments on the six vacant properties. ASC 842-20-50. Communicate the Results: To: Calvin Brain, Controller From: XYZ, CPAs Date: XXX RE: Loss from Rental Agreements At your request, we examined the potential impact of subleasing six offices of Midwest Realty, Inc. (Midwest) to others. The specific issue concerns whether Midwest can currently recognize a loss from the rental commitments on the vacant offices. Midwest has an enforceable obligation to make the lease payments on the vacant offices, and has not generated any revenues from them. If the offices are subleased out, the losses are reasonably estimated. The authoritative literature supports that the accrual of a loss for the vacant lease offices and the amount of the loss will be the minimum estimate of the potential loss. 4. Step 1 -- Identify the Problems © Weirich, Pearson, and Churyk

(1) Preliminary problem identification: Were all related party transactions disclosed? Whether related party transactions created internal control issues? (2) Problem analysis: Bubba Smith, the inventor who founded XCO is still the majority shareholder. Bubba Smith and his two daughters comprise the majority of senior management for XCO, a public company. Bubba Smith and his two daughters are on a seven member board of directors. Interest is not specified in the accounts receivable from Bubba and his two daughters. (3) Redefined statement of the problems: Whether management has performed a proper assessment of the required disclosure of related party transactions under ASC 850-10? Whether management control over related parties was sufficient for internal control purposes under PCAOB AS 2201? Step 2—Authoritative Literature (1) Potential keywords for a search: Related Parties, Internal Control, and Executive Compensation (2) Locate and review the authoritative sources and literature Keyword/ Citation Diagram Keyword Reference Descriptions Citation Related Party Disclosures ASC 850-10 Related Party Disclosures IAS 24 Related Parties PCAOB AS 2410 Audit of Internal Control Over Financial Reporting PCAOB AS 2201 Executive Compensation Reg. S-K, items 402 and 404 Debt instrument treated as stock Reg. §1.385-3 A company must disclose related party transactions. ASC 850-10-05-1. Related parties include immediate family members and key management personnel are related to the entity. ASC 85010-05-3. Auditors must consider the risk of possible undisclosed related party relationships and transactions and as part of understanding internal control over financial reporting, auditor should understand company’s process for identifying related parties. PCAOB AS 2410.04. Auditors must ask the audit committee and management (including the internal auditor, in-house legal counsel, chief compliance officer, and human resources director) about their knowledge of related parties and related party transactions. PCAOB AS 2410. Disclosure of compensation arrangements is different in U.S. GAAP and IFRS standards. U.S. GAAP does not require disclosure in the notes to the financial statements of "compensation © Weirich, Pearson, and Churyk

arrangements” and similar items. ASC 850-10-50-1 Whereas, IAS 24, Related Party Disclosures, requires disclosure in the notes to the financial statements of management compensation. For U.S tax purposes, a taxpayer who fails to collect proper documentation, must treat the related-party debt as equity in its entirety, without further consideration of the instrument’s characteristics. Even if the proper documentation exists, however, does not guarantee debt treatment because the existing facts and circumstances test or the recharacterization rule may still re-characterize the documented debt as equity. Reg. §1.385-3. Remaining Steps Bubba Smith and his two daughters are related parties to XCO. ASC 850-10-05-3. XCO should have disclosed the accounts receivable and any interest paid on the notes. ASC 850-10-50-1. Any interest might qualify as compensation that XCO must disclose. The lack of proper documentation on these related party debts should lead the IRS to take the position that the accounts receivables are equity. Reg. §1.385-3. The auditor should have considered the risk of possible undisclosed related party relationships and transactions and as part of understanding internal control over financial reporting. PCAOB AS 2410.04.

CHAPTER 10 Forensic Accounting Research Discussion Questions 1. Forensic accounting standards are issued by the Forensic & Valuation services Executive committee. 2. Four examples of fraud engagements could include: a. Locating evidence of vendor kickbacks. b. Locating hidden assets. c. Providing assistance to the audit team in investigating a potential fraud. d. Consulting as to implementation of fraud prevention, deterrence, and detection programs. 3. Forensic accounting, also commonly referred to as “litigation support,” generally means the use of accounting in a court of law. 4. Simply defined, fraud is an intentional deception. Black’s Law Dictionary defines fraud as: “A generic term, embracing all multifarious means which human ingenuity can devise, and which are resorted to by one individual to get advantage over another by false suggestions or by suppression of truth, it includes all surprise, trickery, cunning, dissembling, and any unfair way by which another is cheated.” © Weirich, Pearson, and Churyk

Four examples would include; Mangement fraud, Employee fraud, vendor fraud, and insurance fraud. 5. Three components of the fraud triangle include: a. Perceived pressure. b. Perceived opportunity. c. Rationalization. Knowledge of the three elements provides the practitioner with an understanding of the different approaches that may be taken in the investigation. 6.A red flag, or risk factor, is a characteristic that provides a motivation or opportunity for fraud to occur, or an indication that fraud may have occurred. 7. Management fraud, or fraudulent financial reporting, refers to actions whereby management attempts to inflate reported earnings or other assets in order to deceive outsiders. Employee fraud, or misappropriation of assets, refers to illegal acts perpetrated by employees of a company. 8. Risk factors associated with management fraud include: a. b. c.

Management’s characteristics and influence over the control environment. Industry conditions. Operating characteristics and financial stability.

Risk factors associated with employee fraud include: a. Susceptibility of assets to misappropriation. b. Controls. 9. The basic steps of a fraud examination include: a. Identify the issue/ plan the investigation. b. Gather the evidence/the investigation phase. c. Evaluate the evidence. d. Report findings to management/ legal counsel. 10. Two examples of a business/due diligence investigation include: a. Verifying information about an entity before entering into a joint venture. b. A background check on new corporate officer. 11. Three computerized tools utilized by the fraud examiner include: a. Data mining software. b. Public databases. c. Internet.

12. Data mining software, an outgrowth of expert systems, models a database for the purpose of determining patterns and relationships among the data. Whereas public databases are various public accessible databases that contain information of different types such as lawsuits, bankruptcies, tax liens, and property transactions. Many of these databases are useful in a fraud examination/investigation. Exercises 1. Answers will vary depending upon the type of search conducted. 2. The characteristics of identity theft includes: a) Someone wrongfully obrtaining, b) another person’s personal data, c) by deception, d) for economic gain. Two examples to commit identify theft inclue: a) “Sholder surfing” watching you form a nearly location as you punch in your credit card number. b) “Dumpster diving” searching though you dumpster (garbage) for personal data. 3. Answers will vary depending upon the name of the company researched. 4. Answers will vary depending the various types of fraud identified. 5. Answers will vary as the student explains the factors in the Madoff Ponzi scheme. 6. Answer will vary depending on the Enforcement Release accessed. 7. a) Three qualifications for becoming a CFE in the U.S. include: Be an associate member; meet minimum academic and professional requirements; and be of high moral character. b) Three items in the ACFE’s library include: the EthicsLine, FraudInfo Newsletter, and Fraud Prevention Resources. 8. Answers will vary depending on site selected. Knowledge Busters 1. According to Statement on Standards for Forensic Services No. 1, Section 2, states that this statement does not apply to a member who performs forensic services as part of an attest (audit) engagement since including forensic procedures in an audit are not considered a forensic engagement.

2. According to Statement on Standards for Forensic Services No. 1, Section 9, states that a member engaged as an expert witness in a litigation engagement may not provide opinions pursuant to a contingent fee arrangement.

Student Cases with Solutions to accompany Accounting & Auditing Research: Tools & Strategies NOTE: In addition to the text’s exercises and problems, this file presents several short cases for students to access the authoritative literature or other relevant sources to address a particular issue. After each case is presented, the solution appears in color.

Topical Index of Cases for Students INTERMEDIATE ACCOUNTING Cases Case 1: Reporting acquisition and repayment transactions in the Statement of Cash Flows Case 2: Recording a forfeited payment Case 3: Revenue and expense recognition associated extended warranties Case 4: Accounting for “due on demand” note payable Case 5: Purchase of a controlling interest with a greenmail premium Case 6: Revenue recognition in the construction industry Case 7: Accrual and measurement of interest payments Case 8: Recognition of an asset transfer when title has not yet been received Case 9: Capitalization of interest and property taxes on a construction project Case 10: Deferred compensation and life insurance policy recognition Case 11: Reporting earnings per share balances for subsidiary companies Case 12: Deferment of lease payments Case 13: Disclosure of prior period adjustments in the statement of cash flows Case 14: Measurement and recording of payments for sick days Case 15: Comparative cash flow statements Case 16: Social security benefits as assets Case 17: Recording a stock dividend as a stock split Case 18: Gain on a nonmonetary exchange ADVANCED ACCOUNTING Cases Case 1: Reporting of letters of guarantee notes payable Case 2: Factors affecting minority interest control Case 3: Profits and losses in the investment in foreign currencies Case 4: Amortization of foreign currency transaction gains and losses

Case 5: Reflection of expensed computer programs on consolidated financial statements Case 6: Classification of a proposed financial instrument as a hedge Case 7: Disclosure of proceeds and payments from cash flow hedging activities Case 8: Proper valuation of a “guaranteed” business combination GOVERNMENT AND NOT-FOR-PROFIT ACCOUNTING Cases Case 1: Recognition restricted or non-restricted assets that are promised but not received Case 2: Affect of “permanent” reductions in the value of “promised” assets Case 3: Disclosure and classification on a company’s Statement of Cash Flows Case 4: Disclosure of potential interest rate swings and commercial paper by a city Case 5: Capital and operating leases between related parties Case 6: Elimination of profits on intercompany sales Case 7: Accrual of vacation time of unestablished employees AUDITING Cases Case 1: Communication with predecessor auditors Case 2: Interim Financial Statements Case 3: Outside services for inventory counts Case 4: Service Organizations Case 5: Liquidation Basis of Accounting Case 6: Re-issuance of financial statements Case 7: Qualified report and account classification Case 8: Reporting on financial statements including accompanying information Case 9: Accounting for assets held for sale TAX Problems and Cases Tax Problems (students look up various sources) Tax Case 1: When should gross income be accrued? (Basic) Tax Case 2: Stock Purchased by an Employee (Intermediate) Tax Case 3: Business Deductions (Intermediate) Tax Case 4: Deduction for Foreign Travel (Intermediate) Tax Case 5: Income Sourcing – International Tax (Advanced) Tax Case 6: Contingent Liabilities in a Tax-Free Transfer (Advanced) MISC. RESEARCH Cases Case 1. Apple Proxy Case

Case 2. Fifth Largest Fortune 500 Company Case 3. Finding an Article on Corporate Governance Challenges Case 4. Automotive Industry and Tesla Case 5. Dodd-Frank and Corporate Governance Reforms ================================= INTERMEDIATE ACCOUNTING Cases Case 1: Mead Motors purchases an automobile for its new car inventory from Generous Motors, which finances this transaction through its financial subsidiary, Generous Motors Credit Company (GMCC). Mead pays no funds to Generous Motors or GMCC until it sells the automobile. Mead must then repay the balance of the loan plus interest to GMCC. How should Mead report the acquisition and repayment transactions in its Statement of Cash Flows? Case 1 Solution: Problem Identification: How should a company report, if at all, cash and non-cash transactions owed to an entity’s financial subsidiary? Keywords: Cash flows; financ* subsidiaries; operating income. Conclusion: Per ASC 230-10-50-5, Mead should exclude transactions that involve no cash payments or receipts. However, per 230-10-45-17, it should record cash payments to GMCC for repayments of principle (and interest thereon) due to suppliers or their subsidiaries as operating cash (out) flows. Case 2: Narda Corporation agreed to sell all of its capital stock to Effie Corporation for three monthly payments of $200,000. After Effie made the first required payment, it ceased making other payments. The stock subscription agreement states that Effie, thus, forfeits its payments and is entitled to no other future consideration. How should Narda record the $200,000 forfeited payment? Case 2 Solution: Problem Identification: How should a company account for forfeited stock subscriptions? Moreover, do such payments constitute operating or other income? Keywords: Stock Subscription; operating income; additional paid-in capital; owners’ equity; net income; operating income. Conclusion: Per 505-10-25-2, capital transactions that incur no future corporate obligations should be excluded from calculating net or operating income. Thus, the

forfeited cash should become part of additional paid-in capital about any required disclosures for such transactions. Case 3: Lowland Appliance Stores offers customers purchasing its appliances separately priced (extended) warranties. Lowland services these extended warranties. Its customers can receive no refunds for not using these warranties, and, of course, Lowland must honor these contracts—regardless of any future costs in doing so. It also “tracks” the profits and losses these types of warranties generate by appliance category—in order to help maintain a competitive price and costing structures. How should Lowland recognize the revenues and expenses of such extended warranties? Case 3 Solution: Problem Identification: How should a company recognize revenues and expenses associated with separately priced, extended warranties? Such contracts generally are (potential) loss contingencies. Keywords: Loss contingency; non-refundable Conclusion: Per 605-20-25-3, such extended warranties constitute “product maintenance contracts,” where Lowland agrees to perform certain agreed-upon services to these products for a specific time period. As such, it should recognize revenue on a straightline basis over the contract period, unless sufficient historical evidence indicates a superior alternative method of doing so. Lowland should also “match” any related costs in the same time period as the associated revenues. Moreover, Lowland should recognize a loss on such contracts that have an expected net cumulative loss over the remaining contract periods. Further information on this topic also appears in 450-20-05-3 and 46010-25-5; FASB Concepts Statement No. 5, pars. 83 and 84; and FASB Concepts Statement No. 6, par.197. Note: ASU 2014-09 supersedes solution 2018 – transition 606-10-65-1 Case 4: As of January 1, the Lohse Company owes the First Arbor Bank $350,000 which is due on December 31. Since Lohse seems unable to repay the note, the bank agreed that Lohse can “settle” this balance by agreeing to make four, annual installments on each of the next four years, provided that it adds a “due on demand” clause to the note. Specifically, the lender will “do its best” not to call the note “provided that no adverse significant shift in operations occurs." However, First Arbor Bank has the sole discretion to ascertain if these adverse conditions arose, and then to call the note due immediately. How should Lohse account for this above situation? Case 4 Solution: Problem Identification: How should a company account for notes payable containing a “due on demand clause” and both a short- and long-term schedule of payments due?

Keywords: Due on Demand; Notes Payable; Classification of Obligations; Installments. Conclusion: Per 470-10-45-9 and 10, notes that are “due on demand” should be considered as a current liability. However, if Lohse expected to refinance this note on a long-term basis (and a reasonable basis to demonstrate such refinancing existed), it would then reclassify the note as a long-term liability. Case 5: On January 1, the Chin Company agreed to purchase all of Jack Jackson’s interest in the company for $30 per share. Jack, who owns 15%—and a controlling interest of Chin—previously threatened to engage in a hostile takeover attempt of Chin. For the last two years, Chin’s stock traded from about $12-23—reaching $23 on December 31 of last year. How should Chin record this transaction? Case 5 Solution: Problem Identification: Do “greenmail” payments constitute treasury stock transactions? Should Chin assign any “premium” to acquiring Jackson’s controlling interest in the Company, and, if so, how much should it assign to the “greenmail” premium? Keywords: Treasury Stock; Greenmail; Capital Stock; Capital Transactions. Conclusion: Per 505-30-25-3, companies often pay “premiums” (and can even receive “discounts”) to acquire large (potentially controlling) blocks of stocks in the open market. An entity offering a higher purchase price than the open market price should allocate some portion to the unstated rights or privileges and give separate accounting recognition. Case 6: Bo Broker Company charges a fee for bringing together the Acme Construction Company and the First Bank Company. The parties agree that Bo earns her fee when Acme and First “agree” to the terms of the construction mortgage. However, Bo can receive four types of documents to “settle” this matter: (a) a non-interest bearing, unsecured “negotiable” note in payment of the fees earned, which is payable over the time period of the related construction mortgage; (b) a non-negotiable note payable over the same time period as in case (a); (c) a commitment letter, not contingent upon the “future event” of the borrower receiving certain construction draws; or (d) a commitment letter, where the fees would be paid only if the borrower actually receives the draws for the construction from the lender. Bo asks the accountant when to recognize revenues under each of these four scenarios. Case 6 Solution: Problem Identification: What circumstances must exist for an entity to recognize income—especially regarding the issue of when it can “control” the events leading to recognizing revenue?

Keywords: Revenue recognition; construction industry; commitment letter; contingency. Conclusion: Per 450-20-25-3 Bo should recognize the revenues for each of the four cases as follows: (a) for the negotiable note, recognize income at the earlier of when services are performed and billed or when receiving consideration for the proceeds of the note; (b) same as “(a),” except that early consideration is not feasible; (c) for the commitment letter, recognize revenues upon receipt of this “outside” commitment letter which shows the completion of the earnings process; and (d) defer recognizing revenues until both outside parties fulfill their contract obligations. Case 7: James Olds buys a four-year, $1,000,000 certificate of deposit from the Second National Bank. James will receive 5% interest in year 1; 5.5% in year 2; 6% in year three; and 6.5% interest in year 4. If James “redeems” this certificate before the maturity date, he would receive a cumulative 4.5% annual rate of interest of 4.5%. The Bank has ascertained that less than one percent of its depositors redeem their certificates before the maturity date. The bank asks its accountant how to accrue and measure such interest payment obligations. Case 7 Solution: Problem Identification: Should the Bank recognize the future interest costs by: (1) accruing interest @ 5% for the first year, 5.5% for the second year, 6% for the third year, and 6.5% for the third year, plus appropriate compounding factors—and debit interest expense and credit interest payable for these bonds? Or, instead, should the Bank determine the total interest that James is slated to receive at the end of the term of the bond, and accrue a pro rata share of this amount for each month of the four-year term of the bond? Keywords: Bond amortization and discount; contingent liability; interest expense. Conclusion: Per 450-20-25-1 and 3, since only a remote possibility of early withdrawals exists, the Bank should use the above, monthly pro rata approach to recognize the interest due to James. Case 8: On January 1, year 1, Melvin Corporation promises to “unconditionally” transfer a building that cost $100,000 (appraised recently at $300,000) to the Vivian Company on January 1, year 2 for a boat she bought for $250,000. As of December 31, year 2, Melvin still has not transferred title to the building, although it received title to the boat. How should Vivian and Melvin record these transactions? Case 8 Solution: Problem Identification: At what value should Vivian and Melvin recognize like and/or non-like kind exchanges? Should the parties recognize this transaction before Vivian receives title to the building?

Keywords: Like-kind exchanges, nonmonetary transactions; barter transactions; contributions recognition; revenue recognition. Conclusion: Per the provisions of 845-10-30-1, for “different” types of assets exchanged, both parties should recognize the acquired assets at their fair market value(s). Since Vivian’s transaction seem more recent and objective than Melvin’s, the $250,000 value seems more appropriate. 958-605-25-8, a donee receiving an unconditional promise to receive an asset should recognize it as a receivable (until it is received). Thus, Vivian should recognize the $250,000 receivable, unless reasonable, contrary evidence arises that she should recognize some “allowance for uncollectibles” for the possibility of not receiving it. Case 9: Herb Construction Company is building a hotel for speculative purposes. That is, the Company has not yet found a buyer for the hotel, but expects to do so within a few months. Herb, who expects to spend about another two years to complete construction of the hotel, asks his accountant if interest and property taxes associated with this construction site should be capitalized or expensed. At what rate of interest should Herb use, if any, to capitalize any interest costs? Case 9 Solution: Problem Identification: Should property taxes and interest during construction of a hotel be capitalized or expensed? What rate of interest should be used to capitalize any interest costs? Does the fact that no present buyer for the project does not exists affects he results derived? Keywords: Property taxes; interest: capitalization; construction. Conclusion: Per 720-30-45-3, property taxes paid for property under development for use or sale can be capitalized but is usually treated as a period expense. Assets constructed for sale are considered qualifying assets for interest capitalization per 83520-15-5. Per 835-20-30-3 through 30-4, Herb should use a rate of interest that can be “directly” associated with the project under construction. Or a weighted average of rates applicable to other debt that Herb has incurred (even if it were associated with other projects). Case 10: In order to help induce Jill Gregory to remain as president of the Reed Company, in 2000 it promises to pay her (or her estate) $200,000 per year for the next 15 years—even if she leaves the company or dies. Reed wants to properly record this transaction as deferred compensation, but is unsure of how many years it should use to amortize this cost. Moreover, Reed also purchased a “whole life” life insurance policy for Jill, naming the company as the sole beneficiary. Reed wants to ascertain if it can offset the cash surrender value of the policy against the above deferred compensation liability. Case 10 Solution:

Problem Identification: How many years should be used to amortize deferred compensation? Can a company offset the cash surrender value of the policy against deferred compensation liability? Keywords: Deferred compensation; purchase life insurance. Conclusion: Per the provisions of 710-10-25-9, the future payments should be amortized over the 15 remaining years of the contract. Moreover, per 325-30-35-1 through 35-6, Reed should report changes in the cash surrender values of life insurance policies as offsets to insurance expense costs—not as reductions in deferred compensation. Case 11: The Bootsie Holding Company has sales exceeding $10 billion and each of its three, wholly-owned subsidiaries has sales exceeding $2 billion. Three years ago, the subsidiaries had “complex” capital structures—until Bootsie acquired them. Bootsie’s annual report shows its consolidated income and individual income statement accounts of each subsidiary company. Should Bootsie also report separate earnings-per-share balances for the three subsidiary companies? Case 11 Solution: Problem Identification: Should wholly owned subsidiaries report separate earnings per share balances? Keywords: Earnings per share; earnings per share: applicability. Conclusion: Per 260-10-15-2, companies whose securities are traded publicly (or soon expect to do so) should disclose such earnings per share data. However, wholly owned subsidiaries need not do so (since no separate market for their securities exists). Case 12: Leila Company began an operating lease arrangement with Debco Industries, which was slated to begin on January 1, at monthly lease payments of $10,000. However, Debco’s negligence prevented Leila from moving in on time—since it failed to clean up the place adequately enough to earn a Certificate of Occupancy from the township. Thus, on January 1, Leila spent $5,000 for leasehold improvements, which enabled her to obtain the needed Certificate of Occupancy on April 1. In any event, Leila paid Debco all the required $30,000 lease payments and has decided not to pursue legal action for the “un-ready” building. However, can Leila defer the $30,000 January-March lease payments over the remaining 33 months of the lease contract? Case 12 Solution: Problem Identification: Can a lessee defer portions of an operating lease payment for conditions beyond its control? I.e., do the periods of an operating lease begin when the payments are made or when the lessee takes operating control of the asset?

Keywords: Operating lease; leasehold improvement; capitalization of interest (or other) costs Conclusion: 840-20-25-2 states that lessees should consider rent inducements or rent “holidays” as part of the operating term of a lease. i.e., the physical period that rental property is available for use for the lessee serves as a better indicator of the amortization period of the rental contract than any payment period. Next, 840-30-25-3 states that lessees should account for scheduled rate increases over the time that the lessee takes possession of or controls the property. 835-20-15-2 also considers the time needed to get property ready for its “intended use” as the prime criteria to ascertain the capitalization period. Thus, Leila should amortize the $30,000 over the remaining 33 months of the lease. Note: Content will be superseded by ASU 2016-02 for FYE after December 16, 2018. Case 13: After the Julie Company issued its previous years’ financial statements, it noticed that it incorrectly calculated depreciation expense and, thus, disclosed this fact as a prior period adjustment in its current years’ financial statements. (This difference also did not affect any cash balances, since Julie maintained an operating loss for both periods.) However, Julie did not issue comparative financial statements in the current year. Julie now wonders how to disclose this prior period adjustment in its current year’s Statement of Cash Flows. Case 13 Solution: Problem Identification: How should a company disclose prior period adjustments in its Statements of Cash Flows? Keywords: Prior period adjustments; retained earnings; Statement of Cash Flows. Conclusion: Per 250-10-50-9, Julie should disclose the effect of a prior period adjustment (for a single period’s financial statement) as an adjustment in the opening balance in retained earnings—plus make adequate footnote disclosures of the reasons for and effect of the adjustment. Moreover, per 230-10-50-3, Julie should also disclose information about investing and financing activities that did not result in cash receipts for the current period. Thus, Julie should also disclose the differences in the account balances of the two consecutive balance sheets both in the statement of cash flows and in an appropriate footnote. Case 14: The Heather Company’s fiscal year ends on June 30. Its employees (with at least three months of experience) are entitled to 12 paid sick days annually for each calendar year beginning on January 1. An employee not taking his/her earned sick days would receive payment thereon on December 31 of that year. How should Heather record and measure such a liability as of June 30th? Case 14 Solution:

Problem Identification: Should Heather recognize any liability for the above potential contingency, and, if so, how should it measure and record it? Keywords: Contingency; compensated absence; matching concept. Conclusion: Per 710-10-25-1, if : (a) the employees have worked the required time periods to earn the compensated sick pay; (b) these rights are vested; (c) payment of compensation is probable; and (d) the amount can be reasonably estimated, the liability exists. These conclusions follow “reasonable” and “probable” criteria of SFAS No. 5, pars. 5 and 22, which also require measuring the past “history” of employees using these benefits (e.g., also consider employee turnover). In this above, relatively simple example, an employee who used four days of vacation would be “entitled” to eight more—i.e., the balance that Heather must accrue. However, if, the employer plan were based upon an accrual concept, it would pro rate the untaken days for the remainder of year. Case 15: Alex Corporation is planning this year to present comparative income statements but only the current year’s balance sheet. James Johnston, president of Alex Corporation requests your advice as to whether comparative cash flow statements for both the current and prior periods are necessary considering only the current year’s balance sheet is presented. Are there any authoritative pronouncements that address this issue that you could present to Mr. Johnston? Case 15 Solution: Problem Identification: The issue is whether comparative cash flow statements are necessary when comparative income statements are presented, but only a single year balance sheet is also presented. Key Words: comparative statements, cash flow statements Conclusion: 230-10-15-3 states that a business enterprise that reports both financial position and results of operations shall also provide a statement of cash flows for each period for which results of operations are provided. Therefore, comparative cash flow statements need also be presented. Case 16: A new client for your firm is Sam Jones who is preparing personal financial statements for a bank loan. Mr. Jones is attempting to list his social security benefits to be received based on his future life expectancy as an asset on his financial statements. Mr. Jones states that such benefits meet the definition of an asset. Would you agree to allow the social security benefits to be listed as an asset? Case 16: Solution

Problem identification: The issue is whether social security benefits to be received based on one’s future life expectancy should be considered an asset on personal financial statements. Key Words: assets, personal financial statements Conclusion: 274-10-35-11 states that nonforfeitable rights to receive future sums must meet certain criteria to qualify as an asset. One criteria states that the rights must not be contingent on the individual’s life expectancy or the occurrence of a particular event, such as disability or death. Since social security benefits are contingent on one’s life expectancy, such benefits do not qualify to be listed as assets on one’s personal financial statements. Case 17: Albright Inc. has recently issued a 10% stock dividend to its existing stockholders. As a result of the issuance of the stock dividend the market price of the stock declined 25%. Albright has requested your assistance as to treating this stock dividend as a stock split. Would this be acceptable under GAAP? Case 17: Solution Problem identification: The issue for this case is whether a 10% stock dividend that reduces the market price of the stock can be accounted for as a stock split. Key Words: Stock dividends, stock splits Conclusion: 505-20-25-1 through 25-3 state that to treat the 10% stock dividend as a stock split, Albright would need to demonstrate that the additional shares issued is large enough to materially influence the unit market price of the stock. Case 18: Horizons Inc. has agreed to sell an investment in a subsidiary that has been accounted for on the equity method of accounting to a minority stockholder in exchange for the stockholder’s share in Horizons. Since the fair value of the investment exceeds its book value, Horizons CEO is considering recognizing a gain on the exchange. However, the new CFO at Horizons is recommending to the board of directors that the excess from the exchange be accounted as a credit to equity. Horizons turns to you for advice! Case 18: Solution Problem identification: The problem under review in this case is whether a gain on a nonmonetary exchange can be recorded. Key Words: Nonmonetary exchange, nonmonetary asset, or nonreciprocal transfer Conclusion: 845-10-30-1 states that a transfer of a nonmonetary asset is a nonreciprocal transfer and should be recorded at the fair value of the asset transferred, and that a gain or loss should be recognized on the disposition of the asset.

ADVANCED ACCOUNTING Cases Case 1: Rosie Corporation has 70% of the outstanding voting stock of Smith Corporation and 10% of the voting stock of Tommy Corporation. Smith also just spent $10,000 to acquire 20% of Tommy’s voting stock. Smith has issued irrevocable letters of credit to guarantee Tommy’s notes payable. In the current year, Tommy lost $100,000. How should the parties report the above arrangements in its consolidated financial statements? Case 1 Solution: Problem Identification: How should guarantees among related (but not fully owned) parties be disclosed in both their consolidated and separate financial statements? Keywords: Control; consolidated financial statements; related party transactions; gain and loss contingencies. Conclusion: First, Smith’s share of Tommy’s net losses (20% of $100,000 = $20,000) exceeds its cost basis of Tommy ($10,000). Per 450-30-25-1, entities should normally not recognize gain contingencies. Thus, the guarantee should not be recognized in Rosie’s or Tommy’s financial statements—other than through disclosures in the footnotes. Per 810-10-45-21, losses excess, and any further losses, shall be attributed to those interests even if that attribution results in a deficit noncontrolling interest balance.

Case 2: Joe Brock owns 10,000 of the 60,000 outstanding shares of Big Corporation; Leslie Ross own 20,000 shares; Mark Jones and his twin brother Sam each own 5,000 shares; and about 300 other shareholders own the remaining 20,000 shares—with no one other shareholder owning more than 1,000 shares. According to the provisions of SFAS 94, since Leslie owns half of the outstanding shares, he, in general, “controls” Big Corporation and, thus, should consolidate his interest with that of the corporation. However, Joe Brock is unhappy with Mark’s management decisions and plans to “challenge” his authority. What factors arise in considering if a minority investor can maintain such control or even prevent others from exercising such control? Case 2 Solution: Problem Identification: Can corporate control rest with others besides the majority owner? What factors should we examine to make such a determination? Should we separately analyze situations where the minority shareholder seeks actual control, or (merely) wishes to “veto” another party (e.g., majority shareholder) from exercising this control? Keywords: Consolidated financial statements; consolidation (of majority owned subsidiaries); contingencies; related parties; accounting changes.

Conclusion: Per 810-10-25-1 through 25-14, deciding if a minority shareholder can “overcome” the presumption that the majority shareholder maintains this control depends on many facts and judgments. First, can the minority shareholder participate, veto, or cause certain operating ordinary operating (e.g., which bank to hold corporate assets) (i.e., which it calls protective rights) and long-term (e.g., who sets top management’s salary and which tender offer to acquire the company to accept) (i.e., which it calls participating rights) management decisions to occur. Other factors include restating prior year’s financial statements if control passes to the minority shareholder; and does the minority shareholder control technology or customers of crucial interest to the company. Case 3: The Treasury Department of Drof Motors invests “excess” funds daily (e.g., in foreign currencies). It, thus, earns profits and losses, which are included in the company’s consolidated financial statements. Should Drof consider its Treasury operations as a (distinct) segment in preparing its external financial statements? Case 3 Solution: Problem Identification: Should corporate divisions that generate revenues and expenses qualify as an operating segment for financial statement purposes? Keywords: Segment; operating division. Conclusion: Per 280-10-50-1 all operating segments can be reported separately if they meet the guidelines: it generates revenues and expenses that a corporate decision-maker reviews, and has discrete financial information available. However, management should also believe that such additional information can contribute to outside readers and users better understanding the enterprises operations. Case 4: The Builtwell Construction Company is building a hospital for a third party. As such it borrows substantial funds from a foreign bank and repays the required interest costs as scheduled. Builtwell also incurs some foreign currency truncation gains and losses on these transactions. Builtwell properly amortizes the interest costs over the life of the construction project, but would now also like to amortize the associated foreign currency transaction gains and losses as well. Can Builtwell amortize such costs? Case 4 Solution: Problem Identification: Should a construction company amortize or expense the gains and losses of foreign currency transaction gains and losses expended while a building was under construction? Keywords: Foreign currency translation; capitalization (of interest costs). Conclusion: Although Builtwell apparently correctly amortized interest costs during construction—per the provisions of 835, it can not amortize such foreign currency transaction gains and losses. Per 830-20-35-1, increases or decreases in expected

functional currency cash flows become foreign currency transaction gains or losses, i.e., “period costs.” Case 5: Tony Computer Services Corporation trades 50% of its common stock for the rights to certain computer programs of the Janet Corporation. Janet previously expensed such costs of developing these computer programs. Tony concurrently sold the other 50% interest in its stock to the Jeannette Company for $1,000,000. Tony later acquired another the rights to the Udder Computer Company’s computer programs in exchange for stock valued at $1,500,000. Tony, thus, debited Investments in Subsidiaries and credited Earnings for $1.5 million to reflect this latest transaction. How should Tony’s consolidated financial statement reflect the value of the expensed computer programs? Case 5 Solution: Problem Identification: Should Tony recognize the “value” of the acquired computer programs, or should these results be consolidated, i.e., eliminated? Keywords: Equity method of accounting; inter-company gains and losses. Conclusion: Per 810-10-45-18, for fiscal years after December 15, 2008, complete elimination of intercompany income and loss is consistent with consolidated financial statements. The elimination of the intercompany income or loss may be allocated equally between the parent and the non-controlling interest. Moreover, Tony should ascertain that the $1.5 million stated value of the stock issued for the Udder Company is appropriate, e.g., by using “market valuation models” to test such valuations. Case 6: The Rich Company seeks to limit its potential exposure from future variableinterest debt by engaging in a cash flow hedge. Thus, it seeks to acquire a financial instrument that varies in price “in opposition” to Rick’s expected payments on this debt instrument. However, it is unsure of the effectiveness of this hedging instrument—since it is unsure of the expected “timing” of such transactions. Can Rich classify this proposed financial instrument as a cash flow (or other) hedge? Case 6 Solution: Problem Identification: How much detail must a company have about proposed hedging activities in order to categorize them as such? Keywords: Hedging; interest rate swaps; financial instruments. Conclusion: 815-20-25-1 lists the criteria whereas 815-20-25-2 through 25-132 list specifics to fulfill 25-1. 815-20-25-1 requires that at the inception of the hedge the company must document the risk being hedged and how it will assess the effectiveness of the hedging instrument. Thus, if the Company can not document the time period the forecasted transaction that it wants to hedge is expected to occur, and the nature of the

associated asset or liability involved, the transaction does not qualify as a hedge under GAAP. Case 7: Merrill Corporation engages in a valid cash flow hedge where it minimizes the risk from variable interest rated debt by promising to issue dividend payments from both its own portfolio and its portfolio of “outside” marketable securities. Since interest payments normally are classified on the Statement of Cash Flows as Operating Activities; payments of dividends from “outside” investments are classified as Investing Activities; and dividend payments from its own stock are financing activities, where should Merrill disclose the cash flows from the above transactions? Case 7 Solution: Problem Identification: Where in the Statement of Cash Flows should Merrill disclose proceeds and payments from cash flow hedging activities? Keywords: Hedging; cash flow hedging; statement of cash flow. Conclusion: Per 230-10-45-27, cash flows from derivative instruments accounted for as fair value or cash flow hedges may be classified in the same category as cash flows from the (associated) item being hedged—provided that such an accounting policy is disclosed and the instrument does not include another significant financing element at inception in which case it should be classified as a financing transaction. Thus, the cash flows should be categorized into the operating, investing, and financing categories—provided adequate disclosures are made. Case 8: On January 1, year 1, the Allen Company issues 100,000 shares of its stock (which is valued at $10 per share) to acquire the Natie Company. The purchase agreement also states that Allen will pay $200,000 in year two if Natie has net income of at least $400,000 in year 2. There is a 50% chance Natie will meet or exceed $400,000 of net income in year 2. How should Allen recognize this transaction? Case 8 Solution: Problem Identification: This “contingent” value of additional payment during a proposed business combination asks the researcher to obtain a proper “value” for the proposed transaction. Keywords: Business combination; measurement date; contingent payment. Conclusion: Per 805-30-25-5, the acquirer shall recognize the contingent consideration and the acquisition at the fair value = (100,000 shares * $10) + (0.5 *$200,000) =$1,100,000 (not considering time value of money) GOVERNMENT AND NOT-FOR-PROFIT ACCOUNTING Cases

CASE 1: On January 1, the Hawaii Cancer Institute has received a promise from the Obama Foundation to receive a building that the Foundation recently appraised at $200,000. However, the building cost only $125,000. The Cancer Institute promised to keep the building “permanently restricted,” i.e., never to sell it and to use it only for its work in helping cancer patients. As of the end of the Cancer Institute’s fiscal year (December 31), no title to the building was received by the Institute. How should the Institute record this transaction? CASE 1 SOLUTION: Problem Identification: Should a not-for-profit organization recognize assets that contributors promised, but have not yet delivered? If recognition is required, what must the organization report? Keywords: Not-for-profit, Restricted, Contributions. Conclusion: Recognize unconditional promises to receive gifts at their fair market value. ASC 958-605-30-2. Thus, the Cancer Institute should recognize $200,000. Report the gift or contribution as permanently restricted support. ASC 958-605-45-4. Upon receipt of the building, the Cancer Institute may need to adjust the valuation of the contribution, based on how the initial fair market value appraisal was made. ASC 958310-55-4. For example, if the valuation to the Foundation was based on the amount of future cash flows from the building, the Cancer Institute must make an adjustment when it receives the contributed building. CASE 2: On January 1, the Hawaii Cancer Institute has received a promise from the Obama Foundation to receive a building that the Foundation recently appraised at $200,000—but cost it only $125,000. The Institute promised to keep the building “permanently restricted,” i.e., never to sell it and to use it only for its work in helping cancer patients. After not receiving title by December 30, the Institute inquired as to the status of the promised building. The Foundation stated that water damage to the building (from last year’s flood) has permanently reduced the carrying value of the building to $100,000. The Foundation had initially hoped to set up a fund drive to help “clean up” the building. However, both parties have agreed that as of December 31, this fund drive would not materialize and the date to receive the building would remain unknown. How should the Institute now record the promised gift? CASE 2 SOLUTION: Problem Identification: Whether “permanent” reductions in the value of “promised” assets affect the not-for-profit entity’s valuation of “promised” assets?

Keywords: Restricted contributions, valuation allowances (for doubtful accounts). Conclusion: The Institute should reduce its valuation for the decline in the value of the contributed receivable. ASC 958-310-35-13. After receipt, the valuation may change because of the nature of the amount or prior fair market value if based on present value. If the Institute decides that it does not want the building any longer (since it does not wish to spend $100,000 fixing it up), it may decide to reserve and write off the entire balance. Alternatively, if the Foundation removes the permanent restriction upon donation, the Institute can place the asset as an investment—which it can later sell to generate funds for other purposes. CASE 3: On January 1, the Old Town Heart Association received a $1,000,000 endowment from the Chamber family. Under terms of the gift, the Association must permanently restrict the endowment—but may spend up to half of the interest earned on the gift or half of all profits earned from selling such investments for operating purposes. The Association immediately invested the gift proceeds in some “blue chip” stocks. Afterwards, the Association spent half of the $50,000 dividends earned from the Chamber portfolio for operating purposes. Where in the Statement of Cash Flows (i.e., operating, investing, or financing activities) should the Association report these transactions? CASE 3 SOLUTION: Problem Identification: In which parts of a Statement of Cash Flows should a not-forprofit Association disclose and classify its activities? Keywords: Statement of Cash Flows; not-for-profit organization; restricted funds. Conclusion: The Association should generate a statement of Cash Flows. ASC 958-23005-2. The Association generated operating funds by decreasing the cash invested in assets restricted for endowment purposes. Thus, the Association should record as investing activities the difference between cash used to purchase investments and cash received upon their sale. CASE 4: On April 15, the City of Old Putz invests its “available” excess cash with an investment broker. The investment broker then purchases 90-day commercial paper from a set of “blue chip” companies. On June 30, the last day of the City’s fiscal year, the City planned to “roll over” the commercial paper when they mature. However, interest rates fell dramatically in late June resulting in a lower value for the “maturing” commercial paper. More importantly, the City now expects to receive a much lower return on its investment after reinvestment. Should the City make any disclosures or adjustments regarding these transactions?

CASE 4 SOLUTION: Problem Identification: Should a City disclose potential interest rate swings affecting bond values? Should the City remeasure and disclose the value of the maturing commercial paper? If so, what disclosures seem necessary? Keywords: Not-for-profit, Investments, interest-earning investments. Conclusion: Entities need not report the effect of changing market values of short-term money market investments in high quality commercial paper. GAS 31, ¶ 22. As such no further disclosures regarding this matter seem necessary. However, the City may wish to report both the amount of funds invested in such securities and its plans to “roll over” these investments. CASE 5: Mount Pleasant Epilepsy Association is a not-for-profit agency. Joseph Howard is the Chair of its Voluntary Board of Director. He is also the owner of Howard Insurance Company. The Association rents its facilities from Howard Insurance Company. The Company charges the Association $10 per square foot of space per month. This amount is considerably below the City’s average “market” rate of $14 for similar office space. The rental rates have not changed during the five years that the Association has occupied its present location. However, no formal agreement for this rental situation exists. Joseph has “hinted” that “one day” the Company may ask the Association to significantly increase its rental payments or move to another location. What disclosures, if any, should the Association make regarding this situation? CASE 5 SOLUTION: Problem Identification: Does a related party situation exist between an Association and the chair of its voluntary Board of Directors? Does a capital or operating lease exist for the Association’s rental relationship? What disclosures, if any, should the Association make regarding the lease? Keywords: Related party transactions, lease, operating lease, capital lease, disclosure. Conclusion: The Mount Pleasant Epilepsy Association has a potential related party arrangement through the Chair of its Board of Directors. The Association should thus disclose this information—even though the lease terms seem quite favorable. ASC 85010-50-3. However, since the Association engages in a month-to-month lease (i.e., its noncancelable terms are less than one year), per, it need only disclose the terms of the lease. ASC 958-20-60-15 (expected, but not in the exposure draft version). CASE 6: The Oakland County Hospital performs lots of work for Medicare and Medicaid patients.

This results in both reimbursement of certain operating costs and some profit. “Transfers” among related subsidiaries within the Hospital also contain some Medicare and Medicaid “profits.” For example, the pharmacy, nursing and anesthesiology subsidiaries often all participate in a Medicare and Medicaid surgical operation. When the Hospital prepares consolidated financial statements, it asks you whether the Hospital should “eliminate” gains on such transactions—especially if others consider such transactions as dealings with “regulated affiliates.” CASE 6 SOLUTION: Problem Identification: Should a Hospital eliminate profits on intercompany sales and assets among “controlled” groups that participate in Medicare and Medicaid reimbursement policies? Keywords: Consolidated financial statements; regulation; affiliates. Conclusion: A Hospital should not eliminate sales to “regulated affiliates” if the sales price is reasonable, and through the rate-making process, future revenues are expected to equal the sales price from the regulated affiliate’s use of the products or services. ASC 980-810-45-1. Since the Hospital could receive profits on reimbursements on intercompany sales, its financial statements should not eliminate the intercompany profits. ASC 980-10-15-2. Medicare and Medicaid are excluded because they are contractual-type arrangements between the provider and the government agency responsible to pay for the services provided. ASC 980-10-15-7. Thus, the Hospital should eliminate these inter-entity gains and losses from its consolidated statements—but could report them in the individual group members’ separate financial statements.

CASE 7: The City of Mall uses a June 30th year-end. On March 1, the City hired Frank Sears as its City Manager at an annual salary of $100,000. Frank—like all other employees—earns 12 vacation days per year for the first 10 years with the City. Thereafter, he earns 18 vacation days per year. Employees who leave the City receive payment for all vested, unused vacation days. However, all employees must work for at least six months before they can take any vacation days. The City believes that Frank will be an excellent employee and assumes that he will work past the required six months. Should the City accrue vacation time for the City Manager? CASE 9 SOLUTION: Problem Identification: Should the City accrue vacation time for an employee who has not yet vested the necessary time to earn vacation time? Keywords: Compensated absences, vacation pay, and vesting.

Conclusion: Frank’s continued employment with the City is beyond the City’s control. Some employees leave before vesting their vacation time. Thus, the City should not accrue vacation benefits. GASBS 16, ¶ 7. This standard provides vacation leave should be accrued as a liability as the benefits are earned by the employees. However, benefits that are earned but are expected to lapse and not result in compensation to employees should not be accrued as a liability. After six months, to better match the vacation accrual expense, make a prior-period adjustment in the current period. This adjustment is made even if this amount is immaterial. AUDITING Cases Case 1: In year 1, Joe Josephs, CPA, reviewed Lander Company’s financial statements. However, in year 2, the Lander Company hired Tom Holstrum, CPA, to audit its financial statements. Should Tom meet with Joe, and would Joe be considered as a predecessor auditor? Case 1 Solution: Problem Identification: Is a CPA who reviewed prior period financial statements considered as a predecessor auditor? Keywords: Review, predecessor auditor. Conclusion: AU-C 510.05 defines a predecessor auditor and AU-C 210.A27 provides guidance as to discussion with the predecessor auditor. However, a CPA performing compilations and reviews are not predecessor auditors. Nonetheless, Tom may still wish to meet with him to discuss “problem” encountered during this review engagement. Case 2: Gates Inc. has its reviewed interim financial information included with the audited financial statement. However, after the review the auditor believes that the interim financial information is not prepared in accordance with an applicable financial reporting framework. The review report which references the departure is not presented with the interim financial information that accompanies the audited financial statements. The engagement partner requests your assistance to research as to the impact on the report of the audited financial statements. Case 2 Solution: Problem Identification: Are there any modifications needed to the report of the audited financial statements that are accompanied with reviewed interim financial information that depart from an accepted financial reporting framework? Keywords: Interim financial information, departures from accepted financial reporting framework, audit report modifications.

Conclusion: AU-C 930.40 states that an auditor should include an “other -matter” paragraph in the audit report when reviewed interim financial information that accompanies audited financial statements depart from an accepted financial reporting framework. Case 3: Mary Howard, CPA, has long audited the Wheat City Grain Company’s financial statements. Much of Wheat City’s assets consist of wheat stored in three of its grain elevators, and the Company maintains perpetual inventory records of the quantity of wheat stored there. Concurrently, on a surprise basis, at different times each month, state grain inspectors also “count” the quantity of wheat found in these elevators—and have found no material differences in the perpetual records for the five years that they have performed this function. To save both time and audit fees, Mary wants to rely on the state inspectors’ counts instead of her making independent counts thereof. Can Mary do this? Case 3 Solution: Problem Identification: Can a CPA rely on an objective, independent third party (i.e., part of a government agency) to substitute required generally accepted auditing procedures (i.e., observing the counting of the client’s inventory)? Keywords: Reliance on specialists; inventory observation; outside inventory-taking firm; independence. Conclusion: First, the concept of independence requires the CPA not to subordinate his or her judgment to an outside party. Next, AU-C 620.07-.13 require auditors to both review the competence, capabilities, and objectivity of the specialist—and to make appropriate tests of the data the specialist provided. In so doing, the auditor can rely on such reports- along as it does not substitute for the CPA’s own work. Case 4: Johnson & Young, LLP have been requested to be the auditors of Payroll Inc., an outside service company that processes payroll for over 200 clients. In considering the request, Johnson & Young are concerned that they might be required to be independent of user entities serviced by payroll Inc. You have been instructed to research the issue and report back to the partners. Case 4 Solution: Problem Identification: Does an auditor of a service organization need be independent of the user clients of the service organization? Keywords: Service organization, service auditor, independence Conclusion: AU-C 402.A22 states that the service auditor need not be independent of user entities. Case 5: Alex Curtis, during the audit of Landon Company, has determined that the company will be preparing its financial statements on a liquidation basis of accounting

due to the fact that management has decided to liquidate Landon Company at the end of the first quarter of next year. You have determined that this basis of accounting is not

GAAP. As a result, Alex seeks your assistance to determine if Alex can issue an unmodified/unqualified audit report. Case 5 Solution: Problem Identification: Can an unmodified/unqualified audit report be issued on financial statements prepared utilizing the liquidation basis of accounting? Keywords: Liquidation, basis of accounting, unmodified report Conclusion: AU-C 9700.01-.02 concludes that an unmodified/unqualified report may be issued on financial statements prepared utilizing the liquidation basis of accounting which is GAAP. Case 6: Hugo Crossman, CPA, issued a review statement for the CUNY Company for last year and a compiled statement for them in the current year. During the current year, Hugo purchased some CUNY securities, which made him lose his independence—a fact noted in his CPA compilation report. Now, the CUNY Company management wants Hugo to issue comparative two year financial statements (last year and this year). Can Hugo re-issue his review report now that he is no longer independent of the CUNY Company? Case 6 Solution: Problem Identification: Does a subsequent lack of CPA independence impair his or her ability to re-issue prior year’s financial statements when independence was not an issue? Keywords: Independence; compilation; review; comparative financial statements Conclusion: AR 200.08 (SSARS) states that a continuing accountant who performs a “lower” level of service in a subsequent period can re-issue the prior report. The accountant should, include a separate paragraph attached to his or her latest report that indicates this new, lack of independence and indicate that he or she performed no “update” procedures since last issuing the review report. Case 7: Joseph Josephs, CPA is auditing the Elder Company’s current year’s annual financial statements and notices that the Company has violated the 2.1 to 1.0 current ratio requirements as part of its debt agreement with the Sunshine Bank. The company’s current ratio is 1.85 to 1. Elder’s management believes (strongly) that it will improve their current ratio during the 90-day grace period. Nonetheless, the bank has the “right” to call in the entire $2 million, five year loan. However, Joseph is not so sure and must issue his report before this grace period expires. Should Joseph qualify his opinion or demand that Elder re-classify this loan as a short-term liability, in light of the above circumstances? Case 7 Solution:

Problem Identification: Does this present violation warrant re-classifying the loan from a long- to a short-term liability? Should Lander make any additional footnote disclosures? Should Joseph modify his audit report accordingly? Keywords: Callable debt; audit reports (qualified or adverse); contingencies. Conclusion: Per the FASB Codification 470-10-45-11, Elder needs to receive a waiver from the creditor or develop other evidence that the bank will not call this loan. These circumstances do not appear to be an uncertainty since they do not involve matters to be resolved at a later date. Thus, if Joseph disagrees with Elder’s decision, he should issue a qualified (“except for”) or adverse audit opinion. Case 8: In auditing Crispy Inc., the auditor has determined that certain information that is not required by an applicable financial reporting framework, has been included in the company’s basic financial statements which is clearly differentiated and identified. The auditor seeks your assistance to determine is such information need be audited and included in the audit report? Case 8 Solution: Problem Identification: Can information that is included in the basic financial statements, which is not required, be identified and unaudited? Keywords: Reporting on financial statements, other information, accompanying information. Conclusion: AU-C 700.59 and 700.A61-62 state that information that cannot be clearly differentiated need be covered by the auditor’s opinion. Differentiated information can be reported as unaudited. Case 9: You are auditing the financial statements of Air Service Inc., an airplane wholesaler that purchases various types of corporate jets for sale to different companies or individuals. Prior to the sale of an airplane, Air Service utilizes the jet for charter service. In reviewing the financial statements, you noticed that Air Service reports these jets before selling them as part of fixed assets and depreciates such planes. The engagement partner questions such accounting and requests that you research this issue as to the proper treatment for these jets used in the chartering service. Case 9 Solution: Problem Identification: The issue in this case is how the planes used in the chartering business should be accounted for—either as inventory or fixed assets which should be depreciated. Keywords: Inventory, assets held for sale.

Conclusion: Per the FASB Codification ASC 330-10-05-2, the “definition of inventory” one would conclude that the primary use of the jets would determine their treatment in Air Service’s financial statements. Since the jets are held primarily for sale, and the chartering is only a temporary use, the jets should be listed as inventory (current asset) and should not be depreciated.

Tax Problems and Cases Tax Problem 1. Identify the general content of each of the following Internal Revenue Code sections: a. §274(d)(1) b. §751(b)(3)(A) c. §1221(a)(7) Tax Problem 1. Solutions: a. §274(d)(1) – no deduction for travel expenses unless substantiated b. §751(b)(3)(A) – substantially appreciated inventory defined c. §1221(a)(7) – capital asset does not include a hedging transaction

Tax Problem 2. Identify the general contents of each of the following subchapters and parts of the Code: a. Subtitle A, Chapter 1, Subchapter O b. Subtitle C – employment taxes c. Subtitle F, Chapter 67, Subchapter B Tax Problem 2. Solutions: a. Subtitle A, Chapter 1, Subchapter O – gain or loss on disposition of property b. Subtitle C – employment taxes c. Subtitle F, Chapter 67, Subchapter B – interest on overpayments under procedure and administration Tax Problem 3. List the major Code section for the following topics: a. Charitable deductions b. Accrual accounting for deductions c. Foreign income exclusion

Tax Problem 3. Solutions: a. Charitable deductions - 170 b. Accrual accounting for deductions - 461 c. Foreign income exclusion -911

Tax Problem 4. List the following topics for IRS Publications or Form: a. IRS Publication 17 b. IRS Publication 334 c. Form 941 Tax Problem 5. Solutions: a. IRS Publication 17 – Your Federal Income Tax b. IRS Publication 334 – Tax Guide for Small Business (For individuals who use schedule C or C-EZ) c. Form 941 – Employer's Quarterly Federal Tax Return

Tax Problem 5. Identify the topic of the following Treasury Regulations, Revenue Rulings, or Revenue Procedures: a. Treas. Reg. 1.385-4T e. Rev. Proc. 2017-29, 2017-14 I.R.B. 1065 c. Rev. Rul. 68-609, 1968-2 C.B. 327 Tax Problem 5 Solutions. a. Treas. Reg. 1.385-4T - treatment of consolidated groups e. Rev. Proc. 2017-29, 2017-14 I.R.B. 1065 – depreciation tables c. Rev. Rul. 68-609, 1968-2 C.B. 327 - fair market value of intangible assets of a business Tax Cases for Writing Memos - Instructions: In writing a tax memo begin the discussion of the law with at least one paragraph on the relevant Code language. Pinpoint the location of the relevant language as precisely as possible. After each relevant Code section, follow with the relevant Treasury Regulations. Then briefly in separate paragraphs briefly describe any relevant cases or Revenue Rulings. Write clearly and concisely.

For each of the following problems, do not just answer the question asked in the problem. Instead, write a memo identifying the legal issue(s), conclusion, list of relevant authorities, discussion of the law, and the application of the law. Use these subheadings, as it is not enough just to describe the law. The most important parts of the memo are the issue statement(s) and the application of the law to the problem facts, which is sometimes contained under the heading of reasoning. The application should integrate reference to every source of law previously discussed. Tax Case 1. When Gross Income is Accrued (Basic) Taxpayer is a securities firm. Taxpayer uses the accrual method of accounting. Taxpayer executes stock trades and performs settlement functions. Settlement functions include recording the sale and confirming it with the customer. Trades made on December 28, 20X5, until the end of the month are not settled until January of 20X6. Taxpayer made $1,000,000 of net commissions from these trades in late December. Since the security is not credited to the customer’s account until settlement date, taxpayer wants to declare the income on the settlement dates in 20X6. Taxpayer does not receive the money until January 20X6. Advise the taxpayer. Tax Case 1 Solution. ISSUE: Whether an accrual basis securities firm has gross income under section 451(a) on the trading date or in the next year on the settlement date when all the work is performed, payment is due, and money received? CONCLUSION: The trading date is the date determining gross income from net commissions on securities because all the events have occurred then which fixes the right to receive the income. DISCUSSION OF LAW: Gross income includes commissions. § 61(a)(1). Gross income is included in the taxable year received, unless the method of accounting is properly accounted for in a different period. § 451(a). The accrual method generates income when all the events have occurred which fixes the right to receive such income and amount thereof is determinable with reasonable accuracy. Reg. § 1.451-1(a). Taxpayer was a securities company declaring income from trades on the settlement date. The Tax Court held that sales contract on the trading date was a condition precedent that fixed the T’s right to receive the income. The settlement provided conditions subsequent, so that the settlement was irrelevant to gross income determination. Charles Schwab Corp v. Commissioner, 107 T.C. 282 (1996). APPLICATION:

Taxpayer has $1,000,000 of gross income for the net commissions. § 61(a)(1). This gross income is included in taxable year 20X5 because it is accounted for under the accrual method of accounting. Sec. 451(a). The accrual method generates income for the taxpayer when the trading has occurred, because at that time all the events have occurred which fixes the right to receive such income and amount of commissions is determined with reasonable accuracy. Reg. § 1.4511(a). As was the case in Charles Schwab Corp v. Commissioner, 107 TC 282 (1996), taxpayer’s settlement functions were conditions subsequent, so that the settlement date was irrelevant to the determination of gross income.

Tax Case 2: Stock Purchased by an Employee (Intermediate) Stacey became an employee of DotGismo, Inc., a privately held firm. On December 15, 20X3, Stacey was allowed to buy 20,000 shares of DotGismo stock for $40,000 dollars. At that time when Stacey bought the stock, each share was worth $2. DotGismo retains the right to repurchase each share for $2 original purchase price if Stacey leaves DotGismo at any time during the next two years for any reason. DotGismo stock increased to $5 per share in December 15, 20X5, when the two-year restriction ended. Stacey sold the stock on January 18, 20X6 for $9 per share, after the announcement of a new patent for DotGismo. Advise Stacey roughly how much tax must be paid and for what year(s). Assume Stacey is in the 35% tax bracket for ordinary income and 15% for long term capital gains. Tax Case 2. Solution ISSUE: Whether a taxpayer who did not buy the employer stock at a discount, needed to make a section 83(b) election in order to obtain capital gain treatment when she sells the stock. CONCLUSION: Any failure to make a section 83(b) election creates gross income from the restricted stock when the restriction lapsed in 20X5; the gain is ordinary income measured by the FMV less the purchase cost basis. DISCUSSION OF THE LAW: Gross income includes compensation for services under section 61(a)(1) and gains from the sale of property under sec. 61(a)(3). Property having a substantial risk of forfeiture which is transferred in connection with the performance of services is gross income, as measured by its fair market value upon the removal of the substantial risk of forfeiture, less any price paid for the stock. § 83(a). Thus, property received in connection with the performance of services is not taxed under sec. 83(a) until it has substantially vested. Reg. § 1.83-1(a)(1). Substantial risk of forfeiture is defined as rights to full enjoyment of such property which are conditioned upon future performance of services. §

83(c)(1). The holding period for stock having a substantial risk of forfeiture begins when the restriction is lifted. § 83(h). Section 83(b)(1) provides an election to include in gross income in the year of transfer, the excess of the fair market value over the amount paid for the property. One must make the election not later than 30 days after the transfer. § 83(b)(2). An employer made a stock option plan available for key employees. The U.S. Supreme Court held that a purchase from employer for stock options is compensation for services, since it is not a gift. Commissioner v. LoBue, 351 U.S. 243 (1956). Employee purchased employer’s restricted stock when the amount paid for the stock equaled its full fair market value. The Tax Court held that section 83 applies to all restricted stock that is transferred for services. Unless the taxpayer elected at time of purchase to include income difference between purchase price and fair market value, taxpayer must recognize ordinary income for any appreciation in value. Alves v. Commissioner, 734 F.2d 478 (9th Cir. 1984). APPLICATION OF THE LAW: Stacey’s gross income includes her compensation for services under section 61(a)(1). Stacey’s purchase of Gismo stock is transfer of property in connection with the performance of services, because the stock was not widely available for purchase. Commissioner v. LoBue, 351 U.S. 243 (1956). Stacey’s stock had a substantial risk of forfeiture under section 83(c)(1) because her employer could buy it back. Assuming that Stacey did not make a section 83(b) election when she purchased her employer’s stock, Stacey has income in 20X5 when the rights in her stock were substantially vested under Reg. § 1.83-1(a)(1). Stacey’s gross income in 20X5 is $60,000 measured by its fair market value upon the removal of the substantial risk of forfeiture, less the price paid for the stock (20,000 shares having a $5 per share FMV less $2 per share paid for the stock). § 83(a). Stacey must recognize ordinary income for the $60,000 appreciation in the stock’s value. Alves v. Commissioner, 734 F.2d 478 (9th Cir. 1984). Stacey’s gross income in 20X6 when she sells the stock is $80,000 (20,000 shares times [$9 per share FMV less $5 per share basis ($2 cost + $3 prior gain recognized). The $80,000 is short term capital gain since the holding period for Stacey’s stock starts when the restriction lapsed under sec. 83(f). Stacey pays $28,000 of tax in 20X6 (plus the $21,000 of tax in 20X5). However, if Stacey made Section 83(b)(1) election to include in gross income in the year of transfer, the excess of the fair market value over the amount paid for the property, which was -0-, she must have made the election not later than 30 days after the transfer. Sec. 83(b)(2). Then she does not have additional income until 20X6, when she sells the stock. § 61(a)(3). The $140,000 gross income (20,000 shares times [$9 per share selling price less $2 basis]) is long term capital

gain. Stacey should pay about 21,000 of taxes. (15% LTCG rate).

Tax Case 3: Business Deductions (Intermediate) For the past two years, Minsu, a Korean American, worked as a high school physical education teacher. He was also a body-builder and a part-time graduate student in educational technology at State University. As part of preparing a masters thesis, Minsu decided to participate in Arnold’s World Body-building training program and analyze advanced technology used to help students absorb physical education. Arnold’s training program had a regular faculty, curriculum, an enrolled body of students, and advanced technology in its gym equipment. Minsu earned $4,000 during the fall 20X5 as a body-builder; he came in second in the state contest. Minsu paid $5,000 in spring 20X5 for tuition related to his masters degree at State University for one class on advanced computer technology and another $3,000 to participate in the gym. How much can Minsu deduct? Minsu knows about relevant educational tax credits and wants you to focus just on the deductions. Tax Case 3: Solution ISSUE: Whether a training program which has elements of personal and business activities qualifies as a business expense deduction under section 162(a) or a hobby expense under sec. 183. CONCLUSION: The cost of a graduate degree or the body-building training program is not deductible if one is not yet in the trade or business when the expense arose. DISCUSSION OF THE LAW: Section 162(a) allows a deduction for all ordinary and necessary expenses incurred in carrying on a trade or business. Educational expenses are never deductible if the education is part of a study program that will lead to taxpayer qualifying for a new trade or business, Reg. § 1.162-5(b)(3), or if the study is required in order to meet the minimum educational requirements for qualification in the job. Reg. § 1.162-5(b)(2). If the education passes these two tests then the educational expense must either (1) maintain or improve existing skills required in the individual's trade or business or (2) meet the express requirements of the employer to retain his or her employment status. Reg. § 1.162-5(a). For an employee, a change of duties does not constitute a new trade or business if the new duties involve the same general type of work as performed at the individual's present employment. Although additional education may qualify a taxpayer for a position with new duties, the education does not qualify the

taxpayer for a new trade or business if the new duties are in the similar type of work. Reg. § 1.162-5(b)(3). Taxpayer had graduate educational expenses in educational psychology as part of a college's adult education program. The education was part of a degree program that led to employment as a high school guidance counselor. The Tax Court held that these educational expenses were deductible business expenses in Schwerm v. Commissioner, T.C. Memo 1986-16. The Tax Court agreed that the taxpayer was in the trade or business of teaching and found that the graduate education did not qualify the taxpayer for a new trade or business. Although the degree qualified the taxpayer for high school counseling, the court distinguished the result as merely a change of duties involving the same general work of teaching and related duties. A master's degree was not required to meet the minimum educational requirements for the job. The education in educational psychology helped the taxpayer maintain her job skills in education. The Tax Court denied a deduction for earning a masters degree in social work for a teacher of learning-disabled students, reasoning that it qualified her for a new trade or business of entering social work fields. Reisinger v. Commissioner, 71 T.C. 568 (1979). Deductions attributable to a hobby are deductible only to the extent that the gross income derived from such activity exceeds the deductions that would be allowable under the tax law without regard to whether the activity is engaged in for profit. Sec. 183(b)(1). Activities not engaged for in profit are defined with nine criteria in Reg. sec. 1.183-2. Hobby expenses are subject to the 2% floor on miscellaneous items deductions. § 67(b). Personal living expenses are not deductible. § 262(a). APPLICATION OF THE LAW: Minsu’s educational expenses are not deductible if the education is part of a study program that will lead to qualifying for a new trade or business. Reg. § 1.1625(b)(3). The fact that the education helps Minsu maintain or improve existing skills required in the individual's trade or business is not enough. Reg. § 1.1625(a). Minsu’s case of earning a masters degree in a related but slightly different field is similar to the taxpayer who was a teacher of learning-disabled students and was earning a masters degree in social work. Reisinger v. Commissioner, 71 T.C. 568 (1979). Applying the rationale in that case, Minsu’s educational technology program could qualify him for a new trade or business in technology related careers. Although Minsu might argue that he will have a mere change in duties after earning a masters degree, similar to a masters in counseling and guidance for a teacher under Schwerm v. Commissioner, T.C. Memo 1986-16. However, that

case appears distinguishable because of the threshold test that it could qualify Minsu for a new trade or business. The training program at the gym was an activity that appears more as one not engaged for in a trade or business, applying the factors of a hobby under Reg. § 1.183-2. Thus, Minsu deductions attributable to the hobby of body-building are deductible only to the extent that the gross income derived from such activity exceeds the deductions that would be allowable under the tax law without regard to whether the activity is engaged in for profit. § 183(b)(1). Although gym costs are normally nondeductible personal living expenses under sec. 262(a), Minsu should be able to deduct $3,000 of the costs (subject to the limitations of sec. 67(b), up to the $4,000 earnings from the body-building contest).

Tax Case 4: Deduction for Foreign Travel (Intermediate) Sylvia is a professor in business at the University of Hawaii. She went on sabbatical for an academic year to take courses in Chinese at National Taiwan University in Taipei, Taiwan, to expand her knowledge of international business and ability to conduct research in a foreign language. On weekends and during the three-week winter break Sylvia went sight-seeing by herself around the island. However, one time she gave a lecture in Tainan, Taiwan. Sylvia has documented her expenses and saved her receipts. Advise Sylvia on the tax consequences. Tax Case 4. Solution: ISSUE: How much of a professor’s foreign travel expenses while taking courses at a foreign university are deductible after considering the disallowance limitations on travel expense deductions under Sec. 274(c). CONCLUSION: Foreign travel expenses are generally deductible, when one is doing more than mere travel for educational purposes. However, extra traveling expenses around the island of Taiwan during the winter break and on weekends are not deductible when one did not have business responsibilities, such as a lecture to present. DISCUSSION OF LAW: Section 162(a)(2) allows a deduction for all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including traveling expenses while away from home in the pursuit of a trade or business. If travel expenses are incurred for both business and other purposes, the travel expenses are deductible only if the travel is primarily related to the taxpayer's trade or business. Reg. § 1.162-2(b)(1).

Section 274(c)(1) requires an allocation of expenses for foreign travel pursuant to the regulations. The exception under § 274(c)(1)(B) applies if the time not attributable to the trade or business outside the U.S. is less than 25% of the total time on business. Reg. § 1.274-4(d)(2) requires a daily allocation for calculating nonbusiness activity constituting 25% of travel time. Travel expenses are deemed entirely allocable to business activity, if the individual incurring the expenses does not have substantial control over the trip arrangements. Reg. § 1-274-4(f)(5)(i). No deduction is allowed for travel as a form of education. § 274(l)(2). The Ninth Circuit did not disallow a teacher’s extension course travel expenses to Southeast Asia because the courses required attending lectures by university professors, tours of related sights, and significant readings. Ann Jorgensen, RIA TCMemo ¶ 2000-138 (9th Cir. 2000). Taxpayer must substantiate the travel expense by adequate records or sufficient evidence, or the travel expenses are disallowed. § 274(d)(1). Business meals are deductible by only 50% of the cost. § 274(n). APPLICATION OF LAW: Sylvia’s educational expenses in Asia included more than just disallowed education expenses under Sec. 274(l)(2). Similar to a teacher’s deductible extension course travel to Southeast Asia in Ann Jorgensen, RIA TCMemo ¶ 2000-138 (9th Cir. 2000), Sylvia had significant business responsibilities in taking classes at National Taiwan University to enhance her regular teaching responsibilities at the University of Hawaii. Sylvia can establish a business purpose for the course work by integrating some of her new knowledge into her activities of teaching and researching international business. Since Sylvia has travel expenses are incurred for both business and other purposes, the travel expenses are deductible only if the travel is primarily related to the taxpayer's trade or business. Treas. Reg. § 1.162-2(b)(1). Section 162(a)(2) allows Sylvia to deduct all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including traveling expenses while away from home in the pursuit of a trade or business. Sylvia need not allocate the foreign travel expenses under section 274(c)(1) because the exception under sec. 274(c)(1)(B) applies that the time that she spent not attributable to the trade or business outside the United States is less than 25% of the total time on business. Thus, reg. § 1.274-4(d)(2) is not applicable to Sylvia’s travel. Instead, the business travel expenses while Sylvia’s classes are in session are deemed entirely allocable to business activity, because Sylvia did not have substantial control over the arrangements of the trip under Reg. § 1-274-4(f)(5)(i).

Sylvia’s documented records should overcome the Section 274(d)(1) substantiation requirements. Sylvia can deduct her travel, lodging and 50% of the business meals. § 274(n). Tax Case 5: Income Sourcing – International Tax (Advanced) Hidetoshi was a world-renowned rock star from NewCountry. Sony-USA Records contracted with Hidetoshi to produce records. Sony-USA Records retained all intellectual property rights in the recordings. The contract granted Hidetoshi payments or “royalties” based upon future sales of recordings. Hidetoshi paid taxes on the payments in NewCountry as royalties. The U.S.-NewCountry treaty exempts royalties from tax in the U.S. However, NewCountry tax treaty, did not define royalties or compensation for personal services. The IRS has told Hidetoshi, his contract with Sony-USA generates personal service income in the United States. Advise Hidetoshi. Tax Case 5. Solution: ISSUE: Whether a foreign taxpayer’s music contract with a U.S. subsidiary which granted taxpayer “royalties,” generates personal service income taxable in the United States under sec. 863(a)(3). CONCLUSION: A recording contract generates personal service income if taxpayer has no intellectual property rights. DISCUSSION OF THE LAW: Personal service income is sourced according to the location in which the services were performed. Services performed in the U.S. are U.S. source income. § 861(a)(3). The “commercial traveler” exception is foreign-source income if the recipient is a non-resident alien who is in the U.S. for 90 days or less during the tax year, the compensation does not exceed $3,000 for the services performed in the U.S., and the services performed are not effectively connected with a U.S. trade or business. § 863(a)(3). Royalties from tangible property located outside the U.S. are foreign source income. § 862(a)(4). The location of royalties attributable to the use of intangible property (customer based-intangibles) are sourced according to the country in which the property producing the income is used. Rev. Rul. 72-232, 1972-1 C.B. 276. In Ingram v. Bowers, 57 F.2d 65 (CA-2, 1932), the issue was whether income received from master records cut by taxpayer’s deceased spouse was royalty income or personal service income. The master records were used in foreign countries (so royalty income would qualify as foreign source), while the records had been cut in the U.S. (so personal service income would qualify as U.S.

source). The Second Circuit Court of Appeals determined that taxpayer had personal service income from the master records. Broadcast rights in a foreign country of a live boxing match held in the U.S. were determined to be licensed, rather than sold. Rev. Rul. 84-78, 1984-1 C.B. 173. The license resulted in the income being characterized as foreign-source royalty income since the rights were for use in a foreign country. A record company contracted with the Foreign Taxpayer to produce recordings. The company retained all intellectual property rights in the recordings. The contract granted Taxpayer “royalties” based upon future sales of the recordings. The applicable tax treaty did not define royalties or compensation for personal services. The Tax Court in Boulez v. Commissioner, 83 T.C. 584 (1984), decided the contract was intended as a contract for personal services. Although the payments were based on future sales, existence of taxpayer’s property right is fundamental for the purpose of determining whether royalty income exists. Under applicable (U.S.) intellectual property law, Taxpayer owned no intellectual property rights that he could license because the recordings were works for hire and therefore generated earned income from personal services. Because taxpayer performed his services in the U.S., his income was U.S. source and taxable in the United States. APPLICATION OF THE LAW: Hidetoshi’s contract is service income. Similar to the case in Ingram v. Bowers, 57 F.2d 65 (2d Cir. 1932), the issue for Hidetoshi was whether income received was royalty income or personal service income. In both cases, the items were used in foreign countries, while they were produced in the U.S. Thus, the same conclusion arises that Hidetoshi’s income generated is personal service income. Hidetoshi’s case is factually similar to Boulez v. Commissioner, 83 T.C. 584 (1984). In both cases, a record company contracted with the Foreign Taxpayer to produce recordings. The record company retained all intellectual property rights in the recordings. Because Hidetoshi owned no intellectual property rights, no royalty payment existed; instead the recordings were compensation for services. Given that Hidetoshi performed his services in the U.S., his income was classified as U.S. source. § 861(a)(3). Hidetoshi’s case is distinguishable from the facts in Rev. Rul. 84-78, 1984-1 C.B. 173, because no license or intellectual property was produced for Hidetoshi. Thus, the characterization of the income is different. Hidetoshi does not qualify for the “commercial traveler” exception when the compensation exceeds $3,000 for the services performed in the United States. § 863(a)(3). Since Hidetoshi’s income is not royalties, Sec. 862(a)(4) and Rev. Rul. 72-232, 1972-1 C.B. 276, are not applicable.

Tax Case 6: Contingent Liabilities in a Tax-Free Transfer (Advanced) Xco an accrual basis taxpayer has various lines of businesses. One business is a gas station. The land underneath the gas station was not contaminated when Xco purchased it. However, the land now has potential soil and groundwater problems (environmental liabilities). Xco engaged in a section 351 tax-free exchange transferring the gas station to a new subsidiary Sco in exchange for the stock of Sco and assumption of the environmental liabilities. Before the transfer, Xco did not take any environmental remediation efforts to clean up the soil and groundwater problems associated with the gas station. One year later Sco paid $100,000. Tax Case 6. Solution: ISSUE: Whether the transfer of contingent liabilities in a tax-free incorporation might create recognized gain under sec. 357(a). CONCLUSION: No gain is recognized from contingent liabilities, however, they can effect shareholder’s basis in the stock under sec. 358(h). DISCUSSION OF LAW: Sec. 351(a) provides for tax-free exchanges of property contributed to a corporation when the transferors receive 80% or more of the corporation’s stock. However, if other property or money, known as boot, is involved in the transaction, gain is recognized. § 351(b). Liabilities included in the transferred property are generally not considered as boot. Sec. 357(a). However, gain is recognized on liabilities transferred if either the liabilities exceed the adjusted basis [§ 357(c)(1)] or represent bad purpose liabilities for tax avoidance purposes. § 357(b). The basis of the property received is determined under sec. 358(a)(1) as a carryover basis of the property exchanged, decreased by boot received, and increased by gain recognized. However, for purposes of sec. 358 basis, the liabilities assumed are treated as boot received. § 358(d)(1). Rev. Rul. 95-74, 1995-2 CB 36, removed contingent environmental liabilities from under sec. 357(c)(1), because they had not given rise to a deduction nor effected basis. So, contingent liabilities assumed, would not trigger gain to the extent such liabilities exceeded the adjusted basis of property contributed. § 357(c)(1). Section 358(h)(3) includes contingent liability in the definition of liability for purposes of determining whether basis exceeds the fair market value, so that a

reduction in basis should occur. Section 358(h) is aimed at contingent-liabilities tax shelters; so that § 358(h) reduces the basis of stock received by the amount of liabilities assumed but not below its FMV. However, section 358(h) does not apply if either the entire trade or business or substantially all of its assets are contributed. § 358(h)(2). APPLICATION: Xco contributed property to a corporation under Sec. 351(a) for a tax-free exchange for receiving Sco’s stock. Xco’s liabilities included in the transferred property are generally not considered as boot, Sec. 357(a), so no gain is recognized under sec. 351(b). However, if Xco’s liabilities exceed its adjusted basis, gain is recognized on liabilities transferred under sec. 357(c)(1). No facts on Xco indicate that the contingent liabilities represent bad purpose liabilities for tax avoidance purposes. § 357(b). The basis of the property received by Xco is determined under sec. 358(a)(1) as a carryover basis of the property exchanged, decreased by boot received, and increased by gain recognized. However, for purposes of Xco’s sec. 358 basis, the liabilities assumed are treated as boot received, Sec. 358(d)(1), except for contingent liabilities which Rev. Rul. 95-74, 1995-2 CB 36, removed from section 357(c)(1), because they had not given rise to a deduction nor effected basis. So, Xco’s contingent liabilities assumed by Sco, would not trigger gain to the extent such liabilities exceeded Xco’s adjusted basis of property contributed. § 357(c)(1). However, Xco’s contingent liabilities under Sec. 358(h)(3), are used to determine whether basis exceeds the fair market value, so that a reduction in basis should occur. However, sec. 358(h) does not apply if either the entire trade or business or substantially all of its assets are contributed.

MISC. RESEARCH CASES MISC. CASE 1. Apple Proxy Case In 2015, the proxy vote for Apple’s annual meeting had six proposals: 1. The election of the directors, 2. The ratification of the auditor, 3. An advisory vote on executive compensation (“say on pay”), 4. An amendment to the employee stock purchase plan, 5. Shareholder proposal regarding renewable energy, and 6. Shareholder proposal regarding proxy access. a. Where is this proxy statement filed?

b. Find the results of this proxy vote and explain where you found it. What percent of the shareholders voted in favor of the executive compensation and what percent voted in favor of the shareholder proposal on proxy access? MISC. CASE 1. SOLUTION a. Proxies are filed with the SEC. b. ProxyMonitor.org is a unique, publicly available database that tracks shareholder proposals in real time. This database shows 75% of the shareholders voted in favor of the executive compensation and 40% of the shareholders voted in favor of the shareholder proposal on proxy access.

MISC. CASE 2. Fifth Largest Fortune 500 Company a. Identify the five largest “Fortune 500” companies for 2017. b. Identify the primary basic industry for the fifth largest company. c. What does the company identify as its core business segments? d. Where is this company headquartered? e. Provide the market cap, revenue, and net income for that company. f. Did the revenue increase or decrease from 2015? g. Who were the primary competitors for this company? h. What happened to the company’s cash and cash equivalents during 2016 and 2017? i. How does the company define cash equivalents? j. Try to identify the reason for the change. MISC. CASE 2 SOLUTION: a. Walmart, Berkshire Hathaway, Apple, Exxon Mobile, McKesson. b. McKesson, the fifth largest company is in the health care industry. c. The company identifies its two core business segments as distribution solutions and technology solutions. d. The company is headquartered in San Francisco. e. Its market cap was almost $35 billion, the revenue as almost $200 billion, and net income as just over $5 billion. f. The company’s revenue increased almost $20 billion from 2015. g. The company’s cash and cash equivalents declined. i. The company defines cash equivalents in financial note #1 on significant accounting policies as money market instruments with an original maturity of 3 months or less. j. The company completed various acquisitions using cash.

MISC. CASE 3. Finding an Article on Corporate Governance Challenges a. Find a reliable article on corporate governance challenges and priorities for the current year. Summarize the top three challenges or priorities. b. Discuss why you believe the article is reliable? Are there factors that could make the article and its contents more reliable? MISC CASE 3. SOLUTION:

a. Students might find different articles on corporate governance, a subject that has become more important in 2017 for the CPA exam. b. Check whether the student identified the publication as either from the leading financial press or a peer reviewed journal or a leading association on corporate governance, such as the NACD, the National Association of Corporate Directors. See if the student commented on the author, such as a leading multinational accounting firm. For example, in 2016, KPMG published a pamphlet on the insights from the 12th annual audit committee issues conference, a meeting sponsored by the NACD. Governance issues include keeping innovation and strategy in sync, shareholder activists as change agents, and cyber-security challenges. MISC. CASE 4. Automotive Industry and Tesla a. Identify the three largest companies in the worldwide automobile industry. What is the source for your listing and what is size based on (market cap or number of automobiles sold or some other dimension? b. Examine the SEC filings for Tesla in 2016. Who was the Chief Accounting Officer who signed the annual report? In 2017, what did Tesla produce? What were the biggest risks identified by Tesla? MISC. CASE 4. SOLUTION: a. The three largest companies in the automotive industry are Toyota, General Motors, Volkswagen, according to Forbes in September 2016, based on the number of cars produced. However, one might approach the question by market capitalization. In April 2017, Tesla briefly became the most valuable American automotive manufacturer, as measured by its market capitalization. b. Tesla risk factors include numerous risks related to the business and industry. Litigation concerns included litigation related to the acquisition of Solar City. Tesla’s Chief Accounting Officer was Eric Branderiz. In the second half of 2017, Tesla started producing the Model 3, a car for the mass market.

MISC. CASE 5. Dodd-Frank and Corporate Governance Reforms a. In 2017, Congress debated repealing Dodd-Frank. What were four major provisions in Dodd-Frank that impacted corporate governance? b. Has Congress repealed Dodd-Frank? How else could a roll-back on the law occur? MISC. CASE 5. SOLUTION: a. Four major provisions in Dodd-Frank that impacted corporate governance were proxy access by shareholders, majority voting for director elections, “say on pay” vote by shareholders, and pay ratio disclosure. Additional corporate governance provisions include disclosing why a company has chosen to combine or separate the Board chairman and CEO positions, shareholder say on golden parachutes, independence standards for the compensation committee, disclosure on pay for performance between executives and the company’s financial performance, compensation clawbacks following a financial restatement.

b. On June 8, 2017, the House passed the Financial Choice Act which would repeal Dodd-Frank. As of July 9, 2017, the Senate has not taken any action. Discussion also exists about reversing much of Dodd-Frank through administrative regulatory reforms.