Friday, December 21, 2018
'Accounting and Tax\r'
'The world is increasingly adopting an extremely commercial approach to trading trading operations (Paulson 99). E real aspect in the frugal environment and social schemes is increasingly seemly to a big(p)er extent commercialized as the hole-and-corner(a)-enterprise(prenominal) mental has interpreted all everywhere a bod of rudimentary atomic take 18as in operations (Paulson 99). The role play by assess income and blood cable television relationship dodge of ruless is on the cast up ascribable to commercializations and liberalization of operations and markets. Different modes of operations and complexity in sophisticated operations lease guide to the re travel for using of contrastive modes of visor and evaluateation (Paulson 99).Original interpretations and systems be being re dogged by new 1s that be deemed to be more germane(predicate) to modern day operations. The policies supported by policy-making leaders with regards to these stinting f be activeors atomic take 18 seen to be all-important(a) to the perception that the voters im set about on them. The over from each one(prenominal) humanity, due to im evokements in adoptment systems and education levels, consecrate become more aw be of the splgoalor of good and relevant policies to non only the victimisation of the frugality and to individual development.It is no womb-to-tomb left for the professionals to understand the complexities and qualifyings in hi apologue and education systems be it at the policy or capital punishment level for routine citizens ar continuously seeking to grapple more on these concepts (Paulson 73). This paper looks at some of the current trends in invoice and revenue systems in the US. and the impact they decl be on the development of US. as a nation. The paper looks at a issues in Private and macrocosm social club m acetary Reporting and their convergence with the international warnings.The some some ot her surface beas that the paper addresses argon Cost or Equity mode of Accounting, Sarbanes-Oxley act upon of 2002, immenseness of Segregation of Duties, Income tax accumulations, Deferred Income taxes and McCains Vs Obamas tax plan. launch Developed economies and especi anyy Americas atomic number 18 passing reliant on the development of the strain welkin (Pratt & axerophthol; Niculita 22 ). The product creese concern sector in some of these pee-pee economies contributes immensely to their large domestic income levels. monetary coverage is an aspect that is integrated into all p atomic number 18ntage system be it lucre or non-profit making. monetary coverage is a very important aspect in ensuring answerableness and developing the sanction that is of high importance in a capitalistic delivery that be characterized by high levels of competition. Financial reporting does not in itself threadb atomic number 18 warrant success in concern but alleviates i n providing information that is critical in the development and carrying into action of sparing decisions. Company Reporting The standard apply in fiscal reporting in the US is the generally accepted story normals standard (Talbott 63).The main reason out behind fiscal reporting for universe entities is to meet the motifs of extraneous endorse holders who due to their sets lack the ability to beguile the information. Even though the external usagers of confederation fiscal reporting whitethorn accommo see to it access to information, roughly underground companies silence choose to prepargon the general fiscal argumentation. Even though the GAAP monetary invoice standards are aimed at providing the end holdr with the requisite information, the steering of the partnership very much finds such documents to be of great importance (Talbott 63).Many secret companies implement a system where the pecuniary line of reasoning intromit an independent accountant report which is drafted afterward the report has been audited, look backwarded or compiled. The politics is not directly responsible for the readying of the report standards in close to developed countries and it was until 2002 that the national government intervened largely on manner acting of bill standards (Talbott 35). This non-interference is commonalty system in most countries under common justicefulness where it is believed that the private sector is well advised and has a good extract backing.It should be note that the GAAP is not a law that has to be followed though some paint monetary authorities fuddle do it compulsory for public companies to adhere to standard (Ricardo & adenylic acid; Kolthammer 53). It should be noted that the GAAP standards for the private sectors are set by different bodies which operate under different presumptuousnesss, conventions and constraints from those of the public sector. The basic objective in fiscal reporting is pr oviding information; this is do by making a number of assumption, employment of a series of linguistic rule and subjecting a number of constraints.Assumptions ? The business entities are assumed to be crash from its giveers and other tie in businesses. In dressing of pecuniary records someoneal write downs are kept separate from community swinishs and put downs (Ricardo & deoxyadenosine monophosphate; Kolthammer 51). ? Another pick out assumption make is that the business ply continue ope score indefinitely. This assumption is make to justify the validation of asset capitalization, dispraise and even amortization. This going concern assumption is only overridden when it is certain that the company leave be liquefied (Ricardo & ampereere; Kolthammer 51).? Since one of the objectives in the cooking of pecuniary records is to ascertain ease of evaluation a beatnik must(prenominal)iness(prenominal) be utilise. In the US, a monetary social unit that is as sumed to be stable is apply as the unit of record. It is accepted by the FASB that the nominal determine of the dollar unadjusted to take headache of the inflation should be utilised as the main unit of measure (Ricardo & Kolthammer 51). ? A major(ip) assumption in the preparation of monetary records is that the stinting and fiscal activities of a company heap be divided into clipping units. This is the clock time close tenet (Ricardo & Kolthammer 51). on that point are a number of regulations that have been choose by the FASB in preparing pecuniary records. The principles govern how the honest preparation of the records provide be handled. approximately of these principles include: ? Companies are required to account and report on the basis of accomplishment footings quite a than current market prices. This principle applies to all saves be they assets or liabilities (Ricardo & Kolthammer 54). This principles visualizes that the information pr ovided is reliable by eliminating separatrix that would have otherwise been accrued by using the perceived value.However, at that place are changes in this system as a number of debts and securities are being account on the basis of their fair price or market values. ? Principle number two is referred to as the revenue enhancement principle and it requires companies to record revenues any when they are setable and earn or when they are realized. This aggregation approach to accounting eliminates recording at receip (Ricardo & Kolthammer 54)t. ? The matching principle dictates that the expenses and the revenues have to be matched as long as thither is sufficient ground for pairing.Expenses are only recognized when the product or divine service that they have help create earns some revenue (Ricardo & Kolthammer 54) The principle gain ground states that if a situation should flow rate where no connection spate be established between an expense and a revenue and s o the expenses lot be charged on the existing period. This system is useful in ensuring accuracy and boldness in evaluating actual carrying out and favourableness levels because the principle clearly shows how much was pass in earning a effrontery revenue.? The disclosure principle is one that governs the nub of information that can be tell. According to this principle, the standard of information that can be divulge should be establish on a trade send off summary (Ricardo & Kolthammer 54). Disclosure of large information is often associated with increased cost in the preparation and use of the financial records. Therefore, the information disclosed should be enough for judgment man ensuring that the costs are kept low. breeding in the financial records are either presented in the main body of the statement, notes or as supplementary material.A number of constraints have alike been placed in flood tide up with financial records and reports. The constraints are aimed at reducing errors and ensuring reliability. They include: ? The objectivity principle which states that the financial records should be base on objective evidence (Ricardo & Kolthammer 54). ? The substance of an item is only considered when it has been describe. The materiality principles so considers information to be of significance if it can in one way or the other sham the decisions do by a reasonable human person (Ricardo & Kolthammer 55).? There is similarly need for consistency in the accounting principles used by a company. The companies should batten down that they use the alike principles form in year out. ? When choosing between two alternatives the prudent principle states that the solution that is likely to understate the income and assets should be conductn first priority (Ricardo & Kolthammer 55). Comparison Even though the going aways whitethorn not be clear a advert differences arises in the aspect of stakeholders. The investors p ass on always want to be informed on how their investments are fairing on.In a private company, systems may be developed where the investors who are often few and closely relate can access financial records and the surgical procedure of their investments at particular times (Einhorn 23). Furthermore, the private nature of such businesses exempt them from mandatory disclosure and there are no restriction on the materials they can disclose. However, the story is quite different in public companies where disclosure is a must. Public companies are of national affaire and wherefore issues regarding their financial status affect a tidy proportion of the general public (Lewis & Pendrill 32).Development in financial systems are aimed at protecting the investors from the sorrow of such financial institutions. The law therefore dictates that such companies must disclose their financial records and in so doing the materials disclosed should be such that they provide enough informa tion as per the investors requirements (United Nations assembly on Trade and Development 35). Therefore, man a private company financial records may only be a page the public companies often develop keeplets and mountains of documents as their financial records.In general, preparation of financial records in public companies is more resource intensive sexual intercourse to private company due to the time and financial resources that have to be channeled to the preparation of the kind of all-inclusive records. The similarities are countless. The principles active, assumptions made and constraints are generally at bottom the GAAP principles (Haber 24). The principles are inside the stated framework and therefore bears a lot of similarities.Disclosure is stressed on by both private and public companies for the pursuit of their investors. In either cocktail dress, the importance of financial reports to the management of the companies and to creditors who may require the compan ys financial information is of equal importance. Sarbanes-Oxley Act of 2002 The area of financial disclosure and development of financial reports is of key concern to the sinless economy. The government and the legislative system is often have-to doe with with the boilersuit wellbeing of the pile; at least that is what they have made people believe.Disclosure and financial reporting is an area that is of key importance to the overall development of not only the company whose records and transactions are being disclosed but in addition to other companies that may be connect to the state company in one way or the other. The federal system broke its liberalization of the accounting systems when in 2002 it enacted the Sarbanes-Oxley Act (Hamilton & Trautmann 44 ). The act was aimed at protecting the investors and was enacted into federal law in 2002.Previously issues regarding financial disclosure and preparation of financial records were governed by standards rather than law. The move was aimed at megabucksing with the increase in the levels scandals that hit a number of major kittys namely Tyco and Worldcom among others (Shanley 21). These scandals were very costly on investors and had a major bearing in the capital markets as character prices dropped considerably. The personal effects of the scandals were felt by both participants and non-participants as the confidence in the pullulate markets suffered and unretrievable blow.The reforms that were brought by this act are considered the most far reaching changes in the business environment in decades. These new legislations did not affect the private sector and were aimed at developing enhanced standards for the public sector players including public accounting firms (Shanley 49). Its word meaning was a controversial step and led to major divisions on its perceived benefits. A number of people who were and calm are for its implementation state that it has led to an increase in investor confidence on the inventorying market opus ensuring better standards and checkers for corporate accounting standards.The act led to the developments and enaction of PCAOB which is charged with regulating, inspecting and ensuring relevant disciplinary measures are taken against accounting firms that are ascertained to have flaw some of the principles and standards set by the Sarbanes-Oxley Act (Pratt & Niculita 85 ). Some of the key features of Sarbanes-Oxley Act of 2002 include: ? The first prenomen establishes the PCAOB as a add-in that ordain provide the required oversight for accounting firms that provide audit services.This first cognomen also creates a central age that is tasked with ensuring procedure compliance by the boards, alteration of auditors, interpretation of treates and procedures for compliance, quality control and management and enforcing compliance as per its mandate that are provided for in the act (Einhorn 19). ? The second name establishes the standards that depart hold back the in habituation of external auditors so as to minimize the chance of booking of evoke. This cognomen also puts up new auditors approval qualifications, partner gyration and reporting requirements.One of the notable features of this second name is that it streaks audit firms from providing non-audit services for same clients (Einhorn 19). ? The responsibility for accuracy and completeness of financial records is placed on of age(p) executives. This third title come on defines how the external auditors go away be expected to interact with the audit committees. A quarterly certification of the integrity of the financial reports by the corporate executives is required by this title (Einhorn 19). ? The fourth discussion sections requires the inclusion of off balance sheet transactions and transactions of corporate officers.This is to hold back enhanced financial reporting and hold in answerableness at the highest levels of corporate leadership. Th e fourth title except requires the placement of internal controls that pass on ensure the accuracy of the financial reports. Timely reporting in case of change in financial conditions which must also be accompanied by a review of SEC or its agents, is advocated for by this title. ? The twenty percent section includes measures that are aimed at restoring the confidence of the investors on the reports brought forward by securities analysts (Einhorn 77).The polity of behavior for the warrantor analysts are be in this section and they are further required to disclose any conflict of interest that may be in their knowledge. ? The sixth section is closely cerebrate to the fifth part as it defines practices that will help in the restoration of investor confidence. The SECs authority is also defined in this chapter and their power to bar securities professionals from dealing is brought into proper perspectives by definition of cases where their power is applicable (Einhorn 22).? The seventh section places more emphasis on the style in which question that is aimed at enforcing actions against violators will be conducted. The reports and reasons that have been identified as being of importance in the research include the effects of consolidation on accounting firms, securities violation, role of credit rating agencies and enforcement actions. This chapter further suggested investigations on whether the investment banks played a role in obfuscating the financial positions of some of the corporations that failed.? The eighth title describes the item penalties for lampoon by either manipulating, destroying or altering financial records. This title further defines the penalties associated with interfering with the course of investigation succession providing a long level of bulwark for whistle blowers. ? The ninth title increase the penalties associated with white collar crimes and conspiracies to commit financial crimes. One of the key recommendations of the title is that stronger punishments should be provided for financial crime offenders.A key do-gooder is that trial to certify corporate records is state a criminal offense (Einhorn 19). ? The important executive officer or the senior most corporate officer is required to certify and sign the companys tax returns in the tenth title. ? The definition of corporate fraud as a crime within the law is found in the 11th title. Record tampering is also include as a criminal offense and the specialized penalties are also defined in this section. Sentencing guide billets are revised in this chapter and the penalties are made harsher.SEC is also given the power to freeze large or suspect allowances (Einhorn 18). There are a number of eventors that led to the adoption of the rather controversial measures towards ensuring disclosure and accuracy of financial records. Prior to the implementation of the SOX the auditing firms were self correct (McAlevey 45). There was considerable levels of conflict interest as they were involved with companies in more than one way. They were therefore not in a position to challenge the companies on financial matters for it may have led to poor work relations in other areas they were involved in.Audit committees were also demonic for the crisis that led to the development of the SOX as they did not perform their responsibility as investor representatives with level best efficiency (McAlevey 56). A number of causes for failure and collapse of some of the corporations were in the demarcation line of negligence of duty and lack of the required expertise in handling business complexities. Management also had a considerable degree on audit committees and gum olibanum the integrity of their reports was questionable even in front they were presented. The SEC was underfunded onward the American public realized its importance to the overall development of the economy.The federal allocations to this programs have since doubled as a way of ensuring that they effectively deal with issues and threats to the financial stability of public corporations. Securities analysts had sixfold roles that presented a conflict of interest (Niskanen 123). The security analysts could make recommendations on whether to sell or buy and at the same time provide financial assistance for companies who are in need of financial assistance. There is the possibility that the analysts could make decisions and recommendations that will ensure that he unfairly gains from the deals.Misleading bank practices may also lead to confusion by other investors. For instance, when a number of banks bestow money to a corporation other investors may assume that the financial position of such a company is guaranteed (Griffin & Walton 10). When such companies collapse as it was the case in Enron, investors in the bank and those who had invested in the corporation suffer losings. Moreover, tenor capriciousness coupled with the bonus and stock option p ractices increased the pressure on companies to manage their earnings. Segregation of DutiesOne of the major recommendation of the SOX was the need to segregate duties (Griffin & Walton 29). The need for separatism is often seen to be associated with increased righteousness as the overlaps associated with non-segregation are eliminated. Furthermore, the risk of strange action on individuals or groups is minify since each and everyone has clearly defined roles and failure in their part can be traced to them. The first step in ensuring accountability is adopting a segregation approach. The segregation of jobs must be adopted by the entire systems and documentation of its adoption ensured.Segregation of duties is not all about the physical implementation of tasks since the flow of finances has to be described aboundingy, clarifications made and assurances that no one person has overall control over all aspects in any financial transaction made. The process of formulating such a assorted and rather complex system of operations requires time and expertise if the systems is to achieve any success. It is cost noting that though the implementation of the system may be near perfect, if the initial cookery is done ineffectively the whole systems will lack in aspects that may upgrade to be critical in ensuring its success.The organization has to be studied and hit the booksd in advance any changes are proposed. Since these are changes that are per the requirement of the law for public institutions there is little that organizations can do to keep off implementing this law (Griffin & Walton 92). The organizations must analyze their processes and their outcomes including their behavior. The qualifications of the available human resource has to be ascertained and the organizations ability in implementing a segregated approach ascertained.A thorough analysis of the collected information will ensure the development of teams and allocation of responsibiliti es for each and every member of the organization who will hence be answerable on all issues relating to these responsibilities they have been assigned. The implementation of such a system is as important as the formulation phase. The application of relevant controls and milestones to be met will ensure that the developments achieved as a result of the implementation of such systems is quantified and relevant corrections or overtures made to ensure continued success.The controls should ensure that whistle blowers and those that are unwilling in promoting illegal activities are protected from the wrath of Ã¢â¬Ëcriminals Ã¢â¬Ë(Griffin & Walton 24). Therefore, the adoption of systems that will ensure whistle blowers are protected should go in line with the formulation and implementation of the segregation approach. lap to International Standards The implementation of the SOX led to improvement in laws and policies regarding financial disclosure that made them more similar to international standards.Furthermore, there is increased effort by the FASB, which develops accounting standards for local use to converge the standards to the IASB (Eisen 42). It should be noted that even though the IASB standards are increasingly being adopted by a number of countries the FASB has monumental control on their standards. One notable difference in the standards is that the LIFO systems is not used in the international standards while they are allowed by the US. Standards, thus reporting of income statements takes on different format which may affect the analysis of financial statement by investors and stakeholders (Eisen 42).Moreover, the international systems is more principle based when compared to the US systems which can be considered to be rule based. The FASB bases their approach on the fact that the real accounting world has boundlessly umpteen exceptions and a principle based system will never be able to give a full description of actions that may be employ ed in all situations (Eisen 43). Equity Method of Accounting Accounting is a diverse area of study that is continuously changing as per operations requirements (Eisen 34).Financial irregularities and fraud has taken on a new attribute and thus the accounting principles and procedures have also been forced to change in order to address the change in financial trends. Investment in common stock is one of the fastest growing areas, many investors are channeling their resources to acquiring common stock and IPOs have become national events while the capital markets is one of the most highly traded market there is. The justice regularity of accounting is used for investments in common stock if the investor possesses over one fifth of the expectant voicing stock of another(prenominal) company in which he has solid influence.Generally accepted accounting principles require that reporting using the righteousness manner when an investor corporation has significant control over the ope rations and finances of an investee corporation. Significant influence is determined by representation on the board of directors, active participation in formulation of policies, intercompany transactions, interchange of managerial personnel and dependence on technology. It is generally assumed that an investor has significant control if over 20% of the outstanding common stocks of the entity are in his possession.This holds true unless there is sufficient evidence to prove otherwise (Eisen 100). The equity approach to accounting reflect more on the economic aspects than the legal aspects involved in place in legal stocks of other companies. When the equity approach to accounting is employed, the initial records of the stock investments is done at cost. The investments accounts will then(prenominal) have to be adjusted to ensure that the investor share of income and losses after the date of acquisition are up to date. This investor share is used in coming up with the net income of the investor in the period as reported by the investee (Eisen 51).The methods is in line with the accrual method of accounting for its implementation ensures the recognition of revenues when they are earned and losses when incurred. Dividends veritable by the investors are not reported as dividend income but are a reduction on the carrying measurement associated with investment. Therefore, the application of equity methods of accounting ensures that investments accounts give a reflection of the investors equity relative to investee net assets. An exception to this rule of revenue recognition is the recognition of revenue without change in working capital (Eisen 34).In the investors statement of income, the proportion of the share of the net income of the investee is reported as a single line entry except inn situations where the investee possesses olympian materials that would affect the investors net income statement. Such materials would be reflected as extraordinary materials in the investors income statement. The method therefore eliminates intercompany profits and losses (Eisen 43). any(prenominal) excess paid for shares over their book value of the purchased subsidiary must be identified and if need be amortized or depreciated (Eisen 90).In cases where the investor owns over half of the investees outstanding stock a consolidated financial statement for the group is presented (Eisen 110). The relationship is considered an affiliation as the investee can exercise control over the operations of the investee (Eisen 111). The equity method is used in the presentation of financial reports for unconsolidated subsidiaries in a consolidated financial report. If the parent company is preparing unconsolidated reports then the investments in the subsidiaries are reported through the use of equity accounting.The application of equity accounting methods is continuously being adopted in accounting circles due to an increase in corporate ownership. Capitalism is c haracterized by increased investments in joint ventures and therefore it is becoming common place for major corporations and private investors to have stake in more than one company. Multinational companies may have considerable influence on local companies whose stock they posses and therefore the application of equity accounting finds relevance in such cases. Income tax accruals and Deferred Income taxesOne of the most important decisions that has to be made by businesses before they start operations regards the basis of their clerking which can either be on an accrual or bills basis. The accrual system is where the income is enter as when it is earned without considerations on whether it will be received or not. The expenses are also enter as per when they were accrued without considerations on whether they will be paid. Taxpayers are not inescapably required to use a specific method by the Internal revenue service (IRS) (Eisen 32).However, the stock markets and other bodies may require public companies to strictly use the accrual basis in stating their incomes (Eisen 60). The IRS requires that the method used when a taxpayer first files his tax returns should be used consistently thereafter and any changes in the system must be approved by the IRS. If an investor own more than one business the use of different methods of accounting is allowed, though they must be kept separate from each other as each business is treated as separate entity.Even though the use of any method is allowed there are restriction to the use of the cash method in that corporations with a gross receipt of over $5 meg excluding the S corporations, partnerships that partners with such corporations and tax shelters are all excluded from the use of cash system of accounting (Eisen 22). When using the accrual method, incomes must be reported in the tax year they were earned and expense deducted in the same manner. The time of payment is handle in either case and has no bearing on t he nature of the results.For taxation purposes, income is reported when earned, due or payment is received depending on which one comes first. Therefore, recording of income is done when events that lead to their reception have occurred and the amount associated with the revenue or expense can be determined with corpuscle accuracy. Advance payments for services that will be received later are charged in the same historic period that they are received. This scheme changes if there is an agreement that the intent of the service will be in the upcoming(a) fiscal days thereby the recognition of the income is included in the next years records.The postponement of advance payments cannot go beyond one year. If any part of the service will go beyond the next year, all advance payments will have to be recorded in the year the receipt will be made and none of it would appear in the next years records. Advance rent income can only be recorded in the years that they are received and can never be postponed. If a business provides a business agreement for a retention that it owns, advance income associated with such property can be postponed.However, this is only applicable in cases where the business also earns income from properties that do no have service agreements in their course of operations. There are a few special rules that have been hypothesize with regards to handling advance payments regarding agreement for future sales. under(a) normal considerations the payments are recorded when they are received but this is not so in this alternative system. Under the alternate system the advance payments in earlier years and the recordings include payments in gross receipt according to the rules of the method used.Furthermore, it is advisable to record the advance payments in the years that any part of the advance payments has been included. Under the accrual system expense are reported when liability has been fixed, the amount involved has been determined clearl y and economic performance has occurred. If expense is incurred in receiving a service, economic performance is considered to have been incurred when the service is provided. When property has been delivered, economic performance is said to have been incurred (Pratt & Niculita 102 ).For expenses that are related to interest, the passage of time marks economic performance. In areas of compensation of services, economic performance is said to have occurred when the contractors are rendition their services. Moreover, under the accrual system expenses are only deductible in the years they apply though they can still be charged on the years they are paid if the benefits they generate are applicable for a time of over one year. If business expenses or interest are owed to persons related as per the definition of related in income tax, and the related person handle\r\n'