accounting for leases and deferred taxes 1

Competency

Assess the proper accounting for transactions with respect to deferred taxes and leases using the accounting codification and other accounting research tools.

Scenario

CM Corporation (CMC) was founded six years ago by Phil Connor and Eric Martin. The company designs, installs, and services security systems for high-tech companies. The founders, who describe themselves as “entrepreneurial geeks,” met in a computer lab when they were teenagers and found they had common interests in working on security systems for critical industries. CMC hired you as a junior accountant this year.

Lately, Connor and Martin have been working with “radio frequency identification” (RFID) technology. They have developed a detailed system designed to track inventory items using RFID tags embedded invisibly in products. This technology has numerous inventory applications in multiple industries.

One of the most basic applications is tracking manufacturing components; if tagged components “go walking” (if employees attempt to take them), companies can easily track and find them. Connor and Martin have sold their system to several high-tech companies in the area. These companies have a number of government contracts that require extensive security systems to protect sensitive data from infiltration by terrorists and others. To date, CMC’s cash flow from sales and services has adequately funded its operations.

CMC expects much growth potential for its products. As a result, they are considering going public and expanding internationally in the near future.

Instructions

Last year, CMC recorded a deferred tax asset related to product warranties and a deferred tax asset related to accelerated depreciation. A 75% valuation allowance was also established.

However, with an upcoming possible international expansion, Connor and Martin wonder if the company can now reduce or eliminate the valuation allowance. In addition, Connor and Martin are considering alternative financing arrangements for equipment to be used in the upcoming expansion. However, they have not used equipment leases in the past and would like more information. Per CMC’s request, they would like you to research and present in a memorandum your findings on the accounting for leases under GAAP and IFRS and also report on the following topics:

  1. What are the sources of income that may be relied upon to remove the need for a valuation allowance?
  2. What are tax planning strategies? Could CMC possibly employ a tax-planning strategy to support reducing its valuation allowance?
  3. How does IFRS differ from GAAP regarding accounting for income taxes? Are there any major issues?
  4. What are the capitalization criteria for a capital lease?
  5. What comprises the lessee’s minimum lease payments? What is excluded?
  6. How does IFRS differ from GAAP regarding accounting for leases? Are there any major issues?

Memorandum Mechanics should be as follows:

The body of the memorandum should be a professional presentation centered on clear and concise writing. The responses to the questions should be detailed, well researched, and specifically related to CMC’s industry.

Use the FASB Codification and IFRS to address all technical accounting issues presented in the questions, being certain to reference the applicable sections of the Codification and IFRS in your report.

Any other sources used to support your responses should similarly be properly documented. You should have other credible sources in addition to the Codification and IFRS.

F F C B A
0 1 2 3 4
No Pass No Pass Competence Proficiency Mastery
Not Submitted No explanation given of the sources of income that may be relied upon to remove the need for a valuation allowance. Minimal explanation given of the sources of income that may be relied upon to remove the need for a valuation allowance. Basic explanation given of the sources of income that may be relied upon to remove the need for a valuation allowance. Clear explanation given of the sources of income that may be relied upon to remove the need for a valuation allowance.
Not Submitted No definition and explanation tax planning strategies and how CMC could employ a tax-planning strategy to support reducing its valuation allowance. Minimal definition and explanation tax planning strategies and how CMC could employ a tax-planning strategy to support reducing its valuation allowance. Basic definition and explanation tax planning strategies and how CMC could employ a tax-planning strategy to support reducing its valuation allowance. Clear definition and explanation tax planning strategies and how CMC could employ a tax-planning strategy to support reducing its valuation allowance.
Not Submitted No explanation of how IFRS differs from GAAP regarding accounting for income taxes, or major issues addressed. Minimal explanation of how IFRS differs from GAAP regarding accounting for income taxes, and major issues addressed. Basic explanation of how IFRS differs from GAAP regarding accounting for income taxes, and major issues addressed. Clear explanation of how IFRS differs from GAAP regarding accounting for income taxes, and major issues addressed.
Not Submitted No explanation of the capitalization criteria for a capital lease given. Minimal explanation of the capitalization criteria for a capital lease given. Basic explanation of the capitalization criteria for a capital lease given. Clear explanation of the capitalization criteria for a capital lease given.
Not Submitted No explanation of what comprises the lessee’s minimum lease payments and what is excluded. Minimal explanation of what comprises the lessee’s minimum lease payments and what is excluded. Basic explanation of what comprises the lessee’s minimum lease payments and what is excluded. Clear explanation of what comprises the lessee’s minimum lease payments and what is excluded.
Not Submitted No definition of how IFRS differs from GAAP regarding accounting for leases and explanation of major issues. Minimal definition of how IFRS differs from GAAP regarding accounting for leases and explanation of major issues. Basic definition of how IFRS differs from GAAP regarding accounting for leases and explanation of major issues. Clear definition of how IFRS differs from GAAP regarding accounting for leases and explanation of major issues.

 
"Looking for a Similar Assignment? Get Expert Help at an Amazing Discount!"
Looking for a Similar Assignment? Our Experts can help. Use the coupon code SAVE30 to get your first order at 30% off!

Hi there! Click one of our representatives below and we will get back to you as soon as possible.

Chat with us on WhatsApp