This topic from CA19-7 in the text.
Stephanie Delaney, CPA, is the newly hired director of corporate taxation for Acme Incorporated, which is a publicly traded corporation. Ms. Delaney’s first job with Acme was the review of the company’s accounting practices on deferred income taxes. In doing her review, she noted differences between tax and book depreciation methods that permitted Acme to realize a sizable deferred tax liability on its balance sheet. As a result, Acme paid very little in income taxes at that time. Delaney also discovered that Acme has an explicit policy of selling off plant assets before they reversed in the deferred tax liability account. This policy, coupled with the rapid expansion of its plant asset base, allowed Acme to “defer” all income taxes payable for several years, even though it always has reported positive earnings and an increasing EPS. Delaney checked with the legal department and found the policy to be legal, but she’s uncomfortable with the ethics of it.
Answer the following questions.
- Why would Acme have an explicit policy of selling plant assets before the temporary differences reversed in the deferred tax liability account?
- What are the ethical implications of Acme’s “deferral” of income taxes?
- Who could be harmed by Acme’s ability to “defer” income taxes payable for several years, despite positive earnings?
- In a situation such as this, what are Ms. Delaney’s professional responsibilities as a CPA?
Discussion Part 2
This topic from CA20-1 in the text.
Many business organizations have been concerned with providing for the retirement of employees since the late 1800s. During recent decades, a marked increase in this concern has resulted in the establishment of private pension plans in most large companies and in many medium- and small-sized ones.
The substantial growth of these plans, both in numbers of employees covered and in amounts of retirement benefits, has increased the significance of pension costs in relation to the financial position, results of operations, and cash flows of many companies. In examining the costs of pension plans, a CPA encounters certain terms. The components of pension costs that the terms represent must be dealt with appropriately if generally accepted accounting principles are to be reflected in the financial statements of entities with pension plans.
- Define a private pension plan. How does a contributory pension plan differ from a noncontributory plan?
- Differentiate between “accounting for the employer” and “accounting for the pension fund.”
- Explain the terms “funded” and “pension liability” as they relate to:
- The pension fund.
- The employer.
- Discuss the theoretical justification for accrual recognition of pension costs.
- Discuss the relative objectivity of the measurement process of accrual versus cash (pay-as-you- go) accounting for annual pension costs.
- Distinguish among the following as they relate to pension plans.
- Service cost.
- Prior service costs.
- Vested benefits.