Navigate the Financial Accounting Standards Board Accounting Standards Codificat

Question

Navigate the Financial Accounting Standards Board Accounting Standards Codification, FASB ASC database at http://aaahq.org/ascLogin.cfm (Username: AAA52235; Password: 64zySCV) to answer each of the research questions below. For each question, cite relevant code numbers and paragraphs with your brief interpretation.

1. Daniel Stone wanted to know whether changes in tax laws and rates during the current year would affect the computation of his firm’s deferred tax liabilities and deferred tax assets.

2. How should derivative instruments be measured initially?

3. Geo Corp. has decided to issue a stock dividend equal to 20% of the previously outstanding shares to increase the marketability of its stock. How should the stock dividend be properly accounted?

4. What is the primary purpose of a statement of cash flows?

Explanation / Answer

1.Answer
Debt that turns into utterly nugatory within the taxable yr is deductible as a business dangerous debt. To deduct a business dangerous debt, the taxpayer have to exhibit the existence of a valid debtor-creditor relationship, that the debt used to be created or received in connection with a trade or trade, the quantity of the debt, the worthlessness of the debt, and the year that the debt grew to become nugatory.
The latest Tax courtroom case, Sarvak v. IRS, T.C. Memo 2018-sixty eight, illustrates the hindrance with picking simply when a debt becomes worthless. It faulted the taxpayer for not delivering function proof that a nasty debt grew to become worthless in the 12 months he claimed.
IRS broadcasts curiosity charges For Late payments And Tax Refunds
interest charges are staying put - as a minimum on the subject of the internal earnings provider (IRS). The IRS has introduced in income Ruling 2018-18 that curiosity rates will remain the equal for the third calendar quarter (opening July 1, 2018) as they did for the final quarter.
The premiums for the third quarter for members might be:
5% for overpayments; and
5% for underpayments.
Under the inner sales Code, interest premiums are determined on a quarterly groundwork. For individual taxpayers, the overpayment and underpayment charges are calculated utilising the federal brief-time period cost plus three%. Probably the most recent interest charges are computed from the federal short-time period cost determined during April 2018.
Heirs of Heirs of Heirs of Heirs Love Dynasty Trusts
by using Ben Steverman
June 10, 2018
every body dies finally, however in the event youâre wealthy enough, your cash could are living perpetually. Dynasty trusts are a software to make that feasible. Due to the tax overhaul signed by means of President Donald Trump in December, these trusts are getting new concentration from ultra-wealthy americans looking to furnish for the monetary desires of grandchildren, satisfactory-grandchildren and past.
1. What are dynasty trusts?
Most trusts -- financial institution money owed held by using one individual, a trustee, for the improvement of an extra person or workforce -- include expiration dates. A number of states, including Delaware and South Dakota, permit trusts to last ceaselessly. Folks from throughout the U.S. Can open dynasty trusts in these states, and prime wealth planning businesses say theyâre doing so.
2. Why are they getting standard now?
The tax overhaul doubled -- to $eleven.2 million for an person and $22.Four million for a married couple -- the amount that can be handed to heirs with out triggering property and gift taxes. However these bigger thresholds are most effective in place until 2025, giving the rich a possibly restricted possibility to go more wealth to household individuals tax-free, while additionally exerting some manipulate over how heirs spend their inheritances. The better exemption amounts additionally mean rich families can transfer adequate assets to dynasty trusts to justify their additional set-up and administration fees.


2.Ans
The definition of a derivative instrument under IAS 39 is tighter than the corresponding definition under, for example, UK GAAP. According to IAS 39, a derivative instrument has three characteristics:
Its value changes in response to changes in the ‘underlying’ price or index.
The underlying price will often be an interest rate, an exchange rate or a bond price, with an underlying index being an index of such prices.
It requires little or no initial net investment.
This is determined with reference to the actual price of investing in the underlying instrument. A forward foreign exchange contract, for example, is considered as a derivative because it requires no initial net investment – payment is due on the settlement date. A foreign exchange option contract is also considered as a derivative because, although an initial premium is payable, it only gives the right to purchase the foreign currency. The actual investment in the underlying instrument (in this case the foreign currency) only takes place if the buyer of the option chooses to exercise that option.
It is settled at a future date.
Once derivatives have been identified, IAS 39 specifies how they should be recognised both initially and subsequently in the company’s accounts. Under IAS 39, all derivative instruments are classified as ‘held-for-trading’ investments, unless they qualify for hedge accounting and are accounted for as hedges. This means that all such derivative instruments have to be measured at fair value, with any changes recognised on the company’s income statement.
IAS 39 also explicitly recognises that some derivative instruments can be ‘embedded’ in other contracts, for example investments in convertible and exchangeable bonds. To ensure that these instruments are accounted for consistently, IAS 39 requires that where the economics of the ‘embedded’ derivative are not ‘clearly and closely related’ to the economics of the host contract, then the ‘embedded’ derivative should be accounted for separately. In particular, where that ‘embedded’ derivative could have been sold separately, then it should be accounted for separately.
The recognition of financial liabilities
IAS 39 states that liabilities held for trading are measured at fair value with all changes in an accounting period recorded in the income statement. All other liabilities, which are not held for trading, are held at amortised cost.
IAS 39 extends the principles established in IAS 32 for distinguishing between equity and liabilities, such that some instruments that were classified as equity under IAS 32 would be treated as liabilities under IAS 39. Broadly speaking, under IAS 39 an instrument is classified as a liability when the holder of the instrument is not subject to equity risk. This will include all instruments where the holder will receive settlement of any obligation in cash or where the holder has the right to receive settlement in cash. In addition, an instrument is treated as a liability when the issuer’s obligation, even when paid in the issuer’s equity shares, is subject to future events. An instrument is only considered as equity when the holder takes equity risk such as, for example, where the instrument holder will be paid a fixed quantity of equity shares, whose value may vary, at some point in the future.
Transitional rules
Any company adopting IAS for the first time will have to prepare carefully for the transition process. Adopting the new rules may cause significant changes to accounting practice for listed European Union companies, which will have to account to IAS by 2005.
Identification and measurement of assets
Firstly financial instruments, both assets and liabilities, have to be classified with reference to the IAS 39 definitions. Then these assets and liabilities will have to be measured according to their classification.

3.Ans

Stock Splits and Stock Dividends

Stock splits

Let's say that a board of directors feels it is useful to the corporation if investors know they can buy 100 shares of stock for under $5,000. This means that the directors will work to keep the selling price of a share between $40 and $50 per share. If the market price of the stock rises to $80 per share, the board of directors can move the market price of the stock back into the range of $40 to $50 per share by approving a 2-for-1 stock split. Such an action will cause the total number of shares outstanding to double and, in the process, cause the market price to drop from $80 down to $40 per share. For example, if a corporation has 100,000 shares outstanding, a 2-for-1 stock split will result in 200,000 shares outstanding. Since the corporation's assets, liabilities, and total stockholders' equity are the same as before the stock split, doubling the number of shares should bring the market value per share down to approximately half of its pre-split value.

After a 2-for-1 stock split, an individual investor who had owned 1,000 shares might be elated at the prospect of suddenly being the owner of 2,000 shares. However, every stockholder's number of shares has doubled—causing the value of each share to be worth only half of what it was before the split. For example, if a corporation had 100,000 shares outstanding, a stockholder who owned 1,000 shares owned 1% of the corporation (1,000 ÷ 100,000). After a 2-for-1 stock split, the same stockholder still owns just 1% of the corporation (2,000 ÷ 200,000). Before the split, 1,000 shares at $80 each totaled $80,000; after the split, 2,000 shares at $40 each still totals $80,000.

A stock split will not change the general ledger account balances and therefore will not change the dollar amounts reported in the stockholders' equity section of the balance sheet. (Although the number of shares will double, the total dollar amounts will not change.)

Although the 2-for-1 stock split is typical, directors may authorize other stock split ratios, such as a 3-for-2 stock split or a 4-for-1 stock split.

While account balances do not change after a stock split, there is one change that should be noted: the par value per share decreases with a stock split. Even though there are more shares of stock, the total par value is unchanged. For example, if the par value is $1.00 per share and there are 100,000 shares outstanding, the total par value is $100,000. After a 2-for-1 split, the par value is $0.50 per share and there are 200,000 shares outstanding for a total par value of $100,000. Note that the total par value remained at the same amount. A memo entry is made to indicate that the split occurred and that the par value per share has changed.

Stock Dividends

A stock dividend does not involve cash. Rather, it is the distribution of more shares of the corporation's stock. Perhaps a corporation does not want to part with its cash, but wants to give something to its stockholders. If the board of directors approves a 10% stock dividend, each stockholder will get an additional share for each 10 shares held.

Since every stockholder received additional shares, and since the corporation is no better off after the stock dividend, the value of each share should decrease. In other words, since the corporation is the same before and after the stock dividend, the total market value of the corporation remains the same. Because there are 10% more shares outstanding, however, each share should drop in value. With each stockholder receiving a percentage of the additional shares and the market value of each share decreasing in value, each stockholder should end up with the same total market value as before the stock dividend. (If this reminds you of a stock split, you are very perceptive. A stockholder of 100 shares would end up with 150 shares whether it were a 50% stock dividend or a 3-for-2 stock split. However, there will be a difference in the accounting.)

4.Ans
The purpose of the cash flow statement or statement of cash flows is to provide information about a company's gross receipts and gross payments for a specified period of time.
The gross receipts and gross payments will be reported in the cash flow statement according to one of the following classifications: operating activities, investing activities, and financing activities. The net change from these three classifications should equal the change in a company's cash and cash equivalents during the reporting period. For instance, the cash flow statement for the calendar year 2013 will report the causes of the change in a company's cash and cash equivalents between its balance sheets of December 31, 2012 and December 31, 2013.
In addition to the cash amounts being reported as operating, investing, and financing activities, the cash flow statement must disclose other information, including the amount of interest paid, the amount of income taxes paid, and any significant investing and financing activities which did not require the use of cash.
The statement of cash flows is to be distributed along with a company's income statement and balance sheet.

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