The disagreement as regards the adjustment and modification of the liabilities of the deferred tax in the present year is actually a significant issue from the perspective of financial accounting. However, the letter clearly presents that the company is not keen to cheat on acquiring return whilst adjusting specific amount of tax payable in a specific period of reporting. For this purpose, I would propose the improvement as regards the concept of deferred tax liability as well as postponed tax assets.
Deferred tax liability refers to the item of statement of financial performance that normally takes into account adjustments for short-term variances between the accounting of the corporation as well as the carrying values of taxation (Deegan 2013). Particularly, it is very crucial to understand the way a corporation can make deductions for tax as well as the proposed for particular accounts. It can be observed that there can be variances between taxable income of a corporation and earnings registered before calculation of tax. The corporation can acquire the idea as regards the unrealized tax debt after the implementation of the accounting concepts of the deferred tax liability into the account on the declarations of the performance of the company. As it is known to you, the worth of both the accounts DTL as well as the cash account of the corporation can be reduced by the identical value after realization of the tax (Edwards 2013). On the other hand, over-paid amount of tax in due course return to the corporate in the form of tax respite. As per IAS 12, DTA can be regarded as provisional deductible variances and unemployed tax losses are forwarded. Before acquirement of tax or else realization of the particular amount, it is important for the company to register it as the postponed tax asset. Therefore, it is a vital financial reflection together with the present tax obligation (Pratt 2013).
Nevertheless, the consideration of the company as regards the postponed tax liability is entirely incorrect. Again, the account for adjustment of the postponement of tax liability together with current tax liability is the perfect accounting methodology under the accrual principle of accounting (Henderson et al. 2015). However, concerns needs to be raised in case of the corporation does not take into consideration the DTAs as well as DTLs. In addition to this, it is important to consider the matter associated to the present tax liability. Thereafter, such amount needs to be enumerated as expenses connected to the income tax according to the IAS 12. For instance, the total worth of $200 can be considered as the current tax expenses that can be adjusted under the current tax obligation and can be posted under the current liabilities in the declaration of financial performance.
Conversely, if the corporation registers the account for both DTA as well as DTL whilst enumerating tax in the present year, then the variant amount can be registered as the current liability in the declaration of the financial performance.
Therefore, the above given instance clearly reflects the fact that the company can get different outcomes if the accountant does not consider difference of tax amount at the end of the reporting period. Consequently, the corporation needs to disbursements to pay a particular tax that is necessarily the deferred figure at the later time period (Hoskin et al. 2014). Therefore, the difference of temporary of deferred amount needs to have a strong impression in the present period of reporting. Again, it is important to invest time for the enumeration of the DTAs as well as DTLs and post it as the current assets along with the liabilities concurrently.
It can be notified from your letter that there is concern as regards the variance management in particularly the procedure of warranty accounting. According to the directives of the conceptual framework, a business concern might have a strategy for warranty, under which the corporation can make commitments towards their customers. The commitment is for repairing or else rebalancing different types of losses or damages to the items within a particular number of days succeeding the date of the sales consideration (May 2013). Nevertheless, the subsequent costs associated to the commitment of the warranty cannot be acknowledged with certainty particularly at the sales date. Therefore, there is requirement to make a rational approximation as regards the warranty necessity or else expenses (McLaney and Atrill 2014). Thus, this kind of costs needs to be included with current revenues from the sales. However, in other words, the forthcoming costs of warranties as well as guarantees related to the revenues of the present time period needs to be ascertained during the current period. Again, this needs to be registered in the declaration of financial presentation for revenues as well as expenses and to match the two. Thus, the firm’s practice of not recognizing the warranty expenditure before actually incurring the cost of warranty can be regarded to be incorrect. Thus, it can be hereby ascertained that this is not the correct approach for dealing with frequent variances in the amount of expenses for warranty (Schipper et al. 2017).
However, if the company’s product needs to be replaced or else repaired then the business concern needs to bear the cost of warranty for carrying out the action. In particular, this kind of the prospective costs associated to the warranty can be treated as contingent liability for your corporation. In this regard, it is extremely significant to record the warranty costs in the financial pronouncements of the business concern. According to the generalized principles of accounting, all the corporation must have the potential to approximate the extent of the impending liability (Christensen et al. 2014).
The corporation needs to follow the below mentioned formula for a particular period of accounting:
The management of the corporation is suggested to make use of historical data for establishment of the percentage of products that are probably be regarded as claim for warranty. Again, the industrial data are also significant for enumerating the mean cost of replacement or else repair of product (Christensen et al. 2014). In order to abide by the principle of matching in accounting, the approximated cost associated to warranty needs to be registered in the same period as the revenue is being detected from sales of products. In particular, the essential amount needs to be journalized in the following manner:
Every now and then, the warranty cost liability can be referred to as the warranty reserve. After the first year, the claim for warranty can be made for products previously sold by the business units and the real costs will be incurred for replacement otherwise repair of different defective items. However, the actual costs for warranty, for example, borne during the similar period for the item sold in the first year amounts to $6550. The cost is associated to the year one as this specific cost is enumerated as well as permitted at the time when such kinds of items are sold by the business entity. This kind of expenses for warranty has been registered in the financial declaration representing the pecuniary performance and not the account of the earnings (Spieceland et al. 2013). Therefore, the journal entry for posting the actual warranty costs can be recorded in the following manner:
Therefore, your business concern needs to continue this procedure until the expiry of the warranties and at this time there is need to permit the cost of warranty into account.
It can be hereby ascertained that your company lately has decided to sell one of the segments of the business to a specific Canadian Corporation. In addition to this, it is certainly good that the new business concern is also keen to disburse an additional amount of $1.5 million over and above the fair value of the recognisable net assets. Therefore, it is important to understand that the company’s goodwill can be deciphered as the fair market worth of different identifiable assets as well as liabilities secured from the purchase price (Otley and Emmanuel 2013). Again, if such kind of business deal with the Canadian corporation does not get through, then the provided $1.5 million as goodwill will not adjust in the book of accounts of the corporation. Nonetheless, the principles of IFRS 3 mentions that goodwill needs to be considered if the agreement has persistent influence into the business (Balakrishnan and Cohen 2013). Therefore, the additional payments of $1.5 million over and above the fair value of the identifiable net assets cannot be regarded whilst preparing and presenting the statements of the financial position and performance of the firm. However, this particular amount can increase the fair value and thereby generate goodwill at the end of the reporting period. As a result, the unregistered patent needs to be journalized. Therefore, it can posted in the following manner:
The letter mentions that the business entity has received shares particularly from the Canadian corporation as against this specific business division. This refers to the fact that you are regarded as the shareholder of this corporation. Nevertheless, there are certain deliberations as regards the fraction of ownership that the company gets. Say for example, in case if you are currently holding over and above 50% of the shares of the Canadian company, then that corporation can be treated as subsidiary and can register the shares in the financial declarations of the firm. Therefore, the proportional amount can be acquired from the idea of holding the share percentages (Balakrishnan and Cohen 2013).
Balakrishnan, K. and Cohen, D.A., 2013. Competition and financial accounting misreporting.
Christensen, T.E., Baker, R.E. and Cottrell, D.M., 2014. Advanced Financial Accounting. The McGraw-Hill Companies, Inc.
Deegan, C., 2013. Financial accounting theory. McGraw-Hill Education Australia.
Edwards, J.R., 2013. A History of Financial Accounting (RLE Accounting) (Vol. 29). Routledge.
Henderson, S., Peirson, G., Herbohn, K. and Howieson, B., 2015. Issues in financial accounting. Pearson Higher Education AU.
Hoskin, R.E., Fizzell, M.R. and Cherry, D.C., 2014. Financial Accounting: a user perspective. Wiley Global Education.
May, G.O., 2013. Financial accounting. Read Books Ltd.
McLaney, E.J. and Atrill, P., 2014. Accounting and Finance: An Introduction. Pearson.
Otley, D. and Emmanuel, K.M.C., 2013. Readings in accounting for management control. Springer.
Pratt, J., 2013. Financial accounting in an economic context. Wiley Global Education.
Schipper, K., Francis, J. and Weil, R., 2017. Financial Accounting: Introduction to Concepts, Methods and Uses. Cengage Learning.
Spieceland, D.J., Thomas, W. and Herrmann, D., 2013. Financial accounting. McGraw-Hill Higher Education.