Information Regarding CPA's Report - Essay Example

The deferral method specifically focuses on income statement and the tax expense is calculated on the basis of identified revenues and expenses in the income statement. However, the deferral method is not acceptable under GAAP. In contrast, the liability method would estimate the future taxes payable or receivable. Hence, the liability method focuses on the estimation of current as well as deferred tax assets and liabilities. “The amount of income tax expense recognized for a period is the amount of income taxes currently payable or refundable, plus or minus the change in aggregate deferred tax assets and liabilities” (CCH Editorial, p.28). The liability method primarily focuses on the balance sheet.

The changes in the balance sheet elements are used to calculate the amount of income tax expense under this method. 2. Procedures for Reporting Accounting Changes and Error Corrections Generally, accounting changes are of two types including changes in accounting principle and changes in accounting estimate. Mainly, there are two approaches available for reporting accounting changes. They are retrospective approach and prospective approach. Under the retrospective approach, comparative financial statements are recast to clearly illustrate the changes.

In addition, related accounting records are properly adjusted to indicate net effect of the change as of the starting of the current period. In addition, the identified accounting changes and their effects on the income statement and balance sheet are appropriately attached to the financial statements. The prospective approach is used when the application of retrospective approach becomes impractical. In case of reporting error corrections, the cumulative effect of the correction has to be reported as a prior period adjustment if only the statements relating to the current period are presented.

“If comparative financial statements are presented, then the error should be corrected in the earliest affected period presented by correcting any individual amounts on the financial statements” (FASAB). In addition, the effect of correction of an error in previous financial statements on relevant balances must be properly disclosed. 3. Rationale Behind Establishing Subsidiary as a Separate Corporation The concept of making subsidiary as a separate corporation adds to the operational efficiency of an organization.

When a parent company and its subsidiaries operate as separate legal entities, either of them may individually involve in legal proceedings, bankruptcy, or tax delinquency without depending on the other. In addition, the separate operation would be assistable to prevent a non-profitable subsidiary from operating at the expense of the holding company. Hence, the subsidiary corporation would be forced to raise operating funds by itself to meet its business requirements. When a parent company and its subsidiaries operate as a single corporation, the business management would be a cumbersome task because the single firm becomes responsible for dealing with huge volume of transactions.

In addition, the separate operation would aid the holding company to take advantage of tax duties and public sector spending. This concept is also beneficial for the holding company to timely identify the operational pitfalls of its subsidiaries and recommend