Auditing Special Purpose Frameworks--Leases and Income Taxes

As auditors prepare to audit special purpose frameworks, knowledge of underlying principles in commonly used frameworks is a prerequisite.  Previous articles presented a comparison of some of the basic principles in the AICPA’s Financial Reporting Framework for Small- and Medium-Sized Entities (FRF for SMEs) with U.S. GAAP.  This article continues this comparison.  You may obtain the AICPA’s free Toolkits for the FRF for SMEs on its website. http://www.aicpa.org/interestareas/frc/accountingfinancialreporting/pcfr/pages/frf-smes-cpas.aspx

Accounting principles for these topics are discussed below:

·      Lease Accounting

·      Income Tax Accounting

Lease Accounting

U.S. GAAP:

Traditionally, a lessee treats leases as capital or operating leases depending on certain criteria.  Capital leased assets and capital lease obligations are recorded in financial statements.  Operating leases are disclosed.  A lessor treats leases as sales type, direct financing or operating leases.

FRF for SMEs:

Accounting approaches are generally similar to traditional U.S. GAAP.  A lessee either records capital leases or discloses operating leases. A lessor either records sales type or financing leases or discloses operating leases. General disclosures include:

·        Capital Leases—Lessees:

o       Cost of the leased asset, accumulated amortization and the amortization method used.

o       Interest rate, maturity date and the outstanding balance of the obligation.

o       Any security for the lease.

o       Interest expense related to lease obligations.

o       Aggregate payments in each of the five years after the reporting date.

·        Direct Financing and Sales-Type Leases—Lessors:

o       Net investment in each type of lease and implicit interest rates.

·        Operating Leases

o       Lessees—future minimum lease payments in total and for each of the five years after the reporting date.

o       Lessors—cost of assets held for leasing and the related accumulated amortization.

Income Tax Accounting

U.S. GAAP

A deferred income tax method is use to determine the effects of temporary differences between financial and tax reporting.  The standards require management to evaluate and disclose uncertain tax positions for all open tax years, for all taxing jurisdictions. Any estimated liabilities for unsustainable positions should be recorded in the financial statements.

FRF for SMEs:

Management may elect either an income taxes payable method or the deferred income taxes method.  Uncertain tax positions are not required to be evaluated or accrued.  General disclosures include:

·        The accounting policy—income taxes payable or deferred taxes method.

·        For the income taxes payable method:

o       Provision for income tax expense or benefit include in net income or loss before discontinued operations.

o       Explanation or reconciliation of the differences between statutory rates and the effective rate.

o       Unused loss or tax credit carryforwards.

o       Any allocation of expense or benefit to equity transactions.

·        For the deferred taxes method:

o       Current and deferred income tax expense or benefit included income or loss before discontinued operations.

o       Any allocation of expense or benefit to equity transactions.

o       Total amount of unused tax losses and credits and amounts of any temporary differences for which no deferred tax asset has been recognized.

o       Explanation or reconciliation of the differences between statutory rates and the effective rate.

o       Unused loss or tax credit carryforwards.

·        Pass-through entities will disclose they are not subject to income taxes.

A series of four live webcasts on the AICPA’s FRF for SMEs can be accessed by clicking the applicable link on the left side of my home page, www.cpafirmsupport.com.