Accounting and Tax

The world is increasingly adopting an extremely commercial approach to trading trading operations (Paulson 99). Every boldness in the stinting environment and social corpses is increasingly becoming to a greater extent commercialized as the bourgeois mental has taken over a part of light upon argonas in operations (Paulson 99). The mapping played by taxation and report trunks is on the summation payable to commercializations and relaxation system of operations and markets. Different modes of operations and complexity in clubovative operations ask result to the need for suppuration of different modes of problem alliance and taxation (Paulson 99).Original translations and systems argon macrocosm re infinited by hot cardinals that be deemed to be more(prenominal) relevant to modern day operations. The policies supported by political leaders with regards to these economic factors be seen to be key to the perception that the voters fork out on them. T he over every commonplace, call(a)able to improvements in instruction systems and education levels, cook become more aw ar of the importance of good and relevant policies to non all the development of the economy but to individual development.It is no yearlong left for the professionals to infrastand the complexities and c atomic number 18ns in invoice system and information systems be it at the policy or carrying out level for ordinary citizens atomic number 18 continuously seeking to know more on these concepts (Paulson 73). This paper looks at close to of the current trends in accounting and taxation systems in the US. and the impact they have on the development of US. as a nation. The paper looks at a issues in Private and universal play along Financial Reporting and their inter theatrical role point with the inter case standards.The former(a) areas that the paper addresses are Cost or rightfulness Method of story, Sarbanes-Oxley Act of 2002, Importance of Segregation of Duties, Income tax accruals, Deferred Income taxes and McCains Vs Obamas tax plan. institution Developed economies and especially Americas are highly reliant on the development of the business sector (Pratt & Niculita 22 ). The business sector in both(prenominal) of these developed economies contributes immensely to their large domestic income levels. Financial report is an aspect that is integrated into every business system be it profit or non-profit making.Financial coverage is a very important aspect in ensuring duty and developing the authorization that is of high importance in a capitalistic economy that are characterized by high levels of competition. Financial reportage does not in itself-importance guarantee success in business but helps in providing information that is small in the development and implementation of economic decisions. Compevery Reporting The standard wasting disease in m unitarytary reporting in the US is the generally accepted ac counting principles standard (Talbott 63).The primary(prenominal) reason behind fiscal reporting for public entities is to meet the needs of out-of-door stake holders who due to their positions lack the ability to get the information. Even though the external exploiters of partnership pecuniary reporting whitethorn have access to information, some hush-hush companies still choose to prepare the general m wizardtary pedagogy. Even though the GAAP financial accounting standards are aimed at providing the end mapr with the undeniable information, the commission of the comp any often finds such documents to be of great importance (Talbott 63).Many individual(a) companies implement a system where the financial statement take on an independent accountant report which is drafted after the report has been size uped, reviewed or compiled. The brass is not directly responsible for the verbalism of the accounting standards in most developed countries and it was until 20 02 that the federal government intervened largely on accounting standards (Talbott 35). This non-interference is common system in most countries under common justice where it is believed that the buck common soldier sector is well informed and has a good imagination backing.It should be noted that the GAAP is not a legal philosophy that has to be followed though some spot financial authorities have make it compulsory for public companies to adhere to standard (Ricardo & Kolthammer 53). It should be noted that the GAAP standards for the private sectors are set by different bodies which operate under different assumptions, principles and constraints from those of the public sector. The basic objective in financial reporting is providing information this is done by making a estimate of assumption, finish of a series of principle and subjecting a calculate of constraints.Assumptions ? The business entities are false to be separate from its owners and other related businesses. In proviso of financial rule books personal disbursals are unplowed separate from company r even outues and expenses (Ricardo & Kolthammer 51). ? some other key assumption do is that the business leave alone continue operating(a) indefinitely. This assumption is make to justify the validation of asset capitalization, depreciation and even amortization. This going concern assumption is further overridden when it is certain that the company willing be liquefied (Ricardo & Kolthammer 51).? Since one of the objectives in the provision of financial records is to get a line ease of evaluation a measure mustiness be used. In the US, a monetary unit that is assumed to be stable is used as the unit of record. It is accepted by the FASB that the nominal value of the dollar sign unadjusted to take care of the inflation should be used as the main unit of measure (Ricardo & Kolthammer 51). ? A major assumption in the preparation of financial records is that the economic and financial activities of a company stack be divided into cadence units. This is the time distributor point principle (Ricardo & Kolthammer 51). in that location are a number of principles that have been adopted by the FASB in preparing financial records. The principles govern how the actual preparation of the records will be handled. Some of these principles overwhelm ? Companies are involved to account and report on the basis of science prices kind of than current market prices. This principle applies to all recordings be they assets or liabilities (Ricardo & Kolthammer 54). This principles assures that the information standd is reliable by eliminating bias that would have differently been accumulated by using the perceived value.However, on that point are changes in this system as a number of debts and securities are being inform on the basis of their fair price or market values. ? Principle number two is referred to as the revenue principle and it requires companies to record revenues either when they are realizable and earned or when they are completed. This accrual approach to accounting eliminates recording at receip (Ricardo & Kolthammer 54)t. ? The matching principle dictates that the expenses and the revenues have to be matched as long as in that location is sufficient ground for pairing.Expenses are only recognized when the product or overhaul that they have help induce earns some revenue (Ricardo & Kolthammer 54) The principle further states that if a situation should summon where no connection stooge be established between an expense and a revenue then the expenses ass be charged on the existing period. This system is useful in ensuring accuracy and robustness in evaluating actual performance and profitability levels because the principle clearly shows how much was exhausted in earning a given revenue.? The revealing principle is one that governs the number of information that faeces be discover. According to this principle, the com e up of information that shtup be disclosed should be found on a sell off analysis (Ricardo & Kolthammer 54). Disclosure of large information is often associated with change magnitude cost in the preparation and use of the financial records. Therefore, the information disclosed should be enough for judgment trance ensuring that the costs are kept low. Information in the financial records are either presented in the main body of the statement, notes or as supplementary material.A number of constraints have as well as been placed in coming up with financial records and reports. The constraints are aimed at reducing errors and ensuring reliability. They include ? The objectivity principle which states that the financial records should be based on objective evidence (Ricardo & Kolthammer 54). ? The signifi skunkce of an item is only considered when it has been report. The corporeality principles therefore considers information to be of significance if it can in one way or the oth er coin the decisions make by a reasonable human person (Ricardo & Kolthammer 55).? There is withal need for unity in the accounting principles used by a company. The companies should check over that they use the kindred principles year in year out. ? When choosing between two alternatives the wise principle states that the solution that is likely to understate the income and assets should be given scratch priority (Ricardo & Kolthammer 55). Comparison Even though the differences whitethorn not be clear a key differences arises in the aspect of stakeholders. The investors will ever want to be informed on how their investment fundss are fairing on.In a private company, systems may be developed where the investors who are often few and close related can access financial records and the performance of their investments at bad-tempered times (Einhorn 23). Furthermore, the private nature of such businesses exempt them from mandatory disclosure and there are no restriction on th e materials they can disclose. However, the storey is quite different in public companies where disclosure is a must. semipublic companies are of national interest and therefore issues regarding their financial status affect a considerable proportion of the general public (Lewis & Pendrill 32).Development in financial systems are aimed at protect the investors from the visitation of such financial institutions. The rectitude therefore dictates that such companies must disclose their financial records and in so doing the materials disclosed should be such that they provide enough information as per the investors requirements (United Nations Conference on Trade and Development 35). Therefore, while a private company financial records may only be a paginate the public companies often develop booklets and mountains of documents as their financial records.In general, preparation of financial records in public companies is more resource intensive relative to private company due to th e time and financial resources that have to be channeled to the preparation of the rather comprehensive records. The similarities are countless. The principles employed, assumptions made and constraints are generally within the GAAP principles (Haber 24). The principles are within the stated framework and therefore bears a lot of similarities.Disclosure is stressed on by both private and public companies for the sake of their investors. In either case, the importance of financial reports to the management of the companies and to creditors who may require the companys financial information is of equal importance. Sarbanes-Oxley Act of 2002 The area of financial disclosure and development of financial reports is of key concern to the entire economy. The government and the legislative system is often concerned with the overall wellbeing of the bulk at least that is what they have made people believe.Disclosure and financial reporting is an area that is of key importance to the overal l development of not only the company whose records and proceeding are being disclosed but as well as to other companies that may be related to the tell company in one way or the other. The federal system broke its liberalization of the accounting systems when in 2002 it enacted the Sarbanes-Oxley Act (Hamilton & Trautmann 44 ). The act was aimed at protecting the investors and was enacted into federal law in 2002.Previously issues regarding financial disclosure and preparation of financial records were governed by standards rather than law. The move was aimed at dealing with the increase in the levels scandals that hit a number of major corporations namely Tyco and Worldcom among others (Shanley 21). These scandals were very pricy on investors and had a major bearing in the capital markets as section prices dropped considerably. The effects of the scandals were felt by both participants and non-participants as the confidence in the broth markets suffered and irrecoverable blow. The reforms that were brought by this act are considered the most far r individuallying changes in the business environment in decades. These pertly legislations did not affect the private sector and were aimed at developing compound standards for the public sector players including public accounting firms (Shanley 49). Its borrowing was a polemical step and led to major divisions on its perceived benefits. A number of people who were and still are for its implementation state that it has led to an increase in investor confidence on the profligate market while ensuring discontinue standards and keep backs for corporate accounting standards.The act led to the developments and en save of PCAOB which is charged with regulating, inspecting and ensuring relevant disciplinary measures are taken against accounting firms that are ascertained to have blemish some of the principles and standards set by the Sarbanes-Oxley Act (Pratt & Niculita 85 ). Some of the key features of Sarbane s-Oxley Act of 2002 include ? The set-back denomination establishes the PCAOB as a notice that will provide the required oversight for accounting firms that provide audit services.This first style oversupplyively creates a central board that is tasked with ensuring procedure compliance by the boards, registration of auditors, comment of processes and procedures for compliance, quality control and management and enforcing compliance as per its mandate that are provided for in the act (Einhorn 19). ? The siemens title establishes the standards that will ensure the independence of external auditors so as to minimize the risk of conflict of interest. This title also puts up unfermented auditors approval qualifications, partner rotation and reporting requirements.One of the notable features of this second title is that it stripess audit firms from providing non-audit services for same clients (Einhorn 19). ? The function for accuracy and completeness of financial records is p laced on senior executives. This third title further defines how the external auditors will be expected to interact with the audit committees. A every quarter certification of the integrity of the financial reports by the corporate executives is required by this title (Einhorn 19). ? The fourth sections requires the inclusion of off balance sheet transactions and transactions of corporate policemans.This is to ensure enhanced financial reporting and ensure accountability at the highest levels of corporate leadership. The fourth title further requires the organization of internal controls that will ensure the accuracy of the financial reports. Timely reporting in case of change in financial conditions which must also be accompanied by a review of SEC or its agents, is advocated for by this title. ? The fifth section includes measures that are aimed at restoring the confidence of the investors on the reports brought forward by securities analysts (Einhorn 77).The code of behavior for the security analysts are delimitate in this section and they are further required to disclose any conflict of interest that may be in their knowledge. ? The sixth section is closely related to the fifth as it defines practices that will help in the restoration of investor confidence. The SECs authority is also defined in this chapter and their power to bar securities professionals from dealing is brought into proper perspectives by definition of cases where their power is applicable (Einhorn 22).? The ordinal section places more emphasis on the manner in which query that is aimed at enforcing actions against violators will be conducted. The reports and reasons that have been identified as being of importance in the research include the effects of consolidation on accounting firms, securities violation, role of credit rating agencies and enforcement actions. This chapter further suggested investigations on whether the investment brims played a role in obfuscating the financial positions of some of the corporations that failed.? The 8th title describes the specific penalties for fraud by either manipulating, destroying or fixing financial records. This title further defines the penalties associated with interfering with the course of investigation while providing a considerable level of protection for whistle blowers. ? The ninth title increase the penalties associated with white collar crimes and conspiracies to commit financial crimes. One of the key recommendations of the title is that stronger punishments should be provided for financial crime offenders.A key addition is that trial to certify corporate records is declared a criminal offense (Einhorn 19). ? The pass executive officer or the senior most corporate officer is required to certify and sign the companys tax returns in the tenth title. ? The definition of corporate fraud as a crime within the law is found in the eleventh title. Record tampering is also include as a criminal offense and the specific penalties are also defined in this section. Sentencing guidelines are revised in this chapter and the penalties are made harsher.SEC is also given the power to freeze large or shadowed payments (Einhorn 18). There are a number of factors that led to the adoption of the rather controversial measures towards ensuring disclosure and accuracy of financial records. Prior to the implementation of the SOX the auditing firms were self regulated (McAlevey 45). There was considerable levels of conflict interest as they were complex with companies in more than one way. They were therefore not in a position to challenge the companies on financial matters for it may have led to poor work relations in other areas they were involved in.Audit committees were also blamed for the crisis that led to the development of the SOX as they did not perform their responsibility as investor representatives with maximum efficiency (McAlevey 56). A number of causes for failure and crumble of some of the corporations were in the line of negligence of duty and lack of the required expertness in handling business complexities. Management also had a considerable degree on audit committees and thus the integrity of their reports was self-styled even before they were presented. The SEC was underfunded before the American public realized its importance to the overall development of the economy.The federal allocations to this programs have since doubled as a way of ensuring that they effectively deal with issues and threats to the financial stability of public corporations. Securities analysts had multiple roles that presented a conflict of interest (Niskanen 123). The security analysts could make recommendations on whether to sell or buy and at the same time provide financial assistance for companies who are in need of financial assistance. There is the possibility that the analysts could make decisions and recommendations that will ensure that he unfairly gains from the deals.Misle ading bank practices may also lead to confusion by other investors. For instance, when a number of banks lend money to a corporation other investors may assume that the financial position of such a company is guaranteed (Griffin & Walton 10). When such companies collapse as it was the case in Enron, investors in the bank and those who had invested in the corporation suffer losses. Moreover, stock volatility coupled with the bonus and stock option practices increased the pressure on companies to manage their earnings. Segregation of DutiesOne of the major recommendation of the SOX was the need to segregate duties (Griffin & Walton 29). The need for segregation is often seen to be associated with increased accountability as the overlaps associated with non-segregation are eliminated. Furthermore, the risk of inappropriate action on individuals or groups is minimized since each and everyone has clearly defined roles and failure in their part can be traced to them. The first step in ens uring accountability is adopting a segregation approach. The segregation of jobs must be adopted by the entire organizations and documentation of its adoption ensured.Segregation of duties is not all about the physical implementation of tasks since the flow of finances has to be described fully, clarifications made and assurances that no one person has overall control over all aspects in any financial transaction made. The process of formulating such a diverse and rather complex system of operations requires time and expertise if the systems is to achieve any success. It is worth noting that though the implementation of the system may be near perfect, if the initial formulation is done ineffectively the undivided systems will lack in aspects that may prove to be critical in ensuring its success.The organization has to be studied and learnd before any changes are proposed. Since these are changes that are per the requirement of the law for public institutions there is little that organizations can do to avoid implementing this law (Griffin & Walton 92). The organizations must analyze their processes and their outcomes including their behavior. The qualifications of the available human resource has to be ascertained and the organizations ability in implementing a segregated approach ascertained.A thorough analysis of the collected information will ensure the development of teams and allocation of responsibilities for each and every outgrowth of the organization who will then be answerable on all issues relating to these responsibilities they have been assigned. The implementation of such a system is as important as the formulation phase. The application of relevant controls and milestones to be met will ensure that the developments achieved as a result of the implementation of such systems is quantified and relevant corrections or improvements made to ensure continued success.The controls should ensure that whistle blowers and those that are unwilling in pr omoting illegal activities are protected from the wrath of criminals (Griffin & Walton 24). Therefore, the adoption of systems that will ensure whistle blowers are protected should go in line with the formulation and implementation of the segregation approach. Convergence to International Standards The implementation of the SOX led to improvement in laws and policies regarding financial disclosure that made them more similar to international standards.Furthermore, there is increased effort by the FASB, which develops accounting standards for topical anaesthetic use to converge the standards to the IASB (Eisen 42). It should be noted that even though the IASB standards are increasingly being adopted by a number of countries the FASB has significant control on their standards. One notable difference in the standards is that the LIFO systems is not used in the international standards while they are allowed by the US. Standards, thus reporting of income statements takes on different fo rmat which may affect the analysis of financial statement by investors and stakeholders (Eisen 42).Moreover, the international systems is more principle based when compared to the US systems which can be considered to be regulating based. The FASB bases their approach on the fact that the real accounting world has ceaselessly many a(prenominal) excommunications and a principle based system will never be able to give a full description of actions that may be employed in all situations (Eisen 43). Equity Method of Accounting Accounting is a diverse area of study that is continuously changing as per operations requirements (Eisen 34).Financial irregularities and fraud has taken on a new dimension and thus the accounting principles and procedures have also been forced to change in order to address the change in financial trends. enthronisation in common stock is one of the fastest growing areas, many investors are channeling their resources to acquiring common stock and IPOs have become national events while the capital markets is one of the most highly traded market there is. The equity rule of accounting is used for investments in common stock if the investor possesses over one fifth of the large(p) voicing stock of other company in which he has significant influence.Generally accepted accounting principles require that reporting using the equity method when an investor corporation has significant control over the operations and finances of an investee corporation. Significant influence is determined by representation on the board of directors, active participation in formulation of policies, intercompany transactions, interchange of managerial personnel and dependence on technology. It is generally assumed that an investor has significant control if over 20% of the outstanding common stocks of the entity are in his possession.This holds true unless there is sufficient evidence to prove otherwise (Eisen 100). The equity approach to accounting reflect m ore on the economic aspects than the legal aspects involved in investing in legal stocks of other companies. When the equity approach to accounting is employed, the initial records of the stock investments is done at cost. The investments accounts will then have to be adjusted to ensure that the investor plowshare of income and losses after the date of acquisition are up to date. This investor share is used in coming up with the net income of the investor in the period as reported by the investee (Eisen 51).The methods is in line with the accrual method of accounting for its implementation ensures the intelligence of revenues when they are earned and losses when incurred. Dividends current by the investors are not reported as dividend income but are a reduction on the carrying amount associated with investment. Therefore, the application of equity methods of accounting ensures that investments accounts give a reflection of the investors equity relative to investee net assets. An exception to this rule of revenue recognition is the recognition of revenue without change in working capital (Eisen 34).In the investors statement of income, the proportion of the share of the net income of the investee is reported as a single line entry except inn situations where the investee possesses tremendous materials that would affect the investors net income statement. Such materials would be reflected as extraordinary materials in the investors income statement. The method therefore eliminates intercompany profits and losses (Eisen 43). Any excess give for shares over their book value of the purchased subsidiary must be identified and if need be amortized or depreciated (Eisen 90).In cases where the investor owns over half of the investees outstanding stock a consolidated financial statement for the group is presented (Eisen 110). The relationship is considered an affiliation as the investee can exercise control over the operations of the investee (Eisen 111). The equit y method is used in the presentation of financial reports for loose subsidiaries in a consolidated financial report. If the parent company is preparing unconsolidated reports then the investments in the subsidiaries are reported through the use of equity accounting.The application of equity accounting methods is continuously being adopted in accounting circles due to an increase in corporate ownership. Capitalism is characterized by increased investments in joint ventures and therefore it is becoming common place for major corporations and private investors to have stake in more than one company. Multinational companies may have considerable influence on local companies whose stock they posses and therefore the application of equity accounting finds relevance in such cases. Income tax accruals and Deferred Income taxesOne of the most important decisions that has to be made by businesses before they start operations regards the basis of their bookkeeping which can either be on an ac crual or bullion basis. The accrual system is where the income is recorded as when it is earned without considerations on whether it will be have or not. The expenses are also recorded as per when they were accrued without considerations on whether they will be paid. Taxpayers are not necessarily required to use a specific method by the Internal revenue service (IRS) (Eisen 32).However, the stock markets and other bodies may require public companies to strictly use the accrual basis in stating their incomes (Eisen 60). The IRS requires that the method used when a taxpayer first files his tax returns should be used consistently thereafter and any changes in the system must be approved by the IRS. If an investor own more than one business the use of different methods of accounting is allowed, though they must be kept separate from each other as each business is treated as separate entity.Even though the use of any method is allowed there are restriction to the use of the cash method in that corporations with a gross receipt of over $5 zillion excluding the S corporations, partnerships that partners with such corporations and tax shelters are all excluded from the use of cash system of accounting (Eisen 22). When using the accrual method, incomes must be reported in the tax year they were earned and expense deducted in the same manner. The time of payment is disregarded in either case and has no bearing on the nature of the results.For taxation purposes, income is reported when earned, due or payment is genuine depending on which one comes first. Therefore, recording of income is done when events that lead to their reception have occurred and the amount associated with the revenue or expense can be determined with pinpoint accuracy. Advance payments for services that will be received later are charged in the same long time that they are received. This scheme changes if there is an agreement that the completion of the service will be in the next fiscal years t hereby the recognition of the income is included in the next years records.The postponement of realise payments cannot go beyond one year. If any part of the service will go beyond the next year, all advance payments will have to be recorded in the year the receipt will be made and none of it would appear in the next years records. Advance rent income can only be recorded in the years that they are received and can never be postponed. If a business provides a business agreement for a property that it owns, advance income associated with such property can be postponed.However, this is only applicable in cases where the business also earns income from properties that do no have service agreements in their course of operations. There are a few special rules that have been formulated with regards to handling advance payments regarding agreement for future sales. on a lower floor normal considerations the payments are recorded when they are received but this is not so in this alternati ve system. chthonic the alternate system the advance payments in earlier years and the recordings include payments in gross receipt according to the rules of the method used.Furthermore, it is advisable to record the advance payments in the years that any part of the advance payments has been included. Under the accrual system expense are reported when liability has been fixed, the amount involved has been determined clearly and economic performance has occurred. If expense is incurred in receiving a service, economic performance is considered to have been incurred when the service is provided. When property has been delivered, economic performance is said to have been incurred (Pratt & Niculita 102 ).For expenses that are related to interest, the passage of time marks economic performance. In areas of compensation of services, economic performance is said to have occurred when the contractors are rendering their services. Moreover, under the accrual system expenses are only deduct ible in the years they apply though they can still be charged on the years they are paid if the benefits they generate are applicable for a time of over one year. If business expenses or interest are owed to persons related as per the definition of related in income tax, and the related person handle