Demystifying deferred tax accounting: PwC

As specified by Generally Accepted Accounting Principles (GAAP), accrued revenue is recognized when a performance obligation is satisfied by the performing party. For example, revenue is recognized when the customer takes possession of a good or when a service is provided, regardless of whether cash was paid at that time. For instance, a service that should be provided for six months may be paid in full in the first month. In this case, the lump sum payment is spread over the fiscal period by recording it a deferred revenue account. Conversely, were this income only recorded when the funds had been received, the organization’s revenue and profit would be reported in a less consistent manner, making it much more difficult to properly assess the overall health and financial standing of the business. For this same reason, when employing an accrual accounting method, many businesses will also rely on bank reconciliation statements to further account for and monitor these payment gaps.

7A typical liability account, such as accounts payable, accrued expenses, warranty reserves, inventory allowances, or allowances for bad debt is generally used to record expenses (e.g., a debit to salary expense and a credit to accounts payable). Debt is used to record borrowed funds (e.g., a debit to cash and a credit to long-term liability). The lessee records rent expense on a straight-line basis and captures any difference between the cash paid and the expense recognized by debiting and crediting deferred rent. Most often deferred rent is a liability that increases over the first part of the lease term as payments start low and gradually increase. For example, a company receives an annual software license fee paid out by a customer upfront on the January 1.

Tax services

Where a material difference will result, either the output measure shall be modified or more than one output measure shall be used to reflect the resources consumed to perform the activity. (2) The base used to represent the activity being managed or supervised shall be determined by the application of the criteria below. Other terms defined elsewhere in this chapter 99 shall have the meanings ascribed to them in those definitions unless paragraph (b) of this subsection, requires otherwise.

The ROU asset is calculated as the lease liability, which is derived from the present value of future cash payments, adjusted for some specific reconciling items, including prepaid, accrued, and deferred rent. US GAAP, as well as other accounting standards, generally requires that assets and liabilities acquired in a business combination are to be presented at fair market values at the time of acquisition. However, whether or not the corresponding tax bases of the acquired assets and liabilities are also adjusted to fair market values is dependent on how the business is acquired.

Structure and content of financial statements in general

However, whether or not the contractor identifies and separately capitalizes a unit initially, the contractor shall remove the unit from the asset accounts when it is disposed of and, if replaced, its replacement shall be capitalized. (i) Purchase price is the consideration given in exchange for Differences Between Accrued and Deferred Expenses an asset and is determined by cash paid, or to the extent payment is not made in cash, in an amount equivalent to what would be the cash price basis. Where this amount is not available, the purchase price is determined by the current value of the consideration given in exchange for the asset.

• On the balance sheet, the cash balance would go from $100,000 to $92,000, and the deferred revenue balance would go from $100,000 to $80,000.
• This discussion specifically addresses accounting concepts under US Generally Accepted Accounting Principles (US GAAP), although certain elements may also apply under International Financial Reporting Standards (IFRS) or other non-US accounting standards.
• The ROU asset is calculated as the lease liability, which is derived from the present value of future cash payments, adjusted for some specific reconciling items, including prepaid, accrued, and deferred rent.
• In cash basis accounting, a company considers the money it receives as revenue when it receives it.
• (b) Indirect costs shall be accumulated in indirect cost pools which are homogeneous.

(k) This section is applicable to contractor “restructuring costs” paid or approved on or after August 15, 1994. (3) Fiscal year means the accounting period for which annual financial statements are regularly prepared, generally a period of 12 months, 52 weeks, or 53 weeks. (iii) The use of any less formal cost accounting techniques which establishes and maintains adequate cost identification to permit audit verification of the accounting recognition given unallowable costs. (a) The cost to acquire a tangible capital asset includes the purchase price of the asset and costs necessary to prepare the asset for use.

Example of an Expense Accrual

Unless there is a major fluctuation, it will be adequate to ascertain the net book value of these assets at the beginning and end of each cost accounting period, and to compute an average of those two sets of figures. “Recorded” facilities are the facilities capital items owned by the contractor, carried on the books of the business unit, and used in its regular business activity. “Leased property” is the capitalized value of leases for which constructive costs of ownership are allowed in lieu of rental costs under Government procurement regulations. Corporate or group facilities are the business unit’s allocable share of corporate-owned and leased facilities. The net book value of items of facilities capital which are held or controlled by the home office shall be allocated to the business unit on a basis consistent with the home office expense allocation. (7) After the initial allocation of assets, the contractor shall maintain a record of the portion of subsequent contributions, permitted unfunded accruals, income, benefit payments, and expenses attributable to the segment, and paid from the assets of the pension plan.

(ii) Changes in expected economic usefulness, such as changes in expected technical or economic obsolescence of the asset (or group of assets), or of the product or service produced. This Standard shall not apply to contracts and grants with state, local, and Federally recognized Indian Tribal Governments. (1) Compensated personal absence means any absence from work for reasons such as illness, vacation, holidays, jury duty or military training, or personal activities, for which an employer pays compensation directly to an employee in accordance with a plan or custom of the employer. (ii) Where items in that grouping of material are held for use in a single production unit yielding homogeneous outputs. (ii) Where that group of workers, in the performance of their respective functions, forms an integral team (in this case, a labor-rate standard shall be set for each integral team). (c) Practices with respect to the setting and revising of standards, use of standard costs, and disposition of variances are stated in writing and are consistently followed.

In a purchase, GAAP will require all assets acquired and liabilities assumed in a business combination to be recorded at their respective fair values. As a result, the target will normalize its gross margin, which will permit the target to recognize future revenue as the deferred revenue is earned subsequent to the acquisition date. GAAP will not require the seller to accelerate revenue recognition when a company is sold, nor will it require the buyer to capitalize costs post-closing. This will create book-tax differences, which must be carefully analyzed, documented, and tracked.

• Such expenses shall be allocated directly to segments to the maximum extent practical.
• (3) Facilities capital means the net book value of tangible capital assets and of those intangible capital assets that are subject to amortization.
• (b) The cost of units of a category of material may be allocated directly to a cost objective provided the cost objective was specifically identified at the time of purchase or production of the units.
• (ii) The market value of plan assets measured in accordance with paragraphs (b)(6)(i) of this section shall be the basis for measuring the actuarial value of plan assets in accordance with this Standard.
• These funds are deferred revenue regardless of whether the company invoices the client.