Question

In: Accounting

Required: Below are two independent scenarios involving professional standards. For each scenario students need to research...

Required: Below are two independent scenarios involving professional standards. For each scenario
students need to research the appropriate authoritative guidance and report their findings. Specifically,
students need to use the “IRAC” format for reporting their research findings. That is, students need to
identify the overarching “Issue” present for each scenario, identify and appropriately cite the applicable
“Rule”. Students must then specifically demonstrate their understanding of how the rule applies to given
scenario in an “Analysis” section and draw the necessary “Conclusion” with regard to the disposition of
the issue identified.

Scenario 1: Ereq Sheldon is an audit partner for the public accounting firm EMJAE, LLP. Ereq is
auditing ABC, a public company. ABC has requested a written report on the application of accounting
principles for a specific transaction. ABC would like to include this report to be distributed with the
audited financial statements. Ereq is unsure whether such an engagement is appropriate.

Scenario 2: Qiana Syerre is a licensed CPA. One of Qiana’s clients Crashco., an international airline, has
recently purchased some landing slots. Qiana is unsure whether the amounts should be capitalized or
expensed?

Solutions

Expert Solution

Ana:Senario 1:Ereq Sheldon is an audit partner for the public accounting firm EMJAE, LLP. Ereq is auditing ABC, a public company. ABC has requested a written report on the application of accounting principles for a specific transaction. ABC would like to include this report to be distributed with the audited financial statements. Ereq is unsure whether such an engagement is appropriate.

Issue-There may be differing interpretations as to whether and if so how existing accounting principles apply to new transaction and financial products.Managment and others often consult with accountants on the application of accounting principles to those transactions and products to increase their knowledge of specific financial reporting issues.Such consultation offer provide relevant information and insights not otherwise available.

Rule-As per AS 6105 "report on the application of accounting principles" a reporting accountant provides written report or oral advice on the application of accounting principles to specified transaction involving facts and circumstances of a specific entity or the type of opinion that may be rendered on a specific entity's financial statements.

Analysis-Sometimes the nature of transaction do not involve facts or circumstances of a specific entity i.e hypothetical transactions a reporting accountant cannot know for example whether the continuing accountant has reached a different conclusion on the application of accounting principle for the same or a similar transaction or how the specific entity has accounted for similar transaction in past.Therefore an accountant should never undertake an engagement to provide a written report on hypothetical transaction.The reporting accountant should exercise due professional care in performing engagement and should have adequate technical know-how.When evaluating accounting principles that relate to a specific transaction or determining the type of opinion that may be rendered on a specific entity's financial statement the reporting accountant should consult with the continuing accountant of the entity to ascertain all the available facts relevant to form professional judgement.he should perform the following procedures to form a judgement:

a) obtain an understanding of the form and substance of the transaction

b) review applicable generally accepted accounting principle

c)if appropriate consult with other professionals or experts

d)if appropriate perform research or other procedures to ascertain and consider the existence of creditable precedents or analogies.

Conclusion-The accountant report should be addressed to the requesting entity i.e the management or board of directors of the entity.The accountant can give a written report about the principal relating to a specific transaction only if it is not a hypothetical transaction and he can ascertain the principle used in a specific transaction after applying his professional judgement.But in his written representation he should include that it is only for the use of restricted parties and cannot be used by anyone other than the specified parties.

Senario 2:Qiana Syerre is a licensed CPA. One of Qiana’s clients Crashco., an international airline, has
recently purchased some landing slots. Qiana is unsure whether the amounts should be capitalized or
expensed?

Issue:An international airline has purchased some landing slots.Developmental costs related to preparation of operations of new routes should not be capitalized as previously permitted under audits of airlines,the AICPA industry audit guide.

Rule:Preoperating costs related to integration of new types of aircraft would continue to be eligible to be capitalized as permitted by the guide.The costs of landing slots are identifiable intangible assets that should be accounted for in conformity with FASB Statement no 142, Goodwill and other intangible assets.

Analysis:New entrants to a market and airlines expanding in markets need Gates and take off and landing slots available to them at the airports in those markets.These slots are in high demand in busy periods so they have a intrinsic value.So they can be recognized as a intangible asset.

Conclusion:The landing slots should be capitalized as an intangible assets.When determining the useful life of asset the following factors should be taken into consideration:

a)the accelerated pace of change airline industry and the effects of competition among airports.

b)the uncertainty of the continuation of the current governmental policy regarding sale of and access to landing slots.

c)the terms of existing facility leases at airport

d) probability of new airport construction to serve the same metropolitan area

e) traffic patterns and trends and local operating restrictions.


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