Question

Answer the following questions. Please type using a word processing program and bring a printed copy to class. Write as much or as little as you feel necessary to answer each question to the best of your ability. You may use all available resources to complete this case – e.g., lecture slides, notes, your book, and the Accounting Standards Codification. Collaboration with others in your group is allowed to the extent that it is helpful. How you work together is up to you – however, I encourage everyone in the group to take at least some part for every question. Please turn in only one finished assignment for each group. Use appropriate citations where relevant and according to your professional judgment. For questions requiring use of the codification, please use the following style: 1) Cite the ASC down to the Paragraph. For example, (ASC 330-10-05-01) 2) Copy-paste the paragraph you cite from the codification into the word document. 3) Interpret the codification paragraph into ‘plain English’ as best you can. In other words, how would you explain the appropriate accounting treatment to a colleague, boss, or business partner who has a basic understanding of accounting? You may (and are encouraged to) use debits and credits or t-accounts to illustrate the accounting if appropriate.

Question 3 (Codification – 5 points): How does U.S. GAAP define “Cash” and “Cash Equivalents”, respectively? Question 4 (Codification – 5 points): You decide to get into the mining business after graduation. You purchase a large tract of land in the foothills of the Sierra Nevada mountains to search for precious minerals. However, as part of the land purchase and in order to begin mining, you agree with the state of California to return the land back to its original appearance once you are done mining. Find and interpret ASC guidance for how to account for this circumstance. (You may need to cite more than one paragraph.)

Question 5 (Codification – 10 points): After a decade or so in mining, you decide to change jobs because you wanted to do nothing with anything related to tax or tax accounting ever again and in a regulated industry there was too much of this. A few years later, however, the controller comes to you with a comment letter from the SEC which expresses concern about how your company reports its current and deferred income tax accounts in its financial reports. You look as white as a sheet, because you hoped to never do tax accounting again. Find and interpret the appropriate ASC guidance for how to initially measure deferred taxes. (You may need to cite more than one ASC paragraph.)

All questions are not related

Answer 1

3)

ASC 305‐10, Overall, provides implementation guidance on cash on deposit at a financial institution. ... Cash is the most liquid of assets, and cash items are generally classified as a current asset. This chapter talks about its concepts, rules, and examples of cash and cash equivalents

Accounting Standards Codification 305 (ASC 305) was released to address the more specific topic of cash and what equivalents can be considered cash on a company’s balance sheet. The FASB has defined this to increase awareness of the liquidity of a company as when recessions loom or business is slow, the ability for a company to be liquid is very important. The items that make up the “cash” line item of a balance sheet thus must fit into a certain definition.

Definition of Cash under ASC 305

All of the following criteria must be met in order for an investment to be classified as a Cash Equivalents in GAAP financials:

1. Short term

2. Highly liquid

3. Convertible to known amounts of cash

4. So near their present maturity that it is negligible risk of changes in value due to interest rates

Other Examples of Cash Included in ASC 305

Some of the best examples of these items that represent cash equivalents are treasury bills, commercial paper, and money market funds. Cash, of course, is defined as the coins and currency on hand, as well as any balances in checking accounts that would be available for immediate withdrawal. One could also consider such items as an undeposited check, money orders, drafts, and demand deposits to be cash. Cash is by definition assumed to be unrestricted, and any material balances which are restricted should be separately disclosed as such. It is important to note that if a compensating balance arrangement exists based on a borrowing arrangement, those balances should also be considered for separate disclosure if material.

ASC 305-10 provides implementation guidance on cash on deposit at a financial institution. Cash is the most liquid of assets, and cash items are generally classified as a current asset. The classification of investments as cash equivalents is a frequent topic of SEC comment letters. While SEC rules only apply to public entities, preparers of financial statements can benefit from the findings of SEC reviewers. Consistent with common usage, cash includes not only currency on hand but demand deposits with banks or other financial institutions. An entity is often required to maintain a minimum amount of cash on deposit, generally in connection with having a borrowing arrangement with a financial institution. A reporting entity may issue checks with a dollar value exceeding the balance in its checking account. Petty cash and other imprest cash accounts are usually combined in financial statements with other cash accounts

4)

Mining companies generally are those that extract minerals, metals, and similar substances from the earth to be sold as commodities.

For more in depth information on this and other FASB ASC topics, check out the following books.

Mining assets include mineral rights and mineral properties. ASC 930-360-35 provides guidance on how the provisions of ASC 360-10 should be interpreted when entities evaluate mining assets for impairment. When a mining entity evaluates its mining assets for impairment, ASC 930-360 requires the entity to include the value beyond proven and probable reserves and anticipated market fluctuations in the market price of minerals in estimates of future cash flows (both undiscounted and discounted).ASC 930-360-35-2 indicates that estimates of the effects of anticipated fluctuations in the market priceof minerals should be consistent with estimates of a market participant. Generally, an entity shouldconsider all available information, including current prices, historical averages and forward pricing curves.Those marketplace assumptions typically should be consistent with an entity’s operating plans andfinancial projections underlying other aspects of the impairment analysis (for example, amount andtiming of production). Generally it would be inappropriate for an entity to use a single factor, such as thecurrent price or an historical average, as a surrogate for estimating future prices without consideringother information that a market participant would consider

US GAAP Accounting treatment: Capitalize Costs • Development costs are usually carried forward until the mine is commissioned (production begins) because the expenditure is for future benefit from the mineral extraction. • Capitalized development costs are then amortized using the units-ofPwC • Capitalized development costs are then amortized using the units-ofproduction (UOP) method as the resources are mined. Note: Stripping costs incurred in the development stage should be capitalized if the stripping activity can be shown to represent a betterment to the mineral property. A ‘betterment’ occurs when the stripping activity provides access to sources of reserves that will be produced in future periods that would not have otherwise been accessible in the absence of this activity

Exploration and Evaluation –

Accounting Treatment Once exploration and evaluation costs have been recorded in the Profit and Loss statement, they cannot subsequently be reinstated as assets.

US GAAP Accounting treatment:

Capitalize Costs • Development costs are usually carried forward until the mine is commissioned (production begins) because the expenditure is for future benefit from the mineral extraction. • Capitalized development costs are then amortized using the units-ofPwC • Capitalized development costs are then amortized using the units-ofproduction (UOP) method as the resources are mined. Note: Stripping costs incurred in the development stage should be capitalized if the stripping activity can be shown to represent a betterment to the mineral property. A ‘betterment’ occurs when the stripping activity provides access to sources of reserves that will be produced in future periods that would not have otherwise been accessible in the absence of this activity.

Key Accounting Principles: Agenda •Use of Estimates •Joint Ventures •Development Stage Enterprises •Depreciation and Amortization PwC •Deferred Stripping •Revenue Recognition •Impairment and Disposals •Environmental Obligations •Asset Retirement Obligation

Use of Estimates The preparation of mining company financial statements requires us to make estimates and assumptions. The most significant ones are: • Quantities of proven and probable mineral reserves • Classification of mineralization as either reserves or non-reserves PwC • Fair values of acquired assets and liabilities assumed in business combinations • Future commodity prices • Future cost of asset retirement obligations • Amounts and likelihood of contingencies 53 Key Accounting Principles: Use of Estimates (cont) Using these and other estimates and assumptions, we make various decisions in preparing financial statements including: • The treatment of expenditures at mineral properties prior to when production begins as either an asset or an expense PwC • Whether tangible and intangible long-lived assets are impaired, and if so, estimates of fair value of those assets and any corresponding impairment charge • The useful lives of tangible and intangible long-lived assets and the measurement of amortization • The fair value of asset retirement obligations

5)

ACCOUNTING FOR INCOME TAXES UNDER ASC 740: AN OVERVIEW

Accounting for income taxes. Although my parents may always think every CPA prepares tax returns, we know the truth. There are an awful lot of accountants and auditors in this world who spend a majority of their time avoiding the subject of income taxes! Why? It’s complicated. But as one of those people who used to avoid it, I’m here to tell you: it’s the complexities that make it so interesting…in fact, it is now one of my favorite topics to teach in the classroom!

If you’re one of those people who thinks they could use a refresher on ASC Topic 740 but haven’t made it out to see one of our live sessions yet, you’re in luck! Our three-part series on accounting for income taxes was just released on The Revolution, our new online learning platform! So, join me, and let’s take a quick tour of accounting for income taxes, starting with a general overview.

U.S. GAAP, specifically ASC Topic 740, Income Taxes, requires income taxes to be accounted for by the asset/liability method. The asset and liability method places emphasis on the valuation of current and 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. Under this method, which focuses on the balance sheet, the amount of deferred income tax expense is determined by changes to deferred tax assets and liabilities

We all know the general formula for the income tax provision: current tax expense or benefit + deferred tax expense or benefit = total income tax expense or benefit as reported in the financial statements. Let’s take a look at each of these components:

1. Current tax expense or benefit. This is the amount of income taxes payable or receivable for the current year as determined by applying the provisions of tax law to taxable income or loss for the year. Remember, taxable income is different from financial income…it’s what the company actually owes the government(s). Generally speaking, the equation to calculate current income tax expense or benefit is as follows:

Pretax financial income (this is what shows up in the company’s financial statements)

+/- Permanent differences (these are items recognized for book purpose, but never for tax purposes…or vice versa)

+/- Temporary differences (these are differences between amounts reported for tax purposes and those reported for book purposes)

x Enacted tax rate               

Current income tax expense

1. Deferred tax expense or benefit. After the “amount owed to the government” (current tax payable) is calculated we must then determine whether any other income taxes have to be recognized for financial reporting purposes. This depends on whether there are any temporary differences between the amounts reported for tax purposes and those reported for book purposes.

A temporary difference is the difference between the asset or liability provided on the tax return (tax basis) and its carrying (book) amount in the financial statements. This difference will result in a taxable or deductible amount in the future. For example, consider a product warranty liability. For book purposes, a company would record a liability related to a product warranty. However, that liability would not be recognized for tax purposes (i.e. a “zero tax basis”), because the expense related to the product warranty would not be deductible on the income tax return until it was paid. Therefore, the expense and associated liability are recognized for financial reporting purposes before they are recognized for tax purposes. Since GAAP is based on the accrual method of accounting, an asset or liability should be recognized for these differences that have future tax consequences.

Deferred tax expense or benefit generally represents the change in the sum of the deferred tax assets, net of any valuation allowance, and deferred tax liabilities during the year.

Companies first need to calculate their current income taxes payable or receivable, then figure out their deferred tax assets and liabilities. The calculation of deferred tax assets and liabilities should be based on enacted tax law, not future expectations/assumptions. Finally, deferred tax assets (like any other asset) need to be assessed for recoverability. Any amounts not deemed to be recoverable should be written off through expense. The current income tax payable or receivable is recorded with the offset to the P&L (current tax expense). Deferred tax assets and liabilities are normally recorded with the offsetting entry to the P&L (deferred tax expense).