Discuss about the Accounting Issues and Exposure Draft for AICPA.
This paper represents the accounting issues in the article provided and how they relate to the accounting theories. It further explains the assumptions and implications of the theory. It is a theoretical understanding of current accounting issues (Khanna, 2018). This article encourages US citizens to go over their financial plans of the year. With the upcoming deadline to file tax returns, most Americans are ready to file away their tax returns. However, this can be an excuse for them to go over there financial plans for the year. This is easy to do at this time since one has all their financial documents in one place and the login information is still fresh in one’s mind (Parker & Fleischman, 2017).
Kelley Long who is part of the AICPA’s Consumer Financial Education Advocate said that one issue that many Americans face in making changes to their financial plan is they forget their login information. During this period, one is forced to get this information in order to gain access to the tax papers. Hence when one has this access why not take advantage of it and look over your financial plans.
Another good plan to ensure your financial plans is updated is to check the plans on a yearly basis. Since tax returns are filed every year then one can easily remember to go over the plans every time they file the returns. A Harris poll carried in 2017 established that only 8 in 10 Americans used their tax return documents as a basis for their financial plans. Neal Stern said that income tax time ensures that one’s financial plans are the number one priority. At this time one is required to organize and analyze one’s sources of income, outcomes of investments made, and deductibles to help in knowing if one’s strategies are accomplished and if they can lead to the achievement of the goals set.
If one has a large tax refund then this should be a revelation that changes are needed. Taxpayers should not overpay on taxes and at the same time also not to conceal too little. A person with a large income tax refund may feel accomplished but the Internal Revenue Service (IRS) is the winner since they get an interest free loan. On the other hand, the tax bill will be high if one conceals too little. Hence during this income tax period, it is more beneficial to have more money in one’s account rather than a large tax refund (Sudaryanti, Sukoharsono, Baridwan & Mulawarman, 2015).
The issues presented in this article relate to the following accounting theories:
In this theory, one tries to make predictions of accounting practices and also to explain (Smith, 2017). In this case, the taxpayer is supposed to go over their financial plans to know which accounting policies to use which is what the theory explains (Beattie, 2014). Also, the taxpayer can adopt new accounting standards that relate to the financial plans that they have set. By choosing the new policies and accounting standards then one is able to predict what they expect in their financial papers in the coming year (Leong, 2015).
However, this theory has assumptions which include
The theory does not explain what will happen but rather predicts what would happen. In this issue, one might look at their financial plans and choose a policy to attain a certain goal in the coming year. However, the set plans are only predictable and might not likely happen in the coming year due to certain changes (Dyckman & Zeff, 2015). For example, one taxpayer might decide to reduce the amount of money used on food in their financial plans. They might fall sick and the doctor prescribes a certain diet that cost more money. In this case, the money set aside for food will have to be ignored. This circumstance could not be predicted as the theory suggests.
The theory only predicts what one might do and not what they should do (Smith, 2017). The taxpayer does not have specific guidelines set in order to achieve their financial goals but rather just guidelines that they might follow (Scott, 2015).
The theory assumes that every person’s goal is to increase their wealth without considering the consequences. In this case, the taxpayer may set up financial plans that only result to the achievement of goals that involve an increase in wealth. This might not be the case for every individual (Aryee, Walumbwa, Mondeja & Chu, 2015).
In this theory, one looks at the different accounting systems and which system is best to achieve one’s goal. It is more prescriptive than any other accounting theory. (Wildavsky, 2018). In this case after the taxpayer goes over their financial plans to know their sources of income, deductibles, and outcomes of investments made. Here, one is using a formula to assess the income value. After this, one will then determine if their goals were met. If not they are then required to come up with an accounting system that will enable them to achieve their goals in the coming year (Kaya, 2017).
One issue presented is the presence of large tax returns. A taxpayer notices that they pay a large number of returns every year and this does not benefit them in any way but benefits the IRS. He or she will, therefore, look for an appropriate accounting system that will ensure that the amount of tax returns the pay is not too much or too little (Sanchez & Enguidanos, 2015). The accounting system will enable the taxpayer to have enough money left in their paycheck to make for example investments that will lead to the achievement of their goals.
However, this theory has assumptions which include
It assumes that one can set an accounting system that is superior to another. Accounting systems vary depending on the objectives that need to be achieved. One accounting system may not work to achieve one objective but may be completely effective to achieve another goal. For example in the issues named above, one may choose an accounting system that will lead increase in money in the account. As much as this is a good objective maybe the end goal of the taxpayer was to have an excellent income tax record. Therefore we see that not all accounting systems can be used to achieve a certain goal (Baboukardos & Rimmel, 2016).
Hence it is absurd to assume that one accounting system is superior to another because all of them are superior in their own way. It also assumes that the findings are scientific but in a real sense, they are not. Hence it is not effective (Williams & Ravenscroft, 2015).
In this theory, one looks at the relationship between the principals and agents in the business. Its main aim is to solve problems that arise between the principal and the agent in terms of the goals and desires. (Trottier & Gordon, 2017). In this case, the principal is the taxpayer whilst the agent is the IRS. The issue of filing tax returns relates to this theory in that many at times the taxpayer is faced with challenges in paying their tax returns and when they do they are left with little at hand to accomplish whatever goals that they have in life (Raj & Roy, 2016). As explained earlier if the taxpayer pays little returns then they might find it difficult in future to pay since on top of the returns they will have penalties that they need to pay (Nevo, Nevo & Pinsonneault, 2016).
This poses a problem between the taxpayer and the IRS because they owe the IRS money. In this case, the IRS is the decision makers and they decide what the taxpayer has to file and when to file it (Williams & Ravenscroft, 2015).
However, this theory has assumptions which include:
It assumes the risks incurred. In some situations, the agent is the decision maker and they encounter little to no risk and all the losses incurred, the principal will suffer. In this case, the taxpayer is the one who faces all the burden f ensuring their taxes returns are filed paid and filed on time.
It also assumes third-party relationships. The theory only considers relations between two parties. For example, in this case, the IRS and the taxpayer. It does not consider situations that have three parties involved.
Conclusion
The issues presented in the article are very important and require taxpayers to follow in order to avoid future problems. By keeping a track of one’s financial plans, on is able to know what to do and when to do it in order to achieve the financial goals they have set. Also, we see that most people tend to forget their login information ad this is very crucial information to enable one to constantly keep track of their finance. Therefore, one needs to make an effort of noting it down somewhere in order to be able to easily access this. The issue of withholding tax and paying too little is significant in that it can lead to future penalties that one may find difficult to cover. Therefore, it is important to file tax returns that are enough. One is encouraged not to overpay or underpay.
Part 2: EXPOSURE DRAFT:
FASB Exposure Draft. (2018). Proposed Accounting Standards Update: Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40). Retrieved from https://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1176170115612&acceptedDisclaimer=true
Proposed Accounting Standards Update, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract; Disclosures for Implementation Costs Incurred for Internal Use Software and Cloud Computing Arrangements (FASB Exposure Draft, 2018).
The goal of this exposure draft is to assist organizations to take account of the accounting for fees paid by a customer in a cloud computing arrangement by providing guidance for determining when the arrangement includes a software license. If a cloud computing includes a license to internal-use software then the licensed software is accounted for by the customer. This simply means that an intangible asset is identified for the software license. Liability is also recognized for the extent in which the payments are attributable to the software license. If the arrangement does not include license software then the entity accounts for it as a service contract. Thus the fees linked with service of the arrangement are expensed as incurred. (FASB Exposure Draft, 2018))
The exposure draft is introduced to the interest of the public in that it spells out the requirements needed to capitalize implementation costs and also the costs that will be incurred in order to obtain the internal- use the software. Therefore it is for public interest
The proposed ASU requires one to follow the guidance in Subtopic 350-40 on internal use software in order to determine which costs will be in the service contract and those that will be expensed. Hence a customer becomes knowledgeable in the area and has guidance on the internal-use software.
The proposed ASU finally requires a customer to incur the costs in the implementation of the service contract. This is important since the customer is able to account for their money since he or she knows what it is used for and why. Once the customer incurs the costs for the service contract he or she agrees with it and is confident that he or she has made a good investment.
COMMENT LETTERS
ONE
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This comment letter expresses the following views:
The organization is currently undergoing a complex cloud enterprise resource planning (ERP) system implementation. The type, nature, and structure of this cloud system are the same as those that are presented in ASC 350-40 for internal use software. The ERP cloud systems are complex and thus the guidance of the ASC 350-40 really helps us to navigate it. Therefore, we support the guidance of the ASC 350-40 which also helps us to capitalize on costs that are relevant for example costs paid to a third party implementer who is not a cloud host provider.
Also, the organization is upgrading and implementing their internal software and the proposed ASU ensures that any complications encountered will be eliminated. The organization also agrees with ASU that the license should be handed to the customer. This way they are able to focus on expensing implementation costs encountered in the internal-use software arrangements (Christensen, Nikolaev & Wittenberg?Moerman, 2016).
For example, the comment “We believe that it would be appropriate to capitalize certain implementation costs incurred in cloud computing arrangements during the application development phase, as those costs incurred do not provide a one-time benefit at implementation. Rather, the costs incurred to benefit the entity throughout the term of the arrangement, thereby, providing better matching of expenses with the period of benefit through recognition in profit or loss over the term of the arrangement.” The organization agrees with the proposed ASU in letting the customer meet the costs because according to them it will benefit the customer throughout the term of the contract. This benefits the customer throughout the term of the contract.
They do not fully agree with the amendment in terms of licensing since it does not address contracts that have a minor hosting element. For example, the comment’ the revised definition eliminates confusion as to whether or not hosting arrangements (that do not contain a software license) is in scope for ASC 350-40. However, we believe the proposed amendments to the definition of a hosting arrangement could be further modified to address contracts that have a minor hosting element. ‘
TWO
By The California Society of CPA’s (CalCPA)
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This comment letter expresses the following views:
The CalCPA Committee concedes with the proposed accounting standards and believes that the end result would be reasonably consistent accounting for similar arrangements. The committee in CalCPA also believes that the guidance for determining the project stage in Subtopic 350-40 can be constantly applied to a hosting arrangement.
In addition, the committee believes that a customer should apply an impairment model to implementation costs of a hosting arrangement that is a service contract as stated in Subtopic 350-40
The comment letter is for the regulation as shown
For example the comment ‘the Committee believes that the amended definition of a hosting arrangement and the application of existing GAAP are sufficient to determine if arrangements meet the scope of this proposed ASU.’ CalCPA believes in this comment that advice given in the draft is sufficient to determine agreements even those that are minor.
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This comment letter expresses the following views:
The organization agrees with the discussion in paragraph BC7 of the proposed ASU that concedes that implementation costs acquired in a cloud computing arrangement that is a service has a possibility of providing future benefits which can be capitalized as an asset. The organization, however, disagrees with the disclosures in Proposed Subtopic 350-40-50-2. This to them will not provide any useful information to investors for decision making. They thus would like the Board to maintain the current disclosure in Subtopic 350-40-50-1
The organization trusts that the implementation costs discussed in Subtopic 350-40 and in the Proposed ASU only look at one type of cost-setting that may be encountered which is to bring a fixed asset to its intended condition and location of use. An example is the comment ‘We do not believe that there is a more inherent risk or subjectivity related to implementation costs for internal-use software, as compared to any other fixed asset set-up cost, that would warrant additional, targeted disclosure guidance.’
FOUR
By MindtheGAAP
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The organization supports the proposed ASU and that it was as a result of a project to “provide additional guidance on accounting for implementation costs incurred in a cloud computing arrangement that is considered a service contract, due to the diversity in practice”.
The existing U.S. GAAP delivers instruction on how an organization which license software need to account for costs of acquiring and carrying out the software. This, however, is a problem because there are different ways in which a customer of a cloud computing arrangement can account for the costs required in implementing an arrangement. The proposed ASU addresses this issue and provides an affordable solution.
For example in the comment letter ’ for instance, in the alternative views presented in paragraphs BC20-BC26 of the Proposed ASU, some FASB Board members believe that implementation costs associated with a cloud computing arrangement accounted for as a service contract do not meet the conceptual definition of an asset, and therefore should not be accounted for as such. We disagree with that assertion ‘. MindtheGAAP differs with this and states that implementation costs linked with a cloud computing arrangement define an asset.
In this theory, the organization acts in the interest of the public which entails the customers or the target audience. (Deegan, 2013). Comment letter one acts in the interest of the public by agreeing that the license should be in the hands of the customer. To them, they believe that the customer having the license is what is best for them hence their interest lies in the customer. All the comment letters are best explained by this theory. In all the comment letters, they have complied with the proposed ASU in that they ensure that their interest is to the customers and not the company itself (Baker & Burlaud, 2015).
In this theory, the organization acts in the interest of the industry. (Deegan, 2013). The third comment letter acts in the interest of the organization whereby the proposed ASU does not cover all implementation costs. Hence, they do not know the amount and what costs to cover. This poses a problem for the company. This theory least explains the letter comments above. The comment letters are of interest to its customers rather than to the organization.
In this theory, a government agency is set up to act in the interest of the society but instead acts in the interest of the industry. None of the comments have applied this theory and therefore it is the least effective. (Deegan, 2013).
References
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Baboukardos, D., & Rimmel, G. (2016). Positive Accounting Theory.
Baker, C. R., & Burlaud, A. (2015). The historical evolution from accounting theory to conceptual framework in financial standards setting. The CPA Journal, 85(8), 54.
Beattie, V. (2014). Accounting narratives and the narrative turn in accounting research: Issues, theory, methodology, methods and a research framework. The British Accounting Review, 46(2), 111-134.
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FASB Exposure Draft. (2018). Proposed Accounting Standards Update: Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40). Retrieved from https://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1176170115612&acceptedDisclaimer=true
Kaya, ?. (2017). Accounting Choices in Corporate Financial Reporting: A Literature Review of Positive Accounting Theory. In Accounting and Corporate Reporting-Today and Tomorrow. InTech.
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