Introduction
In the article provided, it looks at what incorporation is and how it helps many actors save their money. With the new taxation law, many actors in New York City have to consider incorporation so that they can save their money. Accountants try and help actors as much as they can by providing guidance on what to do with their incomes.
This article presents the following issues
With the new tax, law actors have been forced to incorporate to save their money. This is because in the new law they cannot make deductibles on the expenses that earned the income. Such costs include acting classes, buying scripts and attending voice lessons. Thus most actors find themselves spending a lot of their money to generate these jobs (Schaltegger & Burritt, 2017).
Many actors want to incorporate, but it also costs money. The startup fee is at most times $1000, and besides, there are other costs that an actor must pay (Seele & Gatti, 2017). Some of these costs are Medicare, bookkeeping and accounting expenses, social security and corporate taxes which sums up to $20000. Most actors cannot afford this because their income is $38000 (Kaya, 2017).
Also once incorporated the actors can no longer get unemployment benefits once they are unemployed. Many actors did not like this and preferred having unemployment benefits when they were out of work. For others, the way to go is retirement plans, but they can hardly afford it (Smith, 2017).
This theory is based on predictions. It states that an individual will try to predict and explain what will happen in a given situation (accounting practice). In this case is the issue of the actor thinking as of whether to incorporate or not. The actor will have to predict as to whether incorporating will save him money or not. After visiting the accountant’s office for advice and looking at all the factors, an actor will have to predict whether incorporating will benefit them or not (de Villiers & Maroun, 2017).
A lot of explaining is also involved in this theory. For example, as the actor is making the prediction they will give a reasonable explanation as to why whatever they have predicted is the best solution for them. If they decide to incorporate, for example, they will explain how it will save their income and what the outcome will be after tax deduction.
Agency theory
The agency theory is based on the relationship between the agents and principal of business. This theory is solely based on these two relationships and tries to resolve any conflict that arises between them. At most times the conflict is due to diversity concerning goals and strategies. In this article, the principle is the actor while the agent is the accountant.
This theory can be applied to the article in the issue of the relationship between the accountant and the actor. Before incorporating, the actor has to consult with the accountant first so that they can get advice on what to do. Depending on the actor’s salary the accountant will tell them to incorporate or not. The accountant in this case advices actors who earn $38000 not to incorporate. The actor may be adamant and still want to incorporate regardless of their salary. This will cause conflict between them (Shogren et al., 2017).
The agency theory tries to solve this conflict. The accountant may decide to conform to the needs of the actor so that they do not clash despite the wrong decision. On the other hand, they can choose to be firm and lay out arguments as to why the actor is making wrong choices.
Normative accounting theory
This theory states that one accounting system can be superior to another. In the theory, an individual chooses an accounting system that is most effective for their accounting practice. The theory also tries to explain why they choose the theory. This theory relates to the article in the issue when the actor wants to save their money and thus tries to come up with an accounting system that will achieve this goal.
The actor exploits some options with the accountant such as incorporating or beginning a retirement plan. For the incorporation, the actor must have a lucrative business while the retirement plan saves one $25000 in taxes. The actor will have to choose one of these two systems that will best lead to the achievement of their goals.
III. The significance of the issues
If individuals in the entertainment industry want to earn a living wage, then they should highly consider incorporating. For an actor like James Yagaeshi who has a family in New York and travels a lot, he finds himself having to pay for two households. This becomes so expensive and leaves a dent in his pocket. Therefore incorporating can be an excellent decision for him to save all the money he can.
The positive accounting theory is not prescriptive. This theory explains what ought to happen rather than what should happen based on the explanations and predictions. For example, the actor tries to predict which action he will take to save money (Beams et al., 2017).
The predictions will be based on what ought to happen if they decide to incorporate. In this case, the outcome expected is for money to be saved. However, this may not be the case because it is not necessarily what will happen. The actor might end up not even saving any money because their income is too low (Silva et al., 2017).
The agency theory assumes that there are no risks involved in the relationship between the actor and the accountant. However, this is not always the case. For example, if James decides not to incorporate, then he faces the risk of being taxed a lot which leads to massive losses of his income. The risk applies to the principal and at most times are the ones that suffer at large (Trottier & Gordon, 2017).
Conclusion
Individuals in the entertainment industries need to consider incorporating. This is because most of their expenses, in the new tax law, such as acting classes and voice lessons are not deductible and this was the majority of their earnings.
Question 2
Exposure draft
The following exposure draft was issued by the Financial Accounting Standards Board as a revision of the previous proposed standards update. The board issued the exposure draft for online commenting to help industries in several situations. Its primary aim was to help hosting arrangements know the accounting costs for implementation paid for by the customer. They also provided guidelines for determining whether an arrangement includes license software. If an arrangement is inclusive of software license, then the fees are paid for by the by the customer, and the software license is categorized as an intangible asset. Also, liability is recognized to the extent of the license. The company will account for the fees of implementation if the arrangement does not include a software license (Anderson et al., 2016).
In the previous proposed ASU there were no instructions on how to account for the costs of implementation, and therefore some entities requested it is included in the proposed amendments. The amendment thus addressed this by stating that all costs for implementation to be accounted for by the hosting arrangement (customer) in a contract. The amendments also included the guidelines for capitalizing the implementation costs in an arrangement and also the guidelines for the costs of developing and obtaining internal-use software. However, it only applies to companies that use the instructions in Subtopic 350-40 (Johnson, 2017).
The proposed ASU also gives guidelines on the necessary costs needed for implementation and the ones that are recognized as an intangible asset. In the amendments, the prices for capitalization of implementation will be accounted for by the customer for the duration of the contract. The FASB exposure draft also allows for the entities in a service contract to include disclosures for the implementation costs which they believe will allow for transparency between all that are involved in the arrangement (Hussey, 2017)
This exposure draft has been introduced to the interest of the public. First, they allow for entities to include disclosures for implementation costs. This benefits the customers because they will have all the information they require in a contract and thus promotes transparency. Second, it gives the customer guidelines on the accounting for implementation costs which is again of benefit to the customers in a hosting arrangement. Lastly, it allows licensing of the implementation costs that qualify as an asset which is of benefit to the customer. Therefore the draft puts the interest of the customers (public) first (Seyam & Brickman, 2016).
Comment letters
ONE
By Williams Companies Figure 1: Comment letter one
The views expressed in this comment letter are
Our institution is public, and we expect to contain more hosting arrangements in future. The proposed ASU can guide us on how to set up these arrangements and how to determine which are inclusive of a software license. We, therefore, support the Board’s decision in allowing for the customer to account for the implementation costs.
Our institution supports the board decision in the customer covering the costs for implementation if it includes a software license and we are ready to put the changes to use.
The letter is for the regulation because they agree with the proposed ASU, e.g., the institution is ready to use the guidelines in the amendments as soon as possible Figure 2: Comment letter 2
By Virgin Society of CPA’s
The views expressed in this comment letter are
Our institution is involved in the public sector with various collaborations. Therefore we agree with the proposed ASU to include disclosures in a service contract. We believe this will help our company in providing transparency.
Our institution agrees with the amendments in the capitalization of the implementation costs in a contract. We disagree with the amendment in allowing the customer to use the impairment model because we believe it will bring confusion (Watts & Zuo, 2016).
The letter is for the regulation in that they agree with the proposed ASU since it will benefit the company. The letter is also against the regulation because they disagree with the customer using the impairment model.
THREE By American Bankers Association
The views expressed in this letter are
Our company agrees with the proposed ASU on providing guidance for the accounting of implementation costs and also the evaluation of these costs that are incurred in a contract.
However, we believe that more changes need to be made to the amendments to include a broad scope of application and make it more flexible.
The letter is against the regulation in that they believe the amendments cannot be applied in a broad scope and more adjustments need to be made (Okamoto, 2017).
FOURFigure 4: Comment letter 4
By International Business machines
The views expressed are
Our company supports the proposed ASU and believes that the guidelines given for the accounting of implementation costs are sufficient. We also agree that implementation costs should be capitalized and the arrangement is inclusive of a license for the duration of the contract. We do not agree about providing disclosures for implementation costs because it will not provide any necessary information (Biondi, 2011).
The letter is against the regulation because the institution believes that the disclosures are not necessary.
Theories of regulation
Public theory
The theory states that an agency sets regulations in a way that the public will benefit at large. This theory puts the interest of the public first. It is the most effective theory that applies to the comment letters. For instance, both the first and second comment letters agree with the amendments for disclosures because it will create transparency (Black, 2017).
Private theory
The theory states that regulations are set in a manner that the company itself will benefit at large. In this theory, the company puts its interest first so that its members can benefit. This theory is the least applied to the comment letters. For example, the fourth comment letter believes that the disclosures are not necessary because they do not want specific information to be in public.
Capture theory
The theory states that an agency that sets regulation for the public’s benefit is captured by the industry and sets the regulations for the industry’s benefit. None of the comment letters has applied this theory and is thus the least effective (Mitnick, 2015).
References
Anderson, U. L., Doxey, M. M., Geiger, M. A., Gist, W. E., Janvrin, D. J., & Polinski, P. W. (2016). Comments by the Auditing Standards Committee of the Auditing Section of the American Accounting Association on FASB Exposure Draft of Proposed Accounting Standard Update: Notes to Financial Statements (Topic 235): Assessing Whether Disclosures Are Material: Participating Committee Members. Current Issues in Auditing, 10(2), C1-C9.
Beams, F. A., Brozovsky, J. A., & Shoulders, C. D. (2017). Advanced accounting. Pearson.
Biondi, Y., Bloomfield, R. J., Glover, J. C., Jamal, K., Ohlson, J. A., Penman, S. H., … & Wilks, T. J. (2011). A perspective on the joint IASB/FASB exposure draft on accounting for leases: American Accounting Association’s Financial Accounting Standards Committee (AAA FASC). Accounting Horizons, 25(4), 861-871.
Black, J. (2017). Critical reflections on regulation. In Crime and Regulation (pp. 15-49). Routledge.
de Villiers, C., & Maroun, W. (2017). Introduction to sustainability accounting and integrated reporting. In Sustainability Accounting and Integrated Reporting (pp. 13-24). Routledge.
Evans, S., & Tourish, D. (2017). Agency theory and performance appraisal: How bad theory damages learning and contributes to bad management practice. Management Learning, 48(3), 271-291.
Hussey, R. (2017, May). Leasing of Assets: A Content Analysis of Comment. In GAI International Academic Conferences Proceedings (p. 23).
Johnson, C. H. (2017). FASB and Guarantees of Variable Interest Entities.
Kaya, ?. (2017). Accounting Choices in Corporate Financial Reporting: A Literature Review of Positive Accounting Theory. In Accounting and Corporate Reporting-Today and Tomorrow. InTech.
Mitnick, B. M. (2015). Capturing” Capture”: Developing a Normative Theory of Fiducial Regulation.
Okamoto, N. (2017). Norm entrepreneur lobbying and persuasion: A case study involving the IASB’s modification of an exposure draft. Research in Accounting Regulation, 29(2), 129-138.
Price, J. (2017). Potential introduction of corporate whistleblowing bounties: What are the implications? (Doctoral dissertation, University of New Brunswick, Canada).
Ramsay, I., & Webster, M. (2017). ASIC Enforcement Outcomes: Trends and Analysis.
Schaltegger, S., & Burritt, R. (2017). Contemporary environmental accounting: issues, concepts, and practice. Routledge.
Seele, P., & Gatti, L. (2017). Greenwashing Revisited: In Search of a Typology and Accusation?Based Definition Incorporating Legitimacy Strategies. Business Strategy and the Environment, 26(2), 239-252.
Seyam, A. A., & Brickman, S. (2016). The new requirements relating to going concern evaluation and disclosure provide a critical improvement to the financial statements taken as a whole. International Journal of Business and Economic Development (IJBED), 4(1).
Shogren, K. A., Wehmeyer, M. L., & Palmer, S. B. (2017). Causal agency theory. In Development of Self-Determination through the Life-Course (pp. 55-67). Springer, Dordrecht.
Silva, A., Sancovschi, M., & Santos, A. (2017). The Opportunistic Approach of the Positive Accounting Theory Fails to Explain a Case Study: An Anomalous Situation?.
Smith, M. (2017). Research methods in accounting. Sage.
Stapinski, H. (22 March 2018). The Actor incorporates.
Trottier, K., & Gordon, I. M. (2017). Agency theory: applications in Behavioural Accounting Research. In The Routledge Companion to Behavioural Accounting Research (pp. 121-130). Routledge
Watts, R. L., & Zuo, L. (2016). Understanding practice and institutions: A historical perspective. Accounting Horizons, 30(3), 409-423.
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