Special Items in Financial Statement

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Special Items in Accounting

Dheeraj Vaidya

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1Private and Confidential Not for Circulation

Dheeraj Vaidya

Corporate Bridge Academy

[email protected]

www.corporatebridge.net

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Inventory Valuation Methods

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Methods of Inventory Accounting

First-In First-Out (FIFO)

This method assumes that the first units purchased are the first units sold

The cost of most recent purchases is assigned to ending inventory

Last-In First-Out (LIFO)

The LIFO inventory costing method assumes that the last units purchased are the first to be sold

The costs of beginning inventory and earlier purchases go to ending inventory

Weighted average costing

This method assumes that the units are sold without regard to the order in which they are purchased

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Private and Confidential Not for Circulation 3

Instead, it computes COGS and ending inventories as a simple weighted average

Example

Summary Inventory Records No. of units $/unit Total cost

Inventory on January 1st, 2006 600 100 60,000

Inventory purchased in 2006 200 150 30,000

Cost of goods available for sale in 2006 800 90,000

Inventory sold in 2006 550 250 137,500

Calculate gross profit for the following methods of inventory valuation

a) FIFO

b) LIFO

c) Weighted Average Costing

Also show the Balance sheet and Income Statement Flow


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FIFO:

Calculation of gross profit

Balance Sheet Effect

Assets Liability Shareholders Equity= +

$55,000 flows $55,000

FIFO

Sales 137,500

COGS (550 @ $100) (55,000)

Gross Profit 82,500

Inventory cost as on January 1st, 2006 is taken

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LIFO:



$55,000 flows through the Income Statement as expense

$55,000

cost of goods sold

LIFO

Sales 137,500

COGS (200 units @ $150) (30,000)

COGS (350 units @ $100) (35,000)

Gross Profit 72,500



$65,000

cost of goods sold

Last purchased inventory taken first and the remaining from the

beginning of the year inventory


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Weighted Average Cost

Calculation of Weighted average cost


Weighted average cost taken as per calculation above

Total cost 90,000

Total units 800

Average cost 112.5

Weighted Average cost

Sales 137,500

COGS (550 @ $112.5) (61,875)

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Summary



$61,875

cost of goods sold

Gross Profit 75,625

Summary COGS Ending Inventory

FIFO Costing 55,000 35,000

LIFO Costing 65,000 25,000

Average Costing 61,875 28,125

FIFO: 200*150+50*100 = $35,000

LIFO: =250*100 = $25,000

Average Costing: = 112.5 * 250 = $28,125


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Financial Statement Effects

In an environment of Stable Prices

All three inventory valuation methods (FIFO, LIFO and Weighted Average costs) will yield the same results for Inventory, COGS and Earnings

In an environment of Rising Prices and Increasing or Stable Inventory

Item LIFO FIFO

COGS Higher Lower

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Ending Inventory and Working Capital

Lower as inventory reflects the prices of items purchased at lower prices

Higher as inventory reflects the most recently purchased items

Net WorthLower because earnings and inventory

is lowerHigher because earnings and inventory

is higher

Taxes Lower Taxes Higher Taxes

Earnings Lower because COGS is higher Higher because COGS is lower

Pre-tax Cash Flows Same Same

After-tax Cash flows Higher because of lower tax outgo Lower because of higher tax outgo


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Analytical adjustments

Profitability

LIFO produces higher COGS balances and are better measure of true economic costs

In an environment of rising prices, LIFO produces income that are lower than FIFO

Gross margins and profit margins are lower due to lower income under LIFO

For FIFO firms, profitability ratios should be recalculated using estimates of what COGS would have been under FIFO

Liquidity

FIFO produces inventory figures that are higher and are a better measure of economic value

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FIFO produces inventory figures that are higher and are a better measure of economic value

LIFO, however, uses prices that are outdated (in an environment of rising prices)

Liquidity ratios such as current ratios are higher under FIFO than in LIFO

For LIFO firms, Liquidity ratios should be recalculated using inventory balances that have been restated using LIFO reserve

Solvency

Solvency ratio like debt ratio, debt-to-equity ratio will be lower under FIFO because of higher denominator

For firms that use LIFO, ratios should be calculated using asset and equity figures restated by using LIFO reserve


LIFO Reserve LIFO Reserve x Tax Rate

LIFO Reserve x (1-Tax Rate)

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Change in depreciation policy

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Change in Depreciation Policy

Depreciation Policies

Straight Line Depreciation Method

Sum-of-years digit Method

Double declining method

Written Down value method

Effect of Changes in Depreciation Methods

Impact on Cash Flows

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Impact on Cash Flows

NO IMPACT?

Impact on Earnings

Firm that chooses an accelerated method of depreciation instead of using straight-line will tend to have greater depreciation expense and lower net income

Will continue if the firm is investing in new assets that the lower depreciation on old asset is more than offset by the higher depreciation on new assets

Impact on Operating Performance

ROE?

Retained Earnings?


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Impact of Change in Depreciation Policy

Straight Line Accelerated (WDV)

Depreciaton Expense Lower Higher

Net Income Higher Lower

Assets Higher Lower

Equity Higher Lower

Return on Assets Higher Lower

Return on Equity Higher Lower

Turnover Ratios Lower Higher

Cash Flows Same Same

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Change in depreciation policy of Jet Airways from WDV to SLM

Wrote back Rs9.2bn into its P&L, which helped the company to report profits during the quarter

It also helped Jet to report higher net worth, which will help in keeping reported gearing low

TCS, the software major, increased its depreciation policy on computers from 2 years to 4 years. As a result, 1QFY09 PBT was higher by an estimated Rs500m (c.4% of net profit in 1QFY09).

Cash Flows Same Same

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Operating and Financial leases

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Introduction to Leases

Leases

Contractual agreement between the lessor (owner of asset) and the lessee (rents the asset)

Gives the lessee the right to use specific property

Specifies the duration of the lease and rental payments

Obligations for taxes, insurance, and maintenance may be assumed by the lessor or the lessee

Who are the concerned parties?

Lessee: Transportation (Trucks, Aircrafts), Real Estate (Building), Construction Agriculture

Lessors: Captive Leasing companies, Banks and other Independents

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Rationale for leases

Disadvantages of leases?


Operational

Leasing ready-to-use equipment can be more attractive if the asset requires lengthy preparation and set-up

Leasing avoids having to own the asset that will be required only seasonally, temporarily or sporadically (leasing contract can be tailored)

Leasing for short periods protects against obsolescence

Financial

Leases may not require any money down and may be a less costly means of financing

Lease payments can be tailored to suit the lessees cash flows (up to 100% financing, instead of 80% limit by banks)

Leases may contain less restrictive covenants than other types of lending arrangements


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Lessees Perspective: Capital Leases vs. Operating Leases

Operating Leases

Leases that do not transfer substantially all the benefits and risks of ownership are operating leases

Lessee rents the property

Lessee accrues rent expense

Capital lease

Capitalize a lease that transfers substantially all of the benefits and risks of property ownership, provided the lease is non-cancelable

Lessee economically owns the property

Lessee records the leased asset in the balance sheet (i.e. capitalizes the asset) and reflects the

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Lessee records the leased asset in the balance sheet (i.e. capitalizes the asset) and reflects the corresponding lease obligation

Leases that do not meet any of the four criteria are accounted for an Operating Lease

Test1: Transfer of ownership

Test 2: Bargain purchase option?

Test 3: Lease term > = 75% of economic life ?

Test 4: Present value of payments >= 90% Fair Market Value?


Capital LeaseYes

No

Operating Lease


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Lessees Perspective: Classification of Leases

Example : Lessees Perspective: Classification of Leases

An equipment with a market price of (FMV) of US$100,000 and useful life of 5 years is leased

to a lessee for a period of 4 years. The lease payments are US$26,000 a year. The borrowing

rate for the firm is 8%, and the rate implicit in the lease is 7%. There is no provision for

Lessee to purchase asset at the end of the lease term, nor any bargain purchase option.

Test 1

Does the lease transfer ownership of the property to the lessee by the end of the

non-cancellable lease term?

Answer No

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Answer No

Test 2

Does the lease contain an option to purchase the leased property at a bargain price?

Cost to purchase asset at end of lease na

Estimated asset value at end of lease na


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Lessees Perspective: Classification of Leases

Test 3

Is the lease term greater than or equal to 75% of the estimated economic life of the

leased property?

Estimated useful life (years) 5.0

75% of estimated useful life 3.8

Non-cancellable Lease term (years) 4.0

Difference -0.25Difference is negative implies capital LeaseDifference is negative implies capital Lease

Test 4

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Does the present value of rental and other minimum lease payments, excluding that portion

of the payments representing executory cost, equal or exceed 90 percent of the fair value

of the leased property?

Value of leased asset $100,000

90% of value of leased asset (at lease inception) $90,000

"Present Value" of lease $88,067

Difference $1,933If difference is negative, then Capital Lease

If difference is negative, then Capital Lease


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Lessees Perspective: Operating Lease Accounting

Operating Lease ( At inception)

Operating Lease ( as payments are made)


No Entry No Entry


Cash reduced by periodic lease

Flows through Income statement as rent

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Effect on Cash Flows

Total lease payment reduces cash flow from operations

Operating leases do not affect the lessees liabilities and hence, are referred to as off-balance sheet financing

Footnote disclosure of lease payment for each of the next five years is required


Cash reduced by periodic lease payments

Flows through Income statement as rent expense


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Lessees Perspective: Capital Lease Accounting

Capital Lease ( at inception)

Capital Lease ( as payments are made)


Present value of minimum lease payment


Present value of minimum lease payment

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Interest expense = Discount rate times the Lease liability at the beginning of the period

Depreciation Period calculations

If lease transfers ownership, depreciate asset over the economic life of the asset.

If lease does not transfer ownership, depreciate over the term of the lease.

Effect on Cash Flows

Only portion of the lease payment that is considered interest payment reduces CFO

Part of the lease payment considered payment on principal reduces CFF


a) Cash reduced by periodic lease payments

b) Leased property is reduced by depreciation amount

Flows through Income statement as Interest expense and Depreciation expense

Lease obligation is reduced by periodic lease payment LESS Interest payment


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Lessees Perspective: Example

Operating Lease

Example (continued) : Operating lease and Capital Lease

An equipment with a market price of (FMV) of US$100,000 and useful life of 5 years is leased

to a lessee for a period of 4 years. The lease payments are US$26,000 a year. The borrowing

rate for the firm is 8%, and the rate implicit in the lease is 7%. There is no provision for Lessee

to purchase asset at the end of the lease term, nor any bargain purchase option

If we assume that the lease is an Operating Lease

a) Balance Sheet: No Impact

b) Income Statement Effect: Lease payments of $26,000 treated as expense

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Capital Lease

In the earlier illustration, the lease was a capital Lease



US$88,097 US$88,097

Balance Sheet at Inception

a) Present value at 7% is $88,067

b) Both Asset and Liability increases by the present value of lease payments at inception

c) Cash Flow: Lease payment of $26,000 treated as outflow for Cash flow from operations


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Lessees Perspective: Accounting

Capital Lease: Balance Sheet Effect (as payments are made)

Capitalized lease calculations


a) Cash reduced by periodic lease payments of US$26,000

b) Leased property is reduced by depreciation amount of US$22,017

Flows through Income statement as Interest expense of US$6,165 and Depreciation expense of US$22,017

Lease obligation is reduced by periodic lease payment US$26,000 LESS US$6,165

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Capitalized lease calculations


Note: a) The book value of assets decline each year by the depreciation amount as shown in column (f)

b) Depreciation (term of 4 years) = $88,067/4 = $22,017

c) Principal repayments equals the lease payments LESS interest expense

d) The asset (column f) is being depreciated at a rate that is different from the rate of amortization for

the liability (column d), the two values are equal only at the inception and termination of the lease

Year

(a)

Beginning

Leasehold

Value

(b)

Interest

Expense (a) X

7%

(c)

Lease

payment

(d)

Ending

Leasehold value

(a+b-c)

(e)

Depreciation

Expense

(f)

Book Value

of Assets

0 $88,067 $88,067

1 $88,067 $6,165 $26,000 $68,232 $22,017 $66,051

2 $68,232 $4,776 $26,000 $47,008 $22,017 $44,034

3 $47,008 $3,291 $26,000 $24,299 $22,017 $22,017

4 $24,299 $1,701 $26,000 $0 $22,017 $0


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Comparison of Operating and Capital Leases

Income Statement Effect

Income Statement Effect

$29

Income Statement Effects

Operating

Operating Lease

Year

Operating Expense =

Total Expense Operating Expense

Non-operating

expense Total Expense

1 $26,000 $22,017 $6,165 $28,181

2 $26,000 $22,017 $4,776 $26,793

3 $26,000 $22,017 $3,291 $25,307

4 $26,000 $22,017 $1,701 $23,718

Capital Lease

Operating income is higher for capital lease Operating income is higher for capital lease

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Cash Flow Effect


$21

$22

$23

$24

$25

$26

$27

$28

$29

1 2 3 4

Exp

en

se (

'00

0 $

)

Years

Capital lease

Operating lease

Operating Lease

Year

Cash flow from

operations

Cash flow from

operations

Cash flow from

financing

1 ($26,000) ($6,165) ($19,835)

2 ($26,000) ($4,776) ($21,224)

3 ($26,000) ($3,291) ($22,709)

4 ($26,000) ($1,701) ($24,299)

Capital Lease

Operating income is higher for capital lease

(This is because depreciation expense for capital lease

is lower than the lease payments)

Net income is lower in early years for capital lease

Operating income is higher for capital lease

(This is because depreciation expense for capital lease

is lower than the lease payments)

Net income is lower in early years for capital lease

In operating lease, the total cash payment reduces

cash flow from operations

In capital lease, the part of lease payment considered payment on principal reduces cash flow from financing activities

Total CF is unaffected by the accounting treatment

In operating lease, the total cash payment reduces

cash flow from operations

In capital lease, the part of lease payment considered payment on principal reduces cash flow from financing activities

Total CF is unaffected by the accounting treatment


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Lessees Perspective: Ratio Effects

Effect on Financial Statements

Financial Statement Capital Lease Operating Lease

Assets Higher Lower

Liabilities Higher Lower

Net Income (in early years) Lower Higher

Cash flow from operations Higher Lower

Cash flow from financing Lower Higher

Total Cash Flow Same Same

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Effect on Ratios


Financial Statement Capital Lease Operating Lease

Current ratio Lower Higher

Working Capital Lower Higher

Asset Turnover Lower Higher

Return on assets Lower Higher

Return on equity Lower Higher

Debt/Equity Higher Lower

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Capitalization vs Expensing

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Capitalization versus expensing

Capitalize

Means show the cost as an asset on the balance sheet

These assets have future benefits

Expense

Benefits are immediate

Or future benefits are too uncertain or immaterial

Costs flow through the financial statements

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Management discretion in exercising these choices can significantly impact the financial statements and the ratios

Cost incurred

Balance Sheet

Net Income

(Depreciation or Amortization Expense)

CFI Outflow

Income Statement

Net Income

(Expense)CFO outflow

Capitalization Expensing


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WorldCom Case

Most infamous example of inflating earnings through improper capitalization of expenses

Regulators?

Transaction$3.8bn 2001-02 expenditure on line costs

What was required as per

What WorldCom WorldCom declared

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Accounting Treatment

Regulators? required as per GAAP

$3.8bn must be treated as operating expense

Pre-tax Income should be deducted by $3.8bn

What WorldCom did?

WorldCom capitalized the

costs

$3.8bn was capitalized and put on the

balance sheet (for

amortization)

WorldCom declared bankruptcy in July 2002.

Chief accounting and finance executives charged

with securities fraud


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Income Statement Effects

Income Statement Expensing Capitalizing

Income Variability Greater variability Smoothening effect on net income from year to year

Matching of revenues Less matching of revenues and costs

Cost deferred and matched with revenues

Profitability (Early years) Lower as all expenses flow through the IS

Higher as cost is amortized

Profitability (Later years) Higher as all cost has been expensed

Lower due to amortization of capitalized cost

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Balance Sheet Effects

Cash flow effects

Balance Sheet Expensing Capitalizing

Asset and Liability Lower Higher

Leverage Ratios (debt/equity,debt/asset)

Higher Lower due to higher base

Book Value/Share Lower Higher

Cash Flow Expensing Capitalizing

Cash Flow from Operations Lower Higher

Cash Flow from Investing Higher Lower

Total Cash Flows Same Same


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Capitalization of interest

Capitalized interest is the interest incurred during the construction of long-lived assets.

Capitalized interest is included as the initial cost of the asset on the balance sheet instead of being charged off as interest expense on the income statement

Qualifying assets for capitalized interest

They must require a period of time to make them ready for use

Assets under construction for use in operations

Discrete assets intended for sale or lease

What is the Capitalization period?

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What is the Capitalization period?

Capitalization period begins when

Expenditures for the asset have been made

Activities for readying the asset are in progress

Interest costs are being incurred

Capitalization period ends when

Asset is substantially complete and ready for its intended use

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Intangibles Assets

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Intangibles Capitalized or Expensed

Patents

Goodwill

Advertisements

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Accounting for Research and Development

Future benefits from R&D expenditures is highly uncertain at the start of a project

SFAS 2 requires virtually all R&D expenditures to be expensed as incurred

Principle of conservatism is applied in case of R&D

However, when one firm buys another firm, the total purchase price must be apportioned among the individual assets acquired

$4,000$4,000In-process

R&D (no future

Immediately written off

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SFAS 2 requires that a portion of purchase price be allocated to in-process R&D and be immediately written off

Managers have a strong incentive to allocate a large portion of the purchase price to purchased in-process R&D

$4,000$4,000

$600$600

$400$400

In-process R&D with almost certain future

Tangible Assets

Purchase price

$5,000$5,000

R&D (no future alternative)


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Accounting for Software Development Costs

More liberal for accounting internal expenditures for software development

Software development cost is a major costs for many small, growth service companies and thats their main asset

This prompted FASB to be more liberal while formulating SFAS 86

Research Research Development

expenditures

Development

expenditures

Technologically feasibleExpensed as

incurred

Capitalized and

amortized

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expendituresexpenditures expendituresexpenditures

Before After


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Intangibles Example

How much is recognized as intangible assets

How much is recognized is expensed

Example: Intangibles

An enterprise is developing a new production process. During the year 2001, expenditure incurred

was Rs. 10 lakhs, of which Rs. 9 lakhs was incurred before 1 December 2001 and 1 lakh was incurred

between 1 December 2001 and 31 December 2001. The enterprise is able to demonstrate that, at

1 December 2001, the production process met the criteria for recognition as an intangible asset.

The recoverable amount of the know-how embodied in the process (including future cash outflows

to complete the process before it is available for use) is estimated to be Rs. 5 lakhs.

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How much is recognized is expensed

How much is recognized as intangible assets?

What is the impairment?

During the year 2002, expenditure incurred is Rs. 20 lakhs. At the end of 2002, the recoverable

amount of the know-how embodied in the process (including future cash outflows to complete

the process before it is available for use) is estimated to be Rs. 19 lakhs.


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Intangibles: Capitalize/ Expense

Intangible Asset Treatment as per US GAAP

Research and development Expensed as incurred

Patents and copyrightsCosts incurred in development are expensed but if a patent orcopyright is purchased then the cost is capitalized

Franchise and license costs Capitalized by the purchasing firm

Brands and trademarks Capitalized by the purchasing firm

Advertising costs Expensed as incurred

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GoodwillMay be recognized and capitalized only in purchase transactions.Under US GAAP goodwill is subject to an impairment test

Computer software &development costs

All costs incurred in feasibility studies are expensed but subsequent development costs of an established product can be capitalized

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Deferred Tax

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Introduction to accounting for Income taxes

Difference between Financial & tax reporting

Indian GAAPIndian GAAP

Generally accepted accounting principles is a set of rules for preparing financial statements

Income Tax ActIncome Tax Act

Internal Revenue Services Code sets rules for preparing

tax returns

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Income tax expense from GAAP and income tax payable from Income Tax Act do not equal

When income and expense are treated differently on financial statements than it is on the companys tax returns results in Deferred tax asset or Deferred tax liabilities

Purpose of accounting for income tax

Recognize deferred tax liability or deferred tax asset for the tax consequences of amounts that will become taxable or deductible in future years as a result of transactions or events that already have occurred

Pretax Financial IncomePretax Financial Income

Income Tax Expense

Taxable IncomeTaxable Income

Income Taxes Payable


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Temporary differences

Difference between the tax basis of an asset or liability and its reported (carrying or book) amount in the financial statements that will result in taxable amounts or deductible amounts in future years

Deferred Tax Liability

Accelerated depreciation on tax return (straight line on income statement)

Installment sales of property (installment method for taxes)

Accounting Income >

Taxable Income

Accounting Income >

Taxable Income

Future Taxable Amounts

Future Taxable Amounts



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Installment sales of property (installment method for taxes)

Unrealized gain from recording investments at fair value (taxable when asset is sold)

Deferred Tax Asset

Rent or subscriptions collected in advance

Warranty expenses are accrued on income statement (tax deductible only when warranty claims are paid)

Deferred compensation cost is recognized as it is earned (tax deductible only when payments are made)

Asset impairment

Post retirement benefit expenses

Accounting Income <

Taxable Income

Accounting Income <

Taxable Income

Future Deductible Amounts

Future Deductible Amounts

Deferred Tax Asset

Deferred Tax Asset


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Deferred tax Illustration Temporary Difference

Example 1: Deferred tax calculations

Toy & Co. purchases an asset each year for three years. Asset 1 in the first year, Asset 2 in the second year and

Asset 3 in the third year. The cost of each of these assets is US$10,000, with no salvage value and 4 years life.

Double declining balance method is used on tax returns and straight line for financial statements

Calculate the Deferred tax liability from Year 1 to Year 4.

Tax return calculations (DDB) Year 1 Year 2 Year 3 Year 4

Asset 1 5,000 2,500 1,250 1,250

Asset 2 - 5,000 2,500 1,250

Asset 3 - - 5,000 2,500

Total DDB depreciation 5,000 7,500 8,750 5,000

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If there is no reversal of deferred liability, the cumulative deferred liability will continue to increase as long as the firm continues to grow

Temporary difference reverses from Year 4

Year 1: (5,000 2,500) * (30%) = 750

Year 2: (7,500 5,000) * (30%) = 750

Year 3: (8,750 7,500) * (30%) = 375

Year 4: (5,000 7,500) * (30%) = -750

Year 1: (5,000 2,500) * (30%) = 750

Year 2: (7,500 5,000) * (30%) = 750

Year 3: (8,750 7,500) * (30%) = 375

Year 4: (5,000 7,500) * (30%) = -750

Income Statement (straight line) Year 1 Year 2 Year 3 Year 4

Asset 1 2,500 2,500 2,500 2,500

Asset 2 - 2,500 2,500 2,500

Asset 3 - - 2,500 2,500

Total SL depreciation 2,500 5,000 7,500 7,500

Cumulative Deferred Tax Liability Year 1 Year 2 Year 3 Year 4

Deferred liability @ 30% tax rate 750 750 375 -750

Cumulative Deferred liability 750 1,500 1,875 1,125


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Permanent differences

Permanent differences

Results mainly from revenues or expenses that affect pretax income or taxable income, but not both

No deferred liability or assets are created as these differences are permanent

Common sources of permanent difference

Tax-exempt interest received from US municipal bond obligations

Premium on life insurance policies where the company is beneficiary (not deductible for tax purposes)

Allowable tax credits

Goodwill amortization (under IAS)

As these differences are never deferred but are considered decreases or increases in the effective tax rate

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rate

If the only difference between taxable and pretax incomes were a permanent difference, then tax expense would be simply tax payable

Illustration: Permanent difference

Income Statement Tax Return

Preliminary Income 80,000 80,000

Tax-exempt interest income 20,000 -

Premiums paid on life insurance -5,000 -

Pretax Income / Taxable Income 95,000 80,000

Preliminary tax liability (40%) NA 32,000

Less eligible tax credits NA -4,000

Tax expense / tax liability 28,000 28,000

Effective tax rate/ Statutory tax rate 29.5% 40.0%

No deferred liability or assets are created


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Deferred Taxes

Study of BSE-100 companies

Source of Deferred Tax Companies % of total

Depreciation 78 companies 94.75%

Fiscal allowances on fixed assets HUL, ITC & M&M 2.15%

Interest Accrued Canara Bank, Allahbad Bank 0.67%

Lease Adjustments SBI, MRPL, HDFC 0.58%

Deferred Revenues ONGC 0.44%

Others Others 1.41%

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Others Others 1.41%

Source: Chartered Accountant Journal, July 2006


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Analysts note on Deferred Taxes

The analyst should consider the firms growth rate and capital spending levels when determining whether the difference will actually reverse

Impairment generally result in creation of Deferred tax assets since the write-down of assets is recognized immediately for financial reporting, but not for tax purpose until the asset is sold

Restructuring also leads to creation of Deferred tax assets since for financial reporting purpose the costs are recognized immediately when restructuring is complete, but not expensed for tax purpose until actually paid

Deferred tax liability or assets is expected to reverse

Valued for accounting purpose at its undiscounted value

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Valued for accounting purpose at its undiscounted value

Deferred tax liability or assets is NOT expected to reverse

The difference should be treated as Equity

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Contingent Liabilities

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Contingent Liability

Contingent liabilities represent potential expenses for a company where the outcome is dependent upon one of more future events

If it is probable the liability will crystallize then the full amount must be accrued in the financial statements

However, if payment is less than probably (usually interpreted to be a probability of less than 50%) then no entry is made in the balance sheet; although a contingency is disclosed in the notes to the accounts

Common contingencies include loan guarantees, product warranties and legal claims

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Do Nothing

Special Items in Financial Statement

Documents

Transcript of Special Items in Financial Statement