Accounting Research and Analysis

This assignment requires in-depth research and analysis on several key accounting concepts. Students are expected to examine topics such as performance-based compensation plans, corporate debt contracts, the going concern assumption, and the use of accounting-based measures in M&A performance evaluation. The assignment also delves into environmental accounting (consumption-based accounting of CO2 emissions) and the influence of government ownership and accounting regulations on audit opinions.

Review of Current Accounting
System
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Table of Contents
1.0 INTRODUCTION..........................................................................................................................3
2.0 The facts.....................................................................................................................................3
Who is Involved?.............................................................................................................................3
What happened?...............................................................................................................................3
What actions was taken?..................................................................................................................4
3.0 Accounting principles, standards and concepts.........................................................................4
4.0 CONCLUSION..............................................................................................................................6
REFERENCES.....................................................................................................................................7
APPENDIX..........................................................................................................................................8
Caterpillar slides following a report that accuses it of tax and accounting fraud.................................8
TASK 2.................................................................................................................................................9
Executive summary..........................................................................................................................9
INTRODUCTION................................................................................................................................9
Introduce the major issues in the new standards..............................................................................9
Explaining the views consensus or disagreements between the commenting parties...................10
Analyse the assumptions behind public interest, private interest & capture theories for the
comment letters..............................................................................................................................11
CONCLUSION..................................................................................................................................12
REFERENCES...................................................................................................................................13
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1.0 INTRODUCTION
Accounting standards are standard set by IASB, IFRS and other accounting bodies to ath
accounting practice and following these accounting standards globally. These principles are
circulated globally and made changes in rules time to time so that it corporate and companies carry
on their operational and financial function smoothly. In this report the accounting and tax scandal
made by Caterpillar Company which is US biggest engineering and machinery equipments
company scandal have been discussed. Moreover its accounting principal set by these accounting
bodies and violation and exposure draft and comment letter of few experts have been discussed. The
aim of the report is to clear the concept of International accounting standard and implementation in
organisation can be learned.
2.0 The facts
Caterpillar failed to comply the US taxes and financial reporting in an effort to keep its stock
price high as per government investigation and reports by The New York Times. Caterpillar
returned $7.9 billion in fund structured as loans but did not report them for tax ar accounting
purpose.
Who is Involved?
Caterpillar Inc is an American company who design, manufacture, market and sell engines,
machinery and financial products & insurance to the consumers all around the world. It is a leading
establishments listed on New York Stock Exchange (NYSE) and operates in Industry Equipment,
Engines and Financial Service Company (De Simone, L. 2016). According to the recent report,
Caterpillar has been accused by the Australian statutory bodies for the accounting scandals to
reduce the amount of taxes on billions of dollars (Jansen, J. 2016). It did not comply with the US
taxation legislation as well as regulations on financial reporting. The main target of the company by
non-compliance with the accounting standards is to fraudulently maintain their share price at high
level.
What happened?
In the accounting scandals and fraudulently cooking of the books has resulted a cut-down of
tax bill by 2.4 billion by moving out its US earnings to the subsidiary firm in Swiss. Caterpillar Inc
inaccurately reported their cash movement among domestic as well as overseas subsidaries, more
importantly, Swiss subsidaries and also did not comply the taxation acounting standards in the
financial reoprting. As per the legislations, US companies are taxed at 35% but they are permitted to
defer their taxation duties on those profitability that has been generated offshore untill they are
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brought back to the States, called repatriation. Once when the money is brought
What actions was taken?
As per the story cited a report prepared by dartmouth College that investigated heavy
machinery makers tax practice. The main finding was that caterpillar avoided on billions of dolar it
brought to the US from its Swiss unit and affiliates. Caterpillar returns $7.9 billion in fund
restructure as loan but did not report them for tax or accounting purpose as per Times Report. So
Law enforcement officer with internal revenue service executed a search warrant at Caterpillar's
facilities in the Peoria, Illinois are. Multinational like caterpillar faces a 35% tax rate in the US
vessel then the appropriate rate in other mostly developed economies. This down courage them
from deport of foreign earnings and facing US taxes. President Donald trump has suggested that
companies with large cache of overseas will be able to return at 10% interest rate. Caterpillar
strategies for reducing the taxes it must pay in the United States have saved the company billion of
dollars. Federal agent raided three caterpillar building near its headquarter Peoria as a part of
investigation (Oydele, 2017). Caterpillar said that they will co operating with Law officers and
necessary information provided to Officers. As per company statement said Caterpillar was
cooperating with the officer. Companies report has not been published among public. Spokeswomen
said that company has not been provided with the copy but as per New York time reported it
outlines a complex corporate strategy for returning billion of dollar in offshore account to US
account without payment of federal income tax earnings.
3.0 Accounting principles, standards and concepts
Tax accounting is accounting technique that emphasises on tax inspite of appearance of
public financial statement. Tax accounting is conducted by Internal revenue code which dictates the
specific rules that companies and individuals must follow when preparing tax return. Tax principles
generally differ from generally accepted accounting principle. Violence opf accounting and taxation
principle first came in exist when the three year back when Senate permanent subcommittee on the
investigation published a report on Caterpillar offshore tax strategy, the questionable method to
move most of its profit from the US to Switzerland, where it only pays 4-6% tax rate. After the
government raid the stock of caterpillar lost $4.2 billion in market capital.
As per the IFRS accounting standards recognition of current income tax Interpretation
committee noted that:
 Paragraph 12 of IAS 12 provides the guidelines on the recognition of the current taxes and
current liabilities.
 In the specific facts pattern described the submission, an assets is recognised if the amount
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of cash paid which is certain amount exceeds the amount tax expected to be due which is
uncertain amount.
 The timing of the payment should not affect the amount of current tax expenses recognised.
 As per interpretation committee mentioned in paragraph 88 of IAS 12 provide guidelines on
disclosure required for such items. In the light of existing IFRS guidelines contingent
Liabilities and Contingent Assets should be applied to determine whether to recognise an
assets in which tax position is uncertain.
So caterpillar have violated the IFRS and IAS accounting standard provisions in Income tax
and accounting principle of moving billions of dollars in cash from Switzerland to US and paid tax
only 4-6%. Now after actions of Law officers they have to pay with interest 10% and penalty. So In
specific pattern described the submission assets which are recognised if the amount of cash paid
ehich certain amount exceeds the amount tax accepted to be due which is uncertain. So caterpillar
should have disclosed actual revenue to government and paid all taxes on moving cashes but they
not did it and falsely mentioned the revenue and paid only 4 to 6% interest. Secondly IFRS standard
said that the timing of the current payment should not affect the current tax expenses recognised. So
they have also broken this rule and did not paid timely taxes for current assessment year.
Tax Concept: Income tax consequences of payment on financial instrument classified as
equity. The issues related to the presentation of income tax and issues of cost financial instruments
that are classified as equity that is whether an entity recognised the relevant income tax
consequences directly in equity or in profit and loss. Consequently the interpretation committee
decided to propose an amendment to IAS 12 which clarifies that all payments on financial
instrument classified as equity that distribute profit and are not limited to circumstances described
in paragraph 52 A of IAS 12. The income tax consequences of dividends are linked more directly to
past transactions or events then to distribution of owner, therefore an entity recognise the income
tax consequences of dividend in profit or loss for the period, except the transactions are described in
accounting standard (Kvaal, E. (2017). An entity recognise the income tax consequences of
dividend when to recognise the a liability to pay dividend.
IFRIC interpretation Uncertainty over Income tax Treatment draft interpretation: Draft proposed on
income tax treatment proposed are interpretation treatment would apply to income tax within the
scope of IAS 12 income tax, An entity would determine whether to consider uncertain tax position
separately or collectively, An entity would assume that a tax authority have right to examine the
amount reported to it will examine those amount and have full knowledge of relevant information
when making those examination.
Experts comment: As per ACSB CNC a Canadian company comment later received to ifrs.
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ACSB is Canadian national accounting standard setting body holding a legal authority to set
accounting standard in Canada. As per their responds interpretation committee efforts to address the
diversity in practice related the recognition and measurement of the uncertainty over income tax
treatment. They support the proposal in draft interpretation and their respond include several
sugestion for interpretation committee to consider. The interaction between IAS 10 after reporting
period and draft interpretation in term of new development and uncertain income tax treatment
arising after the reporting period date should be reflected on reporting date.
From overall evaluation, it has been assessed that Caterpillar failed to record and disclose
transactions according to financial reporting standards. Investigation report shows that Caterpillar
returned funds such as $7.9 billion in the form of structured loan. However, concerned parties were
not reported regarding such aspect due to having tax or accounting purposes. The main intention of
firm behind hiding information related to the payment of loan amount was to maintain high market
share (Baadsgaard & Quitzau, 2011). Hence, major issues take place in the accounting standard
related to the aspect of income tax. The main objectives of accounting for income taxes are to
recognize the amount of tax payable or refund for the current year.
Besides this, deferred tax assets and liabilities for the purpose of future tax must be
recognized in the enterprise financial statements. Further, it has been identified that tax
consequences for most of the events which are recognized in the financial statements undertaken for
the determination of tax payable amount. However, tax laws differ to the significant level from
recognition to the measurement requirements. Due to all such aspects differences occur between the
amount of taxable income and prê-tax profit level. In addition to this, variations also take place
between the bases which are undertaken for calculating tax regarding assets or liabilities. Hence ,
due to the all such aspects existing taxation rules do not facilitate fair disclosure of accounting
information.
4.0 CONCLUSION
In this report the accounting and tax scandal by Caterpillar company has been analysed and
accounting principle standards set by IFRS and IAS on income tax treatment and income tax
consequences are explained. Industrial expert comment by Canadian accounting company and
comment letter is described and violation of tax laws and accounting principal and action of US
governments and reaction of Caterpillar Company is detailed.
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REFERENCES
Book and Journals
Baadsgaard, M., & Quitzau, J. (2011). Danish registers on personal income and transfer
payments. Scandinavian journal of public health. 39(7). pp.103-105.
De Simone, L. (2016). Does a common set of accounting standards affect tax-motivated income
shifting for multinational firms?.Journal of Accounting and Economics.61(1). 145-165.
Kvaal, E. (2017). The Role and Current Status of IFRS in the Completion of National Accounting
Rules–Evidence from Norway. Accounting in Europe. 1-8.
Moriguchi, C., & Saez, E. (2008). The evolution of income concentration in Japan, 1886–2005:
evidence from income tax statistics. The Review of Economics and Statistics. 90(4). pp.713-
734.
Ojha, A., Sahu, G.P., & Gupta, M.P. (2009). Antecedents of paperless income tax filing by young
professionals in India: An exploratory study. Transforming Government: People, Process
and Policy. 3(1). pp.65-90.
Small, R., Yasseen, Y., & Jansen, J. (2016). Accounting for deferred taxation: accounting
technical. Professional Accountant, 2016(27). 14-16.
Online
Steven, A., (2017). Caterpillar accounting issues [Online]. Available through:
<http://www.cnbc.com/2017/03/10/cramer-makes-a-rare-exception-for-caterpillars-
accounting-issues.htm>. [Accessed on 11 may 2017]
Oydele, A., (2017). Caterpillar Slides Following a report that accuses it of tax and accounting fraud.
Available through: < http://www.businessinsider.in/Caterpillar-slides-following-a-report-
that-accuses-it-of-tax-and-accounting-fraud/articleshow/57538778.cms>. [Accessed on 13th
May 2017].
APPENDIX
CATERPILLAR SLIDES FOLLOWING A REPORT THAT ACCUSES IT OF
TAX AND ACCOUNTING FRAUD
Date: March 8, 2017
Caterpillar failed to comply with US tax and financial reporting rules in an effort to keep its stock
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price high, according to a government-commissioned report reviewed by The New York Times .
The story cited a report prepared by Dartmouth College that investigated the heavy machinery-
maker's tax practices.
Its main finding was that Caterpillar avoided reporting on billions of dollars it brought to the US
from its Swiss units and affiliates. Caterpillar returned $7.9 billion in funds structured as loans but
did not report them for tax or accounting purposes, The Times reported.
"I believe that the company's noncompliance with these rules was deliberate and primarily with the
intention of maintaining a higher share price," wrote Leslie Robinson, a Dartmouth accounting
professor and author of the report, which was reviewed by The Times but not yet by Caterpillar.
"We were not provided a copy of the report," said Corrie Scott, a Caterpillar spokesperson, in an
emailed statement. "We will not offer comment on a report we haven't seen."
Caterpillar shares were down 3% in premarket trading following The Times' report.
Last week Thursday, law enforcement officers - including some wearing jackets with the Internal
Revenue Service logo - executed a search warrant at Caterpillar's facilities in the Peoria, Illinois
area.
Multinationals like Caterpillar face a 35% tax rate in the US, steeper than the prevailing rates in
most other developed economies. This discourages them from repatriating overseas earnings and
facing US taxes. President Donald Trump has proposed that companies with large stashes of
overseas cash be able to return them at a 10% rate.
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TASK 2
Executive summary
Exposure draft is a document released by Financial Accounting Standard Boards for public
comment on proposed new rules and standards. Since changes in accounting standard can have a
huge impact on the organisation. It is important for the accounting bodies to consult with public and
private or corporate bodies and other individual business firm and take their feedback so that
negative effect from the accounting standards can be minimised. So effect of accounting standards
set by Accounting bodies and it effect on company or business have included in study.
INTRODUCTION
In this report A new accounting standard as per FASB and exposure draft and comments of
accounts experts CA's are included. The aim of the report is to guide the new accounting standard
and it proper implementation in company. So in this report different type of organisation from
accounting bodies, industries, companies and corporate bodies favourable views and disagreement
has been examined on the issuance of proposed standards on disclosure requirement for inventory.
Assumption of companies behind public interest and private interest and evaluation of exposure
draft have been concluded.
Introduce the major issues in the new standards
From assessment, it has been identified that there are several issues associated with the
existing accounting principles and concepts. Hence, it is highly required for the firm to undertake
strategic action which helps in showing suitable view of accounting information. Hence, with the
motive to ensure high level of reliability in the recording of transactions and fair disclosure FASB,
IASB and other concerned authorities take initiatives for building fair accounting system. It has
been found from evaluation that leasing is one of the main areas in which improvements are highly
required. However, GAAP and new rules related to leasing are not highly similar. Assessment level
shows that several issues are prevailed in current accounting system. New proposed changes which
are introduced related to accounting standards aimed to disclose fair information regarding
inventory.
The main objectives behind such disclosure are to provide information about the extent to
which different types of inventory have an impact on future cash flows. Further, it will also present
the manner in which transactions and events that are not anticipated affects inventory balance. By
evaluating the view points of different entities it has been identified that new accounting rule
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regarding inventory will lead confusion in mind of users of final accounts. Moreover, according to
the new rules and standards business entity is not required to disclose information about inventory
costing and valuation such as LIFIO, FIFO and average cost method. In addition to this, accounting
rule and system in relation to inventory will impose high cost in front of the business organizations
which follow IFRS and FASB rules. Hence, high cost and unclear disclosure of information impose
issues in relation to presenting the information in a clear and precise way.
Explaining the views consensus or disagreements between the commenting parties
The proposed FASB standard to bring changes into the disclosure requirement of inventory
aims at updating the disclosure framework of the companies. It is because, GAAP do not contains
sufficient or adequate discosures regarding inventory in the annual financial reports of the company,
however, the new standard aims at addressing the enough information including the disclosure of
cost of goods sold so as to assure the consistency with the ASC and thereby provide useful
information to the users. It contains qualitative disclosure regarding the Retail Inventory Method
(RIM) so as to simplify the mechanism to estimate inventory cost. Various parties have commented
on the proposed accounting standards favourably but there are few points where parties disagreed.
According to the comment letter published by KPMG, it favoured the issuance of new
accounting standard on inventory disclosure as they agreed that the proposed amendments in the
disclosure framework would be definitely more effective and render useful information regarding
inventories which help in sound decision making (KPMG, 2017). However, they suggested that the
proposed ASU also consist several disclosure requirements regarding profit and loss that are related
to the inventory transactions and also stated that it will be auditable for the organizations.
On the other side, Pwc said that inventory disaggregated according to its components such
as raw material, WIP, finished stock, supplies is already a statutory requirement for the SEC
registrants hence, tends to be significantly disclosed by the private firms. Although, they believed
that such amendments will be more effective for the decisions-making still, they concerned about its
accumulation of the essential information about inventory on a global basis will result in significant
incremental costs on the multinational entities. Besides this, inter-company transfer of stock that is
applied in actual business practice to eliminate intercompany profits, they believe that upcoming of
new accounting standard on inventory will be too complex and confusing (Pwc Comment letter,
2017). Thus, they required a flexible approach on the inventory reporting. They agreed with the
standards & favoured its early adoption and mandatory also for all the entities.
Contrary side, California Society of Certified Public Accountant (CalCPA) is not aware that
what will be the aspects of new standards which will be operational or auditable as well. The
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committee believed that the additional disclosure requirement as per the proposed standards will
definitely leads to more incremental and auditing costs to the companies. Thus, the committee did
not reply that to what extent, the proposed standards would be significant. Committee argued that
the informational benefit that can be gained by the issuance of proposed standards would not justify
the additional costs that an entity may incur to disclose the in-depth information regarding inventory
(CalCPA comment letter, 2017). They suggested that both the disclosures under 330-10-50-10
(Qualitative description) and 330-10-15-12 (RIM) would be too expensive to construct and argued
that RI disclosure is not required for the entities except only public firms. On the other side, it
favoured that entities will not have to restate the statements therefore, they supported its early
adoption.
On the other side, Grant Thornton said that undoubtedly, the upcoming standards are both
operational and auditable as well only with one exception that is disclosure of atypical losses. He
said that the standard is still unclear that whether atypical losses that an entity may have from the
inventory spoilage, damage, shrinkage would define it in the context to materiality or any other
measure. The comment letter also favoured the exclusion of public business entities to disclosure
their segmented inventory reporting (Grant Thornton comment letter, 2017). For the issue that
whether paragraph 330-10-50-10 which is about disclosure of qualitative information delivery about
the type of costs that a business incur in stock would be beneficial or not? The comment letter did
not supported it because they state that it will be very little beneficial and likely to boilerplate. In his
opinion, there is no specific requirement for the entities to use only RIM for inventory reporting and
it is not justifiable and also, there is no need to disclose the cost to retail inventory % and for the
adoption of these amendment, non-public enterprise will need a significant time in comparison to
public business entities therefore, it will be beneficial from the later effective date.
Analyse the assumptions behind public interest, private interest & capture theories for the comment
letters
The public and local community able to know nd analyse the accounting treatments of
inventory which are made by the companies in the more proper and appropriate way. Public can
assess that he management of the firm having how much capability to generate sales with the help
of inventory as well as stock. In the public interest there are government also having a key place
where it make interest towards new and proposed disclosures because it provides more information
about the firm in terms of stock level and its uses (Hartwick, 2016). Apart from this, the public able
to boost up their capability for determining as well as analysing loevel of stock and on the basis of
this can take decisions that whether investment needs to made in the entity or not. On the other hand
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side, private interest is due to making the accounting treatment of inventory and its related
transactions at the workplace. Furthermore, when there are new as well as proposed inventory
disclosures comes under consideration then the firm can make the effectual treatments which lead to
prepare the financial statements such as profit and loss as well as balance sheet etc. in effective
ways.
By considering the comment letters it has been analysed and identified that if there are
proposed disclosures will be implemented in the accounting standards then the management as well
as people both are beneficial up to the greater level (Gow and Larcker, 2016). Due to proposing
new standards and disclosures, the public able to assess hat which kind of treatment is made in
which kind and able to take decisions in the proper way. Apart from this, the private or businessmen
are highly able to prepare the balance sheet in the effectual way which leads to analyse the current
and past level of stock. As per the comment letter of CalCPA the people and committee say that if
the new disclosures come then additional requirements for preparing statements will comes under
consideration. Furthermore, due to this it impose incremental costs and expenses on the company
and lead to reduce the return and dividend amount on shares of investors goes down. On the basis of
the comment letter of PWC the commenter describes that some of the areas will be benefited due to
proposed inventory disclosures which are like as plans and schedules, fair value measurements,
income taxes etc (Girella and Bagnoli, 2016). On the opposite side, when new and proposed
disclosures will be there then lead to enhance incremental costs and expenses which is the negative
and adverse situation for the company. On they basis of KPMG comment letter the people and
commenter said that because of introducing new as well as proposed inventory disclosures then
create situation of overlapping at the workplace which is the adverse or unfavourable for the
company or business organisation.
CONCLUSION
The report concluded that although the parties have provided different views and opinion
regarding the issuance of new standards on inventory reporting, still, everyone favoured that it will
be helpful in effective reporting and will assist the entities in decision making by fully disclosure of
the information regarding inventory, therefore, it must be published.
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REFERENCES
Books and Journals
Li, Z., Wang, L., & Wruck, K. H. (2017). Accounting-Based Compensation Plans and Corporate
Debt Contracts.
Jordan, C. E. (2016). FASB's New Standard for Classifying Deferred Taxes. Then PA Journal.
86(7). 22.
Seyam, A. A., & Brickman, S. (2016). The going concern assumptions and presentation on financial
statements. The Business & Management Review. 7(3). 241.
Kaplan, R.S. & Atkinson, A.A., 2015. Advanced management accounting. PHI Learning.
Thanos, I.C. & Papadakis, V.M., (2012). The use of accounting-based measures in measuring M&A
performance: a review of five decades of research. In Advances in mergers and
acquisitions (pp. 103-120). Emerald Group Publishing Limited.
Davis, S.J. & Caldeira, K., (2010). Consumption-based accounting of CO2 emissions. Proceedings
of the National Academy of Sciences. 107(12). pp.5687-5692.
Chan, K.H., Lin, K.Z. & Wang, R.R., (2012). Government ownership, accounting-based
regulations, and the pursuit of favorable audit opinions: Evidence from China. Auditing: A
Journal of Practice & Theory. 31(4). pp.47-64.
Penman, S.H. and et.al. (2015). An accounting-based characteristic model for asset pricing.
Online
KPMG. (2016). [Online]. Available through:
<https://home.kpmg.com/content/dam/kpmg/pdf/2016/02/comment-letter-ed20158-application-
materiality-financial-statements.pdf>. [Accessed on 13th May 2017].
Grant Thornton comment letter. (2017). [Online]. Available through: <
https://www.oecd.org/daf/ca/GrantThornton2015CGP.pdf>. [Accessed on 13th May 2017].
CalCPA comment letter. (2017). [Online]. Available through: <
https://www.calcpa.org/~/media/members/committees%20sections/forensic%20services
%20section/comment%20letters/lit_comment061505.pdf?la=en>.[Accessed on 13th May 2017].
Pwc Comment letter. (2017). [Online]. Available through:
http://www.pwc.com/us/en/cfodirect/assets/pdf/comment-letter/fasb-proposed-inventory-
disclosures.pdf. [Accessed on 13th May 2017].
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