Unit 2: Technical Accounting and Reporting

• Topic 01

  Business Combinations (Advanced)

  15 questions
• Topic 02

  Consolidation (Advanced)

  15 questions
• Topic 03

  Variable Interest Entities (VIEs)

  15 questions
• Topic 04

  Derivatives and Hedging (Advanced)

  15 questions
• Topic 05

  Revenue Recognition (Advanced)

  15 questions
• Topic 06

  Leases (Advanced)

  15 questions
• Topic 07

  Financial Instruments

  14 questions
• Topic 08

  Income Taxes (Advanced)

  15 questions

A few questions from this unit, with the answer and a full explanation. The complete bank is available when you start practising.

1. What is the balance sheet classification of deferred tax assets and liabilities under current GAAP (ASC 740 as amended by ASU 2015-17)?

   • A
     Classified as current assets or liabilities on the face of the balance sheet, regardless of reversal timing
   • B
     All deferred tax assets and liabilities are classified as non-current
     Correct answer
   • C
     Classified as current or non-current based on the expected reversal date of the underlying temporary difference
   • D
     Classified based on the balance sheet classification of the related asset or liability
   Explanation

   Under ASU 2015-17 (codified in ASC 740-10-45-4), all deferred tax assets and liabilities, and any related valuation allowances, are classified as non-current on the balance sheet. This simplification eliminated the prior requirement to classify deferred taxes as current or non-current based on the classification of the related asset or liability or the expected reversal date. Deferred tax assets and deferred tax liabilities for the same taxing jurisdiction are offset and presented as a single net non-current amount (either an asset or a liability).

2. On 1 January Year 1, Company A (lessee) enters into a 5-year operating lease with annual payments of $60,000 due at the end of each year. The implicit rate is not known. Company A's incremental borrowing rate is 5%. What is the initial lease liability?

   • A
     $259,769 (present value of five annual payments of $60,000 at 5%)
     Correct answer
   • B
     $259,769 is the ROU asset; the lease liability is $240,000
   • C
     $300,000 (five payments × $60,000)
   • D
     $285,941 (using 4% as a default rate)
   Explanation

   Under ASC 842-20-30-1, the lease liability is measured as the present value of the remaining lease payments not paid at commencement. With five annual $60,000 payments at a 5% incremental borrowing rate (since the implicit rate is not known): PV = $60,000 × PVIFA(5%, 5) = $60,000 × 4.3295 = $259,770 (approximately $259,769 due to rounding). The lessee uses the incremental borrowing rate when the rate implicit in the lease is not readily determinable. Total undiscounted payments ($300,000) are not the lease liability; the present value is required.

3. Under ASU 2016-09, when does an entity recognise the excess tax benefit from the exercise of employee stock options?

   • A
     In income tax expense (as a reduction of tax expense) in the period the options are exercised
     Correct answer
   • B
     In income tax expense only if the excess benefit exceeds a materiality threshold
   • C
     Deferred until the options vest and are fully settled
   • D
     As a reduction of goodwill if the options were assumed in a business combination
   Explanation

   Under ASU 2016-09 (codified in ASC 718-740), all excess tax benefits and deficiencies from share-based payment awards are recognised in income tax expense (or benefit) in the income statement in the period in which they arise, rather than in APIC as was required under prior guidance. An excess tax benefit arises when the tax deduction (based on the option's intrinsic value at exercise) exceeds the book compensation expense recognised over the vesting period. This change reduces the effective tax rate in years with significant option exercises.