In my previous article, I began discussing audit planning requirements. Among those requirements is an auditor’s responsibility to understand an entity’s applicable financial reporting framework. In this series of writings, the audit strategies discussed will apply to audits of all financial reporting frameworks but focus specifically on two special purpose frameworks, the income tax basis and the FRF for SMEs basis.
The last article in this series summarized four basic principles for the income tax basis. Other basic principles for this basis are presented below.
Property and Equipment
Fixed assets are recorded under both the accrual and cash methods of tax return preparation. Most fixed assets are depreciated using the accelerated tax methods resulting in more rapid depreciation. Within certain limitations, the cost of IRC Section 179 property can be deducted on tax returns in the year of acquisition. Owner’s asset contributions may be valued at the owner’s tax basis. Capitalization of leases generally only occurs when ownership transfers at the end of the lease or there is a bargain purchase.
Generally, goodwill and other intangible assets are amortized over 15 years.
Liabilities (and receivables) are recorded if the entity’s tax return is prepared on an accrual basis. Long-term obligations are recorded under both the accrual and cash methods of preparation.
Subsidiaries owned 80% or more may be consolidated.
Other Basic Principles
The historical cost basis is used. Financial statements prepared under this framework must include appropriate disclosures of the basic accounting principles used and other disclosures of related party transactions, commitments and contingencies, threats to the going concern assumption and other matters necessary for it to be considered a “fair presentation framework.”
While this list of tax basis principles is not exhaustive, it does underpin an auditor’s approach to planning and performing an audit. In the next article in this series, some of the basic principles for the FRF for SMEs will be presented. As always, I invite your questions and comments, either directly below the article or sent to my personal email address, email@example.com.