Ask Questions. Get Answers.

One-Stop Solutions

This platform is designed to help CPA exam candidates ask, learn and grow. So, whether you're looking for accounting answers, advise on practical application of concepts or you just want to check your CPA exam eligibility, get answers to your questions. Infact, this platform offers one-stop solutions for all your questions related to CPA and the CPA exam.

Please fill out the form below if you have any questions.

Your Questions - My Answers

Property, Plant and Equipment
Is there any limit on the amount of interest that can be capitalized?
– Shashi Sharma, Gurgaon, Haryana

Yes, there is a limit. The amount of interest capitalized should not exceed the total amount of interest cost incurred in that period.

Postretirement Benefits
Should we consider net periodic pension cost as an operating expense or a nonoperating expense?
– Aarashi Dutta, Kolkata, West Bengal

The service cost component is reporting as an operating expense and presented as compensation cost. The other components are presented separately from the service cost component and reported as a nonoperating expense.

Earnings Per Share
Do we always consider potential common stock when calculating diluted EPS?
– Pranjal, Ludhiana, Punjab

Only dilutive potential common stock is considered for diluted EPS. So, potential common stock that is anti-dilutive is not considered for calculating diluted EPS.

Accounting for Income Taxes
Do we adjust DTA and DTL when there is a change in tax laws or rates?
– Kartik, Vishakapatnam, Andra Pradesh

Yes, you do. So, if there is a change in the tax laws or rates, deferred tax assets and liabilities are adjusted to give effect to a change in tax laws or rates. What’s important is that the change in tax laws or rates should be recognized only when the changes have been enacted and not just proposed.

Governmental Financial Reporting
Under the modified accrual basis, revenues are recorded only if they are measurable and available for paying current period obligations. Please tell what does the term "available" mean?
– Simran Singh, New Delhi

Property taxes are good example to understand this. Property taxes are considered available if they will be received within 60 days after the fiscal year end. For example, if the city government levies taxes amounting to $90,000 but expects to collect only $80,000 during the current year or within 60 days after the current year, then it will record only 80,000 as revenues from property taxes. The remaining 10,000 it will record as revenues in the next fiscal year. This is about property taxes. What about other items? Governments are free to establish their own definition of “available” for items other than property taxes. This length of time for the purpose of “available” may range from 30 days to 1 year. Generally, you find this to be 60 days. But yes, government can set any other time such as 75 days or 50 days.

Reporting Effects of Changing Prices
Are entities required to disclose financial information that reflects price changes?
– Hans Shukla, Varanasi, Uttar Pradesh

An entity is not required to present the financial information reflecting price changes but it may. So, an entity may present certain financial information that is adjusted for inflation.

Financial Instruments
Which method should be used to account for financial instruments?
– Pooja Tiwari, Bangalore, Karnataka

Entities may choose to elect the fair value option for certain financial instruments and measure and report those financial instruments at fair value. Now this fair value option is little different from the fair value method that you generally use for accounting and reporting investments. Another thing you should note here is that, the option to elect the fair value option is optional. So, an entity may decide not to apply the fair value option when accounting for its financial instruments. And if an entity decides not to elect the fair value option, then usual accounting applies. Let’s take an example to understand this. An entity may elect the fair value option for investments that would otherwise be classified as available-for-sale. But if the entity does not elect the fair value option for these investments, then it should apply the fair value method. Another example, an entity may elect the fair value option for investments that would otherwise be accounted for using the equity method. But if it does not apply the fair value option, then the equity method is used to account for the investments.

When we are performing an impairment testing for intangibles under IFRS, we use the term “value in use”. What does this term mean?
– Jai Raman, Pune, Maharastra

“Value in use” is the present value of the future cash flows.

Foreign Currency Matters
Is it possible for a company to have different functional currencies for different operations?
– Shiva, Mumbai, Maharastra

Yes, it is possible, when the operations are distinct and separate. But, when operations are not distinct and separate, then disaggregation of accounting records is not needed and management should identify one functional currency for all the operations.

Postretirement Benefits
Do corporations still report transition obligation relating to pension obligations and include amortized portion of the transition obligation?
– Aarti, Bangalore, Karnataka

Before I answer your question, I give you a brief background on this. In 1985 SFAS 87, Employers' Accounting for Pensions, was approved and the corporations were given the option of adopting most of the provisions of SFAS 87 either in 1986 or 1987. The impact was that entities were required to report funded status of pension plan (that is, the difference between the fair value of plan assets and the PBO) as of the beginning of the first year in which SFAS 87 was applicable. The funded status reported was not entirely recognized as an expense in the first year but was deferred (by transferring to other comprehensive income) and amortized over the greater of 15 years, or average remaining service life of employees at the time of transition. Now, it has been 30 years since the transition happened. Most of the companies have already amortized this amount. So this item no more appears as a component of net periodic pension cost for most of the companies.

Foreign Currency Matters
What foreign currency exchange rate should be used to translate income statement items?
– Neeti Rajan, Hyderabad, Telangana

You use the current exchange rate. It is the exchange rate as of the dates of recognition for income statement items. Now, entities generally have a large number of income statement items during a particular year, and it may not practicable to use current exchange rate (that is, a separate exchange rate for almost every income statement item). So to make the task of translating income statement items easier, the FASB allows the use of one single average rate to translate all income statement items. So, if you ask me which rate is used to translate the income statement items, my answer would be current exchange rate. But for convenience, the entities are permitted to use the average rate.

Governmental Financial Reporting
Why modified accrual basis is used for preparing government fund financial statements?
– Menal, Bhubaneswar, Orissa

It is important to know that reporting for governmental entities is different from reporting for commercial entities. The reason lies in the objective of reporting. The most important objective of governmental financial reporting is accountability. When I say this, I mean fiscal accountability for governmental activities and operational accountability for business-type and certain fiduciary activities. Fiscal accountability refers to reporting on whether the current financial resources were raised from authorized sources and spent only for authorised purposes in the short term. So, this focuses on how the resources are raised and how they are spent in the short-term. This reporting objective is achieved by using the modified accrual basis of accounting and the flow of current financial resources measurement focus.

If goodwill is internally developed by a business, should we record goodwill in the books?
– Rahul Shastri, Vishakapatnam, Andhra Pradesh

You recognise goodwill only in a business combination. So, you don’t record goodwill, when it is internally developed. Another thing, it is possible that you have acquire a group of assets but you haven’t acquired a business. In this case also you don’t recognise goodwill.

Postretirement Benefits
Do we present net periodic pension cost as a single line item on the income statement?
– Bala Krishna, Chennai, Tamil Nadu

In March 2017, the FASB issued an update that requires an employer to disaggregate the service cost component from the other components of net periodic pension cost. So, the service cost component of net periodic pension cost is presented separately from the other components of net periodic pension cost. These other components may be presented either as a single figure or separately.

Accounting for Income Taxes
I am a bit confused on the issue of "uncertain tax position" when recording the income tax expense or benefit. How can I understand this?
– Rishik Biswas, Kolkata, West Bengal

Okay, I will explain you this way. What happens is that the company and the IRS may disagree on a tax issue, for example whether a transaction is eligible for a tax deduction or the period in which the amount is deductible, or the amount that is deductible. To deal with such uncertain tax positions, FASB provides specific guidance.

Regarding an uncertain tax position, two questions are particularly relevant. The first question is - whether you should recognize an uncertain tax position? And the answer is yes, if the tax position is “more likely than not” (or you can say more than 50% probability that the uncertain position) will be upheld during its audit. If this "more likely than not" criterion is met, then the entity should recognize the uncertain position and record the amount of tax benefit. The next question what amount of tax benefit should be recorded? Okay, so you record the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement with a taxing authority.

Let’s summarize this. So, you first check - whether there is a more than 50% chance that the uncertain position will be upheld and if yes, then you determine the amount of tax benefit that you will record in your books. And the amount you record is the largest amount of tax benefit that is greater than 50% likely of being realized. This is explained more in my video and textbook.

Not-For-Profit Entities
What is a pledge and how do we record a pledge in the books of a not-for-profit entity?
– Dalina, Dehradun, Uttarakhand

Now many people promise to give assets to a not-for-profit entity. These are commonly called pledge. A pledge can be conditional or unconditional. An unconditional pledge depends only on demand by the not-for-profit entity or on passage of time. For example, John promises to pay $5,000 to a not-for-profit entity after 2 months. This is an unconditional promise to give. You record an unconditional pledge by debiting receivable and crediting contributions.

Earnings Per Share
How relevant is the concept of "maximum possible dilution" when calculating dilutive EPS?
– Nakiran, Hyderabad, Telangana

When you are calculating dilutive EPS, you must ensure maximum possible dilution. So, what you want is that your diluted EPS should be lowest possible. Now, a company may have various types of potential common stock. In such a case, when you are calculating diluted EPS, you may find that convertible securities that are dilutive on a standalone basis may be antidilutive when included with other potential common shares in computing diluted EPS. The concept of maximum possible dilution require that such securities should be excluded when computing dilutive EPS. So, even if a security initially appear to be dilutive, you may still not consider for ultimate diluted EPS calculation. This concept is referred as maximum possible dilution.

Governmental Financial Reporting
What is a permanent fund? Please explain me this with an example.
– Pihu Shah, Faridabad, Uttar Pradesh

A permanent fund accounts for resources that contain a restriction that the principal amount of a contribution must be invested and preserved but earnings on amounts invested can be used for various government programs. So, you can’t use the principal. The principal must be maintained intact. Now the examples of these programs include perpetual maintenance of a cemetery or maintenance of public buildings. Let me give you one more example. A city may establish a permanent fund to account for investment earnings to be spent on maintenance of a public museum. The city established a permanent fund because the principal is not be used but to be kept intact. The city is only authorized to use the earnings from the investments.