Chapter 6 of 6Area III, 25–35% of exam

Area III: Income Taxes, Fair Value, Leases and Subsequent Events

This part of Area III covers income tax accounting, fair value measurement, lessee accounting and subsequent events. Questions ask for the amount and timing of recognition and the related disclosures.

Income taxes

Income tax expense has a current part (taxes payable for the year) and a deferred part (the change in deferred tax assets and liabilities). Deferred taxes are measured at enacted rates for the years of reversal and classified as noncurrent. Uncertain tax positions and valuation allowances each use a more-likely-than-not test.

Enacted rates

Deferred taxes use the enacted rate expected to apply when temporary differences reverse.

FASB ASC 740-10-30-8

Noncurrent classification

All deferred tax assets and liabilities are noncurrent in a classified balance sheet.

FASB ASC 740-10-45-4; ASU 2015-17

Valuation allowance

Required when it is more likely than not that some or all of a deferred tax asset will not be realized.

FASB ASC 740-10-30-5(e)

Uncertain tax positions

A position must be more likely than not to be sustained; it is measured at the largest benefit greater than 50% likely on settlement.

FASB ASC 740-10-25-6 and 30-7

Fair value, lessee accounting and subsequent events

Fair value is an exit price in the principal market, using market participant assumptions and, for nonfinancial assets, highest and best use. Lessees recognize a right-of-use asset and lease liability for most leases and classify each as finance or operating. Subsequent events are sorted into those that adjust the statements and those that are only disclosed.

Principal market and costs

Fair value uses the principal market price, adjusted for transport costs but not transaction costs.

FASB ASC 820-10-35-5 and 35-9B to 35-9C

Valuation approaches

Market, income and cost approaches; the cost approach reflects current replacement cost of service capacity.

FASB ASC 820-10-35-24A; ASC 820-10-55-3A to 55-3G

Finance lease criteria

Transfer of ownership, reasonably certain purchase option, major part of economic life, substantially all of fair value, or specialized asset.

FASB ASC 842-10-25-2

Lease payments

Include fixed payments, index- or rate-based variable payments, and amounts probable of being owed under residual value guarantees; usage- or sales-based payments are excluded.

FASB ASC 842-10-30-5

Recognized versus nonrecognized events

Events giving evidence about conditions at the balance sheet date adjust the statements; events arising afterward are disclosed if material.

FASB ASC 855-10-25-1 and 25-3

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