Question

• Discuss one factor that a company might consider in determining the need for a valuation allowance for a deferred tax asset.
• The revised revenue recognition accounting standard employs a five-step process to recognize income upon the transfer of promised goods or services. Many companies bundle a product and a service. How will a company recognize revenue for such products ?
• The defined contribution and defined benefit plans had been the most popular pension plans in use by employers. Many employers have changed from traditional defined benefit plans to defined contribution plans. No major company has adopted a traditional plan in the last 10 years. What would be one possible reason that might explain this trend and the future impact on the accounting for pensions?

Answer 1

1. Discuss one factor that a company might consider in determining the need for a valuation allowance for a deferred tax asset.

As per IAS 12, Income Taxes, The Valuation allowance for a Deferred Tax Asset is created when it is more likely than not that the future taxable profits would not be sufficient to reverse the deferred tax assets.

Valuation allowance can be said to be similar to the provision for doutbful debts when it is doubtful that debtors won't be realised in future

There can be many factors which company might consider in determining valuation allowance like future uncertainty regarding taxable profits which can be used to set off the losses or history of a company of having losses

2. The revised revenue recognition accounting standard employs a five-step process to recognize income upon the transfer of promised goods or services. Many companies bundle a product and a service. How will a company recognize revenue for such products ?

As per IFRS 15, Revenue from contract with customers, a five step process is followed for recognising the revenue. The steps are

1	Identifying the contract
2	Identifying the performance obligation
3	Determining the transaction price
4	Allocation of transaction price to performance obligation
5	Satisfaction of Performance obligation

Where a company bundles a product and a service, company needs to be identify whether this bundle represents a single performance obligation or distinct performance obligation, which is covered under Step 2 mentioned above. The organisation may end up accounting for all goods and services promised in a contract as single performance obligation if entire bundle of promised goods and services is the only distinct performance obligation identified.

3. The defined contribution and defined benefit plans had been the most popular pension plans in use by employers. Many employers have changed from traditional defined benefit plans to defined contribution plans. No major company has adopted a traditional plan in the last 10 years. What would be one possible reason that might explain this trend and the future impact on the accounting for pensions?

As per IAS 19, Employee Benefits, employers are going for Defined Contribution Plans because under this plan entity pays fixed contribution to a separate fund and will have no legal or constructive obligation to pay further contributions if the fund does not hold sufficient assets to pay all the employee benefits relating to employee service in current or prior periods, whereas under traditional plan, company is not relieved from this obligation. Hence company is going for Defined Contribution Plan. Accounting for pensions shall be done as per IAS 19.