CPA Report
MEMO

Drafted Response for Requested Information: Methodology
Financial Accounting Standards No. 96 requires entities to use the liability method for calculating the deferred tax assets and deferred tax liabilities (Wilson, 1990, p. 1). The liability method is used to classify the temporary differences on the balance sheet date as temporary differences. A temporary difference might result in a future reversal as a higher taxable income or deductible differences from future reversal resulting in a lower taxable income (1990). The difference between the tax basis results as an asset or liability transferring into a carrying or book amount in the financial statements (Kieso, Weygandt, & Warfield, 2007, p. 996).
The net deductible can be carried back three years as a taxable income or to other net taxable temporary differences. If there are any remaining net deductible the net taxable temporary differences are normally carried for 15 years. When the net deductible is carried back an imaginary refund is created as a deferred tax asset. This deferred tax asset is considered as a current tax asset because the assets come from the year after the date of balance sheet (1990).
Reporting Accounting Changes
Reporting changes for accounting are identified under accounting principle changes, accounting estimates, and changes in reporting entity classification. Changes in estimates arise from changing depreciable methods on assets (Kieso, Weygandt, & Warfield, 2007, p. 1152). Changes in reclassifying a segment of the company as a separate company or a subsidiary to form a corporation give the entity the ability to consolidate financial statements (2007). Three methods of reporting changes are either currently, retrospectively, or prospectively (2007).
Changes reported in the current year’s financial income statement is an irregular item creating a cumulative