Certified Public Accountant Research & Evidence-Based Practice 4 — Questions and Answers
Question 1: A CPA is determining whether a variable interest entity (VIE) must be consolidated. Under ASC 810, which party consolidates a VIE?
- The entity with the largest equity investment in the VIE
- The primary beneficiary, who has the power to direct VIE activities and the obligation to absorb losses or right to receive benefits (Correct answer)
- All equity holders proportionally based on their ownership percentage
- The entity that originally created and structured the VIE
Correct answer: The primary beneficiary, who has the power to direct VIE activities and the obligation to absorb losses or right to receive benefits
ASC 810 requires the primary beneficiary — the entity with both the power to direct the VIE's most significant activities and the obligation/right to receive significant losses/benefits — to consolidate the VIE.
Question 2: When performing tax research, what distinguishes a Treasury Regulation from an IRS Revenue Ruling in terms of authority?
- Revenue Rulings have the force of law; Treasury Regulations do not
- Treasury Regulations are issued under specific Congressional authorization and generally carry greater weight (Correct answer)
- They carry identical weight since both are issued by the Treasury Department
- Revenue Rulings are binding on all taxpayers; Regulations are advisory only
Correct answer: Treasury Regulations are issued under specific Congressional authorization and generally carry greater weight
Treasury Regulations, especially legislative regulations issued under specific Code authority, generally carry greater legal weight than Revenue Rulings, which represent the IRS's position on a fact pattern but do not have the force of law.
Question 3: A CPA is researching the appropriate hedge accounting model for a client's interest rate swap. Which ASC topic provides this guidance?
- ASC 480
- ASC 815 (Correct answer)
- ASC 825
- ASC 470
Correct answer: ASC 815
ASC 815 (Derivatives and Hedging) provides the comprehensive framework for derivative recognition, measurement, and hedge accounting qualification criteria.
Question 4: Under the AICPA's SSVS No. 1 (now VS Section 100), a CPA performing a valuation engagement must issue which type of report for a conclusion of value?
- A restricted-use summary report
- A detailed report only if the client requests it
- A detailed report, a summary report, or a calculation report depending on engagement terms (Correct answer)
- A detailed report in all circumstances regardless of engagement scope
Correct answer: A detailed report, a summary report, or a calculation report depending on engagement terms
VS Section 100 allows CPAs to perform valuation engagements resulting in a conclusion of value reported in a detailed or summary report, or a calculation engagement with a calculation report.
Question 5: A CPA discovers that a client's prior-period financial statements contain a material error. Under ASC 250, how should this be corrected?
- As a prospective change applied to the current period only
- By restating the comparative prior-period financial statements and disclosing the error (Correct answer)
- By recording a cumulative adjustment to beginning retained earnings without restatement
- By disclosing the error in the notes without adjusting any financial statement amounts
Correct answer: By restating the comparative prior-period financial statements and disclosing the error
ASC 250-10 requires correction of material prior-period errors by restating previously issued financial statements and providing appropriate disclosures.
Question 6: Which of the following best describes a 'Private Letter Ruling' (PLR) in the context of tax research?
- A ruling issued by the Tax Court binding on all taxpayers with similar facts
- An IRS written determination that applies only to the taxpayer who requested it and cannot be cited as precedent by others (Correct answer)
- A published guidance document that all taxpayers may rely upon
- A revenue procedure that establishes safe harbor provisions for all taxpayers
Correct answer: An IRS written determination that applies only to the taxpayer who requested it and cannot be cited as precedent by others
A PLR is issued by the IRS in response to a specific taxpayer's request and is binding only on that taxpayer for the transaction described; it cannot be used as precedent by other taxpayers.
Question 7: A CPA is evaluating whether a lease qualifies as a finance lease under ASC 842. Which criterion, if met, would automatically classify it as a finance lease?
- The lease term is greater than one year
- The present value of lease payments equals substantially all of the fair value of the underlying asset (Correct answer)
- The lessee has an option to extend the lease
- The lessor retains title throughout the lease term
Correct answer: The present value of lease payments equals substantially all of the fair value of the underlying asset
Under ASC 842, if the present value of lease payments and any residual value guaranteed equals substantially all of the underlying asset's fair value, the lease is classified as a finance lease.
Certified Public Accountant Research & Evidence-Based Practice 4
A CPA is determining whether a variable interest entity (VIE) must be consolidated.
Under ASC 810, which party consolidates a VIE?