Accounting Memo. Deloitte Case

The main problem with eVade is that the company owes taxes from the previous  five years as a result of a court ruling in favor of State X, but was not planning to pay them until an amnesty program was established in 2012. They now owe 50 million in taxes, 6 million in interest, and 4 million in penalties. The new amnesty program will forgive 50% of unpaid taxes and all interest and/or penalties.

FASB ASC 250-10-20 states that an error in recognition, measurement, presentation, or disclosure in financial statements resulting from math mistakes, mistakes in using GAAP, or oversight or misuse of facts that existed when the financial statements were prepared.

For the correction of error, I recommend FASB ASC 250-10-45-24. This states that items reported as error corrections shall be reflected as adjustments in the opening balance of retained earnings. When statements are presented, adjustments should be made of the amounts of net income and retained earnings balances for all of the periods reported to reflect the retroactive application of the error corrections.

The amount of sales taxes payable should be recognized in eVade’s financial statements as a 25 million dollar liability and classified as sales tax payable. The error correction involves adjustments to previous financial statements. According to 250-10-45-23, any error in the financial statements of a prior period discovered after the statements are issued should be reported as an error correction by restating the previous statement. Restatement requires the result of the error those presented and be reflected in carrying amounts of assets and liabilities, an offsetting adjustment shall be made to the opening balance of retained earnings, and financial statements for each period shall be adjusted.