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ACCT 312

Pick One only discussion

Your write-up should be no more than 3 pages, double-spaced, with a font size of 12. You do not have to repeat the question but you need to indicate which question you are responding to. Be sure to present your response with detailed example/calculation and the support of authoritative literature (e.g., FASB Accounting Standard Codification or International Accounting Standard).

Access the FASB’s Codification Research System through See “How to Search for and Cite Related Accounting Authoritative Literature” document for detailed guidance. Use the following information to log in: Username: AAA52069; Password: ASm4z2P. Check “Individual Project Grading Rubrics” for project grading policy. Submit your answers through Blackboard (under “Individual Project” tab).


Discussion Question #1 Refer to the article “Rising Interest Rates Trigger Losses on Banks Massive Bond Holdings” in Wall Street Journal (December 7, 2016). What is the difference between realized and unrealized gains and losses on security holdings? What are the three categories of investments identified in authoritative accounting literature? Cite the authoritative guidance you are referencing. What is the difference in accounting treatment of unrealized gains and losses across these three categories of investments? Cite the authoritative guidance you are referencing. Why do unrealized losses affect a bank’s book value but “don’t immediately diminish a banks profits”? In your answer, define the “special bucket…called ‘accumulated other comprehensive income.’”

Discussion Question #2 Refer to the article “Lease-Accounting Rules May Have Hurt Companies’ Valuations, Study Says” in Wall Street Journal (January 27, 2020) and “Pandemic Alters Lease Accounting Landscape” in Journal of Accountancy (May 31, 2020). What authoritative requirements made “a recent change in how companies are expected to account for and report operating leases on company balance sheets” (as in article 1)? What are operating leases? How are they shown on corporate balance sheets? Describe measuring an amount to be included on the balance sheet and the accounts that are affected. Consider your answer to the question above. How is it possible that accounting prior to the new lease accounting standard might not show operating leases on the balance sheet? Due to the pandemic, what was the change the companies with lease contract have to face? How should this change be accounted for? Cite the authoritative guidance when plausible.

Discussion Question #3

Refer to the article “Companies Start Reaping Billions in Tax Breaks to Help Ride Out Slump” in Wall Street Journal (May 13, 2020) and answer the following questions.

What are deferred tax assets and liabilities?

Why are disclosures about deferred taxes useful to identify the ways in which publicly traded companies are taking advantage of economic relief provided through the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”)?

Chipotle Mexican Grill, Inc., takes advantage of accelerated depreciation under the CARES Act. How does accelerating depreciation impact the Chipotle tax return? Does it also impact the depreciation expense reported on Chipotle’s income statement? Explain your answer.

Chipotle Mexican Grill reports that it will take additional accelerated depreciation expenses of $32,256,000 during the first quarter of 2020. At a federal income tax rate of 21%, how will the deferred tax impact of these accelerated depreciation charges be recorded?

What are net operating loss (NOL) carrybacks and carryforwards? Define each and explain how changing income tax rates impact the income tax benefits and refunds received bycorporations.

How does the NOL carryback introduced in the CARES Act allow companies a greater benefit than would a carryforward of net operating losses experienced during the Covid-19 pandemic?

Relevant 10-Q filings:

Chipotle Mexican Grill, Inc :

Valero Energy Corp:

12/11/2016 Rising Interest Rates Trigger Losses on Banks’ Massive Bond Holdings ­ WSJ­interest­rates­trigger­losses­on­banks­massive­bond­holdings­1481132298?tesla=y 1/2

Rising interest rates have sent bank stocks soaring. But there is a dark side to this kind
of market move—banks in the fourth quarter are likely to report losses on their massive
bond portfolios.

U.S. banks suffered a $6.5 billion unrealized loss on the value of securities they hold as
investments as of Nov. 23, according to the most recent data from the Federal
Reserve. This was the first time since 2014 that the Fed data for the banking system as a
whole showed a loss on these securities. As recently as early July, banks had total
unrealized gains on these portfolios of $33.8 billion.

They key is that these losses, or gains, are unrealized and don’t hit earnings. While they
do affect a bank’s book value, or net worth, the losses over time will be offset by
increasing net interest income. That is a trade-off banks and their investors will take in
stride, and even welcome.

Speaking at a financial industry conference Tuesday, Wells Fargo & Co. chief Timothy
Sloan said that while there was likely to be short-term unrealized losses in the bank’s
securities portfolio, higher interest rates were an overall “positive” for the bank.

When rates rise, the value of debt securities tends to fall because the relatively low rates
on existing bonds will look unattractive compared with the higher rates of new
bonds. The decline in bond prices brings the yields of similar bonds in line with each

This copy is for your personal, non­commercial use only. To order presentation­ready copies for distribution to your colleagues, clients or customers visit­interest­rates­trigger­losses­on­banks­massive­bond­holdings­1481132298


Rising Interest Rates Trigger Losses on
Banks’ Massive Bond Holdings
These losses are unrealized, however, and over time they will be offset by higher net interest

Wells Fargo bank teller machines in San Francisco, Calif. PHOTO: ROBERT GALBRAITH/REUTERS

Dec. 7, 2016 12:38 p.m. ET
By JOHN CARNEY;139195294;l

12/11/2016 Rising Interest Rates Trigger Losses on Banks’ Massive Bond Holdings ­ WSJ­interest­rates­trigger­losses­on­banks­massive­bond­holdings­1481132298?tesla=y 2/2

Banks classify a big portion of their bond holdings as investment holdings, or “available
for sale,” distinguishing them from those held for trading purposes. These investment
holdings were $2.66 trillion for U.S. banks at the end of the third quarter, or about 16% of
total assets, according to data from the Federal Deposit Insurance Corp. As well, there is
a smaller group of bonds banks classify as being held to maturity.

When investment securities lose value, the losses are described as “unrealized” and
don’t immediately diminish a bank’s profits. Instead, the losses go into a special bucket
in shareholders’ equity called “accumulated other comprehensive income.”

This cuts into banks’ book value as well some measures of regulatory capital. That can
be a problem for banks with thin capital cushions. But with many banks comfortably
above required minimum capital levels, this isn’t likely to be a cause for concern today.

“I don’t hear many investors concerned about [investment-security] losses and the
impact on capital because the stocks seem to be trading much more on price to earnings
than price to book value and capital ratios are so strong,” said Sanford C. Bernstein
analyst John McDonald.

The losses will only cut into a bank’s profits if they are realized through a sale, meaning
a bank sells bonds for a price lower than what it paid. Or a hit to profit could result if a
bank determines a bond has become permanently impaired—typically because it is
unlikely to pay the promised cash flow.

During the financial crisis, some investors believed banks were hiding losses on
permanently impaired securities in their investment portfolios. That is unlikely to be
the case now. Mostly, bonds are losing value simply because of interest rate moves.

Any knock to bank balance sheets will also be cushioned by the fact that many large
banks have substantially increased the portion of their securities portfolios they classify
as “held to maturity.” Those bonds don’t get marked to market prices unless there is a
permanent impairment.

Such holdings were once a tiny portion of bank balance sheets but have grown in recent
years. The holdings were equal to 24% of banks’ total securities portfolios at the end of
the third quarter, FDIC data show. At the end of 2011, they were just 9%.

Write to John Carney at

Copyright 2014 Dow Jones & Company, Inc. All Rights Reserved

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Journal of Accountancy

Pandemic alters lease accounting landscape
The coronavirus has led to a likely delay in the effective date of FASB’s new lease standard along with other possible

By Stephen G. Austin, CPA; Joel C. Colbourn, CPA; Ane Ohm, CPA; and Don Mitchell
May 31, 2020

Image by Nikada/iStock

In addition to causing enormous disruption to health, safety, and the economy across the globe, the coronavirus pandemic
has significantly altered the landscape for CPAs related to lease accounting.

The changes include a potential effective date delay of FASB’s new lease accounting standard for certain entities, including
private companies; a monumental increase in the number of lease modifications requested by lessees and granted by
lessors; and the need for disclosures related to a company’s lease accounting decisions in the new environment. Here’s a
closer look at lease accounting amid the coronavirus pandemic.

Shelter-in-place, stay-at-home, social distancing, self-quarantine, and other directives have caused significant disruptions
to business operations, with many businesses and industries being effectively shut down. This has resulted in record levels
of layoffs and unemployment claims, with a potential record number of bankruptcy filings expected over the next few



The federal government has taken several actions to provide relief from the devastating economic impact, including
enacting the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136, which provides assistance to
small businesses (under 500 employees) through U.S. Small Business Administration loans primarily to support payroll
costs for affected businesses. While these loans are for a limited period (up to eight weeks), some or all of the loan may be

Despite this government aid, it is anticipated that a significant number of lessees will be looking to negotiate short- or long-
term lease concessions or other relief from lessors. On April 10, the FASB staff issued a Q&A
c=FASBContent_C&cid=1176174459740&pagename=FASB%2FFASBContent_C%2FGeneralContentDisplay) on FASB
ASC Topic 842, Leases, and Topic 840, Leases, accounting for lease concessions related to the effects of the COVID-19

One topic addressed by the FASB staff is the existing guidance requiring an analysis of whether changed lease
agreements provide enforceable rights and obligations for lease concessions. An absence of enforceable rights and
obligations can result in lease modification accounting, where the right-of-use asset and lease liability are remeasured
using an updated discount rate, and the lease classification as either a finance or an operating lease is reassessed.

The FASB staff concedes that existing guidance did not contemplate the speed and volume of modifications resulting from
a major global public health crisis. The FASB staff also acknowledged that absent further interpretative guidance,
appropriately analyzing lease modification requirements on the large volume of leases impacted could be costly and
complex for both lessees and lessors.

A further complication in determining whether lease concessions are consistent with contract terms rather than a contract
modification are the programs implemented or encouraged by governments that permit or require changes to either party’s
contractual obligations during the period impacted by the COVID-19 pandemic.

The underlying premise of remeasuring a lease is that the economics of the lease are affected for the remainder of the
lease term. The FASB staff understands the view that recognizing lease concessions related to the effects of the COVID-19
pandemic over the remainder of the lease term may not reflect the economics of those concessions.

FASB’s staff Q&A provided guidance that it would be acceptable to make an election to account for lease concessions
related to the effects of the COVID-19 pandemic as though the lease agreement provides enforceable rights and
obligations for lease concessions not requiring lease modification treatment even though the existing agreements do not
include such provisions. In making this election, an entity will not need to evaluate whether each applicable lease contains
the enforceable rights provisions.

Noted examples include deferred rental payments from three to six months, most initiating in April 2020. Deferred rents are
then to be paid back in addition to base rents mandated in the lease agreements, starting in 2021, amortized over a
reasonable period. A key point as stated by FASB is that the tenant must be “affected by the economic disruptions caused
by the COVID-19 pandemic” and not use the opportunity to take advantage of the general circumstances.

The FASB staff is clear that this guidance can be applied only if lease concessions do not result in a substantial increase in
the rights of the lessor or obligations of the lessee. There is an expectation of exercising reasonable judgment in
determining that the total payments of a modified lease contract will be substantially the same as or less than the original


When concessions result in the deferral of payments with no substantive changes to contract consideration, the FASB staff
indicated that there may be several ways to account for the deferral. With no method identified as preferable, two possible
alternatives were presented:

Deferred payments are accrued, with lessors continuing to recognize income and lessees continuing to recognize
expenses; or

The deferred payments would be accounted for as variable lease payments.

A company’s lease accounting software should be able to handle either alternative presented.

Regardless of the method used to account for a lease concession related to the effects of the COVID-19 pandemic, there
should be appropriate disclosures about material concessions granted (lessors) or received (lessees) and the related
accounting treatment used, so financial statement users can understand the financial impact of lease concessions related
to the COVID-19 pandemic.

Should the lease concessions granted result in substantial changes to consideration, treating the changes as a lease
modification would be appropriate. The lease liability and right-of-use asset would be remeasured with an updated discount
rate, and the lease term may change with an updated evaluation of the “reasonably certain” criteria for extension or early
termination options. These changes could result in determination of a different lease classification. There may also be right-
of-use asset impairment considerations that could require appropriate attention.

In recognition of the business disruptions caused by the new standard, FASB has proposed delaying by one year the
effective dates of its lease accounting standard for certain entities. If approved, the delay to Topic 842 would apply to
private companies, not-for-profits, and not-for-profit entities that FASB calls public not-for-profits, which have issued or are
conduit bond obligors for securities that are traded, listed, or quoted on an exchange or an over-the-counter market and
that have not yet issued financial statements.

The delay for private companies and private not-for-profits would make the standard effective for private companies and
private not-for-profits for fiscal years starting after Dec. 15, 2021. The effective date for public not-for-profits would be fiscal
years starting after Dec. 15, 2019.

Stephen G. Austin, CPA, MBA, is managing partner, and Joel C. Colbourn, CPA, MBA, is lease accounting director, both
of Swenson Advisers LLP in San Diego; Ane Ohm, CPA, is co-founder and CEO of lease accounting software provider
LeaseCrunch in Hartford, Wis.; and Don Mitchell is managing principal of Cresa Global Inc. in San Diego. To comment on
this article or to suggest an idea for another article, contact Ken Tysiac, the JofA’s editorial director,
at ( or 919-402-2112.

Getting leases in line

The sponsored report “Getting Leases in Line” examines what makes FASB ASC Topic 842, Leases, challenging and
describes new ways for CPAs to add value. To learn more, go to

© 2020 Association of International Certified Professional Accountants. All rights reserved.


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