Category: Dictionary (Accounting, Tax, Auditing)

Valuation:​ The process of determining the PRESENT VALUE of a BOND based on the current MARKET INTEREST RATE.

Use of Professional Skepticism when Evaluating the Results of Testing:​ The AUDITOR must conduct the audit of internal control over financial reporting and the audit of the financial statements with professional skepticism, which is an attitude that includes a questioning mind and a critical assessment of audit evidence.

Unsecured Bond:​ A BOND issued on the general CREDIT of a COMPANY.

Unrestricted Funds:​ Resources of a not-for-profit entity that have no restrictions as to use or purpose.

Unrealized Profit (or Loss):​ PROFIT or LOSS that has not become actual.

Unrealized Loss or Gain on Long-Term Investments:​ A BALANCE sheet ACCOUNT for entering increases or decreases in the value of long-term investments.

Unlimited Liability:​ The responsibility of all the partners in a COMPANY for its DEBT.

Unit:​ Any division of quantity accepted as a standard of measurement or of exchange.

Unissued Stock:​ Shares of a corporation’s stock authorized in its charter but not issued.

Uniform Capitalization Rules:​ These are a set of rules intended to be a single comprehensive set of rules to govern the capitalization, or inclusion in INVENTORY of direct and indirect cost of producing, acquiring and holding property. Under the rules, taxpayers are required to capitalize the direct costs and an allocable portion of the indirect costs attributable to real and tangible personal property produced or acquired for resale. The obvious effect of the uniform capitalization rules is that taxpayers may not take current deductions for these costs but instead must be recovered through DEPRECIATION or AMORTIZATION.

Uniform Accountancy Act (UAA):​ The proposal for a new regulatory framework for the public accounting profession which was developed jointly by the AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS (AICPA) and the NATIONAL ASSOCIATION of STATE BOARDS of ACCOUNTANCY (NASBA). The new framework is intended to enhance interstate reciprocity and practice across state lines by CPAs, meet the future needs of the profession, respond to the marketplace and protect the public that the profession serves.

Unequal Cash Flows:​ Cash flow from an ASSET that may vary from one year to the next.

Unearned Discount:​ ACCOUNT on the books of a lending institution recognizing INTEREST deducted in advance and which will be taken into INCOME as earned over the life of the LOAN.

Underwrite:​ To assume the RISK of buying a new ISSUE of securities from the issuing CORPORATION or government entity and reselling them to the public, either directly or through dealers.

Undervalued:​ SECURITY selling below its LIQUIDATION value or the MARKET VALUE analysts believe it deserves.

Underlying Security:​ SECURITY that must be delivered if a put OPTIONS or call option contract is exercised.

More about Underlying Debt:​ MUNICIPAL BOND term referring to the debt of government entities within the jurisdiction of larger government entities and for which the larger entity has partial CREDIT responsibility.

Unaudited Financial Statements:​ FINANCIAL STATEMENTS which have not undergone a detailed AUDIT examination by an independent CERTIFIED PUBLIC ACCOUNTANT (CPA).

Unamortized Premiums on Investments:​ Unexpensed portion of the amount by which the price paid for a SECURITY exceeded its PAR VALUE.

Unamortized Bond Discount:​ Difference between the FACE VALUE of a BOND and the proceeds received from the sale of the bond by the issuing COMPANY, less whatever portion has been amortized, that is, written off to EXPENSE as recorded periodically on the PROFIT and LOSS statement.

Troubled Debt Restructuring:​ Agreement between DEBTOR and CREDITOR which amends the terms of a DEBT that has little chance of being paid in accordance with its contractual terms. The agreement may involve the transfer of ASSETS in full or partial satisfaction of the debt.

Trend:​ Long-term price or trading volume movements either up, down, or sideways, which characterize a particular MARKET, commodity or SECURITY.

Treasury Note:​ Intermediate-term obligation that matures one to five years from issuance and bears INTEREST.

Treasury Instruments:​ Direct financial obligations of the United States government.

Treasury Bond:​ Long-term obligation that matures more than five years from issuance and bears INTEREST.

Treasury Bill:​ Short-term obligation that bears no INTEREST and is sold at a discount.

Treasury:​ A place where private or public funds are controlled.

Treasurer:​ COMPANY officer responsible for the receipt, custody, INVESTMENT, and DISBURSEMENT of funds, for borrowings, and, if it is a public company, for the maintenance of a MARKET for its securities.

Transferee Liability:​ A person may be held LIABLE for another taxpayer’s delinquent taxes if:

1. The transferee received assets of the transferor-taxpayer; and
2. The transferor was INSOLVENT at the time or was rendered insolvent by that transfer or related series of transfers.

However the insolvency requirement does not apply to GIFT taxes. The transferee is only liable to the extent of the value of the property received from the transferor. Thus, transferee liability merely provides a means for the IRS to recover any assets the transferor-taxpayer attempts to transfer to avoid paying taxes.

Transfer Tax:​ Combined federal TAX on gifts and estates.

Transfer Price:​ Price charged by individual entities in a multi-entity COPORATION on transactions among themselves; also termed transfer cost.

Transfer Agent:​ Agent, usually a commercial bank, appointed by a COPORATION, to maintain records of stock and BOND owners, to cancel and issue certificates, and to resolve problems arising from lost, destroyed, or stolen certificates.

Transaction:​ The act of transacting, especially a business agreement or exchange; event or condition recognized by an entry in the book ACCOUNT.

Trader:​ Anyone who buys and sells goods or services for PROFIT; a DEALER or merchant.

Trademark:​ Distinctive name, symbol, motto, or emblem that identifies a product, service, or firm.

Trade Date:​ Date when a SECURITY transaction is entered into, to be settled on at a later date. Transactions involving financial instruments are generally accounted for on the trade date.

Trade:​ Buying or selling goods and services among companies, states, or countries, called commerce.

Total Quality Management:​ An organizational environment in which all business functions work together to build quality into the firm’s products or services.

Total Gain:​ Excess of the proceeds realized on the sale of either INVENTORY or non-inventory goods.

Total Capitalization:​ Capital structure of a COMPANY, including LONG-TERM DEBT and all forms of EQUITY.

Ton:​ BOND traders’ jargon for $100 million.

Title:​ The written evidence, such as a deed, that proves legal right of possession or control.

Tip:​ Information passed by one person to another as a basis for buy or sell action in a SECURITY.

Timing of Tests of Control:​ The AUDITOR must perform tests of controls over a period of time that is adequate to determine whether, as of the date specified in management’s report, the controls necessary for achieving the objectives of the control criteria are operating effectively.

Term Loan:​ Loan for a specified time period.

Term:​ Period of time during which the conditions of a CONTRACT will be carried out.

Tenancy-in-Common:​ Co-ownership of property. In a valid tenancy-in-common, a deceased co-owner’s title passes to his or her heirs without being included in the estate of the deceased co-owner.

Taxpayer Identification Number (TIN):​ Any individual or other taxable entity that is required to file a return, statement or any other document with the IRSmust indicate his (or its) taxpayer identification number. For an individual, the social security number is used, and if you do not have a social security number, the IRS will assign you a TIN. A federal or employer ID number is assigned to other types of entities and will use that as their TIN.

Taxable Municipal Bond:​ Taxable DEBT obligation of a state or local government entity, an outgrowth of the Tax Reform Act of 1986.

Taxable Earnings:​ The amount of an employee’s earnings subject to a TAX.

Tax Year:​ The period used to compute a taxpayer’s TAXABLE INCOME is tax year. It is an annual period that is either a calendar year , FISCAL YEAR or fractional part of a year for which the return is made.

Tax Shelter:​ Arrangement in which allowable tax deductions or EXCLUSIONS result in the deferral of tax on INCOME that would otherwise be payable currently.

Tax Lien:​ ENCUMBRANCE placed on property as security for unpaid taxes.

Tax Credit for the Elderly and Disabled:​ Taxpayers age 65 or older or those under 65 who are retired with permanent and total disability are eligible to claim a credit to reduce the amount of their tax liability. It is designed primarily to benefit those individuals who receive small amounts of retirement INCOME. Each taxpayer is allocated an initial base amount based on his or her filing status determining the credit. The base amount is then reduced by the amount of nontaxable income, or is phased out for taxpayers whose ADJUSTED GROSS INCOME exceeds certain levels.

Tax Court:​ The U.S. Tax Court is a legislative court functioning to adjudicate controversies between taxpayers and the IRS arising out of deficiencies assessed by the IRS for INCOME, GIFT, ESTATE, windfall profit and certain EXCISE TAXES. It has no jurisdiction over other taxes such as employment taxes. Various sales taxes and certain excise taxes.

Takeover:​ The act or an instance of taking control of something, especially by force.

Surviving Spouse:​ This is a person whose husband or wife died during the tax year. A surviving spouse may file a JOINT RETURN for the year in which the death occurred. In addition a joint return may be filed for the two succeeding tax years if during that time the surviving spouse:
1. Remains unmarried; and
2. Maintains as his home a household that is the principal place of abode during the entire TAX YEAR for a child for whom a dependency exemption may be claimed.

Surplus:​ Not needed; extra.

Sum-of-the-Years-Digits Method:​ An accelerated method of DEPRECIATION in which the depreciable value if an ASSET is multiplied by a decreasing fraction each year of the asset’s useful life.

Subsequent Event:​ Material event that occurs after the end of the accounting period and before the publication of an entity’sFINANCIAL STATEMENTS. Such events are disclosed in the notes to the financial statements.

Strike Price:​ Price of a financial instrument at which conversion or exercise occurs.

Straight-Line Percentage:​ A percentage used to determine the amount of DEPRECIATION to be recorded each ACCOUNTING period for the straight-line method.

Stock Split:​ Increase in the number of shares of a company’s COMMON STOCK outstanding that result from the issuance of additional shares proportionally to existing stockholders without additional capital investment. The PAR VALUE of each share is reduced proportionally.

Stock Rights:​ Stock rights are rights issued to stockholders of a CORPORATION that entitle them to purchase new shares of stock in the corporation for a stated price that is often substantially less than the FAIR MARKET VALUE of the stock. These rights may be exercised by paying the stated price, may be sold, or may be allowed to expire or lapse. Stock rights are generally treated as stock DIVIDENDS.

Stock Options:​ Right to purchase or sell a specified number of shares of stock at specified prices and times.

1) Terminology

a) Grant date – The date at which an employer and an employee reach a mutual understanding of the key terms and conditions of a share-based payment award. The employer becomes contingently obligated on the grant date to issue equity instruments or transfer assets to an employee who renders the requisite service. Awards made under an arrangement that is subject to shareholder approval are not deemed to be granted until that approval is obtained unless approval is essentially a formality (or perfunctory), for example, if management and the members of the board of directors control enough votes to approve the arrangement. Similarly, individual awards that are subject to approval by the board of directors, management, or both are not deemed to be granted until all such approvals are obtained. The grant date for an award of equity instruments is the date that an employee begins to benefit from, or be adversely affected by, subsequent changes in the price of the employer’s equity shares.

b) Measurement Date – The date at which the equity share price and other pertinent factors, such as expectedvolatility, that enter into measurement of the total recognized amount of compensation cost for an award of share-based payment are fixed

c) Fair value – The amount at which an asset (or liability) could be bought (or incurred) or sold (or settled) in a current transaction between willing parties, that is, other than in a forced or liquidation sale.

d) In the Money option – Option granted with an exercise price below the market price on the grant date

e) Out of the Money option – Option granted with an exercise price above the market price.

f) Backdating

i) Exercise price is based on a lower share price prior to the option grant date. The practice of marking a document with a date that precedes the actual date.
ii) Example – Option is approved by the board permits the stock to be priced based upon the lowest price in the past 30 days- permits options to be in the money when issued. Options are suppose to be issued at option price that is neutral at time of issuance.
iii) May not be illegal if

(1) Clearly communicated to shareholders
(2) No documents forged
(3) Reflected in earnings of the company

(a) If under A PB 25 –the granting of in the money options resulted in recognition of compensation expense in earnings. If options were neutral or out of the money then. no compensation would be recognized
(b) If under 123R expense is based upon fair value at grant date. and compensation is recognized it the earningsstatement

g) Spring loading – Timing of option grants to take place before good news or after bad news is released

i) Concerns about insider trading

h) Forward loading – Term used for setting the option grant date to occur after predicted fall in stock price or before predicted stock price increase

i) Terms might involve option to be issued with price to be determined based upon the lowest price as of the issue date or for the next 30 days after the issuance. Grant date does not occur until the conclusion of the 30 day periodwhen the price is known. To determine the price the company needs to look back at the stock price for the last 30 days to determine what the exercise price should be. This is another version of backdating.

i) Discounted options – options that have an exercise price that is less than fair value on the date of grant.

2) Accounting and Tax Ramifications

a) Accounting ramifications

i) Restatement
ii) Unable to file on timely basis while go back and determine what periods are effected
iii) Calls into questions company’s internal controls and governance
iv) Will be unable to file shelf registration
v) May be delisted from exchange

b) SEC reporting implications

i) Potentially inaccurate reporting of executive compensation in proxy statements and annual reports
ii) Potential violation of securities and Law for executive oficiers and directors with Section 16 (a) of the Securities and exchange Act of 1934. required to report on form 4
iii) Potential false or misleading disclosures about the company’s stock option plan in periodic reports filed with the SEC – Failure to disclose the practice of backdating may violate securities and laws against false or misleading disclosures
iv) Potential false Section 302 certifications – Principal and financial executives are required to sign certifications in quarterly and annual reports certifying that among other things that the report filed with the SEC does not include any false statements of amaterial fact or state material facts necessary in order to make the disclosures not misleading.

c) Tax Ramifications

i) Exercise price effects capital gains of the individual and effects compensation expense used by corporation for calculating company’s compensation expense for tax purposes,
ii) Tax ramifications – company

(1) Discounted options that become vested on or after January 1, 2005 are subject to non qualifying deferred compensation rules –
Holder is required to select a fixed exercise date no later than December 31, 2006 or be subject to immediate taxation on vesting , a 20 percent penalty and an interest assessment.
(2) May cause the loss of tax deductions under Section 162 (m), the deduction that public companies take for compensation to chief executive officer and next four highest compensated officers is limited to $1 million each. The deduction for stock options in not usually limited. However, discounted options do not qualify as performance based compensation and therefore the deduction that the company would get may be partially or completely lost. In addition discounted stock options do not qualify for Incentive Stock option (ISO) treatment. (ISO there is no payroll tax or withholding requirements for ISO’s) – If company mistakenly treats backdated stock as an ISO the company my fail to meet payroll tax and income tax withholding requirements.

d) New Rules SEC

i) Effective for years after December 15, 2006
ii) New Disclosures mandated

(1) Fairvalue of options on grant date
(2) Value of grant per 123R
(3) Closing price market price on the date of grant if it is greather than the excericise price of the award
(4) The date the compensation committee or board took action to grant an award if theat date is different than the actual grant date.
(5) Also if the exercise price of an option grant differs from the closing market price per share on the grant date companies must include a description of the method for determining the exercise price.

Stock Market:​ General term referring to the organized trading of securities through the various EXCHANGES and the OVER-THE-COUNTER MARKET.

Stock Exchange:​ Organized marketplace in which stocks, COMMON STOCK equivalents, and bonds are traded by members of the exchange, acting both as agents and principals.

Stock Compensation Plan:​ FRINGE BENEFIT that gives employees the option to purchase the employer’s stock at a specified price during a specified period.

Stepped Up Basis:​ Generally, the basis of property acquired by INHERITENCE, BEQUEST or device from a DECENDANT is the FAIR MARKET VALUE of the property on the date of the decendant’s death. Thus if the fair market value is more than the decedent’s basis, a taxpayers basis in the property received is stepped-up.

Statute of Limitations:​ This sets out the period within which actions may be brought upon claims or within which rights may be enforced. As it pertains to tax returns, the statute of limitations is generally three years from the date a return is due or filed.

Statements on Standards for Accounting and Review Services (SSARS):​ Statements issued by the AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS (AICPA) that specifically relate to REVIEWS and COMPILATIONS.

Statements on Auditing Standards (SAS):​ Statements issued by the Accounting Standards Board of the AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS (AICPA).

Statement of Owner’s Equity:​ The financial STATEMENT that shows how and why an OWNER’S EQUITY, or capital, ACCOUNT has changed over s specific financial PERIOD.

Statement of Financial Condition:​ Basic FINANCIAL STATEMENT, usually accompanied by appropriate DISCLOSURES that describe the basis of ACCOUNTING used in its preparation and presentation as of a specified date, the entity’s ASSETS, LIABILITIES and the EQUITY of its owners. Also known as BALANCE SHEET.

Statement of Financial Accounting Standards (SFAS):​ Statements issued by the FINANCIAL ACCOUNTING STANDARDS BOARD (FASB).

Statement of Cost of Goods Manufactured:​ A formal STATEMENT summarizing the flow of all manufacturing costs incurred during an accounting period.

Statements of Cash Flows:​ One of the basic FINANCIAL STATEMENTS that isGENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) required as part of a complete set of financial statements prepared in conformity with . It categorizes net cash provided or used during a period as operating, investing and financing activities, and reconciles beginning and ending cash and cash equivalents.

Statement:​ Summary for customers of the transactions that occurred over the preceding month.

Stated Value:​ Per share amount set by the BOARD OF DIRECTORS to be placed in the CAPITAL STOCK account upon issuance of NO-PAR VALUE.

Start-Up Costs:​ (1) Costs, excluding acquisition costs, incurred to bring a new unit into production. (2) Costs incurred to begin a business.

Standard Deduction:​ Individual taxpayers who do not itemize their deductions are entitled to a standard deduction amount by which to reduce ADJUSTED GROSS INCOME in arriving at taxable income. The amount of the standard deduction varies by the type of the taxpayer and changes each year. A schedule of standard deductions is easily found in the instructions for the federal form 1040. Each state may also use a standard deduction format, but the amounts and computations differ from the federal and from state to state. Certain taxpayers may not be entitled to use the standard deduction. An example of this would be a married filing separate taxpayer. If one taxpayer itemizes then the other is required to by law even if the married filing separate taxpayer is unknowing of what is included on the spouses separate return. A reason for this might be the prevention of pooling and duplication of deductions.

Standard:​ A widely known and accepted measurement or weight used as a basis for a system of measurements.

Spread:​ Difference between two prices, usually a buying and selling price.

Spot Market:​ MARKET for buying and selling COMMODITIES or financial instruments for immediate delivery and payment based on the settlement conventions of the particular market.

Split Offering:​ New MUNICIPAL BOND ISSUE, part of which is represented by serial bonds and part by TERM MATURITY bonds.

Spinoff:​ Transfer of all, or a portion of, a subsidiary’s stock or other ASSETS to the stockholders of its PARENT COMPANYon a PRO RATA basis.

Speculation:​ Assumption of RISK in anticipation of gain but recognizing a higher than average possibility of LOSS.

Specific Identification Method:​ A way of pricing the cost of INVENTORY as coming from a specific purchase.

Specialized Mutual Fund:​ Fund that limits its investments to a particular sector of the marketplace.

Specialist:​ Member of a stock exchange who maintains a fair and orderly MARKET in one or more securities.

Special Assessment:​ Charge made by a local government for the cost of an improvement or service. It is usually levied on those who will benefit from the service.

Solvent:​ Capable of paying one’s financial obligations.

Small Business Stock:​ Noncorporate investors may exclude up to 50 percent of the GAIN they realize on the disposition of qualified small business stock issued after Aug. 10, 1993, and held for more than five years. The amount of gain eligible for the 50 percent exclusion is subject to per-issuer limits. In order to qualify for the EXCLUSION, the CORPORATIONissuing the stock must be a C Corporation (but excluding certain investment corporations) and it must use at least 80 percent of its assets in active conduct of one or more qualified trade or businesses. In addition, its gross assets cannot exceed $50 million.

Sinking Fund:​ Money accumulated on a regular basis in a separate custodial ACCOUNT that is used to redeem DEBT securities or PREFERRED STOCK issues.

Single-Premium Deferred Annuity (SPDA):​ TAX-deferred INVESTMENT similar to an INDIVIDUAL RETIREMENT ACCOUNT (IRA), without many of the IRA restrictions.

Simplified Employee Pension (SEP) Plan:​ PENSION plan in which both the employee and the employer contribute to an INDIVIDUAL RETIREMENT ACCOUNT (IRA).

Simple Trust:​ This type of TRUST is required to distribute all its income currently, whether or not the TRUSTEE actually does so, and it has no provision in the trust instrument for charitable contributions. It is to be distinguished from a COMPLEX TRUST. A trust may be a simple trust in one year and a complex trust in another year. In the year in which the trust distributes its corpus, it loses its classification as a simple trust.

Simple Plans:​ An employer may adopt a simplified retirement plan called a SIMPLE Plan (Savings incentive match plan for employees) if it has fewer than 100 employees that received at least $5,000 in compensation in the preceding year.

Significant Findings or Issues:​ Substantive matters that are important to the procedures performed, evidence obtained, or conclusions reached and include but are not limited to:
1. significant matters;
2. results of auditing procedures indicating a need for significant modification of planned auditing procedures;
3. audit adjustments;
4. disagreements among members of the engagement team;
5. circumstances that cause difficulty in applying auditing procedures;
6. significant changes in the assessed level of AUDIT RISK;
7. matters that could result in modification of the AUDITORS’ REPORT.

Significant Deficiency:​ A control deficiency or combination of control deficiencies, that adversely affects the company’s ability to initiate, authorize, record, process or report external financial data reliably in accordance with GAAP such that there is more than a remote likelihood that a misstatement of the company’s annual or interim financial statements that is more than inconsequential will not be prevented or detected.