Tatia Wilks, the president of Lewbacca Company, is concerned about the low earnings that Lewbacca is scheduled to report this year. She called the company’s accounting staff into her office to question them about the accounting treatment of several items. She raised the following points:
a. Why do we have to report an expense this year associated with our pension plan? Our company is new, and none of our employees is within even 15 years of retirement. Accordingly, the pension plan won’t cost us anything for at least 15 years.
b. Research to find new products and improve our old products is one of our key competitive advantages. However, you tell me that all of the money we spend on research is reported as an expense this year. This is silly because the results of our research comprise our biggest economic asset.
c. We have an excellent staff of tax planners who work hard to legally minimize the amount of income taxes we pay each year. However, I see in the notes to the financial statements that you are requiring our company to report a “deferred income tax expense” for taxes that we don’t even owe yet! Why? How would you respond to each of these points?