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Flashcards in 1. Conceptual Framework Deck (19)
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1
Q

How do you measure fair value of a financial asset that trades in many markets but has no principal market?

A

Two-step process:

  1. Determine the most advantageous market, which affords the highest sales proceeds net of transaction costs.
  2. Determine the fair value of the financial asset, which is the price quoted in the most advantageous market before transaction costs

Remember: net out transaction costs to determine the most advantageous market, then exclude transaction costs to determine fair value in the most advantageous market.

2
Q

Is an asset valuation account an asset, a liability, equity, or something else?

A

Something else. An asset valuation account reduces or increases the carrying amount of an asset, such as a valuation allowance or accumulated depreciation. It is part of the related asset but is itself neither an asset nor a liability.

3
Q

What are the fundamental qualitative characteristics of financial reporting, per FASB conceptual framework?

A

Relevance and faithful representation

4
Q

What are the enhancing characteristics of financial reporting, per FASB conceptual framework?

A

Comparability, Understandability, Timeliness, and Verifiability (CUT like a V)

5
Q

A prior service cost not recognized in pension expense will have what effect on accumulated other comprehensive income?

A

It will reduce accumulated other comprehensive income.

6
Q

What are the three approaches to measuring fair value?

A

Market approach, Income approach, and Cost approach (MIC)

7
Q

Under US GAAP, what criteria must an item satisfy to qualify for recognition on financial statements?

A
  1. Meets the definition of an Element on financial statements
  2. Measurable in monetary terms
  3. Relevant to users
  4. Based on information that is Faithfully Represented, Verifiable, and Neutral

(RecognizeElMeR FeRVeNtly)

8
Q

What are the ingredients of Faithful Representation?

A
  1. Freedom from Error
  2. Neutrality
  3. Completeness

(Your Friend Roger is never on the FENCe)

9
Q

What are the ingredients of relevance?

A
  1. Predictive value
  2. Confirmatory value

(Roger is P.C.)

10
Q

How are gains and losses recognized under the physical capital maintenance concept?

A

Gains and losses are recognized only when assets are disposed of or liabilities are settled (e.g. in calculating net income).

11
Q

How are gains and losses recognized under the financial capital maintenance concept?

A

Gains and losses are recognized not only when assets are disposed of or liabilities are settled but also when assets or liabilities change in value, resulting in holding gains or losses (e.g. in calculating OCI).

12
Q

What is the definition of fair value for an asset or liability?

A

Fair value is the EXIT price–i.e., the price received when selling an asset or paid when transferring a liability–in an orderly transaction between market participants.

13
Q

Under IFRS, what criteria must an item satisfy to qualify for recognition on financial statements?

A
  1. Measurement must be Reliable
  2. Occurrence must be Probable

(Mr. Opie)

14
Q

If an entity’s tax rate changes after its year-end, but before it issues financial statements, which tax rate should it use to calculate the tax effect of temporary differences under US GAAP?

A

It should use the tax rate that was in effect during its fiscal year.

15
Q

If an entity’s tax rate changes after its year-end, but before it issues financial statements, which tax rate should it use to calculate the tax effect of temporary differences under IFRS?

A

It should use the substantially enacted tax rate, which is the rate that was enacted after year-end but before the financial statements were issued.

16
Q

What are appropriate ways of measuring an element of financial reporting in monetary terms?

A
  1. Historical cost
  2. Replacement cost
  3. Net realizable value
  4. Present value
17
Q

List the types of transactions that affect comprehensive income (but not net income).

A
  1. Unrealized gains and losses on available-for-sale securities
  2. Foreign currency translation adjustments
18
Q

What are level three inputs to valuation techniques that are used to measure the fair value of an asset?

A

Unobservable inputs for the asset (see ASC 820-10-35-37)

19
Q

When does realization occur, according to the FASB Conceptual Framework?

A

Realization occurs when goods or services are converted into cash or a claim to cash. (Note that the conversion of a claim into cash is not realization, such as the collection of a receivable.)