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FAR > Chapter 1: Part 1 > Flashcards

Chapter 1: Part 1 Flashcards

1
Q

Authoritative Literature Included in the Codification

A

“FEDPRIA”

  • Financial Accounting Standards Board
  • Emerging Issues Task Force (EITF)
  • Derivative Implementation Group Issues
  • Accounting Principles Board Opinions
  • Accounting Research Bulletins
  • Accounting Interpretations
  • American Institute of Certified Public Accountants (AICPA)
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2
Q

SEC Standards Included in the Codification

A

“Regulation For Accounting IS Emerging” (included for reference)

  • Regulation S-X
  • Financial Reporting Releases
  • Accounting Series Releases
  • Interpretative Releases
  • Staff Accounting Bulletins
  • EITF Topic D and SEC Staff Observer Comments
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3
Q

What is the PCC and what is its goal?

A

The PCC is the Private Company Council that was created by the Financial Accounting Foundation in order to improve standard setting for private companies in the US. The goal is to establish alternatives to GAAP where possible to make private company financials more relevant, less complex, and cost beneficial.

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4
Q

What is the FASB standard-setting process?

A

Proposed amendments are issued in an Exposure Draft for public comment (requires majority vote of Board), FASB staff analyzes responses then issues an Accounting Standards Update (not authoritative literature), Board considers update and amends the ASC by majority vote.

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5
Q

What is the standard setting process for the IASB?

A

An Exposure Draft is prepared for public comment (requires 9 members), IASB analyzes responses then drafts the IFRS, which then must be approved by no less than 9 members of the IASB.

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6
Q

What is the treatment of the Conceptual Framework under U.S. GAAP vs. IFRS?

A

Under IFRS, entities are directed to refer to and consider the applicability of the concepts in the Framework when developing accounting policies in the absence of a standard or interpretation that specifically applies to an item.

Under U.S. GAAP, the Conceptual Framework CANNOT be applied to specific accounting issues.

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7
Q

What is the Conceptual Framework (U.S.)?

A

Created by the FASB in pronouncements called the Statements of Financial Accounting Concepts (SFAC), they are NOT GAAP, but are simply provide the basic reasoning for financial accounting concepts.

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8
Q

SFAC No. 8, “Conceptual Framework for Financial Reporting - Chapter 1: The Objective of General Purpose Financial Reporting”, lists the objective as?

A

Disclosing an entities performance, or to provide financial information that is useful to the primary users in making decisions about providing resources to the reporting entity.

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9
Q

Who are the primary users of an entities financial statements?

A

They are external and include existing and potential investors, lenders, and other creditors.

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10
Q

What financial information is provided in the general purpose financial reports to meet “informational needs” of the users?

A

The resources of the entity (assets), any claims against the entity (liabilities), should be reported using the accrual basis of accounting.

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11
Q

The financial information provided in the reports divulges what about the entity’s management and board?

A

The financial information shows how effectively and efficiently they have discharged their responsibilities to use the entity’s resources.

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12
Q

How does existing and potential creditors (lenders/investors) use financial information.

A

They can use it to assess the reporting entity’s prospects for future net cash inflows, which can be used to estimate the value of the entity.

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13
Q

SFAC No. 8, “Conceptual Framework for Financial Reporting - Chapter 3: Qualitative Characteristics of Useful Financial Information”, lists the fundamental qualitative characteristics as?

A

Relevance and Faithful Representation

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14
Q

For financial information to be relevant it must:

A 
be capable of making a difference in the decisions made by users and have:
"Passing Confirms Money"
-Predictive Value
-Confirming Value
-Materiality
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15
Q

For financial information to be a faithful representation it must be:

A

“Completely neutral and free from error”

  • Completeness (FS and notes)
  • Neutrality (no bias)
  • Freedom from error
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16
Q

Why does the Faithful Representation characteristic of “freedom from error” not require perfect accuracy?

A

Because it is difficult to determine the accuracy of estimates.

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17
Q

SFAC No. 8, “Conceptual Framework for Financial Reporting - Chapter 3: Qualitative Characteristics of Useful Financial Information”, lists the enhancing qualitative characteristics as?

A

“Compare and Verify in Time to Understand”

  • Comparability (Apple/Microsoft) & Consistency (CY vs PY)
  • Verifiability
  • Timeliness
  • Understandability
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18
Q

What items constitute a full set of financial statements?

A
  • Statement of financial position (BS)
  • Statement of earnings (IS)
  • Statement of comprehensive income
  • Statement of cash flows
  • Statement of changes in owners’ equity
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19
Q

What are the different measurement attributes for assets and liabilities when incorporating into the financial statements?

A

There are a variety of ways including:

  • Historical costs (PPE)
  • Current costs (Inventory)
  • Net realizable value (AR)
  • Current market value (Marketable securities)
  • Present value of future cashflows (LT debt “bonds”)
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20
Q

What are the fundamental assumptions that U.S. GAAP has in regards to a reporting entity?

A
  1. Entity Assumption
  2. Going Concern Assumption
  3. Monetary Unit Assumption
  4. Periodicity Assumption (years, quarters, etc.)
  5. Historical Cost Principle
  6. Revenue Recognition Principle
  7. Matching Principle
  8. Accrual Accounting
  9. Full Disclosure Principle (notes “completeness)
  10. Conservatism Principle
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21
Q

Revenue Recognition Principle

A

Revenue is recognized when it is earned and when it is realized or realizable.
Earned - substantially performed to be entitled to the benefits of the revenue.
Realized/Realizable - when stuff is exchanged for assets.

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22
Q

What is the treatment of losses under the Matching Principle?

A

The matching principle does not govern losses since they result fromm unusual events.

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23
Q

The Conservatism Principle states that:

A

if in doubt when selecting from alternative GAAP methods, the method that is least likely to overstate assets (and revenues/gains) and understate liabilities (and expenses/losses) in the current period should be selected. ie. good news we wait on but recognize expenses/losses immediately.

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24
Q

What are the fundamental assumptions regarding a reporting entity under IFRS?

A
  1. Accrual Basis Accounting

2. Going Concern

25
Q

SFAC No. 6, “Elements of Financial Statements” lists the components as:

A

“REGL ALE needs ID”

  1. Comprehensive Income
  2. Revenues
  3. Expenses
  4. Gains
  5. Losses
  6. Assets
  7. Liabilities
  8. Equity (net assets)
  9. Investments by Owners
  10. Distributions to Owners
26
Q

What is comprehensive income, and what transactions are excluded from it?

A

All differences between beginning equity and ending equity, transactions with owners are excluded.

27
Q

What are the five elements of present value measurements as listed by SFAC No. 7, “Using Cash Flow Information and Present Value in Accounting Measurements”?

A

“UVOTE”

  1. Uncertainty, the price for bearing thereof (credit risk)
  2. Variations of future cash flows
  3. Other factors
  4. Time value of money (the risk-free rate of interest)
  5. Estimate of future cash flow
28
Q

What are the two approaches to determining present value permitted by SFAC No. 7?

A
  1. Traditional Approach = PV of bonds - scheduled known payments
  2. Expected Cash Flow Approach = PV of warranties - uncertain future payments
29
Q

What is the presentation order of the major components of the income and retained earnings statement?

A

“IDEA”
Income Statement:
-INCOME (Loss) from Continuing Operations (Gross of tax)
-Income (Loss) from DISCONTINUED Operations (net of tax)
-EXTRAORDINARY Items (unique to US GAAP, net of tax)

Retained Earnings Statement:
-Cumulative effect of change in ACCOUNTING PRINCIPLE (GAAP to GAAP, net of tax)

30
Q

What does the multiple step income statement do and what is the benefit of using it?

A

Reports operating revenues and expenses separately from non-operating revenues and expenses and other gains and losses. The benefit is enhanced user information.

31
Q

What are the three calculations that are considered for the purposes of discontinued operations?

A
  1. Impairment loss (and subsequent increases in FV - U.S. GAAP, IFRS is individual A&L)
  2. Gain/loss from actual operations
  3. Fain/loss on disposal (upon sale)
    * for the relevant period only*
32
Q

Under U.S. GAAP, a component of an entity may be:

A
  • An operating segment
  • A reportable segment
  • A reporting unit
  • A subsidiary
  • An asset group
33
Q

Under IFRS, a component of an entity may be:

A
  • A separate line of business or geographical area of operations, or
  • A subsidiary acquired exclusively with a view to resale.
34
Q

In order to be considered as discontinued operations, a component must be classified as “held for sale” and meet the following criteria under both U.S. GAAP and IFRS :

A
  1. A plan to sale has been committed to.
  2. The component is available for sale NOW as is.
  3. Actively seeking a buyer.
  4. The sale of the component is probable and is expected to be complete in one year.
  5. The sale is being actively marketed.
  6. Significant changes to the plan or withdrawal of the plan is unlikely.
35
Q

Under IFRS, what must be done before a component can be considered “held for sale”?

A

The individual assets and liabilities must be measured and any resulting gains or losses must be recognized. The component is then reported at the lower of carrying value and fair value less costs to sell.

36
Q

The results of operations of a component of an entity will be reported in discontinued operations if:

A

Either:

  1. The component has been disposed of, or
  2. Is classified as held for sale.

*If the disposal represents a strategic shift that has or will have a major effect on an entity’s operations and financial results.

37
Q

Types of entities to be considered for discontinued operations include:

A

“GEL”

  • Disposal of a major GEOGRAPHICAL area
  • Major EQUITY method investment
  • LINE of business
38
Q

How are subsequent increases in fair value of a component treated?

A

Gains are recognized for the subsequent increase in fair value, but only to the extent of previously recognized cumulative loss.

39
Q

Where in the financial statements must a gain/loss on disposal be disclosed?

A

On the face of the income statement or in the notes to the financial statements.

40
Q

How are exit and disposal COSTS treated?

A

There must be recognition of a liability (FV) for the costs at the present value of future payments.

41
Q

What are common exit and disposal costs?

A
  • Downsizing
  • Closing hub
  • Involuntary employee termination benefits
  • Costs to terminate a contract that is not a capital lease.
  • Costs to consolidate facilities or relocate employees.
42
Q

How are future operating losses expected to be incurred as part of exit/disposal activity treated?

A

Expected future operating losses are recognized in the period in which they are incurred.

43
Q

Where are costs associated with an exit/disposal related to discontinued operations reported on the income statement?

A

In discontinued operations.

44
Q

Where are costs that are NOT associated with an exit/disposal related to discontinued operations reported on the income statement?

A

As part of income from continuing operations.

45
Q

U.S. GAAP defines extraordinary items as those that are:

A

Unusual in nature and infrequent.

46
Q

How are extraordinary items disclosed in the income statement?

A

As a separate line item, net of tax, after discontinued operations.

47
Q

What is the treatment of extraordinary items under IFRS?

A

Extraordinary items are not permitted under IFRS.

48
Q

What are the three classifications of accounting changes?

A
  1. Changes in accounting estimate
  2. Changes in accounting principle
  3. Changes in accounting entity
49
Q

What is the treatment of changes in accounting estimates?

A

These are not considered an error and are handled prospectively, implemented in the current period and continued in future periods. It does not affect prior periods or retained earnings. No separate line item is necessary, but it is material it must be disclosed in the footnotes.

50
Q

What is the treatment of changes in accounting principles?

A

They are handled retrospectively by adjusting beginning retained earnings in the earliest period presented.

51
Q

What is the cumulative effect of a change in accounting principle if non-comparative financial statements are being presented?

A

Equal to the difference between the amount of beginning retained earnings in the period of change and what the retained earnings would have been if the accounting change had been retroactively applied to all prior affected periods.

52
Q

What is the cumulative effect of a change in accounting principle if comparative financial statements are being presented under U.S. GAAP?

A

Equal to the difference between beginning retained earnings in the first period presented and what retained earnings would have been if the new principle had been applied to all prior periods.

53
Q

How must the cumulative effect of a change in accounting principle if comparative financial statements are being disclosed be presented under IFRS?

A

The entity must present three balance sheets (end of CY, beginning and end of PY) and two other financial statements (CY and PY). The cumulative effect would then be shown as an adjustment of the beginning retained earnings on the balance sheet for the beginning of the prior period.

54
Q

What is the exception to changes in accounting principles and how is it treated?

A

The exception is if an item is impracticable to estimate, ie. “to LIFO” or change in depreciation method. These exceptions are handled prospectively.

55
Q

What is the treatment of changes in accounting entity?

A

They are handled retrospectively. All previous financial statements presented in comparative financials should be restated.

56
Q

How are changes in accounting entity handled under IFRS?

A

IFRS does not include the concept of a change in accounting entity.

57
Q

How are errors treated under U.S. GAAP? (Non-GAAP to GAAP)

A

Comparative financials: correct the information if the year is presented, adjust beginning retained earnings of the earliest year presented if the year is not presented.

Non-comparative financials: report as an adjustment to the opening balance of retained earnings (net of tax).

58
Q

How are impracticable errors treated under IFRS? (Non-IFRS to IFRS)

A

The entity is required to restate information prospectively from the earliest date that it is practicable. U.S. GAAP does not have an impracticality exemption for error corrections.

59
Q

How are changes in accounting principle handled when they are inextricably linked to a change in estimate?

A

They are handled prospectively as component of income from continuing operations, with no cumulative effect adjustment being made.

FAR (3 decks)

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