F2 - Financial Reporting and Disclosures Flashcards
(57 cards)
5 Step Recognition Model
- Identify the Contract
- Identify the Performance Obligations
- Determine the transaction price
- Allocate the transaction price to the performance obligations
- Recognize revenue as the performance obligation is satisfied
Revenue Recognition
Rev is recognized when a “performance obligation is satisfied”
When Control of goods has passed to customer.
Timing of payment or contract signing does NOT determine rev recognition
When in Consignment recognize revenue after the consignment period ends!!
% of Completion
Percentage of Completion Method calculates revenue or profit based on the actual costs incurred to date as a % of total estimated costs for procject
Recognizing Losses in Construction Contracts
For long-term contracts, any projected losses are recognized immediately, regardless of the project’s completion %
Ensuring accurate financial reporting of expected outcomes
Agent VS Principal Revenue Recognition
An agent recognizes only the commission or fees earned for facilitating a transaction
NOT the total gross transaction amount handled on behalf of the principal
Consignment arrangements are considered an agent selling for principal
Upfront Payments & Unearned Revenue
If Cash is given upfront the amount is recorded under (Unearned REV)
Revenue is recognized systematically over the period as the services are performed.
Under Bill-and-Hold
They can recognize REV when they are done with the “product” according to customizations
If it was just any other product then NO
Commission Costs
Commission costs would not been incurred if the contract had not been obtained and can be recognized as an asset
Fair Value
Is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date
Valuation Approaches
3 Approaches:
Market Approach - Market prices
Income Approach - Discounted Cash Flows
Cost Approach - replacement costs (adjusted for Depreciation and Obsolescence)
Market Participants
Are independent, Knowledgeable, and willing buyers and sellers acting in their economic best interest in the principal or most advantageous market
Most Advantageous Market
When no principal market exists
The most advantageous market is the one that provides the best price
Do NOT include Costs
But need to net the costs, after net see which one is the most advantageous and go with the selling price.
Level 1
Quoted prices in active markets
for IDENTICAL assets or liabilities
Most reliable and require NO adjustments
Level 2
Inputs include observable,, similar assets or liabilities in active markets or data from Less active/inactive markets
These require adjustments to reflect differences in characteristics between the observed data and the asset or liability measured
“observable, similar, adjustments, inactive market”
Level 3
Unobservable and rely on the entity’s own assumptions or internally developed data
“unobservable, assumptions, internally developed, no market data”
Need to compare at NET
then the FV is the Quoted Price
NI Calculation on Cash Basis
Recognizes Rev & Exp only when cash is received or paid,
ignoring AR & Payable
PP&E Treatment
Cash basis expenses PP&E fully in the purchase year, while modified cash basis capitalizes & depreciates over time
Liabilities Recording
Cash basis doesn’t record liabilities
Modified cash basis recognizes certain liabilities like loans and their payments
COGS Calculation
Cash basis includes all cash paid for inventory, while modified cash basis considers beginning and ending inventory to match costs with revenue
Interest & Income Tax Expenses
Cash basis recognizes these expenses only when paid;
Modified Cash basis accrues and recognizes them if unpaid
Special Purpose Framework
AKA
OCBOA
Includes Cash Basis, modified cash basis, tax basis, and regulatory basis
These are not required to follow GAAP
Not interchangeable with GAAP - make sure you know the differences between Financial Stmts titles
OCBOA TITLES
Cash Basis: Statement of Cash Receipts and Disbursements and Statement of Assets and Equity
Modified Cash Basis: Statement of Assets, Liabilities, and Equity (Modified Cash Basis) & Statement of Rev Collected and Expenses Paid
Tax Basis: Statement of Revenues and Expenses & Statement of Assets and Equity
Accrual Net Income Calculation
Cash Basis Net Income + (End AR- Beg AR) + (Beg AP- End AP)
For Pre-Paid balances it will be End - Beg
