F2 - Financial Reporting and Disclosures

Question 1

When should significant estimates be disclosed in the notes to the financial statements?

Answer 1

When it is “reasonably possible” (not probable) that the estimate will change in the near term, AND the effect of that change will be material.

Question 2

What is the summary of significant policies? Where and what?

Answer 2

Usually the first note (by general best practice, not be requirement). Includes components like: measurement bases, accounting principles and methods, criteria, and policies such as bases of consolidation, depreciation methods, rev rec, etc.

Question 3

Difference between IFRS and US GAAP when it comes to required disclosures?

Answer 3

IFRS requires the following (not required by GAAP):

• Statement of compliance with applicable accounting principles
• Disclosure of judgments made in the preparation of financial statements

Question 4

Where should the following be included in FS: Footnotes or MD&A?

• Info about changes in Stk Equity?
• Analysis of competitors
• Management’s estimates of sales in upcoming year
• Projection of Future Market Conditions

Answer 4

1) Footnotes (any info about significant asset, liability, SE accounts)
2) MD&A (may be included)
3) MD&A (may be)
4) MD&A (may be)

Question 5

Two customers account for over 40% of sales each. What do we have to disclose about these customers:

• Names of the customers, or
• Amount of entity’s revenue from each

Answer 5

• Names: no, not necessary

- Amount of revenue: yes, necessary

Question 6

Management must evaluate whether there is sub. doubt about an entity’s ability to continue as a going concern for:

Answer 6

• “A reasonable period of time…not to exceed…

- ONE YEAR beyond the date the financial statements are issued

Question 7

Do IFRS, GAAP, or both require the following:

-Management performs the evaluation of going concern

Answer 7

• Both require management to perform.

- Board of Directors are NOT required to evaluate

Question 8

Do IFRS, GAAP, or both require the following:

-Presentation of a supplemental schedule showing the balance sheet presented if entity loses GC status

Answer 8

• Neither require this.

- Both require relevant disclosures when there is doubt

Question 9

Do IFRS, GAAP, or both require the following:

-Liquidation basis of accounting (guidance provided by standards)

Answer 9

• GAAP provides specific guidance about preparing financial statements and nec. disclosures related to liquidation basis of accounting
• IFRS provides no such guidance.

Question 10

Under GAAP, if a company is not considered a going concern, what method of accounting must be used to prepare financial statements?

Answer 10

Liquidation basis.

-Again, IFRS does not provide guidance in the described situation.

Question 11

How is IFRS guidance different from GAAP’s when it comes to footnote disclosure of going concern?

Answer 11

IFRS: Disclosure is required when management is aware of “material uncertainties” that may give rise to substantial doubt about ability to continue as gc

Question 12

When is footnote disclosure required for a subsequent event?

Answer 12

“Reasonably possible loss”

Question 13

-Liability estimate for a contingency: 1,250,000
-Insurance policy the company has: up to 5,000,000
-Deductible clause in policy: 250,000
What does this company need to disclose as a liability on current year financials if subsequent disclosure of contingency is required?

Answer 13

-Footnote disclosure: 250,000 loss. Insurance covers the entire loss besides the deductible portion.

Question 14

What is the subsequent event evaluation period for an entity that does not file with the SEC?

Answer 14

Through the date the “financial statements are available to be issued.” Criteria: correct GAAP form and format, and all approvals obtained.
Key point: Entities that do NOT file with SEC are (yes) required to disclose both (1) the date through which sub events have been evaluated, and (2) whether that date is issuance or available to be issued date.

Question 15

What is the subsequent event evaluation period for an entity that does (yes) file with the SEC?

Answer 15

Through the date the financial statements are issued. Criteria: correct GAAP form and format, statements have been widely distributed to financial statement users.
Key point: Entities that file with SEC are NOT required to disclose the date through which sub events are evaluated. It’s redundant.

Question 16

Lawsuit was filed against a company in October. Settled in January. Financials are 12/31. What is the effect of this lawsuit on the financials?

Answer 16

Effects of the resolution of the suit must be taken into account to determine amount of lawsuit liability recorded. If liability is larger than original estimate / recording, there is an additional loss recorded along with the original estimated accrual liability.
-Key point: Financials are a reflection of the company’s position AS OF 12/31. If there was an ongoing suit, there would be a corresponding liability waiting to be paid off/settled AS OF 12/31. When it ends up settled, there could be an additional loss or reduction of liability.

Question 17

Note payable is due 3 months after year end (current liability). 1 month after year end, and before issuance of the financials, a company decides to refinance this note - making it due long into the future with long-term bonds payable. How should the note be classified and disclosed?

Answer 17

Classification: long term liability. Disclosure in footnote.
-Key point: even though the bonds payable were issued after YE, the note existed at the balance sheet date, and therefore needs to be actualized. Liability should be updated and recognized as non-current, and a note disclosure should be added to explain the change in classification.

Question 18

Fair Value Statements: which of the following are true?

1) FV of an asset/liability is specific to the entity making the FV measurement
2) FV is the price to acquire an asset or assume a liability
3) FV includes transportation costs but not transaction costs
4) Price in principal market = FV of asset / liability

Answer 18

1) False. FV is not an entity-specific measure. It is a market-specific measure.
2) False. FV is an “exit” price - the price to sell an asset or transfer a liability - not an “entrance” price.
3) Truuu. Transportation costs yes, transaction costs no.
4) Truuu. FV is a market-specific measure.

Question 19

Fair Value Statements: which of the following are true?

1) Level 1 inputs are most reliable
2) Level 1 measurements are quoted prices in active markets for identical/similar assets/liabilities
3) FV measurements based on management assumptions is not acceptable according to GAAP
4) Level in FV heirarchy of one measurement is determined by level of highest level significant input.

Answer 19

1) True.
2) False. Level 1 measurements are quoted prices in active markets for identical assets / liabilities. Don’t get tripped up by extra language.
3) False. FV measurement based on management assumptions counts as a level 3 measurement. It is acceptable when undue cost to obtain level 1/2 inputs.
4) False. Level in FV heirarchy of a FV measurement is determined by the level of the LOWEST level significant input, not the highest one. 1 = LOW. 3 = High. GET IT.

Question 20

• When there is no principal market… the price in the most (advantageous / disadvantageous) market is the FV measurement?
• Do we use transaction costs to calculate advantageous / disadvantageous?

Answer 20

1) Price in the most ADVANTAGEOUS market is the FV measurement. Why not? Why wouldn’t you want to sell in the most advantageous market? Duh. 74-2, or 76-5? 74-2 every time.
2) Transaction costs are used to determine which market. Not included in final FV though. 74-2 still gives you a FV of 74.

Question 21

What are the acceptable methods of measuring FV per SFAS No. 157?

Answer 21

Easy. 1) Market approach. 2) Cost approach.
Key point: Switching between these methods is ok, its simply a change in accounting estimate. Not a change in principle. Not a correction of an error
Key point 2: EXAM HACK: Correction of an error is NOT a type of accounting change. Know this trick, will save you time.

Question 22

Level 2 inputs are unique. What are some examples?

Answer 22

• Quoted prices for similar assets/liabilities in active markets
• Quoted prices for identical assets/liabilities in non-active markets
• Interest rates that are observable at commonly quoted intervals

Question 23

Farmer Joe sells corn in 4 different “markets” (states). How does he determine the principal market for his corn?

Answer 23

The principal market for Farmer Joe is the market with the greatest OVERALL volume of activity for the particular asset (corn) he is measuring.
Key point: Farmer Joe can sell all the corn he wants in each of the 4 states, but if Michigan is the state with the highest volume of corn purchases in general, and as long as Farmer Joe had access to this market, it becomes his principal market.

Question 24

What is the fair value of Farmer Joe’s farmland (ie. Non-Financial Asset) if it is on the “market” as two different uses (original use farmland, and alternative use shopping plaza)?

Answer 24

The FV of a non-financial asset is its value at its highest and best use. If that means an alternative use, so be it. Shopping plaza value = FV measurement.

Question 25

When a company elects FV measurement option, it must apply this measurement based on

1) instrument-by-instrument basis?
2) type-by-type basis?
3) at the entity level?

Answer 25

A company must apply FV on an instrument by instrument basis. FV is measured for a specific asset/liability, or for a group of assets/liabilities. Once elected, FV will be used until disposal.
Key point: Companies are not required to report all financial assets/liabilities at FV (that’s just not realistic).

Question 26

When we have Level 1, 2, and 3 inputs available to calculate FV, which one do we use?

Answer 26

Level 1. Most reliable.

Question 27

Which segments are deemed to be reportable operating segments?

Answer 27

Any segment with greater than 10% of ALL revenue (including revenue from both unaffiliated and intersegment sales) is a reportable operating segment.
Key point: Look to the bottom right of the chart. Look for Combined revenue. Don’t factor eliminations in to your consideration.

Question 28

What info should a public company report about revenues from its reporting segments?

Answer 28

Separately disclose the amount of sales (each reporting segment) to unaffiliated customers. Also separately disclose the amount of intracompany sales.

Question 29

How do we allocate interest expense, income taxes, and general corporate expenses to different divisions for segment reporting?

Answer 29

Allocate them based off how the segments report to the Chief Operating Decision Maker. They may be allocated, but they are not usually allocated to operating profit.

Question 30

What item(s) are always used in determining a segment’s operating income?

Answer 30

Sales to other segments

Question 31

Enterprise-wide required disclosures:
True or false: a company must report the identity of any customer that provides 10% or more of a particular operating segment’s revenue.

Answer 31

False. A company must report segment information about a company’s major customers if they provide 10% or more of COMBINED revenue, internal or external, of ALL operating segments.

Question 32

If a company discloses information about different reportable operating segments, what must it report?

Answer 32

• Profit or loss for each segment

- Total assets for each segment

Question 33

For segment reporting, if an identified segment’s assets/revenues/operating income constitute more than 10% of combined assets/revenues/operating income of all segments, the segment should be separately reported. Does the same rule apply for liabilities?

Answer 33

No.

Question 34

Which entities are required to report on operating segments?

Answer 34

Only public-reporting companies.

Question 35

What are the two steps to the revenue test when reporting segments?

Answer 35

1) Calculate 10% of combined sales. This is the initial threshold for reporting.
2) Add up all segments that pass the initial threshold. See if they account for 75% of total sales to unaffiliated customers (consolidated after eliminations). If so, no additional reporting segments are required. If not, then add more segments until you hit 75.

Question 36

What do you do when there are losses and gains in reportable segments?

Answer 36

10% of the ABSOLUTE amount of the GREATER of…

• Total combined reporting profit of all segments that reported gains
• Total combined reporting loss of all segments that reported losses.
• Whichever one of those is greater… take 10% of that absolute figure is your threshold for reporting across ALL segments (gains and losses). Absolute value everything.

Question 37

For interim reporting purposes, do we allocate costs that benefit multiple periods when we present interim financial statements?

Answer 37

Yes. If an expense (major factory repairs) will benefit a company for the rest of the year (next 9 months, lets say), allocate the amount of the expense / 9.
-If a company pays property taxes, allocate amount of the expense / 12.

Question 38

Under Regulation S-X, an entity’s annual financials filed with the SEC should include how many of each of the following:

• Balance Sheet
• Income statement
• SCF
• Changes in Owner’s Equity

Answer 38

• 2 balance sheets
• 3 income statements
• 3 SCF
• 3 changes in Owner’s Equity

Question 39

Accelerated Filer’s have how many days to file form 10-K?

Answer 39

75 days for Accelerated. Accelerated filers are not eligible to file quarterly on 10-QSB.
Large Accelerated (Float over 700M) have 60 days.
Non-Accelerated Filers have 90 days.

Question 40

Company files quarterly financials on 10-Q, does not have seasonal fluctuations. Which periods do they have to show balance sheets on form 10-Q?

Answer 40

Only periods required are:

• Most recent quarter end
• End of preceding fiscal year

Not necessary:
-End of preceding year’s corresponding quarter

Question 41

What are some of the events that require 8-K disclosure?

Answer 41

• Creation of an obligation under off-balance sheet arrangement of a registrant
• Unregistered sale of equity securities
• Change in registrant’s certifying accountant

NOT included on 8-K:
-Quarterly results (shown on 10-Q)

Question 42

What are some of the filings that require an XBLR financial statement exhibit?

Answer 42

10-K, 10-Q, 6-K, 20-F, 11-K, 40-F
Forms 3,4,5 (directors, officers, beneficial owners of >10% class of equities) do not contain financial statements.
6-K is semiannual report of foreign private investors (unaudited), 10-Q is quarterly (unaudited), 20-F is annual report of non-U.S. registered, 11-K is annual report of an EBP, 40-F is annual Canadian company (audited)

Question 43

Large accelerated filers must file their 10-Q’s within how many days?

Answer 43

40 days.

45 days for small corporations

Question 44

Which SEC Regulation sets forth the form and content of proper financial statement p&d?

Answer 44

Regulation S-X

Question 45

If fixed assets are sold at a gain/loss during a quarter, what portion should be allocated to the quarter?

Answer 45

Full amount of gain/loss.

Question 46

Quarterly financial reporting should include a provision for income taxes. This uses an effective tax rate that should reflect certain factors like:

Answer 46

• Foreign tax rates
• Available tax planning alternatives
• Effect of other anticipated tax credits
• Capital gains rates
• Foreign tax credits

Question 47

Accounting change with a cumulative effect (such as change in inventory valuation) should affect quarterly earnings Y/N?

Answer 47

N. Should affect beginning of the year retained earnings.

Question 48

What are the thresholds for establishing Smaller Reporting companies, Accelerated Filers, and Large Accelerated Filers?

Answer 48

• Less than 75M of outstanding common equity (float) held by nonaffiliates: smaller company
• Between 75M and 700M of outstanding… : Accelerated filer
• Greater than 700M held: Large accelerated filer

Question 49

Quarterly days due: Accelerated and non accelerated:

Answer 49

Accelerated: 40 days
Non-accelerated: 45 days.
No other categories (big/small doesn’t get broken out here).

Question 50

Interest expense is recorded under which method in the following statements?

• SCF
• Income Statement

Answer 50

• SCF = cash basis

- Income Statement = Accrual basis

Question 51

When preparing F/S on the income-tax basis, how should the non-deductible portion of expenses be reported?

Answer 51

Include them in the expense category in the determination of income.

Question 52

Under OCBOA financial statements, the following SHOULD be included:

• Equivalent statement to an accrual basis balance sheet
• Equivalent of an accrual basis income statement
• Equivalent of an accrual basis SCF

Answer 52

• Balance sheet equivalent: yes
• Income statement equivalent: yes
• SCF equivalent: no, not required

Question 53

Income-tax basis financial statements treat the nondeductible portion of expenses (M&E for example) as:

Answer 53

Included in the “expense” category in the determination of income.

Question 54

“Bonus Method” Question:
Eagle and Falk are partners, capital balances are 45K and 25K. Robb is admitted as new partner. Assets are revalued, Robb is given a 25% interest in capital and profits. Robb put in 30K. What amount is a bonus to original partners?

Answer 54

• 25% of the total capital balance (45+25+30) goes to Robb.
• 25% of the balance (100K) is 25K.
• He put in 30K.
• Bonus paid to the other partners (proportionally) is a total of 5K.

Question 55

When a partnership is incorporate and common stock is issued to new shareholders - how do we calculate the balance in APIC?

Answer 55

APIC + Common Stock = Net Assets (Also = total Shareholders’ Equity)
If you are given the amount & par value of common stock issued, you can easily calculate APIC by subtracting that from Net Assets (Assets - Liabilities)

Question 56

If a partnership is silent on capital contributions, but an agreement is in place to split profits and losses equally, how do we measure capital contributions?

Answer 56

Just as you would normally. No change here.
-Sidenote:
If partners agree to divide initial capital equally, bonus method can be used to even the capital accounts if they were different at first. You would do this by splitting the total assets equally, and paying a “bonus” from one party to the other to even the score.

Question 57

In a partnership, A and B have a capital ratio of 3:1, and a profit to loss ratio of 2:1. The bonus method was used to record C’s admission as a new partner.
Question: What ratio should you use to allocate the excess contribution over the amount that C gets credited for in their capital account (% proportion)?

Answer 57

Options are the:

• Old capital ratio for A&B
• Old profit and loss ratio for A&B
• New relative capital ratio for A&B
• New relative profit and loss ratio for A&B

Answer:
-Under the bonus method, use the OLD profit and loss ratio for A&B to allocate additional bonuses to the OG partners.

Question 58

When a new partner joins a partnership and contributes capital, what entry do we make to adjust their account?

Answer 58

Debit: ______??
Credit: Capital Account (FV of their investment)

Question 59

Goodwill Method Question:
-E and F have capital balances of 45K and 25K in their partnership. G joins and contributes 30K. G gets a 25% interest in capital and profits. How should the partnership allocate capital & goodwill to the partners?

Answer 59

• G should get 25% of total capital: which is imputed based off his 30K contribution. Total capital is therefore 120K
• Capital currently contributed (including G’s) = 100K of assets.
• Remaining 20K of capital is allocated to the 2 OG partners as goodwill.

Question 60

Initial Capital Balances Under the Goodwill Method:

• One partner puts in 60K. One partner puts in 20K.
• Agreement states that they split the initial capital balance, using the goodwill method. How do these balances shake out?

Answer 60

• “Goodwill” the lesser contributing partner’s account up to the higher contributing partner’s.
• 60K is higher than 20K. Lesser contributing partner gets 40K in goodwill in order to “split” the initial capital balance.

Question 61

What is the general difference between bonus method and goodwill method?

Answer 61

• Bonus method does NOT increase/decrease total net assets of the partnership. Instead, it increases/decreases the individual partners’ capital accounts whenever an addition/retirement creates a difference between payout and capital.
• Goodwill method increases (changes) the total net assets of the partnership. Individual partners’ accounts are usually changed to agree the proportion (increased). They don’t decrease.

Question 62

Things to keep in mind with partnership and capital allocation questions…

Answer 62

Read the question carefully.
-Are they asking about profits distributed before/after a mandatory interest/salary payment? Remember to do the payment, then recalculate profit, then do the split…