F2-M4&5-Notes to FSs & Sub. Events Flashcards
The summary of significant accounting policies includes disclosures of:
- Measurement bases used in preparing the financial statements.
- SPECIFIC accounting principles and methods used during the period
Significant estimates should be disclosed when it is ….
REASONABLY possible (not probable) that the estimate will change in the near term and that the effect of the change will be material.
Immaterial items are not disclosed!
Footnote disclosures to the financial statements should include….
any information about significant asset/or liability accounts such as changes in stockholders’ equity.
What is the purpose of information presented in notes to the financial statements?
Information presented in notes to the financial statements have the purpose of providing disclosures required by generally accepted accounting principles. SFAC 5 para. 7
What is a subsequent event?
A subsequent event that occurs AFTER the balance sheet date, but BEFORE the financial statement are issue or are available to be issued.
Explain subsequent event categories
It has two categories.
*A recognized subsequent event (type 1) .Additional info exist at the BS date such as settlement of litigation and loss on an uncollectible receivable . Therefore, it must be recognized or adjusted in the FSs. For example, Company’s:
BS date Dec 31, Y1
FSs issued on Feb 4, Y2.
A lawsuit filed on Oct 12, Y1 and
settled on Jan 2, Y2.
Company can recognize the settlement amount in Dec 31, Y1 FSs because the law suit filed before the BS date.
- Nonrecognized subsequent events (type 2). they do not exist at the BS date and should not be recognized or adjusted. It should be disclosed in footnotes, if it is necessary to keep the FSs from being misleading. For example, Sale of bond or capital sock, loss of plant or inventory due to fire or natural disaster.
Subsequent events issued or available to be issued depends on…
the kind of company.
- A public company must evaluate subsequent events through the date that FSs are issued (happens after available to be issued). They cannot be recognized on the reissuance date unless GAAP allows it. Also, they cannot be recognized on revised FSs because they are considered as reissued FSs.
Note: If the FSs are planned to be issued at a given due date after the BS date, It should be disclosed and recognized in the following year’s FSs. (e.g. in Y3 disclosed & in Y4 recognize). - A private company must evaluate subsequent events through the date that FSs are available to be issued. The date is defined as the date when the financial statements are in a form and format that comply with GAAP and by which all approvals for issuance have been received. It is not necessary that the financial statements have actually been issued.
Rule: Only footnote disclosure is required for a “reasonably possible” loss. The nature of the contingency should be disclosed as well as
the nature of the possible loss or range of loss. For example, a company believes that the loss will be $1,250,000, but it has a $5,000,00 public liability policy deductible for $250,000. The reasonably possible loss in the footnote will be $250,000 deductible portion of the insurance.
If NO PRINCIPAL MARKET exists,
then we use a two-step approach:
Step 1: Determine the most advantageous market by finding best price after considering transaction costs (Net Value).
Step 2: Determine the FV of the quoted stock price.
Net Price= Quoted Price - Transaction Costs
How do you calculate the balance of premium after first interest payment under effective interest method for amortizing premiums?
Cash interest payment = face value x stated rate
Interest expense = carrying value x market rate (yield)
The amortization amount = Interest payment - interest expense
Premium balance = initial premium - the amortization amount
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