FAR 1 - Standard Setting, Income Statement, and Reporting Requirements

Question 1

1.1 Conceptual Frameworks

Name the single source of authoritative nongovernmental U.S. GAAP.

Answer 1

The FASB “Accounting Standards Codification” (ASC)

Question 2

1.1 Conceptual Frameworks

The term “International Financial Reporting Standards” includes what four (4) standards?

Answer 2

1. International Accounting Standards (IAS)
2. International Financial Reporting Standards (IFRS)
3. IFRIC Interpretations
4. SIC Interpretations

Question 3

1.1 Conceptual Frameworks

Who are the three (3) primary users of general purpose financial reports?

Answer 3

Existing and potential:

1. Investors
2. Lenders
3. Other Creditors

Question 4

1.1 Conceptual Frameworks

Name the pervasive constraint on the information provided in financial reporting.

Answer 4

Cost Constraint:

The benefits of reporting financial information must be greater than the costs of obtaining and presenting the information.

Question 5

1.1 Conceptual Frameworks

Name the two (2) fundamental qualitative characteristics of useful financial information.

Answer 5

1. Relevance = Predictive Value, Confirming Value, Materiality
2. Faithful Representation = Completeness, Free from Bias [Neutrality], and Freedom from Error.

Question 6

1.1 Conceptual Frameworks

Name the three (3) elements of relevance.

Answer 6

1. Predictive Value
2. Confirming Value
3. Materiality

Question 7

1.1 Conceptual Frameworks

Name the three (3) elements of faithful representation.

Answer 7

1. Completeness
2. Free from Bias [Neutrality]
3. Freedom from Error

Question 8

1.1 Conceptual Frameworks

Name the four (4) enhancing qualitative characteristics of financial information

Answer 8

1. Comparability
2. Verifiability
3. Timeliness
4. Understandability

Question 9

1.1 Conceptual Frameworks

According to SFAC #5, what five (5) statements should a full set of financial statements include?

Answer 9

1. Statement of Financial Position (Balance Sheet)
2. Statement of Earnings (Income Stmt)
3. Statement of Comprehensive Income
4. Statement of Cash Flows
5. Statement of Changes in Owner’s Equity.

Question 10

1.1 Conceptual Frameworks

What is the difference between realization and recognition?

Answer 10

Realization: When sold and converted to cash (or claims to cash – A/R).

Recognition: When recorded in the financial statements.

Question 11

1.1 Conceptual Frameworks

List the ten (10) elements of financial statements according to SFAC #6.

Memory Aid: CREG and ALE ID

Answer 11

1. Comprehensive Income
2. Revenues
3. Expenditures
   4-5. Gains and Losses
4. Assets
5. Liabilities
6. Equity (of Net Assets)
7. Investments by Owners
8. Distributions to Owners

Question 12

1.1 Conceptual Frameworks

List the six (6) elements of financial statements according to the IASB Framework.

Answer 12

1. Assets
2. Liabilities
3. Equity
4. Income (Revenue and Gains)
5. Expenses (Expenses and Losses)
6. Capital Maintenance Adjustments

Question 13

1.1 Conceptual Frameworks

Name the five (5) elements of present value measurement per SFAC #7.

Memory Aid: EVTUO

Answer 13

1. Estimate of future cash flow
2. Expectations about timing Variations of future cash flows
3. Time value of money (the risk-free rate of interest)
4. The price for bearing uncertainty
5. Other factors ( Example: liquidity issues and market imperfections)

Question 14

1.1 Conceptual Frameworks

Describe the expected cash flow approach for present value computations.

Answer 14

Considers a range of possible cash flows and assigns a (subjective) probability to each cash flow in the range to determine the weighted average, or “expected,” future cash flow.

Question 15

1.2 Reporting Net Income

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

Memory Aid: IDEA

Answer 15

1. Income (or loss) from continuing operations
2. Income (or loss) from discontinued operations
3. Extraordinary items
4. Cumulative effect of a change in Accounting principle.

Question 16

1.2 Discontinued Operations

The gain (loss) from discontinued operations can consist of…

Answer 16

An impairment loss, a gain (loss) from actual operations, and a gain (loss) on disposal.

Question 17

1.2 Discontinued Operations

In what period are the following reported:

1. An impairment loss?
2. A gain (loss) from actual operations?
3. A gain (loss) on disposal?

Answer 17

All are reported in the period in which they occur.

Question 18

1.2 Discontinued Operations

In reporting discontinued operations, how is a “component” of an entity defined under US GAAP and IFRS?

Answer 18

US GAAP

1. An operating segment
2. A reportable segment
3. A reporting unit
4. A subsidiary
5. An asset group

IFRS

1. A separate major line of business or geographical area of operations
2. A subsidiary acquired exclusively with a view to resale.

Question 19

1.2 Discontinued Operations

How do we account for subsequent increases in the fair value of a discontinued component?

Answer 19

A gain is recognized for the subsequent increase in fair value minus costs to sell (but not in excess of the preciously recognized cumulative loss) The gain is reported in the period of increase.

Question 20

1.2 Exit or Disposal Activities

What types of costs are associated with exit and disposal activities?

Answer 20

1. Involuntary employee-termination benefits
2. Costs to terminate a contract that is not a capital lease
3. Other costs associated with exit or disposal activities

Question 21

1.2 Extraordinary Items

Define extraordinary items.

Answer 21

• Material in nature.
• Of a character significantly different from the typical or customary business activities (unusual)
• Not expected to recur in the foreseeable future (infrequent)
• Not normally considered in evaluating the ordinary operating results of an enterprise.

Key Words: Unusual and Infrequent

Remember: Extraordinary items are recognized under U.S. GAAP but not IFRS.

Question 22

1.2 Extraordinary Items

List some examples of extraordinary items

Answer 22

1. The abandonment of, or damage to, a plant due to an infrequent earthquake or an infrequent flood.
2. An expropriation of a plant by the government
3. A prohibition of a product line by a newly enacted law or regulation.

Question 23

1.2 Accounting Changes

Name the three (3) types of accounting changes.

Answer 23

1. Change in accounting principle
2. Change in accounting estimate
3. Change in accounting entity

Question 24

1.2 Accounting Changes

How is a change in accounting principle reported?

Answer 24

• Cumulative effect of change is included in the retained earnings statement as an adjustment of beginning retained earnings balance of the earliest year presented.
• Prior-period FS are restated, if presented.

Question 25

1.2 Accounting Changes What are the special changes in an accounting principle? How are special changes in accounting principle reported?

Answer 25

1. A change to LIFO from another method of inventory pricing under U.S. GAAP. 2. Any other change in which cumulative effect adjustment is considered impractical to calculate. Special changes are reported prospectively (like a change in estimate)

Question 26

1.2 Accounting Changes How is a change in an accounting estimate reported?

Answer 26

1. Prospectively 2. The effect is shown in the current and/or future periods that are affected by the change 3. Prior Period FS are not restated.

Question 27

1.2 Accounting Changes Under U.S. GAAP, how is a change in the accounting entity reported?

Answer 27

All current and prior period financial statements presented are restated.

Question 28

1.2 Accounting Changes How are error corrections reports?

Answer 28

Reported as prior period adjustment to retained earnings and all comparative financial statements presented are restated.

Question 29

1.3 Comprehensive Income Define comprehensive income.

Answer 29

Change in equity (net assets) that results from revenue, expenses, gains, and losses during a period, as well as any other recognized changes in equity that occur for reasons other than investments by owners and distributions to owners.

Question 30

1.3 Comprehensive Income Identify five (5) items included in other comprehensive income. Memory Aid: PUFER

Answer 30

1. Pension adjustments 2. Unrealized gains and losses on available-for-sale securities 3. Foreign currency translation adjustments and gains/losses on foreign currency transactions that are designated as economic hedges of a net investment in a foreign entity 4. Effective portions of cash flow hedges 5. Revaluation surpluses (IFRS only)

Question 31

1.3 Comprehensive Income List the two (2) formats acceptable for reporting comprehensive income.

Answer 31

Statement of Comprehensive Income (single-statement approach) Statement of Income followed by separate Statement of Comprehensive Income (two-statement approach.)

Question 32

1.3 Comprehensive Income List some disclosure requirements for comprehensive income.

Answer 32

1. Tax effects of each component included in current "Other Comprehensive Income" 2. Changes in the accum. balances of components of "Other Comprehensive Income. 3. Total accum. other comprehensive income. 4. Reclassification adjustments between other comprehensive income and net income.

Question 33

1.4 Balance Sheet and Disclosures Overview Identify the contents of the Summary of Significant Accounting Policies not to the financial statements.

Answer 33

Summary of Significant Accounting Policies Identify and describe: 1. Measurement bases used in preparing the financial statements 2. Principles and methods 3. Criteria 4. Policies 5. Pricing

Question 34

1.4 Balance Sheet and Disclosures Overview Describe the related party disclosures required under U.S. GAAP and IFRS.

Answer 34

1. Material related party transactions 2. Related party notes/accounts receivable 3. Control relationships NOTE: IFRS requires disclosure of key management compensation. U.S. GAAP does not require this disclosure.

Question 35

1.4 Balance Sheet and Disclosures Overview What are the U.S. GAAP disclosure requirements for risks and uncertainties?

Answer 35

1. Nature of Operations 2. Use of estimates in preparing the financial statements 3. Significant estimates 4. Current vulnerability due to certain concentrations.

Question 36

1.5 Interim Financial Reporting What are the guidelines for interim reporting?

Answer 36

1. Use the same accounting principles that were used in the most recent annual report. 2. Allocate expenses to the interim period benefited. 3. Revenues are recognized in the period in which they are earned and realized or realizable. 4. A total for comprehensive income in condensed financial statements of interim periods.

Question 37

1.5 Interim Financial Reporting What income tax rate is used in interim financial reporting?

Answer 37

Use best estimate of effective tax rate to be applicable for full fiscal year on quarterly (interim) statements.

Question 38

1.6 Segment Reporting Name the four required disclosures for segments of an enterprise.

Answer 38

1. Operating segments 2. Products and Services 3. Geographic area 4. Major customers

Question 39

1.6 Segment Reporting Define operating segment.

Answer 39

Distinct revenue-producing components of the enterprise about which separate financial information is produced internally, and whose operating results are regularly reviewed by the enterprise. Determined using a "management approach."

Question 40

1.6 Segment Reporting Name two quantitative thresholds used in identifying reportable operating segments.

Answer 40

1. 10% "Size" test | 2. 75% "Reporting Sufficiency" test

Question 41

1.6 Segment Reporting Describe the 10% Test for identifying reportable segments.

Answer 41

1.Revenue Reported revenue, including both sales to external customers and intersegment sales or transfers, is 10% more of the combined revenue, internal and external, of all operating segments. 2. Reported profit or loss The absolute amount of its reported profit or loss is 10% or more of the greater, in absolute amount, of: a. The combined reported profit of all operating segments that did not report a loss, or b. The combined reported profit of all operating segments that did report a loss 3. Assets Assets are 10% or more of the combined assets of all operating segments. NOTE: Must meet only one of the above.

Question 42

1.6 Segment Reporting What is the 75% test for identifying reportable segments?

Answer 42

Combined external (consolidated) revenue of all reportable segments must be at least 75% of the total consolidated revenue of the entity. The practical limit is 10 segments, but this is not a precise limit.

Question 43

1.6 Segment Reporting What are the disclosure requirements for reportable operating segments?

Answer 43

For each reportable segment, the entity must report: 1. Identifying factors 2. Products or services 3. Profit or loss details 4. Assets details 5. Liability details (IFRS only) 6. Measurement criteria 7. Reconciliations.

Question 44

1.7 SEC Reporting Requirements Describe the Form 10-K and the Form 10-Q. What level of assurance must be provided with the financial statements submitted in these forms?

Answer 44

Form 10-K: Filed annually by U.S. registered companies. Includes a summary of financial data, MD&A, and audited FS prepared using GAAP. form 10-Q: Filed Quarterly by U.S. Registered companies. Included unaudited (reviewed) FS, interim MD&A, and certain disclosures.