FAR 2 Flashcards
When is revenue recognized with Completed Contract Method?
Revenue is recognized when the project is complete, BUT expected losses are recognized immediately.
When there is a change in the reporting entity, how should the change be reported in the financial statements?
Retrospectively, including note disclosures, and application to all prior period financial statements presented.
All financial statements need to be restated as if the companies were always combined or whatever the change in entity may be.
When does a franchisor report revenue from initial franchise fees?
When all performance obligations of the sale have been satisfied.
What goes in Other Comprehensive Income?
PUFIER Pension adjustments Unrealized gains and losses (AFS Debt Securities) Foreign currency items Instrument specific credit risk Effective portion of cash flow hedges Revaluation surplus (IFRS Only)
What is included in Operating section of Statement of Cash Flows?
Cash received from customers Cash paid to suppliers and employees Operating expenses paid in cash Interest received and paid Dividends received - NOT dividends paid Taxes paid Purchase and sale of trading securities classified as current assets
Statement of Cash Flows Investing Activities
Making loans to other entities
Purchasing or disposing of trading securities (if classified as non-current), available-for-sale securities, and held to maturity investment securities of other entities (debt or equity)
Acquiring or disposing of property, plant, and equipment
Acquiring another entity under the acquisition method using cash. Payment for the acquisition is shown net of the cash acquired.
Statement of Cash Flows Financing Activities
Equity activities, stock, paying cash dividends
Issuing bonds, notes, debentures, and other borrowings
Payments of principal (not interest) on amount borrowed
How are deferred tax assets calculated and used?
Use the tax rate for future years to originally determine tax asset due to net operating loss.
If have net operating income in future years, can only offset 80% of the taxable income for that year.
Calculate Net Periodic Pension Cost
SIRAGE
Service cost \+ Interest Cost - Return on Plan Assets \+ Amortization of Prior Service Cost - Gains (+ Losses) \+ Existing Net Obligation Amortization or Net Asset = Net Periodic Pension Cost
Calculate Fair Value of Pension Plan Assets
Beginning FV of Plan Assets \+ Return on Plan Assets \+ Contributions - Benefits Paid = Fair Value of Plan Assets
Calculate Pension Projected Benefit Obligation
Beginning Projected Benefit Obligation \+ Service Cost \+ Interest Cost \+ Current period Prior Service Cost - Current Pension Gain - Benefits Paid = Projected Benefit Obligation
Calculate Funded Status of Pension Plan
Fair Value of Pension Assets
- Pension Projected Benefit Obligation
= Funded Status of Pension Plan
What determines if a lease is a finance lease (lessee) / sales-type lease (lessor)?
OWNES - only one must be met
Ownership of the asset transfers from lessor to lessee by the end of the lease term
Lessee has Written option to purchase the asset and is reasonably certain to exercise the option
Net present value of all lease payments and any guaranteed residual value is equal to or substantially exceeds the underlying asset’s fair value.
Term of the lease represents the major part of the Economic life remaining for the asset
Specialized asset such that it will not have an expected, alternative use to the lessor when the lease term ends.
What are required pension plan footnote disclosures?
Reconciliations of beginning and ending balances (assets and obligations) Funded status Narrative description of plan assets Components of Net Periodic Pension (Benefit) Cost - SIRAGE Benefit payments and contributions Impact on other comprehensive income Rates and assumptions Employer and related party transactions Amortization methods Assumptions and commitments Termination benefits
Nonpublic entities do not have to provide reconciliations.
What is the minimum budgetary information required to be reported in government supplementary information?
Schedule showing the original budget, the final appropriations budget, and actual inflows, outflows, and balances on a budgetary basis.
How are bond issuance costs accounted for when bonds are issued at a discount?
Bond issuance costs are included in the discount amount because it has reduced the amount received by the company.
Bonds worth $100,000 sold at 95 and incurred $3,000 of bond issuance costs.
DR Cash 92,000
DR Discount 8,000
CR Bonds Payable 100,000
What is Form 8-K?
Filed to report major corporate events.
Ex. Corporate asset acquisitions or disposals, changes in securities and trading markets, changes to accountants or financial statements, and changes in corporate governance or management.
What is ‘“Income available to common shareholders” when figuring Basic Earnings Per Share?
Net income minus dividends declared on noncumulative preferred stock OR by the dividends accumulated in the current period on any cumulative preferred stock whether of not those dividends have actually been declared.
How to determine “Weighted average number of shares outstanding”
Weight each total of shares outstanding by the amount of time that the total was outstanding. Stock dividends and stock splits are treated as if they had occurred at the beginning of the earliest period presented.
What is difference between dilutive and Antidilutive
Options and similar instruments are only dilutive when the average market price of the underlying common stock exceeds the exercise price of the options or warrants because it is unlikely they would be exercised if the exercise price were higher than the market price.
If the EPS for the action in question is less than the basic EPS, it will be dilutive.
Consolidated financial statements are prepared when one company has controlling financial in another unless . . .
The subsidiary is in legal reorganization or bankruptcy and/or the sub operates under severe foreign currency exchange restrictions, controls, or other governmentally imposed uncertainties so severe that they cast significant doubt on the parent’s ability to control the subsidiary.
What are the characteristics used to determine the primary beneficiary of a variable interest entity (VIE) under US GAAP?
Primary beneficiary is not required to have greater than 50% ownership.
Entity that has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and absorbs the expected VIE losses and/or receives the expected VIE residual returns.
When should equity method accounting be used?
When ownership is between 20-50% or if significant influence can be exercised by the investor over the investee.
When should consolidated financial statements be prepared?
Over 50% control of sub is present unless control is temporary or significant doubt exists regarding the parent’s ability to control the subsidiary.
What conditions need to be present in order for a company to have a variable interest in a business entity?
- Company and business entity have an arrangement
- Business entity is a legal entity
- Business fails to qualify for an exclusion
- Interest is more than insignificant
- Company has an explicit or implicit variable interest in the entity.
What four arrangements can be used to determine if there is variable interest in a business entity?
- Company or a related party significantly participated in the business entity’s design.
- Substantially all of the business entity’s activities, by its design, involve or are conducted on behalf of the company.
- More than half of the total of the equity, subordinated debt, and other forms of financial support is provided by the company.
- Securizations or other forms of asset backed financing arrangements or single-lessee leasing arrangements are the primary activities of the entity.
What characteristics determine if a business entity is a variable interest entity?
- Insufficient level of equity investment at risk.
- Inability to make decisions or direct activities.
- No right to receive expected residual returns.
- No obligation to absorb entity’s expected losses.
- Disproportionately few voting rights.
How are expenses incurred during an acquisition of a company accounted for?
Legal fees and due diligence are expensed in the period incurred (acquisition costs).
Debt securities create liabilities.
Debt security registration costs are capitalized and amortized.
How should the acquirer recognize a bargain purchase in a business acquisition?
As a gain in earnings at the acquisition date
Difference of how goodwill is recorded in GAAP and IFRS
GAAP - Full Goodwill 100% on parent
IFRS - Partial Goodwill percentage owned reported on parent (can also do full goodwill)
When is acquisition price determined when it comes to stock value?
When the sale is finalized use that value of stock.
What do you do if price paid for acquisition is lower than value of assets and liabilites?
Report the difference as a gain
What is the journal entry to eliminate intercompany sales of inventory that the sub has sold?
Dr Sales (amount sold to sub) Cr Cost of goods sold
Dr Cost of goods sold (profit on amount sold by sub)
Cr Inventory
What is journal entry to eliminate sale of equipment to sub?
Dr Gain on Sale
Cr Accumulated Depreciation (for full amount parent would have had because it was all eliminated when sale recorded)
Cr Equipment (to bring back down to parent’s purchase price)
Cr Depreciation Expense (difference between what sub would use and what parent was using)
At what level should goodwill be tested for value impairment under US GAAP?
The reporting unit level.
Evaluation of goodwill impairment involves comparing the carrying amount and the fair value of the reporting unit. If the carrying amount of the reporting unit (including goodwill) exceeds the fair value of the reporting unit (including goodwill), an impairment loss in the amount of the difference must be booked. The loss is capped at the amount of goodwill currently on the books.
At what level should goodwill be tested for value impairment under IFRS?
Each cash-generating unit.
If both an asset group in a company and goodwill in one of its reporting units have to be tested for impairment, how are they tested?
A company will perform impairment analysis and record necessary entries on all assets of the company prior to performing impairment analysis related to goodwill. Reporting units (segments) will be separately tested for impairment analysis. If the fair value of a reporting unit is less than the carrying value, the impairment is assumed to be due to the goodwill as all other assets of the reporting unit would already have been properly adjusted.
What are stock warrants?
Certificates entitling the holder to acquire shares of stock at a certain price within a stated period.
Proportional method for determining bond and warrant values
- Figure total issue amount (discount or premium)
- Add FMV of Bond (* disc or prem) and FMV of warrant (# * market vale)
- Determine percentage of each from total
- Multiply total collected times each percentage
That is the value for each
Journal entry when bonds issued at discount with detachable warrants
Dr Cash
Dr Discount on Bonds Payable
Cr Bonds Payable (face amount)
Cr Paid In Capital - Stock Warrants
If warrants are nondetachable, entire amount goes to bonds (no PIC - Stock warrants)
Incremental Method for determining bond and warrant values
Used when can’t determine fair value of either warrants or bond
Use security for which FV can be determined
Remainder is allocated to other.
Ex: Bond issued at 101, but selling for 98 - difference is value of warrants
When do Identified Concentrations have to be disclosed?
All of the following criteria must be met:
- Concentration exists at the financial statement date.
- Concentration makes the entity vulnerable to the risk of a near-term severe impact.
- It is at least reasonably possible that the events that could cause the severe impact will occur in the near-term.
Calculate days sales in accounts receivable
Ending AR / (Sales / 365)
Where should policy for determining cash equivalents be reported?
Summary of Significant Accounting Policies
Calculation for Impairment Loss
Fair value - Carrying Value
Ignore undiscounted future cash flows
Calculate warranty expense when estimated to be 2% of total sales for year and amount given for actual expense incurred during year
Multiply sales X 2%
Ignore expense incurred
How is an increase in fair value of a derivative instrument not held for hedging purposes recognized?
Recognized in current year net income in the period during which the fair value changes.
What form of accountability do government-wide and fund financial statements focus on?
Government - Wide: Operational Accountability
Funds: Fiscal Accountability
When are revenues recognized in government fund?
Revenues are recognized when measurable and available. Revenues are accrued when earned. Revenues must not only be earned but also collected (generally) within 60 days of year end for recognition in governmental FUND financial statements.
What are special revenue funds?
Special revenue funds account for the proceeds of specific revenue sources (other than debt service or for major capital projects) that are legally restricted or committed to expenditures for specific purposes.
Determine current year R&D expense when one machine is good for R&D project only and another machine is good for R&D and production with life of 10 years
Expense entire amount of machine good for R&D only and add depreciation amount for machine that can be used after in production
Determine goodwill impairment under IFRS for cash-generating unit
Greater of CGU’s fair value less costs to sell and its value in use (PV of future cash flows expected from the CGU) minus carrying value
When purchasing a bond, the present value of the bond’s expected net future cash inflows discounted at the market rate of interest provides what information about the bond?
Price.
The issue price of a bond is a function of two different cash flows, one a lump sum and the other a regular stream of payments.
How is a gain/loss from change in exchange rates between the contract date and payment date accounted for when US company purchases goods.
Gains and losses resulting from foreign exchange transactions that are an “extension” of the parent’s domestic operations are included as a component of “income from continuing operations” in the period in which they occur.
How are deferred tax assets/liabilities reported for IFRS?
Under IFRS, all deferred tax assets and deferred tax liabilities are netted and the net amount is reported as non-current on the balance sheet.
How are underfunded postretirement benefit plans reported?
Underfunded plan reports current liability to the extent that the benefits payable in the next 12 months exceed the fair value of the plan assets. The balance is reported as a noncurrent liability.
How should a nongovernmental, not-for-profit organization report donor-restricted cash contributions for long-term-purposes in its statement of cash flows?
Financing activity inflow.
Cash contributions restricted by the donor for long-term purposes must be reported as a cash inflow in the financing activities section of the statement of cash flows, segregated from other financing activities.
When a purchase order is released, a commitment is made by a governmental unit to buy a computer to be manufactured to specifications for use in property tax administration. This commitment should be recorded in the general fund as what?
Encumbrance
Under modified accrual accounting, the issuing of a purchase order (commitment to purchase) is recorded for internal bookkeeping as:
DR Encumbrance
CR Budgetary Control
The reconciliation of governmental fund financial statements to a government-wide presentation would most likely be found in a city’s . . .
Basic Financial Statements
The reconciliation of governmental fund financial statements to government-wide presentations would be found on either the face of the financial statements or in accompanying schedules with expanded disclosure in the notes to the financial statements, both of which are components of the Basic Financial Statements defined by GASB #34.
Where is accumulated other comprehensive income reported?
On Balance Sheet
What are Governmental Funds?
GRaSPP General Fund (Police) Special Revenue Fund Debt Service Funds Capital Projects Funds Permanent Fund
What are Proprietary Funds?
SE
Internal Service Fund
Enterprise Funds (Sewer)
What are Fiduciary Funds?
CIPPOE
- Custodial Funds
- Investment Trust Funds
- Private Purpose Trust Funds
- Pension (and Other Employee Benefit) Trust Funds
What are characteristics of Governmental Funds?
- Current assets and current liabilities
- Modified accrual
- Emphasis on annual budget cycle
- Time horizon limited to one year
- Revenue recognized only when it can be spent or is available for expenditure within the annual time horizon
- No fixed assets
What are characteristics of Proprietary and Fiduciary Funds?
- Economic resources
- Accrual accounting
- Regular commerce accounting
- Unlimited time horizon
- Current and non-current assets and liabilities are recognized
- Revenue recognized when earned expenses recognized when incurred
When is revenue recognized with modified accrual accounting?
Revenue is recognized when it becomes available and measurable.
How is a gain that is both unusual and infrequent reported under US GAAP?
As Income from continuing operations
How should the effect of a change in accounting principle that is inseparable from the effect of a change in accounting estimate be reported?
As a component of income from continuing operations.
When the effect of a change in accounting principle is inseparable from the effect of a change in accounting estimate, the reporting treatment for the overall effect is as a change in estimate.
A customer places an order and asks that the company wait 60 days to deliver the product. When should the company recognize revenue?
When product is delivered to the customer.
Delivery to the customer ensures that control of the inventory is transferred to the customer, and as a result, the company has satisfied the performance obligation and can record revenue.
How to determine change when switching from FIFO to weighted average method for inventory.
Only use the previous period - it is a balance sheet account, so the balance is cumulative.
What is included in Other Comprehensive Income under IFRS?
Pension gain/loss
Unrealized gain/loss on available-for sale debt securities
Foreign currency translation gains/losses
Effective portion of a cash flow hedge gain/loss
Revaluation gain/loss
If a company sells their building and leases back the building under a finance lease, how is the sale-leaseback considered?
A failed sale.
Rule: If the underlying lease in a sale-leaseback is a finance lease, it is considered equivalent to a repurchase and will be considered a failed sale.
Assuming that no direct costs are involved, what are the components of the lease receivable for a lessor involved in direct-financing lease?
The minimum lease payments plus residual value.
Lessors recording a lease receivable for a direct-financing lease should include the minimum lease payments PLUS any residual value. This is because the lessor can also expect to collect the residual value from the lessee at the culmination of the lease.
At the inception of a finance lease, the residual value expected to be owed at the end of the lease term should be:
Included as part of minimum lease payments at present value.
The residual value expected to be owed at the end of the lease term is, in effect, an additional lease payment and must be included in the calculation of the present value of the minimum lease payments.
How is a security deposit on a lease handled?
As a liability until refunded to the lessee.
If a security deposit is refundable to the lessee, the lessor has to book the deposit as a liability until the point it is returned to the lessee.
What are five criteria for finance lease?
- Title is transferred to lessee
- Lessee has option to buy the leased asset at the end of the lease at an amount viewed as a bargain
- Lease term is for the major part of the useful life of the asset (75%)
- Present value of the minimum lease payments is at least 90% of the fair value of the leased asset.
- Asset is specialized in nature and has no alternative use to the lessor.
How to determine if present value of lease payments is 90% of the fair value
Determine present value of lease payments
Use lower of implicit (stated by lessor) or incremental (market rate used by banks) interest rate to get Annuity present value factor
Multiply lease payment by annuity PVF
This is present value - divide it by fair value of the lease
If 90% or more, lease will be considered a finance lease
What is original journal entry for lessee when entering a finance lease?
Dr Right of use asset
Cr Lease liability
Journal entry for first lease payment when ordinary annuity finance lease
Dr Interest expense
Dr Lease liability
Cr Cash
Journal entries for annuity due finance lease payments
When first payment made: Dr Lease Liability Cr Cash At end of period - to accrue interest Dr Interest Expense Cr Lease liability When next payment made Dr Lease Liability Cr Cash
Journal entry for finance lease amortization
At end of year
Dr Amortization expense
Cr Right of Use asset
To determine amount - divide Right of Use asset by Shorter of lease term or asset’s useful life
How do you calculate the lease payment the lessor will charge lessee?
Fair value of equipment
- Present value of the residual value
Divided by Present value factor of an ordinary annuity
Same calculation if guaranteed residual value or unguaranteed residual value
Lessee’s calculation of the Present Value of the minimum lease payments
Annual lease payment due
times Present Value Fact of an ordinary annuity
Plus
Difference between Guaranteed Residual Value and Expected Residual value TIMES Present Value Factor of a single payment
Equals amount to capitalize as the Lease Liability
Skip second step if UNguaranteed residual value
Determine lower of cost or market on inventory
Take the middle of:
1. Replacement Cost
2. Selling price - Cost of completion = NRV
3. NRV - Profit margin
Compare that to cost
Lower of the two is lower-of-cost-or-market for inventory
If IFRS - it is lower of cost or NRV
Calculate price index
Ending Inventory at current year dollar
Divided by
Ending inventory at base year dollar
Determine cost of goods sold using the gross profit method
Sales - Gross Profit = COGS
What is the Conventional Retail Method for inventory and how is it calculated?
Converts inventory at retail to inventory at cost using a cost/retail ratio. Markups are included in the ratio, but markdowns are not.
Beginning inventory + Purchases + Markups = Available for sale (do this at cost & retail)
Divide AFS at cost by AFS at retail = Cost/Retail ratio
Available for sale - sales - markdowns = ending inventory at retail
Ending inventory at retail divided by cost/retail ratio = lower of cost or market
What is gross profit percentage?
Gross profit percentage is profit divided by sales.
If need to determine COGS, take gross profit percentage - 1 and multiply total sales by that number.
Is excavation costs part of the land cost or building cost?
Building - if just leveling the land, it is part of the land.
How are fixed assets reported for GAAP and IFRS?
GAAP - Cost Method
- Historical cost - Acc. Dep. - Impairment = Carrying value
IFRS: Cost Method or Revalue Method
- Fair value on revalue date - subsequent acc. dep. - subsequent impairment
Initial loss on income statement
If gain later, portion up to previous loss amount goes on income statement - remainder is OCI
If initial gain, it is OCI.
Cannot have more gain on IS than losses.
Determine amount of interest to be capitalized for building construction
During the construction, the amount of expenditures incurred times the interest rate is the amount to be capitalized.
Do not exceed amount of insurance incurred.
Calculate sum of years’ digits depreciation
(Cost - salvage value) x (remaining life at beginning of year divided by sum of years’ digits (n(n+1)/2)
Calculate double-declining balance depreciation
Book value x 2 x (1/Useful life)
Do not consider salvage value
According to FASB conceptual framework, for financial reporting to be useful, it must:
- Provide information useful for making business and investment decisions.
- Be understandable by those who have a reasonable knowledge of business and economic activities and who are willing to study the information carefully.
How are retained earnings reported in consolidated financial statements?
Only the parent’s retained earnings are reported.
The sub’s RE are eliminated in consolidation.
What financial statements is a not-for-profit required to produce?
- Statement of Financial Position
- Statement of Activities
- Statement of Cash Flows
How does the purchase of treasury stock affect Total Stockholder’s Equity and Earnings Per Share?
Decrease in Stockholder’s Equity
Increase in Earnings Per Share
Calculate pension expense
Service cost \+ Interest cost - Return on plan assets = Pension expense Amount contributed is not a factor
How is a contribution with a pledge for additional funds treated when there is a condition that it is to be used to build a building treated when the initial contribution is received?
The initial contribution is a refundable advance, not revenue. The pledge is not recorded until all conditions are satisfied.
What account would government used when police cars are received?
Capital Outlay Expenditures for dollar amount of cars received
Management’s evaluation of the entity’s ability to continue as a going concern should . . .
Occur for each annual and interim reporting period.
How is net income reported on consolidated financial statements?
Parent’s net income less goodwill impairment (if any).
How do we account for a Deferred Tax Asset that is determined to not be realized in the future?
Write down the deferred tax asset.
Dr. Income tax expense
Cr Deferred Tax Valuation Allowance
