FAR Flashcards
Name the single source of authoritative nongovernmental U.S. GAAP
The FASB Accounting Standards Codification (ASC)
What is the Private Company Council?
The Financial Accounting Foundation (FAF) created the PCC to improve standard setting for privately held companies in the US
GAAP where approriate, to make private company financial statements more relevant, less complex, and cost beneficial.
Accounting alternatives for private companies are incorporated into the relevant sections of the ASC.
The International Financial Reporting Standards include what standards?
All four are included:
International Accounting Standards (IAS)
International Financial Reporting Standards (IFRS)
IFRIC Interpretations
SIC Interpretations
Who are the primary users of general purpose financial reports?
Existing and potential investors, lenders and other creditors.
Name the fundamental qualitative characteristics of useful financial information
Relevance and faithful representation
Name the three elements of relevance
Predictive Value
Confirming Value
Materiality
Name the three elements of faithful representation
Neutrality
Completeness
Freedom from error
Name the enhancing qualitative characteristics of financial information
Comparability, verifiability, timeliness, and understandability
Name the pervasive constraint on the information provided in financial reporting
Cost Constraint:
The benefits of reporting financial information must be greater than the costs of obtaining and presenting the information.
According to SFAC No. 5, what should a full set of financial statements include?
Statement of Financial Position (Balance Sheet) Statement of Earnings (Income Statement) Statement of Comprehensive Income Statement of Cash Flows Statement of Changes in Owners' Equity
List the 10 elements of financial statements according to SFAC No. 6
CREG and LALEID
Comprehensive Income
Revenues
Expenses
Gains
and
Losses
Assets
Liabilities
Equity (of Net Assets)
Investments by Owners
Distributions to OwnersName the five elements of present value measurement per SFAC No. 7
EVTUO
Estimate of future cash flows
Expectations about timing Variation of future cash flows
Time value of money (the risk-free rate of interest)
The price for bearing Uncertainty
Other factors (e.g., liquidity issues and market imperfections)
Describe the expected cash flow approach for present value computations
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.
Name the expense that each of the following unexpired costs turn into as they expire:
- Inventory
- Unexpired (prepaid) cost of insurance
- Net book value of fixed assets
- Unexpired cost of patents
- Cost of goods sold
- Insurance expense
- Depreciation expense
- Amortization expense
Are gains and losses on the disposal of assets shown on a “gross basis” (i.e. where both the sale proceeds and the net book value of the disposed asset are reported) or on the “net basis” (i.e. where only the difference between the sale price and the net book value of the disposed asset is reported?
Gains and losses are reported at their net amounts (i.e. proceeds less net book value)
How does a “multiple step” income statement differ from a “single-step” income statement?
A Multiple step income statement reports operating revenues and expenses separately from nonoperating revenues and expenses and other gains and losses. On a single-step income statement’s presentation of income from continuing operations, total expenses are subtracted from total revenues without separation between operating and nonoperating revenues and expenses.
What is meant by a “classified” balance sheet?
A classified balance sheet distinguishes current and non-current assets and liabilities.
List the steps associated with the five-step approach to revenue recognition
Step 1: Identify the contract with the customer.
Step 2: Identify the separate performance obligations in the contract
Step 3: Determine the transaction price
Step 4: Allocate the transaction price to the separate performance obligations.
Step 5: Recognize revenue when or as the entity satisfies each performance obligation.
What criteria must be met in order to recognize revenue on a contract?
All the parties have approved the contract and are committed to performing their obligations
The rights of each party are identified
Payment terms can be identified
Future cash flows are expected to change a s a result of the contract (commercial substance).
It is probable that the entity will collect substantially all of the consideration.
What criteria must be met in order for a performance obligation to be considered distinct?
The promise to transfer the good/service is separately identifiable from other goods or services in the contract.
The customer can benefit from the good/service independently or when combined with the customer’s own available resources.
What is the transaction price and what factors should be accounted for when determining the transaction price?
The transaction price is the amount of consideration an entity expects to received in exchange for transferring goods/services to a customer.
The price should take into account (if applicable):
- Variable consideration
- Significant financing
- Noncash considerations
- Consideration payable to the customer
Describe how allocation works when a contract contains more than one performance obligation.
For contracts with more than one performance obligation, the overall contract transaction price should be allocated among each obligation based on the stand-alone selling price expected for satisfying each unique obligation (along with applying any discounts and/or variable consideration).
Describe how revenue recognition differs when performance is satisfied over time versus at a point in time.
Revenue is recognized based on measuring progress toward completion using either output or input methods when the performance obligation is satisfied over time.
In order to recognize revenue when performance is satisfied at a point in time, the customer must obtain control of the asset.
Distinguish between the treatment of costs incurred in obtaining a contract as assets or as expenses.
If an entity expects to recover these costs through the performance of the contract, the entity will treat them as assets. If the costs are incurred regardless of whether the contract is obtained, they are treated as expenses.
How do control and revenue recognition differ when an entity acts as a principal versus when it acts as an agent?
A principal has control over the good/service prior to transfer, and revenue equal to expected gross consideration will be recognized.
An agent does not have control, and revenue equal to the agent’s feed/commission will be recognized.
Describe the accounting treatment for forwards and options related to repurchase agreements.
Forward or Call Option
- Repurchase price < Original Price (lease)
- Repurchase price > or = Original selling Price (financing arrangement)
Put Option
- Repurchase Price < Original selling price
- – Customer has a significant economic incentive to exercise the right (lease)
- – Customer does not have significant economic incentive
- Repurchase price > or = Original selling price
- – Repurchase price > Expected market value of the asset (financing arrangement)
- – Repurchase price < or = Expected market value of the asset and customer does not have a significant economic incentive to exercise the right (sale with a right of return)
What criteria must be met in order for a customer to obtain control in a bill-and-hold arrangement?
- There must be a substantive reason for the arrangement
- The product is separately identified as belonging to the customer
- The product is ready (in its current condition) for transfer to the customer
- The entity (seller) cannot use the product or direct it to another customer
Define a consignment arrangement, and identify indicators of such a arrangement.
A consignment arrangement exists when a dealer/distributor is tasked by an entity with selling the entity’s products to customers.
Indicators of a consignment arrangement include:
- The entity controls the product until a specified event occurs (such as a sale to a customer)
- The dealer/distributor does not have an unconditional obligation to pay the entity for the product.
- The entity has the authorization to require the return of the product or transfer the product to another party.
When is a warranty considered a separate performance obligation within a contract?
If a customer has the option to purchase a warranty separately or if the warranty provides a service that is beyond the assurance that the product will comply with agreed upon specifications, the warranty will be treated as a separate performance obligation.
A portion of the overall transaction price should then be allocated to the warranty obligation.
Describe refund liabilities and when it is appropriate to book them
A refund liability represents the amount of money an entity does not expect to be entitled to receive. Refund liabilities should be recognized in situations in which customers have a right to return and the entity anticipates having to return a portion of the consideration already received from customers.
Identify two methods of revenue recognition for long-term construction type contracts under US GAAP and IFRS
US GAAP
- Percentage-of-completion
- Completed contract
IFRS
- Percentage-of-completion
- Cost recovery
For long-term construction-type contracts, when are losses recognized?
Immediately when discovered, regardless of the method used for revenue recognition.
State the formula for recognizing the gain/loss on long-term construction-type contracts under the percentage-of-completion method
Total Cost to date/Total estimated cost of contract X Total estimated gross profit - Gross profit recognized to date
When are profits recognized under the cost recovery method?
Profits are recognized only after all costs have been recovered.
Name the types of entities that may be considered for reporting according to the rules for discontinued operations.
- Component of an entity
- Group of components of an entity
- Business
- Nonprofit activity
In reporting discontinued operations, how is a “component” of an entity defined under US GAAP and IFRS?
- An operating segment
- A reportable segment
- A reporting unit
- A subsidiary
- An asset group
Define the following terms as they are used in reporting discontinued operations:
Business
Nonprofit activity
A business is an integrated set of activities and assets that is conducted and managed for the purpose of providing a return to investors or other owners, members, or participants.
A nonprofit activity is an integrated set of activities and assets that is conducted and managed for the purpose of providing benefits, other than goods or services at a profit, to fulfill an entity’s purpose or mission.
What conditions must be present for a disposal to be reported in discontinued operations?
A disposal of a component, group of components, business activity, or a nonprofit activity is reported in discontinued operations if the disposal represents a strategic shift that has or will have a major effect on an entity’s operations and financial results.
The gain (loss) from discontinued operations can consist of . . .
An impairment loss, a gain (loss) from actual operations, and a gain (loss) on disposal
How do we account for subsequent increases in the fair value of a discontinued component?
A gain is recognized for the subsequent increase in fair value minus costs to sell (but not in excess of the previously recognized cumulative loss). The gain is reported in the period of increase.
How is a change in an accounting estimate reported?
Prospectively
How is a change in accounting principle reported?
- Cumulative effect of change is included in the retained earnings statement as an adjustment of the beginning retained earnings balance of the earliest year presented
- Prior period financial statements are restated if presented
What are the special exceptions to the general rule for the reporting of changes in an accounting principle?
How are these exceptions reported?
Changes where it is impracticable to estimate the cumulative effect adjustment, e.g., a change to LIFO from another method of inventory pricing under US GAAP or a change in depreciation methods.
Such exceptions are accounted for prospectively, like a change in accounting estimate.
Name the three types of accounting changes
- Change in accounting principle
- Change in accounting estimate
- Change in accounting entity
Under US GAAP, how is a change in the accounting entity reported?
All current and prior period financial statements presented are restated.
How are error corrections reported?
Reported as prior period adjustments to retained earnings and all comparative financial statements presented are restated.
Define comprehensive income.
Change in equity (net assets) that results from transactions and other events and circumstances from nonowner sources.
Identify six items included in other comprehensive income
PUFIER
Pension adjustments
Unrealized gains and losses on available-for-sale debt securities
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
Instrument-Specific Credit Risk for liabilities (using FV) and their changes in FV
Effective portions of cash flows hedges
Revaluation surpluses (IFRS only)
List the two formats acceptable for reporting comprehensive income. How does this compare with IFRS?
- Statement of comprehensive income (single-statement approach)
- Statement of income followed by separate statement of comprehensive income (two-statement approach)
US GAAP and IFRS both allow the same two presentations.
List some disclosure requirements for comprehensive income
- Tax effects of each component included in current “other comprehensive income”
- Changes in the accumulated balances of components of “other comprehensive income”
- Total accumulated other comprehensive income
- Reclassification adjustments between other comprehensive income and net income
What four situations require adjusting journal entries in order to properly present financial statements on the accrual basis?
- Cash is received before the performance obligation is met (deferred revenues).
- Cash is paid before the expense is incurred (prepaid expenses)
- Cash is received after the performance obligation has been met (receivables).
- Cash is paid after the expense has been incurred (accrued expenses).
What is the journal entry to record the earning of deferred revenue?
Debit Deferred revenue
Credit Revenue
What are the three rules for recording adjusting journal entries?
- Adjusting journal entries must be recorded by the end of the entity’s fiscal year, before the preparation of financial statements.
- Adjusting journal entries never involve the cash account.
- All adjusting entries will hit one income statement account and one balance sheet account.
Identify the contents of the Summary of Significant Accounting Policies note to the financial statements
Identify and describe:
- Measurement bases used in preparing the financial statements
- Specific accounting principles and methods used
What are the US GAAP disclosure requirements for risks and uncertainties?
- Nature of operations
- Use of estimates in preparing the financial statements
- Significant estimates
- Current vulnerability due to certain concentrations
Under what circumstances is an entity considered a going concern?
An entity is considered a going concern if it is reasonably expected to remain in existence and be able to settle all its obligations for the foreseeable future.
What is management’s responsibility to evaluate a company’s ability to continue as a going concern?
Management must evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern for a reasonable period of time not to exceed one year beyond the issuance date of the financial statements.
Under what conditions would substantial doubt exist?
Substantial doubt exists when relevant conditions and events, considered in the aggregate, indicate it is probable (defined as “likely to occur”) that the entity will not be able to meet its obligations as they become due within one year from the financial statement issuance date (in contrast to the balance sheet date).
Management’s evaluation should be based on relevant conditions and events that are known and reasonably knowable at the financial statement issuance date.
What factors should management consider in evaluating whether there is substantial doubt about an entity’s ability to continue as a going concern?
- The entity’s current financial condition
- The entity’s obligations due or anticipated in the next year
- The funds necessary to maintain operations in the next year
- Both internal and external matters indicating financial difficulties for the entity.
If there is substantial doubt about an entity’s ability to continue as a going concern, management should then consider whether the entity has plans to mitigate these conditions and alleviate the substantial doubt. The mitigating effect should be evaluated on the basis of what two conditions?
- Whether it is probable that the plans will be effectively implemented
- Whether it is probable that the implemented plans will be successful in mitigating the adverse conditions
What are the three possible outcomes of management’s evaluation of the analysis of mitigating factors?
No substantial doubt exists, in which case no disclosures are required and financial statements are prepared using the going concern basis of accounting
Substantial doubt is alleviated, in which case the financial statements are prepared using going concern basis, with certain disclosures required.
Substantial doubt is not alleviated, in which case the financial statements are prepared using the going concern basis, with certain disclosures required.
What disclosures are required when substantial doubt is alleviated?
- The primary conditions or events that initially raised substantial doubt about the entity’s ability to continue as a going concern.
- Management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations.
- Management’s plans that alleviated the substantial doubt.
What disclosures are required when substantial doubt is not alleviated?
- The fact that there is substantial doubt about the entity’s ability to continue as a going concern within one year of the financial statement issuance date.
- The primary conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern
- Managements evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations.
- Management’s plans that are intended to mitigate the adverse conditions or events.
What is a subsequent event and what are the two categories of subsequent events?
An event or transaction that occurs after the balance sheet date but before the financial statements are issued or are available to be issued.
- Recognized subsequent events - Provide additional information about conditions that existed at the balance sheet date.
- Nonrecognized subsequent events - Provide information about conditions that occurred after balance sheet date and did not exist n the balance sheet date.
Define fair value
Fair value is the price to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date.
Describe the valuation techniques that can be used to measure the fair value of an asset or liability.
- Market approach - Uses prices and other relevant information from market transactions involving identical or comparable assets or liabilities to measure fair value.
- Income approach - Converts future amounts, including cash flows or earnings, to a single discounted amount to measure the fair value of assets or liabilities.
- Cost approach - Uses current replacement cost to measure the fair value of assets.
Describe the hierarchy of fair value inputs. Which inputs have the highest priority?
- Level 1 Inputs - Quoted prices in active markets for identical assets or liabilities.
- Level 2 Inputs - Inputs other than quoted market prices that are directly or indirectly observable for an asset or liability.
- Level 3 Inputs - Unobservable inputs for the asset or liability that reflect the entities’ assumptions and are based on the best available information.
Note: Level 1 inputs have the highest priority
Name the four required disclosures for segments of an enterprise.
- Operating segments
- Products and services
- Geographic areas
- Major customers
What are the characteristics of an operating segment?
Common characteristics of an operating segment include:
- the nature of the products and services
- the nature of the production processes
- the type or class of customer for the products and services
- the methods used to distribute the products or provide the services and
- if applicable, the nature of the regulatory environment (e.g., banking, insurance, or public utilities)
Name two quantitative thresholds used in identifying reportable operating segments.
- 10 percent “size” test
- 75 percent “reporting sufficiency” test
Describe the 10 percent test for identifying reportable segments
Revenue: Reported revenue, including both sales to external customers and intersegment sales or transfers, is 10 percent or more of the combined revenue, internal and external, of all operating segments.
Reported profit or loss: The absolute amount of its reported profit or loss is 10 percent or more of the greater, in absolute amount, of:
- The combined reported profit of all operating segments that did not report a loss
- The combined reported loss of all operating segments that did report a loss
Assets: Assets are 10 percent or more of the combined assets of all operating segments
Note: Must meet only one of the above
What is the 75 percent test for identifying reportable segments?
Combined external (consolidated) revenue of all reportable segments must be at least 75 percent of the total consolidated revenue of the entity.
The practical limit is 10 segments, but this is not a precise limit.
What are the disclosure requirements for reportable operating segments?
For each reportable segment, the entity must report:
- Identifying factors
- Products or services
- Profit or loss details
- Asset details
- Liability details (IFRS only)
- Measurement criteria
- Reconciliations
Describe Form 10-K and Form 10-Q. What level of assurance must be provided with the financial statements submitted in these forms?
Form 10-K: Filed annually by US registered companies. Includes a summary of financial data, MD&A, and AUDITED financial statements prepared using US GAAP
Form 10-Q: Filed quarterly by US registered companies. Includes unaudited financial statements, interim MD&A, and certain disclosures.
What are the guidelines for interim reporting?
- Use the same accounting principles that were used in the most recent annual report
- Allocate expenses to the interim period benefited
- Revenues are recognized in the period in which they are earned and realized or realizable
- A total for comprehensive income in condensed financial statements of interim periods
What income tax rate is used in interim financial reporting?
Use best estimate of effective tax rate to be applicable for full fiscal year on quarterly statements.
What are the general guidelines for OCBOA financial statement presentation?
- Different titles from accrual basis financial statements
- Required financial statements are the equivalent of the accrual basis balance sheet and income statement
- Financial statements should explain changes in equity accounts
- A statement of cash flows is not required
- Disclosures should be similar to GAAP financial statement disclosures
Define working capital
Working capital = Current assets - Current Liabilities
How is the current ratio computed?
Current ratio = Current assets / Current Liabilities
How is the quick ratio computed?
Quick Ratio:
Cash & cash equivalents + Short-term marketable securities + Receivables (net)
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Current liabilities
