FAR SEC 4 Flashcards
What is the threshold for reporting sales to a single external customer?
Reporting of sales to a single external company is required if the amount of sales is 10% or more of total revenue.
What is the threshold for reporting sales to foreign countries?
No percentage threshold is established for practicable disclosures of geographic information.
1) An entity must disclose revenues attributable to all foreign countries in total.
2) Separate disclosure of revenues from external customers attributed to a single foreign country is also required if those revenues are material. These disclosures are intended to provide information about reliance on particular markets or customers.
Does GAAP require a particular format and location in the financial statements fort the disclosure of a summary of accounting policies?
No. GAAP express a preference for, but do not require, including a summary of accounting policies in a separate section preceding the notes or in the initial note.
How should accounting policies be reported in the financial statements.
A summary of accounting policies preferably SHOULD be included in a separate section preceding the notes or in the initial note.
HOWEVER, GAPP does not require any disclosure of significant accounting policies!
What is the difference between disclosure and recognition?
A disclosure is additional information attached to an entity’s financial statements, usually as explanation for activities which have significantly influenced the entity’s financial results.
Recognition is the recordation of a business transaction in an entity’s accounting records. For example, a loss can be recognized on a lower of cost or market analysis, thereby recording the loss in the accounting records. Or, a sale transaction is recognized by recording revenue in the accounting records.
Disclosure of an event can be accomplished by mentioning an event in the notes without giving quantitative details, whereas recognition requires adjustment to the relevant financial statement line items.
When does an entity recognize adjusting events?
An entity recognizes in the financial statements adjusting events after the reporting period.
What are adjusting events?
Adjusting events are events occurring after the reporting date that provide evidence of conditions that existed at the end of the reporting period. Non-adjusting events are events occurring after the reporting date that do NOT provide evidence of conditions that existed at the end of the reporting period.
Where in its financial statements should a company disclose information about its concentration of credit risks?
The notes to the financial statements.
How is fair market valuation of an asset using prices in the most advantageous market done?
If there is a principle market for the asset, the price in the principle market is used without adjustment for transaction costs. If the asset trades in multiple markets, the most advantageous market is used, i.e., the market with the maximum price without adjusting for transaction costs.
What is credit risk from an accounting standpoint?
Credit risk is the risk of accounting loss from a financial instrument because of the possible failure of another party to perform. An entity must disclose most significant concentrations of credit risk arising from instruments. Group concentrations arise when multiple counterparties have similar characteristics that cause their ability to meet obligations to be similarly affected by change in conditions. An example of such a group is an industry.
For reporting purposes, what are subsequent events?
Subsequent events are events or transactions that occur after the balance sheet date and prior to the issuance (or availability for issuance) of the financial statements. Certain subsequent events or transactions provide evidence about conditions at the date of the balance sheet, including the estimates inherent in statement preparation. Other subsequent events or transactions provide evidence about conditions that did not exist at the date of the balance sheet.
What is segment reporting?
Segment reporting includes interim financial reports and annual financial statements of public business entities. The objective is to provide information about the different business activities of the entity and the economic environments in which it operates.
When should information be reported for segment reporting?
Ordinarily, information is to be reported on the basis that is used internally for evaluating performance and making resource allocation decisions. This approach aligns external and internal reporting.
Disclosure of information is not required if it is not prepared for internal use, and reporting it would not be feasible.
What are three characteristics of an operating segment?
An operating segment has three characteristics:
1) It is a business component of the entity that may recognize revenues and incur expenses.
2) Its operating results are regularly reviewed by the entity’s chief operating decision maker (CODM) for the purpose of resource allocation and performance assessment.
3) Its discrete financial information is available.
What are the necessary and sufficient conditions for aggregating operating segments?
Operating segments may be aggregated if
1) Doing so is consistent with the objective;
2) They have similar economic characteristics; and
3) They have similar products and services, production processes, classes of customers, distribution methods, and regulatory environments.
Full Disclosure Principle
According to the full disclosure principle, understandable information capable of affecting user decisions should be reported. The financial statements are the primary means of disclosure. However, almost all accounting pronouncements require additional disclosures in the notes. Because memorizing them is virtually impossible, candidates should anticipate the disclosure requirements before reading the summary, outline, or actual pronouncement. The appropriate perspective is that of an informed creditor or investor.
Accounting Policies
Accounting policies are the specific principles and the methods of applying them used by the reporting entity. Management selects these policies as the most appropriate for fair presentation of financial statements.
Must businesses and not-for-profit entities disclose all significant accounting policies?
Yes. Business and not-for-profit entities must disclose all significant accounting policies as an integral part of the financial statements.
Is disclosure of accounting policies required in the unaudited interim financial statements?
It depends. Disclosure of accounting policies in unaudited interim financial statements is not required when the reporting entity has not changed its policies since the end of the preceding fiscal year. [NOTE: textbook is unclear on this point, but it seems obvious from what is said that reporting a change in significant accounting principle that has occurred after the end of the preceding fiscal year would be required.]
What is the preferred presentation (disclosure method) for significant accounting policies?
The preferred presentation is a summary of accounting policies in a separate section preceding the notes or in the initial note.
What are the two main elements that must be disclosed about the significant accounting policies?
The disclosure should include accounting (1) principles adopted and (2) the methods of applying them that materially affect the financial statements.
Disclosure of accounting policies extends to which three broad types of accounting policies?
Disclosure extends to accounting policies that involve:
1) A selection from existing acceptable alternatives,
2) Policies unique to the industry in which the entity operates, even if they are predominantly followed in that industry, and
3) GAAP applied in an unusual or innovative way.
What are 6 specific types of accounting policies are commonly required to have disclosure?
Certain disclosures about policies of business entities are commonly required. These items include the following:
1) Basis of consolidation
2) Depreciation methods
3) Amortization of intangibles
4) Inventory pricing
5) Recognition of revenue from contracts with customers
6) Recognition of revenue from leasing operations
Should disclosure of accounting polices avoid duplicating details presented elsewhere?
Yes. Disclosure of accounting policies should not duplicate details presented elsewhere.
For example, the summary of significant policies should not contain the composition of plant assets or inventories or the maturity dates of noncurrent debt.
What is segment reporting?
Segment reporting includes interim financial reports and annual financial statements of public business entities.
What is the objective of segment reporting?
The objective of segment reporting is to provide information about the different business activities of the entity and the economic environments in which it operates.
What is the basis for determining what kind of information is included in segment reporting disclosures?
Ordinarily, information is to be reported on the basis that is used internally for evaluating performance and making resource allocation decisions. This approach aligns external and internal reporting.
For segment reporting, when is disclosure of information not required?
Disclosure of information is not required if it is not prepared for internal use, and reporting it would not be feasible.
What are the 3 characteristics of an operating segment?
1) It is a business component of the entity that may recognize revenues and incur expenses.
2) Its operating results are regularly reviewed by the entity’s chief operating decision maker (CODM) for the purpose of resource allocation and performance assessment.
3) Its discrete financial information is available.
What are the 3 necessary and sufficient conditions for aggregating operating segments?
Operating segments may be aggregated if
1) Doing so is consistent with the objective;
2) They have similar economic characteristics; and
3) They have similar products and services, production processes, classes of customers, distribution methods, and regulatory environments.
What are the three individually sufficient conditions (one only need apply) for reportable segments?
Reportable segments are operating segments that must be separately disclosed if one of the following quantitative thresholds is met:
1) Revenue test. Reported revenue, including sales to external customers and intersegment sales or transfers, is at least 10% of the combined revenue (external and internal) of all operating segments.
2) Asset test. Assets are at least 10% of the combined assets of all operating segments.
3) Profit (loss) test. The absolute amount of reported profit or loss is at least 10% of the greater, in absolute amount, of either the combined reported profit of all operating segments that did not report a loss or the combined reported loss of all operating segments that did report a loss.
What is the revenue test for reportable segments?
Revenue test. Reported revenue, including sales to external customers and intersegment sales or transfers, is at least 10% of the combined revenue (external and internal) of all operating segments.
This is 1 of 3 necessary & sufficient conditions for segment reportability.
What is the asset test for reportable segments?
Asset test. Assets are at least 10% of the combined assets of all operating segments.
This is 1 of 3 necessary & sufficient conditions for segment reportability.
What is the profit (loss) test for reportable segments.
Profit (loss) test. The absolute amount of reported profit or loss is at least 10% of the greater, in absolute amount, of either the combined reported profit of all operating segments that did not report a loss or the combined reported loss of all operating segments that did report a loss.
This is 1 of 3 necessary & sufficient conditions for segment reportability.
What is the value of the percentage threshold used for each of the 3 tests for segment reportability?
(greater than or equal to) 10% of revenue, assets, or absolute profit(loss)
What are the 3 exceptions to the 3 segment reportability tests?
1) If an operating segment does not meet any threshold, management still may report it if such information would be useful.
2) If the total external revenue of the operating segments meeting the quantitative thresholds is less than 75% of consolidated revenue, additional operating segments are identified as reportable until the 75% level is reached.
3) As the number of reportable segments increases above 10, the entity may decide that it has reached a practical limit.
What can happen if an operating segment doesn’t meet any threshold?
If an operating segment does not meet any threshold, management still may report it if such information would be useful.
What procedure is followed if the total external revenue of the operating segments meeting the quantitative thresholds is less than 75% of consolidated revenue?
If the total external revenue of the operating segments meeting the quantitative thresholds is less than 75% of consolidated revenue, additional operating segments are identified as reportable until the 75% level is reached.
What is the “all other” segment category?
Information about nonreportable activities and segments is combined and disclosed in an all other category as a reconciling item.
What option does the entity have when the number of reportable segments exceeds 10?
As the number of reportable segments increases above 10, the entity may decide that it has reached a practical limit.
Operating segments may be aggregated if ______________ (3 elements).
1) Doing so is consistent with the objective;
2) They have similar economic characteristics; and
3) They have similar products and services, production processes, classes of customers, distribution methods, and regulatory environments.
What general information is disclosed for each reportable segment (2 elements)?
General information disclosed includes
1) The factors used to identify reportable segments, such as the basis of organization, and
2) Revenue-generating products and services.
What measure of profit or loss and total assets is reported for each reportable segment (8 elements)?
A measure of profit or loss and total assets should be reported. Moreover, the following amounts should be disclosed if they are included in the measure of profit or loss reviewed by the CODM:
1) Revenues from external customers and other operating segments,
2) Interest revenue and expense,
3) Depreciation,
4) Depletion and amortization,
5) Unusual items,
6) Equity in the net income of equity-based investees,
7) Income tax expense or benefit, and
8) Other significant noncash items.
What are the two major categories of disclosures for each reportable segment?
1) General information
2) A measure of profit or loss and total assets
What is the CODM?
Chief operating decision maker (CODM)
How is external information reported measured for reportable segments?
The external information reported is measured in the same way as the internal information used for resource allocation and performance evaluation. The amount of a reported segment item, such as assets, is the measure reported to the CODM.
What reconciliations are reported for reportable segments?
Reconciliations to the consolidated amounts must be provided for the total reportable segments’ amounts for significant items of information disclosed. These significant items include (1) revenues, (2) profit or loss, (3) total assets, etc.
What restatements may occur for reportable segments (2 elements)?
1) Restatement of previously reported information is required if changes in internal organization cause the composition of reportable segments to change.
2) The entity may choose not to restate segment information for earlier periods, including interim periods. Segment information for the year of the change then must be disclosed under the old basis and the new basis of segmentation if feasible.
For reportable segments, when is restatement of previously reported information required?
Restatement of previously reported information is required if changes in internal organization cause the composition of reportable segments to change.
If a reportable segment must restate previously reported information, what is the alternative to restating segment information for earlier periods?
The entity may choose not to restate segment information for earlier periods, including interim periods. Segment information for the year of the change then must be disclosed under the old basis and the new basis of segmentation if feasible.
When must entity-wide disclosures be provided?
Such disclosures must be provided only if they are not given in the reportable operating segment information.
What are the 4 entity-wide disclosures?
1) Such disclosures must be provided only if they are not given in the reportable operating segment information.
2) Revenues from external customers for each product and service (or each group of similar products and services) are reported if feasible based on the financial information used to produce the general-purpose financial statements.
3) The following information about geographic areas is also reported if feasible:
-External revenues attributed to the home country and to all foreign countries,
-Material external revenues attributed to an individual foreign country,
-The basis for attributing revenues from external customers, and
-Certain information about assets.
4) If 10% or more of revenue is derived from sales to any single customer, (1) that fact, (2) the amount from each such customer, and (3) the segment(s) reporting the revenues must be disclosed. Single customers include entities under common control and each federal, state, local, or foreign government.
In entity-wide disclosures, The following information about geographic areas is also reported if feasible (4 elements).
1) External revenues attributed to the home country and to all foreign countries,
2) Material external revenues attributed to an individual foreign country,
3) The basis for attributing revenues from external customers, and
4) Certain information about assets.
In entity-wide disclosures, how are revenues from external customers reported?
Revenues from external customers for each product and service (or each group of similar products and services) are reported if feasible based on the financial information used to produce the general-purpose financial statements.
What are the single customer thresholds and reporting requirements for entity-wide disclosures (3 elements)?
If 10% or more of revenue is derived from sales to any single customer, (1) that fact, (2) the amount from each such customer, and (3) the segment(s) reporting the revenues must be disclosed. Single customers include entities under common control and each federal, state, local, or foreign government.
What is the best qualitative characteristic of interim financial reports (or other interim information)?
For many reasons, the usefulness of interim financial information is limited. Thus, their best qualitative characteristic is timeliness.
Does GAAP require reporting of interim financial information?
No. But GAAP must be applied when entities report such information, including when publicly traded companies issue summarized interim information. Moreover, federal securities law requires certain entities that meet the definition of an issuer to report interim quarterly information on Form 10-Q.
Is GAAP required for the interim financial reports?
Yes, always. Although interim financial reporting is optional for some entities, entities electing to file interim reports must follow GAAP in the report preparation.
Each interim period is treated primarily as an integral part of _____________.
Each interim period is treated primarily as an integral part of an annual period
Ordinarily, the results for an interim period should be based on the same accounting principles the entity uses___________.
Ordinarily, the results for an interim period should be based on the same accounting principles the entity uses in preparing annual statements, but certain principles may require modification at interim dates.
