Framework Flashcards
(27 cards)
what are the accounting rules and concepts (principals) –
o consistency o - conservatism o - cost/benefit o - matching o - allocation o - full disclosure o - recognition (booking an item) o - realization (selling an item)
what is the main difference between US GAAP and IFRS?
US GAAP is rules based, IFRS is principles based
IASB Framework: 4 Qualitative characteristics
- Relevance
- Reliability
- Understandability
- Comparability / Consistency
What are the 6 objectives of financial reporting?
- To provide information that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity.
- Information about a reporting entity’s economic resources and claims against the entity (Financial Position-B/S)
- Changes in economic resources and claims
- Financial performance reflected by accrual accounting (provides a better basis for assessing the entity’s past and future performance than does cash basis - Income Statement)
- Financial performance reflected by past cash flow (Cash Flows)
- Changes in economic resources and claims, NOT resulting from financial performance (ex: issuing additional stock)
What 2 characteristics make financial statements useful?
F/S must be BOTH Relevant and a Faithful representation
A full set of financial statements includes:
- statement of financial position (balance sheet)
- statement of earnings and comprehensive income (income statement)
- statement of cash flows
- statement of changes in owners equity (statement of investments by and distributions to owners)
10 key elements that make up financial statements
- assets
- liabilities
- equity
- investments by owners
- distributions to owners
- comprehensive income
- revenue
- expenses
- gains
- losses
definition of an asset
an economic resource that has a probable future benefit, one can obtain the benefit, and the transaction creating the benefit has already occurred
definition of a liability
an economic obligation in which one needs to use or transfer an asset, it can’t be avoided and the transaction has already occurred
equity consists if what 3 elements
- contributions / investments by owners
- distributions to owners (dividends)
- comprehensive income (all changes in equity other than “owner” sources)
- contributions / investments by owners
- distributions to owners (dividends)
- comprehensive income (all changes in equity other than “owner” sources)
[DENT]
- Derivative cash flow hedges
- Excess adjustment of Pension PBO and RV of plan assets at year end
- Net unrealized gains or losses on “available for sale” securities
- Translation adjustments for foreign currency
when do you recognize a financial statement element?
it meets the definition of an element (asset, liability)
- element is capable of being measured in monetary terms
- the item is relevant and faithful representation (useful)
ways to measure a financial statement element in monetary terms
- historical cost
- replacement cost
- fair market value (FMV) - per ASC 820 (FASB 157) “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between participants at the measurement date”
- Net realizable value (NRV)
- Present value (PV)
6 steps in applying the fair market value (FMV) approach
- Identify the asset or liability to be measured
- Determine the principal (highest volume) or most advantageous market (maximizes price or minimizes amt paid)
- Determine the valuation premise (in-use or in-exchange)
- Determine the appropriate valuation technique (market, income, cost)
- Obtain inputs for valuation (level 1, level 2, level 3)
- Calculate the fair value of the asset
fair market value (FMV) valuation techniques
[MIC]
- Market approach
- Income approcach
- Cost approach
inputs for FMV valuation, what do the 3 levels represent?
- Level 1 - uses quoted prices from active markets
- Level 2 - Directly or indirectly observable inputs, other than level 1 (yield curves, bank prime rates, interest rates, credit risks, default rates on loans) (2 similar buildings in a downtown market)
- Level 3 - Unobservable inputs are used if level 1 or 2 are not available (using financial forecasts or expected cash flow estimates) (ex. sub-prime mortgages)
Factors that must be considered when calculating present values
SFAC #7
- Risk
- Timing
- Interest
- Amount of cash flows:
- – Traditional approach - use most likely cash flow amounts
- – Expected approach - use weighted avg of different possibilities
Revenue is recognized when… (4 things)
- A binding arrangement exists (signed contract)
- Services rendered or delivery has occurred
- Fixed or determinable price exists
- Collection is reasonably assured
Expenses or losses are recognized as incurred based on what methodologies (3)
- Cause and effect - expenses that produce revenue at identifiable points in time can be matched directly to revenues
- Systematic and rational allocation - expenses that produce revenue over long periods of time are matched to those periods using a reasonable means of allocation (depreciation)
- Immediate recognition - some expenses cannot be directly related to specific benefits and are expensed as incurred (salaries of SG&A)
What are the 4 areas of disclosure with regard to risks and uncertainties?
- Nature of operations: major products, services and markets served
- Use and extent of estimates in preparation of financial statements
- Certain significant estimates, and their potential impact on the amount and value of assets, liabilities, gains and losses
- Current vulnerability associated with concentrations with respect to:
- – Particular customers, suppliers, lenders, grantors or contributors
- – Revenue from particular products, services or fund raising events
- – Available sources of supply of materials, labor, or services; or of licences or other rights used in the entity’s operations
- – Market or geographical area in which the entity conducts its operations
What are the 3 types of notes to the financial statements and what are they used for
they are used to ensure that all disclosures that are required under GAAP are made
- Summary of significant accounting policies
- Summary of significant assumptions - for prospective FS
- Other notes to the financial statements
IASB Framework - items under the Relevance principal
IASB Framework - items under the Relevance principal [Roger is PC and Materialistic] Relevance - Predictive value - Confirmatory value - Materiality
IASB Framework - items under the Reliability principal
Reliability
- Neutrality
- Faithful representation
- Substance over form
- Prudence (conservatism)
- Completeness
IASB Framework - 2 constraints for relevant and reliable information
timeliness
- benefit > cost
