Lecture 1: Conceptual Framework and IFRS

Question 1

Why is it important to know which Capital Maintenance Concept is being used?

Answer 1

when deciding what will be included in income (Comprehensive or NI) the CM concept being used must be known. It affects how fixed assets and investments are measured.

Question 2

Physical Capital Maintenance

Answer 2

only recognize an event when an asset is sold or a liability is settled (Measures the effects of price changes in a nominal or constant dollars) used with Fixed assets, which are not adjusted to MV. MV of fixed assets are difficult to verify and adjustments are based on mgmt estimates (Verifiability is met)

Question 3

Financial Capital Maintenance

Answer 3

recognize an event as a change in the value of an asset or liability occurs (recognize holding gains and losses–current GAAP) used with marketable securities which are reported at market value. An active market for investment securities provides numbers that are verifiable and not subject to mgmt bias (Verifiability)

Question 4

Fair Value Option (ASC 820)

What is required to be reported at FV?

Answer 4

1. Trading securities and AFS Securities (Unrealized G/L recognized on IS and BS OCI respectively)
2. Assets and Liabilities acquired under business combination
3. Impairment losses (CV of asset to FV)
4. Derivatives (Unrealized G/L generally reported in Income, CF Hedges accumulate holding G/L in OCI until recognized) share based payments and stock options

Question 5

Financial Instruments that do not qualify for FV Option (ASC 825)

Answer 5

1. Pension Plan, post retirement, other post employment benefits
2. Leases
3. Financial instruments that are components of equity
4. Share based payments and stock options.

Question 6

FV for Cash

Answer 6

Face Amount

Question 7

FV for Investment in Marketable securities

Answer 7

Market Value

Question 8

FV for AR

Answer 8

NRV

Question 9

FV for Inventory

Answer 9

Replacement Cost subject to Ceiling (Selling Price - Cost of Disposal- NRV) and Floor (NRV- Normal Profit Margin)

Question 10

FV Measurement Approach

6 steps: MAPTIC

Answer 10

1. Identify Asset or liability to be measured
2. Determine the principal or most advantageous market (Highest and Best Use)
3. Determine the valuation premise (in use or in exchange)
4. Determine the appropriate valuation technique (MIC, Market, Income, or Cost)
5. Obtain inputs for valuation (Level 1, 2, 3)
6. Calculate the Fair Value of the Asset

Question 11

Using CF information and PV in Accounting Measurements, what are the factors to be considered?

Answer 11

Risk, timing, interest, amount of cash flows (Traditional approach: uses most likely cash flow, Expected Approach: use weighted average of different possibilities)

exg. CF has a 10% chance of being $100, 60% chance of being $200, 30% chance of being $300
Traditional: $200 because it is most likely at 60%
Expected: ((0.1 X 100) + (0.6 X 200) + (0.3 X 300))=$220

Question 12

Under Accrual Accounting Revenue or gains are recognized when they are:

Answer 12

Earned: goods delivered and Realizable: collect cash or a claim to cash

Question 13

Under Accrual Accounting Expenses or losses are recognized when they are:

Answer 13

Incurred: economic benefit is used up (consumed) or assets lose future benefit (as incurred)

1. Cause and Effect: expenses matched to revenue, COGS when sale occurs
2. Systematic and Rational allocation: expenses that produce revenue over a long period of time, depreciation
3. Immediate Recognition: no directly related to specific benefits like monthly salary

Question 14

Risks and Uncertainties (ASC 275)

4 areas to disclose

Answer 14

1. Nature of Operations
2. Use of Estimates
3. Certain Significant Estimates
4. Current Vulnerability associated with certain concentraions

Question 15

Under IFRS one of the constraints to the primary qualitative characteristics are?

Answer 15

Cost/Benefit and Going Concern

Question 16

Under IFRS, the elements of Financial Position are?

Answer 16

Asset, Liability and Equity

Question 17

Under IFRS, the elements of Performance are?

Answer 17

Income (includes revenues and gains), Expenses (includes losses and capital maintenance adjustments: results from revaluation or restatement of assets and liabilities that cause an increase/decrease in equity)