Section 2 Flashcards
(11 cards)
The FASB has maintained that:
New GAAP should be neutral and not favor any particular reporting objective. One of the objectives of the FASB in setting standards is to develop rules that are unbiased. FASB statements generally do not reflect any reporting bias.
For example, the requirement to expense all research and development costs is uniform across all firms and does not favor one firm over another.
During the period when an enterprise is under the direction of a particular management, its financial statements will directly provide information about:
Enterprise performance but not directly provide information about management performance.
The financial statements provide a wealth of information about the performance and financial position of the enterprise, but they do not directly allow an evaluation of management. There are too many factors that affect the firm’s performance to be able to single out management’s contribution (or lack of it). Many factors interact to determine the performance of the enterprise, one of them being management’s performance. Also, for example, current enterprise performance is affected by the past actions of managers that may no longer be with the enterprise.
According to the FASB conceptual framework, certain assets are reported in financial statements at the amount of cash or its equivalent that would have to be paid if the same or equivalent assets were acquired currently. What is the name of the reporting concept?
Replacement cost. Replacement cost is the amount to be paid for an item at the current time. This concept is used in the lower-of-cost-or-market inventory valuation procedure. Replacement cost is an example of an entry price-the amount required to be paid currently to obtain an asset already held.
Under U.S. GAAP, the disclosure requirements when fair value measurement is used are differentiated by which classifications?
Disclosure requirements when fair value measurement is used are differentiated between items measured at fair value on a recurring basis and items measured at fair value on a nonrecurring basis. Items measured at fair value on a recurring basis are adjusted to (measured at) fair value period after period; an example would be investments held-for-trading. Items measured at fair value on a non-recurring basis are adjusted to (measured at) fair value only when certain conditions are met; an example would be the impairment of an asset.
When an entity uses the fair value option for eligible financial assets and liabilities, what is not an expected outcome of the disclosures required of that entity?
Replace the kind and amount of information that would have been provided if the fair value option had not been used with information related to fair value.
The disclosures required when the fair value option is used are not intended to replace the kind and amount of information that would have been provided if the fair value option had not been used. Rather, the intent is to provide the same kind and amount of information that would have been provided if the fair value option had not been elected.
Expected outcomes include:
- Users being able to understand management’s reasons for using the fair value option.
- Users being able to understand how changes in fair value affect net income.
- Users being able to understand the difference between fair value and cash flows.
Must goodwill be amortized under IFRS for SMEs?
Under IFRS for SMEs, goodwill is assumed to have a limited life and is amortized over that life, or a period not to exceed 10 years if the life cannot be reasonably estimated. Under U.S. GAAP, goodwill is assumed to have an unlimited life and is not amortized.
IFRS requires a classified Statement of Financial Position. What are the required classifications?
Under IFRS, the classified Statement of Financial Position has just two classifications: Current and Non-current. Both assets and liabilities are divided into these two classifications, with Non-current being the default category.
Can FASB enforce GAAP?
No.
The purpose of financial accounting is to provide information primarily for which group?
The purpose of financial reporting is to provide information relevant to the decision making of investors and creditors.
These individuals and firms make decisions about allocating resources across thousands of firms. Investment and credit decisions are the primary focus of financial reporting.
In reference to proposed accounting standards, the term “negative economic consequences” includes:
The inability to raise capital.
A proposed standard may cause firm earnings to fall, for example when they are adopted. Firms will be concerned that lower earnings may make it more difficult to sell stock or to secure loans.
As a result, negative economic consequences become a focal point for arguments against the proposed standard.
The FASB has maintained that:
New GAAP should be neutral and not favor any particular reporting objective.
One of the objectives of the FASB in setting standards is to develop rules that are unbiased. FASB statements generally do not reflect any reporting bias.
For example, the requirement to expense all research and development costs is uniform across all firms and does not favor one firm over another.
