1. Conceptual Framework

Question 1

How do you measure fair value of a financial asset that trades in many markets but has no principal market?

Answer 1

Two-step process:

1. Determine the most advantageous market, which affords the highest sales proceeds net of transaction costs.
2. Determine the fair value of the financial asset, which is the price quoted in the most advantageous market before transaction costs

Remember: net out transaction costs to determine the most advantageous market, then exclude transaction costs to determine fair value in the most advantageous market.

Question 2

Is an asset valuation account an asset, a liability, equity, or something else?

Answer 2

Something else. An asset valuation account reduces or increases the carrying amount of an asset, such as a valuation allowance or accumulated depreciation. It is part of the related asset but is itself neither an asset nor a liability.

Question 3

What are the fundamental qualitative characteristics of financial reporting, per FASB conceptual framework?

Answer 3

Relevance and faithful representation

Question 4

What are the enhancing characteristics of financial reporting, per FASB conceptual framework?

Answer 4

Comparability, Understandability, Timeliness, and Verifiability (CUT like a V)

Question 5

A prior service cost not recognized in pension expense will have what effect on accumulated other comprehensive income?

Answer 5

It will reduce accumulated other comprehensive income.

Question 6

What are the three approaches to measuring fair value?

Answer 6

Market approach, Income approach, and Cost approach (MIC)

Question 7

Under US GAAP, what criteria must an item satisfy to qualify for recognition on financial statements?

Answer 7

1. Meets the definition of an Element on financial statements
2. Measurable in monetary terms
3. Relevant to users
4. Based on information that is Faithfully Represented, Verifiable, and Neutral

(RecognizeElMeR FeRVeNtly)

Question 8

What are the ingredients of Faithful Representation?

Answer 8

1. Freedom from Error
2. Neutrality
3. Completeness

(Your Friend Roger is never on the FENCe)

Question 9

What are the ingredients of relevance?

Answer 9

1. Predictive value
2. Confirmatory value

(Roger is P.C.)

Question 10

How are gains and losses recognized under the physical capital maintenance concept?

Answer 10

Gains and losses are recognized only when assets are disposed of or liabilities are settled (e.g. in calculating net income).

Question 11

How are gains and losses recognized under the financial capital maintenance concept?

Answer 11

Gains and losses are recognized not only when assets are disposed of or liabilities are settled but also when assets or liabilities change in value, resulting in holding gains or losses (e.g. in calculating OCI).

Question 12

What is the definition of fair value for an asset or liability?

Answer 12

Fair value is the EXIT price–i.e., the price received when selling an asset or paid when transferring a liability–in an orderly transaction between market participants.

Question 13

Under IFRS, what criteria must an item satisfy to qualify for recognition on financial statements?

Answer 13

1. Measurement must be Reliable
2. Occurrence must be Probable

(Mr. Opie)

Question 14

If an entity’s tax rate changes after its year-end, but before it issues financial statements, which tax rate should it use to calculate the tax effect of temporary differences under US GAAP?

Answer 14

It should use the tax rate that was in effect during its fiscal year.

Question 15

If an entity’s tax rate changes after its year-end, but before it issues financial statements, which tax rate should it use to calculate the tax effect of temporary differences under IFRS?

Answer 15

It should use the substantially enacted tax rate, which is the rate that was enacted after year-end but before the financial statements were issued.

Question 16

What are appropriate ways of measuring an element of financial reporting in monetary terms?

Answer 16

1. Historical cost
2. Replacement cost
3. Net realizable value
4. Present value

Question 17

List the types of transactions that affect comprehensive income (but not net income).

Answer 17

1. Unrealized gains and losses on available-for-sale securities
2. Foreign currency translation adjustments

Question 18

What are level three inputs to valuation techniques that are used to measure the fair value of an asset?

Answer 18

Unobservable inputs for the asset (see ASC 820-10-35-37)

Question 19

When does realization occur, according to the FASB Conceptual Framework?

Answer 19

Realization occurs when goods or services are converted into cash or a claim to cash. (Note that the conversion of a claim into cash is not realization, such as the collection of a receivable.)