9A: Video Cindy Flashcards
What is topic 958 on the ASC?
Not for profit entities (in industry specific)
Organization of Codification 4
1 Topic
2 Subtopic
3 Section
4 Subsection
SFAC
Who are they issued by?
Statements for accounting financial concepts
Issued by FASB
What are the SFACS?
They are the rules for writing the rules
Codification is…
2) while SFAC is…
GAAP
2) not GAAP (not authoritative)
What were SFAC 1 and SFAC 2 superseded by?
SFAC 8
What is the chapter in SFAC 8 that replaces SFAC 1?
Chapter 1: The Objective of General-Purpose Financial Reporting
What is the chapter in SFAC 8 that replaces SFAC 2?
Chapter 3, Qualitative Characteristics of Useful Financial Information
The objective of general purpose financial reporting is to provide…
Financial info about the reporting entity that is useful to existing
And potential investors, lenders and other decision makers For providing resources to the entity
Not all information needs are met by…
Accounting and financial reporting
Objectives of general purpose financial reporting focus on…
Users of financial information
Who are the primary users of financial reporting? 3
1 investors
2 lenders
3 other creditors who must rely on other entities to provide info To them
Although management is also interested in financial information, management does not rely on general purpose reports because…
Information can be obtained internally
Who are not considered primary users of financial info according to SFAC 8? 2
1 Regulators
2 members of the general public (aren’t investors)
SFAC 8 Chapter 1, states that the objective of financial reporting is to provide: Information that is useful to…
Potential and existing investors, lenders, other creditors (Primary users)
SFAC 8 Chapter 1, states that the objective of financial reporting is to provide: Information about the reporting entity’s…
Economic resources and claims against the reporting entity
SFAC 8 Chapter 1, states that the objective of financial reporting is to provide: Changes in…
Economic resources and claims
SFAC 8 Chapter 1, states that the objective of financial reporting is to provide: Financial performance reflected by…
Accrual accounting
SFAC 8 Chapter 1, states that the objective of financial reporting is to provide: Financial performance reflected by…
Past cash flow
SFAC 8 Chapter 1, states that the objective of financial reporting is to provide: Changes in economic resources and claims…
Not resulting from financial performance
Primary users of accounting information
Existing and potential investors, lenders and other creditors
Hierarchy of accounting Qualities:
Pervasive Costraint
Benefits exceed costs
Ex. Its expensive to gather accounting info and produce financial
Statements
Relevance leads to…
Predictive value and confirmatory value
Faithful representation emphasizes the…
Substance of the transaction over the form
The bias on financial reporting is the bias of…
Conservatism (underlies all of US GAAP)
Financial information is relevant if it has…
Predictive value, confirmatory value or both
Predictive value
Requires info be used to predict future outcomes
Confirmatory value
Requires that info either confirms or changes prior evaluations
An item is material if…
Omitting it or misstating it could influence a user’s decision
Materiality threshold relates to the qualitative characteristic of…
Relevance
Information has the quality of faithful representation if the information depicts…
What it purports to represent
What 3 characteristics should faithful representation have?
1 complete
2 neutral
3 free from error
Completeness, requires that information is…
Presented or depicted in a way users can understand the item Being depicted
Neutrality requires that the item is depicted…
Without bias either favorably or unfavorably to users
Free from error
There are no errors or omissions in the information reported
4 enhancing qualitative characteristics of accounting information
1 comparability
2 verifiability
3 timeliness
4 understandability
Comparability
Enables users to identify and understand similarities and differences between items
Consistency
Use of same accounting methods in different periods
Consistency helps achieve comparability because it…
Helps the user make comparisons across different time periods
Verifiability
Different sources reach consensus or agreement on amount of representation of an item
Direct verification occurs through…
Direct observation
Indirect verification occurs by using techniques such as…2
1 checking formulas
2 recalculating amounts
Verifiability: although forward looking information can’t be verified, the underlying assumptions, methods, facts and circumstances can be…
Disclosed to help users determine if the info is useful
Timeliness
Requires info is available to a decision maker when it is useful To make the decision
Understandability
Classifying, characterizing and presenting info clearly and Concisely
Hierarchy of accounting Qualities:
Threshold for recognition
Materiality
Hierarchy of accounting Qualities:
Fundamental Qualitative characteristics 2
1 relevance (predictive value and confirmatory value)
2 faithful representation (complete, neutral, free from error)
Hierarchy of accounting Qualities:
Enhancing qualitative characteristics 5
1 comparability 2 consistency 3 verifiability 4 timeliness 5 understandability
Substance over form
Substance = bought the asset (ex. capital lease)
Form = rental agreement (ex. Operating lease)
Example of valuation account?
Discount on B/P is a contra valuation account of B/P
FC
Foreign currency
FC translation
Convert foreign currency financial statements to $’s
Interim reporting
Less than 1 year
Recognition vs. Reporting
Recognition: record on financial statements, write JEs
Reporting: includes footnotes with financial statements
SFAC 6: Asset definition
Probable future economic benefits controlled by particular entity
As result of past transactions or events
SFAC 6: 3 characteristics of assets
1 probable future benefit by contribution to future net cash inflows
2 entity can obtain and control access to benefit
3 transaction or event leading to control has already occurred
SFAC 6:
Asset continues as an asset until…
Collected, transferred, used or destroyed
SFAC 6: assets
Valuation accounts are part of…
Related assets
SFAC 6:
Liabilities definition
Probable future sacrifices of economic benefits, arising from
Present obligations of particular entity
Result from past transactions/events
SFAC 6:
3 characteristics of liabilities
1 legal, equitable or constructive duty to transfer assets in future
2 little or no discretion to avoid future sacrifice
3 transaction or event obligating enterprise has already occurred
SFAC 6:
Liability remains a liability until…
Settled or discharged
SFAC 6: liabilities
Valuation accounts are part of…
Related liability
SFAC 6: Equity AKA Net Assets definition
Owner’s residual interest in the assets of entity that remains
After deducting liabilities
SFAC 6: Business enterprises
3 characteristics of equity
1 source of distributions by enterprise to its owners
2 no unconditional right to receive future transfer of assets,
Depends on future profitability
3 inevitably affected by enterprise’s operation and circumstances
Affecting enterprise
SFAC 6: business enterprises
Transactions or events that change owners’ equity include…5
1 revenues and expenses 2 gains and losses 3 investments by owners 4 distributions to owners 5 changes within owners equity
Changes within owners equity does not…
Change total amount
SFAC 6: Revenues definition
Increases in assets or decreases in liabilities during period from
Delivering goods, rendering services
Or other activities constituting the entity’s major or central
Operations
SFAC 6:
3 Characteristics of revenue
1 accomplishments of earning process
2 actual or expected cash inflows resulting from central operations
3 inflows reported gross
SFAC 6:
Expenses definition
Decreases in assets or increases in liabilities
during period from delivery of goods, rendering of services or
Other activities constituting the entity’s major/central operations
SFAC 6:
3 characteristics of expenses
1 sacrifices involved in carrying out earnings process
2 actual or expected cash outflows resulting from central operations
3 outflows reported gross
SFAC 6:
Gains (losses) definition
Increases (decreases) in equity from peripheral transactions of entity excluding revenues (expenses)
and excluding investment/distribution of owners
SFAC 6:
3 characteristics of gains and losses
1 result from peripheral transactions and circumstances that may
be beyond control
2 May be classified according to sources or as operating and
Non operating
3 change in equity reported net
SFAC 6:
3 elements of financial statements exclusive to business enterprise
1 investments by owners
2 distributions to owners
3 comprehensive income
SFAC 6:
investments by owners definition
Increases in net assets resulting from transfers by other entities
Of something of value to obtain ownership
SFAC 6:
Distributions to owners definition
Decreases in net assets resulting transferring assets, rendering
Services, or incurring liabilities by the enterprise to owners
SFAC 6:
Comprehensive income definition
Change in equity of entity during period from transactions
And other events of no owner sources
All equity amount changes except investments and distributions
SFAC 6:
Term “comprehensive” income is used instead of net earnings (net income) because the board is…
Reserving “earnings” for component part of comprehensive
Income yet to be determined
ASC definition of comprehensive income
Total of net income and other comprehensive income
2 ASC approaches to presenting comprehensive income
1 present combined statement of income and comprehensive
Income with OCI at bottom
2 present second statement that directly follows income
Statement
Old Hierarchy of GAAP:
What 4 pieces of literature had the highest level of authority?
1 FASB Statements of Accounting Standards and Interpretations
2 FASB Staff Postions
3 AICPA Research Bulletins
4 Accounting Principles Board Opinions not superseded by FASB
Old Hierarchy of GAAP:
What 3 pieces of literature had the 2nd highest level of authority?
1 FASB Technical Bulletins
2 AICPA Industry Audit and Accounting Guides
3 Statements of position
Old Hierarchy of GAAP:
What 3 pieces of literature had the 3rd highest level of authority?
1 AICPA Accounting Standards Executive Committee Practice
Bulletins cleared by FASB
2 consensus positions of FASB Emerging Issues Task Force (EITF)
3 topics discussed in appendix D of EITF Abstracts
When is the statement of cashflows prepared?
2) what is the basis of accounting used in the statement of cashflows?
Last after other financial statements have been prepared
2) cash basis (not accrual)
Closing journal entries close…
Temporary accounts (revenues, expenses, dividends)
AFS
Available for sale (investments)
In GAAP impairment losses can only be reversed in…
Held for sale investments
SFAC 7: Using Cash Flow Information and Present Value in Accounting Measurements
Statement provides, a framework for using future cash flows as the basis of accounting measurements 3
1 at initial recognition
2 in fresh start measurements
3 for interest method of allocation
SFAC 7 using future cash flows:
Fresh start measurements
Measurements in period following initial recognition that established
New carrying amount unrelated to previous amounts/accting conventions
Interest method allocation, is a reporting convention that uses…
Present value techniques in absence of fresh start measurement
To compute changes in carrying amount of asset or liability
From 1 period to the next
Interest method of allocation:
Like depreciation and amortization conventions, interest methods
Are grounded in…
Notion of historical cost
General principle that governs use of present value?
2) what is not addressed by SFAS 7?
Guidance on measurement issues only
2) recognition issues aren’t addressed by SFAS 7
SFAS 7 does not address when…
2) FASB expects to decide whether a particular situation requires fresh start measurement/accounting response on a…
Fresh start measurements are appropriate
2) project by project basis
The techniques used to estimate future cash flows and interest rates will vary from one situation to another depending on…
Circumstances surrounding asset or liability in question
Certain general principles govern any application of present value techniques measuring assets or liabilities:
Estimated cash flows and interest rates should reflect assumptions about future events and uncertainties that would be considered in deciding…
Whether to acquire an asset or group of assets in arm’s length
Transaction for cash
Certain general principles govern any application of present value techniques measuring assets or liabilities:
Interest rates used to discount cash flows should reflect assumptions that are…
2) otherwise the effect of some assumptions will be…
Consistent with those inherent in estimated cash flows
2) double counted or ignored
Certain general principles govern any application of present value techniques measuring assets or liabilities:
Estimated cashflows and interest rates should be free from both bias and factors…
Unrelated to the asset, liability or group of asset/liabilities
Ex. Deliberately understating estimated net cash flows to enhance apparent future profitability introduces bias into measurement
Certain general principles govern any application of present value techniques measuring assets or liabilities:
Estimated cash flows or interest rates should reflect the…
Range of possible outcomes rather than single most likely min
Or max amount
An accounting measurement that uses present value should reflect the…
2) otherwise items with different risks may appear…
Uncertainties inherent in estimated cash flows
2) similar
Accounting applications of present value have typically used a…
Single set of estimated cash flows and single interest rate
Which approach does SFAC 7 introduce?
Expected cash flow approach
The expected cash flow approach focuses on…
Explicit assumptions about the range of possible estimated cash
Flows and their respective possibilities
The traditional cash flow approach treats uncertainties…
Implicitly in selection of an interest rate
By incorporating a range of possible outcomes, the expected cash flow approach accommodates the use of…
present value techniques when timing of cash flows is uncertain
Multiple-deliverable revenue arrangements is another exception to…
The general revenue recognition principles
Multiple deliverable revenue arrangements:If an entity has revenue generating activities to provide multiple products or services at different times, the arrangement should be evaluated to determine if…
There are separate units being delivered
Multiple-deliverable revenue arrangements: 2 conditions must be met for an item to be considered a separate unit of accounting
1 delivered item has value on stand-alone basis
2 if arrangement includes right of return for delivered item, the Undelivered item must be substantially in control of vendor
Multiple-deliverable revenue arrangements:
1 delivered item has value on stand-alone basis 2 if arrangement includes right of return for delivered item, the Undelivered item must be substantially in control of vendorIf both of the above requirements are met, the revenue arrangement is…
Divided into separate units based on relative selling prices
Revenue recognition criteria are then applied to each separate Unit
Milestone method accounting may be used in accounting for…
Research and development arrangements where revenue (payments)To vendor
is contingent on achieving 1 or more substantive Milestones related to deliverables or units of accounting
Substantive milestone
Uncertain event that can only be achieved based on vendors Performance and 3 additional criteria
3 circumstances that must be met for vendor to recognize the contingent revenue in its entirety in the period in which the milestone was achieved
1 commensurate with vendors performance or enhancement of Value resulting from vendor’s performance
2 relates solely to past performance
3 it’s reasonably relative to all deliverables and payment terms
Recognition of milestone payments, accounting policy should be disclosed in…
The notes of the financial statements
Detail about the milestone method that should be disclosed: A description of…
The overall arrangement
Detail about the milestone method that should be disclosed: A description of each milestone and…
Related contingent consideration
Detail about the milestone method that should be disclosed: A determination of whether each milestone is…
Considered substantive
Detail about the milestone method that should be disclosed: The factors considered in determining whether the milestones are…
Substantive
Detail about the milestone method that should be disclosed: The amount of consideration recognized…
During the period for each milestone
Recognition questions VS measurement issues
Measurement issues = how to measure
Recognition questions = when to measure
