9D Financial Statements Flashcards
How can income statements be presented?
Multi-step or single step form
What is the purpose of the different categories on income statements?
To enable users to assess future cash flows as continuing operations, discontinuing operations, and extraordinary items are presented separately
What does the SEC require of public company with multistep income statement?
Requires the placement of impairment losses in operating income instead of under other expenses and losses
Unusual or infrequent items
1) An unusual or infrequent event considered to be material that does not qualify as extraordinary
2) Placed as part of income from continuing operations after normal recurring revenues and expenses.
3) Eg- restructuring charge
Discontinued operations
1) results from disposal of a business component
2) placed as a separate category after income from continuing operations
Extraordinary items
1) An unusual and infrequent nonrecurring event which has material effects
2) Placed as a separate category after discontinued operations
Change in accounting principle
1) No longer on income statement.
2) Retrospective application
3) Report cumulative effect of change in the carrying amounts of assets and liabilities as of the beginning of the first period presented, with an offsetting adjustment to the opening balance of retained earnings for that period.
3) Finacnial statements for each period are adjusted to reflect period-specific effects of the change for direct effects.
Correction of an error
1) Correction of a material error from a prior period
2) Report as a prior period adjustment by restating the prior-period finacnial statements
3) Cumulative effect of the error on prior periods is reflected in the carrying value of assets and liabilities at the beginning of the first period, with an offsetting adjustmetns made to the opening balance of retained earnings for that period.
4) Financial statements are adjusted to reflect correction of period-specific effects of the error.
What is restructuring?
1) Unusual or infrequent item
2) program that is planned and controlled by management and materially changes either the scope of the business undertaken by the company, or the manner in which that business is conducted
Ex; sale or termination of a line of business
closure of business activities in a particular location
relocation of business activities from one location to another
changes in management structure, or,
fundamental reorganizations that affect the nature and focus of operations
What is costs of exit and disposal?
1) Unusual or infrequent item
2) Includes restructuring
3) liability for this cost should be measured initially at fair value in the period it was incurred
4) FV is usually determined as the PV of the esitmated future payments discounted at the credit-adjusted, risk-free rate of interest
What happens if fair value for exist and disposal costs cannot be reasonably estimated?
1) Recognized in the period where it can be reasonably estimated
2) Onetime termination benefits provided to current employees that are involuntarily terminated
3) Costs to terminate a contract that is not a capital lease
How is onetime termination benefits recognized?
1) Depends on whether employees are required to provide services beyond minimum retention period
2) If yes, the expense is recognized over the period that the services are provided
3) if no, liability is recognized when the plan is communicated to the employees
What is the liability measured at subsequent to initial measurement?
Credit-adjusted risk free rate that was used to the liability initially
What happens to costs associated with exit or disposal activity that does not involve discontinued operations?
1) Included in income from continuing operations before income taxes
2) FN should provide extensive disclosure of the activities
What are the items that are never extraordinary?
1) Foreign currency devaluation
2) Effect of strike
3) Asset writedowns (goodwill, inventory, PPE, receivables, and intangibles)
What is included in loss from discontinued operations?
1) Loss or income of the component for the period and the gain or loss on its disposal
2) Income taxes or tax benefit are deducted from or added to that amount to determine the gain or loss after taxes
How to qualify as discontinued operations?
1) Comprise a component of the entity with operations and cash flows that are clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity
2) Component can be a reportable or operating segment, a reporting unit, a subsidiary or an asset group
What are the requirements to be reported as discontinuing operations?
1) operations and cash flows of the compnent have been (or will be) eliminated from the ongoing operations of the entity as a result of the disposal
2) enttity will not have any significant involvement in the operations of the component after the disposal
What happens if the items are long-lived assets?
Classified as discontinued operations in the first period that it meets the criteria as being “held for sale”
What is the criteria for being “held for sale”?
1) Management commits to a plan of disposal
2) Assets are available for sale
3) Active program to locate a buyer has been initiated
4) sale is probable
5) asset is being actively marketed for sale at a fair price
6) unlikely that the disposal plan will significantly change
How is long-lived assets held for sale reported?
1) Reported at lower of their carrying amoutns or fair values less costs to sell
2) Gain or loss on disposal of discontinued operations is the actual gain or loss if disposal occurs in the same period that the component meets the criteria to be classified as “held for sale”
What if the criteria for held for sale is met in a period before it is disposed of?
1) The amount of the loss (if applicable) on disposal is an estimated loss resulting from the write-down of the group of assets to their estimated fair values
2) Estimated gains cannot be initially recognized
What if the component is held for sale over several reporting periods?
Estimated gains can be recognized based on new information but are limited to the losses previously recognized
Can held for sale items be written up?
Yes, but not above their carrying amounts when they meet the criteria as being held for sale
How are discontinued operations handled in a comparative income statement?
1) Income statement presented for each previous year must be adjusted retroactively to enhance comparability with the current year’s income statement
2) Revenues, COGS, operating expenses (including income taxes) for the discontinued component are removed from the revenues, cost of goods sold, and operating expenses of continuing operations and are netted into one figure, that is “Income (loss) from discontinued operations”
What is comprehensive income?
1) Sum of net earnings (loss) and other comprehensive income
2) It requires disclosure of changes during a period of the following: unrealized gains and losses on available for sale investments and foreign currency items, including any reclassification adjustments and any adjustments necessary to recognize the funding status of pension plans or other postemployment benefits
What is one way of presenting comprehensive income?
1) At the bottom of income statement, continue from net income to arrive at OCI
2) Total amount for net income and its components
3) total amount for OCI and its components
4) total comprehensive income
What is another way of presenting comprehensive income?
1) In a separate statement that may start with net income and that directly follows the statement of income
2) Net income and its components in the statement of net income
3) Comprehensive and its components along with total comprehensive income
How is comprehensive income shown on the balance sheet?
1) Presented separately from retained earnings and APIC
2) changes in the balance are to be presented in the note sto the FS or on the face of the FS
3) each component of OCI will be presented separately and reclassifications shall be presented separately
How are reclassification adjustments to comprehensive income recorded?
1) As unrealized gains (losses) recorded and reported in OCI for the current or prior periods are later realized, they are recognized and reported in net income
2) To avoid double counting, it is necessary to reverse the unrealized amounts that have been recognized
3) Entity must separately disclose information about net income and reclassification out of other comprehensive income effects either on the face of the financial statements containing net income or separately in the notes
4) For items not required to be reclassified in entirety to net income, cross-reference to related disclosures is required
Where is OCI shown on the balance sheet?
1) In the stockholder’s equity
2) when entity has components of OCI, the total of these is closed to the b/s account accumulated OCI, not retained earnings
3) the net loss is closed to retained earnings
What is the balance sheet?
1) Statement of financial position
2) Presents assets, liabilities, and stockholders’ equity
3) Shows effects of transactions at a point in time
4) The other statements: statements of earnings (income) and comprehensive income, statement of retained earnings, and statement of cash flows report the effect of transactions over the period of time
What is the operating cycle?
Average time between acquisition of materials and final cash realization
What are the disclosures required for accounting policies?
1) Set forth in the initial FN to the statements
2) accounting principles used when alternatives exist
3) principles peculiar to a particular industry
4) unusual or innovative applications of accounting principles
Subsequent events
After balance sheet date but before statements are issued or available to be issued
Available to be issued
Form and format that is complete and complies with GAAP and all necessary approvals for issuance have been obtained
Subsequent events procedure SEC filer or conduit bond obligor for conduit debt securities traded publicly
Evaluate events through date FS are issued, all others evaluate through date FS are available to be issued
Recognized sub event
1) Condition existed at the BS date and therefore should be recognized
2) Example: estimate for warranty liability, estimate of contingent liability due to a lawsuit, or an estimate of allowance for uncollectible accounts
3) If settled after BS date but before issuance, settlement amounts should be used as the liability in the balance sheet
Nonrecognized sub event
1) Condition did not exist as of the BS date but after
2) Event not recognized in these cases
3) But if not disclosing means misleading fs, then FN disclosure must be made with nature of event and estimate of impact
Does the subevent date need to be disclosed?
1) No for SEC filer
2) Yes for non-SEC filer- disclose the date and whether date is when FS are available to be issued or issued
Fair value measurements
Required for assets and liabilities like investments, derivatives, asset impairments, asset retirements obligations, goodwill, business combinations, troubled debt restructuring
How to apply fair value measurement
1) Identify asset or liability to be measured
2) Determine the principle or most advantageous market
3) Determine the valuation premise
4) Determine the appropriate valuation technique (market, income, or cost approach)
5) Obtain inputs for valuation (level 1, 2, 3)
6) Calculate the FV
Fair value
The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price) under current market conditions
Orderly transaction
Transaction that allows for normal marketing activities that are usual and customory- it is not a forced transaction or sale
Principal market
1) Fair value assumption that if principle market exists or if not, the most advantageous market
2) market in which the greatest volume and level of activity occurs
Most advantageous market
Maximizes price received for asset or minimizes amountpaid to transfer the liability
Characteristics of principal or most advantageous market
1) Be independent of the reporting entity (not related parties)
2) Be knowledgeable
3) Able to transact
4) Willing to transact (motivated but not compelled)
Price in market?.
Will not be adjusted for transaction costs, such as costs to sell
Cost to sell?
is used to determine which market is the most advantageous. However, selling costs or brokerage fees are not used when calculating fair value
If location is a characteristic of the asset or liability?
price is adjusted for costs necessary to transport the asset or liability to the market
Highest and best use
1) Assumed by FV measurement
2) Maximize the value of the asset or group of assets
3) Use of asset must be physically possible, legally permissible, and financially feasible at the measurement date
4) Not relevant for financial assets and liabilities since they do not have alternative uses and their FV do not depend upon their use within a group.
Highest and best use is used to measure FV as follows:
1) Using asset that provides maximum value with other assets as a group. The fair value of the asset is the price that would be received to sell the asset assuming the asset is used with other assets as a group
2) If asset provides maximum value by itself, the FV of the asset is the price that would be received in a current transaction to sell the asset stand-alone
What are the valuation methods to measure fair value?
Market Approach
Income Approach
Cost Approach
Market Approach
Prices and relevant information from market transactions for identical or comparable assets or liabilities
Income approach
Converts future amoutns to a single current (discounted) amount
Cost approach
Relies on current replacement cost to replace the asset with a comparable asset, adjusted for obsolescence
Fair value disclosure
If valuation technique or approach is changed, it is treated as a change in accounting estimate and treated on a prospective basis.
The disclosure provisions for a change in accounting estimate are not required for revisions or changes to valuation techniques used in FV measurements
Fair value hierarchy
Level 1, 2 and 3
Level 1
1) quoted prices (unadjusted prices) from active markets for identical assets or liablities
2) most reliable evidence of FV and should be used without adjustment whenever possible
3) FV in level 1 is quoted price times quantity held and is not adjusted for the quantity of shares (blockage factor) held
Level 2
1) directly or indirectly observable inputs other than quoted prices of level 1
2) examples include: quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets that are in markets where few transactions occur, prices are not current or prices vary substantively over time
3) also include observable inputs like yield curves, bank prime rates, interest rates, volatilities, prepayment speeds, loss severities, credit rsisk, and default rates.
