All Chapters Flashcards
Name the single source of authoritative nongovernmental U.S. GAAP
The FASB “Accounting Standards Codification” (ASC)
The term “international financial reporting standards” includes what standards
International Accounting Standards
International Financial Reporting Standards
IFRIC Interpretations
SIC Interpretations
Who are the primary users of general purpose financial reports?
Existing and potential:
Investors
Lenders
Other Creditors
Name the pervasive constraint on the information provided in financial reporting
Cost Constraint: the benefit of reporting financial information must be greater than the costs of obtaining and presenting the information
Name the fundamental qualitative characteristics of useful financial information
Relevance and Faithful representation
Name the three elements of relevance
Predictive Value
Confirming Value
Materiality
Name the three elements of faithful representation
Completeness
Neutrality
Freedom from error
Name the enhancing qualitative characteristics of financial information
Comparability
Verifiability
Timeliness
Understandability
According to SFAC No. 5 what should a full set of financial statements include?
Balance Sheet Income Statement Statement of OCI Statement of Cash Flows Statement of Changes in Owners Equity
What is the difference between realization and recognition
Realized: When sold and converted to cash
Recognized: When recorded in F/S
List the 10 elements of financial statements
Comprehensive Income Revenues Expenses Gains Losses Assets Liabilities Equity Investments by Owners Distributions by Owners
List the six elements of financial statements according to the IASB framework
Assets Liabilities Equity Income (revenue & gains) Expenses (expenses & losses) Capital maintenance adjustments
Name the five elements of present value measurements
Estimate of future cash flow Expectations about timing Variations of future cash flows Time value of money The price for bearing uncertainty Other factors
Describe the expected cash flow approach for present value computations
Considers a range of possible cash flows and assigns probability to each cash flow in the range to determine the weighted average or expected future cash flow
What is the presentation order of major components of an income and retained earnings statement?
I - Income from continuing operations
D - Discontinued Operations
E - Extraordinary Items
A - Cumulative effect of a change in Accounting Principle
The gain(loss) from discontinued operations can consist of
Impairment loss, gain(loss) from actual operations, and a gain(loss) on disposal
In what period are the following reported:
1) An impairment loss
2) Gain(loss) from actual operations
3) Gain(loss) on disposal
All are reported in the period which they occur
In reporting discontinued operations, how is a “component” of an entity defined under U.S. GAAP and IFRS?
US GAAP: Operating segment, reportable segment, reporting unit, subsidiary, asset group
IFRS: Separate major line of business or geographical area of operations, subsidiary acquired exclusively with a view to resale
How do we account for subsequent increases in the fair value of a discontinued component
Gain is recognized for subsequent increase in fair value minus costs to sell (but not in excess of previously recognized cumulative loss). Gain is reporting in period of increase
What types of costs are associated with exit and disposal activities?
Involuntary employee termination benefits, costs to terminate a contract
What types of costs are associated with exit and disposal activities
Involuntary employee termination benefits
Costs to terminate a contract that is not a capital lease
Other costs associated with exit or disposal activities
Define extraordinary items
Material in nature
Of a character significantly different from the typical or customary business activities
Not expected to occur in foreseeable future
Not normally considered in evaluating the ordinary operating results of an enterprise (Key words, unusual and infrequent) (Only under GAAP not IFRS)
List some examples of extraordinary items
The abandonment of or damage to a plant due to an infrequent earthquake or an infrequent flood
An expropriation of a plant by the government
A prohibition of a product line by a newly enacted law or regulation
Name the three types of accounting changes
Accounting principle, estimate, & entity
How is a change in accounting principle reported
Cumulative effect of change is included in the retained earnings as an adjustment of the beginning retained earnings balance of earliest year presented
Prior period financial statements are restated if presented
What are the special changes in an accounting principle? How are these changes in accounting principles reported?
A change to LIFO from another method inventory pricing under US GAAP
Any other change in which a cumulative effect adjustment is considered impractical to calculate
Special changes are reported prospectively (like a change in estimate)
How is a change in an accounting estimate reported?
Prospectively, effect is shown in the current and/or future periods that are affected by the change, financial statements are not restated
Under US GAAP how is a change in accounting entity reported?
All current and prior period financial statements presented are restate
How are error corrections reported
Reported as prior period adjustments to retained earnings and all comparative financial statements presented are restated
Define comprehensive income
Change in equity (net assets) that results from revenue, expenses, gains, and losses during a period, as well as any other recognized changes in equity that occur for reasons other than investments by owner owners and distributions to owners
Identify five items included in other comprehensive income (PUFER)
Pension adjustments
Unrealized gains and losses on available for sale securities
Foreign currency translation adjustments and gains/losses on foreign currency transactions that are designated as economic hedges of a net investment in a foreign entity
Effective portions of cash flow hedges
Revaluation surpluses (IFRS only)
List the two formats acceptable for reporting comprehensive income. How does this compare with IFRS?
(Single-Statement) Statement of Comprehensive Income
(Two-Statement) Statement of income followed by separate statement of comprehensive income
US GAAP & IFRS allow same two presentation
List some disclosure requirement for comprehensive income
Tax effect of each component included in current “OCI”
Changes in accumulated balances of components of “OCI”
Total accumulated “OCI”
Reclassification adjustments between “OCI” and net income
Identify the contents of the summary of significant accounting policies note to the financial statements
Identify and describe: Measurement bases used in preparing the financial statements Principles and methods Criteria Policies Pricing
Describe the related party disclosures required under US GAAP & IFRS
Material related party transactions, related party notes/accounts receivable, control relationships (IFRS requires disclosure of key management compensation. US GAAP does not require this)
What are the US GAAP disclosure requirements for risks and uncertainties
Nature of operations, use of estimates in preparing the financial statements, significant estimates, current vulnerability due to certain concentrations
What are the guidelines for interim reporting
Use same accounting principles that were used in the most recent annual report, allocate expenses to the interim period benefited, revenues are recognized in the period in which they are earned and realized or realizable, total for “OCI” in condensed financial statements of interim periods
What income tax rate is used in interim financial reporting
Use best estimate of effective tax rate to be applicable for full fiscal year on quarterly statements
Name the four required disclosures for segments of an enterprise
Operating segments, products and services, geographic areas, major customers
Define operating segment
Distinct revenue-producing components of the enterprise about which separate financial information is produced internally, and whose operating results are regularly reviewed by the enterprise
Determined using a “management approach”.
Name two quantitative thresholds used in identifying reportable operating segments
10% “Size” test
75% “Reporting Sufficiency” test
Describe the 10% test for identifying reportable segments
Revenue - Reported revenue including both sales to external customers and intersegment sales or transfers, is 10% or more of the combined revenue, internal and external, of all operating segment
Reported profit or loss - Absolute amount of its reported profit or loss is 10% or more of the greater, in absolute amount of: (1) Combined reported profit of all operating segments that did not report a loss. (2) Combined reported loss of all operating segments that did not report a loss
Assets - Assets are 10% or more of the combined assets of all operating segments
(ONLY HAS TO MEET ONE OF THESE)
What is the 75% for identifying reportable segments?
Combined external (consolidated) revenue of all reportable segments must be at least 75% of the total consolidated revenue of the entity, practical limit is 10 segments this isn’t a precise limit
What are the disclosure requirement for reportable operating segments
For each reportable segment the entity must report: Identifying factors Products or services PRofit or loss details Asset details Liability details (IFRS only) Measurement criteria Reconciliations
Define developement stage enterprise
Enterprise that devotes substantially all of its efforts to establishing a new business and either planned principal operations have not commenced or no significant revenue has been generated therefrom
Indicate any special accounting treatment for development-stage enterprises
Same GAAP as established operating enterprises, with additional disclosures:
Identify statements as those of a development stage enterprise, accumulated losses identified as deficit accumulated during development stage, in the income statement show revenue and expenses, and cumulative total of both amounts from company’s inception, statement of cash flows include cumulative amounts of cash inflows and outflows from enterprises inception and current amounts of cash inflows and outflows for each period presented, issue a separate statement of stockholders equity, indicating shares issued, date of issuance, dollar amounts assigned, and noncash consderation, if any
What is the date of an entity’s transition to IFRS
Date of opening balance sheet
Describe form 10-K and 10-Q, what level of assurance must be provided with the financial statements submitted in these forms
10-K: Filed annually by US registered companies, includes summary of financial data MD&A, and AUDITED F/S
10-Q: Filed quarterly by US registered companies, included unaudited (reviewed) F/S, interim MD&A, and certain disclosures
In general, what are the criteria for revenue recognition under U.S. GAAP
Earned and realized or realizable, meet the following four criteria; (1) Persuasive evidence of an arrangement exists (2) Delivery has occurred or services have been rendered (3) Price is fixed and determinable (4) Collection is reasonably assured
What are the four categories of revenue transactions under IFRS and what are the common revenue recognition criteria for those catgories
Sales of goods, rendering of services, revenue from interest, royalties, and dividends, construction contracts
Common revenue recognition criteria include: Revenues and costs can be reliably measured, and it is probable that economic benefits will flow to entity. Each category has additional criteria
When should revenue from the performance of services be recognized under US GAAP and IFRS
US GAAP - Period in which services have been rendered and are able to be billed
IFRS - Using percentage of completion method when the out come of the transaction can be estimated reliably
What are the conditions for revenue recognition when the right of return exists?
Sales price is substantially fixed, buyer assumes all risks of loss, buyer has paid some form of consideration, product sold is substantially complete, amount of future returns can be reasonably estimated
Name an example of both 1) accelerated 2) deferred revenue recognition relative to normal recognition when revenue is recognized at the time goods are transferred
Percentage of completion method is a long term construction is an example of accelerated
Installment method (cost recovery) is an example of deferred revenue recognition
How are purchased intangible assets and internally developed intangible assets recorded under US GAAP and IFRS
Purchase Intangible Assets - Recorded at cost, including legal and registration fees, under GAAP & IFRS
Internally Developed Intangible Assets - Legal fees, costs of successful defense, registration fees, consulting fees, and design fees can be capitalized under GAAP & IFRS
Under US GAAP R&D costs must be expensed, under IFRS, research costs must be expensed but development costs may be capitalized if they meet certain criteria
How are intangible assets reported under US GAAP and IFRS?
US GAAP: Reported at cost less amortization (finite life intangibles only) and impairment
IFRS: Reported using cost model or revaluation model, under revaluation model reported at fair value on revaluation date less subsequent amortization and impairment
How should the contractual amounts of future services to be performed under a franchise agreement be accounted for by (1) Franchisor (2) Franchisee
Both should be recorded at their present value as unearned revenue by the franchisor until earned and as an intangible asset by the franchisee
Define start-up costs; What is the accounting treatment of start-up costs?
Costs incurred for one-time activities to start a new operation. Start-up costs include costs incurred in the formation of a corporation.
Start-up costs are expensed in the period incurred
Define goodwill
Excess of fair value of a subsidiary over the fair value of the subsidiary’s net assets, costs of maintaining and/or developing goodwill cannot be capitalized
What is the maximum period over which an identifiable intangible asset (not goodwill) should be amortized?
Shorter of estimated useful economic life and its remaining life
Goodwill not amortized must be tested at least annually for impairment
What is the proper treatment of research and development costs under US GAAP and IFRS
US GAAP: R&D expensed as incurred, unless expenditure is for capital assets that have alternative future uses or for research and development undertaken on behalf of others under a contractual arrangement
IFRS: Research costs must be expensed, development costs may be capitalized if certain conditions are met
List some items not considered research and development costs
Routine periodic design changes
Marketing Research
Quality Control testing
Reformulation of a chemical compound
When should the costs of developing computer software for resale, leases, or licensing be capitalized under US GAAP?
After technological feasibility has been established and before the product is released for sale
How should the costs of capitalized computer software developed for resale be amortized under US GAAP
Annual amortization is the greater of: Percent of revenue method (Total capitalized amount X (current gross revenue / total projected gross revenue) or Straight Line (Total capitalized amount X (1/estimate of economic life)
Outline the treatment of computer software developed internally or obtained for internal use only under US GAAP
Expense costs incurred in the preliminary project state and costs incurred in training and maintenance
Capitalize costs incurred after preliminary project state and for upgrades and enhancements
Capitalized costs should be amortized on a straight-line basis
What is the test of recoverability for the impairment of long-lived assets other than goodwill under US GAAP
Finite Life: If undiscounted future cash flows expected from use of asset and eventual disposal is less than carrying value, recognize loss on impairment
Indefinite life: If FV is less than CV, recognize loss on impairment
How is impairment of long lived assets other than goodwill analyzed under IFRS?
Compare carrying value of asset to assets recoverable amount, recoverable amount is greater than FV less costs to sell and assets value in use (PV of FCF)
What is the calculation for impairment loss under GAAP and IFRS
GAAP: Amount by which carrying amount exceeds FV
IFRS: Amount by which carrying exceeds recoverable amount
How is goodwill impairment analyzed under US GAAP
Goodwill impairment is analyzed at the reporting unit level using a two-step process:
Identify potential impairment by comparing FV of each reporting unit with its CV including goodwill
Measure amount of GW impairment by comparing implied fair value of reporting unit’s goodwill to it’s carrying amount
(Under US GAAP GW impairment test has been simplified by allowing companies to test qualitative factors first to determine whether it is necessary to perform two step test)
How is goodwill impairment analyzed under IFRS
GW Impairment is done at cash-generating unit level using a one step test that compares CV of CGU to CGU’s recoverable amount, impairment losses are first allocated to GW and then allocated on a pro rata basis to other CGU assets
Identify two methods of revenue recognition for long-term construction-type contracts under GAAP & IFRS
GAAP: Percentage of completion & completed contract
IFRS: percentage of completion & cost recovery
For long-term construction type contracts when are losses recognized?
Immediately when discovered regardless of the method used for revenue recognition
State the formula for recognizing the gain/loss on long term construction type contracts under percentage of completion method
(Total cost to date/Total Estimated Cost of Contract) x Total Estimated gross profit - GP recognized to date
State the formula for calculating gross profit realized on installment sales
Cash recieved x (total gross profit/sales price)
When are profits recognized under cost recovery method?
Profits are recognized only after costs have been recovered
How are gains/losses on nonmonetary exchanges recognized under US GAAP
Commercial substance - Always on exchange equal to difference between FV and CV of given up items
No commercial - No gain, full losses
Boot received - Greater than 25% of consideration all gains/losses
How are gains/losses on nonmonetary exchanges recognized under IFRS
Exchange of similar assets - No gain recognized, loss recognized in full
Exchange of dissimilar assets - All gains and losses recognized
When will an asset exchange have commercial substance under US GAAP
Asset exchange has commercial when expects a change in future cash flows change is relative to FV of assets exchanged
In a nonmonetary exchange what is the basis of the new asset under US GAAP?
Record at fair value + cash paid (-cash received) or FV of asset received (for commercial)
net book value of asset given up +/- cash in/out (non commercial)
What are monetary items
Assets & liabilities that are fixed in amount by contract or in terms of number of dollars
Examples include cash, A/R, N/R, A/P and N/P
Items already stated in constant dollars
What are nonmonetary items
Assets and liabilities fluctuate in value with inflation/deflation
Ex: inventories, PPE, capital stock, these items need to be restated to constant dollars
Identify the two foreign currency activities
Foreign currency translations & transactions
What is entity’s functional currency under US GAAP
Functional currency is the currency of primary economic environment in which entity operates, all of these conditions must be met:
Foreign operations are relatively self-contained and integrated within the county
The day-to-day operations do not depend on the parent’s or investor’s functional currency
Local economy of the foreign entity is not highly inflationary
When is the translation method used?
Translation is used to restate financial statements denominated in the functional currency to the reporting currency
When is the remeasurement method used?
Used to restate F/S from foreign currency to entity’s functional currency when:
Reporting currency is the functional currency & F/S must be restated in the entity’s functional currency prior to translating from the functional currency to the reporting currency
Identify the exchange rate to be used when translating different components of the balance sheet and I/S
Assets & Liabilities - Current Exchange Rate
Common Stock & APIC - Historical Rate
Revenues & Expenses - Weighted Average exchange rate for the period
Identify the exchange rate to be used when remeasuring different components of the B/S and I/S
B/S - Monetary (Current exchange rate) Nonmonetary (historical rate)
I/S - Balance sheet item (Historical Rate Non-balance sheet related (weighted average)
Where are remeasurement gains/losses reported in the F/S
Remeasurement gains or losses are recognized on the I/S
Where are translation adjustments reported in the F/S
Translation gains or losses are reported in OCI, treated as unrealized gain or losses
State two types of foreign currency transactions
Operating transactions - importing, exporting, borrowing, lending, and investing
Forward exchange contracts - Agreements to exchange two different currencies at a specific future date and at a specific rate
Where are foreign currency translations gains or losses reported in the F/S
Foreign currency transaction gains or losses are included in determining net income for the period
For operating transactions in foreign currency, detail the recording process
Record original transaction at exchange or spot rate on date of transaction, at B/S date compute G/L on transaction by recalculating using current exchange or spot rate, on payment date compute G/L on transaction by using the exchange rate on payment date
What are the general guidelines for OCBOA F/S presentation
Different titles from accrual basis F/S Required F/S are the equivalent of accrual basis B/S and I/S F/S should explain changes in equity Statement of Cashflows is not required Disclosures should be similar to GAAP
