Basic Concepts

Question 1

What does ASC stand for?

Answer 1

Accounting Standards Codification

Question 2

What are the 5 basic concepts?

Answer 2

Theory, Income Determination, Accruals, Deferrals, and Revenue Recognition

Question 3

Can be defined as coherent set of hypothetical, conceptual, and pragmatic principles forming a general frame of reference for a field of inquiry

Answer 3

Theory

Question 4

What are some of the components of the conceptual framework for financial accounting and reporting?

Answer 4

Objectives, qualitative characteristics, elements, recognition, measurement, financial statements, earnings, funds flow, and liquidity

Question 5

Most basic component of the objective framework

Answer 5

Objectives

Question 6

Underlie the other phases, are derived from the need of those for whom financial information is intended, and provide a focal point for financial reporting by identifying what types of information are relevant

Answer 6

Objectives

Question 7

Criteria to be used in choosing and evaluating accounting and reporting policies

Answer 7

Qualitative characteristics

Question 8

Components from which the financial statements are created. Include assets, liabilities, equity, investments by owners, revenues, expenses, gains, and losses

Answer 8

Elements

Question 9

Must meet criteria for recognition and posses an attribute which is relevant and can be reliably measured

Answer 9

Elements

Question 10

Concerned with what info. should be provided, who should provide it, and where it should be displayed

Answer 10

Reporting considerations

Question 11

Primary users of financial reporting

Answer 11

Investors, lenders, and creditors. Other parties such as Regulators and members of the public not included via SFAC 8

Question 12

Objectives of financial reporting

Answer 12

1) Info that is useful to all primary users
2) Info about the entity’s economic resources and claims against the reporting entity
3) Changes in an entity’s resources and claims
4) Financial performance reflected by accrual accounting
5) Financial performance reflected by past cash flows
6) Changes in entity’s resources and claimed resulting from financial performance

Question 13

Establish criteria for selecting and evaluating accounting alternatives which will meet the objectives

Answer 13

Qualitative characteristics

Question 14

Cost benefit constraint (Persuasive constraint)

Answer 14

If benefits of information do not outweigh costs then the information does not need to be provided

Question 15

Materiality constraint (Threshold for Recognition)

Answer 15

Any item deemed to be immaterial does not need to be provided

Question 16

Two fundamental characteristics of accounting information

Answer 16

Relevance and faithful representation

Question 17

Requires that information be used to predict future outcomes

Answer 17

Predictive value

Question 18

Requires that information either confirms or changes prior evaluations

Answer 18

Confirmatory value

Question 19

Should be complete, neutral, and free from error

Answer 19

Faithful representation

Question 20

Requires that information is presented or depicted in a way that users can understand the item being depicted

Answer 20

Completeness

Question 21

Requires that the item is being depicted without bias either favorably or unfavorably to users

Answer 21

Neutrality

Question 22

No errors or omissions are in the information that is provided

Answer 22

Free from error

Question 23

Enables users to identify and understand similarities and differences between items

Answer 23

Comparability

Question 24

Refers to the use of the same accounting methods in different periods.

Answer 24

Consistency

Question 25

Occurs when different sources reach consensus or agreement on an amount of representation of an item

Answer 25

Verifiability

Question 26

Requires that information is available to a decision maker when it is is useful to make a decision.

Answer 26

Timelines

Question 27

Involves classifying, characterizing, and presenting clearly and concisely

Answer 27

Understandability

Question 28

Intended to assure that users will receive decision-useful information about enterprise resources (assets), claims against those resources (liabilities and equity), and changes therein (the remainder)

Answer 28

Elements of financial statements

Question 29

In order to be included on a statement an item must do what 3 things?

Answer 29

Qualify as an element, meet recognition criteria, and be measurable.

Question 30

Asset-liability view

Answer 30

Earnings are measured by the change in the net economic resources of an enterprise during a period. (Assets and liabilities are key under this view while other elements become secondary)

Question 31

Revenue-expense view

Answer 31

Earnings are a measure of an enterprises effectiveness in using its inputs to obtain and sell outputs. (Revenue and expenses are key under this view while other elements become secondary)

Question 32

Definition of all 10 elements can be found where?

Answer 32

SFAC 6

Question 33

Realization and recognition are addressed where

Answer 33

SFAC 5

Question 34

Definition of accrual accounting is important. Why?

Answer 34

SFAC 8 states that it should be used because it provides a better indication of future cash flows than the cash basis. This is true because accrual accounting records transactions as they occur and not when the cash actually moves.

Question 35

Matching

Answer 35

Is referred by most as a principle or fundamental law of accounting

Question 36

Recognition and measurement

Answer 36

Recognition establishes criteria concerning when an element should be included in the statements, while measurement governs the valuation of those elements.

Question 37

SFAC 5 established what 4 fundamental recognition criteria?

Answer 37

Definitions, measurability, relevance, and reliability

Question 38

Historical cost

Answer 38

Property, plant and equipment, and most inventories are recorded at their historical cost which is the amount of cash or cash equivalent that was paid to acquire an asset. Liabilities involving obligations to provide goods or services are recorded at what is known as is historical proceeds.

Question 39

Current cost

Answer 39

Some inventories are reported at current replacement cost.

Question 40

Current market value

Answer 40

Some investments in marketable securities are recorded at their current market value, which is the amount of cash or cash equivalent it could be obtained by selling an asset in orderly liquidation.

Question 41

Nett realized value

Answer 41

Short-term receivables and some inventories are reported at their net realizable value, which is the nondiscounted amount of cash or cash equivalent into which an asset is expected to be converted in the due course of business minus any costs necessary to make the transaction occur. Liablities, such as trade payables or warranty obligations, are generally reported at their net settlement value.

Question 42

Present or discounted value of future cash flows

Answer 42

Long-term receivables and long-term payables are reported as their future value of cash flows which is converted during the normal course of business minus/plus any costs necessary to make that transaction occur.

Question 43

States that these 5 attributes is appropriate in different situations and will continue to be used in the future

Answer 43

SFAC 5

Question 44

Nominal amounts of money will continue to be the measurement unit

Answer 44

SFAC 5

Question 45

“Well-offness

Answer 45

Capital maintenance holds that capital to be maintained is measured by the amount of cash invested by owners. Earnings may not be realized until the dollar value in net assets is returned.

Question 46

Alternative definition of “well-offness”

Answer 46

This concept holds that the capital to be maintained is the physical productive capability of the enterprise. Earnings may not be recognized until current replacement costs of assets with the same productive capabilities of the assets are used up. Current cost accounting is supported using this method.

Question 47

SFAC 5

Answer 47

1) Recognized revenues when realized or realizable and earned
2) Recognize gains when realized or realizable
3) Recognize expenses when economic benefits are consumed in revenue-earning activities or when future economic benefits are reduced or eliminated (When economic benefits are consumed during a period, the expense may be recognized by matching, immediate recognition, or systematic and rational allocation)
4) Recognize losses when future economic benefits are reduced or elminated

Question 48

Used to compute earnings

Answer 48

Revenues, expenses, gains, and losses

Question 49

Earnings

Answer 49

Extent to which revenues and gains associated with cash-to-cash cycles substantially completed during the period exceed expenses and losses directly or indirectly associated with those cycles

Question 50

Comprehensive income

Answer 50

Any earnings that are adjusted for cumulative accounting adjustments and other nonowner changes in equity

Question 51

Attributes most often used to measure assets and liabilities

Answer 51

Observable marketplace-determined amounts

Question 52

Generally more reliable and are determined more efficiently than measurements that employ estimates of future cash flows

Answer 52

Observable marketplace amounts (includes current cost)

Question 53

What is used to determine assets and liabilities when observable amounts are unavailable?

Answer 53

Estimated cash flows

Question 54

SFAC 7

Answer 54

provides a framework for using future cash flows as the basis of an accounting measure.

Question 55

Fresh start measurement

Answer 55

Measurements in periods following initial recognition that establish a new carrying value amount unrelated to previous amounts and accounting conventions

Question 56

Applies only to measurements at initial recognition, fresh-start measurements, and amortization techniques based on future cash flows

Answer 56

SFAC 7

Question 57

Does not apply to measurements based on the amount of cash or other assets paid or received, or on observations of fair values in the marketplace

Answer 57

SFAC 7

Question 58

Present value formula

Answer 58

Tool used to incorporate the time value of money in a measurement

Question 59

How does FASB define present value?

Answer 59

Current measurement of an estimated future cash inflow or outflow, discounted at an interest rate for the number of periods between today and the date of the estimated cash flow

Question 60

Objective of using present value

Answer 60

To capture, to the extent possible, the economic difference between sets of future cash flows

Question 61

Assets with the same cash flows are distinguished from one another by the timing and uncertainty of those cash flows

Answer 61

Example: An asset with a contractual cash flow due in 10 days would be equal to an asset with an EXPECTED cash flow due in 10 years

Question 62

Fair value

Answer 62

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 under market conditions

Question 63

the only objective of present value, when used at initial recognition and fresh-start measurements, is to estimate fair value

Answer 63

Fair value

Question 64

In the absence of observed transaction prices, accounting measurements at initial recognition and fresh-start measurements should do what?

Answer 64

Attempt to capture the elements that taken together would comprise a market price if one existed

Question 65

Marketplace participants attribute prices to assets and liabilities in order to distinguish the risk and reward of one another.

Answer 65

Fair value

Question 66

For measurements at initial recognition and fresh start measurements, fair value provides the most complete and representationally faithful measurement of the economic characteristics of an asset or liability

Answer 66

Fair value

Question 67

Present value measurement includes what elements according to SFAC 7?

Answer 67

1) an estimate of the future cash flow or a series of future cash flows at different times in more complex cases
2) expectations about possible variations in the amount or timing of those cash flow
3) the time value of money represented by the risk-free rate of interest
4) the price for bearing the uncertainty inherent in the asset or liability
5) other factors, sometimes unidentifiable such as illiquidity and market imperfections

Question 68

SFAC 7 contrasts 2 different approaches to computing present value. What are they?

Answer 68

1) the expected cash flow approach which states that only he time value of money is included in the discount rate. The other factors cause adjustments in arriving at risk-adjusted expected cash flows
2) the traditional approach which states that factors 2-5 are included in the discount rate

Question 69

Certain general principles govern any application of present value techniques in measuring assets

Answer 69

SFAC 7

Question 70

A single interest rate convention can reflect all of the expectations about future cash flows and the appropriate risk premium. This approach may be adequate for some simple measurements but the FASB found it does not provide the necessary tools for more complex cases

Answer 70

Discount rate adjustment approach

Question 71

This approach was found to be more effective in measurements. It uses all expectations about possible cash flows instead of the most likely cash flow.

Answer 71

Expected cash flow (present value) approach

Question 72

When the timing of cash flows is uncertain the expected cash flow approach allows present value techniques to be utilized.

Answer 72

SFAC 7

Question 73

An interest rate in the traditional approach value computation is unable to reflect any uncertainties in the timing of the cash flows. By using a range of possible outcomes, the expected cash flow approach accommodates the use of present value techniques.

Answer 73

SFAC 7

Question 74

The price in an estimate of fair value that marketplace participants are able to receive for bearing the uncertainties in cash flows. It should be identifiable, measurable and significant.

Answer 74

Adjustment for risk

Question 75

Refers to the fact that the cash flows used in a present value measurement are estimates rather than known amounts.

Answer 75

Uncertainty

Question 76

Refers to any exposure to uncertainty in which that exposure has potential negative consequences.

Answer 76

Risk

Question 77

Referring to an entity that prefers situations with less uncertainty relative to an expected outcome

Answer 77

Risk averse

Question 78

The compensation for accepting uncertainty

Answer 78

Risk premium

Question 79

If prices are for an asset or liability are already observable in the marketplace then there is no nee for the present value calculation.

Answer 79

Present value

Question 80

Liabilities can sometimes involve problems different from assets. They can sometimes be held by third party individuals who sell their rights differently than they would sell other assets. To estimate the liability’s fair value accountants must estimate the price necessary to pay the third party to assume the liability.

Answer 80

Present value measurements

Question 81

Financial statements usually attempt to represent changes in assets and liabilities from one period to the next. In principle, the purpose of all accounting allocations is to report changes in the value, utility, or substance of assets and liabilities over time.

Answer 81

Interest methods of allocations

Question 82

A measure of managements efficiency in combining the factors of production into desired goods and services. Also measuring this is the primary objective of accounting

Answer 82

Income

Question 83

Efficient firms with prospects of increased efficiency have greater access to financial capital and at lower costs. Less efficient firms usually have a lower credit rating and trade at a lower price-earnings share.

Answer 83

Cost of capital will be lower for the more efficient company

Question 84

Acquiring raw materials, processing them, and selling the resulting goods and services. Also, providing warranty protection

Answer 84

Revenue production

Question 85

Under accrual basis, revenue recognized at point of sale or when service is performed. Point of sale is either when seller ships (FOB shipping point) or when buyer receives (FOB destination)

Answer 85

Revenue recognition

Question 86

Three exceptions exist

1) during production
2) at the point where production is complete
3) the point of cash collection

Answer 86

Revenue recognition

Question 87

Accounting method) percentage of completion

Criteria for use) 1. long-term construction, property, or service contract

2. Dependable estimates of extent of progress and cost to complete
3. Reasonable assurance of collectibility of contract price

Reasons for departing from sale basis

1. Availability of evidence of ultimate proceeds
2. Better measure of periodic income
3. Avoidance of fluctuations in revenues, expenses, and income

Answer 87

During production basis

Question 88

Accounting method) Net realizable value

Criteria for use) 1. Immediate marketability at quoted prices

2. Unit interchangeability
3. Difficulty of determining costs

Reasons for departing from sale basis

1. Known or determinable revenues
2. Inability to determine costs and thereby defer expense recognition until sale

Answer 88

Completion of production basis

Question 89

Accounting method) installment and cost recovery methods

Criteria for use) 1. Absence of a reasonable basis for estimating degree of collectibility

Reasons for departing from sale basis
1. Level of uncertainty with respect to collection of the receivable precludes recognition of gross profit before cash is received

Answer 89

Cash collection basis

Question 90

Expenses are recognized as related revenues are recognized. Some expenses cannot be associated with particular revenues

Answer 90

Accrual accounting

Question 91

1) can be associated with particular sales

2) attach to a unit of product and become an expense only when the unit to which it is attached is sold

Answer 91

Product costs

Question 92

1) not particularly or conveniently assignable to a product
2) become expenses due to the passage of time by
- immediate recognition if the future benefit cannot be measured
- systematic and rational allocation if benefits are produced in certain future periods

Answer 92

Period costs

Question 93

Net effect of inflows of revenue and outflows of expense during a period of time

Answer 93

Income

Question 94

Recognizes income when cash is received and expenses when cash is disbursed.

Answer 94

Cash basis accounting

Question 95

Accrual basis precedes cash receipt/expenditure

1) revenue- recognition of revenue earned but not received
2) expense - recognition of expense incurred but not yet paid

Answer 95

Accrual

Question 96

Cash receipt/expenditure precedes accrual-basis recognition

1) revenue - postponement of recognition of revenue. Cash is received but not yet earned
2) expense - postponement of recognition of expense. Cash is paid but not yet incurred
3) postpones recognition of revenue or expense by placing the amount in liability or asset account
4) two methods are possible for deferring revenues and expenses depending on whether real or nominal accounts are originally used

Answer 96

Deferral

Question 97

If accruals are reversed the subsequent cash transaction is reflected in the associated nominal account. If accruals are not reversed the subsequent cash transaction must be apportioned between a nominal and real account

Answer 97

Reversing entries

Question 98

Revenues are recorded when cash is received and expenses are recorded when cash is paid

Answer 98

Cash basis

Question 99

Important to identify two types amounts

1) current balance in the account (cash basis)
2) correct balance in the account (accrual basis)

Entries must adjust account balances from current to correct amounts

Answer 99

Adjusting from cash basis to accrual

Question 100

Adjusting a balance sheet account from cash to accrual should result in the other half of the entry being a related income statement account

Answer 100

Adjusting cash basis to accrual

Question 101

1) collections from sales + (ending AR +AR written off)- beginning AR = sales
2) collection from other revenues + (beginning unearned revenue + ending revenue receivable) - (ending unearned revenue+ beginning revenue receivable) = other revenues
3) payments for purchases + (beginning inventory + ending AP) - (ending inventory + beginning AP) = cost of goods sold
4) payments for expenses + (beginning prepaid expenses + ending accrued expenses payable) + (ending prepaid expenses + beginning accrued expenses payable) = operating expenses

Answer 101

Accrual formulas

Question 102

Revenue is recognized as cash is collected, thus revenue recognition is at point of cash collection. Installment sales accounting can only be used where collection of the sale price is not reasonably assured

Answer 102

Installment sales

Question 103

Gross profit is deferred to future periods and recognized proportionately to collection of the receivables. Installment receivables and deferred gross profit accounts must be kept separate by year because the gross profit rate differs from year to year

Answer 103

Installment sales

Question 104

Method is similar to the installment sales method in that gross profit is not recognized until the cumulative receipts exceed the cost of the asset sold

Answer 104

Cost recovery method

Question 105

If interest was to be earned by the seller deferred until the entire cost was recovered.The cost recovery method is used when the uncertainty of collection so great that even use of the installment method is precluded.

Answer 105

Cost recovery method

Question 106

The initial franchise fee may be recognized as revenue by the franchisor only upon substantial performance of their initial service obligation

Answer 106

Franchise agreements

Question 107

The amount and timing of revenue recognized depends on whether the contract contains bargain purchase agreements, tangible property, and whether the continuing franchise fees are reasonable in relation to future service obligations

Answer 107

Franchise agreements

Question 108

Direct franchise costs are deferred until the related revenue is recognized

Answer 108

Franchise agreements

Question 109

Due to the variety of methods of finance and real estate transactions, Determining when the risks and rewards of ownership have been clearly transferred and one revenue should be recognized becomes very complex

Answer 109

Real estate transactions

Question 110

Profit from real estate sales may be recognized in full provide the profit is determinable and the earnings process is virtually complete

Answer 110

Real estate transactions

Question 111

The following four criteria must be met to recognize profit in full at the point-of-sale

1) The sale is consummated
2) The buyers initial and continuing investments are adequate to demonstrate a commitment to pay for the property
3) The sellers receivable is not subject to future subordination
4) The seller has transferred to the Buyer the usual risks and rewards of ownership in a transaction that is, in substance, a sale and does not have a substantial continuing involvement in the property

Answer 111

Real estate transactions

Question 112

Depending on which combination of criteria is met, the real estate sales will be recorded using one of the following methods:

1) deposit
2) cost recovery
3) installment
4) reduced profit
5) percentage of completion
6) Full accrual

Answer 112

Real estate transactions

Question 113

Payments received our recorded as a liability until the contract is canceled or a sale is achieved

Answer 113

Deposit method in real estate transactions

Question 114

The seller recognizes a portion of profit at the time of sale with the remaining portion recognized in the future. profit recognized at the time of sale is determined by calculating the present value of the buyers receivable and applying a formula. The reduced profit recognized at the time of the sale is the gross profit less the present value of the receivable as determined above.

Answer 114

Reduced profit method in real estate transactions

Question 115

If an entity has a 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.

Answer 115

Multiple deliverable revenue arrangements

Question 116

To conditions must be met for an item to be considered a separate unit of accounting:

1) The delivered item has value on a standalone basis (i.e., it can be sold separately by the vendor or customer)
2) if the arrangement includes a right of return for the delivered item, the undelivered item must be substantially in control of the vendor.
3) if it needs both requirements the revenue arrangement is divided into separate units based on the relative selling prices. Revenue recognition criteria are then applied to each of the separate units

Answer 116

Multiple deliverable revenue arrangements

Question 117

Maybe used in accounting for research and development arrangements and which revenue (payments) to the vendor is contingent on achieving one or more substantive to milestones related to deliverables or units of accounting

Answer 117

Milestone method of accounting

Question 118

A substantive milestone is an uncertain event that can only be achieved to based on the vendors performance

(1) it is commensurate with the vendors performance or enhancement of value resulting from the vendors performance
2) it relates solely to past performance
3) it is reasonable relative to all of the deliverables and payment terms

If all of these circumstances are met the vendor may recognize the contingent revenue and it’s entirety in the period in which the milestone is achieved

Answer 118

Milestone method of

Question 119

Do you notes to the financial statements should disclose its accounting policy for the recognition of milestone payments

Answer 119

Milestone method of accounting

Question 120

In addition the following should be disclosed
(one) a description of the overall arrangement
(two) a description of each milestone and related contingent consideration
(three) 80 termination of whether each milestone is considered substantive
(Four) the factors considered in determining whether the milestones are substantive
(5) the amount of consideration recognized during the period for the milestone or milestones

Answer 120

Milestone method of accounting

Question 121

Software products that require significant production, modification, or customization should be accounted for using a SC topic 605

Answer 121

Software revenue recognition

Question 122

Software products that are included with tangible products and are required for the product functionality are excluded from the software revenue recognition rules

Answer 122

Software revenue recognition

Question 123

Software products that do not require significant production, modification, or customization to recognize revenue one all of the following criteria are met:
(One) persuasive evidence of an arrangement exists (two) delivery has occurred
(three) vendors fee is fixed or determinable
(four) collectibility is probable

Answer 123

Software revenue recognition

Question 124

Portion of the fee allocated to an element should be recognized using the same list of criteria

Answer 124

Software revenue recognition

Question 125

Delivery of an element is considered not to have occurred other elements essential to the functionality of it are undelivered. No portion of the fee meets the criteria of collectibility if the portion of the fee allocable to delivered elements is subject to forfeiture, refund, or other concession undelivered elements are not delivered

Answer 125

Software revenue recognition

Question 126

Arrangement that includes multiple elements should allocate the feed to the elements based on vendor specific objective evidence of fair value, regardless of student prices in a contract

Answer 126

Software revenue recognition

Question 127

Arrangements kiss consisting of multiple software deliverables including software products, upgrade/enhancements, post contract customer service, services, elements deliverable on a when and if available basis

Answer 127

Software revenue recognition

Question 128

Under specific objective evidence of fair value is limited to price charged when the same element is sold separately and price established by management if not sold separately yet. It should be probable that the price will not change before being sold separately

Answer 128

Software revenue recognition

Question 129

Allocated to an undelivered elements should not be adjusted. If it is probable that the amount allocated will result in a loss, ASC topic 450, contingencies should be followed

Answer 129

Software revenue recognition

Question 130

Deferred revenue until whichever one of the following occurs first sufficient vendor specific objective evidence does exist or all elements have been delivered

Answer 130

Software revenue recognition

Question 131

Exceptions
1 The PCS is the only undelivered element -recognize the entire fee ratably
2 only undelivered element is services that don’t require significant production, modification, or customization-recognize the entire fee over the period in which the services will be performed
3 arrangement is a subscription in substance-recognize an entire fee ratably
4 fee based on the number of copies

Answer 131

Software revenue recognition

Question 132

Supper accounting for service elements of an arrangement is required if both of following criteria met

1 Service is not essential to functionality of any other elements of the transaction
2 services are described in the contract such that total price of the arrangement would be expected to vary as result of inclusion or exclusion of the services

Answer 132

Software revenue recognition

Question 133

Under GAAP Specific rules have been developed which are stated in the form of conditions which must be met before it is acceptable to recognize profit from “a sale in the ordinary course of business”. Unfortunately these rules represent a patchwork set of criteria for applyingapplying the sales basis of revenue recognition. This patchwork set of criteria contains many inconsistencies either and the results obtained or in the rationale justifying the criteria

Answer 133

Sales basis criteria for selecting transactions

Question 134

Factors to be considered before recognizing revenue on the sale basis

1 whether Economic substance of the transaction is a sale or a financing arrangement
2 determination of sales price
3 probability of collection of sales price
4. Sellers future obligations
5 predictability of returns

Conditions that cause recognition to be delayed beyond time of sale

1 sales price not fixed or determinable
2 payment excused until product is sold
3 payment excused at property stolen or damaged
4 buyer without separate economic substance
5 sellers obligation to bring about resale of the property
6 inability to predict future returns

Answer 134

Sale with the right of return/ASC topic 605

Question 135

Factors to be considered before recognizing revenue on the sale basis

1 weather risks and rewards of ownership are transferred

Conditions that cause recognition to be delayed be on time of sale

1 agreement requires repurchase at specified prices are provides compensation for losses

Answer 135

Product financing arrangement/ASC topic 470

Question 136

Factors to be considered before recognizing revenue on the sale basis
1 pre-probability of collection
2 Sellers continued involvement
3 Whether economic substance of the transaction is the sale of real estate or another type of transactions such as a service contract

Conditions that cause recognition to be delayed beyond time of sale

1 Inadequate buyer investment in the property
2 Sellers continuing obligations, such as participation in future losses, responsibility to obtain financing, construct buildings, or initiate or support operations

Answer 136

Real estate sale/ASC topics 360 and 976

Question 137

Factors to be considered before recognizing revenue on the sale basis

1 Transfer of benefits and risks of ownership
2 probability of collection
3. Predictability of future unreimbursable costs

Conditions that cause recognition to be delayed beyond time of sale

1 inability to meet conditions specified above for real estate sales
2 inability to meet specified conditions indicating transfer of benefits and risks of ownership
3 collectibility not predictable
4 uncertainty about the future on reimbursable costs

Answer 137

Sales type lease/ASC topic 840

Question 138

Factors to be considered before recognizing revenue on the sale basis

1 isolation of transferred assets
2 right to pledge or exchange transferred assets
3 Control of receivables

Conditions that cause recognition to be delayed beyond time of sale

1 transferred assets can be reached by transferor or its creditors
2 transfer he’s inability to pledge or exchange transferred assets
3 Control of receivables not surrendered to to repurchase or redemption agreement

Answer 138

Sale of receivables with recourse /ASC topic 860

Question 139

Factors to be considered before recognizing revenue on the sale basis

transaction has commercial substance

Conditions that cause recognition to be delayed beyond time of sale

1 fair value not determinable
2. Exchange transaction to facilitate sales to customers
3 transaction lax commercial substance

Answer 139

Non-monetary exchange/ATSC topic 845

Question 140

Factors to be considered before recognizing revenue on the sale basis

1 substance of the transaction
2 portion of property leased back
3 length of lease back period

Conditions that cause wrecking mission to be delayed beyond time of sale

All sale-leaseback transactions are financing transactions and not sales transactions and last leaseback covers only a small part of the property where is for a short period of time

Answer 140

Sale-leaseback transaction slash a SC topic 840

Question 141

ASC topic 720-15 (Statement of position (SOP) 98-5) provides the guidance for accounting for a company start up costs. These costs include those incurred during the course of undertaking one time activities related to opening a new facility,introducing a new product or service, conducting business in a new territory, conducting business with a new class of customer or beneficiary, initiating a new process and an existing facility, commencing some new operation, or organizing a new entity. ASC topic 720-15requires start up costs to be expensed rather than capitalized

Answer 141

Reporting a start up costsa

Question 142

Basic concepts are included in the financial accounting concepts. However the concept statements are not concerned authoritative literature and therefore are not included in the accounting standards codification

Answer 142

Research component – accounting standards codification

Question 143

The accounting standards codification database uses the following categories on the main menu: assets, liabilities, equity, revenue, expenses, broad transactions, industry, and master glossary. Under each of these main categories are topics. Topics are further divided into subtopics, Sections and, subsections

Answer 143

Research component – accounting standards codification

Question 144

Citations in this text for information on a certain topic are cited as ASC topic XOXO X. Complete citations for a specific rule are referenced by topic – sub topic – section – subsection.

Answer 144

Research component – accounting standards codification

Question 145

The international accounting standards committee issued international accounting standards is from 1973 to 2001. In addition the IASC created a standing interpretations committee that provided further interpretive guidance on accounting issues not addressed in the standards. Into thousand one, the international accounting standards Board replaced the IASC. The IAS be adopted the existing international accounting standards and interpretations issued by the standing interpretations committee. Since 2000 1B I ASB is responsible for issuing international financial reporting standards and and the I F RS interpretations committee is responsible for issuing interpretations of the standardstherefore the current international accounting guidelines are contained in the IAS and IFR S pronouncements together with S I C and IFRIC interpretations.

Answer 145

International financial reporting standards

Question 146

It is often said that US GAAP employees a “rules “– based approach. In other words the standards are usually explicit as to precise rules that must be followed for recognition, measurement, and financial statement presentation.I F RS on the other hand is considered a “principles “– based approach because it attempts to set general principles for recognition, measurement and reporting, and allows professional judgment and applying these principles. This principles – based approach should focus on a true and Fair view or a fair representation of the financial information

Answer 146

International financial reporting standards is

Question 147

Into thousand two the FASB and the IAS be agreed to work toward convergence in the accounting standards. Therefore you’ll find some IFR S accounting treatments identical, some similar, and others different from US GAAP. And effect of study strategy is to study US GAAP and then learn the significant differences between US GAAP and I F RS. This compare/contrast strategy will help the candidate to remember which method is US GAAP and which method is I F RS

Answer 147

International financial reporting standards

Question 148

Vocabulary or definition differences – although the concepts of US GAAP and IFR S may be similar, vocabulary and definitions are often somewhat different

Answer 148

International financial reporting standards

Question 149

Recognition and measurement differences – differences may exist in when and how an item is recognized in the financial statements. Alternative methods may be acceptable and US GAAP whereas only one method may be allowed for IFR S (or vice versa).in some instances, either US GAAP or I F RS may not require an item to be recognized in the financial statements. In addition the amount recognized (Measurement of the item) may be different in the two sets of standards

Answer 149

IFR S

Question 150

Presentation and disclosure differences – presentation refers to the presentation of items on the financial statements, whereas disclosure refers to the additional information contained in the notes to financial statements. Again differences exist as to whether an item must be presented in the financial statements or disclosed in the footnotes, as well as the types of information that must be disclosed

Answer 150

IFR S

Question 151

Financial statement presentation.

US GAAP

No specific requirement regarding comparative information

comprehensive income may be presented as a standalone statement or at the bottom of the income statement and changes in equity may be presented in the notes.

Presentation of certain items as extraordinary as required

I FRS

Requires comparative information for prior-year.

Requires a separate statement of comprehensive income statement of changes in equity.

Extraordinary items are not allowed

Answer 151

Major differences in US GAAP versus I F RS

Question 152

Revenue recognition

US GAAP

Construction contracts are accounted for using the percentage of completion method is certain criteria are met otherwise the completed contract method is used

I FRS

Construction contracts are accounted for using the percentage of completion method if certain criteria are met. Otherwise revenue recognition is limited to the costs incurred. The completed contract method is not allowed

Answer 152

Major differences in US GAAP versus IFR S

Question 153

Consolidated financial statements

US GAAP

No exemption from consolidating subsidiaries in general – purpose financial statements.

Noncontrolling interest measured at fair value

I F RS

Under certain restrictions of situations is subsidiary (normally required to be consolidated) may be exempt from the requirement

Noncontrolling interest may be measured either at fair value or the proportionate share of the value of the identifiable assets and liabilities of the acquired

Answer 153

Need your differences and US GAAP versus I F RS

Question 154

Monetary current assets and current liabilities

US GAAP

Short-term obligations expected to be refinanced can be classified as non-current only if the entity has the intent and ability to refinance

Contingencies that are probable and can be reasonably estimated are accrued.

Answer 154

Major differences in US GAAP versus I FRS

Question 155

Inventory

US GAAP

LIFO cost flow assumption is an acceptable method

Inventories are valued at lower of cost of market (between a floor and a ceiling)

Any impairment write-downs create a new cost basis previously recognized impairment losses are not reversed

IFR S

The LIFO cost flow assumption is not allowed

Inventories are valued at lower of cost or net realizable value

Previously recognized impairment losses are reversed.

Answer 155

Major differences in US GAAP versus IFR S

Question 156

Fixed assets

US GAAP

Evaluation not permitted

No separate accounting for investment property

Unless the assets are “held for sale “they are valued using the cost model

Biological assets are not a separate category

There is no requirement to account for separate components of an asset

Impairment losses are not reversed.

I FRS

Evaluation of assets is permitted as an election for an entire class of assets but must be done consistently

Separate accounting is prescribed for investment property versus property, Plant, and equipment

Investment property must be may be measured at fair value

Biological assets are a separate category and not included in property plant and equipment

If the major components of an asset have significantly different patterns of consumption or economic benefits, the entity must allocate the cost to the major components and appreciate them separately

Impairment losses may be reversed in the future.

Answer 156

Your differences in US GAAP versus I F RS

Question 157

Financial investments

US GAAP

Component (hybrid) financial instruments are not split into debt and equity components unless certain requirements are met, but they may be bifurcated into debt and derivative components

Declines in fair value below cost may result in impairment loss solely based on a change in interest rate unless entity has the ability and intent to hold the debt till maturity

when impairment is recognized through the income statement, a new cost basis is established and such losses cannot be reversed

Unless the fair value option is elected, loans and receivables are classified as either (one) held for investment, which is measured at amortized cost. Or (two) help for sale, which is measured at lower of cost or fair value

I F RS

Compound financial interests (Convertible bonds, etc.) are split into debt, equity and, if applicable, derivative components

Generally only evidence of a credit default results in an impairment loss for an available for sale that instrument

Impairment losses and available for sale investments may be reversed and future periods

Loans and receivables are measured at amortized cost unless classified into the fair value through profit or loss category or the available for sale category both of which are carried at fair value

Answer 157

Differences in US GAAP versus IFRS

Question 158

Leases

US GAAP

Operating least assets are never reported on the balance sheet

A lease for land and building that transfers ownership to the lessee or contains a bargain purchase option would be classified as a capital lease regardless of the relative value. The fair value of the land at inception represents 25% or more of the total fair value. The Leasee must consider the components separately when evaluating the lease.

I FRS

Assets held by a leasee under operating leases may be capitalized on the balance sheet as they meet certain requirements

When land and buildings are least, elements of the lease are considered separately when evaluating the lease unless the amount for the land element is immaterial

Answer 158

Major differences US GAAP versus IFR S

Question 159

Income taxes

US GAAP

Deferred tax assets are recognized in full but valuation allowance is reduce them to the amount that is more likely than not to be realized

IFRS

Deferred tax assets are recognized only to the extent it is probable that they will be realized

Answer 159

Major differences in the US GAAP versus I FRS

Question 160

The IASB framework for the preparation and presentation of financial statements establishes the underlying concepts for preparing financial statements. This framework addresses the objectives of financial statements, underlying assumptions, qualitative characteristics of financial statement information, definitions, recognition measurement and capital maintenance concepts.

Answer 160

Underlying concepts – the I ASB framework

Question 161

Although the IASB framework contains information similar to the statement of financial accounting concepts by the US financial accounting standards Board, several important differences exist. First, some terms and definitions are different. Second, the elements of financial statements are not identical. Candidates should become familiar with the subtle differences in the two sets of concepts

Answer 161

Underlying concepts – the I a SB framework

Question 162

The IASB framework is not considered an accounting standard and therefore it does not override any accounting treatment required by the international accounting standards and or international financial reporting standards. The framework exists to assist in the development of future international accounting standards and to assist preparers in accounting for topics that do not have guidance in an existing standard

Answer 162

Underlying concepts – the IASB framework

Question 163

In September 2010, the IAS be completed two chapters on a joint conceptual framework project with the FASB. The new conceptual framework contains chapter 1, the objective of general-purpose financial reporting, and chapter 3, qualitative characteristics of useful financial information. Because this is a joint project, the FASB and I ASB chapters 1 and 3 are identical. You may refer to the information earlier in this chapter on those topics. However, until the remaining parts of the joint projects are completed, there are subtle differences between the two frameworks. The most significant differences are terms, definitions, and elements of financial statements.

Answer 163

Underlying concepts – the IASB framework

Question 164

SBSF a C6 contains 10 elements of financial statements: assets, liabilities, equity, investments by owners, distributions to owners, comprehensive income, revenues, expenses, gains, and losses. The IAS be framework contains only five elements: assets, liabilities, equity, income, and expense

Answer 164

Underlying concepts – the IASB framework

Question 165

Asset – an asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity

Liability – a liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources and bodying economic benefits

Equity – equity is the red residual interest in the assets of the entity after deducting all its liabilities

Income – income is increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increased as an equity, other than those relating to contributions from equity participants

Expenses – expenses are decreases in economic benefits during the accounting. In the form of outflows or depletions of assets or in terms of liabilities that result in decreased is in equity, other than those relating to distributions to equity participants

Answer 165

I ASB framework – elements of financial statements

Question 166

An important point to understand is that the definition of income includes both revenue and games. Revenues arise in the normal course of business and are often referred to as sales, fees, interest, dividends, royalties, and rent. Games are other items that meet the definition of income, which may or may not arise in the normal course of business. The IAS be framework indicates that games are increases in economic benefits and are no different in nature from revenues. Therefore they are not regarded as a separate element in the framework. The framework treats losses in the same way, it is no different in nature from other expenses. However the framework also indicates that one gains or losses are reported in the income statement, they are usually displayed separately because this knowledge may be useful to the decision-maker. Games may be reported net of the related expenses, and losses may be reported net of the related income.

Answer 166

Underlying concepts – the IASB framework

Question 167

The IASB framework provides for capital maintenance adjustments. When assets or liabilities are revalued or restated, and there is a corresponding increase or decrease to equity, the definition of income expense may not be met. Therefore I’m on certain items may be included in equity as reevaluation reserves.

Answer 167

Underlying concepts – The I a SB framework

Question 168

The IAS Bfree Mark he finds recognition as the process of incorporating into the balance sheet or income statement and I don’t that meets the definition of an element and satisfies the criteria for recognition. The two criteria for recognition are (one) it is probable that a future economic benefit will flow to the entity, and (two) the item has a cost or value that can be measured reliably

Answer 168

Underlying concepts – the IASB framework

Question 169

The framework also outlines various bases of measurement such as historical cost, current cost, realizable (settlement) value, and present value. Current cost is The amount of cash or cash equivalent that would be paid if the same or equal an ass that were acquired finally. Realizable (settlement) value is the amount of cash that could be currently obtained by settling the asset in an orderly disposal. Although the measurement basis is commonly historical costs, certain accounts use different measurement methods

Answer 169

Underlying concepts – IASB framework

Question 170

As indicated above, revenue is the girls and flow of economic benefits resulting from an entity is ordinary activities. These inflows must increase equity and not increase the contribution of owners or equity participants. Revenue is generated from the sale of goods, the rendering of services, and the use of an entity’s assets by others. various titles are used for revenue including sales, fees, interest, dividends, and royalties. Revenue is measured at the fair value of the consideration received or the receivable, net of trade discounts or rebates

Answer 170

Revenue recognition

Question 171

Revenue is recognized from the sale of goods if all five of the following criteria are met: the significant risks and rewards of ownership of the goods are transferred to the buyer, the entity does not retain either a continuing managerial involvement in our control over the goods, the amount of revenue can be measured reliably, it is probable that economic benefits will flow to the entity from the transaction, and the cost incurred can be measured reliably

Answer 171

Revenue recognition

Question 172

Revenue can be recognized from rendering services when the outcome of rendering services can be estimated reliably. This method is often referred to as the percentage of completion method.

Answer 172

Revenue recognition

Question 173

If the outcomes cannot be estimated the reliably, then revenue should be recognized using the cost recovery method. The cost recovery method recognize revenue only to the extent that the expenses recognized are recoverable. Note: I FR us does not permit use of the completed contract method.

Answer 173

Revenue recognition

Question 174

Barter transactions are not recognized if the exchange goods are similar in nature and value. If the goods are dissimilar, revenue is recognized at fair value of the goods received. The fair value of the goods received cannot be measured, revenue is recognized at the fair value of goods or services given up.

Answer 174

Revenue recognition

Question 175

Interest income is recognized using the effective interest method. Realties should be accrued as provided for in the contract will agreement. Dividends should be recognized when the shareholder has a right to receive the dividend payment.

Answer 175

Revenue recognition

Question 176

Generally the abduction of IFR S involves restating assets, liabilities, and equity using I F RS principles. The “date of transition to IFR S” is defined as the beginning of the earliest period for which an entity presents full comparative information under IFR S and it’s first I FRS financial statements

Answer 176

First time adoption of IFR S

Question 177

With respect to business combinations the first time I doctor has the option of retrospectively and opting IFR S III for all. Presented, or adjusting the assets and liabilities through retained earnings in the period of adoption

Answer 177

First time adoption of IFR S

Question 178

Unless an entity designs to use a fair value election, it will need to recalculate be life to date depreciation or amortization of any PPE or intangible assets under IFR S, this can be quite time consuming. Alternatively, the entity you may use various methods to determine the fair value of the assets and use those amounts as the deemed cost at the time of adoption. I FR us will then be used going forward. The fair value election may be applied on an individual item basis

Answer 178

First time adoption of IFR S