Basic Concepts Flashcards
What does ASC stand for?
Accounting Standards Codification
What are the 5 basic concepts?
Theory, Income Determination, Accruals, Deferrals, and Revenue Recognition
Can be defined as coherent set of hypothetical, conceptual, and pragmatic principles forming a general frame of reference for a field of inquiry
Theory
What are some of the components of the conceptual framework for financial accounting and reporting?
Objectives, qualitative characteristics, elements, recognition, measurement, financial statements, earnings, funds flow, and liquidity
Most basic component of the objective framework
Objectives
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
Objectives
Criteria to be used in choosing and evaluating accounting and reporting policies
Qualitative characteristics
Components from which the financial statements are created. Include assets, liabilities, equity, investments by owners, revenues, expenses, gains, and losses
Elements
Must meet criteria for recognition and posses an attribute which is relevant and can be reliably measured
Elements
Concerned with what info. should be provided, who should provide it, and where it should be displayed
Reporting considerations
Primary users of financial reporting
Investors, lenders, and creditors. Other parties such as Regulators and members of the public not included via SFAC 8
Objectives of financial reporting
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
Establish criteria for selecting and evaluating accounting alternatives which will meet the objectives
Qualitative characteristics
Cost benefit constraint (Persuasive constraint)
If benefits of information do not outweigh costs then the information does not need to be provided
Materiality constraint (Threshold for Recognition)
Any item deemed to be immaterial does not need to be provided
Two fundamental characteristics of accounting information
Relevance and faithful representation
Requires that information be used to predict future outcomes
Predictive value
Requires that information either confirms or changes prior evaluations
Confirmatory value
Should be complete, neutral, and free from error
Faithful representation
Requires that information is presented or depicted in a way that users can understand the item being depicted
Completeness
Requires that the item is being depicted without bias either favorably or unfavorably to users
Neutrality
No errors or omissions are in the information that is provided
Free from error
Enables users to identify and understand similarities and differences between items
Comparability
Refers to the use of the same accounting methods in different periods.
Consistency
Occurs when different sources reach consensus or agreement on an amount of representation of an item
Verifiability
Requires that information is available to a decision maker when it is is useful to make a decision.
Timelines
Involves classifying, characterizing, and presenting clearly and concisely
Understandability
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)
Elements of financial statements
In order to be included on a statement an item must do what 3 things?
Qualify as an element, meet recognition criteria, and be measurable.
Asset-liability view
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)
Revenue-expense view
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)
Definition of all 10 elements can be found where?
SFAC 6
Realization and recognition are addressed where
SFAC 5
Definition of accrual accounting is important. Why?
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.
Matching
Is referred by most as a principle or fundamental law of accounting
Recognition and measurement
Recognition establishes criteria concerning when an element should be included in the statements, while measurement governs the valuation of those elements.
SFAC 5 established what 4 fundamental recognition criteria?
Definitions, measurability, relevance, and reliability
Historical cost
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.
Current cost
Some inventories are reported at current replacement cost.
Current market value
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.
Nett realized value
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.
Present or discounted value of future cash flows
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.
States that these 5 attributes is appropriate in different situations and will continue to be used in the future
SFAC 5
Nominal amounts of money will continue to be the measurement unit
SFAC 5
“Well-offness
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.
Alternative definition of “well-offness”
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.
SFAC 5
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
Used to compute earnings
Revenues, expenses, gains, and losses
Earnings
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
Comprehensive income
Any earnings that are adjusted for cumulative accounting adjustments and other nonowner changes in equity
Attributes most often used to measure assets and liabilities
Observable marketplace-determined amounts
Generally more reliable and are determined more efficiently than measurements that employ estimates of future cash flows
Observable marketplace amounts (includes current cost)
What is used to determine assets and liabilities when observable amounts are unavailable?
Estimated cash flows
SFAC 7
provides a framework for using future cash flows as the basis of an accounting measure.
Fresh start measurement
Measurements in periods following initial recognition that establish a new carrying value amount unrelated to previous amounts and accounting conventions
Applies only to measurements at initial recognition, fresh-start measurements, and amortization techniques based on future cash flows
SFAC 7
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
SFAC 7
Present value formula
Tool used to incorporate the time value of money in a measurement
How does FASB define present value?
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
Objective of using present value
To capture, to the extent possible, the economic difference between sets of future cash flows
Assets with the same cash flows are distinguished from one another by the timing and uncertainty of those cash flows
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
Fair value
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
the only objective of present value, when used at initial recognition and fresh-start measurements, is to estimate fair value
Fair value
In the absence of observed transaction prices, accounting measurements at initial recognition and fresh-start measurements should do what?
Attempt to capture the elements that taken together would comprise a market price if one existed
Marketplace participants attribute prices to assets and liabilities in order to distinguish the risk and reward of one another.
Fair value
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
Fair value
Present value measurement includes what elements according to SFAC 7?
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
SFAC 7 contrasts 2 different approaches to computing present value. What are they?
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
Certain general principles govern any application of present value techniques in measuring assets
SFAC 7
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
Discount rate adjustment approach
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.
Expected cash flow (present value) approach
When the timing of cash flows is uncertain the expected cash flow approach allows present value techniques to be utilized.
SFAC 7
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.
SFAC 7
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.
Adjustment for risk
Refers to the fact that the cash flows used in a present value measurement are estimates rather than known amounts.
Uncertainty
Refers to any exposure to uncertainty in which that exposure has potential negative consequences.
Risk
Referring to an entity that prefers situations with less uncertainty relative to an expected outcome
Risk averse
The compensation for accepting uncertainty
Risk premium
If prices are for an asset or liability are already observable in the marketplace then there is no nee for the present value calculation.
Present value
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.
Present value measurements
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.
Interest methods of allocations
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
Income
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.
Cost of capital will be lower for the more efficient company
Acquiring raw materials, processing them, and selling the resulting goods and services. Also, providing warranty protection
Revenue production
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)
Revenue recognition
Three exceptions exist
1) during production
2) at the point where production is complete
3) the point of cash collection
Revenue recognition
Accounting method) percentage of completion
Criteria for use) 1. long-term construction, property, or service contract
- Dependable estimates of extent of progress and cost to complete
- Reasonable assurance of collectibility of contract price
Reasons for departing from sale basis
- Availability of evidence of ultimate proceeds
- Better measure of periodic income
- Avoidance of fluctuations in revenues, expenses, and income
During production basis
Accounting method) Net realizable value
Criteria for use) 1. Immediate marketability at quoted prices
- Unit interchangeability
- Difficulty of determining costs
Reasons for departing from sale basis
- Known or determinable revenues
- Inability to determine costs and thereby defer expense recognition until sale
Completion of production basis
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
Cash collection basis
Expenses are recognized as related revenues are recognized. Some expenses cannot be associated with particular revenues
Accrual accounting
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
Product costs
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
Period costs
Net effect of inflows of revenue and outflows of expense during a period of time
Income
Recognizes income when cash is received and expenses when cash is disbursed.
Cash basis accounting
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
Accrual
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
Deferral
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
Reversing entries
Revenues are recorded when cash is received and expenses are recorded when cash is paid
Cash basis
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
Adjusting from cash basis to accrual
Adjusting a balance sheet account from cash to accrual should result in the other half of the entry being a related income statement account
Adjusting cash basis to accrual
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
Accrual formulas
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
Installment sales
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
Installment sales
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
Cost recovery method
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.
Cost recovery method
The initial franchise fee may be recognized as revenue by the franchisor only upon substantial performance of their initial service obligation
Franchise agreements
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
Franchise agreements
Direct franchise costs are deferred until the related revenue is recognized
Franchise agreements
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
Real estate transactions
Profit from real estate sales may be recognized in full provide the profit is determinable and the earnings process is virtually complete
Real estate transactions
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
Real estate transactions
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
Real estate transactions
Payments received our recorded as a liability until the contract is canceled or a sale is achieved
Deposit method in real estate transactions
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.
Reduced profit method in real estate transactions
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.
Multiple deliverable revenue arrangements
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
Multiple deliverable revenue arrangements
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
Milestone method of accounting
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
Milestone method of
Do you notes to the financial statements should disclose its accounting policy for the recognition of milestone payments
Milestone method of accounting
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
Milestone method of accounting
Software products that require significant production, modification, or customization should be accounted for using a SC topic 605
Software revenue recognition
Software products that are included with tangible products and are required for the product functionality are excluded from the software revenue recognition rules
Software revenue recognition
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
Software revenue recognition
Portion of the fee allocated to an element should be recognized using the same list of criteria
Software revenue recognition
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
Software revenue recognition
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
Software revenue recognition
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
Software revenue recognition
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
Software revenue recognition
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
Software revenue recognition
Deferred revenue until whichever one of the following occurs first sufficient vendor specific objective evidence does exist or all elements have been delivered
Software revenue recognition
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
Software revenue recognition
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
Software revenue recognition
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
Sales basis criteria for selecting transactions
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
Sale with the right of return/ASC topic 605
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
Product financing arrangement/ASC topic 470
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
Real estate sale/ASC topics 360 and 976
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
Sales type lease/ASC topic 840
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
Sale of receivables with recourse /ASC topic 860
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
Non-monetary exchange/ATSC topic 845
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
Sale-leaseback transaction slash a SC topic 840
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
Reporting a start up costsa
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
Research component – accounting standards codification
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
Research component – accounting standards codification
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.
Research component – accounting standards codification
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.
International financial reporting standards
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
International financial reporting standards is
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
International financial reporting standards
Vocabulary or definition differences – although the concepts of US GAAP and IFR S may be similar, vocabulary and definitions are often somewhat different
International financial reporting standards
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
IFR S
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
IFR S
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
Major differences in US GAAP versus I F RS
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
Major differences in US GAAP versus IFR S
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
Need your differences and US GAAP versus I F RS
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.
Major differences in US GAAP versus I FRS
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.
Major differences in US GAAP versus IFR S
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.
Your differences in US GAAP versus I F RS
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
Differences in US GAAP versus IFRS
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
Major differences US GAAP versus IFR S
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
Major differences in the US GAAP versus I FRS
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.
Underlying concepts – the I ASB framework
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
Underlying concepts – the I a SB framework
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
Underlying concepts – the IASB framework
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.
Underlying concepts – the IASB framework
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
Underlying concepts – the IASB framework
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
I ASB framework – elements of financial statements
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.
Underlying concepts – the IASB framework
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.
Underlying concepts – The I a SB framework
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
Underlying concepts – the IASB framework
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
Underlying concepts – IASB framework
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
Revenue recognition
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
Revenue recognition
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.
Revenue recognition
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.
Revenue recognition
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.
Revenue recognition
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.
Revenue recognition
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
First time adoption of IFR S
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
First time adoption of IFR S
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
First time adoption of IFR S
