Chapter 1 - Conceptual Framework (3) Flashcards
Consistency
same principle each year
Conservatism
considering all risks inherent in the business (accruing a contingent loss)
Cost/Benefit
Costs don’t exceed benefits to be derived
Matching
Recognize a cost as an expense in the same period as the benefit (usually a revenue) is recognized
Allocation
Spreading a cost over more than one period
Full Disclosure
Providing all useful info in the financial statements
Recognition
Booking an item in the financial statements
Realization
Converting non-cash resources into cash or a claim to cash
When to realize a F/S element and how to measure it
Meets the definition of an element (assets, liability);
Elements is the capable of being measured in monetary terms;
The item is Relevant and Faithful Representation (useful)
Historical Cost
amount you paid for it (PP&E)
Replacement cost
what it would cost to replace an item (inventory)
Fair market value (FMV)
Per ASC 820, “the price that would be received to sell an asset or paid to transfer a liability in anorderly transaction between market participants at the measurement date”
Unrealized gains or loss on trading securities = Statement of Income
Unrealized gains or loss on Available for sale securities & derivatives = OCI
All derivatives are always reported at fair value
When FV option is elected, unrealized gains and losses are reported in income
Net realizable value (NRV)
amount expected to a be converted into (A/R)
Present value (PV)
discounted cash flows due to the time value of money (notes/receivable, bonds/payable, leases)
Impairment Losses
Reduction in the carrying value of an asset to its fair value in the period of the impariment
Specific items that do not qualify for the fair value election
Pension plan, post retirement and other post -employment benefits
Leases
Financial instruments that are components of equity
Financial Instruments
cash, evidence of an ownership interest in an entity, or a contract that both:
a) Imposes on one entity a contractual obligation that either:
1. To deliver cash or another F/I to a second entity
2. To exchange other F/I on potentially unfavorable terms with second entity
b) Conveys to that second entity a contractual right either:
1. To receive cash or another F/I from the first entity
2. To exchange other F/I on potentially favorable terms with the entity
Financial assets and liabilities that would qualify for the fair value election:
Most investments:
- AFS securities
- Held to maturity securities
- Investments accounting for under the equity method
F/I such as forward exchange contracts to purchase or sell a foreign currency
3 Valuation Techniques
[MIC]
Market Approach - using information generated by market transactions that involve identical or comparable assets or liabilities
Income Approach - analyzing future amounts in the form of revenues, cost savings, earnings, or some other item
Cost Approach - measuring the cost that would be incurred to replace the benefit derived from an asset
3 levels of inputs
Level I - Most reliable, involves the use of observable data from actual market transactions, occurring in an active market, for identical assets or liabilities
Level II - Involves the use of observable data from actual market transactions but either:
- The transactions did not occur in an active market, or
- The transactions relate to similar, but not identical, assets or liabilities
Level III - Involves the use of unobservable data and are largely based on management’s judgement
