F1 - M1 - Standards and Conceptual Framework Flashcards
Expenses
Operating, COGS, SG&A, Depr, part of normal operations.
SPAC No. 7 Cash Flow Information and “Present Value”
- Future cash flows as measurement basis for assets and liabilities
- Measurement based on future cash flows only, 5 Elements of PV Measurement
o Estimate of Future Cash Flow
o Timing variations
o Time value of money – impacts required returns / discount rate
o Uncertainty - credit risk – impacts required returns / discount rate
o Liquidity issues – impacts required returns / discount rate - Traditional approach – one discount rate, scheduled known payments, PV Bonds
- Expected Cash Flow Approach – More complex cases, range of possible cash flows,
o Examples – Warranties, estimate and accrual under the matching principle
IFRS
International Financial Reporting Standards
2001, IASB responsible to issue, IFRSs, IAS
SFAC
Conceptual Framework – FASB created, “Statements of Financial Accounting Concepts” or “SFAC”, basis / basic reasoning, NOT GAAP, business and nonbusiness enterprises
SEC
Securities and Exchange Commission
– legal authority create “GAAP”, allows accounting profession to create and self-regulate
- 1934
- Issue securities, subject to rules and regulations
- Issues rules and regs in various releases
CAP
Committee on Accounting Procedure
1939 – 1959, part-time, determined “GAAP”
Distributions to owners
Not expense, not on IS, decrease in equity
Measurement Attributes for Assets and Liabilities
- Historical cost = PP&E, paid for it
- Current cost - Inventory
- Net Realizable Value – AR
- Current market value – marketable securities
- Present value of future cash flows – Bonds, notes
“Qualitative Characteristics” - “Faithful Representation”
- “Faithful Representation”
o Complete – all information necessary
o Neutral – free from bias
o Free from error – no material error
SFAC No. 4 Objectives by “Nonbusiness”
resources from contributions or grants, “other than profit”, lack ownership, most human services, churches, foundations,
- Users = Resource providers, constituents “taxpayers”, government, managers,
- “Objectives” – resource allocations, assessing services, assessing management stewardship and performance.
Recognition Criteria
JE, formally recording item on F/S, classify as asset, liability, equity, revenue or expense. Needs the following:
- Measurability - $
- Relevance – capable of making a difference
- Reliability – Faithful, verifiable and neutral
FASB
Financial Accounting Standards Board
1973 – current, determines “GAAP”, full-time, since 2009 issues SFAS, FIN, FTB, 7 members with 5-year terms only two terms
“Qualitative Characteristics” - “Enhancing” Qualitative Characteristics
- “Enhancing” Qualitative Characteristics – Compare and verify in time to understand
o Comparability – compared to similar information, other entities or time periods, consistency
o Verifiability – independent observers
o Timeliness – available in time to make a decision
o Understandability – clear and concisely
SFAC No. 8 Chapter 3 “Qualitative Characteristics”, useful for users
- “Relevance”
- “Faithful Representation”
- “Enhancing” Qualitative Characteristics
Comprehensive Income
ANY change in equity other than investments or distributions
- Sum of Net Income per the Income Statement plus OCI “PUFE
Full Disclosure Principle
Notes and completeness,
Financial “information Provided” in General Purpose Financial Reports
“meet informational needs”, claims against, changes in resources, managements efficiency, accrual basis, FCF, earnings, growth, required return / risk
Gains
“peripheral” transactions, nonoperating, not core business, sales of non-inventory, PP&E
- Selling Price / Net Realizable Value (SP – Cost to Sell) GREATER than Book Value
Accrual Accounting
Record without an exchange of cash, revenue = performance obligation satifsfied, expenses = same period related to revenue / incurred
- Revenue Recognition = earned / satisfies performance and “realizable” (customer able to pay)
- Expense Recognition = incurred to generate revenue, matched against revenue (eg COGS), to periods in which assets provide benefit
“Qualitative Characteristics” - “Relevance”
- “Relevance” – capable in making a difference in the decisions
o Predictive Value – predict future outcomes
o Confirmatory Value – feedback
o Materiality – omission or misstatement of info would affect decision
SFAC No. 8
Chapter 1 “Objective” – provide financial information about company useful to “primary users”, users make decisions about providing resources,
Investments by owners
Not revenue, not on IS, increase in equity
Cost constraint
Benefit is greater than cost
Revenue
Selling inventory or services, part of normal operations
SFAC No. 6 “Elements” of Financial Statements
REGAL ALE ID – Components of F/S – “Measurable” & “Recognition”
- Assets – Probable future economic benefit, valuation accounts may increase or decrease
- Liabilities – Probable future sacrifices of economic benefit
- Equity / “Net Assets” – residual interest in the assets
Private Company Council
“PCC”, FAF created, improve for private companies, “alternatives”, more relevant, less complex and cost beneficial
Primary Users
existing / potential investors, lenders and other creditors, regulators
Fundamental Assumptions and Principles
- Entity Assumption – separate corp or division
- Going Concern – continue to operate in future
- Monetary Unit – money is basis
- Periodicity Assumption – meaningful time periods
- Measurement Principle – mixed attribute system for assets and liabilities to be measured at various bases
Ongoing Standard Setting
“Updates” to Accounting Standards Codification “ASC”, new US GAAP
- Proposed amendment for public comment, exposure draft
- Majority vote for exposure issuance, public comment
- Reviews comments
- Another majority vote to amend to ASC
o Updates are NOT authoritative, just background
APB
Accounting Principles Board
1959 – 1973, part-time, determined “GAAP”
SFAC No. 5, Recognition and Measurement in Financial Statements, full set of F/S
- Statement of Financial Position – “Balance Sheet” – Financial Risk
- Statement of Earnings – “Income Statement” – Performance, operating risks
- Statement of Comprehensive Income – PUFF
- Statement of Cash Flows
- Statement of Changes in Owners’ Equity – Why do up or down?
FASB Accounting Standards Codification
Effective July 1, 2009, single source of authoritative nongovernmental US GAAP
Loses
Nonoperating, not core business
- Selling Price / Net Realizable Value (SP – Cost to Sell) LESS than Book Value
