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FAR > F1 - Standard Setting, I/S, Reporting Requirements > Flashcards

F1 - Standard Setting, I/S, Reporting Requirements Flashcards

1
Q

Who has the legal authority to establish US GAAP?

A

The SEC

Note: The SEC has allowed the accounting profession to establish GAAP and self-regulate.

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2
Q

Name the single source of authoritative non-governmental US GAAP.

A

The FASB “Accounting Standards Codification” (ASC)

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3
Q

The term “International Financial Reporting Standards” includes what standards?

A

(1) International Accounting Standards (IAS)
(2) International Financial Reporting Standards (IFRS)
(3) IFRIC Interpretations
(4) SIC Interpretations

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4
Q

Who are the primary users of general purpose financial reports?

A

Existing and potential:

  • Investors
  • Lenders
  • Other Creditors
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5
Q

Name the pervasive constraint on the information provided in financial reporting.

A

Cost vs. Benefit Constraint

The benefits of financial information must be greater than the costs of obtaining and presenting the information.

Another primary constraint is:

Materiality

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6
Q

Name the fundamental qualitative characteristics of useful financial information.

A

Relevance and Faithful Representation

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7
Q

Name the three elements of relevance.

A

PCM Mnemonic (Passing Confirms Money)

  1. Predictive Value: useful to predict future outcomes
  2. Confirming Value: provides feedback about evaluations previously made by users
  3. Materiality: information is material if an omission or misstatement could affect the decisions made by users.

Note: Materiality is an entity specific aspect of relevance. FASB/IASB have not specified a uniform quantitative threshold for materiality and have not specified what would be material in specific situations.

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8
Q

Name the three elements of faithful representation.

A

“Completely neutral is free from error”

  1. Completeness: includes all information necessary for the user to understand the reported economic phenomena
  2. Neutrality: free from bias in selection or presentation
  3. Freedom from Error: there are no errors in the selection or application of the process used to produce reported financial information, no errors or omissions in the descriptions of economic phenomena. Does not require perfect accuracy (i.e. estimates are sometimes necessary).
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9
Q

Name the enhancing qualitative characteristics of financial information.

A
  • Comparability & Consistency: Apple v. Microsoft; C/Y vs. P/Y
  • Verifiability: different knowledgeable and independent observers can reach concensus a particular depiction is faithfully represented.
  • Timeliness: information is available to users in time to be capable of influencing their decisions.
  • Understandability: classified, characterized, and presented clearly and concisely.
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10
Q

According to SFAC #5, what should a full set of financial statements include?

A
  1. Statement of Financial Position (B/S)
  2. Statement of Earnings (I/S)
  3. Statement of Comprehensive Income
  4. Statement of Cash Flows
  5. Statement of Changes in Owner’s Equity
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11
Q

List the 10 elements of financial statements according to SFAC #6.

A

Comprehensive Income = Net Income + OCI (i.e. all differences between equity and ending equity other than transactions with owners).

AND

REGL ALE needs ID

  • Revenues
  • Expenses
  • Gains
  • Losses
  • Assets
  • Liabilities
  • Equity
  • Investments by Owners
  • Distributions to Owners

IFRS: Adds “capital maintenance adjustments”: theses are increases and decreases in equity from revaluation or restatement of assets and liabilities.

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12
Q

What authoratitive literature is included in the Codification?

A

FEDPRIA

  • FASB
    • SFAS
    • Interpretations
    • Technical Bulletins
    • Staff Positions
    • Staff Implementation Guides
    • STMT 138 Examples
  • EITF
  • Derivative Implementation Group Issues
  • Principles Board Opinions
  • Research Bulletins
  • Interpretations
  • AICPA
    • SoPs
    • Auditing & Acct Guides
    • Practice Bulletins
    • Technical Inquiry Service
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13
Q

What is the ongoing standard-setting process in both the Codification and IFRS?

A

Exposure Drafts for public comment, deliberated and voted by respective boards.

Codification: requires FASB board majority

IFRS: requires at least 9 board members

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14
Q

What are the fundamental assumptions under SFAC #5?

A
  • Entity: there must be an identifiable set of activities (i.e. a company, a division,etc.)
  • Going Concern: a presumption the entity will continue to operate in the foreseeable future
  • Monetary Unit: Money is the basis of economic measurement
  • Periodicity: economic activity can be divided into meaningful time periods
  • Historical Cost: general rule, financial information is accounted for at cost
  • Revenue Recognition: recognize when
    • Earned
    • Realized or Realizable
  • Matching Principle: Expenses matched against the revenue it earned.
  • Accrual Accounting: Record rev/exp without exchange of cash
  • Full Disclosure: Notes to F/S “Completeness”
  • Conservatism Principle: use method least likely to overstate assets (revenues) and understate liabilities (expenses)
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15
Q

Name the five elements of present value measurement per SFAC #7.

A
  • Estimate of future cash flow
  • Expectations about timing variations of future cash flows
  • Time value of money (risk-free rate of interest)
  • The price for bearing uncertainty
  • Other factors (liquidity risks, market imperfections)
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16
Q

What is the presentation order of the major components of an income and retained earnings statement?

A

IDEA

Remember:

  • I: Before & After (Gross & Net) of Tax
  • D, E, A: Net of Tax Always
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17
Q

The gain (loss) from discontinued operations can consist of…

A

An impairment loss, a gain (loss) from actual operations, and a gain (loss) on disposal.

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18
Q

In what period are the following reported:

An impairment loss?

A gain (loss) from actual operations?

A gain (loss) on disposal?

A

All are reported in the period in which they occur.

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19
Q

In reporting discontinued operations, how is a component of an entity defined under US GAAP and IFRS?

A

US GAAP

  1. An operating segment
  2. A reportable segment
  3. A reporting unit
  4. A Subsidiary
  5. An asset group

Bottom line: it can be carved out of the business (clearly distinguished in operation and financial reporting).

IFRS

  1. A separate major line of business or geographical area of operations
  2. A subsidiary acquired exclusively with a view to resale
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20
Q

How do you classify a held for sale component of a business (US GAAP) or disposal group (IFRS)?

A

All must be met:

  1. Managment commits to a plan
  2. For sale right now
  3. An active program to find a buyer started
  4. Sale is probable, and expected to complete within one year
  5. Actively marketed
  6. Actions to complete sale are unlikely to make significant changes to or withdraw the plan.

IFRS: Requires revaluation of A&L before held for sale. Report at lower of (1) carrying value or (2) fair value less costs to sell.

21
Q

In order to report under discontinued operations, an entity must be either:

A

Disposed of, or classified as held for sale.

Requires:

  • Elimination (or will be eliminated) from ongoing ops
  • No significant continuing involvement (i.e. no continued responsibility)
22
Q

What is the discontinued operations calculation?

A
  1. Operating results of the component for FULL YEAR up until sale (but no depreciation or amortization - impairment will take care of this) - net of tax
  2. Gain or loss on disposal - net of tax
  3. Impairment loss - net of tax
    1. Any subsequent revaluations may reverse prior impairments up to the cumulative impairment loss
23
Q

What types of costs are associated with exit and disposal activities?

A
  1. Involuntary employee-termination benefits
  2. Costs to terminate a contract that is not a capital lease
  3. Other costs associated with exit or disposal activities

Measured at FV. Must be involuntary, we have to make payment, and there is little to no discretion to avoid it. Disclosure in notes required.

24
Q

Define extraordinary items.

A

Material, unusual and infrequent.

vs. unusual or infrequent - be careful, not extraordinary.

REMEMBER NET OF TAX if recognizing an extraordinary item!!!!!!

25
Q

List some examples of extraordinary items.

A

The abandonment of, or damage to, a plant due to an infrequent earthquake or an infrequent flood (be careful if these are not unusual events…not extraordinary if so)

An expropriation of a plant by the government

A prohibition of a product line by a newly enacted law or regulation.

Certain extinguishments of long term debt, must specifically state unusual and infrequent.

26
Q

Does IFRS have extraordinary items presented on financial statements?

A

No.

27
Q

Name the three types of accounting changes.

A
  • Change in accounting principle
    • GR: Retrospective
  • Cahnge in accounting estimate
    • Prospective
  • Change in accounting entity
    • Restate
28
Q

How is a change in accounting principle reported?

A
  • Cumulative effect of change (direct and indirect - i.e. bonuses based on changed earnings) is included in R/E statement as an adjustment to Beg. R/E of the earliest year presented.
  • Prior-period financial statements are restated, if presented.
29
Q

What are the special changes in an accounting principle?

How are special changes in accounting principle reported?

A
  • A change to LIFO from another method of inventory pricing under GAAP
  • Any other change in which a cumulative effect adjustment is considered impractical to calculate (change in depreciation method).

Special changes are reported prospectively (like a change in estimate).

30
Q

How is a change in an accounting estimate reported?

A
  • Prospectively
  • The effect is shown in the current and/or future periods that are affected by the change
  • Financial statements are not restated
31
Q

Under GAAP, how is a change in the accounting entity reported?

A

All current and prior period financial statements presented are restated.

Full disclosure required.

IFRS does not recognize this concept.

32
Q

How are error corrections reported?

A

Reported as prior period adjustments to R/E and all comparative financial statements presented are restated to correct the error.

Error corrections are typical when not in compliance with GAAP, but could also be mathematical, presentation, recognition or measurement errors.

33
Q

Define comprehensive income.

A

Change in equity that results from revenue, expenses, gains and losses during a period, as well as any other recognized changes in equity that occur for reasons other than investments by owners and distributions to owners.

Events parked on the balance sheet that “wait” to be recognized on the balance sheet.

34
Q

Identify five items included in other comprehensive income.

A

PUFER - “Direct to equity adjustments”

  1. Pension adjustments
  2. Unrealized gains and losses on AFS securities
  3. Foreign currency translation adjustments and gains/losses on foreign currency transactions that are designated as economic hedges of a net investment in a foreign entity
  4. Effective portions of cash flow hedges
  5. Revaluation surpluses (IFRS only)
35
Q

List the three formats acceptable for reporting comprehensive income. Which format is prohibited under IFRS?

A

Statement of Comprehensive Income (single-statement approach)

Statement of Income followed by separate Statement of Comprehensive Income (two-statement approach)

Component of the Statement of Owner’s Equity (prohibited under IFRS, soon to be ending under GAAP)

36
Q

List some disclosure requirements for comprehensive income.

A
  • Tax effects of each component included in current “other comprehensive income”
  • Changes in the accumulated balances of components of “other comprehensive income”
  • Total accumulated other comprehensive income
  • Reclassification adjustments between other comprehensive income and net income
37
Q

Identify the contents of the Summary of Significant Accounting Policies note to the financial statements.

A

Summary of Significant Accounting Policies

Identify and describe:

  • Measurement bases used in preparing the financial statements
  • Principles and methods
  • Criteria
  • Policies
  • Pricing
38
Q

Descirbe the related party disclosures required under US GAAP and IFRS.

A
  • Material related party transactions
  • Related party notes/accounts receivable
  • Control relationships

Note: IFRS requires disclosure of key management compensation. US GAAP does not require this disclosure.

39
Q

What are the US GAAP disclosure requirements for risks and uncertainties?

A
  • Nature of operations.
  • Use of estimates in preparing the financial statements.
  • Significant estimates.
  • Current vulnerability due to certain concentrations.
40
Q

What are the guidelines for interim reporting?

A
  • Use same accounting principles that were used in the most recent annual report.
  • Allocate expenses to the interim period benefitted.
  • Revenues are recognized in the period in which they are earned and realized or realizable.
  • A total for comprehensive income in condensed financial statements of interim periods.
41
Q

What income tax rate is used in interim financial reporting?

A

Use best estimate of effective tax rate to be applicable for full fiscal year on quarterly statements.

42
Q

Name the four required disclosures for segments of an enterprise.

A
  • Operating segments
  • Products and services
  • Geographic areas
  • Major customers
43
Q

Define operating segment.

A

Distinct revenue-producing components of the enterprise about which separate financial information is produced internally, and whose operating results are regularly reviewed by the enterprise’s Chief Operating Decision Maker.

Determined using a “management approach.”

44
Q

Name two quantitative thresholds used in identifying reportable operating segments.

A
  • 10% “Size” Test
    • Anyone of these 3:
      • Of Revenue (external and internal customers)
      • Of Profit or Loss (absolute amount)
      • Of Assets
  • 75% “Reporting Sufficiency” test
    • Keep adding segments until 75% of unaffiliated (external) revenue is included
    • Practicable limit is 10 segments, but not a precise limit
    • Rest in “all other segments” category
45
Q

What are the disclosure requirements for reportable operating segments?

A

For each reportable segment, the entity must report:

  • Identifying factors
  • Products or services
  • Profit or loss details
  • Asset details
  • Liability details (IFRS only)
  • Measurement criteria
46
Q

Define development stage enterprise.

A

Enterprise that devotes substantially all of its efforts to establishing a new business and either planned principal operations have not commenced or no significant revenue has been generated therefrom.

47
Q

What special accounting treatment is for development-stage enterprises?

A

The same GAAP as any other established enterprise, with additional disclosures:

  • Identify statements as those of a development-stage enterprise
  • Describe CUMULATIVE net losses as “deficit accumulated during the development stage”
  • On the I/S, show revenue and expenses and CUMULATIVE total of both amounts from company’s inception
  • On the C/F, show CUMULATIVE amounts of inflows/outflows since inception, and current amounts for each period presented
  • Issue a separate statement of S/E, indicating shres issued, date of issuance, dollar amounts assigned, and noncash consideration, if any.
48
Q

What is the date of an entity’s transition to IFRS?

A

The date of the opening balance sheet.

49
Q

Describe the Form 10-K and the Form 10-Q. What level of assurance must be provided with the financial statements submitted in these forms?

A
  • Form 10-K: Filed annually by US registered companies. Includes a summary of financial data, MD&A, and audited financial statements prepared using GAAP
  • Form 10-Q: Filed quarterly by US registered companies. Includes unaudited (reviewed) financial statements, interim MD&A, and certain disclosures.

FAR (19 decks)

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