F1: Standard Setting, Income Statement, and Reporting Requirements Flashcards
US Standard Setting Bodies
SEC: allowed self-regulation by profession
FASB: determined GAAP since 1973
Codification
-single source of authoritative nongov’t GAAP
-contents: FEDPRIA
F – FASB releases (but not Statements of Financial Accounting Concepts)
E – EITF
D – Derivative Implementation Group
P – acc’t Principles Board Opinions
R – acc’t Research Bulletins
I – acc’t Interpretations
A – AICPA releases
-also includes relevant portions of SEC rules
FASB Codification Update Process
- new Accounting Standards Updates
- majority vote of FASB board to issue Exposure Draft (for public comment) and then to amend the Codification
International Standards
- IASB determines IFRS
- 9 members of IASB vote to issue Exposure Draft and then to approve new standard
Conceptual Framework
- not IFRS or GAAP
- IFRS: entities can consider framework concepts when no direct IFRS standard on point
- GAAP: framework can’t be applied to specific issues
Objective of Financing Reporting
- provide info useful to primary users
- primary users: investors, lenders, creditors
- financial info: entity resources, claims against entity and effectiveness of mgt use of entity resources
- info used to assess future cash flow prospects
Characteristics of Useful Financial Info
- fundamental characteristics: relevance (predictive value, confirming value, materiality) and faithful representation (completeness, neutrality, free from error)
- enhancing characteristics: comparability/ consistency, verifiability, timeliness, understandability
- benefits of info must exceed costs of obtaining/presenting it
Fundamental Assumptions
- GAAP: entity assumption, going concern, monetary unit, periodicity, historical cost, revenue recognition, matching principle, accrual accounting, full disclosure, conservatism
- IFRS: accrual accounting and going concern
Elements of Financial Statements
- I/S: revenues and expenses (operating), gains and losses (non-operating, peripheral transactions)
- B/S: assets (probable future economic benefits), liabilities (probable future sacrifices of economic benefits from a present obligation), equity (residual interest in assets)
- investments by/distributions to owners (excluded from comprehensive income)
- IFRS: also capital maintenance adjustments (changes in equity from assets/liability revaluation)
Present Value Measurements
- elements: estimate of future cash flows, timing of cash flows, time value of money, price of bearing uncertainty, other factors (liquidity, etc.)
- traditional approach (scheduled known payments) or expected cash flow approach (uncertain future payments, weighted average expected cash flows)
Income Statement
-revenues and expenses (gross amounts less returns/discounts), gains and losses (net amounts)
I – Income from continuing operations
D – Discontinued operations net of tax
E – Extraordinary items net of tax
A – cumulative effect of Accounting principle change net of tax (on statement of Retained Earnings)
Multiple Step Income Statement
Normal operations: Net sales – COGS = Gross Margin, minus Selling Exp, G&A Exp, Deprec Exp = Income from Operations
Non-operating: other revenues/gains/ expenses/losses, unusual OR infrequent items
Income before tax – taxes = Net Income
-COGS includes freight in
-Selling Exp includes freight out, advertising
Single Step Income Statement
-all revenues, minus all expenses (including taxes) = net income
Income from Discontinued Operations
- impairment loss (any subsequent increase in value), gain/loss from operations, gain/loss on disposal – net of tax
- held for sale: plan to sell, available for immediate sale, sale probable, no significant continuing involvement
Exit or Disposal Liabilities
- involuntary worker termination benefits, costs to terminate contract other than capital lease, costs to consolidate facilities/relocate employees
- criteria: obligating event, present obligation to transfer assets or provide services, little discretion to avoid obligation
- liability measured at fair value
Extraordinary Items
- material, unusual and infrequent
- natural disasters (infrequent), expropriation/ prohibition of product line, gain/loss on retirement of debt (if unusual and infrequent)
- not extraordinary: gain/loss of property abandonment, write-offs, foreign currency transaction gains/losses, employee strike, debt retirement if not unusual and infrequent
- if unusual OR infrequent: in income from continuing operations and not net of tax
- IFRS: no extraordinary items
Change in Accounting Estimate
- reported prospectively
- includes change in principle inseparable from change in estimate
Change in Accounting Principle
- change from one principle to another acceptable principle, okay if change required or new principle more fairly presents info
- general rule: adjust beginning retained earnings for earliest period presented for cumulative impact of change (net of tax) and restate prior period statements in comparative presentation
- prospective if change to LIFO inventory or change depreciation method (treated as both change in principle and change in estimate)
Change in Accounting Entity
- entity being reported on changes composition: consolidation instead of individual, or changes in entities that are consolidated
- all presented statements retrospectively restated to show information for new reporting entity
- IFRS does not have concept of change in accounting entity
Error Correction
- include change from non-GAAP to acceptable GAAP method of accounting
- adjust beginning retained earnings of earliest year presented, net of tax
- IFRS: if impracticable to determine cumulative effect, restate prospectively from earliest practicable date
Other Comprehensive Income
P – Pension adjustments (GAAP: gains/losses, prior service costs, net transition assets/liabilities, in OCI until part of net periodic benefit cost; IFRS: actuarial gains/losses, not reclassified to NI)
U – Unrealized gains/losses on available for sale securities (and on debt reclassified from held to maturity to AFS)
F – Foreign currency items (translation adjustments, until sale of investment in foreign entity)
E – Effective portion of cash flow hedge (until cash flows realized)
R – Revaluation surplus (IRFS only, may transfer to Retained Earnings when asset used/sold)
-OCI closed to Accumulated OCI (part of shareholder’s equity)
Reporting of Comprehensive Income
- single statement: calculations of Net Income and OCI on one statement, totaling Comprehensive Income
- two statement approach: start w/ Net Income (determined in prior statement) add OCI, to get Comprehensive Income
- previously under GAAP: comprehensive income presented on Statement of Owners’ Equity
- OCI reported net of tax or before tax w/ separate aggregate tax expense or benefit
Significant Accounting Policies Note
- integral part of financial statements
- IFRS: explicit statement of compliance w/ IFRS
- IFRS (disclosure of judgments and estimates), GAAP (disclosure of estimates)
Related Party Disclosures
- nature of relationship, transactions, amounts paid/due
- IFRS: also bad debt allowance/expense/write-offs, disclosure of key mgt compensation
GAAP Risks/Uncertainties Disclosures
-nature of operations, use of estimates, significant estimates (probable will change and change will be material), risks due to concentrations
Interim Reporting
- not required under GAAP/IFRS, required by SEC for public companies, integral part of annual financial statements (and marked unaudited)
- use accounting principles used in last annual report
- timeliness emphasized over reliability
- tax expense: use estimated annual effective tax rate
- inventory decline: permanent (reflect during period, subsequent increase not to exceed prior losses), temporary (don’t recognize if expected to reverse before end of annual period)
Segment Reporting
- required for public companies
- intercompany transactions not eliminated
- operating segment: earns revenues, results reviewed by COO, discrete financial info available (not corporate headquarters or pension plan)
Reportable Segment Tests
- revenue test: 10% of combined revenue, internal and external, of all segments
- profit or loss: absolute value of profit or loss is 10% of greater of combined profit of profitable segments or combined loss of loss segments
- assets: 10% of combined assets of all segments
- 75% reporting sufficiency: add segments until 75% of external (consolidated) revenue is reported
Segment Disclosures
- segment profit = revenue – traceable costs – allocated costs (as allocated by COO)
- profit or loss, assets, liabilities (IFRS only, if provided to COO)
- entity-wide disclosures: revenues from each product line, revenues/assets from geographic areas, major customers (10% of revenues)
Development Stage Enterprise
- GAAP, start-up company
- expense start-up/org costs immediately
- same financial statements as others, additional disclosures (cumulative accumulated deficit, losses, cash outflows)
IFRS Adoption
- first annual statement adopting IFRS and make explicit statement of compliance w/ IFRS
- three B/S, 2 of all others
- date of transaction is date of opening balance sheet
- recognize all assets/liabilities per IFRS, revaluations made directly to beginning retained earnings
- may value financial assets or liabilities or long-term assets at fair value
- must use same accounting policies in opening balance sheet and all periods shown in first set of IFRS statements
- disclose reconciliation of GAAP and IFRS equity and comprehensive income, recognition or reversal of impairment losses
SEC Forms
- Form 10-K: US annual report; w/in 60 days for large accelerated filers, 75 days for accelerated filers, 90 days otherwise
- Form 10-Q: US quarterly report; w/in 40 days for accelerated filers or 45 days otherwise
- Form 40-F (Canada) or Form 20-F (other): foreign annual report; GAAP, IFRS or OCBOA
- Form 6-K: foreign semi-annual reports
- Form 8-K: major corporate events
- Forms 3/4/5: filed by directors/officers/10% owners
SEC Financial Statement Requirements
- Reg S-K: form and content of interim and annual statements
- interim: review report, B/S (end of quarter and end of prior year), I/S (quarter, end of prior year to end of quarter, same periods for prior year), Cash Flow (end of prior year to end of quarter, same period from prior year)
- annual: audited, 2 B/S, 3 of I/S, changes in equity, cash flows (IFRS: 2 of everything)
XBRL Requirements
- required for US/foreign issuers
- tagging of financial statements, footnotes, other financial statement schedules
- modified liability for first 2 years
