F1 - Standard Setting, Income Statement, and Reporting Requirements

Question 1

Name the single source of authoritative nongovernmental U.S. GAAP.

Answer 1

The FASB “Accounting Standards Codification” (ASC).

Question 2

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

Answer 2

~International Accounting Standards (IAS)

~International Financial Reporting Standards (IFRS)

~IFRIC Interpretations

~SIC Interpretations

Question 3

Who are the primary users of general purpose financial reports?

Answer 3

Existing and potential:

~Investors
~Lenders
~Other creditors

Question 4

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

Answer 4

Cost Constraint:

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

Question 5

Name the fundamental qualitative characteristics of useful financial information.

Answer 5

Relevance and Faithful Representation

Question 6

Name the three elements of relevance.

Answer 6

~Predictive value

~ Confirming value

~ Materiality

Question 7

Name the three elements of faithful representation.

Answer 7

~Neutrality

~ Completeness

~ Freedom from error

Question 8

Name the enhancing qualitative characteristics of financial information.

Answer 8

Timeliness, Verifiability, Understandability, and Comparability.

Question 9

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

Answer 9

~Statement of Financial Position (the balance sheet)
~Statement of Earnings (the income statement)
~Statement of Comprehensive Income
~Statement of Cash Flows
~Statement of Changes in Owners’ Equity

Question 10

What is the difference between realization and recognition?

Answer 10

Realization: When sold and converted to cash (or claims to cash)

Recognition: When recorded in the financial statements

Question 11

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

(REGL ALE ID)

Answer 11

Revenues
Expenses
Gains
Losses
Assets
Liabilities
Equity
Investment by Owners
Distributions to Owners
Comprehensive Income

Question 12

List the six elements of financial statements according to the IASB Framework.

Answer 12

Assets
Liabilities
Income (revenue and gains)
Expenses (expenses and losses)
Capital maintenance adjustments

Question 13

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

(EVTUO)

Answer 13

~Estimate of future cash flow
~Expectations about timing Variations of future cash flows
~Time value of money (the risk-free rate of interest)
~The price for bearing Uncertainty
~Other factors (e.g., liquidity issues and market imperfections)

Question 14

Describe the expected cash flow approach for present value computations.

Answer 14

Considers a range of possible csh flows and assigns a (subjective) probability to each cash flow in the range to determine the weighted-average, or “expected,” future cash flow.

Question 15

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

(IDEA)

Answer 15

Income Statement:
~Income (or loss) from continuing operations
~Income (or loss) from Discontinued operations
~Extraordinary items

Retained Earnings Statement:
~Cumulative effect of a change in Accounting principle

Question 16

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

Answer 16

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

Question 17

In what period are the following reported:

An impairment loss?

A gain (loss) from actual operations?

A gain (loss) on disposal?

Answer 17

All are reported in the period in which they occur.

Question 18

In reporting discontinued operations, how is a “component” of an entity defined unde U.S. GAAP and IFRS?

Answer 18

U.S. GAAP:

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

IFRS:

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

Question 19

How do we account for subsequent increases in the fair value of a discontinued component?

Answer 19

A gain is recoginized for the subsequent increase in fair value minus costs to sell (but not in excess of the previously recognized cumulative loss). The gain is reported in the period of increase.

Question 20

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

Answer 20

~Involuntary employee-termination benefits
~Costs to terminate a contract that is not a capital lease
~Other costs associated with exit or disposal activities

Question 21

Define extraordinary items?

Answer 21

~Material in nature
~Of a character significantly different from the typical or customary business activities (unusual)
~Not expected to recur in the foreseeable future (infrequent)
~Not normally considered in evaluating the ordinary operating results of an enterprise

Key words: Unusual and Infrequent

Remember: Extraordinary items are recognized under U.S. GAAP but not IFRS.

Question 22

List some examples of extraordinary items.

Answer 22

~The abandonment of, or damage to, a plant due to an infrequent earthquake or an infrequent flood.
~An expropriation of a plant by the government.
~A prohibition of a product line by a newly enacted law or regulation.

Question 23

Name the three types of accounting changes.

Answer 23

~Change in an accounting principle
~Change in accounting estimate
~Change in accounting entity

Question 24

How is a change in accounting principle reported?

Answer 24

~Cumulative effect of change is included in the retained earnings statement as an adjustment of the beginning retained earnings balance of the earliest year presented.

~Prior-period financial statements are restated, if presented.

Question 25

What are the special changes in an accounting principle?

How are special changes in accounting principle reported?

Answer 25

~A change to LIFO from another method of inventory pricing under U.S. GAAP

~Any other change in which a cumulative effect adjustment is considered impractical to calculate

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

Question 26

How is a change in an accounting estimate reported?

Answer 26

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

Question 27

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

Answer 27

All current and prior period financial statements presented are restated.

Question 28

How are error corrections reported?

Answer 28

Reported as prior period adjustments to retained earnings and all comparative financial statements presented are restated.

Question 29

Define comprehensive income.

Answer 29

Change in equity (net assets) 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.

Question 30

Identify five items included in other comprehensive income.

PUFER

Answer 30

~Pension adjustments
~Unrealized gains and losses on available-for-sale securities
~Foreign currency translation adjustments and gains/losses on foreign currency transations that are designated as economic hedges of a net investment in a foreign entity
~Effective portions of cash flow hedges
~Revaluation surpluses (IFRS only)

Question 31

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

Answer 31

~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 Owners’ Equity (prohibited under IFRS, will be prohibited under U.S. GAAP for public companies as of 12/15/11 and for nonpublic companies as of 12/15/12)

Question 32

List some disclosure requirements for comprehensive income.

Answer 32

~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

Question 33

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

Answer 33

Summary of Significant Accounting Policies

Identify and describe:
~Measurement bases used in preparing the financial statements

~Principles and methods

~Criteria

~Policies

~Pricing

Question 34

Describe the related party disclosures required under U.S. GAAP and IFRS.

Answer 34

~Material related party transactions
~Related party notes/accounts receivable
~Control relationships

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

Question 35

What are the U.S. GAAP disclosure requirements for risks and uncertainties?

Answer 35

~Nature of operations.
~Use of estimates in preparing financial statements.
~Significant estimates.
~Current vulnerability due to certain concentrations.

Question 36

What are the guidelines for interim reporting?

Answer 36

~Use same account principles that were used in the most recent annual report.

~Allocate expenses to the interim period benefited.

~Revenues are recognized in the period in which they are earned and realized or realizable.

~A total for comprehensive income n condensed financial statements of interim periods.

Question 37

What income tax rate is used in interim financial reporting?

Answer 37

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

Question 38

Name the four required disclosures for segments of an enterprise.

Answer 38

~Operating segments
~Products and services
~Geographic areas
~Major customers

Question 39

Define operating segment.

Answer 39

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.

Determined using a “management approach.”

Question 40

Name two quantitative thresholds used in identifying reportable operating segments.

Answer 40

~10% “Size” test

~75% “Reporting Sufficiency” test

Question 41

Describe the 10% test for identifying reportable segments.

Answer 41

~Revenue
Reported revenue, including both sales to external customers and intersegment sales or transfers, is 10% or more of the combined revenue, internal and external, of all operating segments.

~Reported profit or loss
The absolute amount of its reported profit or loss is 10% or more of the greater, in absolute amount, of
~The combined reported profit of all operating segments that did not report a loss, or
~The combined reported loss of all operating segments that did report a loss

~Assets
Assets are 10% of more of the combined assets of all operating segments.

Note: Must meet only one of the above.

Question 42

What is the 75% test for identifying reportable segments?

Answer 42

Combined external (consolidated) revenue of all reportable segments must be at least 75% of the total consolidated revenue of the entity.

The practical limit is 10 segments, but this is not a precise limit.

Question 43

What are the disclosure requirements for reportable operating segments?

Answer 43

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
~Reconciliations

Question 44

Define development-stage enterprise.

Answer 44

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.

Question 45

Indicate any special accounting treatment for development-stage enterprises.

Answer 45

Same generally accepted accounting principles as established operating enterprises, with additional disclosures:

~Identify statements as those of a developemnt-state enterprise.
~Accumulated losses identified as “deficit accumulated during development stage.”
~In the Income Statement, show revenue and expenses, and cumulative total of both amounts from company’s inception.
~In the statement of cash flows, include cumulative amounts of cash inflows and inflows and outflows for each period presented.
~Issue a separate statement of stockholders’ equity, indicating shares issued, date of issuance, dollar amounts assigned, and noncash consideration, if any.

Question 46

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

Answer 46

The date of the opening balance sheet.

Question 47

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?

Answer 47

Form 10K:
Filed annually by U.S. registered companies. Includes a summary of financial data, MD&A, and audited financial statements prepared using U.S. GAAP.

Form 10-Q:
Filed quarterly by U.S. registered companies. Includes unaudited (reviewed) financial statements, interim MD&A, and certain disclosures.