F1 Standard Setting, Income Statement & Reporting Requirements Flashcards
Name the enhancing qualitative characteristics of financial information.
Comparability, verifiability, timeliness and understandability.
Name the five elements of present value measurement per SFAC No. 7. EVTUO
Estimate of future cash flow
Expectations about timing Variations of future cash flows
Time value of money (the risk free rate)
The price for bearing Uncertainty
Other factors (liquidity, market conditions, etc.)
Name the single source of authoritative nongovernmental US GAAP
The FASB Accounting Standards Codification (ASC’s).
What is the Private Company Council?
- Financial Accounting Foundation (FAF) created the Private Company Council (PCC) to improve standard setting for private companies in the US
- Goal of the PCC is to establish alternatives to US GAAP where appropriate to make private company financial statements more relevant, less complex and cost beneficial.
- Accounting alternatives for private companies are incorporated into the relevant sections of the ASC
How are error corrections reported?
Reported as prior period adjustments to retained earnings and all comparative financial statements presented are restated.
The term “International Financial Reporting Standards” includes what standards?
- International Accounting Standards (IAS)
- International Financial Reporting Standards (IFRS)
- IFRIC Interpretations
- SIC Interpretations
What is the difference between realization and recognition?
Realization - when sold and converted to cash (or claims to cash)
Recognition - when recorded in the financial statements
Name the three elements of faithful representation
- Neutrality
- Completeness
- Freedom from error
Name the two quantitative thresholds used in identifying reportable operating segments.
- 10% size test
- 75% reporting sufficiency test
Who are the primary users of general purpose financial statements?
Existing and potential:
- Investors
- Lenders
- Other creditors
Name the fundamental qualitative characteristics of useful financial information
Relevance and faithful representation
Name the types of entities that may be considered for reporting according to the rules for discontinued operations.
- Component of an entity
- Group of components of an entity
- Business
- Nonprofit activity
List the six elements of financial statements according to the IASB framework
Assets Liabilities Equity Income (revenue & gains) Expenses (expenses & losses) Capital maintenance adjustments
In reporting discontinued operations, how is a “component” of an entity defined under US GAAP and IFRS?
US GAAP - An operating segment - A reportable segment - A reporting unit - A subsidy - An asset group IFRS - A separate major line of business or geographical area of operations - A subsidiary acquired exclusively with a view to resale
Identify the five items in other comprehensive income (PUFER)
Pension adjustments Unrealized gains and losses on AFS securities Foreign currency translation adjustments Effective portion of cash flow hedge Revaluation surplus (IFRS only)
Name three types of accounting changes.
- Change in accounting principle
- Change in accounting estimate
- change in accounting entity
What conditions must be present for a disposal to be reported in discontinued operations?
Disposal of a component, component group, business activity or nonprofit is reported in discontinued operations if the disposal represents a strategic shift that has or will have a major effect on an entity’s operations and financial results.
What types of costs are associated with exit and disposal activities?
- Involuntary EE termination benefits
- Costs to terminate a contract that is not a capital lease
- Costs to consolidate facilities
- Costs to relocated EE’s
Describe the 10% test for identifying reportable segments.
Revenue - is 10% or more of the combined revenue, internal and external, of all operating segments
Reported P&L - absolute amount of its reported profit or loss is 10% or more of the greater of:
- combined reported profit of all operating segments that did not report a loss
- combined reported loss of all operating segments that did report a loss
Assets - are 10% or more of the combined assets of all reporting segments
*note - interest income is not considered in calculating 10% of total revenue.
(Must meet one of the above)
The gain (loss) from discontinued operations can consist of…
An impairment loss, a gain (loss) from actual operations and a gain (loss) on disposal
Define extraordinary items
- Material in nature
- Of 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
Unusual & Infrequent
Define operating segment
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”.
Define the following terms as they are used in reporting discontinued operations: Business, Nonprofit activity
Business - integrated set of activities and assets that is conducted and managed for the purpose of providing a return to investors or other owners, members or participants.
Non-profit activity - is an integrated set of activities and assets that is conducted and managed for the purpose of providing benefits, other than goods or services at a profit, to fulfill an entity’s purpose or mission
Identify the contents of the Summary of Significant Accounting Policies note to the financial statements
ID & Describe:
- measurement bases used in preparing the financial statements
- Principles and methods
- Criteria
- Policies
- Pricing
Describe the expected cash flow approach for present value computations
Considers a range of possible cash flows and assign a (subjective) probability to each cash flow in the range to determine the weighted average or “expected” future cash flow.
List some examples of extraordinary items
- Abandonment of, or damage to, a plant due to an infrequent earthquake or an infrequent flood
- an expropriation or a plant by the government
- a prohibition of a product line by a newly enacted law or regulation
Name the four required disclosures for segments of an enterprise
- operating segments
- products and services
- geographic areas
- major customers
What is the 75% test for identifying reportable segments?
Combined external (consolidated) revenue of all reportable segments must be at least 75% of the total consolidated revenue of the entity
Practical limit is 10, but not precise
What are the US GAAP disclosure requirements for risks and uncertainties
- Nature of operations
- Use of estimates in preparing the financial statements
- significant estimates
- current vulnerability due to certain concentrations
How is a change in accounting estimate reported?
- prospectively
- effect is shown in the current and/or future periods that are affected by the change
- financial statements are not restated
What are the disclosure requirements for reportable operating segments?
For each reportable segment, entity must report:
- Identifying factors
- Products or services
- Profit or loss details
- Asset detail
- Liability details (IFRS only)
- Measurement criteria
- Reconciliations
List the two formats acceptable for reporting comprehensive income. How does this compare with IFRS?
Statement of Comprehensive Income (single-statement approach)
Statement of income followed by separate Statement of Comprehensive Income (two-statement approach)
US GAAP and IFRS both allow the same two presentations
How do we account for subsequent increases in the fair value of a discontinued component
Gain is recognized for the subsequent increases 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.
Name the pervasive constraint on the information provided in financial reporting.
Cost constraint:
Benefits of reporting financial information must be greater than the costs of obtaining and presenting the information
How is a change in accounting principle reported?
- cumulative effect of change is included in the retained earnings statement as an adjustment of the beginning R/E balance of the earliest year presented
- prior period financial statements are restated, if presented.
According to SFAC No. 5, what should a full set of financial statements include?
Statement of Financial Position (B/S) Statement of Earnings (I/S) Statement of Comprehensive Income Statement of Cash Flows Statement of Changes in Owner's Equity
What income tax rate is used in interim financial reporting?
Use best estimate of effective tax rate to be applicable for full fiscal year on quarterly statements.
Under US GAAP, how is a change in the accounting entity reported?
All current and prior period financial statements are presented are restated.
Describe the related party disclosures required under US GAAP and IFRS
- Material related party transactions
- Related party notes/AR
- control relationships
Note - IFRS requires disclosure of key management compensation. US GAAP does not require this disclosure
What are the primary users of general purpose financial reports?
Existing and potential:
- Investors
- Lenders
- Other creditors
What are the special changes in an accounting principle? How are special changes in accounting principle reported?
- A change to LIFO from another method of inventory pricing under US GAAP
- Any other change in which a cumulative effective adjustment is considered impractical to calculate
Special changes are reported prospectively (like a change in estimate)
Define comprehensive income
Change in equity (net assets) that results from revenue, expenses, gains & 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.
Name the three elements of relevance
- Predictive value
- Confirming value
- Materiality
List some requirements for comprehensive income
- tax effects of each component included in current “other comprehensive income”
- changes in the accumulated balances of components of “OCI”
- total accumulated OCI
- reclassification adjustments between OCI and net income
What is the presentation of the major components of an income and RE statement? IDEA
Income from continuing operations
Discontinued operations
Extraordinary items
(RE) Cumulative effect of changes in Accounting principle
What are the guidelines for interim reporting
- use same accounting 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 in condensed financial statements of interim periods
List the 10 elements of financial statements according to SFAC No. 6
Comprehensive income Revenues Expenses Gains & Losses Assets Liabilities Equity (of net assets) Investments by owners Distributions to owners
Describe the for 10-K and 10-Q. What level of assurance must be provided w/ the financial statements submitted in these forms.
10-K: filed annually by US registered companies; includes a summary of financial data, MD&A, and audited F/S prepared by using US GAAP
10-Q: Filed quarterly by US registered companies, includes unaudited (reviewed) F/S, interim MD&A and certain disclosures
Finance capital maintenance is considered to be an element of what?
An element of both “currently reported net income” and “comprehensive income”
