F2 Flashcards
Cash Equivalent
Very liquid asset, short term investments that mature within 3 months since acquisition
IFRS requirement in statement of Accting policies
Statement of compliance with IFRS
Off balance sheet financing example
Operating leases
Statement of significant accounting policies position in notes
1st or 2nd item
What related to estimating must be disclosed?
Known trends and uncertainties (warnings)
When does a concentration make an entity vulnerable?
when there is a risk of loss that could be mitigated through diversification
Concentrations should be disclosed if the following criteria are met
- The concentrations exist
- Puts entity at severe risk in the near term
- Reasonably likely the worst could occur
When will an entity prepare financials under liquidation method of accounting?
When liquidation is imminent
If there is substantial doubt about going concern, what must be disclosed in the notes?
- Condition/ events that gave rise to substantial doubt about going concern
- Management’s evaluation
- Management’s plan to either alleviate substantial doubt (if they believe it will be) or how they intend it mitigate (if they believe it won’t)
Difference between IFRS and GAAP disclosure of judgements and estimates in notes
GAAP does NOT require disclosure of judgements. IFRS does. Both require disclosure of estimates.
What are the 3 inputs in the hierarchy of inputs for fair value?
- Active markets
- Interest rates / inactive markets / similar goods
- Estimates
Management is required to evaluate the going concern of the company for the period of one year AFTER
The financials -issuance- date NOT the financials date
IFRS vs GAAP biggest difference with going concern and when to implement the liquidation basis of accounting
IFRS does NOT offer guidance on the liquidation basis of accounting. GAAP DOES.
What basis of accounting does IFRS specify if the going concern of an entity is in substantial doubt?
IFRS does not specify
When an entity’s plans to mitigate the substantial doubt of an entity’s ability to continue as a going concern are evaluated, what should NOT be factored in?
Whether the conditions that gave rise to the substantial doubt will continue. Only two factors are considered: whether the plan will be effectively implemented and whether it is probable the plan will be successful in mitigating
What two factors should be considered in evaluating an entity’s plan to mitigate the conditions or events that raise substantial doubt about going concern?
Whether it will be
- Effectively implemented and
- Whether it will successfully mitigate the events or conditions
Under IFRS when is disclosure required when an entity’s going concern is in question?
When management is aware of MATERIAL UNCERTAINTIES that give rise to substantial doubt
Under GAAP when is disclosure required when an entity’s going concern is in question?
When there is substantial doubt, even if management has a plan to alleviate
Subsequent Event
Event that occurs after b/s date but b4 reporting date
Types of subsequent events
Recognizable (condition existed BEFORE b/s date like lawsuit)
Nonrecognizable (condition did not exist b4 b/s date)
Examples of recognized subsequent events
- Settlement of litigation
2. Loss on Uncollectable Receivable (for example, customer went bankrupt)
Do subsequent events effect quarterly reporting?
Yes
Nonrecognizable subsequent events are reported how?
Footnotes.
Nonrecognized subsequent events
Didn’t exist at b/s date and occurred after b/s date. The date is the key!
Reissued financials should only recognize subsequent events for what period
Between original b/s date and financials issuance date. NOT after.
IFRS subsequent events differences from GAAP
- Up through date financials are AUTHORIZED for issuance
2. If entity intends to liquidate, cannot prepare under going concern basis
Revised financials - why created?
Correct and error or change in accounting principle.
For NON-SEC filers entity should disclose in revised financials what?
The dates through which subsequent events were evaluated
IFRS / GAAP fair value framework EXCLUDES:
a. Share based compensation
b. Leases
c. Measurements based on vendor-specific objective evidence of fair value
Fair value is an exit or entrance price
Exit price
Fair value definition
What can you get for selling an asset or paying off a liability in an ORDERLY TRANSACTION in the PRINCIPAL market at MEASUREMENT DATE under current market conditions
Fair value is market based measure or entity base measure
Market based
In fair value if principal market isn’t available use the
Most advantageous market
Does fair value include transaction costs?
NO! Exemption: transportation costs allowed if location is an attribute of the asset / liability
How are transaction costs used in fair value MC?
To calculate the most advantageous market
Fair value of a non financial asset (PP+E) assumes
The highest and best use
Orderly transaction
Not by force
Market participants
Independent (unrelated) parties
Principal market
Market with greatest volume of activity
Most advantageous market
Market with best price of asset or minimizes pmt to transfer liability AFTER considering transaction costs. Use if NO principal market
Highest and Best use (for fair value measurement)
Only applies to NON-FINANCIAL assets such as PP+E
Valuation Techniques for fair value measurement
MIC
Market Approach
Income approach
Cost approach
Market Approach (MIC) - fair value valuation technique
An exchange (such as NYSE)
Income Approach (MIC) - fair value valuation approach
Present value of future cash flows (discounted cash flow)
Cost Approach (MIC) - fair value valuation technique
Replacement cost
Level 2 inputs for fair value measurement
Can be an similar asset in an active market or an identical asset in an inactive market
Level 3 inputs (fair value)
Discounted cash flows (future cash flows) - amount and timing has uncertainty.
Unobservable
Fair value disclosures
- What techniques (MIC) and inputs (123)
2. If level 3 inputs are being used, effect on earnings or changes in comprehensive income for period
Sensitivity in estimating
If we change an input a little, how big is the change in output
When picking fair value, choose the highest or lowest value?
HIGHEST value
IFRS vs GAAP difference for segment reporting
IFRS required disclosure of segment liabilities (if such info is provided to CEO), GAAP does NOT
Are intercompany transactions eliminated for segment reporting
NO!
Is segment reporting required for private companies?
No - optional
Operating segment definition
Financially and operationally distinct and operating results are regularly reviewed by CEO or equivalent
**Dependent on how management uses information
What are NOT a component of an operating segment
Pension plans and
Corporate HQ
10% size test for segment reporting
Must report if any of the following are greater than 10%
10% total revenue, profit/loss
10% of company assets
75% percent reporting sufficiency test - segment test
Need to report 75% of company revenues (as segments). I.e. Only allowed an other category with a max size of 25%
If one segment is over >90% then what is needed for segment reporting?
No segment reporting needed
Comparative reporting for segment reporting
A component may be broken out if being compared against a period where it was broken out, OPTIONAL
Segment PnL
Revenues - direct costs (don’t eliminate) - allocated costs by CEO =
Earnings before interest and tax
Items excluded from segment profit or loss
- Interest and tax
- Gains / losses from discontinued ops
- Equity method investment revenue
- Non-controlling interest
IFRS only disclosure for segment reporting
Liabilities for each segment are NOT required by GAAP, but ARE required by IFRS
Segment Reporting Disclosures
You’ll want to reconcile the differences between the consolidated entity and the segment
Must disclose major customer for segments - how defined?
Generates 10% of entity revenue
How are gain contingencies handled in subsequent events?
Gain contingencies are NEVER journalists
In an unrecognized subsequent event - what should be disclosed?
If a loss is reasonably likely and an estimate is available, disclose the loss and estimate.
When are financials considered issued?
When financials are GAAP compliant and widely distributed to financial users
When are financials considered “available” to be issued?
When they are GAAP compliant and approved to be issued
Private vs GAAP subsequent events evaluation end date
Public: date of issuance
Private: date available
Significant estimates should be disclosed in the notes when
It is reasonably possible (not probable!) that estimate will change in the near term and that change will be material
Would management’s estimates of sales or analysis of competitors or future projections of the market be included in the footnotes?
No!
Requirements for notes on a concentration of sales on one customer
The associated revenue for the customer
What is NOT required to be disclosed about a concentration of a customer in the notes? (Say 50% of sales come from one customer)
Name of customer / pmt terms / financial condition of customer NOT required
Should information be repeated in the footnotes?
No
Should going concern be tested for quarterly reporting?
Yes
When is going concern in doubt? When possible we’ll go out of biz or probable?
Probable
GAAP vs IFRS difference in period tested for going concern
GAAP = within one year IFRS = at LEAST one year
When disclosing a recognized subsequent event, what is the testing see if you must make a note?
Will NOT disclosing the event make financial statements misleading?
What is the exemption to not including transaction costs in fair value measure?
Transportation costs if location is a condition of the asset
What is the measurement basis of held to maturity bonds?
Amortized cost
GAAP and IFRS cost model vs revaluation model differences
IFRS allows revaluation of assets (Surplus), but GAAP does NOT
Is land depreciated?
No
Is goodwill amortized?
No - tested for impairment
Fair value includes ___ but not transaction costs
Transportation costs
Is fair value specific to the entity making the measurement?
No - it’s a market based measure (objective)
Change from market approach of measuring fair value to cost approach is what kind of change?
Change in accounting estimate
If the principal market is inaccessible, what market should be used?
Principal market that is accessible
True / false Fair Market valuation does not consider risk
False - all assumptions that are normally made by market participants are considered
What three items is the 10% tested applied for determining is a segment must be reported?
Sales
Profit
Assets
Should operating loss be included in segment reporting?
No - only if operating profit is a loss. In that case exclude all profitable segments and only count loss segments
Does the 75% test include intercompany transactions or only external revenue?
75% of external revenue
For segment reporting - should intracompany sales be disclosed?
Yes - separately
Are discontinued operations included in segment profit?
No
The requirement to disclose a major customer that constitutes more than 10% of company revenue is required for each segment or the entity as a whole?
10% of entity revenue = major customer
What type of entity is required to report on biz segments?
Publicly traded enterprises
MD and A
Management’s discussion and analysis
Large Accelerated Filer
> $700M in outstanding equity held by nonaffiliates
Accelerated filer
> 75M outstanding equity held by non-affiliates
Filing Deadlines for 10-K
Large Accelerated - 60 days
Accelerated - 75 days
All others - 90 days
Filing deadline for 10-Q
Large Accelerated - 40 days
Accelerated - 40 days
All others - 45 days
Biggest difference between 10-K and 10-Q requirements
10-K requires AUDITED financials, 10-Q contains UNAUDITED financials
11-K
EE benefit plans
20-F
Foreign 10-K
40-F
Canadian 10-K
20-F and 40-F can be prepared under what basis of Accting
GAAP or IFRS
6-K
Semi-annual form filed by foreign private issuers
8-K
Major events, any major change. Change in entity composition, auditors, CEO
Forms 3, 4, 5
10% owners filings, filed by owners
Regulation S-X
Guidance for interim and annual financial statements to be filed with SEC
10-Q and 6-K financials must be
Reviewed by independent public accountant
When are interim financials issued for US and Foreign companies?
US - quarterly - 10-Q
Foreign - semi-annually - 6-K
Adjustments for fair presentation in interim financials are
Adjustments to fairly state interim financials, note added for adjustments, and if adjustments are normal recurring, note that too
Can interim financials be condensed?
Yes
Omitted disclosures for interim reporting
Summary of significant accounting policies and details of accounts that have not changed significantly
Definitely Required disclosures for interim reporting
Material contingencies and material events / changes that occurred
of each financial required by SEC for 10-K
2 BS
3 IS / Cash Flow
IFRS vs GAAP # of each financials required for filing
IFRS only requires 2 of each (unless restatement, then they require 3 BS and 2 everything else).
GAAP requires 2 BS and 3 of everything else
XBRL
eXtensible Business Reporting language
XBRL tagging levels
- Each footnote and schedule
- Each significant accounting policy
- Each table within each footnote and schedule
- Each amount within each footnote and schedule
10-K vs 10-Q financials
10-K audited
10-Q reviewed
True/False: Revenue should be smoothed for season fluctuations for quarterly filings
False
If there are seasonal fluctuations, what balance sheets should be reported for 10-Q
Quarterly on last year and ending last year’s. If no fluctuations than last year’s end bal will suffice
The effective income tax rate includes
Foreign tax rates and anticipated tax planning alternatives
If cash basis, a decrease in accounts payable has what effect on converted accrual net income?
It decreases it because current period payments exceeded current period expenses
How is the non deductible portion of expenses such as meals and entertainment reported on financial statements prepared on an income tax basis?
In the expenses category in the determination of income
A net decrease in AR means what on the actual basis
that cash collected exceeded revenues recognized on the accruals basis
A net decrease in accrued expenses means what in the accrual method?
More cash was paid out than expenses recognized. If cash out exceeds expenses accrued than cash method net income will be greater than accrual method NI
Acid Test / Quick Ratio
Cash + Cash Equivalents + Marketable Securities + Net AR / Current Liabilities
Current Ratio
Current Assets / Current Liabilities
Inventory Turnover
Cogs / Average inventory
Receivables Turnover
Net Sales / Recievables
Turnover Ratio - how to figure out?
Whatever is being turned over is averaged and put into the denominator
Turnover ratio in days - how to figure out?
365 / turnover ratio
What does turnover in days mean?
Average number of days for turnover
Cash ratio
Quick ratio but without net Receivables, more conservative
Asset Turnover
Net sales / average assets
Working capital turnover
Sales / average working capital
Operating Cycle
AR turnover in days + inventory turnover in days
Return on total assets
Net income / average total assets
DuPont return on assets
Net profit margin * total asset turnover
= Effective use of generating sales
Return on common equity
(Net income - preferred dividends) / (average common equity)
Times interest earned ratio
[ Recurring income b4 interest and taxes ] / interest Payable
- Add interest exp to EBIT
Does AR Turnover use net Receivables or gross?
Net Receivables
What is common equity? How calculated?
All equity excluding preferred dividends
If assets and liabilities are increased by the same amount of $, how does that effect the debt-to-assets ratio?
The ratio will increase
Partnership Exact Method for new partners
New partner pays book value for 1/x share of partnership. Calculate with finger math bv / (x-1)
Partnership Bonus Method
If partner pays more than bv of share, then excess is bonus to old partners (distributed based on earnings ratio)
If partner pays less than bv for share, excess goes to partner
Partnership Goodwill Method - new partner
Partnership payment for share implies a value for the partnership. If they py $35 for 1/3 than 3/3 of partnership is worth 35 * 3. Distribute bonus to old partners
If not specified partners will split Earnings how?
Equally
Partnership profit / loss distribution - what is interest in capital balances?
% times capital balance for each partner = profit / loss distribution
In a partnership, if interest in partner capital balance exceeds profit, what happens?
Netted against the profit and then distributed as a loss
How is liquidation occur with a capital deficiency?
The deficiency is netted against any liabilities that are owed to the partner. If still deficient, the other partners with a positive balance “buyout” the negative partner (pro rata based on share of profit / loss)
How does the goodwill method differ from the bonus method for admitting a new partner?
Bonus method is payment + existing capital balance = new basis
Goodwill method uses the payment as an implied new basis for the partnership.
When a business is purchased for x amount. What is the starting capital balance? Fair value or purchase value?
Purchase value
Major unanticipated repair that will benefit operations for remainder of calendar year - when expensed?
Capitalize and depreciate over course of the year
Are SEC filers required to disclose period that subsequent events were analyzed?
No - pay close attention to the company being asked about
10-Q number of balance sheets and what periods
No seasonal fluctuations: end of last year, otherwise include last year’s corresponding quarter too
Does share of partnership income = share of capital balance?
No - entirely separate
Cash Revenue to Accrual Revenue
+ AR change
- Unearned Revenue change
= Accrual
Cash Cost of Sales to Accrual Cost of Sales
+ AP change
- Inventory change
= Accrual
Cash operating expenses to Accrual operating expenses
+ Accrued Expenses change
- Prepaid Expenses change
How does decreasing AR lower Accrual income vs cash method income?
Those include previous period AR so they should not be included in Accrual method revenue
If a checkbook balance is determined and there is also a post dated check after the balance sheet drawn on our account (payment), how is cash measured?
Add the post dated check BACK to the checkbook balance
How to calculate allowance for discounts of gross method is used?
% of sales that will have the discount be used * sales UNDER the aging date (2/15 would be 15 days) * discount (in this case, 2%)
Loss on purchase commitments is calculated how?
(Min required to purchase * price) net of scrap value
When calculating lower of cost or market, which one do you pick?
The LOWER one
When goods are held on consignment, the holder is the
Consignor.
If the consignee is holding goods on consignment, DO NOT INCLUDE IN CONSIGNEE INVENTORY
Under IFRS, if an inventory was written down to net realizable value last year (lower of cost or NRV) and the NRV is higher this year, what is the value?
Higher NRV and the write down is reversed. ONLY under IFRS
The segment sales size test threshold is calculated from the external sales column or the total sales column?
TOTAL sales - which includes intersegment sales
The “reporting sufficiency” test for segment reporting is
The 75% test
The “reporting sufficiency” test uses which column - external sales (intercompany excluded) or total sales (includes intercompany)
External sales (unlike the 10% test that uses total sales)
If the 75% test for segment reporting fails and we don’t have enough segments to meet the requirement, what must we do?
Add segments in descending order until we meet the requirement
For most financial ratios, what is better, higher or lower?
Higher
For turnover in days you want lower
Is debt settlement from bankruptcy proceedings of a customer a gain on your books?
No. Satisfies any outstanding AR or notes, the rest is written off. No gain
The two classic examples of subsequent events are
- adjusting contingency liability based on court settlement after b/s date
- Adjusting bad debt expense based off of bankruptcy that occurs after b/s date
Can a loss of a burned down building exceed the carrying value?
No
Are changes in the fair value of an estimate after the b/s date a recognized subsequent event?
No - even if significant, not recognized
Measurement basis for cash and cash equivalents
Fair value
Are Dividends and interest Receivable reported under trade Receivables?
NO - reported separately
Withdrawal of a partner / bonus method steps
Bonus is defined as excess of capital balance paid to withdrawing partner
- Revalue assets to FAIR VALUE (gain)
- Distribute bonus from partnership accounts and then cash out partner
Withdrawal of partner - goodwill method
Excess of capital balance paid to withdrawing partner is the basis of the goodwill
Step 1: revaluation of assets (gain)
Step 2: goodwill is calculated as bonus DIVIDED BY withdrawing partners profit / loss ratio - distributed to all partners
Step 3: cash out partner
With the withdrawal of a partner - what basis is used to allocate bonus to withdrawing partner’s account? (Bonus method)
Remaining partner’s profit or loss ratios
Is sales tax included in the cost of a machine?
Yes - absolutely
Sales tax COLLECTED is not
An expense
But sales tax paid? Can be expensed or capitalized
Painting the ceiling tiles in the hallways - how to record?
Expense as a period expense for regular maintenance
Software is recorded where?
Intangibles - and amortized over their finite life
Replacing cracked office windows as a result of an explosion at a nearby plant - how recorded?
Period expense, regular maintenance. NOT extraordinary repair.
When you see a depreciation MC or sim, what should be your first thought?
Check the dates!!
