FAR 1-2: Income Statement

Question 1

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

IDEA

Answer 1

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 principles

Question 2

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

Answer 2

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

Question 3

In what period are the following reported:

• An impairment loss?
• A gain (loss) from actual operations?
• A gain (loss) on disposal?

Answer 3

All are reported in the period in which they occur

Question 4

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

Answer 4

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 5

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

Answer 5

A gain is recognized 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 6

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

Answer 6

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

Question 7

Define extraordinary items

Answer 7

• 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 8

List some examples of extraordinary items

Answer 8

• 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 9

Name the 3 types of accounting changes

Answer 9

• Change in an accounting principle
• Change in accounting estimate
• Change in reporting entity

Question 10

How is a change in accounting principle reported?

Answer 10

• 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 11

What are the special changes in an accounting principle?

How are special changes in accounting principle reported?

Answer 11

• 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 12

How is a change in an accounting estimate reported?

Answer 12

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

Question 13

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

Answer 13

All current & prior period financial statements presented are restated

Question 14

How are corrections of an error reported?

Answer 14

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