FAR 1

Question 1

Accounting changes are broadly classified as:

Answer 1

• Changes in accounting estimate
• Changes in accounting principle
• Changes in accounting entity

Question 2

Fundamental Qualitative characteristics (per SFAC no. 8 - Conceptual framework for financial reporting Chapter 3. Qualitative Characters of Useful Financial Information)

Answer 2

1. Relevance - capable of making a difference in the decisions made by users. In order for financial information to be relevant, it must have
   (a) Predictive value-used by users to predict future outcomes
   (b) Confirming value-provides feedback about evaluations previously made by users
   (c) Materiality- material at the entity-specific level. Amounts that matter.
2. Faithful representation
   (a) completeness - a complete depiction of the financial information including descriptions and explanations.
   (b) Neutrality- free from bias in selection or presentation
   (c) Freedom from error-there are no errors in the selection or application of the process used to produce financial information and no errors or omission in the description.

Question 3

Enhancing qualitative characteristics

Answer 3

Enhancing qualitative characteristics should be maximized

• Comparability/Consistency
• Verifiability
• Timeliness
• Understandability

Question 4

Recognition and Measurement in the F/S (per SFAC no. 5)

Answer 4

Fundamental assumptions in this concept consist of the following

• Entity assumption - identifiable set of activity (separate corporation, division)
• Going concern assumption
• Monetary unit assumption
• Periodicity assumption -divided into meaning time periods
• Historical cost principle-as a general rule, financial info is based on cost and not market value
• Revenue recognition principle (when it is earned and when it is realized or realizable)
• Matching principle
• Accrual accounting
• Full disclosure principle
• Conservatism principle

Question 5

Other Comprehensive Income
PUFE(R)

(R) relates to IFRS only

Answer 5

• (P)ension changes in funded status: due to gains/losses, prior service costs, and net transition assets or obligations.
• (U)nrealized gains and losses:

a. unrealized holding gains/losses on available for sale securities
b. unrealized holding gains and losses on debt securities transferred from the held to maturity to available for sale classification.
c. Subsequent decr/incr in fair value of the “available-for-sale” securities previously written down as impaired.

• (F)oreign currency items, including translation adjustments.
• The (E)ffective portion of cash flow hedges.
• (R)evaluation Surplus: Gains when intangible assets and fixed assets are revalued. Not reclassified to net income in subsequent periods, but may be transferred directly to retained earnings when the related asset is used or derecognized.

Question 6

Segment reporting - What is an operating segment?

Answer 6

Its a component of an enterprise:

(1) engages in business activities from which it earns revenue and incur expenses (including intercompany transactions)
(2) whose operating results are reviewed by the enterprise’s “Chief Operating Decision Maker” to make decisions about resources to be allocated to the segment and assess its performance
(3) for which discrete financial information is available. (traceable cash flow)

Question 7

Quantitative Thresholds for Reportable Segments

Answer 7

The 10% “Size” test (must meet only one):

1. Reported revenue (sales to external customers and intersegment sales) greater than or equal to 10% of combined revenue (internal and external) of all operating segments.
2. Reported profit/loss greater than or equal to 10% of the greater (absolute value) of:
   a. Combined profit of all operating segments that did not report a loss.
   b. Combined reported loss of all operating segments that did report a loss

3.Assets greater than or equal to 10% of the combined assets of all operating segments

Question 8

Intangible assets w/ Finite Lives -Impairment Test (two-step impairment test)

Answer 8

step 1- Determining the impairment - Compare carrying amount of the asset and compare to the sum of the undiscounted future net cash flows
step 2-If CV> total undiscounted future cash flows, then the asset is impaired. Record impairment based on the difference of CV and fair value (FV)

Restoration of previously recognized impairment losses is prohibited, unless the asset is held for disposal.

Question 9

Intangible assets w Infinite Lives - (i.e. Goodwill) -Impairment Test (one-step impairment test)

Answer 9

Step 1-Compare FV of the intangible asset to the carrying amount (CV)

Question 10

Revenue Recognition when the right of return exists

Answer 10

Revenue should be recognized when the buyer has the right to return the product shall be at the time of sale only if all required conditions are met.

1. Sales price is substantially fixed at the date of sale;
2. buyer assumes all risks of loss (e.g. fire or theft) because the goods are considered in the buyer’s possession;
3. buyer has paid some form of consideration;
4. product sold is substantially complete; and
5. amount of future returns can be reasonably estimated.

Question 11

Impairment of Intangible Assets other than Goodwill -under IFRS

Answer 11

Finite Lifes

1-step impairment test
-Carrying value is compared to the intangible asset’s recoverable amount. The recoverable amount is the GREATER of the asset’s fair value less costs to sell and the asset’s value in use (PV of future cash flows).

IFRS allows reversal of impairment losses.

Question 12

Amortization of Intangible assets other than goodwill

Answer 12

Intangible assets should be amortized over the lesser of the useful economic life or the legal life.

Question 13

Impairment of Goodwill under IFRS

Answer 13

Test done at the cash-generating unit level (CGU).

One-step impairment test
-Carrying value of the CGU compared to CGU’s recoverable amount, which is the GREATER of CGU’s fair value less costs to sell OR its value to use (PV of future cash flows expected from the CGU).

Impairment loss is first allocated to goodwill and then allocated on a pro rata basis to the other assets of the CGU.

Question 14

IFRS, research costs related to internally developed intangible assets

Answer 14

Research costs related to internally developed intangible assets must be expensed, but an asset arising from Development can be Capitalized if ALL of the following are met:

1) technological feasibility has been established
2) Entity intends to complete the intangible asset
3) Entity has the ability to use or sell the intangible asset.
4) Intangible asset will generate future economic benefits
5) Adequate resources are available to complete the development and sell or use the asset.