FAR 1 Flashcards by Nkemji Nwosu

Two types of Long term contracts

Percentage of Completion

2. Completed contract method

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Percentage of completion - Revenue Recognition

Recognize revenue and profit during construction based on expected profit and estimated progress toward completion.

IFRS only permits % of completion method. Under IFRS, if cost are difficult to predict/estimate then you only recognize revenue against the cost incurred to result in a Zero sum (aka Cost recovery method).

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Completed Contract method - Revenue Recognition

Recognize contract revenue and profit at contract completion.

http://accountingexplained.com/financial/revenue/completed-contract-method

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Two types of Pension Plans

Contributory Plan (Defined contribution plan) - employees voluntary make payments to increase their benefits. Employee bears the risk.
Non-Contributory plan (Defined Benefit plan) - Employer bears the entire cost. Employer bears the risk.

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Projected Benefit Obligation (PBO)

Employers deferred compensation obligation it has to its employees for their service under the terms of the pension plan.

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Defined Contribution plan

If overfunded, you record a pension asset. If underfunded, you record a pension liability.

Debit - Pension expense ; Credit - Cash
Overfunded: Debit - Pension Expense; Pension Asset
Credit - Cash
Underfunded: Debit - Pension Expense
Credit - Pension Liability/Cash

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Defined Pension Plan

Highly focus on Pension Expense and Project Benefit Obligation.

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Element of Pension Expense

SIRPAT

S - Service cost + (current period cost in addition to pension expense
I - Interest on PBO + (Expense)
R - Return on Planned Asset - (minus if returned with a positive amount of money)
P - Prior service cost Amortization +
A - Actuarial Gain (-) or Loss (+)
T - Transition Asset (-) or Obligation (+)

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Service cost

-Actuarial present value of new benefits earned by employees during the period.
- Service cost (pension expense) causes an increase in Pension payable.
-

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Return on Plan Assets

it’s the difference in fair value of the plan at the beginning and end of the year adjusted for contributions and benefits paid.

Actual return: Expected Balance of Plan Assets @ FV
LESS: Beginning balance of Plan Assets @ FV
PLUS: Benefits paid
LESS: Contributions

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Over-funded vs Under-funded | Day of Pension Expense.

Company must first recognize Over Funded/Under Funded status of the DBP on the B/S.

It is the difference between the FV of the Plan assets and PBO. If PBO > FV of the Plan Assets, then it is Underfunded.

If underfunded:

Debit OCI as a reduction in Income
Credit Underfunded Pension Liability

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PBO Calculation

Beginning PBO
\+ Interest on PBO accrued for the year
\+ Current Service cost
\+ Benefits paid
=Ending PBO

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Current Ration vs Quick Ratio

Current Ratio: Current Assets/ Current Liability

Quick Ratio: (Cash + AR + Marketing Securities)/Current Liability

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Non-monetary exchange

A nonmonetary exchange is generally measured based on the fair market value of the assets exchanged. 1. If the exchange lacks commercial substance, the asset is measured at its book value before the exchange. 2. If fair value is not determinable: Record the asset at the book value of the asset surrendered.

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Fair Value Methods

Cost Approach, Market Approach, and Income Approach. Use a combination or one that relates or most representative of that asset or liability. The right one to use is based on a FASB Fair value Hierachy levels.

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Cost Approach

Cost to replace the item of similar capacity. Like insurance car replacement of the year of the car etc.

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Market Approach

Identical or comparable assets or liabilties - Like home sales. Where they look at comp of the houses.

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Income approach

Uses discount cash flow to estimate a value. Idea is for an investor to receive yield from an investment that will cover it’s initial cost and ofcourse a return to to offset the investment risk. (COST + RETURN ON INVESTMENT RISK) = Income approach.

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Fair Value Hierachy

Level 1: Inputs are identical observable and most desirable. ex. Usually Certain like Stock price set price.
Level 2: Prices that are similar but not identical taht are directly and indirectly observable. ex. More subjectivity like internally generated cash flow projections for a related asset or liability.
Level 3: Not observable. ex. Used for Asset price.

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Fair Value of an Asset or Liability

The price that would be received when selling an asset or paid when transferring a liability in an orderly transaction between market participants.

Additionally: Fair market value must come from a Primary market..if not, you go to the most advantageous market (one with the most value after cost is implemented). However the fair value would not include the transaction cost.

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Modified Accrual Accounting in GASB.

Government funds uses the modified accrual basis of accounting. Funds that is available and measurable are recorded as revenue during the current fiscal year. Expenditure are recorded when liabilities are both measurable and incurred and payable out of the current financial resources.

Measurable: Objectively determined
Available: expenses that is due or past due and receivable in the current period and collected within the current period, or expected to be collected not more than 60 days.

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Governmental Funds

Types of Funds:

General fund - there can only be one (commonly seen on the CPA).
Special rev fund -
Capital projects fund
Permanent fund - Principal is maintained.
Debt service fund -

All five funds do not carry any long-term assets or depreciation on their books. Fixed asset acquisitions are treated as an expense and charged to Expenditure control.

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General Fund

Mostly taxes, licences, fines and interests.

Measurable and Available - Taxes.
Cash basis recording - Licences and fines.

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Special Rev Fund

Generally used for a specific purpose other than debt service and capital goods acquisition.
—Building Hwy
—Maintain Public parks
—Operate Public schools
The funding for these comes from special tax levies or grants.

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Software Costs

The amount to amortize Capitalized software cost is dependent on the great of the amount computed using (a) the ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product (b) the straight -line method over the remaining estimated economic life of the product including the period being reported on. ASC 985-20-35-1.

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Net Realizable Value

Attributes used to measure assets and liabilities. It is the non-discounted amount of cash, or its equivalent, that is expected to be received (paid) on conversion (liquidation) of the asset (liability) in due course of business less direct costs. NRV is the settlement cost and is used for short-term receivables and some inventories, trade payables, and warranty obligations.

Mark up

Mark up is the same as Gross margin or gross profit, which is also sales price minus COGS ( mark up on sales price).

Correction of an error

FASB 250-10-45-23 Stipulates that a correction of an error in the F/S of a prior period should be reported as a prior period adjustment. Correction of an error is treated retroactively.

Risks and Uncertainties that may impact the prediction of operational results.

The nature of the entity’s operations
The use of estimates in the preparation of the entity’s financial statements
Significant concentration in certain aspects of the entity operations.

IFRS: Lower of Cost or NRV

Whichever is lower between the two is what is recorded as Carrying value.

Payroll Taxes

Payroll taxes are not expenses of the company withholding them; they are a liability until the money is remitted to the government.

Withheld payroll taxes include: Employees’ portion of the FICA (Social Security) and Medicare taxes. Federal and state employee income taxes.

Trading Securities

Trading securities include debt securities and readily marketable equity securities that are bought and held principally for the purpose of selling them in the near term. Trading securities are recognized in the balance sheet at fair value; unrealized holding gains and losses for trading securities are included in EARNINGS.

Available for Sales

Available-for-sale securities (AFS) are investments in debt and readily marketable equity securities that are not classified as held-to-maturity securities or as trading securities. AFS securities are recognized in the balance sheet at fair value; any related unrealized holding gains and losses are excluded from net income and reported as other comprehensive income. NOT LONG TERM OR SHORT TERM,..JUST in the MIDDLE

Held to Maturity

Only investments in debt securities can be classified as held-to-maturity (HTM) securities since equity securities have no maturity date. The reporting enterprise must have the positive intent and the ability to hold the debt security to maturity in order for the investment to be included in this category. Investments classified as HTM securities are measured at amortized cost (i.e., acquisition cost adjusted for amortized premium or discount).

Dividend in Arrears

Dividends in arrears are undeclared and unpaid cumulative dividends on preferred stock and are said to have been “passed.” They must be disclosed in the notes to the financial statements. (They do not represent a liability because they are not an enforceable obligation until declared by the board of directors.) Dividends in arrears must be deducted from net income in earnings per share computations (on common stock).

Notes Receivable

A note receivable is a contractual right to receive a sum certain of money on fixed or determinable dates at a fixed rate of interest. It is a formal and unconditional written agreement. Notes receivable are of longer term (e.g., 3–24 months) than accounts receivable and accrue interest over time at a stated rate. Notes receivable should be recorded at present value. Notes receivable are usually negotiable, may be sold or transferred, usually at a discount (i.e., the seller receives an amount less than the face value, the buyer or payee collects the higher face value at maturity, and the seller recognizes a loss on the sale). Notes receivable may be sold with or without recourse.

Interest

Interest is the charge for the use of money over time. It is the time value of money. Interest is the amount paid (or received) in excess of the amount borrowed (loaned). Interest is a financing expense (income) and is dependent on the interest rate, the principal amount, and the number of interest periods.
Interest = Principal × Interest rate × Time periods
Interest = Amount to be repaid - Amount received (loaned)

What’s a business/Operating Segment?

FASB 280-10-50-1 indicates that an operating segment engages in business activities that generates revenue and expenses, operating results are reviewed by a chief operating decision maker to make decisions about resource allocation and to assess performance. for which discrete financial information is available.

A reporting segment

That meets one of the following quantitative tests are reporting segments:

Segment revenue (both to external customers and intersegmental) is at least 10% of total revenue of all operating segments.
The absolute amount of segment profit (or loss) is at least 10% of all operating segments with a profit (or loss).
Operating segment assets are at least 10% of total assets.

Disclosure of Summary of Significant accounting policies.

Disclosure of accounting policies shall identify and describe the accounting principles followed by the entity and the methods of applying those principles that materially affect the determination of financial position, cash flows, or results of operations. In general, the disclosure shall encompass important judgments as to appropriateness of principles relating to recognition of revenue and allocation of asset costs to current and future periods; in particular, it shall encompass those accounting principles and methods that involve any of the following:

“A selection from existing acceptable alternatives
“Principles and methods peculiar to the industry in which the reporting entity operates, even if such principles and methods are predominantly followed in that industry
“Unusual or innovative applications of GAAP [and, as applicable, of principles and methods peculiar to the industry in which the reporting entity operates].”

Treasury Stock

Treasury stock is shares of the issuing corporation’s own stock (common or preferred) that were issued and were later reacquired in the open market by the issuing corporation and are still held by the issuing corporation. Treasury stock is considered issued but not outstanding. It may be obtained through purchase, settlement of an obligation, or donation, and it may be retired or resold. Treasury stock does not carry voting, dividend, preemptive, or liquidation rights.

Gains and losses do not result from buying and selling your own equity shares. You cannot recognize gains or losses on the Income statement on the Treasury stocks.

Pro forma Financial Statements

The same full disclosure principles related to significant accounting policies and summary of significant assumptions also applies that guides the preparation of historical F/S applies to the reporting of prospective financial statements.

Effective interest rate

Effective interest = Carrying value of the bonds × Effective interest rate × Time period

Impairment assessment

A significant decrease in the market value of the asset, a significant adverse change in the business climate or manner of use of the assets, an accumulation of costs significantly in excess of the amount originally expected to acquire or construct the asset are all factors listed in FASB ASC 360-10-35-21 as warranting an assessment for impairment.

FASB ASC 805-20-55-4 adds long-term customer relationship assets of financial institutions, such as depositor—and borrower—relationship intangible assets and credit cardholder intangible assets to the list of assets requiring assessment for impairment.

3 Types of Revenue in Non profit accounting

Permanently Restricted
Temporary Restricted
Unrestricted.

Restrictions are limits on assets of of not for profit entities imposed by donors explicit, or clearly evident implicit, stipulations. These become permanet Decisions, resolutions, appropriations, etc. by directors, trustees, or managers do no result in restrictions on assets.

Unrestricted Revenue

Other than explicit/implicit donor’s decisions, unrestricted revenues include those dollars in contribution of services that involves highly specialized skills.

Contributions receivable or Pledges

These are payments expected by NFP entities as of F/S state from donors ( or in the case of Pensions, Employee expected contributions) who have previously made commitments. These are recorded as Temporary restrictions.

Temporary Revenues

Almost sound like Receivables or future pledges.

Lease Capitalization (FASB 840-10-25-1)

In order to capitalize a lease, one of the following four must be met in order to consider the lease a capital lease.

the lease transfers ownership of the property to the lessee by the end of the lease term;
the lease contains a bargain purchase option;
the lease term is 75% or more of the estimated economic life of the leased asset; or
the present value of the minimum lease payments is 90% or more of the excess of the fair value of the leased property to the lessor at the inception of the lease over any related investment tax credit retained by the lessor.

Remeasurement

FASB 830-10-45-17: An entity books and records must be kept in the functional currency where monetary balances are translated using the current exchange rate and non-monetary balances (inventory, RM, PPE, Warranty parables, differed income tax credits) are translated by using historical exchange rates.

Translation

Translation adjustments from functional currency shall not be included in determining net income but shall be reported separately and accumulated in OCI.

Goodwill

Goodwill is an asset that represents a future economic benefit arising from other assets acquired in a business combination that are not individually identified and separately recognized. The amount recognized as goodwill includes acquired intangible assets that do not meet the criteria in FASB ASC 805-10-05 for recognition as assets apart from goodwill. Goodwill is generally calculated as the difference between the amount paid for a business minus the fair market value (FMV) of the net assets acquired.

Goodwill is to be tested for impairment at the level of the reporting unit or at one level below an operating segment.

Impairment

Impairment is the condition that exists when the amount of a long-lived asset (asset group) carried on an organization’s books exceeds its fair value. An impairment loss shall be recognized only if the carrying amount of a long-lived asset (asset group) is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset (asset group) is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset (asset group). That assessment is based on the carrying amount of the asset (asset group) at the date it is tested for recoverability, whether in use or under development. An impairment loss is measured as the amount by which the carrying amount of a long-lived asset (asset group) exceeds its fair value.

Contingencies

FASB 450-30-25-1: applies conservatism rule to the contingency (losses recognized now and gains when realized). The standard requires that a loss contingency that is probable and whose amount can be reasonably estimated be accrued by debiting an expense and crediting a liability or a contra asset, as well as disclosing the uncertainty in the notes to the financial statements. If the loss contingency cannot be estimated but is reasonably possible, it must be disclosed in the notes to the financial statements. If the loss contingency is remote, then the auditor should document the rationale for this decision and no adjustment or disclosure is required.

A gain contingency, on the other hand, is not recorded until the event occurs that establishes the gain.

COGS

Beginning inventory + purchases + freight in +

Reporting Liability for the Cost of Lawsuit

You estimate only the best estimate to settle and discount amounts of estimated loss to present value.

Non Interest Bearing

he holder of a non interest bearing note should recognize imputed interest income on the instrument. This requires the following steps:

Calculate the present value of the note, discounted based on the market rate of interest.
Multiply the market rate of interest by the present value of the note to arrive at the amount of interest income.
Record the interest income as a credit to interest income and a debit to an asset account for the investment in the note. Over time, the ongoing series of debits associated with the recognition of interest income will increase the asset amount to the face value of the note.
When the issuer pays off the note, record a debit to cash and a credit to the asset account for the investment in the note.

Financing Activities

Items that may be included in the financing activities line item are:

Sale of stock (positive cash flow)
Repurchase of company stock (negative cash flow)
Issuance of debt, such as bonds (positive cash flow)
Repayment of debt (Not interest which is operational) (negative cash flow)
Payment of dividends (negative cash flow)
Donor contributions restricted to long-term use (positive cash flow)

Operating Activities

Interest Payments

Investing Activities

Cash Payments to acquire Equity Instruments.

Inventory Turnover

Inventory turnover = Cost of goods sold ÷ Average inventory

SEC regulations

SEC Regulation S-X :prescribes the form, content, and presentation of and disclosure requirements of Financial statements.
SEC Regulation S-T(aka S-Technology): Governs the electronic submission of required forms.
SEC Regulation S-K (AKA not 10k but Sk): Filing of non-financial statements.

Liquidating Dividend

Liquidating dividends are distributions to shareholders from other contributed capital accounts rather than retained earnings. A liquidating dividend represents a return of the shareholders’ investment, rather than a return on the investment. There not recorded as Dividend Income.

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FAR 1 Flashcards

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