FAR 1

Question 1

What are the rules for new tax rate implementations under GAAP and IFRS when calculating temporal tax differences

Answer 1

GAAP - requires you to use the enacted future Tax rate

IFRS - you can use the substantially enacted tax rate

EXAMPLE: if a new tax rate is enacted after the year end, but before issuance of its F/S - Old 35% new 38%

GAAP - 35%
IFRS - 38%

Question 2

What is the income approach for measuring Fair Value - how is it calculated

Answer 2

You are determining what is the future benefit that will be derived from the asset and then figure our what is the appropriate amount of investment that would be justified to o get that return

• Common is to measure the prevent value of expected future positive cash flows

Question 3

What are the three approached to measure fair value

Answer 3

MIC

• Market Approach - Use market transactions that involve identical or comparable (An apple stock)
• Cost Approach - What is the cost to replace it
• Income approach - use future amounts discounted to present ( like the form of revenue or cost savings)

Question 4

When is revenue recognized:

Answer 4

Revenue is recognized when earnings process if substantially complete and when revenue is either realized or realizable.

So when you have a sale - even is you get the money - you have only realized the amount that you have delivered. The rest is not recognized yet

• the rating process is complete with regard to only half of the order so only half of the revenue is recognized

Question 5

What are the level inputs when determining fair value

Answer 5

Level I - Quoted prices in active markets

Level II - Quoted prices for similar assets in active markets

Level III - Unobservable inputs - these are commonly internal data and estimates. These are used because there is is no market activity or other equivalent at the measurement date

Question 6

What is the risk of accounting loss and Off Balance Sheet risk of an A/R of $250,000 with ADA of $20,000

Answer 6

If Receivables become worthless they are written off and a loss is recognized in the amount of the carrying value which is $250 - $20 = $230,000. $230K is the risk of accounting loss. This amount is what will appear on the balance sheet and therefore is the total risk amount - there is no off balance sheet risk in this case

Question 7

What is a practical expedient

Answer 7

You use this valuation when you have equity interest in an entity that reports:

net asset value per share

• If this is the case - then you do not need to report the level of inputs

Question 8

What is an asset valuation account

Answer 8

A Valuation account is a separate item that reduces or the carrying amount of an asset (like a contra account)

• therefore it is neither an asset or a liability.
• It is really part of the related asset

Question 9

What is the definition of equity

Answer 9

Assets less liabilities

Equity (which is net assets) is a balance sheet component - balance sheet component

Question 10

What is the definition of Operating Income

Answer 10

Total revenue less total expenses

• Income statement component

Question 11

What is the practice of conservatism

Answer 11

It is when a reporting entity has the option between two valid accounting alternative and chooses the more conservative one.

-Example: reporting inventory at lower of cost or market

Question 12

How do you fins the fair value a financial asset when no principle market exists

Answer 12

The fair value is based on the assumption that the transaction would occur in the most advantageous market

• The most advantageous maximizes the amount that would have been received to sell the asset NET of TRANSACTION costs
• The fair value measure, however includes the transaction costs.

Example:
Market 1 - Sales proceeds $76 with transaction costs of $6

Market 2 - Sales proceeds $80 with transaction costs of $1

Market 2 is the most advantageous based on ignoring transaction costs, but the fair value WILL include the transaction costs or the gross proceeds - $81

Question 13

What does Verifiability refer to in the conceptual framework

Answer 13

verifiability relates to information being free from bias and based on the consensus that would be reached by different users

Question 14

What does Understandability refer to in the conceptual framework

Answer 14

• This related to the clarity with which information is presented

Question 15

Can leases be valued using fair value option?

Answer 15

No - they are specifically excluded

Question 16

What is the definition of an asset

Answer 16

An asset provides probably future economic benefit

• it is within the control of the entity
• it results from a past event or future transaction.
• Assets can be tangible or intangible
• They can be obtained at a cost or in exchange, or in a nonreciprocal transfer
• Claims related to an asset may or may not be legally enforceable - which is not a requirement as long as they represent a probably future economic benefit

Question 17

What does Neutrality refer to

Answer 17

Neutrality indicates that information is free from bias

Question 18

What does materiality refer to

Answer 18

This is whether or not the information is capable of making a difference to users

Question 19

What is the primary objective of financial reporting

Answer 19

It is to provide information that is useful to existing and potential investors, lenders, and otters stakeholders in making decisions about whether or not to provide resources to the entity

Question 20

What are the two primary qualitative characteristics of accounting information that make it useful

Answer 20

Relevance

and Faithful Representation