FAR 1 (Framework, Overview, and Statements) Flashcards
01 - FASB and Standard Setting
Q - The Wheat Committee was involved in the Formation of the FASB.
True.
01 - FASB and Standard Setting
Q - The primary objective of financial statements is to provide information useful in assessing stewardship.
False.
01 - FASB and Standard Setting
Q - “Economic consequences” is a concept used by the FASB to gain acceptance of its proposed standards.
False.
01 - FASB and Standard Setting
Define - “GAAP”
Generally Accepted Accounting Principles: The rules of financial reporting for business enterprises. Also called “accounting standards.”
01 - FASB and Standard Setting
Q - What does GAAP address?
Recognition - a recognized item is recorded in an account and affects the financial statements
Measurement - the dollar amount assigned to an item
Disclosure - many unrecognized amounts are reported in the footnotes to complete the portrayal of financial position and performance
01 - FASB and Standard Setting
Define - “FASB”
Financial Accounting Standards Board: The current standard setting body of the United States. Has 7 full time members, do not need to be CPAs
01 - FASB and Standard Setting
Define - “SEC”
Securities and Exchange Commission: The federal agency that administers securities laws. These laws affect firms that issue debt and equity securities to the public. These firms must file audited financial statements.
01 - FASB and Standard Setting
Define - “AICPA”
American Institute of Certified Public Accountants: The national professional organization for practicing CPAs.
01 - FASB and Standard Setting
Define - “CAP”, “ARB”, “APB”, “FAF”, “FASAC”
CAP: Committee on Accounting Procedure
ARB: Accounting Research Bulletins
APB: Accounting Principles Board
01 - FASB and Standard Setting
Define - “FAF”
Financial Accounting Foundation: Appoints the members of the FASB and advisory councils, ensures FASB funding, and oversees FASB
01 - FASB and Standard Setting
Define - “FASAC”
Financial Accounting Standards Advisory Council: Provides guidance on major policy issues, project priorities, and the formation of task forces
01 - FASB and Standard Setting
FASB’s Process for Issuing an Accounting Standard
- Consideration of adding projects to its agenda.
- Conduct topical research and issue a Discussion Memorandum
- Hold public hearings on the topic
- Evaluate research and comments and issue an Exposure Draft
- Review additional comments and revise ED, if necessary
- Finalize new guidance (majority vote for approval)
- Issue an Accounting Standards Update
01 - FASB and Standard Setting
Define - “EITF”
Emerging Issues Task Force: Acts as a “filter” for the FASB. Consider emerging issues and accelerate the process of establishing rulings
01 - FASB and Standard Setting
Q - In reference to proposed accounting standards, the term “negative economic consequences” includes:
The inability to raise capital.
02 - GAAP and Accrual Accounting
Authoritative GAAP
FASB Codification - sole source for nongovernmental entities, except for SEC guidance
02 - GAAP and Accrual Accounting
Nonauthoritative GAAP
Accountign and financial reporting practices not included in the Codification
02 - GAAP and Accrual Accounting
Accrual Basis
Revenues are recognized when earned, regardless of the period of cash collection.
Expenses are recognized when incurred, regardless of the period of cash payment.
02 - GAAP and Accrual Accounting
Accruals/Deferrals
Accruals: Service provided/received before payment/receipt
Deferrals: Service performed/used after payment/receipt
02 - GAAP and Accrual Accounting
Q - A deferred revenue is a liability account
True.
02 - GAAP and Accrual Accounting
General Rule to Convert from Cash Basis Revenue to Accrual Basis Revenue
Add beginning liability balances and subtract ending liability balances
Subtract beginning asset balances and add ending asset balances
02 - GAAP and Accrual Accounting
General Rule to Convert from Cash Basis Expenses to Accrual Basis Expenses
Subtract beginning liability balances and add ending liability balances (accrued expenses)
Add beginning asset balances and subtract ending asset balances (prepaid expenses)
02 - GAAP and Accrual Accounting
FOB Shipping Point
Title passes at the time the goods are shipped, so a company can recognize revenue from a transaction at the time of shipment
02 - GAAP and Accrual Accounting
Matching
Companies should match expenses to the period in which the benefits are received
02 - GAAP and Accrual Accounting
Right of Return
If a company engages in a sale of goods with a right of return (the buyer may return the merchandise), the company should delay recognition until the right of return has expired
02 - GAAP and Accrual Accounting
Relevance
Relevance is a primary qualitative characteristic. To be relevant, information about an item must have feedback value or predictive value (or both) for users and must be timely
02 - GAAP and Accrual Accounting
Predictive Value
The quality of information that helps users to increase the likelihood of correctly forecasting the outcome of past or present events
03 - Financial Statements
Income Statement
Reports accrual-based performance over a period of time. Dated as fiscal year ended.
03 - Financial Statements
Statement of Comprehensive Income
Reports non-owner changes to equity over a period of time. Dated as fiscal year ended.
03 - Financial Statements
Balance Sheet (Statement of Financial Position)
Reports economic resources and obligations. Dated as of a specific date.
03 - Financial Statements
Statement of Stockholders’ Equity
Reports the changes in owners’ equity over a period of time. Dated as fiscal year ended.
03 - Financial Statements
Statement of Cash Flows
Reports changes in cash over a period of time. Dated as fiscal year ended.
03 - Financial Statements
Categories of Cash Flows
Operating: Related to income statement transactions
Investing: Related to long-term assets and investments
Financing: Related to liabilities and owners’ equity
05 - Objectives, Qualitative Characteristics
Primary Qualitative Characteristics of Financial Information
Relevance: Predictive value, confirmatory value, and materiality (Does it RELATE to my decision?)
Faithful Representation: Completeness, neutrality, and free from error (Can I DEPEND on it?)
05 - Objectives, Qualitative Characteristics
Enhancing Qualitative Characteristics of Financial Information
Comparability, verifiability, timeliness, and understandability
05 - Objectives, Qualitative Characteristics
Q - Interim financial statements can be described as emphasizing:
Timeliness over faithful representation.
Interim reports generally reflect estimates. The objective is to provide reasonable information in a timely fashion, rather than exact information.
05 - Objectives, Qualitative Characteristics
Overall Objective of financial reporting
Decision Usefulness
05 - Objectives, Qualitative Characteristics
What is a predictive value?
Information that assists capital providers in forming expectations about future events.
05 - Objectives, Qualitative Characteristics
What is a confirmatory value?
Information that confirms or changes past (or present) expectations based on previous evaluations.
05 - Objectives, Qualitative Characteristics
What is completeness of information?
Information that includes all necessary data to be faithfully representative.
05 - Objectives, Qualitative Characteristics
What does it mean for information to be neutral?
Information that is free from any bias.
05 - Objectives, Qualitative Characteristics
What does it mean to be free from error?
Information that has no omissions or errors.
05 - Objectives, Qualitative Characteristics
What is comparability?
The quality of information that enables users to identify similarities and differences between sets of information.
05 - Objectives, Qualitative Characteristics
What is verifiability?
Different knowledgeable and independent observers could reach similar conclusions based on the information.
05 - Objectives, Qualitative Characteristics
What is timeliness?
Information that is received in time to make a difference to the decision maker.
05 - Objectives, Qualitative Characteristics
What is understandability?
Information that a user can comprehend within the decision context at hand. Users are assumed to have a reasonable understanding of business and accounting.
06 - Assumptions, Accounting Principles
Entity Assumption
There is a separate accounting entity for each business organization.
06 - Assumptions, Accounting Principles
Going Concern Assumption
In the absence of information to the contrary, a business will have a definite life. This supports the historical cost principle for many assets.
06 - Assumptions, Accounting Principles
Unit-of-Measure Assumption
Assets, liabilities, equities, revenues, expenses, gains, losses, and cash flows are measured in terms of the monetary unit of the country in which the business is operated. Values are not adjusted for inflation.
Capital Maintenance - Financial capital is maintained so long as dividends do not exceed earnings and earnings are not negative.
06 - Assumptions, Accounting Principles
Time Period Assumption
The indefinite life of a business is broken into smaller time frames for evaluation purposes and reporting purposes.
06 - Assumptions, Accounting Principles
Historical Cost Principle
The cash equivalent amount of an asset or liability at the time of origination. This is the market value of the item on the date of acquisition.
06 - Assumptions, Accounting Principles
Net Realizable Value
Used to approximate liquidation value or selling price. It is the net value to be received after the costs of sale are deducted from the current market value.
06 - Assumptions, Accounting Principles
Current Replacement Cost
How much you would have to pay to replace an asset. Represents current market value from the buyer’s perspective.
06 - Assumptions, Accounting Principles
Current Market Value
Also known as fair value. It is the price that would be received to sell an asset or settle a liability in an orderly transaction between market participants at the measurement date.
06 - Assumptions, Accounting Principles
Amortized Cost
Historical cost less the accumulated amortization or depreciation of an asset.
06 - Assumptions, Accounting Principles
Net Present Value
Determined from discounting the expected future cash flows.
06 - Assumptions, Accounting Principles
Revenue Recognition Principle - What is revenue?
Increases in assets or extinguishment of liabilities stemming from the delivery of goods or the provision of services.
06 - Assumptions, Accounting Principles
Revenue Recognition Principle - When to recognize revenue?
Revenues are recognized when they are realized and earned.
Realization occurs when:
- Goods or services have been provided
- Collectibility of cash is assured
- Expenses of providing goods and services can be determined
06 - Assumptions, Accounting Principles
Revenue Recognition Principle - How to measure revenue?
At the cash equivalent amount of the good or service provided.
06 - Assumptions, Accounting Principles
Matching Principle
Addresses when to recognize expenses.
- Only when expenditures help to produce revenues
- Some expenses are allocated based on the time period of benefit provided
- Other expenses are recognized in the period incurred when there is no determinable relationship between expenditures and revenues
06 - Assumptions, Accounting Principles
Full Disclosure Principle
Financial statements should present all information needed by an informed reader to make an economic decision.
06 - Assumptions, Accounting Principles
Assumptions come Entirely from your GUT
Entity
Going Concern
Unit-of-Measurement
Time Period
07 - Constraints and Present Value
Cost Constraints on GAAP
Limit recognition and disclosure if the cost of providing the information exceeds its benefit. However, firms cannot omit disclosures if they are material and mandated.
07 - Constraints and Present Value
Conservatism
The reporting of less optimistic amounts under conditions of uncertainty or when GAAP provides a choice from various recognition or measurement methods.
- Avoid inflating expectations of capital providers
- Conservatism conflicts with neutrality
07 - Constraints and Present Value
Full set of Financial Statements
Balance Sheet, Income Statement, Statement of Comprehensive Income, Statement of Cash Flows, and Statement of Owners’ Equity.
07 - Constraints and Present Value
Recognition and Measurement Criteria
Definition: Definition of a financial statement element is met
Measurability: There is an attribute to be measured
Relevance: Information is capable of influencing decisions
Faithful Representation: Information is complete, neutral, and free of material errors
07 - Constraints and Present Value
Elements of Financial Statements - Assets
Resources that have probable future benefits to the firm, are controlled by management, and result from past transactions
07 - Constraints and Present Value
Elements of Financial Statements - Liabilities
Probably future sacrifices of economic benefits arising from present obligations of an entity to transfer assets or provide services to other entities as a result of past transactions or events
07 - Constraints and Present Value
Elements of Financial Statements - Equity
Residual interest in the firm’s assets. Primarily comprised of past investor contributions and retained earnings.
07 - Constraints and Present Value
Elements of Financial Statements - Investments by Owners
Increases in net assets of an entity from transfers to it by existing owners or parties seeking ownership interest
07 - Constraints and Present Value
Elements of Financial Statements - Distributions to Owners
Decreases in net assets of an entity from the transfer of assets, provision of services, or incurrence of liabilities by the enterprise to owners
07 - Constraints and Present Value
Elements of Financial Statements - Comprehensive Income
Accounting income plus certain holding gains and losses and other items.
07 - Constraints and Present Value
Elements of Financial Statements - Revenues
Increases in assets or settlements of liabilities of an entity by providing goods or services
07 - Constraints and Present Value
Elements of Financial Statements - Expenses
Decreases in assets or incurrences of liabilities of an entity by providing goods or services.
Provide a benefit to the firm.
07 - Constraints and Present Value
Elements of Financial Statements - Gains
Increases in equity or net assets from peripheral or incidental transactions
07 - Constraints and Present Value
Elements of Financial Statements - Losses
Decreases in equity or net assets from peripheral or incidental transactions.
Provide no benefit to the firm.
08 - Fair Value Framework: Introduction and Definition
Define - “Fair Value”
The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date
08 - Fair Value Framework: Introduction and Definition
Elements of Fair Value
Market-based measurement.
Determined for a particular asset, liability or equity item:
- Single item
- Group of related items
Determination should consider attributes of the specific item being measured:
- Condition, location, restrictions of use
- FV not based on buyer’s unique perspective
08 - Fair Value Framework: Introduction and Definition
Define - “Orderly transaction”
Assumed to occur at the measurement date
Assumed to occur under current market conditions
Not assumed to occur in forced liquidation or distressed sale
08 - Fair Value Framework: Introduction and Definition
Define - “Principle Market”
The market available to the entity with the greatest volume and level of activity for the item
08 - Fair Value Framework: Introduction and Definition
Define - “Most Advantageous Market”
The market available to the entity that maximizes selling price or minimizes transfer price
08 - Fair Value Framework: Introduction and Definition
Define - “Market Participants”
Buyers and sellers that are:
- Independent of the reporting entity
- Acting in their best economic interest
- Knowledgeable of the item being measured and the transaction type
- Able and willing to enter a transaction, but not compelled to do so
09 - Recognition and Measurement
Define - “Entry price”
The amount paid to acquire an asset or received to assume a liability
09 - Recognition and Measurement
Define - “Exit price”
The amount received to sell an asset or paid to transfer a liability
09 - Recognition and Measurement
Entry Price does not equal Exit Price - Accounting treatment?
A gain or loss is recognized in income
09 - Recognition and Measurement
Approaches for Fair Value Determination
Market Approach: Uses prices generated by real market transactions for identical or similar items
Income Approach: Discounts future amounts to a current present value
Cost Approach: Uses current amount required to replace the service value of an existing asset
09 - Recognition and Measurement
Fair Value Option Election Dates
- When the item is first recognized
- When an eligible firm commitment is established
- When the accounting treatment of an investment in another entity changes
09 - Recognition and Measurement
Accounting at Eligible Election Date
Determine the Carrying Value (CV).
Determine the Fair Value (FV).
Determine the difference between CV and FV.
Recognize difference as:
- Write item up or down
- Recognize gain or loss in current income
09 - Recognition and Measurement
Accounting after Election
At each subsequent reporting date:
- Adjust item to new fair value
- Recognize difference as:
- Write item up or down
- Recognize gain or loss in current income
DR: Asset
CR: Unrealized Gain - Fair Value Option
10 - Inputs and Hierarchy
Define - “Inputs”
The various assumptions that market participants would use in determining fair value
10 - Inputs and Hierarchy
Types of Inputs
Observable: Developed based on market data obtained from sources independent of the reporting entity
Unobservable: Reflect the reporting entity’s own assumptions used in pricing; developed based on the best information available in the circumstances
10 - Inputs and Hierarchy
Fair Value Measurement Inputs Hierarchy: Level 1
Unadjusted quoted prices at measurement date in active markets for identical items.
- Highest level
- Most reliable evidence of FV
- Liquidity discount: permitted
- Control premium: not permitted
- Blockage discount: not permitted
10 - Inputs and Hierarchy
Fair Value Measurement Inputs Hierarchy: Level 2
Inputs observable, either directly or indirectly, that do not meet all conditions for Level 1.
- Quoted prices in active markets for similar items
- Quoted prices in markets that are not active for identical items
- Observable inputs other than quoted market prices that are relevant to an item being valued
- Inputs derived from or corroborated by observable market data using correlation or other means
10 - Inputs and Hierarchy
Fair Value Measurement Inputs Hierarchy: Level 3
Unobservable inputs for the item being valued.
- Lowest level, least desirable inputs
- May use reporting firm’s internal data
- Based on assumptions or inferences that market participants would make
11 - Disclosure Requirements: Fair Value Framework
What do disclosure requirements depend upon?
Whether fair value is used:
- On a recurring basis
- On a nonrecurring basis: only when certain conditions or situations occur
12 - IASB and Structure
Organization Structure: Monitoring Board
Responsible for appointing and approving the appointment of the Trustees of the IFRS Foundation.
Provides a formal link between the Trustees and public authorities.
12 - IASB and Structure
Organization Structure: IFRS Foundation
Formerly the International Accounting Standards Committee Foundation (IASCF).
The Trustees appoint the members of the IASB, IFRS
Advisory Council, and the IFRS Interpretations Committee.
Responsible for overseeing, reviewing effectiveness, and financing the IASB.
The 22 Trustees are paid and serve terms of three years (renewable once).
12 - IASB and Structure
Organization Structure: IASB
Responsible for promoting the IFRSs, including those for SMEs (small and medium-sized entities), and for approving Interpretations of IFRSs.
The 16 members are paid and serve terms of up to five years (renewable once) and must sever all employment relationships with current employers, including rights to return.
12 - IASB and Structure
Organization Structure: IFRS Interpretations Committee
Similar to the FASB’s Emerging Issues Task Force.
The committee’s pronouncements are reviewed by the IASB before they are issued.
Responsible for reviewing issues arising in the context of IFRSs and issuing Interpretations of those issues.
The 14 members are not paid (though their travel expenses are met by the IFRS Foundation) and serve renewable terms of three years.
12 - IASB and Structure
Organization Structure: IFRS Advisory Council
Advise the IASB on priorities and the views of interested organizations on major projects, as well as the benefits and costs of proposed standards.
There are 30 or more members who are appointed by the Trustees.
13 - IASB Accounting Standards
IFRS Hierarchy
- Requirements in IFRSs dealing with similar and related issues
- The definitions, recognition criteria, and measurement concepts for assets, liabilities, income, and expenses in the Framework
- If no guidance exists, pronouncements of other standard-setting bodies using a similar conceptual framework, other accounting literature, and accepted industry practices
13 - IASB Accounting Standards
Development of IFRS
- Item added to agenda
- Conduct research and issue a Discussion Paper
- Prepare and issue an Exposure Draft
- Review public comments and discussions
- Modify the ED, if necessary
- Finalize and issue the IFRS
14 - IASB Framework
Elements of Financial Statements
Assets Liabilities Equity Income Expenses
14 - IASB Framework
Define - “Asset”
A resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity
14 - IASB Framework
Define - “Liability”
A present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying future benefits
14 - IASB Framework
Define - “Equity”
The residual interest in the asset after subtracting liabilities
14 - IASB Framework
Define - “Income”
Increases in economic benefits deriving from increases in assets or decreases in liabilities that result in increases in equity.
Income may be realized or unrealized and includes both revenues and gains. However, gains are usually reported separately from revenues
14 - IASB Framework
Define - “Expenses”
Decreases in economic benefits deriving from decreases in assets or increases in liabilities that result in decreases in equity.
Expenses may be realized or unrealized and also includes losses. However, losses are usually reported separately from expenses
14 - IASB Framework
Assumptions
- The financial statements are prepared on the accrual basis
- The entity is a going concern
15 - SEC Role and Standard-Setting Process
Purpose of the SEC
The SEC enforces compliance of GAAP for all publicly traded companies and compliance of IFRS for foreign registrants.
Has the authority to set standards, but has delegated that task to the FASB (private sector)
15 - SEC Role and Standard-Setting Process
XBRL
Extensible Business Reporting Language.
XBRL tags accounting data into a taxonomy to ease the access to the data.
15 - SEC Role and Standard-Setting Process
Organizational Structure of the SEC
Has five commissioners appointed by the President.
Has four divisions.
- Division of Corporate Finance: oversees compliance and examines all filings.
- Division of Enforcement: Completes an investigation and takes appropriate actions when there is a violation of a securities law.
- Division of Trading and Markets: Oversees the secondary markets, exchanges, brokers, and dealers.
- Division of Investment Management: Oversees investments advisers and investment companies.
Office of the Chief Accountant - Houses technical expertise on principles, standards, and requirements. Issues position papers for the SEC to consider. Is the link between the SEC and the profession.
15 - SEC Role and Standard-Setting Process
Laws Administered by the SEC
Securities Act of 1933 Securities Act of 1934 Public Utility Holding Company Act of 1935 Trust Indenture Act of 1939 Investment Company Act of 1940 Investment Advisors' Act of 1940 Securities Investor Protection Act of 1970 Sarbanes-Oxley Act of 2002
15 - SEC Role and Standard-Setting Process
SEC Pronouncements
Financial Reporting Releases (FRR): Highest ranking authoritative source of accounting for public companies.
Staff Accounting Bulletins (SAB): Provide the SEC’s current position on technical issues
Accounting and Auditing Enforcement Releases (AAER): Report the enforcement actions taken against accountants, brokers, or others
16 - SEC Reporting Requirements
Regulation S-X
Governs the form and content of financial statements and financial statement disclosures.
Income Statement, Balance Sheet, Changes in Shareholders’ Equity, Statement of Cash Flows, Footnotes, and Qualification of Accountants (independence rules).
16 - SEC Reporting Requirements
Regulation S-K
Governs the form and content of non-financial statement disclosures.
Description of the business, description of stockholder matters, MD&A, changes in and disagreements with accountants, and information on directors and management.
16 - SEC Reporting Requirements
Securities Act of 1933
Requires publicly traded firms offering securities for sale to the public in the primary and secondary markets to file a registration statement, and to provide each investor with a proxy statement before each shareholders’ meeting.
