FAR 1: Income Statement & Comprehensive Income

Question 1

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

IDA

Answer 1

Income Statement = Income (or loss) from continuing operations & Income (or loss) from Discontinued operations

Retained Earnings Statement = Cumulative effect of a change in Accounting principle

Question 2

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

Answer 2

An impairment loss, a gain (loss) from actual operations, and 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 US GAAP and IFRS?

Answer 4

US 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

Define the following terms as they are used in reporting discontinued operations:

Business

Nonprofit activity

Answer 5

A business is an integrated set of activities and asset that is conducted and managed for the purpose of providing a return to investors or other owners, members, or participants.

A nonprofit activity is an integrated set of activities and assets that is conducted and managed for the purpose of providing benefit, other than goods or services at a profit to fulfill an entity’s purpose or mission.

Question 6

Name the types of entities that may be considered for reporting according to the rule for discontinued operations.

Answer 6

1. Component of an entity
2. Group of components of an entity
3. Business
4. Nonprofit activity

Question 7

What conditions must be present for a disposal to be reported in discontinued operations?

Answer 7

A disposal of a component, group of components, business activity, or nonprofit activity is reported in discontinued operations if the disposal represents a strategic shift that has or will have a major effect on an entity’s operations an financial results.

Question 8

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

Answer 8

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 9

Why types of costs are associated with exit and disposal activities?

Answer 9

1. Involuntary employee termination benefits
2. Costs to terminate a contract that is not a capital lease.
3. Cost to consolidate facilities.
4. Costs to relocate employees.

Question 10

Name the 3 types of accounting changes.

Answer 10

1. Change in accounting principle
2. Change in accounting estimate
3. Change in accounting entity

Question 11

How is a change in accounting principle reported?

Answer 11

1. 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.
2. Prior period F/S are restated, if presented.

Question 12

What are the special changes in an accounting principle? How are special changes in accounting principle reported?

Answer 12

1. A change to LIFO from another method of inventory pricing under US GAAP.
2. 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 13

How is a change in an accounting estimate reported?

Answer 13

1. Prospectively
2. The effect is show in the current and/or future periods that are affected by the change.
3. F/S are not restated.

Question 14

Under US GAAP, how is a change in the accounting entity reported?

Answer 14

All current and prior period F/S presented are restated.

Question 15

How are error corrections reported?

Answer 15

Reported as prior period adjustment to RE and all comparative F/S presented are restated.

Question 16

Define Comprehensive Income?

Answer 16

Change in equity (net assets) that results from revenue, expenses, gains and losses during a period, as well as any other recognized changes in equity that occurs for reasons other than investments by owners and distributions to owners.

Question 17

Identify 5 items included in other comprehensive income.

PUFER

Answer 17

Pension Adjustments
Unrealized gains and losses on available-for-sale securities
Foreign currency transalation adjustment and gains/losses on foreign currency transactions that are designed as economic hedges of a net investment in a foreign entity
Effective portionso of cash flow hedges
Revaluation surpluses (IFRS Only)

Question 18

List the 2 formats acceptable for reporting comprehensive income. How does this compare with IFRS?

Answer 18

Statement of Comprehensive Income (Single-statement approach)

Statement of Income followed by separate Statement of Comprehensive Income (two-statement approach)

US GAAP and IFRS both allow the same 2 presentations.

Question 19

List some disclosure requirements for comprehensive income.

Answer 19

1. Tax effects of each component included in current “Other Comprehensive Income”
2. Changes in accumulated balances of components of “Other Comprehensive Income”
3. Total accumulated other comprehensive income
4. Reclassification adjustment between other comprehensive income and net income.