FAR 1 - Standard Setting, Income Statement, and Reporting Requirements

Question 1

Name the single source of authoritative nongovernmental U.S. GAAP.

Answer 1

The FASB “Accounting Standards Codification (ASC).

Question 2

The term “International Financial Reporting Standards” includes what standards?

Answer 2

• International Accounting Standards (IAS)
• International Financial Reporting Standards (IFRS)
• IFRIC Interpretations
• SIC Interpretations

Question 3

What is the Private Company Council?

Answer 3

• The Financial Accounting Foundation (FAF) created the Private Company Council (PCC) to improve standard setting for privately held companies in the U.S.
• The goal of the PCC is to establish alternatives to U.S. GAAP, where appropriate, to make private company financial statements more relevant, less complex, and cost-beneficial.
• Accounting alternatives for private companies are incorporated into the relevant sections of the ASC.

Question 4

Who are the primary users of general purpose financial reports?

Answer 4

Existing and potential:

• Investors
• Lenders
• Other creditors

Question 5

Name the pervasive constraint on the information provided in financial reporting.

Answer 5

Cost Constraint:

The benefits of reporting financial information must be greater than the costs of obtaining and presenting the information.

Question 6

Name the fundamental qualitative characteristics of useful financial information.

Answer 6

Relevance and Faithful Representation

Question 7

Name the three elements of relevance.

Answer 7

• Predictive value
• Confirming value
• Materiality

Question 8

Name the three elements of faithful representation.

Answer 8

• Neutrality
• Completeness
• Freedom from error

Question 9

Name the enhancing qualitative characteristics of financial information.

Answer 9

Comparability, Verifiability, Timeliness, and Understandability

Question 10

According to SFAC No. 5, what should a full set of financial statements include?

Answer 10

• Statement of Financial Position (the balance sheet)
• Statement of Earnings (the income statement)
• Statement of Comprehensive Income
• Statement of Cash Flows
• Statement of Changes in Owners’ Equity

Question 11

What is the difference between realization and recognition?

Answer 11

• Realization*: When sold and converted to cash (or claims to cash)
• Recognition*: When recorded in the financial statements

Question 12

List the 10 elements of financial statements according to SFAC No. 6.

CREG and LALEID

Answer 12

Comprehensive Income

Revenues

Expenses

Gains

and

Losses

Assets

Liabilities

Equity (of Net Assets)

Investments by Owners

Distributions to Owners

Question 13

List the six elements of financial statements according to the IASB Framework.

Answer 13

Assets

Liabilities

Equity

Income (revenue and gains)

Expenses (expenses and losses)

Capital maintenance adjustments

Question 14

Name the five elements of present value measurement per SFAC No. 7.

EVTUO

Answer 14

Estimate of future cash flow

Expectations about timing Variations of future cash flows

Time value of money (the risk-free rate of interest)

The price for bearing Uncertainty

Other factors (e.g. liquidity issues and market imperfections)

Question 15

Describe the expected cash flow approach for present value computations.

Answer 15

Considers a range of possible cash flows and assigns a (subjective) probability to each cash flow in the range to determine the weighted average, or “expected,” future cash flow.

Question 16

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

IDEA

Answer 16

• Income Statement
  
  • Income (or loss) from continuing operations
  • Income (or loss) from Discontinued operations
  • Extraordinary items
• Retained Earnings Statement
  
  • Cumulative effect of a change in Accounting principle

Question 17

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

Answer 17

An impairment loss, a gain (loss) from actual operations, and a gain (loss) on disposal.

Question 18

In what period are the following reported:

An impairment loss?

A gain (loss) from actual operations?

A gain (loss) on disposal?

Answer 18

All are reported in the period in which they occur.

Question 19

In reporting discontinued operations, how is a “component” of an entity defined under U.S. GAAP and IFRS?

Answer 19

U.S. 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 20

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

• Business*
• Nonprofit activity*

Answer 20

A business is an integrated set of activities and assets 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 benefits, other than goods or services at a profit, to fulfill an entity’s purpose or mission.

Question 21

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

Answer 21

• Component of an entity
• Group of components of an entity
• Business
• Nonprofit activity

Question 22

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

Answer 22

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 and financial results.

Question 23

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

Answer 23

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 24

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

Answer 24

• Involuntary employee termination benefits
• Costs to terminate a contract that is not a capital lease
• Costs to consolidate facilities
• Costs to relocate employees

Question 25

Define extraordinary items.

Answer 25

• Material in nature
• Of a character significantly different from the typical or customary business activities (unusual)
• Not expected to recur in the foreseeable future (infrequent)
• Not normally considered in evaluating the ordinary operating results of an enterprise.

Key words: Unusual and infrequent

Remember: Extraordinary items are recognized under U.S. GAAP but not IFRS.

Question 26

List some examples of extraordinary items:

Answer 26

• The abandonment of, or damage to, a plant due to an infrequent earthquake or an infrequent flood.
• An expropriation of a plant by the government.
• A prohibition of a product line by a newly enacted law or regulation.

Question 27

Name the three types of accounting changes.

Answer 27

• Change in an accounting principle
• Change in accounting estimate
• Change in accounting entity

Question 28

How is a change in accounting principle reported?

Answer 28

• 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.
• Prior period financial statements are restated, if presented.

Question 29

What are the special changes in an accounting principle?

How are special changes in accounting principle reported?

Answer 29

• A change to LIFO from another method of inventory pricing under U.S. GAAP
• 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 30

How is a change in an accounting estimate reported?

Answer 30

• Prospectively.
• The effect is shown in the current and/or future periods that are affected by the change.
• Financial statements are not restated.

Question 31

Under U.S. GAAP, how is a change in the accounting entity reported?

Answer 31

All current and prior period financial statements presented are restated.

Question 32

How are error corrections reported?

Answer 32

Reported as prior period adjustments to retained earnings and all comparative financial statements presented are restated.

Question 33

Define comprehensive income.

Answer 33

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 occur for reasons other than investments by owners and distributions to owners.

Question 34

Identify five items included in other comprehensive income.

Answer 34

Pension adjustments

Unrealized gains and losses on available-for-sale securities

Foreign currency translation adjustments and gain/losses on foreign currency transactions that are designated as economic hedges of a net investment in a foreign entity

Effective portions of cash flow hedges

Revaluation surpluses (IFRS only)

Question 35

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

Answer 35

Statement of Comprehensive Income (single-statement approach)

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

U.S. GAAP and IFRS both allow the same two presentations.

Question 36

List some disclosure requirements for comprehensive income.

Answer 36

• Tax effects of each component included in current “Other Comprehensive Income”
• Changes in the accumulated balances of components of “Other Comprehensive Income”
• Total accumulated other comprehensive income
• Reclassification adjustments between other comprehensive income and net income

Question 37

Identify the contents of the Summary of Significant Accounting Policies note to the financial statements.

Answer 37

Summary of Significant Accounting Policies

Identify and describe:

• Measurement bases used in preparing the financial statements
• Principles and methods
• Criteria
• Policies
• Pricing

Question 38

Describe the related party disclosures required under U.S. GAAP and IFRS.

Answer 38

• Material related party transactions
• Related party notes/accounts receivable
• Control relationships

Note: IFRS requires disclosure of key management compensation. U.S. GAAP does not require this disclosure.

Question 39

What are the U.S. GAAP disclosure requirements for risks and uncertainties?

Answer 39

• Nature of operations.
• Use of estimates in preparing the financial statements.
• Significant estimates.
• Current vulnerability due to certain concentrations.

Question 40

What are the guidelines for interim reporting?

Answer 40

• Use same accounting principles that were used in the most recent annual report.
• Allocate expenses to the interim period benefited.
• Revenues are recognized in the period in which they are earned and realized or realizable.
• A total for comprehensive income in condensed financial statements of interim periods.

Question 41

What income tax rate is used in interim financial reporting?

Answer 41

Use best estimate of effective tax rate to be applicable for full fiscal year on quarterly statements.

Question 42

Name the four required disclosures for segments of an enterprise.

Answer 42

• Operating segments
• Products and services
• Geographic areas
• Major customers

Question 43

Define operating segment.

Answer 43

Distinct revenue-producing components of the enterprise about which separate financial information is produced internally, and whose operating results are regularly reviewed by the enterprise.

Determined using a “management approach.”

Question 44

Name two quantitative thresholds used in identifying reportable operating segments.

Answer 44

• 10% “Size” test
• 75% “Reporting Sufficiency” test

Question 45

Describe the 10% test for identifying reportable segments.

Answer 45

• Revenue

Reported revenue, including both sales to external customers and intersegment sales or transfers, is 10% or more of the combined revenue, internal and external, of all operating segments.

• Assets

Assets are 10% or more of the combined assets of all operating segments.

• Reported profit or loss

The absolute amount of its reported profit or loss is 10% or more of the greater, in absolute amount, of:

• The combined reported profit of all operating segements that did not report a loss
• The combined reported loss of all operating segements that did report a loss

Note: Must meet only one of the above.

Question 46

What is the 75% test for identifying reportable segments?

Answer 46

Combined external (consolidated) revenue of all reportable segments must be at least 75% of the total consolidated revenue of the entity.

The practical limit is 10 segements, but this is not a precise limit.

Question 47

What are the disclosure requirements for reportable operating segments?

Answer 47

For each reportable segment, the entity must report:

• Identifying factors
• Products or services
• Profit or loss details
• Asset details
• Liability details (IFRS only)
• Measurement criteria
• Reconciliations

Question 48

Describe the Form 10-K and the Form 10-Q. What level of assurance must be provided with the financial statements submitted in these forms?

Answer 48

Form 10-K:
Filed annually by U.S. registered companies. Includes a summary of financial data, MD&A, and audited financial statements prepared using U.S. GAAP.

Form 10-Q:

Filed quarterly by U.S. registered companies. Includes unaudited (reviewed) financial statements, interim MD&A, and certain disclosures.