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Roger CPA - FAR > FAR-1.1: Conceptual Framework & IFRS > Flashcards

FAR-1.1: Conceptual Framework & IFRS Flashcards

1
Q

What are the 6
objectives of
financial reporting?

A 
1. To provide information that is
useful to existing and potential
investors, lenders, and other
creditors in making decisions about
providing resources to the entity.
2. Information about a reporting
entity's economic resources and
claims against the entity (Financial
Position-B/S)
3. Changes in economic resources
and claims
4. Financial performance reflected by
accrual accounting (provides a better
basis for assessing the entity's past
and future performance than does
cash basis - Income Statement)
5. Financial performance reflected by
past cash flow (Cash Flows)
6. Changes in economic resources
and claims, NOT resulting from
financial performance (ex: issuing
additional stock)
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2
Q

What 2
characteristics make
financial statements
useful?

A

F/S must be BOTH Relevant and a

Faithful representation

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3
Q

what are the
ingredients of the
relevance component
of F/S usefulness?

A 
[Roger is PC and Materialistic] [R PC
& M]
Relevance
- Predictive Value
- Confirmatory value
---Materiality
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4
Q

what are the ingredients of the faithful representation component of F/S usefulness?

A 
[Roger is never on the FENC e]
[FENC]
Faithful Representation
- free from Error
- Neutrality (no bias)
- Completeness
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5
Q

What are the Enhancing Qualitative Characteristics for the Relevance and Faithful representations?

A 
[roger Exercises to be CUT like a V]
[E CUT-V]
Enhancing Qualitative
Characteristics
- Comparability (Consistency)
- Understandability
- Timeliness
- Verifiability
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6
Q

A full set of financial statements includes:

A 
- statement of financial position (balance
sheet)
- statement of earnings and
comprehensive income (income
statement)
- statement of cash flows
- statement of changes in owners equity
(statement of investments by and
distributions to owners)
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7
Q

10 key elements that make up financial statements

A
  • assets
  • liabilities
  • equity
  • investments by owners
  • distributions to owners
  • comprehensive income
  • revenue
  • expenses
  • gains
  • losses
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8
Q

3 basic elements of financial statements

A

assets
liabilities
equity or net assets

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9
Q

definition of an asset

A

an economic resource that has a probable
future benefit, one can obtain the benefit,
and the transaction creating the benefit
has already occurred

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10
Q

definition of a liability

A

an economic obligation in which one
needs to use or transfer an asset, it can’t
be avoided and the transaction has
already occurred

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11
Q

equity consists of what 3 elements

A
  • contributions / investments by owners
  • distributions to owners (dividends)
  • comprehensive income (all changes in
    equity other than “owner” sources)
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12
Q

what changes affect comprehensive income?

A 
[DENT]
- Derivative cash flow hedges
- Excess adjustment of Pension PBO and
RV of plan assets at year end
- Net unrealized gains or losses on
"available for sale" securities
- Translation adjustments for foreign
currency
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13
Q

what are the accounting rules and concepts (principals)?

A
  • consistency
  • conservatism
  • cost/benefit
  • matching
  • allocation
  • full disclosure
  • recognition (booking an item)
  • realization (selling an item)
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14
Q

when do you recognize a financial statement element?

A
  • it meets the definition of an element (asset,
    liability)
  • element is capable of being measured in
    monetary terms
  • the item is relevant and faithful
    representation (useful)
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15
Q

ways to measure a financial statement element in monetary terms

A
  • historical cost
  • replacement cost
  • fair market value (FMV) - per ASC 820
    (FASB 157) “the price that would be received
    to sell an asset or paid to transfer a liability
    in an orderly transaction between
    participants at the measurement date”
  • Net realizable value (NRV)
  • Present value (PV)
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16
Q

6 steps in applying the fair market value (FMV) approach

A 
1. Identify the asset or liability to be
measured
2. Determine the principal (highest volume)
or most advantageous market (maximizes
price or minimizes amt paid)
3. Determine the valuation premise (in-use
or in-exchange)
4. Determine the appropriate valuation
technique (market, income, cost)
5. Obtain inputs for valuation (level 1, level
2, level 3)
6. Calculate the fair value of the asset
17
Q

fair market value (FMV) valuation techniques

A

[MIC]

  • Market approach
  • Income approcach
  • Cost approach
18
Q

inputs for FMV valuation, what do the 3 levels represent?

A
  • Level 1 - uses quoted prices from active
    markets
  • Level 2 - Directly or indirectly observable
    inputs, other than level 1 (yield curves, bank
    prime rates, interest rates, credit risks,
    default rates on loans) (2 similar buildings
    in a downtown market)
  • Level 3 - Unobservable inputs are used if
    level 1 or 2 are not available (using financial
    forecasts or expected cash flow estimates)
    (ex. sub-prime mortgages)
19
Q

Factors that must be considered when calculating present values

A
  • Risk
  • Timing
  • Interest
  • Amount of cash flows:
    — Traditional approach - use most likely
    cash flow amounts
    — Expected approach - use weighted avg of
    different possibilities
20
Q

under accrual accounting, revenues or gains are recognized when they are…

A
  • earned

- realizable (realized)

21
Q

Revenue is recognized when… (4 things)

A 
- A binding arrangement exists (signed
contract)
- Services rendered or delivery has
occurred
- Fixed or determinable price exists
- Collection is reasonably assured
22
Q

Expenses or losses are recognized as incurred based on what methodologies (3)

A 
- Cause and effect - expenses that
produce revenue at identifiable points in
time can be matched directly to
revenues
- Systematic and rational allocation -
expenses that produce revenue over
long periods of time are matched to
those periods using a reasonable means
of allocation (depreciation)
- Immediate recognition - some
expenses cannot be directly related to
specific benefits and are expensed as
incurred (salaries of SG&A)
23
Q

What are the 4 areas of disclosure with regard to risks and uncertainties?

A 
1. Nature of operations: major products,
services and markets served
2. Use and extent of estimates in
preparation of financial statements
3. Certain significant estimates, and
their potential impact on the amount
and value of assets, liabilities, gains
and losses
4. Current vulnerability associated with
concentrations with respect to:
--- Particular customers, suppliers,
lenders, grantors or contributors
--- Revenue from particular products,
services or fund raising events
--- Available sources of supply of
materials, labor, or services; or of
licences or other rights used in the
entity's operations
--- Market or geographical area in
which the entity conducts its operations
24
Q

What are the 3 types of notes to the financial

statements and what are they used for

A 
they are used to ensure that all
disclosures that are required under
GAAP are made
1. Summary of significant accounting
policies
2. Summary of significant assumptions
- for prospective FS
3. Other notes to the financial
statements
25
Q

what is the main difference between US GAAP and IFRS?

A

US GAAP is rules
based, IFRS is
principles based

26
Q

IASB Framework - 4 principal qualitative characteristics

A
  1. Relevance
  2. Faithful Representation
  3. Understandability
  4. Comparability /
    Consistency
27
Q

IASB Framework - items under the Relevance principal

A 
[Roger is PC and
Materialistic]
Relevance
- Predictive value
- Confirmatory value
- Materiality
28
Q

IASB Framework - items under the Faithful Representation principal

A 
Reliability
- Neutrality
- Substance over form
- Prudence
(conservatism)
- Completeness
29
Q

IASB Framework - 2 constraints for relevant and reliable information

A
  • timeliness

- benefit > cost

30
Q

IFRS - 5 key elements of financial statements

A
  • assets
  • liabilities
  • equity
  • income
  • expense
31
Q

IFRS - what is a balance sheet referred to as?

A

Statement of Financial Position

32
Q

IFRS - does the statement of financial position have to be ordered by liquidity?

A

No, but a US GAAP

balance sheet does

33
Q

IFRS - what is the term used for economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants

A

Income

34
Q

IFRS - what are the 2 criteria that must be met for incorporating items on the income statement or statement of financial position

A

It meets the definition of an element and can be measured reliably

Roger CPA - FAR (6 decks)

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