FAR Flashcards
Conceptual Framework (2 characteristics)
Faithful representation & Relevance
Conceptual Framework - Enhancing Characteristics
- Comparability
- Verifiability
- Timeliness
Relevance - Qualitative Characteristics
- Predictive Value
- Confirmatory Value
- Materiality
Faithful Representation - Qualitative Characteristics
- Completeness
- Neutrality
- Free from Error
Gross Profit (Formula)
Gross Profit = Sales - COGS
IFCO (Formula)
IFCO = Gross Profit - Expenses/Taxes
Net Income (Formula)
Net Income = IFCO +/- Discontinued Operations, Extraordinary Items
Cash Flows - Operating Section (Direct)
Interest and Dividend Income, trading investments, suppliers, employees, government
Cash Flows - Operating Section (Indirect)
Reconciliation
Change in Cash = Ch. in Liabilities + Ch. in Equity - Ch. in Other Assets
Cash Flows - Investing Section
Addition/Disposal of Assets, collection of loan principle
Cash Flows - Financing Section
Sale of Equity/Debt, dividends paid, treasury stock
Statement of Cash Flows - Summary
O - Income Statement
I - Assets, Liabilities, Loan Principle
F - Owner’s Equity
A/R - Allowance Method
Credit Sales x % Sales Collectible = Allowance
A/R - Balance Sheet vs. Income Statement Approach
B/S - Aged A/R
I/S - Sales
Factoring A/R - With or Without Recourse
With - factor not responsible
Without - factor responsible for non-collectibles
Inventory Costs
Capitalize costs except for goods on consignment
Inventory Costs -
Returns, Freight In/Out, Interest, Sales Tax, Packaging, Insurance
Returns - Y Freight in - Y Freight out - N Interest - N Sales Tax - Y Packaging - Y Insurance - Y
COGS (Formula)
Beginning + Net Purchases = Goods Available - Ending = COGS
FIFO
oldest costs in COGS, newest costs in Inventory, Increase N/I
LIFO
newest costs in COGS, oldest costs in Inventory, Decrease N/I
LIFO is generally used to minimize income taxes.
LIFO allowed/not allowed under IFRS?
Not allowed
PP&E - Depreciable Cost
Cost – Salvage
Straight Line Depreciation
Cost – Salvage/# yrs.
Service Hours Depreciation
[(Cost – Salvage)/Total hours] x Hours used
Sum of the Year’s Digits Depreciation
yrs. Remain/sum years x (Cost – Salvage)
Double Declining Balance Depreciation
SL Rate x 2 NO SALVAGE
Average Accumulated Expenditures
average cash (or other qualifying expenditures) investment in the project during the period. This is the amount of debt that could have been retired during the period.
Weighted Average Method - PP&E
Capitalizes interest using the weighted average rate on all interest bearing debt.
Specific Method - PP&E
Capitalizes the interest on specific construction loans first. Then, if needed, capitalize interest on all other debt based on the average interest rate for that debt.
Trading Investments (Definition)
Debt and Equity securities bought and held principally for the purpose of selling them in the near term
Trading - Recognition
B/S: Reported at fair market value, usually a current assets on the balance sheet
I/S: Unrealized holding gains or losses will already have been recognized, and should not be reversed. Dividends are income.
Trading - Gains & Losses
Recorded: Unrealized gains and losses are included in earnings in the period they occur
Available for Sale Investments (Definition)
Debt and Equitysecurities not classified as trading or held-to-maturity
AFS - Recognition
B/S: Reported at fair market value, and may be classified as current or noncurrent
I/S: Realized gains and losses are recognized (gain or loss will be difference between selling price and carrying value less any permanent decline in value recognized). Dividends are income.
AFS - Gains & Losses
Recorded: Unrealized gains and losses are excluded from earnings - reported as OCI–unless the decline is considered to be “other than temporary” then–recognized in earnings
Held to Maturity Investments (Definition)
Debt securities that the organization has the positive intent and ability to hold to the maturity date
HTM - Recognition
B/S: Reported at amortized cost and grouped with non-current assets on the balance sheet
I/S: Realized gains and losses are recognized in accordance with amortized cost method. No dividends on debt.
HTM - Gains & Losses
Unrealized gains and losses are excluded from earnings–unless the decline is considered to be “other-than-temporary” or the Fair Value Option is selected
Equity Method Securities (Definition)
An Equity investment whereby the investor has significant influence over investee–generally >20% voting shares.
Equity Method - Recognition
B/S: Reported in accordance with the Equity Method - if control >50% must consolidate
I/S: Realized gains and losses from transactions are recognized for the difference between selling price and the equity basis of the stock. Dividends are NOT income.
Equity Method - Gains & Losses
These securities are not adjusted for changes in market value unless the decline is considered to be “other-than-temporary” or the Fair Value Option is selected
Cost Method Securities (Definition)
An Equity investment where there is no significant influence and it is a security with no readily determinable market value (privately held)
Cost Method - Recognition
B/S: At cost. Cost basis is reduced if there is a liquidating dividend where the dividends declared exceed the investee’s profits. Dividends and profits are measured from the date the investee was purchased.
I/S: Realized gains and losses are recognized (gain or loss will be difference between selling price and carrying value less any permanent decline in value recognized). Dividends are income. WATCH for liquidating dividends!
Cost Method - Gains & Losses
There are no unrealized gains and losses because the cost method is not marked-to-market.
Securities (Trading, HTM, AFS) - Debt vs. Equity
HTM – Debt, Trading – debt/equity, AFS – debt/equity
Securities (Trading, HTM, AFS) - Gains & Losses
HTM – No G/L, Trading – G/L on I/S, AFS – G/L in AOCI
Securities - IFRS
IFRS – 1. Business Model Test, 2. Cash Flow Characteristic Test
Equity Method (Sig. Influence) - Decomposition Tool
Net BV = CS + R/E + APIC
Net FMV = Assets – Liabilities
Price Paid – Net FMV = Goodwill
Intangibles - Definite Life
BV > Recoverable Cost = Impairment (Definite Life)
Intangibles - Indefinite Life
BV > FV = Impairment (Indefinite Life)
Impairment Loss (Formula)
Impairment Loss = BV – FV
Implied Goodwill
FV of Reporting Unit < CV
CV of GW > Implied GW
Employer Payroll Expense
(FICA + Medicare) x ½ + (FUTA + SUTA) = ER Payroll Expense
Gift Card Revenues vs. Extended Warranties
Gift Card Revenues – Unearned Rev, Extended Warranties – separate contract in addition
Notes Payable - Gross vs. Net Method
Gross – Prem/Disc recorded in JE
Net – Prem/Disc included
Notes Payable - Discount vs. Premium
Market > Stated = Discount
Stated > Market = Premium
Bonds Payable - Effective Interest Method
This method first computes interest expense based on the beginning book value of the bond and the market rate at issuance. The difference between interest expense and the cash interest paid is the amortization of the discount or the premium. The market rate at issuance is always used. The rate is not changed after issuance because it represents the true interest rate over the bond term. The amortization of discount or premium is a “plug” figure.
Bonds Payable - Straight Line Method
This method recognizes a constant amount of amortization each month of the bond term. The straight-line method should not be used when
(a) the term to maturity is quite long and there is more than a minor difference between the market and stated rates, or
(b) when there is a very significant difference between the market and stated rates regardless of the length of the term.
Bonds Payable - Stated Rate vs. Market Rate
Stated Rate – Interest, Market Rate – face value of single payment
Troubled Debt - Gains & Losses
Gain = BV of Debt – FV Loss = BV of debt – FV received
Troubled Debt - IFRS
Sum of Net flows
Treasury Stock - Cost Method
T/S debited for cost, reissue > cost = APIC
Treasury Stock - Par Method
T/S debited at par, APIC debited, reissue > cost = addt’l APIC
BV/Share - Common Stock (Formula)
Common Stockholder’s Equity/Common Shares Out = BV/Share
Pension Expense Breakdown
- Service Cost 2. Interest Cost 3. Expected Return on Plan Assets 4&5. Amortization
Pension Expense - Interest
Interest = Begin PBO x Discount Rate
Pension Expense - Expected Return
Exp. Return = Begin FV of Assets x Exp. ROR on Assets
Accounting Changes/Errors
Restrospective – restate previous F/S’s
Prospective – use new estimate at current point forward
Restatement – correct R/E
Adjustment to R/E vs. Error
Adjustment to R/E – cumulative effect
Error – prior period adjustment
Type of Change - Accounting Principle
Restrospective
Type of Change - Accounting Principle, prior year effects impracticable
Prospective
Type of Change - Accounting Estimate
Prospective
Type of Change - Change in Reporting Entity
Retrospective
Type of Change - Correction of Error
Restatement (correct retained earnings)
Cost Method vs. Equity Method Adjustments for Business Consolidations
Cost Method: no adjustments, Equity Method: adjustments
Contingency - Possible
Disclose
Contingency - Can’t Estimate
Disclose
Contingency - Probable & Estimable
Accrue liability and disclose
Contingency - IFRS
“More likely than not”
Basic EPS (Formula)
Income avail to common shareholders/ Weighted avg. shares out = Basic EPS
Diluted EPS (Formula)
N/I – Preferred Stock Dividends / WA Shares Out = Diluted EPS
Cash Flow vs. Fair Value Hedge
Cash Flow Hedge – effects OCI
Fair Value Hedge – effects N/I
Translation - Exchange Rates for Conversion
B/S Current, I/S Historical or WA, R/E formula, plug for Translation Adjust
Remeasurement - Exchange Rates for Conversion
Monetary - current, Non-monetary - Historical
Total Rentals - Leases (Formula)
Damage/Service Payments/# years = Rent Expense/Revenue
Lease Improvements
capitalized over the shorter of the lease term or useful life
Capital Lease (Components)
ANY of the 4 criteria can be met to qualify:
1. Ownership Transfer 2. BPO 3. Lease Term 75% of useful life 4. PV of MLP 90%
Lessor has 2 additional criteria: 1. Collectability, 2. Substantial completion
If none of the criteria are met - Operating Lease
Direct Financing vs. Sales-Type Lease
Direct Financing - BV = FV
Sales-Type - BV not = FV
Executory Costs - Incl./Excl. from MLP’s & Net Account Balance?
MLP’s - Lessee: Exclude; Lessor: Exclude
Net Account Balance - Liability: Exclude; Receivable: Exclude
Annual Lease Payment - Incl./Excl. from MLP’s & Net Account Balance?
MLP’s - Lessee: Include; Lessor: Include
Net Account Balance - Liability: Include; Receivable: Include
Bargain Purchase Option - Incl./Excl. from MLP’s & Net Account Balance?
MLP’s - Lessee: Include; Lessor: Include
Net Account Balance - Liability: Include; Receivable: Include
Unguaranteed Residual - Incl./Excl. from MLP’s & Net Account Balance?
MLP’s - Lessee: Exclude; Lessor: Exclude
Net Account Balance - Liability: Exclude; Receivable: Include
Lessee Guarantee of Residual - Incl./Excl. from MLP’s & Net Account Balance?
MLP’s - Lessee: Include; Lessor: Include
Net Account Balance - Liability: Include; Receivable: Include
3rd Party Guarantee of Residual - Incl./Excl. from MLP’s & Net Account Balance?
MLP’s - Lessee: Exclude; Lessor: Include
Net Account Balance - Liability: Exclude; Receivable: Include
Non-Monetary Exchange - Commercial Substance
new CF’s generate significantly different CF’s from old asset
Non-Monetary Exchange (Formula)
FV New Asset = FV Old + Cash
Lacks Commercial Substance
- Cash not received, no gain or loss recorded.
- Cash received, gains are recognized in proportion to the amount of cash received.
Commercial Substance - Gain (Formula)
FV of Asset Exchanged - BV of Asset Exchanged
Commercial Substance - Loss (Formula)
BV of Asset Exchanged - FV of Asset Exchanged
Not for Profit Accounting - Net Assets Model
- Unrestricted 2. Temporary 3. Permanent
Statement of Functional Expenses (Not for Profit)
optional ONPO’s, program and supporting expenses broken out
Unrestricted Funds
resources are available for expenditure in the current period for any purpose
Temporarily Restricted Funds - Program Restrictions
resources are available for expenditure in the current period but only for specified (operating) purposes
Temporarily Restricted Funds - Asset Acquisition/Capital Restrictions
resources are available for expenditure in the current period but only for capital purposes
Temporarily Restricted Funds - Time Restrictions
resources are available only after a specified time has elapsed or event has taken place
Permanently Restricted
resources are not available for expenditure at any time, although the earnings on the resources may be expended; permanently restricted assets are known as “endowments”
Governmental Accounting - Fund Balance
- Nonspendable 2. Restricted 3. Committed 4. Assigned 5. Unassigned
Governmental Accounting - Net Position
- Investment in Capital Assets 2. Restricted 3. Unrestricted
Governmental Fund Category - Accounting Method & Statements
- Modified Accrual Basis Accounting
- Balance Sheet, Statement of Revenues, Expendituers, and Change in Fund Balance
Governmental Funds
- General 2. Debt Service 3. Special Revenue 4. Internal Service 5. Permanent
Proprietary Fund Category - Accounting Method & Statements
- Accrual Accounting
- Statement of Net Position, Statement of Revenues, Expenses, and Changes in Net Position, Statement of Cash Flows
Proprietary Funds
- Internal Service 2. Enterprise
Fiduciary Fund Category - Accounting Method & Statements
- Accrual Accounting
- Statement of Fiduciary Net Position, Statement of Changes in Fiduciary Net Position
Fiduciary Funds
- Pension Trust Funds 2. Investment Trust Funds 3. Private Purpose Trust Funds 4. Agency Funds
IFRS - Inventory
LIFO is not allowed under IFRS
IFRS - Off-Balance-Sheet Activity
Under IFRS the focus is on whether a company controls an entity; off balance-sheet treatment is less frequent
IFRS - Fair Value Disclosure
There is no “fair value hierarchy” or required disclosures about level 3 assets/liabilities under IFRS
IFRS - PP&E, Intangibles
PP&E and Intangibles can be treated similarly to U.S. GAAP, held at historical cost, depreciated/amortized and reviewed for impairment, or the assets can be revalued to fair value
IFRS - Revenue Recognition
Much less detailed revenue recognition guidance. Completed Contract method is not allowed under IFRS.
IFRS - Research & Development
R&D is expensed under GAAP. Under IFRS, research is expensed but development costs could be capitalized and later amortized.
IFRS - Convertible Debt
Under IFRS convertible debt is generally split between its equity and debt components
IFRS - Pension Accounting
Under IFRS pension costs can be split into its financing and compensation components, the pension plan’s funded states may not appear on the balance sheet, and fair value of plan’s assets is used to calculated expected return, and actuarial gains/losses can be recognized in equity (excluded from income)
IFRS - I/S Expenses
Under IFRS expenses can be displayed by either “function” or “nature” and if function is chosen, then nature must be disclosed in the footnotes.
IFRS - Impairment Write-downs
Under IFRS a more conservative one-step impairment test is used for non-financial assets. “Write-ups” are allowed, but only back to the original cost.
IFRS - Employee Stock Options
Employee stock options are expensed
IFRS - Contingencies
Probable is a lower threshold “more likely than not”. If a range of losses is possible, then the midpoint is chosen as contrasted with the low point under U.S. GAAP.
IFRS - “Netting” of Financial Instruments
Netting is allowed, however the criteria are more restricted than U.S. GAAP.
IFRS - Uncertain Tax Positions
Under IFRS there are many fewer detailed rules for dealing with uncertain tax positions.
Equity - Contributed Capital vs. Retained Earnings
Contributed Capital - Contributed by Owners
R/E - retained by the entity
Gross Profit (Formula)
Sales - COGS = Gross Profit
Income from Continuing Ops (Formula)
Gross Profit - Operating Expenses - Income Taxes = IFCO
Net Income (Formula)
IFCO +/- Discontinued Operations, Extraordinary Items = Net Income
IFRS - Income Statement
Extraordinary items are not allowed
Comprehensive Income (Formula)
N/I + OCI = Comprehensive Income
IFRS - Revaluation of PP&E
permits revaluation of PP&E through OCI.
Cash Equivalents
short-term, highly liquid (ex: Treasury bills, money market funds)
IFRS - Statements of Changes in Equity
Must be a separate statement.
Types of OCBOA
Cash, Modified Cash, Income Tax, Regulatory
Personal F/S (Formula)
Begin Net Worth +/ Ch. in Assets +/- Ch. in Liabilities = End Net Worth
Valuation of Personal F/S
Estimated Current Value = FV
A/R - Gross vs. Net Method
Gross - without discount, Net - with discount
Allowance Method - B/S vs. I/S (Formula)
B/S - A/R x % A/R uncollectible = Allowance
I/S - Credit Sales x % Sales uncollectible = Allowance
Watch for beginning debit balances.
LIFO vs. FIFO
LIFO - newest costs in COGS, oldest costs in Inventory
FIFO - oldest costs in COGS, newest costs in Inventory
Inventory Valuation
Lower of Cost or Market
Types of Capitalized Costs
- Get ready costs 2. Intended condition/use
Natural Resources
does not include the cost of extraction; includes successful efforts/full cost methods
Stock Dividends - are/are not income?
Stock divdends are never income.
Selling Securities - HTM, T & AFS
Ability & Intent - HTM
No Ability or Intent - T & AFS
Debt vs. Equity - Securities
HTM - debt
Trading - debt/equity
AFS - debt/equity
IFRS - Impairment Loss
Impairment losses can be reversed
IFRS - Investments (Tests)
- Business Model Test
2. Cash Flow Characteristic Test
Liquidating Dividend
dividends exceed N/I for the year
Income Effect on Stock Dividends
NO income effect for stock dividends!
Identifiable Intangible Assets
copyrights, patents, trademarks, etc.
Unidentifiable Intangibles
Goodwill
Definite Life Intangibles
capitalize external costs, amortize using the SL method
Indefinite Life Intangibles
capitalize external costs, no amortization!
Impairment Test
- Qualitative Assessment
- Quantitative Assessment
a. FV of Reporting Unit < CV of RU
b. CV of Goodwill > Implied Goodwill
IFRS - Intangibles
Can reverse impairment losses, one-step goodwill test
Operating vs. Financing Liabilities
Operating - Current
Financing - Noncurrent
Deferred Revenue
liability for future goods and services
Notes Payable - Gross vs. Net Method
Gross - uses premium/discount account
Net - does not, directly into N/P account
Bonds Payable - Market vs. Stated
Market > Stated - Discount
Market < Stated - Premium
Market = Stated - Face Value
B/P Discount - Type of Account?
contra liability
Total Interest Expense - B/P (Formula)
Cash + Interest Discount = Interest Expense
Cash - Interest Premium = Interest Expense
Bond Issue Costs
capitalized to deferred charge account, amortized as expense over bond term.
Bond FV Option - IFRS
irrevocable at bond issue
Convertible Bonds - BV vs. MV Method
BV - bond account balances transferred to stock accounts
MV - G/L recorded between BV & MV
Bonds w/ Detachable Warrants
- Separate accrued interest
- Allocate total bond price
- Record allocation to O/E (warrant)
Document issued through due process activities of FASB for amending the Codification?
Changes and updates to the Codification are accomplished through Accounting Standards Updates (ASUs).
FV of a Financial Asset
The quoted price in the most advantageous market
Total Revenues
economic benefit rec’d, does not include discounts and accounts written off that are recovered.
IFRS for SME’s
does not have public accountability, publishes F/S for external users
Comprehensive Income (Formula)
N/I + AOCI
AOCI (Formula)
Running O/E account, increased or decreased by OCI for the period.
Material Loss - Unusal/Infrequent
When a loss is not both unusual and infrequent, it is reported as a component of income from continuing operations.
When a loss is both unusual and infrequent, it is classified as an extraordinary item and reported separately from income from continuing operations.
OCI - Components
G/L on AFS securities and foreign currency translation adjustments
Operating Activities - Direct Method
Income Statement - Revenues/Expenses
Inflows: from customers, interest income or dividend income, sale of trading investments
Outflows: to suppliers, employees, government, for interest or operational expenses
Investing Activities
Balance Sheet - Assets/Liabilities
Inflows: sale of property, plant or equipment, sale of debt or equity securities of other entities, collection of loan principal
Outflows: Purchase of PP&E, purchase of debt or equity securities of other entities
Financing Activities
Owner’s Equity, L/T Debt
Inflows: from sale of equity securities, from issuance of debt
Outflows: to stockholders as dividends, to redeem long-term debt, to re-acquire capital stock
IFRS for SME’s - Goodwill
Under IFRS for SMEs, goodwill is assumed to have a limited life and is amortized over that life, or a period not to exceed 10 years if the life cannot be reasonably estimated.
If a note receivable is determined to be impaired…
A loss or expense is recognized as equal to the difference between the note carrying value and the present value of the cash flows expected to be received..
Total Interest Revenue (Formula)
equals the total amount paid by Ace over the life of the note less the proceeds to Ace.
Lower of Cost or Market - Market Value Ceiling/Floor
market value is replacement cost if replacement cost is between the ceiling value (net realizable value) and the floor value (net realizable value less normal profit margin)
Perpetual vs. Periodic Inventory - FIFO and LIFO
Perpetual -
COGS FIFO - Earliest goods acquired
COGS LIFO - Latest goods acquired prior to each sale
Periodic -
COGS FIFO - Earliest goods acquired
COGS LIFO - Latest goods acquired during the period
IFRS - Inventory Valuation
Lower of Cost or NRV
PP&E - Capitalized Costs
Get ready costs, anything necessary to bring the asset to its intended condition and location
PP&E - Interest Cost
Interest cost is capitalized only during the construction period. Prior to the construction period, interest cost was expensed. Any interest cost incurred subsequent to the construction period will likewise be expensed.
Interest Capitalization - Matching Principle
Interest capitalization exemplifies the matching principle. Until the asset is in service, it cannot produce revenue. The asset is also not yet in its intended condition and location. Thus, expensing of the interest is deferred until the asset can provide revenues against which to match the interest expense.
Recording Stock Dividends
Under any method used to account for an investment in common stock, the investor records a stock dividend received by a memorandum entry to increase the number of shares owned. Since the cost of the investment does not change, the per share cost of the stock decreases.
IFRS - Investments to Receive Cash Flow
Under Business Model, solely to receive cash flow from interest and principal repayments - Amortized Cost
Not Under Business Model, solely to receive cash flow from interest and principal repayments - Fair Value
Liquidating Dividends - Cost vs. Equity Method
Cost Method - liquidating dividends are treated as a reduction in the investment account whereas normal dividends are treated as income.
Equity Method - all dividends are treated as a reduction in the investment account. No dividends received are treated as income under the equity method.
FV & Cost Method - Investment Reconciliation
When either the cost method or the fair value method is used to measure investment property; the entity must provide a reconciliation showing the causes of changes in the carrying amounts of investment property between the beginning and end of a period.
Serial Bonds
Mature at regular intervals rather than on one single date
Debenture Bonds
not secured, backed by only the general credit of the issuing firm. Debenture bonds can also be serial bonds.
Market Price of a Bond (Formula)
PV of all remaining payments, (principal and interest) at the effective interest rate
Bond Premium (Formula)
difference between the bond carrying value and the bond face value.
Amortization of bond premium + interest expense = Cash Interest Paid
Term Bonds
Mature on a single date
Interest Expense vs. Interest Payable vs. Unamortized Bond Premium/Discount
Interest Expense = Face Amount +/- Premium or Discount x Market Rate x Time
Interest Payable = Face Amount x Stated Rate x Time
Unamortized Bond Premium/Discount = Current Premium/Discount - (diff in Interest Exp and Payable)
When debt is issued at a discount, interest expense over the term of debt equals the cash interest paid
Plus discount
When a company declares a cash dividend, retained earnings is decreased by the amount of the dividend on the date of
Declaration - A legal liability comes into existence at declaration. The firm has committed itself to paying resources to shareholders from retained earnings on that date.
When collectability is reasonably assured, the excess of the subscription price over the stated value of the no par common stock subscribed should be recorded as
Additional paid-in capital when the subscription is recorded
Net effect of R/E - Property Dividends
Property dividends are recorded at market value at the date of declaration, then reduced by the amount of gain/loss to find the net effect of retained earnings.
Effects of preferred stock called/retired
When a firm retires preferred stock, cash is paid to the shareholders reducing total owners’ equity. Retained earnings can never be increased when shares are retired, redeemed, or converted into another class of stock.
Benefit Pension Plans - w/in the same company
Within the same firm, overfunded plans are not offset with underfunded plans because a plan’s funds can be used only for the benefits payable under that plan.
Pension Liability (Formula)
PBO - Plan Assets
Gains/Losses on Pensions
effects pension expense, not pension liability
Prior Period Adjustment
A Prior period adjustment is defined as the correction of an error affecting prior-year income.
Change in Accounting Basis
Therefore, the change to the accrual basis is a change from an unacceptable method or basis of accounting to an acceptable method or basis. Such a change is treated as an error correction, which is reported as a Prior period adjustment.
Change in Accounting Principle (i.e. FIFO to LIFO)
Accounting-principle changes are reported as an adjustment to retained earnings at the beginning of the year of change. Prior financial statements are retrospectively adjusted.
What legal form of business combination will result in the need to prepare consolidated financial statements?
Only an acquisition form of business combination will require the preparation of consolidated financial statements. In the merger and consolidation forms of business combination, only one firm will remain after the combination.
Mergers vs. Consolidations vs. Acquisitions
Mergers & Consolidations - the assets and liabilities of the acquired entity/entities are recorded on the books of the acquiring entity. At least one preexisting entity ceases to exist, and the assets and liabilities are recorded on the books of the surviving entity.
Acquisition - the assets and liabilities of the acquired entity remain on the books of the acquired entity. One preexisting entity acquires controlling interest in another preexisting entity, and both continue to exist as separate legal entities.
Changes in contingent consideration in a business combination after the acquisition date
Changes in the fair value of contingent consideration resulting from occurrences that occur after the acquisition date are recognized as gains or losses when the contingent consideration is classified as an asset or a liability.
Contingent Consideration - Recognition
Contingent consideration liabilities are initially recognized at fair value and adjusted to fair value each period until the contingency is resolved or expires. A change in fair value resulting from occurrences after the acquisition date would be recognized as a gain or loss in income in the period of the change, not as an adjustment to the consideration paid to acquire the acquiree.
Cost of Carrying out Combination
Should be expensed, not included in total cost/consideration transferred amount.
IFRS - Contingent Assets in Business Combinations
Not recognized
IFRS - Goodwill in Business Combinations
Goodwill is allocated to Cash Generating Units
Intercompany Receivables/Payables
100% of the transaction should be elimintated, even if the primary company owns less than 100% of the subsidiary.
Cost Method - Subsidiary Investment
When a parent company uses the cost method to account for its investment in a subsidiary, the parent will recognize its share of the subsidiary’s dividends declared as income to the parent.
Cash Flow Hedge - Recognition (Effective vs. Ineffective)
To the extent the change in the fair value of the hedging instrument offsets the change in the fair value of the hedged item, the hedge is effective, and that amount is recognized in other comprehensive income, not current income. To the extent the change in the fair value of the hedging instrument is different than the change in the fair value of the hedged item, the hedge is ineffective, and that amount is recognized in current income.
Disclosure - Significant Concentrations of Credit Risk
All entities must disclose all significant concentrations of credit risk arising from all financial instruments, whether from a single entity or a group of parties that engage in similar activities and that have similar economic characteristics.
IFRS - Impairment Testing
Impairment testing is completed relative to the recoverable amount
Contingency - Recognition
Must be probable and estimable
Contingencies - IFRS
If a range is provided, the median of the range is used for the accrued liability.
Dividends subtracted in computing Basic EPS
(1) the annual dividend commitment on cumulative preferred whether or not declared or paid, and (2) declared dividends on noncumulative preferred whether paid or not.
Arrear dividends are never included in EPS because they were subtracted in computing EPS in a previous year.
Basic vs. Diluted EPS - Calculation differences
Diluted EPS does assume the conversion of securities that have not yet converted as of the balance sheet date, but basic EPS is limited to actual shares of common stock outstanding.
Translation G/L in Financial Statements
Under Translation (method of converting) the Translation Adjustment does NOT enter into determination of Net Income, but is treated as “Other Comprehensive Income” for reporting purposes.
Translation
convert from foreign currency to the reporting currency
Functional Currency - Translation vs. Remeasurement
Translation - local currency is functional currency
Remeasurement - primary entity’s currency (i.e. U.S.) is the functional currency
Leases - Recognition of Rent Expense/Revenue (Definition)
Operating - recognized on a SL basis even if the annual rentals are not equal
Sales-type - initial direct costs recognized as selling expense
Direct financing - initial direct costs are included in lessor’s gross receivable, included in the based on which the annual payments are computed
Operating vs. Capital Leases - Definition
Operating - accounted for as rental agreements, no transfer of effective ownership associated with the lease
Capital - accounted for as if the lease agreement transfers ownership of the asset from the lessor to the lessee
Leasehold Improvement - Recognition
capitalized to a Leasehold Improvement asset account
Amortized over the shorter of the remaining lease term, or the useful life of the improvement
Improvements made in place of rent are expensed in the period incurred.
Leases - Executory Costs
insurance, maintenance, and property taxes
Expensed by: lessor in an operating lease, lessee in a capital lease
Capital Lease Criteria
If ANY of these criteria are met, the lessee has a capital lease:
- Title transfer - an installment purchase is implied
- BPO - allows lessee to purchase the asset for less than its estimated fair value at the end of the term
- Lease term is >75% of the asset’s remaining useful life
- PV of MLP’s is >90% of the FV of the asset at inception
Lessor has 2 additional criteria: 1. Lease payments are collectible, 2. No material cost uncertainties for the lessor
Lease Classifications - Lessor & Lessee
Lessee: Operating or Capital
Lessor: Operating, Capital - Direct Financing, Capital - Sales-Type
Capital - Sales-Type Lease
Leased Asset BV does not = FV
Lessor earns:
- Immediately: Gross Margin = FV - BV
- Interest over the Lease Term
Capital - Direct-Financing Lease (Gross vs. Net Method)
Gross - Unearned interest is a contra receivable account
Net - Interest is included in Lease receivable account
IFRS - Capital Leases Criteria
If ANY of the 5 criteria are met, the lease is a capital lease.
- Title Transfer (SAME)
- BPO (SAME)
- Term is for a major portion of the remaining life of the asset —- More judgmental
- The PV of MLP’s is substantially all of the FV of the asset —– More judgmental
- The asset under lease is specialized or unique such that only the specific lessee can use it w/o major modification. —- NEW
IFRS - Bonds
Debt issue costs (transaction costs) reduce any premium or increase any discount: a reduction in the proceeds from the debt.
Types of Non Profit Organizations
- Voluntary Health & Welfare Organizations
- Other NPO
- Healthcare
- Colleges & Universities
G/L on Cash Flow & FV Hedges
Cash Flow - Reported in OCI
Fair Value - Reported in Income
IFRS - Revenue Recognition on L/T Contracts
international standards require a modified version of completed contract—the cost recovery method, when the percentage of completion method is not allowed.
Contingencies - Probable
Based on professional judgment, the probability of occurrence is considered very high or a near certainty.
Contingencies - Reasonably Possible
Based on professional judgment, the probability of occurrence is neither very high nor remote. In other words, when probability of occurrence is considered along a spectrum of possibilities, the probability of occurrence is not at either end of the spectrum, but is in the large middle section of the spectrum.
Contingencies - Remote
Based on professional judgment, the probability of occurrence is considered to be very low, or as the title implies, remote.
Contingencies - Recognition, Probable but cannot be estimated
In this situation, the loss contingency should be disclosed in the footnotes to the financial statements.
Contingencies - Recognition, Reasonably Possible
In this situation, whether the loss can be reasonably estimated or not, the loss contingency is disclosed in the footnotes to the financial statements.
Contingencies - Recognition, Remote
In this situation, whether the loss can be reasonably estimated or not, the loss contingency can be disclosed in the footnotes to the financial statements. Please note that footnote disclosure is permitted but not required.
