FAR Additional Study Flashcards
IFRS & GAAP Characteristic-Relevance
Relevance is a Qualitative Characteristic of Financial Reporting:
- Makes a difference to user (Materiality)
- Predictive Value – Predicts Future Trends
- Confirmatory Value – Evaluates Past
IFRS & GAAP Characteristic-Faithful Representation
Faithful Representation is a Qualitative Characteristic of Financial Reporting:
- Complete: Nothing omitted that would impact the decision making of the user
- Neutral: Info is presented without bias
- Free from Error: No material errors or omissions
IFRS & GAAP 4 Enhancing Characteristics
o Comparability-Allows users to compare different items
among various periods
o Understandability-Easy to use and understand
o Verifiability-Different people would reach same conclusion
o Timeliness- Information is available in time to make a decision
Pervasive Constraint of IFRS
Cost vs. Benefit
IFRS Criteria for an “element”
- Asset
- Liability
- Equity
- Income
- Expense
IFRS Recognition for Balance Sheet & Income Statement (2 things)
- Must meet the criteria for an Element (ALEIE)
2. Must meet criteria for recognition. (future benefit & reliably measured)
IFRS Criteria for “recognition”
- Probable future economic benefit
2. Can be measured reliably-Cost Recovery method required if value or outcome cannot be measured reliably.
Under IFRS how are gains and losses reported
- Gains are not reported as separate to income.
- Losses are the same as expense, but ARE displayed separately.
Difference between GAAP and IFRS with it comes to refinancing liabilities.
-In order for a current liability to be classified as non-current the refinancing agreement must be EXECUTED under IFRS. Under GAAP the entity only has to show intent.
Define contigent liability
Contingent liabilities are liabilities that may be incurred by an entity depending on the outcome of an uncertain future event such as a court case.
Contigent Liabilities under IFRS:
Under IFRS a contigent liability is accrued “probable” and “measurable”.
It is classified as a “Provision” is payment is uncertain in Timing or Amount.
Financial Assets under IFRS are recorded on the Statement of Financial Position using one of three methods:
o Amortized Cost Objective: Collect Cash Flows Uses Effective Interest Method o Fair Value through OCI Objective: Sell Financial Assets Gain or Loss recognized in OCI o Fair Value through Profit or Loss Objective: Everything Else Gain or Loss recognized in Profit or Loss
IFRS & GAAP-Deferred Tax Assets and Liabilities are classified as______ on the Statement of Financial Position.
Non-Current & Can only be netted if they are related to the same country/taxing authority.
Cost Method (Cost Model)
Asset carried at Cost less Accumulated Depreciation and Impairment Loss
Revaluation Model
- Asset is adjusted to Fair Value, less Accumulated Depreciation
- Increases in value from the adjustment are reported in the current period as Other Comprehensive Income
- Decreases in value from the adjustment are treated as an expense
- Asset must be able to be reliably measured
- Must be applied to whole class of assets, not just one asset
- No guidance on how often assets should be revalued under IFRS
PP&E Under IFRS- Is recorded at Cost using one of what two options?
- Cost Model
2. Revaluation Model
Under IFRS- How are Interest Expense or Finance Costs classified on the Statement of Cash Flows?
They can be classified as Operating or Financing. Once a classification is chosen, all future costs must be classified there.
Changes in Accounting Principle
-Retrospective Application
-Prior Periods adjusted
-Retained Earnings adjusted
-Completed Contract to % Completion
Ex: LIFO to FIFO
Change in Entity
-Retrospective Application
-Prior periods adjusted
-Included in footnotes
Ex: Change to Consolidated Statements
Change in Accounting Estimate
-Prospective Application
-Going Forward adjustment
Ex: Straight Line to DDB Depreciation
Error Correction
-Prior Periods adjusted
-Beginning balances of earliest period adjusted
-Included in footnotes
Ex: Non-GAAP to GAAP
Primary Objective of Accounting:
Measure Income-Income measures a firm’s efficiency
Monetary Units are the basis of all economic activity
FASB Codification:
The most authoritative set of accounting pronouncements. All pronouncements fall under the Codification “umbrella”
Managerial Accounting
- Managerial Accounting is “Timeliness” focused
- Managerial Accounting does NOT follow GAAP
Primary Constraints of Financial Reporting
- Cost vs Benefit
- Materiality
Secondary Constraints of Financial Reporting
- Consistency: Year vs. Year
- Comparability: Company vs. Company
Conservatism
When an estimate is necessary due to uncertainty, conservatism chooses the best option that won’t overstate the financial position of the company
Fair Value characteristics:
o The price you would receive if you sold the asset o Assumes asset is at its highest and best value
o Market Assumes
Asset is sold in its most advantageous market to get the best price possible
-Buyer and Seller are not Related
-Buyer and Seller are Knowledgeable
-Buyer and Seller are able to transact
-This isn’t a hypothetical transaction for Fair Value measurement purposes
-Buyer actually has $10M to purchase
-Buyer and Seller are motivated to buy/sell
Acceptable Valuation Techniques (3)
- Market Approach: market transactions/prices value asset
- Income Approach: present value discount earnings
- Cost Approach: replacement cost values the asset
Royalty Income
Royalty Income is recognized when earned. If royalty % is applied against Net Sales (Gross Sales-Estimated Returns) x %
Installment Sales
Revenue recognized upon receipt of cash. Only used when cash collection is uncertain.
Cost Recovery Method
- Most conservation method of revenue recognition when collection of sale price is uncertain
- No revenue recognized until all costs are recovered from purchase of the asset
Franchise Revenue
Franchisor-Startup Franchise Revenue deferred until performance takes place
Franchisee-Franchise Costs deferred until corresponding revenue is recognized
Discontinued Operations
Company ceases operating a business segment.
- Must represent a strategic shift
- -Major effect on operations and financials
Unusual or Infrequent Items
- Formerly Extraordinary Items
- Two options for reporting: Income Statement (above income from Conti. Ops.) & Footnotes to Financials
- No longer Net-of-tax
Constant Dollar Accounting
Uses CPI to adjust assets to reflect a consistent level of purchasing power due to inflation
Interest Expense: Interest on projects…
Interest on projects (software) for internal use is
not expensed, but is instead capitalized
What accounting policies must be disclosed?
o Includes;
- Accounting Principles used
- Basis of Consolidation
- Inventory Pricing Methods
- Depreciation Method
- Amortization of Intangibles
What risks and uncertainties must be disclosed?
- Nature of Operations
- Use of Estimates & listing of Significant Estimates
- Concentration vulnerability
Going Concerns-Not Alleviated
• Management plan – doubtful success
• Statement Required:
-There is substantial doubt that entity will continue as GC within 1 year of financial statement issuance date
• Disclosures Required:
• Events that led to GC Doubt
• Management evaluation of event
• Management plans to alleviateAlternatives to GAAP Accounting
- Cash Basis-Not GAAP, Oaky for Tax Returns
- Modified Cash-Not GAAP, Avoids GAAP complexities while providing more info. than Cash Basis Accounting
- Income Tax Basis- 3 Options (Cash, Accrual, Hybrid)
- FRF for SMEs-Not GAAP, no authoritative status, developed by AICPA, simplifies reporting for small co.
- Public Business Entities Framework- developed by FASB, GAAP
Financial Reporting Framework for Small & Medium Sized-Entity Framework (FRF for SME):
o Developed by the AICPA o Not GAAP o Has No Authoritative Status o Simplifies reporting for small companies -Uses Historical Cost as measurement basis (instead of Fair Value) -Targeted/Relevant Disclosures only o Provides efficiency and flexibility o Reduces Book vs. Tax differences o Income Taxes – Two Options -Deferred Taxes Method -Taxes Payable Method o Startup Costs – Two Options -Expensed -Amortized (15 years) o Goodwill -Amortized (15 years)
Public Company Framework
o Developed by the FASB
o GAAP
o Small Company Lease Accounting
-Private companies can bypass Variable Interest Entity rules for Leases
-Instead, Lease disclosures are made
o Accounting for Goodwill
-Amortize Goodwill over 10 years
• Will reduce impairment likelihood
• Less than 10 if more appropriate
-Must test for impairment – Two Options
• Entity Level
• Reporting Unit Level
o Interest Rate Swaps
-Simplified Hedge Accounting approach
• Simplifies the process from moving from a variable-rate borrowing + interest rate swap to a fixed-rate borrowingRegulation S-K
oUnder the Securities Act of 1933
oIncluded in the Regulation S-K
- General Business & Securities information
- Financial information
- Management and security holder information
- Registration Statement and Prospectus provisions
- Industry Guides, Exhibits & Asset-backed securities
- Roll-Up Transactions & Mergers
- Oil and Gas disclosures, if applicable
Development Stage Entities (DSE)
–A DSE is a company that is still in the formation stage and hasn’t yet begun principal operations or produced significant revenue
–New GAAP rules relax the reporting requirements for a DSE by removing the need for
o Incremental Financial Reporting
o Data Maintenance
o Inception-to-Date Reporting
o Attaching the DSE label to the F/S
o Disclose descriptions of DSE Activities
o Disclose first-year entity is no longer a DSE
–Benefit: Cost savings without sacrificing F/S usefulness
Serial Bond
Matures in installments
Term Bond
Matures on a Single Date
Debenture Bond
Unsecured
Sinking Fund Bonds
Cash held for Bond Repayment
Requires 5 years of Disclosures
Bond Proceeds Formula
Present Value of the Principal Payment at Maturity + Present Value of Interest Payments made
= Market Value of Bond Proceeds
Stated Rate
Rate on the face of the bond
Market Rate
Rate the bonds are currently selling for
Market Rate > Stated Rate
o Bond will need to sell at a discount in order for buyers to be interested. The difference in market rate vs. the stated is made up by the buyer purchasing the bond for less than par value
Market Rate: 12% Stated Rate: 10%
Par Value: $100
Purchase Price: $98
Market Rate < Stated Rate
o Bond will need to sell at a premium in order for sellers to be interested. The difference in market rate vs. the stated is made up by the buyer purchasing the bond for more than par value Market Rate: 8% Stated Rate: 10% Par Value: $100 Purchase Price: $102
Bond Issuance between Interest Date
- Face x Stated Rate x Interest Accrued since last date
o If a company issues bonds between interest dates, then the total cash that they receive will be MORE than they normally would (set aside any considerations for premium or discount, they are irrelevant for this point).
o Purchaser of the bonds must give the bond issuer the amount of accrued interest up front
Interest Expense
- Interest Expense starts accruing when the bonds are issued – not with the face amount of the bonds
- The amount of interest expense debited is the Effective Yield x Carrying Value
Bond Amortization Methods
- Effective Interest Method of Amortization is GAAP
- Straight Line Amortization in NOT GAAP
Debt Restructure: Debtor-Modification of Terms
If future payments are now less than the carrying
amount of the debt, then a Gain is recognized
Debt Restructure: Debtor- Settlement
o Gain recognized
- Cash Paid - Carrying Amount
- Difference between non-cash asset given and re-valued at FMV and debt carrying amount
Debt Restructure: Creditor-Loan Impairment
o Future Cash Flows discounted at loan’s Effective
Interest Rate < Carrying Value
–Effective Rate calculated using Original Rate,
not Modified Rate
Equity Method
- 21-50% Ownership
- Gives “Significant Influence”
- Purchase Price - Par Value=Good Will
- Dividends received from Investee reduce the investment account and are not income
Acquisition vs. Merger
o Acquired companies continue to exist as a legal entity – their books are just consolidated with the parent company in the parent’s financial statements
o Merged companies cease to exist and only the parent remains
Acquisition Costs
o Expensed in period incurred – i.e. NOT capitalized -Accounting -Legal -Valuation -Consulting -Professional o Netted against Stock Proceeds -Stock registration and issuance costs
Deferred Tax Asset
Deduction will reduce future income taxes expense
o Note: Deferred Tax Assets and Liabilities are calculated using the FUTURE enacted tax rate, not the current one
Never discounted to Present Value
Deferred Tax Liability
Income will be taxable in a future period and
will increase future tax expense
o Note: Deferred Tax Assets and Liabilities are calculated using the FUTURE enacted tax rate, not the current one
Never discounted to Present Value
Permanent Differences
Have no Tax impact
–When calculating the total differences between book and tax income, subtract the Permanent Differences from the total before applying a Future Enacted Tax Rate Ex: Tax-free Bond Interest
Deferred Income Tax Expense
o The sum of Net Changes in Deferred Tax Assets and Deferred Tax Liabilities
o GAAP Method for calculating is the “Asset and Liability Approach”
Note: IFRS uses the “Liability Approach” only
Derivatives
- Recorded at Cost when acquired
- Revalued to FV each period on Balance Sheet
- Trading Securities:Unrealized Gains & Losses: Income Statement
- Available for Sale (AFS) Securities: Unrealized Gains and Losses: OCI
Fair Value hedge
- Initially recorded on Balance Sheet at Fair Value
- Gains/ Losses are reported on Income Statement
Cash Flow hedge
- Initially recorded on Balance Sheet at Fair Value
- Gains/Losses=OCI
