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
Foreign Currency Hedge
Gains/Losses=OCI
Hedging Required Disclosures
o Objectives and Strategies
o Context to help investor understand instrument
o Risk Management Policies
o Complete List of Hedged Instruments
Foreign Currency Transactions vs. Foreign Currency Translation
Foreign Currency Transactions-Used for transactions denominated in something other than a company’ functional currency
>A change in exchange rates between the functional currency and the currency in which a transaction is denominated occurs
o This increases or decreases the expected amount of functional currency cash flows upon settlement of the transaction
o Resulting in a Foreign Currency Transaction G/L
o The G/L goes to the Income Statement
Foreign Currency Translation-US corporation has a subsidiary in a foreign country. Functional/Reporting currency is the US dollar
>The translation issue then revolves around translating the foreign subsidiary’s financial statements into the reporting currency of the parent for purposes of preparing consolidated financial statements
o The G/L goes to OCI
Assets: Donated Property (Non-Reciprocal Transfer) - Donee
o Recorded at Fair Value + costs associated with getting the property into working condition for its designed purpose
o Exam Tip - Think of a charity holding a “fair” and then donating the property which is then recorded at “fair value”
Assets:Donated Property (Non-Reciprocal Transfer) – Donor
o Recorded at Fair Value of asset given up
o Gain or Loss recorded
Software Expenses
-Prior to Technological Feasibility - Expense as R&D
-After Feasibility but prior to Production - Capitalize
-Expenses incurred during production
o Inventory
-During training on internal use software – Expensed
Governmental Accounting Basics: Primary Objective
o Provide information that is useful and benefits a
wide range of users including
- Cost of Services provided
- Sufficiency of Revenues to cover costs
- Financial Position of the Entity
GAAP Hierarchy for State & Local Governments
o Authoritative
-Category A
-GASB Statements
-Category B
-GASB Technical Bulletins
-GASB Implementation Guides
-GASB-Approved AICPA Literature
o Non-Authoritative
-GASB Concepts Statements
-FASB Pronouncements / OtherGovernmental Accounting: Fund Types
- Governemental Funds
- Fiduciary Funds
- Proprietary Funds
Governmental Accounting: Fund Accounting (2 Types)
o Accrual Basis -Current Economic Resources Focus -Revenues recognized when earned o Modified Accrual Basis -Current Financial Resources Focus -Revenues recognized when available & measurable
Budget Estimates
o Appropriation
Highest amount allowed for an expenditure
o Encumbrance
Records purchases & reserves it
Governmental Accounting: Opening Budgetary Entry
Dr Estimated Revenues Control
Cr Appropriations Control
Dr/Cr Budgetary Fund Balance (plug)
Governmental Accounting: Closing Budgetary Entry
Dr Appropriations Control
Dr/Cr Budgetary Fund Balance (plug)
Cr Estimated Revenues Control
Governmental Funds (GSP-CD)
> Use Modified Basis of Accounting
Have a Current Financial Resource Focus
Revenue Recognized when available and measurable
o Sales tax revenue to be received within 60 days of the fiscal year end that will be used to fund expenditures made prior to year-end are treated as revenue in the current fiscal year
General, Special Revenue, Permanent,- Capital, Debt)
General Fund
-Operating Fund of the governmental Unit
>Records Significant Revenues
Taxes, Tickets, Fines, Licenses
>Records Significant Expenditures
Police, Education, Fire Dept.Special Revenue Fund
Restricted for a special purpose such as street repair
Capital Projects Fund
Used to acquire and build facilities
Debt Service Fund
Handles repayment of long-term debt and related interest
Governmental Fund Balance Types
> Restricted-Restricted by Contributor (Strict)
Committed-Restricted by Government (Less strict because they can undo the restriction)
Assigned-Intended to be used for a purpose
NonSpendable- isn’t in a “spendable” state (Inventory)
Governmental Fund Statements
> Balance Sheet
>Statement of Revenues, Expenditures, & Changes in Fund Balances
Derived Tax Revenue
> Collected by People “doing” things
- Buying Cars (Sales Tax)
- Going to work (Income Tax)
Imposed Tax Revenue
> Assessed just because things “exist”
-Property Tax on car
-Real Estate Tax
Recorded as Revenue when Budgeted
Proprietary Fund
>Use Accrual Basis of Accounting -Orientation is Income Determination >Have an Economic Resource Focus >Revenue Recognized when earned and measurable >Internal Service & Enterprise Funds
Internal Service Fund
> Serves the needs of other governmental units
Ex: Motor Pool fixes government vehicles
Enterprise Fund
> Provides goods or services to external users
Ex: Post Office
Proprietary Fund Financial Statements
o Statement of Net Position
o Statement of Revenues, Expenses, and Changes in
Net Assets
o Statement of Cash Flows
Fiduciary Funds
> Used Accrual Basis of Accounting
Have and Economic Resource Focus
Agency,Pension Trust, Investment, & Private Purpose Trust
Agency Fund
Government acts as an “agent” or custodian
Pension Trust Fund
Government is a trustee for a pension plan
Investment Trust Fund
Government is a trustee over a series of investments
Private Purpose Trust
Trust that benefits various individuals and entities
Fiduciary Fund Financial Statements
Statement of Net Position & Statement of Changes in Net Position
Government-Wide Financial Statements
> Statement of Net Position & Statement of Activities
–Prepared on an Accrual Basis
–Focus is on Economic Measurement
–Purpose is to provide Operational Accountability
Component units are reported in the Entity-Wide Financial Statements and not the Fund Financial Statements.
Defined Benefit Pension Plans: Financial Statements Required
1.Statement of Fiduciary Net Position
-Assets
-Deferred Outflows
-Liabilities
-Deferred Inflows
-Fiduciary Net Position
2.Statement of Changes in Fiduciary Net Position
-Additions
Contributions
Net Investment Income
-Deductions
Benefit Payments
Admin Expense
-Net Change in Fiduciary Net Position
3.Financial Statement Notes
-Types of Benefits Provided
-Plan Member Classes
-Board of Directors Information
-Investments
>Policies
>Fair Value Determination
Interim Reporting-Discrete View
Interim period is a separate accounting period-NOT GAAP
Interim Reporting-Integral View
Interim period is part of the annual period-GAAP
Interim Reporting-Rules that differ from normal GAAP
> Gross Profit Method may be used to estimate COGS & Ending Inventory
Temporary declines in Inventory aren’t recognized
Interim Reporting-Discontinued Operations & Unusual/Infrequent Items
o Aren’t prorated
o Fully recognized in Interim Period as incurred
o If it occurs in Q3, it’s recognized in Q3
Interim Reporting-Cumulative Gains & Losses
Reported as if they occurred in the first quarter
Interim Reporting-Inventory Valuation
o If inventory experiences a decline in value during an interim period, the loss is recognized in the interim period
–If the loss is expected to be only temporary, no loss is recognized
Problems with Interim Reporting
The matching principle gets messed up – Expenses incurred in one period may benefit future periods
Segment Reporting
> Required by publicly traded companies
Test of Significance for a Segment (must meet one of
these requirements)
o Revenue of segment is 10% or more of total o Profit is 10% or more of total
o Segment assets are 10% or more of total
o 75% Test
—All segment revenues must equal 75% of total external revenues
Disclosure Requirement
o If 10% or more of enterprise revenue comes from one customer, the segment making the sales must be disclosed
Inventory Discounts- Two Methods
- Gross Method-Records discounts only when used
2. Net Methods-Records discounts whether used or not, unused discounts allocated to financing expense
Gross Margin Formula
Gross Margin=Sales-COGS (BI+P=EI)
Inventory Accounting Systems-Two Methods
>Periodic-Counted at certain times -Weighted-Average Cost Flow Method >Perpetual-Continually updated -Moving-Average Cost Flow Method >In periods of Rising Prices, Ending Inventory under Periodic and Perpetual Methods, are identical under FIFO
Inventory Turnover Ratio
COGS/Average Inventory
Average Day’s Sales
365/Inventory Turnover
Consignments:Consignor
Consignor:
>Sends their inventory to be sold by someone else
>Include consignment items in inventory count
>Include shipping to consignee
Consignments:Consignee
Consignee:
>Sells someone else’s inventory in their store and they get cut of the revenue
>Don’t include consignment inventory held as part of their own inventory
Inventory Errors
> For Exam purposes, just remember
o Beginning Inventory Over/Under stated has no
effect on Ending Retained Earnings (E.RE)
o EI Over = COGS Under = E.RE Over
o EI Under = COGS Over = E.RE Under
On the CPA Exam, you can pick up quick points if you have this relationship memorized
Weighted Average Cost per Unit Formula
(COGAS/Total Units)x Units Sold for COGS=WAC per Unit
Measurement of Inventory-Two Methods
- Lower of Cost or Market
- LIFO & Retail Method
- Lower of Cost or Net Realizable Value (NRV)
- FIFO & Average Cost
- All other Methods besides LIFO & Retail
Lower of Cost or Market Method
>Market Ceiling (NRV) -NRV=Selling Price-Selling *Cost >Inventory Replacement Cost >Market Floor (NRV-Profit Margin) **The middle amount is the market
Lower of Cost or NRV
NRV=Selling price-(Selling*Cost)
- Includes all Inventory Measurement methods other than LIFO & Retail Method
- *Includes Disposal, Completion, Transportation Costs
Investments: Trading Securities
>Balance Sheet Treatment -Recorded at Fair Value -Classified as a Current Asset >Unrealized Gains/Losses -Go to Income Statement >Relcassified to AFS or HTM?-No effect upon Transfer
Investments: Available-For-Sale Securities
> Balance Sheet Treatment
-Recorded at Fair Value
-Classified as Current or Non-Current Asset
Unrealized Gains/Losses-OCI
Reclassified?
-Held To Maturity:Unrealized G/L go to Stockholder’s Equity
-Trading Securities:Unrealized G/L recognized in Current Period
Investments: Held-To-Maturity Securities
> Balance Sheet Treatment
-Recorded at Amortized Cost
-Classified as Current or Non-Current Asset
Unrealized G/L: N/A
Reclassified?
-Available-for-Sale:Unrealized G/L go to Stockholder’s Equity
-Trading Securities:Unrealized G/L recognized Current Period
Capital Lease-Lessee
>Risk of ownership passes by (must meet one) TO-BOP 75/90
>Capitalize at Cost
o Asset & Liability Recorded
o Present Value of Future Lease Payments
o Discount Rate – Lesser of
-Implicit Rate in the Lease
-Market Rate
>Footnotes
o Future minimum rental commitments
o By year – for 5 years
o All remaining years as a groupCapital Lease-Lessor
> Requirements:
o Lessee must TO-BOP 75/90
o Collectability of lease payments is predictable
o No uncertainties about the lessor reimbursing the lessee for costs incurred
Operating Lease-Lessee
> Risk of ownership does not pass
No asset or liability is recorded on financial statements
Leasehold Improvements
o Capitalizes and depreciated over the lesser of
Lease Life or Leasehold Improvements Life
Operating Lease-Lessor
> Rent Revenue recorded
>Remains an asset and depreciated
Direct Financing Lease
> Interest Revenue decrease with passage of time
- Principal amount increases with each payment
- Carrying amount Lease decreases
Sale-Leaseback
> Any profit on the sale is deferred and amortized >Exception:
o If PV of Lease Payments is 10% or less of the asset’s FMV
-Gain is Recognized
o If PV of Lease Payments is greater than 10% of
FMV and the lease is operating
-Gain is recognized except the amount of the
PV of the lease payments
Example:
$100,000 Gain
PV of Lease Payments: $25,000
$75,000 of Gain: Recognized
$25,000 of Gain: Deferred
Quick Ratio
(Cash+AR+Trading Securities)/Current Liabilities
Current Ratio
Current Assets/Current Liabilities
Working Capital
Current Assets-Current Liabilities
A/R Turnover
Credit Sale/Average AR
Inventory Turnover
COGS/Average Inventory
Day Sales in Inventory
365/Inventory Turnover
Days to Collect A/R
Avg AR/Avg Sales Per Day
Gain Contingencies
Don’t accrue due to conservatism
Loss Contingencies
Remote – Don’t Accrue or Disclose
Reasonably Possible – Disclose
Probable – Accrue (if Estimable) and Disclose
Non-Governmental Not-for-Profits
> Private colleges and hospitals that are not government- supported like a public university
Non-Governmental Not-for-Profits: Financial Statements Required
- Statement of Financial Position(similar to BS)
- Statement of Activities(similar to IS)
- Statement of Cash Flows(both direct and indirect ok)
- Statement of Functional Expenses (Volunteer Health org only)
Pension Expense:Projected Benefit Obligation (PBO)
Reflects future compensation levels
Pension Expense:Accumulated Benefit Obligation
PV of Pension Benefits accrued based on
present compensation levels
Pension Expense Formula
\+Prior Service Cost Amortization
-Return on Plan Assets (Estimated)
\+Interest
o Beginning PBO x Interest Rate
o Increase of PBO due to time
\+Unexpected Losses or (-) Gains
\+Service Cost
o As employees work, the Projected Benefit
Obligation increases
=Pension ExpensePension Expense:Fair Value of Plan Assets – PBO
o Overfunded (Asset) = Non-Current only o Underfunded (Liability) = Current & Non- Current o Gains/Losses go to OCI -- Net of Tax
Pension Expense:Financial Statement Disclosures
o Pension Funding Policies
o Types of Assets Held
o 5 Year Benefits to be paid
o 5 Year Benefits in aggregate thereafter
o Estimated Pension Contribution for next period
Pension Expense:Vested Benefits
Owed to employee regardless of continuance of employment via the Full Eligibility Date
The interest rate used to discount stock options is…
The interest rate used to discount stock options is the
risk-free interest rate.
Basic EPS Formula
(Net Income – Preferred Dividends) / Avg C/S Outstanding
> Note – If Cumulative, subtract the P/S dividend regardless of whether or not they’re declared.
>If dividends are in arrears from a prior year on P/S, don’t subtract that amount.
>The prior year P/S cumulative dividend reduces that year’s EPS. Only deduct the current year.
>For EPS purposes, treat C/S stock splits or stock dividends as if they occurred at the beginning of the year, regardless of when actually issued during the year
> EPS is only required to be shown for Income from Continuing Operations and Net Income
o All others (Discontinued Operations) can be shown on the financial statements or in the notes
Diluted EPS Formula
> Stock options increase shares outstanding only if they are dilutive
o Their exercise price is less than market value
o If not, you ignore them in the calculation
> Net Income – P/S dividend + P/S dividend that wouldn’t be paid if converted (wash)
Weighted average common stock + convertible equivalents
Basic EPS must be calculated first and then compared with Diluted EPS.
If Diluted EPS is not less than Basic EPS, then it is anti- dilutive and the security should not be included
Name the 5 steps of revenue recognition
- Identify the contract with a customer
- Identify the performance obligations in the contract
- Determine the transaction price
- Allocate the transaction price to the performance obligations.
- Recognize the revenue when the entity satisfies the performance obligations
Contract criteria
- The parties have approved the contract, verbally, in writing or by implication consistent with the customary business practices.
- Each party’s rights to the goods or services can be identified
- Payment terms can be identified
- The contract has commercial substance
- Collectibility of substantially all of the consideration is probable
Describe the criteria used to identify separate performance obligations.
A contract may include more than one performance obligation. For a performance obligation to be separate, the good or service must be distinct from other goods or services in the contract. A good or service is distinct if a customer can benefit from the good or service on its own.
What methods may be used to recognize revenue when the performance obligation is satisfied over time?
Input method
Output method
What are the two methods of determining transaction price when a contract includes variable consideration?
Expected value approach
Most likely amount approach
Provide an example of a constraint on estimating revenue based on variable consideration.
If earning the variable consideration is based on an uncertainty that is out of the company’s control, such as weather or the volatility of the stock market, then variable consideration is constrained.
Also, if it is probable that a significant reversal of revenue would occur, then variable consideration is constrained.
Describe the journal entry to record sales revenue when noncash consideration is received.
The company will debit an asset account consistent with the noncash consideration received (e.g., a patent or investment) and credit sales revenue. The amount will reflect the fair value of the noncash consideration.
What type of account is Sales Discounts Forfeited and what is its natural balance?
Revenue account presented as “Other Income”
Natural credit balance
When a significant financing component is present in a sales contract, what revenue in addition to sales revenue does the company record?
Interest Revenue
Expected Value Method
Uses the sum of probability-weighted outcomes to determine the transaction price. Use the expected value method when an entity has many contracts with similar characteristics.
Describe how a single total transaction price is allocated to multiple separate performance obligations.
The total transaction price is allocated based on the proportion of the total standalone selling price represented by each performance obligation. The proportion is found by dividing the standalone price for the performance obligation by the total of the standalone prices for the performance obligations. The proportion for each performance obligation is then multiplied by the total transaction price to determine the amount of the total transaction price that will be allocated to each performance obligation.
List the two criteria required for a performance obligation to be considered distinct.
- The customer must be able to benefit from the good or service on its own or with resources readily available.
- The good or service must be able to be separately identified from other promises in the contract.
How is the transaction price allocated for a contract with performance obligations that are not distinct from each other?
If a contract contains promises that are not distinct from each other, then the goods or service promised in the contract represent a single performance obligation. The total contract price is allocated to the single performance obligation.
If the standalone selling prices for performance obligations are not directly observable, what steps should a company take?
When the standalone selling prices are not directly observable, then a company should estimate the standalone selling prices.
The total standalone selling price for three separate performance obligations in a contract is $100,000. The first performance obligation has a standalone selling price of $45,000. What proportion of the total contract transaction price should be allocated to the first performance obligation?
Performance obligation 1 = 45,000/100,000 = .45 or 45%
The measurement focus of governmental-type funds is the determination of:
The measurement focus of governmental type funds is on both:
the changes in financial position and
financial position.
The flow of financial resources refers to the changes in financial position from the sources and uses of financial resources (GASB 1300.102). By contrast, the measurement focus of a proprietary fund is on determining “operating income, changes in net position (or cost recovery), financial position, and cash flows”—similar to a commercial entity.
A firm is applying international accounting standards to its defined-benefit pension plan and has pension gains and losses. As a result,
Pension gains and losses are recognized immediately and in full in accumulated other comprehensive income. However, they are not subsequently amortized to earnings.
The funded ratio of a pension plan compares:
The plan’s fiduciary net position as a percentage of the actuarially determined total pension liability.
According to GASB Statment No. 68 (para 46(b)(1)(d), governmental employers must report as required supplemental information, the pension plan’s fiduciary net position as a percentage of the actuarially determined total pension liability.
Premiums received on general obligation bonds are generally transferred to what fund?
Debt Service Fund
In a Tax Agency Fund, revenues must be recognized:
Revenues are not reported in Agency Funds.
Agency Funds act as intermediaries in the process of disbursing monies from one governmental entity to another. The government has no claim on the resources in the Agency Fund and does not recognize revenues when it receives the monies or recognize expenses when the monies are disbursed.
Which account should Excel City credit when it issues a purchase order for supplies?
Budgetary Fund Balance.
The entry to record a purchase order is a debit Encumbrances and a credit to Budgetary Fund Balance.
Shared revenues received by an Enterprise Fund of a local government for operating purposes should be recorded as:
Non-Operating Revenues
An Enterprise Fund is a type of Proprietary Fund.
Shared Revenues received by a Proprietary Fund for operating purposes should be recorded as Non-Operating Revenues in the period in which they are earned and become measurable.
