FAR - F1 & F2: Standard Setting, Income Statement, and Reporting Requirements Flashcards
F1: Either “unusual in nature” or “infrequent in occurrence”
**“Infrequent in occurrence” but not unusual in nature
presented in “income from continuing operations”
F1: Both “unusual in nature” and “infrequent in occurrence”
presented in “extraordinary items”
F1: Change in method or
Change in “Accounting principle”
**Cumulative effect of a change in accounting principle
GR: “Retro”
handled retroactive or retrospective calculations should be made.
**Equals the difference between retained earnings at the beginning of period of the change and what retained earnings would have been if the change was applied to all affected prior periods.
F1: Change in estimate
should handle prospectively - reported in current and future periods income from continuing operations.
- *NOT an error - DO NOT restate prior periods
- *NOT prior periods and NOT retained earnings
- *NO cumulative effect adjustment is name
- *NO separate line item presentation is made in the F/S
- *ONLY the footnote disclosure is necessary, if material change is being make.
F1: Change in the method of depreciation
Now considered to be both a change in method and a change in estimate.
F1: Corrections of errors of prior periods
Go to retained earnings statements as an adjustment of the opening balance
F1: General and Administrative expenses (Manufacturing co.)
Accounting and legal
Officers salaries
Insurance
F1: Freight-in
part of cost of inventory or cost of sales
F1: Freight-out
part of selling expenses
F1: Sales Representatives salaries
Part of Selling expenses
F1: Changes in “Accounting Entity”
Restate
F1: Under IFRS - Change in Accounting principle
Entity must present 3 balance sheets:
- End of current period
- End of Prior Period
- Beginning of prior period
F1: Change is accounting principle inseparable from a change in accounting estimate
Treated like a change in accounting estimate, prospectively.
F1: A Transaction that is unusual in nature OR infrequent in occurance
Should be reported as part of income from continuing operations and NOT net of tax
F1: IDEA memonic
Income from Continuing Operation => Gross (Before Tax)
Discontinued Operation => Net of Tax
Extraordinary Income => Net of Tax
Accounting Change => Retained Earnings
F1: Change in the reporting entity
Retrospectively, including note disclosures, and application to all prior period financial statements presented.
**If comparative financial statements are presented and a change of reporting entity has occurred, all previous financial statements that are presented in the comparative financial statements should be restated.
F1: ERROR CORRECTION
Prior Period Adjustment - Resate
F1: Comprehensive Income
All items included in “Net Income” (Income from continuing operation, discontinued operation and Extraordinary items) plus “Other Comprehensive Income” items
F1: Comprehensive Income includes all changes in equity during a period
Except those resulting from owner investments and distributions to owners
F1: Unrealized Holding gain on Available-for-sale securities
included in “Other Comprehensive Income”
F1: “Other Comprehensive Income” Includes… PUFER
Persion Adjustments
Unrealized gains and losses(Available-for-securities)
Foreign Currency items
Effective portion cash flow hedges
Revaluation surplus (IFRS only)
- Changes in the funded status of a pension plan
- Unrealized gains and losses on available-for-sale securities
- Foreign currency translation adjustments.
- Effective porting of cash flow hedges
- Pension gain
- Revaluation surplus
F1: “Accumulated Other Comprehensive Income”
Is a component of Stockholder’s equity on the balance sheet
F1: “Comprehensive Income”
- Can be reported in a separate statement of comprehensive income or in a statement of income and comprehensive income.
- Comprehensive income includes only non-owners changes in equity. Stock transactions and dividends are not included in comprehensive income.
- Comprehensive income is reported in interim financial statements and year-end financial statements.
F1: “Net Income” includes…
- Unrealized loss on the trading security
2. Revaluation loss
F1: Reclassification adjustments must be shown in the financial statement that discloses comprehensive income
To avoid double counting an item previously reported as comprehensive income (e.g. unrealized gain), which are now reported as part of net income (e.g. realized gain).
F1: “Accumulated Other Comprehensive Income”
Is a balance sheet account and is reported in the statement of financial position.
F1: Net Income + Other Comprehensive Income =
Comprehensive Income
F1: Under GAAP what amount should be reported as related party disclosures in the notes?
Loans to officers
F1: Under IFRS, what amount should be reported as related party disclosures in the notes?
Officer’s compensation/Salaries and Loans to officers
Officers’ expenses are not related party transactions because these are incurred in the ordinary course of business and not considered to be compensation.
F2: Goodwill
**Goodwill is recognized in the balance sheet when it has been created from a business acquisition or purchase.
Goodwill acquired in an arms-length transaction is capitalized, but internally created goodwill is expensed because an object measure of its value is difficult to obtain.
F2: “BASE” memonic
To determine Revenue/Expenses/Payments during a year B => Beginning Balance A => Additioin S => Substraction E => Ending Balance
F2: Franchisor Accounting (Franchise fee revenue)
- Unearned Revenue
- Earned Revenue
Unearned revenue is recognized as revenue once “Substantial Performance” on such future services has occurred.
Earned Revenue - Franchisor should report revenue from initial franchise fees when all material conditions of the sale have been “substantially performed.”
Substantial Performes means:
- Franchisor has no obligation to refund any payment
- Initial services required of the franchisor have been performed.
- All conditions of the sale have been met.
F2: Goodwill - Under U.S. GAAP
**Goodwill - Under IFRS
Under U.S. GAAP requires that goodwill be tested for impairment at the reporting unit level.
**Under IFRS goodwill should be tested for impairment at each cash-generating unit (CGU)
F2: Impairment loss
Under U.S. GAAP, subsequent reversal of intangible asset impairment losses is prohibited unless the intangible asset is held for sale.
F2: Under the revenue recognition rule:
revenue cannot be recognized until services have been performed.
F2: The Matching principle
Matches expenses against revenues in the same accounting period.
(Expenses are necessarilly incurred to generate revenues. All expenses incurred to generate a particular revenue should be recorded in the same period in which the revenue is recorded)
F2: Computer Software development costs
- Computer software development to be SOLD, LEASED or LICENSED
a. Technological Feasibility
b. Accounting for costs
a. Technological Feasibility is established upon completion of:
i. A detailed program design or
ii. Completion of a working model
b. Accounting for costs
i. Expense costs - planning, design, coding and testing incurred until technological feasibility has been established for the project.
ii. Capitalize costs - coding, testing and producing product masters incurred after technological feasibility has been established and product is released for sale.
F2: Converting from Cash-Basis to Accrual-basis accounting:
Add increases in current assets. For example, when AR increases, the increase is not considered to be income under the cash basis because the cash has not been collected, but the increase is income under the accrual basis.
Subtract decreases in current assets. Conversely, when AR decreases, then cash-basis counted it as revenue when the cash was collected, but under the accrual basis, the income was recognized in a prior period and should not be recognized again in the current period.
Add decreases in current liabilities. For example, when AP decreases, this represents a cash outflow that is recorded as an expense under the cash basis. However, under the accrual basis the paid expenses were recorded in a prior period and should not be recorded again in the current period.
Subtract increases in current liabilities. Conversely, when AP increases, this represents expenses incurred under the accrual basis method that have not been recorded under the cash basis method because they have not been paid.
Therefore, starting with the $70,000, we add the $2,000 decrease in AP, subtract the $200 and $100 increases in unearned revenue and wages payable, add the $300 increase in prepaid rent, and finally subtract the $800 decrease in accounts receivable:
$70,000 + $2,000 - $300 + $300 - $800 = $71,200
F2: Under IFRS, the goodwill impairment test is a one-step test
In which the carrying value of a cash-generating unit (CGU) is compared to the CGU’s recoverable amount, which is the greater of the CGU’s fair value less costs to sell and its value in use (PV of future cash flows expected from the CGU).
“Impairment loss = Recoverable amount - Carrying value”
F2: Under IFRS/U.S. GAAP, the research and development cost
- *Research Costs will always be expensed
- *Development costs may be capitalized if all of the following criteria are met:
1. Technical feasibility has been established
2. The company intends to complete the asset.
3. The company has the ability to sell or use the asset
4. Sufficient resources are available to complete the development and sell/use the asset.
5. The asset will generate future economic benefits. - *Under U.S. GAAP,
1. All research and development costs are expensed except for materials, equipment, or facilities that have alternate future uses are capitalized and depreciated over their useful lives.
2. Legal fees incurred to apply for a patent and to successfully defend the patent rights are capitalized as an asset.
3. Equipment purchased for current and future projects will be capitalized are depreciated.
4. The software maintenance costs are expensed, and the software modification costs are capitalized and amortized over the useful life.
F2: “Deferred Revenue”
e.g. Gift Certificate
Deferred revenue represents future income collected in advance.
- *1. When Gift Certificate SOLD Deferred Revenue is increased.
2. When Gift Certificate REDEEMED, Deferred Revenue is decreased.
3. When Gift Certificate LAPSE/EXPIRED Deferred Revenue is decreased.
F2: 2 types of Long term Construction contract revenue recognition methods:
- completed contract method
- Percentage-of-Completion method
Under Completed Contact method, Revenue is recognized when the contract is completed, however expected losses are recognized immediately in their entirety.
- *Expected losses on contracts are recognized prior to job completion (Conservatism)
- **The Expected profit on project is not recognized until completion.
***Revenue is recognized when the job is completed, not when progress billings are collected or when they exceed recorded costs.
F2: Under Percentage-of-completion
Under percentage-of-completion, appropriate profit should be recorded.
**Estimated losses are recognized in full immediately (Conservatism)
***Income previously recognized would be used to calculate the income recognized in the consecutive years.
**Costs incurred to date” vs “Total estimated costs” is the basis for recognizing revenue, not progress billings.
F2: Calculate Gross Profit or Loss is recognized in each period under Percentage-Of-Completion accounting method
4-Steps process:
- Compute gross profit = Contract price less
- Compute % of Completion = (Cumulative)Total Cost to Date/Total estimated cost of contract
- Compute Gross profit earned to date (cumulative) = Gross profit x % of completion
- Compute gross profit earned for current year = Gross Profit earned to Date less
** An estimated loss on the total contract is recognized immediately in the year it is discovered.
**Any previous gross profit or loss reported in prior years must be adjusted for when calculating the total estimated loss.
F2: Reported Net Assets and Net Liability due to Construction activities
**Net Assets: If the sum of cumulative costs incurred plus cumulative gross profit recognized exceeds cumulative billings, the excess is reported as a current asset.
**Net Liability: If cumulative billings exceeds the sum of cumulative costs incurred plus cumulative gross profit recognition, the difference is reported as a current liability.
**No Asset or Liability: If the two amount are equal. no asset or liability is recognized.
F2: 3 types of Revenue Recognition methods:
- Accrual Method (GAAP & IFRS)
- Installment of Sales Method (Only GAAP)
- Cost Recovery Method (Only IFRS)
- Accrual Methods - When earned and realized/Realizable. Collection is reasonably assured and degree of uncollectibility is estimatable.
- Installment sales method - When cash is collected. Collection is not reasonably assured and no basis for determining collectibility.
- Cost Recovery Method - Recover cash first before profit/Revenue is recognized. Collection is not reasonably assured and no basis for determining collectibility.
F2: 4 Steps to solve installment Sales Problems
- Calculate Gross Profit(G.P) = Sales - COGS
- Calculate Gross Profit % = Gross Profit/Sales
- Realized Gross Profit (I/S) = Cash Collected x GP%
- Deferred Gross Profit (B/S) = Receivable Balance X GP%
**Total GP = Total Sales x GP%
F10: Financial Instruments
I. Types of Financial Insturments
II. Fair Value Option - unrealized gains and losses are reported in earnings.
- Contracts - e.g. BONDS
- Derivatives - Value or settlement amount is derived from the value of another unit of measure. e.g. OFFS
O - Options
F - Futures
F - Forwards
S - Swaps
F10: Hedging
**Reduce risk of holding/trading certain assets. Your are letting somebody else take the risk because you are going to freeze your position right now.
Hedging is the use of a derivative to offset anticipated losses or to reduce earnings volatility. When a hedge is effective, the change in the value of the derivative offsets the change in value of a hedged item or the cash flows of the hedged item.
F10: Common Derivatives = “OFFS”
used.
- Option Contract
i. Call Option - Hope price goes up - buy
ii. Put Option - Hope price goes down - sell
if P< $76 : gain since P goes down - Gain
$75 - $69 = $6 x 10000 = 60,000 Gross
<20,000) Cost
Net Profit = $40,000 - Future Contract - Publicly traded
i. Long/Buy Profit - When Price goes up
ii. Short/Sell Profit - When Price goes down
F2: Accounting for non-monetary exchange
**When a nonmonetary exhange lacks commercial substance, the general rule is that no gain or loss is recognized and the book value approach is used.
**When a non-monetary exchange has commercial substance, the transaction is accounted for using the fair value of the asset surrendered or received, whichever is more evident.
**When a nonmonetary transaction has commercial substance, gains and losses are recognized based on the difference between the fair value and the book value of the asset given up.
“Gain = FV asset given up - BV asset given up”
=90,000 - (140,000 - 80,000) =30,000
“Loss = BV asset given up - FV asset given up”
F2: Under the rule of conservatism
Under the rule of conservatism, losses are recognized in all nonmonetary exchanges when the book value exceeds the fair value of the asset given up.
F2: Under IFRS, nonmonetary exchange
- Under IFRS, losses are recognized in full in all nonmonetary exchanges.
- Under IFRS, gains on nonmonetary exchanges of dissimilar assets are recognized in full. No gains are recognized on nonmonetary exchanges of similiiar assets.
F2: If the exchange lacks commercial substance or has commercial substance.
The company will only recognize a gain if it received boot/cash.
**If there is no boot/cash in the transaction. then no gain is recognized.
**If the boot/cash exceeds 25% of the total consideration, the transaction is considered to be monetary.
F2: Financial statements includes both specific and general prices level
**“Current/Constant dollar” method
F2: Under current cost accounting
**Specific price indexes may be used to restate financial statements items.
F2: Foreign Currency Accounting
“Functional Currency of a company”
The functional currency of a company may be:
- A foreign entity’s local currency, , which is typically the one in which the entity keeps its books
- The currency in which the financial statements will be presented, which is the currency of the parent company; or
- A foreign currency other than the one in which the foreign entity maintains its books.
**The functional currency of an entity generally depends upon the environment in which the entity generates and expends cash unless there is a requirements by law to use another currency.
