FAR - Framework/Overview, Special Purpose Frameworks Flashcards
4 other types of financial statements?
1) comprehensive basis other than GAAP
2) personal financials
3) financials of employee benefit plans/trusts
4) IFRS for SMES (small/medium entities)
OCBOA
Who uses them?
Other comprehensive bases in Acct
1) Cash
2) Modified Cash
3) Income Tax
4) Regulatory
5) Others w/ substantial support
Partnerships and sole proprietors, closely held businesses
cash basis
recognize revenue when receive cash
recognize expense when cash disbursed
no other assets/liab shown, ONLY cash + equity
modified cash basis
combo of cash basis + accrual basis
sub support:
1) equivalent to an element of accrual acct or
2) logical/consistent with GAAP
acceptable modifications:
1) recognize long-term assets and depreciate/amortize
2) recognize A/R when earned and A/P when incurred
3) recognize income taxes when become payable
All related accts must be reported using same basis of acct. Example, if long-term assets recognized, depreciation/deprec. exp also must be recognized
Income Tax basis
recognize income when revenues are taxes
recognize expenses when deductible
Perm differences = items never recognized for tax purposes
1) life insurance on officers
2) intercompany dividends
3) MBI
4) fines
nontaxable rev/nondeductible exp recognized in a statement of rev/exp
1) sep line in rev/exp section of statement of rev/exp
2) sep line shown as additions/deductions from net revenues and expenses
3) nature/amounts disclosed in notes to financials
Possible changes due to IRS findings disclosed in notes
Regulatory
Comply with regulatory requirements
1) state insurance regulatory agency
2) public utility regulatory agency
Use restricted to entity and regulatory agency
Other basis w/ sub support
Definite set of acct/reporting criteria
Applied to all material financial items
Bases of Acct are not OCBOA
1) loan agreement provisions
2) acquisition agreement provisions
Add’l Issues with OCBOA
1) no SCF required
2) GAAP based disclosures required
3) Financials may be audited, reviewed, or compiled by a CPA
4) changing the basis from/to GAAP requires restatement
True/False
Price level or inflation adjusted financial statements are based on an other comprehensive basis of accounting
True
True/False
When financial statements are prepared using an income tax basis of accounting, nontaxable and nondeductible items related to permanent differences must be recognized separately in revenues and expenses, respectively.
False
True/False
When a firm uses a modified cash basis of accounting, it can modify the cash basis in any way it chooses.
False
true/false
When the cash basis or the modified cash basis of accounting is used, the title Income Statement, which is appropriate when the accrual basis of accounting is used, should be replaced by the title Statement of Cash Receipts and Cash Disbursements. This helps distinguish that the statement is not based on full accrual accounting consistent with U.S. GAAP.
True
Need distinguishment otherwise people will assume it’s GAAP when in reality it really is NOT GAAP
True/False
When financial statements are prepared using an income tax basis, two accounting methods can be used: (1) modified cash basis—hybrid method of IRS and (2) accrual basis—IRS. The modified cash basis reflects the use of accrual basis for inventories, cost of goods sold, sales, and depreciation, if these are significant. The accrual basis uses accruals and deferrals with several exceptions (e.g., prepaid income, warranty expense). When financial statements are prepared on an income tax basis, the financial statements should not simply repeat items and amounts reported in the tax return. Thus, items such as nontaxable municipal interest and the nondeductible portion of travel and entertainment expense should be fully reflected in the income statement on the basis used for tax purposes, with footnote disclosure of the differences between the amounts reported in the income statements and tax return.
True
Assets measured in personal financial
Liab measured in personal financial
Calculate net worth in personal financial
estimated current (fair) value in an arms-length transaction, net of disposal costs, if any.
measured at estimated current amounts, which would be based on the lower of:
1) current settlement amount (liquidation value), or 2) present value
Assets - Liabilities = net worth
concepts underlie preparing personal financials?
Who can use personal financials?
Purpose?
Statements?
accrual accounting and fair value measurement.
individuals, husband/wife, family unit
personal borrowing, financial planning, contract requirements, or legal requirements
1) financial condition/position (B/S) 2) statement of changes in net worth
True/False
significant interest in a separate business should be shown as a single line item and amount for each business interest
Assets listed in the B/S should be in order of liquidity w/o distinction to current/non-current classifications
Liab listed in B/S, in the order of maturity, with no distinction as to current/non-current classifications.
For personal financial statements, only vested interests in a retirement plan should be included.
For personal financial statements, assets should be reported net of any costs that would be incurred in disposing of them.
For personal financial statements, works of art should be reported at appraised value.
Personal financial statements are prepared using accrual accounting.
For personal financial statements, liabilities should be presented in the order of their due date, beginning with the most current due.
For personal financial statements, a liability should be recognized for an excess of fair value of net assets over their tax basis.
True
Asset Valuation Guideline -> Assets Value:
1) Receivables
2) Marketable securities/options
3) Vested retirement plans
4) Life Insurance
5) Closely held business
6) Real estate
7) Incoming generating property
8) Intangible assets
9) Future interests/rights
Possible basis for current value:
1) Discounted cash flows
2) Market quote
3) Discounted cash flow/Present Value
4) Cash surrender value less outstanding loans
5) Appraisal, Discounted cash flows, Liquidation value
6) Appraisal, value of recent comparable sales
7) Discounted cash flow
8) Discounted cash flow
9) Discounted cash flow
Required disclosures in personal financials
1) name of those covered by statement
2) assets reported at current value, liab reported at current amount
3) methods used to estimate current values/amounts
4) description of joint ownership of assets
5) concentration of significant investments
6) name, nature, level ownership, and summary of financial info about significant investment in business
7) intangible asset description
8) description of future interest/rights
9) methods/assumptions to compute provision for income taxes
10) unused operating losses, carry-forward losses, unused deductions
11) receivables/debt, maturity dates, interest rates, collateral
12) non-cancelable commitment descriptions
Liab valuation guideline-> Liabilities
1) trade payables
2) non-cancelable commitment
3) income tax payable (prior/current periods)
4) income tax provision (estimated net taxable gains reported on personal statement of financial condition)
Basis for current amount:
1) lower of current settlement or present value
2) discounted cash flow (present value)
3) known and est. amounts payable less withholding/est. tax payments made
4) Difference Between:
Net worth and aggregate tax basis multiplied by tax %
future interest/rights recognized as assets only if:
1) fixed/determinable in amounts
2) not contingent on holder’s life expectancy
3) don’t require future performances
Private company council (PCC)
- created by FAF
- work with FASB to find opportunities for private companies within GAAP
- advise FASB on new GAAP and impact on private sector
The PCC sets standards for private companies by weighing the relevance of the information versus the cost benefit.
Private company definition
A private company is one that is not a public company. The PCC provides a definition of a public company as one that is required to file or furnish financial statements with a regulatory agency related to any type of securities (debt and equity), whether those securities are traded on exchanges or over-the-counter.
What modification is allowed for private companies related to accounting for interest rate swaps?
The hedge accounting for a receive variable / pay fixed interest rate swap is simplified. The private company can assume 100% effectiveness and can use settlement value as a practical expedient for fair market value.
A private company can NOT use settlement value versus cash value to as a surrogate for fair market value for all interest rate swaps.
What modification is allowed for private companies related to accounting for goodwill?
The goodwill can be amortized over a period not to exceed 10 years.
Liquidation
- business closes (cease activities), not going concern anymore
- acct basis must reflect liquidation
- entity can write down liab if legally forgiven
Imminent liquidation
likelihood of return from liquidation is remote, and either
1) liquidation plan is approved, or
2) liquidation plan is approved by other parties (involuntary bankruptcy)
Liquidation Reporting
- assets measured by cash proceed expectancy
- liab measured in accordance to GAAP
- accrue any anticipated expenses/income, disposal costs
Financials required during liquidation
1) Statement of net assets in liquidation
2) statement of changes in net assets in liquidation
3 disclosures when using liquidation basis in acct reporting
1) statement that financials are represented in liquidation acct basis
2) description of the liquidation plan
3) methods/assumptions used to measure assets/liab
True/False
Liquidation basis of accounting is required when liquidation is imminent. (II.D)
Liquidation basis of accounting is required when liquidation is imminent. (I.B.)
Liabilities are to be measured using existing GAAP and not written down based on “expectations” unless legally forgiven.
Liquidation basis of accounting is focused on informing the financial statement users that liquidation is imminent.
False
True
True
True -> purpose
