FAR FS 2 Flashcards
Notes to the Financial Statements
IFRS disclosure requirements versus GAAP disclosure requirement
FS2M1
Both
Disclosure of significant accounting policies
Disclosure of estimates made in preparation of financial statements
ONLY IFRS
Statement of compliance with IFRS
Disclosure of judgments made
Notes to the Financial Statements
Disclosure of vulnerability to concentration is required if all of these criteria are met:
FS2M1
- The concentration exits as of the financial statement date
- The concentration makes the entity vulnerable to the risk of near term severe impact
- It is at least reasonably possible that the events can cause a severe impact from the vulnerability in the near term
Notes to the Financial Statements
Disclosure requirements of risks and uncertainties under GAAP
FS2M1
- Disclosure of an entity’s major products and its principal markets
- Disclosure of use of estimates in preparation for the financials statements
- Disclosure of concentrations when it is reasonably possible that a concentration could cause a severe impact in the near terms
Going Concern
What’s the timeframe management required to evaluate going concern?
FS2M2
Management is required to evaluate whether there is substantial doubt about an entity’s ability as a going concern within one year after the date that the financial statements are ISSUED.
Going Concern
Major difference between GAAP and IFRS?
FS2M2
GAAP
- Requires liquidation basis of accounting if liquidation is imminent
- Requires disclosures when there is substantial doubt whether or not the doubt is alleviated
- Requires management to assess going concern conditions with on year of the date FS’s are issued
IFRS
- No guidance on the basis of accounting to use if liquidation is imminent
- Requires disclosures when management is aware of material uncertainties that may give rise to doubt
- Requires assessment at least one year from the balance sheet date
Going Concern
How should mitigating plans be evaluated?
Under GAAP what is required if management has plans to mitigate conditions causing substantial doubt that the entity will continue as a going concern?
FS2M2
They should be evaluated based on:
- probable effective implementation
- probable that the implementation of the plans will be successful
- Financials statements are prepared under going concern basis of accounting. If liquidation is imminent, then must prepare FS’s via liquidation basis of accounting
- Regardless of whether plans alleviate doubt, footnote disclosure explaining the conditions that raised doubt and the plans implemented to alleviate the doubt are required
Subsequent events
Define subsequent events
What is the difference between recognized subsequent events versus nonrecognized events + examples?
FS2M3
Definition: A subsequent event is an event/transaction that occurs after the balance sheet date but before the financial statements are issued
Recognized subsequent events:
-Existed at balance sheet date
-Must recognized via JEs in the FS’s
Examples (most common):
1. Settlement of litigation - litigation started during the year but settled after BS date but before issuance
2. Loss on uncollectible receivable - a customer filed bankruptcy after BS date but before issuance of FSs. Adjust uncollectible AR/AR accounts via JEs
3. A note payable due the following year (so classified as current liability) was refinanced before issuance > Need to re-classify the note as noncurrent and add disclosure
Nonrecognized subsequent events:
-Events/transactions that did not exist at BS date but occurred before issuance date
-No effect on FS’s (no AJEs) but need disclosure in the notes of nature of the event along with estimated financial impact
Examples: Sale of bond/stocks, business combination, settlement of litigation (if it didn’t exist at BS date), loss of plant /inventory dur to fire/natural disaster, changes in FV in assets/liabilities/foreign exchange rate, significant commitments/contingent liabilities, loss of receivables (if did not exist at BS date)
Subsequent events
What is the subsequent evaluation period for companies that file with the SEC vs companies that do no file with the SEC?
FS2M3
Companies that file with the SEC must evaluate subsequent events through the date FS’s are ISSUED. Issued means they are 1. in a form and format that comply with GAAP and 2. the FS’s have been widely distributed to the FS’s users. Companies that file with the SEC are no required to disclose the date thorugh which subsequent events have been evaluated.
vs
For companies that do not file with the SEC, the evaluation period is through the date the financial statements are available to be issued i.e. 1. all approvals have been received and 2. they are in a form that comply with GAAP. These companies also have to disclose the period of evaluation
Special Purpose Frameworks = OCBOA (other comprehensive basis of accounting)
FS2M7
What is the formula to convert Cash basis revenue to accrual basis revenue?
Cash basis> Accrual basis
Accrual basis > Cash basis
Cash basis> Accrual basis:
Cash basis revenue
+ Ending AR (CY sales that haven’t been collected)
- Beginning AR (PY’s sales that collected in CY)
- Ending unearned revenue (Money that came in CY that should not be recorded as sales yet)
+ Beginning unearned revenue (Cash collected last year for revenue earned this year)
=Accrual basis revenue
Accrual basis > Cash basis:
Accrual basis revenue
- Ending AR ( Sales that we haven’t gotten paid for)
+ Beginning AR (Last years sales that were collected this year)
+ Ending unearned revenue (cash received now for sales to be earned later)
- Beginning unearned revenue (cash earned last year for revenue earned this year)
Special Purpose Frameworks = OCBOA (other comprehensive basis of accounting)
FS2M7
What is the formula used to convert cash paid for purchases to accrual COGS?
Cash basis> Accrual basis
Accrual basis > Cash basis
Cash basis> Accrual basis
Cash paid for purchases
- Ending AP (purchases made this year that haven’t paid for - Accr: DR Exp, CR AP vs. Cash: No JE)
+ Beginning AP (purchases made last year but paid this year - Accr: DR AP, CR Cash vs. Cash: DR Exp, CR Cash)
- Ending Inventory (purchases made this year that have not been sold - Accr: DR Inventory, CR Cash vs. Cash: DR Exp, CR Cash
+ Beginning Inventory (purchases made last year that are sold this year - Accr: DR COGS, CR Inventory vs. Cash: DR Cash, CR Inventory)
=COGS
COGS
+Ending AP (purchases that haven’t been paid for
-Beginning AP (last years purchases that were paid this year)
+Ending inventory (Purchase made this year)
-Beginning inventory (Purchases made last year)
=Cash paid for purchases
Special Purpose Frameworks = OCBOA (other comprehensive basis of accounting)
FS2M7
What is the formula for converting cash paid for operating expenses (cash basis) to accrual basis operating expenses)?
Cash basis> Accrual basis
Accrual basis > Cash basis
Cash basis> Accrual basis
Cash paid for operating expenses
+ ending accrued liabilities (expenses incurred now but haven’t paid for - Accr: DR Exp, CR AP vs. Cash: No JE)
- beginning accrued liabilities (last years expenses that were paid for this year - Accr- DR: AP, CR: Cash vs. Cash - DR: Exp, CR: Cash)
-ending prepaid expenses (payments made this year for future expenses - Accr- DR: PPD Exp, CR: Cash vs. Cash - DR: Exp, CR: Cash)
+beginning prepaid expenses (payments made last year for expenses incurred this year - Accr: DR Exp CR PPD vs. Cash - No JE)
=Accrual basis operating expenses
Accrual basis operating expenses
-ending accrued liabilities (expenses that haven’t paid for)
+beginning accrued liabilities (last years expenses that were paid for this year)
+ ending prepaid expenses (payments made this year for future expenses)
-beginning prepaid expenses (payments made last year for expenses)
=cash basis cash paid for operating expenses
Special Purpose Frameworks = OCBOA (other comprehensive basis of accounting)
FS2M7
What are the different types of OCBOA?
What are the general presentation guidelines?
OCBOA:
- Cash basis
- Modified cash basis
- Tax basis
- Regulatory basis
General presentation guidelines:
- FS’s names should not be like accrual basis names
- Still require BS and IS but no Stmt of CFs
- Disclosures should be similar:
1. Summary of significant accounting policies,
2. Informative disclosures are the same or similar,
3. Disclosures for items not shown on the FS should be included (i.e. related party transactions, subsequent events, uncertainties)
Special Purpose Frameworks = OCBOA (other comprehensive basis of accounting)
FS2M7
Converting cash basis FSs to accrual basis FSs:
BS conversion vs I.S. Conversation
BS Conversion:
Note - A pure cash basis BS will only have cash and equity
All assets and liabilities existing at year end must be added to the BS.
Common additions:
Assets: AR, Inventory, Prepaid expenses ( PPD Ins, taxes, supplies etc), Investment at FV, Fixed assets (net of A/D)
Liabilities: AP, Accrued liabilities (Salaries payable, interest payable, etc), unearned revenue, interest payable, income taxes payable, short/long term debt
I.S. statement conversion:
START: Step 1 - converting cash basis revenue to accrual basis revenue
LESS: Step 2 - converting cash paid for purchases to accrual basis COGS
LESS: Step 3 - converting cash paid for operating expenses to accrual basis operating expenses
=accrual basis Net Income
Additional adjustments:
1. recognize noncash expenses (depreciation and amortization
2. capitalize purchases of fixed assets then depreciate
3. reduce fixed asset balances sold during the period and recognize G/Ls on sale
4. record debt proceeds during period as liabilities
DR cash CR BP, Notes Payable
5. record debt repayments as reductions in liabilities (DR AP or BP, CR cash)
