FAR FS1 Flashcards
What source would a US public company, US private company, and an international company refer to for accounting guidance?
FS1 M1
US public = FASB Accounting Standards Codification
US Private = Accounting Standards Codification (ASC)
International = International Financial Reporting Standards (IFRS)
What are the two qualitative characteristics of useful financial information and their components (3 each) per the FASB and ISB conceptual frameworks?
FS1 M1
1 Characteristic - Faithful representation (reliable):
- Complete - all information necessary in decision making process is there
- Neutral - free from bias
- Free from error - free from MATERIAL error, not ALL error
- Predictive Value - the information can help users make predictions about future outcomes
- Confirmatory Value - the information provides feedback about predictions/evaluations previously made
- Materiality - the information is material if it could affect the decision of the user. Information is important in size and scope to the user
What are the enhancing qualitive characteristics?
FS1 M1
- Comparability - users can compare information from other entities and information from different periods
- Verifiability - independent observers would come to the same conclusion - that the statements are faithfully represented
- Timeliness - the information is recent enough and available
- Understandability - a normal person with a basic business knowledge can understand the information
- What is the ongoing Accounting Standards Codification (ASC) setting process?
UPDATE
- How are amendments incorporated into the FASB Accounting Standard Codification?
FS1 M1
- Proposed amendments to the Accounting Standards Codification (ASC) are issued for public comment in a form of exposure drafts. After this exposure draft public comment period, the public comments/propositions are evaluated, and the Board re-deliberates. Once satisfied, the Board votes. A majority vote of the Board members is required to amend the ASC
Accounting Standards Updates are NOT authoritative literature, but instead provide background information, update the codification, and describe the reasons for changes
- By releasing Accounting Standards Updates
Describe the elements of the financial statements:
- Assets
- Liabilities
- Equity (or Net Assets)
- Investments by Owners
- Distributions by Owners
- Comprehensive Income
- Revenues
- Expenses
- Gains
- Losses
FS1 M2
- Assets - probable future economic benefits Tricky=only 12 months of a PPD expense would be considered a C.A. Anything past that would be a non-C.A.
Tricky=Capitalized technology is amortized at the greater of SL or % of sales - Liabilities - probable future sacrifices of economic benefits from present obligations of the company to transfer assets or services to other entities Tricky=Discount on Bonds payable is a contra-liability account
- Equity (or Net assets) - the residual interest in assets that remain after deducting its liabilities (A=L+E > A-L=E)
- Investment by Owners - Owners transferring cash, property, or services to increase the equity. Not revenue and does not affect I.S.
- Distributions to Owners - distribution of cash, property, or services which decrease equity. Not expenses and does not affect I.S.
- Comprehensive Income - Sum of net income + other comprehensive income = changes in equity other than investments/distributions by/to owners
- Revenues - inflows of assets or settlement of liabilities from delivering goods/services as part of NORMAL operations. Net Revenue = Revenues - allowances for returns - discounts. Reported via gross method
- Expenses - outflows or uses of assets or incurring liabilities from delivery goods/services as part of NORMAL operations. Reported via gross method
- Gains - increases in equity from non-operational events. Selling price/NRV > BV. Considered unusual and infrequent so included as a separate item in income from continuing operations. Reported via Net Method (means you see NRV)
- Losses - decreases in equity from non-operational events. Selling price/NRV < BV. Considered unusual and infrequent so included as a separate item in income from continuing operations. Reported via Net Method (means you see NRV)
Multi-step Income Statement
FS1 M2
Step #1 - Normal operating activities Net sales from CORE business activities (Total revenue - goods, services, rentals - less discounts returns) - COGS = Gross Profit -Selling expenses -General and administrative expenses -Depreciation =Income (loss) from operations
Step #2 - Non-operating activities \+ Other revenue and gains: \+ Interest revenue \+ Gain on sale \+ Other Revenue -Other expenses and losses: - Interest expense - Loss on sale =Income (loss) before unusual items and income tax
Step #3 -Unusual and infrequent activities
-Loss on sale of AFS securities
=Income (loss) before income tax
Income tax expense
=Net income (loss) or Income from continuing operations (if have discontinued operations)
Step #4 Discontinued operations (NET OF TAX)
Loss from operations of xyz
Gain on disposal of xyz
Less: income tax benefit from loss of disposal
Net Income (loss)
Single Step Income Statement
FS1 M2
Single Step Income Statement Step #1 - Revenues and other items: xyz revenue Gain on sale Other revenue =Total revenue and other items
Step #2 - Expenses and other items: COGS xyz expenses Loss on sale Depreciation =Total expenses and other items Net Income/loss (or income from continuing operations)
Revenue Recognition: Five Step Approach
FS1 M3
I - S - T - A - R
I - Identify the contract with the customer
Criteria: 1. All parties approved contract 2. Rights are identified 3. Payment terms are identified 4. Contract has commercial substance 5. Collection of payment is probable
S - Separate performance obligations
Rule of conservatism - combine contracts and only recognize when all obligations are met
-Distinct good/service - Do you sell these items separately? Do your competitors sell them separately? Are the services similar in nature and provided in the same manner (yes-combine, no-separate)?
-Separately identifiable - Are the goods highly interrelated/interdependent? Are the obligations integrated with other goods/services, design and build?
T - Transaction price
Variable consideration - 1. Probability weighted average (lots of options) 2. Most likely (a few options, 2-3)
Significant financing - TVM (if more than 1 year)
Noncash consideration - @ FV
Consideration payable to a customer - cash, credits, vouchers etc reduce the total transaction price
A - Allocate price to the separate obligations
(FV obligation/Total FV of all obligation) X Contract price
R - recognize revenue
Recognize revenue when performance is satisfied by transferring goods/services, which means customer has control of asset
Over time (unearned revenue=liability until earned) or at a point in time
Define Incremental cost and its treatment
FS1 M4
The incremental cost of obtaining a contract are costs that would NOT have been incurred if the contract didn’t exist. If the cost would’ve been incurred regardless of contract, expense it.
Treatment - capitalize and amortize
Example - commission cost to obtain contract
Repurchase agreements 3 types (general)
FS1 M4
Repurchase agreements are either sales (with the right to return) or financing agreements (usually more than selling price=recognize an asset)
3 types:
- Call option - entity has the right to repurchase - seller “can buy”
- Forward option - entity has the obligation to repurchase - seller “must buy”
- Put option - entity’s obligation to re-purchase @ customers request - seller “must buy” if customer requests
Repurchase agreements - Put option only
What if the re-purchase price (RP) is less than original selling price (RP < Org SP)?
What is the re-purchase price (RP) is equal or greater than original selling price (RP = or > Org SP)?
FS1 M4
Put option - depends on if the re-purchase price (RP) is
less than original selling price (RP < Org SP) (situation 1) or Re-purchase price (RP) is equal or greater than original selling price (RP = or > Org SP) (situation 2)
Situation 1:
Re-purchase price (RP) is less than original selling price (RP < Org SP)
A. Lease (if customer has economic incentive to exercise)
B. Sale with with right of return (customer has no significant incentive to exercise)
Situation 2:
Re-purchase price (RP) is equal or greater than original selling price (RP = or > Org SP)
A. Financing agreement (if RP > market value of asset so customer has incentive to exercise)
B. Sale with the right to return (if RP < market value so no incentive to exercise)
Re-purchase agreements
Example:
Selling price of equipment is 350,000
Seller has option to buy it back for 385,000 (re-purchase price)
Call option expires for seller on Dec 31st
- Type? Call, forward or put option?
- Treatment? Lease or financing?
- JEs?
FS1 M4
385k re-purchase price > 350k original price = financing
Financing records an asset and liability, and interest expense during the year
- @ sale date
DR Cash 350,000
CR Financial liability 350,000 - During the year, recognize interest expense for the diff of SP and repurchase price
DR Interest Expense (385K - 350K) 35,000
CR Financial liability 35,000 - Date of expiration for the forward
DR Financial Liability 385,000
DR Revenue 385,000
Repurchase agreements: Treatment for forward/call only
JEs for treatment as a financing agreement
FS1 M4
Treatment: Forward/call
Based on whether it must (forward) or can (call) repurchase the asset for either:
1. less than original selling price = lease
2. equal to/more than original price = financing
If R.P. > BOTH original selling price & expected market value (there is incentive)
Financing Jes:
1. @ sale date
DR Cash 350,000
CR Financial liability 350,000
- During the year, recognize interest expense for the diff of SP and repurchase price
DR Interest Expense (385K - 350K) 35,000
CR Financial liability 35,000 - Date of expiration for the forward
DR Financial Liability 385,000
DR Revenue 385,000
Repurchase agreements
Example 1:
You sell a computer to your sister for 10,000. Your sister has the power to obligate you to buy the computer back from her at her request for 8,000. The current market value (fair value) is 5,000. What is the treatment for this put option?
Example 2:
You sell a computer to your sister for 5,000. Your sister has the power to obligate you to buy the computer back from her at her request for 8,000. The current market value (fair value) is 4,000. What is the treatment for this put option?
Example 3:
In either scenario, what is the treatment if there is no incentive?
FS1 M4
Example 1:
Step 1: Is the agreed re-purchase price less that than the original sales price? Yes
Step 2: Compare the agreed upon re-purchase price to the market value (fair value to see if there is incentive) to determine if there is incentive to exercise the put option
Your sister can force you to buy it at 8,000 or she can go and sell it for 5,000 on the market. Why would she sell on the market if she can force you to buy it for more? Therefore, there is incentive.
Step 3: Treatment is via lease
Example 2:
Step 1: Is the agreed re-purchase price greater that than the original sales price? Yes
Step 2: Compare the agreed upon re-purchase price to the market value (fair value to see if there is incentive) to determine if there is incentive to exercise the put option
Your sister can force you to buy it at 8,000 or she can go and sell it for 4,000 on the market. Why would she sell it on the market if she can force you to buy it for more at 8,000? Therefore, there is incentive.
Step 3: Treatment is via financing agreement
Example 3:
In either scenario, if there is no incentive to exercise then its treated as a sale with the right to return
Bill and Hold Arrangements
What is a Bill and Hold Arrangement and when can you recognize revenue? List the criteria
FS1 M4
When the seller bills the customer for products sold but not yet delivered. Revenue CANNOT be recognized until the customer obtains control of the product.
Control is obtained by the customer if the following criteria are met:
- There must be substantive reason for the arrangement (customer requests it)
- Product is separately identified as belonging to that specific customer (moved to a special location in the warehouse)
- Products are ready for transfer to the customer
- Seller cannot use the product for another customer (customized for that customer)
- List the Discontinued Operations Classification/Accounting rules/Types of entities to be considered
- Which of the following qualify as a discontinued operation?
A. Planned approved sale of a segment
B. Disposal of a part of a business line
C. Phasing out a production line
D. Changes related to technological improvements
FS1 M5
- Classified as held for sale (current asset) and carried at FV. Impairment is recorded when its classified as held for sale. Held for sale means its listed and plan to sell in one year (current asset)
Types of entities to be considered - Component/segment of an entity, group of components, a business or nonprofit activity
Must qualify as strategic shift
- Choice “1” is correct. The planned and approved sale of a segment qualifies as a discontinued operation because a segment is a component of the entity. Segments may be functional in nature, like a major product category or service division, or they can be geographical as well. Additionally, to qualify as a discontinued operation, the sale must represent a strategic shift and must have a significant effect on its operations and financial results. A discontinued operation can also be a group of components, a business or a nonprofit activity.
Choice “2” is incorrect. The disposal of part of a line of business would not qualify as a discontinued operation, although it’s possible that the elimination of the “entire” line could qualify as one if the business line meets the definition of a component of the entity, a group of components, a business or nonprofit activity.
Choice “3” is incorrect. Phasing out a production line is not the discontinuation of a component of the entity and does not qualify as a discontinued operation.
Choice “4” is incorrect. Changes related to “technological” improvements are not the discontinuation of a component of the entity and does not qualify as discontinued operations.
Discontinued Operations
Step for calculations:
- Year of re-classification
- Year of sale
- Taxes
- Presentation
FS1 M5
Step 1: Classify as held for sale? Yes, so record impairment
Step 2: Record operating losses for the whole year in which you classified it as held for sale
Step 3: Record gain or loss in year of sale (use impaired value as BV bc we already impaired it in yr 1)
Step 4: Record operating losses in year of sale (if not same year)
Step 5: Consider the affect of taxes. If operating losses then you will have a tax benefit. If have a gain on sale then will have a tax expense
Presentation - NET OF TAX
Accounting Changes and Error Correction
Treatment of changes in accounting estimates?
Examples
FS1 M6
Treatment: Prospectively; implement in the current and future periods . They do no affect prior periods i.e. no effect on REs
Examples: uncollectible accounts, inventory adjustments, depreciation, “to LIFO” (change in depreciation/”To LIFO” are considered change in accounting but treated as change in estimate)
Accounting Changes and Error Correction
Reason for and Treatment of changes in accounting principles?
Cumulative effect adjustment - GAAP vs IFRS?
Examples
FS1 M6
Reasons: ONLY if GAAP requires it via new standard or Rule of Preferability (more preferable and more fairly presents the information)
Treatment: Retrospective Application - restate prior periods plus cumulative effect adjustment to beg RE of the earliest period presented (Beg RE is adjusted NET OF TAX)
Note GAAP can present one year or comparative FSs (2 years). If IFRS, remember that IFRS requires 2 of each FS + 3 BSs, so Beg RE will be adjusted for the earliest period presented.
Examples: Weighted average to FIFO
Accounting Changes and Error Correction
Treatment of Error Corrections?
Examples
FS1 M6
Correct the information, if the year is presented
or
If the year of the error is not presented, adjust beginning RE of the earliest year presented if comparative (NET OF TAX)
Examples: changes from non-GAAP to GAAP (cash basis to accrual basis), errors in recognition, measurement, presentation, or disclosures resulting from mathematical mistakes, mistakes in application of GAAP, oversight/misuse of facts
Accounting Changes and Error Correction
Treatment of changes in reporting entity?
GAAP vs IFRS
Examples
FS1 M6
Treatment: Retrospective application via RESTATEMENT of all FSs presented
IFRS does not include the concept of change in accounting entity
Examples: consolidated or combined FSs needed because
Statement of Comprehensive Income
What is comprehensive income?
Comprehensive income formula?
FS1 M7
Change in equity from non-owner sources (investments from/distribution to owners)
Formula:
Net Income (per Income Statement)
+ Other Comprehensive income (OCI) (Rev/Exp, G/Ls not included in comprehensive income but excluded from Net Income per GAAP/IFRS)
=Comprehensive Income
Statement of Comprehensive Income
List the Other Comprehensive Income items
FS1 M7
P - U - F - I - E - R
P - Pension adjustments such as G/Ls, pension services costs, PBO (pension benefit obligation=liability), PBA (asset)
U - Unrealized G/Ls for AFS Debt Securities
Changes in FV caused unrealized G/Ls. These are recorded in OCI until they are sold
F - Foreign Currency Items
Two methods when dealing with foreign currencies
1. Translation method (go to OCI) when you need a plug to convert FSs from foreign currency to US Dollar
2. Remeasurement method (G/Ls go to I.S, not OCI)
I - Instrumental Specific Credit Risk - For liabilities for which the FV option is elected. Changes in FV cause Unrealized G/Ls and are reported in OCI
E - Effective Portion of Cash Flow Hedges (not ineffective CF Hedges go to I.S.)
When you protect against losses you buy a CF hedges. Their value increase/decreases and these go to OCI until the item the CF is protecting against is sold then it goes to I.S.
R - Revaluation Surplus (IFRS ONLY)
When you write up/down your intangible/fixed assets. If write down below cost, loss goes to I.S instead of OCI.
Statement of Comprehensive Income
What is Accumulated Other Comprehensive Income?
FS1 M7
A component of equity that includes all other comprehensive income items from current and previous periods.
OCI closes to AOCI (just like net income to RE) after reclassification adjustments that move items from OCI to the Income Statement
Adjusting Journal Entries
What is Deferred revenue? Deferred expenses? Accrued revenues? Accrued expenses?
FS1 M8
Deferred revenues - Cash now, revenue earned later i.e. unearned revenue (liability)
Deferred expenses - Cash now, expenses incurred later i.e. prepaid expenses (PPD Ins, taxes, rent etc)
Accrued revenues - Cash Later, revenue now i.e. AR for services, interest receivable - earned interest now but payment will come later,
Accrued expenses - Cash later, expense incurred now I.e. AP for expenses, Accrued interest payable (DR interest exp CR interest payable), Accrued salaries payable (DR Salaries exp CR Salaries Payable)
Adjusting Journal Entries
Tips and Tricks
FS1 M8
still working on this one
When calculating interest always multiply the principal by the interest. The principal is the BV - any payments that have been made
