FAR Nuggets Flashcards
Interest on N/R
Face amount of note - discounted present value of note
Compute unreasonable interest due on N/R
1. Compute Note's Maturity Value Note Face Value plus Total interest (face value x stated interest x time) = maturity value
- Discount Maturity Value to Present Value
using the market rate of interest
This is the Sale Price and the amount the Note Receivable is recorded at
Maturity Value - Present Value = Interest
DR Note Receivable
CR Sales
Three ways to measure present fair value of an impaired loan
- Present value of the expected future cash flows from the loan discounted at the loan’s original effective rate
- the amount the loan could be sold for
- NRV of the available loan collateral
Loan Impairment
difference between the loan’s carrying value and its fair value
When you transfer an investment from one portfolio to another on the day of the transfer, write that individual security to
Its Fair Market Value
A security should always enter its new portfolio at FMV
Fair Value Hedge
Carried on the balance sheet as an asset (gain) or a liability (loss)
Accounted for at FMV
Unrealized holding gains and losses belong on I/S in current earnings
Treated as FV Hedges: Foreign currency denominated firm commitment hedges OR foreign currency denominated AFS securities hedge
Cash Flow Hedge
On balance sheet as an asset (gain) or a liability (loss)
Accounted for at FMV
Unrealized holding gains and losses: accounting depends on whether hedge is effective or not
Gain on effective hedge: goes directly to stockholder’s equity as an item of OCI
Loss on Ineffective hedge: goes directly to the I/S
Treated as Cash Flow Hedges: Foreign currency denominated forecasted transaction hedge or a foreign currency denominated net investment in foreign operations hedge
Figure out Sales when you know after tax revenue
Total Revenue / (1 - Sales tax rate) = Sales
Sales x tax rate = sales tax
When are dividends a liability?
Only after being declared. They are only disclosed until they are declared.
Accounts that increase with a Debit
DEAL Dividends Expenses Assets Losses
Accounts that increase with a Credit
GIRLS Gains Income Revenues Liabilities Stockholders Equity
Carrying amount of Bond issued at a premium
Face amount + unamortized premium
Carrying amount of Bond issued at a discount
Face amount - unamortized discount
A bond issued at a premium has effectively more or less interest for both sides?
Effectively less interest–less expense for issuer, less income for investor
A bond issued at a discount has effectively more or less interest for both sides?
Effectively more interest–more expense for issuer, more income for investor
Effective Interest Amortization–interest expense on bond payable
Effective Yield x Carrying Value = interest expense
Interest Payable on Bond
Always Stated x face = interest payable (this is the check in the mail)
How are held to maturity securities reported?
At amortized cost (bonds)
How does discount amortization affect the carrying amount of a bond?
Discount amortization increases the carrying value of a bond (both on issuer side and investor side)
How does discount amortization affect net income?
Discount amortization decreases income for an issuer (because when a bond is sold at a discount there is effectively more interest. When there is more interest (expense) taken out of income, income goes down.)
On the investor side: discount amortization increases income because there is effectively more interest income
How does premium amortization affect the carrying value of a bond?
Premium amortization decreases the carrying value (on investor and issuer side)
How does premium amortization affect net income?
On the issuer side: Premium amortization increases income because when a bond is sold at a premium, there is effectively less interest expense.
On the investor side premium amortization decreases income because there is effectively less interest income
Calculate foreign currency translation gain/loss
Unrealized gains/losses are taken to the income statement so use the last balance sheet date as the first point of measurement and the settlement date to figure the gain or loss.
Solve for 10% of income after deducting the 10% contribution amount. The income prior to the contribution is 75,000. Set up the equation to solve for Contribution “c”
C = .1 x 75,000 - C C = 7500 x .1C C = 7500 / .1 C = 6818
Examples of Discontinued Operations
Sale of:
a product line that represents 15% of total revenues
a geographic area that represents 20% of total assets
stores (one of two types) that provided 15% of current period income and 30-40% of net income in the past
An equity method instrument representing 20% of total assets
80% of a product line representing 40% of total revenue, but entity must retain 20% of its ownership interest
Nonbusiness GAAP vs Business GAAP
Nonbusiness GAAP differs significantly from business GAAP. GAAP differs significantly among various types of nonbusiness organizations
How is the change in unamortized bond discount reported in a statement of cash flows?
As an addition to net income in the operating activities section.
The amortization of a bond discount is the difference between cash interest and interest expense. Cash paid for interest is reported in operating activities. Amortization of a discount on bonds payable results in interest expense greater than cash interest. Because more expense has been deducted in computing income than the amount of cash paid for interest, the difference must be added to net income to reconcile to the cash provided or used for operating activities.
How do governments report employer pension contributions?
As an expenditure from a governmental fund (such as the general fund)
How to compute the income share “equity in earnings” for an investor
- Calculate the investor’s share of cumulative preferred dividends from net income
- Deduct total preferred dividends from net income to find common earnings (or earnings attributable to common shareholders)
- Calculate the investor’s share of common earnings
- Add the investor’s share of cumulative preferred dividends and the investor’s share of common earnings to find the investor’s equity in earnings
Investors compute their share of earnings/losses after deducting preferred dividends, whether or not they are declared.
Acquisition of Stock
The acquiring entity becomes the parent company, no third entity is established
Acquisition of assets
Refers to the transfer of assets from the acquired entity to the acquiring entity. No third entity is established.
Statutory Merger
Refers to the merging of the two entities into one. No third entity is established.
Statutory consolidation
Refers to the merging of two enterprises into a newly established enterprise
Are long term customer relationship intangible assets subject to impairment?
Yes these intangible assets are subject to the same tests and measurement as required for other long-lived assets to be held and used
Which market is assumed in fair value measurement, the principal market or the most advantageous market?
The principal market, defined as “the market in which the reporting entity would sell the asset or transfer the liability with the greatest volume and level of activity for the asset or liability.”
If there is no principal market, the most advantageous market should be used. That is defined as “The market in which the reporting entity would sell the asset or transfer the liability with the price that maximizes the amount that would be received for the asset or minimizes the amount that would be paid to transfer the liability, considering transaction costs.”
How are gains/losses on options recognized?
They are currently recognized on the I/S
Options do not qualify for hedge accounting
The cost of an option is the exercise price x the number of options plus the time value of the option
Net Income in an investment accounted for under the fair value option
% of net income attributable to investor
+ or - Fair Value Adjustment
Items NOT eligible for fair value measurement option
Investment in a subsidiary that requires consolidation
Interest in a variable interest entity that requires consolidation
Employers’ and plans’ obligations for pension benefits, other post retirement benefits, other forms of deferred compensation
Financial assets/liabilities recognized under leases
Deposit liabilities withdrawable on demand
Instruments classified as a component of shareholder’s equity
Items eligible for fair value measurement option
Financial assets/liabilities Firm commitments only involving financial instruments A loan commitment An insurance contract A warranty
Fair Value option is applied on a contract-by contract (instrument by instrument) basis, must be applied to the entire instrument, and is irrevocable.
Unrealized gains/losses go to earnings on I/S
How is an unrestricted grant received from another government reported in enterprise and proprietary funds?
Nonoperating revenues
How is a restricted grant received from another government reported in enterprise and proprietary funds?
Capital Contributions
Installment Sale deferred gross profit
Sales (less write offs) (less collections) = uncollected sales x gross proft % = Deferred gross profit
Gross profit on an installment sale is recognized in income in proportion to the cash collection
Gross profit for a period is calculated by multiplying cash collected times the Gross Profit percentage in the period the sales were made
Revenue may result from:
A decrease in a liability from primary operations
Conceptually, revenues increase assets rather than decrease liabilities, but a shortcut is to directly record reduction of liabilities
Consider the earning of currently unearned revenue. Unearned revenue (a liability) would decrease while earned revenue (an asset) would increase
Where are general long term liabilities reported in Governmental Accounting?
In the governmental activities column in the government-wide statement of net position (NOT the statement of activities)
Bonds which will be serviced by an enterprise fund should be reported in the business-type activities column of the government-wide statement of net position
A nonmonetary exchange would usually result in immediate recognition of a gain or loss except:
Fair value is not determinable
Exchange transaction is to facilitate sales to customers
Exchange transaction that lacks commercial substance
In these cases, no gain or loss is recognized and the new book value would be equal to the book value prior to the exchange plus any cash paid
When are results of operations of discontinued operations reported?
The results of operations of a component classified as held for sale are reported in discontinued operations in the periods in which they occur.
Results of operations, less income taxes or benefit, are reported separately
When an entity is classified as held for sale, the unit is written down to fair value so that loss is recognized currently: the loss is any initial or subsequent write-down to fair value less cost to sell
Discontinued operations on the income statement
Income from continuing operations before income taxes
Income Taxes
= Income from continuing operations
Discontinued Operations:
Loss (or income) from operations of discontinued component, including loss on disposal
(plus taxes if loss or less taxes if income)
= loss or income on discontinued operations
Net Income
Gain or loss on disposal is disclosed on the face of the I/S or in the notes
Do permanent differences affect interperiod or intraperiod income tax allocation?
Neither
Amortization of capitalized software costs
The greater of:
- The ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product
- The straight-line method over the remaining estimated economic life of the period including the current period
Ratio of current to total revenues: 30%
Straight line: 1/5 = 20%
Amortization would be 100% - 30%
IFRS revaluation model
Loss goes to I/S
Increase up to the amount of the previous loss is reversed
Additional increases go to an equity account in OCI
What happens to the following accounts when treasury stock is acquired in an amount exceeding the issue price of common stock? (par value method)
Common Stock, Retained Earnings, APIC
Common stock–decrease
APIC–decrease (in the amount for which the stock was originally issued)
Retained Earnings–decrease (for the excess of reacquisition cost over original issue price)
What are special revenue funds used for?
To account for resources raised from revenues that are restricted or committed for expenditure for specific general governmental purposes other than capital outlay or debt service
Some differences between GAAP and IFRS Income Statements
IFRS may classify expenses by either nature or function. If the functional method is used, expenses must be disclosed by nature in the notes.
IFRS “net income” or “net loss” is simply called “income” or “loss”
IFRS definition of discontinued operations is narrower than US GAAP
Disclosures required regarding reportable segments
Revenues from external customers
Revenues from transactions of other operating segments within the same enterprise
Interest Revenue
Interest Expense
Depreciation, amortization and depletion expense
unusual items
equity in income of investee accounts accounted for by the equity method
Income tax expense or benefit
Significant noncash items other than depreciation, amortization, or depletion
Scope of Government MD&A
Should be limited in scope to that information which is needed to support their analysis of financial position and results of operations prescribed by GASB statement 34
Deferred Revenues at the fund level in modified accrual government accounting
the portion of the ending receivable that is measurable but not available and not accounted for as an allowance is deferred revenue.
Ending Receivable
(less collections which count toward the reporting period)
(less ending allowance for uncollectibles)
= deferred revenue
IFRS accounting for goodwill in a business combination
When accounting for goodwill in a business combination, IFRS does not require accounting for Goodwill but allows it as an option.
Stockholder’s Equity on a consolidated balance sheet
Total stockholder’s Equity of the parent company PLUS the noncontrolling interests of the subsidiary
Example: if a parent company owns 80% of a subsidiary, the parent will report 100% of its own stockholder’s equity PLUS 20% of the subsidiary’s stockholder’s equity
Assets and Liabilities on a consolidated balance sheet
The parent owns all of the assets and liabilities of both companies. Reported as parent plus subsidiary assets/ilabilities
Cash vs accrual income when accrued expenses decrease
Cash income will be lower compared to accrual basis income because the decrease in accrued expenses results from paying out more cash for expenses than were incurred
Cash vs accrual income when accounts receivable decreases
Cash basis income will be higher compared to accrual basis income when A/R decreases because that income is a result of collecting more cash than A/R incurred
How to add a Lifo Layer
The beginning inventory is not adjusted for inflation. Add the increase, adjusted for inflation
Capitalized cost of an asset when a N/R is issued
Down Payment, if any
plus Present Value of N/R
plus any shipping, installation, etc
NFP cost allocations
All joint costs should be considered fundraising costs unless the following three criteria are met:
Purpose
Audience
Content
Purpose must be to accomplish program or management and general functions
There should be a specific activity by the audience and the recipient to that end
NFP receives an unconditional promise of donation, how recorded?
It is recognized as receivable (Contributions receivable) when the promise is unconditional or all of the conditions have been met.
Contributions receivable and contribution revenues are recorded in the period that unconditional contributions are made
Unrestricted contributions to be collected in subsequent periods are recorded as temporarily restricted (time restriction)
Promises to contribute a specified amount to a NFP should be reported as income immediately upon receipt of the promise
Is amortization of bond discount an operating, investing, or financing activity?
It is an operating activity. bond discount is an interest expense and is deducted when arriving at net income.
Using the indirect method, this amortization must be ADDED BACK to net income to compute cash provided or used by operating activities (because more expense has been deducted when computing income than has actually been paid.)
Interest EXPENSE:
Bond Discount
Plus
Interest PAID
Recognition principle for share based payment transactions apply to
Common stock granted to employees
Stock options granted to employees
Transfer of other equity instruments to employees
Does not apply to Employee Stock Ownership Plan instruments
Gains/Losses on nonmonetary exchanges with commercial substance
Recognized Immediately (exchange is based on the fair value of the exchanged assets)
What fund would hold money in trust for the benefit of those who are not part of the Government?
Private Purpose Trust Fund
Convert from Cash to Accrual
Add to any cash receipts any increase in net assets (increase in assets less increase in liabilities)
Correction of an error on financial statements
Must restate the financial statements for all prior years.
Carrying amounts for assets, liabilities, and beginning retained earnings must be restated for the earliest year presented in the statements in the year the error is discovered
Required to be reported on 8-K
8-K is for reporting current events including
change in registrant’s certifying accountant
creation of an obligation under an off-balance sheet arrangement
unregistered sale of equity securities
Required to be filed 4 days after event
Not required:
quarterly results of operations and financial condition (10-Q)
Common Stock on consolidated balance sheet
Only common stock of parent is reported. Noncontrolling interest of subsidiary would also be reported (separately)
Fair Value measurement option on stock based employee compensation plans also extends to
Equity instruments exchanged for goods and services
How are earnings on restricted investments reported?
If no donor restriction on earnings: as increase in net assets without donor restrictions (general fund unrestricted revenues)
If donor restriction on earnings: as increase in net assets with donor restrictions
Gain on the sale of plant asset: operating, investing, or financing?
Operating.
Indirect method: An adjustment must be made to remove the gain from investing activities
Which exchange rate is used when translating the capital accounts of a foreign subsidiary
Historical exchange rate is used for capital stock and APIC
Trouble Debt Restructuring (debtor side)
Debtor recognizes a gain or loss on the transfer of assets (difference between fair value and carrying value of the asset)
Debtor recognizes a gain or loss on the restructuring of the debt
(difference between the Fair Value of the asset and the carrying value of the debt)
Two together is the TOTAL gain or loss, but part of it is attributable to the restructuring and part is attributable to the transfer of assets.
Net Income in investment accounted for under the equity method
Share of net income of investee
(less share of dividends)
= net income from the investment
Noncontrolling interest on the income statement
Revenues, expenses, gains, losses, net income or loss and other comprehensive income are reported in the consolidated financial statements at the consolidated amounts, which include the amounts attributable to the owners of the parent and the noncontrolling interest
What would be the benefit of presenting internal service funds in one column in the basic financial statements?
It would simplify the conversion of the fund based information to the government wide financial statement format.
The internal service funds would be governmental activities
Enterprise funds would be business-type activities
Internal service funds are exempt from major funds reporting requirements
Acquisition of treasury stock Par value vs cost method
Cost Method just DR stock and CR Cash
Par Value Method removes some capital from APIC
Income is constructively received and included in gross income
If it is
readily available to the taxpayer
actual receipt is not subject to substantial limitations or restrictions
Basic financial statements for a NFP
Statement of Financial Position
Statement of Activities
Statement of Cash Flows
For Voluntary health and welfare entities:
Statement of functional expenses
Fines and forefeitures in Government Wide financial statements?
Classified as charges for services because they come from people who are directly affected by the program/service, even if they are not benefitting
Accrual of compensated absences in Governmental
Accrue full liability in proprietary funds and government-wide statements (governmental activities and business-like activities.
Accrue only that portion of the liability which will be paid within 60 days for a Governmental Fund
Accrual vs modified accrual
Combining Fund Statements
Part of the CAFR (financial statements) but not considered part of the basic financial statements
Pricing Inventory Perpetual vs Periodic (LIFO)
Perpetual: when there is a sale, that inventory comes out at the price of the inventory that went in just before that sale. What is left is the total value of the lot
Periodic: Inventory is valued at the end of the period at the earliest prices.
Diluted EPS–Options and Warrants–Treasury Stock Method
Treasury stock method assumes that in the money options and warrants were exercised at the beginning of the period (if they were exercised, use the actual exercise date), and that the proceeds were used to purchase common stock at average market prices. Those incremental shares are added to the denominator.
Example: A company has outstanding in the money options of 10,000 shares which can be exercised at $5 per share.
Average market price for the period was $12 per share.
**as long as the average market price is higher than the exercise price, the options are automatically dilutive, you just need to figure out how many of them are dilutive
Company will receive $50,000 from the exercise of those shares, and 10,000 new shares will be created.
They can use that 50,000 to buy 4167 shares (50,000 / 12) to put in the treasury
10,000 - 4167 = 5833 incremental shares outstanding, added to the denominator.
Shortcut:
Average Market Price - exercise price
/
average market price
12-5/12 = 7/12 = .5833
.5833 x 10,000 = 5833 dilutive shares
Potentially Dilutive Securities
Stock Options/Warrants
Convertible Preferred Stock
Convertible Bonds
Contingent Shares
Convertible Preferred Stocks–Diluted EPS
If-Converted Method
Assumes conversion at the earliest possible point (beginning of period)
Convertible Preferred Stocks:
Add conversion to the denominator
And remember there would be NO preferred dividends for those preferred stocks because now they are common
Convertible Preferred Bonds:
Loss Per Share
ADD the current year’s preferred dividend to the loss instead of subtracting it from income…because the preferred dividend increases the magnitude of the loss for common shareholders
Also ignore potentially dilutive securities because putting more shares in the divisor would cause the loss to shrink. Potentially dilutive securities are ANTI DILUTIVE to a loss per share
Convertible Bonds–Diluted EPS
If-Converted Method: Assumes conversion at earliest possible point
Add converted bonds into the denominator
What else changes? If the bonds were actually common stock all year, you wouldn’t have to pay the bondholders any interest. So you have to add the interest NET OF TAX back into the net income
Example:
10% interest rate on 1,000,000 bonds pays 100,000 of interest. 40% tax rate
ADD BACK 60% of the interest (60,000) into the numerator
Be careful: assume conversion at the earliest possible point. If the bonds were ISSUED on March 1, that is the earliest conversion point and you weight them accordingly only add back the proportional amount of interest saved for the year. (10/12)
Contingent Shares–Diluted EPS
For Basic EPS: only put contingent shares in the divisor if the condition has been met (earliest possible point)
For Dilutive EPS: depends on the contingency
If it is time, put the shares in the divisor (earliest possible point) because time has to pass.
If it is a market price of stock or earnings contingency, only add shares in the divisor if the contingency has been met.
Any other contingency, assume it will be met and put in the divisor now at the earliest possible point (when promise was made)
Times Interest Earned Ratio
Earnings Before Interest and Taxes
/
Interest Expense
Government Wide Statement of Activities designed to assess?
Operational Accountability
These are the only statements that report the governments operations
