FAR reviews Flashcards
If it is a change in accounting estimates ( salvage value, life of asset) then take it as beg of the year.
But if it is a change in accounting principle inseparable from estimates ( eg from a straight line to double declining) then take it as the changes are done at the end of the year and depreciation is done using the old method at the year of change too.
Row 2: Salvage value changed from 3k to 1k in year 3, useful life from 10 to 5, cost 20k.
Change in Accounting Estimate | $2,500 | Current Earnings
Old Depreciation = [(20,000 – 1,000) / 10 years] = $1,900 per year
New Depreciation = [(16,200 – 3,000) / 3 years] = $4,400 per year
• As of the beginning of Year 3, the equipment has $3,800 of accumulated depreciation ($1,900 × 2). The new cost basis going into Year 3 is $16,200, and the new useful life of 5 years implies there are only 3 years left.
Dollar impact = $4,400 – $1,900 = $2,500
• As a change in accounting estimate, the impact will be reflected in current year earnings.
Row 3: cost 50 k, salvage value 5 k, 10-year life, in year 4 changed from double-declining to straight line
Change in Accounting Principle inseparable from a Change in Estimate | $2,177 | Current Earnings
Old Depreciation:
• Year 1: [(50,000 – 0) × 2/10] = $10,000
• Year 2: [(50,000 – 10,000) × 2/10] = $8,000
• Year 3: [(50,000 – 18,000) × 2/10] = $6,400
• Year 4: [(50,000 – 24,400) × 2/10] = $5,120
New Depreciation:
• Year 4: [(25,600 – 5,000) / 7] = $2,943
• $25,600 ($50,000 – $10,000 – $8,000 – $6,400) is the basis going into Year 4, while the straight-line method uses salvage value and the remaining useful life of 7 years.
Dollar Impact: $5,120 – $2,943 = $2,177
• As a change in accounting estimate, the impact will be reflected in current year earnings.
Dollar Value LIFO
price index = CY/Base year
Layer (base year1- base year0)* price index = dollar value LIFO
Contingency
Loss: probable - record ( if range chose the lower one)
reasonably possible - disclose
remote - ignore
Gain : probable / reasonably possible - disclose
remote - ignore
Impairment loss
US GAAP
IFRS
US GAAP: 2 step
1st: to see if you have to record the impairment
yes if: undiscounted cash flow < CV
2nd: impairment = CV - FV
goodwill: reporting unit: CV - FV
also, it should be more than goodwill value in the book ( if impairment more than goodwill, then only recognize the amount covered by goodwill in book)
IFRS: 1 step: CV - Recoverable amount
Recoverable amount: greater of NRV(fv - cost to sell)
OR value in use ( PV of future cash flow)
goodwill: cash-generating unit, CV - RA
Inventory valuation:
US GAAP: LIFO
Others
IFRS
US GAAP LIFO - LCM ( lower of cost or market) Market : between value of Replacement amount NRV ( FV - cost to sell) NRV - profit
Others: lower of cost or NRV
IFRS
All: lower of cost or NRV ( coz LIFO not allowed in IFRS)
Pension: non-current asset - always
current liability or non-current liability or both
If underfunded & if FV is less than payable next year, Payable - FV , the difference goes to current liability
rest goes to non-current liability
Book Value of common shareholders
Book Value of common shareholders = common shareholders equity / common shareholder outstanding
common shareholders equity = total equity - preferred equity ( preferred outstanding * liquidating rate) - dividend is arrears
Inventory loss in quarter interim period
Rule: Inventory losses from “permanent market declines” are recognized in the interim period, incurred and later, if they “turn-around,” are recognized as gains in a subsequent interim period only to the extent of previously reported losses.
Rule: “Temporary” market declines need not be recognized at interim when a “turn-around” can reasonably be expected to occur before the end of the fiscal year.
Facts: This $360,000 inventory decline is permanent and the entire loss would be recognized in the quarter interim period incurred (June 30).
G/L Sale of fixed asset : quarter reporting
The entire amount of a gain or loss from sale of fixed assets should be reported during the period (quarter) incurred.
NCI in full good will vs partial goodwill method
full goodwill
NCI = FV of subsidiary * Non controlling interest
partial goodwill
NCI = FV of sub net asset * Non controlling interest
Donations in IS ( commercial biz)
Reported as other operating income in their FV
Bonds in Cash flow
- Purchase of bonds ( you are giving to some other company - Investing
- Issuance of the bond ( you are taking a loan ) - Financing
Total debt ratio
= total liabilities / total assets
ARO (Asset retirement obligation)
Dr. Asset retirement cost ( asset)
Cr. Asset retirement obligation ( PV of the ARO)
Subsequent event
Dr. Accretion expense ( % * ARO)
Cr. ARO
Dr. Depreciation expense
Cr. Accumulated depreciation
at end
Total expense = total accretion expense + accu depreciation expense
total expense = ARO at the starting that we got PV of
When the asset is retired
Dr. ARO
Dr. dismantle expense ( the amount payment is more than ARO )
Cr. Cash /AP
ARO (Asset retirement obligation)
Dr. Asset retirement cost ( asset)
Cr. Asset retirement obligation ( PV of the ARO)
The amount recorded to both the asset and liability will be equal to the fair value of the asset retirement obligation (which is determined by discounting the future cash flows required).
Subsequent event
Dr. Accretion expense ( % * ARO)
Cr. ARO
Dr. Depreciation expense
Cr. Accumulated depreciation
at end
Total expense = total accretion expense + accu depreciation expense
total expense = ARO at the starting that we got PV of
When the asset is retired
Dr. ARO
Dr. dismantle expense ( the amount payment is more than ARO )
Cr. Cash /AP
