FAR SEC 1 Flashcards
Financial Statements
Financial statements are the primary method of communicating to external parties information about the results of operations, financial position, and cash flows.
Financial vs. Managerial Accounting
Management accounting information assists management decision making, planning, and control. It is primarily for internal use. It need not follow GAAP but is often derived from financial accounting records.
Securities and Exchange Commission (SEC)
The SEC has the legal authority to establish financial reporting requirements for publicly traded companies (referred to as issuers) in the United States. Issuers are firms that issue stocks and bonds.
The SEC delegated this authority to the FASB.
The SEC enforces those principles by ensuring that issuers meet certain periodic reporting requirements for the disclosure of financial and other information.
Financial Accounting Foundation (FAF)
The FAF is an independent body established by the accounting profession in 1972. FAF overseas the FASB, FASAC, PCC, and EITF.
Financial Accounting Standards Advisory Council (FASAC)
The Financial Accounting Standards Advisory Council (FASAC) advises the FASB on priorities and proposed standards and evaluates its performance.
Financial Accounting Standards Board (FASB)
The Financial Accounting Standards Board (FASB) establishes financial accounting and reporting standards (i.e., U.S. GAAP) for public and private companies and not-for-profit organizations. The FASB’s Accounting Standards Codification (ASC) is the single source of U.S. GAAP. The FASB updates U.S. GAAP by issuing Accounting Standards Updates (ASUs).
Accounting Standards Codification (ASC)
The FASB’s Accounting Standards Codification (ASC) is the single source of U.S. GAAP.
Accounting Standards Updates (ASUs)
The FASB updates U.S. GAAP by issuing Accounting Standards Updates (ASUs).
The Private Company Council (PCC)
Proposes exceptions to and modifications of U.S. GAAP for private companies and
Advises the FASB on private company issues before new pronouncements are issued.
The Emerging Issues Task Force (EITF)
The Emerging Issues Task Force (EITF) addresses new and unusual accounting issues that require prompt action to avoid differences in accounting treatments. Many consensus positions of the EITF have been included in Accounting Standards Updates (ASUs).
Exposure Draft
An Exposure Draft is published to solicit broad stakeholder responses before voting on the final draft proposal. In some projects, a Discussion Paper also may be issued at an early stage to seek input during the process of drafting the proposal.
ASU to ASC
The FASB votes on a final draft proposal. If a majority of the seven board members approves, an ASU is issued to amend the Accounting Standards Codification (ASC). When an ASU has been incorporated into the FASB’s ASC, it has the status of U.S. GAAP.
Governmental Accounting Standards Board (GASB)
The GASB is a private, not-for-profit, nongovernmental organization established by the FAF as the primary standard setter for state and local governmental entities. (The GASB does not establish GAAP for the federal government.)
Federal Accounting Standards Advisory Board (FASAB)
The FASAB establishes accounting principles for the federal government and issues Statements of Federal Financial Accounting Standards.
FASB’s conceptual framework
The FASB’s conceptual framework is a set of interrelated objectives, qualitative characteristics, elements, and other fundamental concepts. It is described in the Statements of Financial Accounting Concepts (SFACs).
Statements of Financial Accounting Concepts (SFACs)
The FASB’s conceptual framework is a set of interrelated objectives, qualitative characteristics, elements, and other fundamental concepts. It is described in the Statements of Financial Accounting Concepts (SFACs). But SFACs are not authoritative and are not included in the ASC. Instead, they are intended to guide the development and application of U.S. GAAP.
The objective of general-purpose financial reporting
The objective of general-purpose financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors and creditors in making decisions about providing resources to the entity.
Primary users of financial information
Primary users of financial information are current or potential investors and creditors who cannot obtain it directly. Management and regulators are not primary users.
Importance of Future Net Cash Inflows
Primary financial information users’ decisions depend on the expected return. Accordingly, primary users need information that helps them assess the amount, timing, and uncertainty of the entity’s future net cash inflows.
Fundamental Qualitative Characteristics (2 elements)
The two fundamental qualitative characteristics are Relevance and Representational Faithfulness.
Relevance
Relevance is one of two fundamental qualitative characteristics. Information is relevant if it can make a difference in user decisions. To do so, it must be material and have predictive value and/or confirmatory value.
Predictive Value
Information has predictive value if it can be used to generate predictions as an input in a predictive process.
Confirmatory Value
Information has confirmatory value for prior evaluations if it provides feedback that confirms or changes (corrects) them. Predictive value and confirmatory value are interrelated. For example, current revenue may confirm a prior prediction and also be used to predict the next period’s revenue.
Materiality
Information is material if it is probable that an omission or misstatement of an item in a financial report will affect the judgment of a reasonable person who relies on this information. Materiality is entity-specific, whereas relevance is a general idea about what information is useful to investors. Materiality has no specific quantitative threshold. The dollar amount of an item, without regard to the nature of the item, generally is not a sufficient basis for a materiality judgment.
Faithful Representation (3 elements)
Useful information faithfully represents economic events. A perfectly faithful representation has the following characteristics:
Completeness (containing what is needed for user understanding)
Neutrality (unbiased in its selection and presentation)
Freedom from error
Completeness
Completeness (containing what is needed for user understanding)
Neutrality
Neutrality (unbiased in its selection and presentation)
Freedom from Error
Information that is faithfully represented is not necessarily accurate in all respects. Free from error means no errors or omissions exist in the Descriptions of the phenomena and Selection and application of the reporting process.
The process for applying the fundamental qualitative characteristics (3 elements)
The process for applying the fundamental qualitative characteristics is to
(1) IDENTIFY USEFULNESS. Identify what may be useful to users of the financial reports,
(2) IDENTIFY RELEVANCE. Identify the relevant information, and
(3) DETERMINE INFORMATION QUALITY. Determine whether the information is available and can be faithfully represented.
Relevance Pneumonic (3 elements)
Relevance predicts or confirms materiality.
Faithful Representation Pneumonic (3 elements)
A Faithful Representation is complete, neutral, and error free.
Enhancing Qualitative Characteristics (4 elements)
The following enhance the usefulness of Relevant and Faithfully Represented information: Comparability, Verifiability, Timeliness, and Understandability.
Comparability
Comparability (Enhancing Characteristic). Information should be comparable with similar information for (a) other entities and (b) the same entity for another period or date. Thus, comparability allows users to understand similarities and differences. Consistency is a means of achieving comparability over time and between periods. It is the use of the same methods (e.g., accounting principles) for the same items.
Consistency
Consistency is a means of achieving comparability over time and between periods. It is the use of the same methods (e.g., accounting principles) for the same items.
Verifiability
Verifiability (Enhancing Characteristic). Information is verifiable (directly or indirectly) if knowledgeable and independent observers can reach a consensus (not necessarily unanimity) that it is faithfully represented.
For example, consensus-based fair value (e.g., transaction price) is verifiable.
Besides a point estimate, a range of possible amounts and their related possibilities can also be verified.
Timeliness
Timeliness (Enhancing Characteristic). Information is timely when it is available in time to influence decisions.
Understandability
Understandability (Enhancing Characteristic). Understandable information is clearly and concisely classified, characterized, and presented. Information should be readily understandable by diligent users who have a reasonable knowledge of business and economic activities but should not be excluded because of its complexity. The general public is thus not the target audience of financial reporting.
Enhancing Characteristics Pneumonic
Enhancing Comparability Verifies Timely Understanding.
Cost Constraint
Cost is a pervasive constraint on the information provided by financial reporting. The benefits of reporting specific information must justify the costs incurred to provide and use that information.
Financial Statements
Financial statements are the primary, but not the only, means of communicating financial information to external parties.
Notes
Notes supplement or further explain financial information on the face of the statements. Examples of such information are descriptions of the accounting policies used and other disclosures required by GAAP.
Restrictions on Notes
Notes may not be used (1) to correct an improper presentation in the statements or (2) as a substitute for recognition in the statements. Notes can be used for certain GAAP required disclosures, but they can’t substitute for those recognitions that are required to appear on the statements under GAAP.
The notes should contain information about (3 elements)
The notes should contain information about: 1) Financial statement line items. 2) The reporting entity. 3) Unrecognized past events and current circumstances that can affect cash flows.
Supplementary Information
Supplementary information, such as management’s discussion and analysis (MD&A) (described in Subunit 1.6), provides information additional to that in the statements and notes.
A full set of financial statements should report the following
Financial position at the end of the period
Earnings for the period
Comprehensive income for the period
Cash flows during the period
Investments by and distributions to owners (changes in owners’ equity) during the period
Elements
Elements are the classes of items in the financial statements.
What are the Elements of the Statement of Financial Position (Balance Sheet) (5 elements)
Elements: Assets, Valuation allowances, Liabilities, Equity, Investments by and Distributions to owners.
Assets
Assets are probable future economic benefits obtained or controlled by an entity as a result of past transactions or events.
Valuation Allowance
Valuation allowances, such as (1) accumulated depreciation, (2) credit losses, or (3) premium on bonds receivable, are part of the carrying amount of the related assets or liabilities; they are not in themselves assets or liabilities.
Liabilities
Liabilities are probable future sacrifices of economic benefits. They are existing obligations of a specific entity to transfer assets or provide services to other entities as a result of previous transactions or events.
Equity
Equity is the residual interest in the assets of an entity after subtracting liabilities. In a business entity, equity is the ownership interest.
What are investments by owners? In what ways can they occur?
Investments by owners are increases in equity of a business entity during a period. They result from transfers by other entities of something of value to increase ownership interests. Assets (e.g., cash or property) are the most commonly transferred items, but services also can be exchanged for equity interests.
Distributions to owners
Distributions to owners are decreases in equity during a period. They result from transferring assets, providing services, or incurring liabilities to owners.
What are the five elements of the Statement of Earnings and Comprehensive Income?
The Statement of Earnings and Comprehensive Income has the following Elements: Revenues, Gains, Expenses, Losses, and Comprehensive Income.
Revenues
Revenues are inflows or other enhancements of assets or settlements of liabilities (or both) from 1) Delivering or producing goods, 2) Providing services, or 3) Other activities that qualify as ongoing major or central operations.
Gains
Gains are increases in equity from peripheral or incidental transactions or other events and circumstances except revenues or investments by owners.
Expenses
Expenses are outflows or other uses of assets or incurrences of liabilities (or both) from 1) Delivering or producing goods, 2) Providing services, or 3) Other activities that qualify as ongoing major or central operations.
Losses
Losses are decreases in equity from peripheral or incidental transactions or other events and circumstances except expenses or distributions to owners.
Comprehensive income
Comprehensive income includes all the changes in equity of a business entity during a period except those resulting from investments by owners and distributions to owners (owner sources).
Basic Measurement Approaches (2 elements)
There are two basic measurement approaches:
1) the initial amount. The initial amount is determined at the time of the transaction or event.
2) The remeasured amount. The remeasured amount reflects conditions on the financial statement date and is new carrying value not based on the prior amounts reported.
Note: there are more than two measurement approaches, but the basic distinction is between initial measurement and remeasurement.
Initial Amount
An initial amount reflects a transaction date. It is a price or amount assigned when an asset was acquired or a liability was incurred, including later modifications derived from the initial amount (e.g., depreciation or impairment).
Remeasured Amount
A remeasured amount reflects conditions on the financial statement date. It is a new carrying value not based on prior amounts reported. Remeasured amounts are appropriate for 1) Financial assets (assets to be converted to cash) and 2) Liabilities for which the timing and amount of payments is uncertain.
Measurement Attributes/Methods (4 elements)
The Measurement Attributes (or “methods”) are Historical Cost, Fair Value, Replacement Cost, and Settlement Amount.
Historical cost
Historical cost is (a) the price paid to acquire an asset or (b) the amount received for the incurrence of a liability in an actual exchange transaction.
Fair value
Fair value is the price that would be (a) received to sell an asset or (b) paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Replacement cost
Replacement cost is the price that would be paid to acquire an asset with equivalent service potential in an orderly market transaction at the measurement date.
Settlement amount
Settlement amount is the amount at which (a) an asset could be realized or (b) a liability could be liquidated with the counterparty, other than in an active market.
Assumptions of Accounting (4 elements)
The four assumptions of accounting are Economic-entity, Going-concern, Monetary-unit, and Periodicity.
Economic-entity assumption
Economic-entity assumption. The reporting (accounting) entity is separately identified for the purpose of economic and financial accountability. The legal entity and the economic entity are not necessarily the same. For example, a parent and its subsidiary are a single economic entity but are distinct legal entities.
Going-concern assumption
Going-concern assumption. Unless evidence indicates otherwise, every business is assumed to be a going concern that operates for the foreseeable future.
As a result, the liquidation basis of accounting is not used. It is assumed that the entity will not be liquidated in the near future.
Monetary-unit assumption
Monetary-unit assumption. Accounting records are stated in units of money. The changing purchasing power of the monetary unit (inflation) is assumed not to be material.
Periodicity assumption
Periodicity assumption. Economic activity can be divided into distinct time periods. This assumption requires reporting estimates in the financial statements. It sacrifices some degree of faithful representation of information (e.g., completeness) for increased relevance.
Recognition
Recognition is the formal recording or incorporation of an item in the financial statements as an asset, liability, revenue, expense, gain, loss, etc.
Recognition Criteria
Recognition criteria determine whether and when items are incorporated into the financial statements, either initially or as changes in existing items.
Fundamental Recognition Criteria (4 elements)
Four fundamental recognition criteria apply: Definition, Measurable, Relevant, and Reliable.
1)DEFINITION. The item must meet the definition of an element of financial statements.
2)MEASUREABLE. It must have a relevant attribute measurable with sufficient reliability.
3) RELEVANT. The information must be relevant. It must be capable of making a difference in user decisions.
4) RELIABLE. The information must be reliable.
It must be representationally faithful, verifiable, and neutral.
Definition Criterion (Recognition)
The item must meet the definition of an element of financial statements.
Measurable Criterion (Recognition)
It must have a relevant attribute measurable with sufficient reliability.
Relevance Criterion (Recognition)
The information must be relevant. It must be capable of making a difference in user decisions.
Reliability Criterion (Recognition) (3 elements)
The information must be reliable. It must be representationally faithful, verifiable, and neutral.
Constraints on Recognition (2 elements)
Incorporation of any item is subject to the pervasive cost constraint and the materiality threshold.
Fundamental Recognition Criteria Pneumonic (4 elements)
Recognition Defines Measurable Relevance and Reliability.
Accrual Accounting
Elements of financial statements that meet the recognition and measurement criteria are accounted for in the financial statements using accrual accounting.
Accrual accounting records the financial effects of transactions and other events and circumstances on an entity’s economic resources and claims to them when they occur. Thus, recording is not necessarily when the direct cash flows occur.
Accruals
Accruals anticipate future cash flows. They recognize related assets, liabilities, revenues, expenses, gains, or losses. Sales or purchases on account, interest, and taxes are common accruals.
Deferrals
Deferrals reflect past cash flows. They recognize liabilities (for receipts) and assets (for payments), with deferral of the related revenues, expenses, gains, and losses. Recognition of the deferred items occurs when the deferral ends. The deferral ends when the obligation is satisfied or the future economic benefit is used up. Prepaid insurance is an example.
Special purpose frameworks
Accrual accounting is the financial reporting framework used in GAAP. Special purpose frameworks are comprehensive bases of accounting other than GAAP.
Revenue Recognition Principle. (1) What event triggers revenue recognition? (2) What is the definition of the event in (1)?
1) Generally, revenue is recognized when an entity satisfies a performance obligation by transferring a promised good or service (an asset) to a customer.
-An asset is transferred when the customer obtains control of that asset.
2) Control of an asset is transferred when the customer 1) Has the ability to direct the use of the asset and 2) Obtains substantially all of the remaining benefits (potential cash flows) from the asset.
Expenses and Losses Recognition Principle
- Generally, expenses are recognized when an entity consumes economic benefits in its revenue-generating activities. 1) Some expenses (e.g., cost of goods sold) are matched with revenue. They are simultaneously recognized with the revenue that directly result from the same transactions. 2) Certain other expenses (e.g., utilities and administrative employees’ salaries) are recognized during the period in which cash is spent or liabilities incurred. 3) Still other expenses (e.g., straight-line depreciation and amortization) are systematically and rationally allocated to the periods during which the related assets provide benefits.
- Losses are recognized when 1) Future economic benefits of an asset have been reduced or eliminated (e.g., impairment of an asset). 2) Liabilities have been incurred or increased without receipt of an associated economic benefit (e.g., a contingent liability incurred due to a lawsuit against the entity).
Control of an asset is transferred when the customer
Control of an asset is transferred when the customer 1) Has the ability to direct the use of the asset and 2) Obtains substantially all of the remaining benefits (potential cash flows) from the asset.
An asset is transferred
An asset is transferred when the customer obtains control of that asset.
Generally, revenue is recognized when
Generally, revenue is recognized when an entity satisfies a performance obligation by transferring a promised good or service (an asset) to a customer. An asset is transferred when the customer obtains control of that asset.
Generally, expenses are recognized when
Generally, expenses are recognized when an entity consumes economic benefits in its revenue-generating activities.
Some expenses (e.g., cost of goods sold) are matched with
Some expenses (e.g., cost of goods sold) are matched with revenue. They are simultaneously recognized with the revenue that directly result from the same transactions.
Allocating Overhead Expenses
Certain other expenses (e.g., utilities and administrative employees’ salaries) are recognized during the period in which cash is spent or liabilities incurred.
Systematic and Rational Allocation of Expense
Still other expenses (e.g., straight-line depreciation and amortization) are systematically and rationally allocated to the periods during which the related assets provide benefits.
Losses are recognized when
Losses are recognized when
1) Future economic benefits of an asset have been reduced or eliminated (e.g., impairment of an asset).
or 2) Liabilities have been incurred or increased without receipt of an associated economic benefit (e.g., a contingent
Measurement Attributes (Methods) for Assets & Liabilities (6 elements)
Measurement Attributes (Assets & Liabilities) include
1) Historical Cost,
2) Current (replacement) cost,
3) Current market value,
4) Net realizable value,
5) Net settlement value, and
6) Present value.
Each of these is an attribute of the asset/liability that is measurable using the appropriate methods.
Historical cost
Historical cost is the amount of cash paid to acquire an asset. It ordinarily is adjusted subsequently for amortization (which includes depreciation) or other allocations. It is the relevant measurement attribute for property, plant, and equipment.
Current (replacement) cost
Current (replacement) cost is the amount of cash that would have to be paid for a current acquisition of the same or an equivalent asset. It may be used to measure LIFO and retail method inventories.
Current market value
Current market value is the amount of cash that could be obtained by selling an asset in an orderly liquidation.
Net realizable value
Net realizable value is the amount of cash expected to be received for an asset in the due course of business, minus the costs of completion and sale. It is used to measure some inventories.
Net settlement value
Net settlement value is the relevant attribute for trade payables. It is the sum of the undiscounted amount of cash expected to be paid to liquidate an obligation in the ordinary course of business.
Present value
Present value of future cash flows incorporates time value of money concepts. Calculating the present value of future cash flows requires (a) identifying an appropriate interest rate (or discount rate) and (b) identifying the timing and amount of future cash flows. It may be used to measure noncurrent receivables and payables.
Observable Amounts
Accounting measurements ordinarily use an observable amount determined by the market.
Accounting Estimates
When observable market prices are unavailable, estimated cash flows often are used to measure an asset or a liability.
What is the Objective of Fair Value?
The objective is to estimate fair value by distinguishing the economic differences between sets of future cash flows that may vary in amount, timing, and uncertainty.
The following are elements of a present value measurement (5 elements)
The following are elements of a present value measurement:
1) Estimates of future cash flows
2) Expected variability of their amount and timing
3) The time value of money based on the risk-free interest rate
4) The price of uncertainty inherent in an asset or liability
5) Other factors, such as lack of liquidity or market imperfections. For example, the discount rate is increased to account for a lack of liquidity (a liquidity premium).
Traditional Approach to Present Value
The traditional approach uses one set of estimated cash flows and one interest rate. Uncertainty is reflected solely in the choice of an interest rate. This approach is expected to continue to be used in many cases, for example, when cash flows are required by a contract.
expected cash flow (ECF) for Present Value
The expected cash flow (ECF) approach applies in more complex circumstances, such as when no market or no comparable item exists for an asset or liability. The ECF results from multiplying each possible estimated amount by its probability and adding the products. The emphasis is on explicit assumptions about the possible estimated cash flows and their probabilities. By allowing for a range of possibilities, the ECF approach permits the use of expected present value when the timing of cash flows is uncertain. Expected present value is the sum of the present values of estimated cash flows discounted using the same interest rate and weighted according to their probabilities.
Expected present value
Expected present value is the sum of the present values of estimated cash flows discounted using the same interest rate and weighted according to their probabilities.
The purpose of a present value measurement of the fair value of a liability
-The purpose of a present value measurement of the fair value of a liability is to estimate the value of assets required currently to 1) Settle the liability or 2) Transfer the liability to an entity of comparable credit standing. –The effect of an entity’s credit standing on the measurement of its liabilities is captured in an adjustment to the interest (discount) rate.
The Securities and Exchange Commission (SEC)
The Securities and Exchange Commission (SEC) was created by the Securities Exchange Act of 1934 to regulate the trading of securities and otherwise to enforce securities legislation.
Electronic Data Gathering, Analysis, and Retrieval (EDGAR)
Under the 1934 act, disclosures about subsequent trading of securities are made by filing periodic reports using the Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system that are available to the public for review.
Regulation S-X
Regulation S-X describes the form and content of, and requirements for, financial statements filed with SEC. It applies to the reporting of interim and annual financial statements, including notes and schedules.
Give examples of information that must be provided in periodic SEC financial reporting in addition to the financial statements (6 elements)
1) Management’s discussion and analysis (MD&A). This is supplementary information.
2) Management and general data for each director and officer
3) Compensation of the five highest-paid directors and officers
4) Security holdings of directors, officers, and those owning 5% or more of the security
5) Matters submitted to shareholders for approval
6) Pending litigation, e.g., principal parties, allegations, and relief sought
Management’s discussion and analysis (MD&A) (5 elements)
Management’s discussion and analysis (MD&A) of financial condition and results of operations.
This information includes:
1) The entity’s outlook and significant effects of known trends, events, and uncertainties.
It addresses such matters as:
(2) liquidity,
(3) capital resources,
(4) results of operations, and
(5) the effect of changing prices.
Securities Act of 1933
The Act that governs how securities are issued. The Securities Exchange Act of 1934 is what created the SEC.
Securities Exchange Act of 1934
The Securities and Exchange Commission (SEC) was created by the Securities Exchange Act of 1934 to regulate the trading of securities and otherwise to enforce securities legislation.
Form 10-K: 1) When is it due and who is it submitted to? 2) What level of scrutiny does it receive before submission? (3-4): which financial statements are required and for how many years each? (4 elements)
1) Form 10-K is the annual report to the SEC.
2) It must be audited by an independent public accountant.
Annual financial statements include
3) Balance sheets for the two most recent fiscal year ends
4) Statements of income, cash flows, and changes in equity for the three most recent fiscal years.
Form 10-K Deadlines (3 elements)
The annual report must be filed within
1) 60 days of the last day of the fiscal year by large accelerated filers [companies with a public float (the market value of shares held by the public) of $700 million or more]
2) 75 days by accelerated filers (public float of $75 million to $700 million and annual revenues of $100 million or more)
3) 90 days by nonaccelerated filers [(a) public float of less than $75 million or (b) public float of $75 million to $700 million and annual revenues of less than $100 million]
What is the 10-K filing deadline for large Accelerated Filers
60 days of the last day of the fiscal year by large accelerated filers [companies with a public float (the market value of shares held by the public) of $700 million or more]
What is the 10-K filing deadline for accelerated Filers?
75 days by accelerated filers (public float of $75 million to $700 million and annual revenues of $100 million or more)
What is the 10-K filing deadline for nonaccelerated Filers?
90 days by nonaccelerated filers [(a) public float of less than $75 million or (b) public float of $75 million to $700 million and annual revenues of less than $100 million]
Form 10-Q
Form 10-Q is the quarterly report of operations and financial condition filed with the SEC. It must be reviewed by an independent public accountant. A review offers a lower level of assurance than an audit regarding financial condition and the results of operations.
The quarterly report must be filed within
The quarterly report must be filed within
1) 40 days of the last day of the fiscal quarter by large accelerated filers and accelerated filers
2) 45 days by nonaccelerated filers
Form 8-K
Form 8-K is a current report to disclose material events.
It must be filed within 4 business days after the material event occurs.
Material Events, Form 8-K (5 elements)
The following are some examples of material events:
- A change in control of the registrant
- Acquisition or disposition of a significant amount of assets not in the ordinary course of business
- Bankruptcy or receivership
- Resignation of a director
- A change in the registrant’s certifying accountant
Form 20-F
Form 20-F is the annual report to the SEC filed by foreign private issuers. It is similar to Form 10-K. The financial statements in Form 20-F may be prepared in accordance with U.S. GAAP or IFRS (International Financial Reporting Standards).
The SEC Rule, “Interactive Data to Improve Financial Reporting,”
The SEC Rule, “Interactive Data to Improve Financial Reporting,” requires domestic and foreign companies using U.S. GAAP and foreign private issuers using IFRS to provide their financial statements in the XBRL format as an exhibit in their periodic and current reports.
XBRL
XBRL (eXtensible Business Reporting Language) is derived from XML (eXtensible Markup Language), a programming language used to organize and define data online.
What are two uses that are disallowed for the Notes?
Notes may not be used (1) to correct an improper presentation in the statements or (2) as a substitute for recognition in the statements.
When are remeasured amounts appropriate? (2 elements)
Remeasured amounts are appropriate for 1) Financial assets (assets to be converted to cash) and 2) Liabilities for which the timing and amount of payments is uncertain.
When does an event incur both expense and liability?
Under the expense recognition principle, if work has been performed and you haven’t paid for it yet, you book it as an expense and accrue it as a liability. In accrual accounting, the expense and liability can be accrued before the entity is billed or pays for the expense/liability.
Is replacement cost remeasured periodically?
Yes. The replacement cost is the cost to replace the item at the measurement date. Replacement cost remeasurement criteria may vary depending on the asset and the financial statement where it is presented.
In the monetary-unit assumption, do accountants adjust for inflation in the amounts shown on ledgers?
No, accountants don’t adjust ledgers for inflation under GAAP. Some developing countries use accounting principles that include inflation adjustments.
What trade-off is entailed by the periodicity assumption?
Reporting economic activity in distinct time periods may require omitting some information or estimating future values that are not known with certainty until a future period. Thus, faithful representation or completeness are sacrificed in the interest of timeliness and relevance when information is reported periodically.
Do deferrals reflect future cash flows?
No. Deferrals reflect past cash flows and future items to be recognized when those cash past cash flows reverse. Examples of deferrals include prepaid tax, prepaid insurance, prepaid rent.
Do accruals reflect past cash flows?
No, accruals reflect future cash flows and current items to be recognized in the accounting records. Examples include accrued expense and accrued revenue.
When does a deferral end?
The deferral ends when the obligation is satisfied or the future economic benefit is used up. Prepaid insurance is an example.
When is control of an asset transferred? (2 elements)
Control of an asset is transferred when the customer 1) Has the ability to direct the use of the asset and 2) Obtains substantially all of the remaining benefits (potential cash flows) from the asset.
When are losses recognized? (2 elements)
Losses are recognized when 1) Future economic benefits of an asset have been reduced or eliminated (e.g., impairment of an asset). 2) Liabilities have been incurred or increased without receipt of an associated economic benefit (e.g., a contingent liability incurred due to a lawsuit against the entity).
When are expenses recognized - what is the general definition of expense recognition, and what are three main expense recognition rules? (4 elements)
1)Generally, expenses are recognized when an entity consumes economic benefits in its revenue-generating activities.
2) Some expenses (e.g., cost of goods sold) are matched with revenue. They are simultaneously recognized with the revenue that directly result from the same transactions.
3) Certain other expenses (e.g., utilities and administrative employees’ salaries) are recognized during the period in which cash is spent or liabilities incurred.
4) Still other expenses (e.g., straight-line depreciation and amortization) are systematically and rationally allocated to the periods during which the related assets provide benefits.
What are the three main bases for expense recognition?
1) Match expenses with associated revenue.
2) Recognize overhead expenses during the period when incurred.
3) Rational allocation, e.g., straight-line depreciation allocates cost of assets to the periods when the assets provide benefits.
When can a liability generate a loss?
Liabilities can cause a loss if liabilities have been incurred or increased without receipt of an associated economic benefit (e.g., a contingent liability incurred due to a lawsuit against the entity).
When is the expected cash flow method used for present value estimation in accounting?
The expected cash flow (ECF) approach applies in more complex circumstances, such as when no market or no comparable item exists for an asset or liability.
How is the effect of an entity’s credit rating reflected in the net present value analysis of a liability?
The effect of an entity’s credit standing on the measurement of its liabilities is captured in an adjustment to the interest (discount) rate.
How frequently is form 10-K submitted to the SEC?
Annually.
How many years of results are reported in the financial statements for the form 10-K? (2 elements)
Balance sheets for the two most recent fiscal year ends.
Statements of income, cash flows, and changes in equity for the three most recent fiscal years.
What is the 10-K filing deadline for large accelerated filers? What are the criteria for defining large accelerated filers?
60 days of the last day of the fiscal year by large accelerated filers [companies with a public float (the market value of shares held by the public) of $700 million or more]
What is the 10-K filing deadline for accelerated filers? What are the criteria for defining accelerated filers?
75 days by accelerated filers (public float of $75 million to $700 million and annual revenues of $100 million or more)
What is the 10-K filing deadline for non-accelerated filers?
90 days by nonaccelerated filers [(a) public float of less than $75 million or (b) public float of $75 million to $700 million and annual revenues of less than $100 million]
What is a large accelerated 10-K filer?
Companies with a public float (the market value of shares held by the public) of $700 million or more.
What is an accelerated 10-K filer?
Public float of $75 million to $700 million and annual revenues of $100 million or more.
What is a non-accelerated 10-K filer?
Has a public float of less than $75 million or (b) public float of $75 million to $700 million and annual revenues of less than $100 million]
Does income increase equity?
Yes, income always has the effect of increasing equity.
What are the timeframes for 10-K filing depending on filer type? What is the change in filing time differential amount between each filing type?
1) 60 days <=> large accelerated filer
2) 75 days <=> accelerated filer
3) 90 days <=> non-accelerated filer
4) delta time = 15 days (roughly two weeks)
What is the review of the form 10-Q?
The 10-Q must be reviewed by an independent public accountant. A review offers a lower level of assurance than an audit regarding financial condition and the results of operations.
When must form 8-K be filed? (1 element)
Form 8-K must be filed within 4 business days after the material event occurs.
Does the form 10-K entail a comprehensive audit of the annual financial statements?
Yes.
Is the legal entity always the same as the economic entity?
No. For an example, parent and subsidiary are distinct legal entities but should be reported as the same economic entity on consolidated financial statements.
Are SFACs authoritative? Are they incorporated in the ASC?
No to both questions.
When is the ECF method of calculating present value used?
The expected cash flow (ECF) approach applies in more complex circumstances, such as when no market or no comparable item exists for an asset or liability.
What are the interrelated elements of financial statements under Sfac No 6? (10 elements)
Assets, liabilities, equity, investments by owners, distributions to owners, comprehensive income, revenues, expenses, gains, losses
What is the principle of substance over form?
The concept of substance over form guides accountants to present the financial reality of a transaction over its legal form.
What is the expense matching principle?
Matching is synonymous with associating cause and effect. It is based on a direct relationship between the expense and the revenue. For an example, matching credit loss expense with related revenues is an application of the matching principle.
Define recognition.
Recognition is the process of formally incorporating an element into the financial statements of an entity.
What is periodicity?
A basic feature of the financial accounting process is that information about the economic activities of the business should be issued at regular intervals. These time periods should be of equal length to facilitate comparability. They also should be of relatively short duration, e.g., 1 year, to provide business information useful for decision making.
How many cash flows are considered in the ECF approach to present value?
The traditional approach to calculating present value uses one set of estimated cash flows and one interest rate. This approach is expected to continue to be used in many cases, for example, when contractual cash flows are involved. However, according to the FASB’s conceptual framework, the ECF approach is applicable in more complex circumstances, such as when no market or no comparable item exists for an asset or liability. The ECF results from multiplying each possible estimated amount by its probability and adding the products. The ECF approach emphasizes explicit assumptions about the possible estimated cash flows and their probabilities. The traditional method merely includes those uncertainties in the choice of interest rate. Moreover, by allowing for a range of possibilities, the ECF approach permits the use of present value when the timing of cash flows is uncertain.
How many cash flows are considered in the traditional approach to present value?
The traditional present value measurement approach uses a single set of estimated cash flows and a single interest rate.
How does regulation S-K differ from regulation S-X
Disclosure standards for annual reports are covered by Regulation S-K, whereas regulation S-X gives the requirements for filing interim financial statements and pro forma financial information.
What is the objective of present value when used to determine an accounting measurement for initial recognition purposes?
To estimate fair value.
What is the objective of present value when used to determine an accounting measurement for fresh start purposes?
To estimate fair value.
