FAR SEC 4 Flashcards
What is the threshold for reporting sales to a single external customer?
Reporting of sales to a single external company is required if the amount of sales is 10% or more of total revenue.
What is the threshold for reporting sales to foreign countries?
No percentage threshold is established for practicable disclosures of geographic information.
1) An entity must disclose revenues attributable to all foreign countries in total.
2) Separate disclosure of revenues from external customers attributed to a single foreign country is also required if those revenues are material. These disclosures are intended to provide information about reliance on particular markets or customers.
Does GAAP require a particular format and location in the financial statements fort the disclosure of a summary of accounting policies?
No. GAAP express a preference for, but do not require, including a summary of accounting policies in a separate section preceding the notes or in the initial note.
How should accounting policies be reported in the financial statements.
A summary of accounting policies preferably SHOULD be included in a separate section preceding the notes or in the initial note.
HOWEVER, GAPP does not require any disclosure of significant accounting policies!
What is the difference between disclosure and recognition?
A disclosure is additional information attached to an entity’s financial statements, usually as explanation for activities which have significantly influenced the entity’s financial results.
Recognition is the recordation of a business transaction in an entity’s accounting records. For example, a loss can be recognized on a lower of cost or market analysis, thereby recording the loss in the accounting records. Or, a sale transaction is recognized by recording revenue in the accounting records.
Disclosure of an event can be accomplished by mentioning an event in the notes without giving quantitative details, whereas recognition requires adjustment to the relevant financial statement line items.
When does an entity recognize adjusting events?
An entity recognizes in the financial statements adjusting events after the reporting period.
What are adjusting events?
Adjusting events are events occurring after the reporting date that provide evidence of conditions that existed at the end of the reporting period. Non-adjusting events are events occurring after the reporting date that do NOT provide evidence of conditions that existed at the end of the reporting period.
Where in its financial statements should a company disclose information about its concentration of credit risks?
The notes to the financial statements.
How is fair market valuation of an asset using prices in the most advantageous market done?
If there is a principle market for the asset, the price in the principle market is used without adjustment for transaction costs. If the asset trades in multiple markets, the most advantageous market is used, i.e., the market with the maximum price without adjusting for transaction costs.
What is credit risk from an accounting standpoint?
Credit risk is the risk of accounting loss from a financial instrument because of the possible failure of another party to perform. An entity must disclose most significant concentrations of credit risk arising from instruments. Group concentrations arise when multiple counterparties have similar characteristics that cause their ability to meet obligations to be similarly affected by change in conditions. An example of such a group is an industry.
For reporting purposes, what are subsequent events?
Subsequent events are events or transactions that occur after the balance sheet date and prior to the issuance (or availability for issuance) of the financial statements. Certain subsequent events or transactions provide evidence about conditions at the date of the balance sheet, including the estimates inherent in statement preparation. Other subsequent events or transactions provide evidence about conditions that did not exist at the date of the balance sheet.
What is segment reporting?
Segment reporting includes interim financial reports and annual financial statements of public business entities. The objective is to provide information about the different business activities of the entity and the economic environments in which it operates.
When should information be reported for segment reporting?
Ordinarily, information is to be reported on the basis that is used internally for evaluating performance and making resource allocation decisions. This approach aligns external and internal reporting.
Disclosure of information is not required if it is not prepared for internal use, and reporting it would not be feasible.
What are three characteristics of an operating segment?
An operating segment has three characteristics:
1) It is a business component of the entity that may recognize revenues and incur expenses.
2) Its operating results are regularly reviewed by the entity’s chief operating decision maker (CODM) for the purpose of resource allocation and performance assessment.
3) Its discrete financial information is available.
What are the necessary and sufficient conditions for aggregating operating segments?
Operating segments may be aggregated if
1) Doing so is consistent with the objective;
2) They have similar economic characteristics; and
3) They have similar products and services, production processes, classes of customers, distribution methods, and regulatory environments.
Full Disclosure Principle
According to the full disclosure principle, understandable information capable of affecting user decisions should be reported. The financial statements are the primary means of disclosure. However, almost all accounting pronouncements require additional disclosures in the notes. Because memorizing them is virtually impossible, candidates should anticipate the disclosure requirements before reading the summary, outline, or actual pronouncement. The appropriate perspective is that of an informed creditor or investor.
Accounting Policies
Accounting policies are the specific principles and the methods of applying them used by the reporting entity. Management selects these policies as the most appropriate for fair presentation of financial statements.
Must businesses and not-for-profit entities disclose all significant accounting policies?
Yes. Business and not-for-profit entities must disclose all significant accounting policies as an integral part of the financial statements.
Is disclosure of accounting policies required in the unaudited interim financial statements?
It depends. Disclosure of accounting policies in unaudited interim financial statements is not required when the reporting entity has not changed its policies since the end of the preceding fiscal year. [NOTE: textbook is unclear on this point, but it seems obvious from what is said that reporting a change in significant accounting principle that has occurred after the end of the preceding fiscal year would be required.]
What is the preferred presentation (disclosure method) for significant accounting policies?
The preferred presentation is a summary of accounting policies in a separate section preceding the notes or in the initial note.
What are the two main elements that must be disclosed about the significant accounting policies?
The disclosure should include accounting (1) principles adopted and (2) the methods of applying them that materially affect the financial statements.
Disclosure of accounting policies extends to which three broad types of accounting policies?
Disclosure extends to accounting policies that involve:
1) A selection from existing acceptable alternatives,
2) Policies unique to the industry in which the entity operates, even if they are predominantly followed in that industry, and
3) GAAP applied in an unusual or innovative way.
What are 6 specific types of accounting policies are commonly required to have disclosure?
Certain disclosures about policies of business entities are commonly required. These items include the following:
1) Basis of consolidation
2) Depreciation methods
3) Amortization of intangibles
4) Inventory pricing
5) Recognition of revenue from contracts with customers
6) Recognition of revenue from leasing operations
Should disclosure of accounting polices avoid duplicating details presented elsewhere?
Yes. Disclosure of accounting policies should not duplicate details presented elsewhere.
For example, the summary of significant policies should not contain the composition of plant assets or inventories or the maturity dates of noncurrent debt.