FAR2 Flashcards
Cash Basis F.S.
Pure cash basis f.s., cash is only asset, not liabilities, and equity is equal to cash
Direct method exchange rate
US$/FC
Indirect method exchange rate
FC/US$
Current Exchange Rate
Year-end/Spot Rate at B.S. accounts
Forward Exchange Rate
bet in future rate, for specific future date
Historical Exchange Rate
Used for equity, at date of issuance of stock and acquisition of assets (ex/ PP+E)
Weighted Avg Rate
Used for I.S. items (translation)
Functional Currency
Is the currency of the primary economic environment in which the entity operates, usually the local currency or the reporting currency
Foreign Currency Translation
Functional (start with I.S. move to B.S.) goes to OCI
Foreign Currency Remeasurement
Dysfunctional (start with B.S. move to I.S.) goes to I/S
Remeasurement Method (temporal method)
In order from B.S. to I.S. Balance Sheet - Monetary items = spot rate (fixed) - Non-monetary items = historical rate (fluctuate) *get RE from B.S. Income Statement - Gain or loss in I/S - Non-balance sheet items = weighted avg - Balance sheet items = historical rate (PP+E including A/D,COGS/INV,Amortization/bonds and intangibles)
Translation Method (current rate method)
Income Statement first - all I.S. items = weighted avg rate Transfer NI to RE then ending RE to B.S. Balance Sheet last - Assets = spot rate - Liabilities = sport rate - Equity = historical rate Gain or loss in OCI - foreign translation adj.
Historic Cost/Nominal Dollars
Based on historic prices without restatement for changes in the purchasing power of the dollar. (Method of basis for GAAP)
nominal = today
Historic Cost/Constant Dollars
Based on historic prices adjusted for changes in the general purchasing power of the dollar. (adjust inflation)
Current Cost/Nominal Dollars
Based on current cost without restatement for changes in the general purchasing power of the dollar (adjust appreciation)
Current Cost/Constant Dollars
Based on current cost adjusted for changes in the general purchasing power of the dollar. (adjust appreciation and inflation)
Monetary Assets/Liabilities
Fixed
Non-monetary Assets/Liabilities
Fluctuate in value
Purchasing Power Gains
Assets in deflation and Liabilities in Inflation (only monetary)
Purchasing Power Losses
Assets in inflation and Liabilities in deflation (only monetary)
Commercial Substance
Gain/Losses recognized, future cash flows will significantly change
Lacks commercial substance
No change in cash flows OR fair value cannot be determined
- Loss recognized immediately
- Gains (needs boot)
Lacks commercial substance - GAINS
No boot received = no gain
Boot is paid = no gain (loss = cash given)
Involuntary Conversions
Gains and losses recognized
Installment Sales
No reasonable basis for estimating the degree of collectibility
Gross Profit
Sale - Cost of goods sold
Gross Profit %
Gross Profit/Sales Price
Earned Gross Profit
Cash collections x Gross profit %
Deferred Gross Profit
Installment receivables(A/R) x Gross profit %
Completed Contract method (only GAAP)
Recognizes income on completion of contract
- Requirements:
1. Difficult to estimate the costs
2. There are many contracts in progress
3. The projects are short duration (collections are not assured) - Losses recognized in full when discovered
Percentage of Completion Method
Reasonably estimate profitability and provide reliable measure of progress toward completion
% of completion Revenue Recognized
Total costs to date/Total expected costs
= Work done/Total expected work
= % of job earned
Losses = rule of conservatism
Contracts: Revenue Recognition Requirements
Signed contract, risk and rewards transfer, no price contingencies, standard collection terms
Multiple Elements Arrangement (GAAP)
Recognize a portion of revenue as completed
Matching Principle
Expenses = related revenue recognized
Accrued Assets (accrued revenues)
DR: A/R
CR: Accrued Revenue
Accrued Liabilities (accrued expenses)
Dr: Accrued Expense
CR: A/P
Estimated Liabilities
DR: Accrued Expense
CR: Accrued Liabilties
Prepaid Expenses (current assets)
DR: Prepaid Expenses
CR: Cash
Balance sheet only (starts with prepaid then expires to income statement)
Deferred Credits (unearned revenue or deferred revenue)
DR: Cash
CR: Unearned/Deferred Revenue
Balance sheet only in liability section
Royalty Revenue
Recognized when earned
Unearned Revenue
Revenue received in advance is recorded as a liability
Rights to return exist
If conditions aren’t met, revenue = deferred
- Sale price is substantially fixed at date of sale
- Buyer assumes all risks of loss
- Buyer has paid some form of consideration
- Product sold is substantially complete
- Amount of future returns can be reasonably estimated (not a contingent sale)
Initial Franchise Fees
Revenue when “substantially performed”
Intangible asset and amortize over the expected life of the franchise
Continuing Franchise Fees
Revenue when earned, expense as incurred
Internally developed intangible assets
Expense when incurred
Exception: legal fees for a successful defense, registration/consulting fees, design costs, other direct costs to secure the asset - CAPITALIZE
Amortization
Must have a finite life
Goodwill
No amortization, must test for impairment
Acquisition method = goodwill is the excess of an acquired entity’s FV > FV of the entity’s net assets (including identifiable intangibles assets)
Maintaining goodwill = expense
IFRS Revaulation Model
Fair Value = Market-to-market
Original Cost:
- Above = OCI
- Below = I.S.
IFRS Revaluation Losses
Income Statement
Exception: a revaluation loss that reverses a previously recognized revaluation gain is recognized in OCI and reduces the revaluation surplus in Acc. OCI
IFRS Revaluation Gains
OCI
Exception: gains are reported on the income statement to the extent that they reverse a previously recognized revaluation loss
Research and Development Costs
Expense!
Exception: material (tangible assets) with alternative future uses and R+D costs of any nature undertaken on behalf of others under contract - CAPITALIZE AND DEPRECIATE
Computer Software Development Costs
Expense costs incurred until technological feasibility and
THEN capitalize costs incurred after technological feasibility up to the point that the product is released for sale
Reporting an Impairment Loss
Component of Income from continuing operations (I/S)
Impairment - Finite LIfe
Useful life is limited, amortize over useful economic life, two-step impairment test (undiscounted net cash flows and FV)
FV - net CV = impairment loss OR
FV - net CV = loss + cost of disposal = total impairment loss
Impairment - Indefinite Life
Life extends beyond the foreseeable future or cannot be determined, no amortization, one-step impairment test (FV)
FV - net CV = impairment loss OR
FV - net CV = loss + cost of disposal = total impairment loss
Personal Financial Statements
Statement of Financial Condition (B.S.)
Assets reported at Est. Current FV
Liabilities reported at Est. Current amount
Statement of Changes in Net Worth (I.S.)
