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Financial Accounting Standards Board (FASB) Flashcards

1
Q

What is the entity assumption?

A

We assume there is a separate accounting entity for each business organization.

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2
Q

Define “entry price.”

A

The price paid to acquire an asset or the price received to assume a liability.

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3
Q

Describe fair value measurement inputs.

A

Inputs can be observable or unobservable. Observable inputs are based on market data from independent sources. Unobservable inputs are the entity’s assumptions about the factors that impact determination of fair value.

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4
Q

What are the final steps in the standard-setting process?

A
  1. Evaluate research and comments from interested parties and issue an exposure draft.
  2. Solicit additional comments.
  3. Finalize new accounting guidance and issue Accounting Standards Updates (ASUs).
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5
Q

Define “exit price.”

A

The price that would be received to sell an asset or paid to transfer a liability.

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6
Q

What is the role of the Financial Accounting Foundation (FAF)?

A

The FAF exercises oversight of the FASB, appoints the members of the FASB, and ensures funding.

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7
Q

What are the three valuation techniques (or approaches) that should be used in determining fair value for the purposes of generally accepted accounting principles (GAAP)?

A
  1. Market Approach
  2. Income Approach
  3. Cost Approach
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8
Q

Define “fair value” (for accounting purposes).

A

The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

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9
Q

What is the highest structure of the FASB Accounting Standards Codification?

A

The highest structure is areas.

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10
Q

What is the full disclosure principle?

A

Financial statements should present all information needed by an informed reader to make an economic decision. This principle is sometimes referred to as the adequate disclosure principle.

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11
Q

What significant fair value disclosures are required only in annual statements?

A

The methods and significant assumptions used to estimate fair value.

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12
Q

What types of comparisons are fair value option disclosures intended to facilitate?

A
  • Between entities that choose different measurement methods for similar assets and liabilities.
  • Between assets and liabilities in the financial statements of an entity that selects different measurements for similar assets and liabilities.
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13
Q

What are the primary qualitative characteristics of financial information?

A

FAithful Representation and Relevance (FARR)

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14
Q

What does it mean to be free from error?

A

Information is free from error if it is TRUTHFUL.

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15
Q

What are the ingredients of faithful representation?

A
  • Completeness
  • Free from material error
  • Neutrality
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16
Q

What are the major areas in the FASB Accounting Standards Codification?

A
  • General principles 100
  • Presentation 200
  • Assets 300
  • Liabilities 400
  • Equity 500
  • Revenue 600
  • Expenses 700
  • Broad transactions 800
  • Industry 900
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17
Q

List the dates when an entity may elect to use fair value option for an eligible item?

A
  • When the item is FIRST recognized.
  • When firm commitment occurs.
  • When financial, an asset preciously reported at fair value with unrealized gain/loss in earnings no longer qualifies for that fair value treatment.
  • When accounting treatment for an investment changes because it becomes subject to the equity method or ceases to be eligible for consolidation.
  • When an item is measured at fair value at the time of an event but does not require fair value measurement at subsequent reporting dates.
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18
Q

List the enhancing qualitative characteristics of financial information.

A
  • Comparability
  • Verifiability
  • Timeliness
  • Understandability
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19
Q

What is the constraint in setting accounting standards?

A

Cost effectiveness (or cost-benefit)

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20
Q

What are the levels of the fair value hierarchy and what does each consist of?

A

LEVEL 1: highest level, are unadjusted quoted prices in ACTIVE MARKETS for assets and liabilities IDENTICAL to those being valued.
LEVEL 2: are observable for assets or liabilities, either directly or indirectly, other than quoted prices described in level 1.
LEVEL 3: lowest level, are unobservable and used to determine fair value only if observable inputs are not available.

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21
Q

What are revenues?

A

Revenues are increases in assets or extinguishment of liabilities stemming from deliveries of goods or from providing services - the main activities of the firm.

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22
Q

What is the time period assumption?

A

The indefinite life of a business is broken into smaller time frames, typically a year, for evaluation purposes and reporting purposes.

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23
Q

For purposes of the fair value definition, what are the assumed characteristics of market participants?

A

Buyers and sellers that are:

  • Independent of the reporting entity.
  • Acting in their economic best interest.
  • Knowledgeable of the asset or liability and the transaction involved.
  • Able and willing, but not compelled, to transact for the asset or liability.
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24
Q

What is understandability?

A

Information is understandable if the user comprehends it with reasonable effort and diligence.

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25
Q

What is predictive value?

A

To be relevant, accounting information should assist financial statement users in making predictions about future events.

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26
Q

Distinguish between assets and liabilities measured at fair value on a recurring basis and nonrecurring basis.

A

Assets and liabilities measured at fair value on a recurring basis are adjusted to fair value period after a period. Assets and liabilities measured at a fair value on a nonrecurring basis are adjusted to fair value only at the time of a particular event (e.g., significant modification of debt).

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27
Q

What is the role of the Financial Accounting Advisory Council (FASAC)?

A

The FASAC provides guidance on major policy issues, project priorities, and the formation of task forces.

28
Q

When should a company recognize revenues?

A

Revenues are recognized when they are earned and collectibility is reasonably assured.

29
Q

What is completeness?

A

Information is complete if it includes all data necessary to be faithfully representative.

30
Q

What body developed GAAP?

A

The Financial Accounting Standards Board (FASB)

31
Q

What is Financial Accounting Standards Board (FASB)?

A

The FASB establishes financial accounting standards for business entities.

32
Q

What purpose does the Financial Accounting Standards Board (FASB) Accounting Standards Codification serve?

A

The FASB Accounting Standards Codification is the compilation of authoritative U.S. GAAP for nongovernmental entities.

33
Q

What does the Securities and Exchange Commission (SEC) do?

A

It ADMINISTERS the U.S. securities laws, most notably the Securities Act of 1933 and the Securities Exchange Act of 1934 as well as others.

34
Q

Describe the market approach for determining fair value for the purposes of GAAP.

A

This approach uses prices and other relevant information generated by market transactions involving assets or liabilities identical or comparable to those being valued.

35
Q

What is verifiability?

A

Information is verifiable if different knowledgeable and independent observers can reach similar conclusions.

36
Q

How do user groups influence the outcome of the FASB standards?

A

Users influence standards by providing input DURING the DUE PROCESS PROCEDURE.

37
Q

What are the seven key components of the general-purpose external financial report?

A
  1. Income Statement
  2. Balance Sheet
  3. Statement of Cash Flows
  4. Statement of Retained Earnings
  5. Statement of Comprehensive Income
  6. Footnote Disclosures
  7. Auditor’s Opinion
38
Q

List the situations where the entry price may not be the exit price.

A
  • The transaction is between related parties.
  • The transaction occurs when the seller is under duress.
  • The unit of account included in the transaction price is different from the unit of account that would be used to measure at fair value.
  • The market in which the transaction price occurred is different from the market in which the asset would be sold or the liability transferred.
39
Q

What topics does the FASB Accounting Standards Codification not include?

A
  • Other Comprehensive Basis of Accounting
  • Cash Basis
  • Income Tax Basis
  • Regulatory Accounting Principles
40
Q

Describe the income approach for determining fair value for the purposes of GAAP.

A

This approach converts future amounts to a single present amount.

41
Q

What are the first three steps the FASB uses when issuing a new accounting standard?

A
  1. Considers whether to add a project to its agenda in consultation with the Financial Accounting Foundation (FAF).
  2. Conducts research.
  3. Holds a public hearing on the topic.
42
Q

What is neutrality?

A

To be neutral, accounting information must be free of bias.

43
Q

What is timeliness?

A

To be relevant, accounting information must be received in time to make a difference to the decision maker.

44
Q

What is the major purpose of the fair value framework?

A

To provide a framework for the use of fair value in GAAP so as to:

  • Achieve increased consistency and comparability in fair value measurements; and
  • Expand disclosure when fair value measurements are used.
45
Q

Who is the target audience of financial statements?

A

Decision makers; mainly potential investors, creditors, and regulators.

46
Q

What purpose does the fair value hierarchy serve?

A

To prioritize the inputs to valuation techniques used to measure fair value.

47
Q

List the items that entities may elect to measure and report at fair value.

A
  • Recognized financial assets or financial liabilities (some exceptions).
  • Firm commitments.
  • Written loan commitments.
  • Rights and obligations under insurance contracts and warranties.
  • Other financial instruments embedded in nonfinancial derivative instruments.
48
Q

What is confirmatory value?

A

To be relevant, accounting information should assist decision makers in confirming past predictions.

49
Q

Describe the cost approach for determining fair value for the purposes of GAAP.

A

This approach uses the amount currently required to replace the service capacity of an asset.

50
Q

What does a fresh start measurement do?

A

Establishes a new carrying value after an initial recognition and is unrelated to previous amounts (e.g., mark-to-market accounting and recognition of asset impairments).

51
Q

What are the special disclosures required for fair value measurements (on a recurring basis) that are based on unobserved inputs (i.e., level 3 inputs)?

A
  • Narrative description of the uncertainty of fair value to changes in unobservable inputs.
  • Unrealized gains/losses for the period and where reported.
52
Q

What are objectives of financial reporting?

A

To provide information about the entity to current and future users of the financial statements who are making credit and investment decisions.

53
Q

What are the ingredients of relevance?

A
  • Predictive Value
  • Confirmatory Value
  • Materiality
54
Q

What is the lowest structure of the FASB Accounting Standards Codification?

A

The lowest structure is paragraphs

55
Q

When are expenses recognized under accrual accounting?

A

Expenses are recognized when incurred, regardless of the period of cash payment

56
Q

List the elements included in a full set of financial statements.

A
  • Balance Sheet
  • Income Statement
  • Statement of Comprehensive Income
  • Statement of Cash Flows
  • Statement of Owner’s Equity
57
Q

List the financial assets and financial liabilities that entities may NOT use fair value to measure and report.

A
  • An investment in a subsidiary or variable interest to be consolidated.
  • Employers’ and plans’ obligations for pension benefits, other post-retirement benefits, post-employment benefits.
  • Financial assets and liabilities under lease accounting.
  • Demand deposit liabilities of financial institutions.
  • Financial instruments classified by the issuer as a component of shareholders’ equity.
58
Q

How are changes to the FASB Accounting Standards Codification accomplished?

A

Through Accounting Standards Updates (ASU)

59
Q

What is the main purpose of the Securities and Exchange Commission (SEC)?

A

The main purpose of the SEC is to promote efficient allocation of capital by maintaining open, orderly, and fair securities markets.

60
Q

What comprises U.S. GAAP?

A

The FASB Accounting Standards Codification comprise authoritative U.S. GAAP for publicly traded companies. SEC pronouncements are also GAAP for publicly traded entities.

61
Q

What is the reason for the FASB Accounting Standards Codification?

A

To put all accounting guidance in one place.

62
Q

What is comparability?

A

The quality of information that enables users to identify similarities and differences between sets of information.

63
Q

What is the American Institute of Certified Public Accountants (AICPA)?

A

The AICPA is the professional organization for participating CPAs.

64
Q

What does GAAP address?

A

Recognition, Measurement, and Disclosure

65
Q

What is the going-concern assumption?

A

In the absence of information to the contrary, a business is assumed to have an indefinite life (i.e., that is, it will continue to be a going concern).

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