part 1.far.2 Flashcards
other types of financial statements
- prepared on a comprehensive basis of accounting other than GAAP
- personal financial statement
- financial statements of employee benefit plans and trusts
- IFRS for small and medium sized entities
categories of other comprehensive basis of accounting
- cash basis
- modified cash basis
- income tax basis
- regulatory basis
- other basis with substantial support
cash basis f/s
cash received = revenue recognition cash disbursed = expense recognition cash = equity no other asset or liabilities for small, closely held businesses (sole proprietors)
modified cash basis f/s
combination of cash and accrual basis
modifications have support with GAAP
common and acceptable modifications:
- recognition of:
inventory, property plant and equipment, taking depreciation or amortization, income taxes and other payables, a/r, interest bearing payablesincome tax basis f/s
based on income tax rules and regulations not GAAP
- taxable amount = revenue
- deductible amount = expense
certain nontaxable and nondeductible items are included as revenue or expense, in a separate line or in notes to f/s
example:
- muni bond interest received
- life insurance premiums on officers
- fines
- income is recognized on f/s in the period it is taxable.
- expenses are recognized on f/s in the period they are deductible
regulatory basis
comply with regulatory requirements
use should be restricted to the filing entity and regulatory agency
other basis with substantial support
private bank / lender requested f/s price level (or inflation) adjusted f/s
personal f/s are prepared in conjunction with
personal borrowing
personal financial planning
contract requirements
legal requirements
personal f/s required
statement of financial position
personal f/s not required but is often provided
statement of changes in net worth
personal f/s not provided
income statement
statement of cash flows
personal statement of financial position on pfs
prepared based on accrual accounting and fair value measurement
personal statement of financial position on pfs
assets are reported at current values
liabilities are reported at current values
net worth = assets - liabilities
personal statement of net worth
shows causes and amounts of changes in net worth
beggining net worth \+/- change in asset values \+/- change in liabilities values ------------------------------------------- ending net worth
asset valuation & presentation in a statement of net worth on pfs
assets are reported at estimated current values = estimated fair values fair value based on GAAP requirements: . exit value . arm's length transaction . net of disposal costs
asset presentation in statement of net worth on pfs
. in order of liquidity
. separate business interests - shown as separate line items
exp: interest in an s corp.
. business interests (not separate business) shown as separate assets and liabilities. exp: rental property not a separate business, the property is shown as an asset and the mortgage on the property as a liability
. fair value hierarchy disclosures not necessarily required
liability presentation in statement of net worth on pfs
liabilities are reported at estimated current amounts.
.estimated current amounts lower of:
1. amount at which liability could be settled currently or
2. present value of cash to be paid in the future
. non-cancellable commitment at present value of cash for future settlements
. income tax payable at known and estimated amounts payable reduced for prior withholdings and estimated payments made
.value of income tax provision= current tax rate x estimated current value of assets - estimated current amount of liabilities - the tax basis of those net assets
. as if assets and liabilities were disposed at fair value and the excess over their tax basis were taxed under current laws and rates.
valuing specific assets in personal f/s
receivables - discounted cash flows
marketable securities - market quotes
vested retirement benefits - discounted cash flows
life insurance policies - cash surrender value less any loans against the policy
closely held business interest - appraisal, discounted cash flows, capitalized earnings, or multiple earnings
real estate - recent comparable sales or appraisals
income generating property - discounted cash flows
intangible assets - discounted cash flows
future interest/rights - discounted cash flows
a person is vested in a 401k account
after certain years stated by the co. the employee is vested which means, she is entitled to the money she contributed plus the money the co. contributed in her behalf, plus the interest earned on the account up to date.
if the employee is not vested she is only entitled to the money she contributed plus the interest earned on account up to that date. but not on the amount deposited from the company.
income tax related liabilities shown on pfs
income tax payable: estimated amounts payable for prior and current periods, less withholding and ES payments made.
income tax provisions: ES amounts which would be due based on difference between estimated current value of net assets and their tax basis x the tax rate
on personal f/s
liabilities are measured at the lowest of:
liquidation value or present value of cash to be paid
on personal f/s
assets are measured at estimated fair value net of disposal costs
private company council
- works with FASB for alternative accounting for private companies
- PCC develops proposed modifications for FASB approval
- their trade off is: relevance of the info vs. cost benefit
public entity
is registered with the SEC, has securities that are publicly traded in the open market among other things
private companies
are all companies that are not governmental or non-for-profit
goodwill amortization for private companies
- amortized straight line over 10 years or less
- private company must complete impairement testing when a triggering event occurs. if triggering even occurs , the entity applies the normal impairement testing, including the pretest option
private companies
intangibles acquired in business combinations:
- not required to recognize separately from goodwill certain intangibles that cannot be sold or licensed independent from the business. exp: customer contracts, customer relationships and non-compete agreement
must recognize other intangibles that are:
- separable
- contractual or legal such as copyrights, trademarks and customer lists
if the company elects this guidance it must also adopt the goodwill accounting alternative to amortize goodwill over a period not to exceed 10 years.
private companies
hedge accounting:
- applies only to swaps for converting variable rate debt to fixed rate debt (a cash flow hedge)
- entity may assume 100% effectiveness
- valuation disclosure is required
- documents are required
private companies
leasing arrangement:
-not required to apply the criteria to determine whether there is a variable interest in leasing arrangements when the leasee and the lessor are under common control
liquidation
liquidation is when a company anticipates ceasing all activities
liquidation basis of accounting
f/s must use a basis of accounting that reflects imminent liquidation versus going concern
liquidation is considered imminent when
- likehood is remote that the organization will return from liquidation and either:
1. a plan for liquidation is approved or
2. a plan for liquidation is being imposed by other forces (involuntary bankruptcy)
liquidation basis of accounting
- assets are measured by the amount of the expected cash proceeds from liquidation
- liabilities are measured in accordance with GAAP. the entity should not anticipate that it will be released from having to pay those liabilities.
- accrue any expected costs related to the liquidation and any income it expects to earn during liquidation, including any anticipated disposal costs.
net realizable value
is the amount the firm expects to receive from the sale or collection of the item exp. a/r and inventories
present value of future cash flows
this is the primary measurement basis for noncurrent debt (bonds and long-term notes)
owner’s equity
- contributed capital: common stock, preferred stock, contributed capital in excess of par, treasury stock (a contra account)
- retained earnings: total net income to date, less dividends to date
a contra account
has a balance opposite that of the associated account in terms of credits or debits. if the market value is less than the original cost
adjunct account
has a balance that is the same as that of the associated account in terms of debits or credits. if the market value exceeds the original cost
valuation account
is one that is used to increase or decrease the book value of an item to a measure of current value. increase or decrease the net book value of the investment to current market value
goodwill
is the difference between market capitalization and the market value of net identifiable asset.
is an amount that can’t be identified with any individual recorded asset.
goodwill is recorded for accounting purposes only when one firm purchases all or a controlling interest in another firm.
contributed capital
the amount contributed by owners. exp. common stock, preferred stock, additional paid in capital
retained earnings
the amount of earnings retained by the entity
cumulative net income less dividends paid
