Reporting: Special Areas Flashcards
What are subsequent events?
Events occurring between the balance sheet date and the issuance date
Can be recognized or nonrecognized
To what subsequent events does GAAP guidance on subsequent events not necessarily apply?
Events covered by other GAAP rules (e.g. contingent liabilities)
What must be the case for statements to be considered issued or available for issuance?
They must comply with GAAP
When is the period for evaluating subsequent events?
For SEC filers and conduit debt obligors: up until issuance date
For others: up until statements are available to be issued
What are conduit debt obligors?
Private companies for whom governments issue debt securities
What is the general rule for recognizing or not recognizing subsequent events?
Whether the events are relevant to conditions before the balance sheet date
Examples:
-litigation for an event prior to the BS date and for an amount different from the recorded liability
When should subsequent events affecting the realization of assets be recognized?
Whenever they are the culmination of conditions going on for a long time
E.g. if a customer goes bankrupt due to his progressively worsening financial state, and his A/Rs become uncollectible
What disclosures should be made regarding subsequent events?
For non-SEC filers, the dates through which subsequent events were evaluated
Nonrecognized events, the absence of which would be misleading
What count as related-party transactions?
- between parent and subsidiaries
- between subsidiaries
- between enterprise and principal owners, management, or immediate families
- between affiliates
What related-party transactions should be disclosed?
All material ones that are outside the ordinary course of business (e.g. compensation of officers)
Transactions eliminated in preparing consolidated statements (e.g. intercompany sales) are not required
How does a business count as a development stage enterprise?
If “substantially all” of its efforts are devoted to establishing a new business
Either ordinary operations haven’t begun, or if they have, any revenue produced is insignificant
How should development stage enterprises be presented?
According to GAAP, just like others
Still must provide additional information
What would be different on a development stage enterprise’s balance sheet?
Cumulative net losses are reported in stockholders’ equity with some term like “deficit accumulated during development stage”
What would be different on a development stage enterprise’s income statement?
Includes cumulative revenues and expenses from beginning of development stage
Basically the same on statement of cash flows
What would be different on a development stage enterprise’s statement of stockholders’ equity?
From the date of inception:
- number of shares/warrants issued and when
- cash/property received for shares
What should development stage enterprises disclose?
- that they are in the development stage
- what their ordinary business is
- (in their first year of ordinary operations) that they were in the development stage
What is the method used for identifying operating segments?
Management Approach Method
Based on how managers organize segments to make decisions and assess performance
What segment information must be reported?
- profit or loss
- assets and related items
NOT cash flow or liabilities
Only public businesses need to do so
What are three characteristics of operating segments?
Has activities which produce revenue and incur expenses
Results are reviewed by entity’s chief operating decision maker
Discrete financial info is available for it
Who is the chief operating decision maker for a segment?
Not necessarily a title
Identified by function of allocating resources and assessing performance for a segment
May be a group
What is important to know about the segment manager?
- identified by function, not title
- directly responsible to chief operating decision maker
- can be chief operating decision maker
- can be segment manager for another segment
What are the quantitative thresholds that require a segment to be reported?
- its sales are 10% (or more) of total sales (includes intersegment sales)
- its absolute value of profit/loss is at least 10% of (a) the total profit of segments reporting a gain or (b) the total loss of segments reporting a loss – whichever is greater
- its assets are 10% of total assets
Any of these make a segment reportable
When may operating segments be aggregated?
If they are economically similar – what, to whom, and how they sell
When can operating segments be combined to make a reportable segment?
If the segments fulfill a majority of the aggregation criteria
The new segment is reportable even if it doesn’t pass any quantitative thresholds
What is the minimum number of reportable segments required?
Revenue reported by operating segments must be 75% or more of total revenue
Otherwise more operating segments must be identified to surpass 75%
What is the “all other” category?
Non-reportable segments must be combined into this category
The different revenue sources must be described
How can an operating segment be reportable even if it does not meet criteria for reportability?
Management judgment
How do separate operating segments affect prior-period-reporting (e.g. for comparison)?
Prior info must be restated to show a segment as separate, unless it is impracticable to do so
Is there a limit on the number of reportable segments?
Not specifically, but generally 10
What is an entity’s functional currency?
The currency where it primarily operates
When will an entity’s FC be the local currency?
When the foreign operation is independent of the parent company
Translation of financials into parent’s currency (usually dollar) is required
When will an entity’s FC be the parent’s currency?
When the foreign operation is basically an extension of the parent
If books are in local currency, then remeasurement to USD (or whatever) is required
Where does a gain or loss on currency remeasurement go?
Income from continuing operations
Can a company alter the net gain or loss from remeasurement by reporting in a particular currency?
No
Whether the foreign operation’s currency is local or USD, aggregate gains or losses will be the same
What happens if a foreign operation keeps its book with the local currency but has a different foreign currency for FC?
Books must be remeasured to foreign currency and then translated to USD
What is another name for local currency?
Recording currency
When would inflation affect the choice of functional currency?
If the country’s cumulative inflation rate over the last three years was about 100%, the local currency cannot be the FC.
USD will be functional, and remeasurement will be required
What about sales price would indicate that the parent’s currency should be the FC?
If sales prices for the foreign entity’s products change primarily with changes in exchange rates
What must occur for foreign currency statements prior to being translated?
Must conform to GAAP and be measured in functional currency
If not in FC, must be remeasured
What is the goal of remeasuring?
To make the books as if they were initially recorded in the new currency
Certain accounts must be measured at current rates, other accounts at historical rates
What items should be remeasured at historical rates?
- Securities carried at cost (not HTM)
- Inventory carried at cost
- Prepaid expenses
- PPE (and acc. depr.)
- intangible assets (and amort.)
- Common/preferred stock carried at issuance price
- Rev. and exp. for nonmonetary items (e.g. COGS, G&A exp.)
How does the historical exchange rate differ for different items?
Depends on when they were acquired
Examples:
- inventory acquired over year = avg. rate
- building acquired on 2/16 = rate @ 2/16
- common stock issued on 1/4 five years = rate @ that day
- revenues over the year = avg. rate
At what rates should cash and payables be remeasured?
Current rate
What is the translation rate for assets and liabilities?
Current exchange rate (at balance sheet date)
What is the translation rate for revenues and expenses?
Rate at time of revenue/expense recognition
When that is impracticable, weighted-average exchange rate for period can be used
What is the translation rate for contributed capital?
Historical rate
What is the translation rate for retained earnings?
Translated BRE
+ net income (at weighted-average rate)
- dividends declared (at declaration-date rate)
Where are translation adjustments reported?
OCI
Different from remeasurement gain/loss, which is reported in income from continuing operations
How are sales/disposals of foreign investments reported?
Accumulated translation adjustments in OCI will be removed with a reclassification adjustment and reported as gain/loss on disposal
What are foreign currency transaction gains/losses?
When receivables/payables from foreign currency transactions promise a fixed amount of the foreign currency, and then the exchange rate changes
Reported as income from continuing operations
Which foreign currency transactions should be reported in OCI, not income?
Hedges for foreign investments
Transactions between consolidated companies where settlement is not in the foreseeable future
What are the two general rules for foreign currency transactions?
Record any transaction by translating the item at the current rate
At each balance sheet date, update rates to current rate (at that date), reporting unrealized gain/loss on difference
What are different types of foreign currency hedges?
Fair Value hedge
Cash Flow hedge
Hedge of a Net Investment in a Foreign Operation
How do you calculate the gain/loss on foreign currency fair value hedges?
Multiply the foreign currency amount by the difference in spot rates (between date of inception and settlement (or balance sheet) date)
Gain/loss adjusts carrying amount for hedged item
Gain/loss reported in earnings (even for AFS securities)
How do you report gains/losses on foreign currency cash flow hedges?
Effective portion reported in OCI
Ineffective portion reported in earnings
What is effectiveness for a foreign currency cash flow hedge?
The degree that gain/loss for the hedging instrument offsets gain/loss on the hedged item
How do you report gain/loss on a hedge of net investment in a foreign operation?
In OCI
What happens if an unrealized gain is recorded on a depreciable asset?
It is recorded to OCI, but then amortized (credit to gain) over the term of the asset
How do foreign currency gains/losses affect income tax?
If included in taxable income for a year other than when they’re recognized as income, they result in temporary differences
Translation adjustments also result in temporary differences
Are convertible securities considered monetary or nonmonetary assets?
Monetary if valued primarily as a bond
Nonmonetary if valued primarily as stock
Are inventories used on contracts considered monetary or nonmonetary assets?
If expected cash settlement is already fixed (i.e. won’t be priced at market upon delivery), then monetary
Are pension, sinking, and other funds considered monetary or nonmonetary assets?
Depends on the specific assets in the fund
What is the distinctive feature about monetary assets or liabilities?
They involve rights or obligations to cash amounts that are fixed or determinable irrespective of future market prices
Is deferred revenue a monetary or nonmonetary liability?
If it involves an obligation to give goods or services, then it is nonmonetary
Why is preferred stock classified as a monetary item?
Because any stock which the holder can require the issuer to buy back (mandatory redemption) is monetary
What is current cost/constant purchasing power accounting?
Accounting based on units of currency with uniform purchasing power (i.e. inflation is accounted for)
uses CPI-U (CPI for All Urban Consumers) to measure dollar’s purchasing power
What is the current cost for inventory?
Current cost of purchasing the goods
OR:
Current cost of purchasing the resources required to produce the goods (including overhead)
^^^whichever is applicable
What is the current cost for PP&E?
Cost to acquire same “service potential”
- Current cost for a new asset with same service potential, accounting for depreciation so it’s “used”
- Current cost for used asset of same age and condition
- Current cost of new asset with different service potential, but price adjusted to make up for it
What is recoverable amount?
Current worth of the cash expected to be recovered from an asset’s sale or use
What are the two ways recoverable amount can be determined?
Value in use (if not about to be sold)
Current market value (if about to be sold)
How does recoverable amount relate to current cost?
If RA is permanently lower than CC, then it should be measured instead of CC in the supplemental information on CC
How is cost of goods sold reported at current cost?
Reported at lower of current cost or recoverable amount
CC = (avg. # units sold) x (avg. current cost)
Avg. current cost = end and beg. CC divided by 2
How are depreciation, depletion, and amortization expenses reported at current cost?
Take the item’s average current cost for the period and divide it by the estimated useful life
E.g. building with beg. CC of $95,000 and end. CC of $105,000, with useful life of 5 years, will have a depr. exp of $100,000 / 5 = $20,000
How are purchasing power gains/losses determined on monetary items?
Determine the inflation-adjusted values for the beg. balance, ending balance, and transactions
Beg. Bal.
+ Increase in account
- End. Bal.
= Gain/Loss
Gain/Loss depends on whether it is asset or liability
What information on current cost must be reported?
Nothing is required – voluntary supplemental info is encouraged
What is a required disclosure to make for a consolidated company?
The fact that transactions with a customer are 10% of total revenue
Identity of customer need not be disclosed
How does an increased exchange rate affect a foreign currency receivable?
Gives rise to a gain
Increased exchange rate (i.e. more dollars per foreign currency) = you receive more than you would have otherwise gotten
-opposite for liabilities
What is a general rule for choosing an exchange rate in remeasurement?
Anything carried at cost (e.g. all nonmonetary balance sheet items) use the historical rate, while anything carried at FV uses the current rate
How are remeasurement and translations gains/losses reported differently?
Remeasurement gains/losses are reported in income from continuing operations
Translation gains/losses in OCI
What are different purposes for entering into a forward contract?
As speculation on a currency
As a hedge
How do calculate gains/losses on forward contracts used to speculate on currency?
Take difference in FORWARD rates between contract data and other date
“Other date” might be year-end (when gains/losses are recorded) or settlement date
What is a forward rate?
The predicted future rate at an earlier date (reflected in rates for futures contracts available at that date)
How do you calculate gains/losses on forward contracts used to hedge an investment?
Gain/loss depends on difference in SPOT rates, not forward rates
How do you report gains/losses on foreign currency transactions designated as hedges in a foreign investment?
Gain/loss reported in OCI
