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FAR Study > Role and Standard-Setting Process > Flashcards

Role and Standard-Setting Process Flashcards

1
Q

What is the role of the FAF?

A

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

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2
Q

What does the SEC do?

A

It administers the US securities laws, most notably the Securities Act of 1933 and the Securities Exchange Act of 1934 as well as others.

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3
Q

What is the main purpose of the SEC?

A

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

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4
Q

What is the FASB?

A

A private sector body that establishes financial accounting standards for business entities.

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5
Q

What are the final 3 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 ASU.
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6
Q

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

A

Users influence standards by providing input during the due process procedure.

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7
Q

What is the role of the FASAC?

A

Provides guidance on major policy issues, project priorities, and the formation of task forces.

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8
Q
  • What is the AICPA?
  • What is the purpose of the AICPA?
A
  • The national professional organization for participating CPAs.
  • To provide its members with resources, information, and leadership so that they may in turn provide valuable services for the benefit of their clients, employers, and the general public.
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9
Q

What comprises the US GAAP?

A
  • GAAP includes pronouncements issued by CAP, APB, and FASB.
  • There are authoritative and non-authoritative GAAP. FASB ASC is the sole source for authoritative GAAP and includes some parts of the SEC guidance. The SEC guidance is required only for publicly traded companies.
  • Non-authoritative GAAP includes widely recognized and prevalent practices, FASB Concept Statements, AICPA Issue Papers, and IFRS.
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10
Q

What 3 aspects does GAAP primarily address?

A
  1. Recognition
  2. Measurement
  3. Disclosure
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11
Q

What are the 3 parts of the current accounting standard-setting mechanism in the U.S.?

A
  1. FAF - it is FASB’s parent body
  2. FASB - it is an independent body, subject only to FAF
  3. FASAC - it provides guidance on major policy issues, project priorities, and the formation of task forces.
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12
Q

What is the mission of the FASB?

►To improve usefulness & understanding of MAP.

A
  1. Improve the usefulness of financial reporting.
  2. Improve the understanding of the financial information.
  3. Maintain current accounting standards.
  4. Address deficiencies in accounting standards.
  5. Promote international convergence of accounting standards.
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13
Q

Facts about the FASB (from the organization down to the members).

A
  1. Subject only to FAF policies and oversight.
  2. 7 full-time members with renewable for 1 additional term and staggered 5-year terms.
  3. Members need not be CPAs.
  4. Members cannot have employment or investments with other entities.
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14
Q

In promulgating GAAP, the FASB applies the following 4 principles:

  1. Accounting standards should be ______ and not favor any particular industry; standards are for the benefit of ________.
  2. The needs and views of the _______ should be considered; the views of the ________ should not take precedence.
  3. The process of developing standards should be _____ to the public and allow due process to provide opportunity for interested parties to make their views known.
  4. The benefits of accounting standards should ______ their cost.
A
  1. unbiased; financial statement users
  2. economic community; accounting profession
  3. open
  4. exceed
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15
Q

FASB standard-setting process:

A
  1. Add a project to its agenda.
  2. Conduct research on the topic and issue a Discussion Memorandum.
  3. Hold public hearings on the topic.
  4. Evaluate the research and issue an Exposure Draft - the initial accounting standard.
  5. Solicit additional comments, modify the Exposure Draft if needed.
  6. Finalize the new accounting guidance and approve with a majority vote (4 of 7 affirmative votes)
  7. Issue an ASU
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16
Q
  • What is the role of the FASB’s EITF?
  • Are pronouncements issued by EITF included in GAAP?
A
  • To accelerate the process of establishing rules on emerging reporting issues. Like a “filter” enabling the FASB to focus on more pervasive issues. When a consensus of the 15 members is reached on an issue, no further action by the FASB is required. If the EITF is unable to reach a consensus, the FASB may become involved, ultimately revising an existing standard or adopting a new one.
  • YES
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17
Q

What is economic consequence?

A

The effect of a proposed standard on a firm’s financial statements. A common argument against a proposed standard is that it will cause earnings to decline, thus reducing the firm’s ability to raise capital.

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18
Q

When is revenue recognized under accrual accounting?

A

Revenues are recognized when earned, realized or realizable. Earned means goods and services are delivered. Realized or realizable means collection is reasonably assured, regardless of the period of cash collection.

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19
Q
  • What are the 7 components of the general purpose external financial report?
  • List the 5 elements included in a full set of financial statements.
A
  1. Income Statement
  2. Statement of Comprehensive Income
  3. Balance Sheet
  4. Statement of Changes in Owners’ Equity
  5. Statement of Cash Flows
  6. Footnote Disclosures and Supplementary Schedules
  7. Auditor’s Opinion

================================================

  1. Income Statement
  2. Statement of Comprehensive Income
  3. Balance Sheet
  4. Statement of Changes in Owners’ Equity
  5. Statement of Cash Flows
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20
Q

What organizations developed GAAP?

A
  • CAP (before)
  • APB (before)
  • FASB (currently)
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21
Q

What is the classification of assets that are in the form of cash, or will be converted into cash, or consumed within one year or the operating cycle of the business, whichever is longer?

A

Current assets.

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22
Q

Which agency enforces GAAP?

A

The SEC.

23
Q

When are expenses recognized under accrual accounting?

A

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

24
Q

What is the Accounting Principles Board?

A

The APB is the entity that published the 31 opinions, some of which are now part of the FASB ASC.

25
Q

What purpose does the FASB ASC serve?

A

FASB ASC is the sole source of authoritative U.S. GAAP for non-governmental entities, except for the SEC guidance. FASB ASC only includes some parts of the SEC guidance.

26
Q

Facts about FASB ASC:

  1. FASB ASC does not __________ GAAP but provides a _______________.
  2. All guidance in FASB ASC carries ___________ of authority (one level of GAAP). There is no longer a __________ of GAAP.
  3. Accounting and financial reporting practices not included in FASB ASC are _____________.
A
  1. change; newly structured electronic form
  2. the same level; hierarchy
  3. non-authoritative
27
Q

Sources of nonauthoritative GAAP include:

A
  1. Widely recognized and prevalent practices
  2. FASB Concept Statements
  3. AICPA Issue Papers
  4. IFRS
  5. Others

►There is no implied hierarchy for these sources.

28
Q

Does FASB ASC include all the SEC guidance?

A

The ASC includes relevant portions of SEC guidance but does not contain the entire text of SEC rules. For example, the ASC does not include SEC content related to MD&A and other items appearing outside the financial statements.

29
Q

Which basis of accounting both IFRS and US GAAP adopt?

A

Both U.S. and international GAAP reflect the accrual basis of accounting.

30
Q

Define accruals and deferrals, and give examples of each.

A
  • Accrual: when the economic event occurs first you create an accrual account (you are accruing the cash owed or to be paid as an asset or liability).
  • Deferral: when the cash activity occurs first you create a deferral account (you are deferring the recognition of an expense or revenue as an asset or liability).
  • Examples:
    • Accrued revenues are revenue earned before cash received. Sales on account, interest, rent.
    • Accrued expenses are expense incurred before cash paid. Salaries, wages, interest, taxes payable.
    • Deferred revenues are cash received before revenues earned. Rent, subscriptions, gift certificates.
    • Deferred expenses are cash paid before expense incurred. Prepaid insurance, supplies, rent, PP&E.
31
Q

Name the two different formats of presentation for the balance sheet.

A
  • Account form

Assets are shown on the left side of the page, and the liabilities and owners’ equity are shown on the right side. This format emphasizes the balance sheet equation: A=L+OE.

  • Report form

In the report form, which is the most popular form, the 3 categories of accounts are listed from top to bottom, as in a report, with assets always shown first.

32
Q

What approach is used when financial statements are prepared?

A

The all-inclusive approach.

33
Q

What are the items in other comprehensive income?

A
  1. Unrealized gains and losses on available for sale securities
  2. Certain pension cost adjustments
  3. Foreign currency translation adjustments
  4. Unrealized gains and losses on certain hedging activities
34
Q

Where and how are prior period adjustments shown?

A

Shown as adjustments to the beginning balance of retained earnings in the year that the error is discovered.

35
Q

What are the categories that are listed on the statement of cash flows? Give examples of each category.

►Oh IFF (I can pass the CPA exam…)

A
  • Operating Activities.
    • Cash flows related to transactions that flow through the income statement.
    • Also include trading sec. & cash equivalents
    • Interest receipts/payments are operating
    • Inflows include receipts from customers and interest.
    • Outflows include payments to suppliers, to employers, and to taxing authorities.
  • Investing Activities.
    • Cash flows related to the acquisition and disposal of long-term assets and investments
    • Outflows include purchases of plant assets and investments.
    • Inflows include proceeds from the sale of these items.
  • Financing Activities.
    • Cash flows related to the liabilities and owners’ equity sections of the balance sheet.
    • Inflows include issuing debt and equity sec.
    • Outflows include retirement of debt and equity sec., and dividend payments.
  • Effects of Foreign Currency Translation.
36
Q

What are cash equivalents? Give example.

A
  • Short-term investments that are convertible into a known and fixed amount of cash and have an original maturity to the purchaser of 3 months or less.
  • A U.S. treasury obligation purchased when there are 3 months or less remaining to maturity is a cash equivalent.
  • Investments in stocks are not cash equivalents because they have no maturity value and are not convertible into a specific unchanging amount of cash.
37
Q

What is the purpose of the statement of cash flows?

A

To explain the change in cash and cash equivalents that has occurred during the past accounting year.

38
Q

What does the statement of comp income report?

A

The stmt of comp income reports *most but not all* * non-owner changes in equity over a period of time—the same time period as the income statement. This statement is also dated for the year ended December 31, 20xx.

* the stmt of comp income does not include all non-owner changes in equity. PPA and cumulative effect of changes in accounting principles are non-owner changes in equity, but they are not reported in comp income. Instead, they are reported as an adjustment to the beginning balance of retained earnings.

39
Q

The balance sheet is formally referred to as ________________, but “balance sheet” is the more commonly used term.

A

The Statement of Financial Position.

40
Q

Assets, liabilities, and equities are presented on the balance sheet in a prescribed order:

A
  1. Assets are presented in order of decreasing liquidity. The most liquid assets (such as cash) are shown first, and less liquid assets are shown last (such as property, plant and equipment).
  2. Liabilities are shown in order of maturity. Current liabilities are presented first, long-term liabilities are presented last.
  3. Owners’ Equity items are shown in order of permanence. Contributed capital accounts are shown first and retained earnings is shown last. Retained earnings are less permanent due to the fact that dividends are a distribution of earnings.
41
Q

What is the operating cycle? How long is it?

A

The operating cycle of a firm is the period of time required to purchase or produce inventory, sell the inventory, and collect cash from the resulting receivables. For most firms, the operating cycle is significantly less than one year. For firms in some industries, such as construction, the operating cycle is longer than one year.

42
Q

Define and give examples:

  • Current assets
  • Current liabilities
  • LT assets & LT liabilities
A
  • CA: Assets that are in the form of cash, or will be converted into cash, or consumed within one year or the operating cycle of the business, whichever is longer. Example: cash, accounts receivable, trading securities, inventory, ppd assets.
  • CL: Liabilities that are due in the upcoming year or in the operating cycle of the business, whichever is longer, and that will be met through the transfer of a current asset or the creation of another current liability. Both criteria must be met in order for a liability to be classified as current. Example: A/P, wages payable, income tax payable, unearned revenues, warranty liability (for the last 2 items, only the portion to be extinguished within one year of the balance sheet would be classified as current). Also, the current portion of long-term debt is classified as current; it is the amount of debt previously classified as long-term that is now due within one year of the balance sheet date.
  • LT assets & LT liabilities: These are defined by exclusion. All itmes that are not classified as current are classified as long-term. Example: long-term investments, plant assets, certain deferred charges, intangible assets are non-current assets. Notes, bonds, mortgages payable are non-current liabilities.
43
Q

Name Balance Sheet valuation methods for these accounts:

  1. Property, Plant & Equipment, Intangibles
  2. A/R
  3. Inventory
  4. Investments in marketable securities
  5. Liabilities
  6. Owners’ Equity
A
  1. Historical Cost and Depreciate/Amortized Historical Cost (Amortized Cost is Historical Cost less the accumulated amortization of the asset.)
  2. Net Realizable Value (NRV)
  3. Lower of cost or market
  4. Fair value (Current Market Value)
  5. Present value (Determined from discounting the expected future cash flows. Used in many capital budgeting decisions.)
  6. Historical Value of Cash Inflows and Residual Valuation
44
Q

What does the statement of owners’ equity report?

A

It reports the changes in the owners’ equity over a period of time—the same time period as the income statement. This statement presents the changes from investments by owners and distributions to owners. The statement includes contributed capital, additional paid-in capital, and retained earnings.

45
Q

It is important to remember the articulation between the Balance Sheet and the Statement of Cash Flows:

  • If the SCF employs a pure cash definition of funds, the first asset listed on the BS will be ________.
  • If the SCF employs a broader definition of funds, the first asset listed on the BS will be ____________.
A
  • Cash
  • Cash and Cash Equivalents
46
Q

Caution:

It is important that you practice using the Codification before the exam so that valuable time is not wasted struggling with the interface during the exam. The Codification website has several useful tutorials for first-time users.

A

Caution:

It is important that you practice using the Codification before the exam so that valuable time is not wasted struggling with the interface during the exam. The Codification website has several useful tutorials for first-time users.

47
Q

How are changes to the FASB ASC accomplished?

A

ASU.

48
Q

What are the major areas in the FASB ASC?

A
  • 100: General principles
  • 200: Presentation
  • 300: Assets
  • 400: Liabilities
  • 500: Equity
  • 600: Revenues
  • 700: Expenses
  • 800: Broad transactions (transactions that involve with 2 areas and more)
  • 900: Industry
49
Q
  • What is the highest structure of the FASB ASC?
  • What is the lowest structure of the FASB ASC?
  • Is there an implied hierarchy for FASB ASC?
A
  • Areas
  • Paragraphs
  • NO
50
Q

Goals of the FASB ASC:

►Oh IF my SON can determine the goals of FASB ASC…

A
  1. Assist the FASB with International convergence (IFRS)
  2. Facilitate update of accounting standards
  3. Facilitate researching of an accounting issue
  4. Simplify the Structure and accessibility of authoritative GAAP
  5. Provide all authoritative literature in One place
  6. Reduce the risk of Non-compliance with GAAP
51
Q
  • FASB ASC has the following structure:
              • The listing of 16 sections is _______ across all subtopics.
              • In some cases, a section is divided into subsections to facilitate the exposition. Subsections are not ________.
              • Paragraph numbers do not _________ over time. New paragraphs will use a _________.
              • FASB ASC standardized certain terms. It uses the term “______” rather than “firm” or “company” and thus uses the term “________” rather than “intercompany.” The word “________” is used for required treatments, rather than “should,” “must,” or other terms.
A
  1. Areas
  2. Topics
  3. Subtopics
  4. Sections
  5. Subsections
  6. Paragraphs
  • uniform
  • numbered
  • change; letter extension.
  • entity; intra-entity; shall
52
Q
  • Each subtopic has the following 16 sections with the associated numeric identifier:
  • For SEC guidance, the same section numbering system is used with the addition of the _________.
A

00 Status

05 Overview and Background

10 Objectives

15 Scope and Scope Exceptions

20 Glossary

25 Recognition

30 Initial Measurement

35 Subsequent Measurement

40 Derecognition

45 Other Presentation Matters

50 Disclosure

55 Implementation Guidance and Illustrations

60 Relationships

65 Transition and Open Effective Date Information

70 Grandfathered Guidance

75 XBRL Definitions

  • letter “S” preceding the section number.
53
Q

What is excluded from the FASB ASC?

►Corgi: FASB ASC does not like this cute little dog

A
  • C: cash basis accounting
  • O: other comprehensive basis of accounting
  • R: regulatory accounting principles (e.g., insurance)
  • G: governmental accounting standards
  • I: income tax basis accounting

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