Special Purpose Frameworks

Question 1

Describe the basis for measuring assets for a personal statement of financial condition.

Answer 1

Assets in a personal statement of financial condition should be measured at estimated current (fair) value in an arms-length transaction, net of disposal costs, if any.

Question 2

What income tax-related liabilities should be shown in a personal statement of financial condition?

Answer 2

Income Tax Payable: Known and estimated amounts payable for prior and current periods, less withholding and estimated tax payments made; Income Tax Provision: Estimated amount which would be due based on the difference between the estimated current value of net assets and their tax basis (computed as excess of current value of net assets over tax basis of net assets, multiplied by the current effective tax rate).

Question 3

What accounting concepts underlie the preparation of personal financial statements?

Answer 3

Personal financial statements are prepared based on the use of accrual accounting and fair value measurement.

Question 4

Identify the statements included in a set of personal financial statements.

Answer 4

A set of personal financial statements would include: 1. A statement of financial condition (balance sheet); 2. A statement of changes in net worth.

Question 5

In what order should liabilities be shown in a personal statement of financial condition?

Answer 5

In the order of maturity, with no distinction as to current/non-current classifications.

Question 6

How should a significant interest in a separate business be shown in a personal statement of financial condition?

Answer 6

As a single line item at the estimated current fair value of the net assets, separate from other assets.

Question 7

Identify the “entities” for whom personal financial statements are prepared.

Answer 7

Personal financial statements are prepared for: 1. An individual; 2. A husband and wife; 3. A family unit.

Question 8

In what order should assets be shown in a personal statement of financial condition?

Answer 8

In the order of liquidity, with no distinction as to current/non-current classifications.

Question 9

Describe the basis for measuring liabilities for a personal statement of financial condition.

Answer 9

Liabilities in a personal statement of financial condition should be measured at estimated current amounts, which would be based on the lower of: The amount at which the liability could be settled currently (liquidation value), or The present value of cash to be paid in future settlement.

Question 10

Identify some bases of accounting that are not an “other comprehensive basis of accounting.”

Answer 10

1. Accounting based on U.S. Generally Accepted Accounting Principles (GAAP); 2. Accounting based on the unique provisions of a loan agreement; 3. Accounting based on the unique provisions of an acquisition agreement.

Question 11

Identify the other comprehensive basis of accounting (OCBOA).

Answer 11

1. Cash basis; 2. Modified cash basis; 3. Income tax basis; 4. Regulatory basis; 5. A definite set of accounting criteria that has substantial support in practice and which is applied to all material financial statement items (e.g., price level/inflation adjusted statements).

Question 12

Describe a modified cash basis of accounting.

Answer 12

A modified cash basis of accounting results from adjustments made to cash basis accounting. Specifically, while most items continue to be accounted for using the cash basis, some items are accounted for using the accrual basis. As a consequence, the financial statements reflect accounts and amounts based on a combination of the cash basis and the accrual basis.

Question 13

What modification is allowed for private companies related to accounting for goodwill?

Answer 13

The goodwill can be amortized over a period not to exceed 10 years.

Question 14

What is a private company?

Answer 14

A private company is one that is not a public company. The PCC provides a definition of a public company as one that is required to file or furnish financial statements with a regulatory agency related to any type of securities (debt and equity), whether those securities are traded on exchanges or over-the-counter.

Question 15

What does the Private Company Council (PCC) do?

Answer 15

Works with the FASB to set accounting standards for private companies.

Question 16

What modification is allowed for private companies related to accounting for interest rate swaps?

Answer 16

The hedge accounting for a receive variable / pay fixed interest rate swap is simplified. The private company can assume 100% effectiveness and can use settlement value as a practical expedient for fair market value.

Question 17

What financial statements are required of an entity in liquidation?

Answer 17

A statement of net assets in liquidation and a statement of changes in net assets in liquidation.

Question 18

During liquidation, when can an entity write down the value of a liability?

Answer 18

Only when legally forgiven.

Question 19

List three disclosures required when the entity is reporting under the liquidation basis of accounting.

Answer 19

Any three of the following: 1) A statement that the financial statements are presented using the liquidation basis of accounting, 2) Description of the liquidation plan, 3) Methods and significant assumptions used to measure assets and liabilities, or 4) Type and amount of costs and income accrued associated with the liquidation plan.

Question 20

When is liquidation imminent?

Answer 20

A plan for liquidation approved by the person (s) who have the authority to make the plan effective or a plan for liquidation is being imposed on the entity by other forces (i.e., forced bankruptcy).