Standard Setting, Income Statement, and Reporting Requirements

Question 1

change from the cash basis of accounting to the accrual basis of accounting

Answer 1

The cash basis is not GAAP; therefore, it is an error. Correction of an error from a prior period is a reported as prior period adjustment to retained earnings.

Question 2

disposal of a component of a business

Answer 2

Once the decision has been made to dispose of a component of a business and that component meets the criteria to be classified as held for sale, the operating results of the component for the period reported on, and any gain or loss from the disposal, should be reported separately from continuing operations, net of tax. In this question, the component was classified as held for sale and was sold in the same year.
Thus, the results of operations, the $300,000 ($500,000-$800,000) loss, are reported as a loss from discontinued operations. The loss on disposal would be reported as part of that loss from discontinued operations also.

Question 3

change in accounting principle

Answer 3

is now presented as a separate category on the retained earnings statement and is not a component of net income.
Change in depreciation method is no longer considered to be a change in accounting principle. A change in depreciation method is now considered to be both a change in method and a change in estimate.

Question 4

IDA

Answer 4

Income from cont operations
Discont operations
Accounting principle change

Question 5

change in entity

Answer 5

Financial statements of all prior periods presented should be restated when there is a “change in entity” such as resulting from:
Changing companies in consolidated financial statements.
Consolidated financial statements vs. Previous individual financial statements.

Question 6

extraordinary items are reported

Answer 6

as a component of net income, after income from continuing operations and discontinued operations. The reporting of gains/losses as extraordinary is prohibited under IFRS

Question 7

exit and disposal activities

Answer 7

Costs to relocate employees
Benefits related to involuntary (not voluntary) employee termination.
Costs to terminate a contract that is not a capital lease

Question 8

criteria for recognizing a liability associated with exit or disposal activities

Answer 8

An entity’s commitment to an exit or disposal plan, by itself, is not enough to result in liability recognition. A liability is only recognized when all of the following criteria are met:
An obligating event has occurred.
The event results in a present obligation to transfer assets or to provide services in the future.
The entity has little or no discretion to avoid the future transfer of assets or providing of services.

Question 9

Comprehensive income

Answer 9

includes all items included in "net income" plus "other comprehensive income" items. Because the $50,000 unusual and infrequent gain is already included in net income, comprehensive income is:
Net Income
$400,000
"PUFE" adjustments:
Foreign currency translation adjustment
100,000
Foreign currency translation adjustment

Question 10

Comprehensive income

Answer 10

is the change in equity of a business during a period from transactions and other events and circumstances from non-owner sources. It includes all changes in equity except those resulting from investments by owners and distributions to owners. SFAC 6 para 70.

Question 11

Other comprehensive income

Answer 11

include changes in the funded status of a pension plan, unrealized gains and losses on available-for-sale securities, foreign currency items and the effective portion of cash flow hedges.

Question 12

The four main components of other comprehensive income include:

Answer 12

Pension changes in funded status: due to gains/losses, prior service costs, and net transition assets or obligations.
Unrealized gains and losses: unrealized holding gains/losses on available for sale securities and unrealized holding gains and losses on debt securities transferred from the held to maturity to available for sale classification.
Foreign currency items, including translation adjustments.
The effective portion of cash flow hedges.

Question 13

OCI GAAP

Answer 13

The four main components of other comprehensive income include:
Pension changes in funded status: due to gains/losses, prior service costs, and net transition assets or obligations.
Unrealized gains and losses: unrealized holding gains/losses on available for sale securities and unrealized holding gains and losses on debt securities transferred from the held to maturity to available for sale classification.
Foreign currency items, including translation adjustments.
The effective portion of cash flow hedges.

Question 14

OCI IFRS

Answer 14

under IFRS, revaluation gains are reported in other comprehensive income.

Question 15

reportable segment

Answer 15

10% minimums (Revenue, P&L or Assets)
report to the CEO
Segment cash flow is not reported under IFRS (or U.S. GAAP).
Segment profit or loss is reported for each reportable segment under IFRS (and U.S. GAAP).
Segment assets are reported for each reportable segment under IFRS (and U.S. GAAP).
Segment liabilities are reported for each reportable segment under IFRS, if such a measure is regularly provided to the chief operating decision maker. Segment liabilities are not reported under U.S. GAAP.

Question 16

impairment

Answer 16

Since the fair value of the component’s assets is less than the carrying value, there has been an impairment of the assets of the component, and the impairment loss is recognized in Year 1, the year in which the component is classified as held for sale

Question 17

change in depreciation method

Answer 17

s no longer considered to be a change in accounting principle. A change in depreciation method is now considered to be both a change in method and a change in estimate. These changes should now be accounted for as a change in estimate and handled prospectively. The new depreciation method should be used as of the beginning of the year of change and should start with the current book value of the underlying asset. No retroactive or retrospective calculations should be made, and no adjustment should be made to retained earnings.

Question 18

“infrequent in occurrence” but not “unusual in nature”

Answer 18

Under U.S. GAAP, a material transaction that is “infrequent in occurrence” but not “unusual in nature” should be presented separately as a component of “income from continuing operations” when the transaction results in a gain or loss.

Question 19

both unusual and infrequent

Answer 19

reported as a separate component of income from continuing operations but on a pretax, not net of tax, basis.

Question 20

change in accounting principle IFRS

Answer 20

the entity must (at a minimum) present three balance sheets (end of current period, end of prior period, and beginning of prior period) and two of each other financial statement (current period and prior period). The cumulative effect adjustment is shown as an adjustment to beginning retained earnings on the balance sheet for the beginning of the prior period, which would be January 1 of the prior year.