Standards and Frameworks Flashcards
SEC standards in the codification
increases usefulness of codification for public companies; does not contain entire population of SEC rules and regulations
Regulation For Accounting IS Emerging
Regulation S-X Financial Reporting Releases (FRR) Accounting Series Releases (ASR) Interpretive Releases (IR) Staff Accounting Bulletins (SAB) EITF Topic D - SEC Staff Observer Comments (EITF - Emerging Issues Task Force)
authoritative literature in the codification
issued by various standard standard setters
“FEDPRIA”
FASB Emerging Issue Task Force Derivative Implementation Group Issues Accounting Principles Board Opinions Accounting Research Bulletins Accounting Interpretations AICPA
private company council (PCC)
created by FAF (Financial Accounting Foundation) to improve standard setting for privately held companies in the US
establish alternatives to US GAAP to make private company F/S more relevant, less complex, cost beneficial
ongoing standard-setting process (FASB)
FASB updates Codification for new US GAAP issued by FASB
ASUs are not authoritative literature but instead provide background information, update the Codification, and describe basis for conclusions on changes in Codification
International Accounting Standards Board (IASB)
part of the IFRS Foundation; purpose is to develop a single set of high quality global accounting standards
International Financial Reporting Interpretations Committee (IFRIC)
sponsored by IFRS Foundation; provides guidance on newly identified financial reporting issues not addressed in the IFRSs and assists IASB in achieving international convergence of accounting standards
International Financial Reporting Standards (IFRS)
issued by IASB; includes IFRSs, IASs, and Interpretations developed by the IFRIC and the former SIC
ongoing standard-setting process (IASB)
publishes discussion paper on a major new topic and then prepares exposure draft which requires approval from at least 9 IASB members to be issued
Conceptual Framework for Financial Reporting
describes basic concepts that underlie the preparation and presentation of F/S for external users; developed by IASB
Conceptual Framework
GAAP vs IFRS
IFRS - should refer and consider application of concepts in the Framework when developing accounting policies in absence of standard or interpretation
GAAP - Framework cannot be applied to specific accounting issues
International Convergence of Accounting Standards
original goal is to provide single set of high-quality, international accounting standards that companies could use for both domestic and cross-border financial reporting
FASB and IASB cooperated for several years to eliminate differences
adoption of IFRS in the US
SEC has not announced how IFRS might be incorporated into US financial reporting but is working to promote higher-quality financial reporting worldwide
Statements of Financial Accounting Concepts (SFACs)
conceptual framework for FASB pronouncements; not GAAP but provides basis for financial accounting concepts
SFAC No. 8, Conceptual Framework for FR - CH 1: Objective of FR
(SFAC No. 1)
disclose entity’s performance; provide financial information about the reporting entity that is useful to primary users in making decisions
meet informational needs of external/primary users about resources/assets, liabilities, efficiency, profitability; presented using accrual basis of accounting
use financial information to assess ability to generate cash flows
SFAC No. 8, Conceptual Framework for FR - CH 3: Qualitative Characteristics of Useful Financial Information
(SFAC No. 2)
fundamental - relevance & faithful representation
enhancing - compare & verify in time to understand
relevance
“passing confirms money” (PCM)
information is relevant if capable of making a difference in making decisions
predictive value
confirming value
materiality
faithful representation
“completely neutral is free from error”
information is useful if it faithfully represents what is reported
completeness
neutrality (free from bias)
freedom from error (does not require accuracy)
steps to apply fundamental qualitative characteristics
1) identify issue/transaction users want to know about
2) what type of info would be relevant
3) determine if information is available and can be faithfully represented
enhancing qualitative characteristics
“compare & verify in time to understand”
comparability verifiability timeliness understandability cost constraint (benefit > cost)
SFAC No. 4, Objectives of FR by Nonbusiness Orgs
outlines characteristics of NBO, describes its users, and its objectives of FR
SFAC No. 5, Recognition and Measurement in F/S
criteria and guidance on what/when info should be incorporated in F/S
full set of F/S
fundamental recognition criteria
measurements attributes for assets and liabilites
fundamental assumptions of US GAAP
full set of financial statements
- B/S (statement of financial position)
- I/S (statement of earnings)
- statement of comprehensive income
- statement of cash flows
- statement of changes in owner’s equity
measurement attributes for assets & liabilities
historical cost (PP&E) current cost (inventory) net realizable value (AR) market value (marketable securities) PV of future cash flows (LT debt - "bonds")
fundamental assumptions
entity going concern monetary unit periodicity historical cost principle revenue recognition principle matching principle accrual accounting full disclosure principle conservatism principle
entity assumption
company is separate entity from owner
going concern assumption
presumed that entity will continue to operate in foreseeable future
monetary unit assumption
everything is measured in money/currency
periodicity assumption
breakdown activity in time periods (years, quarters, etc.)
historical cost principle
most of assets are accounted for based on cost, not market value
revenue recognition principle
revenue recognized earned when it is realized or realizable
realized - already paid
realizable - accrue for revenue (collectible AR)
matching principle
expenses are recorded in period incurred to generate revenue
accrual accounting
record revenue and/or expense without exchange of cash
full disclosure principle
footnotes “completeness”
conservatism principle
DO NOT:
overstate good news - revenues/gains
understate bad news/expenses/losses
fundamental assumptions
GAAP vs IFRS
IFRS only has one fundamental assumption– going concern
SFAC No. 6, Elements of F/S
SFAC No. 3
“REGL ALE needs ID”
comprehensive income - net income plus other comprehensive income
revenues (operating)
expenses (operating)
gains (non-operating)
losses (non-operating)
assets (B/S)
liabilities (B/S)
equity (B/S)
investments by owners (excluded from comprehensive income)
distributions to owners (excluded from comprehensive income)
elements of financial statements
GAAP vs IFRS
IFRS, in addition, outlines capital maintenance adjustments
capital maintenance adjustments are increases/decreases in equity that arise from revaluation/restatement of assets/liabilities
SFAC No. 7 Using Cash Flow Information and PV of Accounting Measurements
provides framework for using future cash flows as a measurement basis for assets and liabilities
- elements of PV asset/liability
- FV objective (obtain estimate of FV)
- PV computations
- additional factors in measuring liability (costs to settle, company’s credit standing)
- changes in estimated cash flows using catch-up approach
elements of PV measurement
“UVOTE”
uncertainty risk
variations in timing of future cash flows
other factors (liquidity issues, market imperfections
time value of money
estimate of future cash flows
traditional approach
PV computations
used when assets/liabilities have scheduled known payments (PV bonds)
expected cash flow approach
PV computations
used when there’s uncertainty in future payments (PV warranties)
adjustments are required for uncertainties
catch-up approach
PV computations
used when there are changes in estimated FCF
adjust carrying amount of asset/liability to PV determined, using revised estimates and discount, using original effective interest rate
