Transcript Financial Accounting and Reporting (FAR):

Financial Accounting & Reporting
Review Course: F1
Angel Chau, AICPA (inactive)
[email protected]
Financial Accounting and
Reporting (FAR)
Intro - 3

This section contains 3 testlets ( 30 MC each , total of 60
points) + 1 testlet (7 Task based simulations, 40 points)
and lasts for 4 hours.

The weights attached to five basic tasks are as follows:
Concepts and principles for financial statements (17%–
23%)
Typical items of financial statements (27%–33%)
Specific types of transactions and events in financial
statements (27%–33%)
Accounting and reporting for governmental units (8%–
12%)
Accounting and reporting for nongovernmental and notfor-profit organizations(8%–12%)
1.
2.
3.
4.
5.
F1 Outline


GAAP history and SFA concepts
Financial Statements Presentation:
1.
2.
3.
4.
5.
6.
7.
8.



Income Statement
Statement of Retained Earnings
Statement of Comprehensive Income
Balance Sheet
Notes to Financial Statements
Interim Financial Reporting
Segment Reporting
Development Stage Enterprises (DES)
Fair Value Measurement & Disclosure
First Time Adoption of IFRS
SEC Filing Requirements
GAAP Setting Bodies & History





1934: Securities and Exchange Commission (SEC)
(the ultimate legal authority to establish US GAAP)
1939 – 1959: Accounting Research Bulletins (ARB)
1959 – 1973: Accounting Principles Board (APB)
1973 : Financial Accounting Standards of Board
(FASB)
Effective 2009/7/1: the FASB Accounting Standards
Codification became the single source of
authoritative nongovernmental US GAAP.
Accounting and financial reporting practices not
included in the Codification are not GAAP.
Authoritative Literature Included in the
Codification (FEDPRIA)
1.
2.
3.
4.
5.
6.
7.
Financial Accounting Standards Board (FASB)
a. Statements of Financial Accounting Standards
b. Interpretations
c. Technical Bulletins
d. Staff Positions
e. Staff Implementation Guides
f. Statement No. 138 Examples
Emerging Issues Task Force (EITF) Abstracts and Topics D
Derivative Implementation Group Issues
Accounting Principles Board Opinions
Accounting Research Bulletins
Accounting Interpretations
American Institute of Certified Public Accountants (AICPA)
a.
Statements of Position
b.
Auditing and Accounting Guides (Incremental accounting
guidance only)
c.
Practice Bulletins
d.
Technical Inquiry Service (for software revenue recognition)
SEC Standards Included in the Codification
Relevant portions of the following pronouncements
issued by SEC are included for reference:
1.
2.
3.
4.
5.
6.

Regulations S-X
Financial Reporting Release (FRR)
Accounting Series Releases (ASR)
Interpretative Releases (IR)
Staff Accounting Bulletins (SAB)
EITF Topic D and SEC Staff Observer Comments
The SEC section of the Codification do not
contain the entire population of SEC rules and
regulations
Ongoing Standard – setting Process




The FASB updates the codification for new GAAP issued by
FASB & for amendments to SEC content with Accounting
Standards Updates.
An Exposure draft is issued for public comments. Staff
analyzes and studies all comment letter and position
papers for the board to redeliberate on the issue. When
Board is satisfied that all reasonable alternative have been
considered, an Accounting Standards Update is issued.
A majority vote of 3 of 5 FASB members is required to
approve an Exposure Draft for issuance and to amend the
ASC.
All new GAAP and SEC amendments are fully integrated
into the existing structure of the Codification
International Accounting
Standards Board (IASB)





Established in 2001 as part of International Accounting
Standards Committee (IASC) Foundation
Purpose of IASB is to develop a single set of high quality,
global accounting standards
Adopts International Accounts Standards (IAS) issued by
IASC
Issues International Financial Reporting Standards (IFRSs)
IASC Foundation also sponsors International Financial
Reporting Interpretations Committee (IFRIC) which
o
provides guidance on newly identified financial reporting issues
not addressed in the IFRSs and assists the IASB in achieving
international convergence of accounting standards
International Convergence of Accounting
Standards



The IASB and the FASB have been working together
towards the international convergence of accounting
standards since 2002 by eliminating differences between
US GAAP and IFRS, target to complete by 2011.
The goal of convergence project is a single set of high
quality, international accounting standards that
companies can use for both domestic and cross border
financial reporting.
SEC supports the IASB/FASB convergence project and
will make a decision regarding the incorporation of IFRSs
(in 2011?). First time US issuer report in that system will
follow within 4-5 years after decision made.
Conceptual Frameworks underlying
Financial Accounting
 The
FASB creates a conceptual
framework (set forth in 6 Statements of
Financial Accounting Concepts or SFAC)
that are not GAAP, but provides basic
reasoning behind US standards.
 The IASB developed a conceptual
framework for IFRS(set forth in the
Framework for the Preparation and
Presentation of Financial Statements)
SFAC No. 1 "Objectives of Financial Reporting
by Business Enterprises“
F1 - 7
Defines the users of accounting information as
1. Present and potential investors and creditors (external users)
2. users with a reasonable understanding of economic and business
situations.

Defines the objectives of financial reporting. (focus on
informational needs of external users)
1. To provide information that is useful in making rational investment
and credit decisions
2. To help users assess the timing and uncertainty of cash flows. (to
value the company how do they generate cash flow)
3. To provide information on economic resources, claims and changes
in them. (to assess risk / required rate of return from FS)

F1 -8
external
SFAC No.2 - Constraints
 US
1.
2.

F1 -8
GAAP
Benefits > Costs
Materiality
IFRS
1.
2.
3.
Timeliness
Balance between benefit and cost
Balance between qualitative
characteristics
Under IASB framework, materiality is a component of relevance
F1 - 9
SFAC No.2: B.U.D
 Benefit
> Cost
 Understandability
 Primary Qualities of Decision Usefulness
Relevance
a.
R&R
Passing Feels Terrific
Make a difference to decision making process
1.
2.
3.
Predictive Value (information has ability to assist
users in evaluating past, present, or future events)
Feedback Value (enables decision makers to
confirm prior expectations or to adjust or correct he
assessment made)
Timeliness (having the information available while it
is able to influence decisions)
Under IASB framework, the subcategories of relevance are
predictive value, feedback value and materiality.
F1 - 9
SFAC No.2: B.U.D
 Primary
b.
Qualities of Decision Usefulness
R&R
Reliability Nobody Relies on Financials unless Verified
1.
2.
3.
Neutrality (information is free from bias and
free from outside influences)
Representational Faithfulness (agreement
between financial reporting and the recourses
or events represented. Information must be
valid. ) Substance over legal form.
Verifiability (same results could be duplicated
with the same measurement techniques)
Under IASB framework, the subcategories of reliability are
neutrality, representational faithfulness, substance over form,
prudence, and completeness.
SFAC No.2: Secondary
Characteristics
1.

Comparability. (Apple vs. Microsoft)
Accounting information that has been
measured and reported in a similar manner for
different enterprises is considered comparable.
Consistency. (Current Yr vs. Prior Yr)
2.

Accounting information is consistent when an
entity applies the same accounting treatment to
similar events from period to period. When applies
new accounting policies, cumulative effect must
be disclosed.
SFAC 7: Using Cash Flow Information &
Present Value in Accounting
Measurements
F1 - 15
 Provides
a framework for accountants
when using future cash flow as a
measurement basis for assets or liabilities.
 e.g. for bonds, the forecasted future cash
flow includes factors such as future
coupon payments, timing of payments,
principle payment at maturity date etc.
Accountants need to consider the risk of
achieving the cash flow, take the
discount rate as the required rate of
return and discount the future value into
present value as basis of measuring the
bond
SFAC 7: Using Cash Flow Information & Present
Value in Accounting Measurements
Five elements of Present Value Measurement (Asset
or Liability)
1.
2.
3.
4.
5.
Estimate of future cash flow (e.g. Estimate
future dividend, future selling price etc.)
Expectations about timing variations of
future cash flows (e.g. term of lease or
bond interest payments)
Time value of money (inflation, losing of
purchasing power)
The price for bearing uncertainty
Other factors (e.g. liquidity risk and
exchange rate risk)
SFAC 7: Using Cash Flow Information &
PV in Accounting Measurements
Traditional Approach
1.


Used when assets and liabilities have contractual
(i.e. fixed) cash flows that are not expected to vary.
Present value bonds – scheduled known payments
Expected Cash Flow Approach
2.


Used in more complex cases, uses only the risk free
rate of return as the discount rate and then turns its
attention to the expected future cash flows,
considering uncertainties (e.g. default risk) as
adjustment to the future cash flows.
PV of warranties – uncertain future payments
(Toyota sells a 5 yrs long car warranty
CPA-0010
According to the FASB SFAC No.2,
neutrality is an ingredient of:
Reliability
A
Yes
B
Yes
C
No
D
No
Relevance
Yes
No
Yes
No
CPA-0010 Answer is B

Relevance : Passing Feels Terrific
 Predictive Value
 Feedback Value
 Timeliness

Reliability: Nobody Relies on Financials unless
Verified
 Neutrality
 Representational Faithfulness
 Verifiability
CPA - 00005
What is the underlying concept
governing the recording of gain
contingencies?
A. Conservatism
B. Relevance
C. Consistency
D. Reliability
CPA – 00005 Explanation
A is correct (detailed explanation after
page F1-78 on the book)
 Gain contingency – defer it until it actually
happens so we don’t overstate asset or
revenue
 Loss contingency – accrue it now so we
don’t understate liability or loss

Uses of the Income Statement
performance for “a
period of time”


The income statement is useful in
determining profitability, value for
investment purposes, and credit
worthiness.
Also useful in predicting information
about future cash flows based on past
performance
Presentation order (IDEA)
Reported on Income Statement
I
Income (or Loss) from Continuing Operations
o
o
D
E
A
Includes operating activities, non-operating activities, and
income taxes
individual line items show gross of tax, then total reported net of
tax
Income (or Loss) from Discontinued Operations (reported net of tax)
Extraordinary Items (reported Net of Tax)
Reported on Statement of Retained Earnings
Cumulative Effect of Change in Accounting Principle
o
o
reported net of tax
is the cumulative effect of a change from one GAAP to another
GAAP because the new method presents the financial
information more fairly than the old method
(Must Remember IDEA)
Get Familiar w/ Multiple Step
Income Stmt Presentation
Review example on F1-19
Get familiar with it
CPA-00031
Scott Corporation sold a fixed asset used for
operations for greater than its carrying amount. Scott
should report the transaction in the income
statement using the:
a. Gross concept, showing the proceeds as part of
revenues and the carrying amount as part of
expenses in the continuing operations section.
b. Net concept, showing the total amount as an
extraordinary item, net of income taxes.
c. Net concept, showing the total gain as part of
discontinued operations, net of income taxes.
d. Net concept, showing the total gain as part of
continuing operations, not net of income taxes.
CPA-0031 Explanation
 Choice
"d" is correct. The transaction
resulted in a gain, which should be
reported using the net concept (i.e.,
proceeds less carrying amount). This gain
resulted in the recognition of an asset not
in the ordinary course of business, but it
did not qualify as an extraordinary item or
as part of discontinued operations.
 Choices "a", "b", and "c" are incorrect, per
the above explanation.
CPA-00052
Which of the following should be included in
general and administrative expenses?
Interest
a. Yes
b. Yes
c.
No
d. No
Advertising
Yes
No
Yes
No
CPA-00052 Explanation
 Choice
"d" is correct. Interest expense is
classified as a separate line item on the
income statement. Advertising is classified
as a selling expense.
 G&A expenses: Officers, Accountants,
Legal, Insurance, Property Tax.
Introduction to Discontinued Operations
 Discontinued
operations are reported
separately from continuing operations in
the income statement according to the
IDEA mnemonic, net of tax.
 The (normal) loss from discontinued
operations can consist of an impairment
loss (net realizable value –carrying value),
a gain/loss from actual operations, and a
gain/loss on disposal.
Definitions of A Component of an Entity
A.
Component of an Entity – a part of entity for which
operations and cash flows can be clearly distinguished,
both operationally and for financial reporting purposes,
from the rest of entity
1.
U.S. GAAP
a.
An operating segment
b.
A reportable segment
c.
A reporting unit
d.
A subsidiary
e.
An asset group
IFRS
2.
a.
b.
A separate major line of business or geographical
area of operations
A subsidiary acquired exclusively with a view to
resale
Definitions of Discontinued
Operations
Held for Sale - in the period in which ALL of the
following criteria are met:
B.
1.
2.
3.
4.
5.
6.
Management commits to a plan to sell the
component
The component is available for immediate sale in its
present condition
An active program to locate a buyer has been
initiated
The sale of the component is probable and the sale is
expected to be complete within one year
The sale is being actively marketed
Actions required to complete the sale make it unlikely
that significant changes to the plan will be made or
that the plan will be withdrawn
U.S. GAAP vs. IFRS


IFRS: before a component can be classified as
held for sale, the individual assets and liabilities of
the component must be measured in accordance
with applicable standards and any resulting gains
and losses must be recognized. After classification
as held for sale, the component is reported at the
lower of carrying value and fair value less cost to
sell.
U.S. GAAP: does not require the measurement of
individual assets & liabilities before classification as
held for sale, but the classification of a
component as held for sale does trigger an
impairment analysis of the component.
Discontinued Operations: Accounting Rules
A.
Types of Entities to be considered
discontinued operations:
A.
B.
B.
Has been disposed of, or
Is classified as held for sale
Conditions that both must be present
A.
B.
Eliminated from ongoing operations – the
operations and cash flows of the component
have been or will be eliminated from the on
going operation of the entity as a result of the
disposal
No Significant continuing involvement – the
entity will not have any significant continuing
involvement in the operations of the
component after the disposal
Discontinued Operations: Accounting Rules
Discontinued Operations Calculation
1.
Types of items included in results of discontinued
operations
Results of operations of the component
Gain or loss on disposal of the component
Impairment loss (and subsequent increases in fair
value) of the component
a.
b.
c.
1)
2)
2.
3.
Initial and subsequent impairment losses are recognized
Subsequent increases in fair value results in a gain on
I/S (subsequent increase in FV minus cost to sell) and is
recognized no more than previously recognized
cumulative loss; excess goes to OCI
Report in the Period disposed or held for sale
Stop Depreciation and Amortization
Calculation Example
F1
– 23
Understand this
example, you are good
with discontinued
operations
Accrue liability related to Exit or Disposal Activities

New – U.S. GAAP. requires recognition of a liability for the
costs in association with exit or disposal activities
Exit and disposal costs include:
A.
1.
2.
3.
Involuntary employee termination benefits
Costs to terminate a contract
Other costs associated with exit or disposal activities, including
costs to consolidate facilities or relocate employees
Criteria for liability recognition - commitment to exit by itself
is not enough, all followed must be met:
B.
An obligating event has occurred
2.
The event results in a present obligation to transfer assets
(payment) or to provide services in the future, and
3.
The entity has little or no discretion to avoid the future transfer of
assets or proving of services
Future operating losses expected to be incurred as part of an exit or
disposal activity are recognized in the periods incurred.
1.
Exit or Disposal Activities
C.
D.
E.
Liability Measurement - should be at fair value which
should be determined using the US GAAP fair value
measurement techniques discussed later. The liability
may be adjusted in future periods as a result of revisions
to the timing of or estimated cash flows from the exit or
disposal activity. Revisions are accounted for
prospectively (change in estimate)
Income Statement Presentation – costs associated with
exit or disposal activity related to Discontinued
Operation in D; costs not related to Discontinued
Operation in I.
Disclosure – in the notes to the FS in the period the exit
or disposal activity is initiated and all subsequent
periods until the activity is completed
TBS-00010 (7 Task based simulation)
The board of directors of Super Conglomerate, Inc. voted to
dispose of its Tiny Co. subsidiary on Oct 31, Yr 8. On that date, the
net book value of the subsidiary was $15M, but Super believes it
could not sell for more than $12.5M. No buyer had been found as
of Dec 31 Yr 8, but the company was committed to the plan to sell
and was actively looking for a buyer. On May 1 Yr 9, the sale was
completed for $13M.
The subsidiary’s operating results for Yr 8 & Yr 9 were:
1/1/Yr8 – 10/31/Yr8
$5M
11/1/Yr8 – 12/31/Yr8
$1.5M
1/1/Yr9 – 4/30/Yr9
$2.25M
Super’s tax rate is 30%
How Should the disposal of Tiny Co. be reported on Super’s Yr 8
FS?
TBS – 00010 Answer
Loss from Discontinued operations – Yr 8
Answer
Impairment loss
(2,500,000)
Operating loss
(6,500,000)
Gain/loss on disposal
Loss from discontinued operations, before tax (9,000,000)
Tax benefit
2,700,000
Loss from discontinued operations, net of tax
(6,300,000)
Extraordinary Item
Under U.S. GAAP:
1.Material
2.Unusual
3.And
(significantly different from the typical business)
Infrequent (not expected to recur in the foreseeable future)
4.Not
normally considered in evaluating the ordinary operating results of
an entity
Examples of extraordinary item:
1.The
abandonment of or damage to a plant due to an unusual and
infrequent natural disaster
2.An
3.A
expropriation of a plant by the government
prohibition of a product line by a newly enacted law or regulation
4.Certain
gains or losses from early retirement of long term debt only if which
meet the criteria of unusual and infrequent and if so will be stated in CPA
exam question
Non-extraordinary items

Examples:
1.
2.
3.
4.
5.

Gain or loss from disposal of PPE used in the business
Large write down or write off of : receivable, inventory,
intangible, long term security
Gain or loss from foreign currency transactions or
translation
Loss from major labor strike
Long term debt early retirement that is NOT both unusual
& infrequent
Material unusual OR infrequent items are presented as
a separate line item (non-operating) in Income from
Continued Operations. The nature and financial effects
should be disclosed on the face of Income Statement
or in the footnotes.
IFRS prohibits the reporting of extraordinary item on the Income
Statement or in notes to the FS.
CPA-00050
CPA-00050 Explanation
Choice "a" is correct.
Raim - component of income from continuing
operations. Because Raim sustains flood losses every
two to three years, the flood losses are not
"infrequent." Thus, the flood loss is not an
"extraordinary item." (U or I)
Cane - as an extraordinary item. Here, the flood losses
are infrequent because Cane never before (in the
last 20 years) had flood losses. Furthermore, the flood
losses are unusual in nature in that they are unrelated
to the ordinary and typical activities of the company.
(U & I, Net of Tax)
Choices "b", "c", and "d" are incorrect, per rules above.
CPA-00098
Midway Co. had the following transactions during 1992:
1.
$1,200,000 pretax loss on foreign currency exchange due to a
major unexpected devaluation by the foreign government.
2.
$500,000 pretax loss from discontinued operations of a division.
3.
$800,000 pretax loss on equipment damaged by a hurricane.
This was the first hurricane ever to strike in Midway's area.
Midway also received $1,000,000 from its insurance company
to replace a building, with a carrying value of $300,000 that
had been destroyed by the hurricane.
What amount should Midway report in its 1992 income statement as
extraordinary loss before income taxes?
a. $100,000
b. $1,300,000
c. $1,800,000
d. $2,500,000
CPA-00098 Explanation

Choice "a" is correct. Foreign currency devaluations and losses from
discontinued operations are not extraordinary items. The hurricane is
an extraordinary item and the loss, net of insurance, is $100,000.

Choice "b" is incorrect. The loss from devaluation is not considered to
be extraordinary.

Choice "c" is incorrect. The hurricane loss is as follows:
Equipment loss
$ 800,000
Building loss
300,000
Insurance proceeds (1,000,000)
Hurricane loss
$ 100,000

Choice "d" is incorrect. Foreign currency devaluations and losses
from discontinued operations are not extraordinary items.
Cumulative Effect of Accounting Changes
and Error Corrections: IDEA
Accounting Changes :
1. Changes in accounting estimates -Prospective
2. Changes in accounting principles retrospective
3. Changes in accounting entity –
retrospective
Error corrections are not accounting changes.
Therefore it’s separately presented as Prior
Period Adjustments
Changes in Accounting Estimate
Not an error – do not restate prior
periods; prospective approach
A change in accounting estimate occurs when it is
determined that the estimate previously used by the company
is incorrect.
A.
1.
2.
3.
4.
5.
6.
Events Resulting in Estimate Changes
Changes in the lives of fixed assets
Adjustments of year-end accrual of officer’s salaries and/or
bonus
Write downs of obsolete inventory
Material non-recurring IRS adjustments
Settlement of litigation
Changes in accounting principle that are inseparable from a
change in estimate (e.g. change to LIFO, change in
depreciation method)
All 6 above affects current & future I (income from continuing
operations)
B. If a change in accounting estimate affects several future periods,
(e.g. as in above example), the effect on “income before
extraordinary items”, net income, and the related per share
information for the current year should be disclosed in the notes to
the FS.
C. Changes in ordinary accounting estimates (e.g. uncollectible,
inventory adjustments, % of sales, aging) does not have to be
disclosed unless Material
CPA-00081
For 1991, Pac Co. estimated its two-year equipment
warranty costs based on $100 per unit sold in 1991.
Experience during 1992 indicated that the estimate
should have been based on $110 per unit. The effect of
this $10 difference from the estimate is reported:
a. In 1992 income from continuing operations.
b. As an accounting change, net of tax, below 1992
income from continuing operations.
c. As an accounting change requiring 1991 financial
statements to be restated.
d. As a correction of an error requiring 1991 financial
statements to be restated.
CPA-00081 - Explanation
Choice "a" is correct. The effect of the new estimate of warranty costs
(from $100 to $110) is a change in estimate and will be reported in 1992
"income from continuing operations."
Rule: Changes in estimates affect only the current and subsequent
periods (not "prior periods," not "retained earnings").
Choice "b" is incorrect. An accounting change of "principle" is shown
net of tax on the retained earnings statement.
Choice "c" is incorrect. Restating prior years financial statements is only
required when comparative financial statements are shown for prior
period adjustments of subsequently discovered "corrections of errors",
changes in entity or changes in accounting principle.
Choice "d" is incorrect. The facts stating a new estimate of warranty
costs indicate a "change of estimate," not a "correction of an error."
Changes in Accounting Principle (GR:
Retrospective)
Reporting Changes in an Accounting Principle
Changes in accounting principle should be
recognized by adjusting beg. R/E in the earliest
period presented for the cumulative effect of the
change, and, if prior period FS are presented, they
should be restated.
Exception in the General Rule: Handle
prospectively
A) Impracticable to estimate – To LIFO,
impractical to reestablish and recalculate old
inventory layers
B) Change in depreciation method is both a
change in Accounting principle and change in
Accounting estimate
Under IFRS, when it is impracticable to determine the cumulative effect of an error the entity is
required to restate the information prospectively from the earliest dale that is practicable. US
GAPP does not have an impracticality exemption for error corrections.
F1 - 34
CPA-00071
Which of the following statements is correct regarding accounting
changes that result in financial statements that are, in effect, the
statements of a different reporting entity?
a. Cumulative-effect adjustments should be reported as separate items
on the income statement in the year of change.
b. No restatements or adjustments are required if the changes involve
consolidated methods of accounting for subsidiaries.
c. No restatements or adjustments are required if the changes involve
the cost or equity methods of accounting for investments.
d. The financial statements of all prior periods presented should be
restated.
CPA-00071 - Explanation
Choice "d" is correct. Financial statements of all prior periods presented
should be restated when there is a "change in entity" such as resulting
from:
1. Changing companies in consolidated financial statements.
2. Consolidated financial statements vs. Previous individual financial
statements.
Choice "a" is incorrect. Cumulative-effect adjustments are reported in
the retained earnings statement in the year of change.
Choice "b" is incorrect. Restatements are required for changes in entity
(of subsidiaries).
Choice "c" is incorrect. Restatements are required for changes of GAAP
involving the cost or equity methods of accounting for investments.
Comprehensive Income
(Non – Owner Transactions)
PURER bypass I/S and R/E, directly goes to Equity
PUFE
Rescue
PUFE Rescue you from the Comprehensive Income questions.
Comprehensive income should not
be reported on a per share basis
Balance Sheet Presentation
Review F1 - 40
 Classified
BS distinguishes current vs. noncurrent items.
 Note for Stockholder’s Equity section



Contributed Capital: Capital Stock, PIC in
excess of PAR
Internally generated : Retained Earning,
Accumulated Other comprehensive Income
Contra Equity: Treasury Stock
F1 – 41 / 42
CPA-00103
Which of the following information should be
disclosed in the summary of significant accounting
policies?
a. Refinancing of debt subsequent to the
balance sheet date.
b. Guarantees of indebtedness of others.
c. Criteria for determining which investments
are treated as cash equivalents.
d. Adequacy of pension plan assets relative to
vested benefits.
CPA-00103 – C is correct
Interim Financial Reporting
1.
2.
3.
4.
5.
6.
7.
Not required under US GAAP or IFRS
In US, SEC requires quarterly FR
GAAP in Interim Reports = GAAP in most
recent annual report : consistency of
applying accounting principles
Matching Rev & Exp by quarter
In US, IFR emphasizes on Timeliness over
Reliability (unaudited)
IFR is an integral part of annual report and
clearly marked as “unaudited”
US GAAP does not establish presentation
minimums for IFR, IFRS does. (see F1 – 47)
Income Taxes on IFR
1.
2.
Take YTD cumulative income X best
estimate of effective tax rate at the end
of that period
Then subtract the result from the
provision included in previous quarter to
avoid double counting
CPA-00107
For interim financial reporting, a company's income tax
provision for the second quarter of 1992 should be
determined using the:
a. Effective tax rate expected to be applicable for the
full year of 1992 as estimated at the end of the first
quarter of 1992.
b. Effective tax rate expected to be applicable for the
full year of 1992 as estimated at the end of the second
quarter of 1992.
c. Effective tax rate expected to be applicable for the
second quarter of 1992.
d. Statutory tax rate for 1992.
CPA-00107 Explanation
Choice "b" is correct.
The best, most current estimate of the annual
effective tax rate should be used to determine
the income tax provision for the second quarter.
This rate is the effective tax rate expected to be
applicable for the full year of 1992 as estimated
at the end of the second quarter of 1992.
APB 28 para. 19
Required disclosure for
all public companies
under both GAAP & IFRS
Segment Reporting

Required disclosure for all public companies:
Operating Segments (annual & interim)

Products and services

Geographic areas
Benefit > Cost; provides
best relevant information

Major product lines
to users

Use same accounting principles as in Main
FS

E.g. cannot use LIFO in segment reporting, but
uses FIFO in main reports



Intercompany transactions are NOT eliminated
Scope :

segment reporting applies to Public Companies
ONLY
What’s not an operating
segment?
1.
2.
Corporate Headquarters or certain
functional departments that do not earn
revenue (Accounting, Facilities, Legal,
etc.)
Pension Plans & Other post-retirement
benefit plans
Reportable Segment
Material tests for reportable segments
 10%
1.
2.
3.

Combined Revenue (internal + external)
Profit or loss
Asset
75% reporting sufficiency test



materiality test (must only meet one):
Must break down 75% of the entire consolidated
revenue by operating segments. Irrelevant of the
10% thresholds.
The max no of reportable segments is 10.
Any other segments that do not meet the 2
tests above, lump together and disclose in an
“all other segments” category.
Segment Profit or Loss Defined
1.
Formula:
Revenue
for that segment – internal & external
Less: Directly traceable costs
direct salary, direct rent, etc
Less: Allocated Costs
by CFO
-------------------------------------Operating Profit or Loss (EBIT)
for that segment;
Users can better understand the individual
segment’s performance, and analyze for future
scenarios, e.g. how does the allocated costs
impact the rest of the entity if this segment
discontinues.
Unallocated
General Revenues /
Expenses
CPA-00127
CPA-00127 Answer
DSE issues the FS in conformity w/
US GAAP, review F1 – 57 for
disclosure requirements
Start ups devotes most of its resources into R&D. There is no
guarantee that it will be successful. Take the conservative
approach and recognize all cost into expenses.
Fair Value Measurements and Disclosures
About FV







FAS 157 defines fair value as the price received to sell an
asset or the price paid to transfer a liability in a
transaction taking place in an active market. This is
sometimes referred to as "exit value".
FV does not include transaction cost but may include
transportation cost.
FV assumes the highest and best use of an asset.
Orderly transaction- Not a fire sale
Market participants (buyer & sellers) are independent ( nonrelated parties)
Principle market is the one with greatest volume
Most Advantageous Market


use if no principal market exist
MAM is the one w/ best price for assets/liabilities after considering
transaction costs (which is not included in FV measurement but only
help locate MAM)
Fair Value Determination
FV measurement framework
This framework outlines
A. 3 Valuation Techniques to measure FV of
asset / liability
1.
2.
3.
B.
Market Approach – identical & comparable
asset /liability transactions in the market
Income Approach – discount future earnings
into present value, e.g. rental real estate
Cost Approach – uses current replacement
cost
Hierarchy of inputs to be used in the
valuation techniques
Level 1 input
Most Reliable
Level 1 Inputs are quoted prices in active markets for
identical assets or liabilities that the entity has access
to on the measurement date.
Active market characteristics: high trading volume,
small bid/ask spread, highly liquid.
 An example would be a stock trade on the New
York Stock Exchange; price for a barrel of oil in the
market, etc.
 Information at this level is based on direct
observations of transactions involving the identical
assets or liabilities being valued, not assumptions, and
thus offers superior reliability.
 To use this level, the entity must have access to an
active market for the item being valued.
Level 2 Input
Less Reliable
Level 2 inputs are based on market observables.
FASB acknowledged that active markets for identical assets
and liabilities are relatively uncommon and, even when they
do exist, they may be too thin to provide reliable information.
To deal with this shortage of direct data, the board provided
a second level of inputs that includes :

Quoted prices for similar assets or liabilities in active
markets (e.g. no 3-bedroom houses are identical, but
similar within the neighborhood)

Quoted prices for identical or similar assets in markets that
are not active

Observable data other than quoted prices such as
earnings, cash flow, interest rate, etc.
Level 3 Input
Least reliable
 Level 3 inputs are unobservable inputs for the
asset or liability. It reflects management’s
estimates.
 Level 3 inputs should be used only when
observable (Level 1 & 2) inputs are
unavailable or when undue cost and effort is
required to obtain observable inputs.
FV MC 1
FV MC 1 Answer
FV MC 2
FV MC 2 Answer
FV MC 3
FV MC 3 Answer
FV MC 4
FV MC 4 Answer
FM MC 5
FV MC 5 Answer
First Time Adoption of IFRS


An entity’s first IFRS FS are the first annual FS in which the
entity adopts IFRS and makes an explicitly and unreserved
statement in those FS of compliance w/ IFRS.
An entity’s first IFRS FS must include
 B/S – 3 (beg. of prior period, end of prior period, end of
current period; e.g.: 1/1/10, 12/31/10, 12/31/11)
 All others – 2 (2 Statements of comprehensive income, 2
Income statements(if using 2 stmt approach for
comprehensive income, 2 Statements of cash flows, 2
Statements of changes in equity)
 IFRS must be consistently applied from beginning and
throughout the reporting period for these statements
First Time Adoption of IFRS
 Date
of transition to IFRS = date of
opening BS presented.
 E.g. First IFRS annual report is for
12/31/2011, then date of transition is
1/1/2010 (or equivalently 12/31/2009)
Explanation of transitions to IFRS
 An
entity should disclose how the transition from
previous GAAP to IFRS affected its reported
financial positions, financial performances, and
cash flows.
 The disclosure includes:
a.
b.
c.

A reconciliation of equity change from GAAP to IFRS
A reconciliation of total comprehensive income from
GAAP to IFRS
Disclosures related to the recognition or reversal of
impairment losses
Similar reconciliation are required for any interim
financial report for part of a period covered by the
first IFRS FS.
First Adoption of IFRS MC 1
FAIFRS MC 1 Answer
First Adoption of IFRS MC 2
FAIFRS MC 2 Answer
First Adoption of IFRS MC 3
FAIFRS MC 3 Answer
First Adoption of IFRS MC 4
FAIFRS MC 4 Answer
SEC filing requirements
(public issuer and large private held)
Securities offering Registration statement for IPO or new offerings
1.
Disclosures about the securities being offered for sale
2.
The relationship of the new securities to the company’s other securities
3.
Information similar to that filed in the annual filing
4.
Audited financial statements
5.
A description of business risk factors
Form 10K – annual report

due 90 /75/60 days after end of fiscal year

Required for US registered companies
Form 10Q – quarterly report

Due 45/40 days after end of fiscal quarter

Unaudited FS (timeliness over reliability)
Form 11K – annual report of employee’s defined benefit plan(s)

401K; Employee Stock Purchase plan
SEC filing requirements
Form 20F – annual report by foreign private issuers
Form 40F – annual report by specific Canadian companies
registered with SEC
Form 6K – semi-annual report by foreign private issuers, similar
to 10Q
Form 8K – report major corporate events such as asset
acquisitions or disposals, changes in securities and trading
markets, changes to accountants or financial statements, and
change in corporate governance or management
Form 3, 4, &5 – filed by directors, officers, or beneficial owners
of more than 10% of a class of equity securities of a issuer
Regulation S-X
In Regulation S-X, the SEC sets forth the form and content
of and requirements for interim and annual FS to be filed
w/ the SEC. The key provisions are below:
A.
Requirements for Interim Financial Statements
Interim FS filed w/ SEC must be reviewed by an
independent CPA and the review report must be filed
w/ the FS
The interim FS should include
1.
2.
1.
2.
3.
BS (@ end of most recent quarter and @end of preceding
fiscal year)
Income Statement(most recent fiscal quarter, YTD, and
corresponding periods for the preceding fiscal year)
Statements of cash flows(From end of previous year to
end of most recent quarter, and corresponding periods for
the preceding fiscal year)
Regulation S-X
Requirements for Annual FS
B.
1.
2.
Annual FS must be audited by CPA and audit report
must be filed along.
The audited FS must include BS for 2 most recent
fiscal years and Statements of Income, Change in
owner’s Equity, and Cash Flow for each of the 3
fiscal years preceding the date of the most recent
audited BS. (the exact opposite to IFRS
requirements BS- 3, others – 2)
Supplemental Questions
Task Based Simulation
Solution