FAR - Financial Statement Disclosure
For an operating segment to be reportable, it must meet one or more of the following quantitative thresholds: revenue >= 10% of combined revenues profit >= 10% of combined profit; absolute $, no loss reported assets >= 10% of combined assets
(1) Reported revenue is at least 10% of the combined revenue of all operating segments; (2) reported profit or loss is at least 10% of the greater (in absolute amount) of the combined reported profit of all operating segments that did not incur a loss, or the combined reported loss of all operating segments that did report a loss; or (3) its assets are at least 10% of the combined assets of all operating segments.
Disclosure of significant accounting policies is required when:
(1) a selection has been made from existing acceptable alternatives; (2) a policy is unique to the industry in which the entity operates, even if the policy is predominantly followed in that industry; and (3) GAAP have been applied in an unusual or innovative way.
An operating segment:
(1) engages in business activities from which it may earn revenues or incur expenses, (2) has operating results that are regularly reviewed by the entity's chief operating decision maker, and (3) has discrete financial information is available.
Exceptions to disclosure credit risk for FI
(1) instruments of pension plans, (2) certain insurance contracts, (3) warranty obligations and rights, and (4) unconditional purchase obligations
Which information is required to be disclosed in the notes to the financial statements?
- nature of operations, - use of estimates, and - concentrations is required to be disclosed at the balance sheet date.
When disclosure of fair value for fin instruments is optional:
- the entity is nonpublic, - has total assets of less than $100 million, and - has not held or issued any derivative financial instruments, other than loan commitments, during the reporting period.
If it is not practicable for an entity to estimate the fair value of a financial instrument, which of the following should be disclosed?
1. Information pertinent to estimating the fair value of the financial instrument :carrying amount; effective interest rate, maturity 2. The reasons that estimating fair value is not feasible
Which of the following material events occurring after the December 31, Year 6, end of the reporting period does ordinarily result in adjustment of the financial statements before they are issued on February 28, Year 7?
1. The bankruptcy of a customer is an example of an adjusting event after the reporting period. It confirms the existence of an impairment loss at year end. 2. The entity should adjust for stock splits occurring before the statements are authorized for issue. 3. The litigation was pending at year end, and its settlement before the statements are authorized for issue is an adjusting event after the reporting period.
Whether recognized or unrecognized in an entity's financial statements, disclosure of the fair values of the entity's financial instruments is required when
1. it's practicable to estimate the FV 2. aggregated FV are material
Disclosure of significant account policies
1. selection from existing acceptable alternatives 2. GAAP applied in an unusual way 3. Policies unique to the industry
On March 15, Year 4, Krol Company paid property taxes of $180,000 on its factory building for the Year 4 calendar year. On April 1, Year 4, Krol made $300,000 in unanticipated repairs to its plant equipment. The repairs will benefit operations for the remainder of the calendar year. What total amount of these expenses should be included in Krol's quarterly income statement for the 3 months ended June 30, Year 4?
150k/4=45k 300k/3=100k
On April 1, Year 2, the company paid $90,000 in property taxes on its headquarters building for the current calendar year.
22500
On March 31, Year 3, the company recognized a $40,000 write-down due to market decline in inventory. During the third quarter, the inventory's market value unexpectedly increased by $46,000. The company accounts for its inventory using the LIFO method.
40k gain as we had an initial 40k loss the company recognized in the third quarter a gain of $40,000 as a result of the reversal of the previous inventory write-down.
On January 16, Tree Co. paid $60,000 in property taxes on its factory for the current calendar year. On April 2, Tree paid $240,000 for unanticipated major repairs to its factory equipment. The repairs will benefit operations for the remainder of the calendar year. What amount of these expenses should Tree include in its third quarter interim financial statements for the 3 months ended September 30?
60k is for the entire year so 60k/4 = 15k 240k is in quarter 2 and the repairs are for the remainder year thus 240k/3 = 80k
On December 1, Year 5, Luge was awarded damages of $75,000 in a patent infringement suit it brought against a competitor. The defendant did not appeal the verdict, and payment was received in January Year 6.
Accrual only. The payment received subsequent to the balance sheet date should be accrued in Year 5 because it applies to a lawsuit won in Year 5. The amount is not a contingent gain given that the defendant did not appeal. If the defendant had appealed, disclosure, but not accrual, would be necessary.
Which of the following material events occurring subsequent to the December 31, Year 1, balance-sheet date do not ordinarily result in recognition in the financial statements before they are issued on March 2, Year 2?
Acquisition of a subsidiary on January 23, Year 2. Negotiations had begun in December of Year 1.
The Tax Court ruled in favor of the entity on October 25, Year 5. Litigation involved deductions claimed on the Year 1 and Year 2 tax returns. The entity had provided in accrued taxes payable for the full amount of the potential disallowances. The Internal Revenue Service will not appeal the Tax Court's ruling. How should this event be presented in the financial statements?
Adjustment of the financial statements for the year ended September 30, Year 5.
The bankruptcy liquidation of Pop Products, a long-time customer of Crackle Co., was approved on February 15, Year 2. According to the bankruptcy documents, Crackle will receive only $10,000 of the $50,000 owed by Pop on an account receivable. No payments or purchases on this account have been made since December 31, Year 1. Crackle correctly uses the allowance method of accounting for uncollectible receivables. Prepare the journal entry to reflect this transaction on Crackle Co.'s books as of December 31, Year 1
Allowance for doubtful accounts $40,000 Accounts receivable - Pop Products $40,000 This recognized subsequent event must be reflected in the financial statements. The balance at December 31, Year 1, was $50,000. However, because Crackle will receive only $10,000, it must write off $40,000.
Where in its financial statements should a company disclose information about its concentration of credit risks?
An entity must disclose significant concentrations of risk arising from most instruments. These disclosures should be made in the basic financial statements, either in the body of the statements or in the notes
Nancarrow Corp. released its financial statements for the year ended December 31, Year 7, on March 15, Year 8. On February 1, Year 8, Nancarrow settled a long-standing lawsuit that resulted in a material loss. No liability for this circumstance had been accrued in the financial statements. How should this event be disclosed or recognized? The event must be recognized in the financial statements
An entity recognizes in the financial statements adjusting events occurring after the end of the reporting period but before the statements are authorized for issue. These events provide evidence about conditions existing at the end of the reporting period.
Based on the revenue criterion only, segments is (are) reportable?
An operating segment of a business is considered reportable if its reported revenue, including sales to external customers and intersegment sales or transfers, is at least 10% of the combined revenue of all operating segments.
Zero Corp. suffered a loss that would have a material effect on its financial statements on an uncollectible trade account receivable due to a customer's bankruptcy. This occurred suddenly due to a natural disaster 10 days after Zero's balance sheet date but 1 month before the issuance of the financial statements. Under these circumstances,
At the date of the FS the conditions did not existed thus we just need to disclosure them and not change the FS
A company should use its prior-year actual annual tax rate to determine taxes for each interim period.
At the end of each interim period, the company should make its best estimate of the effective tax rate expected to be applicable for the full fiscal year. The rate so determined should be used in providing for income taxes on a current year-to-date basis.
Subsequent events for reporting purposes are defined as events that occur subsequent to the
Balance sheet date but before the issuance (or availability for issuance) of the financial statements.
The following should be disclosed in a summary of significant accounting policies:
Basis of profit recognition on long term contracts Basis of consolidation Depreciation methods Amortization of intangibles Inventory pricing Recognition of revenue from leasing and franchising operations items that can be cash equivalents
Disclosure of accounting policies is an integral part of the financial statements.
Businesses and not-for-profit entities should disclose all significant accounting policies as an integral part of the financial statements. A summary of accounting policies preferably should be included in a separate section preceding the notes or in the initial note.
Disclosure the fair value of financial instruments
Certain entities must disclose the fair value of financial instruments, whether or not they are recognized in the balance sheet, if estimation is feasible. If it is not, descriptive information relevant to estimation of the fair values should be provided.
Vilo Corp. has estimated that total depreciation expense for the year ending December 31 will amount to $60,000, and that year-end bonuses to employees will total $120,000. In Vilo's interim income statement for the 6 months ended June 30, what is the total amount of expense relating to these two items that should be reported?
Costs and expenses other than product costs should be either charged to income in interim periods as incurred or allocated among interim periods based on the benefits received. The depreciation and the bonuses to employees clearly provide benefits throughout the year, and they should be allocated ratably to all interim periods. In the interim income statement for the 6 months ended June 30, the total amount of expense that should be recorded is $90,000 [($180,000 ÷ 12 months) × 6 months].
The summary of significant accounting policies should disclose the
Criteria for determining which investments are treated as cash equivalents.
A loss from a market price decline on inventory accounted for under the LIFO method occurred in the first quarter. The loss was not expected to be restored in the fiscal year. However, in the third quarter the inventory had a market price recovery that exceeded the market decline that occurred in the first quarter. For interim financial reporting, the dollar amount of net inventory should
Decrease in the first quarter by the amount of the market price decline and increase in the third quarter by the amount of decrease in the first quarter. market price decline if is not expected to be restore => is recog in interim FS
A large account receivable from Taylor Industries was considered fully collectible at September 30, Year 5, the balance sheet date. Taylor suffered a plant explosion on October 25, Year 5. Because Taylor was uninsured, it is unlikely that the account will be paid. How should this event be presented in the entity's financial statements?
Disclosure in a note to the financial statements.
On January 5, Year 6, Luge redeemed its outstanding bonds and issued new bonds with a lower rate of interest. The reacquisition price was in excess of the carrying amount of the bonds.
Disclosure only. No accrual is necessary because the refunding did not affect balance sheet amounts at 12/31/Year 5. However, disclosure is most likely necessary to prevent the financial statements from being misleading. The statements for Year 5 must present the extinguishment loss with full disclosure.
Disclosures should be made at the balance sheet date about certain items that could significantly affect a reported amount within 1 year of the balance sheet. True.
Disclosures should be made at the balance sheet date about certain items that could significantly affect a reported amount in the near term, that is, within 1 year of the balance sheet date.
list of examples of significant accounting policies that they should include in the disclosures. Which section of the authoritative guidance lists examples of these items?
FASB ASC 235-10-50-4
Subsequent events providing evidence about conditions existing at the balance sheet date should be disclosed in the notes rather than recognized in the financial statements.
False; should be recognized in FS
Farr Corp. had the following transactions during the quarter ended March 31: Loss on disposal of equipment $ 70,000 Payment of fire insurance premium for calendar year 100,000 What amounts should be included in Farr's income statement for the quarter ended March 31?
Gains and losses that arise in an interim period that are similar to gains and losses that would not be deferred at year end should not be deferred to later interim periods within the same fiscal year. Costs other than product costs, such as a fire insurance premium, that will clearly benefit two or more interim periods should be allocated among the interim periods based on estimates of the time expired, the benefit received, or the activity associated with each period.
Financial instruments
Historical cost is an appropriate measurement attribute for property, plant, and equipment, which often remain in an entity's possession for years, but not for financial instruments, which are constantly turning over. The FASB thus requires all entities to either report on the face of the balance sheet or disclose in the notes the fair values of all financial instruments. Current GAAP are found in FASB ASC 825.
Must be disclosed:
If 10% or more of revenues is derived from one external customer, (1) that fact, (2) the amount from each such customer, and (3) the segment(s) reporting the revenues must be disclosed.
A company that issues quarterly financial statements incurs a material unusual loss in one of the first three quarters. In which of the following ways would the company report this loss?
In the quarter the loss happened - Unusual or infrequently occurring items are recognized in net income in the interim period in which they occur. Note disclosure alone is not sufficient. - Unusual or infrequently occurring items should be separately disclosed, included in interim-period net income, and not prorated over the year.
Snap Staging, Inc., used the following information while preparing its quarterly income statements for the current year: 1 $25,000 35% 2 20,000 35% 3 15,000 30% What is the journal entry to record income tax expense in Quarter 3?
Income tax expense $2,250 Income tax payable $2,250 Income tax for the first and second quarters was $15,750 [($25,000 + $20,000) × 35%]. Income tax for the first three quarters is $18,000 [($25,000 + $20,000 + 15,000) × 30%]. The difference of $2,250 ($18,000 - $15,750) is the third quarter income tax expense.
Information about a major customer
Information about a major external customer must be disclosed if sales to that customer are 10% or more of total revenue. However, no percentage threshold is established for practicable disclosures of geographic information. Instead, an entity must disclose revenues attributable to all foreign countries in total. Separate disclosure of revenues from external customers attributed to a single foreign country is also required if those revenues are material. These disclosures are intended to provide information about reliance on particular markets or customers.
Not a must, but can be disclosed
Information about products and services and geographical areas is reported if it is feasible to do so.
A corporation issues quarterly interim financial statements and uses the lower of cost or market method to measure its LIFO inventory in its annual financial statements. The corporation accounts for its inventory using the LIFO method. Which of the following statements is correct regarding how the corporation should measure its inventory in its interim financial statements?
Inventory losses generally should be recognized in the interim statements. =>an inventory loss due to the market decline can be deferred but An INVENTORY LOSS should be recog at INTERIM; if the loss is recovered during the year is treated as a CHANGE in ESTIMATE
An operating segment has the following three characteristics:.
It is a business component of the entity that may earn revenues and incur expenses. Its operating results are regularly reviewed by the chief operating decision maker (CODM) for the purpose of resources allocation and performance assessment. Its separate financial information is available.
Which of the following items would most likely require an adjustment to the financial statements for the year ended December 31, Year 1? there were conditions at the balance sheet date so adj to FS
Loss on an uncollectible trade receivable recorded in Year 1 from a customer that declared bankruptcy in Year 2
On September 30, Year 3, the company determined that inventory with a cost of $80,000 has a net realizable value of $74,000. The company estimates that the inventory's net realizable value at the end of Year 3 will be at least $82,000. The company accounts for its inventory using the moving-average cost method.
Loss recog is zero No loss is reasonably anticipated for the year. no write off is recog at Interim
On October 15, Year 5, a major investment advisor issued a pessimistic report on the entity's long-term prospects. The market price for its common stock subsequently declined by 50%. How should this event be presented in the financial statements?
No financial statement disclosure. The market price for the entity's common stock is not a financial event that affects the fairness of the presentation of the financial statements. Accordingly, no disclosure is necessary for changes in the market price of the securities.
On December 31, Year 2, the company paid interest of $9,000 on a 12% construction note with a face amount of $100,000. The note was issued on January 1, Year 2, to finance the internal construction of the company's new headquarters. The construction of the headquarters was started during Year 1 and completed during Year 4.
Not a expense, no action at interim
Subsequent events providing evidence about conditions existing at the date of the auditor's report but not at the balance sheet date require adjustment of the financial statements. FALSE
One type of subsequent event provides evidence about conditions that did not exist at the date of the balance sheet but that arose subsequent to that date. These events do not require recognition, but some of them do require disclosure. Examples of subsequent events requiring only disclosure include Sale of a bond or capital stock issue Purchase of a business Settlement of litigation when the precipitating event occurred after the balance sheet date Loss of plant or inventories as a result of fire or flood Losses on receivables resulting from conditions (e.g., a customer's major casualty) arising after the balance sheet date
Information in segment financial statements is to be reported on the basis that is used internally for evaluating performance and making resource allocation decisions.
Ordinarily, segment information is to be reported on the basis that is used internally for evaluating performance and making resource allocation decisions (the management approach). GAAP do not require disclosure of information that is not prepared for internal use if reporting it would not be feasible.
Which of the following items would most likely does not require an adjustment to the financial statements for the year ended December 31, Year 1?
Proceeds from a capital stock issuance in Year 2 which was being approved by the board of directors in Year 1. - just disclosure Uninsured loss of inventories purchased in Year 1 as a result of a flood in Year 2. - if material just disclosure
Interim period reports for publicly traded companies are not required to include basic and diluted EPS or information about reportable operating segments.
Publicly traded companies may report summarized financial information at interim dates that is less detailed than information in annual financial statements. Among the required minimum disclosures are sales or gross revenues, provision for income taxes, net income, and comprehensive income; and basic and diluted EPS for each period presented.
Some types of disclosures that should be made at the balance sheet date include the risks and uncertainties relating to the nature of operations, use of estimates in preparing the financial statements, and current vulnerability due to concentrations.
Should be disclosed at the balance sheet date: nature of operations current vulnerability due to concentrations use of estimates in FS
In financial reporting for operating segments of a public business entity, which of the following must be included in the reported amount of a reportable operating segment's assets? Accumulated depreciation NO Marketable Securities Valuation Allowance NO
The amount of a reported segment item, such as assets, is the measure reported to the chief operating decision maker for purposes of making resource allocation and performance evaluation decisions regarding the segment. Thus, if accumulated depreciation and a marketable securities valuation allowance are not included in that measure, they need not be included in the reported amount of the operating segment's assets.
Which of the following information is not required to be disclosed in the notes to the financial statements?
The company's financial ratios in comparison with the industry average.
For interim financial reporting, the computation of a company's second quarter provision for income taxes uses an effective tax rate expected to be applicable for the full fiscal year. The effective tax rate should reflect anticipated Foreign Tax Rate yes Available Tax Planning Alternatives yes
The estimated annual effective tax rate should be based upon the statutory rate adjusted for the current year's expected conditions. These conditions include anticipated investment tax credits, foreign tax rates, percentage depletion, capital gains rates, and other tax planning alternatives. The rate should also include "the effect of any valuation allowance expected to be necessary at year end for deferred tax assets related to originating deductible temporary differences and carryforwards during the year."
Opto Co. is a publicly traded, consolidated entity reporting segment information. Which of the following items is a required entity-wide disclosure regarding external customers?
The fact that transactions with a particular external customer constitute more than 10% of the total entity revenues 10 of total entity revenues
With certain specified exceptions, an entity must disclose all significant concentrations of credit risk arising from all financial instruments.
True
Financial statements must disclose significant risks and uncertainties. The required disclosures include
Vulnerability due to a concentration if a near-term severe impact is at least reasonably possible.
A doubt about newly formed Nev Company's ability to continue as a going concern was disclosed in its annual financial statements for December 31, 20X6. In March 20X7, management solved the problem that caused the going concern disclosure. Which of the following must the management of Nev disclose in the first quarter financial statements of 20X7?
When substantial doubt about an entity's ability to continue as a going concern was alleviated as a result of management's plans, the entity must disclose the following: 1. Principal conditions or events that raised the substantial doubt 2. Management's evaluation of the significance of those conditions or events 3. Management's plans that alleviated the substantial doubt.
Luge has been notified by a governmental agency that it will be held responsible for the cleanup of toxic materials at a site where it formerly conducted operations. Luge estimates that it is probable that its share of remedial action will be approximately $500,000.
accrual and disclosure; we need to disclose it too
Financial Instruments
cash, evidence of an ownership interest/contract in a company, or both
Disclosure of FI - if estimating fair value is not feasible: disclosure of carrying amount, maturity dates, effective interest rates
certain co must disclosure the fair value of the FI, no matter if they are recognized A publicly traded company must disclose in its summarized financial information for interim periods the fair value of all financial instruments for which estimation is practicable.
FI has contractual obligations and contractual rights
contractual obligations - second contractual rights - first
A government contract completed during Year 5 is subject to renegotiation. Although Luge estimates that it is reasonably possible that a refund of approximately $200,000 to $300,000 may be required by the government, it does not wish to publicize this possibility.
disclosure as it is reasonable possible
A planned volume variance in the first quarter, which is expected to be absorbed by the end of the fiscal period, ordinarily should be deferred at the end of the first quarter if it is
fav or not fav
SUBSEQUENT EVENTS
happens after the balance sheet date and before the issuance or availability of FS
concentration
info about the market example: co has only one supplier The concentration that will make the company vulnerable to a near-term severe impact should be disclosed.
Market Risk
is not required to be disclosed, is encouraged to disclose quantitative info about the market risks of FS
Luge has been sued by a former employee for wrongful dismissal. Luge's lawyers believe the suit to be without merit.
not accrual not disclosure If the suit is without merit, no loss contingency should be accrued or disclosed because the loss is only remotely possible.
During the third quarter, Antrim paid $6,000 in property taxes for the entire fiscal year.
property taxes => evenly over year => 2k
Credit risk disclosed in the body of the FS or in the notes
risk of accounting loss from a FI due to a possible failure of another party
Market risk
risk of loss from the change in the market value of the assets and liabilities
The entity's manufacturing division, whose assets constituted 75% of its total assets at September 30, Year 5 (end of year), was sold on November 1, Year 5. The new owner assumed the bonded indebtedness associated with this property. How should this event be presented in the financial statements?
sale Disclosure by means of supplemental, pro forma financial data.
Examples of nonrecognized subsequent events requiring disclosure only include
sale of a bond capital stock issue loss of plant/inventories due to a natural disaster or fire a business combination Settlement of litigation when the event resulting in the claim occurred after the balance sheet date Losses on receivables resulting from conditions (e.g., a customer's major casualty) occurring after the balance sheet date
Neely Co. disclosed in the notes to its financial statements that a significant number of its unsecured trade account receivables are with companies that operate in the same industry. This disclosure is required to inform financial statement users of the existence of
the risk of accounting loss from a financial instrument.
On June 30, Year 4, Mill Corp. incurred a $100,000 net loss from disposal of a component. Also, on June 30, Year 4, Mill paid $40,000 for property taxes assessed for the Year 4 calendar year. What amount of the foregoing items should be included in the determination of Mill's net income or loss for the 6-month interim period ended June 30, Year 4?
we recog the entire 100k loss also 40k/2 period=20k 120k
