FAR

Understandability

Information is understandable if the user comprehends it within the decision context at hand. Users are assumed to have a reasonable understanding of business and accounting and are willing to study the information with reasonable diligence.

entity assumption

Information is understandable if the user comprehends it within the decision context at hand. Users are assumed to have a reasonable understanding of business and accounting and are willing to study the information with reasonable diligence.

Verifiability

Information is verifiable if different knowledgeable and independent observers could reach similar conclusions based on the information.

Fair Value

This value is also referred to as current market value. It is the price that would be received to sell an asset (or the price to settle a liability) in an orderly transaction from the perspective of a market participant at the measurement date

Amortized cost

This value is historical cost less the accumulated amortization or depreciation of the asset.

Net Realizable Value

This value is used to approximate liquidation value or selling price. It is the net value to be received after the costs of sale are deducted from the current market value

current replacement cost

This value represents how much you would have to pay to replace an asset. Current replacement cost would represent current market value from the buyer's perspective.

Time Period Assumption

Time Period Assumption

The SEC sends a _____________ _________ to a registrant when an accounting irregularity is found.

deficiency letter

ASC 820 objectives

definition of fair value for GAAP purposes, framework for measuring fair value for accounting purposes, a set of required disclosures about fair value measurement when it is used.

Recognition and Measurement Criteria of items in a financial report

definition, measurability, relevance, faithful representation

Example off relevance over faithful representation

depreciation, bad debt expense, pension estimates are estimates over certain amounts

comparability

he quality of information that enables users to identify similarities and differences between sets of information. Consistency in application of recognition and measurement methods over time enhances comparability.

The determination of fair value of a nonfinancial asset assumes the:

highest and best use of the asset by the market participants

Economic consequences

refers to the effect of a proposed standard on a firm's financial statements. A common argument against a proposed standard is that it will cause earnings to decline, thus reducing the firm's ability to raise capital.

Convergence

refers to the working relationship between the FASB and IASB to develop compatible high quality accounting standards

Firms that are registered with the SEC are called ____________

registrants

Primary characteristics of accounting information

relevance and faithful representation

Revenue

Refers to increases in assets or the extinguishment of liabilities stemming from the delivery of goods or the provision of services

capital maintenance

. Capital is said to be maintained when the firm has positive earnings for the year, assuming no changes in price levels.

The APB issued # _________________

31 opinions

Practical Expedient Exception

ASU 820 allows a company to use a "practical expedient" to measure the fair value of an investment that does not have a quoted market price but reports a net asset value per share (NAV). These investment vehicles are often referred to as alternative investments. Examples are hedge funds, private equity funds, real estate funds, venture capital funds, common/collective funds, and offshore funds.

Committee on Accounting Procedure (CAP) issued # ___________________ _______________ ___________________

Accounting Research Bulletins

FASB process when issuing an accounting standard

Add project to agenda - conduct research & issue DM - Hold public hearing - Evaluate research & issue ED - majority vote of FASB needed for approval - Issue an ASU

Unit-of-Measure Assumption

Assets, liabilities, equities, revenues, expenses, gains, losses, and cash flows are measured in terms of the monetary unit of the country in which the business is operated.

FAF (Financial Acocunting Foundation)

Appoints the members of the FASB and its advisory councils, ensures adequate funding for the FASB, and exercises oversight over the FASB.

Confirmatory value

Information has confirmatory value if it confirms or changes past (or present) expectations based on previous evaluations. For example, if reported earnings for a period bear out market expectations, then it has confirmatory value.

Predictive value

Information has predictive value if it assists capital providers in forming expectations about future events.

FASB

Establishes financial accounting standards for business entities. The FASB is an independent body, subject only to the FAF.

The Wheat Committee recommended the formation of what?

FASB

What are the three parts of the current accounting standard setting mechanism in the US?

FASB, FAF, FASAC (Financial Accounting Standards Advisory Council)

nonrecurring basis

FV is determined and applied only when certain conditions or situations occur

recurring basis

FV is determined and applied to an item period after period

Full Disclosure Principle/ Adequate disclosure principle

Financial statements should present all information needed by an informed reader to make an economic decision. This principle is sometimes referred to as the adequate disclosure principle.

Who is the standard setter for the IASB?

IASB

International Organization of Securities Commissions

IOSCO is the recognized international standard setter for securities market

Timeliness

Information is timely if it is received in time to make a difference to the decision maker. Timeliness can also enhance the faithful representation of information.

FASB's Emerging Issues Task Force (EITF)

In this sense, the EITF acts as a "filter" for the FASB, enabling the FASB to focus on more pervasive issues. When a consensus of the 15 members is reached on an issue, no further action by the FASB is required.

Relevance

Info is relevant if it makes a difference to decision makers in their role as capital providers. Info is relevant if it has predictive value, confirmatory value, and materiality

Faithful representation

Information faithfully represents an economic condition or situation when the reported measure and the condition or situation are in agreement. Info is representationally faithful when it is complete, neutral, and free from material error.

User groups influence the outcome of FASB standards by:

Making their views public through the financial press, Providing input during the due process procedure, Putting pressure on the SEC directly to change a proposed standard, or through the U.S. Congress

Measurement Techniques in determining FV for GAAP purposes:

Market approach, income approach, cost approach

in exchange

Maximum value to market participants would occur principally on a stand-alone basis (i.e., the price that would be received in a current transaction to sell the [single] asset)

in use

Maximum value to market participants would occur through its use in combination with other assets as a group

Pervasive Applicability

Other than the exceptions noted above, the content of ASC 820 must be followed when fair value measurement is used, either as required or permitted by other pronouncements.

Statement of Stockholders Equity

Presents changes in owners' equity over a period of time

FASAC

Provides guidance on major policy issues, project priorities, and the formation of task forces.

3 aspect that GAAP recognizes

Recognition, Measurement, Disclosure

expense recognition principle/ matching principle

Recognize expenses only when expenditures help to produce revenues

Goals of Financial Accounting Standards Codification

Simplify the structure and accessibility of authoritative GAAP. Provide all authoritative literature in a single location. Reduce the time and effort required to research an accounting issue. Reduce the risk of noncompliance with GAAP. Facilitate updating of accounting standards. Assist the FASB with research and convergence (IFRS) efforts.

Accounting Principles Board (APB)

The APB is the second private sector group designated to formulate GAAP.

Financial Accounting Standards Board (FASB)

The FASB is currently the standard-setting body in the United States.

5 elements of IASB framework

assets, liabilities, equity, income, expense

cost constraint

The cost constraint on GAAP limits recognition and disclosure if the cost of providing the information exceeds its benefit. Firms may not omit disclosures if they are material and mandated by GAAP.

Fair Value

The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

GAAP

The rules of financial reporting for business enterprises. GAAP are also called accounting standards.

enhancing characteristics

These are complementary to the primary characteristics and enhance the decision usefulness of financial reporting information that is relevant and faithfully represented. The enhancing characteristics are comparability, verifiability, timeliness, understandability

income approach

This approach converts future amounts to a single present amount. Discounting future cash flows would be an income approach to determining fair value.

market approach

This approach uses prices and other relevant information generated by market transactions involving assets or liabilities that are identical or comparable to those being valued.

cost approach

This approach uses the amount that currently would be required to replace the service capacity of an asset (i.e., current replacement cost), adjusting for obsolescence.

physical maintenance

This concept holds that earnings cannot be recognized until the firm has provided for the physical capital used up during the period.

going concern assumption/ continuity assumption

We assume there is a separate accounting entity for each business organization.

In 1971, AICPA appointed the ___________ _________________

Wheat Committee

10 elements of a financial statement

assets, liabilities, equity, investment by owners, distribution to owners, comprehensive income, revenues, expenses, gains, losses

Statements of Financial Accounting Concepts

a "constitution" or underlying set of theoretical concepts in its deliberations

FASB framework 10 elements

assets, liabilities, equity, investment by owners, distributions to owners, comprehensive income, revenues, expenses, gains, and losses

Purposes of the IASB framework

assist the board in developing new IASs and reviewing existing IASs, assist the board in promoting harmonization of standards, assist national setting bodies in developing standards, assist preparers in applying IASs and dealing with topics not yet covered by IASs, assist auditors in forming an opinion, assist users in interpreting financial statements, provide info for parties interesed in the work of the IASB

2 presentation format for balance sheet

account and report format

ASC 820 does not apply to:

accounting principles that address share based payment transactions, ASCs that require or permit measurements that are similar to FV but that are not intended to measure FV, accounting principles that address FV measurement for purpose of lease classification or measurement, ASCs that permit practicability exceptions to FV measurements

Statement of comprehensive income reports:

all non owner changes in equity over a period of time

Structure of the codification

areas - topics - subtopics - sections - subsections - paragraphs

investing cash flows

cash flows related to the acquisition and disposal of long term assets and investments

financing cash flow

cash flows related to the liabilities and owners' equity sections of the balance sheet

Operating cash flows

cash flows related to transactions that flow through the income statement

What happens to firms that don't comply with GAAP?

economic sanctions including raising the difficulty to raise debt and equity capital

What are the accounting assumptions

entity assumption, going concern assumption, unit of measure assumption, time period assumption,

2 underlying assumptions in IASB framework

financial statements are prepared on an accrual basis and the entity is a going concern

IFRS

globally recognized basis for financial accounting and reporting

Mission of FASB

improve usefulness of financial reporting, maintain current accounting standards, promptly address deficiencies in accounting standards, promote international convergence of accounting standards, improve the common understanding of the nature and purposes of info in financial reports

Adoption

in the US, refers to the SEC requirement for publicy traded companies to implement the IFRS accounting standards

The highest and best use of an asset may be:

in use or in exchange

Key components of general purpose external financial report

income statement, statement of comprehensive income, balance sheet, statement of changes in owners equity, statement of cash flows, footnote disclosures and supplementary schedules, auditor's opinion

Traditional approach (discounted cash flows) in determining present value

incorporates expectations about variations in amount or timing of those cash flows, time value of money as measured by the risk free rate of interest, the price for bearing the uncertainty inherent in the asset or liability. Uses the interest rate to capture all the uncertainties and risks inherent in a cash flow measure

Market participants, as used in the definition, are buyers and sellers of the asset or liability that are:

independent of the reporting entity, acting in their economic best interest, knowledgeable of the asset or liability and the transaction involved, able and willing, but not compelled, to transact for the asset or liability

completeness

info is complete if it includes all data necessary to be faithfully representative

free from error

info is free from error if there are no omissions or erros

neutral

info is neutral when it is free from any bias

Materiality

info that is material will impact a user's decision

Instruments not eligible for FV option:

investment in a subsidiary to be consolidated, interest in a VIE that is to be consolidated, employers and plans obligation for employee oriented plans, financial assets and liabilities recognized under lease accounting, demand deposit liabilities of financial institutions, financial instruments that are classified by the issuers as a component of stockholders equity

General Purpose External Financial Report

is a general-purpose one intended for all external users.

Securities and Exchange Commission (SEC)

is the federal government agency that administers the securities laws of the United States. These laws affect firms that issue debt and equity securities to the public.

American Institute of Certified Public Accountants (AICPA)

is the national professional organization for practicing CPAs and has had a great impact on accounting principles over the years. The mission of the AICPA is to provide its members with resources, information, and leadership so that they may in turn provide valuable services for the benefit of their clients, employers, and the general public.

most advantageous market

is the one in which the reporting entity could sell the asset at a price that maximizes the amount that would be received for the asset or that minimizes the amount that would be paid to transfer the liability.

principal market

is the one with the greatest volume and level of activity for the asset or liability within which the reporting entity could sell the asset or transfer the liability.

Conservatism (prudence)

is the reporting of less optimistic amounts (lower income, net assets) under conditions of uncertainty or when GAAP provides a choice from among recognition or measurement methods.

An item is recognized as an element if it meets one of the element definitions and meets the 2 following criteria:

it is probable that a future economic benefit associated with the item will flow to or from the entity, the item has a cost or value that can be measured reliability

What is excluded from the codification?

other comprehensive basis of accounting, cash basis accounting, income tax basis accounting, regulatory accounting principles (ie insurance), governmental accounting standards

The FASB standard codification does not include guidance for non GAAP matters including:

other comprehensive basis of accounting, cash basis, income tax basis, regulatory accounting principles

Which section is the actual accounting material provided in?

paragraphs

During the transition period for an ASU to become effective, the Codification shows the new guidance as:

pending text

stop order

preventing trading in the firm's securities until the disagreement is resolved

What does the balance sheet disclose?

resources of the firm at a point in time

Which level of structure within the codification is uniform?

sections

IFRS standard setting process

set agenda, plan project, develop and publish discussion paper, develop and publish an exposure draft, develop and publish a standard, address unanticipated issues after the standard is issued

Prior period adjustments are shown on which financial statement?

statement of retained earnings

ASU

summarize key aspects of update, detail how codification will change, explain the bases for the update

Examples of cases where the entry and exit price are different:

transaction is between related parties, transaction takes place under durress, the unit of account for the transaction price is different from the unit of account that would be used to measure the asset or liability at FV, the market in which the transaction price takes place is different from the principal market

Items that are included in the statement of comprehensive income and not the income statement:

unrealized gains on losses on available for sale securities, adjustments in the calculation of the pension liability, foreign currency translation adjustments, deferrals of certain gains or losses on hedge accounting

Example of faithful representation over relevance

use of historical cost over a valuation base

expected cash flow approach

uses a risk-free rate as the discount rate.

highest and best use must take into account:

what is physically possible, legally permissible, and financially feasible

An entity can apply the FV option to an eligible item only on the date when one of the following events occur:

when the item is first recognized, when an eligible firm commitment is established, specialized accounting for an item ceases to exist, an investment becomes subject to equity method accounting or to a VIE that is no longer consolidated, an even that requires an item to be measured at FV such as business combination or significant modifications to debt instruments