Financial Reporting Environment
The objective of present value in initial-recognition or fresh-start measurements is to estimate fair value. A present value measurement includes five elements:
(1) estimates of cash flows, (2) expectations about their variability, (3) the time value of money (the risk-free interest rate), (4) the price of uncertainty inherent in an asset or liability, and (5) other factors (e.g., liquidity or market imperfections). Fair value encompasses all these elements using the estimates and expectations of participants in the market.
According to SFAC 7, the elements of a present value measurement are
(1) estimates of future cash flows; (2) expected variability of their amount and timing; (3) the time value of money based on the risk-free interest rate; (4) the price of uncertainty inherent in an asset or liability; and (5) other factors, such as lack of liquidity or market imperfections.
The following information about geographic areas is reported if feasible:
(1) external revenues attributed to the home country, (2) external revenues attributed to all foreign countries, (3) material external revenues attributed to an individual foreign country, (4) the basis for attributing revenues from external customers, and (5) certain information about assets.
The entity should disclose
(1) legal and contractual restrictions on resources and (2) risks of potential loss of those resources. This disclosure relates to the objective of helping users to assess (1) the services that can be provided and (2) the entity's ability to meet obligations as they come due. This objective is separate from the objective of helping users evaluate the entity's operating results.
One set of disclosures concerns risks and uncertainties relating to the nature of operations. Thus, entities must disclose their
(1) major products or services, (2) principal markets, and (3) the locations of those markets. The company must disclose its major products. They also should disclose (1) all industries in which they operate; (2) the relative importance of each; and (3) the basis for determining the relative importance. Thus, the company must disclose the industries in which it operates.
One set of disclosures applies to risks and uncertainties relating to the nature of operations. Thus, entities must disclose their
(1) major products or services, (2) principal markets, and (3) the locations of those markets. They also should disclose (1) all industries in which they operate; (2) the relative importance of each; and (3) the basis for determining the relative importance, e.g., assets, revenue, or earnings. Major competitors are not required to be disclosed.
Comprehensive income must be reported in
(1) one continuous financial statement or (2) two separate but consecutive financial statements.
Current liabilities include those obligations that are expected to be satisfied by the
(1) payment of cash, (2) use of current assets other than cash, or (3) creation of new current liabilities within 1 year from the balance sheet date (or operating cycle, if longer).
Financial reporting by an NFP should provide information about economic resources, obligations, net resources, and changes in them. They include
(1) performance during a period, (2) nature and relationship of resource inflows and outflows, (3) service efforts and accomplishments, and (4) factors affecting liquidity.
GAAP do not specifically define the reported revenue of an operating segment. However, the information reported includes
(1) revenues from external customers, (2) revenues from transactions with other operating segments of the same entity, and (3) interest revenue. The amount of a reported segment item, such as revenue, is the measure reported to the chief operating decision maker for purposes of making resource allocation and performance evaluation decisions regarding the segment. Disclosures are required about measurements of segment profit or loss (including revenue) and segment assets, but GAAP do not stipulate how those measurements are to be made.
Financial reporting by NFPs should provide useful information about factors that affect an organization's liquidity, e.g.,
(1) sources and uses of cash and other liquid assets and (2) borrowing and repayment activities.
Information about products and services and geographical areas is reported if it is feasible to do so. 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.
The commonly required disclosures in a summary of significant accounting policies include
(1) the basis of consolidation, (2) depreciation methods, (3) amortization of intangible assets, (4) inventory pricing, (5) recognition of profit on long-term construction-type contracts, (6) recognition of revenue from franchising and leasing operations, and (7) the policy for defining cash equivalents. Hence, the summary of significant accounting policies should include information about property, plant, and equipment depreciated by the straight-line method.
Certain items are commonly required disclosures in a summary of significant accounting policies:
(1) the basis of consolidation, (2) depreciation methods, (3) amortization of intangibles, (4) inventory pricing, (5) recognition of revenue from contracts with customers, and (6) recognition of revenue from franchising and leasing operations.
Certain items are commonly required disclosures in a summary of significant accounting policies. These items include
(1) the basis of consolidation, (2) depreciation methods, (3) amortization of intangibles, (4) inventory pricing, (5) recognition of revenue from contracts with customers, and (6) recognition of revenue from leasing operations.
Under existing accounting standards, OCI includes, among others,
(1) unrealized holding gains and losses on investments in debt securities; (2) gains and losses on derivatives designated and qualifying as cash flow hedges; (3) certain amounts associated with recognition of the funded status of postretirement defined benefit plans; (4) certain foreign currency items, including foreign currency translation adjustments; and (5) changes in fair value attributable to instrument-specific credit risk of liabilities for which the fair value option is elected. But gains from extinguishment of debt are included in earnings.
Financial reporting by not-for-profit, nongovernmental entities should provide information
(1) useful in making resource allocation decisions; (2) useful in assessing services and ability to provide services; (3) useful in assessing management stewardship and performance; (4) about economic resources, obligations, net resources, and changes in them; and (5) about managers' explanations and interpretations to help users understand financial information.
A measurement based on present value should reflect uncertainty so that variations in risks are incorporated. Accordingly, the following are the necessary elements of a present value measurement:
1) Estimates of future cash flows, 2) Expected variability of their amount and timing, 3) The time value of money (risk-free interest rate), 4) The price of uncertainty inherent in an asset or liability, and 5) Other factors, such as liquidity or market imperfections.
AICPA Council bodies to establish accounting and reporting principles
1) FASB 2) IASB 3) GASB 4) FASAB
NFP Financial reporting objectives:
1) Useful to providers in making resource allocation decisions 2) Useful in assessing services in the ability to provide services 3) Useful in assessing mgmt stewardship in performance 4) About economic resources, obligations, net resources, and changes in them including a) performance of an org during a period b) nature of, and relationship btwn, resource inflows and outflows c) Service efforts and accomplishments d) Factors that may affect an org liquidity
SFAC #7 as an element of present value measurement used to establish the value of assets or liabilities using cash flows
U The Price for Bearing Uncertainty. V Expectations about Timing Variations of Future CF. O Other Factors (e.g., Liquidity Issues and Market Imperfections). T Time Value of Money (the Riskfree Rate of Interest). E Estimate of Future Cash Flow.
The ability to consummate the refinancing may be demonstrated by a post-balance-sheet-date issuance of a long-term obligation or equity securities prior to issuance of the balance sheet. It also may be demonstrated by
a financing agreement prior to issuance of the balance sheet that meets the following criteria: (1) The agreement does not expire within the longer of 1 year or the operating cycle, (2) it is noncancelable by the lender, (3) no violation of the agreement exists at the balance sheet date, and (4) the lender is financially capable of honoring the agreement. Thus, because the lender is not expected to be financially capable of honoring the agreement, the note must be classified as current.
Subsequent events are events or transactions that occur
after the balance sheet date and prior to the issuance (or availability for issuance) of the financial statements. Certain subsequent events or transactions provide evidence about conditions at the date of the balance sheet, including the estimates inherent in statement preparation. Other subsequent events or transactions provide evidence about conditions that did not exist at the date of the balance sheet.
The going concern assumption presumes that
an entity will continue to operate in the foreseeable future. The going concern assumption has nothing to do with money per se.
Under the conservatism constraint, when alternative accounting methods are
appropriate, the one having the less favorable effect on net income and total assets is preferable. However, conservatism does not permit a deliberate understatement of total assets and net income. Furthermore, SFAC 5 describes "a general tendency to emphasize purchase and sale transactions and to apply conservative procedures in accounting recognition." This tendency is a response to uncertainty.
Verifiability is a
characteristic that enhances the usefulness of information that is both relevant and faithfully represented.
Matching (another term for associating cause and effect) requires
costs to be recognized as expenses on the basis of their direct association with specific revenues to the extent possible.
Replacement cost is
defined as the amount of cash or its equivalent that would be paid to acquire or replace an asset currently. Replacement cost is an acquisition cost.
The results of operations of a component that has been disposed of or is classified as held for sale are reported in
discontinued operations if the component has a major effect on an entity's operations and financial results (e.g., major line of business, major geographical area, major equity method investment, or other major part of an entity).
According to the FASB's conceptual framework, matching is
essentially synonymous with associating cause and effect. Matching is simultaneous or combined recognition of the revenues and expenses that result directly and jointly from the same transactions or other events. Estimating credit loss expense on the basis of net credit sales is an example of associating cause and effect, which involves matching the credit loss expense with the credit sales.
Information relating to the nature of operations, use of
estimates, and concentrations is required to be disclosed at the balance sheet date. The company's financial ratios in comparison with the industry average does not belong to the above categories.
FA vs MA
MGMT accounting information assissts management desition making, planning, and control. Managerial accounting need not follow generally accepted accounting principles (GAAP) while financial accounting must follow them
Completeness is an ingredient of
faithful representation. Other ingredients of faithful representation include neutrality and freedom from error
Confirming value provides
feedback about evaluations previously made by users
Representational faithfulness means that
financial information faithfully represents the reported economic phenomena.
Neutrality is the depiction of financial information that is
free from bias in selection or presentation.
The FASB conceptual framework states that the objectives of financial reporting stem
from the informational needs of the external users of the information. SFAC 1 para. 28.
The current vulnerability due to concentrations must be disclosed
if certain conditions are met. Disclosure is necessary if management knows prior to issuance of the statements that the concentration exists at the balance sheet date; it makes the entity vulnerable to a near-term severe impact; and such impact is at least reasonably possible in the near term. A severe impact may result from loss of all or a part of a business relationship, price or demand changes, loss of a patent, changes in the availability of a resource or right, or the disruption of operations in a market or geographic area.
According to SFAC No.8, financial information is relevant
if it is capable of making a difference in the decisions made by users and has predictive and/or confirming value.
Information is verifiable
if knowledgeable and independent observers can reach a consensus that it is faithfully represented.
Comprehensive income includes
net income and other comprehensive income.
The quality of information that helps users forecast future outcomes is
predictive value. Forecasting is predicting.
Recognition is the process of
recording an item in the financial statements of an entity. SFAC 5 para. 6
Interim financial reporting should be viewed as
reporting for an integral part of an annual period.
Asset valuation accounts are
separate items sometimes found in financial statements that reduce or increase the carrying amount of an asset. The conceptual framework considers asset valuation accounts to be part of the related asset account. They are not considered to be assets or liabilities in their own right.
Matching of costs and revenues is
simultaneous or combined recognition of the revenues and expenses that result directly and jointly from the same transactions or other events. SFAC 6 para. 146
The economic entity assumption is
that economic activity can be accounted for when considering an identifiable set of activities. The going concern assumption has nothing to do with money per se.
The periodicity assumption is
that economic activity can be divided into meaningful time periods. The going concern assumption has nothing to do with money per se.
A basic feature of the financial accounting process is
that information about the economic activities of the business should be issued at regular intervals. These time periods should be of equal length to facilitate comparability. They also should be of relatively short duration, e.g., 1 year, to provide business information useful for decision making.
Allocation is
the accounting process of assigning or distributing an amount according to a plan or a formula. SFAC 6 para. 142
Historical cost is
the amount paid by a company to acquire an asset.
The monetary unit assumption means that money is
the common denominator for economic activity and provides an appropriate basis for accounting measurements and analysis.
Comprehensive income is
the periodic change in equity of a business from nonowner sources. Accordingly, comprehensive income is a broad concept that includes not only revenues, expenses, gains, and losses recognized in net income but also other nonowner changes in equity, such as holding gains and losses on available-for-sale debt securities and foreign currency translation adjustments. Furthermore, intermediate components of net income such as gross margin, income from continuing operations before taxes, income from continuing operations, and operating income are included.
Current market value, or fair value, is
the price to sell (not acquire) an asset.
Realization is
the process of converting noncash resources and rights into money. SFAC 6 para. 143
Recognition is
the process of formally recording or incorporating an item in the financial statements as an asset, liability, revenue, expense, gain, or loss.
the primary purpose of an NFP's financial reporting is to provide information useful to
the providers in making resource allocation decisions.
Net realizable value is
the selling price of an asset less any disposal costs.
Resource providers of NFPs primarily need information about
the services provided by the entity and the ability of the entity to continue to provide those services. These needs differ from the needs of resource providers for business entities, who primarily emphasize financial return.
The FASB Accounting Standards Codification is
the single source of authoritative nongovernmental U.S. GAAP. FASB Statements of Financial Accounting Standards are included in the Accounting Standards Codification.
The objective of general purpose financial reporting is
to provide financial information about the reporting entity that is useful to the primary users of general purpose financial reports in making decisions about providing resources to the reporting entity.
The overall objective of financial reporting is
to report financial information that is useful to current and potential investors and creditors in making decisions about providing resources to an individual reporting entity.
The primary purpose of notes to the financial statements is
to supplement or further explain the information on the face of the statements. Notes should contain information useful to investors and creditors for making decisions about providing resources to the entity. Examples of such information are descriptions of accounting policies used and disclosures required by GAAP.
According to the FASB and IASB conceptual frameworks, the primary users of financial reports include all
Investors. B. Creditors. C. Lenders.
Predictive value is
a component of relevance.
Items included in the determination of taxable income may be presented in different sections of the financial statements. Accordingly, intraperiod tax allocation is required. Income tax expense or benefit is allocated to
(1) continuing operations, (2) discontinued operations, (3) other comprehensive income, and (4) items debited or credited directly to shareholders' equity. Operating income is not one of the categories of income subject to intra-period income tax allocation.
An asset or disposal group is classified as held for sale when six conditions are met:
(1) A level of management with authority to approve the action has committed to a plan to sell, (2) the asset is available for immediate sale in its current condition on usual and customary terms, (3) actions (such as actively seeking a buyer) have begun to complete the plan, (4) completion of sale within 1 year is probable, (5) the asset is actively marketed at a price reasonably related to current fair value, and (6) there is little likelihood of significant change in the plan.
An asset or disposal group is classified as held for sale when six conditions are met:
(1) A level of management with authority to approve the action has committed to a plan to sell, (2) the asset is available for immediate sale in its current condition on usual and customary terms, (3) actions (such as actively seeking a buyer) have begun to complete the plan, (4) completion of sale within 1 year is probable, (5) the asset is actively marketed at a price reasonably related to current fair value, and (6) there is little likelihood of significant change in the plan.
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. A depreciation method is a selection from existing acceptable alternatives and should be included in the summary of significant accounting policies. Financial statement disclosure of accounting policies should not duplicate details presented elsewhere in the financial statements, such as composition of plant assets.
The elements of financial statements directly related to measuring the performance and status of business enterprises and nonbusiness organizations are
(1) assets, (2) liabilities, (3) equity of a business or net assets of a nonbusiness organization, (4) revenues, (5) expenses, (6) gains, and (7) losses. The elements of (1) investments by owners, (2) distributions to owners, and (3) comprehensive income relate only to business enterprises. Information disclosed in notes or parenthetically on the face of financial statements amplifies or explains information recognized in the financial statements.
Current assets include, in descending order of liquidity,
(1) cash and cash equivalents; (2) certain individual trading, available-for-sale, and held-to-maturity debt securities; (3) receivables; (4) inventories; (5) prepaid expenses; and ( 6) certain individual investments in equity securities. Trading debt securities are expected to be sold in the near term, so they are likely to be classified as current.
Current and potential investors and creditors of a business entity want to assess their likelihood of receiving cash from
(1) dividends or interest or (2) the proceeds from the sale, redemption, or maturity of securities or loans.
A liability has three essential characteristics:
1. It is a present obligation that entails settlement by probable future transfer or use of cash, goods, or services. 2. It is an unavoidable obligation. 3. The transaction or other event creating the obligation has already occurred.
Difference between expenses and losses
According to the FASB's conceptual framework, expenses are outflows or other uses of assets or incurrences of liabilities (or both) from (1) delivering or producing goods, (2) providing services, or (3) other activities that qualify as ongoing major or central operations. Losses are decreases in equity (net assets) from peripheral or incidental transactions or other events and circumstances except expenses or distributions to owners.
FA procedures information about
Entity's assets, liabilities, revenues , expenses and other elements of financial stmt.
If an entity that reports a full set of financial statements has items of other comprehensive income (OCI), it must report comprehensive income in one continuous statement or in two separate but consecutive statements.
One continuous statement has two sections: net income and OCI. It must include (1) a total of net income with its components, (2) a total of OCI with its components, and (3) a total of comprehensive income. In separate but consecutive statements, the first statement (the income statement) must present the components of net income and total net income. The second statement (the statement of OCI) must be presented immediately after the first. It presents (1) the components of OCI, (2) the total of OCI, and (3) a total for comprehensive income. The entity must begin the second statement with net income.
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:
Principal conditions or events that raised the substantial doubt Management's evaluation of the significance of those conditions or events Management's plans that alleviated the substantial doubt.
According to the FASB conceptual framework, realization concept
Revenues and gains are realized when assets are exchanged for cash or claims to cash. SFAC 5 para. 83.
SEC
SEC has legal authority to establish GR requirements fro PTC(issuers) US. SEC deligated this authority to FASB. SEC enforces this req.s by ensuring that issuers meet cenrtain periodic reporting req.s for disclosure of F and other info.
According to the FASB's conceptual framework, an element describing transactions, events, and circumstances during intervals of time:
Several elements describe transactions, events, and circumstances during intervals of time, including investments by owners, distributions to owners, comprehensive income, revenues, expenses, gains, and losses. Rational allocation procedures are used in accrual accounting.
he major distinguishing characteristics of not-for-profit entities (NFPs)?
Such entities ordinarily have no single indicator of performance comparable to a business enterprise's profit.
NFPs receive significant resources from providers in nonreciprocal transactions from donors, grantors, and others who do not expect proportionate economic benefits. For-profit entities receive resources from contributors (shareholders) who expect to receive dividends and share appreciation.
The operating environments of NFPs and business entities also are similar because they (1) produce and distribute goods and services using scarce resources, (2) must be financially sound in the long run, and (3) are subject to laws and regulations.
According to the FASB and IASB conceptual frameworks, an enhancing qualitative characteristic?
Timeliness, understandability, comparability and verifiability are characteristics that enhance the usefulness of information that is relevant and faithfully represented.
According to the FASB and IASB conceptual frameworks, to be relevant, information should have
To be relevant, information should have predictive value and/or confirming value, and must be material
Timeliness is
a characteristic that enhances the usefulness of information that is relevant and faithfully represented.
Completeness is
a component of faithful representation.
Neutrality is
a component of faithful representation.
Materiality is
a component of relevance.