FAR EXAM 2022 - NON GOVERNMENTAL

Disclosure requirements (GAAP)

-Significant estimates - Statement that actuals could differ from estimates - Relative importance of each business when an entity operates multiple businesses

Held for Sale Criteria

1- management has committed to a plan to sell the component 2- the component is available for immediate sale in its present condition 3- management has begun an active program to locate a buyer 4- the sale is probable within one year 5- the component is being offered for sale at a price that is reasonable in relation to component's fair market value 6- it is unlikely that management will make significant changes to the plan

A derivative instrument is a financial instrument that derives value from the value of some other instrument and has all three of the following characteristics:

1. 1 or more underlyings and 1 or more notional smts or pmt provisions (or both) 2. Requires no initial net investments or one that is small than would be required for similar contracts 3. Terms require or permit a net settlement

Cash Basis to Accrual Basis Accounting

1. Add increases in current assets (an increase isn't income because it hasn't been collected under cash basis - increase is income under accrual basis 2. Subtract decreases in current assets 3. Add decreases in current liabs (e.g. decrease in AP is an outflow of cash 4. Subtract increases in current liabs (e.g. AP increase represents expenses incurred but not recorded under cash basis (not yet paid))

Form 8-K

The report used by publicly traded companies to disclose any material event not previously reported that is important to investors (e.g. issuance of additional shares of common stock, acquisitions, management changes, accountant changes, F/S changes)

Bond liability is shown on the balance sheet

net of unamortized discount

Royalties paid should be reported as expenses in the ...

period incurred

A loss contingency should be accrued in a company's financial statements only if the likelihood that a liability has been incurred is:

probable and estimable - must be disclosed in the FS notes but not accrued in the FS

Any change in the value of the liability after a property has been fully depreciated will be recognized in

profit or loss

Level 1 Inputs for Fair Value

quoted prices in active markets for identical assets

To correct an error in previously issued FS, the error affects in the FS should be ...

restated, the cumulative effect of the error should be reflected in the carrying amounts of assets and liabilities as beg

Changes in Accounting Entity

retrospective application - all previous FS that are presented in that comparative FS should be restated

When a company uses the US GAAP "completed contract" method for a LT construction contract...

revenue is recognized when the job is completed, not when progress billing are collected or when they exceed recorded costs

Accumulated other comprehensive income is a balance sheet account and is reported in the ...

statement of financial position

Accumulated other comprehensive income is a component of ...

stockholders equity on the balance sheet and is reported in the statement of financial position

Legal fees should be capitalized when the outcome of the litigation is ...

successful

For a HTM debt security, based on CECL model, a loss is recorded when

the amortized costs ? the PV of the principal and interest expected to be collected

Concentrations in volume of business transacted - disclose

the amount of the entity's revenue from customers >10%, risk of loss

If a change in accounting estimate cannot be distinguished from a change in accounting principle...

the change is considered a change in accounting estimate treated as a change in accounting estimate and is accounting for prospectively. the effect is reported as a component of income from continuing operations

Under the CECL model, when an AFS debt security has a fair value below amortized costs, the asset should be recorded in ...

the earnings section of the income statement and writing down the costs basis to Fair Value

Gain contingencies should be accrued when

the matter is settled and realizable

Form 10-Q

the quarterly report that publicly traded companies must file with the SEC, unaudited F/S

Market Approach

uses prices and other relevant information from market transactions involving identical or comparable assets or liabilities to measure fair value

Warranty costs should be recognized

when the machines are sold

The equity method of accounting should be used when the investor is able to

exercise significant influence over the affairs of the investee

The interest payable on a bond is calculated by takings the ...

face value of the bond at the beginning of the period x contractual interest rate

Under the acquisition method, all balance sheet accounts must be adjusted to ____ ____ on the acquisition date

fair value

When the acquisition price exceeds the fair value of net assets acquired, assets and liabs should be presented at ...

fair value

Trading debt securities are reported at

fair value with unrealized gains and losses included in earnings

What is included in income from continuing ops on the income statement

- A large loss from a FX transaction - Union strike that shuts down operations for months - Foreign gov't take possession of company's only plant - Damage to a factory due to a rare earthquake

Significant accounting policies include

- Basis of consolidation - Depreciation methods - Amort of intangibles - Inventory pricing - Use of estimates - Fiscal year definition - Special rev rec issues

Comprehensive basis of accounting other than GAAP

- Cash basis and modified cash basis - Tax basis - Prescribed regulatory basis - Other basis with substantial support (eg, price level basis)

Included in form 8-K

- Change in control - Acquisition or disposition of significant amt of assets

Comprehensive income presentation

- Comp Income may be shown on the face of a combined "stmt of income and comprehensive income" a separate section below net income, or in a separate "stmt of comprehensive income" - related tax effects for components must be disclosed

Qualitative characteristics: faithful representation

- Complete - Neutral - Free from error

Disclosure of vulnerability to concentration is required if all of the following criteria are met:

- Concentration exists as of FS date - Concentration make entity vulnerable to risk of a near-term serve impact - Least reasonably possible that the events could cause severe impact in near term

Disclosure of identified concentration vulnerabilities

- Exists at the FS date - Makes the entity vulnerable to the risk of a near-term severe impact - Reasonably possible that the events that could cause the severe impact will occur in the near term

Form 10K filing

- Lrg accelerated filed >$700 mil C/S outstanding - 60 days - Accelerated filed $75 mil - $700 mil C/S outstanding - 75 days - Smaller reporting company - annual rev < $100 mil or $75 million public equity float- 90 days

Finance lease criteria

- Ownership transfers at the end of the lease - Written purchase option the lessee is reasonably certain to exercise - PV of min lease pmts = FV of asset (90% of lease property FV) - Lease term = major part (75%) of asset useful life - Asset is specialized - no alt use to the lessor

Financial statements are considered to be "available to be issued" when:

- The FS are in a form and format that comply with GAAP - All approvals necessary for the issuance of the FS have been received

Valuation technique used to measure the fair value of an asset or liability

- cost approach - income approach - market approach

Reporting unrealized gains and losses (GAAP)

- trading debt securities reported at FV with unrealized G/(L) included in earnings -AFS debt securities reported at FV with unrealized G/(L) reported as a component of OCI

F/S of prior periods presented should be restated when there's a "change in entity" resulting from

1. Changing companies in consolidated FS 2. Consolidated FS versus previous individual FS

Recognition Criteria

1. Definition of elements of FS 2. Measurability with sufficient reliability 3. Relevance 4. Reliability

The seller will book the transaction as a financing arrangement when the ...

1. Repurchase prices is => the original sales price and the expected market value (i.e. the expected market value should not be greater than the repurchase price)

The 10% size test rules for reporting segments

1. reported rev (sales to external customers and intersegment sales) >= 10% of combined rev (internal/external) of all operating segments 2. Reported P/(L) >= 10% of the a. combined profit of all op segments with no losses b. combined reported loss of all op segments that did report a loss 3. assets >= 10% of combined assets of all operating segments (unaffiliated and intersegments) Only one of the 3 criteria need to be met for a segment to have required disclosure

deferred revenue (unearned revenue)

A liability created when a business collects cash from customers in advance of providing goods or services

Business combination measurement

All assets and liabilities will be measured at fair value. Any amount paid in excess of the identifiable FV of net assets is recorded to goodwill

Expected credit loss under the CECL model equals

Amortized costs - PV of expected cash flows

Amortization of leasehold improvements

Amortized over the lesser of the remaining life of the lease

XBRL (eXtensible Business Reporting Language)

An interactive data format that uses computer tags to identify financial statement items

Perfect Hedge

Any loss (profit) in one position is exactly offset by any profit (loss) on the other position.

If comparative FS are presented, how do you treat an error from a prior period (NOT presented) that is being discovered in the current period?

As an adjustment to beginning retained earnings in the statement of stockholder's equity

Impairment Analysis

Asset group should be tested for an impairment loss before goodwill is tested. Reporting units (segments) will be separately tested for impairment analysis.

Capitalized computer software annual amortization rule

Based on the greater of the percentage of revenue of the annual straight-line percentage

How should a US publicly-traded company report a change in Fair value of a hedged AFS security attributable to foreign exchange risk if the hedge is a fair value hedge?

In earnings. Gains and losses on both the FV hedge itself and the hedged item are recognized in earning in the same accounting period

Capital accounts are translated into the functional currency using the

historical exchange rates

Financial information provided in general purpose financial reports does not include information about:

how effectively and efficiently the entity's shareholders' have discharged their responsibility to use the entity's resources. Shareholders do not have a responsibility (or a right) to use the entity's resources.

At the inception of a finance lease, the guaranteed residual value should be:

Included as part of minimum lease payments at PV

Cash Basis to Accrual Basis Accounting reported as ...

Cash basis for financial is not GAAP therefor it is an error. Correction of an error from a prior period is reported as a prior period adjustment to RE

Cash basis revenue to accrual basis revenue

Cash basis revenue + Ending A/R - Beginning A/R - Ending unearned revenue + Beginning unearned revenue = Accrual basis revenue

Identifying a reportable segment

Combined assets of all operating segment exceed 10%, including sales to unaffiliated customers and intersegment sales

When a fixed asset is sold, gain or loss is recognized as part of...

income from continuing operations. The G/(L) is equal to the difference between the proceeds from the sale and the carrying amt of the fixed asset sold

Faithful Representation

information that is - Complete - Neutral - Free from error

Primary users of financial statements

investors, lenders, and other creditors

Impairment calculation (GAAP)

Fair Value - Carrying value

Days sales in accounts receivable

Ending accounts receivable (net) / (Sales (net) / 365)

Form 6-K

Filed semi-annually for foreign private issuers, unaudited financial stmts

Form 3, 4, 5

Form required to be filed by directors, officers and owners with more than 10% stake - no F/S included and XBRL not required

Principal market (most advantageous market)

If there's no principal market, the price in the most advantageous market is the fair value of the stock. Calculation: Price less transaction costs (transaction costs are considered when determining the most advantageous market, but are not included in the fair value measurement)

Inherent risk in an interest rate swap agreement:

I. Risk of exchanging a lower interest rate for a higher interest rate II. The risk of nonperformance by the counter-party to the agreement

General purpose external financial reporting of a corporation focuses primarily on the needs of which of the following users

Investors and creditors and their advisors

Form 10-Q Filing Deadlines

Large accelerated filers : 40 days Non large accelerated filers: 45 days

Level 3 Inputs for Fair Value

Least reliable, unobservable inputs- used when no observable inputs or when undue cost and effort is required to obtain observable inputs

If a security deposit is refundable to the lessee, the lessor has to book the deposit as a ______ until the point it is returned to the lessee (usually at the end of the lease)

Liability

According to the FASB conceptual framework, comprehensive income includes...

Loss on discontinued operations - a change in equity of a business during a period from transactions and other events and circumstances from non-owner sources (e.g. sales revenue)

An entity should recognize a refund liability if...

it receives or expects to receive consideration from a customer and anticipates having to refund a portion or all of that consideration. Book revenue when you can reasonably estimate returns

Comprehensive income

Net Income + OCI = Comprehensive income Comprehensive income includes all changes in equity during a period except those resulting from owner investments and distributions to owners

Level 2 Inputs for Fair Value

Not as reliable as those coming from a stock exchange for an identical asset

general and administrative expenses

Office expenses, such as the - Salaries of the company president and office employees - Depreciation of items used in administration - Rent, utilities, and property taxes on the office building - Insurance - Accounting and legal

Qualitative characteristics: relevance

PCM - Predictive value - Confirmatory value - Materiality value

other comprehensive income

PUFI - Pension adjustments - Unrealized G/(L) (AFS debt securities transferred to HTM and hedges) - Foreign currency items (including translation adjustments) - Instrument specific credit risk

Intangible asset subject to recoverability test when testing for impairment

Patent - Has a limited useful life - recoverability test is only performed on intangibles with a limited life

The fair value for an asset or liability is measured as:

Price that would be received when selling an asset or paid when transferring a liability in an orderly transaction between market participants

Which type of entity is required to report on business segments?

Publicly-traded enterprises

If comparative FS is not presented, the correction of a prior period error in the FS should be reported in the current...

RE statement as an adjustment of the opening balance

US SEC regulations for the FS presentation and disclosure requirements of SEC filings can be found in:

Regulation S-X

Elements of comprehensive income

Revenues, expenses, operating gains, operating losses, FX translation adjustment. Excludes changes from owner investments and distributions to owners

How should unaffiliated customer sales and intracompany sales be disclosed?

Sales must be disclosed separately

Percentage of Completion Method

Step 1: Compute gross profit of completed contract: Contract Price- Estimated total cost = Gross profit Step 2: Compute percentage of completion Total costs to date/Total estimates cost of contract Step 3: Compute GP earned (profit to date) Step 1 x Step 2 = PTD Step 4: Compute GP earned for current year: PTD at current FYE-PTS at beginning of period = Current YTD GP

Reclass adjustments must be shown in the FS that discloses comprehensive income

To avoid double counting in comprehensive income items, which are currently displayed in NI

What is the purpose of information presented in notes to the financial statements?

To provide disclosures required by GAAP

Purpose of reporting comprehensive income

To summarize all changes in equity from nonowner sources.

A change in the valuation technique used to measure fair value is a change in ...

accounting estimate

The translation adjustment from translating a foreign subsidiary's financial statements should be shown as

accumulated component of OCI in consolidated equity until disposed

Held to maturity debt securities are reported at

amortized costs

LT and ST marketable debt securities that the company has the intent and ability to hold to maturity are reported at ...

carrying amount (amortized costs) unless there is a permanent decline in market value

A change is depreciation method is considered a

change in both principle and a change in estimate - these changes should now be accounted for as a change in estimate and accounted for prospectively

Cash flow hedge gains and losses are recorded as a ...

component of OCI (part of the U in PUFI)

Summary of Significant Accounting Policies

conveys valuable information about the company's choices from among various alternative accounting methods (e.g criteria for determining which investments are treated as cash equivalents