FAR EXAM

basic principles of remeasurement

- monetary assets and liabilities are measured with the exchange rate at the date of the B/S -non monetary assets and liabilities and contributed capital are remeasured using the historical rate based on the timing of each one - remeasure all income statement items - the difference between net income/loss and the remeasurement will be the remeasurement adjustment recognized income

What is reported on the F/S?

-Info about economic resources and claims against the entity (B/S) -Changes in economic resources and claims -Financial performance reflected by accrual accounting (Income statement) -Financial Performance reflected by past cash flow (Statement of Cash Flows) - Changes in economic resources and claims NOT resulting from financial performance (Statement of Changes in Owner's Equity)

When to recognize F/S elements

-Meets definition -Measurable -Relevant -Reliable

Cash Basis

-Revenue is recognized when received - Expenses recognized when paid -Fixed assets are expensed

Items required to be reported at FV

-Trading securities or AFS -Investments in equity securities -Assets acquired and liabilities assumed in a business combination (initially) -Impairment losses - ALL derivatives

Two assets that are subject to the recognition of credit losses

-assets measured at amortized cost -AFS debt securities Assets at fair value are normally not subject to credit loss (market is already taken into consideration under FV)

factors to consider when identifying the functional currency

-cash flow -sales prices - demand for the company's product/services - expense - financing and financing costs - intra-entity agreements

items excluded from cash

-compensating balances -postdated checks or NSF -overdraft protection - restricted cash - postage stamps

ways to enter into a foreign market

-foreign currency transaction -financial instruments denominated in a foreign currency - foreign currency exchange transactions -foreign investee

three valuation techniques

-market approach -income approach -cost approach

fair value hedge

-protects a company against risks associated with changes in FV -increase or decrease would be a gain or loss in the income statement -a corresponding gain or loss will be recognized in the same period

cash flow hedge

-protects an entity from a fluctuation in cash flows -used for receivables and payables -changes are reported in OCI

A company is required to document _______ for a fair value hedge

-the relationship between the hedge and the hedged risk - indicate that the hedge is expected to be highly effective -provide an explanation as to how effectiveness will be measured.

Disclosure for FV

-valuation technique -judgements and assumptions -uncertainty -effect of changes in FV measurement -identification of the items at FV -level of inputs -MIC -changes in FV

checkbook balance

+ amounts collected by bank -unrecorded bank charges +/- errors = corrected balance

BANK RECONCILIATION

+ deposits in transit - outstanding checks +/- errors = corrected balance

Measurement in $ terms

- Historical cost -replacement cost -fair value -NRV -PV

Items that DO NOT qualify for the FV option

- Pension, post retirement, and other post-employment benefits -leases -financial instruments that are with equity -share-based payments and stock options

Public Entity Criteria (4)

- Reports F/S to the SEC (voluntary or required) -Regulated by the 1934 Securities Exchange Act - Issue securities that are traded or have securities that are listed on an exchange - Are required to apply GAAP and have securities that are not restricted as to transfer

Notes to the F/S include

- Summary of Significant accounting policies - summary of significant assumption - other notes to the F/S

Methods for Measuring Credit Losses

- discounted cash flow method - loss-rate method -roll-rate method - probability of default method - aging method

Steps to FV measurement

- identify the asset or liability to be measured - determine the principal or most advantageous market - determine the valuation premise (in-use or in-exchange) - determine the valuation technique (MIC) - obtain inputs for valuations (Levels) -calculate the FV

Assets measured at amortized cost

A/R, Financing Receivables (loans, trade accounts, notes, credit cards, certain leases), HTM debt securities

Regulatory basis

When a governmental regulatory agency imposes this report

Election of alternative approach for goodwill is disclosed in the

Summary of Significant Accounting Policies

Modified Cash Bases

Hybrid of accrual and cash - Assets can be capitalized -Tax and inventory can be accrued

steps to perform translation

1. translate all income statement items (WA) for NI 2. translate items on B/S 2a. assets liabilities 2b. contributed capital accounts at historical rates 2c. retained earnings are rolled forward 3. difference will be the translation adjustment for OCI

Liability definition

An economic obligation in which one needs to use or transfer an asset, it cannot be avoided and the transaction has already occurred

Financial Statement Key Elements

Asset, liability, equity, investment by owner, distribution to owners, comprehensive income, revenues, expenses, gains, and losses

Equity

Assets - Liabilities

Full Set of F/S

Balance sheet, income statement, statement of cash flows, statement of changes in owner's equity

Enhancing Qualitative Characteristics

Comparability (same method), verifiability (different sources agree), timeliness, and understandability (clear and concise info)

Other Comprehensive Income (OCI)

Derivative cash flow hedges Excess adjustment of Pension PBO and FV of plan assets at year end Net unrealized gains or losses on AFS securities Translation adjustment for foreign currency

Private Company Council (PCC)

Evaluates existing GAAP to see if nonpublic entities are exempt -developed alternative accounting approach for goodwill

Objective of financial reporting

FOCUSES on the USERS To provide information that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity

Faithful Representation consists of

Free from Error Neutrality Completeness

Public entities submit F/S in accordance with

GAAP or IFRS general purpose framework

nonpublic entities submit F/S with

GAAP, IFRS, Special Purpose Framework (Cash, Tax, Contractual, Regulatory, FRF for Small to Med size

Emerging Issues Task Force (EITF)

Group created in 1984 by the FASB to reach a consensus on how to account for new and unusual financial transactions that might create differing financial reporting practices. WORKS ON SHORT-TERM ISSUES

Constraints to the usefulness of information

Materiality (also goes with Relevance) and Cost/benefit

If INFLATION for monetary items

Monetary Asset - Purchase power LOSS Monetary Liabilities - Purchase power GAIN

Physical capital maintenance concept

Only recognize an event when an asset is sold or a liability is settled

Relevance consists of (roger is PC)

Predictive value - helps users predict and forecast Confirmatory value- helps users confirm the prediction

Entry Price

Price paid to acquire an asset or the amount received to assume a liability in an exchange transaction

Purchased Assets with Credit Deterioration (PCD Asset)

Purchased an asset at a discount due to the credit deterioration - the discount is based on the credit risk and market risk

Financial capital maintenance concept

Recognize an event as a change in the value of an asset or liability occurs

Primary Qualitative Characteristics

Relevance and Faithful representation

Statements of Financial Accounting Concepts (SFACs)

Represents the conceptual framework that guides the development of financial accounting and reporting standards

Fair Value definition

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 (exit price)

when an entity enters into a transaction in which they agree to exchange one currency for another at a specific exchange rate at a specific future point in time they are engaging in

a forward exchange contract

Contractual basis

accrual - when a party is subject to a contract

Asset definition

an economic resource that has a probable future benefit, one can obtain the benefit, and the transaction creating the benefit has already occurred

income approach

analyzing future amounts in the form of revenues, cost savings, earnings, or some other item

to buy the currency at a future date means they are expecting the exchange rate to

be higher

to sell the currency at a future date means they are expecting the exchange rate to

be lower

how is a forward exchange contract's fair value determined?

by determining the exchange rate that is used to value it

Tax Basis

can be cash or accrual revenues and expenses are recognized in the same period

Revenue is realizable when

cash is collected after goods have been delivered

Consistency helps achieve

comparability (goes for both relevance and faithful representation)

intra entity items are eliminated in

consolidation

Allowance for Credit Loss Account

contra asset account -measured at amortized cost -uses the effective interest rate -Increases in allowance are reported in the Credit Losses Expense account -Decreases in allowance are reported in the Reversal of Credit Loss Exposure account

reporting currency

currency in which the enterprise prepares its financial statements

current ratio

current assets/ current liabilities

losses definition

decreases in equity from identical transactions

IFRS Foreign currency for remeasurement and translation

foreign (not transactional), functional, and presentation (not reporting)

the exchange rate that is expected at some point in the future

forward rate

when an entity enters into a transaction that will be settled through payment or receipt of foreign currency, it is recognized in the

functional currency using the exchange rate in effect of the date of transaction

functional currency

greatest economic impact on company - currency in which entity generates and expends cash

why would a company engage in a forward exchange contract hedge?

in case the entity has exposure that is denominated in a foreign currency and it desires protection from the fluctuations in rate changes

When are financial assets required to be written off?

in the period in which it is determined that they are uncollectible

gains definition

increases in equity from identical transactions

revenue definition

inflows from an entity's primary operations

when the FV option is elected

it is permanent and can only be discontinued at the subsequent election date - unrealized gains and losses must be reported in income

transactional currency

local "recording currency" > currency of a particular country - usually the books and records are kept in

cost approach

measures the cost that would be incurred to replace the benefit derived from an asset

What are not adjusted for inflation?

monetary assets and liabilities

if there is no principal market use the

most advantageous market

Level 1

most reliable, uses observable data from the actual market

where does translation go?

on the balance sheet in comprehensive income

where does remeasurement go?

on the income statement

expenses definition

outflows due to an entity's primary operations

Cash and Cash equivalents

petty cash, coin and currency, money market accounts, unmailed checks, savings accounts, CDs with maturity of 3 months or less, bank checks, traveler's checks, money orders, treasury bills

Quick ratio

quick assets/current liabilities Quick assets = cash, marketable securities, and A/R

Under IFRS, a cash flow hedge and a hedge of a net investment in foreign operations are accounted for by

recognizing gains and losses in other comprehensive income

transactional to functional currency?

remeasurement

when the functional currency is in a highly inflationary economy of 100% or more for over 3 years the

reporting currency will be considered the functional currency and the f/s will be remeasured rather than translated

Accrual based accounting

revenues are recognized in the periods that they are earned

the actual exchange rate on a particular date

spot rate

income from PCD assets can only be collected if

the amount can be reasonably estimated

An exchange gain occurs when

the exchange rate increases between the date a receivable is recorded and the date of the cash receipt

when an entity has A/R, N/R, A/P etc in foreign currency they are adjusted based on

the exchange rates as of each balance sheet date

Principal market

the market with the greatest volume or level of activity for the asset or liability

expenses and losses are recognized when

they are incurred or when a loss of future economic benefit is discovered

Risk factors with measuring with PV

timing, risk, interest, amount of cash flows

functional to reporting currency?

translation

Available for sale securities recognize

unrealized gains and loss in OCI

Market approach

uses information generated by market transactions that involve identical or comparable assets or liabilities

Level II

uses observable data, but the transaction did not occur in an active market, or the transaction relates to a similar asset (not identical)

Level III

uses unobservable data and are based on management's judgement

Change in Classification of Loans

when a loan is being sold that is not held for sale the loan is transferred to held for sale. However, any uncollectible portion of the amortized cost basis will need to be written off before the loan is transferred