FAR - CPA Exam
What elements are considered income under the Financial Accounting Standards Board (FASB) framework?
"Revenue" and "gains" as separate elements.
List the steps of developing International Accounting Standards.
1. Add item to agenda; 2. Discuss issue; 3. Publish discussion paper if topic is difficult; 4. Prepare and vote on exposure draft; 5. Issue the Exposure Draft; 6. Analyze the comments on the exposure draft; 7. Debate the issue at hand.
What are the five elements in the International Accounting Standards Board (IASB) framework?
1. Assets 2. Liabilities 3. Equity 4. Income 5. Expenses
What are the first three steps the Financial Accounting Standards Board (FASB) uses when issuing a new accounting standard?
1. Considers whether to add a project to its agenda in consultation with the Financial Accounting Foundation (FAF); 2. Conducts research; 3. Holds a public hearing on the topic.
Identify the types of entities that are not eligible to use IFRS for SMEs.
1. Entities that are required to file financial statements with a regulatory body (e.g., SEC) for the purpose of issuing securities in a public market; or 2. Entities that hold assets in a fiduciary capacity for a broad group of outsiders (e.g., banks, insurance companies, pension funds, etc.).
What are the final three steps in the standard-setting process?
1. Evaluate research and comments from interested parties and issue an exposure draft; 2. Solicit additional comments; 3. Finalize new accounting guidance and issue Accounting Standards Update (ASU).
What are the three valuation techniques (or approaches) that should be used in determining fair value for the purposes of generally accepted accounting principles?
1. Market approach 2. Income approach 3. Cost approach
List the items that entities may elect to measure and report at fair value.
1. Recognized financial assets or financial liabilities, (some exceptions); 2. Firm commitments; 3. Written loan commitments; 4. Rights and obligations under insurance contracts and warranties; 5. Other financial instruments embedded in non-financial derivative instruments.
Earnings
A performance measure concerned primarily with cash-to-cash cycles
List the financial assets and financial liabilities that entities may NOT use fair value to measure and report.
An investment in a subsidiary or variable interest to be consolidated Employers' and plans' obligations for pension benefits, other postretirement benefits, postemployment benefits Financial assets and liabilities under lease accounting Demand deposit liabilities of financial institutions Financial instruments classified by the issuer as a component of shareholders' equity
Distinguish between assets and liabilities measured at fair value on a recurring basis and nonrecurring basis
Assets and liabilities measured at fair value on recurring basis are adjusted to fair value period after a period. Assets and liabilities measured at fair value on a nonrecurring basis are adjusted to fair value only at the time of a particular event (e.g., significant modification of debt).
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. Price level changes cause the application of this assumption to weaken the relevance of certain disclosures
What are some of the purposes of the International Accounting Standards Board (IASB) framework?
Assist the Board to develop new International Accounting Standards (IASs); promote harmonization of standards; and assist, provide information to interested parties.
Observable inputs
Assumptions that market participants would use in pricing an asset or liability based on market data from sources independent of the reporting entity.
Measurement
At the time of origination, assets and liabilities are recorded at the market value of the item on the date of acquisition, usually the cash equivalent. This origination value is referred to as historical cost. For many assets and liabilities, this value is not changed even though market value changes. Other assets, such as plant assets and intangibles, are disclosed at historical cost less accumulated depreciation or amortization.
What types of comparisons are fair value option disclosures intended to facilitate?
Between entities that choose different measurement methods for similar assets and liabilities Between assets and liabilities in the financial statements of an entity that selects different measurement for similar assets and liabilities
Predictive Value
Component of relevance, The quality of information that helps users to increase the likelihood of correctly forecasting the outcome of past or present events.
What are the various types of generally accepted accounting principles which may be used by a U.S. entity?
Depending on the entity, the following types of generally accepted accounting principles may be used: U.S. Generally Accepted Accounting Principles (GAAP); U.S. Other Comprehensive Basis of Accounting (OCBOA); International Financial Reporting Standards (IFRS); IFRS for Small and Medium-sized Entities (SMEs).
What will be the underlying conceptual support for future principles-based accounting standards?
Developing a common framework.
What are some omitted topics for small and medium-sized Entities (SMEs) in International Financial Reporting Standards (IFRS)?
Earnings Per Share, Interim Financial Reporting, Segment Reporting.
Comparability
Enhancing qualitative characteristic of relevance and faithful representation
What should financial statements do according to International Financial Reporting Standards (IFRS)?
Fairly present the underlying financial position and financial performance of the entity by faithfully representing the underlying economic reality the firm faced during the period
True or False: The International Accounting Standards Board (IASB) framework should apply only to public companies, not private corporations.
False, IASB apply to both public and private companies
Full 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
List some examples of simplified recognition and measurement for small and medium-sized entities (SMEs) in International Financial Reporting Standards (IFRS).
Goodwill is amortized; all R&D is expensed, categories of investments reduced, less prior year data required for first- time adoption.
Level 2
Inputs in this level are observable for assets or liabilities (or equity items), either directly or indirectly, other than quoted prices described in Level 1 Quoted prices for similar assets or liabilities in active markets Quoted prices for identical or similar assets or liabilities in markets that are not active markets in which there are few relevant transactions, prices are not current or vary substantially, or for which little information is publicly available Inputs, other than quoted prices, that are observable for the assets or liabilities being valued, including, for example, interest rates, yield curves, implied volatilities and credit spreads Inputs that are derived principally from, or corroborated by, observable market data by correlation or other means
Level 1
Inputs in this, the highest level, are unadjusted quoted prices in active markets for assets or liabilities (or equity items) identical to those being valued that the entity can obtain at the measurement date Quoted prices in an active market provide the most reliable evidence of fair value and, except in unusual circumstances, should be used to measure fair value when available. Quoted prices should not be adjusted because the entity holds a sizable position in the asset or liability relative to the trading volume in the market (often referred to as the "blockage factor"). Adjustments to quoted prices generally result in a fair value measurement categorized in a lower level of the fair value hierarchy
What is the highest level of international generally accepted accounting principles (GAAP)?
International Financial Reporting Standards
What elements of the Financial Accounting Standards Board (FASB) framework are not included in the International Accounting Standards Board (IASB) framework?
Investments by owners, distributions to owners, comprehensive income, gains, losses.
What does the Securities and Exchange Commission (SEC) do?
It administers the US securities laws, most notably the Securities Act of 1933 and the Securities Exchange Act of 1934 as well as others.
What is meant by a "reliable measurement"?
It is a measurement in which a reasonable estimate is made.
What purpose does the fair value hierarchy serve?
Level 1: highest level, are unadjusted quoted prices in active markets for assets and liabilities identical to those being valued Level 2: are observable for assets or liabilities, either directly or indirectly, other than quoted prices described in Level 1 Level 3: lowest level, are unobservable and used to determine fair value only if observable inputs are not available
Identify some of the possible advantages of using IFRS for SMEs, instead of U.S. GAAP, by eligible entities.
More relevant standards Less complicated and voluminous standards Less costly standards to implement Less frequent changes in standards
Liabilities
Probable future sacrifices of economic benefits arising from present obligations of an entity to transfer assets or provide services to other entities as a result of past transactions or events
Equity
Residual interest in the firm's assets, also known as net assets. Equity is primarily comprised of past investor contributions and retained earnings
Assets
Resources that have probable future benefits to the firm, controlled by management, resulting from past transactions. Note the three aspects of this definition
Matching Principle
Revenues are recognized when earned and realized or realizable; the related expenses are recognized, and the revenues and expenses are "matched" to determine net income or loss
When to Recognize Revenue
Revenues are recognized when the entity completes its performance obligation to a customer and the revenue is earned and realized (or realizable) . The performance obligation is completed when the goods or services are delivered (revenue is earned) and cash or promise of cash is received (realized).
When can revisions happen for small and medium-sized entities (SMEs) in International Financial Reporting Standards (IFRS)?
Revisions for SMEs standards happen every three years at most.
Under International Financial Reporting Standards (IFRS), if no standards exist on an accounting issue, what should companies use?
The definitions, recognition criteria, and measurement concepts for assets, liabilities, income, and expenses in the Framework
Amortized cost
This value is historical cost less the accumulated amortization or depreciation of the asset
Unobservable inputs
an entity's own judgments about what assumptions market participants would use
Enhancing Characteristics
complementary to the primary characteristics and enhance the decision usefulness of financial reporting information that is relevant and faithfully represented
Confirmatory value
confirms or changes past (or present) expectations based on previous evaluations
Freight In
cost to transport inventory to the company, which is included as part of inventory cost
Verifiability
different knowledgeable and independent observers could reach similar conclusions based on the information
Neutral
free from any bias intended to attain a prespecified result, or to encourage or discourage certain behavior
Completeness
includes all data necessary to be faithfully representative
Time Period Assumption
indefinite life of a business is broken into smaller time frames, typically a year, for evaluation purposes and reporting purposes.
Cost Constraint
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
Free from error
no omissions or errors
Are International Financial Reporting Standards (IFRS) more rules based or principle based?
principle-based
Timeliness
received in time to make a difference to the decision maker. Can also enhance the faithful representation of information
Fair value
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 (see the fair value lessons for further discussion of fair value)
Faithful representation
reported measure and the condition or situation are in agreement. Financial information that represents an economic phenomenon portrays the economic substance of the phenomenon
Conservatism
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. Used to limit the reporting of aggressive accounting information
Current replacement cost
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
Level 3
the lowest level, are unobservable for the assets or liabilities (or equity items) being valued and should be used to determine fair value only to the extent observable inputs are not available Unobservable inputs should reflect the entity's assumptions about what market participants would assume and should be developed based on the best information available in the circumstances, which might include the entity's own data The reporting entity should not ignore information available about market participants' assumptions and should adjust its own data if information indicated that market participants would use different assumptions
Replacement Cost
the price that an entity would pay to replace an existing asset at current market prices with a similar asset. If the asset in question has been damaged, then the replacement cost relates to the pre-damaged condition of the asset.
Entity Assumption
there is a separate accounting entity for each business organization
Net present value
value determined from discounting the expected future cash flows
Net realizable value
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
Recognition
The process of formally recording an item in the financial statements of an entity after it has met existing criteria and been subject to cost-benefit constraints and materiality thresholds.
Describe the cost approach for determining fair value for the purposes of generally accepted accounting principles (GAAP).
This approach uses the amount currently required to replace the service capacity of an asset.
Net Income
A positive result of 1) revenues and gains minus 2) expenses and losses. A negative result is referred to as net loss.
What did the Securities and Exchange Commission (SEC) eliminate for foreign companies listed in the United States?
A reconciliation of earnings and equity to U.S. generally accepted accounting principles (Form 20-F) in their financial statements.
Comprehensive Income
All changes in net assets of an entity during a period except those resulting from investments by owners and distributions to owners
Freight Out
Cost of freight on shipments to customers, which is included in the income statement either as part of cost of goods sold or as a selling expense
Expenses
Decreases in assets or incurrences of liabilities of an entity by providing goods or services. Expenses provide a benefit to the firm
Losses
Decreases in equity or net assets from peripheral or incidental transactions. Losses provide no benefit to the firm
Distributions to Owners
Decreases in net assets of an entity from the transfer of assets, provision of services, or incurrence of liabilities by the enterprise to owners
Going-Concern Assumption
In the absence of information to the contrary, a business is assumed to have an indefinite life, that is, it will continue to be a going concern. Therefore, we do not show items at their liquidation or exit values
Gains
Increases in net assets from incidental or peripheral transactions affecting an entity.
Investments by Owners
Increases in net assets of an entity from transfers to it by existing owners or parties seeking ownership interest
Revenues
Inflows or other enhancements of assets of an entity or settlements of its liabilities from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing operations.
Materiality
Information that is material will impact a user's decision. Somewhat pervasive throughout the objectives of financial reporting in the sense that the financial statements should present material information because it is decision useful
Describe fair value measurement inputs
Inputs can be observable or unobservable. Observable inputs are based on market data from independent sources. Unobservable inputs are the entity's assumptions about the factors that impact determination of fair value.
Describe fair value measurement inputs.
Inputs can be observable or unobservable. Observable inputs are based on market data from independent sources. Unobservable inputs are the entity's assumptions about the factors that impact determination of fair value.
Define "entry price."
The price paid to acquire an asset or the price received to assume a liability
What is the American Institute of Certified Public Accountants (AICPA)?
The AICPA is the professional organization for participating CPAs.
What is the role of the Financial Accounting Advisory Council (FASAC)?
The FASAC provides guidance on major policy issues, project priorities, and the formation of task forces.
What comprises United States generally accepted accounting principles (GAAP)?
The Financial Accounting Standards Board (FASB) Accounting Standards Codification comprise authoritative U.S. GAAP for publicly traded companies. Securities and Exchange Commission (SEC) pronouncements are also GAAP.
Current Market Value
The amount of cash, or its equivalent, that could be obtained by selling an asset in orderly liquidation
Define "exit price."
The price that would be received to sell an asset or paid to transfer a liability
What are the underlying assumptions of the International Accounting Standards Board (IASB) framework?
The financial statements are prepared on the accrual basis and the entity is a going concern.
What is the main purpose of the Securities and Exchange Commission (SEC)?
The main purpose of the SEC is to promote efficient allocation of capital by maintaining open, orderly, and fair securities markets.
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
Realization
The process of converting non-cash resources and rights into cash or claims of cash.
List the situations where the entry price may not be the exit price.
The transaction is between related parties. The transaction occurs when the seller is under duress. The unit of account included in the transaction price is different from the unit of account that would be used to measure at fair value. The market in which the transaction price occurred is different from the market in which the asset would be sold or the liability transferred
Highest and Best Use
The use that will give the owners the greatest actual return on their investment, regardless of how the owners
Describe the income approach for determining fair value for the purposes of generally accepted accounting principles (GAAP).
This approach converts future amounts to a single present amount.
Describe the market approach for determining fair value for the purposes of generally accepted accounting principles (GAAP)
This approach uses prices and other relevant information generated by market transactions involving assets or liabilities identical or comparable to those being valued.
What is the overall objective of financial statements under International Financial Reporting Standards (IFRS)?
To provide information about the financial position, financial performance, and cash flows of an entity that is useful to a wide range of users in making economic decisions
What is simplified for small and medium-sized entities (SMEs) in International Financial Reporting Standards (IFRS)?
Topics that are irrelevant are eliminated. Recognition and measurement aspects are simplified. Disclosures reduced to 10% of those in regular IFRS.
True or False: Income may be realized or unrealized.
True
Understandability
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
How do user groups influence the outcome of the Financial Accounting Standards Board (FASB) standards?
Users influence standards by providing input during the due process procedure.
When do you recognize an element in the International Accounting Standards Board (IASB) framework?
When it is probable that there is a future economic benefit and the item has a cost or value that can be measured with reliability.
List the dates when an entity may elect to use fair value option for an eligible item.
When the item is first recognized When firm commitment occurs When financial, an asset previously reported at fair value with unrealized gain/loss in earnings no longer qualifies for that fair value treatment When accounting treatment for an investment changes because it becomes subject to the equity method or ceases to be eligible for consolidation When an item is measured at fair value at the time of an event but does not require fair value measurement at subsequent reporting dates
Does the International Accounting Standards Board (IASB) framework include losses for the term "expense?"
Yes, it includes such losses.
