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