Financial Reporting 4
Related parties-Disclosures (SFAS 57)
Affiliates, equity method investees (own more than 20% of entity you have significant influence then must use Equity Mehtod), employee benefit trusts, principal owners, management or any party that can significantly influence a transaction
Cost Flow methods of inventory
FIFO, LIFO, WA
Other Comprehensive Bases of Accounting
Financial statements may be prepared in conformity with a comprehensive basis of accounting other than generally accepted accounting principles (GAAP) or international accounting standards. The four types of OCHOA include (1) Cash-basis financial statements-:In pure cash-basis financial statements the only asset is cash; revenue is recognized when cash is received; and expenses are recognized when they are paid. The pure basis is rarely used. (2) Modified cash-basis financial statements-Modified cash basis financial statements are cash basis statements with modifications that have substantial support. For example, fixed assets, inventories, and the related liabilities are typically recorded in modified cash-basis financial statements. Modifications that have substantial Support involve presenting the items as they would be in GAAP financial statements providing that the presentation is not illogical. As an example, an illogical modification would involve recording inventories but not recording the accounts payable related to the inventories. (3) Tax-basis financial statements-Tax basis financial statements are statements prepared on the basis of tax laws and regulations. When financial statements are prepared on an income tax basis, the financial statements should not simply repeat items and amounts reported in the tax return. Thus, items such as nontaxable municipal interest and the nondeductible portion of travel and entertainment expense should be fully reflected in the tax-basis income statement. (4) Regulatory-basis financial statements-Regulatory financial statements are prepared based on rules established by a regulatory agency.
Current Cost
Increased due to market demand This is for supplementary information only
Unusual or Infrequent Items
Items that are unusual or infrequent but not both should not be presented as extraordinary items. However, they are often presented in a separate section in the.income statement above income before extraordinary items. A common example of such items is a "restructuring charge." Another unusual or infrequent item is accounting for the costs of exit and disposal activities (which include, among other items, restructurings). A liability for a cost associated with an exit or disposal activity should be recognized and measured initially at fair value in the period in which the liability is incurred. The fair value is usually determined as the present value of the estimated future payments discounted at the credit adjusted, risk-free rate of interest
Market
Level 1
Income
Level 2
Cost
Level 3
Comprehensive income
Net Income+Other Comprehensive Income=Comprehensive income Companies are required to show comprehensive income SFAC definition all changes in share holder equity except investments by owners and distributions to owners
Principal owners-Disclosures (SFAS 57)
Owners of more than 10% of a film's voting interests a. Includes known beneficial owners
Affiliate-Disclosures (SFAS 57)
Party is controlled by another enterprise that controls, or is under common control with another enterprise, directly or indirectly
Control-Disclosures (SFAS 57)
Power to direct or cause direction of management through owner ships contract, or other means Greater than 50% shares of OS stock so 50% stock plus one stock
Disclosures (SFAS 57) Representation concerning related party transactions
Representations concerning related-party transactions shall not imply that terms were equivalent to those resulting in arm's-length bargaining unless such statement can be substantiated.
fair value hierarchy
The fair value hierarchy is referred to as Level 1, Level 2, and Level 3, with the fair value hierarchy based on the lowest level of input. The lowest level that is practical should be used to value the asset.or liability.
Income Approach
The income approach converts future amounts to a single current (discounted) amount. discounted future cash flows
Market Approach
The market approach uses prices and relevant information from market transactions. for identical or comparable assets or liabilities. same type of item in the market
Many of the assets disposed of as discontinued operations are long-lived assets. Accordingly, the component is classified as discontinued operations in the first Period that it meets the criteria as being "held for sale":
(1) Management commits to a plan of disposal. (2) The assets are available for sale. (no one is suing over who owns them) (3) An active program to locate a buyer has been initiated (4) The sale is probable. greater than 50% chance it will occur (5) The asset is being actively marketed for sale at a fair price. (6) It is unlikely that the disposal plan will significantly change.
To be reported as discontinued operations, two requirements must be met:
(1) the operations and cash flows of the component have been (or will be) eliminated from the ongoing operations of the entity as a result of the disposal (lock box separate it out of the income from continuing operations) and (2) the entity will not have any significant involvement in the operations of the component after disposal. (you surrender control of it...you wont be involved it in any more you wont be bothered with it anymore)
Applying the fair value measurement approach involves the following six steps:
(a) Identify the asset or liability to be measured. (b) Determine the principal or most advantageous market. (c) Determine the valuation premise. (d) Determine the appropriate valuation technique (market, income, or cost approach). (e) Obtain inputs for valuation (Level J, Level 2, or Level 3). (D Calculate the fair value of the asset.
For assets and liabilities that are measured at fair value on a nonrecurring basis, the following information must be disclosed in interim and.annual period financial statements:
(a) The fair value measurement at the end of the reporting period and the reasons for the measurement. (b) The level within the fair value hierarchy, Level 1, 2, and 3. (c) For fair value measurements categorized within Level 2 or Level 3 of the fair value hierarchy, the inputs and valuation techniques used to measure fair value. (d) For fair value measurements using significant unobservable inputs (Level 3), a description of valuation processes (policies, procedures, and analyses of change from period to period). (e) Por fair value measurements a description of nonfinancial assets with a current use differing from the highest and best use.
For assets and liabilities that are measured at fair value on a recurring basis, the following disclosures are required for each major class of assets and liabilities:
(a) The fair value measurement at the end' of the reporting date. (b) The level within the fair value hierarchy used, segregating the fair value measurements, which use Levels 1, 2,and 3 inputs. (c) The amount of any transfers between Level 1 and Level 2 of the fair value hierarchy and the reason for the transfer along with the entity's transfer policy. Transfers into and out of each level are disclosed separately. (d) For fair value measures using significant other observable inputs (Level 2) and significant unobservable inputs (Level 3), a description of valuation techniques used, the inputs used to determine fair values of each class of assets or liabilities. If there is a change in valuation techniques, the reason for the change' must be disclosed. (e) For fair value measurements using unobservable inputs (Level 3) a reconciliation of the beginning and ending balance, showing 1] Total gains and losses for the period realized and unrealized, presenting gains and losses in earnings and gains and losses in other comprehensive income, and a description of where those gains or losses are included in the income statement, or in other comprehensive income. 2] Purchases, sales, issues, and settlements shown separately. 3] Transfers in and out of Level 3 are shown separately with reasons for the transfers, along with the entity's transfer policy. (f) For fair value measurements using unobservable inputs (Level 3) the amount of total gains or losses for the period included in earnings from unrealized gains and losses for those assets and liabilities still held at the end of the reporting period and the line item in the statement of income (or activities) where the gains and losses are recognized, (g) For fair value measurements using unobservable inputs (Level 3) a description of the valuation processes policies, procedures, and analyses of change from period to period), the sensitivity of the measurement, and any interrelationships. (h) For fair value measurements, a description of nonfinancial assets with a current use differing from the highest and best use.
Disclosures (SFAS 57) include disclosures of material transactions between related parties except
1. Compensation agreements, expense allowances, and other similar items in the ordinary course of business 2. Transactions which are eliminated in the preparation of consolidated/combined FS (dont have to disclose parents sales to subs or vise versa because this is consolidated)
Disclosures (SFAS 57) of material transactions shall include
1. Nature of relationship(s) 2. Description of transactionis, including those assigned zero or nominal amounts 3. Dollar-amounts of transactions for each income statement period and effect of any change in method of establishing terms 4. Amounts due to/from related parties, including terns and manner of settlement (if you owe them or they owe you money, you sell them land or they sell you land even if at a fair value)
There are THREE approaches to presenting income statements what are they
1. present a combined statement of income and comprehensive income with OCI (other comprehensive income) at the bottom 2. present a second statement that directly follows the income statement 3. present comprehensive income in the Statement of Changes in SHE (share holders equity)-Cant use this anymore
Other Comprehensive income (must memorize)
1. reclassification adjustments (occur when you have an item has unrealized holding gain or loss, go between held to maturity and avail for sale) 2. unrealized holding gain or loss on Available for Sale Securities (assumes fair value option is not used-otherwise goes in the NI calc) 3. Pension or other post retirement benefits adjustments a. gain or losses associated with pension b. prior service cost or credits associate with pension or other post-retirement benefit c. transition asset or obligations associated with pension or other post-retirement benefit 4. the unrealized holding gain or loss (effective portion) (inefective portion would be show in NI)on the derivatives held as cash flow hedges, including foreign currency hedges as cash flow hedges 5. cumulative foreign currency translation adjustments (current rate method)
A company can elect to measure the applicable financial assets or financial liabilities at fair value when?
A company can elect to measure the applicable financial assets or financial liabilities at fair value on the date an eligible item is first recognized, the date the entity enters into a firm commitment, the date financial assets cease to qualify for fair value treatment due to specialized accounting rules. (a) For companies using the equity method of accounting, a company can elect to measure the investment at fair value on the date the percentage of ownership changes and the entity is no longer required to consolidate. (own 15% Outstanding stock you don't have to choose the equity method...but when you own 30% you are ordinarily required to use the equity method of accounting...except if you elect the fair value option. Or going from over 50% to less then you can elect fair value.) (b) For debt modifications, the fair value option can be elected on the date the debt is modified. Once the fair value option is elected, it is irrevocable. (once you choose it your stuck with it forever)
Financial Asset Vs Financial Liability Fair Value option
A financial asset is cash, evidence of an ownership interest in an entity, or a contract that conveys a right to receive cash or another financial instrument or to exchange financial instruments on favorable terms. A financial liability is a contract that imposes an obligation to deliver cash or another financial instrument. Cash or receivable notes payable bond payable...a payable
Anonrecognized subsequent event
A nonrecognized subsequent event is one in which the condition did NOT exist at.the balance sheet date, but arose AFTER the balance sheet date. In such cases, the event is NOT recognized in the financial statements. However, if the event is such that the financial statements would be misleading, then a footnote disclosure should be made indicating the nature of the event and an estimate of the financial statement effects. if you own factories...year ended...on january 8th one of the factories burned to the ground...it wouldnt not effect FS however you would disclose this... Will not effect the FS
Restructuring
A restructuring is a program that is planned and controlled by management and materially changes either the scope of the business undertaken by the company, or the manner in which that business is conducted. Examples include (3) Sale or termination of a line of business (b) Closure of business activities in a particular location (c) Relocation of business activities from one location to another (d) Changes in management structure, or (e) Fundamental reorganizations that affect the nature and focus of operations
Accounting policies
Accounting policies must be set forth as the initial footnote to the statements. Disclosures are required of (1) .Accounting principles used when alternatives exist (depreciation what type are you using? construction method, interest, cash equivelants 90 days or less maturity) (2) Principles peculiar to a particular industry (3) Unusual or innovative applications of accounting principles
Balance sheet and Other Comprehensive Income
Accumulated other comprehensive income is reported in the stockholders' equity section of the balance sheet. When ail entity has components of other comprehensive income, the total of these is closed to the balance sheet account entitled accumulated other comprehensive income, not retained earnings.
Disclosures for fair value measurements
Additional footnote disclosures are required for fair value measurements. Fair value measurements are reported by class of assets or liabilities. The class is determined on the basis of the nature and risks of the assets or liability.
The fair value option for reporting financial assets and financial liabilities.
An election can be made to value certain financial assets and financial liabilities at fair value. A financial asset is cash, evidence of an ownership interest in an entity, or a contract that conveys a right to receive cash or another financial instrument or to exchange financial instruments on favorable terms. A financial liability is a contract that imposes an obligation to deliver cash or another financial instrument. allows you to use fair value measure when you ordinarily would not use a fair value amount
An entity that is an SEC filer is not required to disclose the date through which subsequent events are evaluated. However,
An entity that is an SEC filer is not required to disclose the.date through which subsequent events are evaluated. However, a non-SEC filer must also disclose the date through which the subsequent events were evaluated and whether that date is the date the financial statements are issued or available to be issued. Non SEC filers have to keep tracking subsequent events up to the release of the FS where as the SEC filers do not. The provisions of ASC Topics 855 apply both interim and annual reports for all subsequent events that are not addressed by other areas of the Codification.
Subsequent Events SEC vs all other
An entity that is an SEC filer or is a conduit bond obligor for conduit debt securities traded in a public market must evaluate subsequent events through the date the financial statements are issued.' All other entities must evaluate subsequent events through the date that the financial statements are available to be issued. There are two types of subsequent events: recognized and nonrecognized.
Reclassification adjustments (NI and OCI)
As unrealized gains (losses) recorded and reported in other comprehensive income for the current or prior periods are later realized, they are recognized and reported in net income. To avoid double counting it is necessary to reverse the unrealized amounts that have been recognized. REMEMBER OCI is net of taxes Thus if it was a gain on AVS of $45 You would reverse this in OCI net of taxes
IFRS Statement of financial position. Assets are classified
Assets are classified as current and noncurrent. (a) An asset is current if it is expected to be realized or held for consumption in the normal course of the entity's operating cycle, held primarily for trading purposes, expected to be realized within 12 months of the end of the period, or is cash or a cash equivalent that is not restricted . (b) Noncurrent assets include tangible. intangible, operating. and financial assets that are long term, such as held-to-maturity investments, investment property, property and equipment, intangible assets, assets
Other Comprehensive Bases of Accounting Cash Baisis
Cash-basis financial statements-:In pure cash-basis financial statements the only asset is cash; revenue is recognized when cash is received; and expenses are recognized when they are paid. The pure basis is rarely used.
Balance Sheet Accounts Total Assets
Current Assets + Long Term Investments+PPE+Intangible Assets net of Amortization+Other Assets
Total Liabilities
Current Liabilities + Non current Liabilities
Current Assets
Current assets-CUlTent assets is used to designate cash and other assets or resources commonly identified as those that are reasonably expected to be realized in cash or sold or consumed during the normal operating cycle of the business. One Year or LESS
Current Liability
Current liabilities-Current liabilities is used principally to designate obligations whose.liquidation is reasonably expected to require the use of existing resources properly classifiable as current assets, or the creation of other current liabilities One Year or LESS Remember to include the "current payment" first year is current other years or long term (mortgage warranties ect)
Fair Value measurements are based on what type of price
EXIT Price So not the price that would be paid to acquire the asset
Fair value Definition
Fair value is 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 (at exit price) under current market conditions. An orderderly transaction is a transaction that allows for normal marketing activities that are usual and customary. In other words. it is not a forced transaction or sale. regular type of transaction = orderly transaction
Fair value measurements
Fair value measurements are required for certain assets and liabilities (investments, derivatives, asset impairments. asset retirement obligations, goodwill, business combinations, troubled debt restructuring). helps you come up with the value does not tell you when to take the fair value
Immediate family-Disclosures (SFAS 57)
Family members whom principal owners or management might control/influence or becontrolled/influenced by
International Financial Reporting Standards (IFRS) Financial Statements
Financial statements. lAS I provides that a complete set of financial statements must be prepared annually. A complete set of financial statements includes a statement of financial position, a statement of comprehensive income, a statement of changes in equity, a statement of cash flows, and notes containing significant accounting policies and explanations.
IFRS Statement of financial position. Share holders
For shareholders' equity the financial statements must disclose the number of shares of common stock authorized, issued, and outstanding. If there are preference shares (e.g., preferred stock), they must be reported separately including the number of shares authorized, issued, and outstanding. Preference shares that are redeemable at the option of the holder must be classified as liabilities. Treasury shares repurchased are stated at cost and shown as a reduction to shareholders' equity. Accumulated other comprehensive income is reported in the shareholder's equity section of the balance sheet, and noncontrolling interests are disclosed as a separate item in the equity section of the balance sheet.
Net Sales-COGS=
Gross Margin or Gross Profit
Cost of Goods purchased
Gross purchases -purchase discounts -purchases returns and allowances =net purchases +freights in or transportation in (cost of getting goods to you) =cost of goods purchased
how do you calculate net sales?
Gross sales-sales discounts-sales returns and allowances
Unusual and infrequent extroidinary
Hurricane in Minnesota typically never happen before and you expect it to never happen again Hurricane and earthquake Gains and loss for hurricane would be 1 extraordinary item gains and loss for earthquake would be 2 extraordinary item you would net tax Extraordinary gains come from good insurance
SEC registrants much include what in OPEX
Impairement Losses
Equity Method
In many investments, although control is not achieved, the degree of ownership indicates the ability for the investor to exercise significant influence over the investee. -The equity method employs the accrual basis for recognizing the investor's share of investee income. Accordingly, the investor recognizes income as it is earned by the investee. -Furthermore, under the equity method, dividends received from an investee are recorded as decreases in the investment account, not as income -In applying the equity method, the accounting objective is to report the investor's investment and investment income reflecting the close relationship between the companies. -The investor's investment account increases as the investee earns and reports income. Also, the investor recognizes investment income using the accrual method—that is, in the same time period as the investee earns it. If an investee reports income of $100,000, a 30 percent owner should immediately increase its own income by $30,000. This earnings accrual reflects the essence of the equity method by emphasizing the connection between the two companies; as the owners' equity of the investee increases through the earnings process, the investment account also increases. Although the investor initially records the acquisition at cost, upward adjustments in the asset balance are recorded as soon as the investee makes a profit. A reduction is necessary if a loss is reported. -The investor's investment account is decreased whenever a dividend is collected. Because distribution of cash dividends reduces the book value of the investee company, the investor mirrors this change by recording the receipt as a decrease in the carrying value of the investment rather than as revenue. If the investee subsequently reports net income of $50,000, the investor increases the investment account (and its own net income) by $20,000 in recognition of a 40 percent share of these earnings. Conversely, a $20,000 dividend paid by the investee necessitates a reduction of $8,000 in this same asset account (40 percent of the total payout).
In use Vs In exchange
In use-together as a group In Exchange-Single Unit (a) If the asset provides maximum value by using it with other assets as a group. The fair value of the asset is the price that would be received to sell the asset assuming the asset is used with other assets as a group. (b) If the asset provides maximum value on a stand-alone basis, the fair value of the asset is the price that would be received in a current transaction to sell the asset stand-alone.
Constant dollar accounting/historical
Increases due to inflation This is for supplementary information only
fair value hierarchy Level 2
Level 2 inputs are directly or indirectly observable inputs other than quoted prices of Level 1. Examples of Level 2 inputs include quoted prices for similar assets or liabilities inactive markets, quoted prices for identical or similar assets that are in markets where few transaction occur, the prices are not current, or prices vary substantially over time. Level 2 inputs also include observable inputs such as yield curves, bank prime rates, interest rates, volatilities, prepayment speeds, loss severities, credit risks, and default rates. cost approach-kelly blue book
fair value hierarchy Level 3
Level 3 inputs are unobservable inputs. Level 3 inputs may only be used to measure fair value if observable inputs are not available (i.e., there is little market activity for the asset or liability).These unobservable inputs may reflect the reporting entity's own assumptions about the market and are based on the best information available. Example of Level 3 inputs would include pricing a three-year option using the historical volatility on shares, valuing an asset retirement obligation using expected cash flows estimated by the company, or valuing a reporting unit using a firm's financial forecasts for cash flows or earnings. Income approach-discounted cash flow
fair value hierarchy Level 1
Levell uses quoted prices (unadjusted prices) from active markets for identical assets or liabilities. Quoted prices in active markets provide the most reliable evidence of fair value and should be used without adjustment whenever available. Examples of Level I inputs are stock quotations from the New York Stock Exchange, quotations from dealer markets such as NASDAQ or the market from US Treasury securities, brokered markets wherein brokers match buyers and sellers, and principal-to-principal markets. The fair value of a security measured within Level I is the quoted price times the quantity held, and it is not adjusted for the quantity of shares (blockage factor) held Market approach
IFRS Statement of financial position. Liabilities are classified
Liabilities are classified as current and noncurrent. (a) A liability is current if it is expected to be settled in the normal course of business during the operating cycle, due to be settled within 12 months, held primarily for trading purposes, or does not have an unconditional right to defer settlement beyond 12 months. 1] However, certain payables such as trade payables and accruals for operating costs are classified as current liabilities regardless of the settlement date. (b) Interest-bearing liabilities are classified based upon whether they are due within 12 months. 1] However, if an agreement to refinance the liability on a long-term basis is executed prior to the financial statement date, the liability may be classified as noncurrent, a] An executed agreement prior to the balance sheet is not required. 2] For lFRS, if the agreement to refinance is made after the balance sheet date, then the liability must be classified as current at the balance sheet date. Similar to US-GAAP, if a long-term debt becomes callable due to violation of a loan covenant, the liability must be classified as a current liability.
Consolidation of Financial Statements
Many corporate investors acquire enough shares to gain actual control over an investee's operation. In financial accounting, such control is recognized whenever a stockholder accumulates more than 50 percent of an organization's outstanding voting stock. At that point, rather than simply influencing the investee's decisions, the investor clearly can direct the entire decision-making process. Investor control over an investee presents a special accounting challenge. Normally, when a majority of voting stock is held, the investor-investee relationship is so closely connected that the two corporations are viewed as a single entity for reporting purposes. Hence, an entirely different set of accounting procedures is applicable. Control generally requires the consolidation of the accounting information produced by the individual companies. Thus, a single set of financial statements is created for external reporting purposes with all assets, liabilities, revenues, and expenses brought together.
Other Comprehensive Bases of Accounting modified cash basis
Modified cash-basis financial statements-Modified cash basis financial statements are cash basis statements with modifications that have substantial support. For example, fixed assets, inventories, and the related liabilities are typically recorded in modified cash-basis financial statements. Modifications that have substantial Support involve presenting the items as they would be in GAAP financial statements providing that the presentation is not illogical. As an example, an illogical modification would involve recording inventories but not recording the accounts payable related to the inventories.
Where to net income and other comprehensive income get closed out to each year?
NI will be closed out into RE Other Comprehensive income will be in the BS under accumulated other comprehensive income
There are two systems of inventory
Periodic-need to do a calculation on the IS Beginning inventory +Cost of goods purchased =cost of goods avail for sale -end inventory =COGS Perpetual systems
Management-Disclosures (SFAS 57)
Persons responsible for enterprise obectives who have policy-making and decision-making authority a. For example, board of directors, chief executive and operating officers, and vice-presidents b. Includes persons without formal titles
Disclosures
Related-party disclosures are covered by ASC Topic 850 (SFAS 57). Additional disclosures required for specific situations were specified at the end of most pronouncements.
Impairment losses for SEC and non SEC
SEC goes in the operating expenses Non SEC goes in other expenses only if you are not publicly traded
operating expenses
Selling expenses General and Administrative expenses R and D org cost pre-opening expense SEC registrants must put imparement losses here
Reclassification adjustments (NI and OCI) Simple Example
Simple Example You have an AFS at 5 on 1/1/2011 FMV at 12/31/2011 = 7 Journals AFS 2 Unrealized Holding Gain OCI 2 Now on 1/1/2012 you sell for $7 Cash 7 AFS 5 Realized Gain 2 (this shows on NI other revenues and Gains.) So now you have the gain showing twice once in the NI area and once in the OCI (unrealized gain) Thus you need to reverse AFS 2 Unrealized Gain OCI 2 This is the reclassification but remember it needs to be net of tax effect
Balance Sheet otherwise known as
Statements of financial positions
Subsequent events
Subsequent events are those occurring afterthe balance sheet date but before the financial statements are issued or available to be issued. Financial statements are issued when they are distributed to shareholders and other users. Financial statements are "available to be issued" when they are in a form and format that is complete and complies with GAAP and all necessary approvals for issuance have been obtained.
Other Comprehensive Bases of Accounting tax-basis financial statement
Tax-basis financial statements-Tax basis financial statements are statements prepared on the basis of tax laws and regulations. When financial statements are prepared on an income tax basis, the financial statements should not simply repeat items and amounts reported in the tax return. Thus, items such as nontaxable municipal interest and the nondeductible portion of travel and entertainment expense should be fully reflected in the tax-basis income statement.
What does the SEC require as far as comparative financials
The SEC requires that a two-year comparative balance sheet and a three-year comparative income statement and statement of cash flows be presented.
cost approach
The cost approach relies on the current replacement cost to replace the asset with a comparable asset, adjusted for obsolescence. what would be used to replace the item (kelly blue book)
can the fair value election be made on an instrument by instrument basis?
The fair value election can be made on an instrument-by-instrument basis. For example, a company has two available-for-sale securities, Security A and Security B. The company can account for Security A using the cost adjusted fair value method for available-for-sale securities and it can elect the fair value option and account for Security B at fair value. However, if the fair value option is elected, it must be applied to the entire instrument and not a portion of the instrument. For example,if there are multiple advances to a borrower for a single contract, it must be applied to the entire balance of the contract. If the fair value option is applied to an investment in an entity that would normally use the equity method, it must be applied to all debt and equity interests in that entity. (a) Similarly, if the fair value option is elected for insurance contracts, it must be applied to all claims and obligations for that contract. (b) If the fair value option is elected, any unrealized gains and losses are reported in earnings for the period. Therefore, any unrealized gains and losses on an available-far-sale security would be reported on the income statement rather than in other comprehensive income . For a held-to-maturity security, the company would no longer report the investment at amortized cost. Instead, the held-to-maturity security would be marked to fair value at the end.of the period, and the resulting unrealized gain or loss would be reported on the income statement. The rules remain in effect for classifying items on the statement of cash flows as operating or investing activities. you are treating the Fair Value election like you would for stock thus its gonna show up in other earnings not comprehensive income Equity securities not classified as trading securities are classified as available-for-sale securities and reported at fair value with unrealized gains and losses excluded from earnings and reported in a separate component of shareholders' equity as part of other comprehensive income
The fair value price for a financial asset
The fair value is 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 under current market conditions
The fair value measurement assumes
The fair value measurement assumes that the asset or liability is sold or transferred in the principal market, or if no principal market exists, the most advantageous market. The principal market is a market in which the greatest volume and level of activity occurs. The most advantageous market maximizes price received for the asset or minimizes the amount paid to transfer the liability. Market participants in the principal or most advantageous market should have the following characteristics: (a) Be independent of the reporting entity (not related parties), (b) Be knowledgeable, (c) Able to transact, and (d) Willing to transact (i.e., motivated, but not compelled to transact) motivated to be in transaction but not compelled to be in transaction
The fair value option applies to which financial assets
The fair value option applies to all financial assets including available-for-sale, held-to-maturity, and equity method investments. The fair value option also applies to certain financial liabilities, firm commitments that involve financial instruments, written loan commitments. nonfinancial insurance contracts that can be settled by paying a third party, warranties that can be settled by paying a third party, and a host financial instrument that is an embedded nonfinancial derivative instrument separated from a nonfinancial hybrid instrument.
Financial Statements of Trusts what kind of accounting and what value are things presented
The financial statements of a trust are generally presented on the accrual basis and the assets are generally presented at their fair values.
Fair value measurement also assumes the highest and best use of the non-financial asset. What is in use and in exchange
The highest and best use will maximize the value of the asset or group of assets. The use of the asset must be physically possible, legally permissible, and financially feasible at the measurement date. The highest and best use of the asset is then used to determine the valuation premise used to measure fair value as follows: (a) If the asset provides maximum value by using it with other assets as a group. The fair value of the asset is the price that would be received to sell the asset assuming the asset is used with other assets as a group. (b) If the asset provides maximum value on a stand-alone basis, the fair value of the asset is the price that would be received in a current transaction to sell the asset stand-alone.
IFRS Income statement
The income statement. lAS 1 requires that at a minimum, the following items should be included on an income statement: (1) Revenue (referred to as income) (2) Finance costs (interest expense) (3) Share of profits and losses of associates and joint ventures accounted for using equity method (4) Tax expense (5) Discontinued operations (6) Profit or loss (7) Noncontrolling interest in profit and loss (8) Net profit (loss) attributable to equity holders in the parent No Extraordinary items
Approach three for presenting income statement
This is no longer valid as of 2012 present comprehensive income in the statement of changes in SHE
Financial Statements of Trusts
Trusts are entities formed to hold assets for the benefit of the beneficiaries. They are administered by trustees. Trusts generally present the following financial statements: (1) A statement of assets and liabilities. (2) A statement of operations. (3) A statement of changes in net assets.
financial statement disclosures are required if the fair value option is elected.
Two methods are permissible for balance sheet disclosure: (1) present the aggregate fair value and non-fair value amounts in the same line with amounts measured at fair value parenthetically disclosed (ie financal asset total in parenthesies and this is the value at fair value) (2) present two separate line items for fair value and non-fair value carrying amounts. (Financial assets fair value, Financial Assets non fair value)
SEC Reporting Requirements
Unless exempt by regulation, companies with assets of more than $10 million and 500 or more shareholders and securities that trade on a national securities exchange or an over-the-counter market must have the securities registered A foreign registrant can omit the reconciliation between US GAAP <Old home-country GAAP (e.g. IFRS) if the foreign-based company follows IFRS as issued by the IASB.
International Financial Reporting Standards (IFRS) Financial Statements retrospective apply accounting policy
Whenever an entity retrospectively applies an accounting policy, retrospectively restates its financial statements, or reclassifies items, three years of statements of financial position are required for comparative purposes. Presentation and classification of items on the financial statements should be consistent for the periods presented.
Form 10-K/20F
annual report for US/foreign companies
Never extrodinary
any type of foreign currency devaluation effects of a strike good or bad write downs of assets (inventory, receivable, PPE, good will, intangibles)
Discontinued operations
broken out separately. the "loss from discontinued operations" includes the loss or income of the component for the period and the gain or loss on its disposal. income taxes or tax benefits are deducted from or added to that amount to determine the gain or loss after taxes. Line 1 cost to run until you get ride plus the loss of getting rid Line 2 tax effect
The fair value method does not apply to
consolidations, pensions, share-based payments, stock options, other postemployment benefits (OPEB), exit or disposal activities.Jeases, or financial instruments that are a component of equity
Freight in
cost of getting the goods to you the company
Freight out
cost of getting the goods to your customers ie a selling expense
Regulation AB
describes reporting requirements for asset-backed securities.
Regulation S-K
describes the requirements for information and forms required by Regulation S-X
Regulation S-X
describes-the form and content of financial statements filed with the SEC.
Disclosures (SFAS 57) When a control relationship exists,
disclose such relationship even though no transactions have occurred.
If a reporting entity holds a group of financial assets and financial liabilities that are exposed to market and credit risks of counterparties, the reporting entity may apply
fair value to the net position if the following conditions are met: (a) The group of financial assets and financial liabilities are managed on the basis of net exposure; (b) Information about the group is provided on a net basis; and (c) The reporting entity has elected or is required to measure the group at fair value.
Equity Income
if you own 20% or more of another company you show you NI effect in Other revenue gains or other expense losses on the IS
Costs associated with a.n exit or disposal activity that does not involve discontinued operations shall be included in
income from continuing operations before income taxes. The footnotes to the financial statements should provide extensive disclosure of the activities.
Costs can go up for two reasons
inflation demand/market appreciation
Form 8-K/6-K-
information about material events for US/foreign companies.
When are 10K and 10Q's due
large accelerated Filer >=700M 10K due in 60 days 10Q Due in 40 days accelerated filer >=75m.<700m 10K due in 75 days 10Q Due in 40 days non accelerated Filer<75M 10K due in 90 days 10Q Due in 45 days
Regulation Fair Disclosure (FD)
mandates that publicly traded companies disclose material information to all investors simultaneously.
The principal market is a
market in which the greatest volume and level of activity occurs.
The most advantageous market
maximizes price received for the asset or minimizes the amount paid to transfer the liability.
Total Comprehensive income
net income +/- other comprehensive income
The recognition of the liability and expense for onetime termination benefits depends
on whether the employees are required to provide services beyond the minimum retention period. If so, the expense is recognized over the period that the services are provided. If they are not required to provide future services, the liability is recognized when the plan is communicated to the employees.
selling expense
part of OPEX includes Freight out (cost to get goods to someone) Warranty expense (selling point) commissions salaries to sales people depreciation on sales showroom...selling expense (this goes the same for G&A and R&D if you had specific building for those types of activities)
Approach one for presenting income statement
present a combined statement of income and comprehensive income with OCI at the bottom
Approach two for presenting income statment
present a second statement that directly follows the income statement
BS
present assets, liabilities, and stockholders' equity. The balance sheet reports the effect of transactions at a point in time, whereas the statement of earnings (income) and comprehensive income, statement of retained earnings, and statement of cash flows report the effect of transactions over a period of time.
Applying the market approach, income approach, and the cost approach requires gathering information to value the asset or liability. A fair value hierarchy is used to
prioritize the inputs to valuation techniques. The fair value hierarchy is referred to as Level 1, Level 2, and Level 3, with the fair value hierarchy based on the lowest level of input. The lowest level that is practical should be used to value the asset.or liability.
Information statements (Form 8-K)
provide information about material events that affect the company, such as mergers and acquisitions, changes in directors or CEO, other major changes in operations or status, changes in auditors, etc. The Form 8-K must be filed within 4 business days of the occurrence of the events.
A quarterly report (Form 10-Q)
provides quarterly information similar to that in the lO-K but is less detail. It includes quarterly financial statements that are reviewed (not audited) by public accountants. The company files three Form 10-Qs every year and the Form 10-K contains the quarterly results for the fourth quarter. 10Qs are not Audited
Form S-l/F-l
registration statement for US/ foreign companies
Other Comprehensive Bases of Accounting regulatory-basis financial statements
regulatory-basis financial statements-Regulatory financial statements are prepared based on rules established by a regulatory agency.
Development stage enterprise accounting
start ups should follow generally accepted accounting principles. The only additional disclosure required is that cumulative amounts from inception of losses, revenues, expenses, and cash flows should be shown in the income statement and statement of cash flows. Furthermore, the stockholders' equity section of the balance sheet should include cumulative net losses termed "deficit accumulated during development stage," These statements should be identified as those of a development stage enterprise Start ups tend to not have retained earnings they have a deficit accumulated during development stage id the financial statements as coming from a development stage enterprise
To qualify for treatment as discontinued operations
the assets must comprise a component of the entity with operations and cash flows that are clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity. A component may be a reportable or operating segment, a reporting unit, a subsidiary, or an asset group. you have to be able to separate it out
If a firm changes its valuation technique or approach for measuring fair value...what kind of change is this
the change is accounted for as a change in accounting estimate and treated on a prospective basis. The disclosure provisions for a change in accounting estimate are not required for revisions or changes to valuation techniques used in fair value measurements.
A recognized subsequent event is one in which
the condition existed at the balance sheet date and, therefore, is recognized in the financial statements. EG recognized event include an estimate for warranty liability an estimate of a contingent liability due to a lawsuit or an estimate of allowance for uncollectable accounts If a recognized subsequent event is settled after the balance sheet date but before the financial statements are issued or available to be issued, then the settlement amounts should be used as the liability in the balance sheet. ie you know a company owes you 10K they look to be going under after the BS date they go under owing you 12K and this is before you release the FS you would go back and increase the uncollectable account to 12k Gonna Effect the FS
In periods subsequent to initial measurement, changes to the liability shall be measured using
the credit adjusted risk-free rate that was used to measure the liability initially (ie when you calculate your NPV)
In the unusual circumstance when fair value cannot be reasonably estimated,
the liability shall be initially recognized in the period in which fair value can be reasonably estimated. Exarnplesof such liabilities include 1] Onetime terminationbenefits provided to current employees that are involuntarily terminated (severance) 2] Costs to terminate a contract that is not a capital lease 3] Costs to consolidate facilities or relocate employees
Three valuation techniques can be used to measure fair value
the market approach, the income approach, and the cost approach. The market approach uses prices and relevant information from market transactions. for identical or comparable assets or liabilities. The income approach converts future amounts to a single current (discounted) amount. The cost approach relies on the current replacement cost to replace the asset with a comparable asset, adjusted for obsolescence. (a) If a firm changes its valuation technique or approach for measuring fair value, the change is accounted for as a change in accounting estimate and treated on a prospective basis. The disclosure provisions for a change in accounting estimate are not required for revisions or changes to valuation techniques used in fair value measurements. (b) Applying the market approach, income approach, and the cost approach requires gathering information to value the asset or liability. A fair value hierarchy is used to prioritize the inputs to valuation techniques. The fair value hierarchy is referred to as Level 1, Level 2, and Level 3, with the fair value hierarchy based on the lowest level of input. The lowest level that is practical should be used to value the asset.or liability.
comprehensive income
the total of net income and other comprehensive income. Companies are required to show comprehensive income. please note that this is different from the SFAC (concepts) definition of comprehensive income
The price in the principal or most advantageous market shall not be adjusted for
transaction costs. such as costs to sell. However, the cost to sell is used to determine which market is the most advantageous. If location is a characteristic of the asset or liability, the price is adjusted for costs necessary to transport the asset or liability to the market.
Regardless of which income statment you choose
you must show the ending balance of accumulated other comprehensive income on the BS after RE
Control relationship
you own more than 50%...you consolidate
At present, generally accepted accounting principles (GAAP) recognize three different approaches to the financial reporting of investments in corporate equity securities:
• The fair-value method. • The consolidation of financial statements. • The equity method. The financial statement reporting for a particular investment depends primarily on the degree of influence that the investor (stockholder) has over the investee, a factor typically indicatedby the relative size of ownership. Because voting power typically accompanies ownership of equity shares, influence increases with the relative size of ownership. The resulting influence can be very little, a significant amount, or, in some cases, complete control.