2014 Becker Cpa Far1 Accounting Standards And Conceptual Frameworks

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Standard-setting bodies in the United States

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Securities and Exchange Commission (SEC)

Committee on Accounting Procedure (CAP)

Accounting Principles Board (APB)

Financial Accounting Standards Board (FASB)

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Effective July 1, 2009, ____________ became the single source of authoritative non governmental US GAAP.

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FASB Accounting Standards Codification

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The authoritative literature included in the codification is composed by which standard setters?

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FEDPRIA

Financial Accounting Standards Board (FASB)

Emerging Issues Task Force (EITF)

Derivative Implementation Group Issues

Accounting Principles Board Opinions

Accounting Research Bulletins

Accounting Interpretations

American Institute of Certified Public Accountants (AICPA)

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What is the Accounting Standards Updates standard-setting process?

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1. Proposed FASB amendments to the ASC are issued for public comment in the form of Exposure Drafts.

2. A majority vote of the Board members is required to approve an Exposure Draft for issuance.

3. FASB staff analyzes and redeliberates on the issue.

4. FASB staff prepares an Accounting Standards Update for Board consideration.

5. Majority vote of the Board members to amend the Accounting Standards Codification (ASC)

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What is the purpose of the International Accounting Standards Board (IASB)?

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The purpose of the IASB is to develop a single set of high-quality, global accounting standards. The IASB also issues IFRS.

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What is the purpose of the International Financial Reporting Interpretations Committee (IFRIC)?

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The IFRIC provides guidance on newly identified financial reporting issues not addressed in the IFRSs and assists the IASB in achieving international convergence of accounting standards.

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What is the IASB standard-setting process?

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1. IASB publishes a discussion paper. (not required)

2. IASB prepares Exposure Draft.

3. Public comment of Exposure Draft. (required)

4. At least nine members of IASB must approve Exposure Draft for issuance.

5. IASB re-deliberates on the issue.

6. Once IASB is satisfied, they drafts the IFRS.

7. At least nine members of IASB must approve IFRS.

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Statements of Financial Accounting Concepts (SFAC)

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Created by FASB to serve as a basis (basic reasoning) for all FASB pronouncements. (NOT GAAP)

As phases of the convergence project are completed, the FASB will issue each component of the conceptual framework as a chapter in SFAC No. 8.

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SFAC No. 8, "Conceptual Framework for Financial Reporting --Chapter 1: The Objective of General Purpose Financial Reporting"

Previously SFAC No. 1 (replaced by Ch 1 of SFAC No. 8)

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The objective is to provide financial information about the reporting entity that is useful to the primary users in making decisions about providing resources to the reporting entity. (disclose the entity's performance)

Primary users are existing and potential investors, lenders, and other creditors. (external users)

Financial information needed should include information about the resources of the entity, claims against the entity, and how efficiently and effectively the entity's management and governing board have discharged their responsibilities to use the entity's resources. (meet "informational needs")

The primary users use the financial information to assess the reporting entity's prospects for future net cash inflows to the entity.

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SFAC No. 8, "Conceptual Framework for Financial Reporting --Chapter 3: Qualitative Characteristics of Useful Financial Information"

Previously SFAC No. 2 (replaced by Ch 3 of SFAC No. 8)

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Should help users make decisions about the reporting entity based on financial information.

relevance and faithful.

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Qualitative characteristic - Relevance

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"Passing Confirms Money"

**It is relevant that I pass the CPA exam because it confirms more money**

Predictive Value-used to predict future outcomes

Confirming Value-provides feedback about evaluations previously made by users.

Materiality-no material omission or mistatement that could affect the decisions made by users based on financial information.

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Qualitative characteristic - Faithful Representation

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"Completely Neutral is Free from Error"

**Reliable, faithful representation is completely neutral and free from error**

Completeness-All information necessary for the user to understand including explanations. (primary financial statements and notes)

Neutrality-free from bias

Free from Error-no errors or omissions in the descriptions, but does not need to be perfect.

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Steps to apply the qualitative characteristics

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1. Identify the phenomena that has the potential to be useful to the users of a reporting entity's financial information.

2. Identify the type of information about the phenomena that would be most relevant.

3. Determine whether the information is available and can be faithfully represented.

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Enhancing Qualitative Characteristics

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"Compare and Verify in Time to Understand"

Comparability-to identify similarities and differences. The information should be consistent (same methods across entities).

Verifiability-independent observers can reach consensus that a particular depiction is faithfully represented.

Timeliness-available to users in time

Understandability-information is understandable

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The Cost Constraint

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Benefit > cost

The benefits of reporting financial information must be greater the the costs of obtaining and presenting the information.

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SFAC No. 4, "Objectives of Financial Reporting by Nonbusiness Organizations"

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Outlines the characteristics the distinguish nonbusiness organizations from business organizations, describes the users, and sets forth the objectives of external financial reporting by nonbusiness organizations.

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SFAC No. 5, "Recognition and Measurement in the Financial Statements"

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This statement sets forth the recognition criteria and guidance n what and when information should be incorporated in the financial statements.

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SFAC No. 5 -Full Set of Financial Statements

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A. Statement of financial position (balance sheet)

B. Statement of earnings (income statement)

C. Statement of comprehensive income

D. Statement of cash flows

E. Statement of changes in owners' equity

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SFAC No. 5-Measurement Attribute for Assets and Liabilities

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A. Historical cost (i.e. PP&E)

B. Current Cost (i.e. inventory)

C. Net realizable value (i.e. A/R)

D. Current market value (i.e. marketable shares)

E. Present value of future cash flows (i.e. long-term debt "bonds")

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SFAC No. 5-Fundamental Assumptions (of US GAAP)

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A. Entity Assumption

B. Going Concern Assumption

C. Monetary Unit Assumption

D. Periodicity Assumption

E. Historical Cost Principle

F. Revenue Recognition Principle

G. Matching Principle

H. Accrual Accounting

I. Full Disclosure Principle

J. Conservatism Principle

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Entity Assumption

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entity is separate from owner

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Going Concern Assumption

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the entity will continue to operate in the foreseeable future

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Monetary Unit Assumption

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everything is measured in money

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Periodicity Assumption

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economic activity can be divided into meaningful time periods

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Historical Cost Principle

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as a general rule, financial information is accounted for and based on cost, not current market value

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Revenue Recognition Principle

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as a general rule, revenue should be recognized when it is earned and when it is realized or realizable.

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Matching Principle

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all expenses incurred to generate a specific amount of revenue in a period are matched against that revenue

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Accrual Accounting

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record revenue and/or expense without the exchange of cash

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Full Disclosure Principle

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Notes "completeness"

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Conservatism Principle

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"don't overstate the good and/or understate the bad"

1. recognize revenues/gains when earnings process is complete

2. recognize expenses/losses immediately

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What is IASB's fundamental assumption?

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going concern

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SFAC No. 6, "Elements of Financial Statements"

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Comprehensive income + "REGL ALE needs ID"

**If Regl wants to drink ale, he must bring ID**

Comprehensive income

Revenue (Operating - income statement)

Expenses (Operating - income statement)

Gains (Non operating -income statement)

Losses (Non operating -income statement)

Assets (Balance sheet)

Liabilities (Balance sheet)

Equity (Balance sheet)

Investments by Owners (Excluded from comprehensive income)

Distributions to Owners (Excluded from comprehensive income)

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SFAC No. 7, "Using Cash Flow Information and Present Value in Accounting Measurements"

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a framework for accountants to employ when using future cash flows as a measurement basis for assets and liabilities

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Five Elements of Present Value Measurement

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a. Estimate of future cash flow

b. Expectations about timing variations of future cash flows

c. Time value of money

d. The price for bearing uncertainty

e. Other factors (e.g. liquidity issues and market imperfections)

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Fair Value Objective

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If fair value cannot be determined in the marketplace, the objective must be to obtain an estimate of fair value (i.e a present value of future cash flows)

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Present Value Computations

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Traditional Approach- present value of bonds (scheduled known payments)

Expected Cash Flow Approach-present value of warranties (uncertain future payments)