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  • Front
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CAP - Committee on Accounting Procedure
part-time committee, acc research bulletins 39-59
Accounting Prin Board APB,
another part time - determined GAAP 59-73
FASB
1973 On
Statements of Financial Standards (SFAS)
1 - These statements estabilsh GAAP, issued after research, sicussion and public comments
FASB Interpretations
2 - Clarify GAAP. addressing issues that may be conflicting or ambiguous
Technical Bulletins
3 expand upon or further clarify GAAP because of problems that may exist in accounting or reporting under the standard or interpretation
Statements of Accounting Concepts SFAC
4 establish the objectives and concepts for use by the FASB in developing accounting and reporting standards. Do not establish GAAP
Emerging issues Task Force Statements
5 - address emergent issues and may show how to account for specific or unusual applications of GAAP
FASB Implementation Guides
6 questions and answers - nearly no authority
Heirarchy of sources of GAAP
1. SFAS
2. FASB Interpretations
3. Technical Bullitains
4. SFAC
5. EITF
6. FASB Implementation Guides
Hierarchy of Sources of GAAP 2
1. Accounting Research Bulletins (ABR)
2. Accounting Prenciples Board Opinions (APBO)
3. FASB Statement of Fin Acc Standards
4. FASB Staff Positions
5. FASB Interpretations
6. FASB Statement Implementation Issues
BOSSII
SFAC No. 1 -
Defines potential users. Identify Purposes, infor for Credit decisions, CF Prospects, Eterprixe resources, lamils and changes in resources
SFAC No. 2 -
criteria used to select and evaluate acc info. so taht it will meet the obj. set for th by no. 1 identifies the heirarchy of qualitative charac taht are to be considered when alternatives
SFAC No. 2 Heirarchy
1. Understandable
2. Relevan
3. Reliable
4. Comparable
5. Consistent
6. Material
7. Less costly than benefit provided
SFAC No. Constraints
1. Costs and Benefits - benefits of acc info must be greater than cost.
2. Materiality - the info must be material - this info impt to make decisions
Understandability
understandable to those with reasonable info, effort
Usefulness (Primary qual of decision usefulness)-
primary quality of acc info can be broken down by Relevanc and Reliability
Relevance (3)
1. Predictive Value - assist users in past/pre/future
2. Feedback Value - confirm or readjust
3. Timeliness
Reliability (3)
1. Nuetraility
2. Representational Faithfulness - info is valid
3. Verifiability - objective
Secondary Info Characteristics (2)
1. Comparability - compare instatnces
2. Consistency -from period to period.
SFAC No. 3
Elements of Financial Statements of a Busienss
Replaced by 6
SFAC No. 5
Recognition and Measurement in the Fin. Statments - what and when info in Fin Statements
SFAC No. 5 - Full set of Fin Statements
1. Sta of Fin Positon - BS
2. Sta of Earnings - IS
3. Sta of Comprehensive Income
4. Statement of CF's
5. Sta of Changes in OE
SFAC No. 5 - Fundamental Recognition Criteria
formally recording an item in FS
1. Definitions - Does it meet the def. of an element from SFA No. 6
2. Measureability
3. Relevance
4. Reliability
SFAS No. 5 - Measurement Attributes for Ass and Liab (5)
1. Historical Cost
2. Current Cost
3. Net Realizable Value
4. Current Market Value
5. Present Value of Future Cash Flows
SFAS No. 5 - Fundamental Assumptions(10)
1. Entry Assumption - Seperate group of trans 9(corp etc.)
2. Going concern
3 - Monetary Unit - money appropriate
4. Periodically Assumption
5. Historical Cost Assumption - cost, not mkt value
6. Rev Recog Principal
7. Matching Principle
8. Accrual Accounting - not cash
9. - Full Disclosure Prin. - user gets info
10. Conservatism Principal
Rev. Recog. Principal (2 to be recog.)
1. Earned
2. Realized or Realizable
SFAS No. 6
Is Elements of Fin Statements - the elements info for No. 1
SFAS No. 6 - Elements of Fin Statements (10)
1. Comp Income - diff in equity- owner changes
2 - Rev
3 - Exp
4. Gains
5. Losses
6. Assets
7. Liabilities
8 Equity (of Net Assets)
9. Investments by owners
10. Distributions to Owners
SFAC No. 7 -
Using Cf info and PV in acccting measure ments - PV of uncertainties and A and L
SFAC No. 7 (6) -
1. Measurements Based on FCF Only - only talks about what can be det. using future CF's
2. Five Elements of Present Value Measurement
3 Vair Value Objective - est fair val if can't find in mkt.
4. Present Value Computations
5. Liability Measurement considers Additional Factors
6. Changes in Estimated CF Using the Catch-up Approach
SFAC No. 7 - five Elements of PV Measurement (5) -
five elements of PV measurement that are bases of 7
1. estimate of FCF's
2. Espetations about timing variations
3 - Time Value of Money (RFR of int.)
4. The Price for Bearing Uncertainty
5. Other - liq, mkt imperfections.
SFAC No. 7 Present Value Computations (2)
1. Traditional Approach - one discount rate) - Cf
s don't vary
2. Expected CF Approach - uses RFR and focusses on future CF's
SFAC No. 7 - Expected CF Approach (2)
1. Expected CF - CF and prob.
2. Risk and Uncertainty Adjustments to CF's - adjustments for uncertainty
SFAS No. 7 - Liability Measurement Considers Additional Factors
1. Costs to Settle
2. Credit Standing of company
SFAS No. 7 - Catch-up Approach
Catch-up Approach - adjust carrying amt of A or L to the PV determined with revised est. and discount usineg orig. effective rate.
Net Income - 1. Uses and Terminology
Uses - Profitability, Value, Credit Worthines
Terminology
Net Income - 1. Terminology (3)
1. Cost and Unexpired Costs
2. Gross Concept (Rev and Exp)
3. Net Concept
Net Income - 1. Terminology - Costa dn Unexpired Costs (3)
1. Cost - amt paid
2. Unexpired Costs - will be charged, allocated in future
3. Examples
Net Income - 1. Terminology - Unexpired Cost Examples
1. Inventory ====> COGS
2. Prepaid ====> Ins
3. bk val of Assets ====> Depr. Expense
Cost of Patents
Gross Concept (Rev. and Exp.)
1. Rev - are reported at their gross amts (less returns and disc)
2. Exp - gross amts.
Net Concept
Gains - net - proceeds less book value - no in ord business
Loss - net - Not in ordinary course of bus.
Reported in IS (3)
Income(loss) - from continueing ops - Ops, Non-ops and tax - Report Gross
2. Inc/Loss from Discountined Ops - Net of Tax
3. Extaordinary Items (net of tax)
Reported on RE
Cum effect of change in accounting prin. - net of tax
IDEA
I - Inc. from Cont. Ops - gross
D - Disc Ops - Net
E - Extrod. items -net
A - Acct Prin Change - net ( in RE Statement, not IS)
Single Step Income Statement
All exp. out of Rev - simple - no classification
Multi Step Inc. Statement
Op rev and exp. seperately from non-op rev and exp. - and other gains and losses inhanced info
Inventory Cost consists of
Purchase price, freight in
Selling Expense consists of
Freight out, salaries and commissions, advertising
General & Administrative consists of
Officers' salaries, accounting and legal, insurance
Non-operating consists of
Auxiliary activities, interest expense
SFAS No. 144
Discontinued operations are still reported separately from continuing
operations in the income statement according to the IDEA mnemonic, net of tax.
Discontinued operations
The (normally)
loss from discontinued operations can consist of an impairment loss, a gain/loss from actual
operations, and a gain/loss on disposal.
Discontinued operations allocation
In time period incurred (no anticipated)
COMPONENT OF AN ENTITY
A component of an entity is a part of an entity (the lowest level) for which operations and
cash flows can be clearly distinguished, both operationally and for financial reporting
purposes, from the rest of the entity.
COMPONENT OF AN ENTITY (5)
1. An operating segment,
2. A reportable segment (as those terms are defined in segment reporting),
3. A reporting unit (as that term is defined in goodwill impairment testing),
4. A subsidiary, or
5. An asset group.
ASSET GROUP
An asset group is a collection of assets to be disposed of together as a group in a single
(disposal) transaction and the liabilities directly associated with those assets that will be
transferred in that same transaction.
A component of a business is classified as "held for sale" in the period in which ALL of the
following criteria are met: (6)
1. Management commits to a plan to sell the component.
2. The component is available for immediate sale in its present condition.
3. An active program to locate a buyer has been initiated.
4. The sale of the component is probable and the sale is expected to be complete within
one year.
5. The sale of the component is being actively marketed.
6. Actions required to complete the sale make it unlikely that significant changes to the
plan will be made or that the plan will be withdrawn.
The results of operations of a component of an entity will be reported in discontinued
operations if either the component: (2)
1. Has been disposed of, or
2. Is classified as held for sale.
DO Conditions that must be present
All related costs shall be recognized when the obligations to others exist, not necessarily in
the period of commitment to a plan.
DO Both of the following conditions must be met in order to
report in discontinued operations the results of operations of a component that has been
disposed of or is held for sale:
1. Eliminated from Ongoing Operations
2. No Significant Continuing Involvement
Types of Items Included in Results of Discontinued Operations (3)
a. Results of Operations of the Component
b. Gain or Loss on Disposal of the Component
c. Impairment Loss (and Subsequent Increases in Fair Value) of the Component
IDO mpairment Loss (and Subsequent Increases in Fair Value) of the Component
(1) Initial and Subsequent Impairment Losses
(2) Subsequent Increases in Fair Value
DO Initial and Subsequent Impairment Losses
A loss is recognized for recording the impairment of the component (i.e.,
any initial or subsequent write-down to fair value less costs to sell).
DO Subsequent Increases in Fair Value
A gain is recognized for any subsequent increase in fair value minus the
costs to sell (but not in excess of the previously recognized cumulative
loss).
DO Report in the Period Disposed of or Held for Sale
The results of discontinued operations of a component are reported in discontinued
operations (for the current period and for all prior periods presented) in the period the
component is either disposed of or is held for sale. The results of subsequent
operations of a component classified as held for sale are reported in discontinued
operations in the period in which they occur.
DO Depreciation and Amortization
Assets within the component are no longer depreciated or amortized.
DO - ANTICIPATED FUTURE GAINS OR LOSSES
A gain or loss not previously recognized that results from the sale of the component is
recognized at the date of sale and not before (i.e., gains or losses anticipated to occur in
future periods are not recognized until they occur).
DO - SUBSEQUENT ADJUSTMENTS TO AMOUNTS PREVIOUSLY REPORTED
Adjustments to amounts previously reported in discontinued operations that are directly
related (see definition in item E.2, below) to the disposal of a component of an entity in a prior
period are classified in the current period in discontinued operations.
1. Examples
a. Resolution of contingencies related to terms of the disposal transaction (e.g.,
purchase price adjustments and indemnification issues)
b. Resolution of contingencies directly related to the operations the component
before it was disposed of (e.g., warranty obligations and environmental
responsibilities)
c. Settlement of employee benefit plan obligations
DO - Definition of "Directly Related"
In order for a settlement to be considered directly related to a component of an entity, it
must:
a. Have a demonstrated cause-and-effect relationship and
b. Occur no later than one year after the date of the disposal transaction (unless
circumstances beyond the control of the entity exist).
DO - MEASUREMENT AND VALUATION
A component classified as held for sale is measured at the lower of its carrying amount or fair
value less costs to sell. Costs to sell are the incremental direct costs to transact the sale.
DO - PRESENTATION AND DISCLOSURE
1. Present as a Separate Component of Income
The results of discontinued operations, net of tax, are reported as a separate
component of income before extraordinary items.
2. Disclose in Face or in Notes
A gain or loss recognized on the disposal shall be disclosed either on the face of the
income statement or in the notes to the financial statements.
IDEA E (Extrodinary Items) Defined (4)
According to APB Opinion No. 30, extraordinary items are transactions and other events that
are:
1. Material in nature,
2. Of a character significantly different from the typical or customary business activities,
3. Not expected to recur in the foreseeable future, and
4. Not normally considered in evaluating the ordinary operating results of an enterprise.
EI - HOW TO CLASSIFY
Extraordinary items are usually determined by informed professional judgment, taking into
consideration all the facts involved in a particular situation. Since the issuance of SFAS No.
145, the provisions of APB Opinion No. 30 dictate the classification of all extraordinary items.
EI - SEPARATE DISCLOSURE
Extraordinary items must be separately disclosed in the income statement, net of any related
tax effects, after discontinued operations.
EI - EXAMPLES OF EXTRAORDINARY ITEMS (4)
1. The abandonment of, or damage to, a plant due to an infrequent earthquake or an
infrequent flood
2. An expropriation of a plant by the government
3. A prohibition of a product line by a newly enacted law or regulation
4. Certain gains or losses from extinguishment of long-term debt, provided they are not
part of the entity's recurring operations and, thus, meet the criteria of APB Opinion No.
30 (per SFAS No. 145).
EI - EXAMPLES OF NONEXTRAORDINARY ITEMS
The following gains or losses are NOT extraordinary (they are presented as a separate
component of "continuing operations"):
1. Gain or loss from sale or abandonment of property, plant, or equipment used in the
business
2. Large writedowns or writeoffs of:
a. Receivables
b. Inventories
c. Intangibles (including goodwill)
d. Long-term securities (permanent decline)
3. Gain or loss from foreign currency transactions or translation, whether from major
devaluations or otherwise (provided these occur on a regular basis as part of normal
business operations)
4. Losses from major strike by employees
5. Long-term debt extinguishments that are part of a common management strategy (i.e.,
not unusual and infrequent)
MATERIAL UNUSUAL OR INFREQUENT ITEMS
Items of income or loss that are either unusual or infrequent are not extraordinary (e.g., gain on the
sale of a factory building). If material, these items should be reported as a separate line item as
part of income from continuing operations (and not net of tax). The nature of the item and the
financial effects should be disclosed on the face of the income statement or in the footnotes.
IDEA - Accounting Principle Change (3)
GENERAL
Accounting changes are broadly classified as:
(i) Changes in accounting estimate,
(ii) Changes in accounting principle, and
(iii) Changes in accounting entity.
Note that prior period adjustments are not considered accounting changes.
II. CHANGES
APC - CHANGES IN ACCOUNTING ESTIMATE (PROSPECTIVELY)
A change in accounting estimate occurs when it is determined that the estimate previously used by
the company is incorrect.
APC - EVENTS RESULTING IN ESTIMATE CHANGES (6)
1. Changes in the lives of fixed assets
2. Adjustments of year-end accrual of officers' salaries and/or bonuses
3. Write-downs of obsolete inventory
4. Material non-recurring IRS adjustments
5. Settlement of litigation
6. Changes in accounting principle that are inseparable from a change in estimate (e.g., a
change from the installment method to immediate recognition method because
uncollectible accounts can now be estimated)
APC - REPORTING A CHANGE IN ESTIMATE (2)
1. Prospectively
2. Change in Estimate Affecting Future Periods
Prospectively
Changes in accounting estimate are accounted for prospectively (i.e., implement in the
current period and continue in future periods). They do not affect previous periods (i.e.,
no effect on previously reported retained earnings).
Change in Estimate Affecting Future Periods
If a change in accounting estimate affects several future periods (e.g., a revision of
service lives of depreciable assets), the effect on income before extraordinary items,
net income, and the related per share information for the current year should be
disclosed in the notes to the financial statements.
Note: Changes in ordinary accounting estimates (e.g., uncollectible accounts and
inventory adjustments) usually made each period do not have to be disclosed unless
they are material.
CHANGES IN ACCOUNTING PRINCIPLE (RETROSPECTIVE APPLICATION)
A change in accounting principle is a change in accounting from one acceptable
method of GAAP to another acceptable method of GAAP (i.e., GAAP to GAAP).
CHANGES IN ACCOUNTING PRINCIPLE (RETROSPECTIVE APPLICATION) - RULE OF PREFERABILITY
An accounting principle may be changed only if the alternative principle is preferable and
more fairly presents the information. Justification for the change may stem from certain
current and future AICPA Statements of Position and AICPA Industry and Audit and
Accounting Guides.
CHANGES IN ACCOUNTING PRINCIPLE (RETROSPECTIVE APPLICATION) - NONRECURRING CHANGES
An accounting change should not be made for a transaction or event in the past that has
been terminated or is nonrecurring.
CHANGES IN ACCOUNTING PRINCIPLE (RETROSPECTIVE APPLICATION) -EFFECTS OF A CHANGE - Direct Effects
The direct effects of a change in accounting principle are adjustments that would be
necessary to restate the financial statements of prior periods.
CHANGES IN ACCOUNTING PRINCIPLE (RETROSPECTIVE APPLICATION) -EFFECTS OF A CHANGE - Indirect Effects
The indirect effects of a change in accounting principle are differences in
nondiscretionary items based on earnings (e.g., bonuses) that would have occurred if
the new principle had been used in prior periods.
CHANGES IN ACCOUNTING PRINCIPLE (RETROSPECTIVE APPLICATION) -EFFECTS OF A CHANGE - Cumulative Effect - 91
If non-comparative financial statements are being presented, then the cumulative effect
of a change in accounting principle is equal to the difference between the amount of
beginning retained earnings in the period of change and what the retained earnings
would have been if the accounting change had been retroactively applied to all prior
affected periods. It includes direct effects and only those indirect effects that are
entered in the accounting records. If comparative financial statements are being
presented, then the cumulative effect is equal to the difference between beginning
retained earnings in the first period presented and what retained earnings would have
been if the new principle had been applied to all prior periods.
REPORTING CHANGES IN AN ACCOUNTING PRINCIPLE - General Rule - 91
The general rule is that such changes should be recognized
by adjusting beginning retained earnings in the earliest period presented for the cumulative
effect of the change, and, if prior period financial statements are presented, they should be
restated (retrospective application). There are, of course, exceptions to this general rule.
1. Exceptions to the General Rule
a. Impracticable to Estimate
If it is considered "impractical" to accurately calculate this
cumulative effect adjustment, then the change is handled prospectively (like a
change in estimate). An example of a change handled in this manner is a
change in inventory cost flow assumption to LIFO. Since a cumulative effect
adjustment to LIFO would require the reestablishment and recalculation of old
inventory layers, it is considered impractical to try and rebuild those old cost
layers. This change is therefore handled prospectively. The beginning inventory
of the year of change is the first LIFO layer. Additional LIFO layers are added on
from that point forward.
1. Exceptions to the General Rule
a. Impracticable to Estimate
dead
1. Exceptions to the General Rule
b. Change in Depreciation Method
A change in the method of depreciation, amortization, or depletion is considered
to be both a change in accounting principle and a change in estimate. These
changes should be accounted for as changes in estimate and are handled
prospectively. The new depreciation method should be used as of the beginning
of the year of the change in estimate and should start with the current book value
of the underlying asset. No retroactive or retrospective calculations should be
made, and no adjustment should be made to retained earnings.
2. Applications of the General Rule (3)
a. The amount of cumulative effect to be reported on the retained earnings
statement is the difference between:
(1) Retained earnings at the beginning of the earliest period presented, and
(2) Retained earnings that would have been reported at the beginning of the
earliest period presented if the new accounting principle had been applied
retrospectively for all prior periods, by recognizing only the direct effects
and related income tax effect.
b. The new accounting principle is used for all periods presented (prior periods are
restated).
c. If an accounting change is not considered material in the year of change but is
reasonably expected to become material in later periods, it should be fully
disclosed in the year of change.
CHANGES IN ACCOUNTING ENTITY (RETROSPECTIVE APPLICATION)
A change in accounting entity occurs when the entity being reported on has changed
composition. Examples include consolidated or combined financial statements that are
presented in place of statements of the individual companies and changes in the
companies included in the consolidated or combined financial statements from year to year.
CHANGES IN ACCOUNTING ENTITY (RETROSPECTIVE APPLICATION) - RESTATEMENT TO REFLECT INFORMATION FOR THE NEW ENTITY (IF
COMPARATIVE FINANCIAL STATEMENTS ARE PRESENTED) -
If a change in accounting entity occurs in the current year, all previous financial statements
that are presented in comparative financial statements along with the current year should be
restated to reflect the information for the new reporting entity.
CHANGES IN ACCOUNTING ENTITY (RETROSPECTIVE APPLICATION) - FULL DISCLOSURE
Full disclosure of the cause and nature of the change should be made, including changes in
income before extraordinary items, net income, and retained earnings.
Prior period adjustments consist of: (3)
(i) Corrections of errors in the financial statements of prior periods,
(ii) Retroactive restatements required by new GAAP pronouncements, and
(iii) Changes from a non-GAAP method of accounting to a GAAP method of accounting (e.g.,
cash basis to accrual basis), which is a specific correction of an error.
Corrections if the year is presented int the statements
If comparative financial statements are presented and financial statements for
the year with the error are presented, merely correct the error in those prior
financial statements.
Corrections if the year is NOT presented int the statements (if too old)
If comparative financial statements are presented and financial statements for
the year with the error are not presented (e.g., because it is too far back in
years), adjust (net of tax) the opening retained earnings of the earliest year
presented.
Comprehensive Incom PUFE def.
P ension minimum liability adjustments
U nrealized gains and losses (available-for-sale securities)
F oreign currency items
E ffective portion cash flow hedges
COMPREHENSIVE INCOME
Comprehensive income is the change in equity (net assets) of a business enterprise during a
period from transactions and other events and circumstances from nonowner sources. It
includes all changes in equity during a period except those resulting from investments by
owners and distributions to owners.
Net income
+ Other comprehensive income
Comprehensive income
Net income includes the following items: (3)
1. Income from continuing operations
2. Discontinued operations
3. Extraordinary items
Other comprehensive income
Other comprehensive income includes those items in comprehensive income that are
excluded from net income. Prior to the implementation of SFAS No. 130, these types of
items were reported as separate line items (components) of owners' equity. SFAS No. 130
grouped all of these items together and called the changes in them for the period "Other
Comprehensive Income."
Other comprehensive income (4) special items by nature, for example:
1. Pension Changes in Funded Status
2. Unrealized Gains and Losses
3. Foreign Currency Items
4. Effective Portion of Cash Flow Hedges
OCI - Pension Changes in Funded Status
Changes in the funded status of a pension plan due to gains or losses, prior service
costs, and net transition assets or obligations must be recognized in other
comprehensive income in the year the changes occur. All gains or losses, prior service
costs, and transition assets or obligations are included in other comprehensive income
until recognized as a component of net periodic benefit cost. (Pensions are covered in
detail in lecture F-6, later in the course.)
OCI - Unrealized Gains and Losses (3)
The following types of unrealized gains and losses on certain investments in debt and
a. Unrealized holding gains and losses on "available-for-sale securities."
b. Unrealized holding gains and losses that result from a debt security being
transferred into the "available-for-sale" category from "held-to-maturity."
c. Subsequent decreases or increases in the fair value
equity securities (per SFAS No. 115) are reported as components of other
comprehensive income. (All are covered in detail in lecture F-3, later in the course.)
Foreign Currency Items
Foreign currency translation adjustments and gains and losses on foreign currency
transactions that are designated as (and are effective as) economic hedges of a net
investment in a foreign entity (part of SFAS No. 133 and discussed in the F-7 lecture
on derivatives and other financial instruments) are reported as a component of other
comprehensive income. (Foreign currency and its related effects are covered in detail
in lecture F-2, later in the course.)
Effective Portion of Cash Flow Hedges
Cash flow hedges are part of SFAS No. 133 and are discussed in the F-7 lecture on
derivatives and other financial instruments, later in the course. The effective portion of
a cash flow hedge is reported as a component of other comprehensive income.
RECLASSIFICATION ADJUSTMENTS
Adjustments for items that are displayed as part of net income for a period that had
previously been displayed as part of other comprehensive income are referred to as
reclassification adjustments. These adjustments may be displayed on the face of the
financial statement in which comprehensive income is reported or disclosed in the notes to
the financial statements.
ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive income is a component of equity that includes the total of
other comprehensive income for the period and previous periods. Other comprehensive
income for the current period is "closed" to this account, which is reconciled each period
similar to the manner in which retained earnings is reconciled.
3 format taht can be used for comp income
1. Below the total for net income in a statement that reports results of operations;
2. In a separate statement of comprehensive income that begins with net income; or
3. In a statement of changes in equity.
Other comp income does not apply to: (for fin. statements)
non profs and those that don't have comp. income
if you report other comp income in owner's equity, you must:
you must also report accumulated comp income ( doesn't need to be broken down)
2 ways to report comp income
Components of other comprehensive income may be reported either (i) net of tax or (ii)
before related tax effects with one amount shown for the aggregate income tax expense or
benefit related to the total of other comprehensive income items.
comp income - INCOME TAX EXPENSE OR BENEFIT
The amount of income tax expense or benefit allocated to each component of other
comprehensive income is disclosed either on the face of the statement in which those
components are displayed or in the notes to the financial statements.
comp income - interim period reporting
A total for comprehensive income shall be reported in condensed financial statements of
interim periods issued to shareholders.
comp income - REQUIRED DISCLOSURES - all three must disclose: (4)
1. The tax effects of each component included in (current) "Other Comprehensive
Income," either as part of the statement presentation or in the notes to the financial
statements.
2. The accumulated balances of components of "Other Comprehensive Income" (e.g.,
pension funded status changes, unrealized holding gains/losses on securities, foreign
currency items, and the effective portion of cash flow hedges).
(a) The accumulated balances by component may be shown on the balance sheet,
in the statement of changes in equity, or in the notes to the financial statements.
3. Total "Accumulated Other Comprehensive Income" in the balance sheet as an item of
"Equity" (see "required format" on above example).
4. The reclassification adjustments, which are made to avoid double counting in "Other
Comprehensive Income" items that are displayed in net income for the current year
(e.g., previously reported unrealized gains on available-for-sale securities that were
realized during the current year).
BS - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GAAP requires that a description of all significant policies should be included as an integral
part of the financial statements. The preferred presentation is to include the "Summary of
Significant Accounting Policies" as the first or second note to the financial statements.
Policies presented in other notes should not be duplicated.
BS - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Identify and describe: (4)
Identify and describe:
a. Principles and methods
b. Criteria
c. Policies
d. Pricing
BS - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Items not included in this footnote: (5)
Items not included in this footnote:
a. Composition of accounts
b. Amounts in dollars of account balances
c. Details relating to changes in accounting principles
d. Dates of maturity and amounts of long-term debt
e. Yearly computation of depreciation, depletion and amortization
REMAINING NOTES TO THE FINANCIAL STATEMENTS
The remaining notes contain all other information relevant to decision makers (e.g., investors,
creditors, etc.) These notes are used to disclose facts not presented in either the body of the
financial statements or in the "Summary of Significant Accounting Policies." Examples of
relevant note information include the following:
REMAINING NOTES TO THE FINANCIAL STATEMENTS - List (6)
1. Changes in stockholders' equity including capital stock, paid-in capital, retained
earnings, treasury stock, stock dividends and other capital changes;
2. Required marketable securities disclosure including carrying value and gross
unrealized gains and losses;
3. Contingency losses;
4. Contractual obligations, including restrictions on specific assets or liabilities;
5. Pension plan description; and
6. Post-balance sheet disclosures of certain events that occurred before the financial
statements were issued.
INTERIM FINANCIAL REPORTING
Interim financial reporting is generally concerned with the quarterly reports that public companies
must file with the SEC. Generally accepted accounting principles that were used in the most recent
annual report of an enterprise should be applied to interim financial statements of the current year,
unless a change in accounting principle is adopted in the current year.
INTERIM FINANCIAL REPORTING - TIMELINESS OVER RELIABILITY
For interim reporting only, timeliness is emphasized over reliability.
INTERIM FINANCIAL REPORTING - AN INTEGRAL PART OF ANNUAL FINANCIAL STATEMENTS
Interim financial statements must be viewed as an integral part of the annual financial statements.
Because interim financial statements generally are not audited, each statement presented should
be marked "unaudited."
Segment Reporting -
SFAS No. 131 significantly increased the items of disclosure that previously existed in segment
reporting. The objective of requiring these disclosures was to provide information on the business
activities and the economic environment of a company to help users of the financial statements:
Segment Reporting - List (3) - increases of disclosures
(i) Better understand the enterprise's performance,
(ii) Better assess its prospects for future net cash flows, and
(iii) Make more informed judgments about the enterprise as a whole.
In general, an enterprise is required to report a measure of segment profit or loss, segment assets,
and certain related items, but is not required to report segment cash flow or segment liabilities.
Segment Reporting - REQUIRED DISCLOSURES FOR ALL PUBLIC ENTERPRISES (4)
In order to conform with GAAP, financial statements for public business enterprises must
report segment information about a company's:
1. Operating Segments (Annual and Interim)
2. Products and Services
3. Geographic Areas
4. Major Customers
Segment Reporting - USE SAME ACCOUNTING PRINCIPLES AS MAIN FINANCIAL STATEMENTS
The required financial statement information is essentially a disaggregation of the entity's
regular financial statements. The accounting principles used in preparing the financial
statements should be used for the segment information. Segment information presented
must be reconciled to the related aggregate amounts in the financial statements.
Segment Reporting - INTERCOMPANY TRANSACTIONS NOT ELIMINATED FOR REPORTING
It is important to remember that transactions between the segments of an enterprise are not
eliminated as in consolidation between the parent company and subsidiaries.
Segment Reporting - SCOPE (PUBLIC COMPANIES ONLY)
Segment reporting applies to public companies only. It does not apply to not-for-profit
organizations, nonpublic companies, or separate financial statements of members of a
consolidated group if both the separate company statements and the consolidated or
combined financial statements are included in the same financial report.
OPERATING SEGMENTS
A. DEFINITION (3)
(i) That engages in business activities from which it may earn revenues and incur
expenses (including revenues and expenses relating to transactions with other
components of the same enterprise),
(ii) Whose operating results are regularly reviewed by the enterprise's "Chief Operating
Decision Maker" to make decisions about resources to be allocated to the segment and
assess its performance, and
(iii) For which discrete financial information is available.
The definition of a segment depends on how management uses information, which is called
the management approach method. For example, management
NOT EVERY ENTERPRISE IS AN OPERATING SEGMENT (2)
Corporate Headquarters Not an Operating Segment
A corporate headquarters or certain functional departments may not earn revenues or
may earn revenues that are only incidental to the activities of the enterprise and would,
therefore, not be operating segments.
2. Pension Plan Not an Operating Segment
Segments may be aggregated if: (7)
(i) aggregation is consistent with the objective
and principles of segment reporting, (ii) the segments have similar economic characteristics,
and (iii) the segments are similar in:
1. The nature of the products and services,
2. The nature of the production processes,
3. The type or class of customer for their products and services,
4. The methods used to distribute their products or provide their services, and
5. If applicable, the nature of the regulatory environment, for example, banking,
insurance, or public utilities.
QUANTITATIVE THRESHOLDS FOR REPORTABLE SEGMENTS
1. 10% rule
2. 75% rule
3. 90% rule
10% rule (3)
Revenue
2. A segment meets the size test if the absolute amount of its reported profit or loss
is 10% or more of the greater, in absolute amount, of
(1) The combined reported profit of all operating segments that did not report a
loss, or
(2) The combined reported loss of all operating segments that did report a
loss.
3. Assets
75% "Reporting Sufficiency" Test
If the total of external (consolidated) revenue reported by operating segments
constitutes less than 75% of external (consolidated) revenue, additional operating
segments need to be identified as reportable segments, even if they do not meet the
above three tests, until at least 75% of external (consolidated) revenue is included in
reportable segments. The practical limit to the number of segments is 10, which is not
a precise limit.
90% "Single Industry Dominance" Test
There is no requirement to report any segment if a single segment accounts for 90% or
more of the following combined amounts for all segments:
a. Revenue,
b. Reported profit or loss, and
c. Assets.
SEGMENT PROFIT (OR LOSS) DEFINED
Revenues
Less: Directly traceable costs
Less: Reasonably allocated costs
Operating Profit (or loss)
Items Normally Excluded from Segment Profit (or Loss)
(8)
a. General corporate revenues
b. General corporate expenses
c. Interest expense (except for financial institutions)
d. Income taxes
e. Equity in earnings and losses of an unconsolidated subsidiary (i.e., under the
equity method)
f. Gains or losses from discontinued operations
g. Extraordinary items
h. Minority interest
criterion for income expense allocation
Income and expenses are not allocated to a segment unless they are included in the
determination of segment profit or loss reported to the "Chief Operating Decision
Maker."
A development-stage enterprise is one in which either: (2)
(i) Principal operations have not yet commenced, or
(ii) Principal operations have generated an insignificant amount of revenue (or a loss).
A development-stage enterprise - (5)
must issue the same statements plus

A. Identify the financial statements as those of a development stage enterprise.
B. In the balance sheet, describe cumulative net losses as "deficit accumulated during the
development stage."
C. In the income statement, show revenues and expenses for each period being presented, and
present a cumulative amount (generally of losses) from the company's inception.
D. In the statement of cash flows, include:
E. In the statement of stockholders' equity, include the following:
development-stage enterprise -In the statement of cash flows, include:(2)
1. Cumulative amounts of cash inflows and cash outflows from the company's
inception, and
2. Current amounts of cash inflows and cash outflows for each period presented.
In the statement of stockholders' equity, include the following: (5)
1. Number of shares of stock (or other securities) issued,
2. Dates of issuance, and
3. Dollar amounts assigned.
4. If noncash consideration is involved in the issuance, then include:
a. A description of the nature of the consideration, and
b. The basis for its valuation.
SFAS No. 157
Before SFAS No. 157 was issued, GAAP standards included different definitions of fair value and
little information regarding how to use those definitions. SFAS No. 157 standardizes the definition
of fair value, establishes a framework for measuring fair value, and expands fair value disclosures.
SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, and it applies to all
other accounting pronouncements that require or permit fair value measurement, except:
SFAS No. 157 exceptions (3)
A. SFAS No. 123(R), Share-Based Payment and related interpretative pronouncements,
B. ARB No. 43, Chapter 4, "Inventory Pricing," and
C. Accounting pronouncements that permit measurements based on or using vendor-specific
objective evidence of fair value. (Note that these pronouncements are beyond the scope of
the CPA Exam.)
Fair value: (8)
Fair value is the price to sell an asset or transfer a liability in an orderly transaction between
market participants at the measurement date.
1. Fair value is measured for a specific asset or liability, or a group of assets and/or
liabilities.
2. Fair value is a market-specific measure, not an entity-specific measure.
3. Fair value is measured in the principal, or most advantageous, market for the asset or
liability.
4. Fair value is an exit price (the price to sell an asset or transfer a liability), not an
entrance price (the price to acquire an asset or assume a liability).
5. A fair value measure should reflect all of the assumptions that market participants
would use in pricing the asset or liability, including assumptions about risk.
6. Fair value does not include transaction costs, but may include transportation costs if
location is an attribute of the asset or liability.
7. The fair value of an asset assumes the highest and best use of the asset.
8. The fair value of a liability should include the liability's nonperformance risk, which is
the risk that the obligation will not be fulfilled.