Cpa Review- Far 1-1 (Accounting Standards And Conceptual Frameworks)

Front 1

Standard-Setting Bodies in the United States (4)

Back 1

1. Securities and Exchange Commission (SEC)
1934-1939 (FRR+ASR+IR+SAB)
2. Committee on Accounting Principles (CAP)
1939-1959 (ARB)
3. Accounting Principles Board (APB)
1959-1973 (APBO)
4. Financial Accounting Standards Board (FASB)
1973-now (SFAS+FIN+FTB+EITF+SFAC)

Front 2

Single Source of Authoritative Nongovernmental U.S. GAAP

Back 2

The FASB Accounting Standards Codification

Hint 2

Accounting and financial reporting practices not included in the Codification are not GAAP

Front 3

Authoritative Literature Included in the Codification (FEDPRIA)

Back 3

1. Financial Accounting Standards Board (FASB)
2. Emerging Issues Task Force (ETIF) and Topic D
3. Derivative Implementation Group Issues
4. Accounting Principles Board Opinions
5. Accounting Research Bulletins
6. Accounting Interpretations
7. American Institute of Certified Public Accountants (AICPA)

Front 4

SEC Issues Company Specific Accounting Rules and Regulations in... (6)

Back 4

1. Regulation S-X
2. Financial Reporting Releases (FRR)
3. Accounting Series Releases (ASR)
4. Interpretive Releases (IR)
5. Staff Accounting Bulletins (SAB)
6. ETIF Topic D and SEC Staff Observer Comments

Hint 4

These authoritative pronouncements issued by the SEC are included for reference in the Codification

Front 5

Literature Issued by FASB (6) and Member Information (Side 3)

Back 5

1. Statements of Financial Accounting Standards
2. Interpretations
3. Technical Bulletins
4. Staff Positions
5. Staff Implementation Guides
6. Statement No. 138 Examples

Hint 5

-7 full-time members

-Serve for 5-year terms and may be reappointed to an additional 5-year term

-Must sever connections with firms/institutions before joining the Board

Front 6

Literature Issued by AICPA (4)

Back 6

1. Statements of Position
2. Auditing and Accounting Guides*
3. Practice Bulletins
4. Technical Inquiry Service**

Hint 6

*Incremental accounting guidance only

**For software revenue recognition

Front 7

FASB Process for Issuing Accounting Standards Updates (3) and Definition (Side 3)

Back 7

1. Exposure Drafts- require a majority vote and issued for public comment
2. End of Exposure Draft Period- Board analyzes and studies comments and position papers and then re-deliberates on the issue
3. Accounting Standards Update- submitted for Board approval when all alternatives have been considered. Majority vote is required to amend the ASC.

Hint 7

Not authoritative literature. They provide background information, update the codification, and describe the basis for their conclusions.

Front 8

The International Accounting Standards Board (IASB)- History (2), Purpose, & Members

Back 8

-Established in 2001 as part of the International Financial Reporting Services (IFRS) Foundation
-Adopted the International Accounting Standards (IAS)*
-Purpose is to develop a single set of high-quality, global accounting standards
-Has 15 full-time members and two part-time members

Hint 8

*IASs had been issued by the Board of International Accounting Standards Committee

Front 9

International Financial Reporting Interpretations Committee (IFRIC)- History and Purpose (2)

Back 9

-Sponsored and appointed by the IFRS Foundation and their trustees (2002)
-Provides guidance on newly identified financial reporting issues not addressed in the IFRSs
-Assists the IASB in achieving convergence.

Front 10

Literature Issued by the IASB

Back 10

1. International Financial Reporting Standards (IFRSs)
*(Includes)
2. Conceptual Framework for Financial Reporting
3. Exposure Drafts

Hint 10

-IFRSs, IASs, and Interpretations developed by the IFRIC and former SIC

Front 11

IASB Process for New Topics (3, 1 optional)

Back 11

-Generally publishes discussion papers (not required)

1. Prepares an Exposure Draft- publication for public comment required, must be approved by at least 9 members
2. Reconvenes after public comment period
3. Drafts the IFRS when all alternatives have been considered. Also must be approved by 9 members.

Front 12

Conceptual Framework for Financial Reporting (3)

Completion Process (Side 3)

Back 12

-Currently being developed by the IASB in a joint project with FASB.
-Purpose is to converge and improve the FASB and IASB financial reporting frameworks
-Assits the IASB but is not IFRS

Hint 12

-As each chapter of is completed, it replaces the relevant paragraphs in the Framework for the Presentation of Financial Statements

Front 13

IFRS vs. U.S. GAAP

Difference with the Conceptual Framework

Back 13

-IFRS entities are directed to refer to and consider the applicability of the concepts in the Framework

-Cannot be applied to specific accounting issues under U.S. GAAP

Front 14

Goal of International Accounting Standards Convergence

Back 14

To develop a single set of high-quality, international accounting standards that companies can use for both domestic and cross-border financial reporting.

Hint 14

-FASB and IASB have cooperated to improve both GAAP and IFRS and to eliminate the differences between them
-Idea is that over time the 2 sets of standards will become increasingly similar.
-Supported by the SEC who believe the result would benefit U.S. investors.
-Currently considering the incorporation of IFRS into the U.S. financial reporting system

Front 15

FASB's Conceptual Framework (3)

Completion of Phases Process (Side 3)

Back 15

1. Serves as a basis for all FASB pronouncements
2. Set forth in pronouncements called Statements of Financial Accounting Concepts (SFAC)
3. Not GAAP but provide basic reasoning for financial accounting concepts

Hint 15

-Each phase that FASB completes is released as a chapter in Statement of Financial Accounting Concepts No. 8 Conceptual Frameworks for Financial Reporting

Front 16

SFAC No. 1, "Objectives of Financial Reporting by Business Enterprises"

Back 16

-replaced by Chapter 1 of SFAC No. 8

Front 17

SFAC No. 2, "Qualitative Characteristics of Accounting Information"

Back 17

-replaced by Chapter 3 of SFAC No. 8

Front 18

SFAC No. 3, "Elements of Financial Statements of a Business"

Back 18

-replaced by SFAC No. 6

Front 19

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

Characteristics (3), Users (4), & Objectives (Side 3) (4)

Back 19

-Characteristics
1. Significant portion of resources come from contributions/grants
2. Operating purpose is something other than to provide goods/services for profit
3. Lack ownership interests

-Users
1. Resource providers
2. People who use and benefit from the services provided
3. Governing and oversight bodies
4. Managers

Hint 19

-Objectives (Information...)
1. Useful in making resource allocation decisions
2. Useful in assessing and providing services
3. Useful in assessing management performance
4. About economic resources, obligations, performance, nature and relationships, efforts and accomplishments, and liquidity

Front 20

SFAC No. 5, "Recognition and Measurement in the Financial Statements" (4)

Back 20

1. Full Set of Financial Statements
2. Fundamental Recognition Criteria
3. Measurement Attributes for Assets and Liabilities
4. Fundamental Assumptions

Front 21

Full Set of Financial Statements (5)

Back 21

-Part of SFAC No. 5

1. Statement of financial position (balance sheet)
2. Statement of earnings (income statement)
3. Statement of comprehensive income
4. Statement of cash flows
5. Statement of changes in owners' equity

Front 22

Fundamental Recognition Criteria (Definition) (2)

Back 22

-Part of SFAC No. 5

-Recognition is the process of formally recording or incorporating an item in the FS's of an entity and classifying it as an asset, liability, equity, revenue, or expense.
-Look at definitions, measurability, relevance, and reliability

Front 23

Measurement Attributes for Assets and Liabilities (5)

Examples of Each (Side 3)

Back 23

-Part of SFAC No. 5

1. Historical Cost
2. Current Cost
3. Net Realizable Value
4. Current Market Value
5. Present Value of Future Cash Flows

Hint 23

1. Plant, Property, & Equipment
2. Inventory
3. Accounts Receivable
4. Marketable Securities
5. Long-Term Debt, Bonds

Front 24

Fundamental Assumptions of U.S. GAAP (10)

(Definitions for some, Side 3)

Back 24

-Part of SFAC No. 5

1. Entity Assumption
2. Going Concern Assumption
3. Monetary Unit Assumption*
4. Periodicity Assumption
5. Historical Cost Principle*
6. Revenue Recognition Principle
7. Matching Principle
8. Accrual Accounting
9. Full Disclosure Principle*
10. Conservatism Principle

Hint 24

3. Monetary unit doesn't change over time, effects of inflation aren't reflected.
5. Financial info is accounted for and based on cost, not current market value (general rule)
9. User must be given info that would make a difference in the decision process

Front 25

Revenue Recognition Principle

Back 25

-Part of SFAC No. 5, Fundamental Assumptions of U.S. GAAP

-General Rule: revenue should be recognized when it is earned* and when it is realized or realizable*

Hint 25

Earned: considered to be earned when entity has substantially accomplished what it must do to be entitled to the benefits

Realized or Realizable: revenues/gains are recognized when products/assets are exchanged for cash/claims to cash

OR

when related assets received are readily convertible to known amounts of cash/claims to cash

Front 26

Matching Principle

Back 26

-Part of SFAC No. 5, Fundamental Assumptions of U.S. GAAP

-Expenses are necessarily incurred to generate revenue so all expenses incurred to generate a specific amount of revenue in a period are MATCHED against that revenue.

Hint 26

Does not govern the recognition of losses since they result from unusual events.

Front 27

Accrual Accounting

Back 27

-Part of SFAC No. 5, Fundamental Assumptions of U.S. GAAP

-Revenues are recognized when they are earned and expenses are recognized in the same period as the related revenue.

-Not necessarily in the period in which the cash is received or expended by the company

Front 28

Conservatism Principle

Back 28

-Part of SFAC No. 5, Fundamental Assumptions of U.S. GAAP

-If in doubt when selecting from GAAP methods, select the method that is least likely to overstate assets and understate liabilities in the current period.

1. Recognize revenues/gains when the earnings process is complete
2. Recognize expenses/losses immediately

Front 29

SFAC No. 6, "Elements of Financial Statements)

Comprehensive Income

REGL ALE needs ID (Side 3)

Back 29

-Elements are the components of the financial statements. They must be measurable and meet the recognition requirements previously discussed.

-Comprehensive Income includes all differences between beginning equity and ending equity other than transactions with owners (net income + OCI)

Hint 29

If REGL wants to drink ALE, he needs ID

Revenues, Expenses, Gains, Losses, Assets, Liabilities, Equity, Investments by Owners, Distributions to Owners.

-R--E on Income Statement
-R, E: operating section
-G, L: non-operating
-A, L, E: balance sheet
-I, D: excluded from CI

Front 30

Revenues

Back 30

-Inflows, enhancements of assets, or reductions in liabilities from delivering goods/services.

-Recognize revenue at the gross amount (less allowances for return and discounts given)

Front 31

Gains

Back 31

-Increases in equity from peripheral transactions and other events except revenue and investments by owners

-When Selling Price > Book Value

-On IS in non-operating section

Front 32

Losses

Back 32

-Decreases in equity from peripheral transactions and other events except expenses and distributions to owners.

-When Selling Price < Book Value
-Impairment/Write-Down

-On IS in non-operating section

Front 33

IFRS vs. U.S. GAAP

Capital Maintenance (& Def.)

Back 33

-Capital maintenance adjustments are increases/decreases in equity that arise from the re-evalutaion/restatement of assets/liabilities.

-Identified as an element of the financial statements by IASB Framework for the Preparation and Presentation of FS's.

-Not identifies as an element under GAAP

Front 34

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

Def. and 6 parts (Some Def. of parts on Side 3)

Back 34

-Provides framework for when to use future cash flows as a measurement basis for assets/liabilities.
-Provides set of principles that govern the use of present value.

1. Measurements Based on Future Cash Flows Only*
2. 5 Elements of PV Measurement
3. Fair Value Objective*
4. PV Computations
5. Liability Measurement Considers Add'l Factors*
6. Changes in Estimated Cash Flows Using the Catch-Up Approach*

Hint 34

1. Only applies to measurement issues for assets/liabilities that are determined using FCF's only

3. If FV can't be determined in the market place, objective must be to obtain an estimate of FV (i.e. PV of FCF's)

5. Additional factors are (1) Costs to settle and (2) Credit standing of the company

6. To use, adjust the carrying amount of the asset/liability to the PV determined using the revised estimates and discount using the original effective interest rate.

Front 35

Five Elements of PV Measurement

Back 35

-In SFAC No. 7

UVOTE:
1. Price for Bearing UNCERTAINTY (credit risk)
2. Expectations about Timing VARIATIONS of FCF's
3. OTHER Factors (liquidity issues & market imperfections)
4. TIME Value of Money (the risk-free rate of interest)
5. ESTIMATE of FCF

Front 36

IASB Conceptual Framework's Underlying Assumptions

Back 36

-Only 2:

1. Going Concern Assumption
2. Accrual Accounting

Front 37

Present Value Computations

Back 37

-In SFAC No. 7
-2 approaches allowed:

1. Traditional Approach- one discount rate used to take the PV of a FCF stream. May be used when assets/liabilities have fixed CF's that aren't expected to vary (Interest Rate selection is very important here)

2. Expected CF Approach- for complex cases. Uses only the risk-free rate of return as the discount rate, then turns its attention to the expected FCF's*, considering uncertainties* (default risk) as adjustments to FCF's.*

Hint 37

Expected Cash Flow: approach considers a range of possible cash flows and assigns a probability to each to determine the weighted-average or "expected" FCF.

Risk & Uncertainty Adjustments to CF's: adjustments are required for uncertainties in complex PV computations.

Front 38

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

Back 38

-Objective is to provide information about the reporting entity (disclose entity's performance) that is useful to the primary users.

1. Primary Users- (external) existing and potential investors, lenders, and other creditors.

2. Financial Info Provided in General Financial Reports:
-Resources of the entity
-Claims against the entity
-How effectively entity's management & governing board have discharged their responsibilities to use the entity's resources.

-Financial information is used to estimate the value of the company

Front 39

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

Back 39

-Characteristics that are likely to be the most useful in making decisions about the reporting entity based on financial information.

1. Fundamental Qualitative Characteristics: Relevance* & Faithful Representation*

2. Enhancing Qualitative Characteristics: Comparability (Consistency), Verifiability, Timeliness, Understandability

3. The Cost Constraint: pervasive constraint, benefits of reporting info must be greater than the costs of obtaining and presenting it

Hint 39

Relevance- capable of making a difference in decisions made by users. (1) Predictive Value, (2) Confirming Value, (3) Materiality

-Passing Confirms Money

Faithful Representation- info must be reliable, generally not achievable but characteristics must be maximized. (1) Completeness, (2) Neutrality, (3) Freedom From Error