What is the Securities and Exchange Commission?
- Has legal authority to establish U.S. GAAP, but allows accounting profession to establish GAAP and self-regulate.
- All companies issuing securities in U.S. subject to SEC rules and regulations.
- Issued public company specific accounting rules and regulations in Regulation S-X, Financial Reporting Releases (FRR), Accounting Series Releases (ASR), Interpretive Releases (IR), Staff Accounting Bulletins (SAB), and EITF Topic D and SEC Observer comments.
What is the Financial Accounting Standards Board?
- Independent full-time organization established in 1973.
- Through 2009, issued Statements of Financial Accounting Standards (SFAS), FASB Interpretations (FIN), FASB Technical Bulletins (FTB), Emerging Issues Task Force Statements (EITF), FASB Staff Positions, FASB Implementation Guides, and Statements of Financial Accounting Concepts (SFAC).
- Has 7 full-time members serving 5 year terms; may be reappointed for additional 5 year term. Members must sever connections with firms or institutions before joining.
Name the single source of authoritative nongovernmental U.S. GAAP.
The FASB "Accounting Standards Codification" (ASC).
Name the authoritative literature included in the FASB Accounting Standards Codification.
- Financial Accounting Standards Board (FASB)
- Emerging Issues Task Force (EITF) Abstracts and Topic D
- Derivative Implementation Group Issues
- Accounting Principles Board Opinions (APBO)
- Accounting Research Bulletins (ARB)
- Accounting Interpretations
- American Institute of Certified Public Accountants (AICPA)
Name the most authoritative literature included in the FASB Accounting Standards Codification.
- Accounting Research Bulletins (ARB)
- Accounting Principles Board Opinions (APBO)
- FASB Statments of Financial Accounting Standards (SFAS)
- FASB Staff Positions
- FASB Interpretations
- FASB Statement 133 Implementation Issues
Describe the how the FASB's ongoing standard-setting process works.
Updates ASC for new U.S. GAAP issued by FASB and for ammendments to SEC content with Accounting Standards Updates.
How are proposed FASB amendments amended to the Accounting Standards Codification?
- Proposed FASB amendments to ASC issued for public comment as Exposure Drafts (ED); majority vote of three Board members required to issue ED.
- At end of ED public comment period, FASB staff analyzes comment letters and position papers, then FASB redeliberates issue.
- When FASB satisfied that all reasonable alternatives adequately considered, FASB staff prepares Accounting Standards Update.
- Majority vote of three Board members required to amend ASC.
What is the International Accounting Standards Board?
- Established in 2001 as part of International Accounting Standards Committee (IASC) Foundation.
- Replaced Board of the International Accounting Standards Committee, which was created in 1973.
- Purpose is to develop single set of high quality, global accounting standards.
- Has 12 full-time members and 2 part-time members selected to provide mix of practical experience among auditors, preparers, users, and academics.
What is the International Financial Reporting Interpretations Committee?
- Replaced Standing Interpretations Committee (SIC) in 2002.
- Appointed by trustees of IASC Foundation.
- Provides guidance on newly identified financial reporting issues not addressed in IFRSs.
- Assists IASB in achieving international convergence of accounting standards.
The term "International Financial Reporting Standards" includes what standards?
- "IAS IFRS IFRIC-I SIC-I"
- International Accounting Standards (IAS)
- International Financial Reporting Standards (IFRS)
- IFRIC Interpretations
- SIC Interpretations
Describe the IASB's ongoing standard-setting process.
- Discussion paper published (not required).
- Exposure Draft (ED) prepared after reviewing comments on discussion paper.
- ED published for public comment (required); at least nine members must approve issuance.
- IASB analyzes comment letters and position papers then redeliberates on issue.
- After all reasonable alternatives adequately considered, IASB staff drafts IFRS.
- IFRS must be approved by at least nine members.
What is the Framework for the Preparation and Presentation of Financial Statements?
- Similar to FASB Conceptual Framework.
- Developed by IASB to assist in developing future IFRSs and evaluating existing IFRSs.
- Provides basis for reducing number of alternative accounting treatments permitted by IFRSs.
- Framework is not an IFRS.
What is the FASB Conceptual Framework?
- Conceptual framework (set forth in SFAC) that serves as basis for all FASB pronouncements.
- SFAC are not GAAP, but provide basis for financial accounting concepts for business and nonbusiness enterprises.
What is the main difference between the IASB's Framework for the Preparation and Presentation of Financial Statements and the FASB's Conceptual Framework?
- In the absence of standard or interpretation IASB's Framework can be applied to specific accounting issue.
- FASB's Conceptual Framework cannot.
What is the objective of general purpose financial reporting?
To provide useful financial information to primary users of general purpose financial reports in making decisions about providing resources to a reporting entity.
Who are the primary users of general purpose financial reports?
Existing and potential investors, lenders, and other creditors.
Name the pervasive constraint on the information provided in financial reporting.
Cost constraint: Benefits of reporting financial information must be greater than costs of obtaining and presenting it.
Name the fundamental qualitative characteristics of useful financial information.
Relevance and Faithful Representation.
Name the three elements of relevance.
- Predictive Value - can be used to predict future outcomes
- Confirming Value - provides feedback about previous evaluations
- Materiality - could affect decisions made by users; entity-specific
- PMC: I will be RELEVANT when I Pass My CPA exam.
Name the three elements of faithful representation.
- Completeness - includes all necessary information
- Neutrality - free from bias in selection or presentation
- Freedom From Error - no errors in selection or application
- FNC: Financials are Not FAITHFULLY REPRESENTED unless Complete.
Name the enhancing qualitative characteristics of financial information.
- CUTV: It is ENHANCING to CU on TV.
According to SFAC #5, what should a full set of financial statements include?
- Statement of Financial Position (the balance sheet)
- Statement of Earnings (the income statement)
- Statement of Comprehensive Income
- Statement of Cash Flows
- Statement of Changes in Owner's Equity
What is the difference between realization and recognition?
- Realization: When sold and converted to cash (or claims to cash)
- Recognition: When recorded in the financial statements
List the ten elements of financial statements according to SFAC #6.
- CREG and LALEID
- Comprehensive Income
- Equity (of Net Assets)
- Investments by Owners
- Distributions to Owners
List the six elements of financial statements according to the IASB Framework.
- Income (revenue & gains)
- Expenses (expenses & losses)
- Capital maintenance adjustments (increases/decreases in equity due to revaluation/restatement of assets/liabilities)
- ALE ICE
Name the five elements of present value measurement per SFAC #7.
- The price for bearing Uncertainty
- Expectations about timing Variations of future cash flows
- Other factors (i.e., liquidity issues and market imperfections)
- Time value of money
- Estimate of future cash flow
In determining present value, what two approaches does SFAC No. 7 allow?
- Traditional Aproach
- Expected Cash Flow Approach
When should the traditional approach to present value computations be used?
When assets and liabilities have contracutal (i.e., fixed) cash flows that are not expected to vary. Interest rate selection is paramount.
Describe the expected cash flow approach for present value computations.
Considers range of possible cash flows and assigns (subjective) probability to each cash flow in range to determine weighted-average, or "expected", future cash flow.
What is the presentation order of the major components of an income and retained earnings statement?
- Income (or loss) from continuing operations (individual line items reported gross of tax; total reported net of tax on I/S)
- Income (or loss) from Discontinued operations (reported net of tax on I/S)
- Extraordinary items (reported net of tax on I/S)
- Cumulative effect of a change in Accounting principles (reported net of tax on RE/S)
What does income (or loss) from continuing operations consists of? Give some examples of each.
- Operating activities (i.e., revenues, costs of goods sold, selling expenses, & admin. expenses)
- Non-operating activities (e.g., other revenues & gains and other expenses & losses)
- Income taxes
Give some examples for the following items: (1) Inventory Cost, (2) Selling Expense, (3) General & Administrative, and (4) Non-operating.
- (1) purchase price, freight in
- (2) freight out, salaries and commissions, advertising
- (3) officers' salaries, accounting and legal, insurance
- (4) auxiliary activities, interest expense
In what period are the following reported:
An impairment loss?
A gain (loss) from actual operations?
A gain (loss) on disposal?
All are reported in the period in which they occur.
What is a component of an entity?
Part of entity (lowest level) for which operations and cash flows can be clearly distinguished, both operationally and for financial reporting purposes, from rest of entity.
What may a component of an entity be under U.S. GAAP and IFRS?
- U.S. GAAP:
- 1. Operating segment
- 2. Reportable segment (segment reporting)
- 3. Reporting unit (goodwill impairment testing)
- 4. Subsidiary
- 5. Asset group (collection of assets and liabilites, directly associated with each other, that are disposed of together in a single transaction)
- 1. Separate major line of business or geographical area of operations
- 2. Subsidiary acquired exclusively with a view to resale
What criteria must be met in order for a component of a business (U.S. GAAP) or a disposal group (IFRS) to be classified as "held for sale?"
- Management commits to plan to sell component.
- Component available for immediate sale in present condition.
- Active program to locate buyer initiated.
- Sale is probable and expected to be complete within one year.
- Sale of component actively marketed.
- Actions requried to complete sale make it unlikely that significant changes to plan will be made or that plan will be withdrawn.
How is a discontinued component treated before and after classification as held-for-sale (HFS) under IFRS and U.S. GAAP?
- Before classification as HFS, individual assets and liabilities of component must be measured in accordance with applicable standards; resulting gains and losses must be recognized.
- After classification as HFS, component reported at lower of carrying value and fair value less costs to sell.
- U.S. GAAP:
- Does not require remeasurement of individual assets and liabilities before classification as HFS.
- Classification of a component as HFS triggers impairment analysis of component.
What is included in the calculation of a discontinued operation?
1. Results of operations of component (current period and all prior periods presented).
2. Gain or loss on disposal of component.
3. Impairment loss (and subsequent increases in fair value) of component. Loss is recognized for recording the impairment of component. Gain is recognized for any subsequent increase in fair value minus costs to sell (not in excess of previously recognized cumulative loss).
4. Assets within component are no longer depreciated or amortized.
How do we account for subsequent increases in the fair value of a discontinued component?
- Recognized for subsequent increase in fair value minus costs to sell (not in excess of previously recognized cumulative loss).
- Reported in period of increase.
How are anticipated future gains or losses from discontinued operations treated?
- A gain/loss not previously recognized resulting from sale of component recognized at date of sale, not before.
- Gains/losses anticipated to occur in future not recognized until they occur.
How are subsequent adjustments to amounts previously recorded in discontinued operations treated?
Classified in current period in discontinued operations.
In order for a settlement to be considered directly related to a component of an entity, it must...
- Have demonstrated cause-and-effect relationship, and
- Occur no later than one year after date of disposal transaction (unless circumstances beyond control of entity exist).
What types of costs are associated with exit and disposal activities?
- Involuntary employee termination benefits
- Costs to terminate a contract that is not a capital lease
- Other costs (i.e., costs to consolidate facilities or relocate employees)
What criteria are needed to recognize a liability associated with an exit or disposal activity?
- Obligating event has occured,
- Event results in present obligation to transfer assets or to provide services in future, and
- Entity has little or no discretion to avoid future transfer of assets or providing of services.
What are the required disclosures for exit or disposal activities?
1. A description, including facts and circumstances leading to expected activity and expected completion date.
2. For each major cost associated with activity:
a. Total amount expected to be incurred, amount incurred during period and incurred to date.
b. Reconciliation of beginning and ending liability balances showing changes during period for costs incurred, costs paid or settled, and any other adjustments with explanation of reasons.
3. Line item(s) in income statement where costs aggregated.
4. For each reportable segment: total amount of costs expected to be incurred, amount incurred in period and incurred to date, net of any adjustments with explanation of reasons.
5. Liabilities not recognized because fair value cannot be reasonably estimated and explanation of reasons.
Define extraordinary items.
- Material in nature
- Of a character significantly different from typical or customary business activities (unusual)
- Not expected to recur in forseeable future (infrequent)
- Not normally considered in evaluating ordinary operation results of enterprise
- Key words: Unusual and infrequent
- Remember: Extraordinary items recognized under U.S. GAAP, not IFRS.
List some examples of extraordinary items.
- Abandonement of, or damage to, plant due to infrequent earthquake or infrequent flood
- Expropriation of a plant by a government
- Prohibition of product line by newly enacted law or regulation
List some examples of non-extraordinary items.
1. Gain or loss from sale or abandonment of property, plant, or equipment used in the business.
- 2. Large write-downs or write-offs of:
- (i) Receivables.
- (ii) Inventories.
- (iii) Intangibles (including goodwill).
- (iv) 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 regular basis as part of normal business operations).
4. Losses from major strike by employees or by supplier's employees.
5. Long-term debt extinguishments that are part of a common management strategy.
How should income (or loss) from discontinued operations and extraordinary items be presented on an income statement?
Both reported net of tax as single line items after income from continuing operations, with results from discontinued operations listed before any extraordinary items.
Name the three types of accounting changes.
- Change in accounting principle
- Change in accounting estimate
- Change in reporting entity
What is the cumulative effect of a change in accounting principle equal to for comparative and non-comparative financial statements?
- Non-comparative F/S:
- Difference between amount of beginning RE in period of change and what RE would have been if accounting change retroactively applied to all prior periods affected.
- Comparative F/S:
- Difference between beginning RE in first period presented and what RE would have been if new principle applied to all prior periods.
What is the amount of cumulative effect to be reported on the retained earnings statement equal to?
- Difference between:
- (1) RE at beginning of earliest period presented, and
- (2) RE that would have been reported at beginning of earliest period presented if new accounting principle applied retrospectively for all prior periods, recognizing only direct effects and related income tax effect.
How is a change in accounting principle reported?
- Cumulative effect of change included in retained earnings statement as adjustment of beginning RE balance of earliest year presented.
- Prior-period financial statements restated, if presented.
What are the special changes in an accounting principle?
How are special changes in accounting principle reported?
- A change to LIFO from another method of inventory pricing under U.S. GAAP.
- Any other change in which cumulative effect adjustment is considered impractical to calculate.
- Change in depreciation method.
- Special changes are reported prospectively (like change in estimate).
Under IFRS, when an entity disclosing comparative financial information applies an accounting principle retoractively or makes a retrospective restatement of items in the financial statements, the entity must...
- At minimum, present three balance sheets (end of current period, end of prior period, and beginning of prior period) and two of each other financial statements (current period and prior period).
- Cumulative effect adjustment shown as adjustment of beginning RE on balance sheet for beginning of prior period.
- Note: U.S. GAAP does not have three balance sheet requirement.
How is a change in accounting estimate reported?
- Prospectively. Effect shown in current and/or future periods affected by change. F/S not restated.
- If change affects future periods, effect on income before extraordinary items, net income, and related per share information for current year should be disclosed in notes to F/S.
List some events resulting in estimate changes.
- Change in useful life of assets.
- Adjustments of year-end accrual of officers' salaries and/or bonuses.
- Write-downs of obsolete inventory.
- Material non-recurring IRS adjustments.
- Settlement of litigation.
What are changes in accounting entity? Under U.S. GAAP and IFRS, how is a change in the reporting entity reported?
- When entity being reported on changes composition (i.e., consolidated financial statements presented in place of statements of individual companies).
- Under U.S. GAAP, all current and prior period financial statements presented are restated (retrospective application).
- IFRS does not include concept of change in accounting entity.
What do error corrections include?
- Corrections of errors in recognition, measurement, presentation, or disclosure in F/S resulting from mathematical mistakes, mistakes in application of GAAP/IFRS, or oversight/misuse of facts existing when F/S prepared.
- Changes from non-GAAP/IFRS method of accounting to GAAP/IFRS method of accounting (e.g., cash basis to accrual basis).
How are corrections of an error reported?
- Reported as prior period adjustments to retained earnings.
- All comparative financial statements presented restated (retrospective application).
Under IFRS, what must an entity do if it is impracticable to determine the cumulative effect of an error? How is this different from U.S. GAAP?
- Entity requred to restate information prospectively from earliest date practicable.
- U.S. GAAP has no impracticality exemptions for error corrections.
Define comprehensive income.
Change in equity (net assets) that results from revenue, expenses, gains, and losses during a period, as well as any other recognized changes in equity that occur for reasons other than investments by owners and distributions to owners (non-owner transactions).
Identify the contents of the first note to the financial statements.
- Summary of significant accounting policies
- Identify and describe (MACPP):
- Measurement bases used in preparing the financial statements
- Accounting principles and methods
What do the remaining notes to the financial statements contain? Give some examples.
All other information relevant to decision makers; used to disclose facts not presented in either body of the F/S or in "Summary of Significant Accounting Policies."
- 1. Changes in stockholder's 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 F/S issued.
Identify two differences between U.S. GAAP and IFRS regarding the summary of significant accounting policies included within the notes to financial statements.
- IFRS requires explicit and unreserved statement of compliance with IFRS. U.S. GAAP does not have a similar requirement.
- IFRS requires disclosures of significant judgements and estimates management made in applying accounting policies. U.S. GAAP only requires disclosure of significant estimates.
Under U.S. GAAP and IFRS, what do related parties include?
- Affiliates of entity.
- Entities accounted for using equity method.
- Parent or subsidiary entities or subsidiaries of common parent.
- Trusts for benefit of employees (e.g., pension and profit-sharing trusts) managed by or under trusteeship of management.
- Management of entity and their immediate family members.
- Owners of more than 10% of voting interest of entity (principal owners) and their immediate family members (U.S. GAAP only).
Describe the related party disclosures required under U.S. GAAP and IFRS.
- Material related party transactions
- Related party notes/accounts receivable
- Control relationships
- Note: IFRS requires disclosure of key management compensation. U.S. GAAP does not require this disclosure (SEC regulations requires this disclosure outside F/S).
Under U.S. GAAP/IFRS, what disclosures should material related party transactions include?
- Nature of the relationship.
- Description of transactions for each period presented.
- Dollar amounts of transactions for each period presented.
- Amounts due to/from related parties at each balance sheet date.
- Name of related party, if necessary in understanding relationship (U.S. GAAP only).
- Related party allowance for bad debts (IFRS only).
- Related party bad debt expense and/or write-offs (IFRS only).
What are the U.S. GAAP disclosure requirements for risks and uncertainties?
- Nature of operations.
- Use of estimates in preparing F/S.
- Significant estimates.
- Current vulnerability due to certain concentrations.
What are the guidelines for interim reporting?
- Use same accounting principles used in most recent annual report.
- Allocate expenses to interim period benefited.
- Revenues recognized in period earned and realized/realizable.
- Total for comprehensive income in condensed F/S of interim periods
Under IFRS, what are interim financial statements required to include? How is this different from U.S. GAAP?
- 1. Condensed B/S as of end of current year and as of end of preceding financial year.
- 2. Condensed I/S for current interim period and cumulative year-to-date with comparative statements for comparable periods (interim and year-to-date) of preceding financial year.
- 3. Condensed statements of changes in equity cumulatively for current financial year and for comparable year-to-date period of preceding financial year.
- 4. Condensed statements of cash flows for current financial year-to-date and comparable year-to-date period of preceding financial year.
U.S. GAAP does not establish presentation minimums for interim reporting, although guidance is provided by SEC.
What is the general rule for estimating income tax expense for each quarter?
Multiply year to date income by estimated effective tax rate; subtract result from provision included in previous quarter.
What income tax rate should be used for interim financial reporting?
Best estimate of effective tax rate to be applicable for full fiscal year reflecting all tax planning alternatives including foreign tax rates, percentage depletion, capital gains rate, and anticpated investment tax credits.
How is the effective tax rate estimated under IFRS and U.S. GAAP?
- Uses enacted or substantially enacted changes in tax rates.
- U.S. GAAP:
- Uses enacted tax rates only.
Identify five items included in other comprehensive income.
- Pension adjustments
- Unrealized gains and losses on available-for-sale securities
- Foreign currency translation adjustments and gains/losses on foreign currency transactions designated as economic hedges of net investment in foreign entity
- Effective portions of cash flow hedges
- Revaluation surpluses (IFRS only)
What is the objective of segment reporting?
- To help users of financial statements:
- 1. Better understand enterprise's performance.
- 2. Better assess its prospects for future net cash flows, and
- 3. Make more informed judgements about enterprise as a whole.
How are segment liabilities reported under IFRS and U.S. GAAP?
IFRS requires disclosure of segment liabilities if regularly provided to chief operating decision maker.
U.S. GAAP does not require disclosure of segment liabilities.
Name the four required disclosures for segments of an enterprise.
- Operating segments
- Products and services
- Geographic areas
- Major customers
Define operating segment.
- Distinct revenue-producing components of enterprise about which separate financial information produced internally, and whose operating results are regularly reviewed by enterprise.
- Determined using "management approach."
List the three formats acceptable for reporting comprehensive income. Which format is prohibited under IFRS?
- Single statement approach:
- 1. Statement of Income and Comprehensive Income
- Two statement approach (Statement of Earnings/Income Statement +):
- 2. Statement of Comprehensive Income
- 3. Component within Statement of Owner's Equity - displayed as a separate column (prohibited under IFRS)
List some disclosure requirements for comprehensive income.
- Tax effects of each component included in current OCI
- Accumulated balances of components of OCI
- Total AOCI
- Reclassification adjustments between OCI and NI
What is a reportable segment?
Operating segments of an enterprise that meet criteria for separate reporting.
Operating segments that exhibit similar long-term financial performance may be aggregated into a single operating segment if...
- (i) Aggregation consistent with objective and principles of segment reporting.
- (ii) Segments have similar economic characteristics.
- (iii) Segments similar in (1) nature of products and services, (2) nature of production processes, (3) type or class of customer, (4) methods used to distribute products or provide services, and (5) nature of regulatory environment (e.g., banking, insurance, or public utilities).
Name two quantitative threshholds used in identifying operating segments.
- 10% "Size" test
- 75% "Reporting Sufficiency" test
Describe the 10% test for identifying reportable segments.
- Reported revenue (internal and external) is 10% or more of combined revenue (internal and external) of all operating segments.
- Reported profit or loss:
- Absolute amount of reported profit or loss is 10% or more of greater (in absolute amount) of:
- (1) Combined reported profit of all operating segments that did not report loss, or
- (2) The combined reported loss of all operating segments that did report loss.
- Assets are 10% or more of combined assets of all operating segments.
- Note: Must meet only one of the above.
What is the 75% test for identifying reportable segments?
Combined external (consolidated) revenue of all reportable segments must be at least 75% of total consolidated revenue of entity.
Practical limit is 10 segments, not a precise limit.
How is segment profit (or loss) determined?
- Revenues (internal & external)
- Less: Directly traceable costs
- Less: Reasonably allocated costs (determined by CFO)
- Segment profit (or loss)
What are the disclosure requirements for reportable operating segments?
- For each reportable segment, entity must report:
- Identifying factors
- Products or services
- Profit or loss details
- Asset details
- Liability details (IFRS only)
- Measurement criteria
What enterprise-wide disclosures are all public enterprises required to disclose?
- Products and Services
- Unless impracticable and that fact must be disclosed.
- Geographic Areas
- 1. Revenues attributable to enterprise's domicile country, foreign countries (if material), individual foreign countries (if material), and basis for attributing revenues.
- 2. Long-lived assets located in the enterprise's domicile country, in all foreign countries, and in individual foreign countires (if material).
- Major CustomersCustomers who generate 10% or more of enterprise's revenue. Total amount of revenues from each and identity of segment(s) reporting them must be disclosed. Identity of major customer need not be disclosed.
Define development stage enterprise.
Enterprise that devotes substantially all of its efforts to establishing new business and either planned principal operations have not commenced or no significant revenue has been generated therefrom.
Indicate any special accounting treament for development stage enterprises.
Same generally accepted accounting principles as established operating enterprises with additional disclosures:
A. Identify statements as those of development stage enterprise.
B. Accumulated losses identified as "deficit accumulated during development stage."
C. In I/S, show revenue and expenses and cumulative total of both amounts from company's inception.
D. In Statement of Cash Flows, include cumulative amounts of cash inflows and outflows from enterprise's inception and current amounts of cash inflows and outflows for each period presented.
E. Issue separate statement of stockholder's equity, indicating shares issued, date of issuance, dollar amounts assigned, noncash consideration, if any.
Regarding fair value measurement, how are IFRS and U.S. GAAP different?
IFRS has not standardized fair value measurement and disclosure. Fair value is addressed on a topic by topic basis within the IFRS standards.
Define fair value.
Price to sell asset or transfer liability in an orderly transaction between market participants at measurement date.
Define principal markets and most advantageous markets. How is fair value determined for each?
- Principal Market:
- Market with greatest volume or level of activity for asset or liability.
- If principal market exists, price in that market will be fair value measurement, even if more advantageous price in different market exists.
- Most Advantageous Market:
- Market with best price for asset or liability, after considering transaction costs. Transaction costs not included in final fair value measurement.
- Price in most advantageous market will be fair value only if no principal market exists.
Define highest and best use.
Use that maximizes value of an individual asset (in-exchange) or group of assets (in-use).
What is the difference between value in-use and value in-exchange?
- Fair value of asset is based on price to sell the asset to be used by buyer with other assets in a group (e.g., fixed assets).
- Fair value of asset is based on price to sell asset standalone (e.g., financial instruments).
Describe the valuation techniques that can be used to measure fair value of an asset or liability.
1. Market Approach - Uses prices and other relevant information from market transactions involving identical or comparable assets or liabilities to measure fair value.
2. Income Approach - Converts future amounts, including cash flows or earnings, to single discounted amount to measure fair value of assets or liabilities.
3. Cost Approach - Uses current replacement cost to measure fair value of assets.
Describe the hierarchy of fair value inputs. Which inputs have the highest priority?
1. Level 1 Inputs - Quoted prices in active markets for identical assets or liabilities.
2. Level 2 Inputs - Inputs other than quoted market prices that are directly or indirectly observable for asset or liability.
3. Level 3 Inputs - Unobservable inputs for asset or liability that reflect entity's assumptions and are based on best available information.
Note: Level 1 inputs have highest priority.
What must an entity's first IFRS financial statements include?
- balance sheet - 3 (end of current period, end of prior period, and beginning of prior period)
- income statement - 2 (if using two-statement aproach to presenting comprehensive income)
- statement of cash flows - 2
- statement of changes in equity - 2
What is the date of an entity's transition to IFRS?
Date of opening balance sheet.
What are some mandatory exceptions to the retrsopective application of IFRS?
- Derecognition of financial assets and financial liabilities
- Hedge accounting
- Non-controlling interests
- Classification and measurement of financial assets
- Embedded derivatives
When transitioning from GAAP to IFRS, what disclosures are required?
a. Reconciliation of equity reported under previous GAAP to equity under IFRS for (1) date of transition to IFRS, and (2) end of last period presented in entity's most recent GAAP annual F/S.
- b. Reconciliation of total comprehensive income in accordance with IFRS to total comprehensive income in accordance with previous GAAP for latest period in entity's most recent F/S.
c. Disclosures related to recognition or reversal of impairment losses, if impairment losses or reversals were recognized for first time when preparing opening IFRS B/S.
Describe the Form 10-K and the Form 10-Q. What level of assurance must be provided with the financial statements submitted in these forms?
- Form 10-K:
- Filed annually by U.S. registered companies.
- Includes summary of financial data, MD&A, and audited F/S prepared using U.S. GAAP.
- Filing deadline is 60, 75, and 90 days after end of fiscal year for large accelerated filers, accelerated filers, and all other registrants, respectively.
- Form 10-Q:
- Filed quarterly by U.S. registered companies.
- Includes reviewed (unaudited) financial statements, interim MD&A, and certain disclosures.
- Filing deadline is 40 and 45 days after end of fiscal quarter for large accelerated filers and all other registrants, respectively.
What is the Form 11-K?
Annual report of company's employee benefit plan(s).
Describe the Form 20-F and 40-F.
- Filed annually by foreign private issuers.
- Form 40-F filed by specific Canadian registrants and Form 20-F filed by other non-U.S. registrants.
- Similar to Form 10-K and contains financial disclosures, including summary of financial data, MD&A, and audited financial statements.
- Prepared using U.S. GAAP, IFRS, or comprehensive body of accounting principles other than U.S. GAAP or IFRS.
- Certain reconciliations to U.S. GAAP must be provided if comprehensive body of accounting principles other than U.S. GAAP or IFRS is used.
What is the Form 6-K?
- Filed semi-annually by foreign private issuers.
- Similar to Form 10-Q and contains unaudited financial statements, interim period MD&A, and certain disclosures.
What is the Form 8-K?
Reports major corporate events such as corporate asset acquisitions or disposals, changes in securities and trading markets, changes to accountants or financial statements, and changes in corporate governance or management.
What are the Forms 3, 4 and 5?
Required to be filed by directors, officers, or beneficial owners of more than 10 percent of a class of equity securities of a registered company.
What is Regulation S-X?
Form and content requirements for interim and annual financial statements to be filed with SEC.
What are the requirements set forth by Regulation S-X for interim financial statements filed with the SEC?
1. Must be reviewed by independent public accountant and review report must be filed with F/S.
- 2. (a) B/S as of end of most recent fiscal quarter and as of end of preceding fiscal year (2).
- (b) I/S for most recent fiscal quarter, for period between end of preceding fiscal year and end of most recent fiscal quarter, and for corresponding periods of preceding fiscal year (4).
- (c) Statements of cash flows for period between end of the preceding fiscal year and end of most recent fiscal quarter, and for corresponding period for preceding fiscal year (2).
3. Adjustments for fair presentation.
4. May be condensed financial statements.
5. Disclosures sufficient so that interim information is not misleading.
What are the requirements set forth by Regulation S-X for annual financial statements filed with the SEC?
1. Must be audited by independent public accountant, and audit report must be filed with financial statements.
2. Must include B/S for two most recent fiscal years and all other statements (I/S, changes in owners' equity, and cash flows) for three fiscal years preceding most recent audited B/S (B/S - 2, all others - 3).