Blanchard Accounting

  1. 6 Characteristics That Accounting Information Should Possess
    • 1. Understandable
    • 2. Relevant
    • 3. Reliable
    • 4. Comparable and Consistent
    • 5. Unbiased
    • 6. Cost-Benefi t Eff ective
  2. 4 Types of Accounting
    • 1. GAAP
    • a) Used by Investors and Creditors
    • b) Emphasis on value as a going concern
    • 2. SAP
    • a) Used by Regulators
    • b) Emphasis on Liquidation Market Value
    • 3. Tax
    • a) Used by Tax Authorities
    • b) Emphasis on social and political issues
    • 4. Internal
    • a) Used by management
    • b) Emphasis on the needs of management
  3. 4 Principal Financial Reports
    • 1. Balance Sheet: lists assets, liabilities, and surplus (equity) of the company
    • 2. Income Statement: reports income, expenses, and earnings during reporting period
    • 3. Cash Flow Statement: reports sources and uses of cash during reporting period
    • 4. Notes and Disclosures: Allows for additional info not in above statements
  4. 5 Types of Information in Notes and Disclosures
    • 1. Description of accounting policies used to prepare statements
    • 2. Discussion of values that may not be reliably estimable
    • 3. Discussion of risks and uncertainty
    • 4. Forward-looking info: estimates of future financial earnings or events to occur after publication
    • 5. Subsequent events: events that occurred after statement date but before publication
  5. GAAP Hierarchy
    • 1. Organization in charge of securities regulation (SEC)
    • 2. Standards set by specifi ed accounting standard setter (FASB,IFRS)
    • 3. Industry-speci fic guidance (SOPs from the AICPA)
    • 4. Interpretations (IASB interpretations committee)
  6. Fair Value vs. Historical Cost
    • 1. Fair Value
    • a) IASB Defi nition - Fair value is the amount for which an asset could be exchanged or a liability settled between knowledgeable, willing parties in an arm's length transaction
    • b) Very relevant, but less reliable
    • 2. Historical Cost
    • a) Original cost of asset or liability
    • b) Very reliable, but less relevant
  7. Deferral Matching vs. Asset/Liability
    • 1. Deferral/matching
    • a) Coordinates timing of income and expense recognition to occur at same time
    • b) Premiums recognized when earned
    • c) Losses recognized when occurred
    • d) Uses DAC to force matching of prepaid policy acquisition expenses on income statement
    • e) Focus on timing of profi t emergence
    • 2. Asset/liability approach
    • a) Focus on the value of assets or liabilities that exist as of balance sheet date
    • b) Assets booked if future stream of cash flows is certain
    • c) Liabilities booked if entity committed to an obligation resulting in payment of future cash ows
    • d) Does not recognize DAC as an asset if cannot be transferred to cash
    • e) Revenue recognized up front once company gains control of asset resulting in revenue
  8. Advantages and Disadvantages of Principle-Based vs. Rule-Based
    Accounting Standards
    • 1. Principle-based standards
    • a) Advantages - more exible with new and changing products, require less maintenance
    • b) Disadvantages - danger that open interpretation could lead to manipulating fi nancial results
    • 2. Rule-based standards
    • a) Advantages - easier to audit, may produce more consistent reports across entities
    • b) Disadvantages - lack of flexibility and requires more maintenance, potential for loop-holes
  9. Common Insurance Accounts: Balance Sheet - Assets
    • 1. Premiums Receivable: due to policies either from the agent or policyholder
    • 2. Reinsurance Recoverables: paid recoverables from reinsurers
    • 3. Deferred acquisition costs (DAC): Expense payments deferred for income statement purposes under deferral/matching accounting paradigm
  10. Common Insurance Accounts: Balance Sheet - Liabilities
    • 1. Policy Liabilities - liability for inforce insurance contracts for future events
    • 2. Unearned Premium Liability - portion of policy premium for the unexpired portion of policy
    • 3. Claim Liabilities - liability for events that have occurred
    • 4. Claim Expense Liabilities - liability for cost of settling or defending claims for events that have occurred
    • 5. Insurance Expense Liabilities - liability for expenses incurred but unpaid
  11. Common Insurace Accounts: Income Statement
    • 1. Premiums - under deferral/matching earned, under asset/liability written
    • 2. Losses - claims incurred during reporting period
    • 3. Loss Expenses - claim expenses incurred on claims incurred during reporting period
    • 4. Underwriting Expenses - expenses incurred that directly relate to the insurance operation
    • 5. Underwriting Income - premium minus losses, loss expenses,and u/w expenses
    • 6. Policyholder Dividends - generally included in u/w income, but may be subtracted from revenues
  12. 3 Conditions for Biased Accounting Information to be Useful
    • 1. Bias is consistent over time
    • 2. User understands the bias
    • 3. User can adjust the bias to reflect their own bias
  13. 3 Characteristics of Relevant Information
    • 1. Timely
    • 2. Has predictive value
    • 3. Provides useful feedback on past decisions
  14. 4 Characteristics of Reliable Information
    • 1. Representational faithfulness - info represents what it claims to represent
    • 2. Veri fiability - another person should be able to recreate using same info
    • 3. Completeness - should not be missing a material fact that would make info misleading
    • 4. Neutrality - lack of bias
  15. Change in Accounting Principle vs. Change in Accounting Estimate
    • 1. Change in accounting principle
    • a) May require disclosure and recalculation of prior results
    • 2. Change in Accounting estimate
    • a) Would generally involve no prior period recalculation and only impact the latest reporting period
  16. 3 Ways to Treat Discounting of Liabilities on Balance Sheet
    • 1. Liability reported on undiscounted basis and amount of discount treated as an asset
    • 2. Liability could be reported on a discounted basis directly
    • 3. Include discount as a contra-liability in a separate liability account
  17. 2 Ways to Treat Discounting of Liabilities on Income Statement
    • 1. Report unwinding of discount over time as an interest expense
    • 2. Report unwinding as a change in liability estimate with separate disclosure
Card Set
Blanchard Accounting