CPA 2013 FAR-1.1: Conceptual Framework & IFRS


Terms in this set (...)

What are the 6 objectives of financial reporting?
1. To provide information that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity.
2. Information about a reporting entity's economic resources and claims against the entity (Financial Position-B/S)
3. Changes in economic resources and claims
4. Financial performance reflected by accrual accounting (provides a better basis for assessing the entity's past and future performance than does cash basis - Income Statement)
5. Financial performance reflected by past cash flow (Cash Flows)
6. Changes in economic resources and claims, NOT resulting from financial performance (ex: issuing additional stock)
What 2 characteristics make financial statements useful?
F/S must be BOTH Relevant and a Faithful representation
what are the ingredients of the relevance component of F/S usefulness?
[Roger is PC and Materialistic] [R PC & M]
- Predictive Value
- Confirmatory value
what are the ingredients of the faithful representation component of F/S usefulness?
[Roger is never on the FENC e] [FENC]
Faithful Representation
- free from Error
- Neutrality (no bias)
- Completeness
What are the Enhancing Qualitative Characteristics for the Relevance and Faithful representations
[roger Exercises to be CUT like a V] [E CUT-V]
Enhancing Qualitative Characteristics
- Comparability (Consistency)
- Understandability
- Timeliness
- Verifiability
A full set of financial statements includes:
- statement of financial position (balance sheet)
- statement of earnings and comprehensive income (income statement)
- statement of cash flows
- statement of changes in owners equity (statement of investments by and distributions to owners)
10 key elements that make up financial statements
- assets
- liabilities
- equity
- investments by owners
- distributions to owners
- comprehensive income
- revenue
- expenses
- gains
- losses
3 basic elements of financial statements
equity or net assets
definition of an asset
an economic resource that has a probable future benefit, one can obtain the benefit, and the transaction creating the benefit has already occurred
definition of a liability
an economic obligation in which one needs to use or transfer an asset, it can't be avoided and the transaction has already occurred
equity consists if what 3 elements
- contributions / investments by owners
- distributions to owners (dividends)
- comprehensive income (all changes in equity other than "owner" sources)
what changes affect comprehensive income?
- Derivative cash flow hedges
- Excess adjustment of Pension PBO and RV of plan assets at year end
- Net unrealized gains or losses on "available for sale" securities
- Translation adjustments for foreign currency
what are the accounting rules and concepts (principals)
- consistency
- conservatism
- cost/benefit
- matching
- allocation
- full disclosure
- recognition (booking an item)
- realization (selling an item)
when do you recognize a financial statement element?
- it meets the definition of an element (asset, liability)
- element is capable of being measured in monetary terms
- the item is relevant and faithful representation (useful)
ways to measure a financial statement element in monetary terms
- historical cost
- replacement cost
- fair market value (FMV) - per ASC 820 (FASB 157) "the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between participants at the measurement date"
- Net realizable value (NRV)
- Present value (PV)
6 steps in applying the fair market value (FMV) approach
1. Identify the asset or liability to be measured
2. Determine the principal (highest volume) or most advantageous market (maximizes price or minimizes amt paid)
3. Determine the valuation premise (in-use or in-exchange)
4. Determine the appropriate valuation technique (market, income, cost)
5. Obtain inputs for valuation (level 1, level 2, level 3)
6. Calculate the fair value of the asset
fair market value (FMV) valuation techniques
- Market approach
- Income approcach
- Cost approach
inputs for FMV valuation, what do the 3 levels represent?
- Level 1 - uses quoted prices from active markets
- Level 2 - Directly or indirectly observable inputs, other than level 1 (yield curves, bank prime rates, interest rates, credit risks, default rates on loans) (2 similar buildings in a downtown market)
- Level 3 - Unobservable inputs are used if level 1 or 2 are not available (using financial forecasts or expected cash flow estimates) (ex. sub-prime mortgages)
Factors that must be considered when calculating present values
- Risk
- Timing
- Interest
- Amount of cash flows:
--- Traditional approach - use most likely cash flow amounts
--- Expected approach - use weighted avg of different possibilities
under accrual accounting, revenues or gains are recognized when they are...
- earned
- realizable (realized)
Revenue is recognized when... (4 things)
- A binding arrangement exists (signed contract)
- Services rendered or delivery has occurred
- Fixed or determinable price exists
- Collection is reasonably assured
Expenses or losses are recognized as incurred based on what methodologies (3)
- Cause and effect - expenses that produce revenue at identifiable points in time can be matched directly to revenues
- Systematic and rational allocation - expenses that produce revenue over long periods of time are matched to those periods using a reasonable means of allocation (depreciation)
- Immediate recognition - some expenses cannot be directly related to specific benefits and are expensed as incurred (salaries of SG&A)
What are the 4 areas of disclosure with regard to risks and uncertainties?
1. Nature of operations: major products, services and markets served
2. Use and extent of estimates in preparation of financial statements
3. Certain significant estimates, and their potential impact on the amount and value of assets, liabilities, gains and losses
4. Current vulnerability associated with concentrations with respect to:
--- Particular customers, suppliers, lenders, grantors or contributors
--- Revenue from particular products, services or fund raising events
--- Available sources of supply of materials, labor, or services; or of licences or other rights used in the entity's operations
--- Market or geographical area in which the entity conducts its operations
What are the 3 types of notes to the financial statements and what are they used for
they are used to ensure that all disclosures that are required under GAAP are made
1. Summary of significant accounting policies
2. Summary of significant assumptions - for prospective FS
3. Other notes to the financial statements
what is the main difference between US GAAP and IFRS?
US GAAP is rules based, IFRS is principles based
IASB Framework - 4 principal qualitative characteristics
1. Relevance
2. Reliability
3. Understandability
4. Comparability / Consistency
IASB Framework - items under the Relevance principal
[Roger is PC and Materialistic]
- Predictive value
- Confirmatory value
- Materiality
IASB Framework - items under the Reliability principal
- Neutrality
- Faithful representation
- Substance over form
- Prudence (conservatism)
- Completeness
IASB Framework - 2 constraints for relevant and reliable information
- timeliness
- benefit > cost
IFRS - 5 key elements of financial statements
- assets
- liabilities
- equity
- income
- expense
IFRS - what is a balance sheet referred to as?
Statement of Financial Position
IFRS - does the statement of financial position have to be ordered by liquidity?
No, but a US GAAP balance sheet does
IFRS - what is the term used for economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants
IFRS - what are the 2 criteria that must be met for incorporating items on the income statement or statement of financial position
It meets the definition of an element and can be measured reliably