FAR 1 - Conceptual Framework & IFRS

Question 1

What are the two general purpose frameworks?

Answer 1

1. GAAP
2. IFRS

Question 2

What is a special purpose frame work?

Answer 2

Defined as a set of criteria, other than GAAP or IFRS. Also known as, OCBOA - Other Comprehensive Basis of Accounting.

Includes:
Cash Basis

Modified Cash Basis

Tax Basis

Contractual Basis

Regulatory Basis

Question 3

What are the OBJECTIVES of Financial Reporting?

(which focuses on the USERS of F/S)

Answer 3

1. Information to investors, lenders & other creditors
2. Information on entity’s economic resources (B/S)
3. Changes in economic resources & claims
4. Financial performance reflected by accrual accounting (I/S)
5. Financial performance reflected by Cash Flows
6. Changes in resources NOT resulting from financial performance (Issuance of Stocks or Bonds)

Question 4

Primary Qualitative Characteristics (2)

(that makes information USEFUL)

Answer 4

1. Relevance
2. Faithful Representation

Question 5

Relevance

(Roger is PC)

Answer 5

Relevance - Capable of making a difference in the User’s decision making.

The 2 Ingredients are:

1. Predictive Value - helps predict or forecast future result
2. Confirmatory Value (Feedback) - confirm or correct prior predictions

Question 6

Faithful Representation

(Roger is never on the FENCE)

Answer 6

3 Ingredients:

1. Free from Error - no errors or omissions in the info
2. Neutrality - Financial Statment is free of bias
3. Completeness - info is presented in a way users can understand

Question 7

Enhancing Qualitative Characteristics

(Roger is CUT like a V)

Answer 7

Comparability

Understandability

Timeliness

Verifiability

Constraint - Cost/Benefit

Question 8

What are the 4 full set of financial statement?

Answer 8

1. Statement of Position (B/S)
2. Statement of Earnings Financial & Comprehensive Income (I/S)
3. Statement of Cash Flows
4. Statement of Changes in Owner’s Equity

Question 9

What are the 10 Key Elements that make up the financial statements for GAAP?

Answer 9

Asset - Resource that has probable future benefit, one can obtain the benefit, & transaction creating the benefit has already occured.

Liabilities - Obligation which needs use of an asset, cannot be avoided & transaction has already occured.

Equity - Assets less Liabilities

Investments by Owners, Distributions to Owners, Comprehensive Income, Revenue, Expenses, Gains, Losses.

Question 10

What are the three valuation techniques for measuring an item at fair value?

Answer 10

1. Market approach - using information generated by market transactions that involve identical or comparable assets or liabilities
2. Income approach - involves analyzing future amounts in a the form of revenues, cost savings, earnings
3. Cost approach - involves measuring the cost that would be incurred to replace the item

Question 11

What are the three levels of inputs for fair value that is also required to be disclosed when fair value is elected?

Answer 11

Level 1 - use of observable data from actual market transactions

Level 2 - use of observable data from actual market but either (asset is restricted or not traded):

1. ) Transactions did not occur in an active market or
2. ) Transactions relate to similar, but not identical

Level 3 - Based on management’s judgement (Financial Forecast)

Question 12

Fair Value Disclosures

(4 Requirements)

Answer 12

Disclosures centered around consistency & comparability

1. Identification of which items are reported at FV
2. Level of Inputs
3. Valuation Technique Applied
4. Disposition of Changes in FV

Question 13

What are the four areas of disclosures for ASC Topic 275 Risk & Uncertainties?

Answer 13

1. Nature of Operations - description of how entity generates revenues
2. Use of Estimates - amounts relating to F/S
3. Certain Significant Estimates - probable losses
4. Current Vulnerability due to certain concentrations - when an entity doesnt diversify

Question 14

What are the three parts of the NOTES section in the F/S?

Answer 14

1. Summary of significant accounting policies

(E.g. inventory costing method)

2. Summary of significant assumptions

(E.g. anticipated rate of inflation)

3. Other notes to the financial statments

(E.g. contingent liabs, contract obligations)

Question 15

What are the 5 basic F/S Elements of financial reporting for IFRS?

Answer 15

Elements of Financial Position

1. Assets
2. Liabilities
3. Equity

There are 2 Elements of Performance

4. Income
5. Expenses

Question 16

Capital Maintenance Adjustments under IFRS?

Answer 16

Results from the revaluation or restatement of assets & liabilities that cause an increase or decrease in equity (fixed assets), but not from income or expenses.

Question 17

Accounting Rules & Concepts

Recognition

vs

Realization

Answer 17

Recognition - Bookin an item in the F/S

“Reporting” = Recognition

Realization - Converting non-cash resources in to cash or claim to cash (A/R)

“Recording” = Realization

Realization Examples:

Realization is the conversion of an item or service into cash or a claim(A/R) to cash as would be the case when equipment is sold for a note receivable.

Realization occurs at the time that an entity converts goods or services into accounts receivable, and not necessarily when the receivable is collected.

Question 18

Which financial statement is “accumulated” other comperensive income reported?

Answer 18

Statement of FInancial Position (B/S)

Accumulated OCI is reported under of EQUITY

Question 19

What is the difference in the criteria for recognizing an element of financial reporting in GAAP vs. IFRS

GAAP - 3 Criterias

IFRS - 2 Criterias

Answer 19

Under IFRS (2 Criterias):

1. Probablity of Occurance
2. Reliable Measurement

Under US GAAP:

1. Meets the definition of an element (asset,libility)
2. Measured in Monetary Terms
3. Item/Element is Relevant & Faithfully Represented

Question 20

Three methods of recognizing Expenses

Answer 20

The appropriate methods for recognizing expenses include

cause and effect - such as charging inventory to cost of goods sold

systematic and rational allocation - such as depreciation of property and equipment

immediate recognition - such as recognizing salaries expense as it is incurred.