SEC - Securities and Exchange Commision CAP - Committee on Acg. Procedures FASB - Financial Acg. Standard Board PPC - Private Company Council IFRS - International Financial Reporting Standards
SEC: Established by the Securities Exchange Act of 1934, has the authority to establish GAAP but lets the profession self-regulate.
CAP: Determined GAAP from 1939 to 1959, was a part-time Committee of the AICPA
FASB: Established in 1973 and has determined GAAP since then. Its codification became the governing source starting in 2009.
IFRS: Established in 2001
Fundamental qualitative characteristics of useful financial information:
Relevant
and
Faithful Representation (reliable)
Relevant: info makes a difference in decision making and requires:
- predictive value: helps predict (ex. EPS)
- confirmatory value: provides feedback
- materiality: how it can affect your decision
Faithful Representation (reliable):
- complete
- neutral
- free from error
Enhancing qualitative characteristics
- comparability
- verifiability
- timeliness
- understandability
Income from continuing operations
- Includes items that are unusual and/or infrequent
- Includes operating and non-operating
Multi Step I/S: includes revenues and expenses from continuing operations and SEPARATE the ones for non continuing operations. Single Step I/S will show the same bottom line.
Revenue should be recognized when realized or realizable. There are 4 characteristics that must be met in order to recognize revenue
- Evidence of arrangement exists (signed contract)
- Delivery occurred or services performed (risk has been transferred)
- Price can be determined (no contingencies)
- Collection is reasonable (standard collection terms)
Revenue recognition under IFRS is divided into 4 categories and each category has its own rules
- Sale of goods: revenue and cost can be measured, risk has been transferred, no managerial involvement
- Rendering services: use % of completion, revenue and cost can be measured, stage of completion at the end of the period can be measured
- Interest, royalties, and dividends: can be measured
- Construction contracts: % of completion, revenue and contract costs can be estimated as well as stage at the end of the period
Recording revenue for a single good or service
For Insurance premium you would recognize over the term of the insurance (straight line)
Dr. A/R
Cr. Revenue
However, if you got paid but haven’t performed then it will be:
Dr. Cash
Cr. Unearned Revenue
Once you perform:
Dr. Unearned Revenue
Cr. Revenue
Recording revenue when there is a right of return - 5 conditions must be met
Adjustment for returns and allowances is made at B/S date (to record the estimated portion that will be returned)
If unlimited right of return, then in order to recognize revenue you must meet all conditions:
- Price is fixed
- Buyer has all the risk
- Buyer paid consideration
- Product sold is substantially complete
- Returns can reasonably be estimated
Bill and hold sales - I sold you the item but you don’t have space to store it. In order for me to recognize revenue 3 conditions need to be met.
- Risk has passed to the buyer
- Buyer has committed to purchase, there is a fixed price, and there is a date of delivery scheduled
- Good are separated from seller’s other goods
Completed contract method
- US GAAP only
- Used when difficult to estimate costs because it doesn’t comply with the matching principle
- Rule of conservatism so you recognize losses in the year they are discovered
% of completion
- Losses are recognized immediately, reverse previous profit
- In accordance with matching principle but unfortunately it is based on estimates
- Will report a current asset OR current liability
Installment sales method
- This is a cash basis
To record sale (same as cost recovery method)
Dr. A/R
Cr. Inventory
Cr. Deferred gross profit
Collecting $
Dr. Cash
Cr. A/RAND (same as cost recovery method)
Dr. Deferred gross profit
Cr. Realized gross profit
Cost recovery method
- No profit is recorded until all cost was recognized
- Used b/c there is no reasonable basis to estimate collection of payment
- Entries are similar to installment sales method, see previous flashcard
Discontinued operations (includes disposal of a component)
If classified as held for sale depreciation must stop
Gain or loss reported in year of sale
Held for sale reported at lower of:
- carrying amount or
- FV less cost to sell
Shown after continuing operations, net of tax
Disposed or classified as held for sale (must meet 6)
1. Management commits to plan to sell
2. Available for sale on current condition
3. Actively seeking buyer
4. Sale is probable and expected to be completed in 1 year
5. Sale is actively marketed
6. No significant changes are expected
Accounting changes and error corrections
Change in estimate going forward, do not reinstate
Change in acg principle (from no GAAP to GAAP):
- Adjust beginning retained earnings in earliest period presented
If change in accounting entity (consolidation) you must compare apples to apples, IFRS does not even address issue
If there is a mistake: if the year is presented then correct mistake. If the year is not presented then adjust beginning retained earnings of the earliest period presented.
Comprehensive income (non-owners transactions)
= net income (goes to retained earnings)
+
OCI (goes to accumulated OCI)
PUFER
P: pension adjustment U: unrealized gains and losses on available for sale securities F: foreign currency items E: effective portion of cash flow hedges R: revaluation portion (IFRS only)
Comprehensive income (not reported on a per share basis)
Single statement approach or
Two statement approach, which has an income statement and THEN statement of comprehensive income that starts with Net Income
Also, disclose income tax expense on statements or on the notes, reclassification adjustements
