Section 1 - Conceptual Framework & IFRS

Question 1

What is GAAP and who is GAAP authorized by?

Answer 1

• General Purpose Financial Reporting Framework
• Developed by Financial ACCY Standards Board (FASB)
• FASB authorized by SEC

Question 2

What are the two General Purpose Frameworks?

Answer 2

1) GAPP - US

2) IFRS - International Financial Reporting Standards

Question 3

What are the Special Purpose Frameworks or OCBOA?

Answer 3

For nonpublic companies only

• cash basis
• tax basis
• contractual basis
• regulatory basis

Question 4

What does the Private Company Council (PCC) do?

Answer 4

• PCC created by FASB

- Evaluate existing GAAP to simplify and exempt nonpublic entities to reduce cost

Question 5

What are the Primary Qualitative Characteristics that makes f/s useful?

Answer 5

Info must be both RELEVANCE and FAITHFUL REPRESENTATION

• Relevance - “Roger is PC”
  
  • Predictive value
  • Confirmatory value (feedback value)
    
    • Materiality
• Faithful Representation - “FENCe”
  
  • free from Error
  • Neutral (w/o bias)
  • Completeness

Question 6

What are the Enhancing Qualitative Characteristics related to both relevance and faithful representation?

Answer 6

Relate to both relevance and faithful representation

“Roger is CUT like a V”

• Comparability (consistency)
• Understandability
• Timeliness
• Verifiability
• constraint: cost/benefit
• very desirable but not required

Question 7

What are FASB 3 Basic Elements of F/S?

Answer 7

1) Assets
2) Liabilities
3) Equity or net assets

Question 8

What is assets?

Answer 8

Economic resource with:

• probable future benefit
• one can obtain the benefit
• transaction creating benefit occurred already

Question 9

What is included in Comprehensive Income in Equity (or Net Assets)?

Answer 9

These items affect comprehensive income but not net income.

“DENT”

• Derivative cash flow hedges
• Excess adjustment of pension PBO and FV of plan assets at year end
• Net unrealized gains or losses on “available-for-sale” securities
• Translation adjustments for foreign currency

Question 10

What are the four Comprehensive Income elements?

Answer 10

1) revenues - inflows from entity’s primary operation
2) expenses - outflows from entity’s primary operation
3) gains - increases equity from incidental transaction
4) losses - decreases equity from incidental transaction

Question 11

What is the Physical Capital Maintenance Concept on decided what will be included in comprehensive or net income?

Answer 11

Only recognize an event when an asset is sold or a liability is settled (measures the effects of price changes in nominal or constant dollars)

Question 12

What is the Financial Capital Maintenance Concept on decided what will be included in comprehensive or net income?

Answer 12

Recognize an event as a change in the value of an asset or liability occurs (recognize holding gains and losses – current GAAP)

Question 13

When do you recognize a financial statement element?

Answer 13

Recognition

1) Meets the definition of element (asset, liability)
2) Element capable of being measured in monetary terms
3) Items is relevant and faithfully represented (useful)

Question 14

What are the Monetary Terms Measurement?

Answer 14

• historical cost
• replacement cost
• fair market value (FMV)
• net realizable value (NRV)
• present value (PV)

Question 15

What items are required to be recognize at fair value?

Answer 15

1) trading securities or available for sale securities (mark-to-market)
2) assets acquired and liabilities assumed in business combination (consolidation)
3) impairment losses
- all derivatives

Question 16

What items do not qualify for Fair Value election?

Answer 16

1) pension plan, post retirement, and other post-employment
2) leases
3) financial instruments that are components of equity
4) share based payments and stock options

Question 17

When FAIR VALUE option is elected…

Answer 17

…unrealized gains and losses are reported in income.

Question 18

What is Fair Value?

Answer 18

“The price that would be received to sell an asset or paid to transfer a liability in an ORDERLY transaction between MARKET PARTICIPANTS at the measurement date.”

ORDERLY: cannot be forced

MARKET PARTICIPANTS:

• independent
• knowledge of assets/liability
• acquiring or assuming asset/liability
• voluntarily willing to acquire/assume asset/liability

Question 19

What are the Fair Value Valuation Techniques?

Answer 19

MIC

• Market approach
• Income approach
• Cost approach

Question 20

What are the Fair Value THREE levels of input?

Answer 20

• Level 1 - most reliable, identical assets/liabilities
• Level 2 - observable data, similar assets/liabilities
• Level 3 - unobservable data, based on management’s judgment

Question 21

Under Accrual Accounting, when are revenue or gains recognized?

Answer 21

• earned: earnings process is complete

- realizable (realized): collect cash or a claim to cash

Question 22

Based on Revenue Recognition, when is a revenue recognized?

Answer 22

A revenue is recognized when:

• binding signed contract exists
• services rendered or delivery has occurred
• fixed or determinable price exists
• collection is reasonably assured

Question 23

When should you recognize expenses or losses as incurred?

Answer 23

Economic benefit used up (consumed) or assets lose future benefit (as incurred)

• cause and effect
• systematic and rational allocation
• immediate recognition

Question 24

What are the four areas of Risks and Uncertainties Disclosure?

Answer 24

1) nature of operations
2) use of estimates
3) certain significant estimates
4) current vulnerability associated w/ certain concentraions

Question 25

What does the Statements on Financial Accounting Concepts (SFAC) represents?

Answer 25

- FASB periodically issues SFAC - represent the ideas of FASB as to the theoretical framework which it believes should guide financial accounting and reporting

Question 26

When was the Emerging Issues Task Force (EITF) created and what is their role?

Answer 26

- created in 1984 by FASB - account for new and unusual financial transactions - only deals w/ short term issues

Question 27

What is IFRS based on?

Answer 27

- principle-based - leave a lot of room for judgement * GAAP is rule-based

Question 28

What is the Convergence Project?

Answer 28

GAAP and IFRS eliminating major differences

Question 29

Under IFRS, the Financial Statements are prepared based one what?

Answer 29

Prepared on the ACCRUAL BASIS based on the GOING CONCERN concept

Question 30

Under IFRS, what are the 5 Basic F/S Elements?

Answer 30

3 elements of financial position 1) assets 2) liabilities 3) equity 2 elements of performance 1) income 2) expenses

Question 31

What is IFRS Assets?

Answer 31

"A RESOURCE controlled by the entity as a result of PAST EVENTS and from which FUTURE economic benefits are expected to flow to the entity."

Question 32

What is IFRS Liability?

Answer 32

"A present OBLIGATION of the entity arising from PAST EVENTS, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits."

Question 33

What is IFRS Equity?

Answer 33

"The RESIDUAL INTEREST in the assets of the entity after deducting all its liabilities."

Question 34

What is IFRS Income?

Answer 34

- "increases in economic benefit..." | - income includes both revenues and gains

Question 35

What is IFRS Expenses?

Answer 35

- "decreases in economic benefits..." - include losses - include capital maintenance adjusments - revaluation or restatement of assets and liabilities

Question 36

IFRS uses "Profit", what does GAAP use?

Answer 36

US GAAP uses "net income"

Question 37

What are the two IFRS Recognition criterias?

Answer 37

- PROBABILITY of occurrence | - RELIABLE MEASUREMENT

Question 38

What is IFRS Capital Maintenance Adjustments?

Answer 38

Revaluation or restatement of assets or liabilities that cause an increase or decrease in equity

Question 39

What is IFRS Revenue recognized at?

Answer 39

Fair value of consideration received or receivable