Financial Accounting & Reporting

Review Course: F1
Angel Chau, AICPA (inactive)
angelchau@yahoo.com

Financial Accounting and

Reporting (FAR)
Intro - 3

This section contains 3 testlets ( 30 MC each , total of 60

points) + 1 testlet (7 Task based simulations, 40
points) and lasts for 4 hours.

1.
2.
3.
4.
5.

The weights attached to five basic tasks are as follows:

Concepts and principles for financial statements (17%23%)
Typical items of financial statements (27%33%)
Specific types of transactions and events in financial
statements (27%33%)
Accounting and reporting for governmental units (8%12%)
Accounting and reporting for nongovernmental and not-forprofit organizations(8%12%)

F1 Outline
GAAP

history and SFA concepts

Financial Statements Presentation:
1.
2.
3.
4.
5.
6.
7.
8.

Income Statement
Statement of Retained Earnings
Statement of Comprehensive Income
Balance Sheet
Notes to Financial Statements
Interim Financial Reporting
Segment Reporting
Development Stage Enterprises (DES)

Fair

Value Measurement & Disclosure

First Time Adoption of IFRS
SEC Filing Requirements

GAAP Setting Bodies & History

1934:

Securities and Exchange Commission (SEC)

(the ultimate legal authority to establish US GAAP)

1939

1959: Accounting Research Bulletins (ARB)

1959

1973: Accounting Principles Board (APB)

: Financial Accounting Standards of Board

(FASB)

1973

Effective

2009/7/1: the FASB Accounting Standards

Codification became the single source of authoritative
nongovernmental US GAAP. Accounting and financial
reporting practices not included in the Codification
are not GAAP.

Authoritative Literature Included in the

Codification (FEDPRIA)
1.

2.
3.
4.
5.
6.
7.

Financial Accounting Standards Board (FASB)

a. Statements of Financial Accounting Standards
b. Interpretations
c. Technical Bulletins
d. Staff Positions
e. Staff Implementation Guides
f. Statement No. 138 Examples
Emerging Issues Task Force (EITF) Abstracts and Topics D
Derivative Implementation Group Issues
Accounting Principles Board Opinions
Accounting Research Bulletins
Accounting Interpretations
American Institute of Certified Public Accountants (AICPA)
a.
Statements of Position
b.
Auditing and Accounting Guides (Incremental accounting guidance
only)
c.
Practice Bulletins
d.
Technical Inquiry Service (for software revenue recognition)

SEC Standards Included in the Codification

Relevant portions of the following pronouncements

issued by SEC are included for reference:
1.
2.
3.
4.
5.
6.

Regulations S-X
Financial Reporting Release (FRR)
Accounting Series Releases (ASR)
Interpretative Releases (IR)
Staff Accounting Bulletins (SAB)
EITF Topic D and SEC Staff Observer Comments

The SEC section of the Codification do not

contain the entire population of SEC rules and
regulations

Ongoing Standard setting Process

The FASB updates the codification for new GAAP issued by

FASB & for amendments to SEC content with Accounting
Standards Updates.

An Exposure draft is issued for public comments. Staff

analyzes and studies all comment letter and position papers
for the board to redeliberate on the issue. When Board is
satisfied that all reasonable alternative have been considered,
an Accounting Standards Update is issued.

A majority vote of 3 of 5 FASB members is required to approve

an Exposure Draft for issuance and to amend the ASC.

All new GAAP and SEC amendments are fully integrated into
the existing structure of the Codification

International Accounting
Standards Board (IASB)

Established in 2001 as part of International Accounting

Standards Committee (IASC) Foundation

Purpose of IASB is to develop a single set of high quality,

global accounting standards

Adopts International Accounts Standards (IAS) issued by IASC

Issues International Financial Reporting Standards (IFRSs)

IASC Foundation also sponsors International Financial

Reporting Interpretations Committee (IFRIC) which
o

provides guidance on newly identified financial reporting issues

not addressed in the IFRSs and assists the IASB in achieving
international convergence of accounting standards

International Convergence of Accounting

Standards
The IASB and the FASB have been working together
towards the international convergence of accounting
standards since 2002 by eliminating differences between
US GAAP and IFRS, target to complete by 2011.
The goal of convergence project is a single set of high
quality, international accounting standards that
companies can use for both domestic and cross border
financial reporting.
SEC supports the IASB/FASB convergence project and
will make a decision regarding the incorporation of IFRSs
(in 2011?). First time US issuer report in that system will
follow within 4-5 years after decision made.

Conceptual Frameworks underlying Financial Accounting

The

FASB creates a conceptual

framework (set forth in 6 Statements of
Financial Accounting Concepts or SFAC)
that are not GAAP, but provides basic
reasoning behind US standards.
The IASB developed a conceptual
framework for IFRS(set forth in the
Framework for the Preparation and
Presentation of Financial Statements)

SFAC No. 1 "Objectives of Financial Reporting by Business Enterprises

F1 - 7

Defines the users of accounting information as

1. Present and potential investors and creditors (external users)
2. users with a reasonable understanding of economic and
business situations.

Defines the objectives of financial reporting. (focus on

informational needs of external users)
1. To provide information that is useful in making rational
investment and credit decisions
2. To help users assess the timing and uncertainty of cash flows.
(to value the company how do they generate cash flow)
3. To provide information on economic resources, claims and
changes in them. (to assess risk / required rate of return from FS)

F1 -8
external

SFAC No.2 - Constraints

US
1.
2.

F1 -8

GAAP
Benefits > Costs
Materiality

IFRS
1.
2.
3.

Timeliness
Balance between benefit and cost
Balance between qualitative
characteristics

Under
Under IASB
IASB framework,
framework, materiality
materiality is
is a
a component
component of
of relevance
relevance

SFAC No.2: B.U.D

F1 - 9

Benefit > Cost

Understandability
Primary Qualities of Decision UsefulnessR & R

Relevance

a.

Passing Feels
Terrific

Make a difference to decision making process

1.
2.

3.

Predictive Value (information has ability to assist

users in evaluating past, present, or future events)
Feedback Value (enables decision makers to
confirm prior expectations or to adjust or correct
he assessment made)
Timeliness (having the information available while
it is able to influence decisions)

Under
Under IASB
IASB framework,
framework, the
the subcategories
subcategories
predictive
predictive value,
value, feedback
feedback value
value and
and

of
of relevance
relevance are
are
materiality.
materiality.

SFAC No.2: B.U.D

Primary Qualities of Decision Usefulness

b.

Reliability
1.
2.

3.

Nobody Relies on Financials unless

Verified

F1 - 9

R&R

Neutrality (information is free from bias and

free from outside influences)
Representational Faithfulness (agreement
between financial reporting and the recourses
or events represented. Information must be
valid. ) Substance over legal form.
Verifiability (same results could be duplicated
with the same measurement techniques)

Under
Under IASB
IASB framework,
framework, the
the subcategories
subcategories of
of reliability
reliability are
are
neutrality,
neutrality, representational
representational faithfulness,
faithfulness, substance
substance over
over form,
form,
prudence,
prudence, and
and completeness.
completeness.

SFAC No.2: Secondary

Characteristics
Comparability. (Apple vs. Microsoft)
Accounting information that has been measured and
reported in a similar manner for different enterprises is
considered comparable.

1.

Consistency. (Current Yr vs. Prior Yr)

. Accounting information is consistent when an entity
applies the same accounting treatment to similar events
from period to period. When applies new accounting
policies, cumulative effect must be disclosed.

2.

SFAC 7: Using Cash Flow Information & Present

Value in Accounting Measurements
F1 - 15
Provides

a framework for accountants when

using future cash flow as a measurement basis
for assets or liabilities.
e.g. for bonds, the forecasted future cash flow
includes factors such as future coupon
payments, timing of payments, principle
payment at maturity date etc. Accountants
need to consider the risk of achieving the cash
flow, take the discount rate as the required rate
of return and discount the future value into
present value as basis of measuring the bond

SFAC 7: Using Cash Flow Information &

Present Value in Accounting Measurements
Five elements of Present Value Measurement (Asset
or Liability)
1.
2.

3.
4.
5.

Estimate of future cash flow (e.g. Estimate

future dividend, future selling price etc.)
Expectations about timing variations of
future cash flows (e.g. term of lease or
bond interest payments)
Time value of money (inflation, losing of
purchasing power)
The price for bearing uncertainty
Other factors (e.g. liquidity risk and
exchange rate risk)

SFAC 7: Using Cash Flow Information

& PV in Accounting Measurements
Traditional Approach

1.

Used when assets and liabilities have contractual

(i.e. fixed) cash flows that are not expected to vary.
Present value bonds scheduled known payments

Expected Cash Flow Approach

2.

Used in more complex cases, uses only the risk free

rate of return as the discount rate and then turns its
attention to the expected future cash flows,
considering uncertainties (e.g. default risk) as
adjustment to the future cash flows.
PV of warranties uncertain future payments
(Toyota sells a 5 yrs long car warranty

CPA-0010
According to the FASB SFAC No.2,
neutrality is an ingredient of:
Reliability Relevance
A
Yes Yes
B
Yes No
C
No Yes
D
No No

CPA-0010 Answer is B

Relevance : Passing Feels Terrific

Predictive Value
Feedback Value
Timeliness

Reliability: Nobody Relies on Financials unless

Verified
Neutrality
Representational Faithfulness
Verifiability

CPA - 00005
What is the underlying concept
governing the recording of gain
contingencies?
A. Conservatism
B. Relevance
C. Consistency
D. Reliability

CPA 00005 Explanation

A is correct (detailed explanation after
page F1-78 on the book)
Gain contingency defer it until it
actually happens so we dont overstate
asset or revenue
Loss contingency accrue it now so we
dont understate liability or loss

Uses of the Income Statement

performance for a
period of time

The income statement is useful in

determining profitability, value for
investment purposes, and credit
worthiness.
Also useful in predicting information
about future cash flows based on past
performance

Presentation order (IDEA)

Reported on Income Statement

Income (or Loss) from Continuing Operations

o
o

D
E

Includes operating activities, non-operating activities, and income

taxes
individual line items show gross of tax, then total reported net of tax

Income (or Loss) from Discontinued Operations (reported net of tax)

Extraordinary Items (reported Net of Tax)

Reported on Statement of Retained Earnings

Cumulative Effect of Change in Accounting Principle

o

reported net of tax

is the cumulative effect of a change from one GAAP to another GAAP
because the new method presents the financial information more
fairly than the old method

(Must Remember IDEA)

Get Familiar w/ Multiple Step

Income Stmt Presentation
Review example on F1-19
Get familiar with it

CPA-00031
Scott Corporation sold a fixed asset used for operations
for greater than its carrying amount. Scott should report
the transaction in the income statement using the:
a. Gross concept, showing the proceeds as part of revenues
and the carrying amount as part of expenses in the
continuing operations section.
b. Net concept, showing the total amount as an
extraordinary item, net of income taxes.
c. Net concept, showing the total gain as part of
discontinued operations, net of income taxes.
d. Net concept, showing the total gain as part of continuing
operations, not net of income taxes.

CPA-0031 Explanation
Choice

"d" is correct. The transaction

resulted in a gain, which should be reported
using the net concept (i.e., proceeds less
carrying amount). This gain resulted in the
recognition of an asset not in the ordinary
course of business, but it did not qualify as
an extraordinary item or as part of
discontinued operations.
Choices "a", "b", and "c" are incorrect, per
the above explanation.

CPA-00052
Which of the following should be included
in general and administrative expenses?
a.
b.
c.
d.

Interest
Yes
Yes
No
No

Advertising
Yes
No
Yes
No

CPA-00052 Explanation
Choice

"d" is correct. Interest expense is

classified as a separate line item on the
income statement. Advertising is
classified as a selling expense.
G&A expenses: Officers, Accountants,
Legal, Insurance, Property Tax.

Introduction to Discontinued Operations

Discontinued

operations are reported

separately from continuing operations in
the income statement according to the
IDEA mnemonic, net of tax.
The (normal) loss from discontinued
operations can consist of an impairment
loss (net realizable value carrying
value), a gain/loss from actual
operations, and a gain/loss on disposal.

Definitions of A Component of an Entity

A.

Component of an Entity a part of entity for which

operations and cash flows can be clearly distinguished,
both operationally and for financial reporting purposes,
from the rest of entity
1.
U.S. GAAP
a.
An operating segment
b.
A reportable segment
c.
A reporting unit
d.
A subsidiary
e.
An asset group

IFRS

2.
a.
b.

A separate major line of business or geographical area

of operations
A subsidiary acquired exclusively with a view to resale

Definitions of Discontinued
Operations
B.

Held for Sale - in the period in which ALL of the

following criteria are met:
1.
2.
3.
4.
5.
6.

Management commits to a plan to sell the component

The component is available for immediate sale in its
present condition
An active program to locate a buyer has been initiated
The sale of the component is probable and the sale is
expected to be complete within one year
The sale is being actively marketed
Actions required to complete the sale make it unlikely
that significant changes to the plan will be made or
that the plan will be withdrawn

U.S. GAAP vs. IFRS

IFRS: before a component can be classified as held
for sale, the individual assets and liabilities of the
component must be measured in accordance with
applicable standards and any resulting gains and
losses must be recognized. After classification as
held for sale, the component is reported at the lower
of carrying value and fair value less cost to sell.
U.S. GAAP: does not require the measurement of
individual assets & liabilities before classification as
held for sale, but the classification of a component
as held for sale does trigger an impairment analysis
of the component.

Discontinued Operations: Accounting Rules

A.

Types of Entities to be considered discontinued

operations:
A.
B.

B.

Has been disposed of, or

Is classified as held for sale

Conditions that both must be present

A.

B.

Eliminated from ongoing operations the

operations and cash flows of the component have
been or will be eliminated from the on going
operation of the entity as a result of the disposal
No Significant continuing involvement the entity
will not have any significant continuing
involvement in the operations of the component
after the disposal

Discontinued Operations: Accounting Rules

Discontinued Operations Calculation
1.

Types of items included in results of discontinued

operations
Results of operations of the component
Gain or loss on disposal of the component
Impairment loss (and subsequent increases in fair
value) of the component

a.
b.
c.
1)
2)

2.
3.

Initial and subsequent impairment losses are recognized

Subsequent increases in fair value results in a gain on
I/S (subsequent increase in FV minus cost to sell) and is
recognized no more than previously recognized
cumulative loss; excess goes to OCI

Report in the Period disposed or held for sale

Stop Depreciation and Amortization

Calculation Example
F1

23
Understand this
example, you are good
with discontinued
operations

Accrue liability related to Exit or Disposal Activities

New

U.S. GAAP. requires recognition of a liability for the

costs in association with exit or disposal activities
Exit and disposal costs include:

A.
1.
2.
3.

Involuntary employee termination benefits

Costs to terminate a contract
Other costs associated with exit or disposal activities, including
costs to consolidate facilities or relocate employees

Criteria for liability recognition - commitment to exit by itself

is not enough, all followed must be met:

B.

An obligating event has occurred

2.
The event results in a present obligation to transfer assets
(payment) or to provide services in the future, and
3.
The entity has little or no discretion to avoid the future transfer
of assets or proving of services
Future operating losses expected to be incurred as part of an exit or
disposal activity are recognized in the periods incurred.
1.

Exit or Disposal Activities

C.

D.

E.

Liability Measurement - should be at fair value which

should be determined using the US GAAP fair value
measurement techniques discussed later. The liability
may be adjusted in future periods as a result of
revisions to the timing of or estimated cash flows from
the exit or disposal activity. Revisions are accounted
for prospectively (change in estimate)
Income Statement Presentation costs associated with
exit or disposal activity related to Discontinued
Operation in D; costs not related to Discontinued
Operation in I.
Disclosure in the notes to the FS in the period the exit
or disposal activity is initiated and all subsequent
periods until the activity is completed

TBS-00010 (7 Task based simulation)

The board of directors of Super Conglomerate, Inc. voted to dispose
of its Tiny Co. subsidiary on Oct 31, Yr 8. On that date, the net book
value of the subsidiary was $15M, but Super believes it could not
sell for more than $12.5M. No buyer had been found as of Dec 31
Yr 8, but the company was committed to the plan to sell and was
actively looking for a buyer. On May 1 Yr 9, the sale was completed
for $13M.
The subsidiarys operating results for Yr 8 & Yr 9 were:
1/1/Yr8 10/31/Yr8 $5M
11/1/Yr8 12/31/Yr8

$1.5M

1/1/Yr9 4/30/Yr9 $2.25M

Supers tax rate is 30%
How Should the disposal of Tiny Co. be reported on Supers Yr 8 FS?

TBS 00010 Answer

Loss from Discontinued operations Yr 8

Extraordinary Item
Under U.S. GAAP:
1.Material
2.Unusual
3.And

(significantly different from the typical business)

Infrequent (not expected to recur in the foreseeable future)

4.Not

normally considered in evaluating the ordinary operating

results of an entity

Examples of extraordinary item:

5.The

abandonment of or damage to a plant due to an unusual and

infrequent natural disaster
6.An
7.A

expropriation of a plant by the government

prohibition of a product line by a newly enacted law or regulation

8.Certain

gains or losses from early retirement of long term debt only if

which meet the criteria of unusual and infrequent and if so will be stated in
CPA exam question

Non-extraordinary items
Examples:
1.
2.
3.
4.
5.

Gain or loss from disposal of PPE used in the business

Large write down or write off of : receivable, inventory,
intangible, long term security
Gain or loss from foreign currency transactions or
translation
Loss from major labor strike
Long term debt early retirement that is NOT both
unusual & infrequent

Material unusual OR infrequent items are presented as

a separate line item (non-operating) in Income from
Continued Operations. The nature and financial
effects should be disclosed on the face of Income
Statement
or in the footnotes.
IFRS prohibits the reporting of extraordinary item on the
Income Statement or in notes to the FS.

CPA-00050

CPA-00050 Explanation
Choice "a" is correct.
Raim - component of income from continuing operations.
Because Raim sustains flood losses every two to three
years, the flood losses are not "infrequent." Thus, the
flood loss is not an "extraordinary item." (U or I)
Cane - as an extraordinary item. Here, the flood losses
are infrequent because Cane never before (in the last
20 years) had flood losses. Furthermore, the flood
losses are unusual in nature in that they are unrelated
to the ordinary and typical activities of the company. (U
& I, Net of Tax)
Choices "b", "c", and "d" are incorrect, per rules above.

CPA-00098
Midway Co. had the following transactions during 1992:
1.
$1,200,000 pretax loss on foreign currency exchange due
to a major unexpected devaluation by the foreign
government.
2.
$500,000 pretax loss from discontinued operations of a
division.
3.
$800,000 pretax loss on equipment damaged by a
hurricane. This was the first hurricane ever to strike in
Midway's area. Midway also received $1,000,000 from its
insurance company to replace a building, with a carrying
value of $300,000 that had been destroyed by the
hurricane.
What amount should Midway report in its 1992 income statement
as extraordinary loss before income taxes?
a. $100,000
b. $1,300,000
c. $1,800,000
d. $2,500,000

CPA-00098 Explanation

Choice

"a" is correct. Foreign currency devaluations and losses from

discontinued operations are not extraordinary items. The hurricane is
an extraordinary item and the loss, net of insurance, is $100,000.

Choice

"b" is incorrect. The loss from devaluation is not considered to

be extraordinary.

Choice

"c" is incorrect. The hurricane loss is as follows:

Equipment loss $ 800,000

Building loss
300,000
Insurance proceeds (1,000,000)
Hurricane loss $ 100,000
Choice

"d" is incorrect. Foreign currency devaluations and losses from

discontinued operations are not extraordinary items.

Cumulative Effect of Accounting Changes

and Error Corrections: IDEA
Accounting Changes :
1. Changes in accounting estimates -Prospective
2. Changes in accounting principles retrospective
3. Changes in accounting entity retrospective
Error corrections are not accounting changes.
Therefore its separately presented as Prior
Period Adjustments

Changes in Accounting Estimate

Not an error do not restate prior
periods; prospective approach
A change in accounting estimate occurs when it is determined that
the estimate previously used by the company is incorrect.
A. Events
1.
2.
3.
4.
5.
6.

Resulting in Estimate Changes

Changes in the lives of fixed assets

Adjustments of year-end accrual of officers salaries and/or bonus
Write downs of obsolete inventory
Material non-recurring IRS adjustments
Settlement of litigation
Changes in accounting principle that are inseparable from a change
in estimate (e.g. change to LIFO, change in depreciation method)

All 6 above affects current & future I (income from continuing

operations)

B. If a change in accounting estimate affects several future periods,

(e.g. as in above example), the effect on income before
extraordinary items, net income, and the related per share
information for the current year should be disclosed in the notes
to the FS.
C. Changes in ordinary accounting estimates (e.g. uncollectible,
inventory adjustments, % of sales, aging) does not have to be
disclosed unless Material

CPA-00081

For 1991, Pac Co. estimated its two-year equipment

warranty costs based on $100 per unit sold in 1991.
Experience during 1992 indicated that the estimate should
have been based on $110 per unit. The effect of this $10
difference from the estimate is reported:
a. In 1992 income from continuing operations.
b. As an accounting change, net of tax, below 1992 income
from continuing operations.
c. As an accounting change requiring 1991 financial
statements to be restated.
d. As a correction of an error requiring 1991 financial
statements to be restated.

CPA-00081 Explanation
Choice "a" is correct. The effect of the new estimate of warranty
costs (from $100 to $110) is a change in estimate and will be
reported in 1992 "income from continuing operations."
Rule: Changes in estimates affect only the current and subsequent
periods (not "prior periods," not "retained earnings").
Choice "b" is incorrect. An accounting change of "principle" is shown
net of tax on the retained earnings statement.
Choice "c" is incorrect. Restating prior years financial statements is
only required when comparative financial statements are shown for
prior period adjustments of subsequently discovered "corrections of
errors", changes in entity or changes in accounting principle.
Choice "d" is incorrect. The facts stating a new estimate of warranty
costs indicate a "change of estimate," not a "correction of an error."

Changes in Accounting Principle (GR:

Retrospective)

Reporting Changes in an Accounting

Principle
Changes in accounting principle should be
recognized by adjusting beg. R/E in the earliest
period presented for the cumulative effect of the
change, and, if prior period FS are presented, they
should be restated.
Exception in the General Rule: Handle prospectively
A)Impracticable to estimate To LIFO, impractical to
reestablish and recalculate old inventory layers
B)Change in depreciation method is both a change in
Accounting principle and change in Accounting
estimate

Under IFRS, when it is impracticable to determine the cumulative effect of an error the entity
is required to restate the information prospectively from the earliest dale that is practicable.
US GAPP does not have an impracticality exemption for error corrections.

F1 - 34

CPA-00071
Which of the following statements is correct regarding accounting changes
that result in financial statements that are, in effect, the statements of a
different reporting entity?
a. Cumulative-effect adjustments should be reported as separate items on
the income statement in the year of change.
b. No restatements or adjustments are required if the changes involve
consolidated methods of accounting for subsidiaries.
c. No restatements or adjustments are required if the changes involve the
cost or equity methods of accounting for investments.
d. The financial statements of all prior periods presented should be restated.

CPA-00071 Explanation
Choice "d" is correct. Financial statements of all prior periods
presented should be restated when there is a "change in entity" such
as resulting from:
1. Changing companies in consolidated financial statements.
2. Consolidated financial statements vs. Previous individual financial
statements.
Choice "a" is incorrect. Cumulative-effect adjustments are reported in
the retained earnings statement in the year of change.
Choice "b" is incorrect. Restatements are required for changes in
entity (of subsidiaries).
Choice "c" is incorrect. Restatements are required for changes of
GAAP involving the cost or equity methods of accounting for
investments.

Comprehensive Income
(Non Owner Transactions)

PURER bypass I/S and R/E, directly goes to Equity

PUFE

Rescue

PUFE Rescue you from the Comprehensive Income

questions.

Comprehensive income should not

be reported on a per share basis

Balance Sheet Presentation

Review F1 - 40
Classified

BS distinguishes current vs.

non-current items.
Note for Stockholders Equity section

Contributed Capital: Capital Stock, PIC in

excess of PAR
Internally generated : Retained Earning,
Accumulated Other comprehensive Income
Contra Equity: Treasury Stock

F1 41 /
42

CPA-00103

Which of the following information should be

disclosed in the summary of significant
accounting policies?
a. Refinancing of debt subsequent to the
balance sheet date.
b. Guarantees of indebtedness of others.
c. Criteria for determining which investments
are treated as cash equivalents.
d. Adequacy of pension plan assets relative
to vested benefits.

CPA-00103 C is correct

Interim Financial Reporting

1.
2.
3.

4.
5.
6.
7.

Not required under US GAAP or IFRS

In US, SEC requires quarterly FR
GAAP in Interim Reports = GAAP in most recent
annual report : consistency of applying
accounting principles
Matching Rev & Exp by quarter
In US, IFR emphasizes on Timeliness over
Reliability (unaudited)
IFR is an integral part of annual report and clearly
marked as unaudited
US GAAP does not establish presentation
minimums for IFR, IFRS does. (see F1 47)

Income Taxes on IFR

1.

2.

Take YTD cumulative income X best

estimate of effective tax rate at the
end of that period
Then subtract the result from the
provision included in previous quarter
to avoid double counting

CPA-00107

For interim financial reporting, a company's income

tax provision for the second quarter of 1992 should be
determined using the:
a. Effective tax rate expected to be applicable for the
full year of 1992 as estimated at the end of the first
quarter of 1992.
b. Effective tax rate expected to be applicable for the
full year of 1992 as estimated at the end of the
second quarter of 1992.
c. Effective tax rate expected to be applicable for the
second quarter of 1992.
d. Statutory tax rate for 1992.

CPA-00107 Explanation
Choice "b" is correct.
The best, most current estimate of the annual
effective tax rate should be used to determine
the income tax provision for the second
quarter.
This rate is the effective tax rate expected to
be applicable for the full year of 1992 as
estimated at the end of the second quarter of
1992.
APB 28 para. 19

Required disclosure for

all public companies
under both GAAP &
IFRS

Segment Reporting

Required disclosure for all public companies:

Operating Segments (annual & interim)

Products and services

Geographic areas
Benefit > Cost; provides

best relevant
Major product lines
Use same accounting principles asinformation
in Main FS to users

E.g. cannot use LIFO in segment reporting, but

uses FIFO in main reports

Intercompany transactions are NOT eliminated

Scope :

segment reporting applies to Public Companies

ONLY

Whats not an operating

segment?
1.

2.

Corporate Headquarters or certain

functional departments that do not
earn revenue (Accounting, Facilities,
Legal, etc.)
Pension Plans & Other post-retirement
benefit plans

Reportable Segment

Material tests for reportable

segments
10%
1.
2.
3.

Combined Revenue (internal + external)

Profit or loss
Asset

75% reporting sufficiency test

.

materiality test (must only meet one):

Must break down 75% of the entire consolidated

revenue by operating segments. Irrelevant of the
10% thresholds.
The max no of reportable segments is 10.

Any other segments that do not meet the 2

tests above, lump together and disclose in an
all other segments category.

Segment Profit or Loss Defined

1.

Formula:

Revenue
for that segment internal & external
Less: Directly traceable costs direct salary, direct rent, etc
Less: Allocated Costs
by CFO
-------------------------------------Operating Profit or Loss (EBIT) for that segment;

Users can better understand the individual

segments performance, and analyze for future
scenarios, e.g. how does the allocated costs
impact the rest of the entity if this segment
discontinues.

Unallocated General
Revenues /
Expenses

CPA-00127

CPA-00127 Answer

DSE issues the FS in conformity

w/ US GAAP, review F1 57 for
disclosure requirements

Start ups devotes most of its resources into R&D. There is no

guarantee that it will be successful. Take the conservative
approach and recognize all cost into expenses.

Fair Value Measurements and Disclosures

About FV
FAS

157 defines fair value as the price received to sell an asset

or the price paid to transfer a liability in a transaction taking
place in an active market. This is sometimes referred to as
"exit value".
FV does not include transaction cost but may include
transportation cost.
FV assumes the highest and best use of an asset.
Orderly

transaction- Not a fire sale

Market participants (buyer & sellers) are independent ( non-related
parties)
Principle market is the one with greatest volume
Most Advantageous Market

use if no principal market exist

MAM is the one w/ best price for assets/liabilities after considering transaction
costs (which is not included in FV measurement but only help locate MAM)

Fair Value Determination

FV measurement framework
This framework outlines
A. 3 Valuation Techniques to measure FV of
asset / liability
1.
2.
3.

B.

Market Approach identical & comparable

asset /liability transactions in the market
Income Approach discount future earnings
into present value, e.g. rental real estate
Cost Approach uses current replacement cost

Hierarchy of inputs to be used in the

valuation techniques

Level 1 input

Most Reliable

Level 1 Inputs are quoted prices in active markets

for identical assets or liabilities that the entity has
access to on the measurement date.
Active market characteristics: high trading volume,
small bid/ask spread, highly liquid.
An example would be a stock trade on the New
York Stock Exchange; price for a barrel of oil in the
market, etc.
Information at this level is based on direct
observations of transactions involving the identical
assets or liabilities being valued, not assumptions,
and thus offers superior reliability.
To use this level, the entity must have access to
an active market for the item being valued.

Level 2 Input

Less Reliable

Level 2 inputs are based on market observables.

FASB acknowledged that active markets for identical assets
and liabilities are relatively uncommon and, even when
they do exist, they may be too thin to provide reliable
information. To deal with this shortage of direct data, the
board provided a second level of inputs that includes :

Quoted prices for similar assets or liabilities in active

markets (e.g. no 3-bedroom houses are identical, but
similar within the neighborhood)

Quoted prices for identical or similar assets in markets that

are not active

Observable data other than quoted prices such as

earnings, cash flow, interest rate, etc.

Level 3 Input

Least reliable

Level 3 inputs are unobservable inputs for

the asset or liability. It reflects

managements estimates.
Level 3 inputs should be used only when
observable (Level 1 & 2) inputs are
unavailable or when undue cost and effort is
required to obtain observable inputs.

FV MC 1

FV MC 1 Answer

FV MC 2

FV MC 2 Answer

FV MC 3

FV MC 3 Answer

FV MC 4

FV MC 4 Answer

FM MC 5

FV MC 5 Answer

First Time Adoption of IFRS

An entitys first IFRS FS are the first annual FS in which

the entity adopts IFRS and makes an explicitly and
unreserved statement in those FS of compliance w/ IFRS.
An entitys first IFRS FS must include
B/S 3 (beg. of prior period, end of prior period, end
of current period; e.g.: 1/1/10, 12/31/10, 12/31/11)
All others 2 (2 Statements of comprehensive
income, 2 Income statements(if using 2 stmt
approach for comprehensive income, 2 Statements of
cash flows, 2 Statements of changes in equity)
IFRS must be consistently applied from beginning and
throughout the reporting period for these statements

First Time Adoption of IFRS

Date

of transition to IFRS = date of

opening BS presented.
E.g. First IFRS annual report is for
12/31/2011, then date of transition is
1/1/2010 (or equivalently 12/31/2009)

Explanation of transitions to IFRS

An entity should disclose how the transition from
previous GAAP to IFRS affected its reported financial
positions, financial performances, and cash flows.
The disclosure includes:

a.
b.
c.

A reconciliation of equity change from GAAP to IFRS

A reconciliation of total comprehensive income from
GAAP to IFRS
Disclosures related to the recognition or reversal of
impairment losses

Similar reconciliation are required for any interim

financial report for part of a period covered by the
first IFRS FS.

First Adoption of IFRS MC

1

FAIFRS MC 1 Answer

First Adoption of IFRS MC

2

FAIFRS MC 2 Answer

First Adoption of IFRS MC

3

FAIFRS MC 3 Answer

First Adoption of IFRS MC

4

FAIFRS MC 4 Answer

SEC filing requirements

(public issuer and large private held)
Securities offering Registration statement for IPO or new offerings
1.

Disclosures about the securities being offered for sale

2.

The relationship of the new securities to the companys other securities

3.

Information similar to that filed in the annual filing

4.

Audited financial statements

5.

A description of business risk factors

Form 10K annual report

. due

90 /75/60 days after end of fiscal year

. Required

for US registered companies

Form 10Q quarterly report

. Due

45/40 days after end of fiscal quarter

. Unaudited

FS (timeliness over reliability)

Form 11K annual report of employees defined benefit plan(s)

. 401K;

Employee Stock Purchase plan

SEC filing requirements

Form 20F annual report by foreign private issuers
Form 40F annual report by specific Canadian companies
registered with SEC
Form 6K semi-annual report by foreign private issuers,
similar to 10Q
Form 8K report major corporate events such as asset
acquisitions or disposals, changes in securities and trading
markets, changes to accountants or financial statements,
and change in corporate governance or management
Form 3, 4, &5 filed by directors, officers, or beneficial
owners of more than 10% of a class of equity securities of a
issuer

Regulation S-X

In Regulation S-X, the SEC sets forth the form and content of
and requirements for interim and annual FS to be filed w/ the
SEC. The key provisions are below:
A. Requirements for Interim Financial Statements
Interim FS filed w/ SEC must be reviewed by an independent
CPA and the review report must be filed w/ the FS
The interim FS should include

1.
2.
1.
2.
3.

BS (@ end of most recent quarter and @end of preceding fiscal

year)
Income Statement(most recent fiscal quarter, YTD, and
corresponding periods for the preceding fiscal year)
Statements of cash flows(From end of previous year to end of
most recent quarter, and corresponding periods for the
preceding fiscal year)

Regulation S-X

Requirements for Annual FS

B.
1.
2.

Annual FS must be audited by CPA and audit

report must be filed along.
The audited FS must include BS for 2 most recent
fiscal years and Statements of Income, Change in
owners Equity, and Cash Flow for each of the 3
fiscal years preceding the date of the most recent
audited BS. (the exact opposite to IFRS
requirements BS- 3, others 2)

Supplemental Questions

Task Based Simulation

Solution