FAR  1  Review  Notes     1.

 SEC  has  the  legal  authority  to  establish  US  GAAP,  however,  SEC  allow  accounting   profession  to  establish  GAAP  and  self-­‐regulate.   a)  Security  and  Exchange  Commission  (SEC)   The  SEC  was  established  by  the  Security  Exchange  Act  of  1934.    b)  Committee  on  Accounting  Procedure  (CAP)   CAP  was  a  part-­‐time  committee  of  AICPA,  which  issued  ARB,  determined  GAAP  from   1939  –  1959.   c)  Accounting  Principles  Board  (APB)   APB  was  another  part-­‐time  committee  of  AICPA,  which  issued  APBO  and   interpretations,  determined  GAAP  from  1959  –  1973.   d)  Financial  Accounting  Standards  Board  (FASB)   FASB  is  an  independent  full-­‐time  organization,  started  determining  GAAP  since   1973.  FASB  has  7  full-­‐time  members,  they  serve  on  a  5-­‐year  terms.     2.  All  those  regulation  bodies  made  accounting  guidance  complicated,  thus,  from   July  1,  2009,  the  FASB  Accounting  Standards  Codification  became  the  single  source   of  authoritative  nongovernmental  US  GAAP.     3.  International  Accounting  Standards  Board  (IASB)   IASB  has  15  full-­‐time  members  and  2  part-­‐time  members,  with  a  mix  of  practice   experience.     4.  International  Financial  Reporting  Interpretations  Committee  (IFRIC)   IFRIC  was  appointed  by  the  trustees  of  the  IFRS  Foundation  to  assist  the  IASB  in   establishing  and  improving  standards  of  international  financial  accounting  and   reporting.     5.  On-­‐going  standard-­‐setting  process   Discussion  Paper  -­‐>  Exposure  Draft  -­‐>  public  comments  -­‐>  at  least  9  members   approve  Exposure  Draft.     6.  Conceptual  Framework  for  Financial  Reporting  is  a  joint  project  for  IASB  and   FASB.  The  purpose  of  this  project  is  to  converge  and  improve  the  FASB  and  IASB   financial  reporting  framework.  But  the  Conceptual  Framework  is  NOT  an  IFRS.     7.  The  goal  for  international  convergence  of  accounting  standards  is  to  set  up  a   single  set  of  high  quality,  international  accounting  standards  that  companies  can  use   for  both  domestic  and  cross-­‐border  financial  reporting.     8.  FASB  created  a  conceptual  framework  (Statement  of  Financial  Accounting   Concepts,  or  SFAC)  that  serves  as  a  basis  for  all  FASB  pronouncements,  however,   SFAC  is  NOT  a  GAAP.     9.  SFA  No.8  –  Chapter  1:  The  Objective  of  General  Purpose  Financial  Reporting  

To  provide  financial  information  about  the  reporting  entity  that  is  useful  for  the   primary  users  of  general-­‐purpose  financial  reports  in  making  decisions  about   providing  resources  to  the  reporting  entity.  (disclose  entity’s  performance)   a)  Primary  Users  (external)   i.e.  investors,  lenders,  other  creditors   b)  Useful  Information   i.e.  resources  of  the  company,  the  claims  against  the  entity,  how  efficiently  and   effectively  the  entity’s  management  and  governing  board  discharged  their   responsibility  to  the  company’s  resources,  future  net  cash  inflows.     10.  SFAC  No.8  –  Chapter  3:  Qualitative  Characteristics  of  Useful  Financial   Information   a)  Fundamental  –  Relevance  &  Faithful  Representation   Relevance:  1)  Predictive  Value;  2)  Confirming  Value;  3)  Materiality   Faithful  Representation:  1)  Completeness;  2)  Neutrality;  3)  Freedom  from  Error   b)  Enhancing:  1)  Comparability;  2)  Verifiability;  3)  Timeliness;  4)  Understandability   c)  Benefit  >  Cost     11.  Full  set  of  Financial  Statements  include:   Statement  of  financial  position  (Balance  Sheet)   Statement  of  earnings  (Income  Statement)   Statement  of  comprehensive  income   Statement  of  cash  flows   Statement  of  changes  in  owners’  equity     12.  Fundamental  assumptions  (US  GAAP)   Entity  Assumption   Going  Concern   Monetary  Unit   Periodicity   Historical  Cost  Principle   Revenue  Recognition  Principle  (Earned  &  Realized/realizable)   Matching  Principle   Accrual  Accounting   Full  Disclosure  Principle   Conservatism  Principle     Fundamental  assumptions  (IFRS)   Going  concern   Accrual  accounting     13.  Elements  of  Financial  Statements   Comprehensive  income  =  Net  Income  +  Other  Comprehensive  Income  (OCI)   Normal  operating,  recurring:  Revenue  &  Expense   Non-­‐operating,  unusual  or  infrequent:  Gain  &  Loss   Balance  Sheet  item:  Assets,  Liabilities,  Equity  

Investment  of/Distribution  to  owners  (excluded  from  comprehensive  income)     14.  SFAC  No.7  –  Using  Cash  Flow  Information  and  Present  Value  in  Accounting   Measurements  (provides  a  framework  when  using  future  cash  flows  as  a   measurement  basis  for  assets  and  liabilities)   Five  elements  of  present  value  measurement:   1)  Estimate  of  future  cash  flow   2)  Expectations  about  timing  variations  of  future  cash  flows   3)  Time  value  of  money  (risk-­‐free  interest)   4)  The  price  for  bearing  uncertainty   5)  Other  factors  (i.e.  liquidity  issues)     15.  Present  value  computation   1)  Traditional  approach   2)  Expected  cash  flow  approach     16.  Measurement  Attributes  for  Assets  and  Liabilities   1)  Historical  cost  (PPE)   2)  Current  cost  (inventory)   3)  Net  realizable  value  (A/R)   4)  Current  market  value  (marketable  securities)   5)  Present  value  of  future  cash  flows  (long-­‐term  debt,  bond)     17.  Equipment  depreciation  was  assigned  to  a  production  department  and  then  to   product  unit  costs  –  example  of  allocating  overhead   Depreciated  equipment  was  sold  in  exchange  for  a  note  receivable  –  example   realization   Product  unit  costs  were  assigned  to  cost  of  goods  sold  when  the  units  were  sold  –   example  of  matching     18.  Replacement  cost  is  defined  as  the  amount  of  cash  or  its  equivalent  that  would   be  paid  to  acquire  or  replace  an  asset  currently.  Replacement  cost  is  an  acquisition   cost.     19.  Under  IASB  framework,  going  concern  and  accrual  accounting  are  the  only  two   underlying  assumptions  of  financial  statement  preparation  and  presentation.     20.  Presentation  Order  of  major  components  of  Income  statement   I  –  Income  (or  loss)  from  Continuing  Operations  (individual  line  items  show  “gross   of  tax”,  then  total  reported  “net  of  tax”)   D  –  Income  (or  loss)  from  Discontinued  Operations  (net  of  tax)   E  –  Extraordinary  Items  (net  of  tax,  separate  disclosure)   A  –  Cumulative  Effect  of  Change  in  Accounting  Principle  (net  of  tax)     21.  Multiple  step  income  statement  (enhanced  user  information)[I  per  above]   1)  Normal  operating  

Net  sales   Cost  of  sales   Gross  margin   Selling  expense   G&A  expenses   Depreciation  expense   Income  (loss)  from  operations   2)  Non-­‐operating   Other  revenues  and  gains  (interest  revenue,  gain  on  sale  of  fixed  asset,  etc.)   Other  expenses  and  losses  (interest  expense,  loss  on  sale  of  fixed  asset,  etc.)   Income  before  unusual  items  and  income  tax   Unusual  or  infrequent  items  (i.e.  loss  on  sale  of  available-­‐for-­‐sale  securities)   3)  Income  before  income  tax   4)  Provision  for  income  tax  (current,  deferred)   5)  Net  income  from  continuous  operations     22.  Single  step  income  statement   1)  Total  revenues  and  other  items   2)  Total  expenses  and  other  items  (income  tax  expense  included)   3)  Net  income  (net  of  tax)     23.  Discontinued  Operations  (D  per  above)  –  for  that  period!   1)  Impairment  loss   2)  Gain/loss  from  actual  operations   3)  Gain/loss  on  disposal   *  For  that  period  means,  for  example,  classified  as  held  for  sale  in  April  Year  1,  sold   in  June  Year  2,  counts  the  whole  year  of  operational  loss  in  the  discontinued   operations,  not  just  from  April  –  December  for  Year  1.     24.  Held  for  sale:  Once  you  plan/decide  to  sell  the  component,  all  related  revenue   and  expenses  are  reported  under  discontinued  operations  until  sold  (note:  the  sale   is  expected  to  be  complete  within  one  year)     25.  In  order  to  report  as  discontinued  operations:   a)  Eliminated  from  ongoing  operations   b)  No  significant  continuous  involvement  after  disposal     26.  Impairment  loss   a)  Any  initial  or  subsequent  write-­‐down  to  fair  value  less  costs  to  sell  should  be   recognized  as  impairment  loss   b)  A  gain  is  allowed  for  subsequent  increase  in  fair  value  after  initial  impairment   loss  is  recognized,  but  not  exceeding  the  amount  that  previously  write-­‐off     27.  Assets  within  the  component  that  are  reported  in  discontinued  operations  are   no  longer  depreciated  or  amortized.    

28.  Subsequent  adjustment  related  to  discontinued  operations   a)  has  a  cause-­‐and-­‐effect  relationship   b)  occur  no  later  than  a  year  after  the  disposal  transaction   e.g.  contingencies  related  to  disposal,  settlement  of  employee  benefit  plan     29.  Discontinued  operations  component  could  be  disclosed  in  face  or  notes     30.  Exit  or  disposal  costs:  (disclose  in  notes,  not  the  face  of  F/S)   a)  Involuntary  employee  termination  benefits   b)  Costs  to  terminate  a  contract  that  is  not  a  capital  lease   c)  Other  costs  associated  with  exit  or  disposal  activities,  including  costs  to   consolidate  facilities  or  relocate  employees     31.  Examples  of  extraordinary  items:   • Damage  as  a  result  of  infrequent  earthquake  or  flood;   • An  expropriation  of  a  plant  by  the  government;   • A  prohibition  of  a  product  line  by  a  newly  enacted  law  or  regulation;   • Certain  gains  or  losses  from  extinguishment  of  a  long-­‐term  debt  (non-­‐ recurring,  unusual  and  infrequent  in  nature);   Note:  IFRS  does  not  allow  presenting  of  extraordinary  item     32.  Examples  of  non-­‐extraordinary  items:   • Gain  or  loss  from  sale  or  abandonment  of  property,  plant  or  equipment  used   in  business;   • Large  write-­‐down  or  write-­‐off  of  receivables,  inventories,  intangibles   (including  goodwill),  long-­‐term  securities  (permanent  decline);   • Gain  or  loss  from  foreign  currency  transactions  or  translation;   • Losses  from  major  strike  by  employees;   • Long-­‐term  debt  extinguishments  that  a  part  of  a  common  management   strategy  (not  unusual  and  infrequent)     33.  Accounting  change   1)  Changes  in  accounting  estimate  (prospective)   • Changes  in  lives  of  fixed  assets   • Adjustments  of  year-­‐end  accrual  of  officer’s  salary  or  bonus   • Write-­‐don  of  obsolete  inventory   • Material  non-­‐recurring  IRS  adjustment   • Settlement  of  litigation   • Changes  in  accounting  principle  that  are  inseparable  from  a  change  in   estimate  (i.e.  a  change  from  installment  method  to  immediate  recognition   method)     2)  Changes  in  accounting  principle  (retrospective)   Cumulative  effect  –  difference  between  the  amount  of  beginning  retained  earnings   in  the  period  of  change  and  what  retained  earnings  would  have  been  if  the   accounting  change  had  been  retroactively  applied.  

The  general  rule  is  that  changes  in  accounting  principle  should  be  recognized  by   adjusting  beginning  retained  earnings  in  the  earliest  period  presented  for  the   cumulative  effect  of  the  change,  and,  if  prior  period  are  presented,  they  should  be   restated.   Note:     • Non-­‐GAAP  -­‐>  GAAP  =  Error  Correction  (i.e.  Cash  basis  -­‐>  Accrual  basis)   • Change  in  inventory  method  to  LIFO  =  change  in  estimate   • Change  in  depreciation  methods  =  change  in  estimate     3)  Changes  in  accounting  entity  (retrospective  =  restate)   Require  full  disclosure  of  the  cause  and  nature  of  the  change   Note:  IFRS  does  not  include  such  concept     34.  Comprehensive  income  =  NI  +  OCI   Change  in  equity  from  non-­‐owner  transactions   NI  =  Income  from  continuous  operations  +  Discontinued  operations  +Extraordinary   item  (IDE  per  above)   Other  Comprehensive  Income  (OCI)  includes:   P  –  Pension  adjustments  (Pension  changes  in  funded  status:  due  to  gains/losses,   prior  service  costs,  and  net  transition  assets  or  obligations)   U  –  Unrealized  gains  and  losses  (available-­‐for-­‐sale  securities,  and  debt  securities   transferred  from  held-­‐to-­‐maturity  to  available-­‐for-­‐sale)   F  –  Foreign  currency  items  (including  translation  adjustments)   E  –  Effective  portion  cash  flow  hedges   R  –  Revaluation  surplus  (IFRS  only)     35.  Accumulated  Other  Comprehensive  Income  (AOCI)   AOCI  is  a  component  of  equity  that  includes  the  total  of  OCI  for  the  period  and   previous  periods.  OCI  for  current  period  is  closed  out  to  this  account,  just  like  NI  is   closed  out  to  Retained  Earnings.  This  account  is  used  for  certain  gains/losses  that   are  not  ready  to  hit  NI.     36.  The  unrealized  loss  on  the  trading  security  and  revaluation  loss  of  intangible   assets  will  be  reported  in  net  income,  not  other  comprehensive  income.     37.  Both  US  GAAP  and  IFRS  require  a  description  (disclosure)  of  all  significant   policies  be  included  as  an  integral  part  of  the  financial  statements.  Accounting   policies  commonly  described  in  the  footnote:   • Basis  of  consolidation   • Depreciation  methods   • Amortization  of  intangibles   • Inventory  pricing   • Accounting  for  recognition  of  profit  on  long-­‐term  construction  contracts   • Recognition  of  revenue  from  franchising  or  leasing  operations    

38.  Under  US  GAAP,  Officers’  salaries,  officers’  expenses  and  intercompany  sales  are   all  transactions  in  the  ordinary  course  of  business  and  generally  would  not  require   disclosure.  Only  the  loans  to  officers  would  require  disclosure  because  they  are   outside  of  the  ordinary  course  of  business.  However,  compensation  arrangements   for  key  management  would  require  disclosure  under  IFRS.   • Short-­‐term  employee  benefits   • Post-­‐employment  benefits   • Other  long-­‐term  benefits   • Termination  benefits   • Share-­‐based  payments   Thus,  officers’  salaries  need  to  be  disclosed  under  IFRS,  but  officers’  expenses  are   not  considered  related  party  transactions.     39.  For  disclosure  of  accounting  policies,  disclosure  should  NOT  be  limited  to   principles  and  methods  peculiar  to  the  industry  in  which  the  company  operates.  All   material  accounting  policies  should  be  disclosed.     40.  Disclosure  of  risks  and  uncertainties  (US  GAAP)   1)  Nature  of  operations  (major  products,  principal  markets,  etc.)   2)  Use  of  estimates  in  the  preparation  of  financial  statements   3)  Certain  significant  estimates  (reasonably  possible  &  material)   4)  Current  vulnerability  due  to  certain  concentrations     41.  For  interim  only,  timeliness  is  emphasized  over  reliability.  Interim  financial   reporting  should  be  viewed  as  reporting  for  an  integral  part  of  an  annual  period.     42.  Income  taxes  rule  for  quarters:  The  general  rule  is  to  multiple  the  year-­‐to-­‐date   income  by  the  estimated  effective  tax  rate  and  subtract  the  result  from  the  provision   included  in  previous  quarter.     43.  Interim  inventory  valuation:   1)  Disclose  the  method  used  at  the  interim  date  and  reconcile  any  material   difference  with  annual  physical  inventory   2)  Liquidation  of  a  LIFO  base  layer  (US  GAAP  only,  because  IFRS  does  not  allow   LIFO)   3)  Permanent  and  temporary  decline  in  market  value  –  permanent  inventory  losses   should  be  reflected  in  the  interim  period  in  which  they  occur;  temporary  market   value  decline  that  are  expected  to  reverse  before  the  end  of  the  annual  period   should  not  be  recognized  in  interim  period.   e.g.  Due  to  the  decline  in  market  price  in  the  second  quarter,  the  company  incurred   an  inventory  loss.  The  market  price  is  expected  to  return  to  previous  level  by  the   end  of  the  year,  however,  the  decline  had  not  reversed  at  year-­‐end.  The  loss  should   be  reported  in  fourth  quarter  only,  not  in  second  quarter.  Only  when  the  loss  is   probable  and  estimable,  the  expected  loss  must  be  recorded  in  full,  and  the  loss   becomes  such  at  the  end  of  the  fourth  quarter,  not  second  quarter.    

44.  To  adequately  capture  the  impact  of  discontinued  operations  and  extraordinary   items,  both  should  be  included  in  net  income  and  disclose  in  the  interim  financial   statement  notes.     45.  General,  an  enterprise  is  required  to  disclose  segment  profit/loss,  segment   assets,  and  certain  related  items,  but  is  not  required  to  report  segment  cash  flow.   Required  disclosures  for  only  public  enterprises:   • Operating  segments  (annual  and  interim)   • Products  and  services   • Geographic  areas   • Major  customers     46.  Transactions  between  the  segments  of  an  enterprise  are  not  eliminated  as  in   consolidation  between  the  parent  company  and  subsidiaries.     47.  Not  every  enterprise  is  an  operating  segment:  e.g.  corporate  headquarters  and   pension  plan  are  NOT  operating  segments.  In  order  to  qualify  as  segment,  it  has  to   earn  revenue  or  incur  expense  related  to  business  activity.  It  has  operational  results   are  regularly  reviewed  by  chief  operating  officer  to  make  decisions  of  allocating  the   business  resources,  and  with  traceable  (discrete)  financial  information  available.     48.  Quantitative  threshold  for  reporting  segments:   1)  10%  of  revenue,  or  reported  profit/loss,  or  assets  of  all  combined  operating   segments  (note:  use  combined  number,  not  consolidated!)   2)  Keep  adding  segment  until  all  of  the  reported  segments’  revenue  >  75%  of  all   combined  revenue     49.  Segment  Profit/Loss  formula   Revenues  (For  that  segment  –  internal  and  external)   Less:  Directly  traceable  costs   Less:  Reasonably  allocated  costs   =  Operating  Profit  (or  loss)  for  segment     50.  Development  stage  enterprises  must  issue  the  same  financial  statements  as  any   other  enterprises,  with  additional  disclosure  requirements,  such  as  cumulative  net   loss  (deficit  accumulated  during  the  development  stage),  cumulative  loss  from  the   company’s  inception,  cumulative  cash  inflow  and  outflows,  stocks  issued     51.  First  time  adoption  of  IFRS   At  least  3  balance  sheet,  2  statement  of  comprehensive  income,  2  statement  of  cash   flow,  2  statement  of  changes  in  equity,  and  related  notes.     An  entity  should  disclose  how  the  transition  from  previous  GAAP  to  IFRS  affected  its   financial  statements.     52.  SEC  Reporting  Requirements:  (know  the  forms!!)  

1)  10-­‐K  (60/75/90  days)   2)  10-­‐Q  (unaudited,  40/45  days)   3)  11-­‐K  (annual  report  for  employee  benefit  plan)   4)  20-­‐F  and  40-­‐F  (20-­‐F  for  Canadian  companies,  40-­‐F  for  all  other  foreign  private   issuers)  =  10-­‐K  for  US  issuers   5)  6-­‐K  (half-­‐year  report  by  foreign  private  issuers)   6)  8-­‐K  (major  corporate  events)   7)  Form  3,4  and  5  (filed  by  directors,  officers,  beneficial  owners)     53.  Regulation  S-­‐X   Interim:   1)  Condensed  financial  statements  are  okay.   2)  US  –  Quarterly  filing;  Foreign  –  Semi-­‐annually  filing   Annual:   1)  Period  presented:  IFRS  –  all  2  sets;  GAAP  –  2  B/S,  3  all  others     54.  SEC  XBRL  (Extensible  Business  Reporting  Language)   Key  XBRL  terms:   1)  Tag:  machine-­‐readable  code  provides  contextual  information  allowing  data  to  be   recognized  and  processed  by  software   2)  Taxonomy:  defines  the  specific  tags  used  for  individual  items  of  business  and   financial  data     XBRL  exhibits  submitted  to  SEC  are  subject  to  modified  liability  for  24  months  from   the  time  the  filer  first  is  required  to  submit  interactive  data  files.  The  modified   liability  provision  will  terminate  completely  on  October  31,  2014.     Each  company’s  initial  interactive  data  exhibits,  will  be  required  within  30  days   after  the  earlier  of  the  due  date  or  filing  date.  Filers  will  also  receive  a  30-­‐day  grace   period  for  the  first  filing  that  is  required  to  have  footnotes  and  schedules  tagged.        

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