Gleim CPA Review Updates to Financial 2012 Edition, 1st Printing January 27, 2012

Size: px

Start display at page:

Download "Gleim CPA Review Updates to Financial 2012 Edition, 1st Printing January 27, 2012"

Joseph Manning
6 years ago
Views:

1 Page 1 of 10 Gleim CPA Review Updates to Financial 2012 Edition, 1st Printing January 27, 2012 NOTE: Text that should be deleted from the outline is displayed with a line through the text. New text is shown with a blue background. Study Unit 2 Financial Statements Page 87, Question 23: This question was reworded because two of the answer choices appeared to be correct. 23. Which of the following reconciliations need most likely is not required to be presented by first-time adopters of IFRSs? A. T Reconciliation from total comprehensive income (or profit or loss if TCI was not reported) reported under previous GAAP to total comprehensive income reported under IFRSs. B. Accumulated other comprehensive income Reconciliation from extraordinary items reported under previous GAAP to accumulated other comprehensive income extraordinary items reported under IFRSs. C. I Disclosure of the amount of impairment losses reported under previous GAAP to those reported under IFRSs recognized for the first time in preparing the first IFRSs statement of financial position. D. E Reconciliation from equity reported under previous GAAP to equity reported under IFRSs. Answer (B) is correct. (Publisher, adapted) REQUIRED: The reconciliation item most likely not required for to be presented by first-time adopters of IFRSs. DISCUSSION: A reconciliation of accumulated other comprehensive income is not required for first-time adopters of IFRSs. An entity s first IFRSs financial statements must include a reconciliation to its total comprehensive income. The starting point for that reconciliation is the total comprehensive income in accordance with previous GAAP. If the entity did not report such a total, the starting point is profit or loss under previous GAAP Extraordinary items are never recognized under IFRSs. Answer (A) is incorrect. The first IFRSs financial statements must present a reconciliation of total comprehensive income CI reported under previous GAAP (or profit or loss if TCI was not reported) to total comprehensive income CI reported under IFRSs. Answer (C) is incorrect. If the entity recognized or reversed any impairment losses for the first time in preparing its first IFRSs statement of financial position, it must make the disclosures that IAS 36, Impairment of Assets, would have required if the entity had recognized those items in the period beginning with the transition date. Answer (D) is incorrect. The first IFRSs financial statements must present a reconciliation of equity reported under previous GAAP to equity reported under IFRSs as of (1) the transition date and (2) the end of the latest period presented under previous GAAP.

2 Page 2 of 10 Study Unit 5 Financial Statement Disclosure Page 178, Subunit 5.3, 4.b.: This edit adds information regarding the balance sheet presentation for entities not subject to seasonal fluctuations. 4. Seasonality a. If interim information is issued, certain disclosures are mandatory for businesses that have material seasonal fluctuations. These fluctuations cannot be smoothed in interim information. b. Accordingly, reporting entities must disclose the seasonal nature of their activities. They also should consider supplementing interim reports with information for the 12-month period that ended at the interim date for the current and preceding years. 1) Reporting entities in industries not subject to seasonal fluctuations are required to present balance sheet information on Form 10-Q only for (a) the most recent quarter end and (b) the end of the preceding fiscal year. Study Unit 6 Cash and Investments Page 232, Question 30: This update changes the answer explanation to match the outline. 30. In Year 1, Chain, Inc., purchased a $1 million life insurance policy on its president, of which Chain is the beneficiary. Information regarding the policy for the year ended December 31, Year 6, follows: Cash surrender value, 1/1/Yr 6 $ 87,000 Cash surrender value, 12/31/Yr 6 108,000 Annual advance premium paid 1/1/Yr 6 40,000 During Year 6, dividends of $6,000 were applied to increase the cash surrender value of the policy. What amount should Chain report as life insurance expense for Year 6? A. $40,000 B. $21,000 C. $19,000 D. $13,000 Answer (C) is correct. (CPA, adapted) REQUIRED: The life insurance expense to be reported. DISCUSSION: Life insurance expense is equal to the excess of the premiums paid over the increase in the sum of cash surrender value and dividends received. However, the dividends were applied to increase the cash surrender value and were therefore not received. Hence, Chain s life insurance expense is $19,000. Premium $40,000 Minus: Increase in cash surrender value ($108,000 $87,000) (21,000) Dividends received 0 Life insurance expense $19,000 Answer (A) is incorrect. The premium paid is $40,000. Answer (B) is incorrect. The change in the cash surrender value is $21,000. Answer (D) is incorrect. The amount of $13,000 results from subtracting the dividends applied.

3 Study Unit 9 Property, Plant, Equipment, and Depletable Resources Page 3 of 10 Page 323, Subunit 9.1, IFRS Difference: This edit adds an IFRS difference regarding the choices an entity has for the initial recognition of assets. IFRS Difference An entity may choose either the cost model or the revaluation model as its accounting policy. It must apply that policy to an entire class of PPE. A class is a grouping of assets of similar nature and use in an entity s operations, for example, land, office equipment, or motor vehicles. An item of PPE whose fair value can be reliably measured may be carried at a revalued amount equal to fair value at the revaluation date (minus subsequent accumulated depreciation and impairment losses). Revaluation is needed whenever fair value and the asset s carrying amount differ materially. Accumulated depreciation is restated proportionately or eliminated. A revaluation increase must be recognized in other comprehensive income and accumulated in equity as revaluation surplus. But the increase must be recognized in profit or loss to the extent it reverses a decrease of the same asset that was recognized in profit or loss. A revaluation decrease must be recognized in profit or loss. But the decrease must be recognized in other comprehensive income to the extent of any credit in revaluation surplus for the same asset. Page , Subunit 9.5, 2.: This edit improves the wording for exchanges measured at their carrying amounts and adds the treatment for losses with these types of exchanges. 2. Exchanges Measured at Carrying Amount a. When one of the following certain exceptions appliesy, the accounting for a nonmonetary exchange is based on the carrying amount of the assets given up. Unless boot is involved received, no gain or loss is recognized. The following are the exceptions: 1) Neither the fair value of the assets given up nor the fair value of the assets received is reasonably determinable, 2) The exchange involves inventory sold in the same line of business that facilitates sales to customers not parties to the exchange, or 3) The exchange lacks commercial substance, that is, when an entity s cash flows are not expected to change significantly. b. If boot is given as part of an exchange measured at carrying amount, the recipient of the boot must recognize some gain. The amount of gain is calculated in the following steps: 1) Calculate the total potential gain on the exchange. Fair value of other assets received + Boot received - Carrying amount of assets given up Total potential gain

4 2) Calculate the proportion of assets received represented by boot. Boot received Fair value of other assets received Boot received 3) Determine the amount of gain to be recognized. Total potential gain Proportion represented by boot c. If a loss is indicated in an exchange (with or without boot) measured at the carrying amount of the assets given up, the entire loss is recognized. Page 4 of 10 Study Unit 13 Noncurrent Liabilities Page 490, Subunit 13.11, 3.: This update adds contract termination cost information for operating leases. 3. Contract Termination Costs a. Such costs (other than those for a capital lease) are of two types: 1) Costs to terminate prior to completion of the contract s term and 2) Contract costs that will continue to be incurred without economic benefit (continuing costs). a) If the contract is an operating lease, the fair value of the liability at the date use ends must be determined based on the remaining lease rentals. This amount is reduced by estimated sublease rentals that could be reasonably obtained even if the entity does not intend to sublease the property. i) The remaining lease rentals must not be reduced to less than zero. Study Unit 16 Business Combinations and Consolidated Financial Reporting Page 605, Subunit 16.4, 4.a.: This edit clarifies the example for eliminating depreciation between a parent and subsidiary. EXAMPLE During the On the first day of its fiscal year, Platonic sold a piece of equipment to Socratic that had 4 years of useful life remaining. Platonic s gain on the sale was $12,000. Platonic had $15,200 of total depreciation expense for the year and. Socratic s total for the same period had was $8,500. Each uses the straight-line method. The consolidated depreciation expense is as follows: Parent s depreciation expense $15,200 Subsidiary s depreciation expense 8,500 Depreciation expense eliminated ($12,000 4 years) (3,000) Consolidated depreciation expense $20,700

5 Page 5 of 10 Study Unit 19 Governmental Reporting Page 731, Subunit 19.5, 8.d.: This edit changes the account credited in the enterprise fund when a transfer of goods occurs between activity types. d. Transfers between Activity Types EXAMPLE On occasion, a government transfers resources from the general fund to an enterprise fund for a major upgrade or expansion. Fund financial statements. When the transfer is recognized, the accounting is identical to that used above. General fund: Other financing uses -- transfer to municipal hospital fund $130,000,000 Due to municipal hospital fund $130,000,000 Enterprise fund: Due from general fund $130,000,000 Other financing sources -- Interfund transfer from general fund $130,000,000 The movement of cash also is recorded the same way. General fund: Due to municipal hospital fund $130,000,000 Cash $130,000,000 Enterprise fund: Cash $130,000,000 Due from general fund $130,000,000 Government-wide statements. An additional set of entries is made. Resources have passed not only between funds but also between activities. Governmental activities: Transfer to municipal hospital fund $130,000,000 Cash $130,000,000 Business-type activities: Cash $130,000,000 Transfer from general fund $130,000,000

6 Page 6 of 10 Study Unit 20 Not-for-Profit Concepts Page 773, Question 3: This edit changes the question stem and answer explanations to indicate which statements must be included in a complete set of financial statements. 3. A complete set of general-purpose external financial statements issued by a nongovernmental not-for-profit entity should must include A. Statements of financial position as of the beginning and end of the reporting period, a statement of cash flows, and a statement of activities. B. A statement of financial position as of the end of the reporting period and a statement of revenues, expenditures, and changes in fund balances. C. A statement of financial position as of the end of the reporting period, a statement of cash flows, and a statement of activities. D. Statements of financial position as of the beginning and end of the reporting period, comparative statements of cash flows, and comparative statements of activities. Answer (C) is correct. (Publisher, adapted) REQUIRED: The statements included in a complete set of financial statements of NFPs. DISCUSSION: A complete set of financial statements of a not-for-profit entity an NFP must includes (1) a statement of financial position as of the end of the reporting period, (2) a statement of activities and a statement of cash flows for the reporting period, and (3) accompanying notes. Furthermore, a voluntary health and welfare entity must report a statement of functional expenses (e.g., major classes of program services and supporting activities). Answer (A) is incorrect. The statement of financial position should must be as of the end of the reporting period. Answer (B) is incorrect. A statement of revenues, expenditures, and changes in fund balances is reported for the governmental funds of a state or local governmental entity. Answer (D) is incorrect. The statement of financial position should must be as of the end of the reporting period, and comparative statements are not required. Page 781, Question 32: This update improves the answer explanations. 32. On December 31, Year 3, Dahlia, a nongovernmental not-for-profit entity, purchased a vehicle with $15,000 unrestricted cash and received a donated second vehicle having a fair value of $12,000. Dahlia expects each vehicle to provide it with equal service value over each of the next five years and then to have no residual value. Dahlia has an accounting policy implying a time restriction on gifts of longlived assets. In Dahlia s Year 4 statement of activities, what depreciation expense should be included under changes in unrestricted net assets? A. $0 B. $2,400 C. $3,000 D. $5,400 Answer (D) is correct. (CPA, adapted) REQUIRED: The depreciation expense included under changes in unrestricted net assets. DISCUSSION: The expiration of a restriction is recognized when it expires in the accounting records. Expiration occurs when the stipulated time has elapsed, the purpose of the restriction has been fulfilled, or both. It is All amounts released during the period are reported separately as a reclassification in the statement of activities as net assets released from restrictions. The effect is to increase one class of net assets and decrease another. For example, an implied time restriction on In the case of a long-lived depreciable asset, an implied time restriction expires as the economic benefits are used. Depreciation expense is reported as a decrease in unrestricted net assets. Consequently, Dahlia should record a decrease in unrestricted net assets related to depreciation of $5,400 [($15,000 + $12,000) 5-year useful life], assuming given no residual value.

7 Page 7 of 10 Page 781, Question 33: This update improves the answer explanations. 33. The Bruneski family lost its home in a fire. On December 25, Year 3, a philanthropist sent money to the Amer Benevolent Society to purchase furniture for the Bruneski family. The resource provider did not explicitly grant Amer the unilateral power to redirect the use of the assets. During January Year 4, Amer purchased this furniture for the Bruneski family. Amer, a not-for-profit entity, should report the receipt of the money in its Year 3 financial statements as a(n) A. Unrestricted contribution. B. Temporarily restricted contribution. C. Permanently restricted contribution. D. Liability. Answer (D) is correct. (CPA, adapted) REQUIRED: The reporting of a transfer to an NFP with a direction that the assets be used to aid a specific beneficiary. DISCUSSION: If the recipient and beneficiary are not financially interrelated, the recipient does not recognize a contribution unless the donor of cash or other financial assets explicitly grants the recipient variance power, that is, (the unilateral power to redirect the use of the assets) to another beneficiary. Accordingly, the philanthropist s donation is an agency transaction, and the NFP is simply a pass-through entity. Because Amer was not explicitly granted variance power, it is a mere agent or trustee acting on behalf of a the third-party donee. It and has little or no discretion in use of the cash. Thus, the transfer Amer should be accounted for the transfer as a liability, not a contribution.

8 Page 8 of 10 Appendix IFRSs Differences Page 797: This update removes duplicate information from the Appendix. IAS 1 - Presentation of Financial Statements Financial liabilities due to be settled within 12 months should continue to be classified as current. This treatment applies even if (1) the original term exceeded 12 months and (2) an agreement to refinance or reschedule payments on a noncurrent basis is completed after the reporting period and before the financial statements are authorized for issue. Page 66 An entity that expects and has discretion to refinance or roll over the liability under an existing loan agreement classifies it as noncurrent. No items are classified as extraordinary, either on the statement of comprehensive income or in the notes. The minimum presentation on the face of the statement of financial position includes the following line items (but no particular order or format is prescribed): 1. Property, plant, and equipment 2. Investment property 3. Intangible assets 4. Financial assets (other than 5., 8., and 9.) 5. Equity-based investments 6. Biological assets 7. Inventories 8. Trade and other receivables 9. Cash and cash equivalents 10. Trade and other payables 11. Current and deferred tax amounts 12. Provisions 13. Financial liabilities (other than 10. and 12.) 14. Noncontrolling interest 15. Issued capital and reserves 16. The total of assets classified as held for sale and assets and liabilities included in disposal groups classified as held for sale Expenses may be classified by the nature-of-expense method or the function-ofexpense method. No items are classified as extraordinary, either on the statement of comprehensive income or in the notes , 128

9 Page 9 of 10 Page 800: This edit adds an IFRS difference regarding the choice an entity has for the initial recognition of assets. IAS 16 Property, Plant, and Equipment An entity may choose either the cost model or the revaluation model as its accounting policy. It must apply that policy to an entire class of PPE. A class is a grouping of assets of similar nature and use in an entity s operations, for example, land, office equipment, or motor vehicles. An item of PPE whose fair value can be reliably measured may be carried at a revalued amount equal to fair value at the revaluation date (minus subsequent accumulated depreciation and impairment losses). Revaluation is needed whenever fair value and the asset s carrying amount differ materially. Accumulated depreciation is restated proportionately or eliminated. A revaluation increase must be recognized in other comprehensive income and accumulated in equity as revaluation surplus. But the increase must be recognized in profit or loss to the extent it reverses a decrease of the same asset that was recognized in profit or loss. A revaluation decrease must be recognized in profit or loss. But the decrease must be recognized in other comprehensive income to the extent of any credit in revaluation surplus for the same asset. Each part of the item with a cost significant to the total cost must be depreciated separately. But an entity may separately depreciate parts that are not significant

10 Page 10 of 10 Page 801: This update adds a missing IFRS difference to the Appendix. IAS 19 Employee Benefits Instead of using the corridor method, an entity may recognize actuarial gains and losses when they occur. This recognition may be in OCI. The reclassification from OCI to profit and loss is prohibited. Past service cost is recognized immediately to the extent it is vested upon introduction, or amendment, of a plan. Otherwise, it is expensed on the straightline basis over the average period to vesting. For short-term compensated absences, the timing of recognition depends on whether the benefits accumulate. If they do not accumulate, recognition of the expected cost is when the absences occur. If they accumulate, recognition is when services are rendered that increase the employees entitlement to future compensated absences. The accumulating obligation is recognized whether it is vesting (the employee is entitled to a cash payment for an unused entitlement upon leaving the entity) or not vesting, and the amount should not be discounted. The expected cost of accumulating compensated absences equals the additional amount expected to be paid as a result of the unused entitlement at the end of the reporting period

GAPCO KENYA LIMITED. Gapco Kenya Limited

GAPCO KENYA LIMITED. Gapco Kenya Limited 297 Gapco Kenya Limited 298 GAPCO KENYA LIMITED Independent Auditor s Report INDEPENDENT AUDITORS REPORT TO THE MEMBERS OF GAPCO KENYA LIMITED Report on the Financial Statements We have audited the accompanying