2014 FASB UPDATE. ki so w ygandt FASB Update Chapter 18 Revenue Recognition. Donald E. Kieso PhD, CPA. Northern Illinois University

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1 ki so w ygandt 2014 FASB UPDATE 2014 FASB Update Chapter 18 Revenue Recognition Donald E. Kieso PhD, CPA Northern Illinois University DeKalb, Illinois Jerry J. Weygandt PhD, CPA University of Wisconsin Madison Madison, Wisconsin Terry D. Warfield, PhD University of Wisconsin Madison Madison, Wisconsin WlLEY

2 Chapter 1 Financial Accounting and Accounting Standards 2 We Can Do Better Financial Statements and Financial Reporting 4 Accounting and Capital Allocation 4 It's the Accounting 5 Objective of Financial Reporting 5 Don't Forget Stewardship 6 The Need to Develop Standards 7 Parties Involved in Standard-Setting 7 Securities and Exchange Commission (SEC) 7 American Institute of Certified Public Accountants (AICPA) 9 Financial Accounting Standards Board (FASß) 10 Generally Accepted Accounting Principles 13 You Have to Step Back 14 FASB Codification 14 Issues in Financial Reporting 16 GAAP in a Political Environment 16 Evolving Issue Fair Value, Fair Consequences? 17 The Expectations Gap 17 Financial Reporting Ghalienges 18 International Accounting Standards 20 Can You DoThat? 21 Ethics in the Environment of Financial Accounting 21 Conclusion 21 FASB Codification 23 IFRS Insights 31 Chapter 2 Conceptual Framework for Financial Reporting 40 What Is It? Conceptual Framework 42 Need for a Conceptual Framework 42 What's Your Principle? 43 xii Development of a Conceptual Framework 43 Overview of the Conceptual Framework 44 First Level: Basic Objective 45 Second Level: Fundamental Concepts 45 Qualitative Characteristics of Accounting Information 45 Living in a Material World 48 Show Me the Earnings! 50 Basic Elements 52 Third Level: Recognition and Measurement Concepts 53 Basic Assumptions 54 Whose Company Is It? 54 Basic Principles of Accounting 56 You May Need a Map 61 Cost Constraint 61 Summary of the Structure 63 FASB Codification 65 IFRS Insights 78 Chapter 3 The Accounting Information System 82 Needed: A Reliable Information System Accounting Information System 84 Basic Terminology 84 Debits and Credits 85 The Accounting Equation 86 Financial Statements and Ownership Structure 88 The Accounting Cycle 89 Identifying and Recording Transactions and Other Events 89 Journalizing 91 Posting 92 Thal Balance 96 Adjusting Entries 96 Am I Covered? 107 Adjusted Trial Balance 108 Preparing Financial Statements 108

3 24/7 Accounting 110 Closing 110 Post-Closing Trial Balance 113 Reversing Entries An Optional Step 113 The Accounting Cycle Summarized 114 What Do the Nunibers Mean? Hey, It's Complicated 114 Financial Statements for a Merchandising Company 114 Income Statement 114 Statement of Retained Earnings 115 Balance Sheet 115 Statements, Please 117 Closing Entries 117 APPENDIX 3A Cash-Basis Accounting versus Accrual-Basis Accounting 118 Conversion from Cash Basis to Accrual Basis 120 Service Revenue Computation 121 Operating Expense Computation 122 Theoreticai Weaknesses of the Cash Basis 123 APPENDIX 3B Using Reversing Entries 124 Illustration of Reversing Entries Accruals 124 Illustration of Reversing Entries Deferrals 125 Summary of Reversing Entries 126 APPENDIX 3C Using a Worksheet: The Accounting Cycle Revisited 127 Worksheet Columns 127 Trial Balance Columns 127 Adjustments Columns 127 Adjustments Entered on the Worksheet 127 Adjusted Trial Balance 129 Income Statement and Balance Sheet Columns 129 Preparing Financial Statements from a Worksheet 130 IFRS Insights 153 Chapter 4 Income Statement and Related Information 1 58 Financial Statements Are Changing Income Statement 160 Usefulness of the Income Statement 160 Limitations of the Income Statement 160 Quality of Earnings 161 Four: The Loneliest Number 162 Format of the Income Statement 162 Elements of the Income Statement 162 Intermediate Components of the Income Statement 164 Top Line or Bottom Line? 166 Condensed Income Statements 166 Single-Step Income Statements 167 Reporting Various Income Items 168 Are One-Time Charges Bugging You? 169 Unusual Gains and Losses 169 Discontinued Operations 170 Extraordinary Items 173 Extraordinary Times 175 Noncontrolling Interest 176 Summary of Various Income Items 176 Earnings per Share 177 Different Income Concepts 179 Other Reporting Issues 179 Accounting Changes and Errors 179 Retained Earnings Statement 181 Comprehensive Income 182 Evolving Issue Income Reporting 185 FASB Codification 188 IFRS Insights 205 Chapter 5 Balance Sheet and Statement of Cash Flows 212 Hey, It Doesn't Balance! Balance Sheet 214 Usefulness of the Balance Sheet 214 Limitations of the Balance Sheet 215 Grounded 215 Classification in the Balance Sheet 215 "Show Me the Assets!" 223 Warning Signals 226 Balance Sheet Format 226 Statement of Cash Flows 228 Watch That Cash Flow 228 Purpose of the Statement of Cash Flows 228 Content and Format of the Statement of Cash Flows 229 Overview of the Preparation of the Statement of Cash Flows 230 Usefulness of the Statement of Cash Flows 232 "There Ought to Be a Law" 235 Additional Information 236 Supplemental Disclosures 236 What About Your Commitments? 238 Techniques of Disclosure 239 Evolving Issue Balance Sheet Reporting: Gross or Net? 243 APPENDIX 5A Ratio Analysis A Reference 245 Using Ratios to Analyze Performance 245 xiii

4 APPENDIX 5B Specimen Financial Statements: The Procter & Gamble Company 246 FASB Codification 255 IFRS Insights 277 Chapter 6 Accounting and the Time Value of Money 286 How Do I Measure That? Basic Time Value Concepts 288 Applications of Time Value Concepts 288 The Nature of Interest 289 Simple Interest 290 Compound Interest 290 A Pretty Good Start 291 Fundamental Variables 294 Single-Sum Problems 294 Future Value of a Single Sum 295 Present Value of a Single Sum 296 Solving for Other Unknowns in Single-Sum Problems 298 Annuities 299 Future Value of an Ordinary Annuity 300 Don't Wait to Make That Contribution! 302 Future Value of an Annuity Due 303 Examples of Future Value of Annuity Problems 304 Present Value of an Ordinary Annuity 306 Up in Smoke 308 Present Value of an Annuity Due 308 Examples of Present Value of Annuity Problems 309 More Complex Situations 311 Deferred Annuities 311 Valuation of Long-Term Bonds 313 Effective-Interest Method of Amortization of Bond Discount or Premium 314 Present Value Measurement 315 Choosing an Appropriate Interest Rate 316 How Low Can They Go? 316 Example of Expected Cash Flow 316 FASB Codification 320 Chapter 7 Cash and Receivables 344 Please Release Me? Cash 346 What Is Cash? 346 Reporting Cash 346 Summary of Cash-Related Items 348 Luck of the Irish 349 xiv Accounts Receivable 349 Recognition of Accounts Receivable 351 Valuation of Accounts Receivable 352 I'm Still Waiting 358 Notes Receivable 359 Recognition of Notes Receivable 359 Valuation of Notes Receivable 363 Economic Consequences and Write-Offs 364 Special Issues 364 Fair Value Option 365 Disposition of Accounts and Notes Receivable 365 Return to Lender 371 Presentation and Analysis 372 Evolving Issue A Cure for "Too Little, Too Late"? 374 APPENDIX 7A Cash Controls 376 Using Bank Accounts 376 The Imprest Petty Cash System 377 Physical Protection of Cash Balances 378 Reconciliation of Bank Balances 378 APPENDIX 78 Impairments of Receivables 381 Impairment Measurement and Reporting 382 Impairment Loss Example 382 Recording Impairment Losses 383 Lost in Translation 383 FASB Codification 385 IFRS Insights 408 Chapter 8 Valuation of Inventories: A Cost-Basis Approach 414 To Switch or Not to Switch Inventory Issues 416 Classification 416 Inventory Cost Flow 417 Inventory Control 419 Staying Lean 420 Basic Issues in Inventory Valuation 420 Physical Goods Included in Inventory 421 Goods in Transit 421 Consigned Goods 422 Special Sales Agreements 422 No Parking! 423 Effect of Inventory Errors 423 Costs Included in Inventory 425 Product Costs 426 Period Costs 426 Treatment of Purchase Discounts 426 You May Need a Map 427

5 Which Cost Flow Assumption to Adopt? 428 Specific Identification 428 Average-Cost 429 First-In, First-Out (FIFO) 430 Last-In, First-Out (LIFO) 431 Special Issues Related to LIFO 432 LIFO Reserve 432 Comparing Apples to Apples 433 LIFO Liquidation 434 Dollar-Value LIFO 435 Quite a Difference 440 Comparison of LIFO Approaches 440 Major Advantages of LIFO 441 Major Disadvantages of LIFO 442 Basis for Selection of Inventory Method 443 Evolving Issue Repeat LIFO! 445 Inventory Valuation Methods Summary Analysis 445 FASB Codification 449 Chapter 9 Inventories: Additional Valuation Issues 472 Not What It Seems to Be Lower-of-Cost-or-Market 474 Ceiling and Floor 475 How Lower-of-Cost-or-Market Works 476 Methods of Applying Lower-of-Cost-or- Market 477 Recording "Market" Instead of Cost 478 Use of an Allowance 479 Use of an Allowance Multiple Periods 480 "Put It in Reverse" 480 Evaluation of the Lower-of-Cost-or-Market Rule 481 Valuation Bases 481 Valuation at Net Realizable Value 481 Valuation Using Relative Sales Value 482 Purchase Commitments A Special Problem 483 The Gross Profit Method of Estimating Inventory 485 Computation of Gross Profit Percentage 486 Evaluation of Gross Profit Method 488 The Squeeze 488 Retail Inventory Method 488 Retail-Method Concepts 489 Retail Inventory Method with Markups and Markdowns Conventional Method 490 Special Items Relating to Retail Method 493 Evaluation of Retail Inventory Method 493 Presentation and Analysis 494 Presentation of Inventories 494 Analysis of Inventories 495 APPENDIX 9A LIFO Retail Methods 497 Stable Prices LIFO Retail Method 497 Fluctuating Prices Dollar-Value LIFO Retail Method 498 Subsequent Adjustments Under Dollar-Value LIFO Retail 500 Changing from Conventional Retail to LIFO 501 FASB Codification 504 IFRS Insights 525 Chapter 10 Acquisition and Disposition of Property, Plant, and Equipment 536 Watch Your Spending Property, Plant, and Equipment 538 Acquisition of Property, Plant, and Equipment 538 Cost of Land 539 Cost of Buildings 539 Cost of Equipment 540 Self-Constructed Assets 540 Interest Costs Düring Construction 541 What's in Your Interest? 546 Observations 547 Valuation of Property, Plant, and Equipment 547 Cash Discounts 547 Deferred-Payment Contracts 547 Lump-Sum Purchases 548 Issuance of Stock 549 Exchanges of Nonmonetary Assets 550 About Those Swaps 555 Accounting for Contributions 555 Other Asset Valuation Methods 556 Costs Subsequent to Acquisition 556 Disconnected 557 Additions 558 Improvements and Replacements 558 Rearrangement and Reinstallation 559 Repairs 559 Summary of Costs Subsequent to Acquisition 560 Disposition of Property, Plant, and Equipment 560 Sale of Plant Assets 560 Involuntary Conversion 561 Miscellaneous Problems 561 FASB Codification 564 Chapter 11 Depreciation, Impairments, and Depletion 588 Here Come the Write-Offs xv

6 Depreciation A Method of Cost Allocation 590 Factors Involved in the Depreciation Process 590 Alphabet Düpe 592 Methods of Depreciation 592 Special Depreciation Methods 595 Decelerating Depreciation 597 Special Depreciation Issues 598 Depreciation Choices 601 Impairments 601 Recognizing Impairments 601 Measuring Impairments 602 Restoration of Impairment Loss 603 Impairment of Assets to Be Disposed Of 603 Depletion 604 Establishing a Depletion Base 605 Write-Off of Resource Cost 606 Estimating Recoverable Reserves 607 Reserve Surprise 607 Liquidating Dividends 607 Continuing Controversy 608 Evolving Issue Full-Cost or Successful-Efforts? 609 Presentation and Analysis 609 Presentation of Property, Plant, Equipment, and Natural Resources 609 Analysis of Property, Plant, and Equipment 611 APPENDIX 11A Income Tax Depreciation 614 Modified Accelerated Cost Recovery System 614 Tax Lives (Recovery Periods) 614 Tax Depreciation Methods 615 Example of MACRS 615 Optional Straight-Line Method 616 Tax versus Book Depreciation 617 FASB Codification 618 IFRS Insights 637 Chapter 12 Intangible Assets 648 Is This Sustainable? Intangible Asset Issues 650 Characteristics 650 Valuation 650 Amortization of Intangibles 651 Definitely Indefinite 653 Types of Intangible Assets 653 Marketing-Related Intangible Assets 653 Keep Your Hands Off My Intangible! 654 xvi Customer-Related Intangible Assets 654 Artistic-Related Intangible Assets 655 Contract-Related Intangible Assets 655 Technology-Related Intangible Assets 656 Patent Batties 657 The Value of a Secret Formula 658 Goodwill 658 Impairment of Intangible Assets 662 Impairment of Limited-Life Intangibles 662 Impairment of Indefinite-Life Intangibles Other Than Goodwill 662 Impairment of Goodwill 663 Impairment Summary 664 Impairment Risk 665 Research and Development Costs 665 Identifying R&D Activities 666 Accounting for R&D Activities 667 Costs Similar to R&D Costs 667 Branded 670 Presentation of Intangibles and Related Items 670 Presentation of Intangible Assets 670 Presentation of Research and Development Costs 672 Evolving Issue Recognition of R&D and Internally Generated Intangibles 673 FASB Codification 676 IFRS Insights 693 Chapter 13 Current Liabilities and Contingencies 700 Now You See It, Now You Don't Current Liabilities 702 Accounts Payable 703 Notes Payable 703 Current Maturities of Long-Term Debt 705 Short-Term Obligations Expected to Be Refinanced 705 What About That Short-Term Debt? 707 Dividends Payable 707 Customer Advances and Deposits 707 Unearned Revenues 708 Microsoft's Liabilities Good or Bad? 708 Sales Taxes Payable 709 Income Taxes Payable 709 Employee-Related Liabilities 710 Contingencies 715 Gain Contingencies 715 Loss Contingencies 716 Frequent Flyers 722

7 More Disclosure, Please 726 Presentation and Analysis 726 Presentation of Current Liabilities 726 Presentation of Contingencies 728 Analysis of Current Liabilities 729 Evolving Issue Greenhouse Gases: Let's Be Standard-Setters 730 FASB Codification 733 IFRS Insights 753 Chapter 14 Long-Term Liabilities 762 Going Long Bonds Payable 764 Issuing Bonds 764 Types of Bonds 764 All About Bonds 765 Valuation of Bonds Payable Discount and Premium 766 How's My Rating? 768 Bonds Issued at Par on Interest Date 768 Bonds Issued at Discount or Premium on Interest Date 768 Bonds Issued Between Interest Dates 770 Effective-Interest Method 770 Costs of Issuing Bonds 774 Extinguishment of Debt 775 Your Debt Is Killing My Equity 776 Long-Term Notes Payable 776 Notes Issued at Face Value 777 Notes Not Issued at Face Value 777 Special Notes Payable Situations 779 Mortgage Notes Payable 782 Fair Value Option 782 Reporting and Analyzing Liabilities 783 Off-Balance-Sheet Financing 783 Obligated 785 Presentation and Analysis of Long-Term Debt 786 Evolving Issue Fair Value of Liabilities: Pick a Number, Any Number 788 APPENDIX 14A Troubled-Debt Restructurings 790 Settlement of Debt 791 Transfer of Assets 791 Granting of Equity Interest 791 Modification of Terms 792 Example 1 No Gain for Debtor 792 Example 2 Gain for Debtor 795 Concluding Remarks 796 FASB Codification 798 IFRS Insights 815 Chapter 15 Stockholders' Equity 820 It's a Global Market The Corporate Form of Organization 822 State Corporate Law North Orange Street 822 Capital Stock or Share System 823 Variety of Ownership Interests 824 Corporate Capital 824 Issuance of Stock 825 The Case of the Disappearing Receivable 829 Reacquisition of Shares 829 Buybacks Good or Bad? 830 Preferred Stock 834 Features of Preferred Stock 834 A Class (B) Act 836 Accounting for and Reporting Preferred Stock 836 Dividend Policy 837 Financial Condition and Dividend Distributions 837 Types of Dividends 838 Stock Dividends and Stock Splits 841 Splitsville 844 Dividends Up, Dividends Down 846 Disclosure of Restrictions on Retained Earnings 846 Presentation and Analysis of Stockholders' Equity 847 Presentation 847 Analysis 849 APPENDIX 15A Dividend Preferences and Book Value per Share 852 Dividend Preferences 852 Book Value per Share 853 FASB Codification 856 IFRS Insights 874 Chapter 16 Dilutive Securities and Earnings per Share 882 Kicking the Habit Dilutive Securities 884 Debt and Equity 884 Accounting for Convertible Debt 884 xvii

8 Convertible Preferred Stock 886 How Low Can You Go? 887 Stock Warrants 887 Evolving Issue Is That All Debt? 890 Accounting for Stock Compensation 893 Stock-Option Plans 893 Restricted Stock 894 Employee Stock-Purchase Plans 896 Disclosure of Compensation Plans 897 Debate over Stock-Option Accounting 897 A Little Honesty Goes a Long Way 899 Computing Earnings per Share 899 Earnings per Share Simple Capital Structure 900 Earnings per Share Complex Capital Structure 904 Pro Forma EPS Confusion 911 APPENDIX 16A Accounting for Stock-Appreciation Rights 913 SARS Share-Based Equity Awards 914 SARS Share-Based Liability Awards 914 Stock-Appreciation Rights Example 915 APPENDIX 16B Comprehensive Earnings per Share Example 916 Oiluted Earnings per Share 918 FASB Codification 923 IFRS Insights 941 Chapter17 Investments 950 What to Do? Investments in Debt Securities 952 Debt Investment Classifications 952 Held-to-Maturity Securities 953 Available-for-Sale Securities 955 What Is Fair Value? 959 Trading Securities 959 Investments in Equity Securities 960 Holdings of Less Than 20% 961 More Disclosure, Please 964 Holdings ßetween 20% and 50% 964 Holdings of More Than 50% 966 Who's in Control Here? 967 Additional Measurement Issues 967 Fair Value Option 967 Evolving Issue Fair Value Controversy 968 Impairment of Value 969 Reclassifications and Transfers 970 Reclassification Adjustments 970 Transfers Between Categories 974 xviii Summary of Reporting Treatment of Securities 975 Evolving Issue Classification and Measurement The Long Road 975 APPENDIX 17A Accounting for Derivative Instruments 977 Defining Derivatives 977 Who Uses Derivatives, and Why? 978 Producers and Consumers 978 Speculators and Arbitrageurs 979 Basic Principles in Accounting for Derivatives 980 Example of Derivative Financial Instrument Speculation 980 Differences Between Traditional and Derivative Financial Instruments 983 Derivatives Used for Hedging 983 Risky Business 984 Fair Value Hedge 984 Cash Flow Hedge 987 Other Reporting Issues 989 Embedded Derivatives 989 Qualifying Hedge Criteria 989 Summary of Derivatives Accounting 990 Comprehensive Hedge Accounting Example 991 Fair Value Hedge 992 Financial Statement Presentation of an Interest Rate Swap 994 Controversy and Concluding Remarks 995 APPENDIX 17B Variable-Interest Entities 996 What About GAAP? 997 Consolidation of Variable-Interest Entities 997 Some Examples 998 What Is Happening in Practice? 999 APPENDIX 17C Fair Value Disclosures 999 Disclosure of Fair Value Information: Financial Instruments 1000 Disclosure of Fair Values: Impaired Assets or Liabilities 1003 Conclusion 1003 FASB Codification 1005 IFRS Insights 1026 Chapter 18 Revenue Recognition 1040 It's Back Overview of Revenue Recognition 1042 Guidelines for Revenue Recognition 1043 Departures from the Sale Basis 1044 Liability or Revenue? 1045 Revenue Recognition at Point of Sale (Delivery) 1045 Sales with Discounts 1046 Sales with Right of Return 1047 Sales with Buybacks 1049

9 Bill and Hold Sales 1050 Principal-Agent Relationships 1050 Grossed Out 1051 Trade Loading and Channel Stuffing 1053 No Take-Backs 1053 Multiple-Deliverable Arrangements 1054 Summary 1056 Revenue Recognition before Delivery 1057 Percentage-of-Completion Method 1058 Completed-Contract Method 1063 Long-Term Contract Losses 1064 Less Conservative 1067 Disclosures in Financial Statements 1068 Completion-of-Production Basis 1068 Revenue Recognition after Delivery 1068 Installment-Sales Method 1068 Cost-Recovery Method 1077 Deposit Method 1078 Summary and Concluding Remarks 1079 APPENDIX 18A Revenue Recognition for Franchises 1081 Initial Franchise Pees 1082 Example of Entries for Initial Franchise Fee 1082 Continuing Franchise Pees 1083 Bargain Purchases 1083 Options to Purchase 1084 Franchisor's Cost 1084 Disclosures of Franchisors 1084 FASB Codification 1086 IFRS Insights 1109 Chapter 19 Accounting for Income laxes 1116 How Much Is Enough? Fundamentals of Accounting for Income Taxes 1118 Future Taxable Amounts and Deferred Taxes 1119 "Real Liabilities" 1122 Future Deductible Amounts and Deferred Taxes 1123 "Real Assets" 1125 Deferred Tax Asset Valuation Allowance 1125 Income Statement Presentation 1126 Specific Differences 1127 Tax Rate Considerations 1130 Global Tax Rates 1131 Accounting for Net Operating Losses 1132 Loss Carryback 1132 Loss Carryforward 1132 Loss Carryback Example 1133 Loss Carryforward Example 1134 NOLs: Good News or Bad? 1138 Financial Statement Presentation 1138 Balance Sheet 1138 Imagination at Work 1140 Income Statement 1141 Evolving Issue Uncertain Tax Positions 1143 Review of the Asset-Liability Method 1144 APPENDIX 19A Comprehensive Example of Interperiod Tax Allocation 1147 First Year Taxable Income and Income Taxes Payable Computing Deferred Income Taxes End of Deferred Tax Expense (Benefit) and the Journal Entry to Record Income Taxes Financial Statement Presentation Second Year Taxable Income and Income Taxes Payable Computing Deferred Income Taxes End of Deferred Tax Expense (Benefit) and the Journal Entry to Record Income Taxes Financial Statement Presentation FASB Codification 1156 IFRS Insights 1175 Chapter 20 Accounting for Pensions and Postretirement Benefits 1182 Where Have All the Pensions Gone? Nature of Pension Plans 1184 Defined Contribution Plan 1185 Defined Benefit Plan 1185 Which Plan Is Right for You? 1186 The Role of Actuaries in Pension Accounting 1187 Accounting for Pensions 1187 Alternative Measures of the Liability 1187 Recognition of the Net Funded Status of the Pension Plan 1189 Components of Pension Expense 1189 Using a Pension Worksheet Entries and Worksheet 1192 Amortization of Prior Service Cost (PSC) Entries and Worksheet 1195 Gain or Loss 1197 Pension Costs Ups and Downs 1198 Corridor Amortization 1199 Evolving Issue Bye Bye Corridor Entries and Worksheet 1202 Roller Coaster 1204

10 Reporting Pension Plans in Financial Statements 1204 Within the Financial Statements 1205 Within the Notes to the Financial Statements 1207 Example of Pension Note Disclosure Entries and Worksheet A Comprehensive Example 1210 Special Issues 1211 Who Guarantees the Guarantor? 1213 Concluding Observations 1215 APPENDIX 20A Accounting for Postretirement Benefits 1217 Accounting Guidance 1217 Differences Between Pension Benefits and Healthcare Benefits 1218 OPEBs How Big Are They? 1219 Postretirement Benefits Accounting Provisions 1219 Obligations Under Postretirement Benefits 1220 Postretirement Expense 1220 Illustrative Accounting Entries Entries and Worksheet 1221 Recognition of Gains and Losses Entries and Worksheet 1223 Amortization of Net Gain or Loss in Disclosures in Notes to the Financial Statements 1225 Actuarial Assumptions and Conceptual Issues 1225 Want Some Bad News? 1227 FASB Codification 1229 IFRS Insights 1250 Chapter 21 Accounting for Leases 1268 More Companies Ask, "Why Buy?" The Leasing Environment 1270 Who Are the Players? 1270 Advantages of Leasing 1272 Off-Balance-Sheet Financing 1273 Conceptual Nature of a Lease 1273 Accounting by the Lessee 1274 Capitalization Criteria 1275 Asset and Liability Accounted for Differently 1278 Capital Lease Method (Lessee) 1278 Operating Method (Lessee) 1281 Restatements on the Menu 1281 Comparison of Capital Lease with Operating Lease 1282 Evolving Issue Are You Liable? 1283 Accounting by the Lessor 1284 Economics of Leasing 1284 Classification of Leases by the Lessor 1285 xx Direct-Financing Method (Lessor) 1286 Operating Method (Lessor) 1289 Special Lease Accounting Problems 1289 Residual Values 1290 Sales-Type Leases (Lessor) 1296 Xerox Takes on the SEC 1298 Bargain-Purchase Option (Lessee) 1298 Initial Direct Costs (Lessor) 1298 Current versus Noncurrent 1299 Disclosing Lease Data 1300 Unresolved Lease Accounting Problems 1302 Evolving Issue Lease Accounting If It Quacks Like a Duck 1303 APPENDIX 21 ASale-Leasebacks 1306 Determining Asset Use 1307 Lessee 1307 Lessor 1308 Sale-Leaseback Example 1308 FASB Codification 1313 IFRS Insights 1331 Chapter 22 Accounting Changes and Error Analysis 1342 In the Dark Accounting Changes 1344 Changes in Accounting Principle 1344 Quite a Change 1346 Retrospective Accounting Change Approach 1346 Change Management 1348 Direct and Indirect Effects of Changes 1355 Impracticability 1356 Changes in Accounting Estimates 1357 Prospective Reporting 1357 Disclosures 1358 Changes in Reporting Entity 1359 Accounting Errors 1359 Example of Error Correction 1361 Summary of Accounting Changes and Correction of Errors 1363 Can I Get My Money Back? 1364 Motivations for Change of Accounting Method 1365 Error Analysis 1366 Balance Sheet Errors 1366 Income Statement Errors 1367 Balance Sheet and Income Statement Errors 1367 Comprehensive Example: Numerous Errors 1370 Guard the Financial Statements! 1372

11 Preparation of Financial Statements with Error Corrections 1373 APPENDIX 22A Changing from or to the Equity Method 1377 Change from the Equity Method 1377 Dividends in Excess of Earnings 1377 Change to the Equity Method 1378 FASB Codification 1381 IFRS Insights 1404 Chapter 23 Statement of Cash Flows 1410 Show Me the Money! Preparation of the Statement of Cash Flows 1412 Usefulness of the Statement of Cash Flows 1412 Classification of Cash Flows 1413 How's My Cash Flow? 1414 Format of the Statement of Cash Flows 1415 Steps in Preparation 1415 lllustrations Tax Consultants Inc Step 1: Determine the Change in Cash 1417 Step 2: Determine Net Cash Flow from Operating Activities 1417 Earnings and Cash Flow Management? 1419 Step 3: Determine Net Cash Flows from Investing and Financing Activities 1419 Statement of Cash Flows Illustration Illustration Sources of Information for the Statement of Cash Flows 1426 Net Cash Flow from Operating Activities Direct Method 1428 Evolving Issue Direct versus Indirect 1433 Special Problems in Statement Preparation 1434 Adjustments to Net Income 1434 Accounts Receivable (Net) 1438 Not What It Seems 1439 Other Working Capital Changes 1440 Net Losses 1440 Significant Noncash Transactions 1441 Cash Flow Tool 1442 Use of a Worksheet 1443 Preparation of the Worksheet 1444 Analysis of Transactions 1444 Preparation of Final Statement 1451 FASB Codification 1454 IFRS Insights 1480 Chapter 24 Füll Disclosure in Financial Reporting 1486 High-Quality Financial Reporting Always in Fashion Füll Disclosure Principle 1488 Increase in Reporting Requirements 1489 Differential Disclosure 1489 Evolving Issue Disclosure Quantity and Quality 1490 Notes to the Financial Statements 1491 Accounting Policies 1491 Common Notes 1491 Footnote Secrets 1493 Disclosure Issues 1493 Disclosure of Special Transactions or Events 1493 Post-Balance-Sheet Events (Subsequent Events) 1495 Reporting for Diversified (Conglomerate) Companies 1497 Interim Reports 1501 Evolving Issue It's Faster but Is It Better? 1507 Auditor's and Managemente Reports 1508 Auditor's Report 1508 Heart of the Matter 1511 Managements Reports 1511 Current Reporting Issues 1513 Reporting on Financial Forecasts and Protections 1513 Global Forecasts 1515 Internet Financial Reporting 1516 New Formats, New Disclosure 1517 Fraudulent Financial Reporting 1517 Disclosure Overload 1519 Criteria for Making Accounting and Reporting Choices 1520 APPENDIX 24A Basic Financial Statement Analysis 1522 Perspective on Financial Statement Analysis 1522 Ratio Analysis 1523 Limitations of Ratio Analysis 1524 Comparative Analysis 1526 Percentage (Common-Size) Analysis 1527 FASB Codification 1530 IFRS Insights 1548 Index 1-1