FAR Section 1 Conceptual Framework & IFRS

FAR Section 1 Conceptual Framework & IFRS

The monetary unit: an accounting principle that assumes business transactions or events can be measured and expressed in terms of monetary units (money) and the monetary units are stable and dependable. FASB Conceptual Framework (Acctg Constitution) for Financial Reporting Special Notes: The revised Framework stated that relevant financial information is capable of making a difference to the decision made by users. In order to make a difference, financial information has Predictive value, confirmatory value or both. The Boards have clarified that materiality is an entity specific aspect of relevance. A standard setter does not consider materiality when developing standards because it is an entity-specific consideration., i.e., it cannot be specified in general terms to encompass every situation, Basic elements=1-3 Equity = 4-6 Comprehensive Income=7-10 (DENT; P 1-5) When to recognize a F/S element & how to measure it in Monetary Terms? Full disclosure: a. Notes b. Supplementary info Information includes: B/S (stmt of financial position) Financial performance from I/S (stmt of earnings; accrual acctg) econ resources/claims Stmt of Cash Flows Stmt of Investments by & Distributions to Owners (Changes not from financial performance

FASB vs. IASB (GAAP vs. IFRS: International Financial Reporting Standards) Differences between the FASB & IASB: FASB Conceptual Framework GAAP: more rules-based IASB Framework IFRS: principle-based or concept based 10 elements of Financial Statements 5 elements of Financial Statements 3 basic elements 3 elements of financial position Assets Assets Liabilities Liabilities Equity or Net Assets Equity or Net Assets 3 elements of Equity Contributions/Investments by owners Distributions to owners Comprehensive income 4 elements of comprehensive income 2 elements of performance Revenues Income* (both revenues & gains) Expenses Expenses (& losses from ordinary activities) Gains Note: Capital maintenance adjustments Losses are from revaluation or restatement of assets & liabilities, not from income or exp Net Income Profit * Under GAAP, "income" is not a financial statement element; it is used to describe a calculation of some type (e.g., income from continuting operations, net income).

Statement of Cash Flows Operating Activities Preparing the Statement of Cash Flows Two Formats for Reporting Operating Activities Direct Method Indirect Method Reports the cash effects of each operating activity Starts with accrual net income and converts to cash basis

Indirect Method Changes in current assets and current liabilities. Net Income Cash Flows from Operating Activities + Losses & - Gains + Noncash expenses (e.g., depreciation and amortization. 97.5% of all companies use the indirect method.

Indirect Method Change in Account Balance During Year Increase Decrease Current Subtract from net Add to net income. Assets income. Current Add to net income. Subtract from net Liabilities income. Assets = Liabilities + Stockholders Equities Cash = - Accounts Receivable Prepaid Inventory- all other current assets +A/p + Salaries Payable + all other current liabilities +All Long-term Liabilities + Stocks + Paid-in Capital + Non-cash Expenses (e.g. depreciation, amortization) Gains + Losses - Dividend (Note: Trade A/P a debt owed for Inventory (goods, raw materials), & supplies, that are not evidenced by a promissory note. Accrued liabilities a liability for an expense you have not yet paid, e.g., interest payable, salary payable, income tax payable. Other misc. current liabilities: Sales taxes payable, prop taxes payable, use taxes payable (taxes collected from the buyer on goods purchased outside of the taxing jurisdiction)).

Preparing a Statement of Cash Flows - Example Indirect Method Example B&G Company Information Available:

Indirect Method Example B&G Company Additional Information for 2009: Net income was $105,000. Cash dividends declared and paid were $40,000. Bonds payable of $50,000 were redeemed for $50,000 cash. Common stock was issued for $35,000 cash.

Indirect Method Example B&G Company B&G Company Statement of Cash Flows For the Year Ended December 31, 2009 Cash flows from operating activities Net income $ 105,000 Adjustments to accrual-basis net income: Depreciation expense $ 34,000 Increase in accounts receivable (9,000) Decrease in inventory 19,000 Decrease in accounts payable (8,000) Total adjustments 36,000 Net cash provided by operating activities 141,000 Cash flows from investing activities

Recognition & Measurement - GAAP Recognition: must meet following 2 general criteria 1. Probability 2. Reliable measurement Revenue: are increases of assets and reductions of liabilities during a period of time. Rev Recognition: Revenues & gains are recognized when: it is realized or realizable & earned. 1). Realized: when goods or services have been exchanged for cash or claims to cash. or Realizable: when goods or services have been exchanged for assets that are readily convertible into cash or claims to cash. (Readily convertible assets: 1. interchangeable units & 2. quoted prices available in an active market that can rapidly absorb the quantity held by the entity w/o a significant effect on the price. & 2). Earned: when the earning process has been substantially completed, & the entity is entitled to the resulting benefits or revenues.

Recognition & Measurement GAAP (cont d) All 4 criteria must be met for each element of the contract before any revenue can be recognized: 1) persuasive evidence of an arrangement exists; 2) delivery has occurred or services have been rendered; 3) the price is fixed & determinable; & 4) collection is reasonably assured Revenue from the sale of products or the disposal of other assets is recognized on the date of sale (exchange) of the product or other asset, i.e., the delivery date. The following 2 criteria apply: 1) delivery of goods or setting aside goods ordered, and/or 2) transfer of legal title Revenue from allowing others the use of the entity s assets (e.g., interest, royalty, & rental revenue) is recognized when the assets are used (time passage) Revenue from the performance of services is recognized in the period the services have been rendered & are able to be billed by the entity.

Revenue Recognition - IFRS General: revenue is measured at the FV of consideration received or receivable. For a sale of goods, revenue is recognized when all 5 conditions are met: 1. significant risks & rewards of ownership transferred to the buyer. 2. the selling entity doesn t retain managerial involvement associated with ownership or control over the asset/goods sold. 3. the revenue amount can be reliably measured. 4. it is probable that the economic benefits will flow to the entity. 5. transaction costs incurred & to be incurred can be reliably measured. For the rendering of a service: 1. when the outcome can be reliably estimated, revenue is recognized based on the %-of-completion method. 2. when the outcome cannot be reliably estimated, revenue is recognized to the extent of recoverable expenses recognized (cost recovery). Revenues from interest, royalties, & dividends are recognized when the amounts can be reliably estimated & economic benefits will probably flow to the entity. Interest: effective interest method Royalties: accrual basis Dividends: when the shareholders right to receive payment is established.

ASB Codification Framework (ASC)