GAAP Guidebook 2014 Edition Steven M. Bragg
Chapter 1 Introduction... 1 Learning Objectives... 1 Introduction... 1 What is GAAP?... 1 How this Book is Organized... 3 How to Use this Book... 4 Accounting Principles... 4 Summary... 5 Review Questions... 6 Review Answers... 7 Chapter 2 Presentation of Financial Statements... 8 Learning Objectives... 8 Introduction... 8 Related Chapters... 8 Overview of the Presentation of Financial Statements... 8 Presentation Disclosures... 8 Liquidation Basis of Accounting... 9 Liquidation Basis Disclosures... 10 Discontinued Operations... 10 Discontinued Operations Disclosures... 12 Summary... 12 Review Questions... 13 Review Answers... 14 Chapter 3 Balance Sheet... 15 Learning Objectives... 15 Introduction... 15 Overview of the Balance Sheet... 15 The Common Size Balance Sheet... 18 The Comparative Balance Sheet... 19 How to Construct the Balance Sheet... 20 Offsetting... 21 Treatment of Negative Cash... 22 Balance Sheet Disclosures... 22 Summary... 24 Review Questions... 25 Review Answers... 26 Chapter 4 Comprehensive Income... 27 Learning Objectives... 27 Introduction... 27 Related Chapters... 27 Overview of Comprehensive Income... 27 Comprehensive Income Disclosures... 28 Summary... 31 Review Questions... 32 Review Answers... 33 Chapter 5 Income Statement... 34 Learning Objectives... 34 Introduction... 34 Related Chapters... 34
Overview of the Income Statement... 34 The Single-Step Income Statement... 36 The Multi-Step Income Statement... 37 The Condensed Income Statement... 38 The Contribution Margin Income Statement... 38 The Multi-Period Income Statement... 39 How to Construct the Income Statement... 40 Extraordinary Items... 41 Income Statement Disclosures... 42 Summary... 43 Review Questions... 44 Review Answers... 45 Chapter 6 Statement of Cash Flows... 46 Learning Objectives... 46 Introduction... 46 Overview of the Statement of Cash Flows... 46 The Direct Method... 47 The Indirect Method... 49 How to Prepare the Statement of Cash Flows... 50 Disclosures for the Statement of Cash Flows... 51 Summary... 52 Review Questions... 53 Review Answers... 54 Chapter 7 Notes to Financial Statements... 55 Learning Objectives... 55 Introduction... 55 Overview of Notes to Financial Statements... 55 Overview of Notes to Financial Statements... 55 Summary... 57 Review Questions... 58 Review Answers... 59 Chapter 8 Accounting Changes and Error Corrections... 60 Learning Objectives... 60 Introduction... 60 Related Chapters... 60 Changes in Accounting Principle... 60 Changes in Accounting Estimate... 61 Changes in Reporting Entity... 61 Correction of an Error in Previously Issued Financial Statements... 62 Corrections Related to Prior Interim Periods... 62 The Materiality of an Error... 62 Accounting Changes and Error Corrections Disclosures... 62 Change in Accounting Principle... 62 Change in Accounting Estimate... 63 Change in Reporting Entity... 63 Error Corrections... 63 Historical Summaries... 64 Summary... 65 Review Questions... 66 Review Answers... 67 Chapter 9 Changing Prices... 68 Learning Objectives... 68 vi
Introduction... 68 Overview of Changing Prices... 68 Inventory and Fixed Assets... 68 Specialized Assets... 69 Recoverable Amounts... 69 Income from Continuing Operations... 69 Restatement of Current Cost Information... 69 Translation Adjustments... 70 Purchasing Power Gains and Losses... 70 Restatement Steps... 70 Changing Prices Disclosures... 71 Five-Year Summary... 71 Other Current Year Disclosures... 72 Other Disclosures for Mineral Resources Assets... 72 Summary... 73 Review Questions... 74 Review Answers... 75 Chapter 10 Earnings per Share... 76 Learning Objectives... 76 Introduction... 76 Basic Earnings per Share... 76 Diluted Earnings per Share... 77 Disclosure of Earnings per Share... 80 Summary... 81 Review Questions... 82 Review Answers... 83 Chapter 11 Interim Reporting... 84 Learning Objectives... 84 Introduction... 84 Related Chapters... 84 Overview of Interim Reporting... 84 General Interim Reporting Rule... 84 Variations from the Interim Reporting Rule... 85 Changes in Accounting Principle in Interim Periods... 86 Changes in Accounting Estimate in Interim Periods... 86 Error Correction in Interim Periods... 87 Adjustments to Prior Interim Periods... 87 The Integral View... 88 The Discrete View... 89 Comparison of the Integral and Discrete Views... 89 Disclosures for Interim Reporting... 89 Summary... 91 Review Questions... 92 Review Answers... 93 Chapter 12 Risks and Uncertainties... 94 Learning Objectives... 94 Introduction... 94 Related Chapter... 94 Overview of Risks and Uncertainties... 94 Risks and Uncertainties Disclosures... 95 Summary... 96 Review Questions... 97 Review Answers... 98 vii
Chapter 13 Segment Reporting... 99 Learning Objectives... 99 Introduction... 99 Overview of Segment Reporting... 99 Segment Disclosure... 101 Segment Disclosure... 101 Products, Services, and Customer Disclosure... 103 Geographic Area Disclosure... 104 Summary... 104 Review Questions... 105 Review Answers... 106 Chapter 14 Receivables... 107 Learning Objectives... 107 Introduction... 107 Related Chapter... 107 Notes Receivable... 107 Acquisition, Development, and Construction Arrangements... 109 Nonrefundable Fees and Other Costs... 110 Loans and Debt Securities Acquired with Deteriorated Credit Quality... 112 Troubled Debt Restructurings by Creditors... 114 Receivables Presentation... 114 Receivables Disclosures... 115 Summary... 119 Review Questions... 120 Review Answers... 121 Chapter 15 Investments Debt and Equity Securities... 122 Learning Objectives... 122 Introduction... 122 Related Chapters... 122 Overview of Investments Debt and Equity Securities... 122 Accounting for Investments... 122 Impairment of Investments... 123 Restricted Stock... 125 Dividend and Interest Income... 125 Investment Disclosures... 125 Summary... 127 Review Questions... 128 Review Answers... 129 Chapter 16 Investments Equity Method and Joint Ventures... 130 Learning Objectives... 130 Introduction... 130 The Equity Method... 130 Partnerships, Joint Ventures, and Limited Liability Entities... 132 Investment Disclosures... 132 Summary... 133 Review Questions... 134 Review Answers... 135 Chapter 17 Inventory... 136 Learning Objectives... 136 Introduction... 136 Overview of Inventory... 136 The Periodic Inventory System... 138 viii
The Perpetual Inventory System... 139 Inventory Costing... 139 The First In, First Out Method... 140 The Last In, First Out Method... 141 The Weighted Average Method... 142 Standard Costing... 143 The Retail Inventory Method... 144 The Gross Profit Method... 145 Overhead Allocation... 146 The Lower of Cost or Market Rule... 148 Work in Process Accounting... 149 Accounting for Obsolete Inventory... 150 Consignment Accounting... 151 Goods in Transit... 152 Inventory Disclosures... 153 Summary... 153 Review Questions... 154 Review Answers... 155 Chapter 18 Other Assets and Deferred Costs... 156 Learning Objectives... 156 Introduction... 156 Related Chapters... 156 Overview of Other Assets and Deferred Costs... 156 Prepaid Expenses... 156 Preproduction Costs for Long-Term Supply Arrangements... 156 Capitalized Advertising Costs... 157 Insurance Contracts that Do Not Transfer Insurance Risk... 158 Other Assets and Deferred Costs Disclosures... 159 Preproduction Costs for Long-Term Supply Arrangements... 159 Capitalized Advertising Costs... 159 Insurance Contracts that Do Not Transfer Insurance Risk... 160 Summary... 160 Review Questions... 161 Review Answers... 162 Chapter 19 Intangibles Goodwill and Other... 163 Learning Objectives... 163 Introduction... 163 Related Chapters... 163 Goodwill... 163 General Intangibles Other than Goodwill... 167 Internal-Use Software... 169 Website Development Costs... 171 Intangibles Disclosures... 171 Summary... 174 Review Questions... 175 Review Answers... 176 Chapter 20 Property, Plant, and Equipment... 177 Learning Objectives... 177 Introduction... 177 Related Chapters... 177 Overview of Fixed Assets... 177 Initial Fixed Asset Recognition... 179 Fixed Assets Acquired through a Business Combination... 179 ix
Nonmonetary Exchanges... 179 Depreciation and Amortization... 183 Straight-Line Method... 184 Sum-of-the-Years Digits Method... 184 Double-Declining Balance Method... 185 Depletion Method... 186 Units of Production Method... 187 Land Depreciation... 188 Land Improvement Depreciation... 188 Depreciation Accounting Entries... 189 Fixed Asset Impairment... 190 Fixed Asset Disposal... 192 Assets Held for Sale... 192 Abandoned Assets... 196 Idle Assets... 196 Fixed Asset Disposal Accounting... 196 Fixed Asset Disclosures... 197 General Fixed Asset Disclosures... 197 Change in Estimate Disclosures... 198 Intangible Asset Impairment Disclosures... 199 Intangible Asset Disclosures... 199 Not-for-Profit Fixed Asset Accounting... 200 Initial Recognition of Fixed Assets... 200 Restrictions on Contributed Assets... 201 Valuation of Contributed Assets... 202 Valuation of Contributed Services... 202 Valuation of Art, Historical Treasures, and Similar Items... 203 Depreciation of Fixed Assets... 203 Summary... 203 Review Questions... 204 Review Answers... 205 Chapter 21 Liabilities... 206 Learning Objectives... 206 Related Chapters... 206 Extinguishments of Liabilities... 206 Joint and Several Liability Arrangements... 206 Insurance-Related Assessments... 207 Liabilities Disclosures... 208 Summary... 209 Review Questions... 210 Review Answers... 211 Chapter 22 Asset Retirement and Environmental Obligations... 212 Learning Objectives... 212 Introduction... 212 Overview of Asset Retirement Obligations... 212 The Initial Measurement of an Asset Retirement Obligation... 213 Subsequent Measurement of an Asset Retirement Obligation... 214 Settlement of an Asset Retirement Obligation... 214 Overview of Environmental Obligations... 216 Measurement of Environmental Obligations... 217 Recoveries Related to Environmental Obligations... 218 Asset Retirement and Environmental Obligations Disclosures... 219 Asset Retirement Obligations... 219 Environmental Obligations... 220 x
Summary... 220 Review Questions... 222 Review Answers... 223 Chapter 23 Exit or Disposal Cost Obligations... 224 Learning Objectives... 224 Introduction... 224 Overview of Exit or Disposal Cost Obligations... 224 Exit or Disposal Cost Obligation Disclosures... 226 Summary... 226 Review Questions... 227 Review Answers... 228 Chapter 24 Commitments... 229 Learning Objectives... 229 Introduction... 229 Overview of Commitments... 229 Summary... 230 Review Questions... 231 Review Answers... 232 Chapter 25 Contingencies... 233 Learning Objectives... 233 Introduction... 233 Loss Contingencies... 233 Gain Contingencies... 234 Contingency Disclosures... 234 Summary... 235 Review Questions... 236 Review Answers... 237 Chapter 26 Guarantees... 238 Learning Objectives... 238 Introduction... 238 Overview of Guarantees... 238 Guarantee Disclosures... 239 Summary... 240 Review Questions... 241 Review Answers... 242 Chapter 27 Debt... 243 Learning Objectives... 243 Introduction... 243 Related Chapter... 243 General Debt Topics... 243 Sales of Future Revenues... 243 Increasing Rate Debt... 244 Debt with Conversion and Other Options... 244 Debt Instruments with Detachable Warrants... 244 Convertible Securities... 244 Beneficial Conversion Features... 245 Interest Forfeiture... 247 Induced Conversions... 248 Conversion by Exercise of Call Option... 248 Convertible Instruments Issued to Nonemployees as Payment... 248 Contingent Conversion Option... 248 xi
Own-Share Lending Arrangements... 248 Participating Mortgage Loans... 249 Product Financing Arrangements... 250 Debt Modifications and Extinguishments... 250 Troubled Debt Restructurings by Debtors... 252 Debt Presentation... 253 Callable Debt... 253 Classification of Debt that Includes Covenants... 253 Due on Demand Loans... 253 Increasing-Rate Debt... 254 Revolving Debt Agreements... 254 Short-Term Obligations to be Refinanced... 254 Subjective Acceleration Clauses... 254 Own-Share Lending Arrangements... 255 Participating Mortgage Loans... 255 Troubled Debt Restructurings by Debtors... 255 Debt Disclosures... 255 Long-Term Obligations... 255 Short-Term Obligations to be Refinanced... 255 Own-Share Lending Arrangements... 256 Participating Mortgage Loans... 256 Other Debt Disclosures... 256 Troubled Debt Restructurings by Debtors... 256 Summary... 257 Review Questions... 258 Review Answers... 259 Chapter 28 Equity... 260 Learning Objectives... 260 Introduction... 260 Related Chapters... 260 Overview of Equity... 260 Stock Dividends and Stock Splits... 261 Stock Dividend... 261 Stock Split... 261 Treasury Stock... 262 Purchase of Treasury Stock... 262 Resale of Treasury Stock... 262 Cost Method... 262 Constructive Retirement Method... 263 Equity-Based Payments to Non-Employees... 264 Initial Recognition... 264 Spinoffs and Reverse Spinoffs... 265 Equity Disclosures... 266 Rights and Privileges... 266 Preferred Stock... 266 Contingently Convertible Securities... 267 Redeemable Securities... 267 Treasury Stock... 267 Changes in Shareholders Equity... 267 Equity-Based Payments to Non-Employees... 268 Spinoffs and Reverse Spinoffs... 268 Summary... 268 Review Questions... 269 Review Answers... 270 xii
Chapter 29 Revenue Recognition... 271 Learning Objectives... 271 Introduction... 271 Related Chapter... 271 Overview of Revenue Recognition... 271 Public Company Revenue Recognition... 271 The Installment Method... 274 The Cost Recovery Method... 274 The Right of Return... 274 Extended Warranty Revenue... 275 Advertising Barter Transactions... 275 Management Fees... 276 Revenue Recognition for Multiple-Element Arrangements... 276 The Milestone Method... 279 Construction-Type and Production-Type Contracts... 279 Elements of Revenue... 280 Elements of Cost... 280 Back Charges... 281 Provisions for Losses... 281 Percentage of Completion Method... 282 Completed Contract Method... 283 Summary... 284 Gains and Losses... 286 Principal Agent Considerations... 286 Gross or Net Considerations... 286 Shipping and Handling Charges... 287 Expense Reimbursements... 287 Customer Payments and Incentives... 287 Accounting by the Supplier... 288 Accounting by the Customer... 288 Accounting by Service Providers for Payments to Equipment Producers or Resellers... 289 Presentation of Consideration Paid by Suppliers (Supplier Viewpoint)... 289 Presentation of Consideration Paid by Suppliers (Customer Viewpoint)... 290 Layaway Sales Arrangements... 290 Nonrefundable Up-Front Fee Arrangements... 290 Consignment Arrangements... 291 Contingent Rental Income... 292 Revenue Recognition Disclosures... 292 Private Company Disclosures... 292 Public Company Disclosures... 294 Summary... 294 Review Questions... 295 Review Answers... 296 Chapter 30 Compensation General... 297 Learning Objectives... 297 Introduction... 297 Related Chapters... 297 Overview of Compensation... 297 Compensated Absences... 297 Deferred Compensation Arrangements... 298 Lump-Sum Payments under Union Contracts... 299 Compensation Disclosures... 299 Summary... 299 Review Questions... 300 Review Answers... 301 xiii
Chapter 31 Compensation Retirement Benefits... 302 Learning Objectives... 302 Introduction... 302 Related Chapters... 302 Overview of Retirement Benefits... 302 Defined Benefit Plans... 303 Expense Attribution for Delayed Vesting... 305 Discount Rates... 306 Settlements and Curtailments... 306 Termination Benefits... 307 Combined Pension Plans... 307 Defined Contribution Plans... 307 Presentation of Retirement Benefit Information... 308 Retirement Benefit Disclosures... 308 Defined Benefit Plan Disclosures for Public Companies... 308 Defined Benefit Plan Disclosures for Private Companies... 311 Disclosures for Defined Benefit Plans in Interim Periods... 312 Disclosures for Defined Contribution Plans... 312 Summary... 312 Review Questions... 313 Review Answers... 314 Chapter 32 Compensation Stock Compensation... 315 Learning Objectives... 315 Introduction... 315 Related Chapters... 315 Overview of Stock Compensation... 315 The Volatility Concept... 318 Fair Value Calculation Alternatives... 319 Awards Classified as Equity... 321 Award Measurement Problems... 321 Contingent Features... 321 Award Modifications... 321 Income Tax Effects... 322 Awards Classified as Liabilities... 322 Employee Share Purchase Plans... 323 Stock-Based Compensation Disclosures... 324 Summary... 326 Review Questions... 327 Review Answers... 328 Chapter 33 Other Expenses... 329 Learning Objectives... 329 Introduction... 329 Related Chapter... 329 Startup Costs... 329 Insurance Costs... 329 Retroactive Contracts... 330 Claims-Made Contracts... 330 Multiple-Year Retrospectively Rated Contracts... 331 Contributions Made... 332 Real and Personal Property Taxes... 332 Advertising Costs... 332 Electronic Equipment Waste Obligations... 333 Business and Technology Reengineering... 333 Other Expenses Disclosures... 333 xiv
Insurance Cost Disclosures... 333 Real and Personal Property Tax Disclosures... 333 Advertising Cost Disclosures... 334 Summary... 334 Review Questions... 335 Review Answers... 336 Chapter 34 Research and Development... 337 Learning Objectives... 337 Introduction... 337 Related Chapters... 337 Overview of Research and Development... 337 Research and Development Disclosures... 339 Summary... 339 Review Questions... 340 Review Answers... 341 Chapter 35 Income Taxes... 342 Learning Objectives... 342 Introduction... 342 Related Chapters... 342 Overview of Income Taxes... 342 Accounting for Income Taxes... 344 Tax Positions... 344 Deferred Tax Expense... 345 Applicable Tax Rate... 346 Interest and Penalties... 346 Intraperiod Tax Allocation... 346 Taxes Related to Undistributed Earnings... 347 Interim Reporting... 348 Income Taxes Presentation... 350 Income Taxes Disclosure... 350 Balance Sheet... 350 Income Statement... 351 Other... 351 Summary... 352 Review Questions... 353 Review Answers... 354 Chapter 36 Business Combinations... 355 Learning Objectives... 355 Introduction... 355 Related Chapters... 355 Overview of Business Combinations... 355 Identifiable Assets and Liabilities, and Noncontrolling Interests... 357 Goodwill or Gain from Bargain Purchase... 359 Goodwill Calculation... 359 Bargain Purchase... 359 Reverse Acquisitions... 360 Related Issues... 361 Acquisition of Assets... 361 Transactions between Entities under Control of Same Parent... 362 Pushdown Accounting... 362 Income Taxes... 362 Business Combination Disclosures... 363 General Disclosures... 363 xv
Identifiable Assets and Liabilities, and any Noncontrolling Interest... 365 Goodwill or Gain from Bargain Purchase... 365 Reverse Acquisitions... 366 Transactions between Entities under Control of Same Parent... 366 Income Taxes... 366 Summary... 367 Review Questions... 368 Review Answers... 369 Chapter 37 Fair Value Measurement... 370 Learning Objectives... 370 Introduction... 370 The Fair Value Concept... 370 Fair Value Differences from Actual Prices Paid... 371 Fair Value Measurement Approaches... 372 The Net Asset Value Variation... 373 Fair Value Measurements for Liabilities... 374 Use of Multiple Measurements... 374 Fair Value Disclosures... 374 Summary... 376 Review Questions... 377 Review Answers... 378 Chapter 38 Financial Instruments... 379 Learning Objectives... 379 Introduction... 379 Related Chapters... 379 Off-Balance Sheet Credit Risk... 379 Fair Value Option... 379 Registration Payment Arrangements... 380 Financial Instruments Disclosures... 381 Fair Value of Financial Instruments... 381 Concentrations of Credit Risk of Financial Instruments... 382 Market Risk of Financial Instruments... 382 Fair Value Option... 383 Registration Payment Arrangements... 384 Summary... 384 Review Questions... 385 Review Answers... 386 Chapter 39 Foreign Currency Matters... 387 Learning Objectives... 387 Introduction... 387 Related Chapters... 387 Foreign Currency Transactions... 387 Financial Statement Translation... 388 Determination of Functional Currency... 388 Translation of Financial Statements... 389 Use of Average Exchange Rates... 391 Hyperinflationary Effects... 391 Derecognition of a Foreign Entity Investment... 392 Foreign Currency Disclosures... 392 Summary... 393 Review Questions... 394 Review Answers... 395 xvi
Chapter 40 Interest... 396 Learning Objectives... 396 Introduction... 396 Overview of Capitalized Interest... 396 Assets for Which You Must Capitalize Interest... 397 Assets for Which You Do Not Capitalize Interest... 397 The Interest Capitalization Period... 397 The Capitalization Rate... 399 Calculating Interest Capitalization... 400 Overview of Imputed Interest... 401 Interest Disclosures... 403 Capitalized Interest Disclosures... 403 Imputed Interest Disclosures... 404 Summary... 404 Review Questions... 405 Review Answers... 406 Chapter 41 Leases... 407 Learning Objectives... 407 Introduction... 407 Related Chapter... 407 Overview of Leases... 407 Capital Lease Criteria... 407 Lease Classification by Lessor... 409 Lease Reassessment... 410 Accounting for Leasehold Improvements... 410 Special Lease Terms... 411 Operating Leases... 411 Operating Lease Treatment by Lessee... 411 Operating Lease Treatment by Lessor... 412 Capital Leases... 412 Capital Lease Treatment by Lessee... 412 Capital Lease Treatment of Sublease by Lessee... 413 Capital Lease Treatment by Lessor (Sales-Type Lease)... 413 Capital Lease Treatment by Lessor (Direct Financing Lease)... 414 Capital Lease Treatment by Lessor (Leveraged Lease)... 415 Capital Lease Treatment by Lessor (Broadly Applicable)... 416 Sale-Leaseback Transactions... 416 Sale-Leaseback Treatment by Lessee... 416 Sale-Leaseback Treatment by Lessor... 417 Lease Disclosures... 417 Lessee Disclosures... 418 Lessor Disclosures... 419 Summary... 420 Review Questions... 421 Review Answers... 422 Chapter 42 Nonmonetary Transactions... 423 Learning Objectives... 423 Introduction... 423 Related Chapter... 423 Overview of Nonmonetary Transactions... 423 Purchases and Sales of Inventory with the Same Counterparty... 424 Barter Transactions... 425 Exchanges Involving Monetary Consideration... 426 Exchanges of a Nonfinancial Asset for a Noncontrolling Ownership Interest... 428 xvii
Nonmonetary Transaction Disclosures... 429 Summary... 429 Review Questions... 430 Review Answers... 431 Chapter 43 Related Party Disclosures... 432 Learning Objectives... 432 Introduction... 432 Overview of Related Parties... 432 Related Party Disclosures... 432 Summary... 433 Review Questions... 434 Review Answers... 435 Chapter 44 Subsequent Events... 436 Learning Objectives... 436 Introduction... 436 Overview of Subsequent Events... 436 Subsequent Event Disclosures... 437 Summary... 437 Review Questions... 438 Review Answers... 439 Glossary... 441 Index... 453 xviii