Conceptual Framework & IFRS Public

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Conceptual Framework & IFRS

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GAAP: Generally Accepted Accounting Principles = General Purpose Financial Reporting Framework by FASB & SEC Financial Reporting Framework's criteria: Recognition  Measurement Presentation Disclosure 2 General purpose frameworks: GAAP or IFRS nonpublic entities - OCBOA: Other Comprehensive Basis of Accounting Special Purpose Frameworks: Cash Basis Recognize revenues when they are received (not earned), Expenses are recognized when they are paid (not incurred), Fixed assets are expensed and not capitalized. Modified Cash Basis Hybrid b/w cash and accrual Assets can be capitalized and taxes & inventory can be accrued Tax Basis Revenues and expenses are recognized for financial reporting purposes as income tax return Could be cash-basis or accrual-basis Contractual Basis Party to a contract  Regulatory Basis Governmental regulatory agency to report to FRF for SMEs = Financial Reporting Framework for Small and Medium-Sized Entities Under accrual basis, revenues are recognized in the periods in which they are earned (not received), and expenses are recognized when they are incurred (not paid).  Alternative Accounting Approaches for Nonpublic Entities: Private Company Council (PCC) - evaluate existing GAAP to determine disclosures (nonpublic may be exempt) FASB conceptual framework for accounting: Objectives of financial reporting: USEFUL 1. Relevance  Predictive Value Confirmatory Value (Feedback) 2. Material 3. Faithful Representation Free from Error Neutral  Completeness 4. Enhancing Qualitative Characteristics Comparability (Consistency) Understandability Timeliness Verifiability  Constraint: Cost/Benefit
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Elements of Financial Statements: A full set of F/S includes: Stmt of Position (B/S) Stmt of Earnings Fin & Comprehensive Income (I/S) Stmt of Cash Flows Stmt of Changes in Owners' Equity (Stmt of Investment by & Distributions to Owners) 10 key elements - 3 Basic elements are: Assets Liab Equity or Net Assets: Equity: 3 elements - 4. Contributions/ investments by owners 5. Distributions to owners (dividends) 6. Comprehensive Income: DENT - Derivative Cash Flow Hedges Excess adjustment of Pension PBO & FV of plan assets @ yr-end Net unrealized gains/losses on "available-for-sale" securities Translation adj for foreign currency Comprehensive Income: capital maintenance concept- Physical Capital Maintenance Concept - recognize an event when an asset is sold Financial Capital Maintenance Concept  - when change in value of an asset (gain or loss) -GAAP Comprehensive income: 7. Revenues, 8. Expenses, 9.  Gains, 10. Losses Accounting Rules & Concepts: Consistency Conservatism Cost/Benefit Matching Allocation Full Disclosure Recognition Realization Recognition & Measurement: Recognize a F/S element & how to measure it - meet definition, monetary terms, relevant & faithful representation Monetary Terms: Historical Cost Replacement Cost FMV - Fair Market Value NRV - Net Realizable Value PV - Present Value
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Fair Value & Option to Report Fin Assets & Liab @ Fair Value Recognize various items @ fair value: Trading Securities or Available-For-Sale or Market-to-Market Investments in equity securities (business combination) Impairment losses (= reduction in carrying value of asset) All derivatives are reported @ fair value Exceptions that are not qualify for FV: Pension, post-employment benefits Financial Equity Instruments  Share based pmts and stock options Qualify for the Fair Value election: Most investments: Available-for-sale w unrealized gains/losses, held to maturity securities (from amortized cost) Firm commitments, like forward exchange contracts, foreign currency, etc. Unrealized gains/losses are reported in income FV = the price that would be received to sell an asset or paid to transfer a liab in an orderly transaction b/w market participants @ measurement date 3 valuation techniques: MIC Market Approach - Market transactions Income Approach - Revenue, cost savings, earnings, etc. Cost Approach - replacement cost 3 levels of inputs for valuation: Level 1 - most reliable (observable data from actual market) Level 2 - observable but not identical assets/liab Level 3 - unobservable data Disclosures - consistency & comparability in FV measurement Using Cash Flow info & PV in accounting measurements: Risk - probability to receive or pay the cash Timing - pmts are expected to be received IR - Market rates  Amount of cash flows: Traditional Approach - most likely cash flow amounts Expected Approach - weighted average
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Revenue & Expense Recognition: Accrual Accounting - revenues are recognized when earned and expenses when incurred (not received or paid) Revenues or Gains are recognized when: Earned - goods are delivered Realizable - collect or claim to cash Revenue Recognition: Binding arrangement exists (contract) Services rendered/ delivered Fixed or determinable price exists Collection is reasonably assured Sales = buyer has a right of return (reasonably estimable or with expiration date) Recognize Expenses or Losses as Incurred: Economic benefit is used up/ consumed or assets lose future benefit (incurred) Cause & Effect - expenses that produce revenue at identifiable points in time to match directly to revenue Systematic & Rational Allocation - produce revenue over long periods (reasonable allocation, e.g. dep) Immediate Recognition - expenses can't be directly related to specific benefits (e.g. salaries - SG&A exp) Risks & Uncertainties: 4 areas of disclosure: Nature of operations - how entity generate revenue Use of estimates - GAAP or other frameworks Certain significant estimates - reasonably possible change in estimate Current vulnerability associated with certain concentrations - entity does not diversify, possible future events FASB Accounting Std Codification: Stmts on Fin Accounting Concepts (SFAC) Emerging Issues Task Force (EITF) - account for new & unusual financial transactions Summary of significant accounting policies (notes in F/S). Summary of significant assumptions - for prospective F/S Other notes to F/S
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IFRS - Int'l Fin Reporting Std Issued by IASB - Int'l Accounting Std Board (Principle-based/ Judgment vs. Rules-based as GAAP) Convergence Project: diff b/w GAAP vs IFRS - Terminology and definitions Recognition - diff criteria used on F/S Measurement - diff approaches for measuring F/S Presentation - diff in certain items appearing on F/S Disclosure - diff in amount and nature of disclosures Conceptual Framework: Reporting entity Elements of F/S Measurement, Presentation, & Disclosure Objective of General Purpose Fin Reporting: Based on Accrual Basis and Going Concern concept: Assess amounts, timing, and uncertainty of future cash inflows to evaluate returns Prospects for future cash inflows depends on resources available Depend on efficiently and effectively management and governance based on economic and business factors Qualitative Characteristics of Useful Fin Info: Relevant: Predictive Value - predict future outcomes Confirmatory Value - provides feedback abt events/ transactions Materiality Influence users' decisions Faithfully Representation: Freedom From Error Neutrality Completeness Enhance the usefulness of Fin Info: Comparability Understandability Timeliness Verifiability Constraints:  Cost/Benefit Going Concern - Assumption 5 Basic F/S Elements or Fin Position (Performance): Assets - Resources Liab - Obligation Equity - Residual IR in the assets of entity (after deduct liab) Income - Increases Economic Benefits Expenses - Decrease Economic Benefits Capital Maintenance Adj: Financial or Physical Capital - Gain/Loss to Assets/Liab IFRS - Profit (NI for GAAP) Recognition & Measurement: Probability of occurrence Reliable Measurement  Measurement Approaches: Historical Cost Current Costs Realizable or Settlement Value Present Value 2 Basic concepts of Capital: Financial Capital Maintenance  Physical Capital Maintenance FASB (10) vs IASB (5) Framework: 10 FASB Elements: NI Assets Liab Equity or Net Assets Contributions/ Investments by Owners Distributions to Owners Comprehensive Income (DENT) Revenue  Expense Gains Losses 5 IFRS Elements: Profit Assets Liab Equity Income Expenses - capital maintenance adj Revenue is measured @ FV & Disclosures will include: Sales of goods Rendering of services IR Royalties Dividends
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