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
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
