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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

 

 

 

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:

  1. Nature of operations - how entity generate revenue
  2. Use of estimates - GAAP or other frameworks
  3. Certain significant estimates - reasonably possible change in estimate
  4. 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

 

 

 

 

 

 

 

 

Report Fin Assets & Liab @ Fair Value

Stephanie Wong
Module by Stephanie Wong, updated more than 1 year ago
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