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:
- 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
