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
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
