CPA Wiley Financial Exam Review 2013

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CONTENTS
Preface
About the Author
About the Contributor
Basic Concepts – Module 9
Objectives of Financial Reporting
Basic Rules & Concepts
Inventories – Module 10
Inventories
Long-Term Construction Contracts
Fixed Assets – Module 11
Property, Plant, & Equipment
Intangibles
Monetary Assets & Liabilities – Module 12
Leases – Module 13
Accounting for Leases
Bonds
Troubled Debt Restructuring
Pension Plans
Postretirement Benefits
Deferred Taxes – Module 14
Accounting for Income Taxes (ASC 740/FAS 109)
Stockholders’ Equity – Module 15
Stockholders’ Equity
Investments – Module 16
Methods of Reporting Investments
Statement of Cash Flows – Module 17
Statement of Cash Flows
Consolidated Statements – Module 18
Business Combinations
Consolidations
Derivative Instruments – Module 19
Segment Reporting – Module 20
Segment Reporting
Partnership
Foreign Currency
Interim Financial Statements
Personal Financial Statements
Governmental (State and Local) Accounting – Module 21
Governmental (State and Local) Accounting
Not-For-Profit Accounting – Module 22
Accounting for Nonprofit Entities
Index

Copyright © 2013 by John Wiley & Sons, Inc. All rights reserved.
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ISBN: 978-1-118-41059-2 (paperback); 978-1-118-60749-7 (ebk); 978-1-118-60751-0 (ebk); 978-1-118-60770-1 (ebk)
PREFACE
This publication is a comprehensive, yet simplified study program. It provides a review of all the basic skills and concepts tested on the CPA exam, and teaches important strategies to take the exam faster and more accurately. This tool allows you to take control of the CPA exam.
This simplified and focused approach to studying for the CPA exam can be used:
As a handy and convenient reference manual
To solve exam questions
To reinforce material being studied
Included is all of the information necessary to obtain a passing score on the CPA exam in a concise and easy-to-use format. Due to the wide variety of information covered on the exam, a number of techniques are included:
Acronyms and mnemonics to help candidates learn and remember a variety of rules and checklists
Formulas and equations that simplify complex calculations required on the exam
Simplified outlines of key concepts without the details that encumber or distract from learning the essential elements
Techniques that can be applied to problem solving or essay writing, such as preparing a multiple-step income statement, determining who will prevail in a legal conflict, or developing an audit program
Pro forma statements, reports, and schedules that make it easy to prepare these items by simply filling in the blanks
Proven techniques to help you become a smarter, sharper, and more accurate test taker
This publication may also be useful to university students enrolled in Intermediate, Advanced and Cost Accounting; Auditing, Business Law, and Federal Income Tax classes; Economics, and Finance classes.
Good Luck on the Exam,
Ray Whittington, PhD, CPA
ABOUT THE AUTHOR
Ray Whittington, PhD, CPA, CMA, CIA, is the dean of the College of Commerce at DePaul University. Prior to joining the faculty at DePaul, Professor Whittington was the Director of Accountancy at San Diego State University. From 1989 through 1991, he was the Director of Auditing Research for the American Institute of Certified Public Accountants (AICPA), and he previously was on the audit staff of KPMG. He previously served as a member of the Auditing Standards Board of the AICPA and as a member of the Accounting and Review Services Committee and the Board of Regents of the Institute of Internal Auditors. Professor Whittington has published numerous textbooks, articles, monographs, and continuing education courses.
ABOUT THE CONTRIBUTOR
Natalie T. Churyk, PhD, CPA is the Caterpillar Professor of Accountancy at Northern Illinois University. She teaches in the undergraduate and M.A.S. programs as well as developing and delivering continuing professional education in Northern Illinois University’s CPA and CIA Review programs. Professor Churyk has published in professional and academic journals. She serves on state and national committees relating to education and student initiatives and is a member of several editorial review boards. Professor Churyk is a coauthor on two textbooks: Accounting and Auditing Research: Tools and Strategies and Mastering the Codification and eIFRS: A Case Approach.
Basic Concepts – Module 9
OBJECTIVES OF FINANCIAL REPORTING
Financial statements are designed to meet the objectives of financial reporting:
Balance Sheet Direct Information Financial Position Statement of Earnings and Comprehensive Income Direct Information Entity Performance Statement of Cash Flows Direct Information Entity Cash Flows Financial Statements Taken As a Whole Indirect Information Management & Performance Qualitative Characteristics of Accounting Information
IFRS® and US Conceptual Framework as converged
Fundamental characteristics/Decision usefulness Enhancing characteristics Relevance Comparability Predictive value Verifiability Feedback value Timeliness Materiality Understandability Faithful representation Constraints Completeness Benefit vs. costs Neutrality Free from error Elements of Financial Statements
IFRS Elements
Assets Liabilities Equity Income (includes both revenues and gains) Expense (includes expenses and losses) BASIC RULES & CONCEPTS
Consistency Realization Recognition Allocation Matching Full disclosure Revenue Recognition
Accrual method Collection reasonably assured Degree of uncollectibility estimable Installment sale Collection not reasonably assured Cost recovery Collection not reasonably assured No basis for determining whether or not collectible Installment Sales Method
Installment receivable balance Cash collections × Gross profit percentage × Gross profit percentage = Deferred gross profit (balance sheet) = Realized gross profit (income statement) Cost Recovery Method
All collections applied to cost before any profit or interest income is recognized
Converting from Cash Basis to Accrual Basis
Revenues
Cash (amount received) xx Increase in accounts receivable (given) xx Decrease in accounts receivable (given) xx Revenues (plug) xx Cost of Sales
Cost of sales (plug) xx Increase in inventory (given) xx Decrease in
accounts payable (given) xx Decrease in inventory (given) xx Increase in accounts payable (given) xx Cash (payments for merchandise) xx Expenses
Expense (plug) xx Increase in prepaid expenses (given) xx Decrease in accrued expenses (given) xx Decrease in prepaid expenses (given) xx Increase in accrued expenses (given) xx Cash (amount paid for expense) xx Balance Sheet
Current Assets Current Liabilities Cash Short-term debt Trading securities Accounts payable Current securities available for sale Accrued expenses Accounts receivable Current income taxes payable Inventories Current deferred tax liability Prepaid expenses Current portion of long-term debt Current deferred tax asset Unearned revenues Long-Term Investments Long-Term Debt Noncurrent securities available for sale Long-term notes payable Securities held to maturity Bonds payable Investments at cost or equity Noncurrent deferred tax liability Property, Plant, & Equipment Stockholders’ Equity Intangibles Preferred stock Other Assets Common stock Deposits Additional paid-in capital Deferred charges Retained earnings Noncurrent deferred tax asset Accumulated other comprehensive income Current Assets & Liabilities
Assets Liabilities Economic resource Economic obligation Future benefit Future sacrifice Control of company Beyond control of company Past event or transaction Past event or transaction Current Assets Current Liabilities Converted into cash or used up Paid or settled OR Requires use of current assets Longer of: Longer of: One year One year One accounting cycle One accounting cycle IFRS and Current Liabilities
Short-term obligations expected to be refinanced must be classified as current liabilities unless there is an agreement in place prior to the balance sheet date.
A “provision” is a liability that is uncertain in timing or amount If outcome is probable and measurable, it is not considered a contingency Probable means greater than 50
A “contingency is not recognized because it is not probable that an outflow will be required or the amount cannot be measured reliably Contingencies are disclosed unless
probability is remote
Special Disclosures
Significant Accounting Policies
Inventory method Depreciation method Criteria for classifying investments Method of accounting for long-term construction contracts Subsequent Events
An event occurring after the balance sheet date but before the financial statements are issued or available to be issued. Measured through the issuance date.
Two types of events are possible:
1. Events that provide additional evidence about conditions existing at the balance sheet date (recognize in the financial statements) 2. Events that provide evidence about conditions that did not exist at the balance sheet date but arise subsequent to that date (disclose in the notes) IFRS: Subsequent events measured through the date the financial statements are authorized to be issued.
Related-Party Transactions
Exceptions:
Salary Expense reimbursements Ordinary transactions Reporting the Results of Operations
Preparing an Income Statement
Multiple step Single step Revenues Revenues – Cost of sales + Other income = Gross profit + Gains – Operating expenses = Total revenues Selling expenses – Costs and expenses G & A expenses Cost of sales = Operating income Selling expenses + Other income G & A expenses + Gains Other expenses – Other expenses Losses – Losses Income tax expense = Income before taxes = Income from continuing operations – Income tax expense = Income from continuing operations Computing Net Income
Income from continuing operations (either approach)
± Discontinued operations ± Extraordinary items = Net income (Cumulative changes section was eliminated by precodification SFAS 154)
IFRS Income Statement
Revenue (referred to as income)
Finance costs (interest expense)
Share of profits and losses of associates and joint ventures accounted for using equity method
Tax expense
Discontinued operations
Profit or loss
Noncontrolling interest in profit and loss
Net profit (loss) attributable to equity holders in the parent
No extraordinary items under IFRS
Errors Affecting Income
Error (ending balance)
Current stmt Prior stmt Asset overstated Overstated No effect Asset understated Understated No effect Liability overstated Understated No effect Liability understated Overstated No effect Error (beginning balance – ending balance is correct)
Asset overstated Understated Overstated Asset understated Overstated Understated Liability overstated Overstated Understated Liability understated Understated Overstated Error (beginning balance – ending balance is not correct)
Asset overstated No effect Overstated Asset understated No effect Understated Liability overstated No effect Understated Liability understated No effect Overstated Extraordinary Items
Classification as extraordinary − 2 requirements (both must apply)
Unusual in nature
Infrequent of occurrence
One or neither applies – component of income from continuing operations
Extraordinary
A hail storm damages all of a farmer’s crops in a location where hail storms have never occurred
Acts of nature (usually)
Not Extraordinary
Gains or losses on sales of investments or property, plant, & equipment
Gains or losses due to changes in foreign currency exchange rates
Write-offs of inventory or receivables
Effects of major strikes or changes in value of investments
Change in Accounting Principle: Allowed only if required by new accounting principles or change to preferable method
Use retrospective application of new principle:
1) Calculate revised balance of asset or liability as of beginning of period as if new
principle had always been in use. 2) Compare balance to amount reported under old method. 3) Multiply difference by 100% minus tax rate. 4) Result is treated on books as prior period adjustment to beginning retained earnings. a) Note: Indirect effects (e.g., changes in bonus plans) are reported only in period of change. 5) All previous periods being presented in comparative statements restated to new principle. 6) Beginning balance of earliest presented statement of retained earnings adjusted for all effects going back before that date. 7) IFRS: Similar rules—Voluntary change must provide more reliable and relevant information. Journal entry:
Asset or liability xxx Retained earnings xxx Current or deferred tax liability (asset) xxx Or Retained earnings xxx Current or deferred tax liability (asset) xxx Asset or liability xxx Special Changes
Changes in accounting principle are handled using the prospective method under limited circumstances. No calculation is made of prior period effects and the new principle is simply applied starting at the beginning of the current year when the following changes in principle occur:
Changes in the method of depreciation, amortization, or depletion
Changes whose effect on prior periods is impractical to determine (e.g. changes to LIFO when records don’t allow computation of earlier LIFO cost bases)
(Note: the method of handling changes in accounting principle described here under ASC 250-10 replaces earlier approaches, which applied the cumulative method to most changes in accounting principle. Precodification SFAS 154 abolished the use of the cumulative method.)
Change in Estimate
No retrospective application
Change applied as of beginning of current period
Applied in current and future periods
Error Corrections
Applies to:
Change from unacceptable principle to acceptable principle
Errors in prior period financial statements
When error occurred:
Discontinued Operations
When components of a business are disposed of, their results are reported in discontinued operations:
Component – An asset group whose activities can be distinguished from the remainder of the entity both operationally and for financial reporting purposes.
Disposal – Either the assets have already been disposed of or they are being held for sale and the entity is actively searching for a buyer and believes a sale is probable at a price that can be reasonably estimated.
All activities related to the component are reported in discontinued operations, including those occurring prior to the commitment to dispose and in prior periods being presented for comparative purposes.
Reporting Discontinued Operations
Lower section of the income statement:
After income from continuing operations
Before extraordinary items
Reported amount each year includes all activities related to the component from operations as well as gains and losses on disposal, net of income tax effects
Expected gains and losses from operations in future periods are not reported until the future period in which they occur.
Impairment loss is included in the current period when the fair market value of the component is believed to be lower than carrying amount based on the anticipated sales price of the component in future period.
Reporting Comprehensive Income
Statement of Comprehensive Income required as one of financial statements
May be part of Income statement
May be separate statement
Begin with net income
Add or subtract items of other comprehensive income
Other comprehensive income includes:
Current year’s unrealized gains or losses on securities available for sale
Current year’s foreign currency translation adjustments
Current year’s unrealized gains or losses resulting from changes in market values of certain derivatives being used as cash flow hedges
Accounting for Changing Prices
Accounting at Current Cost
Assets & liabilities reported at current amounts
Income statement items adjusted to current amounts
Inventory reported at replacement cost
Cost of sales = Number of units sold × Average current cost of units during period
Differences in inventory & cost of sales treated as holding gains or losses
Depreciation & amortization – Computed using same method & life based on current cost
Accounting for Changes in Price Level
Purchasing power gains & losses relate only to monetary items
Monetary assets – money or claim to receive money such as cash & net receivables
Monetary liabilities – obligations to pay specific amounts of money
Company may be monetary creditor or debtor
Monetary creditor – monetary assets > monetary liabilities
Monetary debtor – monetary liabilities > monetary assets
In periods of rising prices
Monetary creditor will experience purchasing power loss
Monetary debtor will experience purchasing power gain
SEC Reporting Requirements
Regulation S-X describes form and content to be filed
Regulation S-K describes information requirements
Form S-1 (US)/F-1 (foreign)—registration statement
Form 8-K (US)/6-K (foreign)—material event
Form 10-K (US)/20F (foreign)—annual report
Form 10Q—quarterly report
Schedule 14A—proxy statement
Regulation AB—describes asset-backed securities reporting
Regulation Fair Disclosure (FD)—mandates material information disclosures
Fair Value Measurements
Six-step application process
1. Identify asset or liability to measure 2. Determine principle or advantageous market 3. Determine valuation premise 4. Determine valuation technique 5. Obtain inputs (levels) 6. Calculate fair value Multiple disclosures for assets/liabilities measured at fair value on a recurring/nonrecurring basis
Fair Value Concepts
Fair value—the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price) under current market conditions
Principal market (greatest volume of activity)
Most advantageous market (maximizes price received or minimizes amount paid)
Highest and best use—maximize the value of the asset or group of assets
Valuation techniques
Market approach—uses prices and relevant market transaction information Income
approach—converts future amounts to a single current (discounted) amount Cost approach—current replacement cost Fair value hierarchy (level 1, 2, and 3 inputs)
Level 1—quoted market prices Level 2—directly or indirectly observable inputs other than quoted market prices Level 3—unobservable inputs Fair value option—an election to value certain financial assets and financial liabilities at fair value
Inventories – Module 10
INVENTORIES
Goods In Transit
Abnormal costs expensed in current period instead of being included in inventory:
Idle facility expense
Wasted materials in production
Double freight when items returned and redelivered
Cost of Goods Sold
Beginning inventory
+ Net purchases = Cost of goods available for sale – Ending inventory = Cost of goods sold Inventory Errors
Periodic Versus Perpetual
Periodic Perpetual Buy merchandise: Purchases Inventory Accounts
payable Accounts payable Sell merchandise Accounts receivable Accounts receivable Sales Sales Cost of goods sold Inventory Record cost of goods sold Ending inventory (count) Cost of goods sold (plug) Purchases (net amount) Beginning inventory (balance) FIFO – Same under either method LIFO – Different amounts for periodic and perpetual Average – Different amounts for periodic and perpetual Periodic – Weighted-average Inventory Valuation Methods
Applying LIFO
Step 1 – Determine ending quantity Step 2 – Compare to previous period’s ending quantity Step 3 – Increases – Add new layer Step 4 – Small decreases (less than most recent layer) – Reduce most recent layer Step 5 – Large decreases (more than most recent layer) – Eliminate most recent layer or layers and decrease next most recent layer Step 6 – Apply appropriate unit price to each layer For each layer:
Inventory quantity × Price per unit = Inventory value
Application of LIFO
Information given:
Ending Quantity Price per unit Year 1 10,000 units $5.00 Year 2 12,000 units $5.50 Year 3 15,000 units $6.00 Year 4 13,500 units $6.50 Year 5 11,200 units $7.00 Year 6 13,200 units $7.50 Information applied:
Year 1:
Year 2:
Year 3:
Year 4:
Year 5:
Year 6:
Dollar-Value LIFO
Less cumbersome than LIFO for inventory consisting of many items
Combines inventory into pools
Increases in some items within a pool offset decreases in others
Applying Dollar-Value LIFO
Step 1 – Determine ending inventory at current year’s prices Step 2 – Divide by current price level index to convert to base year prices Step 3 – Compare to previous period’s ending inventory at base year prices Step 4 – Increases – Add new layer at base year prices Step 5 – Small decreases (less than most recent layer) – Reduce most recent layer Step 6 – Large decreases (more than most recent layer) – Eliminate most recent layer or layers and decrease next most recent layer Step 7 – Apply appropriate unit price to each layer For each layer:
Application of Dollar-Value LIFO
Information given:
Ending Inventory at Current Prices Price level index Year 1 $200,000 100 Year 2 243,800 106 Year 3 275,000 110 Year 4 255,200 116 Information applied:
Year 1
Year 2:
$243,800 ÷ 1.06 = $230,000 (at base year prices)
Year 3:
$275,000 ÷ 1.10 = $250,000 (at base year prices)
Year 4:
$255,200 ÷ 1.16 = $220,000 (at base year prices)
Dollar-Value LIFO – Calculating a Price Level Index
Simplified LIFO – Company uses a published index Double Extension Method – Cumulative index
Link Chain Method – Annual index
Lower of Cost or Market
Gross Profit Method for Estimating Inventory
Conventional Retail (Lower of Cost or Market)
IFRS: Inventory
LIFO Not permissible
Lower of cost or net realizable value (LCNRV) on item-by-item basis
Biological assets carried at fair value less costs to sell at the point of harvest.
LONG-TERM CONSTRUCTION CONTRACTS
Percentage of Completion
Use when:
Estimates of costs are reasonably dependable
Estimates of progress toward completion
Reporting profit
Recognized proportionately during contract
Added to construction in process
Balance sheet amount
Current asset – excess of costs and estimated profits over billings
Current liability – excess of billings over costs and estimated profits
Calculating profit
Step 1 – Total profit Contract price xxx Total estimated cost Cost incurred to date (1) xxx Estimated cost to complete + xxx Total estimated cost (2) – xxx Total estimated profit (3) = xxx Step 2 – % of completion (Cost to cost method) Costs incurred to date (1) ÷ Total estimated cost (2) = % of completion (4)
Step 3 – Profit to date % of completion (4) × Total estimated profit (3) = Estimated profit to date (5)
Step 4 – Current period’s profit Estimated profit to date (5) – Profit previously recognized = Current period’s profit
Recognizing Losses
When loss expected:
Estimated loss xxx + Profit recognized to date xxx = Amount of loss to recognize xxx Completed Contract
Income statement amount
Profit recognized in period of completion
Loss recognized in earliest period estimable
Balance sheet amount
Current assets – excess of costs over billings
Current liabilities – excess of billings over costs
IFRS Construction Contracts
Prohibits completed contract method

Fixed Assets – Module 11
PROPERTY, PLANT, & EQUIPMENT
General Rule
Capitalized amount = Cost of asset + Costs incurred in preparing it for its intended use
Cost of asset = FMV of asset received or
Cash paid + FMV of assets given
Gifts:
Asset (FMV) xx Income xx Other capitalized costs for assets acquired by gift or purchase:
Shipping Insurance during shipping Installation Testing Land and Building
Total cost:
Purchase price Delinquent taxes assumed Legal fees Title insurance Allocation to land and building – Relative Fair Market Value Method
FMV of land + FMV of building = Total FMV Land = FMV of land ÷ Total FMV × Total Cost
Building = FMV of building ÷ Total FMV × Total Cost
Capitalization of Interest
Capitalize on:
Assets constructed for company’s use Assets manufactured for resale resulting from special order Do not capitalize on:
Inventory manufactured in the ordinary course of business Interest capitalized:
Interest on debt incurred for construction of asset Interest on other debt that could be avoided by repayment of debt
Computed on:
Weighted-average accumulated expenditures Costs Incurred After Acquisition
Capitalize if:
Bigger – the cost makes the asset bigger, such as an addition to a building
Better – the cost makes the asset better, such as an improvement that makes an asset perform more efficiently
Longer – the cost makes the asset last longer, it extends the useful life
Do not capitalize:
Repairs and maintenance Depreciation and Depletion
Basic Terms:
Straight-line rate = 100% ÷ Useful life (in years) Book value = Cost – Accumulated depreciation Depreciable basis = Cost – Salvage value Selection of Method:
Use straight-line when benefit from asset is uniform over life
Use accelerated when:
Asset more productive in earlier years
Costs of maintenance increase in later years
Risk of obsolescence is high
Use units-of-production when usefulness decreases with use
Straight-Line Double-Declining Balance Annual depreciation = Annual depreciation = Depreciable basis Book value × Straight-line rate × Straight-line rate × 2 Partial year = Partial year = Annual depreciation Book value × Portion of year × Straight-line rate × 2 × Portion of year Sum-of-the-Years’ Digits
Annual depreciation = Depreciable basis × Fraction
Partial year:
1st year = 1st year’s depreciation × portion of year 2nd year = Remainder of 1st year’s depreciation + 2nd year’s depreciation × portion of year 3rd year = Remainder of 2nd year’s depreciation + 3rd year’s depreciation × portion of year Units-of-Production
Depreciation rate = Depreciable basis ÷ Total estimated units to be produced (hours)
Annual depreciation = Depreciation rate × Number of units produced (hours used)
Group or Composite
Based on straight-line
Gains or losses not recognized on disposal
Cash (proceeds) xx Accumulated depreciation (plug) xx Asset (original cost) xx Impairment
Occurs if undiscounted future cash flow less than asset carrying amount from events such as:
A decrease in the market value of the asset
An adverse action or assessment by a regulator
An operating or cash flow loss associated with a revenue producing asset
When an impairment loss occurs:
Asset is written down to fair market value (or discounted net cash flow): Loss due to impairment xx Accumulated depreciation xx
Note that test for impairment (future cash flow) is different from write-down amount (net realizable value).
Application of Impairment Rules
Example 1:
Asset carrying value – $1,000,000 Undiscounted future cash flow expected from asset – $900,000 Fair market value of asset – $600,000 Impairment exists – $900,000 expected cash flow less than $1,000,000 carrying amount Write asset down by $400,000 ($1,000,000 reduced to $600,000) Example 2:
Asset carrying value – $800,000 Undiscounted future cash flow expected from asset – $900,000 Fair market value of asset – $600,000 No impairment adjustment – $900,000 expected cash flow exceeds $800,000 carrying amount Disposal of Property, Plant, & Equipment
Cash (proceeds) xx Accumulated depreciation (balance) xx Loss on disposal (plug) xx Gain on disposal (plug) xx Asset (original cost) xx A disposal in involuntary conversion is recorded in the same manner as a sale.
IFRS Impairment
Focuses on events (e.g., breach of contract or significant financial difficulty of the issuer)
Loss recorded income
IFRS: Reversal of losses on investments in debt allowed
Nonmonetary Exchanges
Cash (amount received) Asset – New (FMV) xx Accumulated depreciation (balance on old asset) xx Loss on disposal (plug) Cash (amount paid) Gain on disposal (plug) xx Asset – Old (Original cost) xx FMV
Use fair value of asset received or
Fair value of asset given
+ Cash paid
– Cash received
Exception
Applies to exchanges when:
FMV is not determinable
Exchange is only to facilitate subsequent sales to customers (e.g. ownership of inventory in one city is swapped for similar inventory in another to facilitate prompt delivery to customer in distant city)
Transaction lacks commercial substance (risk, timing, and amount of future cash flows will not significantly change as a result of the transaction)
Loss – FMV of asset given < Carrying value of asset given
Cash (amount received) xx Asset – New (FMV) xx Loss on disposal (plug) xx Cash (amount paid) xx Asset – Old (carrying value) xx Gain – FMV of asset given > Carrying value of asset given
Gain recognized only when cash received
No gain recognized when cash paid or no cash involved
Asset – New (plug) xx Accumulated depreciation (balance on old asset) xx Cash (amount paid) xx Asset – Old (original cost) xx INTANGIBLES
General Characteristics
Lack physical substance
Uncertain benefit period
Associated with legal rights
Initial Accounting
Capitalize costs of purchasing intangibles
Expense costs of developing intangibles internally
Capitalize costs of preparing for use
Legal fees Registration fees Amortization
Straight-line amortization
Amortized over shorter of:
Legal life Useful life Units of sales amortization used if greater than straight-line
Tested for impairment when events suggest undiscounted future cash flow will be less than carrying value of intangible – written down to fair market value.
Intangibles with no clear legal or useful life (trademarks, perpetual franchises) must be examined annually for impairment either qualitatively or quantitatively. If impairment is likely, proceed to impairment test and write down whenever fair market value is less than carrying value.
Goodwill
Acquisition
Must be part of (an acquisition) business combination
Excess of acquisition price over fair value of underlying net assets
Internal costs
May incur development or maintenance costs
All costs are expensed
Amortization
No amortization recorded
Impairment
Annually, qualitatively (or quantitatively) assess whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If so, perform the two-step impairment test:
1. Calculate and compare the fair value of the reporting unit to its carrying value a. If carrying value exceeds fair value, proceed to step 2 2. Compare the implied fair value of the reporting unit goodwill to the carrying value a. Goodwill written down whenever implied fair value is less than carrying value IFRS: Property, Plant, and Equipment
Elect either Cost or Revaluation model (RM). If choose RM Carrying amount = the fair value at date of revaluation less subsequent accumulated depreciation and subsequent accumulated impairment loss Only for assets with value that can be reliably measured Entire class of assets Write asset up or down revaluation surplus account in OCI Can reverse impairment loss Cost method: reversal to income RM: reversal to OCI Requires component depreciation (e.g., parts of an airplane) and review of residual value and useful life each period
Leasehold Improvements
Amortize over shorter of:
Useful life
Remaining term of lease
Patents
Legal costs of defending a patent
Successful – capitalize legal costs as addition to carrying value of patent
Unsuccessful – recognize legal costs as expense and consider writing down patent
Research and Development (R & D)
Research – aimed at discovery of new knowledge New product or process Improvement to existing product or process Development – converting new knowledge into plan or design R & D assets:
Used for general R & D activities Capitalize if purchased from others and alternative future uses exist Amortized if capitalized Charge to R & D expense Used for specific project Charge to R & D expense IFRS allows capitalization of development costs if six criteria are met
Startup Costs
Costs associated with startup of organization should be immediately expensed
Franchises
Initial fee – generally capitalized and amortized
Subsequent payments – generally recognized as expense in period incurred
Software
Expense – cost up to technological feasibility
Capitalize and amortize – costs from technological feasibility to start of production
Coding and testing
Production of masters
Charge to inventory – costs incurred during production
Amortization of capitalized software costs – larger of:
Additional amortization:
Carrying value (after amortization) > Net realizable value (based on future revenues)
Excess is additional amortization
Monetary Assets & Liabilities – Module 12
Bank Reconciliation
Accounts Receivable
Net realizable value = Accounts receivable – Allowance for Uncollectible Accounts
Uncollectible Accounts
Calculate expense and plug balance or calculate balance and plug expense
Allowance Methods - GAAP
Matching concept – Bad debt expense in period of sale
Measurement concept – Accounts receivable at net realizable value
Direct Write-off Method – Non-GAAP
Violates matching concept – Bad debt expense when account written off
Violates measurement concept – Accounts receivable overstated at gross amount
Notes Received for Cash
Calculating Payment
Principal amount ÷ Present value factor = Payment amount
Present value factor for annuity based on number of payments and interest rate Allocating Payments
Payment amount – Interest = Principal reduction
Calculating Interest
Notes Received for Goods or Services
Note Balance
Short-term: Amount = Face value
Long-term: Amount = Fair value of goods or services
Present value of payments if fair value not known
Journal entry:
Note receivable - Face amount (given) xxx Revenue - Calculated amount xxx Discount on note receivable (plug) xxx Notes Received for Goods or Services
Interest Income
Face amount of note – Unamortized discount = Carrying value of note × Interest rate = Interest income Journal entry:
Discount on note receivable xxx Interest income xxx Financing
Receivables — Discounting
Proceeds from Discounting
Face amount + Interest income (Face × Interest rate × Term) = Maturity value – Discount (Maturity value × Discount rate × Remaining term) = Proceeds Financing Receivables — Assignment
Treated as loan
Cash—Proceeds (given) xxx Note payable secured by receivables xxx Accounts receivable assigned xxx Accounts receivable (balance) xxx Financing Receivables — Factoring
Factoring without Recourse
Treated as a sale
Cash (Accounts receivable balance less fee less holdback) xxx Due from factor (holdback)* xxx Loss on sale (fee charged by the factor) xxx Accounts receivable (balance) xxx * Due from factor (receivable) is an amount the factor holds back in case customers return merchandise to the business selling the receivables. If customers return the merchandise, they will not be paying the factor.
Financing with Recourse
Treated as a sale
Cash (Accounts receivable balance less fee less holdback) xxx Due from factor (holdback) xxx Loss on sale (fee charged by the factor + recourse value) xxx Accounts receivable (balance) xxx Recourse liability* * The recourse liability is assigned a fair value and initially increases the loss. If receivables are 100% collected by the factor, the recourse will be reversed:
Recourse liability xxx Loss on sale xxx Financial Statement Analysis
Ratios Involving Current Assets & Liabilities
Working capital = current assets – current liabilities
Current ratio = current assets ÷ current liabilities
Quick ratio = quick assets ÷ current liabilities
Quick assets – current assets readily convertible into cash Cash
Accounts receivable
Investments in trading securities
Ratios Involving Receivables
Accounts receivable turnover = Credit sales ÷ Average accounts receivable
Days to collect accounts receivable = 365 ÷ Accounts receivable turnover
or
Days to collect accounts receivable = Average accounts receivable ÷ Average sales/day
Average sales/day = Credit sales ÷ 365 Ratios Involving Inventories
Inventory turnover = Cost of sales ÷ Average inventory
Days sales in inventory = 365 ÷ Inventory turnover
or
Days sales in inventory = Average inventory ÷ Average inventory sold/day
Average inventory sold/day = Cost of sales ÷ 365 Other Ratios
Operating cycle = Days to collect accounts receivable + Days sales in inventory
Debt to total assets = Total debt ÷ Total assets
Debt to equity = Total debt ÷ Total stockholders’ equity
Return on assets = Net income ÷ Average total assets
Accounts Payable
Purchase shipment terms Payable already recorded Payable not already recorded Shipping point No adjustment Adjust – add Destination Adjust – deduct No adjustment Contingencies
Loss Contingencies
Probable – Accrue & disclose Not estimable – Disclose only
Estimable within range – Accrue minimum of range
Reasonably possible – Disclose only Remote – Neither accrued nor disclosed Contingencies and Provisions
IFRS
Distinguishes between contingencies and provisions
Contingencies depend upon some future event and are disclosed only
Provisions are liabilities that are uncertain in timing or amount
Probability threshold is 50%—accrue and disclose
Estimable within a range—accrue the midpoint of the range
Gain Contingencies
Never accrue (until realization occurs or is assured beyond reasonable doubt)
May disclose
Estimated & Accrued Amounts
Money 1st – Goods or services 2nd Expenses – prepaid
Revenues – unearned
Goods or services 1st – Money 2nd Expenses – accrued
Revenues – receivable
Revenue Items
Calculate amount earned or amount collected
1) Determine changes in accrual items: Debit Credit Revenue receivable Increase Decrease Unearned revenue Decrease Increase 2) Prepare journal entry Cash xxx Revenue receivable xxx or xxx Unearned revenue xxx or xxx Revenues xxx 3) If amount collected is given, that is the debit to cash and the amount required to balance the entry is the amount earned. If the amount earned is given, that is the credit to revenues and the amount required to balance the entry is the amount collected. Expense Items
Calculate amount incurred or amount paid
1) Determine changes in accrual items: Debit Credit Prepaid expense Increase Decrease Accrued expense Decrease Increase 2) Prepare journal entry Expense xxx Prepaid expense xxx or xxx Accrued expense xxx or xxx Cash xxx 3) If amount paid is given, that is the credit to cash and the amount required to balance the entry is the amount incurred. If the amount incurred is given, that is the debit to expense and the amount required to balance the entry is the amount paid. Insurance
Prepaid insurance (end of year)
Total premiums paid × Months remaining / Total # of months
Insurance expense
Prepaid insurance (beginning) + Premiums paid – Prepaid insurance (ending)
Royalties
Royalty income for current year
1st payment – includes royalties earned in latter part of previous period early in current period
Include payment
Deduct royalties from previous period
2nd payment – received for royalties earned during current period
Include entire payment
Additional royalties
Add royalties earned for latter part of current period
Service Contract
Service contract revenues – fees received uniformly during period
Fees received × % earned in 1st period × 50% Deferred service contract revenues
Fees received – Service contract revenues Coupons
Discounts on merchandise Premiums (Prizes) Number of coupons not expired Number of units sold × % expected to be redeemed × % expected to be redeemed ÷ number required per prize – Prizes already sent × Cost per coupon (face + service fee) × Cost per prize – Amount already paid = Liability = Liability Warranties*
Compensated Absences
Four conditions:
Past services of employees
Amounts vest or accumulate
Probable
Estimable
When all conditions met:
Vest Accumulate Vacation pay Must accrue Must accrue Sick pay Must accrue May accrue Miscellaneous Liabilities
Refinancing Liabilities
To exclude from current liabilities − 2 requirements:
Company intends to refinance on a long-term basis
Company can demonstrate ability to refinance
The ability to refinance can be demonstrated in either of 2 ways:
Refinance on long-term basis after balance sheet date but before issuance
Enter into firm agreement with lender having ability to provide long-term financing
IFRS:
Must have an agreement in place by the balance sheet date to exclude from current liabilities
* When calculating warranty expense, be sure to apply the matching principle (e.g., Expected returns on year 1 sales = 2% in year of sale and 3% the year following the sale. Warranty expense would be calculated using 5%, matching all expenses to the period of the sale).
Leases – Module 13
ACCOUNTING FOR LEASES
Lessee Reporting
Transfer of rights & risks of ownership – At least 1 of 4 criteria
Actual transfer
Title transfers to lessee by end of term
Lease contains bargain purchase option
Transfer in substance
Lease term ≥ 75% of useful life
Present value of min lease payments ≥ 90% of fair market value
To calculate present value – lessee uses lower of:
Incremental borrowing rate
Rate implicit in lease (if known)
Capital Leases
Inception of lease
Journal entry to record lease:
Leased asset xxx Lease obligation xxx Amount of asset & liability = PV of minimum lease payments:
Payments beginning at inception result in annuity due
Payments beginning at end of first year result in ordinary annuity
Payments include bargain purchase option or guaranteed residual value (lump sum at end of lease)
Lease payments
Payment at inception:
Lease obligation xxx Cash xxx Subsequent payments:
Interest expense xxx Lease obligation xxx Cash xxx Interest amount:
Balance in lease obligation × Interest rate (used to calculate PV) × Time since last payment (usually 1 year) = Interest amount Periodic Expenses - Depreciation
Actual transfer (1 of first 2 criteria)
Life = useful life of property
Salvage value taken into consideration
Transfer in substance (1 of latter 2 criteria)
Life = shorter of useful life or lease term
No salvage value
Periodic Expenses – Executory costs
Consist of insurance, maintenance, & taxes
Recognized as expense when incurred
Balance Sheet Presentation
Leased asset
Reported as P, P, & E
Reported net of accumulated depreciation
Lease obligation
Current liability = Principal payments due in subsequent period
Noncurrent liability = Remainder
Disclosures
Amount of assets recorded under capital leases
Minimum lease payments for each of next 5 years and in aggregate
Description of leasing activities
Lessor Reporting
Transfer of rights & risks of ownership – At least 1 of 4 criteria
Same criteria as lessee
To calculate present value – lessor uses rate implicit in lease
Additional Criteria
Collectibility of lease payments reasonably predictable
No significant uncertainties as to costs to be incurred in connection with lease
Sales-Type & Direct-Financing Leases
Inception of lease
Journal entry to record lease:
Receivable xxx Accumulated depreciation (if any) xxx Asset xxx Gain (if any) xxx Receivable = fair value of property & present value of lease payments (rate implicit in lease)
Asset & accum dep – To remove carrying value of asset from lessor’s books
Gain
If amount needed to balance the entry, it is a gain or loss and this is a sales-type lease
If the entry balances without a gain or loss, this is a direct financing lease
Collections
At inception of lease:
Cash xxx Receivable xxx Subsequent collections:
Cash xxx Interest income (formula) xxx Receivable xxx Interest amount:
Balance of receivable × Interest rate (implicit in lease) × Time since last payment (usually 1 year) = Interest amount Balance Sheet Presentation
Receivable
Current asset – Principal collections due within one year
Noncurrent asset – Remainder
Operating Leases
Lessor Accounting
Rent revenue
Various expenses (depreciation on asset, taxes, insurance, & maintenance)
Lessee Accounting
Rent expense
Miscellaneous expenses (taxes, insurance, & maintenance)
Rent revenue or expense
Recognized uniformly over lease
Total of rents over term of lease ÷ Number of periods = Rent per period
Sale-Leaseback Transactions
Minor Leaseback
Leaseback ≤ 10% of fair value of property sold
Sale and leaseback recognized as separate transactions
Gain or loss on sale
Other Leasebacks
Seller-lessee retains significant portion of property
Some or all of gain deferred
Deferred amount limited to present value of leaseback payments
Deferred amount spread over lease
Remainder recognized in period of sale
IFRS Lease Rules
IFRS: Lease classification by lessee/lessor the same. Key issue: Look at economic substance to determine if substantially all benefits/risks of ownership transferred
Two types of leases: Finance or operating
IFRS: If sale followed by operating lease, recognize all gain. If sale followed by financial lease, defer and amortize gain
IFRS: Must bifurcate land and building Four tests any one of which means it is a finance lease. Note: No 75% or 90% test The lease transfers ownership to the lessee by the end of the lease term or the lease contains a bargain purchase option, and it is reasonably certain that the option will be exercised. The lease term is for the major part of the economic life of the asset The present value of the minimum lease payments at the inception of the lease is at least equal to substantially all of the fair value of the leased asset. The leased assets are of a specialized nature such that only the lessee can use them without modifications.
BONDS
Issuance – Interest date
Cash (present value approach) xxx Discount or premium (plug) xxx or xxx Bonds payable (face amount) xxx Issuance – Between interest dates
Cash (sales price approach + interest amount) xxx Discount or premium (plug) xxx or xxx Interest payable (interest amount) xxx Bonds payable (face) xxx Proceeds
Present value approach
Present value of principal (lump sum) at yield rate + Present value of interest (ordinary annuity) at yield rate Sales price approach
Sales price given as percentage of face amount
Multiplied by face to give proceeds amount
Interest
Bond issued between interest dates
Calculated amount
Face amount of bonds × Stated rate × Portion of year since previous interest date = Interest amount Effective interest method - GAAP
Straight-line method – Not GAAP
Recording Interest Expense
Interest expense xxx Bond premium or discount (amortization) xxx or
xxx Cash or interest payable xxx Bond Issue Costs
Recorded as asset
Deferred charge
Amortized (straight-line) over term of bond
Not considered part of carrying value
Bond Retirement
Bond payable (face amount) xxx Bond premium or discount (balance) xxx or xxx Gain or loss (plug) xxx or xxx Bond issue costs (balance) xxx Cash (amount paid) xxx Gain or loss is extraordinary if retirement is determined to be both unusual and infrequent
Convertible Bonds
Recorded as bonds that are not convertible
Upon conversion:
Book value method
Issuance price of stock = Carrying value of bonds
No gain or loss
Market value method
Issue price of stock = Fair market value
Gain or loss recognized
Detachable Warrants
Allocate proceeds using relative fair value method
Fair value of bonds (without warrants) + Fair value of warrants (without bonds) = Total fair value Bonds = Proceeds × Value of bonds/total value
Warrants = Proceeds × Value of warrants/total value
Record issuance:
Cash (total proceeds) xx Discount or premium (plug*) xx or xx APIC (amount allocated to warrants) xx Bonds payable (face amount) xx * Bonds payable – Discount or plus premium = Amount allocated to bonds
Disclosures
A bond issuer should disclose:
The face amount of bonds
The nature and terms of the bonds including a discussion of credit and market risk, cash requirements, and related accounting policies
The fair value of the bonds at the balance sheet date, indicated as a reasonable estimate of fair value
IFRS
Option to value financial liabilities at fair value
Financial instruments with characteristics of both debt and equity: “Compound instruments.” Convertible bonds and bonds with detachable warrants separated into components of debt and equity Record liability component at fair value Plug remaining value assigned to equity component
TROUBLED DEBT RESTRUCTURING
Transfer property to creditor
Liability (amount forgiven) xxx Gain or loss on disposal xxx or xxx Asset (carrying value) xxx Gain on restructure xxx Gain (or loss) on disposal = Fair value of asset – Carrying value of asset
Gain on restructure = Carrying value of debt – Fair value of asset
Issuance of equity
Liability (amount forgiven) xxx Common stock (par value) xxx APIC (based on fair value) xxx Gain on restructure xxx APIC = Fair value of stock issued – Par value of stock issued
Gain on restructure = Fair value of stock – Carrying value of debt
Modification of Terms
Total payments under new terms:
If ≥ carrying value of debt – no adjustment made
If < carrying value of debt – difference is gain
Treatment of restructuring gain
Reported in ordinary income unless it is determined that the restructuring is both unusual and infrequent.
Bankruptcy
Order of distribution:
1) Fully secured creditors Receive payment in full
Excess of fair value of asset over debt added to remaining available money
2) Partially secured creditors Receive payment equal to fair value of collateral
Difference considered unsecured debt
3) Unsecured creditors All receive partial payment
Remaining available money ÷ Total of unsecured claims = Ratio
Ratio multiplied by each claim to determine payment
PENSION PLANS
Pension Expense
Service cost (debit) + Interest (debit – Actual return on plan assets (CPA exam assumes positive returns, so credit) + Unexpected losses (credit)/unexpected gains (debit) ± Amortization of prior service cost (debit) ± Corridor amortization of gains (credit) or losses (debit) in Accumulated Other Comprehensive Income (AOCI) = Pension expense reported in operating income Service cost – Increase in plan’s projected benefit obligation (PBO) resulting from services performed by employees
Interest – Beginning PBO × discount (interest) rate
Actual return on plan assets – Increase in plan assets after eliminating contributions and adding back distributions
Gains or losses − 2 components
Difference between actual return and expected return
Amortization of AOCI for Gains/Losses in amount when beginning balance > greater of 10% of beginning PBO or 10% of market related value of beginning plan assets
Report on Balance Sheet difference between fair value of plan assets and the PBO as a noncurrent asset if overfunded and a noncurrent liability if underfunded in a pension asset/liability account.
Disclosures
Description of funding policies and types of assets held: equity, debt, real estate and other
Six components of Pension expense for the period
Expected benefits to be paid each of the next five years and in aggregate for the following five years
Expected cash contribution for the following year
IFRS Pension Accounting
IFRS: Can choose to recognize all gains or losses in other comprehensive income
(i.e., avoid the corridor approach; corridor approach eliminated for firms with fiscal year ends after January 1, 2013)
IFRS: Do not have to report (un)funded status of postemployment plans on face of balance sheet
IFRS: Requires actual fair value of assets (i.e., no weighted-average)
IFRS: May present different elements of pension expense in different parts of income statement (e.g., interest expense in financing section of income statement and service cost in operating income).
POSTRETIREMENT BENEFITS
Types of Benefits
Company pays for:
Health care
Tuition assistance
Legal services
Life insurance
Day care
Housing subsidies
Individuals covered:
Retired employees
Beneficiaries
Covered dependents
Postretirement Benefit Expense
Service cost (debit) + Interest (debit) – Actual return on plan assets (CPA exam assumes positive returns, so credit) + Unexpected losses (credit)/unexpected gains (debit) ± Amortization of prior service cost (debit) ± Corridor amortization of gains (credit) or losses (debit) in Accumulated Other Comprehensive Income (AOCI) = Postretirement benefit expense
Deferred Taxes – Module 14
ACCOUNTING FOR INCOME TAXES (ASC 740/FAS 109)
Income Tax Expense
Taxable income = Pretax accounting income
No temporary differences
Income tax expense = Current income tax expense
No deferred tax effect
Taxable income ≠ Pretax accounting income
Temporary differences
Income tax expense = Current income tax expense ± Deferred income taxes
Current Income Tax
Current income tax expense = Taxable income × Current tax rate
Current tax liability = Current income tax expense – Estimated payments
Taxable income:
Pretax accounting income (financial statement income) ± Permanent differences ± Changes in cumulative amounts of temporary differences = Taxable income Permanent & Temporary Differences
Permanent differences
Nontaxable income (interest income on municipal bonds) & nondeductible expenses (premiums on officers’ life insurance)
No income tax effect
Temporary differences
Carrying values of assets or liabilities ≠ tax bases
May be taxable temporary differences (TTD) or deductible temporary differences (DTD)
Temporary taxable differences result in deferred tax liabilities and temporary deductible differences result in deferred tax assets
Assets
Financial statement basis > tax basis = TTD Financial statement basis < tax basis = DTD Liabilities
Financial statement basis > tax basis = DTD Financial statement basis < tax basis = TTD Often, it is easier to examine the net effect on income. For example, if straight-line depreciation is used for financial statement purposes and MACRS for tax
purposes, depreciation expense for book purposes < that for tax purposes leading to net financial income > net taxable income resulting in a deferred tax liability. Net financial income > net taxable income = deferred tax liability Net financial income < net taxable income = deferred tax asset
Deferred Tax Assets & Liabilities
TTD × Enacted future tax rate = Deferred tax liability
DTD × Enacted future tax rate = Deferred tax asset
Selecting appropriate rate:
1) Determine future period when temporary difference will have tax effect (period of reversal) 2) Determine enacted tax rate for that period Deferred Tax Asset Valuation Allowance
May apply to any deferred tax asset
Is it more likely than not that some or all of deferred tax asset will not be realized
Consider tax planning strategies
Valuation allowance = portion of deferred tax asset that will not be realized
Deferred Income Tax Expense or Benefit
1) Calculate balances of deferred tax liabilities and assets and valuation allowances 2) Combine into single net amount 3) Compare to combined amount at beginning of period Increase in net liability amount = deferred income tax expense
Decrease in net asset amount = deferred income tax expense
Increase in net asset amount = deferred income tax benefit
Decrease in net liability amount = deferred income tax benefit
Balance Sheet Presentation
Identify current and noncurrent deferred tax assets, liabilities, and valuation allowances
Current – TTD or DTD relates to asset or liability classified as current
Noncurrent – TTD or DTD relates to asset or liability classified as noncurrent
TTD or DTD does not relate to specific asset or liability (such as result of net operating loss carryforward) – classify as current or noncurrent depending on period of tax effect
1) Combine current deferred tax assets, liabilities, and valuation allowances into single amount 2) Report as current deferred tax asset or liability 3) Combine noncurrent deferred tax assets, liabilities, and valuation allowances into single amount 4) Report as noncurrent deferred tax asset or liability IFRS for Deferred Income Taxes
Deferred tax assets/liabilities always noncurrent
Use enacted rate or substantially enacted rate
No valuation allowance (reported net)
Accounting for Uncertainty in Income Taxes
Applies to all tax positions related to income taxes subject to ASC 740/FAS 109
Utilizes a two-step approach for evaluating tax positions. Recognition (Step 1) occurs when an enterprise concludes that a tax position, based solely on its technical merits, is more likely than not to be sustained upon examination. Measurement (Step 2) is only addressed if Step 1 has been maintained. Under Step 2, the tax benefit is measured as the largest amount of benefit, determined on a cumulative probability basis, that is more likely than not to be realized (i.e., a likelihood of occurrence greater than 50%). Those tax positions failing to qualify for initial recognition under Step 1 are recognized in the first subsequent interim period that they meet the more-likely-than-not standard, and are resolved through negotiation or litigation or on expiration of the statute of limitations. Derecognition of a tax position that was previously recognized occurs when the item fails to meet more-likely-than-not threshold. ASC 740/FIN 48 specifically prohibits the use of a deferred tax valuation allowance as a substitute for derecognition of tax positions.
Stockholders’ Equity – Module 15
STOCKHOLDERS’ EQUITY
Issuance of Common Stock
Stock issued for cash, property, or services:
Journal entry:
Cash, property, or expense (fair value) xxx Common stock (par or stated value) xxx APIC (difference) xxx Common Stock Subscribed
Subscription – Journal entry:
Cash (down payment) xxx Subscriptions receivable (balance) xxx Common stock subscribed (par or stated value) xxx APIC (difference) xxx Collection and issuance of shares – Journal entries:
Cash (balance) xxx Subscriptions receivable xxx Common stock subscribed (par or stated value) xxx Common stock (par or stated value) xxx Treasury Stock
Acquisition of shares:
Characteristics of Preferred Stock
Preference over common stock
Receive dividends prior to common stockholders
Paid before common on liquidation
Cumulative preferred stock
Unpaid dividends accumulated as dividends in arrears
Paid in subsequent periods prior to payment of current dividends to common or preferred
Not considered liability until declared
Participating preferred stock
Receive current dividends prior to common stockholders
Receive additional dividends, in proportion to common stockholders, in periods of high dividends
Equity Instruments with Characteristics of Liabilities
Financial instruments shares should be classified as liabilities on the balance sheet, even when they appear to be in the form of equity, when any of these characteristics apply:
Preferred shares have a mandatory redemption date payable in cash
An obligation exists to repurchase shares through the transfer of assets to the shareholder.
Shares are convertible to other shares when the exchange rate is based on a fixed monetary value of issuer shares or is tied to variations in the fixed value of something other than the issuer’s shares.
Note that convertible shares whose conversion rate is not adjusted for changes in values do not fall into this category (e.g. preferred stock convertible at a fixed 10 for 1 ratio to the common stock would not be a liability)
Dividends
Cash Dividends
Recorded when declared
1) Dividends in arrears to preferred stockholders if cumulative 2) Normal current dividend to preferred stockholders 3) Comparable current dividend to common stockholders 4) Remainder Allocated between common and preferred shares if preferred stock is participating
Paid to common stockholders if preferred stock is nonparticipating
Property Dividends
Journal entry
Retained earnings (fmv of property) xxx Gain (or loss) xxx or xxx Asset (carrying value of property) xxx Liquidating Dividends
Journal entry
Retained earnings (balance) xxx APIC (plug) xxx Cash or Dividends payable xxx Stock Dividends
Journal entry – Normal stock dividend – usually 20% or less
Retained earnings (fmv of stock issued) xxx Common stock (par or stated value) xxx APIC (difference) xxx Journal entry – Large stock dividend – usually more than 25% – referred to as stock split affected in the form of a stock dividend
Retained earnings (par or stated value) xxx Common stock (par or stated value) xxx Preferred Stock – Special Issuances
Preferred with Detachable Warrants
Cash (proceeds) xxx APIC from warrants (amount allocated) xxx Preferred stock (par) xxx APIC from preferred stock (difference) xxx Amount allocated to warrants using relative fair value method:
Fair value of warrants + Fair value of stock = Total fair value Allocation:
Fair value of warrants ÷ Total fair value × Proceeds = Amount allocated to warrants
Fair value of stock ÷ Total fair value × Proceeds = Amount allocated to stock
Convertible Preferred Stock
Journal entry – Issuance
Cash (proceeds) xxx Preferred stock (par) xxx APIC from preferred stock (difference) xxx Journal entry – Conversion
Preferred stock (par) xxx APIC from preferred stock (original amount) xxx Common stock (par or stated value) xxx APIC (difference) xxx Retained Earnings
Appropriations
Set up to disclose to financial statement users future commitments that are not subject to accrual.
Journal entry:
Retained earnings xxx Retained earnings appropriated for . . . xxx When the commitment is met, accrued, or avoided, the appropriation is reversed.
Journal entry:
Retained earnings appropriated for . . . xxx Retained earnings xxx
Prior Period Adjustments
Made to correct errors in financial statements of prior periods
Adjustment to beginning retained earnings
Equal to net amount of errors from periods prior to earliest period presented
Reduced by tax effect
Presented on statement of retained earnings
Unadjusted beginning balance reported
Increased or decreased for prior period adjustment
Result is adjusted beginning balance
Statement of Retained Earnings
Beginning retained earnings, as previously reported xxx ± Prior period adjustments xxx = Beginning retained earnings, as adjusted xxx + Net income for period xxx – Dividends xxx – Appropriations xxx + Appropriations eliminated xxx = Ending retained earnings xxx IFRS and Owner’s Equity
Unlike US GAAP, statement of changes in owners’ equity required
Stock Options Plans
Noncompensatory Plans
Noncompensatory when:
All employees participate
Participation uniform among employees
Option period limited to reasonable time
Discount below market price limited to reasonable amount
Compensatory Plans
Journal entry
Deferred compensation xxx APIC – Options xxx Options must be accounted for using FMV at date of grant based on:
Market price of options with similar characteristics
Option pricing model Binomial distribution model Black-Scholes model
Intrinsic value (stock price – exercise price) only used when FMV cannot be determined at grant date and must be replaced by FMV as soon as estimate is available
Compensation recognized over service period
IFRS and Stock Options
Applies to all share-based payments
Requires fair-value method in all cases
Measurement of deferred tax asset is based on estimate of future tax deduction at end of each period. Changes in stock prices change to deferred tax asset Excess tax benefits (windfalls) are recorded first in equity (up to amount of cumulative book compensation expense) and then in equity Shortfalls become income tax expense Excess tax benefits are reported as cash inflows from operations all ESOPs are compensatory
Stock Appreciation Rights
Calculating liability
Stock price – Amount specified in stock appreciation rights = Amount per share × # of stock appreciation rights = Total liability × Portion of service period elapsed = Liability on balance sheet date Amount needed to increase or decrease liability is recognized as compensation expense
Quasi Reorganizations
Journal entry:
Common stock (reduction in par value) xxx APIC (plug) xxx or xxx Retained earnings (eliminate deficit) xxx Assets (eliminate overstatements) xxx Book Value Per Share
Calculation:
Total stockholders’ equity – Preferred stock (par value or liquidation preference) – Dividends in arrears on cumulative preferred stock = Stockholders’ equity attributable to common stockholders ÷ Common shares outstanding at balance sheet date = Book value per common share Disclosure of Information about Capital Structure
Rights & privileges of various debt & equity securities outstanding
Number of shares of common and preferred stock authorized, issued, & outstanding
Dividend & liquidation preferences
Participation rights
Call prices & dates
Conversion or exercise prices or rates & pertinent dates
Sinking fund requirements
Unusual voting rights
Significant terms of contracts to issue additional shares
Reporting Stockholders’ Equity
6% cumulative preferred stock, $100 par value, 200,000 shares authorized, 120,000 shares issued and outstanding $ 12,000,000 Common stock, $10 par value, 1,500,000 shares authorized, 1,150,000 shares issued and 1,090,000 shares outstanding 11,500,000 Additional paid-in capital 3,650,000 27,150,000 Retained Earnings:
Unappropriated $ 6,925,000 Retained earnings appropriated for plant expansion 1,400,000 8,325,000 Accumulated other comprehensive income: Accumulated unrealized gain due to increase In value of marketable securities available for sale 750,000 Accumulated translation adjustment (515,000) 235,000 35,710,000 Less: Treasury stock, 60,000 shares at cost 780,000 Total Stockholders’ Equity $ 34,930,000 Earnings Per Share
Reporting Earnings Per Share
Simple capital structure
No potentially dilutive securities outstanding
Present basic EPS only
Complex capital structure
Potentially dilutive securities outstanding
Dual presentation of EPS – basic EPS & diluted EPS
Potentially dilutive securities – Securities that can be converted into common shares
Convertible bonds and convertible preferred stock
Options, rights, and warrants
Basic EPS
Numerator
Income Available to Common Stockholders
Income from continuing operations – Dividends declared on noncumulative preferred stock – Current dividends on cumulative preferred stock (whether or not declared) = Income from continuing operations available to common stockholders ± Discontinued operations ± Extraordinary items = Net income available to common stockholders Denominator
Weighted-average common shares outstanding on the balance sheet date
Diluted EPS
Adjust numerator & denominator for dilutive securities
Assume conversion into common shares
Dilutive if EPS decreases
Convertible Preferred Stock
Dilutive if basic EPS is greater than preferred dividend per share of common stock obtainable:
Add preferred dividends back to numerator
Add common shares that preferred would be converted into to denominator
Convertible Bonds
Dilutive if basic EPS is greater than interest, net of tax, per share of common stock obtainable:
Add interest, net of tax, to numerator
Add common shares that bonds would be converted into to denominator
Options, Rights, & Warrants
Dilutive when market price exceeds exercise price (proceeds from exercise)
The treasury stock method is applied
Calculation done on quarter-by-quarter basis
Presentation of EPS Information
Income Statement
Simple capital structure – Basic EPS only
Income from continuing operations
Net income
Complex capital structure – Basic & Diluted EPS
Income from continuing operations
Net income
Additional Disclosures (income statement or notes)
Discontinued operations
Extraordinary items
Investments – Module 16
METHODS OF REPORTING INVESTMENTS
Method Conditions Consolidation Majority owned (> 50%) Equity Less than majority owned Ability to exercise significant influence Ownership generally ≥ 20% Cost Less than majority owned Unable to exercise significant influence Ownership generally < 20% Not an investment in marketable securities Special Rules Less than majority owned (ASC 320/FASB #115) Unable to exercise significant influence Ownership generally < 20% Investment in marketable securities Equity Method
Carrying Value of Investment
Cost + Earnings – Dividends = Carrying value of investment Earnings
Income reported by investee × % of ownership = Unadjusted amount – Adjustments = Investor’s share of investee’s earnings Adjustments to Earnings
1) Compare initial investment to FMV of underlying net assets 2) Portion of excess may be due to inventory Deduct from income in the first year (unless inventory not sold during year) 3) Portion of excess may be due to depreciable asset Divide by useful life and deduct from income each year 4) Portion of excess may be due to land No adjustment (unless land sold during year) 5) Remainder of excess attributed to goodwill Test each year for impairment and deduct from income if it has occurred Application of Equity Method
Information given:
Investment 25% Cost $400,000 Book value of investee’s underlying net assets $900,000 Undervalued assets: Inventory 100,000 Building (20 yrs) 400,000 Land 200,000 Investee’s unadjusted income $225,000 Dividends $40,000 Information Applied
Changes to and from the Equity Method
Equity Method to Cost Method
No longer able to exercise significant influence
Usually associated with sale of portion of investment
Apply equity method to date of change
Apply cost method from date of change
Cost Method to Equity Method
Now able to exercise significant influence
Usually associated with additional purchase
Apply equity method retroactively
Affects retained earnings and investment for prior periods
Fair Value Option
An entity may elect to value its securities at fair value.
If elected, available-for-sale, held-to-maturity, or equity method investments securities MTM and gain/loss goes to income
Marketable Securities (MES)
* Excluded from net income – included in comprehensive income
Transferring MES between Categories
When transferring between categories (e.g., Trading to AFS), the transfer is
1. Accounted for at fair value 2. Unrealized holding gains/losses are adjusted so as not to be double counted IFRS Investments
Similar to US GAAP, IFRS classifies securities in categories but the account titles differ
Held for Trading (HFT) — further classified as a fair value through profit or loss (FVTPL) security.
FVTPL securities are remeasured each accounting period.
Available for Sale (AFS)
Held to Maturity (HTM)
Equity method investments (can use the equity method or FVTPL)
Can elect to use the FVTPL method for AFS or HTM securities providing the security has an active market.
Once the election is made, it may not be changed.
Instruments without quoted market prices should be accounted for using the cost method.
Life Insurance
Payment of premium:
Cash surrender value of life insurance (increase in value) xxx Insurance expense (plug) xxx Cash (premium amount) xxx Death of insured:
Cash (face of policy) xxx Cash surrender value of life insurance (balance) xxx Gain (difference) xxx
Statement of Cash Flows – Module 17
STATEMENT OF CASH FLOWS
Purpose of Statement
Summarizes sources and uses of cash and cash equivalents
Classifies cash flows into operating, investing, and financing activities
Cash Equivalents
Easily converted into cash (liquid)
Original maturity ≤ 3 months
Format of Statement
Cash provided or (used) by operating activities ± Cash provided or (used) by investing activities ± Cash provided or (used) by financing activities = Net increase or (decrease) in cash & cash equivalents + Beginning balance = Ending balance Inputs to the Cash Flow Statement
Each item on the balance sheet (change from prior year) and income statement must be accounted for. In general:
Operating activities:
Income statement items/adjustments (e.g., sales)
Current assets and current liabilities (e.g., accounts receivable)
Investing activities:
Noncurrent assets (e.g., building)
Financial activities:
Noncurrent liabilities and equity (e.g., bank loan, stock)
Some changes do not involve cash (equipment purchased with stock) and some do not follow the general rule (e.g., dividends payable is a current liability, but since it is the result of stock ownership, its adjustment will appear in financing activities instead of operating activities).
Operating Activities
Components of Direct Method
Collections from customers (plug) xxx Increase in accounts receivable (given) xxx Decrease in accounts receivable (given) xxx Sales (given) xxx Increase in inventory (given) xxx Decrease in accounts payable (given) xxx Cost of sales (given) xxx Decrease in inventory (given) xxx Increase in accounts payable (given) xxx Payments for merchandise (plug) xxx Adjustments Under Indirect Method
Credit changes are addbacks/debit changes are subtractions, for example Increase in accumulated depreciation added back Increase in accounts payable added back Increase in accounts receivable subtracted Decrease in accounts payable subtracted
Investing Activities
Principal collections on loans receivable + Proceeds from sale of investments (except trading securities) + Proceeds from sale of plant assets – Loans made – Payments to acquire investments (except trading securities) – Payments to acquire plant assets = Cash flows from investing activities Financing Activities
Proceeds from borrowings + Proceeds from issuing stock – Debt principal payments – Payments to reacquire stock – Payments for dividends = Cash flows from financing activities Other Disclosures
With direct method:
Reconciliation of net income to cash flows from operating activities (indirect method)
With indirect method:
Payments for interest Payments for income taxes With all cash flow statements:
Schedule of noncash investing and financing activities IFRS and Cash Flows
Interest/dividends in either financing or operations sections but must be consistent
Consolidated Statements – Module 18
BUSINESS COMBINATIONS
Consolidation is required whenever the acquirer has control over another entity.
Acquirer is the entity that obtains control of one or more businesses in the business combination
Ownership of majority of voting stock generally indicates control
Consolidation is required even if control situation is temporary
Consolidation is not appropriate when a majority shareholder doesn’t have effective control: Company is in bankruptcy or reorganization Foreign exchange controls limit power to keep control of subsidiary assets
All consolidations are accounted for as acquisitions The acquirer shall recognize goodwill, the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree, and any residual goodwill Recognize separately Acquisition-related costs Assets acquired and liabilities assumed arising from contractual contingencies Bargain purchase (fair value of assets acquired > amount paid) recognized as gain Fair values of research and development assets Changes in the value of acquirer deferred tax benefits
Accounting for an Acquisition
Combination – Records combined
Assets (at fair market values) xxx Separately identifiable assets xx Goodwill (plug) x Liabilities (at fair market values) xxx Stockholders’ equity (2 steps) * xxx OR Cash (amount paid) xxx Combination – Records not combined
Investment (fair value of net assets) xxx Stockholders’ equity (same 2 steps) xxx OR Cash (amount paid) xxx * Credit common stock for par value of shares issued and credit APIC for difference between fair value and par value of shares issued
Earnings
Consolidated net income:
Parent’s net income + Subsidiary’s net income from date of acquisition ± Effects of intercompany transactions – Depreciation on difference between fair value and carrying value of sub’s assets – Impairment
losses on goodwill (if applicable) = Consolidated net income Retained Earnings – Year of Combination
Beginning retained earnings – Parent’s beginning balance + Consolidated net income – Parent’s dividends for entire period = Ending retained earnings CONSOLIDATIONS
Eliminate the Investment
Example 1 – Date of combination – no goodwill or minority interest
Inventory (excess of fair value over carrying value) xxx Land (excess of fair value over carrying value) xxx Depreciable assets (excess of fair value over carrying value) xxx Common stock (sub’s balance) xxx APIC (sub’s balance) xxx Retained earnings (sub’s balance) xxx Investment xxx Example 2 – Date of combination – no goodwill with minority interest
Inventory (excess of fair value over carrying value) xxx Land (excess of fair value over carrying value) xxx Depreciable assets (excess of fair value over carrying value) xxx Common stock (sub’s balance) xxx APIC (sub’s balance) xxx Retained earnings (sub’s balance) xxx Minority interest (sub’s total stockholders’ equity × minority interest percentage) xxx Investment xxx Example 3 – Date of combination – goodwill and minority interest
Inventory (excess of fair value over carrying value) xxx Land (excess of fair value over carrying value) xxx Depreciable assets (excess of fair value over carrying value) xxx Goodwill (plug) xxx Common stock (sub’s balance) xxx APIC (sub’s balance) xxx Retained earnings (sub’s balance) xxx Minority interest (sub’s total stockholders’ equity × minority interest percentage) xxx Investment xxx Calculating goodwill − 4 steps
1) Determine amount paid for acquisition 2) Compare to book value of sub’s underlying net assets 3) Subtract difference between fair values and book values of sub’s assets 4) Remainder is goodwill Additional entries – after date of acquisition
Debit cost of sales instead of inventory for fair market value adjustment
Recognize depreciation on excess of fair value over carrying value of depreciable assets
Recognize impairment of goodwill (if FMV of goodwill is less than carrying amount)
Eliminating Entries
Intercompany Sales of Inventory
Eliminate gross amount of intercompany sales
Sales xxx Cost of sales xxx Eliminate intercompany profit included in ending inventory
Cost of sales xxx Inventory xxx Eliminate unpaid portion of intercompany sales
Accounts payable xxx Accounts receivable xxx Intercompany Sales of Property, Plant, & Equipment
Eliminate intercompany gain or loss
Gain on sale (amount recognized) xxx Depreciable asset xxx Adjust depreciation
Accumulated depreciation (amount of gain divided by remaining useful life) xxx Depreciation expense xxx Intercompany Bond Holdings
Eliminate intercompany investment in bonds
Bonds payable (face amount of bonds acquired) xxx Bond premium or discount (amount related to intercompany bonds) xxx or xxx Gain or loss on retirement (plug) Xxx or xxx Investment in bonds (carrying value) xxx Variable Interest Entities (VIE)
Also known as special-purpose entities
Control is achieved based on contractual, ownership, or other pecuniary interests
Primary beneficiary — the entity that has controlling financial interest in the VIE and must consolidate it. This must be reassessed every year.
Both conditions must exist for control:
1. Having the power to direct the significant activities of the VIE, and 2. The entity has the obligation to absorb significant losses of the VIE or the right to receive significant benefits. Qualitative approach used to determine control when power is shared among unrelated parties, which could lead to none of the entities consolidating the VIE.
Kick-outs rights — the ability to remove the reporting entity who has the power to direct the VIE’s significant activities
Participating rights — the ability to block the reporting entity with the power to direct the VIE’s significant activities
Push-Down Accounting
The method used to prepare the separate financial statements for significant, very large subsidiaries that are either wholly owned or substantially owned (>90%)
SEC requires (for publicly traded companies) a one-time adjustment under the acquisition method to revalue the subsidiary’s assets and liabilities to fair value.
The entry is made directly on the books to the subsidiary.
Has no effect on the presentation of the consolidated financial statements or separate parent financial statements.
The subsidiary’s financial statements would be recorded at fair value rather than historical cost.
IFRS Business Combinations
Focus is on the concept of the power to control, with control being the parent’s ability to govern the financial and operating policies of an entity to obtain benefits. Control is presumed to exist if parent owns more than 50% of the votes, and potential voting rights must be considered.
Special-purpose entities IFRS: Consolidated when the substance of the relationship indicates that an entity controls the SPE
Consolidated financial statements required except when parent is a wholly owned subsidiary
Equity method Investments must use equity method (i.e., no fair value option)
Joint ventures can use either equity method or proportionate consolidation method
Push-down accounting not allowed
Derivative Instruments – Module 19
Investments in Derivative Securities
Derivatives – Derive their value from other assets. Examples:
Stock option – value based on underlying stock price
Commodity futures contract – value based on underlying commodity price
Initially recorded at cost (or allocated amount) – Reported on balance sheet at fair value
Trading security – unrealized gains and losses on income statement
Available for sale security – unrealized gains and losses reported as other comprehensive income in stockholders’ equity
Characteristics of Derivatives
Settlement in cash or assets easily convertible to cash (such as marketable securities)
Underlying index on which value of derivative is based (usually the price of some asset)
No or little net investment at time of creation:
Futures-based derivative involves no payments at all when derivative created Such a derivative must be settled on settlement date in all cases
Options-based derivative involves small premium payment when derivative created Option holder has right not to settle derivative if results would be unfavorable Payment of premium when derivative created is price of this option
Use of Derivatives
Speculative – Attempt to profit from favorable change in underlying index
Gain or loss on change in fair value reported in ordinary income
Certain derivatives qualify as hedge instruments and must meet the following criteria:
Sufficient documentation must be provided at designation
The hedge must be highly effective throughout its life It must have the ability to generate changes measured every three months (minimum) It must move in the opposite direction to the offsetting item The cumulative change in value of the hedging instrument should be between 80% and 125% of offsetting item The method assessing effectiveness must be consistent with risk management approach Similar hedges should be assessed similarly
If a hedge is not 100% effective, the ineffective portion must be reported in current earnings
Fair Value Hedge – Attempt to offset risk of existing asset, liability, or
commitment
Gain or loss on change in derivative reported in ordinary income Should approximately offset loss or gain on item being hedged
Cash Flow Hedge – Attempt to offset risk associated with future expected transactions
Gain or loss excluded from ordinary income until offsetting future event affects income Reported as part of other comprehensive income until that time
Foreign Currency Hedge – Attempt to offset exposure to foreign currencies
Gain or loss reported in current earnings or other comprehensive income depending on type of foreign currency hedge (foreign-currency-denominated firm commitment, available-for-sale security, forecasted transaction, net investment in a foreign operation)
Financial Instruments
Risk of loss
Market risk – Losses due to fluctuations in market place Credit risk – Losses due to nonperformance of other party Concentration of credit risk – Several instruments have common characteristics resulting in similar risks Required Disclosures
Fair value
Off-balance-sheet credit risk – credit risk that is not already reflected as an accrued contingency
Concentration of credit risk
Hedging disclosures Objective and strategies Context to understand instrument Risk management policies A list of hedged instruments
IFRS Derivatives
No requirement for net settlement
Embedded derivatives: Cannot reassess if “clearly and closely related” unless change in contract that significantly affects cash flows
Fair Value Option and Measurements
The fair value option
May be applied instrument by instrument, with a few exceptions, such as investments otherwise accounted for by the equity method
Is irrevocable
Is applied only to entire instruments and not to portions of instruments
Available for
Recognized financial assets and financial liabilities with the following major exceptions: An investment in a subsidiary that the entity is required to consolidate Pension and other postretirement benefit plans including employee stock plans Lease assets and liabilities Deposit liabilities, of banks, savings and loan associations, credit unions, etc.
Firm commitments that would otherwise not be recognized at inception and that involve only financial instruments
Nonfinancial insurance contracts and warranties that the insurer can settle by paying a third party to provide those goods or services
Host financial instruments resulting from separation of an embedded nonfinancial derivative instrument from a nonfinancial hybrid instrument
Recognize unrealized gains and losses in earnings for businesses and in statement of activities for nonprofit organizations.
Fair Value defined
Exchange price Orderly transaction between market participants to sell the asset or transfer the liability in the principal or most advantageous market for the asset or liability under current market conditions Value is a market-based measurement, not an entity-specific measurement Includes assumptions about Risk inherent in a particular valuation technique or inputs to the valuation technique Effect of a restriction on the sale or use of an asset Nonperformance risk
Expanded disclosures on the inputs used to measure fair value
Level 1
Quoted prices in active markets for identical assets or liabilities
Level 2
Inputs such as quoted prices on similar assets or liabilities or observable for the asset or liability such as interest rates and yield curves
Level 3
Unobservable inputs for the asset or liability that reflect the reporting entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability (including assumptions about risk).
Segment Reporting - Module 20
SEGMENT REPORTING
Definition of Segments
Segments identified using management approach:
Component earns revenue and incurs expenses
Separate information is available
Component is evaluated regularly by top management
Reportable Segments – 3 Tests
Revenue test – Segment revenues ≥ 10% of total revenues
Asset test – Segment identifiable assets ≥ 10% of total assets
Profit or loss test
Combine profits for all profitable segments
Combine losses for all losing segments
Select larger amount
Segments profit or loss ≥ 10% of larger amount
Disclosures for Reportable Segments
Segment profit or loss
Segment revenues include intersegment sales
Deduct traceable operating expenses and allocated indirect operating expenses
Do not deduct general corporate expenses
Segment revenues
Segment assets
Interest revenue & expense
Depreciation, depletion, & amortization
Other items
PARTNERSHIP
Admitting a Partner
Calculating the Contribution – No Goodwill or Bonus
Partnership equity (before new partner’s contribution) ÷ 100% – new partner’s
percentage = Total capital after contribution × New partner’s percentage = Amount to be contributed Journal entry:
Cash xxx New partner’s equity xxx Excess Contribution by New Partner – Bonus Method
Partnership equity (before new partner’s contribution) + New partner’s contribution New partner’s contribution = Total capital after contribution × New partner’s percentage = New partner’s capital – New partner’s capital = Bonus to existing partners Journal entry:
Cash (new partner’s contribution) xxx Capital, new partner (amount calculated) xxx Capital, existing partners (bonus amount) xxx Bonus is allocated to existing partners using their P & L percentages
Excess Contribution by New Partner – Goodwill Method
New partner’s contribution ÷ New partner’s percentage = Total capital after contribution – Total capital of partnership (existing capital + contribution) = Goodwill to existing partners Journal entry:
Cash (new partner’s contribution) xxx Capital, new partner (new partner’s contribution) xxx Goodwill (amount calculated) xxx Capital, existing partners xxx Goodwill is allocated to existing partners using their P & L percentages
Contribution Below New Partner’s Capital – Bonus Method
Partnership equity (before new partner’s contribution) + New partner’s contribution = Total capital after contribution × New partner’s percentage = New partner’s capital – New partner’s contribution = Bonus to new partner Journal entry:
Cash (new partner’s contribution) xxx Capital, existing partners (bonus amount) xxx Capital, new partner (amount calculated) xxx Bonus is allocated to existing partners using their P & L percentages
Contribution Below New Partner’s Capital – Goodwill Method
Partnership equity (before new partner’s contribution) ÷ 100% - new partner’s percentage = Total capital after contribution × New partner’s percentage = New partner’s capital – New partner’s contribution = Goodwill Journal entry:
Cash (new partner’s contribution) xxx Goodwill (amount calculated) xxx Capital, new partner (total) xxx Retiring a Partner
Payment Exceeds Partner’s Balance – Bonus Method
Capital, retiring partner (existing balance) xxx Capital, remaining partners (difference – bonus) xxx Cash (amount paid) xxx Bonus to new partner is allocated to
existing partners using their P & L percentages
Payment Exceeds Partner’s Balance – Goodwill Method
Amount paid to retiring partner ÷ Retiring partner’s percentage = Value of partnership on date of retirement – Partnership equity before retirement = Goodwill Journal entries:
Goodwill (amount calculated) xxx Capital, all partners xxx Goodwill is allocated according to the partners’ P & L percentages
Capital, retiring partner xxx Cash (amount paid to retiring partner) xxx Partnership Liquidation − 5 steps
1) Combine each partner’s capital account with loans to or from that partner 2) Allocate gain or loss on assets sold to partners 3) Assume remaining assets are total loss – allocate to partners 4) Eliminate any partner’s negative balance by allocating to remaining partners using their P & L percentages 5) Resulting balances will be amounts to be distributed to remaining partners FOREIGN CURRENCY
Foreign Currency Transactions
Receivable or payable
Record at spot rate
Adjust to new spot rate on each financial statement date
Journal entry:
Receivable or payable xxx Foreign currency transaction gain xxx OR Foreign currency transaction loss xxx Receivable or payable xxx Gain or loss = Change in spot rate × Receivable or payable (in foreign currency)
Forward Exchange Contracts
All gains and losses measured using forward rate – rate expected to be in effect when settled
Hedge – Protection against change in exchange rate related to existing receivable or payable
Change in forward rate results in gain or loss on hedge
This will approximately offset loss or gain on change in spot rate on receivable or
payable
Special hedge contracts:
Hedge of foreign currency investment – gains or losses reported in equity – excluded from net income but included in comprehensive income
Hedge of foreign commitment – gain or loss deferred and offset against transaction
Speculative contracts – Entered into in anticipation of change in rate
Change in forward rate results in gain or loss
Foreign Currency Financial Statements
Conversion to U.S. $:
Functional Currency – Currency of primary economic environment in which entity operates.
1) Functional currency = local currency Translate from local currency to U.S. $
2) Functional currency = U.S. $ Remeasure from local currency to U.S. $
3) Functional currency neither local currency nor U.S. $ Remeasure from local currency to functional currency
Translate from functional currency to U.S. $
Remeasurement and Translation
Remeasurement Translation Historical rate: Rate at balance sheet date:* Nonmonetary assets and liabilities Assets and liabilities Contributed capital accounts Rate in effect on transaction date Revenue and expense accounts (or weighted-average rate for period): Current rate: Revenues and expenses All other items Gains and losses Difference: Difference: Remeasurement gain or loss Translation gain or loss Reported on income statement Component of stockholders’ equity Excluded from net income Included in comprehensive income * NOTE: To prepare a translated Statement of Cash Flows, the assets and liabilities must be translated at the weighted-average rate, not the rate at the balance sheet date.
INTERIM FINANCIAL STATEMENTS
General Rules
1) Revenues & expenses recognized in interim period earned or incurred 2) Same principles as applied to annual financial statements Special Rules
Inventory Losses
Expected to recover within annual period
Not recognized in interim period
Offset against recovery in subsequent interim period
Recognized when clear that recovery will not occur
Not expected to recover within annual period
Recognized in interim period
Recovery in subsequent interim period recognized
Income Taxes
Estimate of rate that applies to annual period
Other Items
Property taxes – allocated among interim periods
Repairs & maintenance
Generally recognized in interim period when incurred (including major repairs)
Allocated to current & subsequent interim periods when future benefit results
Disposal of a segment – recognized in interim period in which it occurs
Extraordinary item – recognized in interim period in which it occurs
IFRS: Interim
Discrete report, therefore use same accounting policies as in year-end financial statements
Not required
PERSONAL FINANCIAL STATEMENTS
Basic Statements
Statement of Financial Condition
Statement of Changes in Net Worth
Principles Applied
Assets & liabilities – Reported at fair market values
Business interests – Reported as single amount
Real estate
When operated as business – reported net of mortgage
When not operated as business – asset and mortgage reported separately
Retirement plans
Contributions & earnings on contributions by employee included
Contributions & earnings on contributions by employer included to extent vested
Life insurance – Cash surrender value minus borrowings against policy
Income taxes − 2 components
Income taxes on individual’s income for year to date
Tax effect on difference between tax basis and fair values of assets and liabilities
Other liabilities
Current payoff amount, if available
Otherwise, present value of future payments
Governmental (State and Local) Accounting – Module 21
GOVERNMENTAL (STATE AND LOCAL) ACCOUNTING
GASB Concept Statements set forth fundamentals on which governmental accounting and reporting standards will be based
Objective of governmental accounting & reporting – accountability
Provide useful information
Benefit wide range of users
Concepts Statement No. 1 identified three primary users of the external state and local governmental financial reports
The citizenry
Legislative and oversight bodies
Investors and creditors
Governmental financial information should:
Demonstrate operations within legal restraints imposed by citizens
Communicate compliance with laws & regulations related to raising & spending money
Demonstrate interperiod equity – current period expenditures financed with current revenues
To demonstrate full accountability for all activities, information must include:
Cost of services
Sufficiency of revenues for services provided
Financial position
The concepts statements encourage Service Efforts and Accomplishment (SEA) reporting
SEA reporting provides more complete information about a governmental entity’s performance than can be provided by traditional financial statements and schedules
Funds
Government comprised of funds – self-balancing sets of accounts − 3 categories
Governmental
Proprietary
Fiduciary
Methods of Accounting
Funds of a governmental unit use two methods of accounting
Most funds use modified accrual accounting
Some funds use accrual accounting
Modified Accrual Accounting
Differs from accrual accounting:
Focus of financial reporting is financial position & flow of resources
Revenues are recognized when they become available & measurable
Expenditures are recorded when goods or services are obtained
Expenditures classified by object, function, or character
Financial Statements of Governmental Units
General purpose financial statements – referred to as Comprehensive Annual Financial Report (CAFR) − 5 components
Management discussions & analysis – Presented before financial statements
Government-wide financial statements
Fund financial statements
Notes to financial statements
Required supplementary information – Presented after financial statements and notes
A component unit is a legally separate organization for which the elected officials of a primary government are financially accountable.
Users should be able to distinguish between primary government & component units – component units may be blended when either:
Governing body of component is essentially the same as that of the primary government
The component provides services almost exclusively for the primary government
The component unit’s total debt outstanding, including leases, is expected to be repaid entirely or almost entirely by the primary government
Most component units will be discretely presented
Management Discussion & Analysis (MD&A)
Introduces basic financial statements & provides analytical overview of government’s financial activities
Should include:
Condensed comparison of current year financial information to prior year
Analysis of overall financial position and results of operations
Analysis of balances and transactions in individual funds
Analysis of significant budget variances
Description of capital assets and long-term debt activity during the period
Currently known facts, decisions, or conditions expected to affect financial position or results of operations
Government-Wide Financial Statements
Consist of:
Statement of Net Position
Statement of Activities
Report on overall government
Do not display information about individual funds
Exclude fiduciary activities or component units that are fiduciary
Distinction made between primary government and discretely presented component units
Distinction made between government-type activities and business-type activities of primary government
Government-type activities include governmental funds & internal service funds
Business-type activities include enterprise funds only
Characteristics of Government-Wide Financial Statements
Use economic measurement focus for all assets, liabilities, revenues, expenses, gains, & losses
Apply accrual basis of accounting
Revenues from exchanges or exchange-like transactions recognized in period of exchange
Revenues from nonexchange transactions:
Derived tax revenues imposed on exchange transactions recognized as asset & revenues when exchange occurs
Imposed nonexchange revenues imposed on nongovernment agencies recognized as asset when government has enforceable claim & as revenues when use of resources required or permitted
Government-mandated nonexchange transactions provided by one level of government for another recognized as asset & revenue (or liability & expense) when all eligibility requirements met
Voluntary nonexchange transactions recognized similarly to government-mandated nonexchange transactions
Statement of Net Position
Presents assets, liabilities, deferred outflows of resources, and deferred inflows of resources
Assets & liabilities in order of liquidity
Current & noncurrent portions of liabilities reported
Assets + Deferred Outflows of Resources – Liabilities – Deferred Inflows of Resources = Net Position
3 categories of net position
Net assets invested in capital assets, net of related debt – All capital assets, including restricted assets, net of depreciation & reduced by related debt
Restricted net position – Items with externally imposed restrictions on use distinguishing major categories of restrictions
Unrestricted net position – Remainder
Format of Statement of Net Position
Assets, deferred outflows of resources, liabilities, deferred inflows of resources & net position reported for primary government
Separate columns for government-type activities & business-type activities
Amounts combined in total column
Assets, deferred outflows of resources, liabilities, deferred inflows of resources & net position also reported for component units
Amounts reported similarly as those for primary government
Column is not combined with totals for primary government
Statement of Activities
Self-financing activities distinguished from those drawing from general revenues
For each government function
Net expense or revenue
Relative burden
Governmental activities presented by function
Business-type activities presented by business segment
Items reported separately after net expenses of government’s functions:
General revenues
Contributions to term & permanent endowments
Contributions to permanent fund principal
Special items – those that are unusual or infrequent
Extraordinary items – those that are unusual and infrequent
Transfers
Items on Statement of Activities
Depreciation – indirect expense charged to function with asset
Allocated among functions for shared assets
Not required to be allocated to functions for general capital assets
Not allocated to functions for eligible general infrastructure assets Government uses an asset management system Government documents assets preserved appropriately
Revenues classified into categories
Amounts received from users or beneficiaries of a program always program revenues
Amounts received from parties outside citizenry are general revenues if unrestricted or program revenues if restricted to specific programs
Amounts received from taxpayers always general revenues
Amounts generated by the government usually general revenues
Contributions to term & permanent endowments, contributions to permanent fund principal, special & extraordinary items, & transfers reported separately
Format of Statement of Activities
Information for each program or function reported separately:
Expenses
Charges for services
Operating grants & contributions
Capital grants & contributions
Difference between expenses & revenues reported for each program
Equal to change in net position
Separated into columns for governmental activities and business-type activities
Combined into a total column
Remaining items (general revenues, grants & contributions, special & extraordinary items, & transfers) reported separately below functions & programs
Divided into governmental activities & business-type activities with total column
Provides change in net position & ending net position with same amounts as Statement of Net Position
Separate column for component units not combined into total
Additional Characteristics of Government-Wide Financial Statements
Internal Amounts
Eliminated to avoid doubling up
Interfund receivables & payables eliminated
Amounts due between government-type & business-type activities presented as offsetting internal balances
Capital assets include the following:
Land, land improvements, & easements
Buildings & building improvements
Vehicles, machinery, & equipment
Works of art & historical treasures
Infrastructure
All other tangible & intangible assets with initial useful lives > a single period Only identifiable intangibles Internally generated intangibles begin to be capitalized if Objective and capacity identified Feasible Intent to complete
Pension plans Single-employer defined benefit plan or agent defined benefit plan Reports a net pension liability, which is measured as the portion of the actuarial present value of projected benefit payments attributable to past periods of employee service minus the pension plan’s fiduciary net position
Accounting for Capital Assets & Infrastructure
Capital assets reported at historical cost
Includes capitalized interest & costs of getting asset ready for intended use
Depreciated over useful lives
Inexhaustible assets not depreciated
Infrastructure assets may be depreciated under modified approach
Infrastructure includes:
Capital assets with longer lives than most capital assets that are normally stationary
Roads, bridges, tunnels, drainage systems, water & sewer systems, dams, & lighting systems
Eligible infrastructure assets not depreciated
Must be part of network or subsystem maintained & preserved at established condition levels
Additions & improvements increasing capacity or efficiency capitalized
Other expenditures expensed
Fund Financial Statements
Governmental funds include:
General fund
Special revenue funds
Capital projects funds
Debt service funds
Permanent funds
Proprietary funds include:
Enterprise funds
Internal service funds
Fiduciary funds include:
Pension & other employee benefit trust funds
Investment trust funds
Private purpose trust funds
Agency funds
Financial Statements of Governmental Funds
Statements of governmental funds
Balance sheet
Statement of revenues, expenditures, and changes in fund balances
Focus is to report sources, uses, & balances of current financial resources
Apply modified accrual accounting
Capital assets & long-term debt not reported as assets or liabilities
Reports include separate columns for each major governmental fund and single column for total of all nonmajor funds:
General fund is always major
Others major if assets, liabilities, revenues, expenditures meet the 5% and 10% tests: Fund at least 5% of “total” column in government-wide financial statements Fund at least 10% of “government-type” column in government-wide financial statements.
Balance Sheet
Reports assets, liabilities, & fund balances
Reported separately for each major governmental fund
Fund balances segregated into reserved & unreserved
Total fund balances reconciled to net position of governmental activities in government-wide financial statements
Statement of Revenues, Expenditures, & Changes in Fund Balances
Reports inflows, outflows, and balances of current financial resources
Reported separately for each major governmental fund
Revenues classified by major source
Expenditures classified by function
Format of statement:
Revenues – Expenditures = Excess (deficiency) of revenues over expenditures ± Other financing sources and uses ± Special and extraordinary items = Net change in fund balances + Fund balances – beginning of period = Fund balances – end of period Change in fund balances reconciled to change in net position of governmental activities in government-wide financial statements
Financial Statements of Proprietary Funds
Statements of proprietary funds
Statement of net position
Statement of Revenues, Expenses, and Changes in Fund Net Position
Statement of Cash Flows
Preparation of statements
Emphasis is measurement of economic resources
Prepared under accrual basis of accounting
Reports include separate column for each enterprise fund meeting 5% and 10% tests: Fund at least 5% of “total” column in government-wide financial statements Fund at least 10% of “business-type” column in government-wide financial statements. Total of nonmajor enterprise funds in a single column Total of all internal service funds in a single column Four categories Operating Noncapital financing Capital financing Investing Derivatives: Reported at fair value Evaluated for effectiveness each financial reporting period Land held for investment reported at fair value
Statement of Net Position
Prepared in classified format
Current & noncurrent assets & liabilities distinguished
Net position reported in same categories as used in government-wide financial statements
Statement of Revenues, Expenses, & Changes in Fund Net Position
Amounts should be the same as net position & changes in net position shown for business-type activities in government-wide financial statements
Revenues reported by major source
Operating & nonoperating revenues & expenses distinguished
Nonoperating revenues & expenses reported after operating income
Format of statement of revenues, expenses, & changes in fund net position
Operating revenues (listed by source) – Operating expenses (listed by category) = Operating income or loss ± Nonoperating revenues & expenses = Income before other revenues, expenses, gains, losses, & transfers ± Capital contributions, additions to permanent & term endowments, special & extraordinary items, & transfers = Increase or decrease in net position + Net position – beginning of period = Net position – end of period Statement of Cash Flows
Shows sources & uses of cash by major classification
Operating activities reported using direct method
Noncapital financing activities
Capital & related financing activities
Investing activities
Operating income reconciled to cash flows from operating activities (indirect method)
Financial Statements of Fiduciary Funds
Statements of fiduciary funds
Statement of Net Position
Statement of Changes in Fiduciary Net Position
Focus of fiduciary financial statements
Emphasis on measurement of economic resources
Prepared using accrual basis of accounting
Report includes separate column for each major fiduciary fund and column for total of all nonmajor fiduciary funds.
Selection of major funds based on judgment of entity management
No 5% and 10% tests since fiduciary funds weren’t included in government-wide financial statements
Notes to Government Financial Statements
Intended to provide information needed for fair presentation of financial statements
Notes will include:
Summary of significant accounting policies
Disclosure about capital assets & long-term liabilities
Disclosure about major classes of capital assets
Disclosure about donor-restricted endowments
Segment information
Required Supplementary Information
Presented in addition to MD & A
Consists of:
Schedule of Funding Progress for all Pension Trust Funds
Schedule of Employer Contributions to all Pension Trust Funds
Budgetary comparison schedules for governmental funds (reporting basis is same as that chosen by legislative body for budget, and not necessarily that used for financial statements)
Information about infrastructure reported under the modified approach
Claims development information for any public entity risk pools
Governmental Funds
A governmental unit maintains 5 types of governmental funds
General fund – all activities not accounted for in another fund Only fund that reports positive unassigned fund balance
Special revenue funds – account for revenues earmarked to finance specific activities
Capital projects funds – account for construction of fixed assets
Debt service fund – accumulates resources for payment of general obligation debts of other governmental funds
Permanent funds – account for resources that are legally restricted
Fixed assets and LT debt not reported in governmental funds
Instead, reported in government-wide financial statements
Four fund balance classifications Nonspendable (either in form, e.g., inventory, or legally) Restricted (either by contributor or law) Committed to specific purposes (by highest level of governmental decision-making authority) Assigned (intend to spend for purpose but not bound to Unassigned (residual of general fund)
General Fund Accounting
A governmental unit will have one general fund
Annual budget is recorded at the beginning of the year
Revenues, expenditure, & other financing sources & uses are recorded during the year
Adjustments are made at the balance sheet date
Budgetary accounts are closed at year-end
Beginning of Year
Governmental unit adopts annual budget for general fund
Budget recorded with following entry:
Estimated revenues control xxx Estimated other financing sources xxx Budgetary fund balance xxx or xxx Appropriations xxx Estimated other financing uses xxx Estimated revenues control = revenues expected to be collected during the year
Estimated other financing sources = estimate of proceeds from bond issues & operating transfers in
Budgetary fund balance = plug – amount required to balance the entry
Appropriations = expenditures expected during the year
Estimated other financing uses = expected operating transfers out
During the Year
Revenue cycle consists of billing certain revenues, such as property taxes, collecting billed revenues, writing off uncollectible billings, & collecting unbilled revenues
Billing of revenues:
Taxes receivable xxx Allowance for estimated uncollectible taxes xxx Deferred revenues xxx Revenues control xxx Taxes receivable =
amount billed
Allowance for estimated uncollectible taxes = billings expected to be uncollectible
This amount may be adjusted upward or downward during the year
Offsetting entry will be to revenues control
Deferred revenues = portion of billed taxes expected to be collected more than 60 days after close of current year
Revenues control = portion of billed taxes expected to be collected during the current year or within 60 days of close
Collecting billed revenues:
Cash xxx Taxes receivable xxx Writing off uncollectible amounts:
Allowance for estimated uncollectible taxes xxx Taxes receivable xxx Collecting unbilled revenues:
Cash xxx Revenues control xxx Spending cycle consists of ordering goods & services, receiving the goods & services, and paying for them
Ordering goods & services:
Encumbrances control (estimated cost) xxx Budgetary fund balance reserved for encumbrances xxx Receiving goods & services:
Budgetary fund balance reserved for encumbrances (estimated cost) xxx Encumbrances control xxx Expenditures control (actual cost) xxx Vouchers payable xxx Payment:
Vouchers payable xxx Cash xxx Other financing sources & uses are recorded as the transactions occur:
Proceeds of long-term debit issues are recorded as other financing sources when received
Operating transfers to or from other funds are reported as other financing uses or sources as the funds are transferred
Adjustments at Balance Sheet Date
Closing entry – eliminating revenues, expenditures, & encumbrances:
Revenues control xxx Unreserved fund balance (plug) xxx or xxx Expenditures control xxx Encumbrances control xxx The remaining balance in the budgetary fund balance reserved for encumbrances is transferred to a nonbudgetary account:
Budgetary fund balance reserved for encumbrances xxx Fund balance reserved for encumbrances xxx The governmental unit may decide to recognize inventory as an asset:
Inventories (increase) xxx Fund balance reserved for inventories xxx or Fund balance reserved for inventories xxx Inventories (decrease) xxx End of Year
Budget recorded in beginning of year is reversed:
Appropriations xxx Estimated other financing uses xxx Budgetary fund balance xxx or xxx Estimated revenues control xxx Estimated other financing sources xxx Special Revenue Fund
Used to account for revenues that must be used for a particular purpose
Accounting identical to general fund
Capital Projects Fund
Used to account for construction of fixed assets
Fund opened when project commences & closed when project complete
Accounting similar to general fund
Differences in accounting for capital projects fund:
1) Budgetary entries generally not made 2) Expenditures generally made under contract Credit contracts payable
Credit retention payable for deferred payments
Debt Service Fund
Used to account for funds accumulated to make principal & interest payments on general obligation debts
Expenditures include principal & interest payable in current period
Resources consist of amounts transferred from other funds (other financing sources) & earnings on investments (revenues)
Amounts used for interest payments separated from amounts used for principal payments
Cash for interest xxx Cash for principal xxx Other financing sources xxx Proprietary Funds
Account for governmental activities conducted similarly to business enterprises
Enterprise fund:
Used to account for business-type activities
Uses accrual basis accounting
Earned income recognized as operating revenues
Shared taxes reported as nonoperating revenues
Internal service fund:
Used to account for services provided to other governmental departments on a fee or cost-reimbursement basis
Resources come from billings to other funds
Reported as operating revenues
Fiduciary Funds
Pension Trust Fund
Accounts for contributions made by government & employees using accrual accounting
Additional information in notes and supplementary information following notes will include:
Descriptive information about the plan
Information about plan investments
Information about the terms of receivables and nature of reserves
Components of the pension liability
Significant assumptions to measure the pension liability
The measurement date
A ten-year schedule of changes in pension liability
A ten-year schedule of the amounts of total pension liability, fiduciary net position, net pension liability, the covered-employee payroll, and selected ratios
A ten-year schedule of the actuarial computed required contribution, the required contribution, the actual contribution to the plan, and selected ratios
A ten-year schedule of the annual money-weighted return on pension plan assets
Investment Trust Fund
Accounts for assets received from other governments units to be invested on their behalf.
Uses accrual accounting
Private Purpose Trust Fund
Accounts for resources held on behalf of private persons or organizations.
Uses accrual accounting
Agency Fund
Accounts for money collected for various funds, other governments, or outsiders
Includes only balance sheet accounts
Assets always equal liabilities
Uses modified accrual accounting
Interfund Transactions
Nonreciprocal transfers are transfers of resources from one fund to another without any receipts of goods or services, such as a transfer of money from the general fund to a capital projects fund.
Paying fund:
Other financing uses control xxx Cash xxx Receiving fund:
Cash xxx Other financing uses control xxx Reciprocal transfers occur when one fund acquires goods or services from another in a transaction similar to one that would occur with outsiders.
Paying fund:
Expenditures control or Expenses xxx Cash xxx Receiving fund:
Cash xxx Revenues control xxx Reimbursements occur when one fund
makes payments on behalf of another fund
Reimbursing fund:
Expenditures control or Expenses xxx Cash xxx Receiving fund:
Cash xxx Expenditures control or Expenses xxx Loans may be made from one fund to another
Lending fund:
Due from other fund (fund identified) xxx Cash xxx Receiving fund:
Cash xxx Due from other fund (fund identified) xxx Solid Waste Landfill Operations
Environmental Protection Agency imposes requirements on solid waste landfills
Procedures for closures
Procedures for postclosure care
Procedures represent long-term obligations accounted for as long-term debt
Costs to be incurred by governmental funds accounted for in general long-term debt account group
Expenditures in governmental funds reduce general long-term debt account group balances
Costs to be incurred by proprietary funds accounted for directly in funds
Costs associated with closure and postclosure procedures accounted for during periods of operation
Not-For-Profit Accounting – Module 22
ACCOUNTING FOR NONPROFIT ENTITIES
Financial Statements of Not-for-Profit Organizations
All not-for-profit organizations must prepare at least 3 financial statements
Not-for-profit organizations include:
Hospitals
Colleges & universities
Voluntary health & welfare organizations (VHW)
Required financial statements for all types include:
Statement of Financial Position
Statement of Activities
Statement of Cash Flows
VHWs must also prepare a Statement of Functional Expenses
Statement of Financial Position
Includes assets, liabilities, & net assets
Unrestricted net assets – available for general use, including those set aside by board of trustees
Temporarily restricted net assets – donated by outside party & restricted to specific purpose
Permanently restricted net assets – donated by outside party & required to be invested with earnings restricted or unrestricted
NOT-FOR-PROFIT COMPANY STATEMENT OF FINANCIAL POSITION DECEMBER 31, 20X2
Statement of Activities for NPO
Similar to income statement
Reports revenues, gains, expenses, & losses
Also reports temporarily restricted assets released from restriction
Categorized activities among unrestricted, temporarily restricted, & permanently restricted to provide change in net assets for each
Change added to beginning balance to provide ending net assets for each category
Expenses classified by:
Object – nature of item or service obtained
Function – program or activity to which attributed
Character – period or periods benefited from payments
Not-for-Profit Company Statement of Activities For Year Ended December 31, 20X2
Statement of Cash Flows for NPO
Similar to statement of cash flows under GAAP
Special treatment for donated assets restricted for long-term purposes
Classified as cash flows from financing activities
Statement of Functional Expenses
Classifies expenses into program services & support services
Program services – expenses directly related to organization’s purpose
Support services – expenses necessary, but not directly related to organization’s purpose such as fund-raising & administrative expenses
Expenses classified by (similar to statement of activities):
Object
Nature
Character
Contributions Made to and Received by Not-for-Profit Organizations
In general, contributions are income to a not-for-profit organization
Those that are part of the major, ongoing, & central operations are revenues
Those that are not are gains
Unrestricted cash donations:
Cash xxx Donations (unrestricted funds) xxx Permanently restricted
donations:
Cash xxx Donations (permanently restricted funds) xxx Donated services:
Program expense (fair market value) xxx Donations (unrestricted funds) xxx Cash donations restricted for a specific purposes:
When made:
Cash xxx Donations (temporarily restricted funds) xxx When used:
Temporarily restricted net assets xxx Unrestricted net assets xxx Expense xxx Cash xxx Cash donated for purchase of property:
When made:
Cash xxx Donations (temporarily restricted funds) xxx When used:
Temporarily restricted net assets xxx Unrestricted net assets xxx Property xxx Cash xxx Pledges
Promises by outside parties to donate assets
Recognized in period of pledge
Allowance for uncollectible amount established
Some or all may have time restriction – temporarily restricted
Some or all may be unrestricted
Pledges xxx Allowance for uncollectible pledges xxx Donations (unrestricted funds) xxx Donations (temporarily restricted funds) xxx Other Donations
Donations of art, antiques, or artifacts not recognized if:
Asset held for research or exhibition
Asset preserved & unaltered
Proceeds from sale of asset to be used to buy additional art, antiques, & artifacts
Donated assets to be held in trust
Not recognized by not-for-profit organization
Disclosed in footnotes to financial statements
Hospital Revenues
Patient service revenue recorded at gross value of services
Billing may be less due to Medicare allowance or employee discount
Difference recorded in allowance account
Statement of activities will report net amount
Services provided for free due to charity not recognized as revenues
Special transactions:
Bad debts recognized as expense on statement of activities, not reduction of revenues
Miscellaneous revenues from cafeteria, gift shop, parking lot fees, & educational programs classified as other revenue
Donated supplies reported as operating revenue & expense when used
Donations of essential services and unrestricted donations are nonoperating revenues
College Tuition Revenues
Students may receive refunds or price breaks
Refunds to students reduce tuition revenues
Price breaks may result from scholarships or reductions for family members of faculty or staff
Tuition recognized at gross amount
Price break recognized as expense
Index
Accounting for a Purchase
Accounting for Changing Prices
Accounting for Income Taxes
Accounting for Nonprofit Entities
Accounts Payable
Accounts Receivable
Admitting a Partner
Agency Fund
Applying LIFO
Balance Sheet
Bank Reconciliation
Bankruptcy
Basic EPS
Basic Rules & Concepts
Bond Issue Costs
Bond Retirement
Bonds
Book Value Per Share
Business Combinations
Capital Leases
Capital Projects Fund
Capitalization of Interest
Change in Accounting Principle
Change in Estimate
Characteristics of Derivatives
College Tuition Revenues
Common Stock Subscribed
Compensated Absences
Completed Contract
Computing Net Income
Consolidations
Contingencies
Contributions Made to and Received by Not-for-Profit Organizations
Conventional Retail (Lower of Cost or Market)
Convertible Bonds
Converting from Cash Basis to Accrual Basis
Cost of Goods Sold
Cost Recovery Method
Costs Incurred After Acquisition
Coupons
Current Assets & Liabilities
Current Income Tax
Debt Service Fund
Deferred Income Tax Expense or Benefit
Deferred Tax Assets & Liabilities
Depreciation and Depletion
Detachable Warrants
Diluted EPS
Disclosure of Information About Capital Structure
Discontinued Operations
Disposal of Property, Plant, & Equipment
Dividends
Dollar Value LIFO
Earnings Per Share
Elements of Financial Statements
Eliminate the Investment
Eliminating Entries
Enterprise fund
Equity Instruments with Characteristics of Liabilities
Equity Method
Error Corrections
Errors Affecting Income
Estimated & Accrued Amounts
Extraordinary Items
Fin
Financial Instruments
Financial Statement Analysis
Financial Statements of Fiduciary Funds
Financial Statements of Governmental Funds
Financial Statements of Governmental Units
Financial Statements of Not-for-Profit Organizations
Financial Statements of Proprietary Funds
Financing Activities
Financing Receivables - Discounting
Foreign Currency
Foreign Currency Financial Statements
Foreign Currency Transactions
Forward Exchange Contracts
Franchises
Fund Financial Statements
General Fund Accounting
Goodwill
Governmental Accounting
Governmental Funds
Government-Wide Financial Statements
Gross Profit Method for Estimating Inventory
Hospital Revenues
Impairment
Installment Sales Method
Insurance
Intangibles
Intercompany Bond Holdings
Intercompany Sales of Inventory
Intercompany Sales of Property, Plant, & Equipment
Interfund Transactions
Interim Financial Statements
Internal Service Fund
Inventories
Inventory Errors
Inventory Valuation Methods
Investing Activities
Investment Trust Fund
Investments in Derivative Securities
Issuance of Common Stock
Land and Building
Leasehold Improvements
Leases
Life Insurance
Long-Term Construction Contracts
Lower of Cost or Market
Management Discussion & Analysis
Marketable Securities
Methods of Reporting Investments
Miscellaneous Liabilities
Modified Accrual Accounting
Nonmonetary Exchanges
Exception Notes Received for Cash
Notes Received for Goods or Services
Notes to Government Financial Statements
Objectives of Financial Reporting
Operating Activities
Partnership
Partnership Liquidation
Patents
Pension Expense
Pension Plans
Pension Trust Fund
Percentage of Completion
Periodic Versus Perpetual
Permanent & Temporary Differences
Personal Financial Statements
Postretirement Benefits
Preferred Stock
Preferred Stock – Special Issuances
Presentation of EPS Information
Prior Period Adjustments
Private Purpose Trust Fund
Property, Plant, & Equipment
Proprietary Funds
Qualitative Characteristics of Accounting Information
Quasi Reorganizations
Refinancing Liabilities
Reportable Segments
Reporting Comprehensive Income
Reporting Discontinued Operations
Reporting Earnings Per Share
Reporting the Results of Operations
Research and Development
Retained Earnings
Retiring a Partner
Revenue Recognition
Royalties
Sale-Leaseback Transactions
Sales-Type & Direct-Financing Leases
Segment Reporting
Service Contract
Software
Solid Waste Landfill Operations
Special Disclosures
Special Revenue Fund
Startup Costs
Statement of Activities
Statement of Activities for NPO
Statement of Cash Flows
Statement of Cash Flows for NPO
Statement of Financial Position
Statement of Functional Expenses
Statement of Net Assets
Statement of Retained Earnings
Stock Appreciation Rights
Stock Options Plans
Stockholders’ Equity
Treasury Stock
Troubled Debt Restructuring
Use of Derivatives
Warranties