FAR Notes 2 - CPA exam review PDF

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FAR Notes F-1 

When decide to dispose of an asset = impairment loss is FV – disposal costs

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Loss of yr 1 operations + impairment loss = loss on discontinued operations

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“abandonment of assets no longer being used” is still continuing operations

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Once decided to sell = discontinued operations for that entire time, even before actually disposed

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Stock dividends not on CF

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US treasury bills not reporting in CF statement because cash equivalent

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Add together OCI, do net of tax, THEN add NI

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Subtract equity in earnings of unconsolidated affiliates in CF

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Do not include change in fixed assets or change in N/P in operating CF

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Interest received is operating section of CF

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Segment reporting: 10% of combined revenue from inter+outside

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Without recourse: treat as a sale w/ a loss

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Freight out is a SELLING expense

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Freight in is INVENTORY

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BI + purchases – discounts +freight in – EI = COGS

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Lower of cost or market: compare cost to middle value of: Replacement cost, NBV, or NBV – profit

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LIFO = most current inventory costs on I/S

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FIFO = Most recent inventory costs on B/S

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Retail method: BI + purchases + markups = available for sale *compare cost to retail and get a %. Then subtract markdowns and sales to get the new retail. Multiply by %

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Land cost is NOT excavation (that’s building)

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Capitalized interest = Weighted avg accumulated construction x interest rate

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Interest paid = Face x interest rate

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DIFFERENCE Is interest expense

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DD: ( rate/years) x NBV

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Sum of yrs: cost – sv x (remaining yrs/sum of yrs)

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FV given VS CV received

Has/lacks commercial substance 

HAS commercial substance (both parties reflect a G/L)

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G/L calculated by FV – CV of asset GIVEN UP, then back into received machine

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If lacks commercial substance and boot is RECEIVED, then you book a g/l.

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If lacks and boot is given, do not book G/L

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If little boot received, (fv – bv given up) x boot/fv received = G realized

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FV approach used when has commercial sub

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BV approach used when lacks

Securities 

Trading – unrealized G/L Income statement

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Unr G/L for trading is from pd to pd

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AFS – Unrealized G/L on OCI

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If decline in AFS is permanent, then goes directly to I/S

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If AFS, unrealized holding Gain from cost – year 2 *if asks for ACCUMULATED oci

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If AFS asks for unrealized G/L in CURRENT PD “on its yr 2 I/S”, go from yr 1 – yr 2

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If purchased % of preferred stock, NI goes up by div paid to preferred

Finding GW in equity method (heiarchy thing) Bottom level: NBV x % FV x % GW is excess between that and purchase price R&D

2

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Expensed under GAAP

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Successful patent = capitalize

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Impairment GAAP – compare CV to undisc FCF

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Impairment IFRS – GREATER OF FV – CTS or PV FCF. Compare CV to that amount

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FV of reporting unit – assigned $ of reporting unit to A & L = Max GW

Accretion 

Accretion = increase in ARO over time

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Cumulative accretion at end of time + accumulated depreciation = ARO

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Estimated ARC discounted at PV is the accumulated depreciation

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Estimated cost – pv amount is accretion

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Accretion expense increases every yr

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If bonds originally purchased with detachable warrants, take CV of bond + warrants and then allocate %

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Ex: $1,000,000 bonds WITH detachable warrants. FV bond w/o warrant was $1,080,000 and warrants are $120,000. Add to get 1,200,000. Bonds have 90% of that so 90% x 1,000,000 = 900,000. 100,000 is the amount of discount on bonds.

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Book value method: C/S recorded at carrying amount of converted bonds. APIC is difference between that and par value of stock issuance. No G/L – convertible C/S at par

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Market value method: Loss on conversion is the difference between market value of the stock issued and the book value of the bonds before conversion – Still at par, but loss is between market value and bv

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Warrants at market price

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If given bond payable WITH warrant, subtract out cv of warrant from BP

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Add bond issue cost to discount of BP (subtract from face)

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A higher interest rate results in an increase in annual amortization of the discount

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Care about CV given up and FV received (only care about your books

LTD

Cost vs par

3

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Cost method: When levresell below treasury price, RE is affected (not apic)

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Par method reports a lower amount for APIC and same amount for RE if acquire treasury below OG issue, but above par value

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STOCK DIV think SMALL OR LARGE

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IF small, FV, and there is APIC

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If large, Par and no PIC

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“Small farm, large party”

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(Cost – sp)/cost = profit margin

Stock options 

GAAP required all amounts FV over PBO is NONcurrent assets

Net periodic pension stuff 

For net periodic pension costs, add AMORTIZATION of Unrecognized PSC

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In AOCI: Unrecognized PSC, unrecognized trainsition obligations/assets, and unrecognized net G/L. Only subtract gains.

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When there are no actual G/L, the net pension gain is the DIFFERENCE between actual and expected plan assets. Subtract first THEN take the difference net of tax.

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When given unrecognized PSC as of end of PY, divide by remaining service life years

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When there’s a change in funded status of a pension planning due to the incurrence of a PSC, Dr. OCI, Cr. Pension plan asset for the whole amount. Dr. DTA and Cr. DTBenefit – oci for the related tax amount

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For PSC, you always Dr. and Cr. The amount actually amortized, then alongside is the tax amount

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Corridor = Beg PBO and market related assets (10% of larger)

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Take BEG unrecognized gain – 10% then divide by yrs in service

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Under IFRS, pension loss is included in OCI – not amortized to the income statement

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When solving for AOCI balance, it’s NET OF TAX

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Net periodic pension costs never do with net of tax, just if reporting on FS

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EPBO is equal to or greater than APBO as a result of any nonvested benefits

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If post retirement healthcare costs rise, net periodic pension costs will also increase bc you need to pay more in future (higher costs)

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Employee options are at FAIR value of options on GRANT DATE

Income taxes

4

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DTA – Subract from current taxable income

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Current tax rate – DTA or + DTL gets you total tax expense

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Only temporary differences matter

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DTA = future deductible amounts

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Net of tax approach

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If given financial statement income, subtract permanent differences to land at taxable income

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When taxable > financial then DTA

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DTA = future deductible

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DTA represents future tax savings

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Excess depreciation on a tax return means that financial is higher. It’s a liability so add.

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“current portion of taxable income” ignore temp differences/ dta dtl stuff

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Uncollectable accounts expense is temporary

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If given DTA at beginning of year, net out this year’s because deductible

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Effective tax rate = income tax expense/pretax income

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Operating income is not shown net of tax

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Accrued warranty costs are DTA bc expensed under GAAP before Tax, so financial is higher

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“made estimated tax payments” means paid off DTL

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Rent received in advance is temp diff

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NOL carry fwd indefinitely

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Cash to accrual is a prior pd adjustment for correction of error

Consolidations 

NCI for IFRS = FV NET ASSETS x NCI%

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GW GAAP = FV of sub – FV net assets

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Take FV assets – FV liabilities then use that to calculate G/L

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GAAP NCI = FV entire sub x nci%

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Entity is VIE and consolidates IF: investor has power to direct significant economic activities for the VIE and whether investor is primary beneficiary of IE (absorbs 50)

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Entity is not self supporting – needs VIE

Derivatives

5

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Carrying value and fair value of financial instruments must be disclosed

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Credit risk = must show

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Market risk = optional under GAAP, required under IFRS

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Derivatives can be reported as assets or liabilities

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Changes of FV hedge are reported on income statement

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Speculative fair value hedge changes reported in I/S

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Effective portion CF hedge – OCI

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Ineffective portion – I/S

Leases 

If OWNES is met, lessor can’t be operating

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In lease buyback, seller is the lessee whose profit is the difference between FV and BV

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If operating lease, no depreciation expense

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Leasehold improvements are LESSER OF amortization

Lease buyback 

To qualify as a sale: Rev recognition requirements must be met (contract must exist and stuff)

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If it DOES: any difference between asset sale price and FV and PV of lease payments & PV of market rental payments is an adjustment to either sale price or purchase price

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If it DOES NOT: Lessee records a financing liability and lessor records a financing receivable

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“Company should record depreciation expense for the leased machine under operating lease for” ZERO BC OPERATING

“Rent for free” problems 

JE for months free Dr. Rent receivable (for the total amount/total months) Cr. Rental income

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JE for months ½ off Dr. Cash Dr. Rent receivable Cr. Rental inc (for total amt/months)

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JE for normal months Dr. cash Cr. Rent receivable Cr. Rental income

R&D 

Gaap: expense R&D unless alt future use

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IFRS: Expense research, cap development. EXPENSE unsuccessful. Think “UnExplainable”

Software 

E -> Tech -> C

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Tech feasibility is established upon “completion of a detailed program design or a working model”

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Product costs are easily associated with the items to be inventoried as a part of inventory costs

Fair Value Measures 

Level 1: very active market and prices readily available

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Level 2: Trade in active markets, but tend to be based on dealer quotations or alt sources

Partnerships bonus method

6

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Take TOTAL capital balance, divide by however many. Take that then subract what new partner actually contributed.

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New partner gets the actual 1/3

Governmental 

Earnings from tax to be used exclusively to repay specific debt: debt service

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“town is barred by from assuming” – custodial

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Property tacx revenue: Imposed non-exchange revenue. Recorded when levied to extent that it is measurable and available

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“derived” non-exchange tax revenue. Derived from a SALE. Accrued based on timing of RECEIPT (+60 ye)

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“imposed” Accrued when billed (because the customer has to do it, so when billed)

Combining financials – Gov 

Going from fund to Gov-wide net position (modified to full accrual)

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ADD back capital outlay and assets

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Subtract depreciation

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When figuring out CY depreciation, include Capital outlay

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Subtract LT debt

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Under modified approach, infrastructure not included in capitalization

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Add back principal

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Start with “excess revenue over all gov funds”

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Propriety change in net position – internal service fund change in net position = business type activities change in net position

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Gov wide = Economic resource approach and full accrual

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GOV TYPE = GRaSPP + S

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BUSINESS TYPE = E

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CIPPOE is EXCLUDED from gov wide financials, but INCLUDED in fund financials

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GOV wide financials are stmt of NET POSITION and ACTIVITES

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MDA BEFORE

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Add internal service fund changes in net position accounted for in the Proprietary funds

CF regular vs gov 

7

REG: operating, investing, financing

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GOV: operating, nonfinancing, financing, investing

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Reg: Interest income/cash receipts: operating

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GOV: interest income/cash receipts: investing

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GOV: Interest expense/cash payments are capital or noncapital financing depending on what it’s for

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Reg: Capital assets purchased are investing

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GOV: Capital assets purchased are financing activities

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GOV: Unique transactiong like transfers, property tax revenues, special assessments are NONfinancing

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GOV: Reconciliation to operating income

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Modified approach = no capitalization needed nbv

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The general fund of a blended component unit should be reported as special rev

Interfund transactions:

8

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Reciprocal – Rev and expenses

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Nonreciprocal – Other financing sources

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Interfund activities WITHIN a column (either gov type or business type) are ELIMINATED prior to prep of combining

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Interfund activities BETWEEN columns are not eliminated, and reported as interfund balances and transfers (ex: general fund and enterprise)

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Governmental acct: Budget (appropriations), Activity (expenditure), Encumbrance (Cr. Budgetary control)

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PURCHASE METHOD inventory: Dr. Expenditure Cr. Voucher payable for amount purchased, then at year end JE for amount LEFT Dr. inventory Cr. Nonspendable fund bal

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CONSUMPTION METHOD inventory: Dr. Inventory of supply Cr. Voucher payable. At YE do an expenditure Dr. expenditure Cr. Inventory of supply

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BP = other financing sources

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Doscount on PB = other financing uses

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When issue purchase order: Need to set money aside so ENCUMBRANCE and cr. Budgetary control

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When receive it, it’s now an activity so Dr. Budgetary control Cr. Encumbrance (reverse) then Dr. Expenditure (bc now an activity). Expenditures kinda take the place of encumbrances.

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Derivative assets = increase deferred inflows

NFP 

Marketable securities are cash equivalents and NOT on CF stmt

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NFP required to produce: stmt fin position, activity, cf, and functional expense disclosure

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If receive restriction and use on restricted stuff all in the same year, unrestricted from the start

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“assets of charitable remainder trust” Dr. Assets held in chartiable remainder trust Cr. Liability under trust agreement Cr. Contribution rev, W restriction

STATEMENT OF CHANGES in fiduciary net position Grants to other organizations and depreciation are both expenses in NFP 10% of combined assets Bank draft = cash and cash equivalent If original maturity > 90 days, not cash and cash equivalent STATEMENTS GRaSPP: Balance sheet, stmt of revenues, expenditures, and changes in fund balance SE: Statement of net position, statement of rev, expenses, and changes in fund net position, stmt of cash flows CIPPoe: Stnt of fiduciary net position, statement of changes in fiduciary net position Only one with cash flows: SE Only one with BS: GRaSPP GRSPP with NO encumbrances: Debt service and permanent Generally says “additions and deductions”: Cippoe “not obligated” key word for custodial Examples of custodial: Tax collection funds, clearance funds, special assessments I/S for cippoe: changes in fiduciary net position

9

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Allocate “issue proceeds” of a basket purchase or sale of convertible p/s based on relative FMV

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NFP needs to report expenses in statement of activities by functional classification and DISCLOSE expenses in a natural classification by function in the notes to FS

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In a finance lease, the difference between the FV of the leased asset and its cost at inception is recognized as a g/l

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LESSOR RECORDS G/L on sales type lease

10



Record loss immediately during lease buyback

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Level 2 examples: Quoted prices for identical A/L in markets not active, Quoted prices for similar that are active, interest rates observable at commonly quoted intervals

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PPE held at historic cost

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GW: held at historical – impairment

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Equity investments and A/R NOT money market

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Other operating expenses direct CF = Other operating expenses – prepaids

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NFP: statement of ACTIVITIES gives info about rev/expenses

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NFP: Statement of financial POSITION gives info about B/S stuff (think point in time)

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Amount of dividend REVENUE is amount NOT IN EXCESS

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Amount OVER excess is return on capital or LIQUID

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