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FAR

1 Review Notes 1. SEC has the legal authority to establish US GAAP, however, SEC allow accounting profession to establish GAAP and self-regulate. a) Security and Exchange Commission (SEC) The SEC was established by the Security Exchange Act of 1934. b) Committee on Accounting Procedure (CAP) CAP was a part-time committee of AICPA, which issued ARB, determined GAAP from 1939 1959. c) Accounting Principles Board (APB) APB was another part-time committee of AICPA, which issued APBO and interpretations, determined GAAP from 1959 1973. d) Financial Accounting Standards Board (FASB) FASB is an independent full-time organization, started determining GAAP since 1973. FASB has 7 full-time members, they serve on a 5-year terms. 2. All those regulation bodies made accounting guidance complicated, thus, from July 1, 2009, the FASB Accounting Standards Codification became the single source of authoritative nongovernmental US GAAP. 3. International Accounting Standards Board (IASB) IASB has 15 full-time members and 2 part-time members, with a mix of practice experience. 4. International Financial Reporting Interpretations Committee (IFRIC) IFRIC was appointed by the trustees of the IFRS Foundation to assist the IASB in establishing and improving standards of international financial accounting and reporting. 5. On-going standard-setting process Discussion Paper -> Exposure Draft -> public comments -> at least 9 members approve Exposure Draft. 6. Conceptual Framework for Financial Reporting is a joint project for IASB and FASB. The purpose of this project is to converge and improve the FASB and IASB financial reporting framework. But the Conceptual Framework is NOT an IFRS. 7. The goal for international convergence of accounting standards is to set up a single set of high quality, international accounting standards that companies can use for both domestic and cross-border financial reporting. 8. FASB created a conceptual framework (Statement of Financial Accounting Concepts, or SFAC) that serves as a basis for all FASB pronouncements, however, SFAC is NOT a GAAP. 9. SFA No.8 Chapter 1: The Objective of General Purpose Financial Reporting

To provide financial information about the reporting entity that is useful for the primary users of general-purpose financial reports in making decisions about providing resources to the reporting entity. (disclose entitys performance) a) Primary Users (external) i.e. investors, lenders, other creditors b) Useful Information i.e. resources of the company, the claims against the entity, how efficiently and effectively the entitys management and governing board discharged their responsibility to the companys resources, future net cash inflows. 10. SFAC No.8 Chapter 3: Qualitative Characteristics of Useful Financial Information a) Fundamental Relevance & Faithful Representation Relevance: 1) Predictive Value; 2) Confirming Value; 3) Materiality Faithful Representation: 1) Completeness; 2) Neutrality; 3) Freedom from Error b) Enhancing: 1) Comparability; 2) Verifiability; 3) Timeliness; 4) Understandability c) Benefit > Cost 11. Full set of Financial Statements include: Statement of financial position (Balance Sheet) Statement of earnings (Income Statement) Statement of comprehensive income Statement of cash flows Statement of changes in owners equity 12. Fundamental assumptions (US GAAP) Entity Assumption Going Concern Monetary Unit Periodicity Historical Cost Principle Revenue Recognition Principle (Earned & Realized/realizable) Matching Principle Accrual Accounting Full Disclosure Principle Conservatism Principle Fundamental assumptions (IFRS) Going concern Accrual accounting 13. Elements of Financial Statements Comprehensive income = Net Income + Other Comprehensive Income (OCI) Normal operating, recurring: Revenue & Expense Non-operating, unusual or infrequent: Gain & Loss Balance Sheet item: Assets, Liabilities, Equity

Investment of/Distribution to owners (excluded from comprehensive income) 14. SFAC No.7 Using Cash Flow Information and Present Value in Accounting Measurements (provides a framework when using future cash flows as a measurement basis for assets and liabilities) Five elements of present value measurement: 1) Estimate of future cash flow 2) Expectations about timing variations of future cash flows 3) Time value of money (risk-free interest) 4) The price for bearing uncertainty 5) Other factors (i.e. liquidity issues) 15. Present value computation 1) Traditional approach 2) Expected cash flow approach 16. Measurement Attributes for Assets and Liabilities 1) Historical cost (PPE) 2) Current cost (inventory) 3) Net realizable value (A/R) 4) Current market value (marketable securities) 5) Present value of future cash flows (long-term debt, bond) 17. Equipment depreciation was assigned to a production department and then to product unit costs example of allocating overhead Depreciated equipment was sold in exchange for a note receivable example realization Product unit costs were assigned to cost of goods sold when the units were sold example of matching 18. Replacement cost is defined as the amount of cash or its equivalent that would be paid to acquire or replace an asset currently. Replacement cost is an acquisition cost. 19. Under IASB framework, going concern and accrual accounting are the only two underlying assumptions of financial statement preparation and presentation. 20. Presentation Order of major components of Income statement I Income (or loss) from Continuing Operations (individual line items show gross of tax, then total reported net of tax) D Income (or loss) from Discontinued Operations (net of tax) E Extraordinary Items (net of tax, separate disclosure) A Cumulative Effect of Change in Accounting Principle (net of tax) 21. Multiple step income statement (enhanced user information)[I per above] 1) Normal operating

Net sales Cost of sales Gross margin Selling expense G&A expenses Depreciation expense Income (loss) from operations 2) Non-operating Other revenues and gains (interest revenue, gain on sale of fixed asset, etc.) Other expenses and losses (interest expense, loss on sale of fixed asset, etc.) Income before unusual items and income tax Unusual or infrequent items (i.e. loss on sale of available-for-sale securities) 3) Income before income tax 4) Provision for income tax (current, deferred) 5) Net income from continuous operations 22. Single step income statement 1) Total revenues and other items 2) Total expenses and other items (income tax expense included) 3) Net income (net of tax) 23. Discontinued Operations (D per above) for that period! 1) Impairment loss 2) Gain/loss from actual operations 3) Gain/loss on disposal * For that period means, for example, classified as held for sale in April Year 1, sold in June Year 2, counts the whole year of operational loss in the discontinued operations, not just from April December for Year 1. 24. Held for sale: Once you plan/decide to sell the component, all related revenue and expenses are reported under discontinued operations until sold (note: the sale is expected to be complete within one year) 25. In order to report as discontinued operations: a) Eliminated from ongoing operations b) No significant continuous involvement after disposal 26. Impairment loss a) Any initial or subsequent write-down to fair value less costs to sell should be recognized as impairment loss b) A gain is allowed for subsequent increase in fair value after initial impairment loss is recognized, but not exceeding the amount that previously write-off 27. Assets within the component that are reported in discontinued operations are no longer depreciated or amortized.

28. Subsequent adjustment related to discontinued operations a) has a cause-and-effect relationship b) occur no later than a year after the disposal transaction e.g. contingencies related to disposal, settlement of employee benefit plan 29. Discontinued operations component could be disclosed in face or notes 30. Exit or disposal costs: (disclose in notes, not the face of F/S) a) Involuntary employee termination benefits b) Costs to terminate a contract that is not a capital lease c) Other costs associated with exit or disposal activities, including costs to consolidate facilities or relocate employees 31. Examples of extraordinary items: Damage as a result of infrequent earthquake or flood; An expropriation of a plant by the government; A prohibition of a product line by a newly enacted law or regulation; Certain gains or losses from extinguishment of a long-term debt (non- recurring, unusual and infrequent in nature); Note: IFRS does not allow presenting of extraordinary item 32. Examples of non-extraordinary items: Gain or loss from sale or abandonment of property, plant or equipment used in business; Large write-down or write-off of receivables, inventories, intangibles (including goodwill), long-term securities (permanent decline); Gain or loss from foreign currency transactions or translation; Losses from major strike by employees; Long-term debt extinguishments that a part of a common management strategy (not unusual and infrequent) 33. Accounting change 1) Changes in accounting estimate (prospective) Changes in lives of fixed assets Adjustments of year-end accrual of officers salary or bonus Write-don of obsolete inventory Material non-recurring IRS adjustment Settlement of litigation Changes in accounting principle that are inseparable from a change in estimate (i.e. a change from installment method to immediate recognition method) 2) Changes in accounting principle (retrospective) Cumulative effect difference between the amount of beginning retained earnings in the period of change and what retained earnings would have been if the accounting change had been retroactively applied.

The general rule is that changes in accounting principle should be recognized by adjusting beginning retained earnings in the earliest period presented for the cumulative effect of the change, and, if prior period are presented, they should be restated. Note: Non-GAAP -> GAAP = Error Correction (i.e. Cash basis -> Accrual basis) Change in inventory method to LIFO = change in estimate Change in depreciation methods = change in estimate 3) Changes in accounting entity (retrospective = restate) Require full disclosure of the cause and nature of the change Note: IFRS does not include such concept 34. Comprehensive income = NI + OCI Change in equity from non-owner transactions NI = Income from continuous operations + Discontinued operations +Extraordinary item (IDE per above) Other Comprehensive Income (OCI) includes: P Pension adjustments (Pension changes in funded status: due to gains/losses, prior service costs, and net transition assets or obligations) U Unrealized gains and losses (available-for-sale securities, and debt securities transferred from held-to-maturity to available-for-sale) F Foreign currency items (including translation adjustments) E Effective portion cash flow hedges R Revaluation surplus (IFRS only) 35. Accumulated Other Comprehensive Income (AOCI) AOCI is a component of equity that includes the total of OCI for the period and previous periods. OCI for current period is closed out to this account, just like NI is closed out to Retained Earnings. This account is used for certain gains/losses that are not ready to hit NI. 36. The unrealized loss on the trading security and revaluation loss of intangible assets will be reported in net income, not other comprehensive income. 37. Both US GAAP and IFRS require a description (disclosure) of all significant policies be included as an integral part of the financial statements. Accounting policies commonly described in the footnote: Basis of consolidation Depreciation methods Amortization of intangibles Inventory pricing Accounting for recognition of profit on long-term construction contracts Recognition of revenue from franchising or leasing operations

38. Under US GAAP, Officers salaries, officers expenses and intercompany sales are all transactions in the ordinary course of business and generally would not require disclosure. Only the loans to officers would require disclosure because they are outside of the ordinary course of business. However, compensation arrangements for key management would require disclosure under IFRS. Short-term employee benefits Post-employment benefits Other long-term benefits Termination benefits Share-based payments Thus, officers salaries need to be disclosed under IFRS, but officers expenses are not considered related party transactions. 39. For disclosure of accounting policies, disclosure should NOT be limited to principles and methods peculiar to the industry in which the company operates. All material accounting policies should be disclosed. 40. Disclosure of risks and uncertainties (US GAAP) 1) Nature of operations (major products, principal markets, etc.) 2) Use of estimates in the preparation of financial statements 3) Certain significant estimates (reasonably possible & material) 4) Current vulnerability due to certain concentrations 41. For interim only, timeliness is emphasized over reliability. Interim financial reporting should be viewed as reporting for an integral part of an annual period. 42. Income taxes rule for quarters: The general rule is to multiple the year-to-date income by the estimated effective tax rate and subtract the result from the provision included in previous quarter. 43. Interim inventory valuation: 1) Disclose the method used at the interim date and reconcile any material difference with annual physical inventory 2) Liquidation of a LIFO base layer (US GAAP only, because IFRS does not allow LIFO) 3) Permanent and temporary decline in market value permanent inventory losses should be reflected in the interim period in which they occur; temporary market value decline that are expected to reverse before the end of the annual period should not be recognized in interim period. e.g. Due to the decline in market price in the second quarter, the company incurred an inventory loss. The market price is expected to return to previous level by the end of the year, however, the decline had not reversed at year-end. The loss should be reported in fourth quarter only, not in second quarter. Only when the loss is probable and estimable, the expected loss must be recorded in full, and the loss becomes such at the end of the fourth quarter, not second quarter.

44. To adequately capture the impact of discontinued operations and extraordinary items, both should be included in net income and disclose in the interim financial statement notes. 45. General, an enterprise is required to disclose segment profit/loss, segment assets, and certain related items, but is not required to report segment cash flow. Required disclosures for only public enterprises: Operating segments (annual and interim) Products and services Geographic areas Major customers 46. Transactions between the segments of an enterprise are not eliminated as in consolidation between the parent company and subsidiaries. 47. Not every enterprise is an operating segment: e.g. corporate headquarters and pension plan are NOT operating segments. In order to qualify as segment, it has to earn revenue or incur expense related to business activity. It has operational results are regularly reviewed by chief operating officer to make decisions of allocating the business resources, and with traceable (discrete) financial information available. 48. Quantitative threshold for reporting segments: 1) 10% of revenue, or reported profit/loss, or assets of all combined operating segments (note: use combined number, not consolidated!) 2) Keep adding segment until all of the reported segments revenue > 75% of all combined revenue 49. Segment Profit/Loss formula Revenues (For that segment internal and external) Less: Directly traceable costs Less: Reasonably allocated costs = Operating Profit (or loss) for segment 50. Development stage enterprises must issue the same financial statements as any other enterprises, with additional disclosure requirements, such as cumulative net loss (deficit accumulated during the development stage), cumulative loss from the companys inception, cumulative cash inflow and outflows, stocks issued 51. First time adoption of IFRS At least 3 balance sheet, 2 statement of comprehensive income, 2 statement of cash flow, 2 statement of changes in equity, and related notes. An entity should disclose how the transition from previous GAAP to IFRS affected its financial statements. 52. SEC Reporting Requirements: (know the forms!!)

1) 10-K (60/75/90 days) 2) 10-Q (unaudited, 40/45 days) 3) 11-K (annual report for employee benefit plan) 4) 20-F and 40-F (20-F for Canadian companies, 40-F for all other foreign private issuers) = 10-K for US issuers 5) 6-K (half-year report by foreign private issuers) 6) 8-K (major corporate events) 7) Form 3,4 and 5 (filed by directors, officers, beneficial owners) 53. Regulation S-X Interim: 1) Condensed financial statements are okay. 2) US Quarterly filing; Foreign Semi-annually filing Annual: 1) Period presented: IFRS all 2 sets; GAAP 2 B/S, 3 all others 54. SEC XBRL (Extensible Business Reporting Language) Key XBRL terms: 1) Tag: machine-readable code provides contextual information allowing data to be recognized and processed by software 2) Taxonomy: defines the specific tags used for individual items of business and financial data XBRL exhibits submitted to SEC are subject to modified liability for 24 months from the time the filer first is required to submit interactive data files. The modified liability provision will terminate completely on October 31, 2014. Each companys initial interactive data exhibits, will be required within 30 days after the earlier of the due date or filing date. Filers will also receive a 30-day grace period for the first filing that is required to have footnotes and schedules tagged.