far - amazon web services...notes to financial statements 144 management's discussion and...

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FAR2020 SuperfastCPA Review Notes

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Table of Contents

Conceptual Framework and Financial Reporting 1 Conceptual Framework 1

Conceptual Framework 1 Standard Setting Process 3

General Purpose Financial Statements 4 Balance sheet 4 Income statement 7 Statement of comprehensive income 10 Statement of changes in equity 11 Statement of cash flows 12 Notes to financial statements 16 Consolidated financial statements 18 Discontinued operations 21 Going concern 22

Financial Statements for Nonprofits 24 Statement of financial position 24 Statement of activities 25 Statement of cash flows 28

Public company reporting topics 29 Financial statements of employee benefit plans 33 Special purpose frameworks 34

Financial Statement Accounts 36 Cash 36 Receivables 38 Inventory 42 Property, plant, and equipment 48 Investments 56

Financial assets at fair value 56 Financial assets at amortized cost 60 Equity method investments 62

Intangible assets 65 Payables and accrued liabilities 68 Long-term debt 71

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Equity 80 Revenue recognition 86 Compensation and benefits 91 Income taxes 96

Select Transactions 98 Accounting changes and error corrections 98 Business combinations 100 Contingencies and commitments 103 Derivatives and hedge accounting 104 Foreign currency transactions 107 Leases 111 Nonreciprocal transfers 119 Research and development costs 123 Software costs 124 Subsequent events 126 Fair value measurements 127 GAAP vs IFRS 130

Government 133 State and Local Government Concepts 133

Conceptual Framework 133 Measurement focus and Basis of Accounting 135 Purpose of funds 136

Format & Content of the CAFR 138 Government-wide financial statements 138 Governmental funds financial statements 140 Proprietary funds financial statements 142 Fiduciary funds financial statements 143 Notes to financial statements 144 Management's discussion and analysis 145 Budgetary comparison reporting 146 Required supplementary information 147 Financial reporting entity, blended & discrete units 148

Typical Items & Specific Transactions 149 Net position and components thereof 149 Fund balances 150

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Capital assets 151 General and proprietary liabilities 152 Interfund activity & transfers 153 Nonexchange revenue transactions 154 Expenditures and expenses 156 Special items 157 Budgetary accounting & encumbrances 158 Other financing sources and uses 161

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56 Copyright © 2020 SuperfastCPA.com

Investments

Financial Assets at Fair Value

For Equity Securities: All equity securities are required to be recorded at fair value when fair value can be readily determined (see exceptions below). Dividends from equity securities are included in net income. Exceptions to carrying equity securities at fair value: Investments in equity securities will be carried at fair value unless:

1. There is significant influence over the investee and the equity method is used

2. The investment will be consolidated and therefore eliminated 3. The fair value of the investment cannot be readily

determined. In this case, the investment will be recorded at cost and adjusted for any impairments

Equity Securities Example: ABC purchased 10 shares of XYZ for $1,000. Journal entry at purchase: Investment in XYZ $1,000 Cash $1,000 At the balance sheet date if the fair value of the XYZ shares is now $1,250: Investment in XYZ $250 Unrealized gain $250 If ABC received dividends of $50 on their XYZ investment: Cash $50 Dividend income $50

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At the next balance sheet date if XYZ investment is now worth $950: Unrealized loss $300 Investment in XYZ $300 When the XYZ shares are actually sold for $900: Cash $900 Realized loss $50 Investment in XYZ $950 Equity Securities at Cost If the fair value of the securities cannot be readily determined, then the investor would record the investment at cost. Any dividends received would be included in net income. Such investments would be evaluated for impairment based on any of the following factors:

• If there’s been a downturn in the earnings performance, credit rating, business outlook of the investee, or concerns about the ability of the investee to continue as a going concern

• If there’s been a downturn in the economic, regulatory, or market conditions the investee operates in

If it is determined the assets are impaired, the impairment loss is equal to the carrying value of the investment less the determined fair value. In other words, carrying value – fair value = the impairment loss.

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For Debt Securities: The entity has several options for how they carry debt securities as investments:

• The entity will either classify the investment as trading, available-for-sale (AFS), or held-to-maturity.

• If they have the ability and intent to carry the debt securities until maturity, then they will be classified as ‘held to maturity’ (HTM)

• If they don’t have the ability to hold until maturity, or if they don’t plan to hold until maturity, then the investments will be classified as ‘available for sale’ securities (AFS)

• If a debt security is acquired with the intent to sell in the short-term, then it is classified as a trading security

• For trading securities, both realized and unrealized gains & losses are recognized in the income statement

Available for Sale Securities These are debt securities that are “available for sale”. These are reported at fair value on the balance sheet. If the fair value becomes greater than the carrying value, then there is an unrealized gain in OCI. Example: ABC purchased a bond from XYZ for $1,000 and classified it as an AFS security. Journal entry at purchase: AFS securities $1,000 Cash $1,000 At the balance sheet date if the fair value is now $1,250: AFS securities $250 Unrealized holding gain (OCI) $250

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When the amortized cost is greater than the fair value of the investment, there has been a decline in value of an AFS investment. At this point there are two considerations: 1: What portion of the decline in value is because of general market conditions? These are unrealized losses in OCI. 2: What portion of the decline in value is because of a decline in the credit worthiness of the investee? These are credit losses recognized in income and creates a valuation allowance or contra account to the AFS investment. Example: ABC determines that its $100,000 investment in XYZ’s debt securities are now worth $95,000. ABC attributes $3,000 to credit loss, and $2,000 to general market conditions. The credit loss entry would be: Credit loss expense $3,000 Credit loss allowance $3,000 The portion for general conditions would be: Unrealized loss (OCI) $2,000 FV adjustment - AFS securities $2,000 These credit losses can be reversed if the situation changes, but only up to the amount in the credit loss allowance account.

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Financial Assets at Amortized Cost

Held to maturity (HTM) debt investments are reported at amortized cost. These are debt securities that the investor intends to “hold until maturity” of the investment. The fair value option can be elected for a held to maturity investment, and if so then fair value rules apply (see previous section). The investment is recorded at cost (includes brokerage or transfer fees if applicable). Unrealized gains and losses aren’t tracked or measured for HTM investments. Interest income is recognized in earnings (income statement). Example: ABC purchased a debt investment that it intends to hold until maturity. The cost of the investment is $100,000. Journal entry to record investment: HTM investment $100,000 Cash $100,000 If ABC receives $5,000 in interest income from the investment: Cash $5,000 Interest income $5,000 HTM investments are evaluated for impairment at each balance sheet date. If a decline in fair value is 1) below amortized cost and 2) the decline in value is considered other than temporary, the entity evaluates the investment according to the current expected credit loss model (CECL). This model is based on historical experience and business outlook of the investee, market conditions in which the investee operates, and forecasts related to

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the investee to come up with all expected credit losses on an investment (essentially you’re evaluating the ability of the investee to repay the debt and come up with the amount the entity actually expects to receive on this debt investment). The expected credit loss amount is then used to create a valuation allowance that is a contra account to the HTM investment. This amount is debited to “credit loss expense” on the income statement, and then credited to “allowance for credit loss”, the contra account which lowers the amortized cost amount on the balance sheet. Example: ABC evaluates its $100,000 HTM investment and expects a credit loss of $20,000. The entry would be: Credit loss expense $20,000 Allowance for credit loss $20,000 So this allowance lowers the value of the HTM investment on the balance sheet, even though it’s still being carried at its amortized cost, and it provides the net amount that the entity expects to actually collect on the debt investment. At each balance sheet date these credit losses are re-evaluated, and previous losses can be reversed, but only up to the amount in the allowance account.

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Equity Method Investments This is the method used when an investor owns more than 20% but less 50% of voting shares in an entity and/or has “significant influence” over the investee (more than 50% ownership would require consolidation). It’s possible to own 21-49% and still not have significant influence if the investee opposed investor, another investor owns more and “blocks” your interests, you don’t have representation on the board. In this case the fair value option would be used. Also, you can own less than 20% and HAVE significant influence if you own the highest % of stock, if you have representation on the board, or are technologically interdependent with the investee. In this case the equity method could be used. If the investment is greater than the proportionate FV of net assets, the excess is goodwill. However, the goodwill from the equity method is not separated on the balance sheet, it is just included in the investment account. If an entity was accounting for an investment with another method, and then switched to the equity method, that change will be applied prospectively. Recording the investment: The cost of the investment is recorded as “Investment in XYZ”. Example: ABC corp makes an investment in XYZ corp that equals 30% of the stock of XYZ and gives ABC significant influence. The cost of the investment was $100,000. Entry to record investment:

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Investment in XYZ $100,000 Cash $100,000 Dividends reduce the investment on your books, and it’s pro-rata: XYZ pays $10,000 in dividends for the year. ABC would make the following entry: Cash $3,000 Investment in XYZ $3,000 Dividends received are considered a return of investment and lowers the investment account. Income is the opposite: If XYZ had net income of $30,000, ABC’s “share” as a 30% owner is $9,000. The entry would be: Investment in XYZ $9,000 Investment income $9,000 If XYZ reported a net loss of $30,000 for the period: Investment loss $9,000 Investment in XYZ $9,000 Impairment An equity method investment is evaluated for impairment, and if the change in FV is considered other than temporary, the investment is written down to FV and a loss is recognized in income. Other equity method facts: The rules for dividends only apply to the common stock of the investee. If the investor also had preferred stock, dividends

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received from the preferred stock would be regular dividend income. If an investment made is more than the book value for the proportionate amount due to an undervalued intangible asset, as that asset is amortized it will reduce the investment account: Example: ABC purchases 25% of the common stock of XYZ for $500,000. The book value of the shares was $400,000 due to an undervalued intangible asset. ABC determines the useful life of the intangible asset to be 10 years, so each year ABC will amortize $10,000, which will reduce ABC’s “investment in XYZ” account by the $10,000.

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Intangible assets

Intangible assets are either created or acquired. They are assets that don’t have a physical form but are useful to a business for longer than a year. Although stocks and other securities sound like they fit this definition, intangible assets are separate from financial assets or investments. Intangibles either have a definite life, or an indefinite life, but all intangibles can be evaluated for impairment. Identifiable: these can be legally identified such as copyrights, customer lists, patents Unidentifiable: goodwill 2 types of “life”

• Definite life: has a finite life legally or other factors limit its life

⁃ Patents, copyrights

⁃ “Useful life” means how long the asset will provide a benefit, not strictly its legal life on paper. If a patent legally has 20 years left, but management projects it will only generate cash flows for 10 more years, its useful life is 10 years

• Indefinite life: no foreseeable limit on the life of the asset

⁃ Trademarks For definite life intangibles:

• You capitalize external costs (legal fees, etc.) • They are amortized over their useful life on the straight-line

method • There is impairment if book value is greater than recoverable

cost • Impairment loss is BV - FV

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For indefinite life intangibles: • You capitalize external costs • They are NOT amortized (although goodwill can be

amortized for nonpublic companies straight-line over 10-year period)

• Impairment loss is BV - FV Goodwill Goodwill is the excess over fair market value of the acquired company’s assets. It represents brand value, customer loyalty, etc. Goodwill can be impaired if it is determined that the carrying value of the goodwill is greater than its fair value. Goodwill is tested for impairment at the reporting unit level. Impairment loss on goodwill if the entity’s carrying value of goodwill is greater than the entity’s fair value. The difference would be the impairment loss. Impairment losses on goodwill cannot be reversed once recognized. A private(nonpublic) company can elect to amortize goodwill on a straight-line basis over a 10-year period. IFRS and Intangibles Under GAAP, re-valuation of goodwill is NOT allowed. Under IFRS it is allowed if in an active market. Under GAAP, reversal of impairment loss is NOT allowed. Under IFRS a reversal of an impairment loss is permitted.

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Under GAAP, goodwill is recognized at the “reporting unit” level. Under IFRS it is recognized at the cash-generating unit level.

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