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FAR Outline

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FAR 1 Unit Outline
FAR 1
Unit Outline
Module 1—Standards and Conceptual Framework
Financial Accounting Standards

In the United States, the Securities and Exchange Commission (SEC) has the legal authority to
establish U.S. GAAP. In most instances, the SEC has allowed the accounting profession to establish
GAAP and to self-regulate.

The Financial Accounting Standards Board (FASB) is the current standard-setting body in the United
States. The FASB Accounting Standards Codification (ASC) is the single source of authoritative
nongovernmental U.S. GAAP.

The Financial Accounting Foundation (FAF) created the Private Company Council (PCC) to improve
standard setting for privately held companies in the U.S. The goal of the PCC is to establish
alternatives to U.S. GAAP, where appropriate, to make private company financial statements more
relevant, less complex, and cost-beneficial. Accounting alternatives for private companies are
incorporated into the relevant sections of the Accounting Standards Codification (ASC).

The International Accounting Standards Board (IASB) establishes International Financial Reporting
Standards (IFRS).
Conceptual Framework for Financial Reporting

Terminology is the key here. Know the fundamental qualitative characteristics (relevance and faithful
representation) and the enhancing qualitative characteristics (comparability, verifiability, timeliness,
and understandability).
Module 2—Income Statement and Balance Sheet
Uses of the Income Statement and Terminology

The purpose of the income statement is to provide information about the uses of funds in the income
process (i.e., expenses), the uses of funds that will never be used to earn income (i.e., losses), the
sources of funds created by those expenses (i.e., revenues), and the sources of funds not associated
with the earnings process (i.e., gains).

Know the difference between expired and unexpired costs and also the difference between the gross
concept and the net concept.
Income From Continuing Operations

Know the difference between a multiple-step income statement and a single-step income statement.
The multiple-step income statement reports revenues and expenses separately from nonoperating
revenues and expenses and other gains and losses. In the single-step presentation of income from
continuing operations, total expenses (including income tax expense) are subtracted from total
revenues; thus, the income statement has a single step.
Balance Sheet

Under U.S. GAAP, entities may present a classified balance sheet that distinguishes current and noncurrent assets and liabilities. When appropriate, a balance sheet based on liquidity is also
permissible. Review the terminology and be able to recognize a classified balance sheet.
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FAR 1 Unit Outline
Module 3—Revenue Recognition: Part 1
Five-Step Approach to Revenue Recognition

Step 1: Identify the Contract With the Customer.
Contracts are agreements between parties that create enforceable rights or obligations. In order for
revenue to be recognized, a contract must: be approved by all parties, contain identifiable rights for
each party and payment terms, have commercial substance, and involve probable likelihood that the
entity will collect substantially all consideration owed. Contracts may be combined into a single
contract and are potentially modified when the price and/or scope changes.

Step 2: Identify the Separate Performance Obligations in the Contract.
A performance obligation is a promise to transfer either a good or a service to a customer. The
transfer may either be distinct or a series of substantially similar goods/services. To be distinct, the
promise must be separately identifiable from other goods/services within the contract and the benefit
must be available to the customer independently or when combined with their own resources.

Step 3: Determine the Transaction Price.
The transaction price is the amount of consideration that an entity is entitled to receive in exchange
for transferring goods and/or services to a customer. If applicable, variable consideration, significant
financing, noncash considerations, and consideration payable to the customer should be factored into
the transaction price.

Step 4: Allocate the Transaction Price to the Separate Performance Obligations.
If a contract contains more than one performance obligation, the overall transaction price will need to
be allocated to each separate obligation based on the amount of the expected, stand-alone
consideration applicable to each unique obligation. Discounts, variable consideration, and transaction
price changes should all be factored into the allocation process.

Step 5: Recognize Revenue When or as the Entity Satisfies Each Performance Obligation.
Revenue is recognized when the performance obligation is satisfied through transferring the
good/service to the customer (who obtains control). Satisfaction can occur over time (measured using
output or input methods) or at a point in time.
Presentation

A contract asset is booked when the entity has a right to consideration in exchange for
goods/services transferred to the customer prior to actual payment. A contract liability is booked when
an entity has the obligation to transfer goods/services when the customer has already paid prior to
performance.
Module 4—Revenue Recognition: Part 2
Specific Applications Within Revenue Recognition

Costs to obtain a contract are treated as assets if the entity expects to recover them; costs are
treated as expenses if they are borne regardless of whether the contract is obtained. In order for
contract fulfillment costs to be recognized as an asset, they must relate directly to a contract,
generate/enhance the resources of an entity, and be expected to be recovered.

As a principal, an entity has control over the good/service prior to transfer and revenue recognized
will equal expected gross consideration; as an agent, an entity does not have control and revenue
equal to a fee/commission will be recognized.
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FAR 1 Unit Outline

Contracts in which an entity sells an asset and promises, or has the option, to later repurchase the
asset represent repurchase agreements. An obligation to repurchase is a forward; a right to
repurchase at an entity's option is a call option; and a right to repurchase at the customer's option is a
put option.

Bill-and-hold arrangements allow revenue to be recognized prior to the customer receiving the
product. In order to recognize revenue, there must be a substantive reason for holding the product,
the entity cannot use or redirect the product, and it must be separately identified and ready for
transfer to the purchasing customer.

A consignment relationship exists when an entity provides a product to a dealer to be held until it is
ultimately sold to a third-party customer. Revenue is recognized either upon ultimate sale to a
customer or after the expiration of a defined period of time.

Warranties may be treated as separate performance obligations distinct from the product covered in
the contract. Separate treatment is likely if the warranty is not required by law, if the coverage period
is lengthy, and if there are no specific tasks required regarding compliance assurance.

When a customer has a right to return a product, an entity should book: revenue for the amount
of consideration it expects to receive; a refund liability; and an asset related to subsequent
product recovery.
Long-Term Construction Contracts

The percentage-of-completion method recognizes revenue over the term of the construction project
based on estimated profitability and cost estimates following a four-step process.

The completed-contract method recognizes income on completion of the construction contract. This
method does not match revenues and expenses over the long term.

Both methods recognize estimated losses immediately.

Under IFRS, the completed-contract method is not permitted. The percentage-of-completion method
must be used unless the final outcome of the project cannot be reliably estimated, in which case the
cost recovery method is required. Under the cost recovery method, revenue only can be recognized
to the extent of costs incurred.
Module 5—Income Statement: Discontinued Operations
Introduction to Discontinued Operations

Accounting for discontinued operations can consist of gain/loss on current operations, gain/loss on
sale, and impairment loss. Discontinued operations are shown net of tax. Any of these must be
reported as part of discontinued operations in the year incurred.
Definitions

A component of an entity is a part of an entity (the lowest level) for which operations and cash flows
can be clearly distinguished, both operationally and for financial reporting purposes, from the rest of
the entity.
Accounting Rules

The results of operations of a component of an entity or a group of components of an entity, or a
business or nonprofit activity, will be reported in discontinued operations if it has been disposed of or
is classified as "held for sale."

The disposal must represent a strategic shift that has or will have a major effect on an entity's
operations and financial results to be reported as a discontinued operation.
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FAR 1 Unit Outline
Module 6—Accounting Changes and Error Corrections
Changes in Accounting Estimate (Prospective Application)

Changes in estimates, such as the useful life of a plant asset, are incorporated into the accounting
records for the current and future periods (prospectively). No adjustment of prior financial statements
is required.

A change in depreciation method is a change in accounting principle that is inseparable from a
change in estimate and is accounted for as a change in estimate.
Changes in Accounting Principle (Retrospective Application)

Change in principle (or method) involves switching from one acceptable method to another. The
cumulative effect is the change in retained earnings that results from restating prior years from the
"old" method to the "new" method at the beginning of the earliest year presented.

The cumulative effect is reported as an adjustment to beginning retained earnings, net of tax, in the
statement of retained earnings.

Change in accounting principle exception: When it is impracticable to estimate the change in retained
earnings that would result from restating the prior year financial statements, the change in method is
applied prospectively (like changes in estimate). In this case, no restatement of the prior years'
presentation occurs and there is no cumulative effect reported in the statement of retained earnings
(e.g., changing to U.S. GAAP LIFO from any other inventory method).
Changes in Accounting Entity (Retrospective Application)

Changes in entity require restatement of the prior years' financial statements to conform with the new
accounting entity when the prior financials are presented comparatively. IFRS does not include the
concept of a change in entity.
Error Correction (Prior Period Adjustment)

Error corrections are reported net of tax in the statement of retained earnings.
Module 7—Statement of Comprehensive Income
Definitions

Comprehensive income includes all changes in owners' equity other than transactions with owners.
The formula shows that comprehensive income must include net income plus/minus other changes in
owners' equity not resulting from transactions with owners. These other changes are known as other
comprehensive income items.

Other comprehensive income items are revenues, expense, gains, or losses that are included in
comprehensive income but excluded from net income under U.S. GAAP.

The mnemonic PUFER represents the five commonly tested sources of other comprehensive income.


Pension adjustments

Unrealized gains and losses on AFS debt securities

Foreign currency translation items

Effective portion of cash flows hedges

Revaluation surpluses (gains) recognized when intangible assets and fixed assets are
revalued under IFRS
Accumulated other comprehensive income is the cumulative sum of all of the individual components
of other comprehensive income. Accumulated other comprehensive income is an owners' equity item.
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FAR 1 Unit Outline
Financial Statement Reporting

Both U.S. GAAP and IFRS allow the statement of comprehensive income to be presented using the
one-statement approach (statement of income and comprehensive income) or the two-statement
approach (statement of income immediately followed by a separate statement of comprehensive
income).
Other Reporting Issues

Components of other comprehensive income may be reported either net of tax or before related tax
effects, with one amount shown for the aggregate income tax expense or benefit related to the total of
other comprehensive income items.
Module 8—Adjusting Journal Entries
Matching Revenues and Related Expenses

Accrual basis accounting matches revenues with expenses. In order to properly match revenues with
expenses in the periods in which they occur, it is sometimes necessary to defer or accrue revenues
or expenses.
Adjusting Journal Entries

If revenue has been deferred, the company must calculate the amount of revenue that can be
recognized through year-end and make the appropriate adjusting journal entry.

If expenses have been deferred (prepaid), the company must calculate the amount of expenses that
have been incurred through year-end and make the appropriate adjusting journal entry.

An entity must assess whether the performance obligation has been met and revenue can be
recognized prior to the cash being received. If so, revenues must be accrued by recording a
receivable.

An entity must also assess whether expenses have been incurred prior to the cash being paid. If so,
expenses must be accrued by recording accrued liabilities, accounts, payable, or other payable (e.g.,
wages payable).

In some instances, an entity may record receipts to a revenue/expense account when they should
have been recorded to an asset/liability account. An adjusting entry may be required to ensure that
the financial statements are in accordance with the accrual basis of accounting.

Rules for adjusting journal entries are as follows:
•
Adjusting journal entries must be recorded by the end of the entity's fiscal year, before the
preparation of the financial statements.
•
Adjusting journal entries never involve the cash account.
•
All adjusting journal entries will hit one income statement account and one balance sheet
account.
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FAR 2 Unit Outline
FAR 2
Unit Outline
Module 1—Notes to Financial Statements
Summary of Significant Accounting Policies

The Summary of Significant Accounting Policies reflects the methods and policies employed by the firm.
Remaining Notes to the Financial Statements

The remaining notes contain all other information relevant to decision makers. These notes are used
to disclose facts not presented in either the body of the financial statements or in the Summary of
Significant Accounting Policies.

Examples of remaining notes include material information regarding inventory, PP&E, and other
significant asset/liability balances; changes in stockholders' equity; fair value estimates; contingency
losses; contractual obligations; pension plan description; segment reporting; subsequent events; and
changes in accounting principles or implementation of new accounting standards updates.
Disclosure of Risks and Uncertainties (U.S. GAAP)

U.S. GAAP requires the disclosure of risks and uncertainties existing at the date(s) of the financial
statements in the following areas: nature of operations, use of estimates in the preparation of financial
statements, certain significant estimates, and current vulnerability due to certain concentrations.

IFRS requires an explicit and unreserved statement of compliance with IFRS in the notes to the
financial statements. An entity cannot describe financial statements as complying with IFRSs unless
they comply with all IFRS requirements. U.S. GAAP does not have a similar requirement.
Module 2—Going Concern
Going Concern Overview

An entity is considered to be a going concern if it is reasonably expected to remain in existence and
settle all its obligations for the foreseeable future.
Going Concern Presumption

Under U.S. GAAP, preparation of financial statements presumes that the reporting entity will continue
as a going concern. Under this presumption, financial statements are prepared under the going
concern basis of accounting.
Management's Responsibility to Evaluate

Management is required to evaluate whether there is substantial doubt about an entity's ability to
continue as a going concern within one year after the date that the financial statements are issued.
Mitigating Factors

If conditions or events exist that raise substantial doubt about an entity's ability to continue as a going
concern, management should consider whether the entity's plans intended to mitigate those
conditions or if events will be successful in alleviating the substantial doubt.
Results of Management's Evaluation and Required Disclosures

There are three going concern categories based on management's evaluation, including: no
substantial doubt (disclosures not required); substantial doubt alleviated (requires footnotes
disclosures); and substantial doubt not alleviated (requires footnote disclosures).
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FAR 2 Unit Outline
U.S. GAAP vs. IFRS

Note the differences between U.S. GAAP and IFRS when there is substantial doubt about an entity's
ability to continue as a going concern.
Module 3—Subsequent Events
Definition of a Subsequent Event

A subsequent event is an event or transaction that occurs after the balance sheet date but before the
financial statements are issued or are available to be issued.

Recognized subsequent events provide additional information about conditions that existed at the
balance sheet date. Entities must recognize the effects of all recognized subsequent events in the
financial statements.

Nonrecognized subsequent events provide information about conditions that occurred after the
balance sheet date and did not exist at the balance sheet date. Entities should not include
nonrecognized subsequent events in the financial statements.
Subsequent Evaluation Period

An entity that files financial statements with the Securities and Exchange Commission (SEC) must
evaluate subsequent events through the date that the financial statements are issued.

All other entities must evaluate subsequent events through the date that the financial statements are
available to be issued.
Reissuance of Financial Statements

When an entity reissues its financial statements, the entity should not recognize events that occurred
between the date the original financial statements were issued or available to be issued and the date
that the financial statements were reissued, unless an adjustment is required by GAAP or other
regulatory requirements.
Revised Financial Statements

Revised financial statements are considered reissued financial statements.
Module 4—Fair Value Measurements
Fair Value Overview

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants in the principal (or most advantageous) market at the
measurement date under current market conditions.
Fair Value Terminology

The most advantageous market is the market with the best price for the asset (maximizes selling
pricing of asset) or liability (minimizes payment to transfer liability), after considering transaction costs.
Fair Value Measurement Framework

Entities can use the market approach, the cost approach, the income approach, or a combination of
these approaches when measuring the fair value of an asset or liability.

The fair value hierarchy prioritizes the inputs used in the market, cost, and income valuation
techniques. Level 1 inputs have the highest priority and Level 3 inputs have the lowest priority.
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FAR 2 Unit Outline
Fair Value Disclosures

Fair value disclosures by an entity are necessary so that financial statement users can assess the
following:
•
The valuation techniques and inputs used for fair value measurement of assets and liabilities.
•
For fair value measurements using significant unobservable inputs (Level 3), the effect of
the measurement on earnings (or changes in net assets) or other comprehensive income for
the period.
Exceptions to Fair Value Measurement

The entity is exempt from the fair value measurement requirement when:
•
it is not practical to measure fair value;
•
fair value cannot be reasonably determined; or
•
fair value cannot be measured with sufficient reliability.
Module 5—Segment Reporting
Segment Reporting Overview

In order to conform to U.S. GAAP and IFRS, financial statements for public business entities must
report information about a company's: operating segments, products and services, geographic areas,
and major customers.
Operating Segments

A reportable segment exists if it meets one of three quantitative tests:
1. Ten percent of combined revenues to internal and external parties.
2. Ten percent of the greater of reported profit or loss (as an absolute amount).
3. Ten percent of the combined assets of all operation segments.

The "75 percent reporting sufficiency test" is a "catchall" requirement that may require identification of
additional segments to attain the 75 percent level. This test requires that reportable segments total at
least 75 percent of revenue from external parties.

You should be familiar with the definition of operating profit. Segment revenues from sales to internal
and external customers less directly traceable costs and also less reasonably allocated costs equals
segment operating profit (loss).
Reportable Segment Disclosures

Under U.S. GAAP, entities must disclose segment profit or loss, segment assets, and certain other
related items.

Under IFRS, entities must disclose segment profit or loss, segment assets, segment liabilities (if such
a measure is provided to the chief operating decision maker), and certain related items. U.S. GAAP
does not require a disclosure of segment liabilities.
Entity-wide Disclosures

The following disclosures are required for all public entities regardless of the number of reportable
segments, including: products and services, geographic areas, and major customers.
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FAR 2 Unit Outline
Module 6—SEC Reporting Requirements
Overview of SEC Reporting Requirements

Form 10-K must be filed annually by U.S. registered companies (issuers). The filing deadline for Form
10-K is 60 days after the end of the fiscal year for large accelerated filers; 75 days after the end of the
fiscal year for accelerated filers; and 90 days after the end of the fiscal year for all other registrants.
This form contains financial disclosures, including a summary of financial data, management's
discussion and analysis (MD&A), and audited financial statements prepared using U.S. GAAP.

Form 10-Q must be filed quarterly by U.S. registered companies (issuers). The filing deadline for
Form 10-Q is 40 days after the end of the fiscal quarter for large accelerated filers and accelerated
filers, and 45 days after the end of the fiscal quarter for all other registrants. This form contains
unaudited financial statements prepared using U.S. GAAP, interim period MD&A, and certain
disclosures.
Regulation S-X

Regulation S-X outlines the form and content of and requirements for interim and annual financial
statements to be filed with the SEC.
SEC XBRL Reporting Requirements

The SEC's Interactive Data Rule requires U.S. public companies and foreign private issuers that use
U.S. GAAP, as well as foreign private issuers that use IFRS, to present financial statements and any
applicable financial statement schedules in an exhibit prepared using XBRL.
Module 7—Special Purpose Frameworks
Special Purpose Frameworks

Other financial statement presentations include OCBOA (other comprehensive basis of accounting)
financial statements and personal financial statements. OCBOA presentations include financial
statements prepared using the cash basis, the modified cash basis, and the income tax basis.
Converting Cash Basis Financial Statements to the Accrual Basis

Many small businesses use the cash basis or modified cash basis of accounting to account for dayto-day operations. In certain circumstances (e.g., to obtain a loan from a bank, to report to owners, or
to go public), such entities may be required to convert cash basis financial statements to accrual
basis financial statements.

In order to make this conversion, it is essential to understand the differences between cash basis and
accrual basis accounting.
Cash Basis
Accrual Basis
Revenue Recognition
Cash received
Realized or realizable and earned
Expense Recognition
Cash paid
Incurred/owed/benefit received
Module 8—Ratio Analysis
Ratio Analysis Overview

Ratios are financial indicators that distill relevant information about a business entity by quantifying
the relationship among selected items on the financial statements. An entity's ratios may be
compared with ratios of a different period of that entity. An entity's ratios may also be compared with
competitor ratios and industry ratios. These comparative analyses identify trends that may be
important to investors, lenders, and other interested parties.
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FAR 2 Unit Outline
Liquidity Ratios

Liquidity ratios are measures of a firm's short-term ability to pay maturing obligations.
Activity Ratios

Activity ratios are measures of how effectively an enterprise is using its assets.
Profitability Ratios

Profitability ratios are measures of the success or failure of an enterprise for a given time period.
Coverage Ratios

Coverage ratios are measures of security or protection for long-term creditors/investors.
Limitations of Ratios

Although ratios are easy to compute, they depend entirely on the reliability of the data on which they
are based (e.g., estimates, historical costs, fair value, etc.). Additional information is also valuable
when analyzing a company.
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FAR 3 Unit Outline
FAR 3
Unit Outline
Module 1—Cash and Cash Equivalents
Definition and Classifications

Cash must be readily available. Cash equivalents are highly liquid investment securities with maturity
dates within 90 days of the date purchased. The only occasion when time to maturity matters is at the
purchase date.

Restricted cash must be segregated from other cash.
Bank Reconciliations

Bank reconciliations reconcile ending balances per bank and books, with adding and subtracting
items causing differences between the two balances. Outstanding items are adjustments on the bank
side, and adjusting journal entry information provides adjustments on the book side.
Module 2—Trade Receivables
Accounts Receivable

Valuing accounts receivable requires reductions for bad debts, sales returns and allowances, and
sales discounts. This results in a net accounts receivable balance approximating cash expected to
be collected.

Sales discounts are offered to encourage earlier payment by customers. Sales and related
receivables can be recorded using either the gross method or the theoretically preferred net method.

Trade discounts are applied sequentially and receivables are recorded net of any trade discount.

Accounts receivable is presented on the balance sheet at the net realizable value. Estimating
uncollectible accounts receivables includes the following methods:

•
Direct write-off method: used for tax; it is not GAAP.
•
Allowance method is GAAP. The allowance for uncollectible accounts is a contra-asset.
Percentage-of-sales method (income statement approach) determines bad debt expense as a
percentage of sales or credit sales for the period. In the balance sheet approach (percent of
ending A/R and aging method), the ending balance in the allowance account must equal an
amount determined by an analysis of the A/R schedule.
•
In the allowance method, writing off an account receivable involves debiting the allowance and
crediting accounts receivable.
•
When collecting an account previously written off, restore the account receivable and the
allowance and then record the collection in the normal way.
Factoring receivables can be done with or without recourse. With recourse means the transferor
retains the risk of uncollectibility. Factoring without recourse is a sale of the receivable and the
assignee assumes the risk of loss.
Notes Receivable

Discounting notes receivable involves transferring the note to a third party, usually for cash. This
transfer can be with or without recourse. If done with recourse, a contingent liability is created for the
transferor.

Determining the proceeds to be received requires deducting the banker's discount (interest) from the
maturity value of the note. The discount is calculated using maturity value, discount rate, and time left
to maturity.
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FAR 3 Unit Outline
Module 3—Inventory
Types of Inventory

There are four types of inventory: retail inventory, raw materials inventory, work-in-process inventory,
and finished goods inventory.
Goods and Materials to Be Included in Inventory

All inventories owned by an entity should be included in the inventory account. FOB shipping terms
can be used to establish when a purchase or sale has occurred.

Sales with a right of return still count as sales if returns are estimable and other conditions are met.

Consigned goods belong to the consignor.
Valuation of Inventory

Inventory account valuations should include all the costs necessary to make the inventory ready for
intended use (sale).

Lower-of-cost-or-market (U.S. GAAP) and lower-of-cost-or-net-realizable-value (U.S. GAAP and
IFRS) are departures from cost basis caused by a decline in the inventory's utility.

Under the U.S. GAAP lower-of-cost-or-market (LCM) method, when the inventory's replacement cost
is lower than cost basis, a current period inventory write-down may be indicated based on the
relationship between replacement cost and the market ceiling and floor. LCM is used for inventory
that is costed using LIFO or the retail inventory method.

Under the IFRS and U.S. GAAP lower-of-cost-or-net-realizable value method, when an inventory's
net realizable value (Net sales price – Costs to complete and dispose) is lower than cost basis, a
current period inventory write-down should be recorded. Under U.S. GAAP, lower-of-cost-or-net
realizable value is used for all inventory that is not costed using LIFO or the retail inventory method.
Periodic Inventory System vs. Perpetual Inventory System

Perpetual and periodic inventory systems control how an entity accounts for purchases and sales of
inventory.

The perpetual system records purchases with a debit to inventory. The periodic system records
purchases with a debit to purchases.

The perpetual system records sales of inventory in two journal entries. The periodic system only
records the receivable and revenue at time of sale. The inventory account is updated at the end of the
period after taking a physical count.
Primary Inventory Cost Flow Assumptions

Inventory methods under U.S. GAAP include: first in, first out (FIFO); last in, first out (LIFO); and
weighted average. IFRS does not permit the use of the LIFO method. These methods may apply to
both periodic and perpetual systems.

Because FIFO values inventory at most recent costs, it will generally result in the highest ending
inventory, the lowest cost of goods sold, and the highest net income than other methods in a period of
rising prices.

LIFO generally results in the lowest ending inventory, the highest cost of goods sold, and the lowest
net income than other methods in a period of rising prices.

Weighted average is called "moving average" in a perpetual inventory system.
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FAR 3 Unit Outline
Gross Profit Method

The gross profit and retail inventory methods attempt to estimate ending inventory based on the
historical gross profit or cost complement percentage.
Firm Purchase Commitments

Firm purchase commitments require current loss recognition if the contracted price exceeds the
market price and if it is expected that losses will occur when the purchase is actually made.
Module 4—PP&E: Cost Basis
Property, Plant, and Equipment

Property, plant, and equipment are assets acquired for use in operations, possess physical
substance, are long-term in nature, and are subject to depreciation.
Valuation of Fixed Assets Under U.S. GAAP

Under U.S. GAAP, fixed assets are valued at historical cost to acquire and put into use with few
exceptions.

Donated fixed assets are recorded at fair value and a gain or revenue is recognized equal to that value.
Valuation of Fixed Assets Under IFRS

Under IFRS, fixed assets are recorded upon acquisition at historical cost to acquire and put into use.
Subsequently, fixed assets can be reported using either the cost model or the revaluation model:
•
Cost model—Fixed assets are reported on the balance sheet at historical cost less accumulated
depreciation and impairment.
•
Revaluation model—Fixed assets are revalued to fair value at a specific point in time. The
fixed assets are then reported on the balance sheet at fair value on the revaluation date less
subsequent accumulated depreciation and subsequent impairment. When initially adjusting
the fixed assets to fair value, revaluation losses are reported on the income statement and
revaluation gains are reported in other comprehensive income as revaluation surplus. When
the fair value of a revalued asset differs materially from its carrying amount, a further
revaluation is required.
Property

Land should be recorded to reflect all the costs necessary to make the land ready for its intended
use. Land is not depreciated.

Land improvements have finite lives and should be depreciated.
Plant

For the "basket purchase" of land and buildings, allocate the purchase price based on the ratio of
appraised value of individual items.
Equipment

Ordinary repairs that maintain the equipment should be expensed. Extraordinary repairs, such as
overhauls or major replacements, should be capitalized.
Fixed Assets Constructed by a Company

Constructed fixed assets should include capitalized interest on weighted average expenditures
incurred during the construction period.
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FAR 3 Unit Outline
Module 5—PP&E: Depreciation and Disposal
Overview

Physical depreciation is related to an asset's deterioration and wear over a period of time. Functional
depreciation arises from obsolescence or inadequacy of the asset to perform efficiently.
Composite Depreciation and Component Depreciation

Under the component depreciation method, separate significant components of a fixed asset with
different lives should be recorded and depreciated separately. The carrying amount of parts or
components that are replaced should be derecognized. IFRS requires component depreciation.

The composite and group depreciation methods depreciate an entire class of assets over a single life.
U.S. GAAP allows component depreciation and composite/group depreciation.
Basic Depreciation Methods

The straight-line, sum-of-the-years' digits, and declining balance methods are the three major
methods of depreciation. Under IFRS, the depreciation method used should match the expected
pattern of fixed asset consumption. U.S. GAAP does not have the same requirement.

The units-of-production method is similar to the straight-line method except that the life is defined in
number of units expected to be produced.
Disposals

The candidate should be familiar with the journal entries for disposals of fixed assets including sale,
write off of fully depreciated asset, and permanent impairment.
Disclosure

Allowances for depreciation and depletion should be deducted from the specific asset reported on the
balance sheet.
Depletion

Depletion is similar to the units-of-production method, except the former is applied to "wasting"
assets. Restoration costs should be included in the depletion base.
Module 6—Nonmonetary Transactions
Exchanges Having Commercial Substance


Under U.S. GAAP, exchanges having commercial substance affect future cash flows.
•
Recognize all gains/losses in the exchange based on the "old" asset's carrying value in
comparison to the "old" asset's fair value.
•
The new asset's carrying amount will always equal the fair value of the asset given plus cash paid
(or minus cash received).
Under IFRS, nonmonetary exchanges are characterized as exchanges of similar assets and
exchanges of dissimilar assets. Exchanges of dissimilar assets are regarded as exchanges that
generate revenue and are accounted for in the same manner as exchanges having commercial
substance under U.S. GAAP. Exchanges of similar assets are not regarded as exchanges that
generate revenue and no gains are recognized.
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FAR 3 Unit Outline
Exchanges Lacking Commercial Substance

Under U.S. GAAP, exchanges lacking commercial substance do not change future cash flows.
•
All losses are recognized in these exchanges.
•
Gains are not recognized in these exchanges unless boot (cash) is received. If boot is less than
25 percent of total consideration, then recognize gain in proportion to the boot received. If boot is
greater than 25 percent of total consideration, recognize all gain.
Involuntary Conversions

Whenever a nonmonetary asset is involuntarily converted (e.g. fire, loss, theft, or condemnation) to
cash, the entire gain or loss is recognized for financial accounting purposes.
Module 7—Intangibles
Intangible Assets

Intangible assets are long-lived legal rights and competitive advantages developed or acquired by a
business enterprise, including patents, copyrights, trademarks, and goodwill.

Purchased identifiable intangible assets should be recorded at cost plus additional expenditures
necessary to purchase.

Under U.S. GAAP, research and development costs related to internally developed intangible assets
must be expensed. Under IFRS, research costs must be expensed, but development costs may be
capitalized if certain criteria are met.

Identifiable intangibles with finite lives are amortized over the shorter of the estimated economic life
and the legal life. Goodwill and identifiable intangibles with indefinite lives are not amortized and are
subject to impairment testing.

Under U.S. GAAP, intangible assets are reported at cost less amortization (finite life intangibles only)
and impairment. Under IFRS, intangible assets may be reported using the cost model (same as U.S.
GAAP) or the revaluation model.

Revalued intangible assets are reported at fair value on the revaluation date less subsequent
amortization and impairment. Revaluation losses are reported on the income statement and
revaluation gains are generally reported in other comprehensive income.
Franchisee Accounting

The present value of the amount paid or to be paid by a franchisee (the initial franchise fees) is
recorded as an intangible asset on the balance sheet and amortized over the expected period of
benefit of the franchise.
Start-up Costs

In financial accounting, start-up costs are expensed as incurred. (Note: Tax rules permit these costs
to be capitalized.)
Research and Development Costs

U.S. GAAP requires research and development (R&D) expenditures to be expensed as incurred.
Assets with alternative future uses can be expensed over time. (The text shows a list of items not
considered R&D.)

Under U.S. GAAP, when parties contract for R&D services to be performed by another firm, the buyer
of R&D will expense amounts as services are obtained from the provider. The seller will expense
costs as cost of goods sold.

Under IFRS, research costs are expensed and development costs may be capitalized if certain
criteria are met.
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FAR 3 Unit Outline
Computer Software Development Costs

Under U.S. GAAP, if computer software is to be sold, leased, or licensed, the time line is the key.
Expense the development costs from concept to technological feasibility. Capitalize the costs from
technological feasibility through the start of selling activity. Resume expensing further development
costs after selling has started.
Costs capitalized between technological feasibility and the start of selling are amortized using the
greater of two methods: percentage of revenue or straight-line.

Under U.S. GAAP, if computer software is to be used internally, the development costs need to be
amortized on the straight-line basis.

IFRS does not provide separate guidance regarding computer software development costs. Under
IFRS, computer software development costs are internally generated intangibles. Research costs
must be expensed and development costs may be capitalized if certain criteria are met.
Module 8—Impairment
Impairment of Intangible Assets Other Than Goodwill

Under U.S. GAAP, finite-life intangibles are tested for impairment using a two-step test:
•
An asset fails the recoverability test if the asset's carrying value is greater than the sum of future
undiscounted net cash flows.
•
Then, if the asset's carrying value is greater than the asset's fair market value, the excess is the
impairment loss.

Indefinite life intangibles other than goodwill are tested using a one-step test in which carrying value
is compared with fair value. Under U.S. GAAP, impairment losses cannot be reversed unless the
asset is held for disposal.

Under IFRS, an impairment loss for an intangible asset other than goodwill is calculated using a onestep model in which the carrying value of the intangible asset is compared with the intangible asset's
recoverable amount. IFRS defines the recoverable amount as the greater of the asset's fair value less
costs to sell and the asset's value in use. Value in use is the present value of the future cash flows
expected from the intangible asset. IFRS allows the reversal of impairment losses.
Impairment of Property, Plant, and Equipment


Fixed asset impairment under U.S. GAAP contains two steps:
•
Step 1—Test for Recoverability: If the sum of undiscounted expected future cash flows is less
than the carrying amount, an impairment loss needs to be recognized (go to Step 2).
•
Step 2—Calculate Impairment Loss: the impairment loss is the amount by which the carrying
amount exceeds the fair value of the asset.
A fixed asset impairment under IFRS is calculated using a single-step model in which impairment is
the amount that the carrying value exceeds the higher of:
•
Fair value less costs to sell
•
Value in use (present value of expected future cash flows)

If the impaired asset is held for use, the asset is written down to fair value and subsequent
depreciation is based on that fair value. Under U.S. GAAP, if the fair value were to subsequently
"rebound," no restoration is permitted. Restoration is permitted under IFRS.

If the asset is held for disposal, depreciation is discontinued. If the fair value were to partially recover
prior to sale, a restoration is permitted under both IFRS and U.S. GAAP.
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FAR 4 Unit Outline
FAR 4
Unit Outline
Module 1—Financial Instruments
Financial Instruments Overview

Financial assets include cash, ownership interests (stocks, partnerships, LLCs), rights to receive cash
or financial instruments, or exchanges such as derivatives contracts with potentially favorable terms.
Financial liabilities represent obligations to deliver cash or other financial instruments or exchanges
(including derivatives contracts) with potentially unfavorable terms.
Investments in Debt Securities

Debt securities include investments such as bonds, government securities, commercial paper,
redeemable preferred stock, and convertible debt.

Under U.S. GAAP, there are three debt securities portfolio classifications: trading, available-for-sale,
and held-to-maturity.

•
Trading securities are intended for active trading. The portfolio itself is carried at cost and is
reported at fair value in the financial statements through the use of a valuation account.
Unrealized gains or losses are reported on the income statement.
•
Available-for-sale (AFS) securities are carried at cost and are reported at fair value in the financial
statements through the use of a valuation account. Unrealized gains or losses are reported in
other comprehensive income (the "U" in the PUFER mnemonic).
•
Held-to-maturity securities are appropriate when the investor has the ability and intent to hold to
maturity. The portfolio itself is reported in the financial statements at amortized cost.
Realized gains/losses are recognized in net income when a debt security is sold and an AFS security
is impaired.
Investments in Equity Securities

Equity securities include investments such as common and preferred stock, rights to acquire shares
of stock (warrants, stock rights, call options), and rights to dispose of shares of stock (put options).

Equity securities are typically carried at fair value through net income (FVTNI), with unrealized
gains/losses included in earnings.

For equity investments that do not have a readily determinable fair value, the practicability exception
allows an entity to measure an investment at cost, plus/minus observable price changes of identical
or similar investments, less impairment.

Realized gains/losses equal to the sale price relative to the adjusted cost are booked on the income
statement.
Disclosures

Under U.S. GAAP, entities must disclose concentrations of credit risk arising from all financial
instruments, whether from a single party or a group of parties engaged in similar activities and that
have similar economic characteristics. This disclosure is required by all firms except "small" private
firms (assets < $100 million and no derivatives). Market risk disclosure of financial instruments is
encouraged but not required under U.S. GAAP.
Accounting for Financial Instruments Under IFRS 9

Under IFRS 9, financial assets and financial liabilities are initially recognized at fair value and then
subsequently measured at either amortized cost or fair value.

To recognize impairment, IFRS 9 requires a forward-looking impairment model known as the
expected credit loss model.
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FAR 4 Unit Outline
Module 2—Equity Method
When to Use the Equity Method

The equity method is used to account for investments if significant influence can be exercised by the
investor over the investee. Ownership of 20 to 50 percent of the voting stock of another investee
company is presumed significant influence (with exceptions).
Equity Method Accounting

Record the investment at cost. Generally, dividends received from the investee reduce the investment
account and the investor "picks up" its share of investee's earnings by increasing the investment
account and recognizing the earnings on its income statement. Under the equity method, the
investment account is similar to a bank account.

Differences between the price paid for an investment and the book value of the investee's net assets
are allocated first to the FMV of assets and then to goodwill. Excess fixed asset FMV is depreciated;
the excess value of land and goodwill are not amortized.
Comparison of Fair Value and Equity Methods

Be familiar with the diagram in the text comparing fair value and equity methods.
Transition to the Equity Method

When significant influence is obtained in a step-by-step acquisition, the equity method is applied
prospectively by adding the cost of the additional investment to the carrying value of the original
investment. If the investment was previously accounted for as an available-for-sale security, the
holding gains and losses in other comprehensive income are recognized in earnings.
Module 3—Basic Consolidation Concepts
Voting Interest Model

Under the voting interest model, consolidated financial statements are prepared when a parentsubsidiary relationship has been formed. An investor is considered to have parent-subsidiary status
when control over an investee is established or more than 50 percent of the voting stock of the
investee has been acquired.

Business combinations that do not establish 100 percent ownership of a subsidiary by a parent
company result in a portion of the subsidiary's equity (net assets) being attributable to noncontrolling
shareholders.
Variable Interest Entity (VIE) Model

A variable interest entity (VIE) is a corporation, partnership, trust, LLC, or other legal structure used
for business purposes that either does not have equity investors with voting rights or lacks the
sufficient financial resources to support its activities.

The primary beneficiary is the entity which has the power to direct the activities of a variable interest
entity that most significantly affect the entity's economic performance and which absorbs the
expected VIE losses or receives the expected VIE residual returns.

Once a company has established that it has a variable interest in a business entity that is a variable
interest entity (VIE), the primary beneficiary must be determined. The primary beneficiary must
consolidate the VIE.
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FAR 4 Unit Outline
Module 4—Acquisition Method: Part 1
Calculating the Acquisition Price

The acquisition is recorded for the fair value of the consideration paid. Direct expenses are expensed,
and securities issuance costs reduce additional paid-in capital.
Application of the Acquisition Method

Under the acquisition method, the acquiring corporation records the following during consolidation
(CAR IN BIG mnemonic):
•
CAR—The common stock, additional paid-in capital, and retained earnings of the subsidiary are
eliminated.
•
I—The parent company's investment in the subsidiary is eliminated.
•
N—Noncontrolling interest is created if the parent owns less than 100 percent of the subsidiary.
•
B—100 percent of the net assets (assets and liabilities) of the subsidiary (regardless of the
percentage acquired) are recorded at fair value.
•
I—Identifiable intangible assets of the subsidiary are recorded at fair value.
•
G—If there is excess of the acquisition cost plus noncontrolling interest over the fair value of the
subsidiary, then the excess is recorded as goodwill. If the acquisition cost is less than the fair
value of 100 percent of the underlying assets acquired, then the balance sheet and identifiable
intangible assets are still adjusted to fair value and the negative balance is recorded as a gain.
Consolidated Workpaper Eliminating Journal Entry

Review the year-end consolidated workpaper eliminating journal entry in the text.
"CAR:" Subsidiary Equity Acquired

The following formula is used to determine the book value of the assets acquired from the subsidiary:
Assets – Liabilities = Equity
Assets – Liabilities = Net book value
Assets – Liabilities = CAR
Investment in Subsidiary

After the acquisition date, the parent uses either the cost method or the equity method to account for
the investment in subsidiary in its accounting records.
Module 5—Acquisition Method: Part 2
Noncontrolling Interest

Under U.S. GAAP, noncontrolling interest (full goodwill method) is calculated as follows:
Noncontrolling interest (on BS) = Fair value of subsidiary x NCI %

See noncontrolling interest calculation for IFRS under the partial goodwill method (below).
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FAR 4 Unit Outline
Balance Sheet Adjustments to Fair Value, Identifiable Intangible Asset Adjustment to Fair Value,
and Goodwill (Gain)

Under U.S. GAAP, goodwill is calculated as follows (full goodwill method):
Goodwill = Fair value of subsidiary – Fair value of subsidiary's net assets

IFRS allows the use of the full goodwill method on a transaction-by-transaction basis. The preferred
method under IFRS is the partial goodwill method, which calculates goodwill and noncontrolling
interest as follows:
Goodwill = Acquisition cost – Fair value of subsidiary's net assets acquired
Noncontrolling interest (on BS) = Fair value of subsidiary's net identifiable assets x NCI %
Measurement Period Adjustments

During the measurement period, the following adjustments can be made:

The subsidiary's assets and liabilities may be adjusted to better reflect their values on the
acquisition date.

New subsidiary assets and liabilities that existed on the acquisition date may be recognized.
Module 6—Intercompany Transactions
Eliminating Intercompany Transactions

Eliminate 100 percent, regardless of whether there is a noncontrolling interest.

Eliminate all intercompany accounts. For example, simple income statement eliminations include
interest revenue and interest expense, and simple balance sheet eliminations include interest
receivable and interest payable.
Commonly Tested Intercompany Transactions

Intercompany inventory transactions require the elimination of the intercompany sales, intercompany
cost of goods sold, and any intercompany profit on the inventory transactions. The elimination of
intercompany profit is allocated between the purchaser's ending inventory and cost of goods sold.

Intercompany bond transactions require the elimination of the bonds payable account from the
issuer's balance sheet and the investment in bonds account from the balance sheet of the investor.
Do not assume that the issuer sold these bonds directly to the investor.

Intercompany transactions involving land require an elimination making the consolidated financial
statements look as though the transaction had never occurred. Put the land account back to the value
that had been in the seller's books and also eliminate the gain/loss.

Intercompany transactions involving depreciable assets involve essentially the same steps as for
land, but with two complications. There is an accumulated depreciation account that has to be put
back where it was at the time of the intercompany transaction, and depreciation expense after the
sale must be adjusted back to what it would have been had the transaction never occurred.
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FAR 4 Unit Outline
Module 7—Consolidated Financial Statements
Illustrative Consolidated Financial Statements

The consolidated balance sheet includes 100 percent of the parent's and subsidiary's assets
and liabilities (after eliminating intercompany transactions), but does not include the subsidiary's
equity. Noncontrolling interest is presented as part of equity, separately from the equity of the
parent company.

The consolidated income statement includes 100 percent of the parent's revenues and expenses and
all of the subsidiary's revenues and expenses after the date of acquisition. The subsidiary's preacquisition revenues and expenses are not included in the consolidated income statement.

The statement of consolidated comprehensive income should show, separately, consolidated
comprehensive income, comprehensive income attributable to the noncontrolling interest, and
comprehensive income attributable to the parent company.

Because noncontrolling interest is part of the equity of the consolidated group, it is presented in the
statement of changes in equity. The consolidated statement of changes in equity should present a
reconciliation of the beginning-of-period and end-of-period carrying amount of total equity, equity
attributable to the parent, and equity attributable to the noncontrolling interest.
Consolidated Statement of Cash Flows

The preparation of the consolidated statement of cash flows in the period of acquisition is complicated
by the fact that the prior year financial statements reflect parent-only balances and the year-end
financial statements reflect consolidated balances. The following steps are necessary in order to
prepare a consolidated statement of cash flows in the period of acquisition:

The net cash spent or received in the acquisition must be reported in the investing section of
the statement of cash flows.

The assets and liabilities of the subsidiary on the acquisition date must be added to the
parent's assets and liabilities at the beginning of the year in order to determine the change in
cash due to operating, investing, and financing activities during the period.
Preparing Consolidated Financial Statements

Review the exercises in the text that give an example of the preparation of consolidated eliminating
journal entries and the preparation of consolidated financial statements.
Module 8—Goodwill, Including Impairment
Goodwill

Goodwill represents the intangible resources and elements connected with an entity that cannot be
separately identified and reported on the balance sheet (e.g., management or marketing expertise, or
technical skill and knowledge that cannot be identified or valued separately). Goodwill is capitalized
excess earnings power.
Goodwill Impairment

Under U.S. GAAP, goodwill impairment is calculated at a reporting unit level. Impairment exists when
the carrying amount of the reporting unit goodwill exceeds its fair value.
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FAR 5 Unit Outline
FAR 5
Unit Outline
Module 1—Payables and Accrued Liabilities
Overview

Liabilities are probable future sacrifices of economic benefits arising from present obligations of an
entity to transfer assets or provide services to other entities in the future as a result of past
transactions or events. Liabilities must be identified as current or non-current for financial reporting
purposes. Current liabilities are obligations with maturities within one year or the operating cycle,
whichever is longer. Current liabilities are valued at their settlement values or net realizable values.

Trade accounts payable are amounts owed for goods, raw materials, and supplies that are not
evidenced by a promissory note. Purchases of goods and services on credit are usually determinable
as to amounts due and the due date. Cash discounts associated with accounts payable can be
anticipated and journalized. The purchase may be recorded gross or net.

Trade notes payable are formal, written promises to pay on a certain date and arise from the
purchase of goods, supplies, or services. Trade notes payable may include a stated interest rate.

Short-term and long-term debt instruments with a stated interest rate whose payment date does not
coincide with the fiscal year-end will result in an interest payable balance at year-end. The amount
accrued should represent the interest expense incurred that has not been paid in cash as of the
balance sheet date.

Debt instruments may be set up such that periodic principal payments are made during the life of the
borrowing. In this case, the principal due within the next year (or operating cycle) will be classified as
a current liability.

Accrued liabilities relate to expenses incurred that have not been paid in cash at the financial
statement date (such as wages, utilities, rent, etc.).

Taxes payable may include property, sales, and income taxes due but not yet paid.

Unemployment taxes and the employer's share of payroll taxes (e.g., Social Security and Medicare)
should be accrued by the employer as an expense. The liability will not be liquidated until the
amounts are remitted to the appropriate taxing authority. Payroll deductions for Social Security,
Medicare, and income taxes are withheld from employees out of the gross pay of their paychecks.
These deductions are the responsibility of the employee and are therefore not recorded as an
expense, but credited to a payable account until remitted.

Compensated absences are paid absences from employment that can relate to vacation, holidays, or
sick pay. Liabilities related to these future absences are accrued in the year earned if certain
conditions are met.
Exit or Disposal Activities

A liability must be recognized for the costs associated with an exit or disposal activity. These costs
include: involuntary employee termination benefits; costs to terminate a contract that is not a capital
lease; and other costs associated with exit or disposal activities, including costs to consolidate
facilities or relocate employees.
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FAR 5 Unit Outline
Asset Retirement Obligations

An asset retirement obligation is a legal obligation associated with the retirement of a tangible,
long-lived asset that results from the acquisition, construction, or development and/or normal
operation of a long-lived asset, except for certain lease obligations (minimum lease payment and
contingent rentals).

When an asset retirement obligation exists and qualifies for recognition, an entity records an asset
(ARC) and a liability (ARO) on the balance sheet equal to the fair value of the asset retirement
obligation, if a reasonable estimate of fair value can be made. Fair value is generally equal to the
present value of the future obligations.

In subsequent periods after the initial measurement, the ARO liability is adjusted for accretion
expense due to the passage of time, and depreciation expense is recognized on the ARC asset.
Module 2—Contingencies and Commitments
Definition of Contingencies

Contingencies are existing conditions whose outcome depends on some future event or occurrence.
The three categories of contingencies are probable, reasonably possible, and remote.

A loss contingency involves a possible future loss whose existence is proved by subsequent events.

A gain contingency is a claim or right to receive assets whose existence is uncertain but may become
valid upon the occurrence of future events.
Recognition and Measurement of Gain Contingencies

Gain contingencies that are probable are not accrued but are disclosed.
Recognition and Measurement of Loss Contingencies

Loss contingencies that are probable and can be reasonably estimated must be accrued. If a range of
losses is given, the best estimate of the loss is accrued. If no best estimate can be made, the
minimum amount is accrued and the remaining amount is disclosed in a footnote.

The nature and amount (range) of a loss contingency that is reasonably possible is disclosed in the
footnotes and is not accrued.
 Remote contingencies are generally ignored. Remote contingencies that are guarantees must be
disclosed.
Premiums and Warranties

Premiums and warranties are loss contingencies that are generally accrued by the entity as the
expected amounts are probable and can be reasonably estimated.
Module 3—Long-Term Liabilities
Time Value of Money

Review the time value of money formulas and examples in the text.
Long-Term Liabilities

Long-term liabilities are probable sacrifices of economic benefits associated with present obligations
that are not payable within the current operating cycle or reported year, whichever is greater.
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FAR 5 Unit Outline
Notes Payable

Notes payable (contractual rights to pay money at a fixed or determinable rate) must be recorded at
present value at the date of issuance.

If a note is noninterest bearing or the interest rate is unreasonable (usually below market), the value
of the note must be determined by imputing the market rate of the note and by using the effective
interest method.
Debt Covenants

Creditors use debt covenants in lending agreements to protect their interest by limiting or prohibiting
the actions of debtors that might negatively affect the positions of the creditor.

When debt covenants are violated, the debtor is in "technical default" and the creditor can demand
repayment. Most of the time, concessions are negotiated and real default, as opposed to technical
default, is avoided.
Module 4—Bonds: Part 1
Introduction to Bonds Payable

Bonds (payable) are long-term debt instruments issued by an entity. Debentures are unsecured
bonds. Zero coupon bonds are bonds sold with no stated interest but rather at a deep discount and
redeemed at the face value without periodic interest payments.
Bonds Payable vs. Notes Payable

Review the chart in the text that compares bonds (payable) with notes (payable) attributes.
Overview of Bond Terms
 Typically, the face value of individual bonds is $1,000. Interest at the coupon rate may be payable
annually or semiannually and bond prices are quoted as 100s (percentage of face value). The market
will adjust the price paid for the bonds to reflect the market, or effective, interest rate.
Accounting for the Issuance of Bonds

A bond selling price is the sum of the present value of the total face value of the bond plus the
present value of future interest payments, both discounted at the effective (market) interest rate.
When the bond coupon rate exceeds the market rate, the bond will sell at a premium. If the bond
coupon rate is below the market, the market will adjust and the bond will sell at a discount.

Unamortized discount or premium is a component of the carrying value of a bond. Carrying value is
face value at the maturity of the bond, and it is used to calculate the interest expense when using the
effective interest method of premium/discount amortization.

Under U.S. GAAP and IFRS, bond issue costs are deducted from the carrying value of the liability
and amortized using the effective interest method.
Module 5—Bonds: Part 2
Bond Amortization Methods

Bonds can be issued for more or less than their face amounts. If sold above the 100 face value, the
excess is premium. If sold below 100, the difference is discount. Premium and discount result from
market interest rate fluctuation between the time the bond is printed and when it is actually issued,
and they are amortized to interest expense using the straight-line or effective interest method. (U.S.
GAAP allows the straight-line method if the difference between the two methods is immaterial. IFRS
requires the effective interest method.)
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FAR 5 Unit Outline

Under the straight-line method, interest expense is calculated as follows:
Period amortization = Premium/discount and bond issuance cost
Number of periods bond is outstanding
Interest expense = (Face value × Stated interest rate) – Premium amortization
Or:
+ Discount and bond issuance cost amortization

Under the effective interest method, interest expense is calculated as follows:
Interest expense = Carrying value at beg. of period × Effective (market) interest rate
Bonds Issued Between Interest Dates

When bonds are issued between interest payment dates, the selling price includes the accrued
interest to date.
Year-End Bond Interest Accrual

Interest is accrued at year-end from the last interest payment date.
Disclosure Requirements

Companies with many outstanding debt issues often report only one balance sheet total, which is
supported by comments, and schedules in the accompanying notes.
Module 6—Troubled Debt Restructuring and Extinguishment
Troubled Debt Restructuring

A troubled debt restructuring generally involves a creditor granting concessions to a debtor which
would not be likely under normal circumstances in order to increase the likelihood of collection. The
debtor will recognize a gain for the excess of the carrying amount of the payable (including accrued
interest) over the fair value of the assets given up. An ordinary gain or loss may result from the
difference between the FV and the NBV of the asset transferred. A restructuring may involve a
combination of asset transfer, equity transfer, and modification of terms.

If an equity interest is transferred, there may be a gain to the extent that the FV of the equity
transferred exceeds the face of the payable.

If there is a modification of terms, the debtor does not change the carrying amount of the debt unless
it exceeds the total future cash payments specified under the new terms.

From the creditor's standpoint, these loans are treated as impaired if it is probable that the creditor
will be unable to collect the amounts due under the original contract. Bad debt expense (and a
corresponding allowance for credit losses) may be recorded by the creditor when there is a
modification of terms associated with the impairment.
Extinguishment of Debt

Corporations issuing bonds may call or retire them prior to maturity. Callable bonds can be retired
after a certain date at a stated price. Refundable bonds allow an existing issue to be retired and
replaced with a new issue at a lower interest rate.

A liability cannot be derecognized in the financial statements until it has been extinguished. A liability
is considered extinguished if the debtor pays or the debtor is legally released.
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FAR 6 Unit Outline
FAR 6
Unit Outline
Module 1—Operating Leases
Leases

A lease is a contractual agreement between a lessor, who conveys the right to use real or personal
property (an asset), and a lessee, who agrees to pay periodic rents over a specified time.
Operating Leases

Operating leases are rental agreements. All cash flows must be recognized on a straight-line basis
over the lease period as periodic expense to the lessee and as lease revenue to the lessor (matching
principle). Cash payments intended to be returned to the lessee are excluded from the
expense/revenue calculation and are treated as deposits.

Leasehold improvements by a lessee must be expensed over the shorter of the remaining lease term
or the life of the improvement.
Module 2—Capital Leases
Criteria for Capital/Finance Lease

Under U.S. GAAP, a lessee accounts for the lease asset transaction as a capital lease if one or more
of four (OWNS) tests is met:
•
Ownership transfer to lessee at end of lease.
•
Written bargain purchase option exists (purchase option < estimated fair value).
•
The present value of the minimum lease payments is ≥ Ninety (90) percent of the fair value of the
leased property.
•
The lease term is ≥ Seventy-five (75) percent of the asset's economic life.

Under U.S. GAAP, lessors have capital leases when meeting one of the four OWNS tests as
described for lessees above, plus there can be no material uncertainties about collectibility or
unreimbursable costs.

Under IFRS, a lessor classifies a lease as a finance lease if the lease transfers substantially all the
risks and rewards of ownership to the lessee.
Lessee Capital (Finance) Lease Accounting

Lessees record the capital (finance) lease asset and the lease liability at the present value of the
minimum lease payments, not to exceed the fair value of the asset. Under IFRS, initial direct costs
are added to the amount recognized as a finance lease asset.
 Minimum lease payments include the required periodic payments and the bargain purchase
and/or guaranteed residual value (if any). Executory costs (maintenance, insurance, taxes, etc.)
are excluded.

The interest rate used is the lesser of the rate implicit in the lease (if known) or the lessee's
incremental borrowing rate. The lease liability is amortized using the effective interest method.

Depreciation is based on the lease term unless the lessee will own the leased asset after the lease
term (i.e., the lease has a bargain purchase option or ownership transfers to the lessee at the end of
the term), in which case the asset life is used for depreciation.
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FAR 6 Unit Outline
Lessor Accounting

Under U.S. GAAP, lessors with capital leases classify the leases as sales-type or direct financing
leases. These classification terms are not used for finance leases under IFRS. Under IFRS, a salestype lease is referred to as a finance lease of an asset by a manufacturer or dealer lessor and a direct
financing lease is referred to simply as a finance lease.

Sales-type (finance) leases recognize a dealer profit or gross margin at lease inception. As payments
are received, interest revenue is also recognized by the effective interest method.

In a direct-financing type (finance) lease, the lessor acts essentially as a finance company and does
not recognize gross profit on sale. Interest revenue is recognized by the effective interest method.
Module 3—Sale-Leaseback
Overview

In a sale-leaseback transaction, the owner of a property (seller-lessee) sells the property and
simultaneously leases it back from the purchaser-lessor. Sale-leaseback transactions are treated as
single financing transactions, in which profit may be deferred and amortized.
Terminology

Profit or loss on the sale is the amount that would have been recognized by the seller-lessee
assuming that there was no leaseback.
Accounting by Seller/Lessee (U.S. GAAP)

Under U.S. GAAP, gains are recognized based on the rights retained to the use of the leaseback
property:
•
If the seller/lessee retains substantially all (> 90 percent) of the rights, any gain is deferred over
the life of the leased asset.
•
"Minor" (< 10 percent) retention allows full recognition of any gain when the sale of the asset is
recorded.
•
Mid-range rights retention (10 percent to 90 percent) requires that any gain be deferred up to the
present value of the minimum lease payments (operating lease) or capitalized asset (capital
lease), with any excess gain recognized immediately.
Accounting by Seller/Lessee (IFRS)

Under IFRS, gains are recognized based on the classification of the lease as a finance lease or an
operating lease.
•
If the lease is classified as a finance lease, then all gains are deferred and amortized over the
lease term.
•
If the lease is classified as an operating lease, gains are recognized based on the relationship
between the asset's carrying amount, fair value, and selling price. If the sales price of the asset
equals fair value (general rule), gains are recognized immediately (no deferral).
Accounting by Purchaser-Lessor

The acquisition of the asset is accounted for as a purchase. If the lease is an operating lease it is
accounted for as an operating lease, whereas if the lease is a capital lease it is accounted for as a
direct financing lease.
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FAR 6 Unit Outline
Module 4—Derivatives and Hedge Accounting
Definition and Concepts

Derivatives are financial instruments that derive their values from some other instrument and have the
following characteristics:
•
One or more underlying (a price, rate, or other variable) and one or more notional amounts
(currency units, shares, pounds, etc.).
•
Require little or no initial net investment.
•
Terms require or permit a net settlement, or ready settlement outside the contract, or delivery of
an asset that gives substantially the same results.
Common Derivatives

The candidate should be familiar with the common derivative contracts, including options, forward,
futures, and swap contracts.
Derivative Risks

Market risk and credit risk are the inherent risks of all derivative instruments.
Accounting for Derivative Instruments, Including Hedges

All derivative instruments are reported at fair value. The reporting of unrealized gains and losses
depends on the derivative designation (per below).

If there is no hedging designation, any gain or loss must be reported in the income statement. This is
similar to the treatment of trading securities.

When hedging the fair value of an asset or liability currently in the balance sheet, the gain/loss on the
asset/liability and the loss/gain on the hedge are both reported in the income statement for the current
year. The derivative must be expected to be highly effective in reducing the risk (otherwise this is
speculating, not hedging).

If hedging the variability in future cash flows pertaining to a particular risk, the effective portion of the
cash flow hedge goes into other comprehensive income and is deferred until the hedge transaction
affects earnings. The ineffective portion of the cash flow hedge is reported in net income for the
current period.

Foreign currency hedges can be classified as fair value hedges, cash flow hedges, or hedges of a net
investment in a foreign operation.
Derivative Disclosures

Specific disclosures are required for all companies that hold derivatives.
Module 5—Foreign Currency Accounting
Overview

Foreign currency transactions are transactions denominated in a currency other than that used for
financial reporting.

Foreign currency translation is the conversion of financial statements of a foreign entity into financial
statements expressed in the domestic currency (the dollar).
Terminology

The candidate should be familiar with the foreign currency terminology in the text, including the
various exchange rate definitions and the distinction between monetary and nonmonetary items.
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FAR 6 Unit Outline
Foreign Financial Statement Translation

Foreign financial statement translation is the process of converting a foreign subsidiary's financial
statements from the foreign currency to the parent company's reporting currency using the
remeasurement (temporal) method and/or the translation (current rate) method.

The method(s) used to restate the foreign subsidiary's financial statements is determined by the
functional currency of the foreign subsidiary.
•
Remeasurement gains and losses are reported on the income statement.
•
Translation gains and losses are reported in other comprehensive income (PUFER).
Individual Foreign Transactions

Foreign currency transactions require adjusting the receivable or the payable at year-end for changes
in the dollar equivalent of the foreign currency denominated transaction since the transaction date. An
additional gain or loss is reported when the transaction is settled in the foreign currency.
Module 6—Income Taxes: Part 1
Overview

GAAP and tax accounting rules differ considerably. Some of the differences are permanent because
they never reverse. Other differences are temporary because they involve mere timing differences
between the financial and tax accounting rules.

Only temporary differences cause deferred tax consequences.

Tax expense is subdivided into two components: current tax expense (CTE) and deferred tax
expense (DTE).

Current tax expense (CTE) is merely the result of multiplying taxable income from the tax return by
the tax rate. The exam routinely ignores estimated tax payments by firms.

The deferred tax account(s) in the balance sheet must be adjusted at the end of each year to reflect
the appropriate amount of deferred tax liability (DTL) and/or the appropriate amount of a deferred tax
asset (DTA).
Permanent Differences

Permanent differences, such as tax-exempt interest on municipal bonds, or life insurance premiums
when the corporation is beneficiary, are embedded in tax law and will not reverse in the future;
therefore they only affect current tax paid and not the deferred tax accounts.
Temporary Differences

Temporary differences will "turn around" in the future and are part of the deferred tax calculations.
GAAP requires accrual accounting, and tax law treats some items on a cash basis: e.g., estimated
liabilities or bad debt expense.

When an item is recognized for book purposes before it is deductible for tax purposes, a deferred tax
asset (DTA) will result. Using straight-line depreciation for the books and MACRS for tax purposes
will result in lower taxable income in the early years of the asset life and a deferred tax liability (DTL).

DRAs and DTLs must be recalculated each year based on enacted tax rates in the year(s) in which
the taxable item is expected to be realized (DTA) or paid (DTL). IFRS allows the use of enacted or
substantively enacted tax rates.

Under U.S. GAAP, if it is more likely than not that all or part of a deferred tax asset will not be
realized, a valuation allowance must be set up to reduce the asset. IFRS prohibits the use of a
valuation allowance. Under IFRS, a deferred tax asset is recognized when it is probable that sufficient
taxable profit will be available against which the temporary difference can be utilized.
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FAR 6 Unit Outline
Module 7—Income Taxes: Part 2
Uncertain Tax Positions

An uncertain tax position represents some level of uncertainty of the sustainability of a particular tax
position by a company. U.S. GAAP requires a more-likely-than-not level of confidence before
reflecting a tax benefit in a company's financial statements.
Enacted Tax Rate

Because the measurement of deferred taxes is based on the applicable tax rate, it requires that a
company use the enacted tax rate expected to apply to taxable items (temporary differences) in the
periods the taxable item is expected to be paid (liability) or realized (asset).
Treatment of and Adjustment for Changes

The liability method requires that the deferred tax account balance (asset or liability) be adjusted
when the tax rates change.

A change in circumstances that causes a change in judgment about the ability to realize the related
deferred tax asset in future years (valuation allowance) should be recognized in income from
continuing operations in the period of the change.
Balance Sheet Presentation

Under U.S. GAAP, all deferred tax assets and liabilities are reported as a non-current amount on the
balance sheet.
Operating Losses

Operating loss carrybacks are "assured" and can be recognized as a reduction in the book loss in the
year of the loss.

An operating loss carryforward is a DTA and is recognized to the extent that it is "more likely than not
to be realized."
Investee's Undistributed Earnings

Undistributed earnings of an investee are presumed to be distributed in the future and are a
temporary difference.
Income Tax Disclosures

The components of a net deferred tax liability or asset should be disclosed. Additionally, the amount
of income tax expense (or benefit) allocated to continuing operations and the amounts separately
allocated to other items must be disclosed.
Corporation Tax Summary

The candidate should review the Corporation Tax Summary in the text.
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FAR 7 Unit Outline
FAR 7
Unit Outline
Module 1—Pension Benefits: Part 1
Overview

Pension plans can be classified as defined benefit plans and defined contribution plans. The CPA
exam has emphasized defined benefit plans in which an employer provides an employee with defined
retirement benefits in exchange for current or past services. As employees work, the pension benefits
accumulate and actuarial computations are necessary to determine the present value of the future
payments due.

A defined benefit pension plan has two main components: plan assets and pension plan liability.

Plan Assets: The cash and investments set aside by the employer to pay retirement benefits. Plan
assets are measured at fair value. The change in plan assets during an accounting period is
calculated as follows:
Beginning fair value of plan assets
+ Contributions
– Benefits paid to retirees
+ Actual return on plan assets
Ending fair value of plan assets

Pension Plan Liability: The actuarial present value of the pension benefits owed to employees for
current and past service. There are two measures of pension plan liability:
•
The accumulated benefits obligation (ABO) is the actuarial present value of benefits based on
current and past compensation levels.
•
The projected benefit obligation (PBO) is the actuarial present value of benefits based on
expected future compensation levels. The change in the PBO during the accounting period is
calculated as follows:
Beginning projected benefit obligation
+ Service cost
+ Interest cost
+ Prior service cost from current period plan amendments
+ Actuarial losses incurred in the current period
– Actuarial gains incurred in the current period
– Benefits paid to retirees
Ending projected benefit obligation

Under IFRS, the pension plan liability is called the defined benefit obligation (DBO).
Income Statement Accounting

Under U.S. GAAP, net periodic pension cost (SIR AGE) is the net of six components:

+ Current service cost

+ Interest cost

– Return on plan assets

+/– Amortization of prior service costs (cost of retroactive benefits due to changes in plan)

+/– Amortization of gains/losses

+/– Amortization of existing net obligation or net asset at implementation of plan
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
Service cost is reported as an operating expense on the income statement in the same line with other
compensation costs arising during the period. The other components of net periodic pension cost
should be presented on the income statement, separately or in total, below income from operations.
Module 2—Pension Benefits: Part 2
Balance Sheet Accounting

Both U.S. GAAP and IFRS require that companies report the funded status of all pension plans on
the balance sheet. A plan's funded status is calculated as follows:
Fair value of plan assets
– PBO (or DBO)
Funded status

A plan is underfunded when the PBO (or DBO) exceeds the fair value of the plan assets. Under U.S.
GAAP, underfunded pension plans are aggregated and reported as a current liability (to the extent
that benefits payable in the next 12 months exceed the fair value of the plan's assets), a non-current
liability, or both. Under IFRS, underfunded pension plans are reported as a net defined benefit
liability. IFRSs do not specify whether the liability should be reported as current or non-current.

A plan is overfunded when the fair value of the plan assets exceeds the PBO (or DBO). Under U.S.
GAAP, overfunded pension plans are aggregated and reported as a non-current asset. Under IFRS,
overfunded pension plans are reported as a net defined benefit asset. IFRSs do not specify whether
the asset should be reported as current or non-current.
Measurement Date

U.S. GAAP requires that the measurement date of the plan assets and benefit obligations of a
defined benefit pension plan must be aligned with the date of the employer's balance sheet. There
are several exceptions noted in the text.
Off-Balance Sheet Footnote Disclosures

There are extensive required pension plan footnote disclosures. A list is provided in the text.
Module 3—Retirement Benefits Other Than Pensions
Introduction

The cost of retirement health care and other benefits is accrued if the obligation is attributable to
services already rendered; their rights accumulate or “vest”; payment is probable; and the amount
can be reasonably estimated.

Benefits are accrued over the attribution period, the period from the date of hire to the date fully
eligible for the benefit.

Postretirement benefit plans must be reported as described above for pension plans.
Definitions

Accumulated postretirement benefit obligation (APBO) is the present value of future benefits that
have vested as of the measurement date. The APBO is discounted using an assumed discount rate.
This rate should reflect returns on high-quality, fixed-income investments. The discount rate is used to
determine the APBO, EPBO, and the service and interest cost components of net periodic
postretirement benefit cost.

Expected postretirement benefit obligation (EPBO) is the present value of all future benefits expected
to be paid as of the measurement date. It includes the amount that has vested (APBO) plus the
present value of expected future benefits that have not yet vested.
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FAR 7 Unit Outline
Income Statement

The Income Statement formula is as follows:
Current Service Cost
Interest Cost (on APBO)
< Return on Plan Assets >
Amortization or Prior Service Cost
< Gains > and Losses
Amortization / Expense Transition Amount (Net Obligation)
Net Postretirement Benefit Cost
Balance Sheet

Companies must report the funded status of their postretirement benefit plan(s) on the balance sheet
as an asset or a liability (of both). If a company has multiple postretirement benefit plans, the funded
status of each plan is calculated separately.

The funded status of a postretirement benefit plan is calculated using the following formula:
Fair value of plan assets
< APBO >
Funded status
Required Disclosures

The required disclosures are the same for pension plans.
Module 4—Financial Statements of Employee Benefit Plans
Overview

A pension plan and the sponsoring company are two separate legal entities. Pension plan accounting
for the sponsoring company focuses on calculating net periodic pension cost using actuarial outputs
and reporting the funded status of the plan on the sponsor's balance sheet. In addition to the
accounting and reporting done by the sponsor company, U.S. GAAP requires that financial
statements be presented by the pension plan itself.
Required Financial Statements for Defined Benefit Pension Plans


GAAP requires the financial statements of a defined benefit plan to include the following:
•
Statement of Net Assets Available for Benefits: A statement that includes information regarding
the net assets available for benefits at the end of the plan year.
•
Statement of Changes in Net Assets Available for Benefits: A statement that includes information
regarding the changes during the year in the net assets available for benefits.
•
Statement of Accumulated Plan Benefits: Information regarding the actuarial present value of
accumulated plan benefits as of either the beginning or end of the plan year.
•
Statement of Change in Accumulated Plan Benefits: Information regarding the significant effects
of certain factors affecting the year-to-year change in the actuarial present value of accumulated
plan benefits.
A statement of cash flows is not required, but may be presented if it provides relevant information
about the ability of the plan to meet future obligations.
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Required Financial Statements for Defined Contribution Pension Plans

GAAP requires the financial statements of a defined contribution pension plan to include the
following:
•
Statement of Net Assets Available for Benefits: A statement that includes information regarding
net assets available for benefits at the end of the plan year, with separate amounts for
investments carried at fair value and investments carried at contract value.
•
Statement of Changes in Net Assets Available for Benefits: A statement that includes information
regarding the changes during the year in the net assets available for benefits.
•
A statement of cash flows is not required, but may be presented if it provides relevant information
about the ability of the plan to meet future obligations.
Module 5—Stockholders' Equity: Part 1
Overview

Stockholders' (owners') equity includes five major components: 1) capital stock; 2) additional paid-in
capital; 3) retained earnings or deficit; 4) accumulated other comprehensive income; and 5) treasury
stock. When an entity presents consolidated financial statements, any noncontrolling interest must be
shown in equity.
Capital Stock (Legal Capital)

Capital stock includes these terms: authorized, issued, and outstanding. Treasury stock is issued but
not outstanding.

Common shareholders' equity equals total stockholders' equity reduced for the claims of preferred
shareholders.

Book value per share is the common shareholders' equity divided by the number of common shares
outstanding at year-end.

Preferred shares are "first in line" before common shareholders for dividends and payment in
liquidation. P/S may also be cumulative, participating, or convertible. Mandatorily redeemable
preferred stock is reported as a liability because it has a maturity date, like other debt instruments.
Additional Paid-in Capital

Additional paid-in capital can come from several sources in addition to any amount received above
the par value of shares issued.
Retained Earnings

Retained earnings can be increased or decreased by many events, including: income, losses, cash
dividends, property dividends, stock dividends, prior period adjustments, cumulative effects of
changes in accounting principles, and quasi-reorganizations.
Accumulated Other Comprehensive Income

Accumulated other comprehensive income is an equity account into which the components of other
comprehensive income flow.
Treasury Stock

Treasury stock may be accounted for by the cost method or the legal (par value) method. The
candidate should review journal entry examples in text under the cost method and par value method,
including the retirement of treasury stock.

Donated shares result in a credit to contributed capital.
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FAR 7 Unit Outline
Module 6—Stockholders' Equity: Part 2
Accounting for a Stock Issuance (to Nonemployees)

Stock subscriptions are contracts to buy a stock at a future date.

Stock rights provide existing shareholders with the opportunity to buy additional shares and do not
affect equity until exercised.
Distributions to Shareholders

Dividends declared reduce R/E on the declaration date.

Property dividends are recorded at their fair value at the declaration date. Gain or loss is recognized
on that date.

Stock dividends occur in two sizes: small and large. The “break point” is 20 to 25 percent of
outstanding C/S. Small stock dividends tend to be on the exam more often. Small stock dividends are
recorded at fair value on the declaration date. Large stock dividends are recorded at par value.

Stock splits do not require a journal entry and total book value of C/S is unchanged.
Statement of Changes in Shareholders' Equity

The statement of changes in shareholders' equity provides specific information about changes in a
company's primary equity components for a stipulated period(s).
Module 7—Stock Compensation
Employee Stock Options

A stock option is the right to purchase shares of a corporation's capital stock under fixed conditions of
time, place, and amount.

Under traditional stock option and stock purchase plans, an employer corporation grants options to
purchase shares of its stock, often at a price lower than the prevailing market, making it possible for
the individual exercising the option to have a potential profit at the moment of acquisition.

The cost of compensation is measured by the fair value based on an option pricing model. Stock
options or purchase plans can be either noncompensatory or compensatory.

Under U.S. GAAP, an employee stock purchase plan is noncompensatory if it meets all of the
following requirements:

•
Substantially all full-time employees meeting limited employee qualifications may participate.
Excluded are officers and employees owning a specific amount of the outstanding stock in the
corporation.
•
Stock is offered to eligible employees equally, but the plan may limit the total amount of shares
that can be purchased.
•
The time permitted to exercise the rights is limited to a reasonable period.
•
Any discount from the market price is no greater than would be a reasonable offer of stock to
shareholders or others.
Stock option plans that meet the requirements of a noncompensatory plan (above) do not require the
recognition of compensation expense by the sponsoring company. Plans that do not contain these
characteristics are usually classified as compensatory plans.
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
Compensatory stock options and stock purchase plans are valued at the fair value of the options
issued. Under the fair value method, total compensation expense is measured by applying an
acceptable fair-value pricing model, such as the Black-Scholes option pricing model. Any CPA Exam
question will supply this number. This compensation expense, calculated on the grant date of the
options, is allocated over the service period in accordance with the matching principle. The service
period is the vesting period, which is the time between grant date and the vesting date.
Stock Appreciation Rights (SARs)

A stock appreciation right entitles an employee to receive an amount equal to the excess of the
market price of stock at the exercise date over a predetermined amount (usually market price at grant
date). This excess multiplied by the number of rights outstanding is recorded as compensation
expense and a liability.

Compensation expense for stock appreciation rights outstanding must be adjusted annually to
account for changes in the market price of the stock. Unlike stock options, stock appreciation rights
do not require the employee to make a cash payment.
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FAR 8 Unit Outline
FAR 8
Unit Outline
Module 1—Earnings per Share
Overview

An entity's capital structure determines the manner in which earnings per share are disclosed on the
income statement.
Simple Capital Structure (Report Basic EPS Only)

An entity that issues only common stock (no other securities that can be converted to common stock)
has a simple capital structure.

Basic EPS assumes no potentially dilutive securities. Basic EPS divides income available for
common shareholders by the weighted average number of common shares outstanding.
Complex Capital Structure (Report Basic and Diluted EPS)

An entity has a complex capital structure when it has securities that can be potentially converted to
common stock and would therefore dilute or reduce EPS.

Diluted EPS employs the "if converted" and/or "treasury stock" methods to recompute EPS as it
would be if any dilutive securities such as convertible bonds of preferred stock, rights, warrants, and
options were exercised. Antidilutive securities are not considered.

Preferred stock, especially cumulative issues, cause calculation difficulties, as preferred claims are
not available for common shareholders and preferred dividends do not reduce net income.

Contingent shares, if dilutive, are part of the basic EPS calculation if all conditions for issuance are met.
Disclosures

Basic and diluted EPS are disclosed by income statement component for a proper presentation.
Module 2—Statement of Cash Flows
Overview

This statement comprises three sections:
•
Cash Flows From Operating Activities (CFO): Cash receipts and disbursements from transactions
reported on the income statement and current assets and liabilities. Cash flows related to current
notes payable and the current portion of long-term debt are reported as financing cash flows.
•
Cash Flows From Investing (CFI): Cash receipts and disbursements from non-current assets.
•
Cash Flows From Financing Activities (CFF): Cash receipts and disbursements from debt
(including non-current liabilities) and equity.
Cash and Cash Equivalents

Cash equivalents (treated as cash) are debt securities with an original maturity date of three months
or less.
Methods of Presenting the Statement of Cash Flows

Under the indirect method, the operating activities section adjusts net income to cash provided, or
used, by operating activities. The mnemonic CLAD is useful to remember the various adjustments.

When the indirect method is used, a supplemental disclosure of cash paid for interest and income
taxes is required.
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FAR 8 Unit Outline

Under the direct method, the operating activities section shows the major classes of cash receipts
and disbursements in their gross amounts to arrive at net cash provided by (used in) operating
activities.

When the direct method is used, a supplemental disclosure entitled "the reconciliation of net income
to cash provided by operating activities" is required under U.S. GAAP, but is not required under IFRS.
Sections of the Formal Statement

The candidate should be familiar with how individual transactions affect the operating activities,
investing activities, or financing activities of an entity's statement of cash flows. Review the summary
table in the text for individual transaction classifications.

Under both the direct and indirect methods, a disclosure of noncash investing and financing activities
is required.
IFRS Differences in Reporting Cash Flows

Under U.S. GAAP, interest received and dividends received are classified as CFO. Under IFRS,
interest received and dividends received may be classified as CFO or CFI.

Under IFRS, interest paid and dividends paid may be classified as CFO or CFF. Under U.S. GAAP,
interest paid is classified as CFO and dividends paid are classified as CFF.
Comparison of Indirect and Direct Methods

Review the text for examples of how transactions are recorded on the statement of cash flows using
either the indirect or direct methods.
Module 3—Not-for-Profit Financial Reporting: Part 1
Introduction to Not-for-Profit Accounting

Not-for-profit entities frequently depend significantly on donations or contributions. These entities
include: health care organizations (e.g., hospitals), educational institutions (e.g., universities),
voluntary health and welfare organizations (e.g., United Way), and other nongovernmental, not-forprofit entities (e.g., museums).

All of these entities use full accrual basis of accounting.
Not-for-Profit Financial Reporting Standards

The accounting rules for these entities come from the FASB Accounting Standards Codification® (ASC).

The required financial statements include the statement of financial position, statement of activities,
and statement of cash flows.

All not-for-profit organizations must report information about the relationships between functional
classifications and natural classifications of expenses in one location. Not-for-profits may report this
information (1) on the face of the statement of activities, as a schedule in the notes to the financial
statements, or in a separate financial statement (no specific title provided by the FASB).
Statement of Financial Position

Net assets are composed of two elements:
•
Net assets without donor restrictions (no external restrictions)
•
Net assets with donor restrictions (external restrictions either in perpetuity or which can be
satisfied with time or use requirements )

Know that internal board-designated funds are classified as net assets without donor restrictions.

When a donor-imposed restriction is satisfied, the amount ceases to be classified as net assets with
donor restrictions and is reclassified to net assets without donor restrictions.
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FAR 8 Unit Outline
Statement of Activities

There are three required elements required in the statement of activities:
•
Change in total net assets
•
Change in net assets without donor restrictions
•
Change in net assets with donor restrictions

Program services represent the major activities of the organization performed in furtherance of
the organization's mission. Support services represent administration-type functions within the
organization.

Combined costs need to be allocated between program and support services using any
reasonable means.
Module 4—Not-for-Profit Financial Reporting: Part 2
Statement of Cash Flows

In the statement of cash flows (SOCF), transactions are classified in a manner consistent with
commercial accounting. There are three SOCF classifications, including operating activities, investing
activities, and financing activities, with direct or indirect presentation allowed for reporting operating
activities.

Contributions of revenue without donor restrictions that is board-designated for future construction or
the purchase of long-lived assets is classified as an operating activity on the SOCF.
Module 5—Not-for-Profit Revenue Recognition
Revenue From Exchange Transactions

An exchange transaction is one in which the not-for-profit organization earns resources in exchange
for a service performed. Revenues from not-for-profit exchange transactions are recognized when
realized or realizable and earned. Revenues from exchange transactions are classified as revenue
without donor restrictions.
Contributions Received

A contribution is defined as an unconditional transfer of cash or assets (collection is certain) to a new
owner (title passes) in a manner which is voluntary (the donor is under no obligation to donate) and is
nonreciprocal (the donor gets nothing in exchange). Contributions may include cash, services, and
other assets.

Unconditional promises (pledges) are recorded as revenues for the portion considered collectible
after treating the entity's estimate of uncollectibility as an allowance for uncollectible accounts.
Conditional promises are not recognized as revenue until the condition has been satisfied.

Donated services are only recognized as revenue and an equal and offsetting expense some of the
time. The donated service must generally be a specialized service, otherwise needed and measured
easily or enhance the value of a nonfinancial asset

Donated collection items are subject to the same rules as for governments (e.g., capitalized at fair
value); however, this is optional if the collection is exhibited, preserved, and proceeds of any sale are
to be used to acquire other assets for the collection.

Donated materials (if deemed significant) increase assets and support (revenues) at fair value at the
time of the donation.
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FAR 8 Unit Outline
Accounting for Promises to Contribute and Other Support Transactions

Donor-imposed restrictions limit the use of contributed assets. They are recognized as revenues,
gains, and other support in the period received and as assets, decreases of liabilities, or expenses,
depending on the form of the benefits received.
Fundraising

When a not-for-profit offers premiums (e.g., calendars, coffee mugs, tote bags, etc.) to donors as part
of a fundraising campaign, the cost of the premiums is classified as a fundraising expense. Generally,
the difference between the contribution made by the donor and the fair value of any premiums
transferred is classified as contribution revenue.
Industry-Specific Revenue Recognition


Special revenue recognition rules for NFP educational institutions:
•
Tuition revenues are recorded at gross amounts. Gross revenue from tuition and fees is
determined by subtracting canceled classes from assessed student tuition and fees.
•
Any price breaks given to students such as scholarships or tuition waivers may be treated as an
allowance that reduces revenues or as an expense.
Special revenue recognition rules for NFP health care organizations:
•
Patient service revenues are recorded at gross amounts but displayed on the statement of
activities net of deductions.
•
Charitable services (charity care or other deep discounts that are generally provided based on
poverty guidelines) are not recorded as revenues because there was no intention to collect.
•
Bad debt expense may be treated as either an expense (with no effect on revenue) or as a
deduction from revenue depending on whether the organization made an assessment of quality
or collectability of the related patient account receivable.
•
Other operating revenue includes donated supplies/equipment, cafeteria revenue, parking fees,
and gift shop revenue.
•
Nonoperating revenue includes all unrestricted gifts and donations plus donated services.
Module 6—Not-for-Profit Transfers of Assets and Other Accounting Issues
Transfers of Assets to a Not-for-Profit Organization or a Charitable Trust
That Raises or Holds Contributions for Others

An important issue in not-for-profit accounting is the accounting for asset transfers to other not-forprofit organizations, such as foundations, and the circumstances under which those transfers should
be accounted for, as (1) a contribution, (2) a liability, or (3) a change in interest in net assets.

Financially interrelated organizations are defined as organizations related by both of the following
characteristics:
•
One organization has the ability to influence the operating and financial decisions of the other; and
•
One organization has an ongoing economic interest in the net assets of the other.

A not-for-profit is a recipient entity (such as a foundation) when it accepts assets from a resource
provider (such as a donor or other benefactor) and agrees to use the assets on behalf of, or transfer
the assets (and/or the return on the assets) to, a specified beneficiary (such as a university). The
accounting by the recipient entity depends on whether the recipient has variance power and whether
the recipient and the beneficiary are financially interrelated.

Specified beneficiaries recognize their rights to assets held by the recipient unless the recipient is
explicitly granted variance power. Rights, when recognized, will be recorded as a receivable and
contribution, a beneficial interest, or a change in interest in the net assets of the recipient.
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FAR 8 Unit Outline
Other Accounting Issues


The following pertain to financial instruments:
•
All debt securities and those equity securities that have readily determinable fair values are
measured at fair value in the statement of financial position.
•
Realized and unrealized gains and losses on investments are reported in the statement of
activities as increases or decreases in unrestricted net assets unless the use of the investment is
restricted, either temporarily or permanently, by explicit donor stipulations or by law.
•
Gains and losses that are limited to specific uses by donor stipulations may be reported as
increases in unrestricted net assets if the stipulations are met in the same reporting period in
which the gains and income are recognized.
•
Investment returns are reported net of any related investment expense.
An underwater endowment is a donor-restricted endowment fund for which the fair value of the fund
at the reporting date is less than either the original gift amount or the amount required to be
maintained by the donor or by a law that extends donor restrictions. Underwater endowment funds
will report accumulated losses together with the endowment fund in net assets with donor restrictions,
and will be accompanied with specific disclosures.
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FAR 9 Unit Outline
FAR 9
Unit Outline
Module 1—Governmental Accounting Overview
Governmental Accounting and Reporting Concepts

Fund accounting enables service and mission-driven organizations to easily monitor and report
compliance with spending purposes (fund restrictions), spending limits (budget), and other fiscal
accountability objectives.
Industries That Use Governmental Accounting and Reporting Principles

Not-for-profit organizations not run by governments (e.g., hospitals, universities, voluntary health
and welfare organizations, and research organizations) do not use governmental accounting and
reporting principles.
Generally Accepted Accounting Principles for Governmental Entities

Standards for government accounting are established by the Governmental Accounting Standards
Board (GASB).
Key Concepts in Governmental Accounting and Reporting

Funds are separate, independent, self-balancing sets of accounts, similar to a "checkbook." The three
major categories of funds are governmental (GRaSPP), proprietary (SE), and fiduciary (PAPI).

GASB 34 (as amended) establishes the minimum reporting requirements for governments, including
both fund-based and government-wide financial statement presentations supported by notes to the
financial statements and required supplementary information.
Module 2—Fund Structure and Fund Accounting
Fund Structure

Governmental funds use the modified accrual basis of accounting. The five governmental (GRaSPP)
funds are the general, special revenue, debt service, capital projects, and permanent funds.

Proprietary (SE) funds use full accrual accounting. The internal service and enterprise funds are the
two proprietary funds. Proprietary fund accounting is similar to commercial accounting.

Fiduciary (trust) funds use full accrual accounting. The "PAPI" funds are pension, agency, private
purpose, and investment trust funds.
Fund Accounting

The modified accrual basis of accounting is used with the current financial resources measurement
focus. It is a blend of accrual and cash basis accounting concepts.

The full accrual basis of accounting is used with the economic resources measurement focus. It is
identical to the accrual basis used in commercial enterprises.
Module 3—Transactions and Events: Part 1
Accounting for Governmental Funds

The governmental (GRaSPP) funds use modified accrual accounting, which includes the following:
•
Budgetary: Budgetary accounting is used to control spending.
•
Activity: Activity accounting emphasizes the flow of current financial resources.
•
Encumbrance: Encumbrance accounting is used to record purchase orders and aid in the control
of spending.
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FAR 9 Unit Outline
Budgetary Accounting

Most governmental (GRaSPP) funds record budgets, activity, and encumbrances during the year and
close them out at the end of each year (BAE BAE).

Recording a budget that is formally integrated with a government's accounting system involves
journalizing budgeted transactions using the following accounts at the start of the year: Estimated
revenues, appropriations, and estimated other sources/uses. Natural account balances for budgetary
accounting are the opposite of actual activity: Estimated revenues are "debits" and appropriations
(estimated expenditures) are credits. Any excess, or projected surplus, is credited to budgetary
control (a budgetary equity account). A projected shortfall, or deficit, would be debited to that account.
This entry is closed (reversed) at the end of the year.
Activity

Governmental fund revenues are recorded in the real accounts when they are measurable and
available. "Available" is generally defined as collected within 60 days of year-end. Real property taxes
(imposed non-exchange revenues) are accrued when billed to property owners with related revenue
recognition subject to the measurable and available criteria. Derived tax revenues (sales taxes) are
accrued if measurable and collected within 60 days after fiscal year-end (available).

Expenditures are recognized when the vouchers payable (or cash outlay) is recorded. Capital
purchases, debt service payments, and operating expenditures are treated as a current year's
expenditures. Both operating and capital transactions are handled the same way. Non-current assets
are not recognized. Some current assets are recognized. Expenditures for supplies, (prepaid)
insurance, and inventory can be accounted for by the purchase method or consumption method.

Transfers out to other funds, or interfund transfers, represent a use of financial resources, not an
expenditure item.
 For external reporting, governmental fund expenditures are first classified according to the
appropriate fund. Within the fund, there may be further classification by function or program. For
internal or analytical purposes, expenditures also may be classified by organizational unit, activity, or
object class.

Fixed assets purchased, constructed, or leased are not capitalized; however, they are reported on the
government-wide financial statements (F10). Likewise, long-term debt is not recorded as debt in a
governmental fund. Instead, long-term debt is classified as other financing source on the governmentwide financial statements.
Module 4—Transactions and Events: Part 2
Encumbrances

Open purchase orders represent an encumbrance or commitment of the available appropriations of a
governmental fund. For purposes of internal accounting, an encumbrance (debit) is set up with a
credit to budgetary control. When the order is filled, the encumbrance journal entry (J/E) is reversed
for the amount originally recorded and the actual expenditure is recorded in a separate J/E.

Encumbrances are not identified on the face of a governmental fund's external financial statements,
but may be disclosed.
Other Transactions and Events

Interfund activity may include interfund loans (due to/from), interfund services provided or used, and
nonreciprocal interfund transfers or reimbursements.

Deferred outflows of resources have a positive effect on net position and are reported following
assets but before liabilities. In contrast, deferred inflows of resources have a negative effect on net
position and are reported following liabilities but before equity.
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FAR 9 Unit Outline

Assets associated with unavailable resources and derivative instruments used for hedging are types
of transactions classified as deferred outflows and inflows of resources. Additionally, accounting and
reporting for pensions uses the concepts of deferred outflows and inflows to account for changes in a
government's pension liability.
Fund Balances and Components Thereof (GRaSPP)

Governmental fund balances are classified in one of five ways. The following table lists the possible
classifications within GRaSPP fund balances in the order of their limitations (constraint) and the
likely funds in which the classifications would be used.
General
Special
Revenue
Nonspendable


Restricted

Committed

Assigned

Unassigned, Pos.
(Neg.)

Classification
Debt
Service
Capital
Projects
Permanent









()
()
()
()
Net Position and Components Thereof (SE and Government-wide)

Net position reported in the government-wide and proprietary fund balance sheets is reported in three
categories that focus on the accessibility of the underlying funds: net investment in capital assets,
restricted, and unrestricted.
Module 5—Governmental Funds Financial Statements: Part 1
General Fund

There is only one general fund in a particular governmental entity. The general fund accounts for
activities of a government that are not accounted for by any other fund.
Special Revenue Fund

Special revenue funds contain funds "earmarked" for particular purposes. Special revenue funds are
typically restricted or committed to specific purposes other than debt service or capital projects.
Expendable trusts and grants are special revenue funds with unique accounting issues.
Debt Service Fund

Debt service funds (DSF) pay for the principal and interest related to general obligation debt. This is
debt incurred by governmental funds. Other (SE-PAPI) funds service their own debt.
Module 6—Governmental Funds Financial Statements: Part 2
Capital Projects Fund

Capital projects funds are created for each project underway for better accountability of resources
budgeted for each project. Only projects for governmental funds are accounted for within a capital
projects fund.

Financing sources may be long-term debt issues, fund transfers, capital grants, government grants,
or special assessments charged to property owners benefited by the project.
Permanent Funds

Permanent funds are legally restricted. Only income can be spent with the principal amounts
"permanently" restricted from spending.
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FAR 10 Unit Outline
FAR 10
Unit Outline
Module 1—Proprietary Funds Financial Statements
Internal Service Fund

Internal service (IS) funds primarily serve other funds or departments within the government (internal
customers). The financial statements of an IS fund are the statement of net position; a statement of
revenues, expenses, and changes in net position; and a statement of cash flows.
Enterprise Fund

Enterprise funds are used to account for operations that are financed or operated in a manner similar
to private business enterprise. Activities are recorded in the enterprise fund if any of the following
criteria are met:
•
the activity is financed with debt that is secured solely by a pledge of the net revenue from fees
and charges;
•
laws and regulations require that the cost of providing services be recovered through fees; or
•
the pricing policies of the activity establish fees and charges designed to recover its costs.

The financial statements and net asset classifications of an enterprise fund are the same as those for
an internal service fund.

The enterprise and internal service funds are distinguished by their customer; enterprise funds serve
external customers and internal service funds serve the government.
Module 2—Fiduciary Funds Financial Statements
Pension (and Other Employee Benefit) Trust

Pension trust funds account for government-sponsored pension and postretirement plans. Additions
and deductions replace revenues and expenses as activity classifications in the statement of changes
in fiduciary net position.
Agency Trust Fund

Agency trust funds are custodial funds. The current assets equal the current liabilities in the
statement of fiduciary net position, with no fund balance reported.
Private Purpose Trust

Private purpose trust funds, such as an escheat property fund, contain resources for the benefit of
other parties or entities.
Investment Trust Funds

Investment trust funds represent investments held on behalf of others and its assets are generally
reported using fair value.
Module 3—Form and Content of the Comprehensive Annual Financial Report
Governmental Financial Reporting Requirements of GASB 34

Funds have financial statements prepared using their specific accounting method in order to better
demonstrate compliance with government leaders' decisions (fiscal accountability); the governmentwide financial statements display achievement of operating objectives (operational accountability).
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FAR 10 Unit Outline

The sequence of financial reporting presentation is:
•
Governmental entity's financial statements start with management's discussion and analysis
(MD&A).
•
Government-wide financial statements and fund financial statements follow (including a
reconciliation of modified accrual governmental funds to the government-wide financials on the
full accrual basis).
— Governmental funds (GRaSPP) require a balance sheet and a statement of revenues,
expenditures, and changes in fund balances.
— Proprietary funds (SE) require a statement of net position; a statement of revenues,
expenses, and changes in fund net position; and a statement of cash flows.
— Fiduciary funds (PAPI) require a statement of fiduciary net position and a statement of
changes in fiduciary net position.
•
Notes to the financial statements.
•
Required supplementary information (RSI) (other than MD&A) and other supplementary
information.
The Financial Reporting Entity

The financial reporting entity is the primary government entity and all component units that should be
included with it. General purpose governments (e.g., states, counties, and cities) are almost always
considered a primary government and therefore have their own financial statements.

A special purpose local government will be treated as a primary governmental entity if it has
separately elected leaders, is a legally separate entity, and is fiscally independent. It stands by itSELF.

Component units do not meet the SELF criteria and may be blended with the primary government if
they are "intertwined" with it (the component unit is not a separate legal entity, the boards of the
component unit and primary government are substantially the same, or the component unit serves the
primary government exclusively). A discrete presentation is required if the component is legally
separate but financially accountable to the primary government. Most component units should use
discrete presentation.
Module 4—Government-wide Financial Statements
Overview

Government-wide financial statements are prepared on the accrual basis reflecting the economic
resources measurement focus.
Statement of Net Position (a Consolidated Statement)

Government-wide financial statements (GWFS) are presented in net position format
(A – L = NP). Net position consists of three components:
•
Net investment in capital assets net of accumulated depreciation and related debt.
•
Restricted net position consists of restricted assets reduced by related liabilities and deferred
resource inflows (external restrictions).
•
Unrestricted net position includes net assets that are not included in net investment in capital
assets or the restricted component (no external restrictions).
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FAR 10 Unit Outline
Capital Assets: Capitalization and Depreciation

Capitalized assets in the GWFS will include infrastructure-type assets unless the government elects to
use the modified approach. The modified approach includes infrastructure data in RSI: 1) a condition
assessment of assets; and 2) an annual estimate of the amounts required to maintain the assets.

Depreciation is required; however, if the modified approach is used for infrastructure assets, ordinary
maintenance is expensed, and additions or improvements are capitalized.

Donated artwork and historical treasures should be capitalized at their fair values but capitalization is
optional if they will be exhibited, preserved, and the proceeds of any sale will be used to acquire other
assets for the collection.
Statement of Activities

The government-wide statement of activities will include program revenues (SOC) resulting from
exchange-type (charges for services) or non-exchange-type transactions such as operating or
capital grants.

Within the governmental activities and business-type activities columns, interfund activity will be
eliminated; between columns, interfund activity will not be eliminated.
Module 5—Fund Financial Statements
Fund Financial Statements

Fund financial statements require establishing the criteria for major funds. There are two criteria (10
percent of GRaSPP funds or enterprise funds and 5 percent of GRaSPP funds or enterprise funds)
that must be met for a fund to be considered major. The general fund is always major, and internal
service funds are excluded from major fund consideration.
Governmental Funds

The candidate should review the format of the balance sheet and statement of revenue, expenditures,
and changes in fund balance for governmental funds presented in the text.
Proprietary Funds

The proprietary fund statement of cash flows is similar to the commercial statement of cash flows,
with the following seven differences:
•
The direct method is required.
•
A reconciliation of operating income (not net income) to net cash provided by operating activities
is required.
•
There are four categories: operating activities, capital and related financing activities, noncapital
financing activities, and investing activities.
•
Financing activities are reported before investing activities.
•
Interest income is an investing activity.
•
Interest expense is reported in capital and related financing activities or noncapital financing
activities.
•
Capital asset purchases are financing activities.
Fiduciary Funds

Fiduciary funds are required to report net position as the difference between assets plus deferred
outflows of resources and liabilities plus deferred inflows of resources.
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FAR 10 Unit Outline
Module 6—Deriving Government-wide Financial Statements
and Reconciliation Requirements
Reconciliation of Governmental Fund Financial Statements
to Government-wide Financial Statements

A reconciliation between the modified accrual governmental fund financial statements and the
government-wide full accrual basis financial statements must be performed, including: differences in
the fund balances of government funds and net position in the government-wide financial statements,
and differences in the net change in fund balances of governmental funds and the change in net
position for governmental activities.

The adjustments from governmental fund balance to net position from governmental activities can be
remembered using the CANS mnemonic:
Total governmental fund balance
+ Capital assets
- Accumulated depreciation
- Non-current liabilities
- Reduce deferred inflows
- Accrued interest payable
+ Internal Service fund net position
Net position from governmental activities

The adjustments from net change in governmental fund balance to change in net position of
governmental activities can be remembered using the CPAS RIDES mnemonic:
Net change in fund balance—governmental funds
+ Capital outlay
+ Principal payments on non-current debt
- Asset disposals (net book value)
- Sources (other financing sources – debt proceeds)
+ Revenue (measurable and unavailable)
- Interest expense (accrued)
- Depreciation Expense
+ Internal Service fund net revenue
Change in net position of governmental activities
Deriving Government-wide Financial Statements

The process of preparing the government-wide financial statements from the fund financial
statements is similar to the process of preparing consolidated financial statements for commercial
entities. However, added complexity comes from the fact that the governmental fund financial
statements differ from the government-wide financial statements due to differences in measurement
focus, basis of accounting, and excluded funds.
4
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Registered to Alla Bobrysheva (#773084)
FAR 10 Unit Outline
Module 7—Notes and Supplemental Information
Management's Discussion and Analysis

MD&A must be an easily readable summary of the financial statements and will likely include a
description of major initiatives and analyze material variances.
Notes to the Financial Statements

Notes to the financial statements are essential to fair presentation and focus on the primary
government, specifically governmental activities, business type activities, major funds, and nonmajor
funds in aggregate, as well as additional information regarding discretely presented component units.
Required Supplemental Information (Other Than MD&A)

Required supplementary information other than MD&A may include pension data, infrastructure data,
and budgetary comparisons of the original and final budgets as well as the actual amounts.
Optional Supplemental Information (Optional)

Combining statements for nonmajor funds and variance computations is optional.
5
© Becker Professional Education Corporation. All rights reserved.
Registered to Alla Bobrysheva (#773084)
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