Codification Research Case 1-In light of the full disclosure principle, investor
ID: 2578463 • Letter: C
Question
Codification Research Case
1-In light of the full disclosure principle, investors and creditors need to know the balances for assets, liabilities, and equity as well as the accounting policies adopted by management to measure the items reported in the balance sheet.
Instructions
If your school has a subscription to the FASB Codification, go to http://aaahq.org/asclogin.cfm to log in and prepare responses to the following. Provide Codification references for your responses.
(a)
Identify the literature that addresses the disclosure of accounting policies.
(b)
How are accounting policies defined in the literature?
(c)
What are the three scenarios that would result in detailed disclosure of the accounting methods used?
(d)
What are some examples of common disclosures that are required under this statement?
Codification Research Case
2-At a recent meeting of the accounting staff in your company, the controller raised the issue of using present value techniques to conduct impairment tests for some of the company's fixed assets. Some of the more senior members of the staff admitted having little knowledge of present value concepts in this context, but they had heard about a FASB Concepts Statement that may be relevant. As the junior staff in the department, you have been asked to conduct some research of the authoritative literature on this topic and report back at the staff meeting next week.
Instructions
If your school has a subscription to the FASB Codification, go to http://aaahq.org/asclogin.cfm to log in and access the FASB Statements of Financial Accounting Concepts. When you have accessed the documents, you can use the search tool in your Internet browser to respond to the following items. (Provide paragraph citations.)
(a)
Identify the concept statement that addresses present value measurement in accounting.
(b)
What are some of the contexts in which present value concepts are applied in accounting measurement?
(c) Provide definitions for the following terms:
1.Best estimate.
2.Estimated cash flow (contrasted to expected cash flow).
3.Fresh-start measurement.
4.Interest methods of allocation.
Explanation / Answer
1a)Literature that addresses the disclosure of accounting policies is Intermediate Accounting : FASB Codification CE5-1
1b) Information about the accounting policies adopted by an entity is essential for financial statement users. When financial statements are issued purporting to present fairly financial position, cash flows, and results of operations in accordance with generally accepted accounting principles (GAAP), a description of all significant accounting policies of the entity shall be included as an integral part of the financial statements.
1c)
a.A selection from existing acceptable alternatives
b.Principles and methods peculiar to the industry in which the entity operates, even if such principlesand methods are predominantly followed in that industry
c.Unusual or innovative applications of GAAP5
1d) Examples of disclosures:
a. Basis of consolidation
b. Depreciation methods
c. Amortization of intangibles
d. Inventory pricing
e. Accounting for recognition of profit on long-term construction-type contracts
f. Recognition of revenue from franchising and leasing operations
2a)Statement of Financial Accounting Concepts No. 7 which uses Cash Flow Information and Present Value in Accounting Measurements
2b)Accounting applications of present value have traditionally used a single set of estimated cash flows and a single interest rate, often described as the rate commensurate with the risk.In effect, although not always by conscious design, the traditional approach assumes that a single interest rate convention can reflect all the expectations about the future cash flows and appropriate risk premium.
2c)
1)The best estimate can be defined as an appropriate estimation of the expected value of a certain value excluding any margins
2)The cash flow an investor or company expects to realize from a project before that project begins. The actual cash flows received may be greater or less than the expected future cash flows.
3)Fresh start accounting is a general term used to describe the financial reporting requirements for companies exiting bankruptcy.
4) For calculating the actual interest rate of a financial instrument during a time period, based on the book value of the instrument at the start of an accounting period, Effective Interest Rate Method is used. In case the book value of the financial instrument decreases, the interest paid off will also decrease. Similarly in case of increasing value of the financial instrument, the interest paid increases.