Business Analysis & Reporting (BAR) Cheat Sheet

Enterprise Risk Management (ERM) Framework & Risk Responses

The ERM framework helps organizations manage risk to create and preserve value. Management assesses inherent risk (risk if no action is taken) and residual risk (risk after management action).

Core Concepts

• Mission: The organization's core purpose.
• Vision: The organization's aspirations and goals for the future.
• Core Values: The organization's beliefs and ideals.

ERM Components & Principles

• Governance & Culture: Defines desired culture, exercises board oversight, demonstrates commitment to core values, attracts and retains capable individuals, and establishes operating structure.
• Strategy and Objective-Setting: Evaluates alternative strategies, formulates business objectives, defines risk appetite, and analyzes business context.
• Performance: Assesses severity of risk, prioritizes risk, identifies risks (events), implements risk responses, and develops a portfolio view.
• Review & Revision: Assesses substantial change, pursues improvement in ERM, and reviews risk and performance.
• Information, Communication, and Reporting: Leverages information and technology, communicates risk information, and reports on risk, culture, and performance.

Cost-Benefit Analysis & Risk Attitudes

Management evaluates risk response options by comparing the expected reduction in risk against implementation costs (Net Benefit = Expected Benefit − Cost of Control):

• Risk-Averse: General corporate baseline; requires higher return to accept higher risk.
• Risk-Seeking: Accepts heightened volatility for marginal return opportunities.
• Risk-Indifferent: Evaluates purely on expected return regardless of risk variance.

Management Decisions Affecting Value

• Value Created: Benefits exceed the cost of resources utilized (positive NPV, innovation).
• Value Preserved: Ongoing operations efficiently sustain created benefits (customer loyalty, operational excellence).
• Value Eroded: Faulty strategy or poor execution causes negative returns, obsolescence, or impairment.
• Value Realized: Benefits created and preserved are transferred to stakeholders (dividends, market share).

Risk Assessment Stages & 2x2 Response Matrix

• Inherent Risk: Risk in the absence of any direct management action or controls.
• Target Residual Risk: The amount of risk an entity prefers to assume in pursuit of its strategy.
• Actual Residual Risk: The risk remaining after management has executed its risk responses.

Note: Pursue involves accepting heightened risk to exploit strategic market opportunities.

Risk Categories & Exposures

Market vs. Firm-Specific Risk

• Systematic Risk: Also known as market or nondiversifiable risk. It is inherent to the entire market (e.g., inflation, interest rates).
• Unsystematic Risk: Also known as firm-specific or diversifiable risk. It can be eliminated through portfolio diversification (e.g., strikes, lawsuits).

Credit & Liquidity Risk

• Credit Risk: Risk that a borrower will default.
• Liquidity Risk: Risk of being unable to sell an investment quickly without a price concession.

Currency Exchange Risk Exposures

• Transaction Risk: Risk of exchange rate fluctuations between the transaction date and the settlement date.
• Economic Risk: Risk that fluctuations in exchange rates will impact the overall present value of the organization's future cash flows.
• Translation Risk: Risk related to translating a foreign subsidiary's financial statements into the parent's reporting currency.

Financial Risk Mitigation Instruments

• Interest Rate Risk: Floating-rate instruments, interest rate swaps (exchanging fixed for floating cash flows), and Forward Rate Agreements (FRAs).
• Credit Default Swaps (CDS): Financial derivative contracts where the seller compensates the buyer in the event of a debt default by a third-party borrower.
• Unsystematic (Firm-Specific) Risk: Fully eliminable through portfolio diversification across uncorrelated assets.

Money Market Hedge Mechanics

Supply & Demand Shifts

Factors that Shift Demand

• Tastes and Preferences: Changes in consumer tastes, trends, and preferences for a product.
• Prices of Related Goods: The price of substitutes (used in place) or complements (used together).
• Income: Changes in consumers' income, affecting demand for normal and inferior goods differently.
• Number of Buyers: An increase or decrease in the total number of consumers in the market.
• Expectations: Consumer expectations about future prices, income, or product availability.

Factors that Shift Supply

• Input Prices: Changes in the cost of resources used for production (e.g., labor, raw materials).
• Technology: Advancements in production technology that can lower costs and increase output.
• Government Policies: The effect of taxes (increases costs) or subsidies (decreases costs).
• Number of Sellers: An increase or decrease in the number of firms producing the good.
• Expectations: Producer expectations about the future selling price of the good.

Simultaneous Shifts in Supply and Demand

Rule: Same direction shifts → Quantity known, Price indeterminate. Opposite direction shifts → Price known, Quantity indeterminate.

Government Price Controls

• Price Floor: Minimum legal price set above equilibrium → Results in a Surplus (e.g., minimum wage).
• Price Ceiling: Maximum legal price set below equilibrium → Results in a Shortage (e.g., rent control).

Elasticity Concepts

Total Revenue Test of Price Elasticity

SWOT Analysis

A strategic framework used to assess an entity's options to achieve its overall business strategy.

• Strengths (Internal): Attributes that help achieve the objective (e.g., proprietary technology, skilled workforce).
• Weaknesses (Internal): Attributes that harm achieving the objective (e.g., high debt, poor brand reputation).
• Opportunities (External): Conditions helpful to achieving the objective (e.g., new emerging markets, favorable regulations).
• Threats (External): Conditions harmful to achieving the objective (e.g., new competitors, economic downturns).

Strategic Management & Industry Analysis

Porter's Five Forces Framework

Generic Competitive Strategies

• Cost Leadership: Achieving lowest production and distribution costs across a broad industry segment. Succeeds when demand is price-elastic; fails if cost-cutting degrades quality below customer acceptance.
• Product Differentiation: Creating unique product features that justify premium pricing. Succeeds when customers value uniqueness; fails if premium exceeds perceived value.
• Best Cost Strategy: Combining low-cost manufacturing with differentiated features (high perceived value at reasonable price).
• Focus / Niche Strategy: Targeting a narrow, specialized customer segment via either cost focus or differentiation focus.

Types of Business Combinations

• Horizontal: Combination of competitors in the same industry (economies of scale, market share).
• Vertical: Combination of firms at different stages of the production/supply chain (securing raw material supply or distribution).
• Circular: Combination of remote, diversified business units under centralized management.
• Diagonal: Combination of an entity with a firm providing ancillary support services.

Macroeconomic Indicators & Inflation Adjustments

Macroeconomic analysis evaluates aggregate output, price deflators, and the purchasing-power impact of inflation on cash flows, investments, and debt obligations.

Gross Domestic Product (GDP) Valuation Metrics

Inflation Impact on Real Prices, Debt & Purchasing Power

Financial Calculations

Discounted Loan & Net Usable Funds Effective Rate

When a lender deducts interest or compensating balances upfront, the true borrowing cost increases:

Annual Cost of Foregoing Cash Discounts (e.g., 2/10, net 30)

Calculations standardly use a 365-day year; substitute 360 days only when a 360-day year is explicitly specified.

Required Rate of Return Components

Cost of Capital, Equity & Growth

Weighted Average Cost of Capital (WACC)

The composite hurdle rate representing an entity's weighted after-tax required return across all financing sources. Capital investments must yield a return exceeding WACC to create enterprise value:

• V (Total Enterprise Capital): Market value of Common Equity + Preferred Stock + Debt (V = E + P + D).
• Cost of Common Equity (R_e): Required return estimated via CAPM, Gordon Growth, or BYPRP.
• Cost of Preferred Stock (R_p): Stated dividend per share divided by net proceeds per share (D_p / P_p).
• After-Tax Cost of Debt [R_d(1 − T)]: Pretax effective borrowing rate adjusted for the corporate interest tax shield.

Cost of Common Equity (R_e) Estimation Methods

Firms employ three standard methods to estimate the required rate of return on common equity:

Sustainable & Internal Growth Rates

Retention Rate = Addition to Retained Earnings ÷ Net Income = 1 − Dividend Payout Ratio.

Optimal Capital Structure & Leverage

The optimal capital structure is the mix of debt and equity that minimizes the WACC and maximizes the value of the firm.

Debt vs. Equity Financing Characteristics

Financing Strategies

• Short-Term Financing: Provides increased liquidity, higher profitability, and lower financing costs, but comes with increased interest rate risk and decreased capital availability.
• Long-Term Financing: Decreases interest rate risk and increases capital availability, but results in decreased liquidity, lower profitability, and higher financing costs.
• Asset Structure: Higher current assets increase liquidity and decrease distress risk but lower the return on assets. Higher non-current assets decrease liquidity and increase distress risk but yield higher returns on assets.

Operating, Financial & Combined Leverage

Leverage amplifies risk and return. Management monitors operating fixed costs and debt financing across three interrelated measures:

Modigliani-Miller Theorem (Corporate Taxes)

V_L = Levered Firm Value
V_U = Unlevered Firm Value
Interest Tax Shield = D × T_c = [T_c × (r_debt × D)] ÷ r_debt

Specific Debt Financing Profiles

• Commercial Paper: Short-term unsecured promissory notes issued by prime corporations with maturities ≤ 270 days (exempt from SEC registration).
• Debentures: Unsecured corporate bonds backed only by the general creditworthiness of the issuer.
• Subordinated Debentures: Unsecured debt ranking behind senior debt in bankruptcy liquidation (carries higher interest rates).
• Income Bonds: Pay interest only upon achievement of specified corporate net income targets.
• Mortgage Bonds: Secured debt instruments collateralized by specific real property or physical assets.

Working Capital Management

Working Capital Turnover Ratios & Days Outstanding

Turnover Ratios use Average Balances (Net Credit Sales if segregated)
Days Outstanding use Ending Balances (or 365 ÷ Turnover Ratio).

Cash Conversion Cycle (CCC)

Cash Management Motives

• Transaction Motives: Holding cash to meet routine payments.
• Speculative Motives: Holding cash to take advantage of unexpected investment opportunities.
• Precautionary Motives: Holding cash as a safety cushion for unexpected needs.

Methods to Delay Disbursements

• Centralized payables with zero-balance accounts
• Use of drafts (checks payable by a bank)
• Lines of credit

Inventory Management & EOQ

The Economic Order Quantity (EOQ) model calculates the ideal order size to minimize the sum of ordering costs and carrying costs. The formula is:

Opposing Costs

• Ordering Costs: Costs of placing and receiving an order (e.g., purchase order processing, receiving department costs). Decrease as order size increases.
• Carrying (Holding) Costs: Costs of holding inventory (e.g., storage, insurance, obsolescence). Increase as order size increases.

Key Assumptions

• Demand is known and constant.
• Lead time is reliable and does not vary.
• Ordering costs are fixed per order.
• No quantity discounts are available.

Inventory Techniques & Metrics

• Reorder Point: Safety Stock + (Lead Time × Sales during Lead Time).
• SCOR Model: A framework for supply chain management: Plan, Source, Make, Deliver.
• Just-in-Time (JIT): Reduces inventory by receiving goods only as they are needed in the production process.
• Kanban: A visual system to manage and control JIT workflow.

Capital Budgeting & Investment Analysis

NPV vs. IRR: Key Distinctions & Conflicts

Multi-Stage NPV Cash Flow Model

Lease vs. Buy Analytical Framework

Evaluating lease vs. buy requires bifurcating two distinct decisions:

1. The Investment Decision: Discount operational cash inflows at WACC to verify the asset creates enterprise value.
2. The Financing Decision: Discount incremental cash flows of leasing vs. borrowing at the After-Tax Cost of Debt:
   • Buying Cash Flows: Purchase price, tax savings from depreciation (Depreciation × T), after-tax salvage.
   • Leasing Cash Flows: Lease payments and tax savings from lease payments (Lease Payment × T).

Valuation Models

Dividend Discount Models (DDM)

Relative Valuation Multiples

Option Pricing Models & Sensitivity Analysis (Black-Scholes)

• Black-Scholes Model: Prices European-style options (exercisable only at expiration) in continuous time assuming no transaction costs and constant volatility.
• Binomial (Lattice) Model: Prices American-style options (exercisable at any point up to expiration) across discrete intervals over time.

Valuing Tangible Assets

• Cost Method: Original Cost - Accumulated Depreciation = NBV.
• Appraisal Method: Based on professional appraisal.
• Liquidation Method: Amount if sold today.
• Market Value Method: Selling Price - Cost to Sell = NRV.

Valuing Intangible Assets

• Market Approach: Valuation based on similar markets.
• Income Approach: Uses discount rates (FCF to PV).
• Cost Approach: Based on Replacement or Reproduction Cost.

Financial Statement Analysis & Ratios

Financial statement analysis involves using ratios to evaluate an entity's liquidity, solvency, profitability, and operational performance.

Profitability & Return Ratios

3-Stage DuPont Return on Equity (ROE)

Decomposes ROE into operating efficiency, asset efficiency, and financial leverage:

Liquidity & Solvency Ratios

Non-GAAP Measures: EBITDA, FCF & EVA

Economic Value Added (EVA)

NOPAT = Net Operating Profit After Tax = EBIT × (1 − T)
Invested Capital = Total Assets − Current Liabilities.

Data Analytics & Management

Types of Data Analytics

• Descriptive: Describes or explains what has occurred (backward-looking).
• Diagnostic: Explains exactly why an event occurred.
• Predictive: Uses historical data to predict what will occur in the future (forward-looking).
• Prescriptive: Prescribes what actions should be taken to optimize an outcome.

Data Structuring & Transformation

• Structured vs. Unstructured: Structured data is highly organized (tables/rows) while unstructured data is unmodified original content (text, images).
• Primary Key: A database attribute that uniquely identifies a record.
• Foreign Key: An attribute that contains values from a primary key in another table, linking the two.
• Data Cleaning: Ensuring data is complete, current, and formatted correctly prior to analysis.

Database Architecture & Normalization (3NF)

• Normalization (Third Normal Form - 3NF): Organizing database tables to eliminate data redundancy, prevent insert/update/delete anomalies, and ensure every non-key attribute depends strictly on the primary key.
• 4-Step Data Scrubbing: 1) Strip redundant headers and blank rows, 2) Clean non-printable whitespace, 3) Standardize negative number formatting, 4) Resolve date formats and missing data types.

Quality Control Visual Tools

Projection & Forecasting Techniques

Analytical Models

• Sensitivity Analysis: Also known as "What-if" analysis, it uses probabilities to approximate reality by changing one variable at a time.
• Scenario Analysis: Evaluates multiple scenarios which represent alternative possible outcomes.
• Linear Regression: Uses the formula y = a + Bx where y is total cost, a is fixed cost, B is variable cost per unit, and x is total activity.

Statistical Metrics

• Coefficient of Correlation (r): Measures the strength of the linear relationship between variables. Ranges from +1 (perfect positive correlation) to -1 (perfect inverse correlation). A value of 0 indicates no correlation.
• Coefficient of Determination (R²): Measures the proportion of the variance in the dependent variable (y) that is predictable from the independent variable (x).

Cost Estimation: High-Low Method

Learning Curve Analysis (Cumulative Average-Time Model)

Doubling Rule = As cumulative output doubles (1 → 2 → 4 → 8), cumulative average time drops by LR%
Incremental Batch Time = Total Time(2N) − Total Time(N).

Cost Accounting Systems & Inventory Flows

Product vs. Period Costs

• Product Costs (Inventoriable): Capitalized as an asset until sold. Composed of Prime Costs (Direct Materials + Direct Labor) and Conversion Costs (Direct Labor + Manufacturing Overhead Applied).
• Period Costs: Expensed in the period incurred (e.g., SG&A, interest). Abnormal costs are always classified as period costs, whereas normal spoilage is treated as a product cost.

Cost Accumulation Systems

• Job Costing: For custom orders; costs are tracked by individual job.
• Process Costing: For mass-produced, homogeneous products; costs are averaged over all units using Equivalent Units (EU).
• Operations Costing: A hybrid utilizing components of both job and process costing.
• Backflush Costing: Accounts for costs only at the end of the manufacturing process.
• Life-Cycle Costing: Monitors costs throughout a product's entire life cycle.

Process Costing Calculations

Activity-Based Costing (ABC)

Assigns overhead based on multiple activities (cost pools and drivers) rather than a single plant-wide rate. An overhead rate must be calculated for each distinct cost pool.

Cost of Goods Manufactured (COGM)

COGM represents the total cost of goods completed and transferred from WIP to Finished Goods inventory during a period.

Cost of Goods Sold (COGS)

COGS represents the manufacturing costs of products that were completely manufactured and sold during the period.

Service Department Cost Allocation Methods

Service departments (e.g., Maintenance, HR, IT) support production departments (e.g., Assembly, Machining). Their costs must be allocated to production departments to calculate total product costs.

Joint & By-Product Costing

• Joint Products: Two or more products generated from a common input. Joint costs are allocated to these main products.
• By-Products: Products with a low sales value relative to the main product. Revenue from by-products can be used to reduce the joint costs allocated to the main products.
• Split-off Point: The point in the production process where joint products can be individually identified.
• Separable Costs: Costs incurred after the split-off point that are assignable to specific products.

Joint Cost Allocation Methods

Joint costs are incurred in a single process that yields multiple products. These costs must be allocated to the main (joint) products at the split-off point.

1. Relative Sales Value Method

Allocates joint costs based on each product's share of total sales value at the split-off point. This is the preferred method.

2. Net Realizable Value (NRV) Method

Used when products cannot be sold at split-off. Allocation is based on final sales value minus identifiable costs incurred after split-off (separable costs).

3. Physical Unit Method

Allocates joint costs based on a physical measure (e.g., pounds, gallons) of the units produced. This method does not consider the revenue-generating power of products.

Accounting for By-Products

By-products have a relatively minor sales value. The proceeds generated from their sale are accounted for using one of two methods:

• Applied to Main Product: By-product revenue is credited to Joint Costs (reducing the COGS of the main products).
• Miscellaneous Income: By-product revenue is credited directly to a miscellaneous income account on the income statement.

Cost of Quality (COQ) Framework

The Cost of Quality model evaluates the financial trade-off between investing in quality controls versus incurring the costs of product defects. It is divided into Conformance Costs (costs to ensure quality) and Nonconformance Costs (costs resulting from quality failure).

Marginal Analysis & Relevant Costs

• Relevant Costs: Avoidable costs that result from choosing one course of action over another. Unavoidable costs are the same regardless of the chosen course and are not relevant.
• Make vs. Buy Decision: The goal is to select the lowest cost alternative.
  • Excess Capacity: Make the product if the cost to buy is greater than the variable and avoidable cost per unit.
  • No Excess Capacity: Opportunity costs must be included. Make the product if the cost to buy is greater than the variable and avoidable cost per unit plus the opportunity cost.
• Special Order Decisions: Accept if incremental revenue > incremental costs. Consider opportunity cost if there is no excess capacity.
• Sell or Process Further: Process further if incremental revenue from processing > incremental processing costs. Incremental revenue is the new selling price minus the current selling price. Joint costs are untraceable, sunk costs, and therefore irrelevant. Separable costs incurred after the split-off point are traceable and relevant.
• Keep or Drop a Segment: Drop a segment if the unavoidable fixed costs exceed the current net income. Keep the segment if the lost contribution margin is greater than the fixed costs. Drop the segment if the lost contribution margin is less than the fixed costs.
• Lease vs. Buy: Compare the NPV of the cash flows for each option.

Marginal Decision Rules & Resource Optimization

• Special Order Pricing:
  • Excess Capacity: Accept if Incremental Selling Price > Incremental Variable Costs.
  • Full Capacity: Accept if Incremental Selling Price > Variable Costs + Opportunity Cost (Forgone CM of regular sales).
• Constrained Resource Optimization: When capacity is constrained (e.g., machine hours, skilled labor hours), prioritize products with the highest Contribution Margin per Unit of Constrained Resource:

• Sell or Process Further: Joint costs incurred prior to split-off are sunk costs and completely irrelevant. Process further if Incremental Revenue from Processing > Separable Processing Costs.

CVP, Target Costing & Margin Analysis

Absorption vs. Variable Costing Mathematical Reconciliation

• Production > Sales (Inventory Increases): Fixed MOH is capitalized into ending inventory → Absorption Income > Variable Income.
• Production < Sales (Inventory Decreases): Prior fixed MOH is released from beginning inventory to COGS → Variable Income > Absorption Income.
• Production = Sales (No Inventory Change): Fixed MOH expensed equals fixed MOH incurred → Absorption Income = Variable Income.

Break-Even & CVP Analysis

Target Costing

Used to establish the maximum cost allowed to ensure profitability per unit and total sales volume.

Performance Metrics & Responsibility Centers

Metrics used to evaluate management, operational efficiency, and investment center performance. A responsibility center is a segment of a business for which a manager has control and accountability.

Responsibility Centers

• Cost Center: Manager responsible for costs only (e.g., production department).
• Revenue Center: Manager responsible for revenues only (e.g., sales department).
• Profit Center: Manager responsible for both revenues and costs (e.g., a specific product line).
• Investment Center: Manager responsible for revenues, costs, and invested capital (e.g., a subsidiary).

Investment Center Performance Evaluation

Non-GAAP Measures

• EBITDA: Removes factors that do not impact operating performance (interest, taxes, D&A).
• Free Cash Flow: Cash remaining after operating expenses and capital investments (FCF = CFO − CapEx).
• Core Earnings: Profits derived exclusively from the main/principal business.

Operational & Nonfinancial Measures

Balanced Scorecard (Four Perspectives)

• Financial: "How do we look to shareholders?" (e.g., ROI, Residual Income, EVA, profit margins).
• Customer: "How do customers see us?" (e.g., customer satisfaction, retention rate, net promoter score).
• Internal Business Processes: "What business processes must we excel at?" (e.g., MCE, defect rates, throughput time).
• Learning and Growth: "Can we continue to improve and create value?" (e.g., employee training hours, technology investments, retention of key staff).

Comprehensive Variance Analysis

Variance analysis isolates the differences between actual and expected costs or revenues to identify inefficiencies.

Cost Variances

Direct Materials Mix & Yield Variances (Advanced Decomposition)

When production blends multiple direct materials (e.g., chemical formulation, batch processing), the total Materials Quantity Variance separates into Mix and Yield components:

Sales Variances & Multi-Product Decomposition

Overhead Variance Combinations (2-Way, 3-Way, 4-Way Analysis)

Organizations group the four standard manufacturing overhead (MOH) variances into aggregate analytical frameworks:

Master Budget Components

The Master Budget is a comprehensive plan for an organization, typically for one year. It is composed of operating and financial budgets.

Operating Budgets

Operating Budget Schedules & Mathematical Equations

Financial Budgets

Detail the inflows and outflows of cash and the overall financial position.

• Capital Expenditures Budget
• Cash Budget
• Budgeted Balance Sheet
• Budgeted Statement of Cash Flows

Budgeting Standards

Standards are per-unit budgets integral to the development of a flexible budget.

• Ideal standards: Assume perfect efficiency and effectiveness (e.g., no spoilage or downtime).
• Current attainable standards: Represent work by employees with appropriate training without extraordinary effort (allows for normal spoilage/downtime).
• Authoritative standards: Set exclusively by management.
• Participative standards: Set by managers and the individuals held accountable for meeting them.

Business Combinations & Divestitures

Acquisition: Goodwill vs. Bargain Purchase

In a business combination, Goodwill is recognized if the purchase price exceeds the fair value of the net assets acquired. The calculation is as follows:

• If the result is positive, it is Goodwill, which is capitalized as an intangible asset and tested for impairment.
• If the result is negative, it is a Bargain Purchase Gain. This gain is recognized immediately in the acquirer's current earnings.

Types of Divestitures

Companies may divest components for strategic goals, market analysis, or regulatory compliance:

• Sell-Offs: Sale of a subsidiary, typically because it is underperforming or lacks synergy.
• Spin-Offs: Creating a new independent company separate from the parent to unlock potential value, resulting in no cash inflow.
• Equity Carve-Out: A subsidiary is made public through an IPO, which generates cash and provides the parent with a controlling interest.

Consolidation & Intercompany Transactions

A parent must consolidate a subsidiary when it has control (over 50% voting interest), with exceptions requiring the equity method for bankruptcy or legal reorganization.

Treatment of Combination Costs

• Acquisition Costs: Expensed immediately (e.g., legal and consulting fees).
• Registration & Issuance Costs: Deducted from the value of the stock issued (debit to APIC).

Consolidation Elimination Entry

This journal entry eliminates the subsidiary's equity and the parent's investment account:

Noncontrolling Interest (NCI) Rollforward

To calculate the Noncontrolling Interest at year-end, use the following formula:

Measurement Period

A period not exceeding one year from the acquisition date. It ends when it becomes obvious no better information will be available to adjust provisional amounts recognized at the acquisition date.

Intercompany Inventory

All intercompany transactions must be eliminated during consolidation. Any unrealized profits on assets that remain within the consolidated entity at year-end must be deferred.

• Profit Deferral: Defer 100% of the gross profit on inventory that remains unsold to outsiders at year-end.
• Subsequent Period: When the inventory is sold to an outsider in the next period, the deferred profit is recognized.

Intercompany Fixed Assets

• Gain/Loss Deferral: Defer 100% of any gain or loss on the intercompany sale in the year of the sale.
• Restore Basis: The asset must be restored to its original cost basis on the consolidated books.
• Correct Depreciation: "Excess" depreciation (depreciation on the gain) must be reversed in all subsequent periods until the asset is sold externally.

Variable Interest Entities (VIE) — ASC 810

A Variable Interest Entity (VIE) is a legal entity whose equity holders lack the typical characteristics of a controlling financial interest. A reporting entity must consolidate a VIE if it is the Primary Beneficiary.

Characteristics of a VIE (Meets ANY ONE)

• Insufficient Equity at Risk: Total equity at risk cannot finance operations without additional subordinated support (rebuttable presumption if < 10% of total assets).
• Lack of Controlling Rights (as a group): Equity investors collectively lack:
  • Power to direct activities that most significantly impact economic performance; OR
  • Obligation to absorb expected losses; OR
  • Right to receive expected residual returns.
• Disproportionate Voting vs. Economics (Anti-Abuse): Voting rights are non-proportional to economic exposure AND substantially all activities are conducted on behalf of an investor with disproportionately few voting rights.

Primary Beneficiary Test (Must Possess BOTH)

1. Power Criterion: The power to direct the activities of the VIE that most significantly impact the entity's economic performance.
2. Economics Criterion: The obligation to absorb losses OR the right to receive benefits from the VIE that could potentially be significant to the VIE.

Stock Compensation (Options & SARs)

Compensation for stock-based plans is recognized as an expense in the financial statements.

Employee Stock Options

• Measurement: Compensation expense is measured at the fair value of the options on the grant date, using a pricing model like Black-Scholes.
• Allocation: The total compensation cost is allocated on a straight-line basis over the vesting period (the period during which the employee earns the right to the options).

• Expiration: If vested options expire, the APIC - Stock Options balance is reclassified to APIC - Expired Stock Options. No reversal of previously recognized expense is permitted.

Stock Appreciation Rights (SAR)

SARs entitle employees to receive cash equal to the excess of the market price of stock over a predetermined strike price. No cash is received by the corporation.

• Accounting Treatment: The company records a Compensation Expense and a Liability (not APIC).
• Subsequent Adjustments: Because it is a liability, the compensation expense must be adjusted annually based on the current market price until the rights are exercised.

Noncompensatory Stock Purchase Plans (4 Criteria)

A stock purchase plan is noncompensatory (no expense recognized) if ALL FOUR are met:

1. Substantially all full-time employees meeting limited service criteria may participate.
2. Stock is offered on an equal basis or proportional to employee compensation.
3. The time window allowed to exercise is limited to a reasonable period.
4. The discount from market price does not exceed reasonable issuance costs (safe harbor ≤ 5%).

Option Exercise & Expiration Journal Entries

Revenue Recognition

5-Step Model

The framework for recognizing revenue under ASC 606 is based on the following five-step process:

1. Identify the contract(s) with a customer.
2. Identify the separate performance obligations in the contract.
3. Determine the transaction price (considering variable consideration, financing, and discounts).
4. Allocate the transaction price to the performance obligations based on relative standalone selling prices (SSP):
   $$\text{Allocated Price}_i = \text{Total Transaction Price} \times \left( \frac{\text{Standalone Price}_i}{\sum \text{Standalone Prices}} \right)$$
5. Recognize revenue when (or as) the entity satisfies a performance obligation.

Advanced Scenarios

Specialized scenarios alter the standard timing of revenue recognition under ASC 606.

• Principal vs. Agent: The principal maintains inventory, while the agent receives a percentage commission as revenue.
• Bill & Hold: Revenue is recognized when the product is ready if the customer requested to hold it, not when payment is received.
• Refund Liability: Recognize revenue when the refund period ends.
• Repurchase Agreements: A forward or call option where the repurchase price is less than the original selling price acts as a lease. If the repurchase price is greater, it is a financial arrangement.
• Put Options: If the repurchase price is less than the original selling price and there is an economic incentive, it is treated as a lease; if there is no economic incentive, it is a sale with a right of return.

Long-Term Contracts

Under ASC 606, revenue recognition is determined by when control of a good or service transfers to the customer, which can occur either over time or at a point in time.

Revenue Recognized Over Time: An entity recognizes revenue over time if certain criteria are met (e.g., the customer controls the asset as it is created). Progress toward completion is measured using either input or output methods.

• Input Method (Cost-to-Cost):
  $$\text{Percent Complete} = \frac{\text{Cumulative Costs Incurred to Date}}{\text{Total Estimated Contract Costs}} = \frac{\text{Costs to Date}}{\text{Costs to Date} + \text{Estimated Costs to Complete}}$$
  $$\text{Current Period Revenue} = (\text{Total Contract Price} \times \text{Percent Complete}) - \text{Cumulative Revenue Previously Recognized}$$
• Output Method: Revenue is recognized based on direct measurements of the value transferred to the customer (e.g., milestones achieved, units delivered).

Anticipated losses on the contract are recognized in full immediately.

Revenue Recognized at a Point in Time:

• If the criteria for over-time recognition are not met, revenue is recognized in full when the customer obtains control of the completed asset.
• Costs are capitalized during the contract and expensed upon completion.
• Anticipated losses are still recognized immediately in full.

Contract Costs Capitalization

• Incremental Costs of Obtaining a Contract: Costs that would not have been incurred if the contract had not been obtained (e.g., sales commissions) must be Capitalized as an Asset if the amortization period is > 1 year. Practical expedient: Expense immediately if ≤ 1 year. General bid and proposal costs are expensed as incurred.
• Costs to Fulfill a Contract: Direct materials, direct labor, and allocated direct costs that generate or enhance resources of the entity used to satisfy performance obligations must be Capitalized as an Asset if expected to be recovered.

Long-Term Construction Accounting: CIP vs. Progress Billings

At each balance sheet date, Construction in Progress (costs incurred + gross profit recognized) is netted against Progress Billings on a contract-by-contract basis:

• CIP > Progress Billings: Reported as a Current Asset titled: "Costs and Estimated Earnings in Excess of Billings" (Contract Asset).
• Progress Billings > CIP: Reported as a Current Liability titled: "Billings in Excess of Costs and Estimated Earnings" (Contract Liability).

Complete Construction Journal Entries

Foreign Currency Accounting & Transactions

This applies when a company buys or sells goods/services in a currency other than its functional currency. The key is that transaction gains and losses are always reported in Net Income.

Transaction Gains and Losses

1. Transaction Date: Record the accounts receivable or payable using the exchange rate (spot rate) on this date.
2. Balance Sheet Date: Remeasure the receivable/payable using the current spot rate. The difference creates an unrealized gain or loss, which is reported in current period income.
3. Settlement Date: Remeasure the receivable/payable using the spot rate on the settlement date. A further gain or loss is calculated and reported. The transaction is then settled.

Remeasurement vs. Translation

Functional Currency & Hyperinflationary Economies

• Functional Currency Criteria: The currency of the primary economic environment in which the subsidiary operates (typically where it generates and expends cash, maintains bank accounts, and procures financing).
• Hyperinflationary Economy Trigger: An economy is hyperinflationary when cumulative inflation exceeds 100% over a 3-year period (≈ 26% compounded annually).
• Mandatory Accounting: When a subsidiary operates in a hyperinflationary economy, its functional currency is deemed dysfunctional, and the Remeasurement Method into USD is MANDATORY (all gains/losses reported in Net Income).

Derivatives & Hedge Accounting

A derivative is a financial instrument that derives its value from an underlying asset, rate, or index. Under ASC 815, all derivatives must be recognized on the Balance Sheet at Fair Value.

Three Mandatory Legal Characteristics

To qualify as a derivative under ASC 815, a contract must possess ALL THREE of the following:

1. Underlying & Notional Amount: Has one or more underlyings (specified interest rate, security price, commodity price, FX rate) and one or more notional amounts (number of currency units, shares, bushels).
2. Minimal or No Initial Net Investment: Requires no initial net investment, or an initial outlay smaller than what would be required for contracts with similar response to market factors.
3. Net Settlement: Terms require or permit net settlement, or the contract can readily be settled net by a market mechanism outside the contract.

Hedge Classification & Accounting Treatment Matrix

Foreign Currency Transaction Hedging Strategies

Lease Classification & Accounting

Lease classification determines the accounting treatment for both the lessee and the lessor, and it is based on a universal set of criteria that assess whether the lease effectively transfers control of the underlying asset.

Lease Classification Criteria

The classification hinges on the following two sets of criteria:

• Criteria for Transfer of Control:
  • Ownership of the asset transfers to the lessee by the end of the lease term.
  • A written purchase option exists that the lessee is reasonably certain to exercise.
  • The Net Present Value of lease payments is 90% or more of the asset's fair value.
  • The economic life of the asset is primarily consumed during the lease term (75% or more).
  • The asset is specialized with no alternative use to the lessor at the end of the term.
• Additional Lessor-Only Criteria:
  • The present value of the sum of lease payments, lessee-guaranteed residual value, and third-party guaranteed residual value is equal to or substantially exceeds the asset's fair value.
  • Collection of the lease payments is probable.

Accounting Treatment Flow

Lessor Accounting Distinctions

• Sales-Type & Direct Financing Leases: The lessor removes the asset from the balance sheet and recognizes Interest Income over the lease term.
• Operating Lease: The lessor keeps the asset on the balance sheet, continues to record depreciation, and recognizes Rental Income.

Lessor Sales-Type Lease Journal Entries

Segment & Public Company Reporting

Identifying Reportable Segments

A segment is reportable if it meets the 10% "Size" Test in any of the following categories:

• Combined Revenue (internal & external)
• Absolute value of Profit or Loss
• Identifiable Assets

75% Reporting Sufficiency Test: Total external revenue of all reportable segments must be at least 75% of total consolidated revenue. If not, add the next highest segment until the threshold is reached.

Significant Segment Expense Principle

Public entities must disclose Significant Segment Expenses that are regularly provided to the Chief Operating Decision Maker (CODM) and included in the reported measure of segment profit or loss.

• CODM Title: Must disclose the title and position of the CODM.
• Single Segments: Single-segment entities must provide all disclosures required for multi-segment entities.
• Interim Periods: Segment disclosures are required in interim periods (10-Q) and annual periods (10-K).

SEC Reporting Regulations

• Regulation S-X (Financials): Dictates financial statement presentation. Requires Balance Sheets (2 years) and Statements of Income, Cash Flows, and Equity (3 years).
• Regulation S-K (Non-Financials): Dictates qualitative disclosures (Business details, Management information).

Items Excluded from Segment Profit or Loss

• General corporate revenues and corporate headquarters SG&A expenses.
• Interest expense (for non-financial operating segments).
• Income tax expense.
• Equity in earnings of unconsolidated subsidiaries and discontinued operations.
• Noncontrolling interest (NCI).

SEC Periodic Filing Deadlines

Note: Form 8-K (Current Report of Material Events) must be filed within 4 business days of the triggering event.

R&D, Software, and Intangible Costs

Specific Intangible Rules

• Start-up and Organizational Costs: Must be expensed immediately as incurred.
• Legal Fees: Unsuccessful legal fees are expensed. Successful legal fees (e.g., successfully defending a patent) are capitalized.

Research & Development (R&D)

Under US GAAP, R&D costs are generally expensed as incurred. However, there are exceptions:

• Materials/equipment with alternative future uses are capitalized and depreciated over their useful lives (only the depreciation is charged to R&D).
• R&D performed under contract on behalf of others is treated as a normal operating expense (not R&D).

Computer Software Accounting Framework

Marketed Software Dual Amortization Standard

Annual amortization begins when the software product is available for general release to customers. On a product-by-product basis, annual amortization is the GREATER of the two methods:

Balance Sheet Valuation (Lower of Cost or NRV)

At each balance sheet date, the unamortized capitalized cost of a computer software product is evaluated against its Net Realizable Value (NRV):

Subsequent reversal of capitalized software write-downs is strictly prohibited.

Employee Benefit Plan Financial Statements

Defined Benefit Plans

Risk is borne by the employer to fund specific retirement benefits. Required statements include:

• Statement of Net Assets Available for Benefits (Assets)
• Statement of Changes in Net Assets Available for Benefits (Income Statement equivalent)
• Statement of Accumulated Plan Benefits (Liabilities)
• Statement of Changes in Accumulated Plan Benefits

Defined Contribution Plans

Risk is borne by the employee; the employer simply contributes a set amount. Required statements include:

• Statement of Net Assets Available for Benefits
• Statement of Changes in Net Assets Available for Benefits

Goodwill Impairment Test

Goodwill is tested for impairment at the reporting unit level. Under US GAAP, the evaluation can involve up to two steps:

1. Qualitative Assessment (Optional)

Management may first assess qualitative factors to determine whether it is more likely than not (a greater than 50% chance) that the fair value of a reporting unit is less than its carrying amount. If so, the quantitative test is required.

2. Quantitative Test

1. Compare the Fair Value (FV) of the reporting unit with its Carrying Value (CV), including goodwill.
2. If the CV > FV, an impairment loss is recognized for the difference.
3. The loss cannot exceed the carrying amount of goodwill. Under U.S. GAAP, once recognized, goodwill impairment can never be reversed in subsequent periods under any circumstances (even if held for disposal).

Impairment Testing: Finite-Lived vs. Indefinite-Lived Intangibles

XBRL (eXtensive Business Reporting Language)

XBRL uses tags to define financial data for digital reporting. The tagging structure operates on four distinct levels:

• Level 1: Each complete footnote or schedule is tagged.
• Level 2: Each significant accounting policy is tagged.
• Level 3: Each table within a footnote or schedule is tagged.
• Level 4: Individual amounts within each footnote or schedule are tagged.

Governmental Accounting Foundations

• Standard Setter: Governmental Accounting Standards Board (GASB).
• Objective: To demonstrate fiscal accountability for public resources entrusted to the organization.

GASB GAAP Hierarchy

1. GASB Statements (highest authority).
2. GASB Technical Bulletins, Implementation Guides, and literature of the AICPA cleared by the GASB.

GASB Conceptual Framework

• Public Accountability: Providing financial info to citizens to justify raising resources.
• Interperiod Equity: Ensuring the government lives within its means and doesn't shift the burden to future taxpayers.

Fund Accounting Overview

Fund Operational Classification Nuances

• Special Revenue vs. Permanent Fund: Special Revenue funds account for resources legally restricted/committed where both principal and interest may be spent. Permanent funds account for resources where only earnings (interest) may be spent (principal maintained intact for public purposes).
• Permanent Fund vs. Private-Purpose Trust: Permanent funds benefit the general public (e.g., public park maintenance, cemetery perpetual care). Private-Purpose Trust funds (fiduciary) benefit specific private individuals, organizations, or other governments (e.g., scholarship fund for police officers' children).
• Internal Service vs. Enterprise: Enterprise funds are mandatory if debt is backed solely by pledged user fees, legal requirements mandate cost recovery through fees, or pricing policies establish fees to recover costs (including capital costs).

Modified Accrual Basis

• Revenue: Recognized when measurable and available (collectible within current period or 60 days after year-end).
• Expenditures: Recorded when the liability is incurred. No long-term assets/liabilities recorded on fund F/S.

Supplies Inventory Accounting: Purchase vs. Consumption Method

Governmental funds record inventoriable supplies (e.g., office supplies, road salt) using either the Purchase Method or the Consumption Method under modified accrual.

1. Purchase Method

Expenditures are recognized immediately when inventory is acquired. Material ending inventory is recorded on the balance sheet with an offsetting credit to Nonspendable Fund Balance:

2. Consumption Method (GAAP Preferred)

Inventory is capitalized as an asset upon acquisition and expensed as consumed. At year-end, fund balance equal to the ending inventory is reclassified as Nonspendable:

Fund Balance & Net Position Categories

Fund Balance Categories (Governmental Funds)

Presented in a hierarchy of spending constraints:

• Nonspendable: Amounts not in spendable form (e.g., inventory, prepaids) or legally required to be maintained intact (e.g., corpus of a permanent fund).
• Restricted: Amounts constrained for specific purposes by external parties (creditors, grantors) or by law.
• Committed: Amounts constrained for specific purposes by the government's highest level of decision-making authority (e.g., a city council ordinance).
• Assigned: Amounts the government intends to use for a specific purpose, without a formal commitment.
• Unassigned: The residual classification for the General Fund. It is the only category that can have a negative balance.

Net Position Categories (Gov-Wide & Proprietary Funds)

• Net Investment in Capital Assets: Capital assets net of accumulated depreciation, reduced by outstanding debt incurred to acquire, construct, or improve those assets (unspent debt proceeds are excluded from debt or added back).
• Restricted: Net position subject to externally imposed constraints by creditors, grantors, or enabling legislation.
• Unrestricted: Residual amount of net position not meeting the definitions of Net Investment in Capital Assets or Restricted Net Position.

Non-Exchange Revenue

In Governmental Funds (Modified Accrual), revenue is recognized when it is measurable and available. "Available" means collectible in the current period or soon enough thereafter to pay current liabilities.

Major Fund Reporting

A governmental or enterprise fund is considered a "major fund" and must be reported in a separate column if it meets both parts of a two-step test:

Interfund Activity

Flows of resources between a government's funds and its primary government or component units.

Reciprocal (Exchange-like)

• Interfund Loans: Temporary extensions of credit, expect repayment.
• Interfund Services: Sales and purchases of goods/services between funds at market-based prices. These are treated as revenues for the providing fund.

Nonreciprocal

• Interfund Transfers: Flows of assets without an expectation of repayment (e.g., annual transfer from General Fund to Debt Service Fund). These are eliminated in the government-wide financial statements.
• Interfund Reimbursements: Repayments from a fund that is ultimately responsible for an expenditure to a fund that initially paid for it. These are also eliminated in the government-wide statements.

Reporting Interfund Balances

• Interfund receivables and payables between a governmental fund and an enterprise fund must be reported as "internal balances" on the government-wide financial statements.

Special Items vs. Extraordinary Items

Budgetary Accounting & Expenditures

Expenditure Classifications

• Function/Program: Broad purposes like public safety or culture and recreation.
• Character: Fiscal period relevance, such as current operating, capital outlay, or debt service.
• Object Classes: The chart of accounts level, detailing specific items like salaries, wages, or supplies.

Available Budgetary Spending Authority

Spending Capacity = Remaining uncommitted balance available for new purchase orders without exceeding authorized limits.

Year-End Treatment of Unused POs

If a purchase order remains unused at year-end, the original encumbrance entry is reversed. The unassigned fund balance is then decreased while the committed (or assigned) fund balance is increased to reserve the funds for the next year.

Budgetary Comparison Reporting (GASB 34 / ACFR)

State and local governments are legally accountable for compliance with the approved public budget. GASB 34 mandates formal budgetary comparison reporting:

• Scope of Mandate: Required for the General Fund and each major special revenue fund that has a legally adopted annual budget.
• Required Comparison Columns: Must present three distinct columns: (1) Original Budget, (2) Final Amended Budget, and (3) Actual Budgetary Amounts. Note: A variance column is optional under GAAP.
• Budgetary Accounting Basis: Prepared on the government's budgetary basis (cash, modified cash, or encumbrance basis). An accompanying schedule or note must provide a formal reconciliation from the budgetary basis to GAAP (modified accrual).
• Reporting Placement: May be presented as a Basic Financial Statement (governmental fund statement) or as Required Supplementary Information (RSI) immediately following the financial statement notes.

Governmental Lease Accounting

Lease treatment in governmental accounting depends heavily on the fund type and whether the lease transfers ownership.

Short-Term Leases (< 12 months)

Handled identically across all funds. The lessee records a Lease Expense when payments are made, and the lessor records Revenue.

Contracts that Transfer Ownership (Modified Accrual - Gov. Funds)

Contracts that Transfer Ownership (Full Accrual - Proprietary/Gov-Wide)

Accounted for as Financed Purchases (Capital Asset & Note Payable / Financed Purchase Obligation, depreciated over estimated useful life).

Standard Leases (Non-Transfer)

Accounted for as Right-to-Use (RTU) Lease Assets & Lease Liabilities (amortized over shorter of lease term or useful life).

Governmental Lessor Accounting Journal Entries (GASB 87)

Subscription-Based IT Arrangements (SBITAs - GASB 96)

SBITAs (cloud computing, SaaS) are accounted for identically to GASB 87 non-ownership transfer leases:

• Initial Measurement: Record a Subscription Liability (PV of subscription payments) and a Subscription Asset (Intangible Right-to-Use Asset) equal to liability + capitalizable initial implementation costs (plus prepayments and minus vendor incentives; preliminary project stage costs are expensed).
• Subsequent Accounting: Amortize the subscription asset over the shorter of subscription term or useful life; record interest expense on the subscription liability. Short-term contracts (≤ 12 months) are expensed as incurred.

The Financial Reporting Entity & Accountability

Primary Government vs. Component Units

• Primary Government: Must be legally separate, have a separately elected board, and be fiscally independent of other state/local governments.
• Component Unit: A legally separate entity for which the primary government is financially accountable.

Component Unit Presentation

• Discrete Presentation (Default): Used when the component unit is a separate legal entity and the primary government approves its budget. It is presented in a separate column, indicating it is "influenced" by the primary government.
• Blended Presentation (Rare): Used when the component unit is substantially the same as the primary government, or serves the primary government exclusively. It is controlled by and consolidated with the primary government.

Levels of Accountability

• Operational Accountability: Assessed by the Government-wide financial statements.
• Fiscal Accountability: Assessed by the Fund financial statements.

Government-Wide Financial Statements & Reconciliation

Presents a consolidated overview of the government's financial position. Uses Full Accrual and the Economic Resources measurement focus.

• Statements: Statement of Net Position & Statement of Activities.
• Key Features: Includes capital assets and long-term debt. Fiduciary funds are excluded. Internal Service Fund activity is allocated.
• Reconciliation: A reconciliation from the governmental fund financial statements to the government-wide statements is required for both the balance sheet and the income statement.

Net Position Reconciliation (Balance Sheet)

Change in Net Position Reconciliation (Statement of Activities)

This reconciliation adjusts the Net Change in Governmental Fund Balance to the Change in Net Position of Governmental Activities.

Program Revenues Categories (Statement of Activities)

On the Statement of Activities, expenses are offset by Program Revenues to determine net (expense) revenue. Program revenues are classified into three distinct authoritative categories:

1. Charges for Services: Revenues derived directly from those who purchase, use, or directly benefit from goods/services provided (e.g., water utility billings, garbage collection fees, building permits, parking fines).
2. Operating Grants & Contributions: Mandatory and voluntary grants/donations restricted to financing operational expenses of a specific program (e.g., state grant restricted for police department training).
3. Capital Grants & Contributions: Mandatory and voluntary grants/donations restricted to purchasing or constructing capital assets for a specific program (e.g., federal highway grant for bridge construction).

Proprietary Fund Statement of Cash Flows

The governmental Statement of Cash Flows is required ONLY for Proprietary Funds. It features 7 key distinctions from commercial GAAP:

Annual Comprehensive Financial Report (ACFR)

The ACFR is the official annual report of a government. It has three main sections:

1. Introductory Section: Includes a letter of transmittal, organizational chart, and list of principal officers. (Unaudited)
2. Basic Financial Statements: Includes government-wide F/S, fund F/S, notes to the F/S, and the auditor's report. (Audited)
3. Statistical Section: Presents multi-year data (e.g., 10-year trends) on financial, economic, and demographic information. (Unaudited)

Infrastructure Capitalization: Required vs. Modified Approach

Governments can account for eligible infrastructure assets (e.g., roads, bridges) using one of two approaches.

The Required Approach

The standard method mandates recording the historical cost of the asset and depreciating it over its useful life.

• Asset Additions: Capitalized as Capital Assets and recorded as Capital Outlay Expenditures.
• Maintenance: Routine repairs and maintenance are recorded as expenses.
• Depreciation: Depreciation expense is recorded, reducing the net position of the asset through accumulated depreciation.

The Modified Approach

This is an alternative to depreciating eligible infrastructure assets in the government-wide financial statements. Instead of recording depreciation, expenditures to maintain and preserve the assets are expensed in the period incurred.

• Asset Additions: Still capitalized just as they are under the required approach.
• Maintenance: Recorded as an expense.
• Depreciation: NO depreciation is recorded; no entry is made for depreciation expense.

To use the Modified Approach, two requirements must be met:

1. An asset management system is in place.
2. Documentation shows the infrastructure assets are being preserved at or above a disclosed condition level.

Artwork & Historical Treasures Capitalization Rules

Governments must capitalize works of art and historical treasures at historical cost or acquisition value, UNLESS ALL THREE of the following criteria are met (optional capitalization):

1. Held for public exhibition, education, or research in furtherance of public service rather than financial gain.
2. Protected, kept unencumbered, cared for, and preserved.
3. Subject to an organizational policy requiring proceeds from sales of collection items to be used to acquire other items for collections.

Depreciation Rule: Capitalized collections that are exhaustible (useful life diminished over time) must be depreciated; collections deemed inexhaustible are NOT depreciated.

Governmental Long-Term Liabilities: Net Pension (GASB 68), OPEB (GASB 75) & Debt Service

State and local governments report long-term liabilities on the government-wide Statement of Net Position and proprietary statements under economic resources/full accrual.

Net Pension Liability (GASB 68) & Net OPEB Liability (GASB 75)

A defined benefit pension or OPEB plan measures its unfunded obligation reported on the government-wide balance sheet:

• Immediate Pension Expense: Recognized in the current period for: (1) Service cost, (2) Interest on total pension liability, (3) Current-period benefit changes, and (4) Administrative expenses, net of employee contributions.
• Deferred Outflows / Inflows of Resources:
  • Investment Earnings Variance: Difference between projected and actual earnings on pension plan investments is amortized straight-line over a closed 5-year period.
  • Actuarial Assumptions & Experience: Differences between expected and actual experience or changes in economic/demographic assumptions are amortized straight-line over the average remaining service life of all active and inactive plan members.

General Long-Term Debt Servicing & Measurement