Financial Accounting & Reporting (FAR) Cheat Sheet

Full Set of Financial Statements

1. Statement of Financial Position (Balance Sheet)
2. Statement of Earnings (Income Statement)
3. Statement of Comprehensive Income
4. Statement of Cash Flows
5. Statement of Owner's Equity

Comprehensive Income

Items of Other Comprehensive Income (OCI):

• Pension Adjustments
• Unrealized Gains and Losses on Available-for-Sale Debt Securities
• Foreign Currency Items (including translation adjustments)
• Instrument-Specific Credit Risk
• Effective Portion of Cash Flow Hedges

Individual Foreign Transactions

Direct Method: Domestic price of another currency ($/€)

Indirect Method: Foreign price of domestic currency (€/$)

SEC Filing Deadlines

Form 10-K

Form 10-Q

Stock Definitions

• Authorized: Amount of stock that may be issued.
• Issued: Stock that has been sold/distributed.
• Outstanding: Issued Stock - Treasury Stock.

Retained Earnings

Book Value Per Common Share

Common Shareholder Equity (SE): Total Assets - Total Liabilities - Preferred Equity - Dividends in Arrears

Common Shares Outstanding: Shares Issued - Shares Repurchased (Treasury)

Stock Issuance Journal Entries

Basic & Diluted Earnings Per Share (EPS)

Preferred Stock - Equity with Options

Treasury Stock

Cost Method (95% of the time)

Carried at reacquisition cost. G/L = Reissue Price - Repurchase Cost. G/L determined upon reissue/retirement.

Par/Stated Value Method (5% of the time)

G/L calculated immediately upon repurchase. T/S debited at par.

Stock Subscriptions

Subscription Default: 1) Issue stock proportional to amount paid, 2) Refund partial payment, or 3) Retain payments and credit APIC.

Dividends

Date of Declaration: DR: RE, CR: Div. Payable

Date of Record: No JE. Determines who gets paid.

Date of Payment: DR: Div. Payable, CR: Cash

• Property (In-Kind) Dividend: Use FMV of property. G/L recognized.
• Scrip Dividend: Note payable used for cash shortage.
• Small Stock Div (<20-25%): Reduce RE by FMV.
• Large Stock Div (>20-25%): Reduce RE by Par Value.

The 5-Step Revenue Recognition Model (ASC 606)

Revenue is recognized based on the transfer of control of promised goods or services to customers.

Step 1: Identify the Contract

A contract exists if all are met: approved by all parties, rights identified, payment terms identified, commercial substance exists, and probable collection. If not met, recognize revenue only if consideration is nonrefundable and no remaining obligations exist.

Contract Modifications: Treated as a new contract if scope increases (distinct goods/services added) AND price increases by standalone selling price.

Step 2: Identify Separate Performance Obligations (POs)

A PO is distinct if the customer benefits independently AND it is separately identifiable. A transfer is separately identifiable if it:

• Does not highly integrate with other items.
• Does not significantly customize or modify other items.
• Does not depend on or relate to others (not highly interdependent).

Step 3 & 4: Determine & Allocate Transaction Price

Determine expected consideration and allocate to each PO based on relative standalone selling prices.

Step 5: Recognize Revenue

Recognize when (or as) the customer obtains control.

• Over Time (if any met): Customer simultaneously receives/consumes benefit, entity creates/enhances an asset the customer controls, or asset has no alternative use and entity has right to payment.
  • Output Method: based on value to customers.
  • Input Method: based on entity's efforts to satisfy the PO.
• Point in Time: Entity has right to payment, customer has legal title, physical possession, significant risks/rewards, or accepted the asset.

Fair Value Measurement

Hierarchy of Inputs

Fair value is prioritized based on the observability of inputs. The hierarchy gives the highest priority to quoted prices in active markets and the lowest priority to unobservable inputs.

• Level 1 (Highest Priority)
  Quoted prices in active markets for identical assets or liabilities.
• Level 2
  Observable inputs other than quoted prices, such as quoted prices for similar assets, interest rates, or yield curves.
• Level 3 (Lowest Priority)
  Unobservable inputs, reflecting the entity's own assumptions about what market participants would use (e.g., internal cash flow projections).

Valuation Techniques

• Market Approach: Uses prices from market transactions involving identical or comparable assets.
• Cost Approach: Uses the amount that would be required to replace the service capacity of an asset (i.e., replacement cost).
• Income Approach: Converts future amounts (e.g., cash flows) to a single discounted amount.

Market & Measurement Principles

• Principal Market: The market with the greatest volume and level of activity for the asset or liability.
• Most Advantageous Market: Used if no principal market exists; maximizes the price received for an asset or minimizes the price paid for a liability, after considering transaction costs.
• Highest and Best Use: The valuation premise for non-financial assets, which considers a market participant's optimal use of the asset to maximize its value.

Segment Reporting (ASU 2023-07)

Significant Expense Principle

Public entities must disclose Significant Segment Expenses that are:

1. Regularly provided to the Chief Operating Decision Maker (CODM).
2. Included in the reported measure of segment profit or loss.

Other Disclosures:

• CODM Title/Position: Must disclose the title and position of the CODM.
• Single Segment Entities: Must now provide all disclosures required for multi-segment entities (including the significant expense table).
• Interim Periods: Segment disclosures are now required in interim periods (10-Q), not just annual periods.

Notes to the Financial Statements

• Summary of Sig. Acct. Policies: First or second footnote. Describes measurement bases and specific principles used.
• Disclosure of Risks & Uncertainties: Describes major operations, use of estimates, and significant concentrations. A concentration should be disclosed if all of the following are met:
  • The concentration exists at the financial statement date.
  • The concentration makes the entity vulnerable to a near-term severe impact.
  • It is at least reasonably possible that the event causing the impact will happen in the near term.
• Other Notes: Contingencies, pension plans, segment disclosures, FV estimates, changes in SE, material asset/liability info.

Accounting Changes & Error Corrections

Subsequent Events

Event after B/S date but before F/S are issued/available.

Types of Subsequent Events

Public firms evaluate until F/S are issued. Private firms evaluate until F/S are available to be issued.

Other Bases of Accounting (OCBOA)

• Cash Basis: Revenue is recognized when cash is received; expenses when cash is paid. F/S include a "Statement of Cash and Equity" and a "Statement of Cash Receipts and Disbursements".
• Modified Cash Basis: A hybrid method including modifications like capitalizing fixed assets, accruing income taxes, or capitalizing inventory. Financial statements can include a "Statement of Assets and Liab (Modified Cash Basis)", "Statement of A&L arising from cash transactions", and "Statement of revs collected and expenses paid".
• Income Tax Basis: Rules used to prepare a tax return are used for financial statements. F/S includes "Statement of Assets, Liabs, Equity (Income Tax Basis)" and "Statement of Income (Income Tax Basis)".
• OCBOA Guidelines: Titles should be different, equivalents of B/S and I/S are required, equity changes explained, and disclosures similar to GAAP. A Statement of Cash Flows is not required.

Cash to Accrual Basis Conversion

General Rules: Add increases in current assets & decreases in current liabilities. Subtract decreases in current assets & increases in current liabilities.

Liquidity & Solvency Ratios

Profitability Ratios

Sales Discounts (Gross vs. Net Method JEs)

Sales discounts are offered to incentivize prompt payment. Terms like "2/10, n/30" mean the customer can take a 2% discount if they pay within 10 days, otherwise the full amount is due in 30 days.

Journal Entry Comparison

Inventory Master Guide

Ownership & Title

• FOB Shipping Point: Title transfers when goods leave seller's dock (buyer owns in transit).
• FOB Destination: Title transfers when goods arrive at buyer's dock (seller owns in transit).
• Consigned Goods: Remain in consignor's (seller's) inventory until sold by consignee.
• Sale with Right of Return: Include in seller's inventory if returns cannot be reasonably estimated.
• Installment Sales: Include in seller's inventory if uncollectible debts cannot be estimated.

Valuation Rules

FIFO/WA: Lower of Cost or Net Realizable Value (NRV). $$ \text{NRV} = \text{Selling Price} - \text{Costs to Sell} $$

LIFO/Retail: Lower of Cost or Market. Market is the middle value of: 1) Replacement Cost, 2) Ceiling (NRV), 3) Floor (NRV - Normal Profit).

Note: Substantial and unusual losses from subsequent measurement of inventory should be disclosed in the F/S. In rising prices, LIFO yields the Highest COGS, Lowest Net Income, and Lowest Ending Inventory.

Costing Methods

• Specific Identification: Cost is unique to each item (large/high-value items).
• Weighted Average (Periodic): Used for homogeneous products. Cost per unit = Total Inventory Costs / Total # of units available.
• Moving Average (Perpetual): Computes weighted average after each purchase.

Inventory Systems

• Periodic: Physical count determines End Inv. & COGS. Purchases debited to "Purchases" account.
  Formula: Beg. Inv. + Purchases = COGAS. COGAS - End. Inv. = COGS.
• Perpetual: Records updated for each item sold. Purchases debited directly to "Inventory".
  Selling JE: DR: Cash/AR, CR: Sales AND DR: COGS, CR: Inventory.
• Modified Perpetual: Keeps updated count of quantity on hand, but cost is determined later.

Error Impact: If Ending Inventory is Overstated → COGS is understated → Profit is overstated → RE is overstated.

Composite Depreciation

Averages the economic lives of a group of dissimilar assets and depreciates them as a single unit.

1. Find the total depreciable base:
   $$\text{Total Cost} - \text{Total Salvage}$$
2. Find total annual depreciation for all assets.
3. Calculate Average Composite Life:
   $$ \text{Average Composite Life} = \frac{\text{Total Depreciable Base}}{\text{Total Annual Depreciation}} $$

Sale of Asset under Composite Method:

No gain or loss is recognized. The entry is simply:

JE: DR: Cash, DR: Accumulated Depreciation (plug), CR: Asset (Cost)

Cash & Bank Reconciliation

Bank Balance

• + Deposits in Transit
• - Outstanding Checks
• +/- Bank Errors

Book Balance

• + Interest, Note collections
• - Service Charges, NSF Checks
• +/- Book Errors

Cash Equivalents: Short-term, highly liquid investments readily convertible to cash with an original maturity of 90 days or less.

Uncollectible A/R (Allowance)

Estimate BDE: DR: BDE, CR: ADA

Write-off: DR: ADA, CR: A/R

Collection of Written-off:

1. DR: A/R, CR: ADA (Restore)
2. DR: Cash, CR: A/R (Collect)

Instructional T-Accounts

Accounts Receivable

Accumulated Depreciation

A/R: Factoring & N/R: Discounting

Factoring w/o Recourse: True sale. Remove A/R, recognize G/L. DR: Cash, DR: Due from Factor, DR: Loss, CR: A/R.

Factoring w/ Recourse: May be sale or borrowing. Sale if control surrendered, repurchase not required, obligation can be estimated.

Discounting N/R: 1. Calc Maturity Value (Principal + Interest). 2. Calc Bank Discount (MV x Bank Rate x Time). 3. Calc Proceeds (MV - Discount). 4. Calc Int. Income/Expense (Proceeds - Face Value).

PP&E Capitalized Costs

Land: Purchase price, commissions, legal fees, site development, draining swamps, clearing trees, removing old buildings (net of salvage), and existing obligations like back taxes.

Plant/Building: Purchase price, architect fees, deferred maintenance, digging foundation, construction period interest.

Equipment: All expenditures related to acquisition or construction. Capitalize improvements that increase quantity/quality.

Equipment Substitutions

When substituting a new, similar asset for an old one:

• If old asset's carrying value is known: Write off old asset and record new asset.
• If old asset's carrying value is not known: Debit Accumulated Depreciation for the cost of the new asset and credit cash.

Capitalizing Interest

On self-constructed assets. Capitalize the lower of actual interest cost incurred or computed capitalized interest (avoidable interest).

Capitalization period begins when expenditures are made, activities are in progress, and interest cost is being incurred. The period stops if these conditions cease. Brief or intentional interruptions do not stop capitalization, but unintentional interruptions do.

Disposal of Assets

Nonmonetary Exchanges

Accounting for the exchange of one nonmonetary asset for another depends on whether the transaction has "commercial substance."

Commercial Substance

A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. This change can be in the areas of risk, timing, or amount of cash flows.

Gain/Loss Recognition Flow

Basis of Acquired Asset

• For fair value transactions (with commercial substance): The basis of the new asset is its fair value (or the FV of the asset given up plus any cash paid).
• For transactions lacking commercial substance: The basis of the new asset is the book value of the asset given up. This is adjusted for any boot paid (increases basis) or boot received (decreases basis) and any gain recognized.

Depreciation & Similar Methods

Straight-Line:

Sum-of-the-Years'-Digits:

Units-of-Production:

Double-Declining Balance:

Composite Depreciation

Composite Life $$ = \frac{\text{Total Depreciable Base}}{\text{Total Annual Depreciation}} $$

Averages the economic lives of a group of assets. No G/L is recognized on retirement of an asset.

Depletion (Natural Resources)

Allocation of the cost of natural resources. GAAP allows cost depletion only; percentage depletion is NOT allowed.

1. Depletion Base: Total Cost (Cost of Land + Development Costs + Restoration) - Residual Value.
2. Unit Depletion Rate: Depletion Base / Est. Recoverable Units.
3. Yearly Depletion: Unit Rate × Units Extracted.
4. Yearly Depletion in COGS: Unit Depletion Rate × Units Sold.

Asset Impairment

Step 1: Recoverability Test: If an asset's future undiscounted cash flows are less than its carrying value, it is impaired.

Step 2: Calculate Loss:

• Held for Use: Depreciate new cost basis. No restoration of loss permitted.
  $$ \text{Loss} = \text{Carrying Value} - \text{Fair Value} $$
• Held for Disposal: No depreciation. Restoration of loss is permitted.
  $$ \text{Loss} = \text{Carrying Value} - (\text{Fair Value} - \text{Costs to sell}) $$

Intangible Assets

• Patents (Finite Life): Amortize over shorter of useful or legal life.
• Goodwill (Indefinite Life): Test for impairment annually. Do not amortize.
• Start-up Costs: Expensed as incurred.
• Franchisee Costs: Capitalize and amortize initial costs; expense ongoing costs as incurred.

Cloud Computing Arrangements

• Phase 1 (Preliminary Project): Determining system requirements for software; expensed when incurred.
• Phase 2 (Application Development): Work performed to customize or change configurations. Capitalize implementation costs. Expense training, maintenance, and support.
• Phase 3 (Post Implementation): Once software is placed in service; expensed when incurred.

Crypto Assets (ASC 350-60)

Scope: Assets that are intangible, fungible, cryptographically secured, reside on a blockchain/distributed ledger, and are not created by the reporting entity.

Measurement

Balance Sheet: Measure at Fair Value.

Income Statement: Changes in Fair Value (Gains/Losses) are recognized in Net Income in the period they occur.

Presentation

• Balance Sheet: Present separately from other intangible assets.
• Income Statement: Present gains/losses separately from amortization/impairment of other intangibles.
• Statement of Cash Flows: Classified as Operating Activities (if received as noncash consideration in ordinary course of business) or nearly always Operating due to "trading" nature of active management.

Troubled Debt Restructuring (Debtor JEs)

Transfer of Assets

Debt is extinguished. Two gains/losses are possible.

Transfer of Equity Interest

Debt is extinguished. A gain is recognized.

Modification of Terms

Debt is not extinguished. Adjust future cash flows. No gain unless total future undiscounted cash flows < CV of debt.

Loan Impairment (Creditor)

Occurs when it's probable that the creditor will be unable to collect all amounts due. The impairment loss is the difference between the investment in the loan and the present value of expected future cash flows.

Carrying Value of Debt

The net amount at which a bond or other debt instrument is reported on the balance sheet.

Notes Payable: Measurement

Notes Payable are written promises to pay money at a fixed rate and are measured as follows:

• Gross Notes Payable: Calculated as the periodic payment amount multiplied by the number of payments.
• Present Value of Notes: The gross amount is discounted to its present value. Difference between Gross and PV is the discount.

Principal Reduction Calculation

To find the principal reduction for a period's payment on an interest-bearing note:

1. Calculate Interest Expense: Beginning carrying value of the note × effective market interest rate.
2. Calculate Principal Reduction: Periodic cash payment − calculated interest expense.

Trade Accounts Payable: Discount Methods

Similar to Accounts Receivable, purchase discounts can be recorded using either the Gross or Net method.

• Gross Method: The payable is recorded at its full amount. A purchase discount is recognized if the payment is made within the discount period.
• Net Method: The payable is recorded assuming the discount will be taken. If the discount is not taken, the lost discount is recorded to an expense account.

Common Current Liabilities

• Trade A/P & N/P: For inventory, raw materials, etc.
• Sales Tax Payable: Liability created when collecting tax on behalf of the government (company has a payable, no expense).
• Employee-Related Liabilities:

  Expense for Employer: FICA, FUTA, SUTA

  Not an Expense (Deductions): Employee Income Tax, Employee FICA

• Accrued Vacation: Accrue in year earned if services rendered, rights accumulate, payment is probable, and amount is estimable. If unestimable (but other criteria met), disclose in notes.

Estimating Premiums Liability

To estimate the liability for outstanding claims at year-end:

1. Total Estimated Redemptions = Coupons Issued × Estimated Redemption Rate.
2. Coupons to be Redeemed = Total Estimated Redemptions − Coupons Already Redeemed.
3. Outstanding Claims = Coupons to be Redeemed / Coupons Required Per Premium.
4. Estimated Liability = Outstanding Claims × Cost Per Premium.

Loss Contingencies

Gain Contingencies: Do not accrue. Disclose if not remote.

Remote Contingencies Requiring Disclosure

Disclose remote contingencies if they involve guarantees, such as:

• Debt of others guaranteed
• Obligations of commercial banks
• Guarantees of repurchase A/R sold

Annuity Definitions

• Annuity Due: Payments occur at the beginning of each period.
• Ordinary Annuity: Payments occur at the end of each period.

Exit or Disposal Activities

A liability is recognized for costs associated with an exit or disposal plan (e.g., severance, contract termination costs, facility consolidation).

Criteria: An obligating event has occurred, resulting in a present obligation to transfer assets in the future, and the entity has little or no discretion to avoid it. The liability is measured at fair value.

Disclosures

Exit disclosures should be made during the period the exit was initiated and all subsequent periods until the activity is complete. Disclosures must include:

• A description of the exit/disposal activity.
• Each major cost, including both the amount and a reconciliation of the liability balances.

Asset Retirement Obligation (ARO)

Initial JE: DR: Asset Retirement Cost (Asset), CR: ARO Liability (at Present Value)

Subsequent Measurement:

• Accretion Expense: Increases ARO liability due to passage of time. DR: Accretion Exp, CR: ARO.
  
  $$ \text{Accretion Exp} = \text{Beginning ARO} \times \text{Discount Rate} $$
• Depreciation Expense: Depreciates the ARC asset over its useful life. DR: Depreciation Expense, CR: Accumulated Depreciation.

Bonds

Issuance & Amortization

Discount: Market Rate > Coupon Rate. Price < Face Value.

Premium: Market Rate < Coupon Rate. Price> Face Value.

Price = PV of future principal payment + PV of future periodic interest payments (use Market Rate for PV).

Carrying Value: Face Value - Unamortized Discount OR + Unamortized Premium.

Interest Expense:

Coupon Paid:

Amortization: Difference between Int. Expense & Coupon Paid.

Initial Journal Entries (Issuer)

Initial Journal Entries (Investor)

Bonds Issued Between Interest Dates

When bonds are issued between interest payment dates, the buyer pays the seller for the accrued interest since the last payment date.

This accrued interest is added to the price of the bond. The issuer will pay a full 6-month interest payment at the next payment date.

Lease Accounting (Lessee)

Lease Commencement Date

The date on which the lessor makes the underlying asset available for use by the lessee.

Lease Options

• Option to Extend: Included in the lease term if the lessee is reasonably certain to exercise it.
• Option to Terminate: The lease term ends on the date the option becomes exercisable if the lessee is reasonably certain to exercise it.
• Options controlled by Lessor: Only the lessor's actions are considered when determining the lease term.

Lease Classification Flow

5 Finance Lease Criteria

• Ownership of asset transfers to lessee by end of term
• Lessee has written option to buy asset with reasonably certain exercise
• NPV of all lease payments + residual value exceeds 90% of FV
• Term of lease represents 75% of the economic life remaining
• Asset is specialized so there is not expected alternative use

Lease Payment Components

• Required fixed payments
• Exercise option payments if reasonably certain
• Purchase price at the end of the lease
• Variable payments based on an index or rate
• Residual guarantees
• Termination penalties
• Non-lease components that may be included

Does not include:

• Guarantees of lessor debt
• Other variable payments

Accounting Treatment

Initial Entry for Both Lease Types:
Debit Right-of-Use Asset, Credit Lease Liability

Finance Lease (Subsequent):

• Debit Interest Expense
• Debit Lease Liability
• Credit Cash or Lease Payable
• Debit Amortization Expense, Credit Accumulated Amortization - Right-of-Use Asset

Operating Lease (Subsequent):

• Debit Lease Expense (single straight-line amount)
• Credit Cash or Lease Liability

Partnership Details

Profit and Loss Distribution

Partnership profits and losses are split based on the method specified in the partnership agreement.

Admission of a Partner

Exact Method: No goodwill or bonus. Price paid = book value of capital account purchased.

Bonus Method: Total capital of new partnership = old capital + new partner's contribution. If new partner's capital account differs from contribution, a bonus is paid to/from the old partners.

Goodwill Method: Goodwill is recorded and allocated to old partners based on their P/L ratio.

Withdrawal of a Partner

Bonus Method: Difference between the withdrawing partner's capital balance and the amount paid is a bonus to/from the remaining partners.

Goodwill Method: Goodwill is recorded and allocated to all partners before the withdrawing partner is paid out.

Liquidation of a Partnership

Order of preference for payments:

1. Dispose of all non-cash assets and allocate any gains or losses to the partners' capital accounts based on their P/L ratio.
2. Pay off all liabilities to outside creditors.
3. Distribute remaining cash to partners based on their final positive capital balances (not their P/L ratio).

Investment Accounting Summary

Equity Method (20-50%)

Initial Investment:

Share of Net Income:

Dividends Received:

Investment Reclassification & Sale

Reclassification

Transfers between categories are accounted for at fair value on the date of transfer.

• To Trading: Unrealized G/L recognized in current earnings.
• From HTM to AFS: Unrealized G/L recorded in OCI.
• From AFS to HTM: Unrealized G/L from OCI is amortized over the remaining life of the security.

Sale of Trading Security

The realized gain or loss is the difference between the selling price and the carrying value at the time of sale.

Sale of Available-for-Sale (AFS) Security

A realized gain or loss is recognized in earnings, calculated as the difference between the selling price and the original cost of the security. Any unrealized gains or losses in Accumulated Other Comprehensive Income (OCI) must be reversed upon sale.

Impairment of Debt Securities

• Trading: Not applicable (already at FV through NI).
• AFS: ECL recognized on I/S. Any excess loss (FV drop > ECL) goes to OCI.
• HTM: ECL recognized on I/S. Asset is written down.

JE: DR: Credit Loss, CR: Allowance for Credit Losses

Consolidation (>50%) Adjustments

At acquisition, 100% of sub's net assets are recorded at FV. Parent's basis is acquisition price.

• Eliminate sub's Common Stock, APIC, & Retained Earnings.
• Eliminate parent's Investment in Sub account.
• Create Noncontrolling Interest (for portion not owned).
• Adjust sub's Balance Sheet assets & liabilities to Fair Value.
• Record identifiable Intangible Assets at Fair Value.
• Record Goodwill (or Gain if acquisition price < FV of net assets).

Eliminating Intercompany Transactions (100% eliminated)

• Inventory/Sales: Eliminate intercompany sales/COGS. Defer unrealized profit in ending inventory.
• Bonds: Treat as if debt is retired. Eliminate intercompany interest/ amortization and recognize G/L on extinguishment. (DR: B/P, DR: Premium, CR: Investment in Bonds, CR: Gain).
• Land/Fixed Assets: Eliminate intercompany G/L. Restore asset to original cost and restore accumulated depreciation to its pre-sale balance. (DR: Intercompany Gain, CR: Asset/AD).

Statement of Cash Flows (Indirect Method)

Operating:

Investing: Non-current assets (e.g., sale/purchase of PP&E, investments).

Financing: Debt and Equity (e.g., issuing stock/bonds, paying dividends, repaying principal).

PPE T-Chart for CFs

Can be used to find cash paid for acquisitions.

Advanced Tax Topics & Disclosures

Intraperiod Tax Allocation: Income tax expense is allocated to continuing operations, discontinued ops, OCI, etc.

Changes in Tax Status: If a non-taxable entity becomes taxable, recognize DTA/DTL. If taxable becomes non-taxable, write off existing DTA/DTL.

Income Tax Disclosures (ASU 2023-09)

Rate Reconciliation: Public entities must reconcile statutory to effective rate. Separate disclosure required for any item ≥ 5% of (Statutory Rate × Pretax Income).

Income Taxes Paid: Disaggregate by Federal, State/Local, and Foreign. Further disaggregate any specific jurisdiction ≥ 5% of total taxes paid.

Pretax Income: Must be disaggregated between Domestic and Foreign on the Income Statement.

Uncertain Tax Position

A "more-likely-than-not" (>50%) threshold must be met to recognize the benefit. Measure tax benefit as largest amount that has a greater than 50% cumulative probability.

If the threshold isn't met, record the liability:

Deferred Taxes

Temporary Tax Differences

Temporary differences will reverse over time.

• Book Income First, Tax Income Later → DTL: (e.g., Installment Sales, Equity Method Income). Pay tax later; favorable.
• Tax Expense First, Book Expense Later → DTL: (e.g., Accelerated Depreciation for Tax).
• Tax Income First, Book Income Later → DTA: (e.g., Prepaid Rent/Interest/Royalties). Pay tax now; unfavorable.
• Book Expense First, Tax Expense Later → DTA: (e.g., Warranty Expense, Bad Debt Expense).

Note: In rising prices, FIFO (tax) / LIFO (book) creates a DTL. In falling prices, it creates a DTA.

Permanent Differences

Do not create DTA/DTL as they do not reverse in the future. Examples include: Muni-bond/tax-exempt interest, life insurance proceeds on officers' key man policy, life insurance premiums when the corp is the beneficiary, certain penalties, fines, bribes, and kickbacks, the non-deductible portion of meals/entertainment, and excess percentage depletion over cost depletion.

Dividends-Received Deduction (DRD): A permanent tax difference based on the percentage of ownership one corporation has in another.

All DTA/DTLs are reported as non-current on the balance sheet.

GASB GAAP Hierarchy

The Governmental Accounting Standards Board (GASB) establishes accounting and reporting standards for governments. The hierarchy for selecting accounting principles is as follows:

1. GASB Accounting Standards Board Statements.
2. GASB Bulletins, implementation guides, and literature cleared by the AICPA.

Governmental Accounting Foundations

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

GASB Conceptual Framework

Outlined in GASB Concepts Statements 1-6:

• 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.

Characteristics of Info

Information should possess the following characteristics:

• Understandability: Understood by those without deep accounting knowledge.
• Reliability: Verifiable, free from bias, and faithful representation.
• Relevance: Makes a difference in user decisions.
• Timeliness: Issued in time to affect decisions.
• Consistency: Principles should not change from year to year.
• Comparability: Reports should be comparable between different entities.

NFP Statement of Cash Flows: Detailed Classification

Operating Activities

• Receipts from unrestricted contributions, resources, and government grants for operating purposes.
• Cash from program service fees (e.g., tuition, admissions).
• Interest and dividends on operating investments.
• Cash paid to suppliers and employees for program services.
• Charitable disbursements (e.g., grants paid as part of mission).
• Receipts/ payments for settlements of lawsuits.
• Cash payments for administrative and fundraising expenses.
• Interest payments on operating debt.

Investing Activities

• Investments in Property, Plant & Equipment (PPE).
• Proceeds from the sale of works of art.
• Proceeds from the sale of assets that were restricted for acquiring new PPE.
• Proceeds from sales of investments.

Financing Activities

• Proceeds from borrowing and repayment of principal.
• Receipts from contributions restricted for acquiring long-lived assets (e.g., PPE).
• Receipts from contributions restricted for establishing or growing an endowment fund.

Not-for-Profit (NFP) Concepts

• Basis of Accounting: Full Accrual.
• Standard Setter: Financial Accounting Standards Board (FASB).
• Characteristics: Revenues come from contributions, the purpose is not to make a profit, and ownership interests are different from business enterprises.
• User Needs: Users, such as donors and creditors, need information to assess the services an NFP provides and to evaluate the performance of its management.

Users (donors, members, creditors) need information to assess:

1. The amount and nature of an organization's assets, liabilities, and net assets.
2. The effects of events that change the amount and nature of net assets.
3. The amount and kinds of inflows and outflows of economic resources.
4. The relationship between the inflows and outflows.
5. How an organization obtains and spends cash.
6. The service efforts of an organization.

Fund Accounting Overview

Governmental

• Modified Accrual
• Current Financial Resources

• General: Ordinary operations financed by taxes.
• Special Revenue: Revenues from specific sources that are restricted/committed.
• Debt Service: Accumulation of resources for paying long-term debt.
• Capital Projects: Resources restricted/committed for major capital assets.
• Permanent: Resources legally restricted where only earnings (not principal) may be used.

Proprietary

• Full Accrual
• Economic Resources

• Internal Service: Cost-reimbursement basis with internal customers.
• Enterprise: Required if ANY are met: 1) Debt secured by pledge of fee revenue, 2) Laws require fees adequate to recover costs, 3) Pricing policies established to produce fees to recover costs.

Fiduciary

• Full Accrual
• Economic Resources

• Custodial
• Investment Trust
• Private-Purpose Trust
• Pension & Other Employee Benefit

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.

Fund Financial Statements

• Governmental: Balance Sheet; Statement of Revenues, Expenditures, and Changes in Fund Balances.
• Proprietary: Statement of Net Position; Statement of Revenues, Expenses, and Changes in Net Position; Statement of Cash Flows.
• Fiduciary: Statement of Fiduciary Net Position; Statement of Changes in Fiduciary Net Position.

Not-for-Profit (NFP) F/S

Required Statements:

• Statement of Financial Position: Assets, Liabilities, Net Assets (With/Without Donor Restrictions).
• Statement of Activities: Reports changes in net asset classes, specifically including:
  • Change in total net assets.
  • Change in net assets with donor restrictions (including contributions).
  • Change in net assets without donor restrictions.
  • Releases from Donor Restrictions.
• Statement of Cash Flows: Operating (includes charitable contributions and receipts of unrestricted resources), Investing, and Financing (includes receipts from contributions restricted for long-term purposes) sections.

NFP Contribution & Revenue Recognition

Contribution Criteria

For a transfer to be considered an unconditional contribution, it must be: voluntary, nonreciprocal, unconditional, and title to the assets must pass.

NFP Recipient & Beneficiary Accounting