FAR Area I: Financial Reporting

The conceptual framework SFAC 8

The FASB conceptual framework (SFAC 8) is not GAAP itself; it is the theory the FASB uses to develop standards. The objective of general-purpose financial reporting is to provide information useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity.

Fundamental qualitative characteristics

For information to be decision-useful it must have both fundamental characteristics:

• Relevance: information that can make a difference in a decision. Composed of predictive value, confirmatory value, and materiality (an entity-specific aspect of relevance).
• Faithful representation: the depiction agrees with the underlying economics. To be faithfully represented, information should be complete, neutral (free from bias), and free from error.

Enhancing qualitative characteristics

These enhance the usefulness of information that is already relevant and faithfully represented:

• Comparability: enables users to identify similarities and differences across entities and periods (consistency is the application of comparability within one entity over time).
• Verifiability: knowledgeable, independent observers could reach consensus that a depiction is faithful.
• Timeliness: information is available before it loses its capacity to influence decisions.
• Understandability: information is classified, characterized, and presented clearly and concisely.

Elements of financial statements (SFAC 6)

The ten elements are: assets, liabilities, equity, investments by owners, distributions to owners, comprehensive income, revenues, expenses, gains, and losses.

Recognition and measurement attributes

Recognition is the process of recording an item in the financial statements. Five measurement attributes are used in current GAAP:

The two assumptions underlying accrual accounting are the economic-entity and going-concern assumptions, along with the monetary-unit and periodicity assumptions.

Income statement & comprehensive income ASC 220 / ASC 205-20

Single-step vs multi-step

• Single-step: groups all revenues and gains together, then all expenses and losses together; one subtraction yields income from continuing operations. Simple but provides no gross-profit or operating-income subtotal.
• Multi-step: presents intermediate subtotals: net sales − COGS = gross profit; gross profit − operating expenses = operating income; then non-operating items and taxes to reach income from continuing operations.

Discontinued operations (ASC 205-20)

A component (or group of components) is reported in discontinued operations only when its disposal represents a strategic shift that has (or will have) a major effect on operations and financial results. Key points:

• Reported net of tax in a separate section after income from continuing operations.
• Includes the results of operations of the component and any gain or loss on disposal (or remeasurement to fair value less costs to sell).
• A held-for-sale component is measured at the lower of carrying amount or fair value less costs to sell; depreciation stops once classified as held for sale.

Comprehensive income and OCI

Comprehensive income = net income + other comprehensive income (OCI). OCI captures items that bypass net income under GAAP. It may be presented in a single continuous statement or in two consecutive statements.

Reclassification adjustments

When an OCI item is realized and recognized in net income, a reclassification adjustment removes it from accumulated OCI to avoid double counting (for example, a previously unrealized AFS debt gain is reclassified to net income when the security is sold). Accumulated OCI is reported as a separate component of equity on the balance sheet.

Balance sheet & disclosures ASC 210 / 850 / 855 / 275

Classification

The classified balance sheet separates current from noncurrent assets and liabilities. Current items are those expected to be realized or settled within one year or the operating cycle, whichever is longer.

Related-party disclosures (ASC 850)

Transactions with related parties (affiliates, owners, management, family) are disclosed even when no accounting recognition differs from arm's-length terms. Required disclosures include the nature of the relationship, a description of the transactions, dollar amounts, and amounts due to or from related parties. Do not assert that transactions were at arm's length unless it can be substantiated.

Subsequent events (ASC 855)

• The evaluation period runs through the date the statements are issued (SEC filers) or available to be issued (non-filers).
• Example of Type I: settlement of litigation for a condition that existed at year-end. Example of Type II: a fire destroying a plant after year-end, or issuance of stock after year-end.

Going concern (ASC 205-40)

Management must evaluate whether there is substantial doubt about the entity's ability to continue as a going concern within one year after the date the statements are issued (or available to be issued). If substantial doubt exists, disclose the conditions, management's evaluation, and (if not alleviated) plans. Disclosure differs based on whether management's plans alleviate the substantial doubt.

Risks and uncertainties (ASC 275)

Disclosures address the nature of operations, use of estimates in the preparation of financial statements, certain significant estimates, and current vulnerability due to concentrations (for example, a major customer, supplier, or geographic region).

Statement of cash flows ASC 230

Under ASC 230, cash flows are classified into three activities. The statement reconciles the change in cash and cash equivalents.

Where interest, dividends, and taxes go (US GAAP)

Direct vs indirect method (operating section)

• Direct method: reports gross operating cash receipts and payments. If used, a reconciliation of net income to operating cash flow is still required.
• Indirect method: starts with net income and adjusts for non-cash items and changes in working capital. This is the most common method.

Common indirect-method adjustments to net income

• Add back non-cash expenses: depreciation, amortization, depletion, and losses.
• Subtract gains (for example, gain on sale of equipment, because the full proceeds appear in investing).
• Adjust for changes in current operating accounts: an increase in a current asset (AR, inventory) is subtracted; an increase in a current liability (AP, accrued expenses) is added.

Noncash investing and financing activities (for example, acquiring assets by issuing stock or assuming debt, or converting debt to equity) are disclosed separately and excluded from the body of the statement.

Statement of changes in equity ASC 505

This statement reconciles the beginning and ending balances of each equity component over the period. Typical columns include common stock, additional paid-in capital, retained earnings, accumulated OCI, and treasury stock.

• Retained earnings roll-forward: beginning balance + net income − dividends declared ± prior-period adjustments (error corrections, net of tax) = ending balance.
• Accumulated OCI changes by the period's OCI, net of reclassification adjustments.
• Contributions from and distributions to owners (stock issuances, treasury purchases, dividends) flow through their respective columns.
• A prior-period adjustment for an error correction is reported as an adjustment to the beginning balance of retained earnings, net of tax.

Segment & interim reporting ASC 280 / ASC 270

Operating segments (ASC 280)

Segment reporting uses the management approach: segments are identified the way the chief operating decision maker (CODM) reviews them. A component is a reportable operating segment if it meets any one of the three 10% quantitative thresholds:

• Revenue test: segment revenue (external + intersegment) is ≥ 10% of combined revenue of all operating segments.
• Profit or loss test: absolute amount of the segment's reported profit or loss is ≥ 10% of the greater (in absolute value) of combined reported profit of all profitable segments or combined reported loss of all loss segments.
• Assets test: segment assets are ≥ 10% of combined assets of all operating segments.

Required disclosures include a measure of segment profit or loss, total segment assets, and reconciliations to consolidated totals. Enterprise-wide disclosures cover products/services, geographic areas, and major customers (a single customer providing ≥ 10% of revenue).

Interim reporting (ASC 270)

Interim financial statements (for example, quarterly) are viewed primarily under the integral view: each interim period is an integral part of the annual period, so certain estimated annual amounts (such as the effective annual tax rate) are allocated across interim periods.

• Income tax: apply the estimated effective annual tax rate to year-to-date income.
• Costs benefiting more than one interim period are allocated among them; an inventory loss expected to recover by year-end need not be recognized.
• A discrete view treats each interim period as a standalone period; GAAP generally favors the integral view, though some items (for example, certain inventory and tax matters) borrow from the discrete view.

SEC reporting Reg S-X / Reg S-K

Public companies (issuers) file with the SEC. Regulation S-X governs the form and content of financial statements; Regulation S-K governs the non-financial disclosure items (for example, MD&A and business description).

Filer categories and 10-K / 10-Q deadlines

Deadlines run from the entity's fiscal year-end (10-K) or fiscal quarter-end (10-Q). Other common forms include Form S-1 (registration of securities), Forms 3, 4, and 5 (insider ownership), and Form 20-F (foreign private issuers).

Special-purpose frameworks (OCBOA) AICPA

A special-purpose framework (other comprehensive basis of accounting, OCBOA) is a non-GAAP basis used by smaller or specialized entities. Common bases:

OCBOA statements use titles that differ from GAAP titles (for example, "Statement of Assets and Liabilities Arising from Cash Transactions" rather than "Balance Sheet") to avoid implying GAAP conformity. Disclosures comparable to GAAP are still expected where relevant.

Ratios & financial-statement analysis

Ratio analysis groups into liquidity, solvency, profitability, and activity (efficiency) measures.

Days outstanding measures invert turnover: days sales in inventory = 365 ÷ inventory turnover; days sales outstanding = 365 ÷ receivables turnover.

Not-for-profit financial reporting ASC 958

Not-for-profit (NFP) entities follow ASC 958. The required statements are the statement of financial position, the statement of activities, and the statement of cash flows. Under ASU 2016-14, all NFPs must also present an analysis of expenses by both nature and function (in a separate statement of functional expenses, on the face of the statement of activities, or in the notes).

Net asset classes

NFPs report two classes of net assets:

Statement of activities

Reports revenues, expenses, gains, and losses and the resulting change in each net asset class. Expenses are reported by function (program services vs supporting activities such as management/general and fundraising); an analysis of expenses by nature and function is required.

Contributions: conditional vs unconditional (ASC 958-605)

• An unconditional contribution is recognized as revenue when received (or promised), measured at fair value.
• A conditional contribution contains a barrier the NFP must overcome and a right of return; it is not recognized until the condition is substantially met. Cash received in advance of meeting the condition is a refundable advance (liability).
• Donor-restricted contributions increase net assets with donor restrictions; when the restriction is satisfied, a reclassification ("net assets released from restrictions") moves the amount to without donor restrictions.

Donated services and in-kind gifts

• Donated services are recognized only if they (a) create or enhance a nonfinancial asset, or (b) require specialized skills, are provided by someone possessing those skills, and would otherwise be purchased.
• Donated materials (in-kind gifts) are recorded at fair value when received. Contributed nonfinancial assets require separate presentation and disclosure under ASU 2020-07.

State & local governments GASB 34

State and local governments follow GASB standards. GASB 34 established the dual-perspective reporting model with both government-wide and fund financial statements.

Measurement focus and basis of accounting (MFBA)

Modified accrual revenue recognition

Under modified accrual (governmental funds), revenues are recognized when measurable and available. "Available" means collectible within the current period or soon enough thereafter (commonly within 60 days) to pay current-period liabilities. Expenditures are generally recognized when the related fund liability is incurred.

Fund types

Required components of the annual report

• MD&A (Management's Discussion and Analysis): required supplementary information presented before the basic financial statements; an objective, easily readable analysis.
• Government-wide statements: statement of net position and statement of activities, separating governmental and business-type activities (fiduciary funds are excluded).
• Fund financial statements for governmental, proprietary, and fiduciary funds.
• Notes and other required supplementary information (for example, budgetary comparison and pension schedules).

The reconciliation

Because governmental funds use modified accrual but government-wide statements use full accrual, a reconciliation bridges the two. Common reconciling items: adding capital assets (net of accumulated depreciation) and long-term liabilities (bonds payable) that are not reported in governmental funds, and converting expenditures to expenses (for example, recognizing depreciation and adjusting for the difference between expenditures and accrued expenses).