ACG4111
Intermediate Financial Accounting II
Version
1
Financial
Accounting Standards Codification Research Assignment
Write
your name and student number in the space below.
Student
(L, F):___________________________________________________
Student/Panther
ID:_________________________
This
assignment is comprised of researching several of the more current
technical topics in accounting and responding to several specific
technical standard questions about the topics. You may be asked to
interpret how the technical standard is applied or what the
objective(s) of the related GAAP rules are attempting to address.
Note that the FASC is now the one
and only source of
the technical GAAP standards; other sources are no longer accepted as
GAAP.
You
can access the Financial Accounting Standards Board (FASB) Financial
Accounting Standards Codification database at:
http://aaahq.org/ascLogin.cfm.
Type in the following:
Username:
AAA52092
Password:
92FqjZZ
Click
on “FASB Accounting Standards Codification” and the database will
open. The topics are found on the left side of the welcome page.
Clicking on the topic will return the subtopics and contents. You can
access each topic by either scrolling over the topics and subtopics
until you find the related content or topic or by using the search
box found in the top right of the screen.
I.
FASB Accounting Standards Codification (FASC) Questions
This
section deals with certain general background considerations and
information related to the FASC and the answers can be found by
clicking the “About the Codification” and “Notice to
Constituents” sections on the FASC Welcome Page. This section is a
good general source of information about the FASC and should be
reviewed prior to starting to answer the specific questions set forth
in all sections. The related research
questions that you must answer are:
When
did the FASC Codification become effective?
Answer
According
to About codification page, the Codification is effective for interim
and annual periods ending after September 15, 2009
Did
the FASC change prior GAAP?
Answer
According
to Notice to Constituents V4.10_0 All previous level (a)-(d) US GAAP
standards issued by a standard setter are superseded. Level (a)-(d)
US GAAP refers to the previous accounting hierarchy. All other
accounting literature not included in the Codification is
nonauthoritative.
So FASC did not change but Codification structure is significantly
different from the structure of previous standards.
What
does the FASB expect from the new FASC structure and system?
Answer
According
to Notice to Constituents V4.10_0 p.5 Among other things, the
Codification is expected to:
1.
Reduce the amount of time and effort required to solve an accounting
research issue
2.
Mitigate the risk of noncompliance through improved usability of the
literature
3.
Provide accurate information with real-time updates as Accounting
Standards Updates are released
4.
Assist the FASB with the research and convergence efforts.
What
are the “topics” used in the ASC?
Answer
According
to Notice to Constituents V4.10_0 p.12. The
Topics reside in Areas which can be categorized as follows:
1.
The General Principles Area (Topic Codes 105–199) relates to broad
conceptual matters.
2.
The Presentation Area (Topic Codes 205–299) addresses how
information is presented in the financial statements. It does not
address other aspects of financial accounting such as recognition,
measurement, or derecognition for individual financial statement
ccounts.
3.
The Assets, Liabilities, and Equity Areas (Topic Codes 305–399,
405–499, and 505–599, respectively) contain guidance about
specific individual balance sheet accounts (e.g., cash, accounts
payable, additional paid-in capital).
4.
The Revenue and Expenses Areas (Topic Codes 605–699 and 705–799,
respectively) contain guidance about specific individual income
statement accounts (e.g., sales revenue, employee compensation).
5.
The Broad Transactions Area (Topic Codes 805–899) contains guidance
about multiple financial statement accounts and its Topics are
generally transaction-oriented (e.g. business combinations,
derivatives, nonmonetary transactions).
6.
The Industry Area (Topic Codes 905–999) contains guidance about
specific industries or types of activity.
Are
Securities and Exchange Commission (SEC) references included in the
ASC?
Answer
Yes,
because according to
Notice to Constituents V4.10_0 p.20.
SEC
content is included for reference
to improve the usefulness of the Codification for public companies.
The
system attempts to embed relevant SEC content for reference in the
same Topics and Subtopics as all other content.
II.
Topic-Specific Research
You
have been hired at an audit firm as a first year staff. This firm
requires that all references to generally accepted accounting
principles in the audit workpapers include the corresponding FASC
citation (topic and subtopics). Below are three independent
situations found at your clients that require research and
documentation.
For
each question, (1) provide the citation number (topic and subtopic)
that addresses the question and (2) answer the question.
Document this under the question, indenting your answer or otherwise
indicating it is the answer (bold, underline, different color, etc.)
Change
in Accounting Principles
As
part of the year-end accounting process and review of operating
policies, Cullen Co. is considering a change in the accounting for
its equipment from the straight-line method to an accelerated method.
Your supervisor wonders how the company will report this change in
principle. He read in a newspaper article that the FASB has issued a
standard in this area and has changed GAAP for a “change in
estimate that is effected by a change in accounting principle.”
(Thus, the accounting may be different from what he learned in
intermediate accounting.) Your supervisor wants you to research the
authoritative guidance on a change in accounting principle related to
depreciation methods.
Identify
the main authoritative guidance for accounting and reporting
guidelines for a change in accounting principle related to
depreciation methods?
Answer
The
main authoritative for accounting and reporting guidelines for change
in accounting principle relating to depreciation methods is under
Topic Accounting changes and error correction 250-10
The
Accounting Standards Codification (ASC) Topic
250, subtopic 10, which is Accounting
Changes and Error Corrections.
Is
a change of depreciation method a change in accounting principle or
a change in estimate?
Answer
A
change of depreciation method is a change in accounting period.
Under
Topic 250-10
Accounting Changes and Error Corrections-Overall-20-Glossary-
Change in Accounting Principle is also defined as:
A
change in the method of applying an accounting principle also is
considered a change in accounting principle.
(c)
What
are the conditions that justify a change in depreciation method, as
contemplated by Cullen Co.?
Answer
When
there is a change in estimate being affected by a change in
accounting principle or change in entity, as stated in topic 250:
A
change in accounting estimate that is inseparable from the effect of
a related change in accounting principle. An example of a change in
estimate effected by a change in principle is a change in the method
of depreciation (as well as amortization, or depletion) for
long-lived, nonfinancial assets.
(d)
What
guidance does the SEC provide concerning the impact that recently
issued accounting standards will have on the financial statements in
a future period?
According
to topic 250 -10 Accounting
Changes and Error Corrections
The
recently issued accounting standards will affect financial statements
both directly and indirectly in the future as follow:
Directly
the standards will have effect on Assets or liabilities. For example,
an adjustment to an inventory balance to effect a change in
inventory valuation method. Other examples of direct effects of
change in accounting principe are deferred income tax assets or
liabilities.
Indirectly
the standards will have effects on any changes to current or future
cash flows that result from making a change in accounting principle
that is applied retrospectively. Like a change in a nondiscretionary
profit sharing or royalty payment that is based on a reported amount
such as revenue or net profit.
Warranty
Pleasant
Co. manufactures specialty bike accessories. The company is known for
product quality, and it has offered one of the best warranties in the
industry on its higher-priced products—a lifetime guarantee,
performing all the warranty work in its own shops. The warranty on
these products is included in the sales price.
Due
to the recent introduction and growth in sales of some products
targeted to the low-price market, Pleasant is considering partnering
with another company to do the warranty work on this line of
products, if customers purchase a service contract at the time of
original product purchase. Pleasant has called you to advise the
company on the accounting for this new warranty arrangement.
(a)
Identify
the primary authoritative guidance that addresses the accounting for
the type of separately priced warranty that Pleasant is considering.
Answer
The
primary authoritative guidance that addresses the separate priced
warranty that Pleasant Co is considering is under topic
605 Revenue Recognition – 20 Services – 25 Recognition
The
Accounting Standards Codification (ASC) or
Paragraphs 605-20-25-1 through 25-6 provide guidance on revenue
recognition by sellers of extended warranty or product maintenance
contracts.
(b)
When
are warranty contracts considered separately priced?
Answer
If
a customer has the option to purchase a warranty separately, it
represents a service warranty that should be accounted for as a
separate performance obligation.
Under
Accounting Standards Codification (ASC)
topic or paragraph
605-20-25-1:
Separately
priced contracts for extended warranty and product maintenance
contracts provide warranty protection or product services and the
contract price of these contracts is not included in the original
price of the product covered by the contracts.
(c)
What
are incremental direct acquisition costs and how should they be
treated?
Answer
The
incremental direct acquisition costs are those identified with
obtaining a specific contract which otherwise would not have been
incurred. These costs are deferred and charged to expense account in
their proposition to revenue.
Under
ASC topic or paragraph 605-20-25-4
Costs
that are directly related to the acquisition of a contract and that
would have not been incurred but for the acquisition of that contract
(incremental direct acquisition costs) shall be deferred and charged
to expense in proportion to the revenue recognized.
Notes
Payable
Your
client has been operating for just two years, producing specialty
golf equipment for women golfers. To date, the company has been able
to finance its successful operations with investments from its
principal owner and cash flows from operations. However, current
expansion plans will require some borrowing to expand the company's
production line.
As
part of the expansion plan, the company will acquire some used
equipment by signing a zero-interest-bearing note. The note has a
maturity value of $50,000 and matures in 5 years. A reliable fair
value measure for the equipment is not available, given the age and
specialty nature of the equipment. As a result, the client is unable
to determine an established exchange price for recording the
equipment (nor the interest rate to be used to record interest
expense on the long-term note). They have asked you to conduct some
accounting research on this topic.
(a)
Identify the authoritative literature that provides guidance on the
zero-interest-bearing note. Use some of the examples to explain how
the standard applies in this setting.
Answer
845
Nonmonetary Transactions - 10 Overall – 30 Initial Measurement
Under
ASC topic or paragraph 845-10-30-8
Fair
value should be regarded as not determinable within reasonable limits
if major uncertainties exist about the realizability of the value
that would be assigned to an asset received in a nonmonetary
transaction accounted for at fair value. An exchange involving
parties with essentially opposing interests is not considered a
prerequisite to determining a fair value of a nonmonetary asset
transferred; nor does an exchange ensure that a fair value for
accounting purposes can be ascertained within reasonable limits. If
neither the fair value of a nonmonetary asset transferred nor the
fair value of a nonmonetary asset received in exchange is
determinable within reasonable limits, the recorded amount of the
nonmonetary asset transferred from the entity may be the only
available measure of the transaction.
Under
ASC topic or paragraph 310-10-30-6
Paragraph835-30-25-11explains
that, in the absence of established exchange prices for the related
property, goods, or services or evidence of the fair value of the
note (as described in paragraph (835-30-25-2),
the present value of a note that stipulates either no interest or a
rate of interest that is clearly unreasonable shall be determined by
discounting all future payments on the notes using an imputed rate of
interest as described in Subtopic 835-30.Paragraph
835-30-25-11
explains
that this determination shall be made at the time the note is
acquired; any subsequent changes in prevailing interest rates shall
be ignored.
(b)
How is present value determined when an established exchange price is
not determinable and a note has no ready market? What is the
resulting interest rate often called?
Answer
Under
ASC topic or paragraph 835-30-25
If
an established exchange price is not determinable and if the note has
no ready market, the problem of determining present value is more
difficult. To estimate the present value of a note under such
circumstances, an applicable interest rate is approximated that may
differ from the stated or coupon rate. This process of approximation
is called imputation, and the resulting rate is called an imputed
interest rate.Nonrecognition
of an apparently small difference between the stated rate of interest
and the applicable current rate may have a material effect on the
financial statements if the face amount of the note is large and its
term is relatively long.
Under
ASC topic or paragraph 835-30-20
Imputed
Interest Rate
The
interest rate that results from a process of approximation (or
imputation) required when the present value of a note must be
estimated because an established exchange price is not determinable
and the note has no ready market.
Therefore,
Present value is determined by approximating an applicable interest
rate that may differ from the stated or coupon rate. And the
resulting interest rate is often called imputed Interest rate
(c)
Where should a discount or premium appear in the financial
statements? What about issue costs?
Answer
Under
ASC topic or paragraph 835
Interest - 30 Imputation of Interest - 45 Other Presentation Matters
45-1A
The
discount or premium resulting from the determination of present value
in cash or noncash transactions is not an asset or liability
separable from the note that gives rise to it. Therefore, the
discount or premium shall be reported in the balance sheet as a
direct deduction from or addition to the face amount of the note.
Similarly, debt issuance costs related to a note shall be reported in
the balance sheet as a direct deduction from the face amount of that
note. The discount, premium, or debt issuance costs shall not be
classified as a deferred charge or deferred credit.
Accounting
Standards Update No. 2015-03—Interest—Imputation of Interest
(Subtopic 835-30)
To
simplify presentation of debt issuance costs, the amendments in this
Update would require that debt issuance costs be presented in the
balance sheet as a direct deduction from the carrying amount of debt
liability, consistent with debt discounts or premiums.
Therefore,
They all appear under the balance sheet. That is discount premium and
issue costs.