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192. Discuss the definition, recognition, and measurement of liabilities.
The criteria for recognition of a liability are as follows:
Firms report many financial liabilities as the present value of the amount payable, except that firms can ignore
discounting for liabilities due within one year. Nonfinancial liabilities, those settled by providing goods and
services instead of cash, appear at either the amount of cash received (for example, advances from customers)
or the expected cost of providing goods and services (for example, warranty liability).
Obligations under executory contracts do not usually appear as liabilities because they do not represent a
present obligation. An exception involves leases accounted for as capital, or finance, leases. Firms also do not
recognize certain obligations that are uncertain as to amount or timing or both as liabilities, unless those items
The FASB and the IASB are reconsidering the role of uncertainty, or probability, in the
definition, recognition, and measurement of liabilities. Existing recognition criteria include
a probable future sacrifice of resources; one issue involves the minimum probability level to
warrant recognition of an uncertain obligation as a liability. U.S. GAAP does not specify
193. Discuss the definition, recognition, and measurement of shareholders’ equity for a corporation.
Equity
bonds and some preferred stock issues subject to redemption.
194. Discuss the definition, recognition, and measurement of revenue.
Revenue
decreases in liabilities that result in increases in equity, other than those relating to contributions from equity
participants. Firms recognize revenue, or income, when they satisfy two conditions:
related to the product and the portion related to the services?
195. Discuss the definition, recognition, and measurement of gains and losses .
Gains and Losses
196. Describe comprehensive income, net income, and other comprehensive income.
COMPREHENSIVE INCOME, NET INCOME, AND OTHER COMPREHENSIVE INCOME
197. Describe accrual and cash accounting.
Accrual Accounting
Accrual accounting measures the effects of transactions and events in the periods when they occur. In contrast,
cash-basis accounting recognizes only cash receipts and disbursements. Under accrual accounting, firms
recognize revenues when an arrangement satisfies the revenue recognition criteria, increasing net assets but not
198. Describe what is meant by a reporting entity.
Entity
199. Describe the relationship between financial reporting standards and the financial reporting objectives,
qualitative characteristics of accounting information, and elements of financial statements that comprise the
200. When do firms recognize revenue?
201. How do firms report accounts receivable?
202. How do firms account for inventories?
203. How do firms account for property, plant, and equipment?
PROPERTY, PLANT, AND EQUIPMENT
Firms initially record property, plant, and equipment, sometimes referred to as fixed assets, at acquisition cost,
the cash paid or the fair value of other consideration given in exchange for the asset. Acquisition cost includes
204. How do firms account for intangibles other than goodwill?
INTANGIBLES OTHER THAN GOODWILL
U.S. GAAP and IFRS require firms to treat some or all expenditures made to internally
develop brand names, customer lists, new technologies, and other intangibles as expenses in
205. How do firms account for goodwill?
GOODWILL
In ordinary usage, goodwill refers to various unidentifiable intangible resources of a firm,
206. Explain the accounting for notes and bonds.
NOTES AND BONDS
U.S. GAAP and IFRS account for notes and nonconvertible bonds payable similarly. Firms
initially record long-term notes and bonds at their issue price, the present value of the future
207. Explain the accounting for leases.
LEASES
Firms account for leases using either the operating lease method or the capital (finance) lease
method. The operating lease method treats leases as executory contracts, with neither the
208. Explain the accounting for retirement benefits.
RETIREMENT BENEFITS
U.S. GAAP and IFRS require firms to recognize the cost of retirement benefits (pensions,
health care, life insurance) as an expense while employees work, not when they receive payments or other
benefits during retirement. Employers often contribute cash to a trust, an entity legally separate from the
employer, to fund their retirement obligations. The trust invests the funds received to generate a return.
Payments to employees come from both the employer’s contributions and investment returns. The accounting
records of the trust are separate from the accounting records of the employer, and the amounts on the two sets of
books usually differ. Two issues in accounting for defined benefit retirement benefits are as follows:
209. Explain the accounting for income taxes.
INCOME TAXES
Income before taxes for financial reporting usually differs from taxable income reported to tax authorities. The
differences arise because of (1) permanent differences (items that affect income for financial reporting but never
210. Explain the accounting for marketable securities.
MARKETABLE SECURITIES
Firms sometimes acquire bonds or capital stock of other entities for their expected returns
(through interest, dividends, and price appreciation) without any intent to exert influence
or control over the other entity. U.S. GAAP and IFRS presume that the acquisition of any
amount of bonds, and the acquisition of less than 20% of the voting stock of another entity
implies an inability to exert significant influence or control. Firms account for such securities
as passive investments. Firms classify such securities into three categories:
211. Explain the accounting for derivative instruments.
DERIVATIVE INSTRUMENTS
Firms often acquire derivative instruments to hedge interest rate, exchange rate, commodity price, and other
risks. U.S. GAAP and IFRS classify derivatives into three categories:
212. Explain the accounting for intercorporate investments in common stock.
INTERCORPORATE INVESTMENTS IN COMMON STOCK
Firms sometimes invest in the common stock of other entities in order to exert significant influence or control
over the other entity. U.S. GAAP and IFRS assume that firms owning between 20% and 50% of the voting
stock of another entity can exert significant influence, and firms owning more than 50% can exert control,
unless other information indicates the contrary.
with its own.
Standard-setting bodies are reconsidering the concept of an accounting entity, including
the use of majority equity ownership to gauge control of another entity. The evolving
concept of control involves both the capacity to direct the strategic, operating, investing, and
financing decisions of another entity and the ability to benefit from value increases and to
bear the loss from value decreases of the other entity.
213. Explain the accounting for redeemable preferred shares.
REDEEMABLE PREFERRED SHARES
214. Explain the accounting for employee stock options.
EMPLOYEE STOCK OPTIONS
215. Explain the accounting for the issuance of securities with warrants attached or that have conversion
privileges.
216. Explain the accounting for treasury shares.
TREASURY SHARES
217. Explain the accounting for errors and changes in accounting principles and changes in accounting
estimates.
