Date post: | 20-Feb-2017 |
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The Balance Sheet
Nyoman Ardiantha Putera / 344132Muhammad Heickal Pradinanta / 350168
The Relationship between balance sheet and income statement
“Articulation means that the two statements are mathematically defined in such a way that net income is
equal to the change in owners’ equity”
ArticulationAccounting elements: assets, liabilities, owners’ equity, revenues, gains, expenses, and losses.
Income calculated from: revenues, gains, expenses, and losses.
Assets - Liabilities = Owners’ equity
Traditional Articulated Approachrevenue-expense
concerned with definition, recognition, and measurement of income
derived by matching
accounting rules governed income statement and balance sheet, income measurement rules burdens balance sheet.
concerned about stabilizing the fluctuating effect of income statements
asset-liability
concerned with measuring and reporting assets and liabilities
income statement as simply a way of classifying and reporting changes in net assets
unrealized holding gains and losses
Nonarticulated approach
Severe traditional articulated approach with a revenue-expense-based income statement and an asset-liability-based balance sheet
Definition of AssetsEstablishes what types of economic factors appear in
the balance sheet, elements to be recognized, measured, and reported in it
1. Committee on Terminology (1953, paragraph 26)emphasizes on legal property, includes deferred charges
2. APB (1970a, paragraph 132)emphasizes that assets are economic resources
3. FASB (1985, paragraph 25)emphasizes further evolution on “assets are economic resources”
Executory ContractsHow to account mutually unperformed executory contracts
no recognition is needed in financial statement because the exchange has not yet occurred (eg. employment contracts, long-term purchase agreement)
Recognition and Measurement of AssetsReviews how specific types of assets are measured. Using original acquisition cost (historical cost), historical cost less cumulative charges to income (book value), replacement cost, selling prices, net realizable value (selling price - disposal cost), and net realizable value - normal markups.
Recognition and Measurement of Assets (cont.)Receivables
carried at historical cost
adjusted for uncollectible amounts (estimate)
attributes measured using net realizable value
Recognition and Measurement of Assets (cont.)Investments Not Subject to Equity Accounting
1.Held to Maturity
uses effective rate of interest
2.Trading
uses fair value
3.Available for sale
uses fair value
Recognition and Measurement of Assets (cont.)Equity securities in an amount of 20% (significant influence) to 50% (majority) of the outstanding stock are valued using equity method
uses historical cost
investment increase after:
eliminating investor-investee transactions profit
reducing amortization and dividends paid
Recognition and Measurement of Assets (cont.)Inventories
Ending Inventory: (quantity on hand x quantity by the acquisition cost)
FIFO
LIFO
Weighted Average
Used Conservatism.
Recognition and Measurement of Assets (cont.)Self-Constructed Assets and Manufactured Inventories
variable (direct) costing
production cost charged under variable production costs, fixed costs charged as period costs.
full-absorption costing
assign all manufacturing costs, fixed and variable to the production costs.
requires the development of arbitrary overhead rates on assumed production levels
Recognition and Measurement of Assets (cont.)Impaired Assets
writedowns long-lived assets and possible related goodwill
decreased market value, significant physical change in the asset, declining cash flows from both current and prospective operations
Recognition and Measurement of Assets (cont.)Nonmonetary Exchanges of Similar Assets
APB Opinion No. 29: the sacrifice to obtain a new asset with a traded-in asset and possibly some cash (book value)
SFAS No. 153: amended APB Opinion No. 29.
commercial substance (fair value) new asset must have different cash flow
no commercial substance (book value) following the old asset
Recognition and Measurement of Assets (cont.)Intangible Assets
For example: A/R, FDI, capitalized lease rights, copyrights, patents, trademarks.
depreciation, depletion, amortization (book value)
Capitalizing Intangible Costs
“it makes sense to recognize intangible investments as assets when uncertainty of benefits considerably resolved”
- SFAS No. 86, Lev and Zarowin
Recognition and Measurement of Assets (cont.)Deferred Charges
1.prepaid costs
provide future benefits in the form of reduced future cash outflows (eg. prepaid insurance)
2.costs
deferred from expense recognition because income measurement rules (eg. startup costs)
LiabilitiesDefinition of Accounting liabilities:
1. Something represented by a credit balance that is or would be properly carried forward upon a closing of books of account according to the rules or principles of accounting
2. Economic obligations of an enterprise that are recognized and measured in conformity with GAAP
3. Liabilities are probable future sacrifices of economic benefits
Types of Accounting LiabilitiesContractual liabilities
Constructive obligations
Equitable obligations
Contingent liabilities
Deferred credits
first type represents prepaid revenues
second type arises from income rules that defer income statement recognition of the item
Recognition and Measurement of LiabilitiesThe general principle is the liabilities are measured at
the amount established in the exchange
For current liabilities, it represents the face value of the obligation to be settled.
For noncurrent obligation, the measurement represents a Present value calculation based on current interest rates.
Recognition and Measurement of Liabilities (Cont.)Notes Payable With Below Market Rates of Interest
APB Opinion No.21: it must be discounted
The real economic value of the transaction is measured at imputed market prices
Recognition and Measurement of Liabilities (Cont.)Bonds Payable
Recorded at the net proceeds of the transaction
net proceeds = present value of future interest payments and principal repayment, discounted at the market rate of interest less costs
Recognition and Measurement of Liabilities (Cont.)Convertible Bonds
the investors are willing to pay a price for conversion option and the price is paid in the form of lower interest rates
The policies are used to account for convertible bonds:
1.Treat convertible debt as conventional debt until conversion
2.segregate the amount of the debt as the price paid for the conversion privilege and to add to contributed capital
Recognition and Measurement of Liabilities (Cont.)Debt with Stock Warrants
APB Opinion No. 14: a value be assigned to detachable stock warrants that can accompany the issue of debt.
This policy is inconsistent
The little difference is the amount of being paid in the transaction for the right to acquire stock
Recognition and Measurement of Liabilities (Cont.)Hybrid Securities
Redeemable preferred stock
has nonvoting power
fixed dividend
callable by the issuer
Trust preferred stock
First issued by Texaco in 1993
Company sells preferred stock to subsidiary
The subsidiary sells bonds to the parent
Securitizations
Involves the sale by a firm (transferor) of an asset or group of assets to another firm (transferee)
raising the issue of whether the transferor has relinquished all rights in the assets.
Owners’ EquityThe stockholders’ residual interest in the net assets of the firm
Stockholders equity includes:
Contributed capital
Legal capital; represent the limited liability of stockholders
Other capital; stock premiums,donated capital,etc.
Earned capital (Retained earnings)
Owners’ equity transaction:
Capital Transaction
Income-related transaction
Recognition and Measurement of Owners’ EquityTreasury stock
Seen as a method of signaling future prospects to stockholders
Methods can be used to account for treasury stock:
The cost method
The par value method
Stock dividends
ARB No.43:
Large stock dividends (over 25%)
Small stock dividends (less 20%)
Two purposes:
give shareholders evidence of their interest in retained earnings
lower the price of the shares with the stock dividend serving as a stock split
Financial InstrumentsContracts involving a financial asset of one entity and a financial liability (or equity) of another entity
Example: Representing ownership of the asset
Derivatives
Financial instruments whose value is based on other financial instruments, stock indexes or interest rates, interest rate indexes, or some asset.
Types of Derivatives1.Forward-Based Derivatives
a.One party realizes a gain and other party realizes a loss
b.involve foreign currencies, debt contracts
2.Option-Based Derivatives
a.Gives the buyer (owner) the right to buy or sell a specific price of a standard commodity or a financial instrument.
b.for example call options for stocks, convertible bonds, and convertible preferred stock
FASB pronouncements on Derivatives
SFAS No. 133
valuing derivatives at fair value
SFAS No. 138
clarifying amendments for a few implementation difficulties in SFAS No. 133
SFAS No. 149
amends SFAS No.133, requires contract handled uniformly to improve comparability
SFAS No. 156
technical standards dealing with the servicing of financial assets and liabilities including securitizations
SFAS No. 159
allows exceptions relative to fair value measurement of certain financial instruments
Classification in The Balance SheetTwo classifications:
Current and noncurrent approach
Current defined as firm’s operating cycle or one year,whichever is longer
Also make liquidity ranking
Only gives a crude indication of a firm’s liquidity
Monetary and nonmonetary system
Thank You