01.04. Selected Accounting Concepts

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01.04. Selected Accounting Concepts
2013-03-07 19:54:32
Selected Accounting Concepts

Selected Accounting Concepts
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  1. Fair Value vs Historical Cost
    • fair value: price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date
    • if no such market, estimate --> mark-to-model rather than mark-to-market
    • historical value: price at which an asset or liability was originally obtained
    • may need to consider amortization / depreciation
    • (+) more reliable
    • (-) less relevant
  2. Recognition vs Measurement
    • different probability standards (when to record / measure)
    • multiple recognition triggers and measurement rules
  3. Deferral-Matching vs Asset-Liability
    • deferral-matching: focuses on income statement more than balance sheet (eg: earned vs written premium)
    • balance sheet accounts: DAC (deferred acquisition costs); unearned premium liabilities
    • (+) timing of profit emergence - steady pattern
    • (+) reliable measure of value @ reporting date
    • asset-liability: focus is on value of assets that exist as of balance sheet date
    • would not recognize DAC or unearned premium liability beyond loss
  4. Impairment
    • test used to prevent inconsistencies between 2 valuations using diff accounting framework
    • asset considered impaired if no longer expected to produce the economic benefits expected when first acquired
  5. Revenue Recognition
    • when is revenue recognized?
    • deferral-matching: as service is rendered
    • asset-liability: when acquiring asset (up front)
  6. Reporting Segment
    • regulatory financial statements usually required on non-consolidated basis (eg: banking vs insurance)
    • GAAP requires reporting at the reporting segment level - can be split by product / region depending on autonomy of management
    • required items by segment - not all items (eg: income statement by segment, but not balance sheet)
  7. Change in accounting principle vs estimate
    • principle: may require special disclosure of the change, with recalculation for prior period results
    • estimate: generally affects only the latest period
  8. Principle-Based vs Rule-Based
    • principle-based: rely on interpretation and judgment
    • (+) flexible to new and changing products / environment
    • (+) require less maintenance
    • (-) more difficult to audit
    • (-) concern over consistent and reliable interpretations
    • (-) can be used to manipulate results
    • rule-based
    • (+) easier to audit
    • (+) produce more consistent and comparable reports
    • (-) lack of flexibility to changing products / environement
    • (-) requires more maintenance
    • (-) may be subject to manipulation (too literal)