Financial Accounting and Reporting: Recognition, Measurement, and Disclosures
Core recognition principles
FAR tests whether you can apply the FASB conceptual framework to transactions. Revenue recognition under ASC 606 follows five steps: identify the contract, identify performance obligations, determine the transaction price, allocate the price, and recognize revenue when (or as) obligations are satisfied. A frequent trap is allocating a discount or variable consideration incorrectly across multiple performance obligations.
Measurement topics
Know the measurement bases for inventory (lower of cost or net realizable value under U.S. GAAP for most inventory), property/plant/equipment (cost less accumulated depreciation; impairment when carrying amount exceeds undiscounted future cash flows), and investments (fair value for trading and available-for-sale securities, with unrealized gains/losses in earnings vs. OCI respectively). Leases require recognizing a right-of-use asset and lease liability for most leases.
Liabilities, equity, and disclosures
Distinguish operating from finance leases; finance leases front-load expense. For bonds, premium/discount amortization affects interest expense. Equity transactions - treasury stock, stock splits, dividends - change share counts without changing total equity in the case of splits.
Worked rule of thumb
Inventory NRV: if cost is $100 and NRV is $92, write down to $92; the write-down is not reversed under U.S. GAAP even if NRV later recovers. IFRS permits reversal up to original cost - a classic comparison trap.