Financial Accounting and Reporting (FAR): Recognition and Measurement
Financial Accounting and Reporting (FAR) tests U.S. GAAP recognition, measurement, presentation, and disclosure across the financial statements. High-yield areas include revenue, leases, bonds, income taxes, pensions, earnings per share, cash flows, consolidations, and subsequent events.
Core measurement
Apply ASC 606 in five steps: identify the contract, identify performance obligations, determine transaction price, allocate it, and recognize revenue when control transfers. For bonds, use the effective-interest method. For deferred taxes, recognize temporary differences using enacted rates. For EPS, use the treasury stock method for dilutive options and the if-converted method for dilutive convertible securities.
Worked example
A company issues $1,000,000 face, 5% annual coupon, three-year bonds when the market yield is 6%. Issue price is the present value of $50,000 annual interest for three years plus $1,000,000 at maturity: approximately $973,270. Year 1 interest expense is $973,270 × 6% = $58,396. Cash interest is $50,000, so discount amortization is $8,396 and carrying amount rises to $981,666. The interest expense uses the market yield at issuance, not the coupon rate.
Traps
Do not record a bond discount as a separate asset or use straight-line amortization when it differs materially. Under ASC 842, a lease can be a finance lease or operating lease; both recognize a right-of-use asset and lease liability. Do not recognize variable consideration without applying the constraint. Interest paid is an operating cash flow under U.S. GAAP, while dividends paid are financing. Exclude antidilutive securities from diluted EPS.