pt 3

Revenues recognition timing can be uncertain; advertising expenditures are expensed in the period incurred.
Timing of asset and liability recognition and de-recognition is linked to when expenses are recognized.
Example: Google spends $1,000,000 on TV ads; revenue effects are uncertain, so the cost is expensed in the period.

GAAP uses a mixed attribute measurement model (choose attribute to maximize relevance and representational faithfulness).
Five measurement attributes:
1. Historical cost
2. Net realizable value
3. Current cost
4. Present (or discounted) value of future cash flows
5. Fair value
These attributes may yield the same amount at initial recognition but can differ in important ways later.

Historical cost = amount given (asset) or received (liability) in the original exchange.
Depreciated (or amortized) cost = historical cost less depreciation/amortization to date for long-lived assets.
Reasons for using historical cost:
- Provides cash flow information (cash paid/received).
- Objective and verifiable due to the original exchange.

NRV = estimated selling price in the ordinary course of business − reasonably predictable costs of completion, disposal, and transportation.
Example: NRV = selling price − (costs of completion + disposal + transportation).
Inventory example (FIFO): report at the lower of FIFO cost or NRV.

Present value bases measurement = future cash flows discounted for time value of money.
PV is used to approximate fair value; SFAC 7 provides the framework for using future cash flows in measurement.
PV example (generic):
$PV =</p><p>$ ( ext{sum of discounted future cash flows})$$
Note: See Chapter 5 for time value of money concepts.

Fair value = price that would be received to sell an asset or transfer a liability in an orderly market transaction.
Three valuation approaches:
1. Market approaches: base on market information (e.g., use a market price or P/E multiples).
2. Income approaches: estimate future amounts and convert to present value.
3. Cost approaches: estimate replacement cost of assets.
Three-level hierarchy prioritizes inputs:
1. Level 1: Quoted prices in active markets for identical assets.
2. Level 2: Observable inputs other than Level 1 (e.g., quoted prices for similar assets).
3. Level 3: Unobservable inputs (based on entity’s own data).
Example applications:
- Marketable securities measured at fair value using Level 1 inputs (NYSE/NASDAQ prices).
- Noncash transactions measured at fair value for each element when cash is not exchanged.
- Asset retirement obligations (AROs) typically require Level 3 inputs to reflect the present value of expected cash outflows.
Disclosures: provide description of inputs used; for recurring Level 3 measurements, disclose the effect on earnings (or net assets).

Level 1: Quoted prices in active markets for identical assets.
Level 2: Observable inputs other than Level 1 (e.g., quoted prices for similar assets in active or inactive markets).
Level 3: Unobservable inputs reflecting the entity's own assumptions.

GAAP allows a fair value option for certain financial assets and liabilities, enabling a one-time choice to report at fair value.
If exercised for bonds payable (instead of historical cost, adjusted for amortization), gains/losses flow to the income statement.
Rationale: reduce earnings volatility and support convergence with IFRS/IASB.
Why not for buildings or land? Because not all asset classes are cash-equivalent or easily adjusted for fair value; options are typically reserved for financial instruments.

Full-disclosure principle: financial reports should include information that could affect external decisions; benefits must exceed costs.
Disclosure methods include:
1. Parenthetical or modifying comments on the face of statements.
2. Notes to the financial statements with accounting principles, contracts, and litigation.
3. Supplemental schedules and tables with detailed information.

July 2024: FASB issued Measurement (Chapter 6 of Concept Statement No. 8).
Key idea: measurement is anchored in prices; entry prices and exit prices are alternative measurement systems that provide relevant and faithful measurements.
Entry price: price to obtain an asset or to assume a liability; amortized historical cost is an entry price.
Exit price: price to sell an asset or settle a liability; can be market-based or company-specific.
Implication: use whichever price best achieves the objective of financial reporting; no substantial changes expected in GAAP.