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FASB: Changes in Liabilities, Equity Measurement and Reporting

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The accounting for liabilities, both current and long-term, and equity has changed significantly since the inception of the FASB. Discuss some of the primary changes in the accounting (measurement and reporting) for liabilities and equity that the FASB has implemented.

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FASB established a traditional fair value hierarchy as explained in Topic 820. There are three levels of assets and liabilities, which have a different disclosure level. Level 1 assets and liabilities value is based on quoted price of an active market. There will be no adjustments made to the fair value. Level 2 assets and liabilities value is based on "observable inputs," which may or may not be a quoted price of an active market. The value may be based on the price of an identical or similar asset that is listed in an active or inactive market or interest rate and yield curves. Level 3 assets and liabilities value is based on "unobservable inputs," which maybe an organization's internal estimate and set pricing model. This type of asset or liability is not liquid and extremely risky that must adhere ...

Solution Summary

The solution is a 519-word discussion on FASB liabilities, including a look at critical clarifications on the fair value method and equity instruments.

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Measurement Attributes and FASB's Conceptual Framework

Aspects of the FASB's Conceptual Framework

Determine whether the following statements are true or false. If a statement is false, explain why.

1. Comprehensive income includes change in equity resulting from distributions to owners.
2. Timeliness and predictive value are both characteristics of relevant information.
3. The tendency to recognize favorable events early is an example of conservative.
4. The conceptual framework focuses primarily on the needs of internal users of financial information.
5. The seven Statements of Financial Accounting Concepts are considered part of generally accepted accounting principles.
6. The overriding objective of financial reporting is to provide information for making economic decisions.
7. The term recognition is synonymous with the term disclosure.
8. Once an accounting method is adopted, it should never be changed.

Measurement Attributes and Going Concern Problems

One of the underlying assumptions of the accounting model is the going concern assumption. When this assumption is questionable, valuation methods used for assets and liabilities may differ from those used when the assumption is viable. For each of the following situations, identify the measurement attribute that would most likely be used if the company is not likely to remain a going concern.

1. Plant and equipment are carried at an amortized cost on a straight-line basis of $1,500,000.
2. Bonds with a maturity price of $2,000,000 and interest in arrears of $500,000 are reported as a noncurrent liability.
3. Accounts receivable are carried at $700,000, the gross amount charged for sales. No allowance for doubtful accounts is reported.
4. The reported LIFO cost of inventory is $300,000.
5. Investments in a subsidiary company are recorded at initial cost plus undistributed profits.

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