CPA Review: FAR - Interim Financial Reporting

The CPA Review Lesson of the Month for March features Roger Philipp, CPA discussing "Interim Financial Reporting" from his FAR course. You've heard of an annual financial report or statement. But, did you know that most companies that issue annual financial statements also issue interim reports on a quarterly basis as well? In these reports, timeliness is emphasized over reliability. Follow along with Roger in this brief excerpt from his online FAR course that describes interim financial reporting.

Interim Financial Reporting

Companies that issue annual financial statements typically issue interim reports on a quarterly basis as well. In general, the application of generally accepted accounting principles to a report covering three months will be no different than for a report covering one year, since an interim period is an integral part of the overall year. Timeliness is emphasized over reliability. As a result (ASC 270):

• Revenues are recognized in each quarter as earned and realized (for example, estimates must be made each quarter when applying the percentage-of-completion method of construction accounting to determine the profit in each period).
• Expenses are matched to each quarter (for example, a property tax bill covering an entire year must be allocated equally to the four quarters).
• Accounting Changes made in an interim period are to be reported by retrospective application in accordance with FASB 154.

For example, assume a client received an annual rental payment of $300 from a client on 1/2/X1 and paid a $100 property tax bill covering all of calendar year 20x1 on 3/15/X1. The effects of these items on the interim reports in the 20x1 are:

Quarter	1st	2nd	3rd	4th
Rent Income	75	75	75	75
Property Tax	(25)	(25)	(25)	(25)

One item that may need special consideration is the provision for income taxes. When preparing an annual report, the company already knows its taxable income for the year and can compute its income tax provision with full knowledge of the applicable tax rates and available tax credits.
When computing income taxes at an interim date, however, the company must make an estimate of the effective annual tax rate that it believes will be applicable for that entire year. This should take into account estimates of total taxable income for the year and any tax planning strategies the company plans to adopt during the year.
The estimate of the effective annual tax rate should be updated at each interim date, and the provision for income taxes in later quarters will be based on the current estimated rate applied to cumulative income reduced by provisions reported in early periods.
For example, if a client has income of $100 in the first quarter of 20x1 and expects the effective annual tax rate for all of 20x1 to be 25%, then the provision for income taxes in the first quarter will be $100 x 25% = $25. If the client has an additional $150 of income in the second quarter, and revises their estimate of the effective annual tax rate for all of 20x1 to 30%, then the provision for income taxes in the second quarter will be calculated as follows:

Income in 2nd quarter of 20X1	150
Income in 1st quarter of 20X1	100
Income for 6 months ended 6/30/X1	250
Expected effective annual tax rate	30%
Income taxes for 6 month period	75
Less: amount reported in 1st quarter	(25)
Income tax provision in 2nd quarter	50

Another item requiring special handling on interim reports is inventory. The use of inventory estimation techniques is permissible for interim reports. A special problem, however, involves fluctuations in inventory values at interim dates.
Since interim periods are integral parts of the entire year, they must be computed in a manner that will result in consistent presentations with the full year. A company sometimes experiences declines in inventory values at interim dates that are expected to be recovered by year-end. In these cases, inventory should not be written down to market at the interim date. On the other hand, if a decline in value is not expected to be recovered before year-end, then the inventory should be written down.
For example, assume a client has suffered a substantial drop in the replacement cost of their inventory at the end of the first quarter, but believes these values will recover before the end of the year. The decline in market will not be reported in the first quarter. If the client is incorrect, and values do not recover by the end of the year, the decline will be reported in the fourth quarter.
On the other hand, assume a decline occurs in the first quarter, and the client does not believe prices will recover by year-end. They will write down the inventory to market in the first quarter. If the client is incorrect, and values recover in the third quarter of the year, the increase in market will have to be reported in the third quarter to offset the decline reported in the first quarter. Any increase in value in the third quarter that exceeds the decline reported in the first quarter is ignored, since inventory is not valued at market when it is higher than cost.

To Summarize:
• Property taxes, bonuses, depreciation – allocate to all quarters
• Inventory losses – in that quarter
• Major expenses - in that quarter, unless benefit future quarters then allocate.
• Discontinued operations – in that quarter
• Extraordinary gain/loss – in that quarter
• Income tax expense is estimated each quarter using the rate expected for the entire year.

Study Strategy 101

Without a thorough and realistic study strategy for passing the CPA Exam, you're setting yourself up for frustration and failure. Roger always says, "The CPA exam is a test of discipline and in order to succeed, you're going to have to overcome procrastination, poor planning, and the temptation of outside distractions."

The first step in planning your study strategy should be a detailed schedule. If you are taking a Live CPA Review course, part of the work is done for you as you can base your study schedule off of your class schedule. If you've chosen a self-study CPA Review course or have chosen to study on your own, it's even more critical to schedule the lectures and subsequent study time throughout the week so you don't get distracted or lose track of where you should be in relation to when you sit for the exam.

The trick is to plan out your entire week, from waking up in the morning to going to sleep at night and all the studying you will do in between. It may seem overwhelming if you're working 50-60+ hours per week during tax season but if you've created a detailed schedule for yourself, you'll get a better picture of where you can fit in study time. Lunch hours are a perfect example of fitting in study time where seemingly none exists. Some firms even encourage unlicensed staff to use downtime to study for the CPA exam. If you cannot fit in a full hour-long lecture, you can easily pop in your simulation software and get through a few sets of multiple choice questions.

Remember how the brain learns; if you slowly build your knowledge base over time instead of trying to cram everything in at once, you will have a stronger and clearer picture of the concepts you are trying to retain. This method will come in handy when that section on bonds that stumped you for weeks pops up at the test center!

The key to an effective study plan is sticking to it. In her book "You Can Pass the CPA Exam: Get Motivated", Debra Hopkins shares a story of a CPA candidate who left her review class early because she wanted to watch her favorite baseball team play in the World Series. The candidate explained her choice by saying that she chose watching the game because she was worried it would be the last time her team would play for the season. Obviously, her priorities were a bit off, to say the least.

You have to accept up front that some activities will need to be sacrificed. Hopefully you have supportive friends and family who understand that while you're focused on passing the CPA exam, you won't be as available to spend time with them. Or, perhaps you have a supportive manager who appreciates your drive as an unlicensed accountant to further your career goals. But even if you don't have either of these in your life, you can still tackle this huge undertaking. Make peace with the fact that you may have to give up volunteering, or other favorite activities. Although you're making large sacrifices in your personal life, it's only temporary and will prove a worthy investment in the long run!

Talk to your friends and family and ask for their support through this process. Remember that the CPA exam is a very unique animal and, if you haven't tried it, you have no idea how difficult it truly is. Let people close to you know that you may not be as available to socialize but you haven't forgotten about them.

Whatever you do, do not put this off! You'll regret it in the long run. Be true to yourself and your goals; after all, you're the one who decided to pursue CPA licensure so do yourself a favor and stick to your plan.

The most important thing to remember is that even the best plans sometimes fail; there are things out of your control that may prove to be an obstacle but always keep your goal in sight. If you're honest with yourself about your strengths and weaknesses, you can maintain the dedication to your goal while remaining flexible when things don't go your way.

You can do this!

If you are a CPA exam candidate struggling to put together a study schedule, find a study buddy to motivate you or feel free to send us a note or leave us a comment so we can help you put one together.

The CPA Exam is Changing

You’ve all been asking, so here it is. The rumors are true; the CPA Exam will undergo some major changes starting January 1st, 2011. The American Institute of Certified Public Accountants (AICPA) is working hard to ensure that the exam is consistent with the knowledge and skills required of entry level CPAs in the industry.

Content:
One of the biggest questions we receive is whether or not the exam will include IFRS. The answer is yes. The AICPA recently conducted a survey of CPAs with 2-15 years of experience. Based on the results, it was determined that all entry level CPAs should be somewhat bilingual in IFRS and US GAAP, although US GAAP is expected to prevail in the US for some time. Therefore, there will be a mixture of both types of questions on several sections of the exam. You can expect to see IFRS questions on the AUD, FAR and BEC sections. For now, REG is free of IFRS, but this will probably change in the future. Don’t worry, we’ll keep you posted!
Aside from IFRS, there will be a revamp of the topics covered on each section.

Below is an overview of how these topics will change.

Format:
The actual format of the CPA Exam is changing as well. It will still be a 14 hour fun-filled experience, but the time allocation, along with the actual format will be adjusted.

In the current format, AUD, FAR and REG all have three testlets of Multiple-Choice questions, two Simulations and two Written Communication tasks. In the new format, the Multiple-Choice testlets will stay the same, but the Simulations and Written Communication tasks will change. Simulations are currently long formatted questions that should take about 40-45 minutes for candidates to complete. Beginning January 1st, they will do away with these long problems, and replace them with six to seven shorter Task-Based Simulations (TBS). Of the six to seven TBS’s, two will not count towards your overall score, and will be used for the AICPA’s research. Of course, you won’t have any idea which ones will affect your score! Furthermore, Written Communication will no longer be a part of these three sections.

BEC is currently made up of three Multiple-Choice testlets containing 30 MCQ each (total of 90 MCQ). These three testlets will remain in the new format, but will have 24 MCQ per testlet (total of 72 MCQ). The BEC section will also include three Written Communication tasks. One of these tasks won’t be counted towards your final score. Again, you’ll have no idea which it will be.

In order to accommodate these changes and to keep the overall CPA Exam at 14 hours, the following time changes will be made:

• AUD, which is currently a 4.5 hour exam, will decrease to an even 4 hours.
• BEC, which is currently a 2.5 hour exam, will increase to an even 3 hours.
• The FAR section will maintain its status at 4 hours.
• REG will remain at 3 hours.

The charts below should help you wrap your mind around the new format:

Weight/Scoring:
In order to pass the CPA Exam, you will still need to have at least a 75 out of a possible 99 points on each section of the exam. With the new format, each area will have different weight towards your final score. Below shows how each sections’ weight will change:

The new changes and Roger CPA Review:
We understand that many candidates are concerned that their CPA Review Course will not keep them up to speed with the upcoming changes—especially in regards to content. You can be certain that, at Roger CPA Review, we are making all of the necessary changes to our lectures and materials to ensure our students continue to achieve pass rates of 86% or better. Whether you plan on taking your exam before or after these changes are implemented, our course will meet your needs. As leaders in this industry, we’re proud to meet the challenge these changes present, and are committed to helping our students pass with the most motivating instruction and up-to-date information.

Coming Changes to the CPA Exam

As many of you may know, January 1st, 2011 will bring new changes to the CPA Exam. Some of these changes include:

• The larger simulations in the AUD, FAR, and REG sections will now be smaller task based simulations (TBS)
• All written communication will be contained in the BEC section
• New Content will be introduced into the various sections including the introduction of International Financial Reporting Standards (IFRS) to FAR

For more details, watch our video with Mitra Wilson as she explains everything you need to know about what the exam will look like in 2011!

NASBA, AICPA, and Prometric extend contract by 10 years

The three organizations that jointly administer the Uniform CPA Examination have extended their contract to 2024. The American Institute of Certified Public Accountants , the National Association of State Boards of Accountancy , and Prometric , have been administering the exam for the past six years.

Barry Melancon, AICPA president and CEO said, "The CPA exam is the gateway to the accounting profession and under this arrangement we have seen the exam improve and grow. About 93,000 candidates took the examination in 2009 – a record."

In order to receive licensure as a CPA in the United States you must pass the Uniform CPA Examination. The exam consists of multiple choice questions, essays, and simulations that replicate work place situations. April of 2004 marked the beginning of the exam being administered using computer-based testing and the exam is set to undergo additional changes and improvements to be implemented in 2011.

Make sure to check out the Become a CPA section of our website to get more details on this process.