Which of the following is correct regarding a concentration of credit risk?I. It is the risk that a counterparty will partially or completely fail to perform per the terms of the contract.II. It exists if a number of counterparties are engaged in similar activities and if the industry they are in experiences economic disaster or ceases to exist.

For the 2026 CPA Exam (Financial Accounting and Reporting - FAR), financial instruments, foreign currency, and price level adjustments are critical topics, heavily focused on valuation, recognition, and the impact on financial statements, particularly within the 27-37% weightage of "Select Transactions".  1. Financial Instruments (Investments and Debt) FAR focuses on the valuation of financial assets and liabilities based on ASC 820 (Fair Value Measurement) and ASC 320/321.  Investments in Securities: Debt Securities: Held-to-maturity (amortized cost), Trading (fair value through net... Show more

For the 2026 CPA Exam (Financial Accounting and Reporting - FAR), financial instruments, foreign currency, and price level adjustments are critical topics, heavily focused on valuation, recognition, and the impact on financial statements, particularly within the 27-37% weightage of "Select Transactions". 

1. Financial Instruments (Investments and Debt)
FAR focuses on the valuation of financial assets and liabilities based on ASC 820 (Fair Value Measurement) and ASC 320/321. 

Investments in Securities:
Debt Securities: Held-to-maturity (amortized cost), Trading (fair value through net income), or Available-for-sale (fair value through OCI).
Equity Securities: Generally measured at fair value through net income.
Long-Term Debt: Valuation of bonds, notes payable, and equity transactions.
Fair Value Option: Companies may elect to record certain financial assets/liabilities at fair value to reduce volatility.
Derivatives: Often tested for hedge accounting, distinguishing between fair value hedges and cash flow hedges. 

2. Foreign Currency Accounting
Foreign currency involves two distinct scenarios: Transactions (single transactions) and Translation (consolidating foreign subsidiaries). 
 

Foreign Currency Transactions (Single):
Recorded using the spot rate on the date of transaction.
If unsettled at the balance sheet date, monetary items (receivables/payables) are revalued at the current rate, with gains/losses recognized immediately in income.
Foreign Currency Translation (Subsidiaries):
Remeasurement Method (Dysfunctional Currency): Used when the subsidiary is in a highly inflationary economy or integrated with the parent. Remeasurement gain/loss goes to the income statement.
Translation Method (Functional Currency): Used when the foreign currency is the functional currency. Assets/liabilities use the current rate, while income statement items use the weighted average rate.
Translation Adjustment: Cumulative adjustment goes to Other Comprehensive Income (OCI). 

3. Price Level Accounting & Inflation
Price level accounting deals with restating financial statements for changes in purchasing power (inflation). 
Monetary vs. Non-Monetary Items: The core distinction for adjusting financial statements.
Monetary Items (Cash, A/R, Payables): Fixed in amount regardless of inflation. Purchasing power gains/losses arise from holding these.
Non-Monetary Items (Inventory, PPE, Equity): Restated to current purchasing power using a price index.
Highly Inflationary Economy: Under US GAAP, if a foreign entity's economy has cumulative inflation of 100% or more over three years, the remeasurement method must be used (rather than translation). 

Key 2026 Exam Focus Areas
Master the PUFER Acronym: For OCI components (Pension, Unrealized Gains/Losses, Foreign Translation, Effective Hedge, Revaluation Surplus).
Transaction Gains/Losses: Understand that foreign currency transaction gains/losses go to income, while translation adjustments go to OCI.
Simulation Preparation: Expect Task-Based Simulations (TBS) requiring journal entries for foreign currency transactions and consolidation worksheets for translation. 

Show less