The Financial Accounting and Reporting (FAR) section of the Certified Public Accountant (CPA) Exam is a four-hour exam that consists of 66 multiple-choice questions (MCQs) and 8 task-based simulations (TBSs). The exam scoring for the FAR exam is weighted 50% toward MCQs and 50% toward TBSs. The FAR Exam tests your knowledge of general accounting principles, capital leases, bonds, and balance sheets. It will also test your dedication to time management.
The FAR exam tests a CPA candidate’s knowledge in financial accounting and reporting frameworks used by both public and private companies, nonprofits, and state and local governments. The frameworks that are eligible for testing on the FAR section of the CPA Exam encompass the standards and regulations by the Financial Accounting Standards Board (FASB), U.S. Securities and Exchange Commission (U.S. SEC), and Governmental Accounting Standards Board (GASB).
|Area I||Conceptual Framework, Standard-Setting, and Financial Reporting||25–35%|
|Area II||Select Financial Statement Accounts||30–40%|
|Area III||Select Transactions||20–30%|
|Area IV||State and Local Governments||5–15%|
The FAR section of the CPA Exam is usually considered the most difficult section of the exam. Why is it considered to be the most difficult? Most CPA candidates agree that the variety of information needed to prepare for FAR exceeds the amount of information needed in other exam sections. There are other ways in which CPA candidates will need to display their knowledge on the FAR Exam, which include the following areas:
- Compensation and benefits accounting, including, for example, compensated absences and stock compensation.
- Diverse topics such as bonds, deferred taxes, derivatives, hedging, inventory valuation, leases, liabilities, non-monetary exchange, or variable-interest entities.
- Hold-to-maturity investments, debt and equity investments, and joint ventures.
- Earning-per-share, segment reporting, fair value measurements, disclosures, and reporting.
- Accounting acumen for both governmental and nonprofit entities.
So, what is considered the top four most difficult aspects of the FAR Exam?
- FAR’s diversity of subject matter is its most difficult condition. This is true even within a single topic. The test is structured so that one topic might solicit seven to eight different responses, including its theoretical underpinnings, credit or debit values, financial statement positioning, post-transaction account balance, its value mid-year (6/30) or at year-end (12/31), and inquiries into fair value elected or not-elected.
- You will be required to demonstrate proficiency in analyzing unusual fluctuations in financial activity and how to make appropriate adjustments. This entails preparing account reconciliation and related schedules, as necessary.
- Similarly, you must be able to select or utilize correct accounting treatments for new or unusual transactions, assessing their economic substance. For instance, you may be asked to account for Business Combinations, which often requires unusual journal entries, including reports of Intercompany Transactions, as well as calculation of Goodwill and Non-controlling Interest.
- You will also be asked to write cash-flow, comprehensive-income, and changes-in-equity statements. Pension, bond, and stockholder equity problems have been cited as among FAR’s most difficult. Similarly, familiarity with Securities Exchange Commission (SEC) reporting requirements will be required for Forms 10-K and 10-Q.
Government and Not-for-Profit Accounting on the FAR Exam
Two sections to focus on for the FAR Exam are governmental and not-for-profit accounting. Many candidates are not familiar with these two sections because some colleges don’t teach these in their accounting programs. In addition, there’s a small number of CPA candidates who have worked at nonprofits or government entities or have ever audited them. This may make some candidates feel some anxiety because there are a few fundamental concepts that are different from financial accounting. If you are one of those candidates, don’t worry, the two topics are not as difficult as some people think.
If you have a solid foundation in financial accounting, it will be easy for you to pick up on the differences. If you ignore these sections because you are tight on time and you are uncomfortable with them, you’ll be making a big mistake. Keep in mind that there is also some new terminology that requires memorization. Spend some time on these two topics and you’ll know that you have 25% of the FAR exam in your back pocket. That will give you better peace of mind and motivation for when you’re tackling them on the CPA Exam.
How to Tackle Governmental and Not-for-Profit Accounting on the FAR Exam
- Do all the MCQs at least twice
- Don’t skip the TBSs
- Know the names of the different financial statements for each governmental fund type
- Be very familiar with the different not-for-profit (NFP) statements
- Focus on the Statement of Activities and the different types of restrictions and re-classifications in between them
How to Study for the FAR Exam
- Focus on the FAR Exam first. FAR requires the most amount of time to prepare for, so it’s great to focus on it first. FAR is easier for recent college graduates who can still remember college accounting course materials well, so we strongly recommend taking FAR while the material is still fresh.
- Understand financial statements. Although the FAR Exam is very detailed, everything on the exam refers back to financial statements. Understanding the details of the financial statements makes learning the material easier. Additionally, knowing and understanding financial statements helps you analyze questions on the exam much easier. If your study efforts are getting compressed, working knowledge of the statements allows you to logically examine most questions from the study materials.
- Know that theories do not lead to quickly solving problems. For some FAR material, even though you are very familiar with the material, you will still need to practice the questions in order to keep up a good pace at the time of testing.
- Frequently review previous chapters while you study new ones. Since FAR has so many chapters, it is really easy to forget what you have learned and it takes much more time to go back through it all as a review. So, be sure to frequently review previous information as you continue to work through your FAR studies.
- Partner with a credible CPA Review course. Partner with a CPA Review course that uses in-depth answer explanations, has engaging lectures, integrates robust tracking and reports into their course materials, and has a comprehensive app that syncs across all devices.
Most of all, continue studying, reviewing, and working through MCQs and TBS each and every day, and you will be well prepared for the FAR section of the CPA Exam.