FAR has the lowest pass rate of any CPA exam section, and much of that difficulty can be traced to a handful of notoriously challenging topics. If you can master these hard topics, you dramatically improve your odds of passing. In this article we identify the six hardest FAR topics based on candidate feedback, exam analytics, and AICPA blueprint weighting, and provide specific study strategies for conquering each one.
1. Governmental Accounting
Governmental accounting is consistently cited as the most difficult FAR topic. The fund accounting model used by state and local governments is fundamentally different from the accrual-based model used in commercial accounting. You need to understand multiple fund types, two measurement focuses, two bases of accounting, and two sets of financial statements (government-wide and fund-level).
Why It Is So Hard
- The modified accrual basis of accounting is unfamiliar to most candidates.
- There are five governmental fund types, two proprietary fund types, and four fiduciary fund types, each with different reporting rules.
- Government-wide statements use accrual accounting, but fund-level statements use modified accrual, and you need to understand the conversion between them.
- Many candidates had limited governmental accounting coursework.
How to Master It
- Learn the fund types first. Use the mnemonic GRaSPP (General, Special Revenue, Debt Service, Capital Projects, Permanent) for governmental funds. Once you know the fund types, the reporting rules make more sense.
- Focus on modified accrual rules. Understand when revenue is "available" and "measurable" under modified accrual. This is the key concept that differentiates governmental from commercial accounting.
- Practice conversion entries. Know how to convert fund-level statements to government-wide statements. This is a common simulation topic.
- Study this topic early. Do not save governmental accounting for the last week. You need time to absorb the different framework.
2. Pensions and Other Post-Employment Benefits
Pension accounting under ASC 715 is one of the most calculation-intensive topics on FAR. You need to understand the components of net periodic pension cost, the projected benefit obligation, plan assets, and the various gains, losses, and amortization items that flow through other comprehensive income.
Why It Is So Hard
- The topic involves multiple interacting components that all affect different financial statement line items.
- Prior service cost, actuarial gains and losses, and expected return on plan assets each have different recognition and amortization rules.
- The distinction between the PBO, ABO, and VBO confuses many candidates.
How to Master It
Start by memorizing the components of net periodic pension cost using the mnemonic SIR-AGE: Service cost, Interest cost, Return on plan assets (expected), Amortization of prior service cost, Gains and losses, Amortization of existing transition amounts. Then practice computing each component from a set of given data. Work through at least 10 practice problems before exam day.
3. Lease Accounting (ASC 842)
The updated lease standard ASC 842 requires lessees to recognize virtually all leases on the balance sheet. Candidates must understand the classification of leases as either finance or operating, compute right-of-use assets and lease liabilities, and handle modifications and reassessments.
Why It Is So Hard
- Present value calculations are required for both the lessee and lessor.
- The classification criteria for finance vs. operating leases involve multiple tests.
- Lessor accounting has three classification categories (sales-type, direct financing, operating) with different recognition models.
- Lease modifications add another layer of complexity.
How to Master It
- Master present value computations. Practice computing the present value of lease payments with and without a calculator. Know how to use annuity-due and ordinary annuity factors.
- Build a framework. Create a table that summarizes lessee and lessor accounting for each lease type, including initial measurement, subsequent measurement, and income statement effects.
- Practice journal entries. Work through complete examples from lease inception through termination. The exam frequently tests your ability to record lease entries for specific periods.
4. Consolidations and Business Combinations
Consolidation accounting requires you to prepare financial statements for a parent company and its subsidiaries as if they were a single entity. This involves eliminating intercompany transactions, adjusting for non-controlling interests, and allocating goodwill.
Why It Is So Hard
- Consolidation entries are complex and multi-step.
- Intercompany transactions (inventory sales, fixed asset transfers, loan transactions) each require specific elimination entries.
- Non-controlling interests must be calculated and reported correctly.
- The acquisition method under ASC 805 involves fair value allocations and goodwill computations.
How to Master It
- Learn the basic consolidation entry first. Memorize the standard elimination entry (SEADI: Stockholders equity, Equity in earnings, Amortization/depreciation, Dividends, Investment). This provides the framework for all consolidation problems.
- Practice intercompany eliminations one type at a time. Master inventory eliminations before moving to fixed asset eliminations, then bond eliminations.
- Work full consolidation worksheets. Exam simulations may present a full worksheet. Practice completing them under timed conditions.
5. Bonds and Long-Term Debt
Bond accounting requires understanding of present value calculations, premium and discount amortization, and the effective interest method. While the individual concepts are not extremely difficult, the calculations are error-prone and the topic frequently appears in simulations.
How to Master It
- Understand the relationship between coupon rate and market rate. If the coupon rate is above the market rate, the bond is issued at a premium. If below, at a discount. This intuition guides all subsequent calculations.
- Practice the effective interest method. Create amortization tables and verify that your carrying value converges to par at maturity. This mechanical skill is heavily tested.
- Know the early extinguishment rules. When a bond is retired early, the difference between the carrying value and the reacquisition price is a gain or loss. Practice these computations.
6. Deferred Taxes
Deferred tax accounting under ASC 740 requires you to identify temporary differences between book and tax basis, determine whether they create deferred tax assets or liabilities, and evaluate the need for a valuation allowance.
How to Master It
- Start with the basic concept. A deferred tax asset arises when you pay more tax now than book expense suggests (you will get a future benefit). A deferred tax liability arises when you pay less tax now than book expense suggests (you will owe more in the future).
- Memorize common temporary differences. Depreciation, warranty expenses, unearned revenue, and bad debt allowances are the most frequently tested temporary differences.
- Practice the valuation allowance analysis. Understand the "more likely than not" threshold and the factors that affect whether a deferred tax asset needs a valuation allowance.
Putting It All Together
These six topics do not represent the entirety of FAR, but they represent the areas where candidates lose the most points. A candidate who invests focused study time in governmental accounting, pensions, leases, consolidations, bonds, and deferred taxes, and supplements that with solid coverage of the remaining FAR content, is well-positioned to pass.
Think CPA provides targeted practice for each of these challenging areas. Our question bank tags every question by topic and difficulty level, making it easy to drill down on the areas where you need the most work. Combine that with our adaptive study plan and you have a preparation system designed to tackle FAR's hardest topics head-on.