2300: Specific Transactions, Events & Disclosures Flashcards
1
Q
A lease is a capital lease if it meets one of these 4 criteria.
A
- Transfer of Ownership to lessee upon completion
- Bargain Purchase Option
- Term > or = 75% of estimated economic life
- Present Value > or = 90% of the excess fair value
2
Q
Define Spot Rate and Forward Rate (foreign currency)
A
Spot Rate - Exchange rate existing at the current date
Forward Rate - Specified exchange rate at specified future date
3
Q
How should a receivable be recorded on the date of sale when payment will be in a foreign currency at a later date?
A
Receivable should be calculated to domestic dollars using the spot rate on the date of sale and recorded in that amount. Exchange Gain or Loss is recorded as each payment is received.
4
Q
Bargain Purchase:
After December 15, 2008 how is the excess of appraised net value of identified acquired assets over acquisition price reported?
A
As an extraordinary gain
5
Q
Which types of enterprises are required to report on business segments?
A
publicly traded enterprises
NOT non-public, joint venture, and not-for-profit
6
Q
What are servicing assets/liabilities and how should they be reported and valued?
A
Loans sold to another entity while obligation/right to service the loans is retained.
Assess for impairment/increased obligation based on fair value.
Report separately on balance sheet at fair value.
7
Q
What factors warrant an assessment for impairment for an asset?
A
Significant decrease in market value of asset
Significant adverse change in its use or condition
Significant adverse change in business climate, legal factors, regulation
Accumulation of costs significantly in excess of expectation in acquiring or constructing asset
Associated operating or cash flow loss in combination with historical or projected continuing losses
Expectation asset will be disposed of significantly prior to end of useful life
Damage to long-term customer relationship (intangible) assets
Completion of depreciation equating carrying value to expected salvage value does NOT warrant assessment
8
Q
How does IFRS differ from GAAP in accounting for business combinations?
A
Unlike GAAP, IFRS
- does not require goodwill to be recognized but it is an option
- recognition of extraordinary gain as a “bargain purchase” is prohibited
9
Q
What is the basic accounting equation in determining changes in accounts period to period?
A
Beginning Balance + Additions - Deletions = Ending Balance
10
Q
How do you determine and value impairment of goodwill under GAAP?
A
Step 1: For reporting unit, compare year end overall fair value to the combined book value of assets, liabilities and goodwill.
Step 2: If combined book value exceeds overall fair value, compare the implied value of goodwill (difference between fair value and book value of assets and liabilities only) to book value of goodwill.
Difference is the impairment value, but limited to book value of goodwill.
11
Q
At what level is goodwill tested for impairment?
A
GAAP: Reporting Unit (Operating Segment (OS) or one level below)
IFRS: Cash-Generating Unit (CGU, smallest group of assets that generates cash-flows, can’t be larger that OS
12
Q
How is value determined in a nonmonetary exchange?
A
Company uses the fair value of the item GIVEN (of the item it is exchanging) unless the fair value of the item to be received is “more clearly evident*”.
*With appraisal is stronger indicator of value than without
13
Q
What criteria is used in determining sufficiency of reportable segments in consolidated financial statements?
A
Total external revenues of all reportable statements must make up at least 75% of consolidated income, otherwise additional segments must be identified.
14
Q
What is the primary difference in accounting for an intangible asset with a finite useful life and one with an indefinite life?
A
An intangible asset with a finite life is amortized over its useful life.
An intangible asset with an indefinite life is not amortized but is evaluated for impairment.
15
Q
Is a subsequent reversal of a previously recognized impairment loss allowable?
A
No, it is prohibited. IFRS permits.
16
Q
What are transaction costs and how do they effect price as a determination of fair value?
A
Transaction costs are incremental direct costs to sell an asset or transfer a liability. Adjustments to fair value are not made for these costs.
Price is the fair value including (adjusted for) any costs incurred to transport assets/liabilities to/from principal to most advantageous markets. These are not transaction costs.
17
Q
In a sale of financial assets how is the carrying value of assets sold allocated between assets sold and any retained interest?
A
Allocate the previous carrying amount of assets sold between the participating interest sold and the participating interest held based upon the fair value of the assets.
18
Q
What is the formula for calculating ending liability for an escrow account?
A
Beginning Escrow Liability + Escrow Receipts - Escrow Payments + Interest Earned - Fees Charged to Customers = Ending Escrow Liability
19
Q
What amount of ownership interest in an investment requires its inclusion in consolidated financial statements?
A
A parent will consolidate investments in which it has a controlling interest (> 50% of voting stock) in its consolidated financial statements.
20
Q
Which accounts are eliminated through consolidation of financial statements?
A
Intercompany payables and receivables must be eliminated against each other.
Investment account by parent must be eliminated against the parent’s share of the subsdiary’s shareholders’ equity.
Goodwill may be recognized in the investment eliminating entry but will not be then eliminated by another eliminating entry.
21
Q
What are the 3 circumstances when changes to prior financial statements are considered and when is each applied?
A
Change in accounting principle/entity - Retrospective (revise all years displayed) UNLESS SPECIFICALLY MANDATED BY FASB PRONOUNCEMENT TO INCLUDE CUMULATIVE EFFECT IN NI AT YEAR OF CHANGE
Change in accounting estimate - Prospective (going forward)
Correction of errors - Restatement (revise all affected years displayed)
22
Q
How do you determine and value impairment of goodwill under IFRS?
A
One Step:
If carrying amount exceeds “recoverable amount” of CGU, recognize impairment loss. Recoverable amount is the greater of fair value or value in use (present value of future cash flows). Apply impairment loss first to goodwill then pro rata to carrying value of other assets in CGU.
*Cash Generating Unit
23
Q
Is reversal of impairment loss allowable under GAAP or IFRS when attributable to:
1, Goodwill?
2. Indefinite Life Intangibles
3. Long Life Assets (Held & Used)
A
GAAP always prohibits reversal of impairment losses.
IFRS:
- Prohibits reversals of impairment losses attributable to goodwill.
- IFRS mandates annual review for indicators of reversal for impairment loss attributable to Indefinite Life Intangibles and Long Life Assets Held/Used. If indicated, estimate “recoverable amount” and reverse up to the lesser of that amount or initial carrying amount.
- Same as 2 except Initial carrying amount is adjusted for inflation
IFRS reports biological assets at fair value less costs to sell while US GAAP reports a standard asset at cost less depreciation.
24
Q
What is carrying value compared to when testing for impairment of goodwill, other indefinite life intangible assets and long lived assets held and use for GAAP? IFRS?
A
GAAP compares Carrying Value to Fair Value in all tests for impairment.
Calculation of impairment for goodwill and indefinite life intangibles is the difference.
For long lived assets, the loss is identified instead by
- comparing Carrying Value to Undiscounted Estimated Future Cash Flows, but the actual impairment amount is
- calculated compared to Fair Value.
IFRS compares Carrying Value to “recoverable amount” to whichever is the GREATER of Fair Falue or Present (Discounted) Value of future cash flows generated for all of the asset(s) including goodwill, indefinite life intangibles and long lived assets.
25
In testing for impairment of indefinite life intangibles what is the unit of account for GAAP? IFRS?
GAAP - individual asset and rarely grouped inseparable intangible long-lived assets
IFRS - individual asset (if not possible than CGU)
26
In testing for impairment of long life assets held and used what is the unit of account for GAAP? IFRS?
GAAP - lowest level asset group for which cash flows are identifiable, rarely a single asset
IFRS - individual asset (if not possible than CGU)
27
What are the 3 entries necessary for foreign currency transactions (other than forward contracts)?
Purchase:
Inventory (example) DR
A/P CR
Recorded in functional currency multiplied by effective exchange rate on purchase date
Year end:
A/P DR (CR)
Exchange Gain (Loss) CR (DR)
Adjust by effective exchange rate on year end date
```
Payment:
A/P DR (CR)
Exchange Gain (Loss) CR (DR)
Cash CR
Credit A/P for existing balance. Credit Cash for original foreign currency amount established at purchase date multiplied by the effective exchange rate on payment date. Credit (Debit) Exchange G(L) by the difference.
```
28
What is the relationship between Gain/Loss and exchange rate for the debtor? creditor?
Debtor - payable (inverse):
Gain - decrease in exchange rate (less functional dollars required)
Loss - increase in exchange rate (more functional dollars required)
Creditor - receivable (direct):
Gain - increase in exchange rate (more functional dollars received)
Loss - decrease in exchange rate (less functional dollars received)
29
What is a hedge that does not qualify for hedge accounting and how is it accounted for?
1. Speculative Forward Contract
2. Options Contract
Related Gains/Loss are included in Net Income* for the periods in which changes in fair value occur
Account for the Transaction and the Forward contract
Include change in Rate + Time Value of Money
Alternatively, Qualified Hedges are reported as a separate component of Equity (OCI)
30
Define the two steps used in foreign currency translation of financial statements and the their significance in reporting.
1. Remeasurement Adjustment - remeasure subsidiary FS from recording to functional currency and REPORT IN NI (not necessary if they are already the same i.e. Zags)
2. Translation Adjustment - translate subsidiary FS from functional to parent's recording currency and report cumulative translation adjustment as a component of stockholers' equity. Report adjustments separately IN OTHER COMPREHENSIVE INCOME and accumulate in comprehensive income ( not necessary if they are already the same i.e. USD)
Only 1 step will be required if only 2 currencies are involved.
31
What rates are used in foreign currency translation?
BS - Spot Date
IS and other "Period Ending" FS - Weighted Average for the period
PIC (CS/APIC) - historical (issue) date no earlier than investment date of parent
Changes to RE - date of transaction
Together result in Translation Gain/Loss Adjustment to Cumulative Translation Adjustment to balance Trial Balance is reported as a separate component of stockholders' equity. (Note this adjustment occurs only in translation of FS not in transactions)
32
When is a subsidiary required to use reporting currency of parent (USD) as its functional currency?
Country with highly inflationary currency i.e. approx. 100% over 3-year period
33
Define operating segments
Require all of the following:
1. business activities that earn revenue and incur expenses
2. results regularly reviewed by chief operating decision maker regarding performance and resource allocations (usually has a segment manager)
3. discrete financial information available
34
What are the criteria for reportable segments?
One of the following:
1. Revenue (provides 10% or more of combined revenue including sales to external customers and intersegment sales)
2. Profit or Loss (absolute P/L is 10% or more of the greater of (1) combined profits for segments with profits or (2) combined losses for segments with losses)
3. Assets (10% or more of combined assets for all operating segments)
measured as for chief decision maker not as for consolidated financial statments
reportable segments must be identified to account for at least 75% of total revenue (sales to external, unaffiliated customers)
prior and current period reporting for all reportable segments (if prior then include current, if current then include prior)
10 is the practical limit for number of reportable segments, remainder in "all other" category
35
Required disclosures for reportable segments
General Info (ID factors, products/services)
Reconciliations* - Reportable Segment to Consolidated:
1. Revenues
2. Profit & Loss (internal/external Sales, Interest, Depr/amort, Unusual G/L, Equity, income Tax, Extraordinary, Sig Noncash) to Income from Continuing Ops
3. Assets
4. Other significant items
*Same areas of 10% or more that qualify it as a reportable segment
36
What is the proper accounting for Research & Development costs?
R&D costs are expensed as incurred.
D is after technological feasibility.
Capitalization only occurs once economic viability is reached.
R&D assets do not appear on balance sheet.
IFRS expenses R but may capitalize D
US GAAP software:
internal use may capitalize R&D
external use may capitalize only D (like IFRS)
37
What is the basic principle for accounting for nonmonetary exchanges?
The asset received is recorded at the fair value of the asset given up. Only record it at the fair value of the asset received if its fair value is more clearly evident.
38
What is the modification of accounting for nonmonetary exchanges and when is it applied?
The asset received is recorded at the book value (recorded amount, carrying value) of the asset given up instead of fair value only if one of the following is true:
1. Fair value is not determinable
2. The exchange transaction is to facilitate sales to customers (trade items for each to sell to its customer)
3. The exchange transaction lacks commercial substance
(cs = significant difference in asset's cash flows or entity-specific value)
39
If cash is included in an otherwise nonmonetary exchange without commercial substance, how is gain calculated?
Without commercial substance, asset received is recorded at book value of asset given up. With the addition of cash, partial gain is recognized:
Ratio of cash received to Fair Value of total consideration received (cash received/asset received + cash received) times
implied gain (Fair Value of asset surrendered less carrying value)
40
What is a transaction gain/loss and how is it recorded?
Results from a change in exchange rates between functional currency and foreign currency denominating the transaction.
Transaction gains/losses are recorded in net income for the period in which the exchange occurs, not as an extraordinary gain or contra amount
41
What are the 4 fundamentals of derivatives?
1. Derivatives are Rights/Obligations that are assets/liabilities to be reported in FS
2. Fair Value is the only relevant measure
3. Only assets/liabilities are reported as such on FS
4. Special accounting is provided only for qualifying hedge items
42
What are the 3 characteristics of derivatives?
1. (a) 1 or more Underlyings (rate/price/pmt), (b) 1 or more Notional Amounts (specific units) or Payment Provisions or (c) Both
2. requires No Initial net Investment
3. Net Settlement - Required or Permitted by terms, readily accomplished outside terms, or asset provided not substantially different than NS
Examples:
Swaps (exchange cash flows: interest rate/currency)
Options (buy/call or sell/put specific item and price)
Futures (deliver commodity/currency, specific date/price thru clearinghouse)
Forward Contracts (same as future, no clearinghouse)
43
What are the 3 categories of hedges that qualify for special hedge accounting?
Fair Value
Cash Flow
Foreign Currency Exposure (fair value, cash flow, net investment)
Disqualified = recognize g/l currently in net income
44
How is basic earnings per share (EPS) calculated?
Net income - Preferred Dividends/Weighted Average Common Shares Outstanding
WACSO = # shares outstanding times months/12 per each change in quantity, summed
45
How is diluted earnings per share (EPS) calculated?
SEE Fast Book 2335
46
2375 Interim Financial Reporting
do a card to include:
Costs not directly associated with with interim revenues are allocated equally
Extraordinary items are recognized in the period that they occur
Cum Effect of change in accounting principle or corrections of an error should be reflected retroactively to all periods presented with appropriate adj to RE or accum other comprehensive income opening balance for earliest year presented
47
What is the depreciation term for capital leases?
The term is for the life of the lease unless there is a transfer of ownership or bargain purchase option at the end of the lease in which case it is the estimated life of the asset.
48
How is a freight-out cost by parent in sale to sub accounted for in consolidated statements?
Selling Expenses (Parent)
Less Intercompany Selling Expenses (i.e. freight-out)
Plus Selling Expenses (Sub)
Equals Consolidated Selling Expenses
(I believe If freight-in cost were paid by the sub, it would attach to proportionately to the inventory only the portion sold would be eliminated from selling expenses for cost of goods sold.)
49
How is impairment of goodwill reported?
In income from continuing operations where it would have been recognized if amortized.
50
If difficult to distinguish change in accounting principle from change in estimate, how is change accounted for?
As a change in estimate, so handled prospectively (current and future years), not retroactively.
Note disclosure to explain/justify change and impact on income and EPS.
51
Define "principal" and "most advantageous" market and when each is applied in determining fair value.
Principal market is that with the greatest volume/level of activity for an asset or liability. Assumed in fair value measurement.
Most advantageous market is that which maximizes amount received for an asset or minimizes amount paid to transfer a liability. Used only when no principal market exists.
Both considered from reporting entity's perspective.
Transaction costs are excluded but costs to transfer to applicable market are NOT transaction costs.
52
What is the effect on WACS of stock dividends and stock splits?
2335
Stock splits/dividends are treated retroactively for the entirety of current and prior periods presented (beginning of earliest year presented). Apply even if occurs after year end, prior to FS issue.
The # of shares outstanding for each period is individually increased by the % stock dividend so that it is as if the split/dividend were in effect.
#shares X restatement for div/split (1.20 = 20%) X fraction of year (x/12) = WA (for each segment)
Sum WA of segments for WACS
53
What is the effect of preferred stock on the numerator for EPS?
2335
Subtract PS dividends from NI.
If cumulative, subtract regardless of declaration.
If noncumulative, subtract only if declared.
Ignore dividends in arrears (already accounted for).
If entity has a Net Loss, PS dividends are added instead to calculate loss per share.
54
Name and explain the method used in calculating the denominator in dilutive EPS calculations effected by outstanding stock options/warrants?
2335
Treasury Stock Method:
Assume exercise at the beginning of period or issuance (if later) and only if avg mkt price > exercise price.
Assume reaquistion of common stock (purchase of Treasury stock) by the entity with the proceeds from exercise at avg mkt price.
The net increase in outstanding shares is added to the denominator (WACS + WPotentialCS)
55
Name and explain the method used in dilutive EPS calculations as effected by convertible securities (convertible bonds, convertible preferred stock).
2335
If Converted Method:
Assume conversion to common stock at the beginning of period or issuance (if later).
Interest Expense (net of tax) or Dividend Savings to the entity must be added back to NI (numerator) upon the conversion.
Int Expense:
Cash ($Bond Value X %Int Rate) + Disc (- Prem) Amort
X (1 - tax rate)
X x/12time
Dividend Savings:
% (cumulative or noncumlative-declared) x Value (par for per share, otherwise total)
Incremental Common Shares (WPCS) due to the conversion are added to the denominator
(WACS + WPCS)
WACS + #shares converted X x/12 time
56
If multiple convertible securities exist, how is diluted EPS calculated?
2335
The conversion is assumed only if it is dilutive.
First calculate per share effect of each instance of PCS (potential common shares):
Convertible PS = Dividends/Incremental Shares
Convertible Bonds = Interest net of Tax/Incremental Shares
Apply the lowest per share effect first to calculate diluted EPS.
Only continue to apply subsequent per share effects in ascending order if that effect is less than the previously caculated diluted EPS.
57
What are contingencies and how are they accounted for?
uncertainty as to possible gain or loss resolved by occurrence (or lack thereof) of future event(s)
Examples included collection of receivables, warranty obligations, risk of casualty loss, threat of asset expropriation, litigation, guarantees for others
Loss contingencies - recorded according to probability Probable - likely accrue/disclose (accrue only with reasonable estimate (range = low unless other = better)
Reasonably Probable - > remote, < likely (disclose)
Remote - unlikely, slight (only disclose guarantees)
Don't accrue/disclose for general risks or lack of insurance, disclose if anticpated to occur after BS date. Accrual may appropriate RE.
Gain contingencies - do not accrue, only disclose
IFRS:
best number in range must be selected
discount accruals to present value (GAAP may)
some recognition for gain cont allowable
contingent liabilities not recognized (guarantees?)
lower threshold than "probable" is "more likely than not"(>=51%)
58
Define retirement as related to ARO (Asset Retirement Obligations).
other-than-temporary removal from service of long-lived asset
sale, abandonment, recycling, disposal, permanent idling (not temp)
59
How is a condemnation award accounted for?
Condemnation award is an involuntary conversion of a nonmonetary asset in exchange for a monetary asset.
Gain is recognized in spite of reinvestment.
New asset recorded at acquistion cost.
Net effect: New asset carrying value is increased by excess of new asset cost over prior asset carrying value.
Change in CV = FV2 - CV1
60
What is the primary subject of FASB ASC 275 Risks and Uncertainties
Disclosure or risks and uncertainties is critical to a user's process of evaluating future cash flows and results of operations.
61
When does US GAAP allow an exception for impracticality? IFRS?
US GAAP - calculating impact of changes in accounting principle
IFRS - changes in accounting principles and correction of errors
62
What are criteria by which operating segments may be combined?
```
Nature of products/services
Nature of production processes
Type/class of customer
Distribution methods for products/services
Nature of regulatory environment
```
63
What is a statutory consolidation?
A + B = C
A third entity, C is a new entity created to acquire assets of A & B
A & B cease to exist
In acquisition of assets, stock or statutory merger, two entities are merged into an existing one. There is no third entity.
All 4 are referred to as business combinations as are true mergers or mergers of equals.
64
Name and describe types of leases.
Operating - right to use property in exchange for future rental payments (initial material indirect costs inucurred by the lessor are capitalized and amortized by the lessor)
Capital (per one of four criteria):
--Direct Financing (PV of lease pmts = cv of lessor)
Interest Rev only (no profit) to Lessor
--Sales-type (includes manufacturer's profit, PV > cv, profit/sale recognized with each payment)
Sales-leaseback (sale of property with lease back to seller)
Capitalized = Purchase + Direct Financing Lease
Not cap = Purchase + Operating Lease
65
In addition to minimum lease payments, what is and is not included in lease payments for direct financing leases by the lessee? The lessor?
Lessee/Lessor also includes:
residual guaranteed value
penalty for failure to renew/extend
bargain purchase option
```
Lessee/Lessor Excludes:
executory costs
contingent rentals
any agreement by lessor to pay lessee debt on property
residual value guaranteed by 3P*
(*Lessor includes, cannot be related)
```
66
How is residual value accounted for (guaranteed and not guaranteed)?
Guaranteed -- included and capitalized for both
Not Guaranteed -- Lessor excludes, Lessee has a separate asset for residual value (Lessee Sales/COGS are reduced by PV of residual value
67
How are executory costs (taxes, maintenance, insurance) accounted for in leases?
Not capitalized or included in Lessor min lease pmt receivable/Lessee lease obligation
Treated as expenses as paid by the lessee or amortized by lessor
68
Disclosure required for fair value hedges?
Net Gain/Loss recognized in earnings (including when it no longer qualifies as a fair value hedge)
69
Presentation of discontinued operations.
results of operations net of tax for a component that is disposed of or classified as held for sale are reported separately on the income statement discontinued operations for current and prior periods reported
70
1933 Securities Act
accounting and disclosure requirements for initial offerings of stocks or bonds
71
1934 Securities Exchange Act
created SEC
72
How do nonlevel payments or bonus paid at singing affect accounting for a lease?
Nonlevel pmts and bonuses result in revenue deviation from a straight-line pattern. Revenues are still recognized on a straight-line basis (consistent amount) over the life of the lease.
73
How does amortization of capitalized assets affect total expenses?
Amortized portion for the period is expensed
Expense Dr
Amortization CR
74
How are software costs accounted for?
Expense up to technological feasibility.
After tf, capitalized (amortize) and report at the lower of useful life or NRV
Recognize impairment loss if NRV is less than amortized cost
75
Define Accretion Expense
Increase in ARO (asset retirement obligation) that accrues as an operating expense
Original undiscounted cash flow estimate of ARO is adjusted to discounted ARO and period changes are recognized to include the passage of time (accretion expense/amortization of discount) and revisions of timing or amount of original estimate.
76
How are acquistion (acquisition-related) costs accounted for?
Expensed as incurred.
Acquistion method is required to account for AQ of another company. AQ method requires AQ (related) costs to be expnesed as incurred.
AQ costs and Restructuring costs are recognized separately from the business combination and usually expensed.
77
How are leasehold improvements accounted for?
Capitalized and amortized over the LESSER of:
1. useful life of improvements
2. remaining term of lease
78
How is the transfer of an entire financial asset accounted for?
If transferor "surrenders control*" it constitutes a sale not a borrowing.
Assets including beneficial interests are recognized at fair value.
Derecognize transferred assets, recognize at fair value assets, liabilities and beneficial interest received in exchange and recognize the difference as a gain or loss.
If any beneficial interest is retained in a sale, the previous carrying value is allocated based on the fair value of those interests.
*beyond the reach of creditors, even bankruptcy, transferor can no longer pledge/exchange and transforee can, transferor, consolidated affiliates and agents do not maintain effective control
79
How is fair value for an asset or liability measured?
Assumes an orderly transaction between market participants at measurement date by the PRICE:
```
Asset = RECEIVED to SELL it (not paid to acquire)
Liability = PAID to TRANSFER it (not received to assume)
```
80
How is TDR accounted for when asset is transferred to satisfy the debt in full?
Ordinary Gain/Loss to debtor for difference between CV and FV of asset
Gain to debtor on TDR for excess of liability over FV of asset
TDR portion could be extraordinary (if not typical for economic/legal reasons i.e. bankruptcy is extraordinary)
81
Explain FASB ASC 825-10-25 regarding Fair Value Measurement
Permits FV election but does not require it, if supported by concurrent or preexisting documentation
Unrealized G/L due to FV measurement are reported in Earnings (not direct to retained earnings)
Applied contract-by-contract, instrument by instrument, to the entire item
Specified dates allowed for election:
At initial adoption of FASB ASC 825-10-25 standard
Subsequently at initial recognition or event changing its basis
Purpose is to mitigate volatility without having to apply complex hedge accounting provisions
82
What is noncontrolling interest and where is it reported?
Noncontrolling interest (minority interest) is the portion of equity (net assets) in a subsidiary not directly or indirectly attributable to a parent.
It is reported in the Owner's Equity section of the Balance Sheet
83
When are consolidated statements required and how are earnings reported?
If Parent/Sub relationship exists (i.e. a company owns >50% of voting interest in another), consolidated statements are required.
100% of the earnings are reported in the consolidated statement. If the parent owns less than 100%, the remaining, noncontrolling (minority) interest is listed in the Owner's Equity section of the Balance Sheet
84
How are retained earnings calculated?
Prior Year RE
+ NI
Less Dividends
= Current Year RE (net assets)
85
```
Calculate Gain (Loss) on a trade + cash given
(has commercial substance)
```
FV Asset Given
- CV Asset Given (Cost - Accum D)
= Gain (Loss)
CV Asset Received = CV of Asset Given + Boot Given
```
If FV Asset Received is more clearly evident:
FV Asset Received
- Boot Given
- CV Asset Given (Cost - Accum D)
= Gain (Loss)
```
86
Enterprise-wide disclosure of major customers
If revenues from transactions with a single external customer exceed 10% of enterprise-wide revenues,
disclose revenue attributable and from which segment(s)
(not customer identity or revenue specific to each segment)
Major customer = a group under common control or any singular government (federal, state, local, foreign)
87
Material Related-Party Transactions
Disclosure required (other than compensation arrangements, expense allowance and similar items)
```
Disclose:
Nature of relationship
Description of transaction
Dollar amount for periods presented and affects of any changes
Amount due as of BS date and terms
```
```
Examples:
sale, purchase, trxfr of real or personal property
services received, furnished
use or lease of property/equipment
borrowings/lendings
guarantees
compensating balances to benefit
```
88
Rules for Nonmonetary Exchanges
1. Losses are always recognized
2. Gains are recognized if the exchange is measured at fair value
3. If any of three conditions for exception to fair value*, use book value.
No Boot, no Gain.
Boot Given, New Asset recorded at CV old asset + Boot (no Gain) but first recognize any impairment loss
Boot Received, Partial Gain (pro rata Boot/Boot + FV x Gain)
*1) FV not determinable, 2) Trans to facilitate sales to customers, 3) lacks commercial substance (risk, timing, amount of future cash flows (not tax effects) is significantly different)
89
Items NOT eligible for FV election per FASB ASC 825-10-15-4
Investment in Sub for which consolidation is required
Variable interest for which consolidation is required
Obligations for pensions and other post retirement benefits
Lease A/L
Deposit liabilities for banks/depository institutions
Financial instruments classified by issuer as component of shareholders equity
90
Who can expense R&D costs done under contract for another company?
The company purchasing the R&D can expense it.
The company providing the services cannot (operating activity of that company).
91
How are intercompany receivables reported on the balance sheet?
They are eliminated and therefore NOT reported.
92
Accounting for ARO
Discount the estimated FutV cost of disposal (first adjusted up for inflation) back to present value (by the company's cost of borrowing i.e. credit-adjusted risk free rate)
DR Asset PV
CR ARO (Liability) PV
```
Depreciate asset (PV s/l over 40 years, a minimal amount)
Accrete liability (PV effective interest method, grows back up to estimated FutV of disposal adjusted for inflation, significant amount)
```
IFRS requires regular recalculation of ARO to current market conditions (fair value).
93
Reporting of a mandatorily redeemable instrument
Classify as a liability with proper disclosure unless required only upon liquidation or termination of the reporting entity (in light of going concern assumption)
94
Lessee accounting for capital lease
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At inception:
Record Asset and Liability
at the lower of
present value of minimum lease payments or
fair value of asset
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Payments:
Interest Expense and
Reduction in Liability
Period:
Amortize/depreciate asset
95
Definition and Recognition of subsequent events
events that occur after balance sheet date but before FS issued or available to be issued
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recognize only if condition existed at balance sheet date
otherwise nonrecognized (disclose?)
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96
How is depreciation for an asset exchanged in an intercompany sale affected on the consolidated financial statements?
The eliminating entry upon consolidation is to change depreciation to what it would have been had the asset not been sold.
97
Ordinary Gain/Loss
Reported as a separate component of income from continuing operations before discontinued or extraordinary items.
98
Three types of Financial Instruments that must be presented as liabilities on the balance sheet.*
*not between liabilities and equity
Mandatorily redeemable
Obligations to 1. repurchase issuer's shares by 2. transferring Assets (both required)
Certain obligations to issue a Variable number of shares
NOT cumulative or convertible P/S or discounted C/S
99
Significant Estimates
Reasonably possible, material
Disclose
Examples:
Inventory/Equipment subject to rapid obsolescence
Obligations for environmental remediation
Contingent liabilities for obligations of other entities
L/T obligations (pensions/postemployment)
Disposition of assets (net proceeds/losses)
100
Valuation approaches
Income (future cash flows/earnings discounted to PV)
Cost (current replacement)
Market (identical, comparable assets/liabilities)
101
Nonmonetary exchange and impairment
Recognize Impairment Loss on exchange of similar productive assets if CV > FV at exchange date BEFORE recording nonmonetary exchange unless exchange lacks commercial substance
102
Accounting for Speculative Foward Contract
Does not qualify as a hedge
compare (30) day future rate to (90) day future rate, for example, to calculate gain/loss to net income not spot rates like purchase transactions
103
Inventory losses from market declines
Recognize in the interim period in which decline occurs only if the decline is expected to be other-than-temporary
If recovered in a later period, recognize gain only to the extent of previously recognized loss
104
When are restorations of carrying value for long lived assets permitted?
Held for disposal - fair value increases subsequent to recording impairment (reversal allowed only up to prior write down)
105
Report Total Stockholder's Equity on Consolidated Balance Sheet
Report COMBINED parent and sub accounts for assets and liabilities
TSE = Parent SE + noncontrolling interest portion (%) of sub SE
106
Accounting for Profit in a Sale with Leaseback
Determine if capital or operating per standard criteria.
If capital, then profit or loss is deferred and amortized over the life (of asset or lease?) as a reduction in depreciation expense.*
* If seller retains only minor use of asset, p/l recognized unless lease payments are unreasonable (then a portion is still deferred)
* If seller retains significant use but less than substantially all, then excess of sale over PV min lease pmts (operating) or amount of leased asset (capital) is recognized immediately
107
Revenue recognition and software sales.
If significant production, modification, customization not required, then recognize when ALL are met:
1. persuasive evidence of arrangement
2. fee fixed or determinable
3. collectibility probable
4. delivery occurred
108
November 1, Y1 forward exchange contract for
1,000,000 yen on February 1, Y2, for $10,000 based on:
November 1, three-month forward exchange rate
$1 for 100 yen (1,000,000 x 1/100 or $10,000)
December 31, forward exchange rate tone month $1 for 103
November 1, acquired inventory for 1,000,000 yen to be paid in exactly three months. The forward exchange receivable is designated as a hedge for this payable.
November 1, the spot (current) exchange rate is $1 for 94 December 31, the spot (current) exchange rate is $1 for 96
The value of the forward exchange contract is based on the forward exchange rate.
November 1 - three month contract becomes
December 31 - one month contract
one-month contract could be acquired for $9,708 (1,000,000 x 1/103) so $292 loss recognized on the forward exchange contract
The company also has a payable on the inventory purchase that is remeasured at the spot (or current) rate.
day of purchase, debt value $10,638 (1,000,000 x 1/94)
end of the year, value debt $10,417 (1,000,000 x 1/96)
$221 gain.
recognize a net loss of $71 ($292 loss less $221 gain)
109
Consolidated cost of goods sold
COGS parent + COGS subsidy less intercompany transfer plus unrealized gain remaining in inventory
Unrealized Gain:
(a) transfer price less related COGS = total gross profit
(b) calculate unrealized portion of (a) remaining in inventory*
*ending inventory is a negative in arriving at COGS, removing unrealized gain increases COGS
110
Sales-Type Lease
Calculate sales price based upon usual mark up. Total lease payments less sales price is deferred interest reveune. Implicit interest rate X sales price less any up front payment year one and principal in subsequent years = interest expense
The entire Normal Gross Profit on the sale is recognized immediately. Any amount received above the normal sales price is recognized as interest revenue throughout the life of the lease (as the initial reported value of the receivable). For Year One, the lessor recognizes gross profit and interest revenue at the effective rate.
111
IFRS revaluation of assets to fair value
Required for entire class of assets
G/L each period
Loss is NI on IS (not OCI on BS)
Gain is OCI on BS, w/in SE (not NI on IS)
Conservatism
112
Long lived asset qualifies as Held for Sale
Reclassified on balance sheet
Reported at the lower of book value or net realizable value:
If net realizable value is lower, a loss must be recorded to reflect the drop in reported value. (If remains at BV, no G/L.)
Depreciation of the asset is stopped when it qualifies as being held for sale.
113
Fair Value Hedge vs. Cash Flow Hedge
FV Hedge = NI
Fair value hedge is bought to
offset a possible loss
from an asset or liability that is recorded at fair value. Since the account being hedged is recorded at fair value, its gain or loss will go into net income. Thus, the offsetting gain or loss on the hedge is also put into net income.
CF Hedge = OCI until due
A cash flow hedge is bought to
ensure that an appropriate amount of cash is received or paid.
There is not a reported gain or loss to be eliminated. Therefore, any gain or loss on a cash flow hedge is temporarily put into accumulated other comprehensive income (in stockholders’ equity) until it is terminated. The gain/loss will go from accumulated other comprehensive income to net income when the derivative comes due.
114
Lessor/Lessee Interest Rate on Capital Lease
US GAAP:
Lessor: Implicit
Lessee: Implicit if known, otherwise incremental borrowing
IFRS:
Lessor/Lesse: Implicit
115
Compounded interest in a capital lease
When interest is not explicitly paid, it is added to the leas obligation, then the next payment is subtracted. This gives you the carrying amount to apply the applicable interest rate to the following year.
