3 - Marketable securities Flashcards
And the balance sheet marketable securities classified as trading or available for sale are valued
At fair value
On the balance sheet marketable securities classified as held to maturity are valued
At amortized cost
How are unrealized gains and losses on trading securities recognized
Unrealized gains and losses on trading securities are recognized on the income statement
How are unrealized gains and losses on available-for-sale securities recognized
Unrealized gains and losses on available-for-sale securities are reported in other comprehensive income
Note: under IFRS foreign exchange gaines and losses on available-for-sale debt securities are reported on the income statement
List three conditions one losses on multiple securities classified as available-for-sale are recognized in income
Sale of the security
Transfer of the security to trading classification
other than temporary decline of individual security below cost (impairment)
When a marketable equity security is transferred from trading to available-for-sale or vice versa at what cost is it transferred?
- Transferred at a fair value when which then becomes new basis
- for a security transferred into a trading category the difference is treated as a realized gain or loss and is recognized on the income statement
- for a security transferred from the trading category the unrealized holding gain or loss will already have been recognized in earnings
note: transfers to and from the trading category should be rare
How are gains and losses and financial instruments that hedge trading securities reported?
Reported earnings consistent with reporting unrealized gains and losses on trading securities
How are gains and losses and financial instruments that hedge available for sale securities reported
Reported earnings together with the offsetting gains or losses on the available for sale securities attributable to the hedged risk
What disclosures should be made for available for sale and held to maturity securities
- Aggregate fair value
- gross unrealized holding gains and losses
- amortized cost basis by type
- information about the contractual maturity of debt securities
State the criteria to consolidate
- Consolidate when the parent is able to control the subsidiary usually this is indicated by greater than 50% ownership of the voting stock of the subsidiary
- do not consolidate when control is not with the owners as in bankruptcy of subsidiary
Identify the three levels of control and the appropriate accounting method for each
No significant influence
- cost method: trading or
available-for-sale securities
at fair value
significant influence but 50% or less ownership
- equity method
Control
- costs are equity method for (internal
accounting)
- consolidated financial statements
(external reporting)
How is the year and investment in investee reported on the balance sheet calculated under the equity method
Beginning investment in investee + investors share of investing earnings - investor share of investee dividends - amortization of FV differences \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ ending investment in investee
How is an investors equity method investment reported on the income statement
Investors share of investee earnings
- amortization of FV differences
________________________________. equity in earnings / investee income
How are joint ventures accounted for under IFRS and US GAAP
Joint ventures are accounted for using the equity method under both US GAAP and IFRS
In a step-by-step acquisition what is the accounting treatment when significant influence is acquired
- Going from the cost method to the equity method is handled like a change in accounting principle retroactively
- go back retroactively with the equity method but not with the new ownership percentage
- prior period financial statements are restated
When are consolidated financial statements prepared
When the parent company has control over the subsidiary company.
Control is achieved with more than 50% of the voting stock of the subsidiary is owned directly or indirectly by the parent and no other factors are present that would indicate a lack of control (bankruptcy, reorganization)
In acquisition accounting state the consolidating workpaper elimination entry.
CARINBIG
Dr. Common stock - subsidiary Dr. APIC - subsidiary
Dr. Retained earnings - subsidiary Cr. investment in subsidiary
Cr. noncontrolling interest
Dr. Balance sheet adjustments to fair value
Dr. Identifiable intangible assets to fair value Dr. Goodwill
How are expenses relating to the combination treated under the acquisition method
- Direct out-of-pocket costs are expensed
- Stock related costs are a reduction in the value of the stock issued (normally a debit to additional paid in capital)
- Indirect costs are expensed
- Bond issue costs are capitalized and amortized
In an acquisition how are acquired identifiable intangible assets amortized?
Finite useful life: amortized to residual value over expected useful life
Indefinite useful life: do not amortize
How is goodwill calculated under the US GAAP acquisition method?
U.S. GAAP
Goodwill is the excess of the fair value of the subsidiary (acquisition cost plus noncontrolling interest) over the fair value of the subsidiaries net assets, including identifiable intangible assets at FV.
Goodwill = fair value of subsidiary - fair value of subsidiaries net assets
Goodwill recorded in a business combination is not amortize the entire investment is subject to the impairment test.
How is goodwill calculated under the IFRS acquisition method
IFRS
- Goodwill is recognized under the full goodwill method (same as US GAAP) for the partial goodwill method.
- under the partial goodwill method, goodwill is the excess of acquisition cost over the fair value of the subsidiaries net assets acquired
- Partial goodwill = acquisition cost - Fair value of subsidiaries net assets acquired
How is noncontrolling interest (balance sheet) calculated under US gap
Noncontrolling interest (NCI) = FV of subsidiary x NCI %
How is noncontrolling interest (balance sheet) calculated under IFRS?
IFRS permits the use of the fall Goodwill method
Full Goodwill Method (same as US GAAP)
NCI = FV of subsidiary x NCI %
Partial Goodwill Method
NCI = FV subsidiary’s net identifiable assets x NCI %
How is noncontrolling interest on the income statement calculated
Subsidiary net income
x noncontrolling interest %
_____________________________
NCI in net income
In a business combination what is the treatment of an acquisition in which the acquisition cost is less than the fair value of 100% of the net assets acquired
The acquisition cost is allocated to the fair value of 100% of the balance sheet accounts and the fair value of 100% of the identifiable intangible assets. this creates a negative balance in the acquisition account which is recorded as a gain.
Name several pro forma workpaper illumination entries when producing consolidated financial statements
Eliminate
- the effects of intercompany
dividends.
- parents investment and subaccount
- the entire stockholders equity section of the
sub
- the effects of the gain and loss
and adjust the excess depreciation on the
sale of property plant and equipment
between affiliates
- all intercompany sales and purchases
- all other intercompany balance sheets and
income statement accounts
- intercompany profit in cost of goods sold and
in beginning and ending inventories relating
to an intercompany sale of merchandise
between affiliates
Adjust - recognize noncontrolling interest - adjust the balance sheet of the sub to fair value - establish goodwill
State the workpaper illumination entry for intercompany inventory transactions
Dr. Retained Earnings
(Intercompany profit in
beginning inventory)
Dr. Intercompany sales
Cr. Intercompany cost of good sold
Cr. Cost of good sold intercompany profit
in goods sold
Cr. Ending inventory intercompany profit in
ending inventory
State the workpaper illumination entry for intercompany bond transactions
Dr. Bonds payable
Dr. Premium (or credit discount)
Cr. investment in affiliates bonds Cr. Gain on extinguishment of bonds or (debit
loss on extinguished of bonds)
State the workpaper illumination entry for intercompany land transactions
Dr. Intercompany gain on sale of
land
Cr. Land
State the workpaper illumination entries for intercompany depreciable assets transactions
Elimination entry 1
Eliminate intercompany gain and adjust asset and accumulated depreciation to original amounts:
Dr. Intercompany gain on sale of machinery
Cr. machinery
Cr. accumulated depreciation
Elimination entry 2
Eliminate excess depreciation:
Dr. Accumulated depreciation
Cr. depreciation expense
When are combined financial statements prepared
- Companies are under common control
- companies are under common management
- unconsolidated subsidiaries are combined
When preparing combine financial statements identify the requirements
- Intercompany transactions and balances among these companies are eliminated.
- Non controlling interest treated like consolidated financial statements
- capital stock and retained earnings are added across not eliminated.
- income statements are added across
Describe push down accounting
Report assets and liabilities at fair value in separate financial statements of subsidiary. in effect, consolidation adjustments are pushed down into the records.
- assets and liabilities are adjusted to fair market value at date of acquisition
- retained earnings of a subsidiary are transferred to paid in capital
- net income of each subsidiary include depreciation amortization and interest expense based on fair value rather than historical cost
- the SEC requires pushed on the county for each substantially wholly owned “substantially wholly owned subsidiary”
