31

Question 1

does a call option give the buyer the right, but not obligation to purch. the underlying asset at strike price?

Answer 1

yes, they have the right, but not obligation to buy

Question 2

what are the disclosures for FV of derivative instruments on the BS?

Answer 2

• line items for FV’s of derivative instruments are reported on BS
• FV’s reported on BS must be sep’d b/w derivatives used for hedging and non-hedging purposes
• FV’s of A and L are reported sep’ly
• FV’s must be reported on a GROSS basis, not net

Question 3

what derivative instrument has the least credit risk?

Answer 3

futures contracts b/c they are made thru a clearinghouse

counterpart credit risk is eliminated

Question 4

when would you want to exercise a call option with a premium?

Answer 4

exercise when it reaches or goes above the strike + premium price

Question 5

what are primary disadvantages of using forward contracts?

Answer 5

• no active market for these privately negotiated instruments
• there is credit risk assoc’d (nonperformance of other)
• forward contracts are unregulated
• one benefit is that they do have flexibility and can modify terms

Question 6

how should a derivative instrument be reported in CF’s when they are not held for trading purposes?

Answer 6

they should be CFI, not CFO

*CFO is held for trading purposes

Question 7

what are the GAAP req’d disclosures for a FV hedge transaction?

Answer 7

• net G/L recog’d in current period
• any portion of G/L excluded from assessment of effectiveness
• effective portion of the hedge
• NOT the fin. impact from indiv. settlement dates of current reporting period

Question 8

does a stock put option represent a contingent agreement?

Answer 8

yes b/c buyer has option to execute terms, but not obligation

Question 9

is credit risk a bigger concern for the party that stands to gain from its position?

Answer 9

yes, b/c party in losing position will more likely fail to perform

Question 10

what is the JE for reversal of DTA/DTL?

Answer 10

*DTA:
Dr: ITE - def’d
Cr: DTA

*DTL:
Dr: DTL
Cr: ITB - def’d

Question 11

what happens when DTA decreases?

Answer 11

ITE increases

Question 12

what are examples of a tax position taken by a corp?

Answer 12

• allocation/shift of income b/w jurisdictions
• decision to classify a trans., entity, or other position in a tax return as tax exempt
• characterization of income, or a decision to exclude reporting TI, in a tax return
• NOT a presumption that the relevant taxing authority will examine the tax position and have full knowledge of all relevant info

Question 13

if a change in the provisions of a cap. lease gives rise to an op. lease, the trans. should be acc’d for as:

Answer 13

a sales-leaseback

for a modified lease

Question 14

how is EB PBO calc’d?

(BASE formula)

Answer 14

BB PBO
\+ svc cost
\+ int cost
\+ PSC from CY
\+ actuarial loss CY
- actuarial gain CY
- ben. paid
-----------------------------
= EB PBO

Question 15

how is EB FV plan A’s calc’d?

BASE formula

Answer 15

BB FV plan A
\+ contr's
\+ ACTUAL return on plan A's
- ben. paid
------------------
= EB FV Plan A

*formula to help find actual return on plan A’s

Question 16

what is SIR AGE and its JE?

Answer 16

• S = current svc cost
• I = int cost
• = return on plan A’s
• A = amort. of PSC
  -/L = from diff. of returns or change in actuarial assumpt’s
• ## E = amort. of existing net obl./NA= net periodic pen. cost

*unam’d “AGE” = AOCI

*JE:
Dr: pen comp exp (svc cost)
Dr: net per. pen. cost (IRAGE)
Cr: pen ben L - CY (sum up)
Cr: OCI (if necessary)

Question 17

how is “I” calc’d?

Answer 17

BB PBO * discount rate
= int cost

*not prime/market rate

Question 18

how is calc’d?

2 ways

Answer 18

(1) actual returns
- use “BASE” formula

(2) expected returns
- BB plan A’s * expected rate = expected return

*diff. b/w actual and expected is recog’d in OCI and amort’d to net per. pen. cost w/ any actuarial G/L

Question 19

how is “A” calc’d?

Answer 19

BB unam’d PSC / avg remaining svc life
= amort. of PSC

*removal of unam. PSC from AOCI JE:

Dr: OCI
Cr: pen. L

Dr: net pen. cost
Cr: OCI (AOCI increased)

Question 20

under IFRS, is unam’d PSC booked to OCI?

Answer 20

no, it is expensed immediately

Question 21

how do we calc. for “G”?

Answer 21

G/L calc’d in 2 ways:

(1) recog. G/L on I/S in period incurred OR
(2) recog. G/L in OCI and then amort. unrececog’d G/L to net per pen cost over time using CORRIDOR APPROACH:
* for PBO/plan A, whichever is greater

unrecog'd G/L
<10%  BB PBO/FV plan A>
-------------------------------------
= excess 
/ avg. remaining svc life 
----------------------------------
= amort. of unrecog'd G/L

**if unrecog’d G/L is lower than 10% PBO/plan A, no amort. necessary

Question 22

how do we calc. for “E”?

Answer 22

BB PBO

-------------------
= initial unfunded obl.
/ greater of 15Y or avg job life
---------------------------------
= min. amort.