4: Financial Instruments

Question 1

Available for sale securities

Answer 1

Reported at fair value. Unrealized gains or losses are recognized in OCI (PUFER). AFS securities are reported in investing cash flows.

Question 2

Trading securities

Answer 2

Reported at fair value. Unrealized gains or losses go to net income. Current securities are reported as operating, noncurrent securities are reported as investing cash flows.

Question 3

Held to maturity securities

Answer 3

Reported at amortized cost, debt only. No realized or unrealized gains or losses as HTM securities are not marked to market at period end. Is an investing cash flow.

Question 4

Equity Method

Answer 4

Equity method is used for common stock with influence and ownership of 20-50% of an equitable investment. Common stock is a reduction (withdrawal) on the investment and is not recorded as investment income.

Question 5

Book value does not equal Fair market value in equity method.

Answer 5

First take the percentage of ownership. The percentage of the difference in the book value and fair market value attributed to inventory, equipment, etc. (not land) is amortized over its remaining life. This results in a decrease to the investment. Remaining amount to get to the investment will be put into goodwill which does not get amortized.

Question 6

In the fair value and the equity method liquidating dividends have what effect on the investment account?

Answer 6

They reduce the the carrying amount of the investment account.

Question 7

Voting interest model

Answer 7

Consolidate the subsidiary at 100% fair value on acquisition date. 2 exceptions are legal reorganization and bankruptcy.

Question 8

Requirements to identify a variable interest.

Answer 8

1. company and business have an arrangement. 2. the business entity is a legal entity. 3. business fails to qualify for an exclusion (NFP, etc). 4. The interest is more than insignificant. 5. company has an explicit or implicit variable interest in the entity.

Question 9

Requirements to identify a variable interest.

Answer 9

1. company and business have an arrangement. 2. the business entity is a legal entity. 3. business fails to qualify for an exclusion (NFP, etc). 4. The interest is more than insignificant. 5. company has an explicit or implicit variable interest in the entity (absorb losses and gains).

Question 10

Requirements to be a Variable Interest Entity

Answer 10

One of five

1. Insufficient level of equity investment at risk ($).
2. Inability to make decisions or direct activities.
3. No obligation to absorb entity’s expected losses.
4. No right to receive expected profits.
5. Disproportionately few voting rights.

Question 11

Partial Goodwill calculation

Answer 11

IFRS:

Goodwill= Acquisition Costs- FV of subsidiary’s net assets acquired

Question 12

US GAAP Goodwill calculation

Answer 12

Goodwill= FV of subsidiary - FV of subsidiary’s net assets

Question 13

Partial goodwill NCI calculation

Answer 13

Non-controlling interest= FV of subsidiary’s net assets * NCI%