9. Investments, Intangible Assets Flashcards
What’s excluded from equity securities?
Debt securities (even convertible ones), redeemable pref. stocks, treasury stocks
State the 3 level of ownership (%), level of economic influence, valuation basis, reporting classification, BS presentation
0-20%: nominal, cash or FV, trading or AFS, investment (current or noncurrent)
21-50%: significant, equity method or FV, equity investment, investment (noncurrent)
51-100%: control, equity method or cost method, subsidiary, consolidate financial stmt
No significant influence: two criteria for held to maturity?
Intention to hold
Ability to do so
Sales of debt securities can be considered as held to maturity under which situations?
If sale is near enough to maturity date
If sale occurs after investor collected the substantial portion (>85%)
No sig influence: at what cost held to maturity security recorded and carried?
At purchase price + directly related costs (broker fee, transfer fee).
At amortized cost
Criteria for trading investment?
Purpose is to trade in the near term
Trading investment at what cost recorded and carried?
At cost
At FV
Trading investment: How is it adjusted at BS date ?
Lower of carrying value or FV
AFS: where unrealized G/L recorded?
OCI
AFS: at what cost recorded and carried?
Record at cost
Carry at FV. Adjust to FV at BS date
When is cost method allowed for investment?
When investor can’t exercise significant control and there is no readily determinable FV
What is liquidating dividend and how does it impacts investment?
Occurs when divi declared is in excess of earnings of investee. Reduces the investment
When the transfers of investment items occur?
There are changes in intent to hold the item or ability to do so
How many classification under IFRS and what are they?
2.
Held to maturity and FV through profit and loss
Held to maturity valuation on what basis under US and IFRS?
U: contractual basis
I: estimated CF and life
Impairment in debt securities can be reversed under U and I?
U: no
I: yes
Classification requirement as held to maturity under U and I?
U: intent and ability
I: business model, CF characteristic model
G/L recorded in OCI recycled in income when sold under U and I?
U: yes
I: no
Cost method allowed under IFRS?
No
Equity method, what’s in dr and cr for investment acct (BS)?
Equity income acct (IS)?
Dr: original cost, pro-rata share of investee income
Cr: pro-rata share of investee divi
Dr: amortization of FV > BV income
Cr: pro-rata share of investee income
What’s investee called under IFRS?
Associates
Who can use FV option under IFRS?
Certain investors (venture capitalists, mutual funds, unit trusts)
Uniform accounting required for investor and investee under U and I?
U: no
I: yes
Reporting dates between investor and investee under U and I?
U: encouraged to be within 3 mo
I: just be within 3 mo
Can losses be recognized if imminent return to profit is assured under U and I?
U: yes
I: no
Equity method impairment loss under U and I?
U: CV > FV
I: CV > RV
Equity method: treatment when investment is about to be sold under U and I?
U: Equity method till it’s sold
I: adjust to lower of FV or BV and reclassify as held for sale
Stock dividend, how to compute? Recorded at the time?
Adjust only shares
Ex) 1000 shares OS. 10% stock divi - 100 shares increase
No.
Impairment of equity securities:
Trading securities, impairment how to compute?
AFS, how to compute?
T: measured at FV. Any impairment already recognized. No need.
A: changes in FV recorded in OCI. If change is not temporary, unrealized G/L transfer out of AOCI and recognized in earnings
Impairment of equity securities, reversal permitted?
No
Cost method, treatment of impairment?
Don’t have readily determinable FV - not needed unless specific events happen.
Debt securities impairment considered to be OTTI (other than temporary impairment under 3 situations.
If the holder has an intent to sell the debt securities
If more than likely the holder must sell
If the holder does not expect PV of estimated CF to recover the entire amortized cost
Impairment of debt securities reversal allowed?
No
What’s the definition of intangible assets?
LT operational assets that lack physical substance or presence, but are currently used in the operation of a business and have a useful life extending more than one yr beyond BS date
What intangible assets are recognized in the acct?
If benefits obtained through contractual or legal rights If separable (can be sold, transferred, licensed, exchanged)
What intangible assets should be capitalized and expensed?
Expensed if not specifically identifiable, have determinable values, or inherent in a continuing business and related to the entity as whole.
Capitalized: registration fees, legal costs paid to outsiders
Definite life intangibles: treatment of external costs, amortization impairment?
Indefinite life other than GW?
GW?
D: capitalize, over useful life, if BV > R (recoverable cost: sum of expected future net cash inflows from use and disposal), impaired. Loss: BV - FV
I: capitalize, no amortization, same
G: no amortization, 2 steps impairment (if BV > FV, impaired. Loss: BV - FV)
If patents are used for the same purpose and patents don’t have usefulness apart from the group, which useful life should be used?
The shortest one
Legal defense, which one can be capitalized? Successful or unsuccessful?
Successful
Impairment loss for definite and indefinite items can be reversed?
No
How does cash surrender value of life ins policy impact ins expense?
Changes proportionally. Ex) if cash pd is $800 and cash surrender value $200, exp is $600.
Are GA related costs added to GW amount?
No
Can internally developed GW be recognized?
No
What’s the level impairment of GW must be performed?
Reporting unit level
Explain the two steps of impairment.
First step (quantitative) - likely occurred (>50%). Second (quantitative) - BV > FV impaired. Loss: BV - FV
How are R&D costs treated?
Expensed in the period occurred
Treatment of fixed asset used in several R&D projects?
Capitalize. Depr. is included in the annual R&D costs. Dr: R&D expense Cr: Accum. Depr.
Treatment of fixed asset used temporary in a R&D project?
Capitalize. Depr. related to the time period included in R&D costs
Treatment of a fixed asset used in a single R&D project, the asset has no alternative use?
The entire cost of the asset expensed as R&D immediately
When a patent is developed internally, how the costs is treated?
Purchased?
Expensed.
Capitalized
When R&D purchased from other firm, how treated?
Expensed included in R&D.
If the firm performs R&D for other firm, how is it treated?
Accumulated in inventory costs and expensed as COGS or cost of service provided at the end of the contract
Does IFRS allow companies to capitalize development cost?
Yes
Software costs treatment: if incurred during R&D? After R&D?
Expensed
Capitalized (development costs - amortized)
R&D continues till when?
Until technological feasibility of the software established (program model or working model of the software is complete)
Treatment of software production costs (duplication of software/ manuals)?
Capitalize in inventory and expense through COGS as sale takes place
Software: treatment of customer service and maintenance?
Expense as inccur
Amortization of capitalized computer software costs. How?
Use whichever results in a larger amounts
Revenue method: B (BV at the beg of the year) x R (current yr revenue) / (current yr revenue+estimated future revenue)
Or current yr revenue x % of expected revenue
SL method: B / N
Software impairment?
BV > NRV (future estimated gross revenue less operating costs) - loss. BV written down to NRV.
Written ups NOT allowed
Under IFRS, revaluation of intangible assets to FV and reversal of impairment loss allowed?
Yes.
If there is active market.
Permitted.
IFRS: impairment tested at which level?
The cash generating unit
GW impairment loss can be reversed under U and I?
No for both
Does IFRS allow capitalizing of internally developed GW?
No
For small and medium size companies, GW amortized?
Yes, over useful life. If not available, assign 10 yrs
AFS: where its unrealized G/L reported?
OE: OCI.
What amount debt securities except held to maturity should be measured?
FV
What amount should investment in AFS be reported?
FV
How to compute the bond amount on BS when it’s purchased at premium?
- Compute premium amount: investment carrying amount - cash pd
- Compute monthly amortization
- # 2 x length before the BS date
- Carrying amount - #3
What amount should the held to maturity be reported?
Amortized cost = carrying value
How to compute interest receivable?
Face amount x contracted interest rate
How to compute bond amount at BS date when it’s purchased at discount?
- (Face x contracted rate) - (cash paid x effective rate): 1st yr
- (Face x contracted rate) - (cash paid + #1 x effective rate): 2nd yr
- Cash paid amount + #2 & 3
IFRS: transfer of investment securities between categories: which one can be transferred? Financial stmt restated?
Debt securities.
Yes
IFRS: what amount should the debt securities reported under an entity’s business model plan to hold investment solely to receive cash from interest and principal pmt?
If not under business model?
Amortized cost: par value +- amortized cost
FV
IFRS: transfer between amortized cost to FV and vice verse ok for debt securities?
Yes to both
When should dividend considered to be income?
When investor has only insignificant influence.
Significant influence: reduction in investment
Liquidating dividend: reduction in investment
Significant control investment: compute income stmt amount: how do you treat excess FV of inventory when they are sold?
COGS must reduce the income: the inventory amount sold x %of control
Compute stock rights amount for BS?
[stock right per unit @ FV / (FV stock rights per unit + FV exright)] x the original cost
Stock dividend: does it change the investment cost? Cost per share? The % of ownership?
No. Yes. No
Is stock dividend recognized in account when received?
No. Foot note only
When are credit losses recognized in earnings?
When the entity has the positive ability and intent to hold the securities and does not expect to recover the entire cost basis
Intangible assets: can costs related such as legal fees and registration fees be capitalized? Cost such as training and salaries of employees?
Yes.
No.
What amount can be recorded as life ins policy payment?
The amount received - cash surrender value
Start up costs: capitalized or expensed?
Expensed
Leasehold improvements: does it include furnitures and equipment?
No
How to compute purchase price and GW:
Average annual income, total OE, MV of assets, average rate of return, risk adjusted rate of return given.
GW: PV of excess earnings. Purchase price=GW+MV assets.
- MV assets x average expected rate of return=expected earnings.
- Excess earnings=average annual income - #1 = GW
- # 2 x PV of annuity factor at risk adjusted rate
- Purchase price = #2 + 3
Which category of items use the recoverability test?
How is it tested?
Definite life intangible asset.
- If RC < BV - impaired. RC=the sums of the net cash flows from using the asset and disposal.
- Compare BV with FV for impairment loss
IFRS GW impairment when components of a unit is shown. How toncompute impairment?
Compare RC and the total BV of the components.
The difference is the impairment.
Do not allocate
What amount AFS should be recorded at BS date? What’s the BV then?
FV
BV=FV
When does cost method investment reduce in value?
When liquidating dividend declared.
How do you know the dividends are liquidating?
When dividends are accumulatively more than accumulative income.
When securities are transferred between classification, how are they valued in a new classification?
FV
How is debt security measured under IFRS?
Amortized cost when both business model/cash flow test met. FV when not met.
Software package development. Is the cost of training capitalized or expensed?
Expensed.
