Area 3 Flashcards
Consolidated balance sheet prepared immediately after the purchase of an entity, the consolidated stockholders equity is calculated as:
Equity reported is always = acquirer’s equity + any noncontrolling interest
Purchasing a controlling interest (greater than 50%) in another entity the resulting business conbination is viewed as a single economic entity. Any identifiable assets’ FMV adjustments are reflected in consolidated assets
ROU assets should be amortized over what term
ROU assets are amortized over the shorter of the lease term or the asset’s useful life unless there is a purchase option reasonable certain to be excerised or title transer; then the ROU asset is amortized over the asset’s useful life
Accounting changes types and treatment
Change in accounting principle -> retrospective
Change in accounting estimate -> prospective
Change in reporting entity -> retrospective
Error correction -> retroactive
Preparing financial statements under the cash basis of accounting. What statement would be included (hint: similar to income statement for GAAP)
The statement of revenues collected and expenses paid
How is gross profit reported on combined financial statements?
Any interco gross profit remaining in ending inventory must be eliminated
Interco gross profit = seller’s GP rate * interco sales remaining in the buyer’s ending inventory
Combined F/S DO NOT include the parent company
Variable interest entity (VIE)
Exists when an investor has controlling financial interest in another entity but the amount of control isn’t proporionate to its ownership. VIE is a separate legal entity. Required to prepare consolidated F/S with the VIE
Typical characteristics:
- VIEs are not self-sufficient
- Investors do not participate in a VIE’s gains and losses
- A VIE’s value is affected by another entity’s value
Under an operating lease, lease-related expenses include
Hint: 2 items
Monthly lease payments (rent) and the monthly amortization of leasehold improvements
When there is a change in the reporting enity, how should the change be reported in the financial statements?
Retrospectively, including note disclosures, and appliation to all prior period financial statements presented
What is included in the lease liability of a finance lease
lease liability = PV of lease payments, including purchase option, any nonrefundable fees and any residual value guarantee
Lease with a purchase options likely to be exercised is a finance lease
Finance lease criteria
Hint: S-PO-T-75-90
Specialized lease property
Purchase option reasonable certain to be exercised
Transfers title at end of lease
Lease term major part of remaining economic life (>=75%)
PV of lease payments substanially all of leased item’s FV (>=90%)
Finance Lease: lessee interest expense
interest expense = lease liability balance * interest rate * time period
Note: The interest rate used for this calculation should be the lease’s implicit rate if known or lessee’s incremental borrowing rate
Debt securities reported at
HTM reported at amortized cost; AFS and trading reported at FV -> when FV option not elected
Unrealized gain/loss for AFS
Unrealized gain/loss for AFS reported to OCI and transferred to AOCI. When AFS is sold the difference is treated as realised gain/loss and any unrealized holding gain/loss is removed.
Net carrying value (FV)
AFS securities - allowance for credit losses - unrealized losses (FV adjustment)
What is a derivative
A derivative is a financial instrument that has no net investment, an underlying and a notional amount, and a net settlement
Fair Value hedge
Used for recognized assets and liabilities (items with fixed valued)
Changes in value reported on income statement
FV hedge is reported at FV with unrealized gains/losses recognized in net income in the period of change on the same line as the corresponding gain/loss on the hedged item
Cashflow Hedge
Used for forecasted transactions (items with variable cash flows)
Changes in value reported in other comprehensive income
Call option valuation
time value + intrinsic value
Intrinsic value
(market value - exercise price) * # of shares
Put Options
Right to sell the stock to a given party
Expect stock will decline in value
Exercise if FMV of stock < strike price
Call Options
Right to buy the stock from a given party
Expect stock will increase in value
Exercise if FMV of stock > strike price
Two inherent risks with interest rate swaps that cannot be reflected on the FS but must be disclosed
1 the risk of exchanging a lower interest rate for a higher rate (interest rate risk)
2 the risk that the counterparty might default on the agreement (credit risk)
To qualify for simplified hedge accounting rules for IR swaps:
the variable rate on the swap and the orginal debt must be linked to the same index
the IR swap’s fair value at inception must be close or equal to zero
the notional amount must be less than or equal to the debt’s principal balance
How to record transactions of foreign currency
Transactions of foreign currency (AR / AP) are initally recorded at the transaction date exchange rate. On settlement date they are revalued with the settlement date exchange rate with any gains or losses reported in the income statement
