Chapter 3: Marketable Securities & Business Combinations Flashcards
What are the 3 classifications of securities?
Trading
Available for sale
Held to maturity
Trading Security: How is this reported on the BS? Unrealized G/L?
Current & Fair Value
Income Statement
AFS Security: How is this reported on the BS? Unrealized G/L (GAAP & IFRS)?
Non-current & Fair Value
GAAP: OCI
IFRS: AFS debt securities reported on I/S
Held-to-Maturity Security: How is this reported on the BS? Unrealized G/L?
Non-current & Amortized Cost
No Unrealized G/L
Treatment of transfers between classes.
1) Trading to any other class
2) any other class to trading
3) held-to-maturity to AFS
4) AFS to held-to-maturity
1) No adjustment needed
2) I/S
3) OCI
4) Amortize G/L from OCI
(GAAP) Which securities recognize impairment? How do you recognize impairment loses? Reversals of impairment? What about IFRS?
AFS & HTM Recognize impairment on I/S HTM - no reversal AFS - reversal on OCI not I/S (IFRS) - reversal on I/S allowed
JE - Sale (gain) of trading securities
DB: Cash
CR: Trading Security
CR: Realized gain on trading security
JE - Sale (gain) of AFS
DB: Cash
DB: Unrealized gain on AFS (out of AOCI)
CR: AFS Security
CR: Realized gain on AFS
What disclosures in the FS must be made for AFS and HTM securities?
aggregate FV
unrealized g/l
amortized cost
info on maturities
What are the three degrees of control? When do you use them?
Cost method: 0% - 20%
Equity method: 20% - 50% (could be less than 20% if significant influence)
Consolidate: 50% or more
(Cost Method - B/S) JE for acquisition
DB: Investment in Investee
CR: Cash
(Cost Method - B/S) JE for YE mark to market (gain/loss)
(LOSS)
DB: unrealized holding losses (OCI)
CR: Investment in investee (or valuation acct)
(GAIN)
DB: Investment in investee (or valuation acct)
CR: unrealized holding gains (OCI)
(Cost Method - B/S) JE for liquidating dividend in excess of RE
DB: Cash
CR: Investment in Investee
(Cost Method - I/S) JE for Cash Dividends
DB: Cash
CR: Dividend Income
(Equity Method - B/S) JE for acquisition
DB: Investment in Investee
CR: Cash
(Equity Method - B/S & I/S) JE for increase of % of earnings
DB: Investment in investee
CR: Equity in Earnings
(Equity Method - B/S) JE for Cash Dividends
DB: Cash
CR: Investment in investee
(Equity Method - B/S & I/S) JE for amortized GW over NBV
DB: Equity in Earnings
CR: Investment in investee
(Equity Method) When are the two instances that GW is created in purchase? How are they treated?
1) Difference between FV & NBV
Amortized over life of asset
2) Difference between purchase price & FV
Nothing
What makes up the B/S accounts for Cost & Equity Methods?
Cost Method: Purchase price
Equity Method: Purchase price + investee income - amortization of GW over NBV - dividends
What makes up the I/S accounts for Cost & Equity Methods?
Cost Method: Cash dividends (not over RE)
Equity Method: Investee income - amortization of GW over NBV
What are the two NCI GWmethods & their formulas?
(GAAP) Full GW Method: NCI = FV sub * NCI %
(IFRS) Partial GW Method: NCI = FV sub net ID assets * NCI %
What are the two general GW methods & their formulas?
(GAAP) Full GW Method: GW = FV sub - FV sub Net Assets
(IFRS) Partial GW Method: GW = Acquisition Cost - FV sub net assets acquired
What consists of FV sub’s net Identifiable assets?
in-process R&D, contracts, intangibles other than GW, software, un-patented technology
What is the treatment for successful In-process R&D? Failure of IP-R&D?
Success = amortize Failure = impair/write-off
When do you use the acquisition method?
Control is over 50% & must consolidate
How do you record the investment in sub for acquisition method?
Acquisition Price (original cost) = Investment in Sub = FV of consideration given
How do you treat the following instances during the initial acquisition: 1) Finders Fees; 2) Registration Fees/SEC Filings; 3) Indirect Costs; 4) Bond Issue Costs
1) Expense
2) Reduce APIC of Parent
3) Expense
4) Capitalized & amortize
What is the eliminating JE for consolidation?
"CAR IN BIG" DB: C/S - Sub DB: APIC - Sub DB: RE - Sub CR: Investment in Sub CR: NCI DB: B/S Adjustment to FV DB: ID assets to FV DB: Goodwill
How do you find RE in sub if the beginning RE is not given?
Ending RE + Dividends - NI = Beginning RE
For the B/S, what is the Acquisition Date NCI formula? After acquisition date?
= FV of sub * NCI %
= Beg. NCI + NCI % of Sub NI - NCI % of sub dividends
What’s the treatment for going from 1) non-control to control; 2) control to more/less control; 3) Control to non-control?
1) re-measure C/S to FV & recognize in I/S
2) Adjust APIC
3) recognize G/L on sale of stock in I/S & re-measure C/S to FV & recognize in I/S
What’s the main item that needs to be disclosed under the acquisition method?
Disclosure of the consolidation policy used
