COMBINED FS

Question 1

What is the main difference in the preparation of financial statements between consolidating financial statements and combining financial statements?

Answer 1

In consolidating financial statements, the investment accounts of the parent company in the other companies being consolidated are eliminated against the parent’s percentage ownership of the equity of those companies. In combining financial statements, any investment one combining company has in another combining company is eliminated against the owned company’s equity in the amount of the investment, not in the amount of percentage ownership. Therefore, there can be no difference between the dollar amount of the investment and the dollar amount of equity eliminated.

Question 2

What is the main different between when combined financial statements would be appropriate and when consolidated financial statements would be appropriate?

Answer 2

Consolidated financial statements must be prepared only when one of the companies being consolidated (a parent company) has controlling interest, either directly or indirectly, in the other companies being consolidated. Combined financial statements can be prepared when there is no single company (parent company) that has control of the companies being combined.

Question 3

Identify at least five financial liabilities.

Answer 3

1. Accounts payable;2. Notes and Bonds payable;3. Option contracts (with unfavorable terms);4. Futures and forward contracts (with unfavorable terms);5. Swap contracts (with unfavorable terms).

Question 4

Identify at least five financial assets.

Answer 4

1. Cash and cash equivalents;2. Accounts receivable;3. Investments in debt or equity securities;4. Ownership interest in a partnership, joint venture, or other entity;5. Option contracts (with favorable terms);6. Futures and forward contracts (with favorable terms);7. Swap contracts (with favorable terms).

Question 5

What are the basic types or categories of financial instruments?

Answer 5

1. Cash;2. Evidence of an ownership interest in an entity;3. Contracts that result in an exchange of cash or ownership interest in and entity that:; 1. Imposes on one entity a contractual obligation (liability); and 2. Conveys to a second entity a contractual right (asset).

Question 6

How are financial assets that are classified as “Loans and Receivables” measured and reported under International Financial Reporting Standards (IFRS)?

Answer 6

Financial assets classified as “Loans and Receivables” under IFRS are measured at amortized cost, with related interest and amortization recognized in current income.

Question 7

What are the categories of financial assets identified under International Financial Reporting Standards (IFRS)?

Answer 7

1. Financial assets measured at fair value with changes reported through profit/loss;2. Loans and receivables;3. Instruments held to maturity (other than loans and receivables);4. Instruments available for sale.

Question 8

Under International Financial Reporting Standards (IFRS), how is an impairment of a financial asset determined and reported?

Answer 8

Under IFRS, an impairment loss is determined as the difference between the carrying amount of the asset and its recoverable amount. The amount of any impairment loss is recognized in current income.

Question 9

What are the categories of financial liabilities identified under International Financial Reporting Standards (IFRS)?

Answer 9

1. Financial liabilities measured at fair value with changes reported through profit/loss, including:; 1. Liabilities held for trading; 2. Derivatives (that are liabilities); 3. Financial liabilities for which the fair value option is elected.;2. Other liabilities.

Question 10

Define “market risk”

Answer 10

Market risk is the possibility of loss from changes in market values due to changes in economic circumstances, not necessarily due to the failure of another party to perform.

Question 11

Define “credit risk”.

Answer 11

Credit risk is the possibility of loss from the failure of another party (or parties) to perform according to the terms of a contract.

Question 12

If it is not practicable to estimate the fair value of a financial instrument, what must be disclosed?

Answer 12

1. The reasons why it is not practicable to estimate fair value and;2. Information pertinent to estimating fair value, such as carrying amount, effective interest rate, maturity date, etc.

Question 13

List the disclosure requirements for financial instruments where it is practicable to estimate fair value.

Answer 13

1. Fair Value;2. Related carrying amount;3. Whether instrument/amount is an asset or liability.

Question 14

What must be disclosed about each significant concentration of credit risk?

Answer 14

1. Information about the common activity, region, or economic characteristic that identifies the concentration;2. The maximum (gross) amount of loss due to the credit risk;3. The entity’s policy of requiring collateral or other security to support financial instruments subject to credit risk;4. The entity’s policy of entering into master netting arrangements to reduce the credit risk associated with financial instruments.

Question 15

What is the “underlying” element of a derivative instrument?

Answer 15

A specified price, rate, or other variable (e.g., a stock price, interest rate, currency exchange rate, etc.).

Question 16

What is an embedded derivative?

Answer 16

An embedded derivative is a portion of, or term in, a contract (host contract that is not itself a derivative) that behaves like a derivative.

Question 17

How is the value or settlement amount of a derivative determined?

Answer 17

By the multiplication (or other calculation) of the notional amount and the underlying.

Question 18

Define “hedging”.

Answer 18

A risk management strategy that involves using offsetting (or counter) transactions or positions.

Question 19

What are the three basic elements of a derivative?

Answer 19

1. One or more underlying and one or more notional amounts;2. Requires no initial net investment;3. Terms require or permit a net settlement.

Question 20

What is the “notional” amount element of a derivative instrument?

Answer 20

A specified unit of measure (e.g., number of shares of stock, pounds or bushels of a commodity, number of foreign currency units, etc.).

Question 21

List the four different possible uses of derivatives.

Answer 21

1. Derivatives not used as a hedge;2. Fair value hedges;3. Cash flow hedges;4. Foreign currency hedges.

Question 22

What is the formal documentation required at the inception of a fair value hedge?

Answer 22

1. The hedging relationship;2. The objective and strategy for undertaking the hedge;3. Identification of the hedging instrument;4. Nature of the risk being hedged;5. How effectiveness of the hedge will be assessed.

Question 23

List the conditions under which an “unrecognized firm commitment” exists.

Answer 23

When an entity enters into a contract to buy or sell but has not yet booked the transaction.

Question 24

Define a “fair value hedge.”

Answer 24

The hedge of exposure to changes in fair value of a recognized asset, recognized liability, or an unrecognized firm commitment from a particular risk.

Question 25

What are the accounting requirements for a change in the fair value of a fair value hedging instrument and the asset, liability, or firm commitment being hedged?

Answer 25

1. Adjusting carrying amount of the derivative and hedged item to fair value;2. Recognizing gains/losses from revaluing the derivative and the hedged item in current income.

Question 26

How are changes in the fair value of derivatives used to hedge cash flows treated?

Answer 26

Each period the change in fair value of the derivatives is used to:;1. Adjust the derivative instrument to fair value;2. Recognize in other comprehensive income an amount equal to the change in present value of expected cash flows of the hedged item;3. Recognize any difference between change in fair value and change in present value of expected cash flows in current income.

Question 27

Define a “cash flow hedge”.

Answer 27

The hedge of an exposure to variability (changes) in the cash flow associated with a (recognized) asset, liability, or a forecasted transaction due to a particular risk.

Question 28

What are the conditions necessary for a forecasted transaction to be the hedged item in a cash flow hedge?

Answer 28

The forecasted transaction is:;1. Specifically identified as a single transaction or group of individual transactions with the same risk exposure;2. Probable of occurring;3. With an external party (with limited exceptions);4. Capable of affecting cash flows and earnings;5. Not for acquisition of an asset or incurrence of a liability accounted for at fair value with the change reported in current income.

Question 29

Define a “forecasted transaction”.

Answer 29

A forecasted transaction is a planned or expected transaction for which there is not yet either a firm commitment or any rights or obligations established.

Question 30

Define “foreign currency hedge”.

Answer 30

The hedge of an exposure to changes in the dollar value of assets or liabilities (including certain investments) and planned transactions that are denominated (to be settled) in a foreign currency.

Question 31

Identify five (5) kinds of foreign currency exposure that may be hedged.

Answer 31

1. Forecasted foreign-currency-denominated transactions;2. Unrecognized foreign-currency-denominated firm commitments;3. Foreign-currency-denominated recognized assets or liabilities;4. Investments in AFS Securities;5. Net investments in foreign operations.

Question 32

List the required disclosures for derivatives designated as fair value hedges.

Answer 32

1. Net gain/loss recognized in earnings and where net gain/loss is reported in the financial statements;2. Net gain/loss recognized in earnings from hedged firm commitments that no longer qualify for hedge treatment.

Question 33

What should disclosures for derivatives designated as fair value hedges distinguish between?

Answer 33

Fair value hedges, cash flow hedges, hedges of investments in foreign operations, and other derivatives.

Question 34

Which U.S. GAAP characteristic of a derivative is not included in the definition of a derivative under IFRS?

Answer 34

Notional Amount.

Question 35

Are part term hedges allowed under IFRS?

Answer 35

Part term hedges are allowed.

Question 36

What are the requirements for accounting for the transfer of a financial asset as a sale by the transferor?

Answer 36

1. Write off asset sold (or portion thereof);2. Write on assets obtained and liabilities incurred;3. Measuring assets and liabilities at fair value;4. Recognizing gain/loss on the sale in current earnings.

Question 37

List the accounting requirements for the purchase of financial assets by the transferee.

Answer 37

1. Writing on all assets obtained and liabilities incurred;2. Measuring all assets and liabilities at fair value.

Question 38

For transfers of financial assets that are appropriately either a sale or secured borrowing with pledge of security, what are the basic guidelines for accounting treatment?

Answer 38

Basic accounting guidelines:;1. Derecognize a transferred asset or portion thereof that qualifies as a sale;2. Continue to recognize a transferred asset or portion thereof (i.e., a retained interest) that does not qualify as a sale;3. Recognize any assets or liabilities that result from the transfer.

Question 39

What does the appropriate accounting for the transfer of a non-cash financial asset as collateral in a secured borrowing depend on?

Answer 39

1. Whether secured party has the right to sell or repledge the collateral;2. Whether debtor has defaulted.

Question 40

How is the gain or loss on the transfer of a financial asset (or portion thereof) treated as a sale determined?

Answer 40

The gain or loss is measured as the difference between the proceeds received from the sale and the carrying value of the asset (or portion thereof) sold. Proceeds of the sale include any assets obtained and (less) any liabilities incurred in the transfer.

Question 41

Under what conditions is the transfer of a financial asset treated as a secured borrowing with the pledge of collateral?

Answer 41

The transfer of a financial asset is treated as a secured borrowing with pledge of collateral when either:; 1. The criteria for surrender of control are not met; or; 2. A portion (component) of a financial asset that is not a participating interest is transferred.

Question 42

Describe the accounting treatment for a transfer of a financial asset if criteria for surrender of control are met.

Answer 42

The criteria for surrender of control must be met and either:; 1. An entire asset transferred or; 2. A component of an asset that qualifies as a participating interest is transferred.

Question 43

If a portion of a financial asset is sold and another portion retained, how is the amount to be initially recognized for each portion determined?

Answer 43

The carrying value of the entire asset (pre-transfer) is allocated between the portion sold and the portion retained based on their relative fair values at the date of transfer.

Question 44

Under what conditions will a transferor write off (and a transferee recognize) a non-cash financial asset transferred as collateral in a secured borrowing?

Answer 44

When the transferor has defaulted under the terms of the contract and is no longer entitled to redeem the pledged asset. In that case, the transferor will write off the financial asset and the transferee will recognize the financial asset (collateral).

Question 45

At what amount are separate servicing assets and servicing liabilities initially recognized?

Answer 45

At fair value at the date of separation from a transferred financial asset or at date of acquisition.

Question 46

What condition results in a servicing asset?

Answer 46

Estimated future revenues are expected to exceed estimated costs of servicing the assets, as reflected in fair value.

Question 47

What methods may a holder use to measure a servicing asset or a servicing liability after initial recognition?

Answer 47

Subsequent to initial recognition, a servicing asset or servicing liability may be measured at either:; 1. Amortized in proportion to and over the period of estimated net income or net loss, or; 2. At fair value, with changes in fair value recognized in current income.;In either case, a servicing asset should continue to be assessed for impairment.

Question 48

What condition results in a servicing liability?

Answer 48

Estimated future revenues are expected to be less than estimated costs of servicing the assets, as reflected in fair value.

Question 49

Under what conditions will a debtor write-off (derecognize) a liability?

Answer 49

The debtor pays the creditor and is relieved of its obligation for the liability.;OR;The debtor is legally released from being the primary obligator under the liability either by the creditor or by law/courts.

Question 50

If a debtor is released as being primarily responsible for a liability but becomes secondarily responsible for the liability, what should be its accounting related to that change?

Answer 50

It will:; 1. Derecognize the original liability and the consideration paid for release; 2. Recognize at fair value any liability associated with being secondarily liable for the obligation; 3. Recognize a gain or loss as the difference between the original liability written off and the consideration paid plus the fair value of the secondary liability.

Question 51

When determining whether a debt extinguishment results in a gain or a loss, what are the financial statement adjusting items?

Answer 51

Reacquisition items to be accounted for:; Debt issue costs; Any unamortized discount/premium; Difference between debt’s face value and reacquisition amount

Question 52

When determining whether a debt extinguishment results in a gain or a loss, how is that calculated?

Answer 52

Gain/Loss = Reacquisition price - Net Carrying Amount

Question 53

Under IFRS what are the two steps needed for derecognition of a financial asset?

Answer 53

1. Determine whether the financial asset transfer involves the transfer of substantially all of the risks and rewards of ownership. If so, account as a sale of the asset. If not, go to step 2.;2. If the financial asset transfer does not involve substantially all of the risks and rewards of ownership, then determine whether control has been transferred. If so, account for the transfer as a sale; if not account for it as a secured borrowing.

Question 54

How is surrender of control determined under IFRS?

Answer 54

Under IFRS, financial assets are derecognized when the entity loses control of the contractual benefits that comprise the financial asset. Loss of control focuses on the transfer of risks and rewards associated with the financial asset.

Question 55

What are two the major U.S. GAAP - IFRS differences related to servicing rights?

Answer 55

1. IFRS considers servicing rights retained in the transfer of a financial asset as a retained interest in the transferred asset, not as a new separate asset as done under U.S. GAAP.;2. Under IFRS the servicing asset would be recognized based on its allocated portion of the carrying value of the entire financial asset before transfer. Allocation is done based on relative fair values.