F10 Flashcards
FV, Partnerships, VIEs, AROs, Liabilities, Contingencies, Subsequent Events, & Financial Instruments (GAAP & IFRS)
Exit Price
Define Fair Value
Price received to sell an asset OR paid to transfer a liability in orderly transaction.
- Market based measure
- Does not include transaction costs, may include transportation if location is an attribute of asset/liability. (Used to calculate mst advantageous market)
Principal Market
- Market with the greatest volume or level of activity
- 1st Option
Most Advantageous Market
- Market with the best price after considering transaction costs (not included in final FV measurement)
- 2nd option
- Only if there is NO principal market
3
FV Valuation Techniques
- Market Approach: uses price and other relevant information from market transactions involving identical or comparable assets or liabilities to measure FV
- Income Approach: PV of discounuted cash flows: converts future amounts including cash flow earnings to a single discounted amount to measure FV
- Cost Approach: uses current replacement cost to measure FV of assets
3 Levels
Hierarchy of Inputs
Level 1: identical (quoted prices in active markets for identical assets/liabilities)
Level 2: similar (quoted price for similar asset)
Level 3: unobservable inputs (discounted cash flows)
Note: If multiple levels are used, the FV is classified based on the “lowest level” of reliability used.
3
Exceptions to Fair Value Measurement
- Not practicable to measure FV
- FV cannot be reasonability determined
- FV cannot be measured with sufficient reliability
3
In creating a new partnership interest with an investment of additional capital, what methods can be used?
- Exact
- Bonus
- Goodwill
Describe the exact method of creating a new partnership interest with an investment of additional capital.
The purchase price equals the book value of the capital account purchased.
- No adjustment to the existing partners’ capital accounts
- No goodwill or bonus
Finger Math: 25% interest = Total capital / (4-1)
Bonus = Balance has the power
Describe the bonus method of creating a new partnership interest with an investment of additional capital.
New partner’s capital account = (A + B + C) x C’s percentage of ownership.
Excess of new partner’s contribution over capital interest is a bonus to the old partners.
Excess of capital received over new partner’s contribution is a bonus to the new partner.
Describe the goodwill method of creating a new partnership interest with an investment of additional capital.
GW is recognized based on total value of the partnership implied by new partner’s contribution.
New partner investment / % ownership
Less: Old Partners’ capital
GW is shared by the existing partners using the agreed profit/loss ratio.
Describe the bonus method of withdrawal of a partner
Difference between the balance of withdrawing partner’s capital account and the amount that person is paid is the amount of the bonus.
The bonus is allocated among the remaining partners’ capital accounts is in accordance with their remaining profit and loss ratios.
Describe the goodwill method of a withdrawal of a partner.
The partners may elect to record the implied goodwill in the partnership based on the payment to the withdrawing partner. The amount of the implied goodwill is allocated to all of the partners in accordance with their profit and loss ratios.
After allocating goodwill, the balance in the withdrawing partner’s capital account should equal the final distribution to the withdrawing partner.
In liquidating a partnership, what is the order of preference?
- Creditors
- Loans and advances to partners
- Capital accounts of partners
Remember that all losses must be provided for before disposal; that is, maxmum potential loss before distribution of cash.
What is a Variable Interest Entity (VIE)
A corporation, partnership, trust, LLC, or other legal structure used for business purpose that either does not have equity investors with voting rights OR lacks sufficient financial resources to support its activities.
Who is the primary beneficiary of a VIE and how does the primary beneficiary account for its VIE investment?
The entity with the power to direct the activities of the VIE that most significantly impacts the entity’s economic performance and:
- Absorbs the expected VIE losses; OR
- Receives the expected VIE residual returns.
The primary beneficiary must consolidate the VIE.
Who consolidates when one entity receives the expected returns from a VIE and another entity absorbs the expected losses?
The entity that absorbs the expected losses consolidates.
Define an Asset Retirement Obligation.
A legal obligation associated with the retirement of a tangible long-lived asset that results from the acquisition, construction, development, and/or normal operation of a long-lived asset.
How is an ARO initially measured?
At fair value (PV of the future obligation) as an asset (Asset Retirement Cost) and a liability (Asset Retirement Obligation)
How is an ARO accounted for in periods after initial measurement?
The ARO liability is adjusted for accretion expense and the ARO asset is depreciated.
How is ARO accounted for in the periods after initial measurement?
The ARO liability is adjusted for accretion expense and the ARO is depreciated.
Name 4 types of restructurings involving debt
- Transfer of assets
- Transfer of equity interest
- Modification of terms
- Combination of above 3
How is the gain (loss) measured in a troubled debt restructuring involving the modification of terms?
Difference between carrying amount of the obligation prior to restructuring and undiscounted total future cash flows required after restructuring, if undiscounted future cash flows are less than the carrying amount.
How is the gain (loss) measured in a troubled debt restructuring involving a transfer of assets?
Restate the assets transferred to fair value and recognized a gain or loss in ordinary income.
Recognize a gain for the difference between FV of the assets transferred and the carrying amount of the debt forgiven. The gain is possibly reported as extraordinary under U.S. GAAP if it meets the U.S. GAAP requirements (material, infrequent and unusual).
When is a gain (loss) NOT recognized on troubled debt restructuring?
For debtor, when there is a modification of terms and payment of the entire debt is not affected.
For creditor, when the total cash to be received is greater than the amount receivable. The difference is amortized as interest.
When is a loan considered impaired?
Probable that all amounts due (principal and interest) will not be received.
How is an impaired loan reported by the creditor?
Present value of the loan’s expected future cash flows discounted at the loan’s effective interesting rate.
Dr: Bad debt expense
Cr: Allowance for credit losses
5
What are the general disclosures for the debtor in a troubled debt restructuring?
- Description of main changes in terms and/or features
- Gain on restructuring of payables (aggregate)
- Net gain/loss on transfers of assets recognized in period (aggregate)
- Per share amount of aggregate gain on the restructuring of payables
- Amount of contingently payable amounts included in the CV of restructured payables (and any conditions that would cause those amounts to become payable or forgiven)
4
What are the general disclosures for creditors in a troubled debt restructuring?
- Creditor’s policy for recognizing interest income
- Any commitment the creditor has to lend additional funds to the debtor
- Activity in the allowance account for the reporting period
- Average recorded investment in impaired loans for the period (including the amount of related interest income and the interest income recognized on a cash basis)
Identify the 3 ranges of lilihood that a future event will confirm a contingent liability.
- Probable
- Reasonably possible
- Remote
When are contingent liabilities accrued?
When the loss is both probable and can reasonably be estimated, then record and disclose.
Financial statement disclosure only for reasonably possible contingent losses.
Remote contingent losses are not disclosed, unless they are “guarantee-type” contingent losses, which must be disclosed
What is the accounting treatment of gain contingencies?
Gain contingencies are not reflected on the balance sheet but are disclosed as to their nature and amount if liklihood is probable and to do so would not be misleading.
What is a subsequent event and what are the 2 categories of subsequent events?
Event/transaction that occurs after the B/S date but before the F/S are issued or are avaialbe to be issued.
- Recognized subsequent events - provide additional info about conditions that existed at B/S date.
- Nonrecognized subsequent events - provide info about conditions that occurred after B/S date and did not exist on B/S date.
List the disclosure requirements for financial instruments under U.S. GAAP
- FV and related carrying amounts
- Concentrations of credit risk
- Market risk (optional)
Describe the financial instrument fair value option under U.S. GAAP
On specified election dates, an entity may choose to measure eligible financial instruments at fair value with unrealized gains and losses reported in earnings.
The FV option is irrevocable.
Define a derivative instrument
A “derivative instrument” is a financial instrument (or other contract) that “derives” its value from the value of some other instrument and has all 3 of the following characteristics:
- 1 or more underlyings and 1 or more notional amounts or payment provisions (or both)
- Requires no initial net investment
- Its terms require or permit a net settlement
Define underlyings and notional amount as they relate to a derivative financial instrument
Underlying: specified price, rate or other variable (i.e. interest rate, security price, foreign exchange rate, index of price/rates etc…)
Notional amount: a specified unit of measure (i.e. currency units, shares, bushels, pounds, etc…)
OFFS
Name 4 common derivative instruments
- Options
- Futures
- Fowards
- Swaps
Identify 3 types of hedge designations
- FV hedge
- Cash flow hedge
- Foreign currency hedge
Describe the accounting for changes in fair value associated with each type of hedge designation.
FV hedge - current earnings, with G/L from change in value offsetting A/L
Cash flow hedge
Effective portion - OCI until cash flows from hedged item are realized
Ineffective portion - in current earnings
Foreign currency hedge (FV and cash flow)
Net investment hedge - OCI as cumulative translation adjustment
