F10 Flashcards
When should an entity prepare its financial statements using the liquidation basis of accounting?
When liquidiation is imminent, an entity must prepare its financial statements using the liquidation basis of accounting. Generally, a company is in liquidation when it is converting its assets to cash or other assets and is settling its obligation with creditors with the intent of ceasing activities. FS must be prepared using a basis of accounting the helps FS users understand how much the organization will have available to distribute to investors after disposing its assets and settling its obligations.
Define Fair Value
Fair value is the price to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date.
Describe the valuation technique that can be used to measure the fair value of an asset or liability.
Market Approach –> Uses prices and other relevant info from market transactions involving identical or comparable assets or liabilities to measure FV. Income Approach –> converts future amounts including cash flow from earnings to a single discounted amount to measure FV. Cost Approach –> Uses current replacement cost to meausre the fair value of assets.
What are the criteria for “imminent liquidation”?
In order for liquidation to qualify as imminent the following criteria must be met : The likelihood of the entity returning from liquidation is remote and either a liquidation plan is approved by individuals with the authority to make the plan effective and the likelihood is remote that the plans execution will be blocked by other parties or a liquidation plan is imposed by other forces such as involuntary bankruptcy.
Describe the hierarchy of fair value inputs. Which inputs have the highest priority?
Level 1 inputs - quoted prices in active markets for identical assets or liabilities Level 2 - Inputs other than quoted market prices that are directly or indirectly observable for an asset or liability. Level 3 - Unobservable inputs for the asset or liability that reflect the entities assumptions and are based on best available information. If multiple levels available, use the weakest link!
Describe the proper accounting when the liquidation basis is initially applied.
On the effective date that the liquidation basis must be applied, a cumulative-effect adjustment is required to account for any differences between existing measurements and the measurements required under the liquidation basis. At each subsequent reporting date, assets, liabilities, and accruals must be remeasured.
In creating a partnership interest with an investment of additional capital, what three methods can be used?
Exact, Goodwill, Bonus Method
Describe the measurememnt basis for assets and liabilities under the liquidation basis of accounting
Assets must be measured & presented at the amt of cash proceeds expected from liquidtaion. Items that were not previously recognized under US GAAP (trademarks & patents) but are expected to be sold in liquidation or used in settling liabilities should be recognized. Liabilities should be measured and recognized according to US GAAP that otherwise applies to them. Adjustments can be made to reflect changes in assumptions (such as payments are expected to be made) stemming from the decision to liquidate)
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.
Describe the accounting for costs expected to be incurred during and at the end of the liquidation process.
Costs that are expected to be incurred during and at the end of the liquidation process must be accrued, as well as income expected to be earned during the period of time the entity is in liquidation. All amounts must be presented Seperately and at non discounted values.
Describe the bonus method of creating a new partnership interest with an investment of additional capital.
Bonus Method – New partners capital account = (A + B + C) x Cs percentage ownership. Excess of new partners contribution over capital interest received is a bonus to the old partners. Excess of capital interest received over new partners contribution is a bonus to the new partner.
Describe the financial statements required under the liquidation basis of accounting?
An entity preparing FS under the liquidation basis of accounting must present both a statement of net assets in liquidation and a statement of changes in net assets in liquidation. For the latter, the initial statement will present only changes in net assets that occurred during the time frame since imminent liquidation was established.
Describe the goodwill method of creating a new partnership interest with an investment of additional capital.
Goodwill is recognized on the total value of the partnerships implied by the new partners contributions. Goodwill is shared by existing partners using the agreed profit/loss ratio.
What are the disclosures required for a company that is applying the liquidation basis of accounting.
A statement that the FS are prepared using liquidation basis accounting, the plan for liquidation, significant assumptions and methods used to measure assets and liabilities. the expected time frame for completing the liquidation process. the type and amount of costs and income accrued as well as the period over which these costs and revenue are expected to occur.
Describe the bonus method of withdrawal of a partner.
The difference between the balance of the withdrawing partners 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 in accordance with their remaining profit or loss ratios.
Describe the goodwill method of 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 partners capital account should equal the final distribution to the withdrawing partner.
In liquidating a partnership, what is order of preference.
Creditors, Loans and advances for partners, Capital accounts of partners. Remember that all losses must be provided for before disposal that is, maximum potential losses before distribution of cash.
What is a variable interest entity (VIE)?
A corporation, partnership, trust, LLC, or other legal structure used for business purposes 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 impact 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.
