F10 Flashcards
What does fair value include and exclude?
Includes: transportation costs
Excludes: transaction costs (used to calculate advantageous market)
Fair value is _____________ -based measure
market
*uses exit price
Fair value is the price that….
would be received to sell an asset and paid to transfer a liability
Most Advantageous Market
*use FMV of market where net of transaction costs is highest
Three Valuation Techniques for Fair Value Measurement
- Market approach = prices or market information
- Income approach = PV
- Cost approach = replacement cost
Levels for FMV
- identical assets in an active market
- nonidentical assets or identical without active market
- management estimate and judgment
*reported using the lowest level used
Partnerships: Distinguishing between Bonus and Goodwill
Bonus: Balance
Goodwill: implied value (existing partners only)
Three Methods for Creating Partnership
- exact method (finger counting)
- bonus method
- goodwill method
How to account for partner’s loan to partnership?
*decrease the loan balance and the equity account in the same transaction
Methods for Withdrawal of Partner
- Bonus Method
* revalue assets to fair value and then payout (difference is deducted from remaining partners) - Goodwill Method
* revalue assets to fair value
* recognize goodwill proportionately to bring exiting partner’s total to payout amount
* decrease exiting partner’s capital account only
Variable Interest Entities
- variable interest = financial stake
- variable interest entity = that company’s equity characteristics are strange
- primary beneficiary = we have power over them and get P&L
* *absorbs expected losses and receives residual returns
VIE’s CANNOT BE PERSONS
IFRS & Variable Interest Entities
*consolidate when there is control
Asset Retirement Obligations
ARC & ARO
- recorded initially at PV
- ARC is DEPRECIATed over life of accretionary period (ACCUMULATED DEPRECIATION)
- accretion expense uses discount rate
- ARC + accretion expense = total cost
- difference is plugged to an additional expense
New/Increase = new interest rate Old/Decrease = old interest rate
Troubled Debt Restructuring
Transfer of Assets
- gain/loss on asset (FV vs book)
- gain (possibly extraordinary) carrying amount - FV
Transfer of Equity Interst
1. carrying amount of payable - FV of equity
Modification of Terms
- prospectively
- FV < carrying value = gain
Modification of Terms Example - Troubled Debt Restructuring
- compare total future cash payments with carrying amount of payable (including any interest)
- get rid of old NP and recognize new NP
Troubled Debt Restructuring - Creditor Accounting
GR: not extraordinary
*Receipt of Assets or Equity = ordinary loss
Modification of Terms
*bad debt expense and allowance for credit loss
Payroll Deductions and Expenses
- be sure to double FICA
* the second half of FICA is a business expense for the employer
Premiums & Estimated Liabilities
Total number coupons issued x estimated redemption rate = total estimated coupon redemptions
*can subtract out any funds that would be received along with the coupons
If warranty expenses are incurred evenly throughout the year, how should the expense be calculated?
*use half of the amount that normally would be attributed to that full year
Classification of Contingencies
Probable = likely
Reasonably possible = more than remote, less than likely
Remote = slight chance of occurring
IFRS & Definition of Probable
More likely than not
If a range of losses is given, which amount is chosen?
- the one that is most reasonably likely or the lowest amount
- IFRS uses the midpoint in the range
Types of Subsequent Events
Type I: relate to pre-existing items
Type II: important new event
Are gain contingencies reported?
- no journal entry is made, but a disclosure will be made
* avoid misleading implications
When financial statements are reissued, do subsequent events need to be updated?
No
Types of Derivatives
options, futures, forwards, swaps
Financial Instruments
- contracts which result in an exchange of cash or ownership interest in an entity
- cash, foreign currency, demand deposits
- evidence of an ownership interest
- derivatives
Fair Value Option
- irrevocable and is reported in earnings
* can only be used for IFRS if it reduces a measurement or recognition inconsistency
Where does the Fair Value Disclosure appear?
*body of financial statements or footnotes
Which type of risk is required to be disclosed?
- concentration of credit risk
- market risk is not required but it is encouraged
- IFRS requires credit risk, liquidity risk, and market risk to be disclosed
Underlying & Notional Amount
Underlying = specified price, rate, or other variable
Notional Amount = currency unites, share, bushels, pounds, etc.
Hedging
*the use of a derivative to offset anticipated losses or to reduce earnings volatility
How can settlement occur with a derivative?
- actual payment or receipt of goods
* other party makes up the difference and does not release item
Option Contract
call = buy (hope prices increase) put = sell (hope prices decrease)
Futures Contract
*publicly traded
long/buy profit (P increase)
short/sell profit (P decrease)
Forward Contract
*privately negotiated futures contracts
Swap Contract
*private agreement to swap interest rates (variable for fixed)
When using a cash flow hedge where settlement involves payment in cash rather than goods, is an account receivable recognized?
No, instead you would recognize an asset or liability called cash flow hedge
Accounting for Derivatives: Accounting Types
- Fair Value Hedge = asset or liability changes = earnings
- Cash Flow Hedge = variability in future cash flows = effective in OCI and ineffective in earnings
- Foreign Currency Hedge (Fair Value or Cash Flow)
- Foreign Currency Net Investment Hedge = OCI
*speculation = earnings
When are accounts receivable/payable reported with derivative transactions?
*for the original journal entry for a sale or receipt of goods on credit
What is deemed to be effective?
80% - 120%
Firm Commitment
*firm commitment to buy/sell at a given price; recognized in earnings
When there is a firm commitment and another derivative
*make sure to account for both
Net Settlement
*just get rid of the liability or gain and DR or CR the corresponding entry to cash
Final Journal Entry to Resolve Cash Flow Hedges
*remove gain/loss out of OCI and into earnings
Derivative Disclosures
- description of objective for derivatives
- volume of the company’s derivative activity
- location and amounts of gains and losses in earnings or OCI
- effectiveness and ineffectiveness of each hedge and where income was reported
Financial Instruments that Must be Classified as Liabilities
- shares that are mandatorily redeemable
- obligation to repurchase the issuer’s equity shares by transferring assets
- financial instruments that represent an obligation to issue a variable number of shares
Accounting for Financial Instruments under IFRS 9: Debt Instruments
- valued at amortized cost or fair value
* fair value is measured in P&L
Accounting for Financial Instruments under IFRS 9: Equity Instruments
- valued at fair value with gains and losses in earnings UNLESS
- *part of hedging relationship
- *entity makes irrevocable election to present gains and losses in OCI
Reclassification: required only when the entity changes the business model
Classification of Measurement of Financial Liabilities under IFRS 9
- recognized at FV and then recorded at fair value or amortized cost
- reclassification may not occur between amortized cost and fair value
The Liquidation Approach is applied _______
prospectively when liquidation is imminent
Entities that Require Liquidation Approach
- bankruptcy and expectation to liquidate
- benefit plans which are terminated by sponsors
- limited-life entities that are not following the pre-established liquidation plan
Requirements for Imminent Classification
- returning from liquidation is remote
2. liquidation is approved or liquidation plan is imposed by other forces
Measurement of Assets, Liabilities, and Accruals
*cumulative-effect adjustment is required
- assets are measured at quick sale expected cash proceeds
- liabilities are measured at U.S. GAAP
- accruals: costs expected to be incurred and income expected to be earned
Financial Statement Presentation and Disclosure
- Statement of Net Assets in Liquidation and a Statement of Changes in Net Assets in Liquidation
- Disclosures
* statement that using liquidation basis
* plan for liquidation
* significant assumptions used to measure
* time frame
* costs and income accrued
