F10 Flashcards
Troubled debt TRANSFER OF EQUITY
CV of payable
- FV of equity
= GAIN
Define ‘underlying’ as it relates to financial instruments
An ‘underlying’ is a specified price, rate, or other variable (interest rate, security or commodity price, foreign exchange rate, index of prices or rates, etc), including a scheduled event (payment under contract) that may or may not occur.
Define notional amount
A notional amount is a specified unit of measure (currency units, shares, bushels, pounds, etc).
Value or settlement amount
The value or settlement amount of a derivative is the amount determined by the multiplication of the notional amount by the underlying.
Notional amount x underlying
Payment provision
A payment provision is a specified or fixed or determinable settlement that is to be made if the underlying behaves in a certain way.
Troubled debt TRANSFER OF ASSETS
Fair value asset transferred
- NBV of asset transferred
= Ordinary Gain/Loss
Carrying amount of the payable
- Fair value asset transferred
= Gain (When the question asks you what the gain on the income statement should be)
Something to remember for TROUBLED DEBT RESTRUCTURING
FV - CV = Gain/Loss
CV > TOTAL FUTURE CASH PAYMENTS, THEN GAIN
Option contract
A contract between two parties that gives one party the right, but not the obligation, to buy or sell something to the other party at a specified price (the strike price or exercise price) during a specified period of time. The option buyer, or holder, must pay a premium to the option seller, or writer, to enter into the option contract. A call option gives the holder the right to buy from the option writer at a specified price during a specified period of time. A put option gives the holder the right to sell to the option writer at a specified price during a specified period of time.
Call option —- BUY
Put option —- SELL
Futures contract
Futures Contract —-
An agreement between two parties to exchange a commodity or currency at a specified price on a specified future date. One party takes a long position and agrees to buy a particular item while the other party takes a short position and agrees to sell that item. Unlike an option, both parties are obligated to perform according to the terms of the contract. Futures contracts are made through a clearinghouse and have standardized notional amounts and settlement dates.
Long position —- BUY
Short position —- SELL
Forward contract
Forward Contract —-
Similar to futures contracts except they are privately negotiated between two parties with the assistance of an intermediary, rather than through a clearinghouse. Terms are established by the parties to the contract. Typically assets or currency at a specified price at a certain future date. No initial net invest on forwards.
Swap contract
Swap Contract —-
A private agreement between two parties, generally assisted by an intermediary, to exchange future cash payments. Common swaps include interest rate swaps, currency swaps, equity swaps, and commodity swaps. A swap agreement is equivalent to a series of forward contracts. A series of future cash flows, multiple payments.
Fair value hedge
A FAIR VALUE hedge is designated to hedge exposure to changes in fair value of a recognized asset or liability, or of an unrecognized firm commitment. Gains and losses are recognized in earnings.
Derivative instruments
Derivative instruments are either assets or liabilities on the balance sheet and measured at fair value. Gains or losses not designated as a hedging instruments are recognized currently in earnings (similar to trading securities).
Cash flow hedge or a foreign currency cash flow hedge
A CASH FLOW hedge is meant to hedge exposure to variability in expected future cash flows attributed to a particular risk.
Gains and losses on the INEFFECTIVE portion of a cash flow hedge are reported in earnings
Gains and losses on the EFFECTIVE portion of a cash flow hedge are deferred and reported of OCI until the hedged transaction impacts earnings
- Sale or expense is hedged – from AOCI reclassified to earnings when sale or expense is recognized in earnings
- Inventory purchase is hedged – from AOCI reclassified to earnings when inventory sold to customers
- Fixed asset purchase is hedged – from AOCI reclassified to earnings when fixed asset is depreciated
- Asset or liability is hedged – from AOCI reclassified to earnings when the asset or liability impact earnings
Ineffective portion means where the change in the fair value of the derivative instrument exceeds the change in the present value of the future cash flows of he hedged item/exposure.
Also applies to a foreign currency cash flow hedge.
Statement of cash flows for hedging activities
Cash flows from a derivative with no hedging designation should be accounted for in investing activities, unless the derivative is held for trading purposes. For trading, report in operating activities. If the derivative held as a hedge may be accounted for in the same category as the item being hedged.
IFRS RULES REGARDING FINANCIAL INSTRUMENTS
Financial assets are recorded initially at fair value and then subsequently recorded at amortized cost or fair value. For financial instruments that are debt instruments are reported at amortized cost
Foreign currency fair value hedge
a FOREIGN CURRENCY FAIR VALUE hedge – gains and losses from changes in the fair value of foreign currency transaction hedges classified as fair value hedges are accounted for in the same way as fair value hedges, in earnings.
Foreign currency net investment hedge
a FOREIGN CURRENCY NET INVESTMENT hedge – gains and losses from changes in the fair value of foreign currency transaction hedges entered into to hedge a net investment in a foreign operation are reported in OCI as part of the cumulative translation adjustment for the effective portion and current income for the ineffective portion.
US GAAP disclosures for credit risk and market risk
US GAAP - concentration of credit risk must be disclosed, and disclosure of market risk is encouraged but not required.
IFRS disclosures for credit risk and market risk
IFRS requires disclosure of the nature and extent of risks arising from financial instruments, including disclosure of credit risk for each class of financial instrument, disclosure of liquidity risk, and disclosure of market risk. The market risk disclosure is NOT optional under IFRS.
What is included in the ARO balance
CUMULATIVE ACCRETION EXPENSE + CUMULATIVE DEPRECIATION EXPENSE = ARO
Initial measurement of ARO
INITIAL MEASUREMENT OF ARO
DR Asset retirement cost (asset) XXX
CR Asset retirement obligation (liability) XXX
IFRS —- also called a decommissioning liability. Initially measured at the best estimate of the expenditure required to settle the obligation. US GAAP requires initial measurement at fair value.
Subsequent measurement of ARO
SUBSEQUENT MEASUREMENT OF ARO - ACCRETION AND DEPRECIATION
This is the increase in the ARO liability due to the passage of time.
DR Accretion expense XXX
CR Asset retirement obligation (liability) XXX
DR Depreciation expense XXX
CR Accumulated depreciation XXX
CUMULATIVE ACCRETION EXPENSE + CUMULATIVE DEPRECIATION EXPENSE = ARO
IFRS —- a decommissioning obligation is remeasured each period for changes in the amount or timing of cash flows and changes in the discount rate. Under US GAAP, the obligation is only adjusted for changes in the amount or timing of cash flows. i.e. the change in the liability is recognized under IFRS in profit amd loss in the income statement.
Exact method - creation of new partner
Exact Method
Purchase price equal to the book value of the capital account purchased, no goodwill or bonuses are recorded
Determine the exact amount a new partner will have to pay to get his capital account in the exact proportional interest to the new net assets of the partnership.
Old partners capital account stays the same
Formula:
Total equity = (all partners contributions) + (% new partner)
Then you multiply what you get to the new partners percent ownership
