F10

Question 1

Troubled debt TRANSFER OF EQUITY

Answer 1

CV of payable
- FV of equity
= GAIN

Question 2

Define ‘underlying’ as it relates to financial instruments

Answer 2

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.

Question 3

Define notional amount

Answer 3

A notional amount is a specified unit of measure (currency units, shares, bushels, pounds, etc).

Question 4

Value or settlement amount

Answer 4

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

Question 5

Payment provision

Answer 5

A payment provision is a specified or fixed or determinable settlement that is to be made if the underlying behaves in a certain way.

Question 6

Troubled debt TRANSFER OF ASSETS

Answer 6

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)

Question 7

Something to remember for TROUBLED DEBT RESTRUCTURING

Answer 7

FV - CV = Gain/Loss

CV > TOTAL FUTURE CASH PAYMENTS, THEN GAIN

Question 8

Option contract

Answer 8

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

Question 9

Futures contract

Answer 9

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

Question 10

Forward contract

Answer 10

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.

Question 11

Swap contract

Answer 11

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.

Question 12

Fair value hedge

Answer 12

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.

Question 13

Derivative instruments

Answer 13

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).

Question 14

Cash flow hedge or a foreign currency cash flow hedge

Answer 14

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.

Question 15

Statement of cash flows for hedging activities

Answer 15

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.

Question 16

IFRS RULES REGARDING FINANCIAL INSTRUMENTS

Answer 16

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

Question 17

Foreign currency fair value hedge

Answer 17

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.

Question 18

Foreign currency net investment hedge

Answer 18

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.

Question 19

US GAAP disclosures for credit risk and market risk

Answer 19

US GAAP - concentration of credit risk must be disclosed, and disclosure of market risk is encouraged but not required.

Question 20

IFRS disclosures for credit risk and market risk

Answer 20

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.

Question 21

What is included in the ARO balance

Answer 21

CUMULATIVE ACCRETION EXPENSE + CUMULATIVE DEPRECIATION EXPENSE = ARO

Question 22

Initial measurement of ARO

Answer 22

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.

Question 23

Subsequent measurement of ARO

Answer 23

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.

Question 24

Exact method - creation of new partner

Answer 24

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

Question 25

Bonus method - creation of a new partner

Answer 25

Bonus Method
Purchase price is more or less than the book value of the capital account purchased, bonuses are adjusted between the old and new partners’ capital accounts and do not affect partnership assets
Determine total capital and the interest to the new partner
If interest less than amount contributed, bonus to old partner (s)
If interest greater than amount contributed, bonus to new partner

B = Bonus = Balance in total capital accounts controls the capital account allocation

Bonus will be credited to the following partner:
Existing partners - when new partner pays more than NBV
New partner - when new partner pays less than NBV

Question 26

Goodwill method - creation of a new partner

Answer 26

Goodwill Method
Goodwill is recognized based on the total value of the partnership implied by the new partner’s contribution.
Compute new ‘net assets before goodwill’ after admitting new (or paying old) partner
Memo: compute new ‘capitalized’ net assets (= total net worth) and compare ‘capitalized net assets’ with ‘net assets before goodwill’
And the difference is goodwill to be allocated to the old partners according to their old partnership profit ratios.

G = Goodwill = Going in investment (dollars) controls capital account allocation and goodwill calculation

Implied value (new partners contribution x number of partners in the firm)
- total partners capital accounts
Goodwill

Then..
Capital Account Balances 
Goodwill x Partner A %
Goodwill x Partner B %
Partner C Capital Account Balance  = amount contributed

Question 27

A company recorded a decommissioning liability and recognized the amount recorded as part of the cost of the related property. After the property was fully depreciated,the DL was reviewed and adjusted. How should this change in the DL be recognized under IFRS?
A. The change in the liability is recognized in profit or loss
B. The change in the liability is recognized as a change in the carrying amount of the property if the liability increases but is otherwise recognized in profit or loss
C. The change in the liability is recognized in other comprehensive income
D. The change in the DL is not recognized until it is settled

Answer 27

A. The change in the liability is recognized in profit or loss

Note: these rules apply to US GAAP as an asset retirement obligation. Any change in the value of the liability after the property has been fully depreciated will be recognized in profit or loss.

Question 28

Under IFRS, a sponsoring company must consolidate a special purpose entity (SPE):
A. Only if the company has a >50% interest in the SPE
B. When the company is the primary beneficiary of the SPE.
C. If the company controls the SPE
D. When the company has voting rights that are disproportionate to its economic interest

Answer 28

C. If the company controls the SPE

Question 29

Which of the following statements is most accurate regarding the valuation of assets and liabilities under the liquidation basis of accounting?
A. Liabilities should be adjusted based on the estimate of relief impact from bankruptcy
B. Assets may increase in value on the balance sheet
C. Adjustments to asset and liability totals must be equivalent in order to keep equity constant
D. Assets and liabilities should be adjusted to reflect fair value

Answer 29

B. Assets may increase in value on the balance sheet

Question 30

IFRS Sale Leaseback

Finance lease:

Answer 30

If a finance lease, any profit is deferred and amortized over the lease term

Question 31

IFRS Sale Leaseback

Operating lease

Answer 31

Sales price = Fair value
Profit and loss recognized IMMEDIATELY

Sales price > Fair value
Profit loss DEFERRED period asset exp. to be used

Sales price