F10 Fair Value, Partnerships, VIE's, ARO's Liabilities, Contingencies, etc.

Question 1

Describe the accounting for costs expected to be incurred during and at the end of the liquidation process.

Answer 1

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 separately and at nondiscounted values.

Question 2

Describe the hierarchy of FV inputs. Which inputs have the highest priority?

Answer 2

1- level 1 inputs: quoted prices in active markets for identical assets or liabilities
2- level 2 inputs: inputs other than quoted market prices that are directly or indirectly observable for an asset of liability
3- level 3 inputs: unobservable inputs for the asset or liability that reflect the entities assumptions and are based on the best available information.

Note; level 1 inputs have the highest priority

Question 3

Describe the exact method of creating a new partnership interest with an investment of additional capital.

Answer 3

The purchase price equals the book value of the capital accounts purchased

• no adjustment to the existing partner’s capital accounts
• no goodwill or bonus.

Question 4

Who is the primary beneficiary of a VIE and how does the primary beneficiary account for its VIE investment?

Answer 4

The entity with the power to direct the activities of the VIE that most significantly impact the entity’s economic performance and:
1- absorbs the expected VIE losses; or
2- receives the expected VIE residual returns

The primary beneficiary must consolidate the VIE.

Question 5

Define derivative instrument

Answer 5

A derivative instrument is a financial instrument (or other contract) that derives its value from the value of some other instrument and has all three of the following characteristics:
1- one or more underlyings and one or more notional amounts or payment provisions (or both)
2- requires no initial net investment; and
3- its terms require or permit a net settlement

Question 6

What are the general disclosures for creditors in a troubled debt restructuring?

Answer 6

1. the creditors policy for recognizing interest income
2. any commitment the creditor has to lend additional funds to the debtor
3. the activity in the allowance account for the reporting period.
4. the 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)

Question 7

What is the difference between estimated liabilities and accrued liabilities?

Answer 7

Estimated are for amounts that will be paid in the future where the amount is not known precisely when the liability must be recorded. Estimated liabilities are recorded in the current period in order to match the expenses to be paid in the future to the revenue recorded in the current period. ie. estimated liability for warranties

Accrued liabilities are generally recorded for amounts that are known and for expenses that have been incurred, but for which payment has not yet been made/ ie. accrued payroll expense, when payment is made on the first day of the next period.

Question 8

How is an impairment loan reported by the creditor?

Answer 8

Present value of the loan’s expected future cash flows discounted at the loan’s effective interest rate

Dr. bad debt expense
Cr. allowance for credit losses

Question 9

What are the general disclosures for the debtor in a troubled debt restructuring?

Answer 9

1- a description of the main changes in terms and/or features of settlements
2- gain on restructuring of payables (in the aggregate)
3- net gain or loss on transfers of assets recognized in the period (in the aggregate)
4- per share amount of the aggregate gain on the restructuring of payables.
5- the amount of contingently payable amounts included in the carrying amount of restructured payables (and any conditions that would cause those amounts to become payable or to be forgiven)

Question 10

List the disclosure requirements for financial instruments under US GAAP

Answer 10

• fair value and related carrying amounts
• concentrations of credit risk
• market risk (optional)

Question 11

What are the criteria for “imminent liquidation”?

Answer 11

• the likelihood of the entity returning from liquidation is remote; and
• either;
• • a liquidation plan is approved by the individual(s) with the authority to make the plan effective, and the likelihod is remote that the plan’s execution will be blocked by other parties, or;
• -a liquidation plan is imposed by other forces such as an involuntary bankruptcy

Question 12

Describe the measurement basis for assets and liabilities under the liquidation basis of accounting

Answer 12

• assets must be measured and presented at the amount of cash proceeds expected from liquidation, items that were not previously recognized under GAAP (ie. trademarks and 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 GAAP that otherwise applied to them. Adjustments can be made to reflect changes in assumptions (such as when payments are expected to be made) stemming from the decision to liquidate.

Question 13

Name four common derivative instruments

Answer 13

• option contracts
• futures contracts
• forward contracts
• swap contracts

Question 14

How is the gain (loss) measured in a troubled debt restructuring involving a transfer of assets?

Answer 14

Restate the assets transferred to FV and recognize a gain or loss in ordinary income.

Recognize a gain for the difference between the FV of the asset transferred and the carrying amount of the debt forgiven. The gain is possibly reported as extraordinary under GAAP if it meets the GAAP requirements (material, infrequent, and unusual)

Question 15

How is the gain (loss) measured in a troubled debt restructuring involving the modification of terms?

Answer 15

It is the difference between the 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.

Question 16

What is the effective interest rate method?

Answer 16

Method under which each payment on a note (or other loan) would be divided between an interest component and a principal component as though the note had a constant effective stated rate (or adequate rate) of interest.

Question 17

When should and entity prepare its financial statements using the liquidation basis of accounting?

Answer 17

• When liquidation is imminent, and entity must prepare its financial statements using the liquidation basis of accounting
• generally, a Co. is in liquidation when it is converting its assets to cash or other assets and is settling its obligations w/ creditors w/ the intent of ceasing its activities
• F/S’s must be prepared using a basis of accounting that helps F/S users understand how much the organization will have available to distribute to investors after disposing of its assets and settling its obligations.

Question 18

Describe the bonus method of withdrawal of a partner.

Answer 18

the difference between the balance off the 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 in accordance w/ their remaining profit and loss ratios.

Question 19

What is a subsequent event and what are the two categories of subsequent events?

Answer 19

An event or transaction that occurs after the balance sheet date but before the F/S are issued or are available to be issued.
1- recognized subsequent events; provide additional information about conditions that existed at the balance sheet date.
2- nonrecognized subsequent events - provide information about conditions that occurred after the balance sheet date and did not exist on the balance sheet date.

Question 20

Describe the proper accounting when the liquidation basis is initially applied.

Answer 20

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 by under the liquidation basis. At each subsequent reporting date, assets, liabilities and accruals must be remeasured.

Question 21

Describe the goodwill method of creating a new partnership interest with an investment of additional capital.

Answer 21

• goodwill is recognized based on the total value of the partnership implied by the new partner’s contribution
• goodwill is shared by the existing partners using the agreed P/L ratio.

Question 22

When is a loan considered impaired?

Answer 22

When it is probably that all amounts due (principal and interest) will not be received.

Question 23

Describe the valuation techniques that can be used to measure the FV of an asset or liability.

Answer 23

Market, income or cost approach.

Question 24

Describe the accounting changes in FV associated with each type of hedge designation.

Answer 24

FV hedge - included in current earnings w/ G/L from change in value of offsetting asset/liability.

Question 25

Describe an asset retirement obligation (ARO)

Answer 25

Legal obligation associated with the retirement of a tangible long-lived asset that results from the acquisition, construction, development and/or normal operation of long-lived asset

Question 26

When are contingent liabilities accrued?

Answer 26

• when the loss is both probable and can be reasonably estimated, the 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
• remote contingent losses are not disclosed, unless they are “guarantee-type” contingent losses, which must be disclosed.

Question 27

In creating a new partnership interest with an investment of additional capital, what three methods can be used?

Answer 27

• exact method
• bonus method
• goodwill method

Question 28

Define underlying and notional amount as they relate to a derivative financials instrument.

Answer 28

underlying: a specific price, rate or other variable (i.e. interest rate, security price, foreign exchange rate, index of prices or rates, etc.)

Notional amount: a specified unit of measure (i.e. currency units, shares, bushels, pounds, etc.)

Question 29

How is an ARO initial measured?

Answer 29

at FV (present value of the future obligation) as an asset (asset retirement cost) and a liability (asset retirement obligation).

Question 30

Premiums, warranties, and service contracts are examples of estimated liabilities. When are the liabilities for these types of expenses recorded and why?

Answer 30

Recorded in the same period as the revenue associated with the various transactions in order to accomplish matching of costs and revenues

Example: when a product is sold w/ a warranty, the future expense of satisfying the warranty is estimated and recorded as a liability in the same period as the sale.

Question 31

What are the disclosures required for a company that is applying the liquidation basis of accounting?

Answer 31

• a statement that the financial statements are prepared using the liquidation basis of 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 revenues are expected to occur.

Question 32

Describe the exact method of creating a new partnership interest with an investment of additional capital.

Answer 32

The purchase price equals the book value of the capital account purchased;

• no adjustment to the existing partner’s capital accounts
• no goodwill or bonus.

Question 33

Name four types of restructurings involving debt.

Answer 33

1- transfer of assets
2- transfer of equity interest
3- modification of terms
4- a combination of the above three.

Question 34

What is the accounting treatment of gain contingencies?

Answer 34

Gain contingencies are not reflected on the B/S but are disclosed as to their nature and amount if the likelihood is probable and to do so would not be misleading.

Question 35

When is a gain (loss) not recorded on troubled debt restructuring?

Answer 35

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. Difference is amortized as interest.

Question 36

How is an ARO accounted for in periods after initial measurement?

Answer 36

The ARO liability is adjusted for accretion expense and the ARO asset is depreciated.

Question 37

Identify the three types of hedge designations.

Answer 37

• fair value hedge
• cash flow hedge
• foreign currency hedge

Question 38

How are premiums or discounts resulting from recording notes payable and receivable at PV presented in the F/S’s?

Answer 38

Premium or discount that arises from the use of PV’s on cash and noncash transactions is inseparable from the related asset or liability. Therefore such premium or discount valuation accounts are added to (or deducted from) their related asset or liability on the B/S.

Discounts or premiums resulting from imputing interest must not be classified as deferred charges or credits.

Question 39

Describe the goodwill method of withdrawal of a partner.

Answer 39

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 w/ 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.

Question 40

Describe the financial statements required under the liquidation basis of accounting.

Answer 40

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.

Question 41

Describe the financial instrument FV option under GAAP.

Answer 41

On specified dates, an entity may choose to measure eligible financial instruments at FV w/ unrealized gains and losses reported in earnings. FV option is irrevocable.

Question 42

How are notes receivable and notes payable recorded in the F/S’s?

Answer 42

Must be recorded at PV at the date of issuance.

If a notes is non-interest bearing or the interest rate is unreasonable, the value of the note must be determined by imputing the market rate of the note and by using the effective interest method.

Question 43

In liquidating a partnership, what is the order of preference?

Answer 43

• creditors
• loans and advances to partners
• capital accounts of partners

*All losses must be provided for before disposal; that is, max potential losses before distribution of cash.

Question 44

Identify the three ranges of likelihood that a future event will confirm a contingent liability.

Answer 44

• probable
• reasonably possible
• remote

Question 45

What disclosures are required for subsequent events?

Answer 45

1- if an entity is not an SEC filer, entity must disclose the date through which subsequent events have been evaluated
2- nonrecognized subsequent events should be disclosed if disclosure is necessary to keep the F/S’s from being misleading.

Question 46

Describe the bonus method of creating a new partnership interest with an investment of additional capital.

Answer 46

Bonus Method:
New partner’s capital account = (A+B+C)* C’s percentage ownership
Excess of new partner’s contribution over capital interest received is a bonus to the old partners
Excess of capital interest received over new partner’s contribution is a bonus to the new partner.

Question 47

Explain the difference between the net method and gross method of recording AP.

Answer 47

Gross method: the gross method records a purchase w/out regard to the discount. When invoices are paid within the discount period, a purchase discount is credited.

Net method: purchases and AP are recorded net of the discount. If payment is made w/in the discount period, no adjustment is necessary. If payment is made after the discount period, a purchase discount lose account is debited.

Question 48

What is a variable interest entity? (VIE)

Answer 48

A corporation, partnership, trust, LLC, or other legal structure used for business purposes that either does not have equity investors w/ voting rights or lacks sufficient financial resources to support its activities.

Question 49

Who consolidates when one entity receives the expected returns from a VIE and another entity absorbs the expected losses?

Answer 49

The entity that absorbs the expected losses consolidates.

Question 50

Partial goodwill method under IFRS

Answer 50

FV of subsidiaries net assets * NCI. That’s it. Goodwill is calculated as Acquisition cost less FV of subs net assets

Question 51

IFRS depreciation for multiple useful lives

Answer 51

Component depreciation. Each item is depreciated separately, take note of what is included (cost of building and roof, subtract roof cost before calc., etc)

Question 52

Financial instruments not exceeding one year are recorded at…

Answer 52

Face amount

Question 53

Accrual of gain/loss contingencies

Answer 53

Gain contingencies are not accrued, only loss contingencies

Question 54

Interest and dividends can be reports on the CF under IFRS in…

Answer 54

CFO or CFI

Question 55

New entity or change in accounting principle under IFRS, issuer must include @ min…(# of F/S’s)

Answer 55

3 balance sheets (statements of net position)
2 income statements (statements of operations)

Effect of change in accounting principle is accounted for in beginning R/E of prior year.

Question 56

Accrual of loss contingencies nuance

Answer 56

Accrue if reasonably possible…if multiple reasonably possible amounts and no one is better than the other…accrue the lowest amount

Question 57

Recording gains and losses on hedging securities

Answer 57

Recorded in earnings in same accounting period as incurred.

Question 58

Bond issue costs under IFRS

Answer 58

reduce the cash received and are deducted from the carrying value the liability

Question 59

Misc. considerations for inventory calc under IFRS

Answer 59

“Cost” is usually FIFO inventory cost. IFRS uses lower of cost of NRV. NRV is FV less costs to sell.

Question 60

Research and development expenses under IFRS

Answer 60

Research expenses must be expensed, certain development expenses may be capitalized.