F10: MISC Topics

Question 1

What is the principal market and what is the most advantageous market? How they account for fair value and transaction costs?

Answer 1

• The principal market is where you just take the fair value of the market and do not account for transaction costs.
• When it comes to most advantageous markets you are taking into account the transaction costs, but when you get the one with the highest net amount, you will take the market price not the net price. This is done if there is no principal market.

Question 2

What is the hierarchy of inputs when it comes to fair value?

Answer 2

• Level 1 inputs are identical items only! (similar wouldn’t fall under this), and they are quoted prices in the active market. They take the market approach. On the measurement date.
• Level 2 inputs are similar items which are on the active markets. They can be for identical items but they are not on the active market. EX. discounting future cash flows.
• Level 3 you are going to use the discounted cash flows, and they are unobservable inputs. Assumptions based on the best available information. Only use if there is no level 1 or 2 information. Based solely on managements assumptions. Ex. projected cash flows.

Question 3

If there are multiple levels of inputs what level of inputs do you use?

Answer 3

You will always choose the lowest level that is available, the “weakest link”.

Question 4

What is the exact method in accounting for a partnership?

What is the formula for this?

Answer 4

-Where the purchase price is = to the book value. No Good will or bonus!
-If they are getting 1/4 interest, then you do 4-1 = 3. Divide the total amount thats been contributed by 3 to get the ownership interest that must be put in.
Ex. 2. getting 1/5 interest, 5-1 = 4. Divide by 4.
Ex. 3 There is total 75 assets put in 1/4 interest, divide 75/3, have to put in 25.

Question 5

What is the bonus method when accounting for a new partnership?

Answer 5

-Either the existing partner gets a bonus(new partner pays more), or the new partner gets a bonus ( new partner pays less).

• if new partner pays more than NBV or the Balance then old partners will get the bonus.
• If new partners pays less than NBV or the Balance then they get the bonus.
• To get the balance you are going to add up the current amounts owned by partners plus the amount contributed by the new partner.

Question 6

What is the Goodwill method when accounting for a new partnership?

Answer 6

• This is based on the total implied value of the new partner contribution.
• The implied value is the amount that the new partner contributed times the percent of ownership. EX. They want 1/3 interest, so we multiply the amount they contributed times the 3.

Question 7

How does the profit and loss distribution take place?

Answer 7

First you start with the amount of profit, then you take away the bonuses and apply them to the specific partners. You do the same for partners with guaranteed salaries, and all interest which is based on their capital accounts.

Question 8

What are the steps that are associated with the liquidation of a partnership?

Answer 8

1. Sell other assets for cash, which increases the cash account and decreases the other assets. (If you sell for less than the value in other accounts its a loss, which has to be distributed).
2. Use cash to pay off any A/P. Decrease cash.
3. Allocate the loss based on the profit and loss.
4. Offset the owed amount of loans. Based on the partner that has them.
5. Then the cash is allocated to the remaining partners.

Question 9

What are the three conditions for consolidation when it comes to a VIE?

Answer 9

1. There is is variable interest - have financial stake in another company.
2. Variable interest entity itself- the characteristic of the company are strange. Basically it cannot operate on its own, without financial assistance.
3. Primary beneficiary - we are the power, we get the profits and we are the ones that feel the loss. We are the ones benefiting from what they are doing.

Question 10

What are some examples of a variable interest entity?

Answer 10

1. The entity does not absorb the losses.
2. They have no right to get the profits.
3. They do not make the decisions.
4. There is disproportional voting rights.

Question 11

How do you record the accretion expense?
How do you record the depreciation expense?
As these items relate to ARO’s.

Answer 11

1. DR: Accretion expense
   Cr: ARO (liability)
   This entry is increasing the value of the ARO to the undiscounted value, for ARO’s are issued at PV so they are discounted.
2. DR: Depreciation expense
   Cr: Accumulated depreciation
   The total of the Accretion + the Depreciation expense = the ARO.

Question 12

How do you calculate the accretion expense?

Answer 12

The beginning ARO x the risk adjusted rate.

The book value or the carrying value of the ARO does not matter.

Question 13

How do you calculate an ordinary gain or loss?
When you automatically recognize an gain on transfer?
These are transfer of assets for a debtor.

Answer 13

1. Fv of asset transferred - NBV of asset transferred = ordinary gain or loss.
2. Carrying amount of the payable (debt owed) - FV of asset transferred = Gain never a loss (debt discharge). Also known as the gain from restructuring the debt.

Those two amounts added up and subtracted from the total debt that is forgiven will give you the total gain.

Question 14

How do you deal with a transfer of equity if you are a debtor?

Answer 14

Carrying amount of the payable - FV of equity transferred = Gain all the time

Question 15

How do you estimate the premium when it comes to accrued liabilities? (Formula)

Answer 15

Total number of coupons issued X estimated redemption rate = total estimated coupon redemptions.

Question 16

What do you do when the loss is probable and can be reasonably estimated?

Answer 16

You record a JE DR: Expense, CR: Liability.
- If there is a range of numbers that are no better estimates than the other than the lowest amount in the range should be used, with a note that says that is its possible that more be accrued.

Question 17

What do you have to do when the loss is just reasonably possible?

Answer 17

• You just have to disclose there is no need for a journal entry.
• And disclose the nature of the loss or range of loss.

Question 18

If the loss is remote then do what? Is there an exception?

Answer 18

You would just ignore it. 
BUT IF DOG apply disclose
D - debts of other guarenteed
O - obligations of commercial banks
G - guarantees to repurchase receivables

Question 19

What does DOG stand for?

Answer 19

D - debts of others is guaranteed.
O - obligation of commercial banks
G - guarantees to repurchase receivables.
If any of these items are met, then you have to disclose them even if the chance of the liability is remote.

Question 20

What would you do for a subsequent event that existed as of the date of the F/s?

Answer 20

You would accrue for this and disclose it as a subsequent event in the financial statements.

Question 21

How do you treat non recognized subsequent events, what are they?

Answer 21

They are events that occurred after the balance sheet date so they would only need disclosure.

Question 22

What are some financial instruments? Describe each, if they are private, or public, and what you want to happen to the price.

Answer 22

OFFS - they are a type of derivative.
O- Options - you are either getting a put (want price to fall) or a buy option (want P to increase)

F- Futures - you either take a long position (want P to increase), or a short (want P to fall), publicly traded

F-Forwards - similar to futures, but they are privately traded.

S- Swaps - assisted by an intermediary, but it also a private transaction that will result in exchange of cash in the future. Want to get more than you paid.

Question 23

When is a derivative hedge an asset or a liability on the balance sheet? And what is it measured by?

Answer 23

• It will be an asset if you are a winner and getting money, meaning the hedge protected you.
• If you are a loser and have to pay money then it will be a liability .
  They are always measured at the fair value.

Question 24

What are the four type of hedges?

Answer 24

1. no hedging designation - goes on the income statement, similar to T/S
2. Fair value hedge - buy a option and also buy a put option in case the price falls, then the put will save you. Gains and losses will also be in the income statement.
3. Cash flow hedge - if its ineffective then the change will go into the I/S; if it is effective then the change will go into the OCI, and the I/s later
4. Foreign currency hedge - if fair value then G/L on the income statement, if Cash flow hedge the effective portion goes into the OCI, and the ineffective portion goes into the income statement, if its a net investment hedge then it goes into OCI.

Question 25

When are financial instruments required to be reported as liabilities?

Answer 25

• When they are mandatorily redeemable
• There is an obligation to repurchase
• obligation to issue a variable number of shares

Question 26

What are the three key things to take into account for financial instruments under IFRS 9?

Answer 26

1. Classification and measurement of financial assets - they are first measured at fair value then subsequently measured at amortized cost or fair value.
2. Impairment - doesn’t apply to financial assets through profit and loss does apply to financial assets measured at amortized cost or fair value through OCI.
3. Hedge accounting - it will be classified as an hedge instrument if it is measured at fair value through the profit and loss not on if its a derivative instrument.

Question 27

When is the liquidation basis of accounting used?

What are the two criteria that must be met?

Answer 27

Only when the liquidation is imminent, and it will be applied prospectively.

1. the likelihood of the entity returning from liquidation is remote.
2. liquidation plan is approved by those with authority OR liquidation plan is imposed by other forces.

Question 28

Dividends and interest that are received can go under which category of the Cash flows under IFRS?
How about interest that is paid? How about dividends paid?

Answer 28

They can go under either the operating or investing activities.
Interest that is paid is either an operating or financing activity. Dividends paid is the same thing as interest that is paid.