F4 Flashcards
For a held-to-maturity security - when is a loss recorded based on CECL model?
Loss is recorded when the amortized cost exceeds the PVFCF
For AFS debt security: When is a credit loss recognized and where is it reported? What is the amount of PVFCF
Recognized when Amortized cost > FV –> Asset has to be written down to lower FV,` credit loss
PVFCF = Amort cost LESS Credit loss
*note that the unrealized loss or valuation allowance is not included
Reported on Income Statement
What should Equity Method investment disclosure include?
disclose the Company’s accounting policy for the investment
For most financial instruments - what amount is disclosed?
FV and Carrying Value
How are Trading Securites classified?
At FV, within holding G/L in earnings
How do you calc the NCI during the year?
Beg NCI
+ NCI share of Sub NI
- NCI share of Sub dividends
___________________________________
End NCI
In a business combination - how are direct costs treated?
Expensed in the period incurred
What is the consolidating elimination entry?
DR: CAR (CS/APIC/RE) OF SUB acquiring
CR: IN (investement in sub = purch amt, NCI if not 100%)
DR: BI (BS at FV, ID IA at FV) for changes in assets to FV
Goodwill/Gain (plug)
What is the qualitative evaluation of Goodwill impairment?
- used before quantitative evaluation
- Used to determine if quantitative is needed
- If 50% chance that the FV of Net assets < BV continue to quantitative
What is the cap on impairment loss?
Cannot exceed the BV of GW
Where are the Unrealized G/L from FV option recorded?
in I/S
What are not examples of Debt securities
Options (future or forward), leases, AR and AP
For a trading debt securities:
What is it classified as (A/L)
Where in the cashflows is it
Where is G/L recorded?
CA
CF operations
FV = G/L on IS
For AFS debt securities
What is it classified as (A/L)
Where in the cashflows is it
Where is G/L recorded?
CF investing
FV realized G/L –> IS
FV unrealized G/L –> OCI
For HTM debt securities:
What is it classified as (A/L)
Where in the cashflows is it
Where is G/L recorded?
CA/NCA
Amortized cost
no g/l
What is the calc of Impairment on debt security
PV - amort cost
what is FVTNI used to classify?
Valuation of equity securities (for public companies)
What are the 5 disclosures necessary for securities
- investment in debt securities (type,G/L, value)
- investment in equity securities (type,
- FV - need to state category
- Concentration of credit risk
- Market risk (optional)
What are the three rules for Variable interest entity?
- Variable interest exists (financial stake in company)
- In a VIE (lack basic equity)
- primary beneficiary (Biggest winner/loser)
what are the 5 ways to distinguish that a business entity is a VIE
- Insufficient level of equity in risk
- Inability to make decision
- No obligation to absorb
- no right to rec returns
- Dis proportion of voting rights
If an there is an asset and in addition to GW that needs to be evaluated for impairment in a REPORTING UNIT - how will the GW be evaluated?
Evaluate other assets impairment first prior to GW
If you acquire 100% of a company for stock @par of 10 and @FV of $17 - what is the value of investment?
Recorded at FV ALWAYS (17)
How do you record the impairment of GW JE?
DR: Impairment loss
CR: Goodwill
What is the JE to eliminate Intercompany Payable and Receivable?
DR: Intercomp payable
CR: Intercompany rec
Will the “investment in subsidiary” included in the Consolidated FS?
NO - it is a credit in CAR IN BIG –> removed so no double counting
When a subsidiary and consolidated entity pay dividends, what amount will be reported on the consolidated F/S
Only the parent issued dividends bc the subsidiary dividends will be eliminated
What are the exceptions to consolidation when a company has controlling int of another entity?
- when subsidiary is in legal reorganization or bankruptcy
- sub operates under severe foreign currency exchange transactions
- other govt imposed uncertanties so severe that cast doubt on parent to own subsidiary
What is the valuation of equity securities reported at? where are unrealized G/L reported for these?
- reported at FVTNI
- Unreal G/L reported on i/s
What is the impact of an undervalued asset amortization on the investment income using the equity method?
This will decrease the both rev and investment account
DR: Equity rev
CR: Investment in sub
If there is goodwill created from an equity investment, how is the accounting treatment for this?
DO NOTHING, the entire investment is subject to impairment
When acquiring a company - what is the amount assigned to inventories (FG and RM)
Fair value
FG FV = EST SP - costs of disposal and profit allowance
What are two type of securities that are not Equity securities?
Treasury stock and convertible bonds
Under the FVTNI - what is the entry to record dividends rec
DR: Cash
CR: Dividend incoe
What are the 3 ways that the investment account will decrease through FVTNI
- Shares of stock are sold
- Cumulative dividends exceed cumulative earnings (ROC)
- subsidiary incurs losses that result in impairment
Even if a company owns a majority of voting interest in an investee. How will a noncontrolling shareholder stop them from having controlling financial interest?
If the noncontrolling shareholder has the right to block decisions in the ord course of business
If an investor investment is reduced to zero due to investee losses and equity method is suspended, when can the investor resume applying the equity method?
Once the investee has returned to profitability and any net losses allocated to the investor during suspension period are covered by investors share of investee NI
What is the definition of a financial instrument?
Contract with the right to receive cash and obligation to the issuing party to pay cash
When the FV of equipment is greater than BV in acquiring a company, what is the impact on the equity method (include JE)
only for assets with depreciation
- FV - BV of asset = BS Gain
- BS Gain * equity invest % = portion to investor
- Portion to invest / Useful life remaining = Amortization
- Decreases both Investment income and investment account
JE:
DR: Income in investee
CR: investment in investee
What is the classification of an amount held in a sinking fund required by bond agreement
Restricted cash
What is credit risk
Risk that other party will partially or not complete terms of agreement (i.e will not collect –> AR)
If an entity is acquired July 1, 2021 - what would the consolidated F/S be as of July 1,2021?
BS of both Parent and Sub
IS of only Parent (bc no sub income/loss operations yet)
What is the cap on the amount of GW impairment loss?
If the impairment is greater than the GW balance –> only record loss up to the amount of GW on the books
I.e CV = 105, FV = 90, GW balance = 12 … normally impairment would be 15 (105-90) however, bc GW balance is 12 –> record 12
