F4 Flashcards
Trading securities
Type of asset, where cash flow, how measured?
Current asset
Cash flow from continuing ops
Fair value - all gain / loss to IS
Redeemable Preferred Stock
Debt - debt rules
Has maturity date
No voting rights
Available for sale securities
Type of asset, where cash flow, how measured?
Cash flow from investing Fair value (unrealized gains / losses to OCI
Held to maturity debt securities
Type of asset, where cash flow, how measured?
Debt only Amortized cost (not fair value)
Requirements for held to maturity
INTENT and ABILITY to hold the securities to maturity
Debt securities reported at fair value are classified as
Either trading securities or available for sale
Offset account for unrealized gains and losses JE for fair value adjustments of financial instruments
Valuation account (fair market adjustment) Contra asset
Is retained earnings affected by recognizing an unrealized loss on AFS securities?
No - does not effect retained earnings. Effects OCI and comprehensive income
If AFS is permanently impaired, where is the loss recognized?
IS - NOT OCI
Requirements for transferring between categories of securities
Must be justified
If a trading security is non-current, where does it appear on the cash flow?
Investing
If a trading security is current where does it appear on the cash flow?
Operating
What happens to unrealized gain / loss when transferring from trading securities to another category?
Unrealized gain / loss in earnings shall NOT be reversed
What happens to unrealized gain / loss when transferring to trading securities?
Recognize in Earnings
What happens to unrealized gain / loss when transferring from AFS to HTM?
Unrealized holding gain will be amortized over the remaining life of the security (like discount / premium)
Interest income cash flow category
Operating
Permanent impaired HTM, where does loss go?
Mark to FMV and loss goes to IS
Does permanently impaired loss ever hit OCI?
Never - b/c this is a realized loss
Can you have significant influence if you don’t have voting rights?
No
Non public trading securities are valued at
Cost less impairment
Private means hard to judge FV
Liquidating JE for investor
Cash
Investment in investee
What is a liquidating dividend?
Dividend is greater than what the company has in retained earnings. The excess is liquidating
Fair value through net income
Trading security rules for equity investments
Required disclosures for investments in debt securities
Fair value (HTM / AFS)
Unrealized gains and losses
Amortized Cost
Market risk
Sensitivity to overall macroeconomic conditions
Encouraged disclosure - not mandatory
Credit risk concentrations
Mandatory disclosure
Risk of loss from party nonperformance
How to calculate realized gain / loss on AFS debt security
Original cost - selling price = gain (loss)
Reverse OCI
FVTNI
Fair value through net income (trading security rules by named differently to keep equity separate)
Can Equity be avail. For sale?
No
IFRS difference in equity instruments gains / losses (investor)
Equity instruments can be valued as AFS (FVOCI)
Practability exception to fair value reporting
Not practical to report at fair value
What is required to disclose for financial instruments that have elected the practicability exception?
Carrying amount
Impairment
Can trading securities be impaired under GAAP or IFRS?
No - changes in fair value already recognized in NI
IFRS reclassification of investor securities difference from GAAP
Recognize gain / loss in earnings no matter the classification and remeasure at fair value
IFRS impairment difference for investor securities
AFS -> loss to OCI
JE for Dividends received (no significant control)
Cash
Dividend income
Where does unrealized gain and loss go for trading securities?
IS
Where does unrealized gain and loss go for AFS?
OCI
Where does unrealized gain / loss go for HTM?
Not measured
Reclassification from AFS to HTM - what happens unrealized holding gain / loss?
Adjustment of yield in manner consistent to amortization of premium or discount
What most likely would cause a decline in bond’s market value?
Interest rate increase
Items excluded from fair value reporting options
a. Leases
b. Pension benefit assets / liabilities
c. Investments in subsidiaries
Equity method is not appropriate even when investor owns 20 - 50% when
Bankruptcy in sub Invest in sub temporary Lawsuit or complaint filed Standstill agreement No significant influence
How are Earnings and Dividends recorded for investments under the equity method?
a. Earnings increased investment
b. Dividends decrease investment - they are NOT income
Income from investment equity method account is what account (revenue side)
Equity in investee income
Equity in investee income is calculated how
Preferred stock dividends + share of earnings available to common stock (net income reduced by preferred dividends)
If impairment is temporary, how recorded?
Only permanent impairment is recorded
Transition from fair value method to equity method for equity investment
Add to investment and account prospectively
If significant influence is acquired in an investment of investee on Dec 31st, how should income from investee be calculated?
Investment from investee would be calculated as ( 0/12 * % owned * investee Earnings ) b/c the control was acquired on the last day of the year and only Earnings after that date (prospective) will be income
Under the equity method, when is goodwill obtained from an investment tested for impairment?
It isn’t. The entire investment is tested for impairment
Significant doubt exists in the parent’s ability to control the subsidiary when
Bankruptcy
Legal reorganization
Severe foreign restrictions
IFRS VIE
SPE
Special purpose entity
Under IFRS when does an entity consolidate a SPE?
When the entity has CONTROL
Does a sub’s partial ownership of. Parent company affect the decision to consolidate?
No
Record company acquisition based on fair market value of common stock at announcement date or closing date?
Closing date
Business combination costs are
Direct out of pocket costs are Expensed
Stock registration and issuance costs are
Debit APIC
Direct reduction of the value of stock issued
Contingent consideration JE for acquisition of sub
Invest in Sub
Contingent Liability
Add to invest in sub and record as contingent Liability
Do preferred Dividends increase income or decrease investment under equity method?
Preferred Dividends increase income under the equity method
CAR IN BIG
CS, APIC, RE
Invest in sub, NCI
BS FV, Intangible FV over carrying
Goodwill
How is FV of finished goods calculated?
Estimated selling prices less costs of disposal and a reasonable profit allowance
Is replacement cost an appropriate measure of fair value for raw materials inventory?
Yes
Can NCI have a neg. balance in consolidation?
Yes, if there is sufficient loss in sub
What is the partial method of goodwill?
Preferred method of calculation of NCI under IFRS - Fair value of net assets * ownership %
In process R + D in business combinations
A capitalized intangible asset. Example you buy a cancer research company b/c of the potential for a cure.
Expense any R&D after acquisition and amortize if research is successful, otherwise impair
Private company goodwill accounting alternative
Amortize goodwill and some intangibles are forgone in favor of goodwill such as customer related intangibles and non-competes
Amortized over MAX 10 years
Do the partial and full goodwill methods differ when the parent owns 100% of the sub?
No
In the partial goodwill method in consolidation, how much goodwill does NCI get?
None
When an entity switches from equity method to consolidation method, how is gain / loss calculated?
FIRST The equity method investment must be adjusted to fair value - this results in a gain or loss. Then goodwill is calculated
When acquiring a company that already has in process R + D on the books and the fair value of that intangible is higher than CV, what do you record as the value for in process R + D?
The fair value
How should Dividends paid by sub be reported on consolidated financials when ownership interest is less than 100%?
Fully eliminate against investment in sub and NCI accounts
Amount of unrealized company profit eliminated is…
The difference between consolidated inventory and sub + parent inventory and consolidated inventory
If a sub buys parent stock, what is the gain / loss on transaction?
No gain / loss - it’s recorded as treasury stock
The amount of Depr. Expense on equipment sold through intercompany is decreased by
1 / x * gain
where x is the useful life left when the intercompany sale took place
If a parent owns x% of a sub and the sub acquires the parent’s bonds, what is the % of gain the parent recognizes as gain on extinguishment of debt?
100%
If a parent owns x% of a sub and the parent acquires the sub’s bonds, what is the % of gain the parent recognizes as gain on extinguishment of debt?
x% b/c it’s the sub’s bonds, NCI will recognize 1 - (x / 100) of the gain
When subs declare Dividends, what amount will be reported on parent’s consolidated financials?
The NCI portion only
Formula for finding cost from markup and sales
Sales / (1 + markup %) = cost
Does markup = gross profit %?
No!
Is NCI part of parent’s equity?
Yes!
Tricky part of consolidating sub net income
Only include sub revenues and expenses AFTER date of acquisition
Net cash spent or received in an acquisition must be reported where in the statement of cash flows?
Investing section
Financing section needs to report what if NCI exists on consolidated financials
Dividends paid by sub to NCI
JE to adjust sub’s intercompany note payable unrealized loss
No entry necessary because will be eliminated in consolidation
Goal of intercompany elimination for transfer of fixed asset
- Eliminate gain on sale
- Eliminate differences in carrying price and AD
- Eliminate excess Depr exp
If you own 95% of a company how much income do you recognize from sub in your own income?
95%, 5% will go to NCI instead of closing to your RE
When consolidating parent and sub, do you use fair value or book value?
Fair value of sub’s assets at ACQUISITION DATE and book value of parent’s (can’t mark up fixed assets under GAAP)
How to calculate ending NCI in equity?
Acquisition price / % ownership - acquisition price = beg NCI + NCI share of sub NI
Cash Generating Unit
IFRS or GAAP term?
IFRS
When is there possible impairment?
FV < BV
Goodwill should be tested for value impairment at what level under GAAP
Reporting unit
Goodwill should be tested for value impairment at what level under IFRS
Cash generating unit
If both an asset group and goodwill have to be tested for impairment, which should be tested first?
Asset group. Fair value of identifiable assets have to be determined before FV of unidentifiable assets can be determined
Implied goodwill
Excess of fair value over identifiable net assets and the max goodwill allowed
Excess of book value over implied goodwill is equal to the goodwill impairment
Carrying value exceeds fair value means
There may be impairment
Fair value exceeds carrying value means
There is no impairment
Equity method goodwill impairment vs consolidation when tested?
Consolidation - yearly
Equity method - goodwill is NOT tested for impairment, instead entire investment tested for impairment
When liquidating a partnership - advances from partners are
A. cashed out
B. Offset with their capital balances (increase)
B. Right to offset. Increases capital balances
