F4- Financial Instruments, Business Combinations and Goodwill Flashcards

1
Q

Bonds to be held until maturity (AFS) are recorded at what?

A

Amortized Cost

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2
Q

Equity Securities a company does not intend to sale in the near term and classified as what? Gain/losses are included where?

A

AFS Securities and as a separate component of OCI

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3
Q

Dividend Revenue under the FV method

A

Should be recognized to the extent of cumulative earnings since acquisition and return of capital. The portion to be included on the income statement would be the amount “not” in excess of investor’s share in the investee’s undistributed earnings since the date of the investment

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4
Q

Short-t5erm Investments

A

Discounts/premiums are not amortized

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5
Q

Any temporary difference on AFS are recorded as what? (difference between mid-year and year end)

A

“Net unrealized loss” in OCI

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6
Q

When are losses on securities recognized on the I/S?

A

Once the loss in value is considered permanent.

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7
Q

Trading securities unrealized gain/losses are reported where?

A

Income statement

Note: AFS unrealized losses are recorded in OCI but gains go to the income statement

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8
Q

how are trading securities valued?

A

FV

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9
Q

FV option for recognizing financial assets/liabilities calculation:

A

Income is calculated as the amount of the dividend received (*ownership%) +/- appreciation/decline in the investment during the year

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10
Q

FV Option of accounting can’t be used for what:

A

Leases, Investment in Sub and Pensions

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11
Q

Temporary Losses on AFS/Trading securities:

A

AFS: Should be credited to an allowance account and debited directly to OCI (other than temporary losses should be debited to income statement and credit to the security account)

Trading: Should be credit to allowance account and debit income statement

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12
Q

Switching categories of securities from AFS to Trading

A

AFS -> Trading = unrealized holding gain/loss with be recognized immediately in earnings

Trading -> AFS = unrealized holding gain/loss was already recognized in earnings

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13
Q

Equity Method: Receiving Dividends

A

When a company receives a dividend from a company they invest in using the equity method, the dividend should be accounted for by reducing the unit cost of all the stock owned in that company.

FV method: dividends are considered income

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14
Q

Equity Method and its affects on income

A

The investor records revenue as their “% share of the investee’s earnings” not dividends received

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15
Q

Equity Method: Inventory/land appreciation

A

Investor would record:

FIFO inventory FV increased so the investor would:
-Record the additional COGS associated (thus decreasing earnings)

Land FV increased so the investor would:
-No effect on equity earnings

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16
Q

Equity Method: Calculating total investment

A

Purchase Price
+Share % of earnings
-Share % of dividend received
=YE Balance

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17
Q

When an investor acquires significant influence then what??

A

Equity method is used from that point forward. Only recognize income from the investee from that point forward.

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18
Q

Calculating Goodwill:

A

Difference between:

Purchase Price and FV of assets received

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19
Q

Equity Method: Calculating Investment Income: Acquiring Assets with Excess Fair Value

A

Excess FV Amortization

(Excess FV * Ownership %)
/Useful life (PPE - Inventory just * ownership %)

=Equity Investment Income

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20
Q

Preferred Stock Ownership and the Equity Method

A

Doesn’t allow investor to have significant influence: Must use FV Method - Dividend Income goes straight to I/S

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21
Q

When calculating revenue from investment and preferred stock is involved:

A

Subtract preferred dividends before calculating revenue from investment.

Also add dividend revenue:
$dividends * ownership%

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22
Q

Goodwill created in an investment accounted for under the equity method:

A

IGNORED

23
Q

FV Method:

A

Dividends are considered income for the year.

24
Q

Reporting Consolidated Financials is done under what accounting concept?

A

Economic Entity

25
Q

Vertical Chain in Consolidation:

A

Parent Co. owns >50% of sub and Sub owns >50% of third company = Consolidate

26
Q

VIE Entities:

A

Must be able to dictate activities, share in losses and earnings.

Not required to have >50% ownership

27
Q

Variable Interest in an entity:

A

Most liabilities (except short term - A/P) represent Variable interests

28
Q

When does a company have insufficient equity investment at risk?

A

When the companies “equity investment at risk” is less than the equity investment at risk of similar Non-VIE entities.

29
Q

Acquisition Method: Calculating APIC

A

Total Investment (FV of stock * # of shares)

-Common Stock (at Par Value)

= APIC

30
Q

Direct Costs under the acquisition method are recorded how?

A

Deducted in determining NI of the combined corporation for the period in which the costs occurred.

31
Q

Net Assets Acquired using acquisition method of accounting:

A

Based on FMV

32
Q

Acquisition Method: Registration and Issuance Costs/Legal Expenses

A

Registration Costs reduce value of stock issued (subtract directly from APIC)
APIC = (MV-PAR * Shares) -
Registration Costs

Legal and Consulting Fees/Finder Fees (acquisition costs) are directly expensed

33
Q

When acquisition price exceeds the FV of net assets acquired, how should the assets be presented?

A

FV

34
Q

Goodwill under IFRS (partial) and Non-Controlling Interest

A

Acquisition price - ((FV of net assets acquired) *ownership%))

Non-controlling interest = Same Except (*NCI%)

35
Q

Goodwill under US GAAP (common stock acquisition)

A

Goodwill = (FV of Subsidiary - FV of Assets Acquired)
Example:
FV of sub x 75% = 300,000 (acquisition price)
FV = $400,000
GW = 400,000 - FV of net assets

36
Q

IFRS (common stock acquisition)

A

NCI = FV of subsidiary assets * NCI%

37
Q

US GAAP: FV of Sub Acquisition and NCI

A

FV of sub = (Acquisition price / % acquired)

NCI = (Fv of Sub * %NCI)

38
Q

Calculating Gain when working with Goodwill:

A

( Total Investment (common stock + contingent consideration given) - BS Adjustment (FV-BV) )

39
Q

Business acquisition: How does the acquirer recognize a bargain purchase?

A

As a gain in earnings on the date of acquisition

40
Q

Dividends paid in acquisitions:

A

Dividends paid by subs are eliminated in consolidation

NCI isn’t (only left on consolidated BS)

41
Q

Inter-company sales:

A

Take (total revenue (both companies) - consolidated = inter-company sales)

42
Q

Inter-company payables:

A

Take (total AR - consolidated = inter-company payable)

43
Q

Intercompany Sales:

A

The effect of these sales should be eliminated

44
Q

Intercompany Sales: Getting to carrying value of inventory

A

(Total Revenue - Consolidated) = Intercompany Revenue

  • COGS % (1-GP%)
  • % on the consolidated B/S (unpaid amount)
45
Q

Calculating Intercompany COS:

A

(Total COS (both companies) - Intercompany Sales) = Adjusted COS

46
Q

Fixed Asset Costs and Consolidation

A

Fixed Asset cost from outside world is used and remains on the Balance Sheet (amount is net of gains recognized earlier)

47
Q

Unrealized Gross Profit (subsidiaries inventory)

A

((Shipments from - Shipments to)/Shipments From)

*Inventory Acquired from Subsidiary

48
Q

Difference in depreciation expense:

A

Original Depreciation Expense (before intercompany sale) - Depreciation Expense if there was no intercompany sale

49
Q

Getting to income from RE Statement:

A

1/1: Balance

  \+Income **Squeeze

=Income before Dividend payment

+/-Dividend Payment

12/31: Balance

50
Q

At date of Acquisition: SE will equal what?

A

(SE at date of acquisition will equal the SE of the parent company) + FV of any NCI

-subsidiaries SE is eliminated completely

51
Q

Net income after acquisition:

A

NI should not change from parent’s (if equity method used)

52
Q

Acquisition Method requires what in regards to recognizing assets of subsidiaries?

A

+100% of the FV of subsidiaries assets be recognized.

+BV of parents

=New total

53
Q

Goodwill impairment test: GAAP vs IFRS

A

GAAP: each reporting unit

IFRS: each CGU (cash generating unit)
-One step process:
Compare: ( > of FV - cost to sale or Value in
use/recoverable amount) vs Carrying value