F4- Financial Instruments, Business Combinations and Goodwill Flashcards
Bonds to be held until maturity (AFS) are recorded at what?
Amortized Cost
Equity Securities a company does not intend to sale in the near term and classified as what? Gain/losses are included where?
AFS Securities and as a separate component of OCI
Dividend Revenue under the FV method
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
Short-t5erm Investments
Discounts/premiums are not amortized
Any temporary difference on AFS are recorded as what? (difference between mid-year and year end)
“Net unrealized loss” in OCI
When are losses on securities recognized on the I/S?
Once the loss in value is considered permanent.
Trading securities unrealized gain/losses are reported where?
Income statement
Note: AFS unrealized losses are recorded in OCI but gains go to the income statement
how are trading securities valued?
FV
FV option for recognizing financial assets/liabilities calculation:
Income is calculated as the amount of the dividend received (*ownership%) +/- appreciation/decline in the investment during the year
FV Option of accounting can’t be used for what:
Leases, Investment in Sub and Pensions
Temporary Losses on AFS/Trading securities:
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
Switching categories of securities from AFS to Trading
AFS -> Trading = unrealized holding gain/loss with be recognized immediately in earnings
Trading -> AFS = unrealized holding gain/loss was already recognized in earnings
Equity Method: Receiving Dividends
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
Equity Method and its affects on income
The investor records revenue as their “% share of the investee’s earnings” not dividends received
Equity Method: Inventory/land appreciation
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
Equity Method: Calculating total investment
Purchase Price
+Share % of earnings
-Share % of dividend received
=YE Balance
When an investor acquires significant influence then what??
Equity method is used from that point forward. Only recognize income from the investee from that point forward.
Calculating Goodwill:
Difference between:
Purchase Price and FV of assets received
Equity Method: Calculating Investment Income: Acquiring Assets with Excess Fair Value
Excess FV Amortization
(Excess FV * Ownership %)
/Useful life (PPE - Inventory just * ownership %)
=Equity Investment Income
Preferred Stock Ownership and the Equity Method
Doesn’t allow investor to have significant influence: Must use FV Method - Dividend Income goes straight to I/S
When calculating revenue from investment and preferred stock is involved:
Subtract preferred dividends before calculating revenue from investment.
Also add dividend revenue:
$dividends * ownership%