F4 INVESTMENTS, BUSINESS COMBINATIONS, AND GOODWILL Flashcards
DESCRIBE THE FINANCIAL INSTRUMENTAL FAIR VALUE OPTION UNDER U.S. GAAP.
ON SPECIFIED ELECTION DATES, AN ENTITY MAY CHOOSE FINANCIAL INSTRUMENTS AT FAIR VALUE. HOWEVER, ONCE ELECTED THE FAIR VALUE IS IRREVOCABLE.
ON THE BALANCE SHEET, DEBT SECURITIES CLASSIFIED AS TRADING OR AVAILABLE-FOR-SALE ARE VALUED HOW?
AT FAIR VALUE
HOW ARE UNREALIZED GAINS/LOSSES ON DEBT SECURITIES CLASSIFIED AS TRADING SECURITIES RECOGNIZED?
UNREALIZED GAINS AND LOSSES ON TRADING SECURITIES ARE RECOGNIZED ON THE INCOME STATEMENT.
HOW ARE UNREALIZED GAINS/LOSSES ON DEBTS SECURITIES CLASSIFIED AS AVAILABLE-FOR-SALE RECOGNIZED (ASSUMING NO EXPECTED CREDIT LOSS)?
OTHER COMPREHENSIVE INCOME
ON THE BALANCE SHEET, DEBT SECURITIES CLASSIFIED AS HELD-TO-MATURITY ARE VALUED HOW (ASSUMING NO EXPECTED CREDIT LOSS)?
AT AMORTIZED COST.
LIST THREE CONDITIONS WHEN LOSSES ON DEBT SECURITIES CLASSIFIED AS AVAILABLE-FOR-SALE ARE RECOGNIZED IN INCOME.
SALE OF THE SECURITY
TRANSFER OF THE SECURITY TO TRADING CLASSIFICATION.
WHEN THERE IS AN EXPECTED CREDIT LOSS ON THE AVAILABLE-FOR-SALE SECURITY. THE CREDIT LOSS REPORTED IN NET INCOME CANNOT EXCEED THE AMOUNT BY WHICH FAIR VALUE IS BELOW AMORTIZED COST.
WHEN A MARKETABLE DEBT SECURITY IS TRANSFERRED FROM TRADING TO AVAILABLE-FOR-SALE, OR VICE VERSA, AT WHAT COST IS IT TRANSFERRED?
TRANSFERRED AT FAIR VALUE, WHICH THEN BECOMES NEW BASIS.
FOR A SECURITY TRANSFERRED INTO THE TRADING CATEGORY, THE DIFFERENCE IS TREATED AS A REALIZED GAIN OR LOSS AND IS RECOGNIZED ON THE CINOME STATEMENT
FOR A SECURITY TRANSFERRED FROM THE TRADING CATEGORY, THE UNREALIZED HOLDING GIAN OR LOSS WILL ALREADY HAVE BEEN RECOGNIZED IN EARNINGS.
NOTE: TRANSFERS TO AND FROM THE TRADING CATEGORY SHOULD BE RARE.
WHEN DOES CREDIT LOSS HAVE TO BE BOOKED FOR DEBT INVESTMENTS?
A CREDIT LOSS MUST BE REPORTED ON AN AVAILABLE-FOR-SALE OR HELD-TO-MATURITY DEBT SECURITY WHEN IT IS PROBABLE THAT THE AMOUNTS DUE (PRINCIPAL AND INTEREST) WILL NOT BE COLLECTED.
HOW IS A CREDIT LOSS RECOGNIZED FOR AN AVAILABLE-FOR-SALE OR HELD-TO-MATURITY DEBT SECURITY?
WHEN THERE IS AN EXPECTED CREDIT LOSS, INVESTMENT SHOULD BE REPORTED AT THE PRESENT VALUE OF THE PRINCIPAL AND INTEREST THAT IS EXPECTED TO BE COLLECTED. THE CREDIT LSOSS IS THE DIFFERENCE BETWEEN AMORTIZED COST AND THE PRESENT VALUE.
FOR AN AVAILABLE-FOR-SALE SECURITY, THE CREDIT LOSS CANNOT EXCEED THE AMOUNT BY WHICH FAIR VALUE IS BELOW AMORTIZED COST, BECAUSE THE INVESTOR HAS THE OPTION TO SELL AN AVAILABLE-FOR-SALE INVESTMENT IF THE LOSS ON THE SLAE WILL BE LESS THAN THE EXPECTED CREIDT LOSS.
HOW IS THE REALIZED GAIN OR LOSS CALCULATED FOR TRADING AND AVAILABLE-FOR-SALE DEBT SECURITIES WHEN THEY ARE SOLD?
TRADING SECUIRTIES
REALIZED GAIN/LOSS = SELLING PRICE VERSUS THE ADJUSTED COST (ORIGINAL COST +/- UNREALIZED GAINS OR LOSSES PREVIOUSLY RECOGNIZED IN NET INCOME)
AVAILABLE-FOR-SALE SECURITIES
REALIZED GAIN/LOSS = SELLING PRICE VERSUS THE ORIGINAL COST,ADJUSTED FOR ANY CREIDT LOSSES RECORDED ON THE NCOME STATEMENT FROM PREVIOUS PERIODS (NOTE THAT ANY UNREALIZED GAINS OR LOSSES IN AOCI MUST BE REVERSED)
DESCRIBE THE “PRACTICALITY EXCEPTION” FOR EQUITY SECURITIES.
FOR EQUITY INVESTMENTS THAT DO NOT HAVE A READILY DETERMINABLE FV, THIS EXCEPTION ALLOWS AN ENTITY TO MEASURE EQUITY INVESTMENTS AT COST, LESS IMPAIRMENT, PLUS/MINUS OBSERVABLE PRICE CHANGES OF IDENTICAL OR SIMILAR INVESTMENT FROM THE SAME OWNER.
HOW ARE NON-LIQUIDATING AND LIQUIDATING DIVIDENDS DISTRIBUTED BY EQUITY SECURITIES REPORTED BY THE INVESTOR RECEIVING THEM”?
NON-LIQUIDATING DIVIDENDS RECEIVED BY THE INVESTOR ARE ACCOUNTED FOR AS DIVIDEND INCOME.
LIQUIDATING DIVIDENDS RECEIVED BY THE INVESTOR ARE ACCOUNTED FOR AS A REUTRN OF CAPITAL.
DESCRIBE THE RECOGNITION OF AN IMPAIRMENT LOSS ON EQUITY SECURITIES IF A QUALITATIVE ASSESSMENT INDICATES THAT IMPAIRMENT EXISTS.
IMPAIRMENT LOSSES APPLY TO EQUITY SECURITIES VALUED USING THE PRACTICALITY EXCEPTION. IF IMPAIRMENT EXISTS, THE COST BASIS OF THE SECURITY WILL BE WRITTEN DOWN TO FAIR VALUE IWTH THE WRITE-DOWN REFLECTED AS A REALIZED LOSS AND INCLUDED IN EARNINGS.
HOW IS THE REALIZED GAIN OR LOSS CALCULATED FOR EQUITY SECURITIES WHEN THEY ARE SOLD?
REALIZED GAIN/LOSS = SELLING PRICE VERSUS THE ADJ. COST +/- UNREALIZED GAINS OR LOSSES PREVIOUSLY RECOGNIZED IN NET INCOME.
HOW IS THE YEAR-END INVESTMENT IN INVESTEE REPORTED ON THE BALANCE SHEET CALCULATED UNDER THE EQUITY METHOD?
BEGINNING INVESTMENT IN INVESTEE \+ INVESTOR'S SHARE OF INVESTEE EARNINGS -INVESTOR'S SHARE OF INVESTEE DIVIDENDS -AMORTIZATION OF FV DIFFERENCES =ENDING INVESTMENT IN INVESTEE
