FAR 10 Flashcards
FV: Define Fair Value
price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal (or most advantageous) market
Market-Based
Includes: transportation costs
Excludes: transaction costs
FV: Fair Value does not apply to
(1) pensions, (2) leases, (3) share-based compensation, and (4) vendor- specific objective evidence
FV: Define Principal Market for Fair Value Measurement
Market greatest volume or level of activity for asset or liability
FV: List the 3 valuation techniques for Fair Value
- Market Approach (quoted prices)
- Income Approach (PV of discounted cash flows)
- Cost Approach = current replacement cost
FV: List the 3 levels of inputs for Fair Value
Level 1: quoted prices for identical A&L
Level 2: observable inputs for similar A&L
Level 3: Unobservable, reporting entity’s assumptions
Fair value classified based on lowest level input
Partnership: What is the journal entry used to record purchase or sale of existing partnership interest?
No JE required
Partnership: Upon formation of a partnership, how are assets, liabilities, and capital accounts recorded?
Assets = fair value Liabilities = present value Capital = assets - liabilities
Note: Tax rule = rollover cost
Partnership: Creation of a new partnership interest - describe the exact method
Equal to book value of capital account purchase
Partnership: Creation of a new partnership interest - describe the bonus method
Based on balance in total capital account after contribution.
Allocate G/L to old partners based on P&L ratio
Partnership: Creation of a new partnership interest - describe the goodwill method
Recognize an intangible asset implied by the new partner’s contribution
Allocate to OLD partners according to P&L ratio
Partnership: Partnership P&L distribution - what costs are always provided for in full even in a loss situation
- Bonus
- Interest on capital account
- Salaries
Distribute remaining P or L according to P&L ratio
Partnership: Withdrawal of a partner - describe the bonus method
- Revalue assets to reflect fair value
- Bonus = Difference between balance of withdrawing partner’s capital account and the amount that person is paid
Allocated to remaining partners based on REMAINING P&L ratio
Partnership: Withdrawal of a partner - describe the goodwill method
- Revalue assets to reflect fair value
- Record goodwill to make withdrawing partner’s capital account equal payoff
- Payoff withdrawing partner
Partnership: Liquidation of a Partnership - order of preference regarding distribution of assets
- Distribute G/L on sale of assets (conversion to cash)
- Pay off creditors
- Offset partner’s capital accounts
Note: if capital deficiency then remaining partners are charged according to their remaining P&L ratios
All possible losses must be charged to the partners’ capital accounts in their income and loss ratios before any distribution is made.
VIE: what are the characteristics of a VIE
- variable interest
- variable interest entity
- primary beneficiary
VIE: define a Variable Interest criteria
- company and business entity have an arrangement (any one of 4)
- business entity is a legal entity (not a person)
- business entity fails to qualify for exclusion
- Interest is more than insignificant
- company has explicit or implicit variable interest in the entity (absorbs loss/receives returns)
VIE: what constitutes an agreement in defining a Variable Interest
Any one of the following 4:
(a) company participated in entity’s design
(b) substantially all entity’s activities involve or are conducted on behalf of the company
(c) > 50% total equity, subordinated debt, and other forms of financial support is provided by company
(d) securitizations or other forms of asset-backed financing agreements or single-lessee leasing arrangements are the primary activities of the entitiy
VIE: What are examples of variable interest
- explicit investments at risk
- explicit guarantees of debt, the values of assets, or residual values of leased assets
- implicit guarantees with related party involvement
- most liabilities EXCLUDING short-term trade payables
- most forward contracts to sell assets owned by the entity
- options to acquire leased assets at the end of the lease terms at specified prices
Note: explicit means in writing or legally enforceable
VIE: list the characteristics of a Variable Interest Entity
- insufficient level of equity investment at risk (cannot operate on own without additional subordinated financial support)
- holders of equity investment at risk have inability to make decisions or direct activities
- holders of equity investment at risk have no obligation to absorb entity’s expected losses
- holders of equity investment at risk have no right to receive expected residual returns
- disproportional voting rights (assumed when all 3 exist:
(a) substantially all activities conducted on behalf of or involve an equity investor
(b) voting rights of that equity investor are small in comparison with the focus on that investor, and
(c) voting rights of one or more equity investors are out of line with the investor’s obligation to absorb losses or right to receive returns)
VIE: when does an entity have sufficient equity investment at risk (and is therefore not a VIE)
- entity can finance its own activities
- entity’s equity investment at risk is at least as much as the equity investment of other non-VIE entities that hold similar assets of similar quality
- other facts and circumstances indicate that equity investment at risk is sufficient
- Fair value of equity investment at risk is greater than expected losses
VIE: who is the primary beneficiary
- has power to direct activities of a VIE that most significantly impact the entity’s economic performance and
- absorb losses or receive VIE returns
Note:
- party that absorbs losses = primary beneficiary
- it is possible for an entity to be a VIE without a primary beneficiary
VIE (IFRS): define a special purpose entity
Sponsoring company controls and must consolidate an SPE when:
- it is benefited by the SPE’s activities
- it has decision-making powers that allow it to benefit from the SPE
- absorbs the risks and rewards of the SPE
- has a residual interest in the SPE
ARO: define an asset retirement obligation
Legal obligation associated with the retirement of a tangible long-lived asset that results from the acquisition, construction, or development and/or normal operation of a long-lived asset
Exception: certain lease obligations
ARO: what approach is used to value and recognize an ARO
Balance Sheet Approach