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
ARO: When is an ARO recognized
When is meets the definition of a liability
- duty or responsibility
- little or no discretion
- obligating event
Note: uncertainty about whether performance will be required does not defer the recognition of a retirement obligation
Note: IFRS refers to an ARO as a “decommissioning liability”
ARO: how is the ARO initially recorded
- At the fair value of the ARO (PV of future obligation) or when a reasonable estimate of fair value can be made
- Journal Entry:
Dr. Asset Retirement Cost (asset)
Cr. Asset Retirement Obligation (Liab.)
Note: IFRS records decommissioning liability at best estimate of the expenditure required (not fair value)
ARO: what expenses are recognized
- Accretion Expense (using the credit-adjusted tax-free rate)
- Depreciation expense
Note: asset should be fully depreciated by end of accretion period
ARO: what rates are used for revisions to cash flow estimates
GAAP:
- Upward revisions to undiscounted cash flows = use current discount rate
- Downward revisions = use historical (or weighted average) discount rate
IFRS: remeasure obligation each period for changes in BOTH
- amount or timing of cash flows and
- changes in discount rate
ARO: does ARO accounting apply to leases
Yes.
- Lessees:
(a) ARO included in minimum payments = no further action
(b) ARO imposed otherwise, ARO accounting applies - Lessors: ARO accountign applies
ARO: how are additional costs at retirement recognized
As an expense in the period of retirement
Debt Restructuring - Debtors: how is the carrying amount of the payable calculated
carrying amount =
- face of payable PLUS
- accrued interest PLUS
- premiums MINUS
- discounts
etc.
Debt Restructuring - Debtors: how is the transfer of an asset recorded
- Recognize ordinary gain/loss on revaluation of asset to fair value
- Recognize possible extraordinary GAIN for difference between carrying value of payable - FV asset
Debt Restructuring - Debtors: how transfer of equity interest recorded
- Recognize possible extraordinary GAIN on difference b/t carrying value of payable over FV of equity transferred
Debt Restructuring - Debtors:in a modification of terms, what is the interest expense
computed by the Effective Interest Method,
the new effective rate of interest is the discount rate at which the carrying amount of the debt is equal to the present value of future cash payments
Debt Restructuring - Debtors: in a modification of terms, what are the total future cash payments
principal and any accrued interest at the time of the restructuring that continues to be payable by the new terms
Debt Restructuring - Debtors: in a modification of terms, when is a gain recognized
when the total future cash payments (NOT PV) are less than the carrying amount
gain is possibly extraordinary
Note:
- allocate reduction over several accounts (premium, discount, etc.)
- all cash payments after the restructuring reduce the carrying amount
- NO interest expense is recognized after the date of restructure
- ALL future payments (principal and interest) reduce the not payable
Debt Restructuring - Debtors: what is the order of preference when a combination of methods is used
- first reduce carrying amount of payable by the fair value of any asset or equity used
- recognize G/L for difference b/t FV and NBV of any asset transferred
- No gain on restructuring is recognized unless the carrying amount of payable exceeds total future cash payments
Debt Restructuring - Creditors: when is a loan considered impaired
when it is probable that the creditor will be unable to collect all amounts due under the original contract
Debt Restructuring - Creditors:how is impairment measured when assets or equity are received
- full settlement:
- fair value of asset/equity
- fair value of receivable satisfied - partial payment: fair value of asset or equity
Debt Restructuring - Creditors: what type of loss does a creditor recognize
ORDINARY LOSS = recorded receivable over FV of asset/equity received
Debt Restructuring - Creditors:how is impairment measured using the modification of terms method
based on loans present value of expected future cash flows discounted at loan’s HISTORICAL effective interest rate
Note: other rates that may be used =
- observable market rate
- fair value of collateral received
Note: any costs to sell should be estimated and should reduce the cash flows
Debt Restructuring - Creditors:how is impairment recorded using the modification of terms method
Create a valuation account with a corresponding charge to bad debt expense
Debt Restructuring - Creditors:what are the exceptions to troubled debt restructuring
- groups of loans collectively evaluated for impairment (credit cards)
- loans measured at market value
- leases
- held-to-maturity debt securities
Liabilities: how are current liabilities measured
at settlement values (a.k.a. net realizable value)
Liabilities: how are cash discounts associated with Trade Accounts Payable recorded
- Gross Method
- if discount is earned: credit “Purchase Discount” - Net Method
- if discounts is NOT earned: debit “Purchase Discount Lost”
Liabilities: are Sales Taxes Payable considered expenses
No
Liabilities: how are Use Taxes Payable recorded
Use Taxes: taxes collected from the buyer of goods purchased outside the taxing jurisdiction
accrued by the buyer until remitted
Liabilities: how are Property Taxes Payable recorded
2 Methods: (requires consistency)
1) Accrue prior to receipt of tax invoice and match in year for which invoice pertains
2) Record as payable upon receipt of tax invoice and expense in year of receipt
Note: property taxes are often invoiced in arrears
Liabilities: are Payroll Deductions considered an expense of the company
No
Liabilities: how are Unemployment Taxes and the Employer’s Share of Payroll Taxes recorded
Accrue by the employer as an expense
Note: employer’s share of payroll taxes includes Social Security and Medicare
Liabilities: how should notes payable and receivable be recorded
- At present value on date of issuance
2. Unreasonable interest rate or non-interest bearing: impute the MARKET RATE using the effective interest method
Liabilities: how are notes treated when rights or privileges are attached
they must be evaluated separately
Note:
if no rights or privileges are attached and the IR on the note reflects prevailing rates, record note PAYABLE at face WITHOUT any present value consideration
Liabilities: what interest rate is presumed when ntoes are issued or received solely for cash equal to its face amount
stated interest rate
Liabilities: what view is used when notes are issued with unreasonably low or absent interest factors
substance over form
Liabilities: what is involved in recognizing the substance of a note over its form
- determine the present value of the obligation at the appropriate market IR and
- record the receivable or payable at FACE
- record the sale of the asset at the present value of the obligation
- record any difference as a discount or premium that must be amortized over the LIFE of the note
Liabilities: what note transactions do NOT require the present value calculation
- arising in ordinary course of business and terms do not exceed one year (short-term notes)
- paid in property or services (not in cash)
- representing security or retain age deposits
- bearing an IR determined by a govt. agency
- arising from transactions b/t a parent and its subsidiaries
Liabilities: what characteristics should be considered in determine the appropriate IR of a ntoe
- credit rating of the issuer
- restrictive covenants or collateral involved
- prevailing market rates
- rate at which debtor could borrow funds
Liabilities: what method is used to amortize the discount or premium of a note
Effective Interest Method
- Payment = Face X Stated Rate
- Interest = Carrying Value X Effective Rate
- Principal = Payment - Interest
Liabilities: how are notes presented in the F/S
at Net value
premium or discount is added or subtracted from the related asset or liability
Note: NO deferred charges or credits are recognized
Liabilities: what are the disclosure requirements for notes
- full description of N/P or N/R
- effective interest rate
- face amount
Liabilities: how are note issue costs reported
separately in B/S as deferred charges
amortize over life of the note
Liabilities: what is the purpsoe of debt covenants
covenants by creditors used to protect their interest by limiting or prohibiting the actions of debtors that might negatively affect the creditor’s position
Liabilities: what type of default occurs from the violation of debt covenants
technical default
Note: usually concessions are negotiated to avoid actual default
Liabilities: what are some examples of debt covenants
Disclose:
- limitations on issuing additional debt
- restrictions on payment of dividends
- limitations on the disposal of certain assets (collateral)
- minimum working capital requirements
- Collateral requirements
- Limitations on how the borrowed money can be used
- Maintenance of specific financial ratios
- debt to equity
- debt to total capital
- interest coverage (times interest earned)
Estimated Liabilities: define an estimated liability
recognition of a probable future charge that results from a prior act
examples;
- warranties
- trading stamps
- coupons
Estimated Liabilities: how is the cost of a premium recognized
charged to sales in the period that benefits from the premium offer
Estimated Liabilities: how is the premium liability recorded
- outstanding estimated redemption
2. multiply by cost of premium (net of amount paid by customers for the premium)
Estimated Liabilities: define a warranty and when a seller recognizes the warranty
warranty = seller’s promise to ‘correct” any product defects
accrued in year of sale as liability when cost can be reasonably estimated
Note: contingency = probably and reasonably estimable)
Estimated Liabilities: how are service contracts recognized
unearned revenue
Note: service contracts usually include cash received prior to the period in which the related expense occurs
Accrued Liabilities: define an accrued liability and give examples
accrued liability (accrued expense) = expense recognized or incurred (through passage of time or other criteria) but not yet paid
examples:
1. accrued interest
2. accrued wages
3. accrued unemployment taxes
4. accrued employer’s portion of FICA taxes
Accrued Liabilities: how does Becker suggest tacking questions related to the accrual of bonuses paid to key employees
select the “middle answer” and work your way backwards
Contingencies: define a contingency and give examples of loss contingencies
contingency = existing condition, situation, set of circumstances involving varying degrees of uncertainty that may result in the increase or decrease in an asset or the incurrence or avoidance of a liability
examples:
1. conductibility of receivables
2. obligations regarding product warranties and defects and unredeemed coupons
3. risk of loss of property by fire, explosion, or other hazards
4. pending or threatened litigation
5. actual or possible claims and assessments
6. risk of loss from catastrophes assumed by property and casualty insurance companies
7. guarantees of indebtedness of others
8. obligations of commercial banks under standby letters of credit
9. agreements to repurchase receivables (or related property) that have been sold
10. environmental damages
Contingencies: list the classifications of contingencies
- probable - likely to occur
- reasonably possible - more than remote but less than likely
- remote - slight change of occurring
Note: IFRS defines
- probable as “more likely than not” (> 50%)
- possible as “may but probably will not occur”
Contingencies: when is a contingent liability recognized
loss is probable and reasonably estimated (recognize liability and expense)
Contingencies: what amounts are recognized when only a range of reasonably possible estimates is anticipated
GAAP: best estimate or minimum amount of range
- Note disclosure required for possibility of additional amount over amount accrued
IFRS: expected value (midpoint of range)
Contingencies: how is a reasonably possible loss recogniezed
as a note disclosure including:
- nature of contingency
- nature of possible loss or range of losses or that an estimate cannot be made
NO J/E or accrual
Contingencies: what are the exceptions to ignoring remote losses and how are they recognized
exceptions are “guaranteed type”: (DOG)
- debts of others guaranteed (officers/related parties)
- Obligations of commercial banks under standby letters of credit
- Guarantees to repurchase receivables (or related property) that have been sold or assigned
recognition: disclosure of nature, amount, and any expected recovery
Contingencies: how are unasserted claims treated
like any other contingency
Contingencies: are general or unspecified business risks recognized as contingencies
No
Contingencies:how are appropriations of retained earnings treated
- shown within stockholders’ equity and clearly identified
- costs or losses are NOT charged to appropriation and no amount is transferred to income
- Restore to retained earnings when no longer necessary
Contingencies:what rule governs the recognition of gain contingencies
conservatism
Contingencies: how are gain contingencies recorded
note disclosure of amount and nature if probable or reasonably possible as long as F/S do not become misleading
Subsequent Events: define a subsequent event and list the 2 types
subsequent event = event or transaction that occurs after the B/S date but before the F/S are issued or available to be issued
two types:
- recognized subsequent events
- nonrecognized subsequent events
Subsequent Events: define recognized subsequent events and give examples
subsequent events that provide additional information about conditions that existed at the B/S date
- settlement of litigation that arose before B/S date
- loss on uncollectible receivable (customer files bankruptcy after B/S date)
Subsequent Events: how are recognized subsequent events recorded
entities must recognize effects of all recognized subsequent events in the financial statements
Define nonrecognized subsequent events and give examples
subsequent events that provide info. about conditions that occurred after the B/S and did NOT exist at the B/S date
- sale of bond or capital stock
- business combination
- settlement of litigation arising after B/S date
- loss of plant or inventory due to fire or natural disaster
- change sin the fair value of assets or liabilities or foreign exchange rates
- entering into significant commitments or contingent liabilities
Subsequent Events: what is the evaluation period
- public companies and other entities that intends to widely distribute the F/S: through the date the F/S are issued
- issued: when F/S have been widely distributed to users in form and format that complies with GAAP - Others: through date F/S are available to be issued
- available: when inform and format that complies with GAAP and all approvals for issuance have been obtained
Subsequent Events: what are the required disclosures
- Non-SEC entities: date through which subsequent events have been evaluated and if date is “issued” or “available” date
- Nonrecognized subsequent: disclose nature and estimate if necessary to keep F/S from being misleading
Optional: pro forma F/S showing effect if subsequent had occurred at B/S date
Subsequent Events: IFRS treatment
- Subsequent events = “Events After The Reporting Period”
- Evaluation period = from reporting period through date F/S are authorized for issuance
- Recognized = “Adjusting Events After Reporting Period”
- Nonrecognized = “Nonadjusting Events After Reporting Period”
- Specifically addresses going concern issues (impossible if mgmt determines after yr-end that it intends to liquidate the company or cease trading)
Subsequent Events: what are revised F/S and how are they recognized
Definition: F/S that have been revised to correct an error or to reflect the retrospective application of US GAAP
Considered “Reissued F/S”
Subsequent Events: what events are recognized when a company reissues F/S
- do NOT recognize events that occurred b/t the date of the original F/S issuance or available to be issued and the date the F/S were reissued
- UNLESS required by GAAP or other regulatory requirement
Financial Instruments: list the 4 types of financial instruments
- cash, foreign currency, and demand deposits
- evidence of an ownership interest in an entity (stock certificate, partnership interest, or LLC interest)
- Contracts (or series of linked contracts) which result in an exchange of cash or ownership interest in an entity (i.e. Bonds)
- Derivatives (financial instruments whose value or settlement amount is derived from the value of another unit of measure)
- Options
- Futures
- Forwards
- Swaps
Financial Instruments: when are gains and losses recognized under the Fair Value Option
unrealized gains and losses are reported in earning in the period in which they occur
Financial Instruments: how is the Fair Value Option applied
- individual financial instruments
- irrevocable
Financial Instruments: what instruments are eligible for the Fair Value Option recognition
- recognized financial assets and financial liabilities
- AFS investment
- investment otherwise accounted for using the equity method - NOT ALLOWED:
- investments in subsidiaries or VIE
- pension benefit assets and liabilities
- financial instruments classified as equity
- financial assets or liabilities recognized under leases
- deposit liabilities of financial institutions
Financial Instruments:when is the Fair Value Opetion allowed under IFRS
when doing so eliminates or significantly reduces a measurement or recognition inconsistency
or
group of financial assets or liabilities is managed and its performance is evaluated on a fair value basis and the information on the group is provided to key mgmt personnel
Financial Instruments:what are the required fair value disclosures
- fair values for all financial instruments for which it is practicable to estimate
- carrying value of all financial instruments showing whether the amounts represent assets or liabilities
- methods and significant assumptions used to estimate fair value
- description of any changes in methods or significant assumptions during the period
- reasons why it is not practicable to estimate fair value and pertinent info. to estimating it
GAAP: apply to all entities except private w/ < $100M in assets with no derivatives
Financial Instruments: describe the “concentration of credit risk” disclosure and “market risk” disclosures
- Concentration of Credit:
- credit risk: other party will not perform
- concentration: entity has material contracts with 1+ parties in same industry or region with similar economic characteristics
- GAAP & IFRS: REQUIRED: for all financial instruments - Market Risk
- risk = possibility of loss from changes in economic circumstances (stock market)
- GAAP: OPTIONAL
- IFRS: REQUIRED (along with Liquidity Risk)
Financial Instruments:what are the required risk disclosures under IFRS
- concentration of credit risk
- liquidity risk
- market risk
Financial Instruments: define a derivative and its 3 requirements
financial instrument that derives its value from the value of other instruments and has ALL 3:
- 1+ underlying and notional amounts or payment provisions (or both)
- Requires no initial net investment or one that is smaller than would be required for other types of similar contracts
- Terms require or permit (a) a net settlement or (b) it can be readily settled net outside the contract or (c)by delivery of an asset that gives substantially the same results
Financial Instruments:define a derivative underlying
specified price, rate, or other variable including a scheduled event that make or may not occur (i.e. strike price)
Financial Instruments:define a derivative notional amount
specified unit of measure (currency units, shares, bushels, points, etc.)
Financial Instruments: define a derivative value or settlement amount
underlying X notional amount
Financial Instruments: define a derivative’s payment provision
specified (fixed) or determinable settlement that is to be made if the underlying behaves in a specified way
Financial Instruments: define hedging
use of derivative to offset anticipated losses or reduce earnings volatility
when effective: no gain or loss or changes in value of hedged item b/c offset by hedge
Derivatives: what is an Option Contract
- contract b/t 2 parties that gives one party the right (not obligation) to buy or sell something to the other party at a specified price during a specified period of time
- buyer/holder must pay a premium to option seller/writer
- call option: right to buy from seller
- put option: right to sell to seller
Derivatives: what is a Futures Contract
- agreement b/t 2 parties to exchange a commodity or currency at a specified price on a specified future date
- publicly traded
- one party takes a long position and agrees to buy a particular item
- other party takes a short position and agrees to sell that item
- BOTH parties are obligated to perform
Derivatives: what is a Forward Contract
a private Futures Contract
Derivatives: what is a Swap contract
- private agreement b/t 2 parties to exchange future cash payments
- common swaps: (1) interest rate, (2) currency, (3) equity, (4) commodity
- equivalent to a series of forward contracts
Derivatives: what are the risks inherent in all derivative instruments
- Market Risk: risk that entity will incur a loss (“zero sum game”)
- Credit Risk: risk that other party will not perform according to the terms
Derivatives: how are derivatives recorded on the B/S
- at fair value
- as an asset or liability
- classification depends on whether or not the derivative is a hedge
1. not designated as a hedge
2. Fair Value Hedge
3. Cash Flow Hedge
4. Foreign Currency Hedge
Derivatives: how are derivatives not designated as a hedge recognized
- similar to trading securities
- recognize G/S in earnings
Derivatives: how are Fair Value Hedges recorded
Definition: hedge the exposure to changes in FV of recognized A/L or unrecognized firm commitment
Recognition: G/L on instrument AND G/L ON HEDGED ITEM are recognized in earnings
Note: derivative must be expected to be highly effective
Derivatives: how are Cash Flow Hedges recorded
Definition: hedges exposure to variability in expected future cash flows
Definition of effective: w/in 1/5 of actual (80% - 120%)
Recognition:
- Ineffective: report G/L in current earnings
- Effective: report in OCI until hedged transaction impact earnings
Derivatives: when to the various effective Cash Flow Hedges impact earnigns
- foretasted sale or expense is hedge: when sale or expense is recognized in earnings
- forecasted inventory purchase is hedged: G/L reclassified when inventory is sold to customers
- forecasted fixed asset purchase is hedged: G/L reclassified as fixed asset is depreciated
- existing asset or liability is hedged: G/L reclassified when A/L impacts earnings
Derivatives: what are the 3 types of Foreign Currency Hedges and how are the recorded
- Foreign Currency Fair Value Hedge = in income statement
- Foreign Currency Cash Flow Hedge:
- ineffective = in income statement
- effective = in OCI - Foreign Currency Net Investment (in Foreign Operations) Hedge =
- Effective Portion: OCI as part of the cumulative translation adjustment
- Ineffective Portion: income statement
Derivatives: how are derivatives reported in the Statement of Cash Flows
- no hedging designation should be accounted for in Investing Activities unless held for trading purposes
- Derivative with NO hedging designation and held for trading: OPERATING
- Derivative held as a hedge: same category as item being hedged
- Derivative is “other than insignificant financing element” at inception: ALL cash flows recognized in FINANCING
Financial Instruments: what are the required disclosures
- description of the entity’s objectives and strategies
- each instrument’s primary risk exposure and classification
- segregate derivatives used for hedging purposes and those not
- info. about the volume of derivative activity
- location and fair values in F/S
- locations and amounts of G/L reported in income and OCI separately for each type of hedge
- Fair Value Hedges and related hedged item: net G/L recognized in earnings during the current period, effective portion of hedge, and portion of G/L excluded
- Cash Flow Hedges and related hedged item: description of events that will result in reclassification of G/L from OCI
Financial Instruments: what financial instruments MUST be classified as liabilities
- those in the form of shares that are mandatorily redeemable
- those, other than outstanding shares, that represent an obligation to repurchase the issuer’s equity shares by transferring assets
- those that represent an obligation to issue a variable number of shares
Financial Instruments: how are financial assets classified and measured under IFRS 9
Initially recorded at fair value and then subsequently measured at either amortized cost or fair value:
- Debt instruments:
- (a) amortized cost if both (1) asset held to collect contractual cash flows and (2) contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest
- (b) fair value if conditions above are NOT met or entity elects at initial recognition - Equity instruments (investments in another co.): recognize at fair value with G/L in earnings UNLESS:
- (1) part of a hedging relationship or
- (2) entity makes an irrecovable election on initial recognition to present G/L in OCI
**Note: G/L recognized in OCI are NEVER recognized in earnings but MAY be reclassified in equity
Financial Instruments: when are measurement reclassification allowed in IFRS 9 for financial assets
when the entity changes the business model under which it manages financial instruments
Note: accounted for prospectively
Financial Instruments: how are financial liabilities classified and measured under IFRS 9
Initially recorded at fair value then subsequently recognized at either amortized cost or fair value:
- amortized cost: general measurement using effective interest method
- fair value permitted in certain circumstances (when entity at initial recognition irrevocably designates a financial liability as measured at FV through Profit or Loss)
- gains and losses recognized in earnings UNLESS entity is required to present effects of changes in the liability’s credit risk in OCI
Financial Instruments; how are reclassification of the measurement method recorded for financial liabilities under IFRS 9
reclassification is never allowed
NOTE: when is the Liquidation Basis of Accounting testable
Jan. 1 2014
