FAR 10 Flashcards
Fair value is…
Exit price
Price that is received for sell of asset
Price paid to transfer liability
Market based
Fair value DOES NOT include
Transaction costs
What determine the most advantageous market?
Transaction cost
Most advantageous market is…
The best price of asset/liability, after considering transaction costs
Quoted stock price - transactions costs
(2nd option)
Principal market
Market with greatest volume or level of activity
1st option
Valuation Techniques of Fair value measurement
- Market approach
- Income approach - PV or discounted CF
- cost approach - replacement cost
Level 1 Input
Use identical prices/value
Market approach is best
‘Most reliable’
Level 2 input
Inputs other than quoted market prices
Quote prices for similar assets/liabilities in an active market
Quote prices for identical assets/liabilities in a not active market
Level 3 Input
Unobservable Input
Discounted Cash flow
‘Management assumption’ - internally generated CF
Lease reliable
If multiple levels are used, the level of hierarchy is based on..
The lowest level significant input
Change in valuation technique is considered to be what type of accounting change?
Change in estimate
Purchase/sale of exisitng partnership interest is
Merely a swap of the partners
NO JOURNAL ENTRY
Treatment of Assets/ Liabilities of Formation of partnership
Assets - at fair value
Liabilities - record at PV
Tax rule is NBV assets contributed
3 ways for Creation of new partnership interest
- Exact
- Bonus
- Goodwill
Exact
‘Creation of new partnership interest’
- When purchase price = B/V of capital account purchased
Old partners’ capital account ‘dollars’ stay the same
NO BONUS/GOODWILL
Fraction of the required interest % (e.g. if it asks for 25% interest in the partnership, then it is 1/4)
1/4, 4-1 = 3, total $ in partnership/3
Bonus
‘Creation of new partnership interest’
Bonuses are adjusted between old and new partners’ capital accounts and do not affect partnership assets.
Calculation
Step 1: Calculate the total capital account, including new capital account
Step 2: total capital account x new partner’s interest= how much new partner gets
If new partner pays > gets, bonus is for existing partner
Increase existing partners’ capital accounts
DR Cash
CR Capital A
CR Capital B
CR capital C
If new partner pays
Goodwill
‘Creation of new partnership interest’
GOODWILL GO TO OLD PARTNERS
Same capital amount as investment for new partner
Calculation
Step 1: compute implied value = investment amount of new partner/new partnership interesr
Step 2: Total partner’s capital accounts = sum up all the partner’s capital amount
Step 3: Goodwill = implied value - partners’ capital account
DR Cash DR Goodwill CR Old partner CR old Parter CR Capital (amount contributed)
Profit & Loss Allocation
Total profit and loss SUBTRACT: Interest SUBTRACT: salaries SUBTRACT: bonus Equal : Total profit & loss to allocate per profit and loss ratio
Withdraw of partner
‘Bonus Method’
Implied goodwill is allocated to existing partner
Step 1: Revalue Asset
DR Asset Adjustment
CR: Capital A
CR: Capital B
STep 2: Payoff withdraw partner
DR Capital A
DR Capital B
CR Cash
Withdraw of partner
‘Goodwill Method’
Implied goodwill is allocated to ALL partner
Step 1: revalue assets to reflect FV
DR asset adjustment
CR Capital A
CR Capital B
Record goodwill
DR Goodwill
CR Capital A
CR capital B (equal to the exact buyout amount)
Payoff withdraw partner
DR capital B
CR Cash
Liquidation of partnership
- Creditors, including partner who are creditors, MUST BE PAID FIRST
- All partners’ capital account
Loss on liquidation of partnership
Must be SUBTRACTED from total partnership account before any distribution is made to partners
Assets contributed by the partner are valued at…
FV - any related liabilities
Variable interest entities
‘Consolidation required even if company owns no stock if 3 conditions met’
- Variable interest - have financial stake in another company
- variable interest entities
- primary beneficiary - power to direct activities of variable interest entity, get P&L
Identifying a variable interest in a business entity
Step 1
1 Company and business entity have an arrangement
2. Business entity is a legal entity
Characteristics of variable interest entities
Step 2
- Insufficient level of equity investment
- Inability to make decisions
- Cannot absorb loss or obtain gain
- Disproportional voting rights
Primary Beneficiary Consolidates
- Has power to direct activities
2. Get loss/gain
Private company may elect
NOT to consolidate
Asset Retirement Cost ‘Journal Entry’
DR Asset retirement Cost (asset)
CR Asset retirement obligation (liability)
Asset & Liability at PV
Accretion cost
‘Asset Retirement Obbligation’
Interest Expense
DR Accretion Expense
CR Asset Retirement Obligation
Depreciation Expense
‘Asset Retirement Obligation’
DR depreciation Expense
CR Accumulated Depreciation (decrease asset retirement cost)
Asset retirement obligation formula
accumulative accretive expense + cumulative depreciation expense
Upward revision to undiscounted cash flows
“new” liabilities
Increase
Current discount rate
Downward revision to undiscounted cash flows
“old” liabilities
Decrease
Use historical (weighted average) discount rate
Accretion Expense is
Interest Expense
Increase obligation
Depreciation expense
Decrease asset
Accounting & Reporting by Debtor
‘Transfer of Assets - Adjust to FV’
Simply a transfer of real estate/ Revaluate asset to fair value
Ordinary Gain/Loss
FV asset transferred
= Ordinary gain/loss
Accounting & Reporting by Debtor
‘Transfer of Assets - Recognize possibly extraordinary gain/loss’
Restructing of payable
Carrying amount of the payable
=Gain (possibly extraordinary)
Accounting of restructing of debt
Reporting by Debtor
‘Transfer of Equity - Recognize possibly extraordinary gain/loss’
Restructing of payable
Carrying amount of the payable
=Gain (possibly extraordinary)
Modification of Terms is accounted for as
Prospectively
JEs for restructure of debt
‘Transfer of asset’
DR N/P DR Interest Payable CR Land CR Gain on disposal of land CR gain on restructing
JEs for restructure of debt
‘Transfer of equity’
DR N/P DR Interest payable CR C/S CR APIC CR Gain on restructing
JEs for restructure of debt
‘Modification of term’
DR NP
DR Interest payable
CR N/P
CR gain on restructing
Accounting of restructing of debt
Reporting by Creditor
Receipt of assets & equity - FV recorded
Receipt of Modification Terms - PV
Large write-down and write-offs are NOT
Extraordinary item
Accounting of restructing of debt - Creditor report
Receipt of Modification Terms
Record as PV
Carrying amount of debt
= Bad debt
DR Bad Debt expense
CR Allowance for credit losses
Accounting of restructing of debt
Reporting by Debtor
‘Modification of terms’
Carrying amount of the debt
=Gain
Accounts Payable
‘Gross amount’
Record without discount
If discount was taken, then DR discount account
Accounts Payable
‘Net Method’
Recorded at net of discount
If payment made after discount period, discount lost account is DR
Interest Revenue Earned Formula
Total cash received
Total interest revenue
If N/P & A/P does not exceed one year, then it is recorded as
Face Amount
Contingencies - Probable
U.S GAAP
Likely to occur
Contingencies - Reasonably possible
U.S GAAP
More than remote, but less than likely
Contingencies - Remote
U.S GAAP
Slight chance of occurring
Contigencies - Probable
IFRS
More likely than not to occur
> 50%
Contigencies - POssible
IFRS
May but probably will not occur
Provision for loss contingency should accrued, must meet these two conditions
GAAP
- Loss is probable
- Amount of loss can be reasonably estimated
Record JE
DR Expense
CR Liability
If no amount in the range is a better estimate than any other amount within the range, then
MINIMUM = ACCRUED
EXCESS = DISCLOSE NOTE
Provision for loss contingency should accrued,
IFRS
Mid point of the loss range
Contingency loss is reasonably possible should be
GAAP
Disclosed
Do not record JE/accrue
Loss is Remote
GAAP
Ignore, but disclose if these conditions are met
- Debts of others guaranteed (officers/related parties)
- OBligation of commercial banks under standby letters of credit
- guarantees to repurchase receivables (or related property) that have been sold or assigned
Gain contingencies
‘Probable or reasonably possible’
Do not record JE
Must disclose
Contingent Liability when all range in value are equally likely, should pick
The lowest amount
Subsequent event is an event
that is occured after the B/S date but before theF/S issued or available
Subsequent event should be…
Disclosed and record JE
Recognized subsequent events is
Events that existed at balance sheet date
Nonrecognized subsequent event is event that
Occurred after the B/S date
Did not exist at B/S Date
Disclose
Recognized subsequent events are referred to as..
IFRS
Adjusting events after the reporting period
Non-recognized subsequent events are referred to as..
IFRS
Non-adjusting events after reporting period
When liquidation is imminent, then it is accout for…
Prospectively
Criteria to qualify as ‘imminent’
- Likelihood of the entit return from liquidation is REMOTE
AND
- either
- liquidation plan is approved by the individual who have authority
- liquidation plan is imposed by other forces,
F/S for liquidation basis of accounting
- Statement of Net Assets in Liquidation
2. Statement of Changes in net assets of liquidation
IFRS - Fair value option is only used when
it can be elected for financial assets if doing so eliminates or significantly reduces a measurement or recognition inconsistency
Fair value must be
Disclosed
All credit/concentration risk must be
Disclosed in the notes to the financial statements
Disclosure - IFRS
Disclose credit risk, liquidity risk, market risk
Market risk is
Encourage to disclose, but not require
Option Contract types
The right to buy/sell something to the other party at a specified price
Call - right to buy
Put - right to sell
Future contract types
Public agreement
- Long - buy and profit when price increases
- Short - sell, profit when price decreases
Forward contract is
Similar future contracts, but they are private agreement
Swap contract is
Private agreement between 2 parties
Hope what you received > what you pay
Treatment of gain/loss of derivation
‘No hedging designation - Speculative’
Recognize in I/S
Treatment of gain/loss of derivation
‘Fair value hedge’
Recognize in I/S
Treatment of gain/loss of derivation
‘Cash flow hedge - ineffective’
Recognize in I/S
Treatment of gain/loss of derivation
‘Cash flow hedge - Effective’
Recognize in OCI
Foreign currency fair value hedge
Recognize in I/S
Foreign currency net Investment Hedge
Recognize in OCI
Criteria for Debt Instrument to measure at cost:
Similar to Held-to-Maturity
- Hold assets in order to collect contractual cash flows
2. Solely payments of principal and interest
Under IFRS, reclassification of equity instrument is
- Permitted
2. Account for as prospectively
Under IFRS, reclassification of debt instrument is
Cannot reclassify
Fair value of financial instruments may be disclosed in
- Body of the F/S
2. Footnotes of F/S
Perfect hedge results in
No possibility of future gain/loss
Calculating gain/loss of stock investment when FV is elected, should include
- Dividend Income
2. The gain/loss from the investment