FAR 10

Question 1

What are the rules under IFRS when applying the equity method

Answer 1

Under both GAAP and IFRS the equity method is applied when an entity has the ability to exercise significant influence over the investee

Under IFRS this is considered to be the case when the investor has the power to participate in the decisions of the investee

Question 2

What do you do when the fair value of FIFO inventory exceeds their carrying amount under the equity method

Answer 2

• Under FIFO it is assumed that inventory on hand is sold first.
• If FV is greater than Carrying value the differences increases cost of sales
• this decreases the investee’s income
• The investor will then recognize a proportionate amount of the investors adjusted income

Question 3

a deposit from a customer to protect yourself against nonpayment for future service should be classified as

Answer 3

liability

Question 4

What is in comprehensive income

Answer 4

net income and OCI

Question 5

When an entity under IFRS elects to recognize changes in fair value of an equity instrument in OCI rather than profit and loss - how is this reported? what if there are impairments

Answer 5

the investment is reported at its fair value on the balance sheet and any increases or decreases are recognized in OCI.

Impairments are recognized in profit and loss

If you are valuing an investment like this and you recognize a loss - if later the investment increases the loss is reversed

If the FV is higher than the reversal the remaining increase is reported in OCI

Example - impairment loss of $30K
next year the FV increases by $45K

• The loss of $30K would be reversed resulting in a gain in profit and loss of $30K
• The remaining $15K is recognized in OCI

Question 6

what is the difference between GAAP and IFRS for recognizing an element of financial reporting

Answer 6

GAAP -
1 - the item conforms to the definition of an element
2 - the item is capable of being measured in monetary terms
3 - the item is relevant and faithfully represented

IFRS - an element has probability of occurrence and reasonable measurement

Question 7

What does the FASB issue as part of the due process activities for amending the accounting standards codification

Answer 7

A proposed accounting standards update

Question 8

What are the objectives of financial reporting

Answer 8

• provide information that is useful to creditors and investors
• provide information about an entity’s resources and claims against them
• reporting changes in an entity economic resources and claims
• reporting performance measured using accrual accounting
• reporting changes in economic resources and claims form sources other than the entity’s financial performance
• indirectly providing information about management’s performance regarding its stewardship responsibilities

Question 9

What are derivatives

Answer 9

Derivatives are financial instruments with an:

• Underlying
• Notional Amount
• Net settlement

Question 10

What is a notional amount

Answer 10

This is a specific unit of measurement - such as number of shares

Question 11

How do you determine the settlement amount

Answer 11

The underlying is multiplied by the notional amount

Example: 100 shares * $20 per share

Question 12

What are common types of derivatives

Answer 12

• Option Contracts
• Futures contracts
• Forward Contracts
• Swap Contracts - swap a fixed interest rate for a variable rate

Question 13

How are derivative recognized or measured

Answer 13

They are either an asset or a liability

They are measured at fair value

Changes in Fair value result in gains and losses that are recognized in earnings

Question 14

What is a hedge

Answer 14

This is an item that you would “hedge” against ( a hedging item. It is an asset or liability that is subject to a possible loss

Question 15

What is a hedging instrument

Answer 15

It is a contract or other arrangement that mitigates the possible loss of the hedging item

You use a “hedging instrument” to hedge against a hedging item

Question 16

How does an item qualify for hedge accounting

Answer 16

• the hedge must be considered to be “highly effective”

- This means that it effectively offsets the changes in cashflows or fair value that it is being hedged against

Question 17

What are examples of items you use hedging for

Answer 17

• Commodity price fluctuation risk
• Foreign exchange fluctuation risk
• Interest rate fluctuation risk
• Credit Risk

Question 18

What is Fair Value Risk

Answer 18

This is the risk of loss due to a change in the fair value of a hedged item

• It converts fixed risk into floating risk

How it works:
- You enter into a firm commitment (legally enforceable)

• The fair value hedge is used against this risk .
• At the date of the agreement the firm commitment has prices licked down so the hedge reduces your risk of the price going up or down - hedge your bets

Question 19

How do you account for a fair value hedge at the balance sheet date

Answer 19

• at balance sheet date:
• Adjust the hedging instrument to FV at balance sheet date
• Adjust the hedged item to fair value at the balance sheet date
• recognize in current income the gain/loss on the hedged item from evaluating each
• If the hedge doe NOT exactly match the hedged item - the difference is a gain/loss in current income

Question 20

What is a Cash Flow Risk

Answer 20

This is the risk of loss due to change in cashflows from a hedged item

• A cash flow hedge converts a floating risk to a fixed risk

Example: forecasted transaction

This is a transaction that is expected to occur so you use a cashflow hedge to lower your risk from changes in cashflow