FAR 9

Question 1

Under IFRS No. 9:

Answer 1

Only investments in debt securities may be transferred between categories, in which case financial statements of prior periods must be restated for comparative purposes.

Question 2

Under IFRS No. 9, how is a debt investment for solely receiving cash and no accounting mismatch recorded?

Answer 2

At amortized cost, which is par value plus unamortized premium. If not to solely receive cash, then at fair value.

Question 3

Criteria for a capital lease:

Answer 3

Any one of the following: 1. Transfer of ownership of the leased asset to the lessee at the end of the lease term, 2. There is a bargain purchase option (BPO), 3. Lease term is at least 75% of the leased asset’s useful life at inception, 4. Present value of minimum lease payments at inception is at least 90% of the market value of the leased asset.

Question 4

What are the components of the lease receivable for a lessor involved in a direct-financing lease?

Answer 4

Minimum lease payments plus residual value.

Question 5

How to depreciate an asset, given a BPO at end of capital lease and expectation of purchase of asset at end of lease:

Answer 5

(PV of lease payments + PV of BPO) / Estimated useful life of asset

Question 6

Define “direct” and “indirect” quotes for foreign currency.

Answer 6

Direct quote is 1 unit of a foreign currency in U.S. dollars. Indirect quote is foreign currency in terms of $1.

Question 7

Where are the effective and ineffective portions of hedges reported?

Answer 7

Ineffective should be in current income; effective in other comprehensive income.

Question 8

Hedging a recognized asset is intended to offset the risk of exchange rates between:

Answer 8

The date an asset is recognized and the date the asset is fully satisfied.

Question 9

Which hedge using a forward contract will at least a portion of any currency exchange gain or loss on the hedging instrument be reported as translation adjustment in other comprehensive income?

Answer 9

Net investment in foreign operations hedge.

Question 10

When translating financial statements from a foreign currency to a reporting currency:

Answer 10

Assets and liabilities are translated using the spot rate as of the balance sheet date; Revenues, expenses, gains, and losses can be translated using the exchange rate when the transaction occurred or the weighted average exchange rate for the period.

Question 11

How are foreign exchange and translation gains or losses reported?

Answer 11

Foreign exchange G/L as net income/loss; translation G/L in OCI.

Question 12

Instead of being translated at the spot rate, how is common stock translated?

Answer 12

Using the historic exchange rate in effect when the account amount arose (or when the investment was made, if later).

Question 13

Instead of translated, how is retained earnings calculated?

Answer 13

Beginning RE in USD + converted (to USD) net income - converted dividends declared = ending RE in USD.

Question 14

Remeasurement, based on the temporal method of conversion, converts foreign currency amounts to foreign currency amounts using different exchange rates for different accounts based on:

Answer 14

Whether the accounts are monetary or non-monetary.

Question 15

If a foreign (Mexican) subsidiary is a direct extension of the domestic (U.S.) entity:

Answer 15

The functional currency of the foreign subsidiary is the parent’s currency, the U.S. Dollar. Sales from the sub will be in pesos, so the sub has to remeasure the financial statements from the peso to the U.S. Dollar.

Question 16

How does remeasurement and translation work when converting from one currency to another?

Answer 16

Remeasure from the recording currency to the functional currency. Then translate from the functional currency to the reporting currency if they are different.

Question 17

In a sales-leaseback, how to calculate deferred loss:

Answer 17

Assuming fair value exceeds carrying value to create “artificial loss”, deferred loss is the carrying value minus the sales price.

Question 18

How are gains and losses treated in sales-leasebacks?

Answer 18

They are deferred and amortized over the term of the lease, whether operating or capital lease. Deferred gains are treated as deferred credits in operating leases and as asset valuation allowances in capital leases. In minor leasebacks, they are recognized immediately.

Question 19

Define a minor leaseback:

Answer 19

Where the present value of the lease payments is less than or equal to 10% of the fair value of the property sold

Question 20

Under the equity method, how are dividends treated?

Answer 20

As a reduction in the investment in the firm declaring the dividend.