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Becker FAR Cards > FAR Chapter# 10 > Flashcards

FAR Chapter# 10 Flashcards

1
Q

FAR 10-1 - FAIR VALUE MEASUREMENT | Define fair value

A

Fair value is the price to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date.

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2
Q

FAR 10-2 - FAIR VALUE MEASUREMENT | Describe the valuation techniques that can be used to measure the fair value of an asset or liability

A
  1. Market Approach - Uses prices and other relavant information from market transactions involving identical or comparable assets or liabilities to measure fair value.
  2. Income Approach - Conversts future amounts, including cash flows or earnings, to a single discounted amount to measure the fair value of assets or liabilities.
  3. Cost Approach - Uses current replacement cost to measure the fair value of assets.
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3
Q

FAR 10-3 - FAIR VALUE MEASUREMENT | Describe the hierarchy of fair value inputs. Which inputs have the highest priority?

A
  1. Level 1 Inputs - Quoted prices in active markets for identical assets or liabilities.
  2. Level 2 Inputs - Inputs other than quoted market prices that are directly or indirectly observable for an assetor a liability.
  3. Level 3 Inputs - Unobservable inputs for the asset or liability that reflect the entities assumptions and are based on the best available information.

Note: Level 1 inputs have the highest priority.

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4
Q

FAR 10-4 - PARTNERSHIPS | In creating a new partnership interest with an investment of additional capital, what three investment mehtods can be used?

A

Exact mehtod
Bonus method
Goodwill method

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5
Q

FAR 10-5 - PARTNERSHIPS | Describe the exact method of creating a new partnership interest with an investment of additional capital.

A

The purchase price equals the book value of the capital account purchased.

  • No adjustment to the existing partners’ capital accounts
  • No goodwill or bonus
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6
Q

FAR 10-6 - PARTNERSHIPS | Describe the bonus method of creating a new partnership interest with an investment of additional capital.

A

Bonus Method

New partner’s capital account = (A+B+C) x C’s percentage ownership. Excess of new partner’s contribution over capital interest received is a bonus to the old partners. Excess of capital interest received over new partner’s contribution is a bonus to the new partner.

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7
Q

FAR 10-7 - PARTNERSHIPS | Describe the goodwill method of creating a new partnership interest with an investment of additional capital.

A

Goodwill is recognized based on the total value of the partnership implied by the new partner’s contribution.

Goodwill is shared by the existing partners using the agreed profit/loss ratio.

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8
Q

FAR 10-8 - PARTNERSHIPS | Describe the bonus method of withdrawal of a partner.

A

The difference between the balance of the withdrawing partner’s capital account and the amount that person is paid is the amount of the bonus.

The bonus is allocated among the remaining partners’ capital accounts in accordance with their remaining profit and loss ratios.

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9
Q

FAR 10-9 - PARTNERSHIPS | Describe the goodwill method of withdrawal of a partner.

A

The partners may elect to record the implied goodwill in the partnership based on the payment to the withdrawing partner. The amount of the implied goodwill is allocated to all of the partners in accordance with their profit and loss ratios.

After allocating goodwill, the balance in withdrawing partner’s captial account should equal the final distribution to the withdrawing partner.

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10
Q

FAR 10-10 - PARTNERSHIPS | In liquidiating a partnership, what is the order of preference?

A

Creditors

Loans and advances to partners

Capital accounts of partners

Remember that all losses must be provided for before disposal; that is, maximum potential losses before distribution of cash.

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11
Q

FAR 10-11 - VARIABLE INTEREST ENTITIES | What is a variable interest entity (VIE)?

A

A corporation, partnership, trust, LLC, or other legal structure used for business purposes that either does not have equity investors with voting rights or lacks suffcient financial resources to support its activities.

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12
Q

FAR 10-12 - VARIABLE INTEREST ENTITIES | Who is the primary beneficiary of a VIE and how does the primary beneficiary account for its VIE investment?

A

The entity with the power to direct the activities of the VIE that most significantly impact the enity’s economic performance and:

  1. Absorbs the expected VIE losses, or
  2. Receives the expected VIE residual returns.

The primary beneficiary must consolidate the VIE.

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13
Q

FAR 10-13 - VARIABLE INTEREST ENTITIES | Who consolidates when one entity receives the expected returns from a VIE and another entity absorbs the expected losses?

A

The entity that absorbs the expected losses consolidates.

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14
Q

FAR 10-14 - ASSET RETIREMENT OBLIGATIONS | Define an asset retirement obligation (ARO).

A

A legal obligation associated with the retirement of a tangible long-lived asset that results from the acquisition, construction, development, and/or normal operation of long-lived asset.

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15
Q

FAR 10-15 - ASSET RETIREMENT OBLIGATIONS | How is an ARO initially Measured?

A

At fair value (present value of the future obligation) as an asset (asset retirement cost) and a liability (asset retirement obligation).

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16
Q

FAR 10-16 - ASSET RETIREMENT OBLIGATIONS | How is an ARO accounted for in periods after initial measurement?

A

The ARO liability is adjusted for accretion expense and the ARO asset is depreciated.

17
Q

FAR 10-17 - TROUBLED DEBT RESTRUCTURINGS (IMPAIRED LOANS) | Name four types of restructurings involving debt.

A
  1. Transfer of assets
  2. Transfer of equity interest
  3. Modification of terms
  4. A combination of above three
18
Q

FAR 10-18 - TROUBLED DEBT RESTRUCTURINGS (IMPAIRED LOANS) | How is gain (loss) measured in a troubled debt restructuring involving the modification of terms?

A

It is the difference between the carrying amount of the obligation prior to restructuring and undiscounted total future cash flows required after restructuring, if undiscounted future cash flows are less than the carrying amount.

19
Q

FAR 10-19 - TROUBLED DEBT RESTRUCTURINGS (IMPAIRED LOANS) | How is the gain (loss) measured in a troubled debt restructuring involving a transfer of assets?

A

Restate the assets transferred to fair value and recognize a gain or a loss in ordinary income.

Recognize a gain for the difference between the fair value of the assets transferred and the carrying amount of the debt forgiven. The gain is possibly reported as extraordinary under U.S. GAAP if it meets the U.S. GAAP requirements (material, infrequent, and unusual).

20
Q

FAR 10-20 - TROUBLED DEBT RESTRUCTURINGS (IMPAIRED LOANS) | When is a gain (loss) not recognized on a troubled debt restructuring?

A

For debtor, when there is a modification of terms and payment of the entire debt is not affected.

For creditor, when the total cash to be received is greater thann the amount recievable. The difference is amortized as interest.

21
Q

FAR 10-21 - TROUBLED DEBT RESTRUCTURINGS (IMPAIRED LOANS) | When is a loan considered impaired?

A

Probable that all amounts due (principle and interest) will not be received.

22
Q

FAR 10-22 - TROUBLED DEBT RESTRUCTURINGS (IMPAIRED LOANS) | How is an impaired loan reported by the creditor?

A

Present value of the loan’s expected future cash flows discounted at the loan’s effective interest rate.

Dr. Bad debt expense
CR. Allowance for credit losses

23
Q

FAR 10-23 - TROUBLED DEBT RESTRUCTURINGS (IMPAIRED LOANS) | What are the general disclosures for the debtor in a troubled debt restructuring?

A
  1. A description of the main changes in terms and/or features of settlements
  2. Gain on restructuring of payables (in the aggregate)
  3. Net gain or loss on transfers of assets recognized in the period (in the aggregate)
  4. Per share amount of the aggregate gain on the restructuring of payables
  5. The amount of contingently payable amounts included in the carrying amount of restructured payables (and any condtions that would cause those amounts to become payable or to be forgiven)
24
Q

FAR 10-24 - TROUBLED DEBT RESTRUCTURINGS (IMPAIRED LOANS) | What are the general disclosures for creditors in a troubled debt restructuring?

A
  1. The creditor’s policy for recognizing interest income
  2. Any commitment the creditor has to lend additional fund to the debtor
  3. The activity in the allowance account for the reporting period
  4. The average recorded investment in impaired loans for the period (including the amount of related interest income and the interest income recognized on a cash basis)
25
Q

FAR 10-25 - CONTINGENCIES | Identify the three ranges of likelihood that a future event will confirm a contingent liability.

A

Probable

Reasonably Possible

Remote

26
Q

FAR 10-26 - CONTINGENCIES | When are contingent liabilities accrued?

A

When the loss is both probable and can be reasonably estimated, then record and disclose.

Financial statement disclosure only for reasonably possible contingent losses.

Remote contingent losses are not disclosed, unless they are “guarantee-type” c

27
Q

FAR 10-27 - CONTINGENCIES | What is the accounting treatment of gain contingencies?

A

Gain contigencies are not reflected on the balance sheet but are disclosed as to their nature and amount if likelihood is probable and to do so would not be misleading.

28
Q

FAR 10-28 - SUBSEQUENT EVENTS | What is a subsequent event and what are the two categories of subsequent events?

A

An event or transaction that occurs after the balance sheet date but before the financial statements are issued or are available to be issued.

  1. Recognized subsequent events - Provide additional information about conditions that existed at the balance sheet date.
  2. Nonrecognized subsequent events - Provide information about conditions that occurred after the balance sheet date and did not exist on the balance sheet date.
29
Q

FAR 10-29 - SUBSEQUENT EVENTS | What disclosures are required for subsequent events?

A
  1. If an entity is not a SEC filer, the entity must disclose the date through which subsequent events have been evaluated.
  2. Nonrecognied subsequent events should be disclosed if disclosure is necessary to keep the financial statements from being misleading.
30
Q

FAR 10-30 - FINANCIAL INSTRUMENTS | List the disclosure requirements for finanancial instruments under U.S. GAAP

A

Fair value and related carrying amounts

Concentration of credit risk

Market risk (optional)

31
Q

FAR 10-31 - FINANCIAL INSTRUMENTS | Describe the financial instruments fair value option under U.S. GAAP.

A

On a specified election dates, an entity may choose to measure eligible financial instruments at fair value with unrealized gains and losses reported in earnings. The fair value option is irrevocable.

32
Q

FAR 10-32 - FINANCIAL INSTRUMENTS | Define derivative instrument.

A

A “derivative instrument” is a financial instrument (or other contract) that “derives” its value from the value of some other instrument and has all three of the following characteristics:

  1. One or more underlyings and one or more notional amounts or payment provisions (or both);
  2. Requires no initial net investment; and
  3. Its terms require or permit a net settlement.
33
Q

FAR 10-33 - FINANCIAL INSTRUMENTS | Define underlying and notional amount as they relate to a derivative financial instrument.

A

Underlying: a specified price, rate, or other variable (e.g. interest rate, security price, foreign exchange rate, index of prices or rates, etc.)

Notional amount: A specified unit of measure (e.g., currency unitis, shares, bushels, pounds, etc.)

34
Q

FAR 10-34 - FINANCIAL INSTRUMENTS | Name four common derivative instruments

A

Options contracts

Futures contracts

Forward contracts

Swap contracts

35
Q

FAR 10-35 - FINANCIAL INSTRUMENTS | Identify the three types of hedge designations.

A

Fair value hedge

Cash flow hedge

Foreign currency hedge

36
Q

FAR 10-36 - FINANCIAL INSTRUMENTS | Describe the accounting for changes in fair value associated with each type of hedge designation.

A

Fair value hedge:
Included in current earnings with gain or loss from change in value of offsetting asset/liability

Cash flow hedge:
Effective portion - include in other comprehensive income until cashflows from hedged item are realized
Ineffective portion - include in current earnings

Foreign currency hedge:
Fair value hedge - included in current earnings with gain or loss from change in value of offsetting asset/liability
Cash flow hedge - included in other comprehensive income (effective portion)
Net investment hedge - included in other comprehensive income, as cumulative translation adjustment

Becker FAR Cards (10 decks)

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