FAR (Marketable Securities ) Flashcards
Classification fo Securities
Trading security- are those security (debt and equity) that are bought and held principally of the purpose of selling them in the near term. It is generally C/A
Available for sale securities / non current asset
Held to maturity securities (debt security only) - Non C/A general rule
Under IFRS , Classification of marketable security
1) Financial assets at fair value through profit and loos 2) Available for sale 3) Held to maturity
Note: Financial asset at fair value through profit and loss is a financial asset that meets either of the following condition
a) It is classified as held for trading
b) The asset is designated as an investment at FV profit and loss using FV option
Trading ,Available for sale securities & Held to maturity securites
They must be reported FV. Unrealized gain or loss trading security goes to income statement
J/E to record loss on I/S for trading security
Unrealized loss on trading security DR
valuation account CR
Held to maturity security are valued at amortized cost
Trading and available for sale securities
Dr. Cash
Cr. Trading Security
Cr. Realized gain on trading security (IDEA)
Available for sale securities
Dr. Cash
Dr. Unrealized gain on available for sale security
Cr. Available for sale security
Cr. Realized gain on available for sale security
Consolidation requirements in gap period
Under US GAAP, Significant transcations during the gap period require disclosure. Under IFRS, the subsidiary F/S must be adjusted for significant transactions during the gap period.
Definition of consolidation
A combination of the F/S of two or more entities into a single set of F/S representing a single economic unit
Impairment of Securities (US GAAP)
If the decline FV as other than temporary, the cost basis of the individual security is written to FV as the new cost and realized included earning - I/S
Subsequent changes in FV are not recognized if the security is classified as held to maturity
Impairment of securities (IFRS)
impairment loss is recognized in earnings and individual security written down by directly reducing the cost basis or use the valuation allowance.
Equity method
Investment originally recorded at the price paid to acquire and the investment account subsequently adjusted as the net assets of the investee change through the earning of income and payment of dividend.
The distribution of dividends by the investee reduces the investment balance.
Equity method is not appropriate
Bankruptcy of subsidiary
Investment in subsidiary is temporary
A lawsuit or complaint is filed
A “standstill agreement” is signed
Another small group has majority ownership and they operate the company without regard to the investor
The investor cannot obtain the Financial information
The investor cannot obtain representation on the board of director
Cost method cash dividend J/E
Cash – DR
Dividend income — Cr
Distribution that exceeds investor’s share of the investee’s R/E
Cash — DR
Investment in investee —-Cr
Equity method J/E
B/S and I/S J/E to record increase by the investor/parent’s ownership percentage of earning of investee
Investment of investee –Dr
Equity in earnings/investee income – Cr
J/E to record depreciation on undervalued equipment
Equity in investee income - Dr
Investment in Samll —CR
Joint venture accounting
Two or more purchase of stock cause in an investee corporation to go from not having significant influence to have significant influence but less than 50%
The Equity method should be used and the period cost method (FV) was used are retrospectively adjusted
IFRS Joint venture accounting
IFRS generally require entities to apply the equity method prospectively from the time at which investor obtains significant influence. Retroactive adjustment is not required
Consolidated F/S
Under US GAAP, all majority -owned subsidiaries must be consolidated except when significant doubt exists regarding the parents ability to control the subsidiary such as
- The subsidiary is in legal reorganization
- Bankruptcy and/or the subsidiary operates under severe foreign restrictions
An acquiring corporation should adjust the following
- Common stock, A.P.I.C and R/E of subsidiary are eliminated
- Investment in subsidiary is eliminated
- Non-controlling interest is created
- Balance sheet of subsidiary is adjusted to FV
- Identifiable intangible assets of the subsidiary are recorded at their FV
- Goodwill (or gain) is Required
Consolidating workpaper Eliminating J/E
Dr- Common Stock Dr- APIC- Subsidiary Dr- R/E -Sub Cr Investment in subsidiary Cr- Non-controlling interest
Dr Balance sheet adjustment to FV
Dr Identifiable intangible assets to FV
Dr Goodwill
Mnemonic ; CAR IN BIG
J/E to record the retrospective adjustment to the investment and R/E account and write off the unrealized loss on available for sale securities
Dr Investment in Small Co.
Cr Retained Earning
Cr Unrealized loss on Available for sale securities
The acquisition method has two distinct accounting characteristics
- 100 % of the net assets acquired (regardless of % acquired ) are recorded at FV with any unallocated balance remaining creating goodwill and 2. When the companies are consolidated, the subsidiary’s entire equity ( including C/S , APIC and R/E earning ) is eliminated
FV= acquisition price = investment in subsidiary
J/E Flow chart - Acquisition date calculation
Common Stock - Sub APIC - Sub Retained Earning - Beginning Sub (Investment in Sub) (non-controlling interest) Difference B/S FV adjustment Difference Identifiable intangible assets Difference
IFRS non-controlling interest
Can be calculated using either the Partial goodwill method or the Full goodwill method . the partial goodwill method is the preferred method.
Full goodwill method (under us gaap) = NCI = FV of subsidiary X non controlling interest %
Partial goodwill method NCI = FV of subsidiary’s net identifiable assets X non controlling interest %
Consolidation and de-consolidation
No control to Control - Re-measure previously held equity interest to FV. The I/S will reflect this adjustment
Control - More or less - Equity transactions (no gain or loss on the I/S , additional paid in capital adjusted)
Control to non control - Recognize the gain or loss of the sale of the stock. Remeasure the remaining non consolidating interest at FV. Recognize FV on I/S
Under U.S. GAAP, noncontrolling interest (NCI) is calculated as
Under the IFRS partial goodwill method, noncontrolling interest (NCI) is calculated
NCI = Fair value of subsidiary × NCI %
NCI = FV of subsidiary net assets × NCI %
Inter-company Inventory/Merchandise Transactions
Inter-compnay profit must be eliminated from the ending inventory and the cost of goods sold of the purchasing affiliate. 100% profit should should be eliminated even if the parent’s ownership interest is less than 100%
Inter-company J/E Elimination -Merchandise Transaction
Dr Inter-company sales
Dr R/E (profit in beginning inventory)
CR Inter-Company COG sold
CR COG sold (inter company profit included in cogs of the purchasing affiliate)
CR Ending inventory ( inter company profit in the ending inventory)
Inter company sale of land/ Depreciable fixed assets
The inter-comapny gain/loss on the sale of land remains unrealized until the land is sold to an outsider
The gain or loss on the inter company sale of a depreciable asset is unrealized from a consolidated F/S perspective until the assets is sold to an outsider
