FAR Notes Flashcards
What pieces of authoritative literature are included in the codification?
(FEDPRIA) FASB; Emerging Issues Task Force; Derivative Implementation Group Issues; APB Opinions; Accounting Research Bulletins; Accounting Interpretations; AICPA
What are the fundamental qualitative characteristics of useful financial information?
Relevant and Faithful Representation (Reliable)
Elements of relevance as it pertains to the qualitative characteristics of useful financial information
Predictive Value; Confirming Value; Materiality. (PCM) Passing Confirms Money
Elements of faithful representation as it pertains to the qualitative characteristics of useful financial information
Completeness; Neutrality; and Freedom from Error
Elements that enhance the usefulness of information that is relevant and faithfully presented.
Comparability; Verifiability; Timeliness; Understandability. (Compare and verify in time to understand)
Elements of Financial Statements
REGL ALE needs ID Revenues Expenses Gains Losses Assets Liabilities Equity Investments Distributions
Presentation Order of the Major Components of an I/S and R/E Statement
IDEA; I/S: Income or Loss from Continuing Ops (Before Tax) / Income or Loss from Disc Ops (net of tax) / Extraordinary Items (net of tax) / Stmt of R/E: Cumulative Effect of Change in Accounting Principle (net of tax)
Discontinued Operations
Separately reported element shown in the income statement; net of tax; after income from continuing operations
Remeasurement of Individual Assets
Required under IFRS before a component can be categorized as Held for sale.
Conditions required to be present in order to report income from discontinued operations
BOTH 1-Eliminated from ongoing operations (ops & cash flows) 2-No significant continuing involvement
Items reportable within results from discontinued operations
1-Operations results within the component 2-gain or loss on disposal of the component 3-impairment loss and subsequent increases in fair value of the component
When to report results from discontinued operations
Report in the period disposed or the period that the component is held for sale
Calculation of Discontinued Operations
Results from Oerations (+/-) Gain or Loss on Actual Disposal (+/-) Impairment Loss (and subsequent increases in FV)
How to account for exit and disposal activities
GAAP now requires recognitions of a liability for costs associated with an exit or disposal activity.
Accounting for Extraordinary Items
GAAP: must be infrequent and unusual. IFRS: No such thing as an extraordinary event
Three types of Accounting Changes for which F/S would change
Change in accounting estimate; change in accounting principle; change in accounting entity
How to account for a change in accounting estimate
Make changes to the F/S prospectively. This is NOT an error; do NOT restate prior periods. Restate only the current period and future periods.
How to account for a change in accounting principle
Make changes to the F/S retrospectively. This change can be made only If required by GAAP/IFRS or if it more fairly presents the information.
Number of B/S required for a change in accounting principle
IFRS requires three (1/1/X1; 12/31/X1; 12/31/X2). GAAP does not have a three year requirement; it only requires 2.
Exceptions to handling changes in accounting principle retrospectively
Handle prospectively and DO NOT restate if the changes are impractable to estimate; inseparable from a change in estimate; a change TO LIFO; or a change in depreciation method
How to account for a change in accounting entity
Restate F/S retroactively. This is unique to US GAAP and is NOT part of IFRS.
How to account for presentation of F/S related to an error correction
Restate F/S retroactively. Example: Going from Cash Basis to Accrual Basis (non-GAAP to GAAP). IFRS has a impracticability exemption whereas GAAP does not.
What is comprehensive income?
Change in equity (net assets) of a business during a period from transactions; and other events and circumstances from non-owner sources. (Not dividends)�
What items are considered to be OCI?
PUFER - Pension Adjustments / Unrealized Gains & Losses / Foreign Currency Items / Effective Portion of Cash Flow Hedges / Revaluation Surplus (IFRS only)
Two approaches for reporting other comprehensive income
Single Statement Approach & Two-Statement Approach. Single - starts w/Revenues and displays OCI items individually & in total. Two - starts w/Net Income and then deducts OCI items.
What is segment reporting?
Applies to public companies only; purpose is to enhance biz activities info to help users
What is an operating segment?
Has its own revenues & expenses. Discrete financial information is available with a traceable cash flow.
What is a reportable segment?
Operating segments that meet criteria for separate reporting.
Quantitative tests for reportable segments
10% Size test (must meet only one) Revenue / P&L / Assets - If any of these >=10% then they are a reportable segment.
Sufficiency test for reportable segments
If after reporting segments that meet the 10% tests; the aggregate presentation falls short of 75% of external consolidated revenue; additional segments must be added to arrive at 75%
How are start-up and organizational costs handled for development stage enterprises?
Expensed immediately; under GAAP.
First time adoption of IFRS in general
Company must make an explicit and unreserved statement in compliance w/IFRS
First time adoption of IFRS (Balance Sheet)
All assets and liabilities should be classified and recognized under IFRS. They should be restated to conform w/IFRS and adjustments should be made directly to R/E at the date of transition.
SEC Form S-1
Registration Statement
SEC Form 10-K
Annual Statement that must be filed within 60 days (value >$700m) within 75 days (value >$75m) or within 90 days (value <75m)
SEC Form 10-W
Quarterly Statement that must be filed within 40 days (value >$700m) $75m) or within 45 days (value <$700m)
SEC Form 11-K
Annual Report of Benefit Plan
SEC Forms 20-F and 40-F
Annual Statement for Foreign Private Issuers (40-F is Canada; 20-F is everyone else)
SEC Form 6-K
Semi-Annual Statement for Foreign Private Issuers
SEC Form 8-K
Major Corporate Events
SEC Forms 3; 4; and 5
Directors; officers; or beneficial owners > 10%
What does SEC Reg S-X do?
Sets forth the form and content of requirements for interim and annual financial statements
What is XBRL?
Extensible Business Reporting Language; data tags that describe financial information for business and financial reporting
XBRL Tag
Machine readable code that provides contextual information
XBRL Taxonomy
Specific tags used for groups of data
Instance Document
XBRL formatted document containing tagged data
GAAP Revenue Recognition Requirements
Persuasive evidence of an arrangements exists; delivery has occurred or services have been rendered; price is fixed and determinable; collection is reasonably assured
IFRS Revenue Recognition Requirements for Goods
Revenue and costs incurred for the transaction can be measured reliably; probable that economic benefits will flow to the entity; entity has transferred to the buyer significant risk and rewards of ownership; and entity does not retain managerial involvement
IFRS Revenue Recognition Requirements for Services
Revenue and costs incurred for the transaction can be measured reliably; probable that economic benefits will flow to the entity; stage of completion can be measured reliably
IFRS Revenue Recognition Requirements for Construction Contracts
Revenue and costs incurred for the transaction can be measured reliably; probable that economic benefits will flow to the entity; stage of contract completion can be measured reliably
What is deferred revenue or deferred credits?
Cash received before it is earned. Revenue is recognized when it is earned.
Accrual Accounting
Required by GAAP. Involves the process of employing the revenue recognition rule and the matching principle to the recognition of revenues and expenses. (NO current cash impact; I/S impact only)
Deferral
Cash is received or expended but is not recognizable for financial statements purposes. Ex: Prepaid Expense or Liability (NO Current I/S impact; B/S impact only)
Accrued Assets
Revenue recognized or earned through the passage of time; but not yet paid to the entity. (DR A/R; CR Accrued Revenue)
Accrued Liabilities
Expenses recognized or incurred through the passage of time; but not yet paid by the entity. (ex: accrued interest payable; accrued wages; etc.) (DR Accrued Exp; CR Accrued Liab or A/P)
Estimated Liabilities
Recognition of probable future charges that result from a prior act. (Ex: Warranties; trading stamps; coupons; etc.) (DR Accrued Exp; CR Accrued Liab)
Expired Costs
Income Statement Expensed Costs that expire during the period and have no future benefit (ex insurance expense; COGS; period costs; etc.)
Unexpired Costs
Balance Sheet carried costs that are capitalized and matched against future revenues. (Ex: prepaid expense; deferred charges; etc.)
Prepaid Expenses
Expenditures with a residual value. Also may occur where there exists a right to future services. (DR Prepaid Expense; CR Cash)
Deferred Charges
Pertain to future operations but are not charged to a tangible asset. (DR Deferred Charge; CR Cash/Asset)
Deferred Credits
Unearned revenue or deferred revenue. Future income contracted for and/or collected in advance; not yet earned. Liability on the B/S. (DR Cash; CR Unearned/Deferred Revenue)
Unearned Revenue
Revenue received in advance is a liability (EX: rent received in advance) Earn it or return it
Revenue recognition when the right to return exists
Not a contingent sale. 1-sales price substantially fixed at date of sale;2-buyer assumes all risks of loss;3-buyer has paid some form of consideration;4-product sold is substantially complete;5-amount of future returns can be reasonably estimated
Franchise fee revenue - initial franchise fees
Revenue when substantially performed. Initial services from the franchisor (site selection; construction supervision; bookkeeping; QC; etc.)
Franchise fee revenue - continuing franchise fees
Revenue when earned. Ongoing services such as percentage of revenue; management training; promotion; legal assistance; etc.)
Substantial performance (franchise fee revenue)
franchisor has no obligation to refund any payment received; initial services required of the franchisor have been performed; and all other conditions of the sale have been met.
Intangible assets
Specifically identifyable: patents; copyrights; franchises; trademarks. Not speficically identifiable: goodwill.
Recording purchased intangible assets
Capitalize the asset at cost; can also capitalize legal and registration fees incurred to obtain an intangible asset.
Recording internally developed intangible assets
GAAP: Expense against income when incurred; as GAAP prohibits capitalization of R&D. Ex: Cost to develop; maintain; or restore goodwill; goodwill from advertising; trademarks; etc. should be expensed.
Exception to rule requiring to expense costs associated with intangibles
Certain expenses associated with specifically identifiable intangibles can be capitalized. Ex: Legal fees related to a successful defense of the asset; registration or consulting fees; design costs (of a trademark); other direct costs to secure the asset.
IFRS rule related to expensing vs. capitalizing R&D costs
IFRS says that research costs must be expensed; but development costs can be capitalized if technological feasibility has been established; the entity intends to complete the intangible asset; entity has the ability to use or sell the intangible asset; it will generate future economic benefits; and adequate resources are available to complete the development and sell or use the asset.
How to measure cost for recording intangible assets acquired from arm’s length transactions
Cost is the amount of cash disbursed or the fair value of other assets distributed; the PV of amounts to be paid for liabilities incurred; and the fair value of consideration received for stock issued.
Cost of unidentifiable intangible assets
Difference between the cost of the group of assets or enterprise acquired and the sum of the costs assigned to identifiable assets acquired; less liabilities assumed.
Amortization of intangibles
Straight-line; systematic charges to income over the period estimated to be benefited by the intangible asset. Must have a finite life.
Patent amortization rules
Amortize over the shorter of its estimated life or remaining legal life
Amortization of purchased goodwill
Not permitted. Goodwill has an indefinite life; the required approach is to test goodwill for impairment at least annually.
Rule for a worthless intangible
During the year that the asset becomes worthless; the entire remaining cost should be written off to expense. (Ex: technological obsolescence or an unsuccessful patent defense lawsuit)
Rule for an impaired intangible
During the year that the asset becomes impaired; an impairment loss should be recognized to the extent that the full carrying amount becomes unrecoverable
Rule for a change in the useful life of an intangible
During the year that the asset experiences a change in useful life; the remaining book value is amortized over the new remaining life
Rule for the sale of an intangible
During the year that the asset is sold; compare the carrying value at the date of the sale with the selling price to determine the gain or loss.
IFRS Cost Model of Intangible Valuation
Intangibles are reported at cost adjusted for amortization and impairment.
IFRS Revaluation Model for Intangible Valuation
Intangibles are initially recognized at cost and then revalued to fair value at a subsequent valuation date; adjusted for subsequent amortization and subsequent impairment.
IFRS Intangible Revaluation Losses
Reported on the I/S; unless the loss is reversing a previously recognized revaluation gain. A reval loss that reverses a reval gain from a prior period is recognized as a reduction to reval fain in OCI. This ultimately reduces the reval surplus in AOCI.
IFRS Intangible Revaluation Gains
Reported in OCI & accumulated in equity as a reval surplus in AOCI; unless the reval gain reverses a previously recognized reval loss. A reval gain is reported in the I/S to the extent that it reverses a previously recognized reval loss.
IFRS Impairment of Revalued Intangible Assets
Impairment is recorded first by reducing any reval surplus in equity to 0; with further impairment losses reported on the I/S.
Start-Up Costs
Expenses incurred in the formation of a corporation (Ex: legal fees) are considered organizational costs. These should be expensed when incurred. (Remember income tax treatment is different - 5000 start up and 5000 organizational costs can be expensed; then amort over 180 months)
What is goodwill?
The representation of intangible resources and elements connected with an entity
Calculation of Goodwill - Acquisition Method
Under the acquisition method; goodwill is the excess of an acquired entity’s fair value over the fair value of the entity’s net assets; including identifiable intangible assets.
Calculation of Goodwill - Equity Method
This involves the purchase of a company’s capital stock. Goodwill is the excess of the stock purchase price over the fair value of the net assets acquired.
Handling costs associated with maintaining; developing; or restoring goodwill
These costs are expensed and not capitalized.
US GAAP treatment of R&D costs
Expense unless: (1) the materials; equipment; or facilities (tangible assets) have alternate future uses -or- (2) the R&D costs are undertaken on behalf of others under a contractual agreement.
IFRS treatment of computer software development costs
No separate guidance provided by IFRS regarding this; but they are considered internally generated intangibles; which means that research costs must be expensed; but development costs may be capitalized if certain criteria are met
Computer software development to be sold; leased; or licensed
Expense costs incurred until technological feasibility has been established for the product; capitalize costs after this point until the product is released for sale.
Establishment of technological feasibility
completion of a detailed program design or the completion of a working model
Amortization of capitalized software costs (software for sale; lease; or license)
Annual amortization is the GREATER of (1) % of revenue (total capitalized amt X [current gross revenue for period/total projected gross revenue]) or (2) straight line (total capitalized amount X [1/estimate of economic life])
Computer software developed internally or obtained for internal use only
Expense costs incurred in the preliminary project state; capitalize costs (S/L) incurred after technological feasibility and for upgrades and enhancements.
Impairment
Analysis and reduction in carrying value of intangibles and fixed assets held for use and/or to be disposed of. Should be reviewed at least annually and/or anytime events occur that could prompt changes in the amount of carrying value that is recoverable.
Impairment of Intangible assets other than goodwill - US GAAP
Intangibles with a determinable useful life are amortized over that finite life. If no useful life can be determined; the intangible has an indefinite life and is not amortized.
Impairment of Intangible assets with indefinite lives - US GAAP
Use a one-step impairment test. This includes Goodwill. Compare the FV of the intangible to its carrying amount. If FV < carrying value; an impairment loss is recognized = to the difference.
Impairment of Intangible assets with finite lives - US GAAP
Use a two-step impairment test. Step 1-Carrying amount is compared to the sum of the undiscounted C/F expected to result from the use of the asset and its eventual disposition. Step 2-If the carrying amount exceeds the undiscounted C/F; the asset is impaired and the imp loss is recorded for the diff between the carrying amount of the asset and its FV.
Reporting an impairment loss
Component of income from continuing operations; before income taxes (unless the impairment loss is related to discontinued ops)
Restoration of previously recognized impairment loss
This is prohibited under US GAAP unless the asset is held for disposal.
Impairment of Intangible assets other than goodwill - IFRS
Carrying value is compared with the asset’s recoverable amount. The recoverable amount is the greater of the asset’s FV less costs to sell and the asset’s value in use. Value in use is the PVFCF expected from the intangible asset. IFRS does allow the reversal of impairment losses.
Goodwill impairment - US GAAP
Calculated at reporting unit level; impairment exists when the carrying amount of the reporting unit goodwill exceeds its fair value.
Evaluation of goodwill impairment - US GAAP
Step 1-identify potential impairment by comparing the FV of each reporting unit with its carrying amount; including GW. Step 2-measure amount of GW impairment loss by comparing the implied FV of the reporting unit’s GW with the carrying amount of that GW.
Evaluation of goodwill impairment - IFRS
GW impairment testing is done at the CGU level. Carrying value is compared to CGU recoverable amount; which is the greater of the CGU’s FV less costs to sell and the value in use. (Value in use is the PVFCF expected from the CGU).
Completed contract method
US GAAP only; recognizes income only on completion (or substantial completion) of a long-term construction contract.
When can the completed contract method be used?
US GAAP only; 1-it is difficult to estimate the costs of a contract in progress; 2-many contracts are in progress so that about an = # are completed in a year anyway; 3-projects are of short duration and collections are not assured.
Completed contract B/S presentation
Excess of accumulated costs over related billings should be reflected in the B/S as a current asset (due on accounts [receivable] or cost of uncompleted contracts in excess of progress billings [sometimes called CIP]; and the excess of accumulated billings over related costs should be reflected as a current liability (progress billings on uncompleted contracts in excess of cost)
Accounting for the Completed Contract Method
Applicable overhead and direct costs should be charged to advances on the CIP account (asset); billings and/or cash received should be credited to advances on CIP account (liability); the excess (either direction) is classified as current because of the current operating cycle concept; and losses should be recognized in full the year they are discovered.
Percentage of Completion method
Appropriate to use this method when collection is assured and the entity’s accounting system can reasonably estimate profitability and provide a reliable measure of progress towards completion
Determination of revenues recognized under the % of Completion Method
income recognized is the % of estimated total income either that incurred costs to date bear to total estimated costs based on the most recent cost information; or that may be indicated by such other measure of progress toward completion appropriate to the work performed.
Loss provision rules under % of Completion Method
A provision for the loss on the entire contract should be made when current estimates of the total contract costs indicate a loss. Previous gross profit of loss reported in prior years must be adjusted for when calculating the total estimated loss.
Percentage of Completion B/S presentation
Show due on accounts (receivable) and costs and estimated earnings of uncompleted contracts in excess of progress billings as current asset accounts. Show progress billings in excess of cost and estimated earnings on uncompleted contracts as a current liability.
Accounting for the Percentage Completion Method
Journal entries are the same as the completed contract method except that the amount of estimated gross profit earned in each period is recorded by charging the CIP account and crediting realized gross profit
Calculation of gross profit under the percentage of completion method
1) contract price less estimated total cost = gross profit 2) total cost to date / total estimated cost of contract 3) gross profit X % of completion from step 2. 4) profit to date from step 3 at end of period minus PTD at beginning of period = current YTD gross profit.
Formula for gross profit calculated for installment sales
Sale-COGS
Formula for gross profit percentage for installment sales
Gross Profit/Sales Price
Formula for earned gross profit for installment sales
Cash Collections X Gross Profit Percentage
Formula for deferred gross profit for installment sales
Installment Receivable X Gross Profit Percentage
Journal entry to record an installment sale
Dr Installment Sale Accounts Receivable; Cr Inventory and Cr deferred gross profit (Contra-receivable)
Journal entry to record cash collection on an installment sale
Dr Cash; Cr Installment Sale Accounts Receivable
Journal entry to record profit on collection for an installment sale
Dr Deferred Gross Profit; Cr Realized gross profit on installment sales
Cost recovery Method
No profit is recognized on a sale until all costs have been recovered. At the time of the sale; expected profit is recorded as deferred gross profit; cash collections are first applied to recovery of product costs; then collections afterwards are recognized as profit.
Journal entry to record sale under the cost recovery method
Dr Cost recovery receivable; Cr inventory & Cr deferred gross profit
Journal entry to record the year 1 collection under the cost recovery method
Dr cash; Cr cost recovery receivable
Journal entry to record the final year collection under the cost recovery method
Dr cash; Cr cost recovery receivable AND Dr Deferred gross profit and Cr realized gross profit on cost recovery sales
What is commercial substance?
an exchange has commercial substance if the FCF change because of the exchange (risk; timing; or amount of CF)
Journal entry for exchanges that have commercial substance
Dr new asset (FV of consideration given); Dr accum depr of asset being given up; Dr Cash Received; Dr Loss if Any; Cr old asset at historical cost; Cr cash paid; Cr gain if any
IFRS: Nonmonetary exchanges
Either characterized as exch of similar assets or exch of dissimilar assets. Dissimilar: exchanges that generate revenue and are treated the same as exchanges having commercial substance under GAAP. Similar: exchanges that do not generate revenue and no gains are recognized.
Exchanges lacking commercial substance
Losses: always recognize. Gains: 1-No boot received; no gain. 2-Boot paid-no gain. 3-Boot received-recognize proportional gain (= 25% of total consideration.
Involuntary conversions of a nonmonetary asset
The entire gain or loss is recognized. Tax rules are different. If gain timing differs; a temporary difference will result and interperiod allocation will be necessary.
Historic Cost/Nominal Dollars
Basis for GAAP used in the primary financial statements. Based on historic prices w/o restatement for changes in the purchasing power of the dollar.
Monetary Assets/Liabilities
Fixed or denominated in dollars regardless of changes in specific prices or the general price level (ex cash; notes; bonds)
Non-Monetary Assets/Liabilities
Fluctuate in value with inflation and deflation (ex inventory; stock; PP&E; etc.)
Foreign Currency Transactions
Transactions with a foreign entity denominated in a foreign currency
Foreign Currency Translation
Conversion of financial statements of a foreign entity into F/S expressed in the domestic currency (the $)
Direct Method Exchange Rate
The domestic price of one unit of another currency (ex: 1 euro costs $1.47)
Indirect Method Exchange Rate
The foreign price of one unit of domestic currency (ex: 0.68 euros buys $1)
Current exchange rate
Spot rate - typically used for all B/S accounts; exch rate at the current date; or for immediate delivery
Forward exchange rate
exchange rate existing now for exchanging two currencies at a specific future date (Bet)
Historical Exchange rate
rate in effect at the date of issuance of stock or acquisition of assets (Used for equity)
Weighted average rate
calculated to take into account the fluctuations for the period. (Used for I/S)
reporting currency
currency of the entity ultimately reporting financial results of the foreign entity
functional currency
currency of the primary economic environment in which the entity operates; usually the local currency or the reporting currency
Foreign Currency Translation
restatement of F/S denominated in the functional currency to the reporting currency using appropriate rates of exchange
Foreign Currency Remeasurement
restatement of foreign F/S from the foreign currency to the entity’s functional currency (ex: reporting currency is the functional currency or F/S must be restated in the entity’s functional currency prior to translating the F/S from the functional to the reporting currency
Foreign F/S Translation - Translation Method
Functional. Start with I/S @ weighted average; proceed to B/S at year end rate; C/S & APIC @ historical; roll forward R/E; plug equity B/S (CTA) to AOCI. Reported: puFer
Foreign F/S Translation - Remeasurement Method
Dysfunctional Start with B/S & break out monetary at year-end rate vs. nonmonetary at historical rate; proceed to I/S @ weighted avg for income; historical for B/S related accounts; I/S plug is gain/loss (R/E). Reported: Idea.
General OCBOA presentation guidelines
Differentiate the titles from accrual basis F/S; explain changes in equity amounts; and a statement of C/F is not required.
Trading securities
Both debt and equity that are bought and held principally for the purpose of selling them in the near term
Available-for-sale securities
Both debt and equity not meeting the classifications of either trading or held-to-maturity.
Held-to-maturity securities
Debt securities only that the entity has the positive intent and ability to hold to maturity.
IFRS vs GAAP differences: Marketable Securities
AFS; HTM same. Similar to trading under GAAP - IFRS refers to financial assets at FV through profit or loss.
Valuation of AFS securities
Must be reported at Fair value. Changes in FV result in unrealized holding gains or losses
Valuation of Trading securities
Must be reported at Fair value. Changes in FV result in unrealized holding gains or losses
Reporting of unrealized gains/losses on Trading Securities
Included in earnings; shown on the I/S hitting the Valuation Account and unrealized loss/gain accounts.
GAAP Reporting of unrealized gains/losses on AFS Securities
Included in OCI (pUfer); shown in OCI hitting the Valuation Account and unrealized loss/gain accounts.
IFRS Reporting of gains/losses on AFS Securities
Included in OCI (pUfer); except for foreign exchange gains and losses on AFS debt securities; which are reported directly to the I/S.
GAAP Reporting of realized gains/losses
Sale of security or impairment of an AFS security. All are recognized on the I/S.
Valuation of HTM Securities
Valued at amortized cost.
Reclassification from trading securities to any other
Unrealized holding gain or loss at the date of transfer is already recognized in earnings and shall not be reversed. (No adjustment is necessary)
Reclassification from any other to trading securities
Unrealized holding gain or loss at the date of transfer shall be recognized in current earnings immediately.
Reclassification from HTM Debt to AFS
Unrealized holding gain or loss at the date of transfer shall be reported in OCI.
Reclassification from AFS Debt to HTM Debt
Amortize gain or loss from OCI with any bond premium/discount amortization
GAAP Impairment of HTM Security
Determine if temporary. If decline in value is other than temporary; write down to fair value as the new cost basis. This is a realized loss and included in earnings (I/S). Subsequent changes in FV are not recognized.
GAAP Impairment of AFS Security
Determine if temporary. If decline in value is other than temporary; write down to fair value as the new cost basis. This is a realized loss and included in earnings (I/S) Subsequent increases to FV are reported in OCI. Subsequent decreases; if temporary; are included as an unrealized loss in OCI.
IFRS Impairment of HTM/AFS Securities
Impairment losses recognized in earnings and the individual security is written down by directly reducing the cost basis or by using a valuation allowance. Previously recognized impairment losses may be reversed; with the amount of the reversal shown in the I/S.
Sale of trading security
Dr Cash; Cr Trading security. Dr/Cr realized loss/gain
Sale of AFS Security
Dr Cash; Cr AFS Security. If gain; Dr unrealized gain on AFS sec (PUFE) Cr Realized Gain on AFS sec (IDEA).
Income Tax Effects of Marketable Securities
tax effects must be reflected into the computation of deferred income taxes; because unrealized gains and losses are not deductible for tax purposes.
Three methods of reporting business combinations/consolidations
Cost Method; Equity Method; Acquisition Method
Cost Method
Do not consolidate / No significant influence (typically <20%) (AKA fair value method / AFS method)
Equity method
Do not consolidate / Significant influence but <50% ownership (typically 20%-50%)
Acquisition Method
Investor has >50% ownership (control) of the subsidiary
Cost Method Balance Sheet Presentation
Record costs at accquisition (FV+legal fees) Dr Investment in Investee & Cr Cash. Record unrealized loss and adjust to FV at year-end Dr Unrealized holding losses (OCI) & Cr Investment in Investee (or valuation account). If gain; reverse the entry but Cr is unrealized holding gains; not OCI. Return of Capital or Liquidating Dividend Dr Cash; Cr Investment in Investee
Cost Method Income Statement Presentation
Record cash dividends from investee’s R/E; do not recognize stock dividends (memo entry only) Dr Cash & Cr dividend income if dividends are income to the investor/parent. If dividends exceed investor’s share of the R/E; reduce basis; return of capital by Dr Cash and Cr Investment in Investee.
Equity Method
Used when the company owns 20-50% of voting stock of an investee and/or exercises significant influence over the operating and financial policies of the investee.
Equity method income statement presentation
record the investor’s/parent’s ownership % of earnings as income (Dividends are not income; treat as bank withdrawals Dr. Investment in Investee and Credit Equity in earnings/investee income
Equity method balance sheet presentation
record initial investment at cost by Dr Investment in Investee; Cr Cash. Increase ownership % of earnings of investee by Dr Investment in Investee and Cr equity in earnings/investee income. Decrease investor/parent’s ownership percentage of cash dividends by investee by Dr. Cash Cr. Investment in Investee.
Accounting for differences between the purchase price and book value (NBV) of the investee’s net assets under the equity method
Multiply % of company obtained by the NBV. This is the NBV of equity acquired. Multiply the % of company obtained by FV. This is the FV of equity acquired. Find difference between FV of assets and price paid. This is GW.
Amortization of Premium or FV difference in Asset over related asset life
Do not amortize GW and do not amortize land. Dr equity in investee income and Cr investment in investee. This is like a bank service charge and lowers income from the investee.
Joint venture accounting
Under both GAAP and IFRS; investors generally account for joint venture investments using the equity method
Acquisition Method recording initial investment
Valued at consideration given or the consideration received; whichever is more evident. Entry is date of acquisition: Dr Investment in Sub; Cr Cash or C/S and APIC
Treatment of subsidiary’s equity under the acquisition method
Entire equity (including C/S; APIC; and R/E) is eliminated/not reported.
Treatment of subsidiary’s net assets acquired under the acquisition method
100% of the net assets acquired (regardless of the % acquired) are recorded at FV with any unallocated balance remaining creating goodwill.
Mnemonic for adjustments needed during a consolidation
CAR IN BIG - [C/S; APIC; R/E (CAR) is the old owner’s equity or NBV] [Investment in Sub; Noncontrolling Interest (IN) - Paid FV by parent; total FV of sub] [B/S FV adj; Identifiable Intangible Assets; Goodwill (Dr) or Gain (Cr) (BIG) plug GW] – CAR & BIG normally Dr; IN normally Cr
CAR formula for acquisition method
A-L=Equity; A-L=NBV; A-L=CAR.
Acquisition method - journal entry to adjust C/S; APIC; and R/E
Debit each of these in the sub’s equity accounts in the EJE
Acquisition method - journal entry to adjust investment in sub account
EJE Crediting Investment in Sub from Parent’s books. Nothing is capitalized to Investment in sub. Direct out of pocket costs are expensed; indirect costs are expensed; bond issue costs are capitalized and amortized; and stock registration and issuance costs are deducted from APIC (Dr APIC of parent)
Acquisition method - journal entry to adjust for noncontrolling interest
if <100% is acquired; a credit to the noncontrolling interest account is established to account for the portion of the FV NOT acquired
Acquisition method - journal entry to adjust for B/S
EJE to Debit 100% of the Fair Value of the sub’s assets and liabilities; even if parent acquires <100%
Acquisition method - journal entry to adjust for intangible assets of the sub
EJE to Debit FV of intangible assets of sub acquired
Acquisition method - journal entry to adjust for Goodwill or Gain
If there is an excess of the FV of the sub over the FV of the sub’s net assets; the remaining is Debited to GW. If there is a deficiency in the acquisition cost compared to the sub’s FV; then the shortage/negative amount is recorded as a gain.
IFRS - NCI partial goodwill method
NCI=FV of Sub’s net identifiable assets X NCI%
IFRS - NCI full goodwill method
NCI=FV of Subsidiary X NCI%
Acquisition Method In Process R&D
Carry as an intangible asset (meets definition if it has a probably future economic benefit) separately from GW at the acquisition date; do not immediately write off; later: success-amortize/failure-impair & write off
Acquisition Method for transactions with GW
When a premium is paid for a sub; parent paid more than the NBV+FV of assets. First; adjust B/S to FV & Recalc depreciation. Then; separate intangibles into finite/infinite lives & allocate. Last; any remaining acquisition cost is allocated to GW. This GW is not amortized; but it subject to impairment testing.
IFRS Full GW Method (GAAP or IFRS)
GW=FV of Sub - FV of Sub’s Net Assets
IFRS Partial GW Method (IFRS only)
GW=Acquisition cost - FV of Sub’s Net Assets Acquired
