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
Where to report cash spent or received in the acquisitions in the statement of C/F?
Investing section
Step acquisition - consolidation and deconsolidation
gaining or losing control is a remeasurement event because the parent exchanges a noncontrolling investment asset for a controlling financial interest in all of the underlying assets and liabilities of the target.
Intercompany transactions for external reporting
Eliminate 100%; even when a noncontrolling interest exists. Only eliminate if consolidating.
Intercompany merchandise transactions
Reverse the original intercompany transaction and if the inventory was sold to outsiders; correct COGS/if it is still on hand; correct ending inventory
Intercompany bond transactions
If one member of the consolidated group acquires an affiliate’s debt from an outsider; the debt is considered to be retired and a gain or loss is recognized on the consolidated I/S.
Intercompany sale of fixed assets
Eliminate the gain or loss on the sale and correct the accumulated depreciation; unless the asset is land.
Combined F/S
Group of related companies; no parent company; companies under common control; common management; or unconsolidated subsidiaries
WC
CA-CL; often a measure of solvency of a company
Current Ratio
CA/CL
Quick Ratio
(Cash + net receivables + marketable securities)/CL - OR - (CA-Inv)/CL
Cash & Cash Equivalents
S/T; highly liquid investments that are both readily convertible to cash and (90 days or less from date of purchase)
NRV of A/R
balance of A/R adjusted for allowances for uncollectibles; sales discounts; and sales returns and allowances.
A/R Sales or Cash Discounts - Gross Method
Records the sale without regard to the available discount. Dr A/R & Cr Sales for the gross. If discount is taken; debit sales discounts taken (contra revenue) and cr AR for the full sale.
A/R Sales or Cash Discounts - Net Method
Records the sale as if the discount will be taken each time. Dr A/R & Cr Sales for the net. If the period lapses and the full cash payment comes in; Cr Sales Discounts Not Taken (Revenue)
Trade Discounts
These are typically quantity discounts that are quoted in percentages. (ex: 40% and 10%) Apply these sequentially
Sales Returns and Allowances
Dr Sales Returns & Allow (contra sales) and Credit A/R for the actual return of a sale. To estimate and accrue; if history shows that a material percentage of sales are returned.
Direct Write Off Method
used for income tax; (NOT GAAP); writes off the debt when it becomes uncollectible.
Allowance Method
(GAAP) This estimate is made based on past experience; booking an expected amount currently and adjusting depending on results.
Percentage of Sales Method
(I/S Approach) a % of each sale is debited to Bad Debt Expense and credited to Allowance for Doubtful Accounts; based on historical data.
Percentage of A/R at Year End
(B/S Approach) a % of ending A/R is calculated based on historical data. This ending balance is achieved by making an adjustment to bad debt expense and allowance up or down; as needed.
Aging of Receivables Method
(B/S Approach) a % of estimated uncollectible accounts based on historical data is multiplied by balances in A/R based on age. The estimated uncollectible amount sum is the balance that should be in the allowance account after adjustment.
Subsequent Collection of A/R Written Off-Allowance Method
1-Restore account written off Dr A/R; Cr Allow; then 2-record cash collection Dr Cash;Cr A/R
Pledging of A/R
Company uses existing A/R as collateral for a loan. Dr Cash; Cr Note Payable. Only requires note disclosure.
Factoring of A/R
Company can convert receivables into cash by assigning them to a factor with or without recourse.
Factoring of A/R Without Recourse
True Sale. Sale is final and the assignee assumes the risk of any losses on collections.
Factoring of A/R With Recourse
Sale or a loan. A/R collateral. The factor has an option to re-sell any uncollectible receivables back to the seller.
Notes Receivable F/S Presentation
Unearned interest and finance charges are deducted from the face amount of the related promissory note (this states the receivable at present value)
Discounting Notes Rec
Holder endorses back of the note to a 3rd party and receives a sum of cash. (Dr. Cash; Cr. Note Rec Discounted {contra asset})
Discounting Notes Rec w/Recourse
Holder remains contingently liable for payment. Reported on B/S with a corresponding contra account
Discounting Notes Rec w/o Recourse
True Sale. Holder assumes no further liability. Should be removed from B/S. No contingent liability.
FOB Shipping Point
Buyer Pays. Title passes to the buyer when the seller delivers the goods to a common carrier. Included in buyer’s inventory upon shipping. Freight In added to cost of inventory
FOB Destination
Seller Pays. Title passes to the buyer when the buyer receives the goods from the common carrier. Included in seller’s inventory thought not in warehouse. Freight Out is a selling expense.
Shipment of Non-Conforming Goods
If wrong goods are sent; title reverts to seller upon rejection by the buyer. Goods should not be included in buyer’s inventory if rejected.
Sale with a Right of Return
If amount of goods likely to be returned can be estimated; the transaction should be recorded as a sale with an allowance for estimated returns recorded.
Consigned Goods
Remain in the inventory of the consignor (true owner). Agent (consignee) holds and sells on the owner’s behalf. Inventory cost includes cost to ship goods to consignee.
Inventory Valuation GAAP
General rule is that inventory is stated at cost as long as it is to be sold at a profit.
Departure from Cost Basis (GAAP)
1-LCM: ordinary course of business; utility of goods is no longer as great as their cost; a departure from measuring at cost is required. 2-Precious Metals or Farm Products:valued at NRV; which is the selling price less costs of disposal.
Purpose of using LCM
Conservatism. May be applied to a single item; a category; or total inventory.
Determining Market under GAAP
Middle value of ceiling; floor; and replacement cost.
LCM Replacement Cost
Cost to purchase the item of inventory as of the valuation date
LCM Market Floor
NRV-Profit Margin. This is the market ceiling (SP-costs to complete and dispose) - a normal profit margin.
LCM Market Ceiling
NRV. This is an item’s selling price less costs to complete & dispose.
LCM under IFRS
IFRS simply says lower of Cost or NRV (SP-costs to complete and dispose) � same as Market Ceiling under GAAP.
Reversal of Inventory Write-Downs
GAAP prohibits this; IFRS allows it for subsequent recoveries of inventory value; limited to the original write-down; reduces inventory costs to I/S (COGS)
LCM Disclosure
Separate identification on the I/S when the losses from write-downs are both substantial and unusual. Otherwise; if small; include in COGS
Periodic Inventory System
Uses account purchases. Physical count at the end of the period and aggregate all purchases before applying inventory method; thus plugging COGS. (BI+Purchases=COGAFS-EI=COGS [plug])
Perpetual Inventory System
Inventory records updated each time a sale is made; COGS tabulated with each sale; running total kept of inventory balances. (Dr. COGS and Cr. Inventory) + (Dr Cash; Cr. Sales)
Specific Identification Method
For large; high value; and heterogeneous goods. Cost of each item is uniquely identified to that item.
FIFO
First costs inventoried are the first costs transferred to COGS. Result of periodic and perpetual methods are the same.
Weighted Average Method
End of period - average cost of each item in inventory is the weighted average of all items in inventory. Suitable for a homogeneous product line & a periodic inventory system.
Moving Average Method
Computes the weighted average cost after each purchase by dividing the total cost of inventory available after each purchase; by the total units available after each purchase. Must use perpetual with this method; more current than weighted average.
LIFO
NOT permitted under IFRS. GAAP only - last costs inventoried are the first costs transferred to COGS. EI includes the oldest costs.
LIFO Conformity Rule
US: If LIFO is used for income tax purposes; it also must be used for F/S.
LIFO Layers
Each purchase is thought to have been put into a bucket. When sales occur; the inventory is removed from the top of the bucket. Layers are top to bottom; depending on which was laid down last.
Dollar Value LIFO
Inventory is measured in dollars and is adjusted for changing price levels.
Dollar Value LIFO Calculation
Three columns; Base Year Cost; Current Year Cost; $ Value LIFO. 1/1/Y1 all 3 are the same. At 12/31/Y1; CY cost/BY cost = price index. Squeeze to find change for year; which is Base year 1 layer. Multiply this by price index to get Y1 $ value LIFO layer. Add to beginning to get 12/31/Y1 $ value LIFO EI.
Firm Purchase Commitments
legally enforceable agreement to purchase a specified amount of goods in the future. Must be disclosed in the F/S or notes. If an expected loss results; rule of conservatism says that an estimated loss should be booked.
GAAP Valuation of Fixed Assets
Historical Cost; cash or cash equivalent price of obtaining the asset and bringing it to location and condition necessary for its intended use.
IFRS Valuation of Fixed Assets - Cost Model
Reported at historical cost adjusted for Accum Depr & Impairment
IFRS Valuation of Fixed Assets - Reval Model
A CLASS of FA is revalued to FV and then reported less subsequent Accum Depr and Impairment.
IFRS FA Reval Losses
When FV < Carrying value; revals are reported on the I/S; unless the loss reverses a previously recognized gain in OCI.
IFRS FA Reval Gains
When FV > Carrying value; revals are reported to OCI and accumulated in equity as revaluation surplus; unless the reval gain reverses a previously recognized loss. Report on I/S to the extent that they reverse a previously reported I/S loss.
IFRS FA Impairment
If revalued FA subsequently become impaired; impairment is recorded first by reducing any OCI reval surplus to zero; then reporting further impairment losses on the I/S.
Cost of Equipment: Capitalize or Expense
Expense ordinary repairs; capitalize most improvements and replacements. If carrying value of old asset is unknown and asset’s life is extended; Dr Accum Dept for the cost of the improvement/replacement.
Cost of Land
All costs UP TO excavation are considered land costs. (Purchase price; title and legal fees; clearing of brush; site development; less proceeds from sale of existing buildings; etc.)
Cost of Buildings
All costs beginning with excavation forward (Purchase price; alterations; improvements; architect fees; etc.)
Investment Property (IFRS)
Land or buildings held to earn rentals or for capital appreciation are classified and reported this way. GAAP does not specify this classification.
Investment Property Measurement Models (IFRS)
Cost Model: Historical cost less Accum Depr. FV Model: investment property is reported on the B/S at FV & NOT depreciated.
Capitalization of Interest Costs
Exception to the Rule as interest is normally expensed. It SHOULD be capitalized as part of producing FA held during construction. Calculate using accumulated expenditures; do not exceed actual interest costs.
Composite vs. Component Depreciation
Composite averages the economic lives of a number of property units and depreciates the entire class over a single life. Component considers each asset individually.
Straight Line
Cost-Salvage Value/Estimated Useful Life
SYD
SYD is denominator; numerator is # of time periods; declining by 1 each period. Multiply factor by depreciable base (cost of asset - salvage value)
Declining Balance
IGNORE Salvage Value. 2 or 1.5 X (1/N) X (Cost-Accum Depr) Plug final period depreciation expense
Units of Production
Relates depreciation to estimated production capability of the asset and is expressed in a rate per unit or hour. (Cost-SV)/Est units or hours to = a depr rate per unit. Turns depr into a variable cost rather than fixed.
Depletion
allocation of cost for wasting natural resources such as oil; gas; and minerals to the production process.
Cost Depletion
GAAP. Base/Recoverable Units = Rate per unit. Rate per unit X units extracted = depletion. If not all units extracted are sold; must allocate depletion between COGS and Inventory.
FA Impairment-test for recoverability (US GAAP)
Estimate FCF expected to result from the use of the asset & eventual disposition. If sum of undiscounted expceted FCF < carrying amount; an impairment loss needs to be recognized.
FA Impairment-calc of impairment loss (US GAAP) Held for use
Take FV or PV of future net CF; subtract net carrying value to get impairment loss. Write asset down; depreciate the new cost; and do not restore
FA Impairment-calc of impairment loss (US GAAP) Held for disposal
Take FV or PV of future net CF; subtract net carrying value; and add cost of disposal to get total impairment loss. Write asset down; do not take any depreciation; and restoration is permitted.
FA Impairment-calc of impairment loss (IFRS)
One step model; Take FA recoverable amount (greater or value in use {PCVFCF} or NRV = FV - Cost to Sell) and subtract carrying value. If negative; impairment loss. Can reverse if subsequently changes based on calculation.
Capital Lease
Sale in substance; called a finance lease (IFRS) or (GAAP) a Capital lease or Sales-Type or Direct Financing Type Lease
Lease Bonus
Ex Commission paid to a real estate agent. Classified as an asset (deferred charge) and amortized using the S/L method over the life of the lease.
Leasehold Improvements
Permanently affixed to the property and reverts back to the lessor at the termination of the lease. Should be capitalized and depreciated over the lesser of lease life or asset life.
Security Deposits
Nonrefundable should be deferred by the lessor (unearned revenue) and capitalized by the lessee (prepaid rent exp) until the lessor considers the deposit earned. Refundable should be treated as a receivable by the lessee and a liability by the lessor until the deposit is refunded.
Lessee Capital Lease Criteria (US GAAP)
Must meet one condition to capitalize OWNS Ownership transfer at end of lease; written option for bargain purchase; Ninety% of leased property fair value is <= to the PV of lease payments; Seventy-Five % or more of economic life is being committed in lease term.
Lessee/Lessor Finance Lease Criteria (IFRS)
depends on the substance of the transaction rather than on the form of the contract. Substantially all of the risks and rewards inherent in ownership are transferred to the lessee. Same criteria for lease classification for both lessee and lessor.
Lessor Sales-Type/Direct Financing Type Criteria (GAAP)
All three must be met (LUC) Lessee owns the leased property; Uncertainties do not exist regarding any unreimbursable costs to be incurred by the lessor; and Collectibility of the lease payments is reasonably predictable.
Sales-Type Lease
FV of leased property at the inception of the lease differs from the cost or carrying amount to the lessor -> Manufacturer’s or Dealer’s Profit or Loss. (2 profits - gain on sale & interest income)
Direct Financing Lease
FV of leased property at the inception of the lease is the same as the cost or carrying amount to the lessor -> No Manufacturer’s or Dealer’s Profit or Loss. (1 profit - interest income)
Lessee Accounting for Capital Lease
Dr FA-leased property; Cr Liability-obligation under capital lease for lower (lesser) of the FV at the inception of the lease or cost = PV of minimum lease payments (required payments; bargain purchase option; guaranteed residual value)
Interest Rate used to Calc PV of Minimum Lease Payments
Use the lower (lesser) of the rate implicit in the lease (if known) or the lessee’s incremental borrowing rate (rate available in the market to the lessee)
Depreciation of FA - Capital Lease
Capitalized lease assets - Salvage Value = Depreciable Basis / Periods of Benefit = Depreciation Expense (per period)
Period of Benefit (Depreciable Life) US GAAP
Use estimated economic life of asset (OW) Use lease term (NS)
Period of Benefit (Depreciable Life) IFRS
Shorter (lesser) of the lease term and the useful life of the asset.
Lease Liability and Asset Amortization (Lessee)
Create schedule with lease payments; interest on unpaid obligation; reduction of lease liability; and carrying amount of lease obligation. Start with PV of minimum lease payments in column 4; calculate 2 as rate X balance in column 4; subtract from lease payment and calculate down.
Sales-Type (Finance) Lease - Gross Investment
Minimum lease payments + any unguaranteed residual value accruing to the benefit of the lessor
Sales-Type (Finance) Lease - Net Investment
Gross Investment X PV
Sales-Type (Finance) Lease - Unearned Interest Revenue
Gross Investment - Net Investment
Sales-Type (Finance) Lease - COGS
Cost of Asset - PV of unguaranteed residual value = COGS (Dr COGS; Cr Inventory)
Sales-Type (Finance) Lease - Sales Revenue
PV of minimum lease payments (Dr Lease Payments Rec; Cr Sales Revenue and Cr unearned interest income)
Direct Financing (Finance) Lease - Gross Investment
Minimum lease payments + any unguaranteed residual value
Direct Financing (Finance) Lease - Net Investment
Gross Investment X PV
Direct Financing (Finance) Lease - Unearned Interest Revenue
Gross Investment - Net Investment
Recording a Direct Financing Lease
Dr Lease Payments Receivable and Cr Asset & Cr Unearned Interest Rec (No Dr to COGS; Cr Revenue)
Sale-Leaseback
Owner (seller-lessee) sells the property and simultaneously leases it back from the purchaser-lessor.
Excess Profit of Sale-Leaseback (Operating)
Amount of profit on the sale that exceeds the PV of the minimum lease payments (Sale price-asset NBV-PV min. lease payment = Excess Gain)
Excess Profit of Sale-Leaseback (Capital)
Amount of profit on the sale that exceeds the recorded amount (lesser of FV of leased prop or PV of minimum pymts) of the asset (Sale price-asset NBV-Leaseback asset = Excess Gain)
Amount of Deferred Gain in Sale-Leaseback (GAAP)
Determined by the retained rights to remaining use of the leaseback property. Major (>90%) / Less than Substantially All but Greater than Minor (10%-90%) / Minor (<10%)
Sale-Leaseback Substantially All Rights Retained >90%
Usually capital leases; defer all gain and amortize over the leased asset
Sale-Leaseback Rights Retained 10%-90%
Defer gain up to the PV of the Minimum Leaseback Payments (Operating Lease) or Capitalized Asset (Capital Lease). Gain in excess of this amount is recognized immediately.
Sale-Leaseback Minor Portion of Rights Retained <10%
Recognize gain or loss at the time of sale-leaseback transaction. Gains are not deferred.
Sale-Leaseback Losses
Recognize Immediately unless artificial loss. When Sale price < FV; loss is deferred and amortized over the leaseback period.
Amortization of Deferred Gain - Capital Leaseback
Any deferred gain or loss is amortized in proportion to the amortization of the leased asset
Amortization of Deferred Gain - Operating Leaseback
Any deferred gain or loss is amortized in proportion to the gross rental expense over the life of the lease
Sale-Leaseback Finance Lease Profit - IFRS
Deferred and amortized over the lease term
Sale-Leaseback Operating Lease Profit - IFRS
When SP>FV;profit S/B deferred & amortized over period asset is to be used. SP<=FV: profit or loss recognized immediately (no deferral).
Subleases
Will be Capital if the original lease meets either O or W of OWNS. Otherwise; it is operating. If original is operating; sublease is also operating.
Bonds Issued at Discount
Market Rate > Face Rate. Ex: Issue 600 $1000 10% bonds at 99. Bond issue proceeds = $594;000.
Bonds Issued at Premium
Market Rate < Face Rate. Ex: Issue 600 $1000 10% bonds at 101. Bond issue proceeds = $606;000.
Convertible Bonds Nondetachable Warrants
Convertible bond itself must be converted into capital stock.
Convertible Bonds Detachable Warrants
Bond NOT surrendered upon conversion; only the warrants + cash representing the exercise price of the warrants. Warrants can be bought and sold separately from the bonds.
J/E Bonds Issued at Discount
To Borrower: Dr Cash; Dr Discount on Bond Payable; Credit Bond Pay. To Investor: Dr Investment in Bonds and Cr Cash
J/E Bonds Issued at Premium
To Borrower: Dr Cash; Cr Premium on Bond Payable; Credit Bond Pay. To Investor: Dr Investment in Bonds and Cr Cash
Unamortized Discount on Bond Payable
Contra account to Bonds Pay; Presented on B/S as direct reduction from the face (par) value of the bonds to arrive at the carrying value of the bonds at any given time.
Unamortized Premium on Bond Payable
Presented on B/S as direct addition to the face (par) value of the bonds to arrive at the carrying value of the bonds at any given time.
Bond Issue Costs (GAAP)
Transactions costs of the bond issue. Ex: legal fees; accounting fees; etc. These are deferred charges (asset) and amortized into expense using S/L method.
Bond Issue Costs (IFRS)
Bond issue costs are NOT recorded as a separate asset; they are deducted from the carrying value of the liability and amortized using the effective interest method.
S/L Method of Discount/Premium Bond Amort
NOT GAAP and prohibited under IFRS - but GAAP allows if not materially different from the effective interest method. Premium or Discount / # of periods the bond is outstanding = Periodic Amortization. Interest Expense = Payment amount (+/-) Amort
Effective Interest Method (AKA Constant Yield Method)
Required by IFRS/GAAP. Interest Expense = Effective Interest Rate X Carrying Value at the BEGINNING of the period. Amort = diff between interest exp & cash interest paid at stated rate.
Effective Interest Method Balance Sheet Effect
Bond Face X Coupon Rate = Interest Paid. Interest Expense (from I/S) - Interest Paid = Amortization
Effective Interest Method Income Statement Effect
Net Carrying Value X Effective Interest Rate = Interest Expense. Interest Expense - Interest Paid (from B/S) = Amortization
Accrued Interest for Bond Issues
Amount of Interest accrued since last interest payment is added to the price of the bond. J/E Dr Cash; Dr Discount on Bonds Pay; Cr Bonds Pay; Cr Bond interest expense. When first interest payment is due; reverse the int exp. Dr Bond Interest Exp; Cr Cash.
Year End Bond Interest Accrual
Credit a payable if the date of a scheduled payment and the issuer’s year-end do not agree.
Bond Sinking Funds
Non-current; restricted asset; Trustee fund (restricted cash) pursuant to the indenture wherein the company contributes money each year so that at maturity; there is a sum available to repay the entire liability.
Bond Sinking Fund Reserve
Appropriation of R/E to indicate to the shareholders that certain R/E are being accumulated for bond sinking fund purposes
Calculation of Periodic Sinking Fund Payments
Use future value of annuity; Dr. Bond Sinking Fund and Cr Cash. For fund earnings; Dr. Bond Sinking Fund; and Cr Interest Revenue
Serial Bonds
Alternative to Sinking Funds; Mature in Installments. Allow issuer to match maturity dates with org’s cash flow requirements.
Serial Bonds Amortization
Either effective interest method (just the same as for term bonds) or Bonds Outstanding Method (not GAAP) which is like SYD. Fraction of Bonds outstanding (declining percentage) X Premium
Convertible Bonds
Nondetachable warrants; often issued for more than face value because of the value of the conversion feature. Issuance price is allocated to the bonds because difficult to assign a specific value to the conversion feature. (GAAP)
Book Value Method for Convertible Bonds
No Gain or Loss is recognized. At conversion; the bond payable and related premium or discount are written off and C/S is credited (at par). APIC is credited for the excess of the bond’s carrying value over the stock’s par value less any conversion costs (plug). NO I/S impact; C/S and APIC ONLY.
Market Value Method for Convertible Bonds
NOT GAAP. I/S impacted because a gain or loss is recognized. At conversion; the bonds payable and related premium are written off; and C/S is credited at par. The credit to APIC is the excess of market price of the stock over par value. Diff between market value of the stock and the book value of the bonds is a recognized gain or loss.
Bonds Sold with Detachable Warrants
Warrants are traded separately and are considered to be a separate financial instrument. A value should be assigned to the conversion feature at the time of issue (Cr to APIC - warrants) Dr. Cash; Cr Bonds Pay; Cr APIC - Warrants.
Warrants only Method for Detachable
used only if the FV of the warrants is known. Upon issue; Dr Cash; Dr Bonds Pay; Cr APIC - Warrants; and plug a premium or discount on bonds pay. At exercise; reverse the credit to APIC-warrants; Cr Common Stock; and Plug a credit to APIC based on the cash paid and the balance of the entry.
Market Value Method for Detachable
used if both the FV of the warrants and bonds are known. Sales price is allocated to the bonds and warrants based on relative market value (like a weighted average)
Extinguishment of Debt
Call or retirement of bonds before maturity. Usually generates a gain or loss depending on if issued at a premium or discount along with current market prices. Adjust for bond issue costs reported as an asset; related unamortized discount or premium; and the difference between the face value and the reacquisition proceeds.
Gain or Loss on Extinguishment of Debt
reacquisition price - net carrying amount; only extraordinary if unusual and infrequent
Defined Benefit Plan
Benefits received at retirement determined by a formula.
Defined Contribution Plan
Contributions made to the plan are determined by a formula. Ex: 401K
Funded status of Defined benefit plans
Overfunded has assets > liabilities. Underfunded has assets < liabilities. FV Plan assets - PBO = Funded Status
Accumulated Benefit Obligation
actuarial PV of benefits attributed by a formula based on current and past compensation levels (uses current salary)
Projected Benefit Obligation
actuarial PV of all benefits attributed by the plan’s benefit formula to employee service rendered prior to that date. It only uses an assumption as to future compensation levels. This is used because it is the most conservative value (highest liability)
Prior Service Cost
Cost of Benefits based on service granted for subsequent plan amendments or retroactive credit given. Increases the PBO in the period of the amendment or initiation and should be amortized to pension expense over the future service periods of the affected employees
Income Statement Presentation of Pension Expense
Net Periodic Pension Cost - SIR AGE / Service Cost (Current); Interest Cost; Return on Plan Assets; Amort of Prior Service Cost; Gains and Losses; Amort of existing net obligation or net asset. Gains and returns are subtractions. Dr Net periodic pension cost; Cr Pension Benefit Liability & Cr. OCI
Current Service Cost-Pension Expense
PV of all benefits earned in the period; or the increase in the PBO during the current period. This is calculated by an actuary and is normally given on the exam.
Interest Cost for Pension Expense
Increase in the PBO due to the passage of time. Discount rate normally given.
Return on Plan Assets-Pension Expense
GAAP allows the use of either the actual return on assets or the expected return on assets. If expected is used; the difference between that and the actual must be recognized in OCI each period and amortized to pension expense over time with any actuarial gains and losses.
Amortization of unrecognized prior service cost
PSC increases the PBO and is recorded as unrecognized PSC in OCI. It is amortized to pension expense over the plan participant’s remaining years of service. Calculated using the unrecognized prior service cost balance at the beginning of the period.
Gains and Losses for Pension Expense
Two sources; actuarial change in assumption (actuarial gains and losses) or difference between expected and actual return on plan assets when expected is used to calculate pension expense. GAAP allows the gains and losses to be recognized in the perion incurred or to record them in OCI and amortize them under the corridor approach; for smoothing purposes.
Corridor Approach for Pension Expense Gains/Losses
Unrecognized gain or loss is amortized over the employee’s average remaining service period; if as of the beginning of the year; this amount >10% of the FV of plan assets (Assets) or PBO (Liabilities). If so; unrecognized gain or loss - 10% of Liab/Assets = Excess. Excess / Avg remaining service life = amort of unrecognized gain or loss
Amort of existing net obligation or net asset
PBO - FV Plan Assets = Initial unfunded obligation. Initial unfunded obligation / (greater of 15 years or average employee job life) = minimum amort.
B/S treatment of Pension Plan Contributions
Increases plan’s asset if overfunded or decreases liability if underfunded. Dr Pension benefit asset/liab & Cr Cash
Pension Plan Asset
Overfunded. Noncurrent. FV Plan assets > PBO. For B/S; aggregate & report in total as a noncurrent asset
Pension Plan Liability
Underfunded. FV Plan assets < PBO. For B/S; aggregate and report as a current liab; noncurrent liab; or both. Current only to the extent that the benefit obligation payable w/in next 12 mos exceeds the FV of Plan Assets
Reconciliation of Beginning & Ending Funded Status
Beginning funded status + Contrib (+/-) SIRAGE = Ending Funding Status
AOCI for Pension Expense (AGE)
Unless the company chooses to recognize the pension gains and losses immediately; AGE must be reported in AOCI. Tax Effects of these items must also be recognized in AOCI.
J/E for Prior Service Cost and Pension Losses
Dr. OCI; Cr. Pension benefit asset/liability. These decrease the funded status of the pension plan and are recorded in the period incurred. A deferred tax asset also may be recognized in OCI as an offset to the unrecognized PSC or pension loss. Dr Deferred Tax Asset; Cr Deferred Tax benefit - OCI
J/E for Amort to Pension Expense for Prior Service Cost & Pension Losses
Reclassified out of OCI and recognized as a component of pension expense. Dr. Net periodic pension cost; Cr OCI. Also - related deferred tax benefit should be removed from OCI and recorded on I/S. Dr Deferred Tax Benefit - OCI; Cr Deferred Tax Benefit - Income Statement
AOCI Pension Gains
Increase the funded status of the pension plan. Dr Pension benefit asset/liability; Cr OCI. Also; Dr. Deferred tax expense - OCI; Cr. Deferred Tax Liability
Amort to Pension Expense of Pension Gains
Reclassification Dr OCI; Cr Net Periodic Pension Cost; & Dr. Deferred Tax Expense - Income Statement; & Cr. Deferred Tax Expense - OCI
Pension Settlements
Occur when pension plan assets increase in value to the point that sale of the pension plan assets allows a company to purchase annuity contracts to satisfy pension obligations
Pension Curtailments
Events that reduce the expected remaining years of service for present employees or eliminate accrual of defined benefits
Termination Benefits
Arise when employees are paid to terminate their rights to future pension payments
Postretirement Benefits other than Pensions-Accrual Requirements
Employee service already rendered & employees’ rights accumulate or vest (liability) AND payment is probable & amount of benefits can be reasonably estimated (contingency rules)
Accumulated Postretirement Benefit Obligation
PV of future benefits that have vested as of the measurement date
Expected Postretirement Benefit Obligation
PV of all future benefits expected to be paid as of the measurement date
I/S Approach to Postretirement Benefits
Benefit-years-of-service approach is used; PBO is accrued during the period the employee works (the attribution period)� Usually begins at employee’s date of hire and ends at vesting date� NOT when retired and NOT when paid
Components of Net Postretirement Benefit Cost
Same as Pensions (SIRAGE; except that E: Amort or Expense of the Transition Obligation is different.
Amort. Expense of the Transition Obligation
One of two ways: immediate expense recognition by recording the entire obligation in one year as the effect of a change in accounting principle; OR delayed recognition by using S/L amort over the remaining service life of plan participants. (use greater of 20 years or avg remaining service period)
Funded status of Postretirement Benefit Plans
FV of Plan Assets - APBO = Funded status. Postretirement Benefit Plan Asset if overfunded and Liability if underfunded.
AOCI - Postretirement Benefit Plans
Same treatment as pensions (AGE of SIRAGE)
Deferred Compensation Liability Recognition
Book at the PV of benefits expected to be provided in exch for the employee’s service to date. Benefits should be recognized in a systematic and rational manner over the period of service.
Intraperiod Tax Allocation
IDEA PUFER; I shown gross; then net of tax; DEA PUFER shown net of tax
Interperiod Tax Allocation
recognize through the matching principle the amount of current and future tax related to events that have been recognized in financial accounting income
Permanent Differences
Do not affect the deferred tax computation; they affect current tax only; could be either a nondeductible or a nontaxable item that does not reverse. Ex: tax-exempt interest; Fines; etc.
Temporary Differences
These affect both current and deferred tax
Accounting for Interperiod Tax Allocation
Total income tax expense for the year = current income tax + deferred income tax. (Current income tax payable + change in the deferred tax asset or liability from the beginning to the end of the period.
Deferred Income Tax expense/benefit
Change in the deferred tax liability or asset account on the B/S from the beginning of the year to the end of the year (called the B/S approach)
Deferred Tax Liability
For Income; F/S 1st-tax return later. Since taxable later; future tax liability. For expense; tax return expense 1st;F/S expense later. Since tax deductible first; future tax liability. Ex: income: installment sales; expenses: depreciation expense
Deferred Tax Asset
For income; tax return income first-F/S income later. Since taxable income first; Prepaid Tax Benefit (asset). For expense; F/S expense 1st-tax deduction later. Since tax deduction later; future tax benefit (asset). Ex: Prepaid rent; bad debt expense.
Valuation Allowance
Contra Asset account used to net against deferred tax asset for the portion that is not expected to be realized. These are NOT permitted under IFRS.
Uncertain tax positions
some level of uncertainty as to the sustainability of a particular tax position taken by a company. GAAP requires a more likely than not level of confidence before reflecting a tax benefit in the F/S.
Two-step approach to analyzing uncertain tax positions
1-test for more likely than not if a dispute with the taxing authority were taken to the court of last resort. 2-Measurement - recognize the largest tax benefit that has a >50% likelihood of being realized upon ultimate settlement with the taxing authority
Enacted Tax Rate
Used for deferred taxes. When tax rates change and are voted into law and forthcoming (for certain) - the new rates should be applied to taxable items. DO NOT use anticipated; proposed; or unsigned. Prospectively change - do not go backwards. Adjustment for period of change is recognized in income from continuing ops.
Net temporary adjustment for deferred tax account
Adjustment is for the change in deferred taxes (asset or liability) due to the current year’s events. Income tax expense/benefit is the difference between the beginning balance in the deferred tax account and the properly computed ending balance in the account.
Balance Sheet Presentation of Deferred Tax Assets & Liabilities
Classify based on the related asset or liability for financial reporting (current/noncurrent) Mama. If no related asset or liab. Then classify based on expected reversal date of the temporary difference.
Presentation of multiple deferred tax assets and/or liabilities
All deferred tax assets and liabilities classified as current must be netted/offset and presented as one amount (either net current asset or a net current liability). Same rules for noncurrent.
Operating Loss Carrybacks
Used to reduce current taxes due or receive a refund for a prior period. They are a tax benefit (asset) and s/b recognized to the extent they can be used in the period they occur. Dr. Tax refund receivable; Cr. Tax Benefit
Operating Loss Carryforwards
20 years. Valuation allowance may be necessary. Tax effects are recognized to the extent that they are more likely than not to be realized. Dr. Deferred Tax Asset; Cr. Tax Benefit. (debit reduces taxes payable in the future and credit reduces NOL in the current period)
Investee’s Undistributed Earnings
DRD. Tax Return: taxable income is the dividend received. The DRD is based on the % ownership. DRD is permanent difference. GAAP F/S - Equity method says to report percentage of investee’s income for an investment between 20%-50%. This creates a temp difference. Presumption is that all undistributed earnings will be distributed to the investor/parent at some point and will then reverse.
Capital Stock (Legal Capital)
Amount of Capital that must be retained by the corporation for the protection of creditors. Par value of both P/S and C/S is included.
Book Value per Common Share
Common S/H Equity / Common Shares Outstanding
Common S/H Equity Formula
Total S/H Equity - Preferred Stock Outstanding - Cumulative Preferred Dividends in Arrears
Preferred Stock
Preference relating to liquidation; preference relating to dividends; which could be participating; non-participating; cumulative; or non-cumulative.
Cumulative Preferred Stock
All or part of the preferred dividend not paid in any year accumulates (called dividends in arrears) and must be paid in the future before C/S can be paid.
Participating Preferred Stock
Preferred shareholders share (participate) with C/S holders in dividends in excess of a specific amount. Fully participating - participate without limit. Partially participating - preferred S/H participate to a limited extent.
Convertible Preferred Stock
May be exchanged for C/S at the option of the stockholder at a specified rate.
Mandatorily Redeemable Preferred Stock
Issued with a maturity date; similar to debt; must be bought back by the company on the maturity date.
Additional Paid In Capital
Contributed capital in excess of par or stated value. Could arise from a variety of transactions such as bond conversion; sale of T/S at a gain; or the issuance of liquidating dividends
Appropriations in R/E
Discloses to shareholders that some of R/E are not available to pay dividends b/c they have been restricted for legal or contractual reasons.
Quasi-Reorganization
Accounting adjustment that revises the capital structure as though it had been legally reorganized. When a corp has a significant deficit in R/E; the deficit can be eliminated and allow a fresh start. Requires S/H formal approval.
Procedure for quasi-reorganization
- Revalue assets to current FV & liab to PV. No net increase in net assets is permitted and the write-down is charged directly to R/E. 2. Bring R/E to 0 against APIC. If APIC is insufficient; par or stated value can be reduced; thus reducing capital stock.
Treasury Stock
Corp’s own stock that has been issued to S/H and subsequently reacquired.
Cost Method of Accounting for T/S
T/S are recorded and carried at their reacquisition cost. Gain or loss determined when T/S is reissued or retired. APIC-T/S is Dr for Loss and Cr for gains. If APIC-T/S is insufficient to cover losses; R/E can be decreased to absorb the loss. R/E can never be increased through T/S transactions.
Par Method of Accounting for T/S
T/S are recorded by reducing the amounts of par (or stated) value and APIC received at the time of the original sale. T/S is debited for par; APIC-C/S is Dr (reduced) for the pro rata share of the orig issue price attributable to the reacquired shares. APIC-T/S is credited for gains and debited for losses when T/S is repurchased at prices that differ from the orig selling price. Losses may also decrease R/E if the APIC-T/S cannot absorb them.
Date of Dividend Declaration
Date the BOD formally approves a dividend. Dr Exp & Cr Liability
Date of Dividend Record
Date the BOD specifies to whom the payments are to be made
Property (In-Kind) Dividends
Distribution of non-cash assets to S/H. On declaration date; property to be dist is restated to FV and any gain/loss should be recognized in income.
Liquidating Dividends
Reduce total paid in capital. When dividends to S/H exceed R/E. Charged first to APIC then to C/S or P/S as appropriate.
Stock Dividends
No dividend income reported by S/H. If small (25%) reduce R/E by par (don’t hit APIC). No change to equity; just a change in form.
Stock Splits
No J/E; par is reduced per share proportionately. No change in BV.
Noncompensatory Stock Options
no J/E until stock is purchased; then regular entry.
Compensatory Stock Options
valued at FV of the first options issued. Dr Exp & Cr APIC-options each period. When exercised; Dr Cash; Dr APIC-options to reverse; Cr C/S at par & Cr APIC-C/S as a plug.
Option Price/Exercise Price
Option price is the price at which the stock can be purchased pursuant to the option contract.
Exercise Date of Option
Date by which the option holder must use the option to purchase the underlying
Grant Date of Option
date the option is issued. No J/E
Vesting Period
period over which the employee has to perform services in order to earn the right to exercise the options.
Simple Capital Structure
Only one type of stock outstanding: C/S - Only must report base EPS for income from continuing ops and for NI on the face of the I/S.
Complex Capital Structure
Must report basic and diluted EPS for income from continuing ops and for NI on the face of the I/S. Having at least one of convertible securities; warrants or other options; contingent shares; etc.
Basic EPS Formula
(NI-PD)/WACSO or Income available to common S/H / weighted average # of C/S outstanding
Stock dividends and stock splits in calculation for EPS
treat as though they occurred at the beginning of the period. Shares outstanding or split must be restated for the portion of the period before the stock dividend/split.
Diluted EPS Formula
Basic EPS + Pref Divs + Bond Interest Net of tax / WACSO New. (Income available to C/S S/H + interest on dilutive securities) / WACSO assuming all dilutive shares are converted to C/S.
Dilution from Options; Warrants; and their Equivalents
No change to numerator; only increase denominator.
T/S Method for dilution
Assumes that proceeds from the exercise of stock options; warrants; and their equivalents will be used to repo T/S at the prevailing market price.
Dilutive versus Antidilutive
Conservatism. Assume that if an option is in the money; it will be converted. If not in the money; assume that it will not be exercised.
Dilution from Convertible Bonds
Add Interest expense; net of tax; to the numerator; due to the assumed conversion of bonds to C/S. Add to denominator the common shares associated with the assumed conversion.
Antidilution from Convertible Bonds
Rule of conservatism. Each issue should be considered separately in sequence from most to least dilutive with options and warrants generally included first. Do not include results if antidilutive.
Dilution from Convertible P/S
Adjust the numerator as P/S divs do not affect NI; add to the denominator the # of shares assoc w/assumed conversion @ 100%. Antidilution rules apply.
Operating C/F
Transactions reported on the I/S; CA & CL excluding current notes pay and current portion of L/T debt; which are reported in financing CF
Investing C/F
Noncurrent assets
Financing C/F
Debt (including noncurrent liab); interest bearing; and equity
Cash equivalents
S/T liquid investments quickly convertible to cash; so near maturity that orig maturity is < 90 days
Overdrafts
GAAP says they are financing; IFRS says cash
Two ways to prepare a statement of C/F
Indirect - is a recon. Starts with NI and adjusts toward C/F. Direct - shows classes of C/F. Operating is the only difference. Investing and financing are the same. GAAP and IFRS encourage use of the direct method.
Direct Method of C/F
operating section shows the major classes of operating cash receipts and disbursements. A recon of NI to net C/F is required in a separate schedule under GAAP. IFRS does not require the recon.
Indirect Method of C/F
Start with NI per I/S and work toward C/F.
Operating Activities (C/F)
change in Operating Assets - all CA except cash & cash equiv. + change in Operating Liab - all non-interest bearing liabilities
Gains and Losses (C/F)
Non-operating. Investing.
Supplemental Disclosures for Indirect Method
Cash paid for interest + income taxes. Also - for indirect or direct; must disclose schedule of noncash investing and financing activities as well as disclosure of accounting policy.
Working Capital
CA-CL; often a measure of solvency of a company
Current Ratio
CA/CL
Cash ratio
Cash equivalents + Marketable Securities / CL (no receivables)
AR Turnover
net credit sales / avg net receivables
AR turnover in days
average net receivables / (net credit sales/365)
inventory turnover
COGS / average inventory
inventory turnover in days
average inventory / (COGS/365)
operating cycle
AR turnover in days + inventory turnover in days
WC Turnover
sales / average working capital
total asset turnover
net sales / average total assets
net profit margin
NI / net sales
return on total assets
NI / average total assets
ROI
NI + IE(1 X tax rate) / Avg (L/T liabilities + equity)
ROE
NI-Preferred dividends / average common equity
debt / equity
total liabilities / common S/H equity
debt ratio
total liab / total assets
TIE
recurring income before taxes and interest / interest
operating cash flow / total debt
operating cash flow / total debt
Fair Value
Exit Price; price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal (or most advantageous) market. This is what the market is willing to pay; not what you want for it. Does not include transaction costs but can be considered in determination of the most advantageous market
Ordely Transaction
Cannot be a forced transaction; no liquidation; no bankruptcy
Principal Market
Market with the greatest volume or level of activity; used as FV even if a more advantageous price exists in a different market
Most Advantageous Market
The market with the best price for the asset or liability; after considering transaction costs. Although transaction costs are used in the determination; they are not part of the FV calculation.
FV Measurement Framework - Valuation Techniques
Market approach - uses prices and other relevant information from market transactions involving identical or comparable assets; income approach - PV discounted cash flows; cost - current replacement cost
Fair Value Hierarchy of Inputs
Prioritizes the inputs that can be used in valuation techniques. Level 1; 2; 3.
Fair Value Hierarchy of Inputs - Level 1
Most reliable and should be used when available; Quoted prices in active markets for identical assets or liabilities that the reporting entity has access to on the measurement date
Fair Value Hierarchy of Inputs - Level 2
Inputs other than quoted market prices that are directly or indirectly observable for the asset or liability (similar assets or liab in active markets or identical or similar assets in markets that are not active)
Fair Value Hierarchy of Inputs - Level 3
Unobservable. Reflection of entity’s assumptions and should be based on best available information. (DCF)
Admission of Partner - Purchase or Sale of Existing Partnership Interest
Outside of partnership transaction; consent of all partners; no journal entry; only change name of capital account
Admission of Partner - Formation of Partnership
Assets are valued at FV and liabilities assumed are recorded at their present value
Admission of Partner - Creation of New Partnership Interest w/Investment of Additional Capital - Exact Method
Equal to book value. No GW; no bonuses. Exact amount new partners will have to pay to have a capital account in exact proportion to everyone existing. Finger math.
Admission of Partner - Creation of New Partnership Interest w/Investment of Additional Capital - Bonus Method
Either bonus to new partner where they pay less or bonus to existing partners where the new partner pays more. Add existing capital accounts + new partner’s contribution. Divide total by # of partners. Subtract contrib from new partner. If negative-bonus to existing partners based on profit sharing ratio. If positive - charge existing partners capital accounts based on profit sharing ratios
Admission of Partner - Creation of New Partnership Interest w/Investment of Additional Capital - GW Method
GW recognized based upon the total value of the partnership interest implied by new partner’s contribution. Multiply new partner’s contrib X total number of partners = implied value. Subtract out balance of capital accounts; Dr GW and Cr capital accounts according to Profit ratios
Partnership Profit and Loss distribution
Distributed equally in the absence of an agreement. INTEREST; SALARIES; and BONUSES are deducted prior to any distribution.
Withdrawal of a Partner - Bonus Method
Write assets to FV first; then difference between the balance of the withdrawing partner’s capital account and the amount the person paid (bonus) is allocated among remaining partner’s capital accounts in accordance with their profit and loss ratios.
Withdrawal of a Partner - GW Method
Write assets to FV first; then record the implied GW in the partnership based on the payment to the withdrawing partner. Amount of GW is allocated to ALL of the partners in accordance with their profit and loss accounts.
Partnership Liquidation-Asset Distribution
Creditors; including partners who are creditors; all possible losses; convert noncash assets; gain or loss realization; capital deficiency; right of offset; remaining partners charged; distribution
VIE
Must consolidate if 3 conditions met: Variable Interest (financial stake in another company); VIE (does not have equity investors with voting rights or lacks sufficient financial resources to support its activities); and Primary Beneficiary - power to direct activities of VIE.
SPE - IFRS
Specific type of VIE created by a sponsoring company to hold assets or liabilities; often for structured financing purposes.
ARO
legal obligation assoc w/the retirement of tangible long lived asset that results from the acquisition; construction; or development and/or normal operation of a long-lived asset. (Cumulative accretion expense + cumulative depreciation expense)
ARO Recognition
duty or responsibility; little or no discretion to avoid; obligating event
Initial Measurement of ARO
FV=PV of future obligation. Dr ARC (capital asset) and Cr ARO.
Subsequent Measurement of ARO
ARO liability is adjuted for accretion expense due to the passage of time and the ARC asset is depreciated
Accretion Expense
Interest expense every year on the ARO. Increases the ARO liability due to the passage of time calculated using the appropriate accretion rate. Dr. Accretion Expense; Cr. ARO
Depreciation Expense of ARC
Decreases the ARC asset reported on the B/S. Each year; Dr Depr Expense & Cr Accum Depr - ARC
Revisions to Cash Flow Estimates (ARO)
Upward revisions to undiscounted cash flows are new liabilities - use current discount rate. Downward revisions require removal of old liabilities - use historical or weighted average discount rate
Transfer of Assets / Troubled Debt Restructuring
recognize ORDINARY loss or gain on adjusting asset to FV from BV. Recognize possible Extraordinary gain on carrying amount of the payable minus the newly adjusted FV of the asset transferred. (Never a loss)
Transfer of Equity Interest / Troubled Debt Restructuring
recognize possible Extraordinary gain on the carrying amount of the payable - the FV of equity transferred (amount of debt discharge)
Accounting for modification of terms
Handle prospectively; debtor does not change the carrying amount unless the carrying amount exceeds the total future cash payments specified by the new terms. If so; debtor should reduce the carrying amount and recognize the difference as a gain.
Trade Accounts Payable - Gross Method
Records purchases without regard to the discount. If invoices are paid within the discount period; a purchase discount is credited.
Trade Accounts Payable - Net Method
Purchases and AP are recorded net of the discount. If payment is made after the discount period; a purchase discount lost account is debited.
Notes Payable and Receivable
Must be recorded at PV at the date of issuance so that income or loss for the period is not distorted; if note rate is unreasonable; impute the rate by using the effective interest method.
F/S presentation of the discount or premium
From using PV on cash and noncash transactions is inseparable from the related asset or liability. Premium or discount valuation accounts are added to or deducted from their related asset or liability on the B/S
