FAR1 Flashcards
1
Q
FASB private sector - establishes GAAP for business sectors what are the 5 missions of FASB?
A
- Improve the usefulness of financial accounting
- Maintain current accounting standards
- Promptly address deficiencies in accounting standards
- Promote international convergence of accounting standards
- Improve the common understanding of the nature and purpose of information in financial reports
2
Q
FASB # for new std approve
A
majority 4 out of 7
3
Q
FASB new standard approval steps
A
- exposure draft
- solicit additional comments
- finalize by issuing an Accounting Standards Update (ASU)
4
Q
Define EITF
A
Emerging issues task force 15 members
acts as filter for FASB, if 15 member consensus then no further action required by FASB - otherwise FAB becomes involved
5
Q
Negative economic consequence
A
effect on proposed standard
- may cause earnings to decline
- thus reducing firms ability to raise capital
6
Q
FAF role
A
Financial Accounting Foundation
- exercise oversight for FASB
- appoints members of FASB
- $ ensures funding
7
Q
FASAC role
A
Financial accounting standards advisory counsel
a. guidance on major policy issue
b. project priorities
c. formation of task force
8
Q
Qualitative Characteristics of accounting information
PRIMARY QUALITATIVE CHARACTERISTICS
A
- Relevance
a. predictive value
b. confirmatory value (confirms or changes previous evaluations)
c. materiality - Faithful representation
a. Completeness
b. Neutrality (without bias)
c. Free from error (no omissions)
9
Q
Qualitative Characteristics of accounting information
ENHANCING QUALITATIVE CHARACTERISTICS
A
- Comparability (Consistency helps meet the goal)
- Verifiability
- Timeliness
- Understandability
10
Q
fair value framework
The Principal Market define
A
The principal market is the one with the greatest volume and level of activity for the asset or liability within which the reporting entity could sell the asset or transfer the liability.
11
Q
fair value framework
The Most Advantageous Market define
A
The most advantageous market is the one in which the reporting entity could sell the asset at a price that maximizes the amount that would be received for the asset or that minimizes the amount that would be paid to transfer the liability.
12
Q
fair value measurement and gaap
A
The use of fair value measurement is required by a number of GAAP pronouncements.
13
Q
SEC
# of commissioners
name the 4 divisions
A
the sec has 5 commissioners appointed by the President
Four Divisions:
1 Division of Corporate Finance - oversees compliance, examines all filings
2 Division of Enforcement - investigates and takes action when violation of securities law
3 Division of Trading and Markets - oversees secondary markets, exchanges, brokers and dealers
4 The Division of Investment Management - oversees investment advisers and investment companies
14
Q
main pronouncements published by the SEC
A
Financial Reporting Releases (FRR) - formal pronouncements, highest-ranking authoritative source of accounting for public companies.
Staff Accounting Bulletins (SAB) - current position on technical issues
15
Q
SEC
Accounting and Auditing Enforcement Releases (AAER)
A
These report the enforcement actions that have been taken against accountants, brokers or others. for example Worldcom
16
Q
statement of financial position
Name 3 important valuations for a company
A
- Total OE or net assets – amount determined by current US GAAP and is found in the balance sheet;
- Market value of net identifiable assets -the amount of cash that would remain after selling all identifiable assets (including identifiable intangibles) and paying off all liabilities - firm’s “split up” or liquidation value. -assets appraised
- Total value of the firm – Its market capitalization—the total value of the firm’s outstanding stock.
17
Q
what is a valuation account used for?
A
increase or decrease the book value of an item to a measure of current value
18
Q
FV definition applied to nonfinancial assets
A
- highest and best use considers what is: physically possible legally permissible financially feasible - highest and best use may be: in use -- usually nonfinancial assets in exchange -- usually financial assets
19
Q
When are prepaid taxes NOT a current asset?
financial income and tax income are the same
no tax expense reported
A
once the current tax bill is calculated, the prepaid taxes of $300,000 are transferred into a tax expense account to cover the $300,000 in current year tax expense.
20
Q
Financial statements prepared on the income tax basis how should the nondeductible portion of meal & entertainment expenses be reported
A
included in the expense category in the determination of income. the income tax return requires full business exp info to calculate the deductible amount
21
Q
Which financial statement use primarily to determine liquidity and financial flexibility
A
Balance sheet, statement of financial position
financial flexibility -shows the degree of leverage and ability to adapt to changing financial conditions as well as the ability to manage future cash flows when conditions change.
22
Q
which statement shows the wealth position of the firm and allows an assessment of the relative risk of the enterprise.
A
bs
23
Q
define deferred revenue, type of acct, examples
A
Liability account
cash received before revenue earned
prepaid rent, subscription, gift certificates, airline tickets
24
Q
define accrued revenue, type of acct, examples
A
Asset account
revenue earned before cash received
sales on account AR, interest receivable-time has passed and you have earned interest on an account-interest accrued
25
define deferred expense, type of acct, examples
Asset account
cash paid before expense incurred
Prepaid insurance, supplies, PP&E
26
define accrued expense, type of acct, examples
Liability account
expense incurred before cash is paid
payable of: salaries, interest, taxes
27
downside to cash basis accounting
limited, does not provide the future economic benefits or the future economic resources available
28
FASB Acctng stds Codification if the sole authoritative source for GAAP and includes guidance from which sources
CAP Committee on Accounting Procedure pronouncements, APB Accounting Principles Board, FASB Financial Accounting Standards Board, SEC guidelines for publicly traded entities
29
define accrual
economic event occurs first
30
define deferral
cash activity occurs first
31
convert from cash NET INCOME to accrual NET INCOME
add the beginning liability balances and subtract the ending liability balances; also, subtract beginning asset balances and add ending asset balances.
32
convert accrual to cash
use T account to find change is AR, add or subtract revenue
33
dr Depreciation exp, cr Accumulated depr
| accrual or deferred type entry
deferred expense. In this case the cost is deferred over a number of years, rather than a number of months
34
conceptual framework decision usefulness
primary characteristics
RELEVANT
pcm
predictive value (confirms or changes previous evaluations)
confirmatory value
materiality
35
conceptual framework decision usefulness
primary characteristics
FAITHFUL REPRESENTATION
completeness
neutrality (without bias)
Free from error (no omissions)
36
conceptual framework
| ENHANCING CHARACTERISTICS
Comparability (consistency helps meet the goal)
Verifiability
Timeliness
Understandability
37
measurement methods
1. Long Term Receivables
2. Available for sale securities
3. Equipment
1. pv of future cash flows
2. current market value
3. historical cost or historical proceeds
38
identify measurement methods for each
1. Warranty Obligations
2. Short Term Payables
3. Account Receivable
1. Net Realizable Value or settlement rate
2. Historical cost or Historical proceeds
3. Net Realizable Value or settlement rate
39
measurement methods
1. Bonds payable due in 10 years
2. Trading Securities
1. PV of future cash flows
| 2. Current market value
40
process of converting noncash resources and rights into cash and claims to cash
realization
41
a measure primarily concerned with cash to case cycles
earnings
42
cash to accrual method
USE T ACCOUNTS
if dr cash ADD
if cr cash SUBTRACT
if dr exp (non cash) ADD BACK
43
accrual to cash method with accounting formula
A=L+E (^ equals change)
split A as cash A and other A solve for cash A
fill in change if increase, if decrease change sign
^cash A=^L+^E-^other A
44
cash to accrual method with accounting formula
A=L+E (^ equals change)
split A as cash A and other A solve for cash A
fill in change if increase, if decrease change sign
^cash A=-^L-^E+^other A
45
Dividend transactions in the Statement of Cash Flow
OPERATING ACTIVITIES
Cash Inflows: Dividend Income
FINANCING ACTIVITIES
Cash Outflows: Dividends Paid to stockholders
46
define PCC
| Private Company Council
Little GAAP
Issues standards for private companies for FASB approval
trade off is relevance of the information vs cost benefit
47
FASB EITF
Emerging Issues Task Force
| Provides implementation and interpretation guidance withing GAAP
48
FASB std setting process
1. adds project to agenda
2. conducts research and issues discussion memorandum
3. pubic hearing
4. issues exposure draft
5. modifies exposure draft
6. consensus - finalizes and issues accounting stds update ASU (ASU integral part of GAAP/codification)
49
AICPA has substantial input into the standard setting process TRUE or FALSE
true
50
GAAP non-authoritative documents
FASB concepts
AICPA issued papers
IFRS
51
excluded from the codification
1. other comprehensive basis of accounting
2. cash basis accounting
3. income tax basis
4. regulatory accounting principles (insurance)
5. governmental accounting stds
52
conceptual framework assumptions
assumptions = gut feeling
1. Entity
2. Going concern
3. Unit of measurement (not inflation adjusted)
4. Time period
53
conceptual framework
| principles
1. Revenue recognition
2. Expense recognition (matching)
3. Measurement
4. Disclosure
54
conceptual approaches for fair value determination
1. Market Approach
2. Income Approach
3. Cost Approach
55
Fair Value Determination
| Market Approach
Used prices generated by real market transactions for identical or similar transactions
How much can I replace an item for
56
Fair Value Determination
| Income Approach
Discounts future amounts to a current present value
57
Fair Value Determination
| Cost Approach
Use current amount to replace the service value of an existing asset, theory of substitution,
less likely for a financial asset, more likely for a non financial asset
58
cannot use fair value option
1. entities your are going to consolidate
2. pensions or other employee benefits
3. lease financial assets or lia
4. demand deposits at financial institutions
5. instruments that are components of shareholders equity
59
if use fair value option for held to maturity investment security then =>
treatment is like held for trading investment - unrealized gains and losses go to earnings IS
60
PPE may be measured and reported using fair value true or false
false
61
define blockage factor
a blockage factor occurs when and entity holds a sizable portion of an asset or liability relative to the trading volume of the asset or lia in the market
62
Fair Value Measurement Input Hierarchy
| LEVEL 1
Unadjusted quoted prices at measurement date in active markets for identical items
a. liquidity discount - permitted
b. control premium - not permitted >50%
c. blockage discount - not permitted
63
Fair Value Measurement Input Hierarchy
| LEVEL 2
Observable input either directly or indirectly, that do not meet all conditions for level 1
a. quoted prices in active markets for similar items
b. quoted priced in markets that are not active
c. observable inputs other than quoted market prices that are relevant to the item being valued
d. inputs derived from or corroborated by observable mkt data using correlation or other means
64
Fair Value Measurement Input Hierarchy
| LEVEL 3
lowest level with least desirable inputs
- may use reporting firms internal data
eg determining fair value of closely held stock
65
disclosure requirements when FAIR VALUE is used on RECURRING basis
- level of fair value
- transfers into and out out each hierarchy, discuss separately
- if level 3 use a roll forward
- if level 3 description of valuation process used
- if level 3 quantitative info about unobservable inputs
- if level 3 narrative of sensitive changes to unobservable inputs
- if level 3 gains/losses for period due to unrealized gains/losses for reported items still held a measurement date
66
disclosure requirements when FAIR VALUE is used on NONRECURRING basis
- reasons for fair value measurement
- level of fair value hierarchy
- if level 2 or 3 description of any changes in technique
- if level 3 the effect of measurement on earnings or OCI
- if level 3 quantitative info about the unobservable inputs used
- if level 3, if "highest an best" use of nonfinancial assets differs from current use, disclose that fact and why
67
example of Fair Value NONRECURRING item
asset impairment
68
Fair Value quantitative info must be presented in tabular format true or false
true
69
the methods and significant assumptions used to estimate Fair Value must be disclosed in both annual and interim reports True or False
false
| (disclosed) only in annual reports
70
When are asset and lia measured at Fair Value on Recurring Basis adjusted to Fair Value
Period after Period
71
When are asset and lia measured at Fair Value on Nonrecurring Basis adjusted to Fair Value
Only at the time of a particular event (eg significant modification of debt)
72
role of AICPA in regard to setting accounting standards and statements
No AICPA does not set accounting standards
AICPA develops, issues , and enforces Standards and statements for:
Audit & Attest Standards, Code of Professional Conduct, Compilation and Review Standards, Peer Review Standards, Tax Standards
73
Define SEC reg S-X
governs content of 10k financials
includes info on reporting requirements
governs the form and content of financial statements and financial statement disclosures, IS, BS, Changes in Shareholders Equity, cash flow, footnotes, qualification of accountants (independence).
74
Define SEC reg S-K
| governs content of 10k nonfinancial
governs the form and content of nonfinancial statement disclosures; desc of business, desc of stockholder matters, MD&A, changes in and disagreements with accountants, info on directors and mgt
75
the securities act pf 1933 Form S-1
registration for new securities
Part 1 = prospectus
- 2 yrs BS audited, comparative
- 3 yrs IS, cash flow, SE audited, comparative
- 5 yrs of selected of selected financial info
Part 2 = cost of issuing and distributing the security
- detailed info on officers, directors
- additional fs schedules
76
small registrations
under a certain monetary threshold or number of purchasers—are considered to be private placements and are exempt from certain disclosures.
77
SEC of 1934 FILING REQUIREMENTS
| Large Accelerated Filer
10K=60 days after fiscal year-end
| 10Q=40 days after quarter-end
78
SEC of 1934 FILING REQUIREMENTS
| Accelerated Filer
10K=75 days after fiscal year-end
| 10Q=40 days after quarter-end
79
SEC of 1934 FILING REQUIREMENTS
| Nonaccelerated Filer
10K=90 days after fiscal year-end
| 10Q=45 days after quarter-end
80
define Large Accelerated Filer
A company with worldwide market value of outstanding voting and nonvoting common equity held by nonaffiliates of $700 million or more;
81
define Accelerated Filer
A company with worldwide market value of outstanding voting and nonvoting common equity held by nonaffiliates that is $75 million or more but less than $700 million;
82
define Nonaccelerated Filer
A company with worldwide market value of outstanding voting and nonvoting common equity held by nonaffiliates less than $75 million.
83
10K has 4 parts
1. desc,risk factors,legal, submission of matters to a vote of stockholders
2. mkt price stock, MD&A, mkt risk, fs, controls & procedures
3. directors, officers, accountant fees services, ownership, related party
4. exhibits, signatures, certification
84
sec report 10Q not required to be audited - define fs reports required
Balance sheet for the quarter and prior fiscal year end;
Quarterly and year-to-date income statements for this quarter and the same period in the previous year; and
Cumulative year-to-date statements of cash flow for the current and prior fiscal years.
85
define economic income
The change in the net worth (fmv of net assets) of a business enterprise during an accounting period. Jan1 less Dec31
86
formulas for Cost of Goods Manufactured and COGS using COGManu
COGManu=COGS-BI+EI
| COGS=COGManu+BI-EI
87
define economic income
the change in the net worth of a business enterprise during an accounting period
88
Items not shown on the IS
- Items included in OCI
- prior period adjustments
- cumulative effect of a change in accounting principle
89
define loan capital (borrowed capital)
Capital held by a business that has been borrowed, through a long-term loan or sale of stock shares. Loan capital must be repaid within a set period regardless of the financial status of the firm. NOT INCLUDED IN OE
90
SCF requirements
Operating
Investment
Financing
Foreign Currency Translation
NET CHANGE reconciliation
- separate schedule for:
Non cash Investing and Financing activities described exchange for other noncash items
Conversion of debt to equity (bonds to common stock)
Acquisition of assets by incurring a Mortgage, entering into a capital lease, issuing stock
91
SCF Net Effect (on Cash) of Foreign Currency Translation
| How are transactions converted to dollar equivalent
(1) the exchange rate in effect at the date of each transaction or (2) an average exchange rate for the period, if not materially different from the specific rates in effect on the dates of the transactions. If at period end use spot rate
92
SCF reconciliation in change in cash formula
Net Increase (or Decrease) in Cash and Equivalents (during X2)
+ Beginning Cash and Equivalents (1/1/X2)
= Ending Cash and Equivalents (12/31/X2)
93
SCF Obtain LOAN to purchase land to be held as investment O I or F?
Financing
94
define contra equity
An owner's or stockholders' equity account with a debit balance instead of the normal credit balance. Examples include the owner's drawing account, a dividend account, and the treasury stock account.
95
SCF formula for determining expense - accrual to cash basis
^E=^C-^L+^Other Assets
| cash here only used to completed formula
96
SCF indirect method Add or Subtract from income
1. Amortization of Premium on Bond Investment
2. Amortization of Discount on Bond Investment
1. Add back to Net Income
| 2. Subtract from Net Income
97
SCF indirect method Add or Subtract from income
1. Amortization of Premium on Bond Payable
2. Amortization of Discount on Bond Payable
1. Subtract from Net Income
| 2. Add back to Net Income
98
SCF indirect method Add or Subtract from income
| Undistributed income under equity method of accounting for Investments;
Subtract from Net Income
99
SCF Patent ^ O I or F?
Patent (intangible) requires amortization (for full amount)and is therefore OPERATING
100
SCF Retained Earnings O I o F?
RE contains dividends is therefore FINANCING
101
SCF DIRECT Method operations calculation
- Calculate CASH RECEIVED FROM CUSTOMERS
- Calculate CASH PAID TO SUPPLIERS (remember formula or "purchases" includes cash and noncash adjust for AP)
- Calculate CASH PAYMENTS TO EE
- Calculate CASH PAYMENTS TO PURCHASE PREPAID ASSETS
- Calculate INTEREST PAYMENTS
- Calculate INCOME TAX PAYMENTS
OR
- Calculate OPERATING EXPENSES PAID (IS oper exp less non cash items)
102
leverage ratio
average total assets/average s/h equity
103
define liquidity/solvency ratio measures
measures the ability to meet maturing obligations
104
Securities Defensive-Interval Ratios
| explain and define formula (also called cash availability ratio)
(Cash + (Net) Receivables + Marketable Securities) / Average Daily Cash Expenditures
Measures the quantitative relationship between highly liquid assets and the average daily use of cash in terms of the number of days that cash and assets can be quickly converted to support operating costs.
105
Times Preferred Dividend Earned Ratio
| explain and define formula
Net Income / Annual Preferred Dividend Obligation
| Measures the ability of current earnings to cover preferred dividends for a period
106
define successful leverage
Successful leverage is practiced by a company when it can borrow at a particular rate of interest, and then use the proceeds to earn a higher rate of return on stockholder's equity (contributed capital investment)
107
Price Earnings Ratio
| explain and define formula
stock price per share/earnings per share eps
(stock price per sh is future performance, eps is past performance)
Measures the price of stock relative to its earning per sh, indicated how the market values the stock when compared to other stocks
108
Price Earnings Ratio $2.5/$.2 = 12.5 times
| interpret this ratio
The market has priced this stock at 12.5 times earnings
109
Debt-Equity (leverage ratios)
| list examples
L/E, E/A, L/A using A = L + Equity
110
Return on Total Assets
| explain and define formula
(Net Income + (add back) Interest Expense (net of tax effect)) / Average Total Assets
Measures the rate of return on total assets and indicates the efficiency with which invested resources (assets) are used.
111
Common Stock Yield
| explain and define formula
Dividend per Common Share / Market Price per Common Share
| Measures the rate of return (yield) per share of common stock.
112
Debt Ratio
| explain and define formula
Total Liabilities / Total Assets
| Measures the proportion of assets provided by creditors. Indicates the extent of leverage in funding the entity.
113
Private Company
| GOODWILL
amortized on a straight line basis for 10 years, or less than 10 years if appropriate
Test for impairment only when there is a triggering event
114
Private Company
| HEDGE ACCOUNTING
```
applies only to swaps for converting variable-rate debt to fixed-rate debt (a cash flow hedge)
settlement value (and not FV) can be used for swap valuation however this does not include performance risk - need to make adjustment for performance risk
```
115
Private Company
| VIE
do not need to be evaluated as a Variable Interest Entity
116
Private Company
| INTANGIBLE ASSETS ACQUIRED IN A BUSINESS COMBINATION
do not need to be recognized separately from goodwill, -not required to separate customer intangibles such as customer lists and no
n-compete business)
117
financial statement required of an entity in liquidation
- statement of net assets in liquidation
| - statement of changes in net assets in liquidation
118
```
IFRS
Monitoring Board
IFRS Foundation
IASB
Working Groups
(layout in excel)
```
Monitoring Board - approve and oversee trustees
APPOINTS
IFRS Foundation - private sector, 22 trustees, 3 year terms, appoint, oversee, raise funds
REPORTS TO Monitoring Board, APPOINTS
IASB - Maximum 16 members, set technical agenda, approve standards, exposure drafts, and interpretations - no enforcement power
REPORTS TO IFRS Foundation, APPOINTS
Working Groups - for major agenda projects
REPORTS TO IASB
119
IFRS Interpretations Committee
| layout in excel
IFRS Foundation APPOINTS
IFRS Interpretations Committee - 14 members, issue interpretation on the application of IFRS and develop other minor amendments
REPORTS TO IASB
120
IFRS Advisory Council
| layout in excel
IFRS Foundation APPOINTS
IFRS Advisory Council - Approximately 40 members, advise on agenda and priorities
REPORTS TO IFRS Foundation and REPORTS TO IASB
121
ASAF
| layout in excel
IFRS Foundation APPOINTS
Accounting Standards Advisory Forum (ASAF) - Provide standard setter input into technical projects
REPORTS TO IASB
122
IOSCO
authority from public capital market similar to SEC
International Organization of Securities Commission
1983 - present
123
IASB Framework (reference for preparers)
and
IASB Framework assumptions
true and fair
primary characteristics same as fasb
Relevance, Faithful representation
1. accrual accounting 2. going concern
124
accounting for bank overdrafts if no 2nd bank acct offset
US
IFRS
US - shown as a liability (not deducted from cash)
| IFRS - netted from cash
125
Claim against shipper for goods lost in transit
| is this a receivable?
yes
| The firm has a current claim on another entityThe firm has a current claim on another entity
126
Transfers of receivables under IFRS 39
1. If the entity transfers substantially all of the risks and rewards of ownership, the transfer is treated as a sale.
2. If the entity retains substantially all of the risks and rewards of ownership, the transfer is treated as a secured borrowing.
3. If neither conditions 1 or 2 hold, the entity accounts for the transaction as a sale if it has transferred control and as a secured borrowing if it has retained control.
127
Define Factor Holdback account
receivable - proceeds retained by the factor to cover estimated sales discounts, sales returns, and sales allowances.
128
define LISH inventory method
last in still here also know as FIFO
129
what inventory costs are capitalized
costs to bring inventory to sale
| freight, insurance in transit, taxes, packaging
130
Define illusionary profits in regard to FIFO inventory
using the first-in, first-out cost flow assumption under US GAAP, the actual historical cost of inventory that is charged to the cost of goods sold during periods of rising costs is smaller than the amount computed using replacement costs. This smaller amount of costs charged to the income statement means reporting greater profit. The difference in the profit is said to be illusory.
131
convert EOY inventory of $3,200 with price index 1.1 to base year dollars
$3,200/1.1 = $2,909 base year cost
132
advantages of Dollar Value LIFO over quantity of goods LIFO
1. reduces the effect of the liquidation problem
2. allows companies to use FIFO internally
3. reduces clerical errors
133
explain LIFO liquidation issue
it occurs when a company using LIFO method sells (or issues) more than it purchases.
LIFO liquidation causes distortion in net operating income and may become a reason of higher tax bill in current period. When LIFO inventory is liquidated, the old costs are matched with the current revenues and as a result, financial statements show higher income. The LIFO liquidation, therefore, causes a higher tax liability in periods of high inflation.
134
lower of cost or market adjustment - JE
1. direct method
2. allowance method
```
direct method
DR COGS
..CR Inventory
allowance method
DR Holding loss
..CR Allowance to reduce inventory to lcm
```
135
use cost/sales ratio to calculate what?
COGS
| if ratio 60% then 60% of sales = COGS
136
retail inventory method
| calc EI cost
EI retail X cost/retail ratio
137
retail inventory method
| calc cost/retail ratio
```
C O S T
BI
Purch
Frt In
(purch returns)
(abnormal shortage)
= Cost Total
R E T A I L
BI
Purch
(Purch returns)
Net Markups
(abnormal shortage)
= Retail Total
```
138
retail inventory method
| calc EI Retail
```
Retail total
(markdowns)
(sales)
sales returns
(ee discounts)
(normal shortage)
= EI RETAIL
```
139
retail inventory method
cost ratio variations
1. FIFO
2. FIFO, LCM
1. FIFO excludes inventory
| 2. FIFO LCM excluded inventory and markdowns
140
if purchase inv contract cannot be modified and there is a market price decline then a loss is probable and must be recognized - what is JE
(Recoveries result in a gain but only to the extent of the previously recognized loss.)
```
accrue and recognize on BS
DR Loss on purchase commitment
CR Liability on purchase commitment
if contract not executed at BS date.
if inv received then record at market and recognize a loss
```
141
IFRS inventory difference compare to US
1. uses lower of cost or NRV (by item)
2. use same cost flow method for similar inventory
3. reversal of write downs permitted (only to the extent of the previous write down)
4. LIFO prohibited
142
40% markup on $40,000 selling price
| what is cost
40,000=cost + .4(40,000)
| cost = 40,000 - 16,000 = 24,000
143
periodic inv system what are JEs
```
BI 600, inv acquisition dr purchase
DR Purchases 5400
..CR AP 5400
DR AR
..CR Sales
end of period JE
DR EI physical 2400
DR COGS plug 3600
..CR Purchase 5400
..CR BI 600
```
144
cost to raze a building already owned by the firm
| land or building
increases the loss on disposal of the building.
145
grading land parcel before building construction
| land OR building
land
146
Excavation for construction of basement
| land OR building
building
147
Interest capitalization year end JE
| the amount capitalized cannot exceed the total interest incurred - used incurred if interest calculation higher
DR Asset under construction (construction in progress)
| ..CR Interest expense
148
Which is the most appropriate financial statement to use to determine if a company obtained financing during a year by issuing debt or equity securities?
one of the key purposes of the statement of cash flows is to disclose how a business financed its operations!.A statement of cash flows should report the cash effects during a period of an enterprise’s operations, its investing transactions, and its financing transactions.
149
interest capitalization - calc ave accumulated expenditures AAE based on period expenses in use SPECIFIC METHOD
if not 1st year add AAE prior yr ending balance to new year for full year expense
1. calc ave interest rate on NON construction loans (rateX$ + rateX$ ...)/total dollar
2. interest capitalized = rateX$ construction + NON construction rate(AAE-construct loan)
* if AAE total debt then capitalize all debt not just avoidable = rateX$ construction + new ave NON construct rate X total non construct debt
150
interest capitalization - calc ave accumulated expenditures AAE based on period expenses in use WEIGHTED METHOD
if not 1st year add AAE prior yr ending balance to new year for full year expense
1. calc ave interest rate on ALL debt (rateX$ + rateX$...)/total dollar
2. interest capitalized = new rate X AAE
* if AAE total debt then capitalize all debt not just avoidable = rateX$ construction + new ave NON construct rate X total non construct debt
151
define natural resource
noncurrent asset that contains the cost of acquiring, exploring and developing a natural resource deposit. It does NOT include the cost of extracting the resource.
(Once extracted, the natural resource noncurrent asset is transferred to resource inventory a current asset.)
152
define depletion
allocation of cost from natural resource noncurrent assets to inventory
153
define 1. depletion rate 2. depletion for a period
1. (natural resources account balance - residual value)/total estimated units
2. (depletion rate) x (number of units removed in period)
154
JE accounting for Extraction Costs and Production Costs
costs are debited to the inventory of resource, NOT to the natural resources account. CR cash, materials, wages payable
155
define impairment for assets, determine if impaired
| (individual or sum of group) STEP 1
CV > undiscounted cash flow UCF (cash inflow less cash outflow to obtain net inflow), (recoverable cost RC)
CV NOT recoverable
156
how to MEASURE impairment if assets held for SALE (program to find buyer, sale expected in 1 yr, sale probable, asset being marketed) (disposal)
STEP 2
impairment if = CV > FV LESS cost to sell (NRV)
| record CV > FV LESS cost to sell, loss CF-FV LESS cost to sell, recognize GAIN CV
157
how to MEASURE impairment if assets held for use
| STEP 2
impairment loss = CF - FV write down to FV
DR impairment loss
CR Accumulated depreciation OR asset
cannot write back up
158
classification of assets to be disposed of other than a sale
continue to classify asset as held for use until disposal occurs, continue to depreciate, impaired if CF > FV
impairment reversal allowed up to original impairment
159
IFRS impairment test
impairment when = CV > PV of future cash flows discounted at the asset's original interest rate (value in use)
Recoverable Amount is the higher of the fair value less cost to sell OR value in use
discounting required in evaluation stage
impairment losses can be reversed (except for GW)
160
IFRS impairment review when and what criteria
entity must complete a review of assets EACH BS date to determine if evidence of impairment. FACTORS:
- significant financial difficulty of the issuer
- breach of contract, default or delinquency in payments
- concessions granted to the borrower because of legal or financial reasons
- bankruptcy of the borrower becomes probable
161
IFRS impairment steps
1a. find Recoverable Amount= the greater of the fair value less cost to sell OR value in use
1b. value in use = PV of future cash flow discounted at the asset's original interest rate OR cash generating unit groupings
2. Compare Recoverable Amount to CV
3. Determine if there is impairment
CV > Recoverable Amount (impairment)
4. Calculate impairment CV - Recoverable Amount
162
IFRS how is impairment loss presented if the asset is carried at fair value
any impairment loss would be classified out of OCI and into earnings
163
IFRS PPE
1. estimated useful life and depreciation method reviewed annually
2. component depreciation required in some cases
3. PPE can be revalued to fair value
4. interest earned on construction fund can offset the interest costs
5. investment property (at cost then later possibly FV) is specifically defined as property held to earn rental income and/or capital appreciation
164
IFRS PPE Fair Value Remeaurement
- remeasured to FV if FV can be reliably remeasured
- applied to the entire class or components
- increases in asset FV above original cost are recorded in a revaluation surplus acct (decreases as losses to IS)
- revaluation asset increase JE
DR asset
CR revaluation surplus acct (equity acct part of OCI)
- subsequent increases gain recognized to the extent of loss, additional gain recognized in revaluation surplus
165
IFRS PPE proportional method accumulated depreciation
building cost $125,000
Accum depr $25,000
NBV $100,000 FV $120,000 $120,000/$100,000 = 1.20%
proportionate ratio of FV =
($125,000 X 1.2) = $150,000 - $125,000 = $25,000
($25,000 X 1.2) = $30,000 - $25,000 = $5,000
DR Building $25,000
..CR Accum depr building $5,000
..CR Revaluation Surplus building $20,000
the balance in revaluation surplus is depreciated over the remaining asset life goes to retained earning
166
IFRS PPE reset method accumulated depreciation
```
accum depr is reset to zero by closing it to the building acct, the building acct is adjusted for the revaluation
DR Accum depr $25,000
..CR Building $25,000
DR Building $20,000
..CR Revaluation Surplus $20,000
```
167
define articulation
describes the interrelationship of the elements of the financial statements, eg info flows back and forth between the IS and the BS A=L + OE
168
Nongovernmental not-for -profit entity required FS
| Nongovernmental not-for -profit VH&W entity required FS
```
NFP FS
1. Statement of financial position
2. Statement of Activities
3. Statement of Cash Flows
VH&W NFP FS
1, 2, 3 PLUS
4. Statement of Functional Expenses
```
169
Total Asset Turnover
Net Sales/Average Total Assets
170
Dividend Yield
Dividend Per Common Share/Market Price per CS
171
Equity RAtio
Total Stockholders' Equity/Total Assets
172
calc additional debt needed to me debt/equity = .75
| current debt 420 current equity 1000
.75 = debt/1000
debt = 750
additional needed = 750 - 420 = 330
173
Personal Financial Statement Net Worth Calc
assets: historical cost 500, estimated current value 900
lia: historical cost 100, estimated current amount 80
income tax rate 30%
1. estimated asset value - estimated lia value = 820
2a. est asset - historical asset = 400
2b. historical lia - est lia = 20 (absolute)
3. 2a plus 2b = 420
4. multiply 420 X .30 = (126) tax expense
5. 820 - 126 = net worth = 694
174
Employee Benefit Plans and Trusts required FS
1. Statement of Net Assets available for benefits of the plan as of the end of the plan year (plan investments reported at FV)
2. Statement of Changes in Net Assets available for benefits of the plan as of the end of the plan year
175
Liquidation Basis required FS
1. Statement of Net Assets in Liquidation
| 2. Statement of Changes in Net Assets in Liquidation
176
put option
the options to SELL assets (underlying securities) at an agreed price on or before a particular date
177
Transfer from available-for-sale to held-to-maturity - Reporting
Transfer from available-for-sale to held-to-maturity
178
Premature sale of held to maturity securities are considered at maturity IF:
1. the sale occurs so close to maturity that interest rate risk is virtually eliminated
2. the sale occurs after at least 85% of the principal has been collected.
179
trading security FV use mark to market at reporting period end what is JE for unrealized loss (statement of cash flows OPER)
DR Unrealized Loss (IS)
| ..CR Valuation Allowance
180
Available for Sale (original cost $17,000) FV use mark to market at reporting period end what is JE for realized (security sold for $15,000 less $1,500 transaction costs) gain to IS (statement of cash flows INVESTING)
Prior Unrealized loss $1,700 went to OCI
```
DR Unrealized loss (OCI) $1,700
..CR Security OR Contra Account $1,700
sale:
DR Cash $13,500
DR Loss on Sale $3,500
..CR Investment AFS $15,300
..CR AOCI Reclass adj $1,700
```
181
Available for Sale securities unrealized gains and losses reported as OCI UNLESS:
the decline is considered "other than temporary" => recognize these in earnings
182
bond prices and interest rate RELATIONSHIP?
Bond prices and interest rate changes are inversely related. When bond prices Increase the mkt value of fixed income investments such as bonds Decreases.
183
acquired 50,000 sh common stock at initial offering, not significant shareholder, no other relationship with company, intends to hold investment indefinitely
TRADING, AVS, HTM
Available for Sale
184
circumstances when cost method (equity, no FV, no significant influence) investment value changes
1. Impairment, bankruptcy (permanent decline in value)
2. Liquidating Dividend distributed (return OF investment)
- must total to date income and to date dividends to calc!!
DR Cash 20
CR Investment in S (liquidated portion)
CR Dividend Income
185
IFRS Investments describe classifications
| impairment loss on debt investment can be reversed if there is objective evidence
1. Held to Maturity - debt measured at amortized cost, effective interest rate based on Estimated cash flow and Estimated life
2. Fair Value through profit or loss - debt at FV and all equity at FV
186
IFRS OCI option
| if an investor does not hold an equity investment for trading purposes
entity may elect to record gains/losses to OCI upon initial recognition of investment. Election is irrevocable.
187
when is prepaid tax not a current asset
tax expense not recorded AND no difference between financial statement and income tax financials. Prepaid tax an overestimation use in future years not within 1 year
188
1. sales returns and allowance is a contra account to?
2. allowance for sales returns & allowance is a contra account to?
3. Allowance for sales discounts is a contra account to?
1. sales
2. AR
3. AR
189
sold Oct merchandise on credit for $11000 received a 10% notes receivable. due in ONE year what are JEs for:
1. non interest bearing note
this is a current receivable recorded at face value
(If it had been due in > 1 year then long term receivable, should be recorded at Present Value)
```
1. DR NR 11,000
..CR Discount on NR 1,000
..CR Sales 10,000
year end adj entry
DR Discount on NR 250
..CR Interest Income 250
note due date
DR Cash 11,000
DR Discount on NR 750
..CR Interest Income 750
..CR NR 11,000
```
190
sold Oct merchandise on credit for $10000 received a 10% notes receivable. due in ONE year what are JEs for:
2. interest bearing note
this is a current receivable recorded at face value
(If it had been due in > 1 year then long term receivable, should be recorded at Present Value)
```
2. DR NR 10,000
..CR Sales 10,000
year end adj entry
DR Interest receivable 250
..CR Interest income 250
note due date
DR Cash 11,000
..CR Interest receivable 250
..CR Interest Income 750
..CR NR 10,000
```
191
sale of receivable with recourse versus sale of receivable without recourse
Sales of receivable with recourse requires the estimation and recording of a Recourse Liability as an additional credit on the seller's books which may increase the loss if there was ome
192
if customer pays note to the seller of the receivable and not the purchaser of the receivable what is JE for the receivable seller
DR Dishonored notes receivable
| CR Cash
193
define standing agreement (in investing)
investor cannot exercise significant influence over the investee and likely would use fair value to carry and report the investment.
(equity ownership never going to change)
A standstill agreement is a contract that stalls or stops the process of a hostile takeover. The target firm either offers to repurchase the shares held by the hostile bidder, usually at a large premium, or asks the bidder to limit its holdings. This act will stop the current attack and give the company time to take preventative measures against future takeovers.
194
select equity method accounting
1. record investment at cost
2. capture investees book values and fair values at date of investment
3. id and allocate difference between cost and book WHAT IS JE
a. if FV > Book then IDENTIFIABLE ASSETS
b. if FV Book
CR Equity Investment amortization of FV > Book
195
equity investor JE for investee OCI
DR Investment in Investee
| ..CR Other Comprehensive Income (to accumulated AOCI in equity )
196
Equity investment TOOL for problem solving
100% need 20%
-----------------------------------------
PRICE PAID, FV XX
goodwill ----------------->unidentifiable assets
NET FMV of ASSETS & LIA
-----------------------------------------
Plant Assets (add these to net BV to = Net FMV)
Copyright -------------------->identifiable items
Bonds revalued to FMV
NET BV (assets - lia)
197
Equity Method Investment JE
| Equity Method Income JE
```
EQUITY INVESTMENT in S (equity only)
DR Equity Investment orig cost
DR % S income (equity accrual)
..CR % S dividends
..CR depreciation of FMV revaluation
EQUITY INCOME in S
DR depreciation of FMV revaluation
..CR % S income (equity accrual)
```
198
switch from equity to Available for sale or trading...
change from equity to Fair Value
| difference between FV and prior equity based carrying amount will be recognized as a gain or loss
199
under the equity method of accounting for investments the investor does NOT recognize prior period adjustments recognized by the investee T or F
False
200
if investor switches from FV to Equity method the net income of prior periods must be adjusted T or F
True
201
An investors' write off (due to investee financial problems) of a portion of bargain purchase (cost
False
202
ratio for Days to Collect A/R (flip this (sales per day))
Ave AR/Ave Sales per day
203
IFRS equity method
| term used for investees with significant influence
associates
204
IFRS equity method investments
| who can apply Fair Value Options
venture capitalists
mutual funds
unit trusts (unincorporated mutual fund structure, unmanaged portfolios)
205
IFRS equity method investments
| Equity investees and investors must use same ...
accounting policies
206
IFRS equity method
1. Reports dates for investor and associates must be...
2. define impairment loss
3. if investment to be sold adjust to...
4. associate loss
1. within 3 months
- adjust for significant transactions during this 3 mos period
2. carrying value less recoverable amount (FV less cost to sell)
3. lower of fair value or carrying amount and reclassify as held-for-sale
4. do not recognize
207
equity investment
| equity income if FV > book
income calc less depreciation
208
IFRS Joint Venture - how is it carried out?
| equity method
the joint venture activity is carried out through a separate entity, corporation/company/partnership
209
IFRS Joint Operation
proportionate consolidation method
reported on separate line items in the investors finanial statement
each party to the joint arrangement has rights to the separate assets and obligations relating to the arrangement, no separate entity is formed
210
Corporate Joint Ventures T or F
1. the equity shares issued by a corporate joint venture are widely traded
2. the forming parties of a corporate joint venture are generally the shareholders in the corporation
1. False
| 2. True
211
formula to calc Value of stock rights
(when receive stock rights allocate some of the investment of stock to Stock Rights)
stock right has Value IF option price
fmv of each right
--------------------------------------------- X CV stock$
fmv of each rt + fmv stock ex right
DR Investment in stock rights
..CR Investment in stock
212
exercise stock rights at given $ by crediting cash, credit stock rights on books then calc DR investments in stock
DR Investment in stock
..CR Investment in stock rights
..CR Cash
213
lapse of stock rights JE
DR Loss on expiration of stock right
| CR Investment in stock rights
214
1. define stock rights
2. define stock warrants
(both detachable, may be traded on major exchanges)
1. enable the holder to purchase (more) stock below the market price, stock rights value, available for a short period of time, then they expire
2. issued certificates (new debt sweetener) that give the holder of the warrant the right to purchase shares of stock at a certain price at a certain time (detachable warrants - stockholders equity) - longer time to expire
215
IFRS Investment property, a separate category on the BS of investments
cost OR FV measure (same method for all property)
1. FV gains/loss recognized in income
2. cost carry at reported cost, must disclose FV, assess for impairment => recognize loss and accumulated impairment
3. all investment property is initially recorded at cost
216
impairment of debt and equity securities - test annually for OTTI (will security recover)
1. equity securities
2. debt securities
recovery of impairment losses prohibited
Other than temp impairment
1. reclassify the losses in AOCI to earnings
2a. loss is the difference between amortized cost and FV, recognize in earnings
2b. if holder does not expect to recover entire amortized cost basis then:mo
- recognize in earnings the OTTI portion associated with Credit Loss (reduction of credit value)
- recognize in OCI the OTTI portion associated with other factors (general economic factors think may recover)
217
JE to record Trading Security unrealiazed gain on IS
DR Valuation Allowance
| CR Unrealized gain on Trading Security
218
bonds that you plan to sell are classified as
trading securities value at FV
219
initial sales commitment to pay good, later receivable subject to future subordination - what method should be used to record sales
cost recovery
220
Change in AOCI from one year to the next is also a change in
```
OCI which is a change in Comprehensive Income
AOCI:
Begin Bal DR $35
Other Comprehensive LOSS CR $5
Ending Bal DR $30
```
221
IFRS for an item to be recognized in the financial statements, what two criteria are required
it meets the definition of an element and can be measured reliably
222
equity investment
difference between the cost of the investment and the CV of the net assets is called a differential which is Periodically ...
amortized to Reduce the amount of the investment
223
internally developed intangibles are expensed EXCEPT
registrations fees and legal costs paid to others (capitalized)
224
definite life intangibles Amortize EXTERNAL COSTS ONLY for example
registration fees, legal and accounting fees, Outside Design Costs, successful legal defense costs, cost of direct purchases of intangibles from others
225
an increase is the cash-surrender value (the asset of the insured firm) of a life insurance policy owned by a company would be recorded by...
decreasing annual insurance expense
226
1. intangible Customer List definite life or indefinite life?
2. Capitalization
3. impairment cost method?
1. definite life
2. only expenditures made to external parties
3. Recoverable cost
227
Intangible Franchise Initial Fee definite life or indefinite life?
either definite life or indefinite life
228
1. intangible Software Development definite life or intangible life?
2. Capitalization?
3. Impairment cost method?
1. Part definite life intangible, PART NOT INTANGIBLE
2. only expenditures beyond technical feasibility
3. NRV test for capitalized amount
229
a perpetual franchise right is not subject to amortization T or F?
True
230
goodwill impairment test
CV goodwill > implied FV of goodwill
measure at reporting unit (ru) level or below
FIRST review qualitative factors - economy, industry, market and first specific factors
SECOND Pre quantitative 2 step measures:
1. measure the FV of the reporting unit and compare to CV. IF CV > FV impaired go to step 2 to measure loss
2a. FV of the reporting unit shall be allocated to all the assets and lia (including unrecognized intangible assets) of the reporting unit
*excess of FV ru over the amounts assigned to assets and lia = Implied FV of Goodwill
2b. compare CV GW to implied GW
DR Impairment Loss
..CR Goodwill
231
1. calc implied GW
| 2. calc GW impairment loss
```
1. FV RU = 1700 Net FMV = 1600
FV identifiable Assets 2650
less CV GW given (350)
less lia given (700)
= Net FMV Identifiable of 1600
IMPLIED GW = 1700 - 1600 = 100 => REPORTED
IMPAIRMENT LOSS =
= CV GW 350 - Implied GW 100 = 250
```
232
gw calc simple version
| calc for 100% then adjust for 75% or other lower
1. start with Net Book Value = A - L
2. Revalue to FV tangible and intangible net assets ADD to Net BOOK VALUE
3. new # is Net Fair Market Value (FMV-Net Assets)
4. Compare to FV of business as a whole OR FV RU usually given
5. the difference is Implied Goodwill
233
IFRS Identifiable Intangibles
1. can be revalued in an active market T or F
2. reversal of impairment loss permitted T orF
3. estimated useful life and amortization method tested annually
IFRS Goodwill
4. tested for impairment at CGU level T or F
5. One step CV of CGU compared to recoverable amount T or F
6. GW impairment cannot be reversed!!
True for IFRS not US GAAP
1. T
2. T up to CV
3. T
4. T
5. T of additional value remaining after GW impairment - allocate to other assets in the CGU
6. T
234
bank loan $3,500,000
current portion $100,000
bank loan in violation of loan agreement.
creditor has NOT waived the rights to demand immediate payment for the loan. What is the amount of current liability?
the entire bank loan is a current liability due to the violation of the terms of the loan agreement and the fact that the creditor has NOT waived its right to demand immediate loan payment.
235
short term is not always the same as a current lia for example a bond due in the next year being settled with a bond sinking fund but the bond sinking fund is non current OR current
bond due in the next year is non current since it will be settled with a non current asset of bond sinking fund OR with stock from the debtor
(violation of debt restriction may be letting the current ratio ca/cl drop below 3)
236
how are non current liabilities valued?
1. PV of future payments
| 2. fair value
237
classification of a long term note suddenly made callable or payable upon demand
callable bonds also called redeemable bonds
current lia
238
formula - one measure of the operating cycle
365/inventory turnover + 365/AR turnover = number of days to sell the inventory on hand + the number of days required to collect accounts receivable
239
FIND bonus and tax formulas - fact pattern:
Bonus is based on oper income after tax but before deducting the bonus. Oper income before tax and bonus = 90,000. bonus rate 10%, tax rate 40%.
```
B = .10 (90,000 - T)
T = .40 (90,000 - B)
```
240
FIND bonus and tax formulas - fact pattern:
Bonus is based on oper income after tax and after bonus. Oper income before tax and bonus = 90,000. bonus rate 10%, tax rate 40%.
```
B = .10 (90,000 - T - B)
T = .40 (90,000 - B)
```
241
dividends are not lia until declared.
dividends in arrears typically have not been declared
Declare Dividends:
DR Retained Earning OR Dividends Declared
..CR Dividends Payable
Pay Dividends
DR Dividends Payable
..CR Cash
242
voluntary bankruptcy
Partially Secured Creditors receive payment from assets pledged for partially secured creditors any remaining claims for under...
Unsecured Non Priority => do NOT NET to unsecured is not enough to cover lia from assets
243
warranty accounts explain transactions:
1. BS Asset: Deferred Warranty expense
2. BS Lia: Unearned Revenue
3. IS: Warranty Revenue
4. IS: Warranty Expense
1a. DR Sales Commissions paid at sale
1b. CR calculated cost = cost to date/estimated cost X actual paid sales commissions AND 4. DR Warranty Expense
2a. CR sales of warranty contracts
2b. DR estimated revenue calc = cost to date/estimated cost X warranties sold AND 3. CR Warranty Revenue
4. DR Amount spent on service claims todate
244
vendor specific objective evidence VSOE
(revenue arrangement for multiple deliverables)
Preferred
in accounting practices, vendor-specific objective evidence (VSOE) is a method of revenue recognition allowed by US GAAP that enables companies to recognize revenue on specific items on a multi-item sale based on evidence specific to a company that the product has been delivered.
245
Third Party Evidence TPE
(revenue arrangement for multiple deliverables)
Second most Preferred
is the second most preferred criteria with which to establish fair value of a deliverable. The measure for the pricing of this criterion is the price that a competitor or other third party sells a similar deliverable in a similar transaction or situation.
246
dividends or dividend equivalents may be paid on options
1. accounted for on dividends that vest?
2. accounted for on dividends that do not vest?
1. charge against retained earnings
| 2. compensation expense
247
stock based compensation what interest rate is used to discount the both the exercise price of the option and the future dividend stream
the risk free interest rate
248
equity investment problems allows deduct the amortized difference cost less book from the investment
equity investment problems allows deduct the amortized difference cost less book from the investment
249
investments using the fair value options how are dividends treated?
dividends are treated as income with Fair Value option investments
250
stock dividends decrease retained earnings JE?
DR Retained Earnings
CR Common Stock Dividends Distributable
(at par)
CR Paid in Capital in excess of par (plug)
251
Outstanding Debt Year 1: Current OR Non
8% note, due in 11 equal annual principal payments, plus interest
beginning December 31, year 2 $110,000
Current is $10,000 installment of 8% debt due in year 2
252
loan $500,000
how do the $10,000 origination fees and
the $15,000 the 3 point non refundable fee charged to borrower impact the original loan amount?
$500,000 + $10,000 origination fee (would receive only $490,000 if no refundable fee but owe $500,000)
- $15,000 non refundable fee
Total due $495,000
253
under IFRS how are convertible bonds recorded?
Separated into debt and equity components with the liability component recorded at fair value and the residual assigned to the equity component.
254
1. bond sinking fund is increased when?
| 2. what happens to the bond sinking fund when cash is used to purchase investments?
1. when periodic additions are made to the fund AND when revenue is earned on the investments held in the fund
2. the components of the fund change (cash is invested and replaced by bonds or other securities but the total fund balance is not afffected
255
convertible debt securities have interest rates lower than nonconvertible debt securities T or F
T
256
non interest bearing notes how is payment calculated?
interest is part of the note of eg $10,000. PV 5 yr note is $7,835 Interest is $2,135. NO INTEREST PAID DURING THE 5 YEARS, borrowing $7,835 pay $10,000 at end of 5 yrs. interest expense each recording period, accrue at year end
257
How are Installment Notes Calculated?
each payment includes interest and principle
the last payment reduces the note payable to zero
SL method not allowed
Assume note paid in equal payments 6% stated 10% effective. Using stated rate find PV annuity and divide face amount by the PVa. this is the payment amount. Using the market rate find the PV of the annuity of the payment to determine the total amount borrowed.
calc accrued interest at year end - watch the dates - Each annual accrued interest calc s/b net of prior year debited NP
258
purchased 4 mos note to pay for inventory during busy season due Feb 1. All goods sold by Dec 1.
stated rate 16% market rate 11%
the cost of goods sold was Overstated or Understated and by what factor?
```
Understated by the difference between the note's face amount and the note's October 1, 2005 present value.
The note (and merchandise) should have been recorded at its Present Value using the market interest rate of 11%. This rate is lower than the stated rate of 16% implying that the present value of the note (face value and interest payments at 16%) using 11% exceeds the face value of the note. Thus, the merchandise was recorded at an amount which understated its market value. All the merchandise was sold before the end of the year causing cost of goods sold to be similarly understated.
```
259
```
amortization table CPA EXAM USE:
1/1/year 1
1/31/year 1
12/31/year 2
12/31/year 3
```
```
amortization table CPA EXAM USE:
1/1/year 1
1/31/year 1
12/31/year 2
12/31/year 3
```
260
issuer 3/1/05 incorrectly uses for bonds issued at a Discount SL and NOT effective interest, at 12/31/05
is CV understated OR overstated?
is Retained Earnings understated OR overstated?
CV Overstated, RE Understated
The SL method recognizes the average amount of discount amortization every period, which must be Larger than under the effective interest method Early in the bond term. Thus, Interest Expense under the SL method results in Higher interest expense, Lower retained earnings, and Higher bond carrying value because more discount is amortized early in the bond term than under the effective interest method.
261
1. bond total interest expense over the bond term with a discount?
2. bond total interest expense over the bond term with a premium?
1. total cash interest + initial discount
2. total cash interest - initial premium
IF FULL NOT YET REACHED
1a. total to date cash interest + amortization to date
2a. total to date cash interest - amortization to date
262
bond issue costs impact on:
1. cash receipts from issuance
2. bonds payable
1. deduct from cash receipts
| 2. No change to bond lia, record bond issue costs separately as a deferred charge
263
IFRS bond issue cost
Do Not capitalize and amortize to exp over life of bond as in GAAP- early retirement increase loss, decrease gain
- called transaction costs
How are they recognized?
reduces any premium or increases discount
| = Reduction in the Proceeds from the Debt
264
Bond Fair Value Option choices
book schedule including discounts and premiums calcs done off of balance sheet
Record unrecognized gains or losses as FV vs BOOK
in income statement eg
DR Fair Value Allowance (FVA)
..CR Unrealized Gain
- Irrevocable
- Can apply to one, several, or all bonds
- change to FV includes effects of discount or premium
- compare new FV to off BS book to determine unrecognized gain or loss
265
IFRS Bond Fair Value Option requirement
limited to liabilities that are part of a group with financial assets managed together
due to Risk Management OR Investment Strategy
266
```
convertible bonds lower interest rates Why?
BOOK VALUE METHOD NO GAIN NO LOSSS
mkt value (based on mkt CS price at year end) gain or loss recognized for the difference between the mkt value and book value of the bonds
```
due to the value of the conversion feature
267
bonds with detachable stock warrants requirements
| plus JEs issuance, warrants exercised, warrant expire
1. separate accrued interest from the proceeds
2. allocate the total bond price to the bonds and the warrants
ISSUANCE
DR Cash (bond value eg 105)
DR discount on bond (face-allocated amount)
..CR Detachable Stock Warrants (allocated amount)
..CR Bonds Payable
EXERCISED ISSUER JE
DR Cash (from warrants)
DR Detachable Stock Warrants
..CR Common Stock
..CR Contributed Capital excess or par
EXPIRE
DR Detachable Stock Warrants (allocated amount)
..CR Contributed Capital expired warrants
268
IFRS convertible bonds JE
separate equity and debt components (similar to US GAAP warrants)
only the book method is used
no expense inducement use only OE debit
IFRS convertible bonds
DR Bonds Payable
DR Conversion feature (OE) (amount of issuance)
..CR Bond Discount (unamortized amount)
..CR Common Stock (at par)
..CR Contributed Capital in excess of par (plug)
269
JE for convertible debt with issue price not much different than the face value due to the inseparability of the debt and equity portion
issuance does not impact cs - wait until holder converts
DR Cash
..CR Bond Premium
..CR Bond Payable
270
deferred tax liability arising from depreciation
| Current OR Noncurrent
Noncurrent
The classification of a deferred tax account is based on the classification of the underlying account, which in this case is a plant asset (always noncurrent).
271
firms prefer to report noncurrent liabilities over current liabilities. Why?
better to refinance current lia on long term basis
To appear more liquid
| it does not do any good to pay off the current lia because the liquidity has decreased by that reduction in cash
272
IFRS current lia if converted to noncurrent lia, intent and documentation must occur prior to the BS date, T or F
T
273
Early retirement of debt
1. Gains occur when interest rates...
2. Losses occur when interest rates...
1. increase, current price of the bond falls below book
| 2. decrease, current price rises about book value
274
Bond retirement procedure after interest date payment:
Calc unamortized bond price - use original discount or premium and calc using remaining years/total years
Calc unamortized bond issue costs see above
Calc retirement selling price
DR face amount of bond, Dr unamort premium, CR unamort discount, CR unamort bond issue costs
Plug gain or loss
275
Define: The term in-substance defeasance
refers to the process of purchasing securities and placing them in an irrevocable trust. The principal and interest of those securities is then used by the company to pay off the principal and interest on bonds they've issued.
276
IFRS do NOT recognize modification of debt as TROUBLED
2 cases of modification
1. Significant
2. Insignificant
1. using original rate of interest
(PV of new debt) - (PV of old debt) >= 10% old debt
2. using original rate of interest
(PV of new debt) - (PV of old debt)
277
Troubled Debtor modification of terms 2 types
1. new loan lower than original Type 1
2. lower interest rate, same CV new loan restructured cash flows greater than original - Type 2
1. recognizes gain, no further interest, ALL cash payments are return of principal
2. no gain or loss recorded, CV of debt stays the same (net is interest), compute new lower rate of interest, Record Interest using new rate for the remainder of the loan
1st year new rate times original debt
2nd year new rate times original debt less prior year DR to note payable (new note payable)
278
Troubled debt type 2 Calc New Loan Rate, modification is 2 payments of $196,270 to cover debt $350,000
sum of restructure flows $392,570>$350,000
new rate must be lower than original rate of 10%
Calc interest expense recognized
therefore $350,000= $196,270(PVannuity,rate??,2payments)
350,000/196,270 = (PVannuity,rate??,2payments)= 1.78326
1.78326 (given in problem) => 8%
Interest Expense = 8% X $350,000 = $28,000
279
Troubled debt type 2 Calc modification of Debt with new rate
Calculating new Loan DO NOT FORGET to MULTIPLY THE NEW RATE X NEW FACE X *Number of new YEARS to pay P L U S the face for new loan amount
Troubled debt type 2 Calc modification of Debt with new rate
Calculating new Loan DO NOT FORGET to MULTIPLY THE NEW RATE X NEW FACE X *Number of new YEARS to pay P L U S the face for new loan amount
280
advantage appropriating retained earnings
signals a future reduction in cash dividends (albeit on a temporary basis). resulting in total retained earnings maintianed at a higher level
281
times interest earned OR interest coverage ratio formula:
| measures a company's ability to meet its debt obligations
EBIT/Interest Charges
or interest expense
EBITA/Interest Expense
282
IFRS Debt Covenant if debtor breaches
- debt payable on demand classified as CURRENT
| unless creditor allows grace period at least 1 year after BS date
283
successful efforts method of accounting for natural resource exploration costs =>
expenses the cost of all the unsuccessful exploration costs immediately. Full costing increases earnings today.
successful efforts method of accounting for natural resource exploration costs =>
expenses the cost of all the unsuccessful exploration costs immediately. Full costing increases earnings today.
284
1. under IFRS statement of cash flows, Interest or Dividends received may be classified as?
2. under IFRS statement of cash flows, Interest or Dividends paid may be classified as?
1. Operating OR Investing
| 2. Operating OR Financing
285
theoretically RM inv Purchases with a discount should be recorded net of discount. If the discount is not taken the amount should be?
discounts forgone are recorded as financing expenses
286
fixed assets Double Declining Balance doe NOT use Salvage Value
fixed assets Double Declining Balance doe NOT use Salvage Value
287
Prior-year errors in reporting other comprehensive income do not affect the beginning balance of retained earnings. Rather, they ...
result in erroneous balances in accumulated other comprehensive income.
288
IFRS Equity => differences from GAAP
| During periods of hyperinflation disclose the impact and restate FS to new current price level
EQUITY
Share Capital or Ordinary Shares(similar to CS)
Share Premium or Preference Shares (similar to CS)
Reserves - specifically identified purpose items such as =>
..revaluation of plant assets, foreign currency translation, appropriations
Retained Earnings
EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF THE COMPANY
Non-Controlling Interests
289
IFRS BS differences
| During periods of hyperinflation disclose the impact and restate FS to new current price level
Comparative periods are required
| Under US GAAP comparative periods ONLY required if SEC registrant
290
IFRS Statement of Shareholders Equity differences
| During periods of hyperinflation disclose the impact and restate FS to new current price level
Changes in OE must be presented in a separate statement
| Under US GAAP changes in OE may be presented in the footnotes
291
IFRS Statement of Comprehensive Income differences
During periods of hyperinflation disclose the impact and restate FS to new current price level
> Expenses are reported by Business Function (activity) or Nature (type, how used)
1. Permits revaluation of PPE in OCI. Reclassification of PPE revaluation must also flow through OCI, NOT INCOME.
2. Per share measures are NOT prohibited.
3. Footnote includes amount of DIVIDENDS PROPOSED as well as Dividends Declared
292
IFRS Statement of Cash Flows differences
| During periods of hyperinflation disclose the impact and restate FS to new current price level
1. Interest paid - Operating OR Financing
2. Interest received - Operating OR Investing
3. Taxes paid - Operating HOWEVER in Investing or Financing if specifically identified with an item
4. Dividends received - Operating or Investing
5. Dividends paid - Operating or Financing
6. Cash or cash equivalents May include bank overdrafts
293
1. what depreciation method does not use salvage value
2. what depr method is use for group/composition assets
3. define inventory appraisal method of depr
1. double declining
2. SL
3. for groups of small homogeneous assets, end of year assets appraised and FV is recorded
294
ending RE calc
```
Begin RE
+ NI
- Dividends
+/- prior period adjustments or other...
-------------------
End RE
```
295
define nonmonetary asset, provide examples
items with no fixed value,
| plant assets, inventory
296
account classification(s) of common stock subscription receivable
ContraOE (contra - common stock subscribed) UNLESS the subscription is fully paid before the FS are available to be or are issued => then it is an Asset classification
297
An investors' write off due to investee financial problems of a portion of bargain purchase cost>book value, will reduce the amount of the investment equity revenue that would otherwise be recognized by the investor. T or F
false
298
If Preferred stock considered mandatorily redeemable using a specified date and specified amount OR when an event certain to occur takes place How is it classified?
classified as debt NOT equity
more debt like characteristics, initially recorded at FV, THEN the PV of amount to redeem it. Dividends paid are recorded as interest expense.
299
preferred stock Called or Redeemed
1. all dividends in arrears must be paid
2. preferred stock and PIC accounts are closed
3. A DR difference is recorded WHERE?
4. A CR difference is recorded WHERE?
3. Retained Earnings, more was paid than the book value of the preferred stock
4. Contributed Capital because less was paid than the book value
300
Preferred stock conversion
1. all dividends in arrears must be paid
2. preferred stock and PIC accounts are closed and Transferred to Common Stock and PIC Common
3. If the par value of Common exceeds the preferred book value (not often) - Retained Earnings is Debited for the difference.
Preferred stock conversion
1. all dividends in arrears must be paid
2. preferred stock and PIC accounts are closed and Transferred to Common Stock and PIC Common
3. If the par value of Common exceeds the preferred book value (not often) - Retained Earnings is Debited for the difference.
301
IFRS Preferred stock called or redeemed How is it classified? under the following circumstances:
1. Mandatorily redeemable
2. holder has the right to require the issuer to redeem
If criteria not met now but expected to be made later than classify as debt
1. Liability, Debt
| 2. Liability, DEbt
302
Basic Earnings per share formula
amount of company's profit or loss for an accounting period that is available to the shares of its Common Stock outstanding
NI - Current Year Preferred Dividends/weighted ave number of shares
(preferred dividends declared AND not declared)
(weighted CS share take beginning and ending and divide by 2)
303
Treasury Stock Accounting
1. EPS is increased or decreased? (not in calc)
2. Retained earnings can be increased or decreased?
TS is a Contra Equity account subtracted form OE
one reason firms buy their stock is to reduce future cash dividends
1. Increased
2. Decreased
TS is a Contra Equity account subtracted form OE
one reason firms buy their stock is to reduce future cash dividends
304
Treasury Stock COST method reissuance
1. If reissuance price is greater than cost the difference is Credited to?
2. If reissuance price is less than cost the difference is Debited to?
3. assume FIFO use shares remaining 1st at their cost OR other method such as average...
1. Paid In Capital from Treasury Stock
2. Paid in Capital from Treasure Stock until that account is exhausted then any remainder would be Debited to Retained Earnings
3. assume FIFO use shares remaining 1st at their cost OR other method such as average
305
Treasury Stock Par method ISSUANCE
1. DR at par, prorata share of PIC Common is removed
2. If treasury stock price is original issue price then?
REVERSE FOR REISSUANCE
1. difference is credited to paid in capital from treasury stock
2. difference is debited to paid in capital from treasury stock until exhausted then any remainder would be Debited to Retained Earnings
REVERSE FOR REISSUANCE
306
Treasury Stock Cost method ISSUANCE
1. Dr treasury stock at Cost
2. Contributed Capital NOT affected
AT REISSUANCE Credit treasury stock at cost and the difference between the purchase price and reissue price is recorded in Contributed Capital from Treasury Stock
Treasury Stock Cost method ISSUANCE
1. Dr treasury stock at Cost
2. Contributed Capital NOT affected
AT REISSUANCE Credit treasury stock at cost and the difference between the purchase price and reissue price is recorded in Contributed Capital from Treasury Stock
307
Share Retirement transactions
Retired shares are placed back into authorized but unissued category.
1. DR Common stock at par
2. If purchase price is less than the original issue then
contributed capital from stock retirement is Credited
3. If purchase price is greater than the original issue then price then contributed capital from stock retirement is Debited until exhausted then DR RE
308
receive your own stock as a donation
what is the classification of this stock?
what is the JE?
what is the impact on stockholders equity?
1. treasury stock
2. DR treasury stock
........CR Gain or Revenue
3. none, the TS reduces equity and the revenue increasing income, increasing RE therefore increasing Equity by the same amount
309
define script dividend
| companies may issue these to conserve cash reserves
when company declares a dividend but does not have the cash to pay it. Promise to pay later in effect creating a note payable paying interest
310
```
define liquidating dividends
eg company with $50k income were $10k is depletion may offer declare dividends up to $60k
DR Retained Income $50,000
DR Contributed Capital $10,000
..CR Dividends Payable $60,000
```
paid from contributing capital NOT retained earnings, a return OF capital not at return ON capital
used with assets to be depleted since they cannot be replaced - depleted coal can not be returned to the mine
311
large stock dividends accounted for as a stock split
DR APIC contributed capital
| ..CR Common Stock
312
define stock appreciation rights
a form of employee compensation that allow receipt of stock or cash at the difference between the stated value and the market value
313
dividend distribution order Preferred and Commom
1. Preferred in Arrears
2. Preferred Current
3. Common matching amount = preferred % X total par of common outstanding
4. Preferred additional % (if participating)
5. Common get remainder
314
dividend distribution Preferred and Common
Partially Participation
What happens there is not enough to pay both classes of stock their participation % amounts
Use the par % to allocate by par $ value
315
cash restricted for retirement of bonds. What type of account is restricted cash?
Investment
316
1. property dividend DECLARED JEs
2. property dividends Recorded JEs
3. property dividends PAYMENT JES
```
1. DR RE
.......CR Dividends Payable (at market)
DR Asset
....CR Gain on disposal
2. No Entry
3. DR Dividends payable
.........CR Asset
```
317
1. Declare small stock dividend JE
| 2. Declare large stock dividend (% of divided is >= 20% to 25% (par))
```
1. DR Retained Earnings
......CR CS
......CR PIC CS
2. DR Retained Earnings
.......CR Common stock
```
318
1. Book Value per Share
- used for comparison to market price per share (typically higher)
- represents historical value of the firm per common share
2. define preferred stock claims
1. Total OE - Preferred stock claims/end # cs shares
outstanding
OR
CS equity (must be calcd)/end # of cs shares outstanding
2. - dividends in arrears
.....- liquidation preference (amount to be paid to preferred before common receives any cash upon liquidation)
319
define Quasi Reorganization
Allows a firm with Negative Retained Earnings to "start fresh" and begin paying dividends without being unduly burdened by past operating losses
320
identify 4
steps in a quasi reorganization
RESULT
An updated BS with ZERO Retained Earnings, reduced assets and reduced contributed capital
**Shareholders and Creditors MUST approve reorg
"RE since June 3, 2004, when a deficit of $1,000,000 was eliminated through a reorganization"
1. revalue write down overstated assets to fair value which reduces RE
2. Use contributed capital accounts to absorb all or part of the deficit (negative) RE
3. Reduce the common stock account and therefore par value if necessary
4. in subsequent reports RE must be dated for a period of 10 yrs after reorg to show the fact and the date of the quasi reorg, for 3 yrs the amount of accum deficit should be disclosed
321
revenue recognition
| Deferred gross profit acct is a contra accounts receivable account
revenue recognition
| Deferred gross profit acct is a contra accounts receivable account
322
installment revenue formulas
1. calc gross profit %
2a. deferred gross profit
2b. deferred gross profit
3. recognized gross profit
4. Next Year NEW deferred gross profit after 1st year calc
5. Accounts receivable
6. Net accounts receivable
1. sales - COGS/sales (specific year)
if gross profit % is 25% then return of cost is 75%
2a. installment sales - COGS
2b. gross profit % X gross AR
3. gross profit % X cash collected (specific year)
4. initial dgp - recognized gross profit
5. beginning AR, sales - cash received (RGP/GP%=cash collected, cash collected less current AR = net AR
6. AR - deferred gross profit OR cost that has not been paid for
323
revenue recognition
| Completion of Production method, When is revenue recognized? units produced must be homogeneous, precious metals
At end of production based on agreed to price
| - when sale of output is assured and definite price is assured
324
revenue recognition
Cost recovery method
1. Net accounts receivable
1. AR - deferred gross profit
| ... cost not recovered
325
Sales with significant right to return
recognize revenue after the return privilege has expired
ONLY if 6 criteria are met may revenue be recognized BEFORE the return privilege has expired.
What are the 6 criteria? **most important
if all 6 criteria are met recognize all revenue EXCEPT for actual returns during the period and Estimated Returns at year end.
* *6. The amount of future returns can be reasonably estimated
1. price fixed and determinable at date of sale
2. buyer has paid or is obligated
3. buyers obligation not changed by theft, damage
4. if resale buyer, has economic substance
5. seller no future performance obligations
326
Sales with significant right to return ALL CRITERIA MET
Credit sales $4000, gross profit 40%, sales returns and allowances SRA for the year $400, gross AR at year end $1000, the return privilege on $600 has not expired at YE. Estimated return rate 15%
1. YE adjusting entry
2. Net Sales
```
ALL CRITERIA MET
1. DR SRA $200 (.15*$4000-$400)
........CR DGP $80 (.40 X SRA $200)
........CR COGS $120
2. $4000-$-200-$400= $3400
```
327
Sales with significant right to return NOT ALL CRITERIA MET
Credit sales $4000, gross profit 40%, the return privilege on $600 has not expired at year end
1. YE adjusting entry
1. DR sales $600 (rt of return not expired)
.....CR DGP............$240 (.40 X $600)
.....CR COGS........$360 (.60 X $600)
328
initial franchise fee record as Unearned until services are fully performed by the franchisor
1. What event is typical representation of services fully provided by the franchisor?
2. if initial franchise fee service extended over a long period of time recognize revenue using?
1. commencement of operations by the franchisee - earliest point to which franchisor performance is completed
2. % of completion OR completed contract
329
Construction Accounting
CIP construction in progress is an inventory account
Billings account is CONTRA to CIP to avoid double counting
When CR Billing DR AR to transfer from physical asset CIP to financial asset AR
If CIP>Billings then current NET ASSET
If Billings>CIP then current NET LIA
Construction Accounting
CIP construction in progress is an inventory account
Billings account is CONTRA to CIP to avoid double counting of assets
When CR Billing DR AR to transfer from physical asset CIP to financial asset AR
If CIP>Billings then current asset
If Billings>CIP then current lia
330
construction accounting annual summary JEs
1. cost incurred year i
2. billings
3. payments received
Percentage of Completion YE entry
4. Calc revenue and profit (end of contract)
1. DR CIP $200
.....CR Materials, cash etc $200
2a. DR AR $100
........CR Billings $100
2b. DR Construction Receivable $100
............CR Billing on CIP.........................$100
3. DR Cash $50
........CR AR ............$50
4. DR Construction Exp $200 (actual costs)
.....DR CIP $133 (profit calc added to CIP, value added)
...........CR Revenue $133
331
construction accounting
| percentage of completion each period new calc
costs incurred to date/estimated total project cost
332
IFRS Contract construction accounting
when the Percentage of Completion is not appropriate, the Completed Contract method CANNOT be used.
Therefore USE....
```
cost recovery method (zero-profit method)
Here construction expense = Revenue
Therefore NO gross profit
Last JE
DR expense
....CR revenue
```
333
```
Contract construction accounting Balance Sheet
CURRENT ASSETS order
Cash
Construction Receivable
Construction in Progress
Billing on CIP (credit balance)
Cost and Profit in Excess of Billings
```
```
Contract construction accounting Balance Sheet
CURRENT ASSETS order
Cash
Construction Receivable
Construction in Progress
Billing on CIP
Cost and Profit in Excess of Billings
```
334
adverting expense
certain Direct Response advertising expenses can be capitalized if the direct result is revenue from that advertising US GAAP ONLY
infomercials due to probable future benefit
costs of logos
internet advertising
salaries of people directly involved in advertising concept development
335
accumulated and vested has the right to (no longer contingent on continued employment, retires) vacation time
1. accrue lia if accumulated? y or n
2. accrue lia if vested? y or n
1. y
| 2. y
336
Defined Benefit Pension Plan DISCLOSURES
- a description of the plans KEY ELEMENTS such as investment policies
- components of pension expense
- reconciliation of projected benefit obligation and fair value of plan assets
- funded status
- rates used measuring benefit amounts (discount, return on plan assets, compensation)
- best estimates of next year's contribution to plan
Defined Benefit Pension Plan DISCLOSURES
- a description of the plans KEY ELEMENTS such as investment policies
- components of pension expense
- reconciliation of projected benefit obligation and fair value of plan assets
- funded status
- rates used measuring benefit amounts (discount, return on plan assets, compensation)
- best estimates of next year's contribution to plan
337
Pension Expense P-R-I-U-S
define components
Prior Service Cost recognized in OCI
Unexpected Gains and Losses recognized in OCI
*Amortize PSC and Unexpected Gains in Losses gradually through delayed recognition in Pension Expense
Amortize as of the beginning of the year
P + Prior Service Cost Amortization
R - Return on Plan Assets (Estimated) begin of year
I + Interest Cost, increase in PBO due to the passage of time (PBO beginning of year X discount rate)
U + Unexpected Amortized Loss (PBO gain, asset actual expected)
S + Service Cost, estimate of the increase of pension benefits payable (PBO) as a result of employee services rendered during the current year
338
Pension Accounting
1. What makes up the IS reporting
2. What makes up the BS reporting
1. Annual pension expense - PV cost of benefits earned during the year Current Period plus and minus adjustments - continuing operations
2. Pension related Asset/Liability computed as:
Fair Value of pension fund assets - Projected Benefit Obligation (PBO) also = the FUNDING STATUS
339
Pensions
| Fair Value of Plan Assets =
Sum of contributions to date + sum of actual earnings on the fund to date - benefits paid to date
340
Pensions
PSC Prior Service Cost 2 types of amortization allowed by GAAP
a choice but company must be consistent
$ pcs/#= service period, $ psc/service period = amort per year
1. SL
..- find Average service in years
2. Service Method
..- use Actual number of years= # of employees ea yr of service - summed for all yrs
341
pensions
1. recognize prior service cost
2. prior service cost amortization JE
1. DR PSC-OCI
.......CR Pension Liability
2. DR Pension Expense
....CR PSC-OCI
342
pensions
| JE for Pension Expense unexpected losses and gains
DR Pension gains/losses-OCI (here net gain)
....CR Pension liability
DR Pension Liability
....CR Pension gains/losses-OCI (here net loss)
343
Pensions
Amortization of Unexpected Gains and Losses
2 types allowed
Corridor (minimum) amount = 10% of the larger of PBO or assets at January 1
1. SL
= Net pension gain or loss/ave remaining service period of plan participants period = amort
2. Minimum Corridor Amortization (lower than SL or zero)
= (Net pension gain or loss - Corridor Amount))/ave remaining service period of plan participants
344
1. Pension Expense JE
| 2. Funding contribution to trustee
1. DR Pension Expense
........CR Pension Liability
2. DR Pension Liability
.........CR Cash
345
Defined CONTRIBUTION Plan Financial Statements
Statement of Net Assets
Statement of Changes in Net Assets
Statement of Cash Flows (not required but encouraged)
A General Description of the Plan Agreement
346
Defined BENEFIT Plan Financial Statements
A statement reporting net plan assets at Fair Value
A FS reporting changes in net plan assets at Fair Value
A statement of actuarial PV of accumulated plan benefits
Factors affecting the change in actuarial PV of above
Statement of Cash Flows (not required but encouraged)
A General Description of the Plan Agreement
347
pensions
| PBO = PBO begin yr + Service Cost begin + Interest Cost begin- Benefits Paid begin - actuarial gain
pensions
| PBO = PBO begin yr + Service Cost begin + Interest Cost begin- Benefits Paid begin -actuarial gain
348
post retirement
Companies must disclose in the notes to the FS the effect that ?? % point increase would have on the aggregate service and interest costs of the accumulated post retirement benefit obligation on health care benefits.
1%
349
pensions JE
1. funding (putting $ into fund)
2. loss
3. amortize loss
```
1. DR Pension Liability
......CR Cash
2. DR Pension Loss-OCI
.......CR Pension Liability
3. DR Pension Expense
.........CR Pension Loss-OCI
```
350
pensions
| Assets = Assets begin yr + actual return begin+ funding contribution begin - benefit payments begin
pensions
| Assets = Assets begin yr + actual return begin+ funding contribution begin - benefit payments begin
351
IFRS PENSIONS
Use PSC Past Service Cost NOT "prior"
Vested Amounts are expensed immediately
Unvested amounts amortized over the remaining vested period
IFRS PENSIONS
if 70% vested of PSC $550,000 ==>expense $385k in current yr
in Future years ($550k -$385k)/10 amort yrs= $16.5
352
IFRS Defined Benefit Liability Calc
| DBO similar to PBO
DBO - Plan assets at fair value = funded status +/- Unrecognized net gain/loss - Past Service Cost + DEFINED BENEFIT LIABILITY is on BS
353
pension
| AOCI Other Comprehensive Income used with Prior Service Cost *RELATED HOW what is JE for 1st yr
DR Pension Expense $171
DR OCI .........................$140 (actual returns less expected)
DR Pension Fund.......$500 (actual returns)
....................*CR AOCI PSC amort $150
......................CR PBO.......................$2200
354
pensions DEFINE
1. pension plan curtailment
2. pension plan settlement gain or loss
1. occurs when the sponsor stops accruing the pension benefits for a portion of the future services of plan participants
2. the amount of net pension gain or loss which has not be recognized in pension expense due to delayed recognition
355
Pension item Noncurrent or Current
1. Pension Assets
2. Pension Liabilities
1. Noncurrent BS, restricted to fund pension plan benefits in the future
2. Current OR Noncurrent BS, if a company cannot pay ee plan benefits from existing plan assets, the portion of the lia that is expected to be paid within the next operating cycle will be in the current lia section BS
356
Retirement Benefits Obligation Measure
Accumulated Postretirement Benefit Obligation
1. liability
2. define EPBO
3. APBO calc example ee bene after 20 yrs has worked 13
3. define Per Capita Claims Cost
APBO ( a fraciton of EPBO)
1. APBO less plan Assets
2. Expected Postretirement Benefit Obligation - actuarial PV of the benefits expected to be received by the ee at retirement
3. APBO = (13/20)EPBO
4. estimated costs based on the historical norms adjusted for estimated health care cost trend rates, effected by estimated age at retirement, one's health and other factors
357
Post retirement bene expense Define 6 components
*#6 is unique to retirement bene
#4, #5, #6 delayed recognition applies
1. Service cost
2. Interest Cost
3. Expected Return on Assets
4. Amortization of Prior Service Cost
5. Amortization of Net Gain or Loss at Jan 1
* 6. Amortization of transition obligation
358
Post Retirement bene
JEs for ENDING BS Post Retirement Benefit Lia
1. Calc begin post retirement lia => APBO-Assets
1b. Calc beginning post retirement bene expense eg 52
2. actuarial gain
3. funding
4. CALC ENDING post retirement bene from JEs
$200 + $49 - $4 - $16 - $20 = $209
1. 300 APBO - 100 Assets = 200
1b. DR 52 post retirement exp begin (calculated)
DR 2 post retirement bene amort gain/loss-OCI (gain opposite of lia)
....CR PSC-OCI 5 amort
....CR Post retirement bene Lia 49 (this is the 52 expense less the asset gain = actual return 10 - expected return 6)
1b. DR post retirement lia 4 assets
..........CR post retirement gain/loss-OCI 4 assets
2. DR post retirement bene lia 16 actuarial gain
........CR post retirement gain/loss-OCI 16 actuarial gain
3. DR post retirement bene lia 20 funding
.......CR cash 20 funding
359
Post retirement bene
AMORTIZATION OF TRANSITION OBLIGATION
company may elect to expense transition obligation all at once OR amortize SL over service period
example begin ABPO $2050, work 6 yrs, expected to work 30 yrs of service at retirement
Begin ABPO $2050/service life 24 yrs = $85 amort of transition obligation
service life 30-6= 24 years
360
1. Record interim period inventory declines in full if permanent?
2. Record interim period inventory declines if temporary?
1. yes
| 2. no
361
IFRS pensions
| How is the discount rate for pensions determined?
Use the market yield at the end of the reporting period for high quality corporate bonds having a similar term of maturity.
362
Stock Compensation - what are the JEs?
1. record compensation expense include forfeiture calc
2. Exercise calc record % is less than 100%
3. Expiration eg stock price does not rise above option price, ee has contributed their work in lieu of other compensation
4. Adjustment if not exercised, do not adjust compensation exp, ee services still received UNLESS ee did not not meet service requirement ONLY IF SERVICES NOT MET:
DR PIC Stock Options
...CR Compensation Expense
1. forfeiture 3%, 3 yr exp during ee service period
(3 X $100,000)(1 - .03)3rd power = $273,802 =>273803/3
DR Compensation exp $91,267
.....CR Paid in Capital Stock-Options $91,267
2. DR Cash
......DR Paid in Capital Stock-Options
..........CR Common Stock
..........CR Paid in Capital in Excess of par
3. DR Paid in Capital Stock Options
..........CR Paid in Capital from Expired Stock
Rational: ee influence the stock price increase from their work efforts
363
Stock Compensation Forfeiture rate changes during service period - how is this recorded?
calc change in the year of change
| adjust compensation expense in current year to correct prior years
364
Stock Compensation Performance (variable) Plan
| 1. if no options vest because the incentives were not met reverse compensation - JE
based on sales, EPS etc
1. DR PIC - Options
......CR Compensation Expense
365
Stock Option JEs
1. Noncompensatory company matching for ALL ee
2. Compensatory - if all noncompensatory criteria not met
1. DR Compensation Expense (company match)
....DR Cash (ee contribution)
........CR Common Stock (par of stock issued)
........CR PIC-CS (price less par of stock issued)
2. DR Compensation Expense (discount from mkt price)
....DR Cash (discounted price)
........CR Common Stock (par of stock issued)
........CR PIC-CS (price less par of stock issued)
366
Stock option compensation
1. fair value method options$ based on option pricing model, NET EFFECT reduce RE and increase permanent capital by the amount of the options of the grant plus ee $, RE converted into permanent capital
Stock option compensation
1. fair value method options$ based on option pricing model, NET EFFECT reduce RE and increase permanent capital by the amount of the options of the grant plus ee $, RE converted into permanent capital
367
define stock option Graded Vesting Plans
stock options that stagger the vesting date
368
```
stock awards (restricted) shared based compensation
1.net method JE year end
2.net method when vests JE
3. gross method initial JE
4. Each year end JE
IF Award Does Not Vest REVERSE EXPENSE
```
```
stock is restricted until the award vests
1. DR Compensation expense 1 yr
....CR PIC - Restricted Stock
2. DR PIC - Restricted Stock
.........CR Common Stock
.........CR PIC - common
3.DR DEFERRED Compensation exp All Years (contra OE)
.......CR Common stock
....CR PIC - Common
4. DR Contribution expenses
........CR DEFERRED Compensation Expense
```
369
Stock Appreciation Rights
Find difference between grant date $ and ye current mkt $ per service period
1. compensation JE year 1
Year 2 new $ if 3 year service period new $ X 2/3 less year 1 expense (called catch up)
Year 3 new amount X 3/3 (one) less all recorded exp
2. Vest in yr 4 per grant option yr 4 new mkt
3. exercise
Stock Appreciation Rights
1. DR Compensation Expense
.......CR SAR Liability
2. DR compensation exp account for increase yr 4 CR SAR lia, CR compensation account for decrease yr 4 exercise
3. DR SAR Liability
........CR Cash (payment to ee may be cash or stock)
370
Income taxes
| effective rate =
income tax exp/pretax income
permanent differences distort the effective tax rate
footnote the reconciliation of the legal tax rate and the effective tax rate
371
Common permanent tax differences:
1. tax exempt interest eg municipal bonds income
2. fines and penalties from violation of the law
3. life insurance Premiums on key ee where co. is the bene, Proceeds are not taxable but are a gain for the books
4. dividends received deduction if investor is another corporation eg 80% excluded 20% taxed
5. depletion = GAAP depletion cost of natural resources used up LESS tax depletion based on revenues of resources sold (use portions for calculation income but apply NO deferred tax)
6. Nondeductible portion of meal and entertainment
expense
7. lobbying, political expense
372
income tax temporary differences
yrs of Deferrals are Originating initial timing differences, other yrs Reversing eliminating timing diff impact
1. DTL - revenue recognized earlier, AR, unrealized gain on trading security, 20% dividends equity method; exp recognized later- prepaid exp, depr exp, GW tested for impairment GAAP, amortized for tax
2. DTA - revenue recognized later, unearned revenue, expenses recognized earlier, accrued exp, warranty exp, bad debt exp, carryforward of NOL, uncollectable account exp
Prepaid Tax (asset)
1. future taxable income > future pretax accounting income
future taxable temporary difference
2. future taxable income
373
income tax temporary differences
* Warranty Expense - Tax code allows a deduction ONLY for servicing actual warranty claims
1. DTL classification
2. DTA classification
1. Revenue recognized earlier (before payment) eg equity method undistributed dividends
Expense recognized later (after $ eg prepaid exp OR depr)
2. Revenue recognized later (unearned revenue, prepaid rent)
Expense recognized earlier (bad debt, accrued exp, warranty exp)
374
Deferred tax expense year 2 = ($200 X(25%-20%)) + ($100 X 25%) = $35
year 1 rate 20%, year 2 rate 25%
year 1 $200 year 2 $100
= the increased rate on future taxable amounts at the begin of yr PLUS the amount for current year
Deferred tax expense year 2 = ($200 X(25%-20%)) + ($100 X 25%) = $35
year 1 rate 20%, year 2 rate 25%
year 1 $200 year 2 $100
= the increased rate on future taxable amounts at the begin of yr PLUS the amount for current year
375
income tax Effective Tax Rate Calc (more complex)
*muni bond interest $10,000, pretax FA income $90,000
future rate 35%
Statutory tax rate................................... .30
Effect of nontaxable muni bond int (.0333)
> $10,000(.3)/$90,000
Effect of future rate income on temp difference .0028
> $5,000(.35-.30)/$90,000
EFFECTIVE TAX RATE.......................... .2695
> $24,250/$90,000
income tax Effective Tax Rate Calc (more complex)
*muni bond interest $10,000, pretax FA income $90,000
future rate 35%
Statutory tax rate................................... .30
Effect of nontaxable muni bond int (.0333)
> $10,000(.3)/$90,000
Effect of future rate income on temp difference .0028
> $5,000(.35-.30)/$90,000
EFFECTIVE TAX RATE.......................... .2695
> $24,250/$90,000
376
1a. Deferred tax items are current or non current based on the associated asset or lia
1b. if not asset or lia associated current of noncurrent is based on what?
2. How are valuation allowances for deferred tax Assets allocation?
1b. based on the expected reversal date
eg Deferred tax assets related to carry forwards
Percentage completion method used for contract for GAAP financial income but completed contract used for tax purposes
2. Pro rate to current and noncurrent deferred tax assets
377
1. JE operating loss carryback
| 2. JE operating loss carryforward (future rates)
1. DR Tax refund receivable
.......CR Tax benefit (reduction of book loss)
2. deferred tax assets future cash savings
DR Deferred tax asset
.....CR Tax benefit (reduction of book loss)
378
```
income tax (example with reversing depreciation)
Gross Non-Current Deferred Income Tax Liability = Taxable Income Above PreTax Financial Income
```
```
income tax (example with reversing depreciation)
Gross Non-Current Deferred Income Tax Liability = Taxable Income Above PreTax Financial Income
```
379
income tax reconciliation
Income from continuing liability before tax $500,000
Income tax expense............................................($120,000)
Income from continuing operations................$380,000
Extraordinary gain net of tax................................$42,000
Net Income............................................................ $422,000
income tax reconciliation
Income from continuing liability before tax $500,000
Income tax expense............................................($120,000)
Income from continuing operations................$380,000
Extraordinary gain net of tax................................$42,000
Net Income............................................................ $422,000
380
Income tax Rate Changes During the Year
| How is the change applied?
The new rate is applied at the beginning of the year (estimate change) to recompute the deferred tax balances. There is an immediate change to income tax expense.
381
DTA Valuation Allowance
| DTA should NOT be recognized when:
Past expiration of NOL carryforwards
Recent String of Operating Losses
Doubt about future profitability
382
calc taxable income from Book Income +/- DIFFERENCES
```
Book Income 95,000
Permanent DIFFERENCE 5,000 (50% meals)
Temporary DIFFERENCE 18,000 (warranty)
Temporary DIFFERENCE (10,000) depreciation
TAXABLE INCOME $107,000
```
383
Income Tax DTA Valuation allowance JE
split between Current and Noncurrent based on the relative balances in the DTAs
DR Deferred Tax Expense
......CR Valuation Allowance Current
......CR Valuation Allowance Noncurrent
384
Net Operating Loss CB CF create a "benefit" to the company recognized in the year of the loss - a Deferred Tax Asset. The value of the NOL is the TAX SAVED.
Carryback JE?
recorded in the NOL year
Net Operating Loss CB CF create a "benefit" to the company recognized in the year of the loss - a Deferred Tax Asset. The value of the NOL is the TAX SAVED.
DR Income Tax Receivable
...CR Income Tax Benefit - NOL CB (gain acct, negative income tax expense)
385
NOL Carryforward JE?
| recognize income the period of the loss
DR Deferred Tax Asset
| ....CR Income Tax Benefit - NOL CF
386
IFRS Income Tax IFRS
1. Valuation Allowance Y or N
2. What rates used when measuring current and deferred taxes
3. Deferred tax accounts ALWAYS NONCURRENT
1. No, recognition of the DTA only to the EXTENT it is probable that they will be realized.
2. Enacted and substantially enacted tax rates and tax law applies. (for U.S. the rates must be enacted)
3. Deferred tax accounts ALWAYS NONCURRENT
387
applying NOL CF
current year ending DTA calc is the total expected DTA therefor net against previous balance and record CR DECREASE in DTA or CR INCREASE In DTA to autocalc bal - Make sure the DTA balance is reversed in the Next Year to close DTA
applying NOL CF
current year ending DTA calc is the total expected DTA therefor net against previous balance and record CR DECREASE in DTA or CR INCREASE In DTA to autocalc bal - Make sure the DTA balance is reversed in the Next Year to close DTA
388
Included in disclosures for Income Taxes
| Government grants to the extent that they are used to reduce income tax
Included in disclosures for Income Taxes
| Government grants to the extent that they are used to reduce income tax
389
12/2005 income tax payable $13,000
12/2005 current deferred tax asset $20,000
12/2004 current deferred tax asset $15,000
12/2005 decides 10% of deferred tax asset would not be realized
in 2005 FS what is total income tax expense?
initial DTA = 12/2005 $20,000 LESS 12/2004 $15,000 = $5,000
12/2005 10% deferred tax asset not realized = current yr DTA $20,000 X 10% = $2,000
DR Income Tax Exp $10,000
DR DTA $5,000
....CR Income Tax Payable $13,000
....CR Valuation $2,000
390
Initial adoption of new principle to new events. A Change in Accounting Principle? Y or N
N
391
ID accounting approach
1. Accounting Principle Change
2. Accounting Principle Change - determining prior yr effects impracticable
3. Accounting estimate change
4. Change in reporting entity
5. Corrections of accounting error
1. Retrospective (calc all prior yr changes in begin RE, update presented comparable statements for period only)
2. Prospective (change current and future periods)
3. Prospective (eg depr, amortization, depletion estimates)
4. Retrospective (in RE statement comparative yr change includes prior years only up to that yr not all yrs)
5. Restatement (retrospective, correct all prior data and report in 1st yr presented, change begin RE current ONLY one open GL)
392
the retrospective application of a change in accounting principles is limited to the DIRECT EFFECTS of the change and related tax effects. eg inv, deferred tax, impairment. DEFINE indirect effects give examples.
INDIRECT effects are changes CURRENT or FUTURE cash flows as a result of retrospective application. eg a change in nondiscretionary profit sharing plan from a principle change, litigation settlements
393
1. change in declining balance method to SL method late in the life of a plant asset, normal application. Prospective Account Estimate Change OR Not a Change
2. Change in method of computing depletion of natural resources
1. No a change
| 2. Prospective
394
**Retroactive Application Reporting in the Statement of RE**
Show cumulative change from IS in the earliest period presented in RE statement. However The JE is always made in the CURRENT Year.
**Retroactive Application Reporting in the Statement of RE**
395
example Retrospective Application
WA to FIFO 40% tax
DR Inventory $8,000
....CR Cumulative Effect of Change $4,800 (.60 X $8,000)
....CR Deferred Tax Liability $3,200 (.40 X $8,000)
1. What type of account is Cumulative Effect of Change
2. Inventory change impact on IS
1. It does not appear in IS. It closes to RE.
2. Since Ending Inventory higher with FIFO this means COGS is lower, NI higher, RE higher before 20X8 yr of change, income tax expense increased therefore DTL exists
396
example Retrospective Application
multiple years presents, recast presented statements
The RE statement Cumulative Effect of change is calculated for the first yr presented base on ending inventory of prior yr - is begin change of yr presented
example
cumulative effect - change in previous yr EI net of tax
Begin RE if cumulative effect CR, add to RE for adjusted begin RE, add *NI eg subtract dividend balance ending RE
*ADJUST NI each year for COGS change
397
Retrospective Application historical LIFO data impracticable to retrieve
How to proceed?
Use the Earliest best year of data (not necessarily the year of change) and apply prospectively NO Cumulative Effect
398
Retrospective Application Change in Entity principle change
Examples
Change from cost or fair value of method of accounting for an investment to the equity method of investment
Change in entities
Presenting consolidated or combined FS in place of FS of individual entities
change in entity
| **change from equity to cost or fair value method is accounted for Prospectively
399
JE to record Retrospective Application
1. principle change related to inventory
2. principle change related to receivables
1. DR Inventory
.......CR Cumulative effect of accounting change
.......CR Deferred Income Tax Liability
2. DR Receivables
..........CR Cumulative effect of accounting change
400
**Cash basis NI $70,000 convert to accrual basis**
```
AP begin $3000 end $1000
Unearned revenue begin $300 end $500
Wages payable begin $300 end $400
Prepaid rent begin $1200 end $1500
AR begin $1400 end $600
```
```
$70,000
$2000 AP
($200) Unearned revenue
($100) wages payable
$300 prepaid rent
($800) AR
----------
$71,200 Accrual NI
```
401
**Cash basis NI convert to accrual basis NI**
| short formula
+ begin lia
- ending lia
- begin asset
+ ending lia
402
Prospective accounting changes NO net of tax accounting CHANGE Reporting
Prospective accounting changes NO net of tax accounting change Reporting
403
examples of Retrospective Accounting Applications principle change
- change from corridor amortization to SL amortization for defined benefit pensions
- change from indirect method of accounting for cash flows to direct method
examples of Retrospective Accounting Applications principle change
- change from corridor amortization to SL amortization for defined benefit pensions
- change from indirect method of accounting for cash flows to direct method
404
IFRS accounting principle changes
- Accounting Principle Policies (not Principles)
- No specific guidance on Indirect Effects
- Impracticability exception for BOTH errors and accounting policy changes
* US Indirect effects of accounting principles are Retroactive
* US Impracticability exception for Accounting Principle ONLY
IFRS accounting principle changes
- Accounting Principle Policies (not Principles)
- No specific guidance on Indirect Effects
- Impracticability exception for BOTH errors and accounting policy changes
* US Indirect effects of accounting principles are Retroactive
* US Impracticability exception for Accounting Principle ONLY
405
examples of Assets with Obligations
Future costs that are integral to the operations of an asset, ARO increased over time
Obligation established at the beginning of the assets life
Capitalize future asset retirement costs
```
Dismantling an Asset
Removal
Site Reclamation
Nuclear Decommissioning
Closing a mine
```
406
accretion expense = ARO increased each yr due to the passage of time, an operating expense
formula?
annual begin ARO balance X interest rate used at initial measurement
407
Environmental Obligation (EO)
arises from a violation of an environmental law or regulation such as:
Clean Air Act, Clean Water Act
| obligation accrued when probable and can be estimated
408
ARO JE
| Closing ans reclamation $ X probability = Expected Cash Flow , multiple by interest, inflation rates ext
```
DR Developed mine (noncurrent asset)
...CR Asset Retirement Obligation (liability)
capitalize over time:
DR Accretion Expense
...CR ARO
At End:
DR ARO
DR Loss on Settlement of ARO
...CR Cash (actual cost to close mine)
```
409
```
Purchase is an ASSET acquisition - Legal Merger OR Consolidation
DR cash $200
DR land $240 new fmv
DR GW $30 (calculated)
...CR AP new fmw $50
...CR NP new fmw $140
...CR cash $ paid $280
```
```
Purchase is an Asset acquisition - Legal Merger OR Consolidation
DR cash $200
DR land $240 new fmv
DR GW $30 (calculated)
...CR AP new fmw $50
...CR NP new fmw $140
...CR cash $ paid $280
```
410
Purchase is a STOCK acquisition - LEGAL ACQUISITION
DR Equity Investment in Soda $280
...............................................CR Cash $280
Soda STILL a legal entity, must consolidate FS
Purchase is a STOCK acquisition - LEGAL ACQUISITION
DR Equity Investment in Soda $280
...............................................CR Cash $280
Soda STILL a legal entity, must consolidate FS
411
Acquisition transaction fees are EXPENSED as incurred
list, what is JE
EXCEPT registering and issuing securities => goes to deferred stock issue cost then to APIC reduction
EXCEPT debt eg bond issue costs, recognize asset and amortize over life of debt
DR Acquisition Fees $25,000
......CR Cash $25,000
legal, audit, finder fees etc
412
combinations - Treatment of Stock Issue Costs necessary to issue stock to complete the purchase
DR Deferred Stock Issue Costs $10,000
.....CR Cash $10,000
1. what type of account is Deferred Stock Issue Costs
2. what the JE for stock issue costs When Combination Occurs
1. prepaid account, an asset
2. When combination occurs
DR APIC $10,000
.....CR Deferred Stock Issue Costs $10,000
413
If acquisition NOT begin of year include in INCOME only $ after the acquisition PLUS all dividends of the purchase year incurred after the date of acquisiton
If acquisition NOT begin of year include in INCOME only $ after the acquisition PLUS all dividends of the purchase year incurred after the date of acquisiton
414
Do Not Use Acquisition Method of Accounting for:
- Formation of Joint Venture
- Combination between Not For Profit orgs
- Acquisition of For Profit firm by Not For Profit org
Do Not Use Acquisition Method of Accounting for:
- Formation of Joint Venture
- Combination between Not For Profit orgs
- Acquisition of For Profit firm by Not For Profit org
415
Acquisitions - Define
1. Acquisition date
2. Measurement period
after the measurement period accounting for the business combination should be changed only to Correct an ERROR
1. date of control, date acquirer transfers consideration ($ best estimate), can before or after closing date
2. after acquisition date, acquirer may adjust accounts and amounts of business combination, cannot exceed 1 yr
416
Obtaining control of a business WITHOUT transferring consideration
list
- by contract (one of the combine businesses must be Acquirer)
- through lapse of veto rights held by minority shareholders
- aquiree reaquires shares of its own stock so that a remaining shareholder has controlling interest
417
BEFORE recording acquisition of company adjust assets lia to FV what is JE
land CV $126 land FV $150
DR Land $24,000
...CR Gain on land revaluation $24,000
Before recording acquisition
418
Acquisition - Contingent Consideration JE
1. P acquires S for $5mn If S meets certain performance targets within the first yr P will pay an additional $500 k
On the Date of the Acquisition the FV of the $500 k contingent consideration is $200 k
2. After 6 months FV contingent consideration is $300 k
3. One yr after acquisition P decides to pay $450 k
1. DR Equity Investment in S $5,200 k
..................CR Cash $5,000 k
..................CR Contingent Earnings Lia $200 k
2. DR Expense related to contingency $100 k
..................CR...........Contingent Earnings Lia $100 k
3. DR Expense related to contingency $150
.....DR Contingent Earnings Lia $300
............CR Cash...............................................$450
419
Value of the acquisition includes EE shared based payments eg from stock options in acquiree company pre acquisition
IF related to POS combination apply to post combination expense
Value of the acquisition includes EE shared based payments eg from stock options in acquiree company pre acquisition
IF related to POST combination apply to post combination expense
420
Obtaining control of a business WITHOUT transferring consideration
* Equity of acquiree held by others is NonControlling Interest
treat as noncontrolling interest in the FS
| (shares of Acquiree voting stock not owned directly or indirectly by the Acquirer) (Acquirer obtains
421
Acquisition - Recognizing intangible assets acquired
- Goodwill previously recognized by the Acquiree is NOT recognized by the Acquirer (Subtract their GW$ from their net asset $)
- indemnification rights, record as asset, measure on same basis as original asset or lia
- Derecognize indemnification when settled or expired
Acquisition - Recognizing intangible assets acquired
- Goodwill previously recognized by the Acquiree is NOT recognized by the Acquirer (Subtrac their GW$ from thier net asset $)
- indemnification right, record as asset, measure on same basis as original asset or lia
- Derecognize indemnification when settled or expired
422
Acquisition - Control in Stages or Step
01/X7 P acquires 20% voting stock of S for $150 available for sale security
01/X9 P acquires 40% voting stock of S => now a 60% Business Combination
original 20% current FV $185 therefore $35 in AOCI
what is JE
DR AOCI $35
...CR Gain on investment $35
THE $185 is now part of the Cost of investment in 60% ownership
423
in the process of finding full FV of the company acquiring must ID FV of NonControlling Interest IF:
1. Stock Traded in active market use Market Price
2. Stock NOT Traded in active market use valuation methods "Fair Value Measurement"
ln the process of finding full FV of the company acquiring must ID FV of NonControlling Interest IF:
1. Stock Traded in active market use Market Price
2. Stock NOT Traded in active market use valuation methods "Fair Value Measurement"
424
Noncontrolling Interest and Controlling Interest may not be proportional due to an Acquisition Premium
Must calc and total Noncontrolling and Controlling amounts to FIND GW for acquisition Based on 100% of acquiree
Noncontrolling Interest and Controlling Interest may not be proportional due to an Acquisition Premium
Must calc and total Noncontrolling and Controlling amounts to FIND GW for acquisition Based on 100% of acquiree
425
Define Bargain Purchase Acquisition
| cash or CS of Aquiree less than CV
you gave $850 in consideration and received $900, acquiree bankrupt or under financial stress, forced sale
426
Contingent Liabilities Assumed initially recorded at FV, As FV changes adjust:
1. liability how?
2. asset how?
MUST CHANGE value of contingencies after acquisition
1. adjust to HIGHER of Acquisition date FV OR amount recognized under ASC 450 evaluate and measure at probablity discounted cash flows
2. adjust to LOWER of Acquisition date FV OR best estimate of future settlement amount
427
Contingent Consideration Acquisition initially measure at FV, Subsequent to business combination for results AFTER combination
1. if equity based
2. asset or lia
3. JE for 6 months later loss
1. Do not remeasure, Adjust Equity elements when contingency settles
2. adjust to FV at EACH reporting date AND recognize gain or loss in current income
3. DR Loss on FV change of contingent lia $1500
...............CR Contingent Lia $1500
428
Acquisition with Reacquired rights based on prior combination rights
Acquirer amortizes this intangible rt over contract period
Acquisition with Reacquired rights based on prior combination rights
Acquirer amortizes this intangible rt over contract period
429
basic Recording Merger/Consolidation JE for Legal Merger
| with Goodwill
DR Assets acquired
DR Goodwill
.......CR Liabilities Assumed
.......CR Consideration Paid
430
basic Recording Merger/Consolidation JE for Legal Merger
| with Bargain Purchase Option
```
DR AR
DR Inventories
DR PPE
DR Other Assets
........CR AP
........CR Other Current Lia
........CR Long Term Lia
........CR Cash/NP/Equity
........CR Bargain Purchase Gain
```
431
Legal Acquisition JE
One entity gains control over another
Acquirer records Investment in subsidiary (asset)
Entities continue as separate legal entities, separate FS
Consolidate Separate Financial Statements
Legal Acquisition JE
DR Investment in S $1000
....CR Cash $1000
432
Nearly formed Consolidated company
1. RE equals
2. SE equals
1. zero
| 2. A-L of assets acquired
433
Variable Interest Entity is a legal entity
- Cannot finance its activities without additional subordinate financial support
- Expected losses exceed total equity investment at risk
- no equity, sponsors provide most resources
- set up for a specific purpose, activity often by contract
- value of sponsors, holders interest increases decreases with changes in net asset value of the VIE
needs someone to come in and give it a cash infusion
* if investor primary bene then consolidate
Variable Interest Entity is a legal entity
- Cannot finance its activities without additional subordinate financial support
- Expected losses exceed total equity investment at risk
- no equity, sponsors provide most resources
- set up for a specific purpose, activity often by contract
- value of sponsors, holders interest increases decreases with changes in net asset value of the VIE
needs someone to come in and give it a cash infusion
* if investor primary bene the consolidate
434
consolidation of VIE primary bene two conditions
(primary bene consolidated FS not always required)
(directs the most significant economic activities, NOT necessary the one with greatest equity
1. power criterion - power to direct activities VIE, economic performance
2. Losses/benefits (or risks/rewards) criterion - obligation to absorb losses from or right to receive bene of VIE
435
# define unconsolidated subsidiary
- foreign sub largely controlled by foreign government
- domestic sub in bankruptcy and under the control of the courts
- registered investment companies
- brokers/dealers in securities
majority owned sub is not consolidated due investor lack of effective control
report sub as an "Investment" asset of the parent
- use fair value or equity method
436
IFRS Business Combinations
U S proforma info for current and prior periods presented
U S not required to disclose assumptions related to acquired contingencies
1. Contingent assets not recognized
2. GW is allocated to cash generating units, NOT RU
3. GW impairment is a 1 step process. Is it recoverable on not.
4. Proforma info for current period only
5. Required to disclose assumptions related to acquired contingencies
437
parents accounting for subsidiary to be consolidated
which methods?
consolidation process different for each same end result
Cost
Equity
Any other method it chooses
438
information required to consolidate FS
1. FS (or adjusted TB) of the separate affiliated entities
2. as of the acquisition date
- book values of assets acquired and lia assumed
- FV of assets acquired and lia assumed
- FV of any noncontrolling interest in the acquired entity
- FV of any equity interest in the acquired entity owned by the parent prior to the acquisition date
3. intercompany transaction data (for the operating period) and intercompany balances (as of period end)
4. cost of parents investment in entity
information required to consolidate FS
1. FS (or adjusted TB) of the separate affiliated entities
2. as of the acquisition date
- book values of assets acquired and lia assumed
- FV of assets acquired and lia assumed
- FV of any noncontrolling interest in the acquired entity
- FV of any equity interest in the acquired entity owned by the parent prior to the acquisition date
3. intercompany transaction data (for the operating period) and intercompany balances (as of period end)
4. cost of parents investment in entity
439
consolidated statements AT acquisition
- Consolidated Statements = Parent Statement
>>IS, RE, Cash Flows
Consolidated statement NOT = Parent statement BS
- - GW from consolidation only on consolidated statement
- use BSs from parents and subs, eliminate interco, calc
consolidated statements AT acqisition
440
basic investment consolidating eliminating entry
```
DR Common Stock Sub
DR APIC Sub
DR RE Sub
DR Adjust Identifiable Assets
DR Differential if any
......CR Adjust Identifiable Lia.
......CR Investment in Sub - Parent
......CR Non Controlling Interest if any
```
441
consolidations
If the parent uses the EQUITY method to carry on its books the investment sub, the carrying value of the investment will change as the equity of the sub changes. However, if the parent used the COST method, the carrying value on its books normally will not change.
consolidations
If the parent uses the EQUITY method to carry on its books the investment sub, the carrying value of the investment will change as the equity of the sub changes. However, if the parent used the COST method, the carrying value on its books normally will not change.
442
consolidations
1. noncontrolling interest is shown where
2. dividends paid parent or sub where shown
1. shown in consolidating FS but not in separate unconsolidated FS
2. dividends paid by the sub are eliminated in the consolidated FS. Parent owns 10% therefore 90% are eliminated. The remaining 10% dividends are included in noncontrolling interest.
Therefore only the Parents dividends paid are included in the consolidated FS
443
EQUITY Method Consolidations
Parent adjusts investment in sub for:
> parents share of sub's income or loss
> parents share of dividends declared
> Amortization of difference between the FV of investment and book value of net assets acquired
>depr/amortization of purchase price differenctial
> parents investment in sub account at end of period of combination may be different than at end of combination
EQUITY Method Consolidations
Parent adjusts investment in sub for:
> parents share of sub's income or loss
> parents share of dividends declared
> Amortization of difference between the FV of investment and book value of net assets acquired
>depr/amortization of purchase price differenctial
> parents investment in sub account at end of period of combination may be different than at end of combination
444
Cost Method Consolidations
Parent does NOT adjust investment in sub
unless liquidating dividend
(see reciprocity for 2nd year)
Cost Method Consolidations
Parent does NOT adjust investment in sub
unless liquidating dividend
445
push down accounting required for consolidations by SEC registrants owning 100% of sub
what is process
push down those purchase price differentials to the SUB GL
push down ALL revaluations to the GL of the sub to sub books
eg ppe changes depr changes, inventory
eg GW calc
DR PPE
DR Inventory
DR Patents
DR GW (non current asset)
.....CR Revaluation Capital (equity account)
** subs equity is eliminated during consolidation
446
Equity Method consolidations adjusting JEs
1. parents share of sub income loss
2. parents share of dividends declared by sub
3. amortization, depr difference between FV of identifiable assets and book value of assets
(This entry reduces income recognized from the sub and related investment increase by the amount of depr the parent must recognize on its FV greater than book value)
```
1. DR Investment in sub
.......CR Income from Equity investment
2. DR Dividends receivable/cash
.......CR Investment in sub
3. DR (From Depreciation) Income from Equity Investment
.........CR Investment in sub
```
447
depr assets written up at end of SUBSEQUENT PERIODS
RE begin = for expense written up in prior yrs on consolidated worksheet
DR RE
DR Depr Exp
DR Amort Exp
....CR Accumulated depreciation
....CR Intangible Assets (not GW)
depr assets written up at end of SUBSEQUENT PERIODS
RE begin = for expense written up in prior yrs on consolidated worksheet
DR RE
DR Depr Exp
DR Amort Exp
....CR Accumulated depreciation
....CR Intangible Assets (not GW)
448
Cost Method consolidations
1. DO NOT ADJUST BOOKS for carrying amount of investment
2. DO recognize share of dividends declared by sub as dividend income
1. Dr Investment in S
.......CR Cash
2. DR dividend receivable/cash
..........CR dividend income
449
cost method reciprocisty define
Adjusts the parents investment account for changes in the subs RE since the business combination up to the beginning of period being consolidated that have not yet been recognized in the parent's investment account because it is using the cost method
450
```
NCI equity calc on date of consolidation on consolidated FS, BS
+ Sub NBV
+ 100% of the differential
- depr/amort of differential
- GW impairment loss
= subs adjusted NBV
X NCI % ownership of sub
= NCI Equity
```
```
NCI equity calc on date of consolidation on consolidated FS of sub
+ Sub NBV
+ 100% of the differential
- depr/amort of differential
- GW impairment loss
= subs adjusted NBV
X NCI % ownership of sub
= NCI Equity
```
451
NCI income calc on date of consolidation reported on consolidated IS as an expense
+ sub independent income current ye
- Current yr depreciation/amort of differential
- Current GW impairment loss
= subs adjusted net income
X NCI % ownership in S
= income to NCI to be reported on the IS
NCI income calc on date of consolidation reported on consolidated IS as expense
+ sub independent income current year
- Current yr depreciation/amort of differential
- Current GW impairment loss
= subs adjusted net income
X NCI % ownership in S
= income to NCI to be reported on the IS
452
REMEMBER in calculating NBV 12/2016 with purchase 01/2016
| New NBV = begin NBV + net income - dividends = Ending NBV
REMEMBER in calculating NBV 12/2016 with purchase 01/2016
| New NBV = begin NBV + net income - dividends = Ending NBV
453
intercompany transactions can result in gains or losses on the books of affiliated entities
intercompany transaction eliminations are NOT recorded on the books of the affiliated entities.
intercompany transactions can result in gains or losses on the books of affiliated entities
intercompany transaction eliminations are NOT recorded on the books of the affiliated entities.
454
intercompany transactions
1. define upstream transactions
2. define downstream transactions
1. from parent to sub profit on parents books
| 2. from sub to parent profit on subs books
455
```
entries to eliminate intercompany sales
DR sales 12
....CR COGS 12
DR COGS 4
....CR Inventory 4
```
```
entries to eliminate intercompany sales
DR sales 12
....CR COGS 12
DR COGS 4
....CR Inventory 4
```
456
intercompany transactions P owns LESS than 100%
multiply PROFIT by % owned, then eliminate
*however ALL 100% intercompany sales and COGS are eliminated
JE to eliminate profit on books
DR RE (beginning)
....CR Inventory (beginning)
intercompany transactions P owns LESS than 100%
multiply PROFIT by % owned, then eliminate
*however ALL 100% intercompany sales and COGS are eliminated
JE to eliminate profit on books
DR RE (beginning)
....CR Inventory (beginning)
457
intercompany fixed asset transactions
intercompany gain of $3000 3 year depr remaining on asset, to be eliminated at the end of the yr following the yr of the fixed asset sale is?
$3000/3 yrs = $1000 depr on the gain by buyer on interco gain
$3000 - $2000 = $1000 depr
answer $3000 - $1000 = $2000
458
intercompany fixed asset transactions
**the intercompany gain on the date of sale, divided by the remaining useful live of the asset, will ALWAYS equal the difference in the depreciation taken by the buyer and seller (only if the useful life is not changed)
intercompany fixed asset transactions
**the intercompany gain on the date of sale, divided by the remaining useful live of the asset, will ALWAYS equal the difference in the depreciation taken by the buyer and seller (only if the useful life is not changed)
459
intercompany bond transactions
when on affiliated owns the bonds issued by another affiliate
*when a bond is purchased by an affiliate it is a "constructive retirement of bonds"
Recognize Gain or Loss on constructive retirement
intercompany bond transactions
when one affiliated owns the bonds issued by another affiliate
*when a bond is purchased by an affiliate it is a "constructive retirement of bonds"
Recognize Gain or Loss on constructive retirement
460
SUBSEQUENT intercompany bond ELIMINATIONS
| separate companies continue to carry I/C bond related accounts on their books, Eliminate each yr consolidated
SUBSEQUENT intercompany bond ELIMINATIONS
| separate companies continue to carry I/C bond related accounts on their books, Eliminate each yr consolidated
461
```
IFRS consolidations (principle based)
- controlled can be obtained with
```
U.S Only outstanding voting rights are used to measure control
U.S. Non Controlling interest is assigned their % of GW from acquisition premium (purchase price differential)
**calculate NCI share without GW add the controlling interest amount to equal total FV of entity at 100%
Parent share GW = Total GW
462
combined financial statements
define
(eliminate intercompany transaction, no GW, no bargain purchase, no one parent or >50% owner)
For management, lending or financing reasons
```
NOT consolidated
combined statements due to :
combined control by individuals
common management
unconsolidated subs
```
463
financial instruments
| Including Derivatives such as options, futures, forwards and swaps
Not all contracts are financial instruments
a contract to exchange commodities is not a financial instrument
a warehouse receipt evidencing ownership of a commodity is not a financial instrument
464
IFRS financial instruments
- defines financial assets and lia separately, certain redeemable preferred stock shares are lia
- identifies as specific category for loan and receivables (non derivative financial assets with fixed or determinable payments that are not quoted in the active market)
- impairment tested is completed relative to the recoverable amount
US financial instruments
- does not define financial assets and lia separately
- no specific category for loans and receivables
- impairment testing is completed relative to fair value
465
financial instrument key disclosures
Market risk disclosures not required but encouraged, possibility of loss from market value due to changes in economic circumstances - market rate of interest, inflation rate
What would our exposure be? question to answer
1. fair value, CV, asset or lia
2. credit risk
3. concentration of credit risk (country, same industry, economic characteristics such as highly leveraged)
- info about the common activity
- maximum amount of loss due to each credit risk
- entities policy on requiring collateral or other security
- policy of entering into master netting arrangements to reduce credit risk
466
Derivatives defined - financial instrument
examples:
1. Option Contracts such as stock option
2. Futures Contracts such as contracts made through a clearing house for exchange in the future as a price set now
3. Forward Contacts like futures contracts but directly between contracting parties-not through clearinghouse
4. Swap Contracts to swap fixed rate debt for variable rate debt or vice versa
1a. underlying = price or rate eg a futures contract on cotton where the UNDERLYING amount is the COTTON
1b. AND a NOTIONAL (unit of measure) amount eg How Much Cotton do I have, how many bushels, tons
1c. OR a payment provision - If Then Clause (if it rains tomorrow then I am going to pay you $10)
2. requires very small or no initial investment
3. permits or requires settlement in cash, in lieu of delivery of the underlying
4. value or settlement rate = notional amt X underlying
467
Derivative Recognition and Measurement
> as assets (contractual rights) OR lia (contractual obligations)
> measure at FV
MEASURE OF THE INSTRUMENT not the underlying
MEASURE OF THE RIGHT TO BUY the cotton
Derivative Recognition and Measurement
> as assets (contractual rights) OR lia (contractual obligations)
> measure at FV
MEASURE OF THE INSTRUMENT not the underlying
MEASURE OF THE RIGHT TO BUY the cotton
468
1. call option
2. put option
3. embedded derivative
4. bifurcate
If clearly and closely related items to the Host Instrument NO need ot bifurcate
1. right to buy
2. right to sell
3. embedded in a host contract (debt instruments, equity instruments, leases)
4. separate the derivative from the host contract
469
Derivative held for speculation
>not designated or qualified to Hedge Risk
> Entered into to obtain profit
> adjust to FV at BS date
What is JE
DR Derivative Instrument
| .....CR Gain on Derivative (IS)
470
the INTRINSIC value of the Call Option is the difference between the exercise STRIKE price and the MARKET price. (Market price - Strike price) X # of shares = INTRINSIC VALUE
the INTRINSIC value of the Call Option is the difference between the exercise STRIKE price and the MARKET price. (Market price - Strike price) X # of shares = INTRINSIC VALUE
471
Hedging (increase certainty, decrease volitility) Elements
1. hedging item
2. hedging instrument
1. my risk, a recognized asset or lia, a firm commitment, or a planned transaction that is subject to risk of possible loss
2. purchased to mitigate the risk i am going to have on a hedging instrument to mitigate or eliminate possible loss associated with hedged item
472
1. natural or economic hedge
| 2. hedge accounting
1. use a derivative to offset the price of a commodity, interest rate, foreign exchange exposure - No Special Hedge Accounting, use marked to market accting=>earnings
2. use a derivative to offset the price of a commodity, interest rate, foreign exchange exposure - when certain criterial are met
473
items eligible for Hedge Accounting
Commodity Price Risk
Foreign Exchange Risk
Interest Rate Risk
Credit Risk
474
1. Fair Value Risk
| 2. Cash Flow Risk
1. Risk of loss due to change in FV of hedged item
Converts fixed risk TO Floating (variable or suject to change)
2. Risk of loss due to change in cash flows of hedged item
Converts Floating risk to Fixed risk
475
forward contract
hedge against an exposed asset created by having an account in a denomination other than the functional currency
476
fair value hedge
the hedge of an exposure to changes in fair VALUE of an asset or lia or unrecognized firm commitment
> unrecognized firm commitment is a legally binding contract not yet recognized as asset/lia under GAAP (recorded when you purchase the item)
> a FV hedge converts a fixed price exposure to a floating price
fair value hedge
the hedge of an exposure to changes in fair VALUE of an asset or lia or unrecognized firm commitment
> unrecognized firm commitment is a legally binding contract not yet recognized as asset/lia under GAAP (recorded when you purchase the item)
> a FV hedge converts a fixed price exposure to a floating price
477
1. at the money
| 2. in the money
1. option's strike price = price of the underlying security
both call and put options will be simultaneously at the money
2a. for at call option when to option's strike price is below the market price for the underlying asset
2b. for a put option when the strike price is above the market price of an underlying asset
478
```
fixed value hedge of FIXED INTEREST RATE
converts the fixed rate to floating
> only benchmark rate may be hedged
> only 2 rates are bench marked
- Direct US Obligations
- London Interbank Offer Rate LIBOR
```
```
fixed value hedge of FIXED INTEREST RATE
converts the fixed rate to floating
> only benchmark rate may be hedged
> only 2 rates are bench marked
- Direct US Obligations
- London Interbank Offer Rate LIBOR
```
479
Hedge of Non financial Asset or Lia
| Risk of change in FV of entire asset or lia
FV of portion of asset or lia CANNOT be hedged item
Hedge of Non financial Asset or Lia
| Risk of change in FV of entire asset or lia
FV of portion of asset or lia CANNOT be hedged item
480
Cash flow hedge
hedge of changes in cash flow associated with an asset, lia or forecasted transaction
> forecasted transaction - a planned transaction with another party for which rights and obligations have not yet been established
> cash flow hedge converts variable cash flows to fixed cash flows
Cash flow hedge
hedge of changes in cash flow associated with an asset, lia or forecasted transaction
> forecasted transaction - a planned transaction with another party for which rights and obligations have not yet been established
> cash flow hedge converts variable cash flows to fixed cash flows
481
Hedge of cash flows related to forecasted transactions CANNOT involve:
- a business combination
- a parent's equity in a sub
- an entity's own equity instruments
482
Foreign Currency Hedge
to mitigate the changes in the values of assets, lia and forecasted transactions that are denominated in a foreign currency
> denominated foreign currency - an asset (receivable), a lia (payable) or planned transaction that will settled in a foreign currency
> the hedge is to mitigate the changes in the exchange rate between currencies
Foreign Currency Hedge
to mitigate the changes in the values of assets, lia and forecasted transactions that are denominated in a foreign currency
> denominated foreign currency - an asset (receivable), a lia (payable) or planned transaction that will settled in a foreign currency
> the hedge is to mitigate the changes in the exchange rate between currencies
483
Hedge Effectiveness
1. assessing hedge effectiveness
2. measuring ineffectiveness
(cash flow hedge the ineffective portion goes to earnings and the effective portion goes to OCI)
(fair value hedge the effective portions can offset each other and ineffective residual is a gain or loss)
1. the right to use hedge accounting
| 2. the determination of how much of the hedge needs to be recognized in earnings
484
Assessing Hedge Effectiveness
PROSPECTIVE - forward looking, expectation that a planned hedging relationship will be effective over future periods
if need to use a futures or forward contract that is not the same commodity must use prospective analysis:
> use regression analysis, statistical
> use qualitative assessment of terms
Assessing Hedge Effectiveness
PROSPECTIVE- forward looking, expectation that a planned hedging relationship will be effective over future periods
if need to use a futures or forward contract that is not the same commodity must use prospective analysis:
> use regression analysis, statistical
> use qualitative assessment of terms
485
Assessing Hedge Effectiveness
RETROSPECTIVE - look back are we actually being effective
test each BS date and every 3 mos with the same methodology USING:
Cumulative Dollar-offset, regression, qualitative assessment critical terms...
Assessing Hedge Effectiveness
RETROSPECTIVE - look back are we actually being effective
test each BS date and every 3 mos with the same methodology USING:
Cumulative Dollar-offset, regression, qualitative assessment critical terms...
486
Measuring Hedge INEFFECTIVENESS
Change in value of derivative/change in value of hedged item
recognize in income of the current period of change
(if beyond 80%-120% norm range then hedge discontinued)
Measuring Hedge INEFFECTIVENESS
Change in value of derivative/change in value of hedged item
recognize in income of the current period of change
(if beyond 80%-120% norm range then hedge discontinued)
487
IFRS Derivatives
- No concept of Notional
- Normal Purchase/Sales contracts not considered derivatives NO formal Documentation required
- embedded derivative only assessed at initiation of contract
- embedded derivatives within a single host separated as multiple derivatives
U S embedded derivatives within a single host separated and bundled as one derivative
488
IFRS Hedge Accounting
- foreign exchange risk associated with business combination can be hedged
- **Part term hedges are permitted
- non-derivative items can be used as hedging instruments
- interest rate does not need to be the benchmark rate
- the short cut method is not permitted
IFRS Hedge Accounting
- foreign exchange risk associated with business combination can be hedged
- **Part term hedges are permitted
- non-derivative items can be used as hedging instruments
- interest rate does not need to be the benchmark rate
- the short cut method is not permitted
489
Examples of transfer of financial assets
Participating Interest Concept
> proportional ownership of entire financial asset
> cash flows are allocated in proportion to ownership
> each participant has same priority
> interest holders have no recourse to transferor
> no participant has the right to pledge or transfer the asset unless all interest holders agree
factoring or transferring financial assets
securitization of groups of loans
repurchase agreements
490
Transfer of financial assets Terms
1. Interest only strip
2. Cleanup call
3. Securitization
4. Wash Sale
5. Factoring
1. contractual right to receive all or some of the interest due on an interest bearing financial asset such as a bond or a mortgage loan
2. Option held by the servicer to purchase transferred financial assets when the amount of outstanding assets fall below a certain level. The servicer may be the transferor and these are used when the outstanding amount have fallen below a level at which the servicing costs become burdensome.
3. The process in which the financial assets are combined and transformed into securities that can then be sold.
4. A process where the same financial asset is purchased soon after the sale of that same asset. Wash sales are accounted for as sales unless there is a concurrent contract to repurchase that asset in which that entity retains control of the asset.
5. Arrangements to discount AR on a nonrecourse notification basis. If the arrangements meet the criteria for surrendering control the transactions are accounted for as sales.
491
Accounting for Transfer of Financial Assets
1. surrender of control of enter asset =
2. surrender of control of component
a. components are participating interest =
b. components NOT participating interest=
3. surrender of control entire asset NOT met =
1. sale of asset
2a. sales of asset
2b. secured borrowing
3. securing borrowing
492
servicing of financial assets (contractually separated from the underlying asset)
1. examples
2. contract to service financial asset is Recognized as a
a. Service Asset when?
b. Service Lia when?
1. collecting principle, interest , fees
paying taxes, insurance and other obligations
performing accounting and other services
2a. expected revenues > expected cost of servicing as reflected in FV
2b. expected revenues
493
Accounting for Recognized Service Asset or Lia
either
> Amortize in proportion to recognition of income/loss OR
> Adjust to fair value with gains or losses in income
Accounting for Recognized Service Asset or Lia
either
> Amortize in proportion to recognition of income/loss OR
> Adjust to fair value with gains or losses in income
494
JE of servicing of service assets
fact pattern: O has $100 loan receivable yields 10% remaining life 9 yrs, sell loan $100 loan principle to P. O continues to service loans for 2% of the interest.
Loan FV $100 Service Right FV $9, P gets 8% interest
1. calc O proceed s and gain
2. sale recorded by O
1a. $100 + $9 = $109
1b. $109 - $100 = $9
2. DR cash $100
......DR servicing asset $9
.........CR loan receivable $100
.........CR gain $9
495
JE of servicing of service assets
fact pattern: O has $100 loan receivable yields 10% remaining life 9 yrs, sell loan $100 loan principle to P. O continues to service loans for 2% of the interest.
Loan FV $100 Service Right FV $9, P gets 8% interest
3. Purchase recorded by S
4. O's amortization of service asset
3. DR Loan Receivable $100
..........CR Cash $100
4. $9/9 yrs = $1 per yr
DR servicing asset Amortized expense $1
..CR Servicing Asset $1
496
recognized serving assets should be assessed for impairment
| recognized serving lia should be assessed for understatement
recognized serving assets should be assessed for impairment
| recognized serving lia should be assessed for understatement
497
accounting for extinguishment (derecognition ) of lia
In Substance Defeasance is NOT extinguishment
defined: creating and funding an irrevocable trust to satisfy all obligations of the debt
accounting for extinguishment (derecognition ) of lia
In Substance Defeasance is NOT extinguishment
defined: creating and funding an irrevocable trust to satisfy all obligations of the debt
498
```
Common contingent liabilities (gain contingencies footnoted only until receive actual amount)
lawsuits
warranties
rebates and premiums
coupon lia (current lia), free gifts
environmental
contingencies from business combination aquisition
guarantees of indebtedness
compensated absence lia
JEs ?
```
Common contingent liabilities (gain contingencies footnoted only until receive actual amount)
```
record accrual:
DR estimated lawsuit loss
...CR estimated lawsuit lia
record actual:
DR estimated lawsuit lia
DR lawsuit loss
...CR Cash
```
499
recording warranties (current and noncurrent)
expense recognition at sale - accrual
DR warranty exp
...CR warranty lia
current yr warranty work done or warranty used
DR warranty lia
...CR cash, labor parts, inventory
1
500
1. amount definite and probable =>
2. amount reasonable estimable and probable=>
3. not estimable, but probable =>
4. ALL reasonably possible=>
5. All remote=>
1. recognize lia and report footnote
2. recognize lia and report footnote
3. footnote
4. footnote
5. no required disclosure
501
Guarantees Contingent Liability
1. the guarantor recognizes the lia at fair value initially even if their is NO expectation of payment
2. the 2nd part is the uncertain contingent obligation - the contingent lia subject to the contingent lia principles. Record the greater of the FV and the amount to be recognized as a contingency.
Guarantees Contingent Liability
1. the guarantor recognizes the lia at fair value initially even if their is NO expectation of payment
2. the 2nd part is the uncertain contingent obligation - the contingent lia subject to the contingent lia principles. Record the greater of the FV and the amount to be recognized as a contingency.
502
example premium contingent lia
W offered premium to customer of a mug (W cost $.75) with the return of 20 coupons. One coupon placed in each can of coffee. 70% of coupons redeemed
YR 1 mugs purchased 6 YR 2 mugs purchased 4
YR 1 cans sold 100 YR 2 cans sold 200
YR 1 coupons redeemed 40 YR 2 coupons redeem 120
1. Record purchase of mugs
2. record estimated premium exp and lia
1. yr 1 DR Premium Inventory $4500
................CR Cash $4500
yr 2 DR Premium Inventory $3000
.............CR Cash $3000
2. yr 1 DR Estimated Premium expense $2325
.................CR Estimated Premium liability $2325
yr 2 DR Estimated Premium exp $5250
.................CR Estimated Premium lia $5250
503
example premium contingent lia
W offered premium to customer of a mug (W cost $.75) with the return of 20 coupons. One coupon placed in each can of coffee. 70% of coupons redeemed
YR 1 mugs purchased 6 YR 2 mugs purchased 4
YR 1 cans sold 100 YR 2 cans sold 200
YR 1 coupons redeemed 40 YR 2 coupons redeem 120
3. record rememption of coupoinrs
3. yr 1 DR Estimated Premium Lia $1500
...............CR Premium Inventory $1500
yr 2 DR Estimated Premium Lia $4500
..............CR Premium Inventory $4500
504
IFRS does not use term Contingency
1. PROVISION for Recognized Contingency NOT Contingency (must be estimable)
1b. CONTINGENT LIA for unrecognized disclosed contingent obligation
2. More Likely Than Not
IFRS does not use term Contingency
1. PROVISION for Recognized Contingency NOT Contingency
1b. CONTINGENT LIA for unrecognized disclosed contingent obligation
2. More Likely Than Not
505
under IFRS Accruals and Provisions are reported separately.
accruals are much less uncertain = utilities payable, wages payable
provisions =income taxes payable, property taxes payable, compensated absences
IFRS measurement of provisions
Discounting is required if there is a material difference between the expected amount paid and its present value
506
list US contingent lia that are equivalent to IFRS provisions
warranties
| premium lia
507
Basic earnings per share BEPS
preferred dividends for eps = if Cumulative declared preferred=>1 ONE full year of current dividends
= if noncumulative declared => AMOUNT declared
preferred dividends for eps = if Cumulative NOT declared=> 1 ONE full year of current dividends
if noncumulative NOT declared=> none, 0
NI - current yr preferred stock dividends/weighted average CS shares outstanding
508
Diluted earnings per share DEPS (earnings per share-assuming dilution)
with complex capital structure must disclose both BEPS and DEPS
NI-preferred stock dividends + adjustments to income for assumed conversion of Potential CS/weighted ave of CS outstanding per period + shares from assumed conversion Potential CS
509
BEDS denominator
stock dividends and splits are retroactively applied to the beginning of the year- any stock issuance or Treasure stock purchase BEFORE a stock dividend or split is adjusted. =>
BEDS denominator
| the dividend or split is applied to statements of earlier periods shown comparatively with the current statements
510
define contingent shares
shares issuable for little or no cash consideration upon satisfaction of certain conditions
considered outstanding when their conditions have been met.
511
diluted earnings per share computation
1. compute BEPS
2. make changes in numerator and denominator
3. use BEPS as benchmark for antidilution
diluted earnings per share computation
1. compute BEPS
2. make changes in numerator and denominator
3. use BEPS as benchmark for antidilution
512
PCS Potential CS Equivalent
Diluted EPS formula
PCS Potential CS Equivalent
NI - preferred stock dividends + adjustments to income for assumed conversion of PCS/wtd avg of CS outstanding for period + shares from assumed conversion PCS
513
DEPS
> For stock options and warrants use "treasury stock method"
> when more than 1 PCS use dilution/anti-dilution method (use the PCS that is most dilutive first)
DEPS
>For stock options and warrants use "treasury stock method"
> when more than 1 PCS use dilution/anti-dilution method (use the PCS that is most dilutive first)
514
DEPS If Converted Method
Numerator effect of assumed conversion of bonds =
after-tax interest expense SAVED had the bonds converted. (interest exp only with discount or premiums). Example
100, 5%, $1000 convertible bonds outstanding all year
each bond convertible into 20 shares of CS
bonds issued at face tax rate 30%
100($1000)(.05)(1 - .30) = $3,500
515
DEPS If Converted Method
| Denominator effect, 100,5%,$1000 convertible bonds outstanding, each bond convertible into 20 shares of CS
100(20) = 2000
516
DEPS If Converted Method
Numerator/Denominator effect = $3,500/2000= $1.75
$1.75
see #514 and #515
NI $18,500, CS outstanding 5000
= ($18,500 + $3,500)/(5000 + 2000) = $3.14
517
DEPS Treasure Stock Method for stock options
1. Assume we exercise stock options
2. Use the proceeds to purchase treasure stock at the market price = exercise amount $/market price
3. Incremental Share Denominator Effect
Calc share added to the denominator of DEPS =
ADD PCS stock options SUBTRACT treasury shares
4. Options are Dilutive if exercise/option price
DEPS Treasure Stock Method for stock options
1. Assume we exercise stock options
2. Use the proceeds to purchase treasure stock at the market price = exercise amount $/market price
3. Incremental Share Denominator Effect
Calc share added to the denominator of DEPS =
ADD PCS stock options SUBTRACT treasury shares
4. Options are Dilutive if exercise/option price
518
DEPS with Multiple Potential Common Stock
> compute the numerator and the denominator effect for each PCS
> enter the PCS with the lowest ratio and compute an initial value for DEPS
> keep going until to enter ALL PCS OR
- find and Antidilutive PCS and STOP (do not enter this PCS, DEPS is the previous value calculated)
DEPS with Multiple Potential Common Stock
> compute the numerator and the denominator effect for each PCS
> enter the PCS with the lowest ratio and compute an initial value for DEPS
> keep going until to enter ALL PCS OR
- find and Antidilutive PCS and STOP (do not enter this PCS, DEPS is the previous value calculated).
519
DEPS Antidilutive
Is never allowed for...
(anti-dilutive = option price > market price)
Income from continuing operations, therefore BEPS=DEPS
| anti-dilution may occur with other subtotals, such as Discontinued Operations or Extraordinary items
