FAR10 Flashcards
Fair Value Measurement
The price received to:
sell an asset OR paid to transfer a liability
FV transaction costs vs. transportation costs
Transactions costs not included,
Transportation costs are included
Principal Market (1st option)
The market with the greatest volume or level of activity
Most advantageous market (2nd option)
The market with the best price for the asset or liability, after considering the “transaction costs” but transactions costs not included in the final fair value measurement
Valuation Techniques
Accounted for a change in accounting estimate (prospectively)
Market Approach
Uses prices and other relevant info from market transactions involving identical or comparable assets or liabilities to measure FV
Income Approach
Converts future amounts, including cash flows or earnings, to a single discounted amount to measure FV
Cost Approach
Uses current replacement cost to measure FV
Hiearchy of Inputs
Level I inputs are most reliable FV measurement and Level III inputs are least reliable (if multiple levels used then FV is based on “lowest level”)
Level 1 Inputs “identical”
Are quoted prices in active markets for identical assets or liabilities (measurement date)
Level 2 Inputs “similar”
Quoted prices for similar assets or liabilities in active markets OR Quoted prices for identical or similar assets in markets that are not active
Level 3 Inputs “discounted cash flows”
Are unobservable inputs for asset or liability (reflect assumptions on best available info)
Partnership GAAP vs. Tax Rules
GAAP Rule = FV of assets contributed
Tax Rule = NBV of assets contributed
Partnership Exact Method
Determine the exact amount a new partner will have to pay to get his capital account in the exact proportional interest to the new net assets of the partnership “finger math”
Partnership Bonus Method
To either existing partners if new partner pays more than receives OR to new partner if new partner receives more than pays “balance in total capital accounts”
Partnership Goodwill Method
Recognized based upon the total value of the partnership implied by the new partner’s contribution (to old partners) “going in investment”
Profit and Loss Distribution
All interest, salaries, and bonuses are deducted from total profit to arrive at amount
Withdrawal of a Partner
Bonus Method - allocated among remaining partners’ with their remaining profit and loss ratios
Goodwill Method - allocated to ALL with their profit and loss ratios
Liquidation of a Partnership
First creditors, including partners who are creditors, then second partners’ capital (losses must be provided for before distributions)
Liquidation of a Partnership (capital deficiency)
Remaining partners must absorb the deficiency to their remaining profit and loss ratios (“poor partners do not have any money to repay their shortage, so the “rich” partners are paid first)
Formation of a partnership, tangible assets (inventory and real estate) would be recorded at…
fair market value at the date of the investment
Variable Interest Entities (VIEs)
Consolidation required if met:
- Variable Interest (has financial stake)
- Variable Interest Entities (VIEs) - equity characteristics are strange
- Primary Beneficiary (power) - absorbs losses and receives profits
The entity’s equity investment at risk is less than the equity investment at risk of similar non-VIE entities
indicate that an entity has an insufficient level of equity investment at risk
IFRS, a sponsoring company must consolidate a special purpose entity (SPE)
“Control” exists when the sponsoring company is benefitted by the SPE’s activities, has decision making powers that allow it to benefit from the SPE, absorbs the risks and rewards of the SPE, and has a residual interest in the SPE
Asset Retirement Obligations (ARO)
Is the obligation (liability) associated with the retirement of a tangible long-lived asset (valued at PV): Accretion increases
Asset Retirement Cost (ARC)
The amount is capitalized (asset) that increases the carrying amount of the long-lived asset when a liability for an ARO is recognized (valued at PV): Depreciation reduces
Troubled Debt Restructuring (Debtor)
Recognize ordinary gain/loss: FV - NBV asset transferred = “Ordinary gain/loss”
Recognize ordinary gain on:
CV of payable - FV asset/equity transferred = Gain (amount of debt discharged)
Creditor may measure impairment based on
(1) a loan’s observable market price, or
(2) the fair value of the collateral if the loan is collateral dependent.
If foreclosure of a loan is probable, impairment measured on FV of the collateral
Trade A/P Gross Method
Records the purchase without regard to the discount, if paid within the discount period then purchase discount is credited
Trade A/P Net Method
Purchases and A/P are recorded net of discount (if made within discount period then no adjustment necessary), if payment made after the discount period, a purchase discount loss account is debited
Common Debt Covenants
Limitations on issuing additional debt, Restrictions on the payment of dividends, Limitations on the disposal of certain assets, Minimum working capital requirements, Collateral requirements, Limitations on how the borrowed money can be used, Maintenance of specific financial ratios
Imputed interest on non-interest bearing note
reported as interest expense
Total Estimated Coupon Redemptions
Total # coupons issued X Estimated redemption rate
Accrued Liabilities - Bonuses
1) Bonus = % (income - taxes)
2) Taxes = % (income - bonus)
Net payroll and employer FICA
Gross wages X FICA rate (1 + rate)
Recognize warranty costs
At the date of sale, the warranty costs are probable and estimable and must be recognized
Contingencies
Probable - record JE
Reasonably Possible - disclose
Remote - Ignore
*Gain contingencies only disclose (conservatism)
Subsequent Events
Recognized: Record JE and disclose
Nonrecognized: Disclose
Contingencies Amount Range
GAAP: use minimum point in range (unless best estimate is given)
IFRS: use midpoint in range
Current liabilities
include only those liabilities which are due within the next operating cycle (normally the next year
Derivative may be designated and qualify as a fair value hedge
- There is formal documentation of the hedging relationship between the derivative and the hedged item.
- The hedge must be expected to be highly effective in offsetting changes in the fair value of the hedged item and the effectiveness is assessed at least every 3 months.
- The hedged item is specifically identified.
- The hedged item presents exposure to changes in fair value that could affect income.
Disclosures of Financial Instruments
GAAP: required to disclose credit and liquidity risk but encouraged to disclose market risk
IFRS: required to disclose credit risk, liquidity risk, and market risk
Call option
Gives the holder the right to buy from the option writer at a specified price (hoping price goes up)
Put option
Gives the holder the right to sell to the option writer at a specified price (hoping price goes down)
Futures Contract (publicly traded)
Long position (buyer) profits if goes up and Short position (seller) profits if goes down
Hedge on inventory = goes to P/L
Derivations B/S
“winner” = asset (receives $ that protects you)
“loser” = liability (pays $ that hurts you)
Measured at FV
No hedging designation and Fair Value Hedge
Recognized G/L in I/S (earnings)
*same with foreign currency Fair Value Hedge
Cash Flow Hedge
Ineffective = goes to I/S
Effective = goes to OCI then I/S later
*same with foreign currency Cash Flow Hedge
Foreign Currency Net Investment Hedge
Reported in OCI as part of the cumulative translation adjustment
If financial instruments have both liabilities and equity
Then classified as liability
IFRS 9: Financial Asset
Recognized at FV (either amortized cost or FV)
Debt Instruments: Amortized cost measurement (held-to-maturity) and Fair value measurement (AFS goes to OCI or trading-do not contain cash flows so goes to P/L)
Reclassifications = prospectively
IFRS 9: Financial Liabilities
Fair Value measurement at FV on P/L
- Reclassifications not allowed
IFRS 9: Impairment
Does not apply to financial assets = P/L
Applies to financial assets = OCI
*if credit risk increases significantly then full lifetime expected credit losses are recognized
IFRS 9: Hedge Accounting
Fair Value Hedge = goes to P/L unless elected in OCI
Cash Flow Hedge = in OCI (effective)
Net Investment in a foreign operations = Effective in OCI and ineffective in P/L
Derivatives include
options, futures, forwards, and swaps “OFFS”
Contract settlement value tied to underlying notional amount
Liquidation
Imminent and applied prospectively (bankruptcy, benefit plans terminated, or limited-life entities)
Criteria for Imminent Liquidation
Intent of ceasing its activities: likelihood of the entity returning from liquidation is remote AND either a liquidation plan is approved by individuals with authority OR a liquidation plan is imposed by other forces (i.e. involuntary bankruptcy)
Liquidation Disclosures (Statement of Net Assets in Liquidation and Statement of Changes in Net Assets in Liquidation)
Statement that the F/S prepared using the liquidation basis, Plan for liquidation, Significant assumptions/methods used to measure assets and liabilities, Expected time frame, and Type and amount of costs and income accrued
IFRS Impairment loss
Fair value less costs to sell - Carrying value
