Financial Reporting & Analysis 1: Inter-corporate Investments Flashcards

1
Q

What are inter-corporate investments?

A

Inter-corporate investments are investments in other companies, and they effect both the Income Sheet and the Balance Sheet

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2
Q

What are the 4 types of inter-corporate investments?

A

1) Investments in Financial Assets
2) Investments in Associates
3) Business Combinations
4) Joint Ventures

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3
Q

How much influence and control does the investor have in the investee under an investment in financial assets?

A

There is not significant influence, generally equity stake is less than 20%

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4
Q

How much influence and control is there under an investment in associates? What method do we report investments in associates?

A

There is generally significant influence and equity stake is between 20%-50%.

We use the equity method of reporting.

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5
Q

How much influence and control is there under a Business Combination? How do we report a Business Combination?

A

Investor is a controlling member, with ownership > 50%.

We report business combinations using the consolidation method.

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6
Q

What is the influence structure in a Joint Venture and how do we classify a Joint Venture?

A

Influence is shared among investors, and reported using the equity method.

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7
Q

For Investments in Financial Assets, we usually consider them (passive or active)because ______

A

Passive, because we don’t have significant control or ownership

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8
Q

For Invesments in Financial Assets, Dividends and Income are reported ______

A

On the income statements

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9
Q

Held to Maturity securities are typically (debt or equity). What are some of their characteristics?

A

HTM are typically debt securities. They generally will have a fixed or determinable payment schedule and maturity date.

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10
Q

When considering how a HTM security is initially recognized, compare IFRS and GAAP

A

For IFRS, a HTM security is initially recognized at Fair Value.
For GAAP, a HTM security is initially recognized at Price Paid.

These two are generally the same amount

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11
Q

When considering how a HTM security is subsequently recognized, compare IFRS and GAAP.

A

IFRS and GAAP are the same when it comes to subsequent value recognitions. HTM securities are recognized at their amortized cost using the Effective Interest Method.

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12
Q

For a HTM security, interest income is reported where?

A

On the Balance Sheet

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13
Q

For a HTM security, how do we recognize unrealized gains and losses?

A

We don’t recognize them, because we intend to hold the security until maturity, so they should not be consequential.

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14
Q

Securities Held for Trading, as well as securities designated as Carried at Fair Value, are broadly classified as _______

A

Fair Value through Profit and Loss (FVPL)

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15
Q

How would you classify debt and equity securities that are held with the intent to sell in the near term?

A

Held for Trading

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16
Q

Held for Trading securities are initially recognized at ______

A

Fair Value

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17
Q

For Held for Trading securities, how do we treat unrealized gains and losses?

A

They are reported as profit and loss

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18
Q

For Held for Trading securities, how do we treat realized gains and losses?

A

They are reported as Profit and Loss

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19
Q

For Held for Trading securities, how do we treat income from interest and dividend payments?

A

Though Profit and Loss

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20
Q

Available For Sale securities are (debt and/or equity) investments that are not classified as ____ or _____

A

AFS securities are both debt and equity securities that are not classified as HTM or FVPL

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21
Q

For AFS securities, we generally initially recognize them at _____

A

Fair Value

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22
Q

For AFS securities, how to we recognize realized gains and losses?

A

For AFS securities, realized gains and losses go on the income statement

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23
Q

For AFS securities, interest and dividend income go on the ______

A

Income Statement

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24
Q

What is the main difference between IFRS and GAAP when it comes to unrealized gains and losses on AFS securities?

A

The main difference is that for GAAP, ALL unrealized gains and losses flow to OCI. Importantly, ALL includes exchange rate movements for debt securities. Under IFRS, the impacts of FX movements does not flow to OCI, they go straight to the income statement.

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25
Q

Under IFRS, for unrealized gains and losses, if there is an impact from FX movements for an AFS debt security, how do we recognize that impact?

A

It flows directly to the income statement. THis is the main difference between IFRS and GAAP. WHen it comes to unrealized gains and losses on AFS debt. GAAP would say FX impacts are included in OCI. IFRS breaks them out.

26
Q

Under GAAP, for unrealized gains and losses on an AFS debt security, how do we recognize the impact of FX movements.

A

We do not break away FX movements. GAAP includes ALL unrealized gains and losses as OCI. Under IFRS, FX movements flow directly to the income statement while all other unrealized gains and losses go to OCI.

27
Q

Under both IFRS and GAAP, unrealized gains and losses on AFS equities are recognized _____

A

In OCI

28
Q

Under IFRS And GAAP, how do we classify unrealized gains and losses on debt securities classified as AFS?

A

TRICK QUESTION, BE CAREFUL. IFRS and GAAP recognize unrealized gains and losses as OCI, but IFRS recognizes unrealized gains and losses as a result of FX movements separately, they flow directly to the income statement. GAAP groups all unrealized gains and losses as OCI and does not differentiate.

29
Q

Under IFRS and GAAP, realized gains and losses on an AFS security (it was sold), how do we recognize?

A

Remember, unrealized gains and losses would have been flowing to OCI (except FX on debt under IFRS, not GAAP). So, once the security is sold (gains/losses are realized), we will reverse those out of OCI and report it as a Profit or Loss under a reclassification adjustment.

30
Q

What are Loans and Receivables?

A

Loans and Receivables are non derivative financial assets with fixed or determinable payments.

31
Q

Contrast the differences in how IFRS and GAAP come to the classification of Loans and Receivables.

A

IFRS:
Has a specific definition for loans and receivables. They do not rely on a legal form for classification.
GAAP:
Relies on a legal form for classification. Can be classified as HFT, AFS, HTM.

32
Q

What is the broad difference in how IFRS and GAAP consider if a company may reclassify an Investment in Financial Assets. What is something they both have in common?

A

IFRS is more strict. You can’t reclassify Designated at FV, HFT. You may reclassify HTM to AFS, and AFS to HTM, but rules are again more strict.

GAAP is less strict, and generally allows for the reclassification when it is deemed justified.

They both have in common the fact that if you reclassify a HTM security, you may be barred from using the HTM designation in the future.

33
Q

Under IFRS, can you reclassify HTM debt as AFS debt?

A

You may reclassify HTM debt to AFS debt if there is a change in intention of ability to HTM. But, you may be prohibited from using HTM in the future if you do so.

34
Q

Under IFRS, if we choose to reclassify a HTM debt security to an AFS debt security, how will we recognize the reclassification?

A

The newly classified AFS debt security will be remeasured at fair value, because AFS securities are required to be measured at FV. Any difference between the FV and the actual carrying cost will be amortized in OCI.

35
Q

Under IFRS, can we reclassify a Designated at Fair Value Security? What about under GAAP?

A

Remember IFRS is more strict. Under IFRS, you generally are prohibited from reclassifying a DFV security. Under GAAP, you are generally allowed if it is justified.

36
Q

Under IFRS, can you reclassify a HFT security? What about under GAAP?

A

Remember, IFRS is more strict when it comes to reclassifications. Under IFRS, you are restricted from reclassifying a HFT security. GAAP generally allows it if it is justified.

37
Q

Under IFRS, can we reclassify an AFS debt security? What about GAAP?

A

Under IFRS, you may only reclassify two types, HTM and AFS, to and from. You may reclassify an AFS debt security to HTM if your intent or ability changes. GAAP generally allows it.

38
Q

Under IFRS, when an AFS debt security is reclassified as a HTM debt security, how do we recognize it?

A

At the time of the reclassification, the FV of the AFS security becomes the new cost of the HTM security. Any unrealized gains and losses that were previously recognized in OCI are amortized to P&L over the maturity of the security using the EIM.

39
Q

Under IFRS, can we reclassify debt from HFT or AFS to Loans and Receivables?

A

Remember, while GAAP uses a legal form to determine wether and asset can be classified as L&R, IFRS uses a definition. If the definition is met, a HFT or AFS debt security may be reclassified as a L&R.

40
Q

If there is no reliable way to come to a FV estimate for an AFS security, what do we do?

A

In the case that there is no way to come to a FV, and there is no evidence of impairment, we will measure the AFS security at cost.

41
Q

Under GAAP, when you reclassify a HFT security to an AFS security, how do we treat the unrealized gains and losses?

A

Remember, a HFT security has its unrealized gains and losses recognized in P&L, because we are holding it for trading. So, the difference between Fair Value and carrying value (the unrealized gain or loss) has already been recognized.

42
Q

Under GAAP, when a security is reclassified as HFT, how do we recognize unrealized gains and losses?

A

Remember, for HFT securities, all unrealized gains and losses are recognized in P&L. So, if something changes to HFT, any unrealized P&L has to go directly to P&L.

43
Q

Under GAAP, when HTM is reclassified as AFS, how do we recognize unrealized gains and losses?

A

Remember, with AFS securities, unrealized gains and losses flow to OCI (with the exception of FX under IFRS, GAAP doesn’t differentiate). With HTM, unrealized gains and losses are ignored because they theoretically don’t matter since we are holding it to maturity. So when you change from HTM to AFS, all of those unrealized gains and losses need to flow over to OCI.

44
Q

Under GAAP, when we reclassify AFS debt to HTM debt, how do we recognize unrealized gains and losses?

A

Remember, AFS recognized unrealized gains and losses as OCI. HTM ignored unrealized gains and losses. SO, when we change AFS to HTM, we need to take those unrealized gains and losses are are in OCI and amortize them over the maturity of the security, just as we would with a premium/discount for a HTM security using the EIM.

45
Q

Who is more strict with Impairments, IFRS or GAAP?

A

IFRS

46
Q

Under IFRS, when it comes to recognizing impairment, compare the difference when it comes to wether or not the asset is classified at Fair Value.

A

If an asset is classified at Fair Value, any impairment is already reflected because unrealized gains/losses are recognized in P&L. If it is not classified at fair value, any impairment will immediately be recognized in P&L.

47
Q

When it comes to impairments on debt securities under IFRS, at least one ______ event must occur. What type of events do not count as an impairment under IFRS?

A

At least one loss event has to occur under IFRS to impair a debt security. You may not consider a credit rating downgrade, a loss of marketability, or expected future events of loss (no matter how certain) as an impairment.

48
Q

Under IFRS, an equity security may be considered impaired if …..

A

Under IFRS, there has been a substantial and extended decline if fair value, below cost basis. Also, if there have been substantial changed in tech/mkt/legal environments that indicate that the initial cost may not be recovered.

49
Q

Under IFRS, how do we calculate the impairment costs on a HTM debt security or a L&R?

A

Under IFRS, The impairment costs is calculated as the difference between the carrying value and the present value of expected future cash flows discounted at the initial effective interest rate. That new carrying amount will be reduced through an allowance account.

50
Q

Under IFRS, impairment loss for HTM debt and L&R is recognized in ______

A

P&L

51
Q

Under IFRS, can you reverse a previous impairment cost on a HTM debt or L&R security?

A

Under IFRS, you may revered a previous impairment cost. However, this will in turn increase the carrying value of the security as well as net income.

52
Q

Under IFRS, for an impairment on an AFS security, how do we recognize the impairment loss?

A

Remember, for AFS securities, any unrealized gain or loss would have been considered OCI. So, in the case of an impairment, that impairment loss (unrealized loss) will flow out of OCI and onto the income statement as a reclassification adjustment.

53
Q

Under IFRS, can we reverse an impairment charge for AFS securities?

A

No. Under IFRS, unlike AFS debt, you may NOT reverse an impairment loss on AFS equity

54
Q

How does GAAP determine if there can be an impairment loss?

A

GAAP is lest strict than IFRS. GAAP considers a security impaired if the decline in its value is “other than temporary”.

55
Q

For AFS and HTM debt securities, under GAAP, how do we come to the new cost?

A

Under GAAP, the cost basis will be written down to the new Fair Value.

56
Q

For AFS and HTM debt, under GAAP, how to we treat the impairment loss?

A

Under GAAP, for AFS and HTM debt, the impairment loss is treated as a realized loss on the income statement.

57
Q

Under GAAP, for AFS debt and equity, how do we come to the new cost basis after an impairment?

A

Under GAAP, the cost basis is written down to the new Fair Value.

58
Q

Under GAAP, for AFS debt and equity, how do we treat the impairment loss?

A

Under GAAP, an impairment loss on AFS debt and equity is a realized loss on the income statement.

59
Q

Under GAAP, can you reversed an impairment on AFS?

A

No allowed.

60
Q

After an impairment of an AFS security, under GAAP, how are subsequent changes in fair value recognized?

A

Remember, unrealized gains and losses for an AFS security flow to OCI. Therefore, once the new FV is determined, any unrealized gains or losses that result in changes of FV will flow through to OCI as usual.