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CFA Level 2 COPY (930) > Financial Reporting and Analysis > Flashcards

Financial Reporting and Analysis Flashcards

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1
Q

The Financial Accounting Standards Board (FASB) - Generally Accepted Accounting Principles (US GAAP)

A

The International Accounting Standards Board (IASB) - International Financial Reporting Standards (IFRS)

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2
Q

IFRS inventory valuation

A
  • Specific indentification
  • FIFO
  • Weighted average cost
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3
Q

US GAAP inventory valuation

A
  • Specific indentification
  • FIFO
  • Weighted average cost
  • LIFO
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4
Q

Increase in the LIFO reserve - The increase is subtracted from COGS to get the FIFO value

A

Decrease in the LIFO reserve - The decrease is added to COGS to get the FIFO value

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5
Q

LIFO liquidation

A
  • Occurs when the number of units sold exceeds the number of units purchased
  • If inventory unit costs have been rising from period to period and LIFO liquidation occurs, this will produce an inventory-related increase in gross profits
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6
Q
  • Changing to LIFO from FIFO or average cost
  • Changing to FIFO or average cost from LIFO
A
  • Increases profits when prices are decreasing and reduces tax expenses when prices are increasing
  • Reduces tax expenses when prices are decreasing and increases profits when prices are increasing
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7
Q

IFRS Write downs - Lower of cost or net realisable value

A
  • Selling price in the ordinary course of business less the cost to make the sale and the cost to get the inventory in condition for sale
  1. A loss is recognised as an expense on the income statement (may be included as part of cost of sales)
  2. Reversals are limited to the amount of the original write-down and recognised as a reduction in cost of sales (reduction in the amount of inventories recognised as an expense)
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8
Q

US GAAP Write downs - Lower of cost or market value

A
  • Market value equals the higher of:
    • the current replacement cost, or
    • the net realizable value less a normal profit margin
  1. Write downs cannot be reversed - Reduce the value of the inventory and the loss is generally included in COGS
  2. Replacement cost should not (1) exceed net realizable value or (2) be lower than net realizable value less a normal profit margin
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9
Q

Inventory valuation example #1

A
  • Carrying value = $100
  • Replacement cost = $90
  • Net realizable value = $95
  • Net realizable value less normal profit margin = $80
  • Inventory would be recorded at $90 under U.S. GAAP and at $95 under IFRS
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10
Q

Inventory valuation example #2

A
  • Carrying value = $100
  • Replacement cost = $90
  • Net realizable value = $105
  • Net realizable value less normal profit margin = $95
  • Inventory would be recorded at $95 under U.S. GAAP and at $100 under IFRS (i.e., no write-down is required)
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11
Q
  • COGS (from LIFO to FIFO)
  • NI (from LIFO to FIFO)
  • Retained earnings (RE) (from LIFO to FIFO)
A
  • COGS (LIFO) - increase in LIFO reserve
  • NI (LIFO) + increase in LIFO reserve x (1 - t)
  • RE (LIFO) + LIFO reserve x (1 - t)
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12
Q

Ending shareholders’ equity

A

Beginning shareholders’ equity + NI + OCI - dividends + net capital contributions from shareholders

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13
Q

Interest incurred during the construction of an asset to sell

A

The capitalised interest appears on the company’s balance sheet as part of inventory and then expensed as part of the cost of sales

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14
Q
  • Capitalised interest
  • Expensed interest
A
  • Operating cash flow
  • Investing cash flow
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15
Q

Research costs

A
  • IFRS: expensed ( development costs can be capitalized after feasability has been established)
  • US GAAP: expensed (exceptions for software - cost are capitalized after feasability has been established)
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16
Q

SG&A

A

Selling, general and administrative

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17
Q

IFRS - recoverable amount for impairment

A
  • The higher of its fair value less costs to sell and its value in use (value in use is the discounted value of expected future cash flows)
  • An asset is impaired if its carrying amount is greater than its recoverable amount
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18
Q

US GAAP - two steps for impairment

A
  1. Recoverability is assessed: an asset is not recoverable when the carrying amount exceeds the undiscounted expected future cash flows
  2. The loss is measured as the difference between the asset’s fair value and carrying amount
  • The impairment loss is a non-cash item
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19
Q

Impairment tests for all long-lived assets

A
  • IFRS - Annually
  • US GAAP - When events or changes in circumstances indicate that its carrying amount may not be recoverable
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20
Q

Impairment tests for goodwill and identifiable intangible assets

A

IFRS & US GAAP - Annually or more frequently when there are indications that impairment might have occured

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21
Q

IFRS revaluation

A
  • If the first revaluation results in an increase in the asset’s value, it is accounted for in OCI and is included in equity as revaluation surplus
  • If an asset revaluation initially decreases the carrying amount, the decrease is recognised in profit or loss (similar to an asset impairment)
  • Later, if an asset revaluation increases the carrying amount, it is recognised in profit or loss to the extent that it reverses a revaluation decrease of the same asset previously recognised in profit or loss
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22
Q
  • Cost model
  • Revaluation
A
  • IFRS & US GAAP
  • IFRS only
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23
Q

IFRS expenses classification

A

Either by nature or funtion

  • Nature: depreciation, purchases of materials, transport costs, etc
  • Function: costs of sales, SG&A, etc
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24
Q

Synthetic lease

A

Provides the tax benefits of ownership while not requiring the asset to be reflected on the company’s financial statement

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25
Q

IFRS leases

A
  • If substantially all the risks and rewards of ownership are transferred to the lessee - financial (capital) lease
  • Otherwise - operating lease
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26
Q

US GAAP leases

A

Financial (capital) lease 4 criteria (only one is required):

  1. The lessor transfers ownership of the asset to the lessee at the end of the lease term
  2. A bargain purchase option is given to the lessee allowing it to purchase the leased asset at a price lower than the expected fair market value of the asset
  3. The life of the lease is equal to or greater than 75% of the economic life of the asset
  4. The present value of the minimum lease payments (MLP) is equal to or greater than 90% of the fair market value of leased property
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27
Q

Financial lease

A
  • The discounted value of future lease payments is reported under lease obligation
  • The value of the leased asset is reflected on the balance sheet
  • Only the interest portion of the lease payment is included in operating cash flow. The portion of the lease payment that reduces the lease liability is included in financing cash flow
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28
Q

US GAAP lessor

  • direct financing leases
  • sales-type leases
A
  • Direct financing leases: the present value of the lease payments equals the carrying amount of the leased asset
  • Sales-type leases: the present value of the lease payments exceeds the carrying amount of the leased asset
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29
Q

Held-to-maturity

A
  • For debt securities only
  • IFRS & US GAAP - the investor has the intent and the ability to hold the asset until maturity
  • IFRS - not aloud to classify as held-to-maturity if a similar asset has been reclassified during two prior years
  • IFRS - initially recognized at fair value
  • US GAAP - initially recognized at price paid
  • IFRS & US GAAP - reported at amortized cost using the effective interest rate method unless impairment exists / discount or premium is amortized
  • Interest payments: interest income. Sold before maturity: profit or loss. Transaction costs: included in initial fair value
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30
Q

IFRS - fair value through profit or loss

A
  • Held for trading: debt or equity securities acquired with the intent to sell them. Interest and dividends are recognized through profit or loss
  • Designated at fair value: investments that might otherwise be classified as available-for-sale or held-to-maturity
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31
Q

Available-for-sale

A
  • Initially recognized at fair value
  • Remeasured and recognized at fair value in subsequent periods
  • Unrealized gain or loss is reflected in OCI net of taxes
  • Recognized in profit or loss when the investment is sold
  • Interest (effective interest method) and dividends are included in profit or loss
  • Changes in market value are reported in shareholder’s equity
  • IFRS FX debt: Change in fx rate → included in profit or loss. The remaining porting is included in profit or loss
  • US GAAP FX debt: OCI
  • IFRS & US GAAP FX equities: OCI
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32
Q

Securities sold when classified as Available-for-sale

A

The cumulative unrealized gain or loss is removed from OCI and recognized through P&L

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33
Q

Loans and receivables

A
  • IFRS: carried at amortized cost
  • US GAAP: relies on a legal form for the recognition of debts securities. Classified as either held for trading, available-for-sale or held-to-maturity
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34
Q

Reclassification of investments - US GAAP

A
  1. If a security initially classified as held for trading is reclassified as available-for-sale, any unrealized gains and losses (arising from the difference between its carrying value and current fair value) are recognized in profit and loss
  2. If a security is reclassified as held for trading, the unrealized gains or losses are recognized immediately in profit and loss. In the case of reclassification from available-for-sale, the cumulative amount of gains and losses previously recognized in other comprehensive income is recognized in profit and loss on the date of transfer
  3. If a debt security is reclassified as available-for-sale from held-to-maturity, the unrealized holding gain or loss at the date of the reclassification (i.e., the difference between the fair value and amortized cost) is reported in other comprehensive income
  4. If a debt security is reclassified as held-to-maturity from available-for-sale, the cumulative amount of gains or losses previously reported in other comprehensive income will be amortized over the remaining life of the security as an adjustment of yield (interest income) in the same manner as a premium or discount
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35
Q

IFRS financial asset impairment

A

The impairment is recognized through P&L

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36
Q

Equity instruments measure (as of 2012) - IFRS

A
  • FVPL
  • FVOCI
  • Equity investments held for trading must be measured at FVPL
  • Other equity investments can be measured at FVPL or FVOCI but the choice is irrevocable
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37
Q

Cost method classification

A
  • Held to maturity
  • Available for sale
  • Fair value through profit or loss (held for trading or designated as fair value)
  • Loans and receivables
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38
Q

Equity method of accounting

A
  • Investment initially recorded at cost
  • Earnings and losses are reported in income
  • Dividends and other distributions are treated as a return on capital and reduce the carrying amount of the investment
  • Single line on the balance sheet
  • Single line on the income statement
  • Investments are classified as non-current
  • Changes in market value are ignored
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39
Q

Transactions with associates

A

Because an investor company can influence the terms and timing of transactions with its associates, profits from such transactions cannot be realized until confirmed through use or sale to third parties

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40
Q

Equity method impairment

A
  • IFRS: recognized on the income statement and the carrying amount of the investment is either reduced directly or through and allowance account. The loss must have an impact of future cash flows
  • US GAAP - recognized on the income statement and the carrying amount of the investment is reduced to its fair value. The loss must be deemed permanent
  • Both standards prohibit reversals
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41
Q
  • Merger
  • Acquisition
  • Consolidation
A
  • A + B = A
  • A + B = (A + B)
  • A + B = C
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42
Q

Acquisition (or consolidation) method

A

Recognition and measurement of:

  • identifiable assets and liabilities
  • financial assets and liabilities
  • goodwill
  • any non-controlling interest
  • contingent liabilities
  • indemnification assets
  • when acquisition price is less than fair value (difference recognized through P&L)
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43
Q

Contingent liabilities

A
  • IFRS: only those that can be reliably measured
  • US GAAP: those that are probable and can be reasonably estimated
44
Q

Consolidated non-controlling interest

A
  • IFRS: either at fair value (full goodwill) or as a proportion of the acquiree’s identifiable assets (partial goodwill)
  • US GAAP: at fair value (full goodwill)
45
Q

Business combination

A
  • Acquisition method - more than 50%
  • Equity method - more than 20% and less than 50%
  • Cost method - less than 20%
  • Proportionate consolidation method
    • 0% to 20% - no influence
    • 20% to 50% - influence
    • more than 50% - control
46
Q

Qualifying SPE

A

Under IFRS, SPEs must be consolidated if they are conducted for the benefit of the sponsoring entity. Further, under IFRS, SPEs cannot be classified as qualifying. Under US GAAP, qualifying SPEs (a classification which has been eliminated) do not have to be consolidated

47
Q

Pooling of interest method

A
  • Assets and liabilities are reported at historical book value
  • Acquisition method is now required. Assets and liabilities are reported at fair value
48
Q

Joint venture

A

Equity method for 50/50 joint venture

49
Q

Goodwill impairment - IFRS

A
  • Impairment amount = carrying amount - recoverable amount
  • Recognized on the income statement
  • Reduces the value of the goodwill
50
Q

Goodwill impairment - US GAAP

A
  • There is impairment if the fair value < carrying value
  • Implied goodwill = fair value - fair value of the identifiable net assets
  • Impairment amount = current carrying value of goodwill - implied goodwill
51
Q

Partial and full goodwill valuation

A
  • Partial goodwill:
    • Goodwill = amount paid - (proportion acquired x net assets)
    • Non-controlling interest = (1 - proportion acquired) x net assets
  • Full goodwill:
    • Goodwill = fair value - net assets
    • Non-controlling interest = (1 - proportion acquired) x fair value
52
Q

SPEs and VIEs consolidation

A

Special purpose (SPEs) and variable interest entities (VIEs) are required to be consolidated by the entity which is expected to absorb the majority of the expected losses or receive the majority of expected residual benefits

53
Q

Pension obligation

A
  • IFRS & US GAAP: Present value of future benefits earned by employees
  • IFRS - PVDBO: Present value of the defined benefit obligation
  • US GAAP - PBO: Projected benefit obligation
54
Q

Funded status - IFRS and US GAAP

A

= fair value of the plan assets - PV of the defined obligation

55
Q

Vesting - Contribution plan

A

Refers to a provision that stipulates that the employee might be elegible to the pension benefits only after staying with the company for a certain number of years or other criterias

56
Q

Pension overfunded or underfunded status

A
  • Underfunded: Net liability on the balance sheet
  • Overfunded: Net asset on the balance sheet. Equals to the lower of the net surplus or the present value of futures benefits or future contributions reductions
57
Q

Service cost

A
  • Current service cost is the amount by which a company’s pension obligation increases as a result of employees’ service in the current period
  • Past service cost is the amount by which a company’s pension obligation relating to employees’ service in prior periods changes as a result of plan amendments or a plan curtailment
  • IFRS - service costs (including both current service costs and past service costs) are recognised as an expense in P&L
  • US GAAP - past service costs are reported in OCI in the period in which the change giving rise to the cost occurs. In subsequent periods, these past service costs are amortised to P&L over the average service lives of the affected employees
58
Q

Pension cost (expense) - P&L & OCI

A
  • IFRS - P&L: Service costs (current and past), net interest expense/income (discount rate as the expected return)
  • IFRS - OCI: Remeasurement
  • US GAAP - P&L: Current service costs, interest expense, return on pension asset (expected return rather than actual return)
  • US GAAP - OCI: Past service costs (reported to OCI in the period in which they occur and amortized to P&L in subsequent periods over the average service lives of the employees)
  • US GAAP: Actuarial gains or losses are included either in net liability or net asset and are reported in either P&L or OCI
59
Q

Pension cost (expense) for a defined contribution plan

A

Equals the amount contributed by the firm

60
Q

Periodic pension cost (expense) - IFRS

A

= service cost + net interest income/expense + remeasurements (net return on plan assets and actuarial gains and losses)

* complete table on p. 182

61
Q

Periodic pension cost (expense) - US GAAP

A

= current service cost + amortization of past service costs + interest cost on the pension obligation - expected return on plan assets + (actuarial gains and losses including differences between the actual and expected returns on plan assets)

* complete table on p. 182

62
Q

Total periodic pension cost (expense)

A

The total periodic pension cost is the change in the net pension asset or liability excluding the effect of the employer’s periodic contribution to the plan

63
Q

Total periodic pension cost (expense) calculation

A
  • = employer’s contribution + [(pension obligationst - pension obligationst - 1) - (pension assetst - pension assetst - 1)]
  • = empoyer’s contribution + increase in net liabilities
64
Q

Rate that should be used to discount pension costs

A

The yield on high quality corporate bonds is the appropriate discount rate that should be used to calculate the present value of the future benefits because it represents the rate at which the defined benefit obligation could be effectively settled

65
Q

Corridor approach

A
  • The net cumulative actuarial gains and losses in excess of 10% of the greater amount of the fair value of the plan asset or the defined benefit obligation are amortized to P&L over the average service lives of the employees
66
Q

Options grant terminology

A
  • Grant date: date at which the options are granted
  • Service period: period between the grant date and the vesting date
  • Vesting date: date at which the employees can first exercise the options
  • Exercise date: date when employees can convert the options to stocks
67
Q

Adjusted interest coverage ratio (when capitalizing an operating lease)

A

= [EBIT + operating lease rent expense - depreciation] / [interest expense + additionnal interest expense on the lease]

68
Q

SAR

A

Stock appreciation rights

69
Q

Current rate method

A
  • All assets are translated using the current rate
  • Sales, selling expenses, interest expenses, COGS and taxes are translated at the average rate
70
Q

Temporal method

A
  • Assets and liabilities carried on the foreign currency balance sheet at current value should be translated at the current exchange rate
  • Assets and liabilities carried on the foreign currency balance sheet at historical costs should be translated at the historical exchange rate
  • Gain or loss on net income
  • Only monetary assets and liabilities are translated at the current exchange rate. Non-monetary assets and liabilities are translated at the historical exchange rate. (Monetary items: cash, receivables & payables. Non-monetary items: inventory, fixed assets, deferred revenue & intangibles)
  • Sales are translated at the average rate
71
Q

Functional currency

A
  • Foreign currency: current method
  • Parent’s currency: temporal method
72
Q

When the functional currency is not the same as the parent’s presentation currency

A
  • The current rate method is used
  • Self-contained, independent subsidiaries whose operating, investing and financing activities are primarily located in the local market will use the local currency as the functional currency
73
Q

When the functional currency is the same as the parent’s presentation currency

A
  • The temporal method is used
  • Subsidiaries whose operations are well integrated with the parent will use the parent’s currency as the functional currency
74
Q
  • Channel stuffing
  • Bill-and-hold
  • Tunneling
  • Propping
A
  • Inducing customers to order more goods than they would normally do through offers of discounts and other incentives
  • Revenue is recognized when the invoice is issued while the goods remain on the premise of the seller
  • Dealings between a public and a private entity with unfavorable terms for the public one in order to transfer wealth to the private one
  • Dealings between a public and a private entity where resources are transfered to the public one in order to ensure its economic viability
75
Q

Cash-flow-based accruals ratio

A

[NI - (CFO + CFI)] / (Average NOA)

76
Q

Balance-Sheet method accruals ratio

A
  • Accruals Ratio = (NOAt – NOA t-1)/ ((NOAt + NOA t-1)/2)
  • ((NOAt + NOA t-1)/2) = Average NOA
77
Q

NOA

A

(Total Assets – Cash) – (Total Liabilities – Total Debt)

78
Q
  • Current ratio = Current assets / Current liabilities
  • Quick ratio = (Cash + Short-term marketable investments + Receivables) / Current liabilities
  • Cash ratio = (Cash + Short-term marketable investments) / Current liabilities
  • Defensive interval ratio = (Cash + Short-term marketable investments + Receivables) / Daily cash expenditures
  • Receivables turnover ratio = Total revenue / Average receivables
  • Days of sales outstanding (DSO) = Number of days in period / Receivables turnover ratio
A
  • Inventory turnover ratio = Cost of goods sold / Average inventory
  • Days of inventory on hand (DOH) = Number of days in period / Inventory turnover ratio
  • Payables turnover ratio = Purchases / Average trade payables
  • Number of days of payables = Number of days in period / Payables turnover ratio
  • Cash conversion cycle (net operating cycle) = DOH + DSO – Number of days of payables
  • Working capital turnover ratio = Total revenue / Average working capital
79
Q
  • Fixed asset turnover ratio = Total revenue / Average net fixed assets
  • Total asset turnover ratio = Total revenue / Average total assets
  • Gross profit margin = Gross profit / Total revenue
  • Operating profit margin = Operating profit / Total revenue
  • Pretax margin = Earnings before tax but after interest / Total revenue
  • Net profit margin = Net income / Total revenue
  • Operating return on assets = Operating income / Average total assets
  • Return on assets = Net income / Average total assets
A
  • Return on equity = Net income / Average shareholders’ equity
  • Return on total capital = Earnings before interest and taxes / (Interest bearing debt + Shareholders’ equity)
  • Return on common equity = (Net income – Preferred dividends) / Average common shareholders’ equity
  • Tax burden = Net income / Earnings before taxes
  • Interest burden = Earnings before taxes / Earnings before interest and taxes
  • EBIT margin = Earnings before interest and taxes / Total revenue
80
Q
  • Financial leverage ratio (equity multiplier) = Average total assets / Average shareholders’ equity
  • Total debt = The total of interest-bearing short-term and long-term debt, excluding liabilities such as accrued expenses and accounts payable
  • Debt-to-assets ratio = Total debt / Total assets
  • Debt-to-equity ratio = Total debt / Total shareholders’ equity
  • Debt-to-capital ratio = Total debt / (Total debt + Total shareholders’ equity)
  • Interest coverage ratio = Earnings before interest and taxes / Interest payments
A
  • Fixed charge coverage ratio = (Earnings before interest and taxes + Lease payments) / (Interest payments + Lease payments)
  • Dividend payout ratio = Common share dividends / Net income attributable to common shares
  • Retention rate = (Net income attributable to common shares – Common share dividends) / Net income attributable to common shares = 1 – Payout ratio
  • Sustainable growth rate = Retention rate × Return on equity
  • Earnings per share = (Net income – Preferred dividends) / Weighted average number of ordinary shares outstanding
81
Q
  • Book value per share = Common stockholders’ equity / Total number of common shares outstanding
A
  • Free cash flow to equity (FCFE) = Cash flow from operating activities – Investment in fixed capital + Net borrowing
  • Free cash flow to the firm (FCFF) = Cash flow from operating activities + Interest expense × (1 – Tax rate) – Investment in fixed capital
82
Q

IFRS

  • Service costs
  • Net interest income/expense
  • Remeasurements: Net return on plan assets and actuarial gains and losses
A
  • Recognised in P&L
  • Recognised in P&L as the following amount: Net pension liability or asset × interest rate
  • Recognised in OCI and not subsequently amortised to P&L
    • Net return on plan assets = Actual return – (Plan assets × Interest rate).
    • Actuarial gains and losses = Changes in a company’s pension obligation arising from changes in actuarial assumptions.
83
Q

US GAAP

  • Current service costs
  • Past service costs
  • Interest expense on pension obligation
  • Expected return on plan assets
  • Actuarial gains and losses including differences between the actual and expected returns on plan assets
A
  • Recognised in P&L
  • Recognised in OCI and subsequently amortised to P&L over the service life of employees
  • Recognised in P&L
  • Recognised in P&L as the following amount: Plan assets × expected return
  • Recognised immediately in P&L or, more commonly, recognised in OCI and subsequently amortised to P&L using the corridor or faster recognition method
    • Differences between expected and actual return on assets = Actual return – (Plan assets × Expected return).
    • Actuarial gains and losses = Changes in a company’s pension obligation arising from changes in actuarial assumptions
84
Q

Accounting for foreign currency transaction with intervening balance sheet date

A
  • An unrealized gain or loss is first recognized on the income statement on the statement date
  • A currency transaction gain or loss is after recognized on the income statement on the date the transaction is completed
85
Q

Gross profit

A

= revenues (sales) - COGS

86
Q

Balance sheet exposure

  1. Net asset
  2. Net liability
A
  1. Foreign currency:
    • Strengthens: positive translation adjustment
    • Weakens: negative translation adjustment
  2. Foreign currency:
    • Strengthens: negative translation adjustment
    • Weakens: positive translation adjustment
87
Q

Dividends translation

A

Translated at the exchange rate in effect when the dividends are declared

88
Q

Foreign currency translation in a highly inflationary economy

A
  • Temporal method (current of historical rate)
  • Restate for inflation/ translate using current exchange rate
    • The asset is restated for inflation: (1 + inflation level) x historical price
    • The restated amount is translated using the current rate
  • Items are restated in function of the rate used to measure them:
    • Current rate: no restatement
    • Average rate: restate using average inflation rate
    • Historical rate: restate using full inflation rate over the period
89
Q

IFRS factors for determining functional currency

A
  1. Revenues
  2. Sales
  3. Operating costs
  4. Financing costs
90
Q

Temporal method net exposure

A
  • Monetary assets - monetary liabilities
  • Cash and receivables - payables, current liabilities and long-term debt
  • If monetary assets > monetary liabilities → net asset exposure
  • If monetary assets < monetary liabilities → net liability exposure
91
Q

Operating versus sales-type leases

A
  • Cash flow statement - Total cash flow statements remain unaffected by operating and capital leases. That said, cash flow from operations will include only the interest portion of the capital-lease expense. The principal payment will be included as a cash outflow from cash flow from financing activities. As a result, capital leases will overstate CFO and understate CFF
  • Income statement - A capital-lease payment includes two components: one is the interest expense - which is included in the income statement but is not part of operating income (earnings before taxes from continuing operations) - and the second component is the principal payment, which is not included in the income statement . Instead, depreciation expenses are included in income statement which are part of operating income. The interest portion will be higher in the first few years of the lease, and is consistent with the interest expense of an amortized loan. Total income over the life of the leased assets will be the same for operating and capital leases
92
Q
  • Current assets
  • Current liabilities
A
  • Cash and other assets that are expected to be converted to cash within a year. Include cash and cash equivalents, accounts receivable, inventory, marketable securities, prepaid expenses and other liquid assets that can be readily converted to cash
  • Debts or obligations that are due within one year. Include short-term debt, accounts payable, accrued liabilities and other debts
93
Q

Amortization of excess amount paid

A

Provision to be deducted from the calculation of investments in associates when an excess amount was paid over net book value

94
Q

Net income and dividend accounts when calculating investments in associates

A
  • Add proportional share of net income
  • Subtract proportional share of dividends
95
Q

Equity method pro-rata share of income

A

= pro-rata share of net income - amortization of excess purchase price - unrealized profit

96
Q

Balance of investments in associate (equity method)

A
  • = purchase price + equity income - dividends received - amortization of excess purchase price*
  • * (sometimes the amortization of excess purchase price is included in the balance of investments calculation ex. p 131, and sometimes it is included in the equity income calculation ex p. 134)
97
Q

US GAAP reclassification of investments

A

US GAAP allows reclassifications (transfers) of securities between all categories when justified

98
Q

IFRS reclassification of investments

A

IFRS generally prohibits the reclassification of securities into or out of the designated at fair value category, and reclassification out of the held for trading category is severely restricted. Held-to-maturity (debt) securities can be reclassified as available-for-sale if a change in intention or a change in ability to hold the security until maturity occurs

99
Q

Equity method - US GAAP and IFRS accounting

A
  • US GAAP - all entities can account for their equity method investments at fair value
  • IFRS - the fair value option is only available for venture capital firms/ mutual funds and similar entities
100
Q

Classification of leases and earnings quality

A
  • A financial (capital) lease enhances earnings quality
  • An operating lease lowers earnings quality
101
Q

Assumptions causing actuarial gains/losses

A
  • Future salary increases
  • Discount rate
  • Expected vesting time
102
Q

Other comprehensive income most frequent entries

A
  • Unrealized gains and losses on available for sale securities
  • Gains and losses on derivatives held as cash flow hedges (only for effective portions)
  • Gains and losses resulting from translating the financial statements of foreign subsidiaries
  • Actuarial gains and losses on defined benefit plans
  • Changes in the revaluation surplus
103
Q

Non-controlling interest under the acquisition method

A
  • Reduces shareholder’s equity
  • Reduces net income (net income is the same as under the equity method)
104
Q

Currency translation in hyperinflationary economy

A
  • US GAAP - Financial statements are translated as if the parent’s currency were the functional currency (temporal method)
  • IFRS - Financial statements first need to be restated for inflation and then translated using the current exchange rate
105
Q

IAS 29 for hyperinflationary economy

A
  • Balance sheet:
    • Monetary assets and monetary liabilities are not restated
    • Non-monetary assets and non-monetary liabilities are restated for changes in the general purchasing power of the monetary unit
    • All components of stockholders’ equity are restated by applying the change in the general price level
  • Income statement:
    • All income statement items are restated by applying the change in the general price index from the dates when the items were originally recorded to the balance sheet date.
    • The net gain or loss in purchasing power that arises from holding monetary assets and monetary liabilities during a period of inflation is included in net income
106
Q

Fair value

A

The amount at which an asset (or liability) could be bought (or incurred) or sold (or settled) in a current transaction between willing parties, that is, other than in a forced or liquidation sale; as defined in IFRS and US GAAP, the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date

CFA Level 2 COPY (930) (13 decks)

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