Financial Reporting - Chp 16

Question 1

3 types of intercorporate investments and ownership % of each and accounting method used

Answer 1

• Financial assets (<20% & no control)
  
  • held to maturity
  • fair vlaue through profit or loss
  • available for sale
• Investments in associates (20%-50%, significant influence of ops)
  
  • equity method
• business combinations (usually >50%, has control of ops)
  
  • acquisition method

Question 2

held to maturity (financial assets) - definition and reporting on balance sheet and income statement

Answer 2

debt securities acquired with intent to hold to maturity. Cannot be sold prior to maturity. (NOT equity securities)

1. Balance sheet: at amortized cost (present value of remaining cash flows discounted at market rate of interest at issuance)
   
   1. If bought at par, will remain at purchase price
   2. If bond premium or discount, must recognize this
2. Income statement: Interest income but changes in fair value ignored

Question 3

Fair value through profit or loss (financial assets) - two types, definitions, affects on balance sheet and income statement

Answer 3

1. Held-for-trading: debt and equity acquired for near term profit.
   
   1. Balance Sheet: reported at fair value
   2. Income statement: changes in fair value (realized and unrealized) and dividend/interest income recognized, This mean income statement will have more volatility if shares are “classified as trading”
2. Designated at fair value: Firm chooses to report securities that would otherwise be held-to-maturity or available-for-sale as fair value.
   
   1. Balance Sheet: reported at fair value
   2. Income statement: changes in fair value (realized and unrealized) and dividend/interest income recognized

Question 4

Available for sale ( financial assets) - definiton and affects

Answer 4

1. Available-for-sale – neither of others
   
   1. Balance sheet: reported for fair value
   2. Income statement: Only realized gains/losses or dividend/interest income
      
      1. Unrealized gains/losses reported in other comprehensive income. When sold they are moved over to income statement

Question 5

Reclassification of assets to another kind of financial asset

Answer 5

1. Transfers will affect net income but value of assets stays the same
2. Transfer from available for sale to held for trading means any unrealized gains must now be recognized in income

Question 6

GAAP rules for impairment of financial asset

Answer 6

1. Security is impaired if decline in value is determined to not be temporary. For both HTM and AFS, write down to fair value is treated as a realized loss (recognized on income statement)
2. Reversals: reversal of impairment losses is not allowed

Question 7

IFRS rules for impairment of financial asset

Answer 7

1. Impairment indicated if at least one loss event has occurred and its effect on future cash flows can be reliably estimated, but losses due to future events are not recognized
   
   1. For debt security: default of payments, bankruptcy of issuer, or others considered reason for impairment. Credit rating downgrade or lack of liquid market not considered reason enough
   2. Equities: Impaired if experienced an extended decline below its carrying value
2. If HTM is impaired, carrying value is decreased to present value of its estimated future cash flows (may not be fair value)
3. Reversals:
   
   1. HTM can be reversed if recovery is due to an event.
   2. AFS debt can be reversed if recovery is due to an event
   3. Reversals not permitted for equity