FRA Flashcards
Explain Special Purpose Entities (SPEs).
Special Purpose Entities (SPEs) allow the sponsoring company to retain financial control over the SPE’s assets and/or operating activities, while third parties hold most of the voting interest in the SPE.
Typically, these third parties funded investments in the SPE with debt directly or indirectly guaranteed by the sponsoring company.
Describe other factors to consider in analyzing a bank.
Describe the two methods by which the periodic pension cost may be calculated.
Describe how to evaluate the quality of a company’s financial reports.
Describe debt security impairment under U.S. GAAP.
Impairment means that the investor will be unable to collect all amounts owed according to contractual terms at acquisition.
Differentiate between loans and receivables under IFRS and U.S. GAAP.
List choices that affect the balance sheet or cash flow statement.
Overstated equity due to understating liabilities or contingent liabilities or overstating financial assets.
Cash flow from operations may be increased by deferring payments on payables, accelerating payments from customers, deferring purchases of inventory, and deferring other expenditures.
Identify the components of high financial reporting quality.
Describe recognition of noncontrolling interests on the consolidated balance sheet and income statement.
On what does the current period’s translation adjustment results in a gain or loss depends on?
Describe how an analyst’s viewpoint on the permanence of earnings should affect a forecast.
Analysts should consider whether events occur with enough regularity to be considered a permanent source of income or expense, or whether the event is a one-off with little likelihood of repeating.
Distinguish between IFRS and U.S. GAAP for those pension costs that are not capitalized.
List the forms of accounting difficulties that can result in a delay of filing.
(1) Internal disagreements on an accounting principle or estimate, (2) lack of adequate financial staff, or (3) discovery of an accounting fraud that requires further examination.
Distinguish between impairment under IFRS and U.S. GAAP.
Explain the income tax paid by multinational companies.
Describe effects of increasing the expected return on plan assets under U.S. GAAP.
Explain mean reversion in earnings and how the accruals component of earnings affects the speed of mean reversion.
Describe impairment of goodwill.
List other types of postretirement benefits.
Health care insurance
Life insurance premium payments
Describe effects of an assumed increase in compensation growth.
List the indicators of influence of investments in associates.
Representation on the board of directors.
Participation in the policy-making process.
Material transactions between the investor and the investee.
Interchange of managerial personnel.
Technological dependency.
Describe dirty surplus accounting.
Identify the disadvantages of share-based compensation.
Describe available-for-sale (AFS) investments.
Explain how remeasurement is recognized.
Remeasurement generally results from a change in assumptions. This component of periodic pension cost is recognized in OCI under both IFRS and U.S. GAAP, but amortized to P&L only under U.S. GAAP.
Demonstrate the use of a framework for the analysis of financial statements.
Define the purpose
Collect input data
Process the data
Analyze the data
Develop/communicate recommendations
Follow up to obtain feedback on decisions
Demonstrate the use of various types of analysis given a particular problem, question, or purpose.
Describe defined contribution pension (DC) plans.
Explain measurement under the acquisition method.
All identifiable tangible and intangible assets and liabilities of the acquired entity are measured at fair value.
The acquirer must also recognize any assets and liabilities that the acquiree has not recognized on its financial statements.
Identify the limitations of quantitative models.
Explain IFRS and U.S. GAAP disclosure requirements relating to foreign currency transaction gains and losses.
Give the formula used to calculate the periodic pension cost of a company’s DB pension plan.
Periodic pension cost = Current service costs + Interest costs + Prior service costs + Actuarial losses − Actuarial gains − Actual return on plan assets
How do IFRS and U.S. GAAP differ on the treatment of contingent assets and liabilities?
Describe purchasing power gains and losses from inflation.
Describe determination of the interest rate used to discount future pension benefits.
How are debt instruments measured?
At amortized cost, fair value through other comprehensive income (FVOCI), or fair value through profit or loss (FVPL), depending on the business model.
List the advantages of share-based compensation.
Explain the accounting for DC plans.
Describe the types of stock grants.
Outright stock grants: Shares are granted to an employee without any conditions.
Restricted stock grants: An employee returns shares to the company for failing to meet certain conditions.
Performance shares: Contingent on meeting performance goals, where performance is usually measured by accounting earnings or return on assets.
Explain accounting for share-based compensation.
Both IFRS and U.S. GAAP require companies to measure share-based compensation expense based on the fair value of the compensation granted.
Describe sources of information about risk.
Describe reclassification for equity and debt instruments under the new standards.
How is net interest expense/income on the pension obligation calculated?
Net interest expense (income) = Net pension liability (asset) × Discount rate
= (Pension obligation − Fair value of plan assets) × r
Differentiate between equity-settled and cash-settled share-based compensation.
Evaluate the quality of a company’s financial reports.
Explain the net income difference between the current rate method and the temporal method.
COGS and depreciation are translated at different rates under the two methods.
Under the current rate method, the translation gain/loss is reported in shareholders’ equity. Under the temporal method it is reported on the income statement.
List estimates required to determine the pension obligation.
Projected compensation levels and increases.
A discount rate used to determine the present value of future pension payments. Higher discount rates lead to lower pension obligation.
The probability that some employees will not satisfy the plan’s vesting requirements.
Define interest expense.
How may financial assets be classified under IFRS?
Describe disclosures related to sources of foreign exchange risk.
(1) Source(s) of its currency risks and approach to measuring and managing those risks (usually in MD&A).
(2) Present a sensitivity analysis on the effects of currency fluctuations (usually in the additional disclosures sections of the notes).