FRA intercorporate Flashcards
Reading 13 - Intercorporate
What are the categories of business combination under US GAAP
MERGER
ACQUISITION
CONSOLIDATION
Describe Pooling (Uniting) of Interests
- The book value of both companies is used.
What 3 types of assets are combined on the acquirers balance sheet with the Acquisition method
All the following, on or off balance sheet at Fair Value:
(a) Tangible and Intangible assets
(b) indemnification assets
(c) In-process R&D
What is the IFRS criteria to include a Contingent liability in the Acquisition method?
- A present obligation that arises from past events
2. Can be measured reliably.
What is the criteria to recognise an indemnification asset in the Acquisition method?
If the Target indemnifies the Acquirer for:
a. Contingency
b. Uncertainty related to any of the Acquirees specific assets or liabilities
c. losses above a specified amount for a particular contingency.
How is a Bargain Acquisition established and recognised in the Acquisition method.
If the Purchase price is less than the fair value of the net assets acquired.
Recognised immediately as a gain on the Income Statement.
Where are unrealised gains and losses reported in FVPL?
Income statement
If a bond is held with the intention to sell for liquidity reasons what is the classification?
Not Amortised Cost
Amortised Cost requires an intention to collect all contractual cash flows
Equity Method -
- How is carrying value calculated
- What elements go on income statement
Beginning value (at purchase date, the purchase price)
a) plus % share of Net Income of affiliate
b) minus % share of excess depreciation= % share (FV-BV+Residual)/time
c) minus % share of derecognised profits with affiliate
d) minus % share of dividends from affiliate
Equity Income = (a) + (b) + (c) = this goes on income statement
(d) Dividends do not go on income statement, it is return of capital
Equity Method -
- How is goodwill measured?
- Where is goodwill recorded?
Goodwill =
Price paid for % share
minus
FV (identifiable net assets (on and off balance sheet)
Goodwill is embedded in the carrying value
Equity Method -
- How is Goodwill impairment tested?
- How does IFRS measure impairment?
- How does US GAAP measure impairment?
- Goodwill is embedded in carrying value and not separately tested for impairment.
Goodwill is part of the “total fair value of impairment test” - Impairment loss (IFRS) = (Recoverable Value minus Carrying Value)
US GAAP
STEP 1
- (Carrying Value > Fair Value)
STEP 2
- Impairment of Goodwill = [ Carrying Value of Goodwill - (FV_unit - FV Net Assets_unit) ]
Equity Method -
- Reversal of impairment losses (IFRS)
- Reversal of impairment losses (US GAAP)
- IFRS reversal of impairment loss not allowed, except for non-good will items
- US GAAP - reversal not allowed
What happens to Sponsors receivables when an SPE is consolidated?
Receivables sold to SPE are reversed onto the Sponsor consolidated balance sheet
How would an analyst adjust CF for Sponsor of a SPE that has securitised the Sponsors receivables?
CFO would go down
CFF would go up
Total CF remains the same
Equity Method -
- Balance Sheet recognition of investee.
- Income statement recognition of investee.
1. BS=Single line item on balance sheet CV = previous CV A) + %NI B) - % excess depreciation C) - derecognised profits D) - % dividends
- IS=single line item for Investee income (equity income) = A-B-C
How is the price of acquisition shown in Pooling of interests?
- The price paid for the acquisition is not evident on financial statements.
Compare ratios for Pooling of Interests vs Purchase method
This acquisition is shown at Book Value for Pooling of interests.
When compared with Purchase method (acquisition is at fair value) for Pooling of interests:
(a) ROA is higher - because Assets are lower (all assets at BV not FV)
(b) Expenses are lower - because Depreciation expense is lower (less depreciation due to BV not FV)
Describe a US GAAP Merger
MERGER - acquirer A absorbs all assets of B.
A + B = > A
Describe a US GAAP Acquisition
ACQUISITION - results in a Parent - Subsidiary structure.
A + B => Group A (A and B)
Describe a US GAAP Consolidation
CONSOLIDATION - a new company, C, is formed that swallows A and B.
A + B => C
How may contingent consideration be classified?
At fair value as:
a) Asset
b) Liability
c) Equity
How are changes in fair value of contingent consideration recognised for IFRS?
Asset and liability classified contingent consideration is recorded on the consolidated income statement:
- IFRS - the change in FV of liability classified contingent consideration
Equity contingent consideration is not remeasured and is settled within equity.
How is in-process R&D treated after Acquisition?
- Amortised - if completed and economically viable.
2. Impaired - if not completed or not economically viable.
How are Restructuring costs of a business combination measured?
- IFRS and US GAAP do not recognize these costs at acquisition.
- Recognised subsequently as the costs are incurred.
Under IFRS 9 FVOCI where is Dividend income booked?
Income statement
Under IFRS 9 FVOCI where are unrealised Gains and losses booked?
OCI section of Equity
Under IFRS 9 FVOCI where are realised gains and losses booked?
INCOME STATEMENT
What is booked differently between FVPL and FVOCI
In FVOCI unrealised Gains and losses are booked in OCI section of equity and not booked on the income statement (as in FVPL)
How is excess depreciation in Equity Method calculated?
%Share of FV of (depreciable assets minus BV of depreciable assets plus residual assets) .
% share (FV-BV+Residual)/time
How is excess depreciation in Equity Method calculated?
%Share of FV of (depreciable assets minus BV of depreciable assets plus residual assets) .
[% share (FV-BV) minus Investors Residual] /time
Calculate profit derecognition downstream
%share of Investee x (Profit on 100% sale to Investee x % of sale not made to third Party)
E. G.
INVESTOR MY MAKES £100 ON SALE TO Affiliate of which it owns 40%
Affiliate sells on 80%
- Derecognised Profit= 20% of £100 x Investors % share of Affiliate (40%)
= £8
Compare Leverage Ratio between Equity and Acquisition method
Liabilities and Equity both lower in Equity method
Due to non recognition of Investee debt
Compare assets, liabilities, revenues and expenses between Equity Method and Acquisition method
All higher under Acquisition method (Real)
Compare Net Income between Equity and Acquisition methods
Net Income is the same
Compare Profit Margin between Equity and Acquisition methods
- Income is the same for both methods
- Sales are lower in Equity method because affiliate sales are not included
- Profit Margin is higher in Equity method since Income is a percentage of a smaller amount of sales
Compare ROE between Equity and Acquisition method
- Income is the same
- Equity of acquiree is not included in Equity method
- Equity is lower for the same income in Equity method
Therefore ROE is Higher in Equity method
Compare ROA between Equity and Acquisition method
- Income is the same
- Assets are lower in Equity method (assets of Investee not included in Equity method)
- ROA is Higher under Equity method.
How is Goodwill Reported in the Equity method?
It is Not separately reported.
It is embedded in the carrying value.
Goodwill is implied.
How are changes in contingent consideration measured in US GAAP
Asset and liability classified contingent consideration is recorded on the consolidated income statement:
- US GAAP - both assets and liability classified contingent consideration
Equity contingent consideration is not remeasured and is settled within equity.
Equity method
What impairment losses can be reversed under
(a) US GAAP
(b) IFRS
(a) No reversals - US GAAP
(b) non Goodwill reversals only - IFRS
Reversal of Equity Method impairment losses under IFRS?
Not allowed page p22 curriculum vol 2
Under IFRS what securities are considered along with voting shares?
- Exercisable Warrants
- Convertible Warrants / Securities
- Call Options
Under IFRS which type of Associate can be recorded as financial asset under Fair Value?
- Venture Capital co’s
- Mutual Funds
- Unit trusts
- Investment related insurance funds
Explain no arbitrage of bid-ask spread
Bid= Dealer buys, clients sells
Ask=Dealer offers to sell, Client buys
No arbitrage
1. Bid
What two class of liabilities are included on Acquirers balance sheet under acquisition method
On or Off balance sheet at Fair Value:
(b) liabilities
(c) contingent liabilities at acquisition
What is the translation rate for a Dividend under the Current Rate Method
The rate on the date the Dividend was DECLARED
What translation rate is used for Income Statement, Retained Equity and Equity under the Current Rate method
Historical (Average rate)
Which balance sheet items are NOT translated at the Current Rate under All current rate method?
Equity, Retained Earnings
Where does Cummulative Translation Gain/Loss end up under the All Current Rate Method
CTA is in Equity side of Balance Sheet
Changes to what type of security classification violates the clean surplus rule
AFS or held for sake because changes Equity without going through Income Statement.
