FRA - Intercorporate investment

Question 1

Assoiates

Answer 1

20-50%
Equity method
significant influence

representation on the BOD
Participation in the policy making process
material transactions b/w investor and investee
interchange of managerial personnel
technological dependency

Question 2

Financial Assets

Answer 2

<20%
fv through p/l
fv through OCI
Amotized cost
not significant

Question 3

Business combinations

Answer 3

> 50%
subsidiary
consolidation

Question 4

Joint ventures

Answer 4

shared control

Equity method

Question 5

FV through P/L

Hold for trading (debt/equity)

Answer 5

B/S: Fair value
I/S: Interest, dividend, REALIZED/UNREALIZED G/L
coupon pmt on par, get interest on starting balance

Question 6

FV through OCI

Designated at FVOCI

Answer 6

B/S: Fair value
Unrealized g/l in oci, move to i/s when realized

I/S: Interest, dividend, REALIZED G/L

Question 7

Amortized cost

Debt

Answer 7

B/S: Amortized cost
I/S: Interest, REALIZED G/L

Amortized premium = coupon on par - interest on bb. balance

carrying value of bond = bb balance- amortized premium

Question 8

Reclassification of financial assets

Answer 8

not permitted for equity

permitted for debt only if the business model has changed

Question 9

From Amortized cost fo FVPL

Answer 9

unrealized g/l moved to i/s

Question 10

FVPL to amortized

Answer 10

fair value at the reclassification date becomes the carrying amount

Question 11

Equity method

Answer 11

B/S carrying amount of investment in B/S

recognize cost at inception
one-line consolidation

(adj accumulated net profit of investee - accumulated dividends declared by the investee) * % of interest owned
- purchase price

I/S:
gain is recognized + current year’s net profit of investee
*% interest owned

Question 12

Good will (equity method)

Answer 12

Acquisition cost- fair value of net identifiable assets (bv of net identifiable asset + fv appreciation)

Question 13

Equity Income - Equity method

Answer 13

NI of investee
-Depr. adjustment
(fv of pp&e / useful life) - pre-acquisition depr)
=Equity income of investor

One-line consolidation - 
Equity Investment  = 
Purchase cost 
\+equity income
-dividend (not included in investment income)

Question 14

Impairment - Acquisition method

FV Option IFRS

Answer 14

IFRS -
One of more loss events with impact on future CF
if carry > recoverable
loss= carry value - fair value

Question 15

Impairment - FV Option GAAP

Answer 15

GAAP -
carrying value and is determined to be permanent
>fair value
impairment loss
= implied fv of reporrting unit’s goodwill - carrying amount

max reduction is amount of Goodwill

impairment loss recognized on I/S
carrying value on B/S reduced to fair value

Question 16

Equity method - transaction with associates

Upstream

Answer 16

profit recorded on associate’s I/S

the investor’s share of unrealized profit must be deferred by REDUCING the amount recorded under equity method

Question 17

Equity method - transaction with associates

Downstream (sale down to assciated)

Answer 17

Profit recorded on investor’s I/S

the investor’s share of any unrealized profit must be deferrer by reducing the amount recorded under equity method

Question 18

Equity Income from transaction - Equity method

Answer 18

NI of investee
-Depr. adjustment 
(fv of pp&e / useful life)  - pre-acquisition depr)
- UNREALIZED profit *% ownership
=Equity income of investor 

One-line consolidation - 
Equity Investment  = 
Purchase cost 
\+equity income --reflecting unrealized profit
-dividend

Question 19

unrealized profit in transactions with associate (downstream)

Answer 19

profit realized by S = 
(selling price P - resold price  S) 
profit realized by P = 
(selling price - bv of good) / selling price --profit margin
* profit realized by S
* %ownership

upsteam is straight forward

Question 20

Acquisition method

Answer 20

Minority interest recognized in both I/S and B/S (equity account)
= diff. in asset and equity account
No more investment account in B/S and I/S

+ goodwell in asset

Question 21

Goodwell (acquisition)

Answer 21

= consideration + fv of minority interest - fv of net assets of target company

Question 22

Full goodwill

Answer 22

US GAAP & IFRS
= consideration / % interest acquired - fv of net assets
=fv - fv of identifiable asset of subsidiary
Minority interest = consideration / % interest own

Question 23

Partial goodwill

Answer 23

IFRS only

=consideration - fv of net asset * % of interest acquired

minority interest = % MI shares own & fv of net assets

Question 24

Pooling-of-interest

Answer 24

target’s assets and liabilities are stated at historical book value in the consolidated financial statements
not allowed under IFRS

Question 25

SPE

Answer 25

a legitimate financing mechanism to segregate certain activities and thereby reduce risk

By transferring the variability in the risk of a project to a sponsor, a lender can provide a lower cost of financing to the company that creates the SPE.
In return, the sponsor will RECEIVE pro-rata profits/RISK/RETURN or other residual interests in the project.

under IFRS, SPE must be consolidated if the sponsoring entity controls SPE.

impact b/s (same borrow directly or through SPE)

Question 26

VIE

Answer 26

An entity that is financially controlled by one or more parties that do not hold a majority voting interest

equity investors lack any of the following:
ability to make decisions
the obligation to absorb losses
the right to receive returns

primary beneficiary (Absorb majority of losses)
must consolidate it as subsidiary regardless of how much of an equity investment it has in the VIE. 

impact b/s

Question 27

The initial choice of classification into fair value through OCI is irrevocable and reclassification is not allowed for equity securities.

Answer 27

The initial choice of classification into fair value through OCI is irrevocable and reclassification is not allowed for equity securities.

Question 28

Book value of net asset

Answer 28

equity+ RE

Question 29

As the financial effect of the contingent liabilities cannot be reasonably estimated, under U.S. GAAP they should not be included.

Answer 29

As the financial effect of the contingent liabilities cannot be reasonably estimated, under U.S. GAAP they should not be included.

Question 30

goodwill formula

Answer 30

purchase price
-% * bv of net asset of sub
- attributable to diff. b/w fv and bv of net identifiable asset
= goodwill

Question 31

investment income

Answer 31

includes dividends, interest, and realized gains

Question 32

investments in a bond can be classified as amortized cost if it meets the two criteria;

Answer 32

business model test
and cash flow characteristic test.
But if the asset may be sold prior to collecting all the contractual cash flows, be measured using one of the two fair value methods.

Question 33

investment income equity method

Answer 33

WAI’s share of Aurora’s net income for the year:

20% × $93 million =
18.6
Less amortization of the identifiable intangible:

(20% × $60 million)/10 years
(1.2)
Less unrealized profit after tax on the unsold landing gear in WAI’s ending inventory. One half of the inventory is unsold, therefore one half of the $12 million profit should not be recognized:

0.5 × $12 million × 20% share

Question 34

reinvestment payoff years

Answer 34

total debt = Current debt + Long term debt = 2,271 + 1,347 = € 3,618

Reinvestment = Capital expenditures + Expenditures on intangibles = 824 + 73 = € 897

Operating cash flow − reinvestment = 2,449 − 897 = €1,552/year

Years to repay debt from operating cash flow = 3,618/1,552 = 2.3 years