FRA2 Flashcards
Debt, equity or both, which can be recorded at amortized cost when you hold a minority interest
Debt only
Name/explain how each % interest in another company is called
0-20% = no influence 20-50% = Associates, significant interest 50%+ = controlling interest
When you have a non-controlling interest, explain the 3 ways you record your interest in your financial statements
Amortized cost, only used for debt, unrealized gains and losses are not recorded anywhere. You treat these securities like a held to maturity security
Fair Value through Profit and Loss: All realised gains and losses are recorded on income statement. The asset itself sits on the balance sheet.
Fair value through OCI: All realised gains are put on the income statement, all unrealised gains are put on the balance sheet (OCI).
Can a equity security be held at amortized cost?
No way
Can you reclassify equity securities from FV OCI to FV PL
No way
Can you reclassify debt securities from Amortized cost to another?
Yes, you must immediately recognize gains and losses.
What do we do with PPE when it can be revalued upward when a company takes a significant position in it
The value of the PPE is revalued upward to its fair value
How to calculate Goodwill within the equity method
So, think about it. You take your purchase price, minus the original book value (* % owned) then minus the INCREASED changed value of PPE (*% owned)
So if PPE went up by 300$, and you own 10% of the company, you would subtract….$10 correct
How do you calcualte what you put on the income statement using the equity method of accounting
If there is no funny business with writing up assets, it is the net income off the affiliate times the % owned. Simple.
If the affliliates assets are written up, you have to DEPRECIATE the valued up value (not the whole value, just the uped value) and this is all times the % owned.
So if the value of a PPE goes up by 300$, and you own 10%, and it is depreciated for 10 years straight line, you would subtract an additional $3 from net income.
Where are gains and losses put for FVPL when holding no significant interest of a company?
On the income statement. The market value of the security is what it is recorded at on the balance sheet
FV for OCI, where do you record realised and unrealsied gains or losses
Realised IS, Unrealised Balance sheet
What is interest income?
Cash pmts plus amortization up or down of premium or discounts to pat value of bond purchased
How do you calculate full goodwill (US GAAP) and Partial Goodwill (IFRS)
Full goodwill is the = FV of subsidiary - FV of all net tangible assets
IFRS = Purchase price - (% owned * net tangible assets)
Can goodwill be amortized?
No
Which is bigger, full or partial goodwill?
Full
Explain how you consolidate a balance sheet
Assets + Assets
Liabilities + Liabilities
Net assets = Net assets - (% NOT owned Net assets) . This will be minority share
Explain how you consolidate an income statement
Put all line items together, then on net income you subract the % attributable to other interests
With FVPL, at what price and where do you record the asset itself.
The fair value is recorded on the balance sheet, same with OCI
What is the carrying value of a controlled entity at the time of sale
In the year of acquisition, the investor company reports its investment in the investee at the acquisition cost
What is the carrying value of a controlled entity a year post purchase
Purchase price (which is last years carrying value) + Net income - divs - amoritization
To what value do you write down cash generating units
To their recoveravble amount
How do you calculate minority interest
Net assets of acquiree * % not owned
For a SPE, how do you calcualte what is added to the parent’s balance sheet?
It is everything that is not invested into the SPE itself, anything going out, or anything that the firm could have done itself, but instead just did through an SPV
WHen is something is carried at amoritized cost, when would it not be recorded at historic cost?
if it is pruchased at premium or discount
Durbin watson test and serial correlation. If the number is less than 2, what does that mean
THERE IS SERIAL CORRELATION
How is GDP growth linked with the intertemporal rate of substitution
Inversly. More consumption = higher gdp growth
What is the CDS Spread
A periodic premium paid by the buyer to the seller that serves as a return over Libor required to protect against credit risk.
Explain basis trading
A trade based on the pricing of credit in the bond market versus the price of the same credit in the CDS market. To execute a basis trade, go long the “underpriced” credit and short the “overpriced” credit. A profit is realized when the price of credit between the short and long position converges.
if the durbin watson stat is higher than the critical value, is there serial correlation
NO
Explain pairwise modeling?
it gets you the same answer as binomial modeling, the only difference is you do something like this.
Coupon / Spot Value 1 + Coupon/Spot value 1+Spot Value 2 etc etc.
For random walks, B0 should equal what and B1 should equal what? Think about it
B0 = 0 and B1 =1, think of the formula of x-1=x+e
What does an increased discount rate do to the service cost?
Decreases it
identify components of Periodic Pension Expense, Peridoic Pension Cost, TPPC for both USGAAP and IFRS.
PERIODIC pension expense - SIEA for USGAAP and Spin for ifrs. SIEA = service + interest - expected + amortisation. Spin is Serice + past + net interest. Periodic pension cost is everything on the income and oci statements, but uses actual return instead of expected return.
Change in the PBO is SIPABEER
change in assets is CAB
Total cost can also be found as Ending funded status - beginning - contributions
