IFA Flashcards
What are Provisions?
Liability that is expected to arise in the future as a result of past events
Where are Provisions recognized?
Balance Sheet
What are Contingent liabilities?
Potential liabilities that may or may not arise in the future
Where are Contingent Liabilities recognized?
Notes to the Financial Statements
- Only if considered probable, or reasonably probable
What is included in the Financial Statements?
Balance sheet
Income Statement
Statement of Cash flows
Statement of changes in Equity
How to test Provision recognition
Identify the existence of a present obligation
Determine the likelihood of the obligation being settled
Determine the settlement amount
Record the provision in the financial statements
How are operating leases accounted for?
Expensed
How are finance leases accounted for?
-Lessee
PV of Lease liability = Right of Use Asset
- Deprecaited
Interest Expense
- Liability left* interest rate, rest amortization
What are onerous Contracts?
Contracts where the company loses money on
How are Environmental Provisions accounted for?
PV of liability
Depreciation Expense
Interest Expense on PV
What are issues with Restructuring Provisions?
Companies want to include a lot of stuff to make Balance Sheet look better
- one time cost
Recognition Contingent Assets/Liabilities
Virtually Certain 90%+ Report/Report
Probable 51%+ Disclose/Report
Possible 5%+ No Disclose/Disclose
Remote 0%+ No Disclose/ No Disclose
How to account for notes Payable
Interest and FV as given
How to calculate the price of a bond
PV of Face Value
+ PV of the Coupon
How to Account for a discount bond
Its Interest
Dr. Cash Cr. Bonds payable, with PV
Dr. Interest Expense
Cr. Interest Payable/Cash if paid
Cr. Bonds Payable for amortization
How to Account for a premium bond
Its interest
Dr. Cash Cr. Bonds payable, with PV
Dr. Interest Expense
Dr. Bonds Payable for amortization
Cr. Interest Payable/Cash if paid
Summarize Gerakos, Lang and Maffet - AIM
Pro: Reduced Capital gains Tax
Con: AIM Firms underperform,
Higher Failure Rates,
Firms in the AIM manage earnings more often
Summarize Jones - Intangible Assets
Firms that voluntarily capitalize assets do so to manage earnings,
especially prior to failure.
Sample of Australian Firms
Summarize Gordon, Hsu - Impairment
IFRS Impairments decrease cash flows
GAAP ones do not - Because of delay
Value in use in IFRS des not trigger under impairment
Both differ in time of recognition and how impairment is measured
Summarize Bharath, Sunder, Sunder - Accounting Quality
Lower Quality - Lend from Banks
Banks possess superior information - less adverse selection costs
Summarize Chyz and Gaertner
Under US Gaap
Paying too much Taxes forces turnover anytime,
Paying too little only after Sarabanes-Oxely
They test a lot of alternative explanations
Summarize Beatty, Liao & Weber
Firms with poor accounting rather lease than buy
Poor accounting itself already incentivises leasing
Bank monitoring can substitute for accounting
In times of liquidity constraints poor accounting firms lease more
Summarize Israeli - IAS 40
Firms can recognize or disclose the fair values of their assets
They do so in what way fits them better
Disclosed values are seen as less important, even though equally as influential
When are debt investments measured at amortized cost?
Company plans to hold them and to collect contractual cash flows.
Otherwise fair value
