overview Flashcards
Estimate of future cash flow
Timing variations of future cash flows
Time value of money (risk-free rate)
Uncertainty - credit risk
Other (liquidity issues)
5
elements of present value measurement (Asset - note rec.; Liability - bonds)
Point in time
Requires the following: (“RAPPeL”)
Rewards
Customer has significant rewards and risks
Accepted
Customer accepted the asset
Payment
Entity has right to payment
Physical
Entity transferred physical possession
e
Legal
Customer has legal title
REPPeL
Forward
Definition
Entity’s obligation to repurchase the asset
Accounting
If repurchase < original selling price
Lease
If repurchase is = or > original selling price
Financing arrangement
Call option
General definition
Entity’s right to repurchase the asset
Accounting
If repurchase < original selling price
Lease
If repurchase = or > original selling price
Financing arrangement
Put option
Definition
Entity’s obligation to repurchase the asset at the customer’s request
Accounting
If repurchase < original selling price
If customer has significant economic incentive to exercise the right
Lease
If customer does NOT have significant economic incentive to exercise the right
Sale w/ a right of return
If repurchase = or > original selling price
If repurchase price is > the expected MV of the asset
Financing arrangement
If repurchase price is < or = the expected MV of the asset & the customer does NOT have significant economic incentive to exercise the right
Sale w/ a right of return
PUT option
Anticipated “future” gains or losses
G/L not previously recognized that results from sale of component is recognized at date of sale and not before
Measurement and valuation
Component classified as “held for sale” is measured at the lower of:
Carrying amount (BV), or
NRV (selling price - costs to sell
Presentation and disclosure
Results of discontinued operations are reported NET OF TAX as separate component of income below income from continuing operations
Gain or loss on disposal can be reported either
Upon “held for sale”
Initial and subsequent impairment losses
(Selling price - costs to sell) = NRV
If NRV < BV = impaired = have to write down
(Carrying value - NRV), net of tax = impairment loss amount
If loss is determined to be more in the subsequent year than estimated
Additional loss, net of tax = additional impairment loss amount
Subsequent increases in fair value
Can reverse prior impairment loss and record a gain if there is an increase in NRV, but cannot go up more than prior impairment loss
Depreciation and amortization
Stops once management/board decides to dispose
Changes in accounting principle that are inseparable from a change in estimate
Definition
Still changes in accounting principle (NOT estimate) but handled prospectively, why? – impractical to estimate
If considered “impractical” to accurately calculate this cumulative effect adjustment, then change is handled prospectively (like change in estimate)
Examples
Change to LIFO
form DD to SL. SL uses SV where DD does not. Estimation win!!
Change in depreciation method
Accounting Treatment
Comparative FS presented
If the year of the error is presented
Correct the info in that year
If the year of the error is not presented
Correct the beginning RE (NET OF TAX) of the earliest year presented
Effect on Statement of RE - “net of tax”
Reconcile the beginning balance of RE w/ ending balance
Usually presented immediately following the IS or as a component of Statement of SE
Foreign currency translation method items
Translation method - CTA & OCI*
Remeasurement method - G/L on IS (NOT OCI)
Other comprehensive income: “PUFIE” - goes to equity (accumulated OCI)
Pension adjustment
Unrealized gains and losses on available-for-sale debt securities
Foreign currency translation method items
Translation method - CTA & OCI*
Remeasurement method - G/L on IS (NOT OCI)
Instrument-specific credit risk
Effective portion of cash flow hedges
Matching principle
Reclassification adjustments
Avoids double accounting - from AOCI to IS
Accumulated Other Comprehensive Income (AOCI)
Rules for Recording AJEs
Must be recorded by end of entity’s fiscal year & before preparation of FS
Never involve the cash account
All AJEs will hit one IS account & one BS account
Notes from MCQs
“Advances” affect cash flow but do not affect accrual basis expense
JE to record Prepaid Expense
DR: Prepaid Expense XXX
CR: Cash XXX
AJE to record expense that has been incurred (over time)
DR: Expense XXX
CR: Prepaid Expense XXX
Remaining notes to FS
All other information that is relevant to decision makers
Material information
Changes in stockholders’ equity
Required marketable securities disclosure
FV estimates
Contingency losses
Contingency gains
Contractual obligations
Pension plan description
Segment reporting
Subsequent events (including discontinued segment & outside ordinary course of business)
Changes in accounting principle or implication of new accounting standards update
Related party disclosures
Disclosure of Risks and Uncertainties (U.S. GAAP)
Nature of Operations
Description of entity’s major products/services and its principal markets, including the locations of those markets
Use of estimates in preparation of FS
Certain significant estimates
Inventory or equipment subject to rapid technological obsolescence
Deferred tax asset valuation allowances
Capitalized computer software costs
Loan valuation allowance
Litigation-related obligations
Amounts reported for LT obligations, such as pension/post-retirement benefits
Amounts reported in LT contracts
TC is not included in the cost
Market approach
Uses prices and other relevant info from market transactions
“Exchange”
I
ncome approach
Converts future amounts, including CFs or earnings, to a single discounted amount - PVFCP (DCF) sum (PVFC)
Cost approach
Uses current replacement cost
*Does NOT include transaction costs, BUT may include transportation costs if location is an important attribute of asset or liability
EXCEPTION: transaction cost is used to calculate most advantageous market, but then disregarded in FV measurement
Nonfinancial asset assumes highest and best use of the asset (PP&E)
In practice, choose the highest price available
NOT segment cash flow
NOT segment liabilities if regularly provided to “chief operating decision maker”
Require Disclosures for ALL public entities:
Operating segments (annual and interim)
Products and services
Geographic areas
Major customers
Disclosure Requirements
Required to disclose:
Segment P&L
Segment assets
Certain related items
Form 10-Q
Quarterly report
Contains:
Unaudited FS prepared using US GAAP
Interim period MD&A
Certain disclosures
Filing deadlines:
Large accelerated: 40 days
Accelerated: 40 days
All others: 45 days
Form 11-K
Annual report of company’s employee benefit plan(s)
Form 20-F
Non-US (10-K) annual report
Contains:
Financial disclosures
Summary of financial data
MD&A
Audited FS (using GAAP)
Form 40-F
Canadian (10-K) annual report
Contains:
Financial disclosures
Summary of financial data
MD&A
Audited FS (using GAAP)
Form 6-K
Semi-annual report by foreign private issuers (similar to form 10-Q)
Contains:
Unaudited FS
Interim period MD&A
Certain disclosures
Form 8-K
Report on major events
Corporate asset acquisitions/disposals
Changes in securities and trading markets
Changes to accountants or FS
Changes in corporate governance or management
Forms 3, 4, and 5
10% owners - directors, officers, or beneficial owners of > 10%
Disclosure requirements
Dividends per share and in total for each class of shares
Principles of consolidation or combination
Assets subject to lien
Defaults with respect to any issue of securities/credit agreements if existed at the BS date & not cured
Preferred share disclosures
Restrictions that limit the payment of dividends
Significant changes in bonds, mortgages, or similar debt
Summarized financial info of subsidiaries not consolidated & 50% or less owned entities
Income tax expense
Warrants or rights outstanding
Related party transactions that affect FS
Repurchase and reverse repurchase agreements
Accounting policies for derivative instruments
Days Sales in AR
Ending net AR / [ Net sales / 365]
Number of days required to collect AR
General rule: the lower the better
Cash ratio
(Cash + Marketable securities) / Current liabilities
Most liquid, smallest numerator
Balance per books
- Service charges
+ Bank collections
- NSF checks
+ Interest income
+/- Errors
Balance per bank
+ Deposits in transit
- Outstanding checks
+/- Errors
Percentage of AR method
Amount calculated is the ending balance that should be in the Allowance for Doubtful Accounts
Step 1: Calculate the necessary ending balance in Allowance for Doubtful Accounts
Step 2: Back into current year Bad Debt Expense
Allowance method (GAAP - matching principle)
Contra-asset account
Debit allowance account to write off receivable
Allowance account has a normal credit balance
What makes Allowance for Doubtful Accounts go up or down?
Up
Bad Debt Expense accrual each year
Recoveries
Down
Write-offs
DR: Allowance for Uncollectible Accounts XXX
CR: AR XXX
Subsequent collection of AR written off
Allowance method
DR: AR XXX
CR: Allowance for Uncollectible Accounts XXX
DR: Cash XXX
CR: AR XXX
Notes Receivable
Definition
Written promises to pay a debt
Face value = principal
Maturity value = principal + interest
For the year ended December 31, Beal Co. estimated its allowance for uncollectible accounts using the year-end aging of AR. The following data are available:
Allowance for uncollectible accounts 1/1 $42,000
Provision for uncollectible accounts (2% of $2m) 40,000
Uncollectible accounts written off 11/30 46,000
Estimated uncollectible accounts per aging 12/31 52,000
After the year-end adjustment, the uncollectible accounts expense should be:
Beg balance: $42,000
Add: Provision for year 40,000
Less: Uncollectible AR written off (46,000)
Ending balance (before adj) 36,000
Estimated uncollectible AR 52,000
Difference $16,000
Provision $40,000 + Adj of $16,000 = $56,000
Allowance for Sales Returns (subtracted from gross sales to get net sales) functions very similarly to Allowance for Doubtful Accounts
Security deposits are not accounts receivable
FOB shipping point “freight in”
Title passes to buyer when seller delivers goods to common carrier
Goods shipped should be included in buyer’s inventory upon shipment (in truck)
All selling costs are included in buyer’s inventory
FOB destination “freight out”
Title passes to buyer when buyer receives goods from common carrier
Goods shipped should be included in seller’s inventory until delivered to buyer
All selling costs are paid by the seller and are NOT included in the buyer’s inventory
Historical cost: purchase price “+”
Whenever assets are purchased requiring fixed payments extending beyond one year, the assets should be valued at the PV of all future payments
Donated Fixed Assets
Come on the books at FV
Journal entry
DR: Fixed Asset (FMV) XXX
CR: Gain on Nonreciprocal Transfer XXX
Two rules concerning capitalized interest
Rule 1
Only capitalize interest on money actually spent, NOT on total amount borrowed
Rule 2
The amount of capitalized interest is the LOWER of
Actual interest cost incurred, or
Computed capitalized interest (avoidable interest)
Disclose in FS
Total interest cost incurred during the period
Capitalized interest cost for the period, if any
WAAA
50000011%=55000
1000009%=9000
Total 64000
Actual Acummulated expenditure
= $600,000
Actual interest exp given $150,000
WE will capitalized the $64000 (lower), and exp the rest.
Sale of an asset during its useful life
DR: Cash received from sale XXX
DR: Accumulated depreciation XXX
Difference is G/L (CR/DR) XXX or XXX
CR: Sold asset at cost XXX
Write-off fully depreciated asset
DR: Accumulated depreciation (100% of it) XXX
CR: Old asset at full cost XXX
Total and permanent impairment
Journal entry
DR: Accumulated depreciation (per records) XXX
DR: Loss due to impairment XXX
CR: Asset at full cost XXX
Calculation of depletion
Depletion base
Cost - Residual value
Cost includes (“REAL”)
Residual value (subtract)
Extraction/development cost
Anticipated restoration cost
Land purchase price
Unit depletion rate
Depletion base / Estimated recoverable units
Final calculation
Unit depletion rate * Number of units extracted
Journal Entries
To record the exchange and gain on exchange
DR: New Asset XXX Initial BV “cost”
DR: Accumulated Depreciation - Old Asset XXX Wipe off
CR: Old Asset XXX Historical cost
CR: Gain on Disposal of Asset XXX Recognized
CR: Cash XXX Paid
To record the exchange and loss on exchange
DR: New Asset XXX Initial BV “cost”
DR: Accumulated Depreciation - Old Asset XXX Wipe off
DR: Loss on Disposal of Asset XXX Recognized
CR: Old Asset XXX Historical cost
CR: Cash XXX Paid
EXCEPTIONS that are capitalized:
Legal fees and other costs related to successful defense of the asset
Unsuccessful is expensed
Then, test asset for impairment
Registration or consulting fees
Design costs (of a trademark)
Other direct costs to secure the asset
Intangible assets
Definition
Long-lived legal rights and competitive advantages developed or acquired by a business enterprise
Classification
Patents, copyrights, franchises, trademarks, and goodwill
May be either specifically identifiable (patents, copyrights, franchise, etc.) or not specifically identifiable (goodwill)
Manner of acquisition
Purchased intangible assets
Capitalize at cost
Internally developed intangible assets
General rule
Expensed
EXCEPTIONS that are capitalized:
Amortization of Capitalized Software Costs
GREATER of:
Percentage of revenue
Total capitalized amount x (Current gross revenue for period / Total projected gross revenue for product)
Similar to percentage-of-completion
Straight-line
Inventory
Capitalize
Costs incurred after technological feasibility has been established
Direct costs of materials and services
Costs of employees directly working on the project
Interest costs incurred for the project
Impairment of Intangible assets other than (NOT) goodwill
Indefinite life
step impairment test
Compare FV (discounted future cash flows) of intangible asset to its CV
Write down to fair value
Finite life
Tested whenever triggering events (bad things)
2 step impairment test
Step 1
Recoverability test
Compare sum of undiscounted future cash flows to CV
If undiscounted future cash flows > carrying value
STOP, asset is not impaired
If undiscounted future cash flows < carrying value
Asset is impaired, go to Step 2
Step 2
Book impairment loss
Impairment loss equal to the difference between carrying value and fair value (FV) or discounted (PV) cash flows
It is important to remember the following rules when performing your calculations:
Determining the impairment: use undiscounted future net cash flows
Amount of the impairment: use fair value (FV) or discounted (PV) future cash flows
It is important to remember the following rules when performing your calculations:
Determining the impairment: use undiscounted future net cash flows
Amount of the impairment: use fair value (FV) or discounted (PV) future cash flows
For external reporting “CAR IN BIG”
Common stock (sub’s old equity eliminated)
APIC (sub’s old equity eliminated)
RE of subsidiary are eliminated (sub’s old equity eliminated)
Investment in subsidiary is eliminated (parent’s investment eliminated)
Noncontrolling interest (NCI) is created (if not 100% owned)
Balance sheet of subsidiary is adjusted to FV at acquisition date (100% assets; 100% liabilities)
Identifiable intangible assets of subsidiary are recorded at FV (premium paid)
Goodwill (or gain) is required (plug)
Consolidated workpaper eliminating JE
External Reporting
Done on workpaper (NOT on company books)
DR: Common stock - subsidiary XXX Eliminate sub’s old owner’s equity
DR: APIC - subsidiary XXX Eliminate sub’s old owner’s equity
DR: Retained earnings - subsidiary XXX Eliminate sub’s old owner’s equity
CR: Investment in subsidiary XXX Eliminate parent’s investment account
CR: Noncontrolling interest XXX Create NCI if not 100% owned
DR: Balance sheet adjustments to FV XXX Adjust to FV on acquisition date
DR: Identifiable intangible assets at FV XXX Record intangibles paid
DR: Goodwill XXX Plug goodwill for any excess premium paid
