READING 29 ANALYZING BALANCE SHEETS Flashcards
Nonmonetary assets that lack physical substance.
Intangible assets
Intangible assets that can be acquired separately or are the results of rights or privileges conveyed to their owners
Identifiable intangible assets
True or false
Patents, trademarks, and copyrights are unidentifiable intangible assets
False
Patents, trademarks, and copyrights are identifiable intangible assets
True or false
Goodwill is unidentifiable intangible assets
True
Intangible assets that cannot be acquired separately and have unlimited life
Unidentifiable intangible assets
True or false
Under IFRS identifiable intangible assets that are purchased can be reported on the balance sheet using only the cost method
False
Under IFRS identifiable intangible assets that are purchased can be reported on the balance sheet using the cost method and revaluation model
True or false
Under U.S. GAAP identifiable intangible assets that purchased can be reported on the balance sheet using only the cost method
True
Intangible assets that are created internally such as research development are expensed incurred under?
U.S. GAAP
A firm must identify the research stage (discovery of new scientific or technical knowledge) and the development stage (using research results to plan or design products). The firm must expense costs incurred during the research stage but can capitalize costs incurred during the development stage. Under?
IFRS
Criteria a project must meet for the firm to capitalize development costs include the following: the project is technically feasible, the resources exist to complete the project, a market exists for the product, and the company has the intention and resources to complete the project and sell the product.
True or false
Intangible assets with indefinite lives are amortized and are tested for impairment at least annually.
False
Intangible assets with indefinite lives are not amortized.
True or false
Finite-lived intangible assets are amortized over their useful lives and tested for impairment in the same way as PP&E.
True
Costs that are expensed incurred under both IFRS and U.S. GAAP?
Start-up and training costs
Administrative overhead
Advertising and promotion costs
Relocation and reorganization costs
Termination costs
Amount by which the purchase price is greater than the fair value of the acquired company’s identifiable net assets (assets minus liabilities).
Goodwill
Why are acquirers often willing to pay more than the fair value of a target’s identifiable net assets?
Because the target may have assets that are not reported on its balance sheet.
For example, the target’s reputation and customer loyalty certainly have value, but that value is not quantifiable.
Also, the target may have research and development assets that remain off the balance sheet because of accounting standards.
True or false
Goodwill is only created in a purchase acquisition. Internally generated goodwill is expensed as incurred.
True
True or false
Because it is an intangible asset with indefinite life, goodwill is not amortized but must be tested for impairment at least annually.
True
If good will is impaired, the company decreases its value, what happens to the income statement?
Recognizes a loss in the income statement
Complete the following
… goodwill derives from the expected future performance of the firm, while … goodwill is the result of past acquisitions.
economic goodwill derives from the expected future performance of the firm, while accounting goodwill is the result of past acquisitions.
Contracts that give rise to both a financial asset of one entity and a financial liability or equity instrument of another entity.
Financial instruments
Unquoted equity investments and loans to and notes receivable from other entities are financial assets measured at?
Costs (for which fair value cannot be reliably measured)
Under U.S. GAAP, debt securities acquired with the intent to hold them until they mature and measured at amortized cost are classified as
Held-to-maturity securities
Amortized cost is equal to the original issue price
- Principal payments
+/- amortized discount/premium
- impairment losses
Unrealized Gains/Losses: Ignored (no impact on income statement or equity).
Mark-to-market accounting, include trading securities, available-for-sale securities, and derivatives. are financial assets measured at?
Fair value
Debt securities acquired with the intent to sell them in the near term. Reported on the balance sheet at fair value, with unrealized gains and losses (changes in market value before the securities are sold) recognized in the income statement.
Trading securities
True or false
All equity securities holdings with quoted market prices (except those that give a company significant influence over a firm) are treated as trading securities
True
True or false
Derivative instruments are treated the same as trading securities.
True
Debt securities that are not expected to be held to maturity or traded in the near term. Like trading securities, are reported on the balance sheet at fair value.
However, any unrealized gains and losses are not recognized in the income statement but are reported in other comprehensive income as a part of shareholders’ equity.
Available for sale
Triple D Corporation, a U.S. GAAP reporting firm, purchased a 6% bond, at par, for $1 million at the beginning of the year. Interest rates have recently increased, and the market value of the bond declined $20,000. Determine the bond’s effect on Triple D’s financial statements under each classification of securities.
If the bond is classified as a held-to-maturity security, the bond is reported on the balance sheet at $1,000,000. Interest income of $60,000 [$1,000,000 × 6%] is reported in the income statement.
If the bond is classified as a trading security, the bond is reported on the balance sheet at $980,000. The $20,000 unrealized loss and $60,000 of interest income are both recognized in the income statement.
If the bond is classified as an available-for-sale security, the bond is reported on the balance sheet at $980,000. Interest income of $60,000 is recognized in the income statement. The $20,000 unrealized loss is reported as part of other comprehensive income.
True or false
Under IFRS, firms can make an irrevocable choice to carry any financial asset at fair value through profit and loss. This choice is not available under U.S. GAAP.
True
Under IFRS, firms may make an irrevocable choice at the time of purchase to account for equity securities as?
fair value through the other comprehensive income
Under IFRS, financial assets that do not fit either of “measured at amortized cost” or “measured at fair value through comprehensive income” are measured at? fair value through profit and loss (unrealized gains and losses reported on the income statement).
fair value through profit and loss (unrealized gains and losses reported on the income statement).
If the financial liabilities are not issued at face value, the liabilities are usually reported where?
On the balance sheet at amortized costs
In some cases, financial liabilities are reported at fair value. Examples include held-for trading liabilities such as
short position in a stock, derivative liabilities, and nonderivative liabilities with exposures hedged by derivatives.
Income taxes payable in future periods as a result of timing differences between financial accounting and tax accounting
Deferred tax liabilities
True or false
Deferred tax liabilities are created when the amount of income tax expense recognized in the income statement is lower than taxes payable using tax accounting.
False
Deferred tax liabilities are created when the amount of income tax expense recognized in the income statement is greater than taxes payable
