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FAR > 13. Business Combinations, Financial Instruments > Flashcards

13. Business Combinations, Financial Instruments Flashcards

1
Q

What are three types of business combination?

A

Merger, consolidation, and acquisition

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2
Q

What is the acquisition date? Can it be after or before closing date?

A

The date the acquire takes control of the entity.

Yes.

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3
Q

What’s the treatment of costs related to acquisition such as legal, accounting, general fees?

A

Expense as incurred

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4
Q

Which entities are exempt from acquisition method?

A

Joint ventures, acquisition of assets (not business), businesses under common control, combination of NFP

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5
Q

Define a business

A

An integrated set of activities and assets that is capable of being conducted and managed through the use of inputs/process for the purpose of providing the economic benefits to the owners, member, or participants

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6
Q

Explain measuring period

A

Period after the acquisition date. The acquirer may adjust any provisional amount.

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7
Q

What’s the impact on GW by recognition of additional identifiable assets or liab?

A

Asset: decrease GW
Liab: increase GW

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8
Q

What’s the time limit on measuring period?

A

One yr

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9
Q

What’s contingent consideration? Initial JE? Subsequent JE when FV increases. At the time of pmt (increased more)?
What about consideration occurred after the acquisition date?

A

An obligation of the acquirer to transfer additional assets or equity interest to the former owners if certain future events or conditions met.
Dr: Investment in S. Cr: Cash. Cr: Contingent earnings liability.
Dr: Expense related to contingent liability. Cr: Contingent earnings liability (Increase).
Dr: Contingent expense (increase). Dr: Contingent earnings liability. Cr: Cash.
Treat as G/L in earnings.

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10
Q

Where should the change in FV for contingent consideration reported during acquisition period and after?

A

During: adjust the cost of business
After: in income

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11
Q

Shared-based pmt award:

Where is it reported if the acquire is obligated and if not

A

Obligated: become a part of consideration transferred (portion related to precombination service), treated as compensation expense (the portion not related to precomb service)
Not obligated: treat as compensation expense

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12
Q

Is previously recognized GW cumulative?

A

No

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13
Q

Contingency assumed: treatment if contractual and non contractual.

A

Contractual: at FV
Non: recognize at FV if it’s more likely than not the asset/liab will be recognized.

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14
Q

How should indemnification rights be recognized?

A

As asset

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15
Q

When NCI involved and the acquirer got only 70%, what amount should an acquirer recognize for GW?

A

The 100%

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16
Q

How should the difference between the FV of acquirer’s precombination equity interest and carrying value be accounted?
Where does the FV in NCI reported?

A

Dr: investment in…
Cr: gain on investment in…

In the cost of acquisition

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17
Q

Contingent liability assumed during acquisition period: as FV changes, how should it be accounted if liab and if asset? Is contingent asset recognized under IFRS?

A

Liab: higher of acquisition date FV or amount recognized under ASC 450.
Asset: lower of acquisition FV or the best estimate of future settlement .
No.

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18
Q

Contingent consideration after measurement period: if equity base and if asset/liab base?

A

Equity: don’t adjust till contingency settled.

Asset/liab: adjust to FV @ each reporting date, recognize G/L

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19
Q

Stmt of CF treatment of contingent consideration:
Date of acquisition and within 3 mo?
After 3 months?

A

Investing

Financing up to the amount accrued for contingent liability
Operating in excess of accrued contingent liability

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20
Q

Legal merger and consolidation JE.
GW?
Bargain purchase?

A

GW:
All DR acquiring plus GW
All CR acquiring plus Cash

Bargain:
All Dr acquiring
All CR acquiring plus Cash plus Bargain purchase gain

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21
Q

JE for legal acquisition:
GW?
Bargain purchase?

A

GW: Dr: investment in… Cr: Cash
Bargain: Dr: Investment in… Cr: Cash plus Bargain purchase gain

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22
Q

Does RE for acquired entity carry on?

A

No

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23
Q

How registration and issuance cost of CS in combination accounted? Does it impact the cost of acquisition?

A

Reduce cash and APIC.

No.

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24
Q

When no MV available for computing CS issuance, what should you do?

A

Use FV of net identifiable assets acquired

25
Q

Do both contingent asset and liab recognized under U and I?

A

U: yes
I: no contingent asset

26
Q

Must both pro for a info for current and prior period be disclosed under U and I?

A

U: yes
I: current only

27
Q

Must assumptions related to acquired contingencies be disclosed under U and I?

A

U: no
I: yes

28
Q

How should the transaction costs directly attributed to financial instrument accounted?

A

Expensed

29
Q

What are the three elements of derivatives (derive value from others)?

A 
Has underlying (specific price or rate) and notional amount (specific units) or pmt provision (if - then).
Requires no or small initial investments
Permits or requires settlement in cash in lieu of delivery of underlying
30
Q

List four major derivative examples

A 
Option contract (a right to buy or sell).
Future contract (obligation to buy or sell at price set now though clearing house or exchange market).
Forward contract (obligation to buy or sell at price set now directly between parties).
Swap contract (Exchange of CF stream usually associated with interest on debt).
31
Q

How should derivative measured and how should its change in FV treated?

A

At FV.

Recognize G/L in earnings immediately

32
Q

When should derivative be bifurcate? What do you do when the host and embedded derivative has been accounted at FV?

A

When the host contract and the embedded derivative are not clearly and closely related (triggering event must be related to the host instrument) or meet the definition of derivative.
New embedded derivative at FV. Remaining carrying value allocated to the host contract.
No need for bifurcation.

33
Q

What are items eligible for hedge accounting?

A

Commodity price risk
Foreign exchange risk
Interest rate risk
Credit risk

34
Q

What are items not eligible for hedge accounting?

A

An investment accounted for using equity method
A firm commitment to carry out business combinations
A NCI in subsidiary
Transactions included in consolidated stmts unless they are for FX forecasted transaction
The risk of changes in FV of held to maturity securities due to interest rate

35
Q

How to determine if a hedge is highly effective?

A

Change in value of derivative / change in value of hedged item = between 80-125%

36
Q

Does IFRS require notional amount for derivatives?

Formal documentation requirement?

A

No for both

37
Q

Legal merger and consolidation or acquisition: JE?

A

M&C: All received at FV (Dr or Cr) + GW.
Cr: Cash paid.
A: Dr: Investment in S. Cr: Cash paid.

38
Q

Intangible recognition: Can R&D be recognized as intangible asset by acquirer?

A

Yes.

39
Q

When should contingent liability be recognized by the acquirer? When probable? When should it be derecognized?

A

No, when it’s more likely than not.

When contingent is resolved or probable that the firm no longer is liable.

40
Q

Indemnification rights: Treatment?

A

Same amount of liability and asset.

41
Q

Business combination: Assumption related to acquired contingencies must be disclosed under G and I?

A

No. Yes.

42
Q

Financial instrument: What is based on under G and I?

A

G: Contractual obligation. I: Business model in how it’s managing the instrument.

43
Q

Financial instrument disclosure requirement. Explain.

A

Re: FV, concentration of credit risk (possibility of loss due to the counter party’s failure). Market risk recommended, but not required.

44
Q

What are two type of option contract? When is it in-the-money (asset) or out (not liability because it’s a right not an obligation)?

A

Call (right to buy): In - can buy cheaper than the strike price - asset) and put (right to sell): In - can sell less than market price.

45
Q

What are common host contracts for derivative?

A

Debt instrument, equity instrument, leases

46
Q

How do you account for derivative held for speculation?

A

FV.

47
Q

What makes up a hedge?

A

A hedged item (subject to risk) + A hedging instrument (mitigate the risk) = a hedge

48
Q

What are two types of hedge?

A 
Natural or economic hedge (no special accounting. G/L in earnings).
Hedge accounting (must qualify - formal documentation on the date enter into contract and derivative must be highly effective).
49
Q

What are two types of hedge accounting hedges?

A 
FV hedge (a fixed cash flows, variable FV).
CF hedge (Variable cash flows, fixed FV).
50
Q

What are items that are eligible for hedge accounting?

A

A recognized asset/liability (FV or CF hedge). Firm commitment (still unrecognized asset/liab. has a fixed value - FV hedge). Forecasted transaction (a transaction that is expected to occur. No firm commitment - CF hedge - floating price risk).

51
Q

How are G/L on hedged item and hedging instrument accounted for FV hedge and CF hedge?

A

F: in earnings (was decided where in earnings). CF: ineffective portion in NI. Effective portion in OCI.

52
Q

What is unrecognized firm commitment?

A

Legally binding contract not yet recognized as asset/liability.

53
Q

FV or CF hedge of fixed interest rate: What are two benchmark rate that can be hedged?

A

Direct US treasury obligations.

London interbank offer rate.

54
Q

When will the G/L in OCI from CF hedge be removed from AOCI? JE in the case of inventory.

A

When the hedged item impacts the income stmt.
Dr: COGS. Cr: Inventory.
Dr: AOCI. CR: COGS. COGS will be netted and reduced.

55
Q

Types of foreign currency hedges and treatment?

A

Forecasted transaction (CF hedge), firm commitment (FV hedge), A recognized asset/liab (Either), investment in AFS (FV hedge), net investment in foreign operation (FV hedge, but G/L goes o OCI)

56
Q

How often must the effectiveness of a hedge be assessed? When don’t you have to assess?

A

Every BS date. At least every 3 months.

Only for swap for interest rate hedge when all aspects of hedging relationship exactly match.

57
Q

When or how long does embedded derivative must be assessed under G and I?

A

G: whole life of the derivative.
I: Only at initiation of the contract.

58
Q

Embedded derivative: After bifurcated, is it separately reported or bundled under G and I?

A

G: Bundled. I: Separate.

59
Q

Business combination related forecasted transaction: can be hedged under G and I?

A

G: No. I: Yes.

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