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becker far > F10 > Flashcards

F10 Flashcards

1
Q

What does fair value include and exclude?

A

Includes: transportation costs
Excludes: transaction costs (used to calculate advantageous market)

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2
Q

Fair value is _____________ -based measure

A

market

*uses exit price

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3
Q

Fair value is the price that….

A

would be received to sell an asset and paid to transfer a liability

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4
Q

Most Advantageous Market

A

*use FMV of market where net of transaction costs is highest

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5
Q

Three Valuation Techniques for Fair Value Measurement

A
  1. Market approach = prices or market information
  2. Income approach = PV
  3. Cost approach = replacement cost
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6
Q

Levels for FMV

A
  1. identical assets in an active market
  2. nonidentical assets or identical without active market
  3. management estimate and judgment

*reported using the lowest level used

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7
Q

Partnerships: Distinguishing between Bonus and Goodwill

A

Bonus: Balance
Goodwill: implied value (existing partners only)

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8
Q

Three Methods for Creating Partnership

A
  1. exact method (finger counting)
  2. bonus method
  3. goodwill method
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9
Q

How to account for partner’s loan to partnership?

A

*decrease the loan balance and the equity account in the same transaction

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10
Q

Methods for Withdrawal of Partner

A
  1. Bonus Method
    * revalue assets to fair value and then payout (difference is deducted from remaining partners)
  2. Goodwill Method
    * revalue assets to fair value
    * recognize goodwill proportionately to bring exiting partner’s total to payout amount
    * decrease exiting partner’s capital account only
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11
Q

Variable Interest Entities

A
  1. variable interest = financial stake
  2. variable interest entity = that company’s equity characteristics are strange
  3. primary beneficiary = we have power over them and get P&L
    * *absorbs expected losses and receives residual returns

VIE’s CANNOT BE PERSONS

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12
Q

IFRS & Variable Interest Entities

A

*consolidate when there is control

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13
Q

Asset Retirement Obligations

A

ARC & ARO

  • recorded initially at PV
  • ARC is DEPRECIATed over life of accretionary period (ACCUMULATED DEPRECIATION)
  • accretion expense uses discount rate
  • ARC + accretion expense = total cost
  • difference is plugged to an additional expense
New/Increase = new interest rate
Old/Decrease = old interest rate
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14
Q

Troubled Debt Restructuring

A

Transfer of Assets

  1. gain/loss on asset (FV vs book)
  2. gain (possibly extraordinary) carrying amount - FV

Transfer of Equity Interst
1. carrying amount of payable - FV of equity

Modification of Terms

  1. prospectively
  2. FV < carrying value = gain
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15
Q

Modification of Terms Example - Troubled Debt Restructuring

A
  • compare total future cash payments with carrying amount of payable (including any interest)
  • get rid of old NP and recognize new NP
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16
Q

Troubled Debt Restructuring - Creditor Accounting

A

GR: not extraordinary
*Receipt of Assets or Equity = ordinary loss

Modification of Terms
*bad debt expense and allowance for credit loss

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17
Q

Payroll Deductions and Expenses

A
  • be sure to double FICA

* the second half of FICA is a business expense for the employer

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18
Q

Premiums & Estimated Liabilities

A

Total number coupons issued x estimated redemption rate = total estimated coupon redemptions

*can subtract out any funds that would be received along with the coupons

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19
Q

If warranty expenses are incurred evenly throughout the year, how should the expense be calculated?

A

*use half of the amount that normally would be attributed to that full year

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20
Q

Classification of Contingencies

A

Probable = likely
Reasonably possible = more than remote, less than likely
Remote = slight chance of occurring

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21
Q

IFRS & Definition of Probable

A

More likely than not

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22
Q

If a range of losses is given, which amount is chosen?

A
  • the one that is most reasonably likely or the lowest amount
  • IFRS uses the midpoint in the range
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23
Q

Types of Subsequent Events

A

Type I: relate to pre-existing items

Type II: important new event

24
Q

Are gain contingencies reported?

A
  • no journal entry is made, but a disclosure will be made

* avoid misleading implications

25
Q

When financial statements are reissued, do subsequent events need to be updated?

A

No

26
Q

Types of Derivatives

A

options, futures, forwards, swaps

27
Q

Financial Instruments

A
  • contracts which result in an exchange of cash or ownership interest in an entity
  • cash, foreign currency, demand deposits
  • evidence of an ownership interest
  • derivatives
28
Q

Fair Value Option

A
  • irrevocable and is reported in earnings

* can only be used for IFRS if it reduces a measurement or recognition inconsistency

29
Q

Where does the Fair Value Disclosure appear?

A

*body of financial statements or footnotes

30
Q

Which type of risk is required to be disclosed?

A
  • concentration of credit risk
  • market risk is not required but it is encouraged
  • IFRS requires credit risk, liquidity risk, and market risk to be disclosed
31
Q

Underlying & Notional Amount

A

Underlying = specified price, rate, or other variable

Notional Amount = currency unites, share, bushels, pounds, etc.

32
Q

Hedging

A

*the use of a derivative to offset anticipated losses or to reduce earnings volatility

33
Q

How can settlement occur with a derivative?

A
  • actual payment or receipt of goods

* other party makes up the difference and does not release item

34
Q

Option Contract

A 
call = buy (hope prices increase)
put = sell (hope prices decrease)
35
Q

Futures Contract

A

*publicly traded

long/buy profit (P increase)
short/sell profit (P decrease)

36
Q

Forward Contract

A

*privately negotiated futures contracts

37
Q

Swap Contract

A

*private agreement to swap interest rates (variable for fixed)

38
Q

When using a cash flow hedge where settlement involves payment in cash rather than goods, is an account receivable recognized?

A

No, instead you would recognize an asset or liability called cash flow hedge

39
Q

Accounting for Derivatives: Accounting Types

A
  • Fair Value Hedge = asset or liability changes = earnings
  • Cash Flow Hedge = variability in future cash flows = effective in OCI and ineffective in earnings
  • Foreign Currency Hedge (Fair Value or Cash Flow)
  • Foreign Currency Net Investment Hedge = OCI

*speculation = earnings

40
Q

When are accounts receivable/payable reported with derivative transactions?

A

*for the original journal entry for a sale or receipt of goods on credit

41
Q

What is deemed to be effective?

A

80% - 120%

42
Q

Firm Commitment

A

*firm commitment to buy/sell at a given price; recognized in earnings

43
Q

When there is a firm commitment and another derivative

A

*make sure to account for both

44
Q

Net Settlement

A

*just get rid of the liability or gain and DR or CR the corresponding entry to cash

45
Q

Final Journal Entry to Resolve Cash Flow Hedges

A

*remove gain/loss out of OCI and into earnings

46
Q

Derivative Disclosures

A
  • description of objective for derivatives
  • volume of the company’s derivative activity
  • location and amounts of gains and losses in earnings or OCI
  • effectiveness and ineffectiveness of each hedge and where income was reported
47
Q

Financial Instruments that Must be Classified as Liabilities

A
  1. shares that are mandatorily redeemable
  2. obligation to repurchase the issuer’s equity shares by transferring assets
  3. financial instruments that represent an obligation to issue a variable number of shares
48
Q

Accounting for Financial Instruments under IFRS 9: Debt Instruments

A
  • valued at amortized cost or fair value

* fair value is measured in P&L

49
Q

Accounting for Financial Instruments under IFRS 9: Equity Instruments

A
  • valued at fair value with gains and losses in earnings UNLESS
  • *part of hedging relationship
  • *entity makes irrevocable election to present gains and losses in OCI

Reclassification: required only when the entity changes the business model

50
Q

Classification of Measurement of Financial Liabilities under IFRS 9

A
  • recognized at FV and then recorded at fair value or amortized cost
  • reclassification may not occur between amortized cost and fair value
51
Q

The Liquidation Approach is applied _______

A

prospectively when liquidation is imminent

52
Q

Entities that Require Liquidation Approach

A
  1. bankruptcy and expectation to liquidate
  2. benefit plans which are terminated by sponsors
  3. limited-life entities that are not following the pre-established liquidation plan
53
Q

Requirements for Imminent Classification

A
  1. returning from liquidation is remote

2. liquidation is approved or liquidation plan is imposed by other forces

54
Q

Measurement of Assets, Liabilities, and Accruals

A

*cumulative-effect adjustment is required

  • assets are measured at quick sale expected cash proceeds
  • liabilities are measured at U.S. GAAP
  • accruals: costs expected to be incurred and income expected to be earned
55
Q

Financial Statement Presentation and Disclosure

A
  1. Statement of Net Assets in Liquidation and a Statement of Changes in Net Assets in Liquidation
  2. Disclosures
    * statement that using liquidation basis
    * plan for liquidation
    * significant assumptions used to measure
    * time frame
    * costs and income accrued

becker far (10 decks)

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