F4

Question 1

Fair Value Option

Answer 1

Entities can choose whether or not to measure certain instruments at fair value.
Eligible instruments are AFS and equity method debt investments
Unrealized gains and losses are reported in earnings

Question 2

Classifications of debt securities

Answer 2

1. Trading security- generally a current asset, valued at fair value, G/L go to I/S, cash flows from operations
2. Available For Sale security- valued at fair value, cash flow from investments
3. Held to maturity- cash flows from investing, valued at amortized cost

Question 3

Accounting for Unrealized G/L when switching debt security classification

Answer 3

Transfer from Trading: No adjustment necessary
Transfer to Trading: Recognized in current earnings
HTM to AFS: Record in OCI
AFS to HTM: Amortize gain or loss with bond discount

Question 4

Practicability exception

Answer 4

Allows an entity to measure an equity investment at cost less impairment +/- observable price changes on market with similar investments.
Applicable to nonpublic entities that cannot easily determine fair value

Question 5

Realized gains and losses

Answer 5

Recognized when a debt security is sold
Impairment (loss) on AFS security or nonpublic securities
Recognized credit loss

Question 6

Derivative financial instrument

Answer 6

A contract between parties based on an underlying financial asset.
Ex. options, forwards, futures, swaps

Question 7

Debt security

Answer 7

A security representing a creditor relationship with an entity:
Corporate bonds
Redeemable preferred stock
Government securities
Convertible debt
Commercial paper

Question 8

Exceptions to Consolidation (US GAAP and IFRS)

Answer 8

US GAAP: Subsidiaries are in legal reorganization, declared bankruptcy, or have foreign restrictions
IFRS: Parent itself is a subsidiary, parent is not publicly traded, AND Parent of the parent produces consolidated statements

Question 9

Variable Interest Entity (VIE)

Answer 9

A business entity that does not have equity investors with voting rights, or lacks financial resources
A primary beneficiary that financially supports the VIE is required to consolidate the VIE
Examples: Long-term liabilities, forward contracts to sell assets, options to acquire a leased asset

Question 10

Exclusions from VIEs

Answer 10

Nonprofit organizations
Employee benefit plans
Registered investment companies
Accounts of life insurance companies
Governmental organizations

Question 11

A company has variable interest in an entity when all these conditions are met

Answer 11

Company and business entity have an arrangement
Business entity is a legal entity
Entity is not one of the exclusions
Company has more than insignificant interest in entity, explicit or implicit

Question 12

An entity is a VIE when it meets any of these conditions

Answer 12

Insufficient Equity Investment (Can’t operate on its own)
Inability to make decisions or direct activities
No obligation to absorb losses
No right to receive residual returns
Disproportionate voting rights

Question 13

Acquisition method

Answer 13

Used when 100% of net assets are acquired.

Subsidiary’s entire equity, common stock, retained earnings, is eliminated

Question 14

Partial Goodwill Method

Answer 14

Option under IFRS, calculates non-controlling interest by only using the fair value of the subsidiary’s net identifiable assets (excludes goodwill)
Non-controlling interest = FV of net identifiable assets x (1- ownership %)

Question 15

Identifiable Intangible Assets in acquisition

Answer 15

Agreements/contracts
Rights
Permits
Patents/ copyrights/ trademarks
Franchises
Computer software licenses
Technical drawings
Customer lists
Unpatented technology
In process R&D
Noncompete agreements

Question 16

Simple Intercompany Transactions

Answer 16

Fixed asset sales = Gain on sale / Depreciation expense
Inventory transactions = Sales / COGS
Bonds = Interest expense/ Interest Income

Question 17

Goodwill presentation on FS

Answer 17

Acquisition method- Reported as a seperate asset on consolidated balance sheets
Equity method- Embedded in inventory account (Stock price - FV of net assets)

Question 18

Consolidation Adjustment for External Reporting

Answer 18

DR Common Stock (acquired company)
DR Additional Paid In Capital (acquired company)
DR Retained Earnings (acquired company)
CR Investment in Subsidiary
CR Non-controlling interest
DR Balance Sheet Adjustments to FV
DR  Identifiable Intangible Assets
DR Goodwill

Question 19

JE to eliminate intercompany bond transactions

Answer 19

DR Bonds Payable (Face value)
DR Premium
DR Loss on Extinguishment of Bonds (Face value > Intercompany price)
CR Investment in [Company’s] bonds
CR Discount
CR Gain on Extinguishment of Bonds (Intercompany price > Face value)

Question 20

JE to eliminate intercompany fixed asset sales

Answer 20

DR Intercompany gain on sale
DR or CR Fixed Asset (Original cost - Intercompany price)
CR Accumulated Depreciation (at time of sale)

Question 21

When is the equity method required?

Answer 21

When investor has “ability to excercise significant influence” over the investee.
If this is not directly stated, entities with ownership of 20-50% are assumed to have significant influence.

Question 22

When is the equity method not appropriate?

Answer 22

Subsidiary is bankrupt
Investment in sub is temporary
Lawsuit/complaint has been filed
Another small group has majority ownership (>50%)