F10

Question 1

Exit Price

Define Fair Value

Answer 1

Price received to sell an asset OR paid to transfer a liability in orderly transaction.

• Market based measure
• Does not include transaction costs, may include transportation if location is an attribute of asset/liability. (Used to calculate mst advantageous market)

Question 2

Principal Market

Answer 2

• Market with the greatest volume or level of activity
• 1st Option

Question 3

Most Advantageous Market

Answer 3

• Market with the best price after considering transaction costs (not included in final FV measurement)
• 2nd option
• Only if there is NO principal market

Question 4

3

FV Valuation Techniques

Answer 4

1. Market Approach: uses price and other relevant information from market transactions involving identical or comparable assets or liabilities to measure FV
2. Income Approach: PV of discounuted cash flows: converts future amounts including cash flow earnings to a single discounted amount to measure FV
3. Cost Approach: uses current replacement cost to measure FV of assets

Question 5

3 Levels

Hierarchy of Inputs

Answer 5

Level 1: identical (quoted prices in active markets for identical assets/liabilities)

Level 2: similar (quoted price for similar asset)

Level 3: unobservable inputs (discounted cash flows)

Note: If multiple levels are used, the FV is classified based on the “lowest level” of reliability used.

Question 6

3

Exceptions to Fair Value Measurement

Answer 6

• Not practicable to measure FV
• FV cannot be reasonability determined
• FV cannot be measured with sufficient reliability

Question 7

3

In creating a new partnership interest with an investment of additional capital, what methods can be used?

Answer 7

1. Exact
2. Bonus
3. Goodwill

Question 8

Describe the exact method of creating a new partnership interest with an investment of additional capital.

Answer 8

The purchase price equals the book value of the capital account purchased.

• No adjustment to the existing partners’ capital accounts
• No goodwill or bonus

Finger Math: 25% interest = Total capital / (4-1)

Question 9

Bonus = Balance has the power

Describe the bonus method of creating a new partnership interest with an investment of additional capital.

Answer 9

New partner’s capital account = (A + B + C) x C’s percentage of ownership.

Excess of new partner’s contribution over capital interest is a bonus to the old partners.

Excess of capital received over new partner’s contribution is a bonus to the new partner.

Question 10

Describe the goodwill method of creating a new partnership interest with an investment of additional capital.

Answer 10

GW is recognized based on total value of the partnership implied by new partner’s contribution.

New partner investment / % ownership
Less: Old Partners’ capital

GW is shared by the existing partners using the agreed profit/loss ratio.

Question 11

Describe the bonus method of withdrawal of a partner

Answer 11

Difference between the balance of withdrawing partner’s capital account and the amount that person is paid is the amount of the bonus.

The bonus is allocated among the remaining partners’ capital accounts is in accordance with their remaining profit and loss ratios.

Question 12

Describe the goodwill method of a withdrawal of a partner.

Answer 12

The partners may elect to record the implied goodwill in the partnership based on the payment to the withdrawing partner. The amount of the implied goodwill is allocated to all of the partners in accordance with their profit and loss ratios.

After allocating goodwill, the balance in the withdrawing partner’s capital account should equal the final distribution to the withdrawing partner.

Question 13

In liquidating a partnership, what is the order of preference?

Answer 13

• Creditors
• Loans and advances to partners
• Capital accounts of partners

Remember that all losses must be provided for before disposal; that is, maxmum potential loss before distribution of cash.

Question 14

What is a Variable Interest Entity (VIE)

Answer 14

A corporation, partnership, trust, LLC, or other legal structure used for business purpose that either does not have equity investors with voting rights OR lacks sufficient financial resources to support its activities.

Question 15

Who is the primary beneficiary of a VIE and how does the primary beneficiary account for its VIE investment?

Answer 15

The entity with the power to direct the activities of the VIE that most significantly impacts the entity’s economic performance and:

1. Absorbs the expected VIE losses; OR
2. Receives the expected VIE residual returns.

The primary beneficiary must consolidate the VIE.

Question 16

Who consolidates when one entity receives the expected returns from a VIE and another entity absorbs the expected losses?

Answer 16

The entity that absorbs the expected losses consolidates.

Question 17

Define an Asset Retirement Obligation.

Answer 17

A legal obligation associated with the retirement of a tangible long-lived asset that results from the acquisition, construction, development, and/or normal operation of a long-lived asset.

Question 18

How is an ARO initially measured?

Answer 18

At fair value (PV of the future obligation) as an asset (Asset Retirement Cost) and a liability (Asset Retirement Obligation)

Question 19

How is an ARO accounted for in periods after initial measurement?

Answer 19

The ARO liability is adjusted for accretion expense and the ARO asset is depreciated.

Question 20

How is ARO accounted for in the periods after initial measurement?

Answer 20

The ARO liability is adjusted for accretion expense and the ARO is depreciated.

Question 21

Name 4 types of restructurings involving debt

Answer 21

1. Transfer of assets
2. Transfer of equity interest
3. Modification of terms
4. Combination of above 3

Question 22

How is the gain (loss) measured in a troubled debt restructuring involving the modification of terms?

Answer 22

Difference between carrying amount of the obligation prior to restructuring and undiscounted total future cash flows required after restructuring, if undiscounted future cash flows are less than the carrying amount.

Question 23

How is the gain (loss) measured in a troubled debt restructuring involving a transfer of assets?

Answer 23

Restate the assets transferred to fair value and recognized a gain or loss in ordinary income.

Recognize a gain for the difference between FV of the assets transferred and the carrying amount of the debt forgiven. The gain is possibly reported as extraordinary under U.S. GAAP if it meets the U.S. GAAP requirements (material, infrequent and unusual).

Question 24

When is a gain (loss) NOT recognized on troubled debt restructuring?

Answer 24

For debtor, when there is a modification of terms and payment of the entire debt is not affected.

For creditor, when the total cash to be received is greater than the amount receivable. The difference is amortized as interest.

Question 25

When is a loan considered impaired?

Answer 25

Probable that all amounts due (principal and interest) will not be received.

Question 26

How is an impaired loan reported by the creditor?

Answer 26

Present value of the loan’s expected future cash flows discounted at the loan’s effective interesting rate.

Dr: Bad debt expense

Cr: Allowance for credit losses

Question 27

5

What are the general disclosures for the debtor in a troubled debt restructuring?

Answer 27

1. Description of main changes in terms and/or features
2. Gain on restructuring of payables (aggregate)
3. Net gain/loss on transfers of assets recognized in period (aggregate)
4. Per share amount of aggregate gain on the restructuring of payables
5. Amount of contingently payable amounts included in the CV of restructured payables (and any conditions that would cause those amounts to become payable or forgiven)

Question 28

4

What are the general disclosures for creditors in a troubled debt restructuring?

Answer 28

1. Creditor’s policy for recognizing interest income
2. Any commitment the creditor has to lend additional funds to the debtor
3. Activity in the allowance account for the reporting period
4. Average recorded investment in impaired loans for the period (including the amount of related interest income and the interest income recognized on a cash basis)

Question 29

Identify the 3 ranges of lilihood that a future event will confirm a contingent liability.

Answer 29

1. Probable
2. Reasonably possible
3. Remote

Question 30

When are contingent liabilities accrued?

Answer 30

When the loss is both probable and can reasonably be estimated, then record and disclose.

Financial statement disclosure only for reasonably possible contingent losses.

Remote contingent losses are not disclosed, unless they are “guarantee-type” contingent losses, which must be disclosed

Question 31

What is the accounting treatment of gain contingencies?

Answer 31

Gain contingencies are not reflected on the balance sheet but are disclosed as to their nature and amount if liklihood is probable and to do so would not be misleading.

Question 32

What is a subsequent event and what are the 2 categories of subsequent events?

Answer 32

Event/transaction that occurs after the B/S date but before the F/S are issued or are avaialbe to be issued.

1. Recognized subsequent events - provide additional info about conditions that existed at B/S date.
2. Nonrecognized subsequent events - provide info about conditions that occurred after B/S date and did not exist on B/S date.

Question 33

List the disclosure requirements for financial instruments under U.S. GAAP

Answer 33

• FV and related carrying amounts
• Concentrations of credit risk
• Market risk (optional)

Question 34

Describe the financial instrument fair value option under U.S. GAAP

Answer 34

On specified election dates, an entity may choose to measure eligible financial instruments at fair value with unrealized gains and losses reported in earnings.

The FV option is irrevocable.

Question 35

Define a derivative instrument

Answer 35

A “derivative instrument” is a financial instrument (or other contract) that “derives” its value from the value of some other instrument and has all 3 of the following characteristics:

1. 1 or more underlyings and 1 or more notional amounts or payment provisions (or both)
2. Requires no initial net investment
3. Its terms require or permit a net settlement

Question 36

Define underlyings and notional amount as they relate to a derivative financial instrument

Answer 36

Underlying: specified price, rate or other variable (i.e. interest rate, security price, foreign exchange rate, index of price/rates etc…)

Notional amount: a specified unit of measure (i.e. currency units, shares, bushels, pounds, etc…)

Question 37

OFFS

Name 4 common derivative instruments

Answer 37

1. Options
2. Futures
3. Fowards
4. Swaps

Question 38

Identify 3 types of hedge designations

Answer 38

1. FV hedge
2. Cash flow hedge
3. Foreign currency hedge

Question 39

Describe the accounting for changes in fair value associated with each type of hedge designation.

Answer 39

FV hedge - current earnings, with G/L from change in value offsetting A/L

Cash flow hedge

Effective portion - OCI until cash flows from hedged item are realized

Ineffective portion - in current earnings

Foreign currency hedge (FV and cash flow)

Net investment hedge - OCI as cumulative translation adjustment