Flashcards in F3 - Marketable Securities and Business Combinations Deck (33):
On the balance sheet, marketable securities classified as trading or available-for-sale are valued...
At fair value
On the balance sheet, marketable securities classified as held-to-maturity are valued...
At amortized cost
How are unrealized gain/loss on trading securities recognized?
Unrealized gains and losses on trading securitied are recognized on the income statement.
How are unrealized gains/losses on available-for-sale securities recognized?
Unrealized gains and losses on available-for-sale securities are reported in other comprehensive income.
Note: Under IFRS, foreign exchange gains and losses on available-for-sale debt securities are reported on the income statement.
List three conditions when losses on marketable securities classified as available-for-sale are recognized in income.
~Sale of the security
~Transfer of the security to trading classification
~Other than temporary decline of individual security below cost (impairment)
When a marketable equity security is transferred from trading to available-for-sale, or vice versa, at what cost is it transferred?
~Transferred at fair value, which then becomes new basis.
~For a security transferred into the trading category, the difference is treated as a realized gain or loss and is recognized on the income statement.
~For a security transferred from the trading category, the unrealized holding gain or loss will already have been recognized in earnings.
Note: Transfers to and from the trading category should be rare.
How are gains and losses on financial instruments that hedge trading securities reported?
Reported in earnings, consistent with reported unrealized gains and losses on trading securities.
How are gains and losses on financial instruments that hedge available-for-sale securities reported?
Reported in earnings together with the offsetting gains or losses on the available-for-sale securities attributable to the hedged risk.
What disclosures should be made for available-for-sale and held-to-maturity securities?
~Aggregate fair value
~Gross unrealized holding gains and losses
~Amortized cost basis by type
~Information about the contractual maturity of debt securities
State the criteria to consolidate subsidiaries.
~Consolidate when the parent is able to control the subsidiary. Usually this is indicated by greater than 50% ownership of the voting stock of the subsidiary.
~Do not consolidate when control is not with owners (as in bankruptcy of subsidiary).
Identify the three levels of control and the appropriate accounting method for each.
No significant influence:
Cost method: Trading or available-for-sale securities, at fair value
Significant influence but 50% or less ownership:
~Cost or equity method (internal accounting)
~Consolidated financial statements (external reporting)
How is the year-end "investment in investee" reported on the balance sheet calculated under the equity method?
Beginning investment in investee
+ Investor's share of investee earnings
- Investor's share of investee dividends
- Amortization of FV differences
= Ending investment in investee
How is investor's equity method investment reported on the income statement?
Investor's share of investee earnings
- Amortization of FV differences
= Equity in earnings/investee income
How are joing ventures accounted for under IFRS and U.S. GAAP?
Joint ventures are accounted for using the equity method under both U.S. GAAP and IFRS.
In a step-by-step acquistion, what is the accounting treatment when significant influence is acquired?
~Going from the cost method to the equity method is handled like a change in accountin principle--retroactively.
~Go back retroactively with the equit method but not with the new ownership percentage.
~Prior period financial statements are restated.
When are consolidated financial statements prepared?
When the parent company has control over the subsidiary company. Control is achieved when more than 50% of the voting stock of the subsidiary is owned directly or indirectly by the parent and no other factors are present that would indicate a lack of control (bankruptcy, reorganization).
In Acquistion Accounting, state the consolidating workpaper elimination entry.
Dr. Common stock--Subsidiary
Dr. Retained earnings--Subsidiary
Cr. Investment in subsidiary
Cr. Noncontrolling interest
Dr. Balance sheet adjustments to fair value
Dr. Identifiable intangible assets to fair value
How are expenses relating to the combination treated under the acquisition method?
~Direct out-of-pocket costs are expense.
~Stock-related costs are a reduction in value of the stock issued (normally a debit to additional paid-in-capital).
~Indirect costs are expensed.
~Bond issue costs are capitalized and amortized.
In an acquisition, how are acquired identifiable intangible assets amortized?
~Finite useful life: Amortized to residual value over expected useful life.
~Indefinite useful life: Do not amortize.
How is goodwill calculated under the U.S. GAAP acquisition method?
~Goodwill is the excess of the fair value of the subsidiary (acquisition cost plus noncontrolling interest) over the fair value of the subsidiary's net assets, including identifiable intangible assets at FV.
~Goodwill = Fair value of subsidiary - Fair value of subsidiary's net assets.
~Goodwill recorded in a business combination is not amortized. The entire investment is subject to the impairment test.
How is goodwill calculated under the IFRS acquisition method?
~Goodwill is recognized using the full goodwill method (same as U.S. GAAP) or the parital goodwill method.
~Under the partial goodwill method, goodwill is the excess of the acquistion cost over the fair value of the subsidiary's net assets acquired.
~Partial goodwill = Acquisition cost - Fair value of subsidiary's net assets acquired.
How is noncontrolling interest (balance sheet) calculated under U.S. GAAP?
Noncontrolling interest (NCI) = FV of subsidiary x NCI %
How is noncontrolling interest (balance sheet) calculated under IFRS?
IFRS permits the use of the full goodwill method or the partial goodwill method.
Full Goodwill Method (same as U.S. GAAP):
NCI = FV of subsidiary x NCI %
Partial Goodwill Method:
NCI = FV of subsidiary's net identifiable assets x NCI %
How is noncontrolling interest on the income statement calculated?
Subsidiary net income
x Noncontrolling interest %
= NCI in net income
In a business combination, what is the treatment of an acquisition in which the acquisition cost is less than the fair value of 100% of the net assets acquired?
The acquistion cost is allocated to the fair value of 100% of the balance sheet accounts and the fair value of 100% of the identifiable intangible assets. This creates a negative balance in the acquisition account, which is recorded as a gain.
Name several pro forma workpaper elimination entries when producing consolidated financial statements.
~The effects of intercompany dividends.
~Parent's investment in sub account.
~The entire stockholder's equity section of the sub.
~The effects of the gain or loss and adjust for the excess depreciation on the sale of property, plant and equipment between affiliates.
~All intercompany sales and purchases.
~All other intercompany balance sheet and income statement accounts.
~Intercompany profit in cost of goods sold, and in beginning and ending inventories relating to an intercompany sale of merchandise between affiliates.
~Recognize noncontrolling interest.
~Adjust the balance sheet of the sub to fair value.
State the workpaper elimination entry for intercompany inventory transactions.
Dr. Retained earnings (intercompany profit in beginning inventory)
Dr. Intercompany sales
Cr. Intercompany cost of goods sold
Cr. Cost of goods sold (intercompany profit in goods sold)
Cr. Ending inventory (intercompany profit in ending inventory)
State the workpaper elimination entry for intercompany bond transactions.
Dr. Bonds payable
Dr. Premium (or credit discount)
Cr. Investment in affiliates bonds
Cr. Gain on extinguishment of bonds (or debit loss on extinguishment of bonds)
State the workpaper elimination entry for intercompany land transactions.
Dr. Intercompany gain on sale of land
State the workpaper elimination entries for intercompany depreciable assets transactions.
Elimination Entry 1--Eliminate intercompany gain and adjust asset and accumulated depreciation to original amounts:
Dr. Intercompany gain on sale of machinery
Cr. Accumulated depreciation
Elimination Entry 2--Eliminate excess depreciation:
Dr. Accumulated depreciation
Cr. Depreciation expense
When are combined financial statements prepared?
~Companies are under common control.
~Companies are under common management.
~Unconsolidated subsidiaries are combined.
When preparing combined financial statements, identify the requirements.
~Intercompany transactions and balances among these companies are eliminated.
~Noncontrolling interests treated like consolidated financial statements.
~Capital stock and retained earnings are addes across, not eliminated.
~Income statements are added across.