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far > F4 - Investments, Business Combinations, and Goodwill > Flashcards

F4 - Investments, Business Combinations, and Goodwill Flashcards

1
Q

What is the rule for financial instruments that are valued under the FV option?

A

Unrealized gains (losses) are recognized on the IS and not on OCI. Therefore, AFS are not elegible for FV option.

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2
Q

What is the valuation of AFS securities?

A

@ FV

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3
Q

What is the valuation of HTM securities?

A

@ Amortized Cost

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4
Q

What is the valuation of Trading securities?

A

@ FV

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5
Q

Where are unrealized gains (losses) reported?

A

AFS = Included in OCI
Trading Securities = Included in Net Income
HTM = Not recognized (NBV).

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6
Q

When are realized gains (losses) recognized?

A

When securities are sold. (Just like TAX!)

Realized Gain = Selling price - NBV

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7
Q

What happens when a trading security becomes an AFS or HTM security?

A

Security is recorded at FV, and there is no recognized income.

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8
Q

What happens when an AFS or HTM security becomes a trading security?

A

Security is recorded at FV, and unrealized gains (losses) are recognized in the IS and are part of net income.

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9
Q

What happens when an HTM security becomes an AFS security?

A

Security is recorded at FV, and unrealized gains (losses) are recognized in OCI.

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10
Q

What happens when an AFS security becomes an HTM security?

A

Security is recorded at FV, and unrealized gains (losses) from OCI are amortized.

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11
Q

When is a credit loss recorded, under the CECL model, for HTM securities?

A

Credit loss is recorded when amortized cost > PV on expected future cash flows.

Credit Loss = PV - Amortized Cost.

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12
Q

What does PV on expected future cash flows mean?

A

Principal (cost) + Interest.

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13
Q

What should I do when I get a question with PV factor and PV of an ordinary annuity factor?

A
  1. Calculate Total PV.
    Total PV = (Principal * PV Factor) + (Interest to be recovered * PV of an ordinary annuity factor)
  2. Caculate credit loss.
    Credit Loss = PV - Amortized Cost.
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14
Q

When is a credit loss recorded, under the CECL model, for AFS securities?

A

When:

a. PV < FV < Amortized cost; or
b. FV < PV < Amortized cost

Loss must not be greater than Total loss.
Total loss = FV - Amortized Cost

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15
Q

What happens if your total loss is greater than your credit loss?

A

Total Loss is reduced by Credit Loss, and it is reported as Unrealized loss.

Unrealized loss = Total Loss - Credit loss.

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16
Q

What happens when you have an AFS security with PV < Amortized cost < FV?

A

There will be an unrealized gain reported on OCI.

Unrealized gain = FV - Amortized Cost

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17
Q

What is the JE to record unrealized gains and losses to arrive @ FV?

A

Gain
Valuation account
Unrealized gain on trading securities

Loss
Unrealized gain on trading securities
Valuation account

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18
Q

What is the JE to record a credit loss?

A

Credit loss

Allowance for credit losses

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19
Q

How is the unrealized gain (loss) calculated for equity securities?

A

Unrealized gain (loss) = Sum of securities FV - Sum of NBV.

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20
Q

When is a dividend not recognized on the IS if its not accounted under the equity method?

A

When it is a liquidating dividend.

Gotta zero out asset to get out

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21
Q

What is the range % that makes an investor have significant influence?

A

20%-50%.

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22
Q

What if the ownership % is below the range?

A

Must make sure that the question says:

“It has significant influence”, because this is how they trick you.

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23
Q

What is BASE?

A 
Just like TAX PARTNERSHIPS!!!
B = Beg Basis (Cost)
A = Add Share of Income (Net Income * % Ownership)
S = Substract share of dividends paid
E = End Balance (New basis)
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24
Q

How are preferred stock investments and not significant influence investments accounted for?

A

@ FV. Dividend is dividend income, and does not affect the investment account.
Share of earnings is reduced by preferred dividends paid.

Remember! Preferred dividends are MANDATORY and are reduced from net income.

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25
Q

What happens when an investor owns both preferred and common stock with significant influence?

A

a. Calculate TOTAL preferred stock dividends paid, if not given in the question.
b. Calculate Net Income after TOTAL dividends paid.
c. Calculate share of net income.
d. Calculate share of dividends paid.
e. Calculate Income from Investment = c + d.

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26
Q

What is another way that an investor can exercise “significant influence”?

A

When the investor:

a. Has representation on the BOD.
b. Participates in policy making process.
c. Material IC transactions.
d. Interchanged managerial personnel.
e. Depends on IT from investor.

27
Q

What is goodwill under the equity method?

A

Purchase price - Share of total FV

28
Q

What is asset FV difference under the equity method?

A

Share of total FV - Share of total NBV
This difference is amortized over the life of the asset, and decreases the invesment value, and the share of income as well.

29
Q

What is the JE to record asset FV difference under the equity method

A

Income from investment
Investment Value

Income is debited to show the amortization expense, and investment is credited as the amortization decreases the value of the investment.

30
Q

When would a parent company not produce consolidated FS?

A

When the sub is in legal reorg or in bankruptcy.

31
Q

What is a VIE?

A

An entity that doesn’t have investors with voting rights or can’t support their activities. (
Ex. Chart LATAM! We pay everything under the cost sharing agreement…!

32
Q

Who is the primary beneficiary of a VIE?

A

The one who consolidates the VIE into their FS. It also has power to direct activities, absobs their losses, and receives the expected residual returns.

33
Q

What is the key to recognize a Variable Interest?

A
  1. Explicit investments at rist.
  2. Explicit guarantees of debt, values of assets, or residual valujes of leased assets.
  3. Implicit guarantees with RP involvement.
  4. Most liabilities, except ST trade payables.
  5. Most forward contracts to sell VIE assets.
  6. Options to acquire leased assets at the end of lease terms at specified prices.
34
Q

How do I know if the business entity is a VIE and has insufficient level of equity investment at risk?

A

There is insufficient level of Equity Investment at Risk (I must support the entity financially).

35
Q

How do I know if the business entity is NOT A VIE and DOES NOT HAVE insufficient level of equity investment at risk?

A
  1. The entity can support itself (I don’t have to give them $ for them to operate)
  2. The entity’s equity investment at risk = the equity investment at rist of other non-VIEs.
  3. FV of equity investment at risk > Expected losses.
36
Q

What is the value of your investment on the acquisition method?

A

FV = Acquisition price = Investment subsidiary.

37
Q

What are the consolidation adjustments needed, for external reporting, under the acquisition method?

A
  1. Common stock, APIC, and RE of sub are removed. (CAR)
  2. Investment in sub is eliminated. (I)
  3. NCI is created - FV of portion of sub not owned. (N)
  4. BS of sub is adjusted to FV (B)
  5. All intangibles but goodwill are (I) recorded @ FV.
  6. Goodwill required = Acquisition Cost + NCI - FV of sub’s net assets. (G)
38
Q

What is asset fair value difference under the acquisition method?

A

Asset FV Diff = FV of sub’s net assets - NBV of Sub’s net assets.

39
Q

What is the FV of sub’s net assets?

A

FV of Assets - FV of Liabilities

40
Q

What happens when the acquisition price > FV of net assets acquired?

A

Acquiring company should present assets and liabilities @ FV.

41
Q

What items are expensed as incurred in an acquisition?

A

a. Fees of finders, and consultants.

b. Legal fees.

42
Q

What items are not expensed as incurred but are a reduction to APIC?

A

a. Stock registration fees, SEC filings.

43
Q

What is the formula for APIC?

A

APIC = # of shares * (Market value per share - Par value per share) - Registration fees if any.

44
Q

What is goodwill under the acquisition method?

A

Goodwill = FV of Acquisition - FV net assets

*If negative, then amount is gain!

45
Q

What is NCI under the acquisiton method?

A

NCI = FV of Acquisition * (100% - Acquired %)

46
Q

What happens when the question tells me that the company acquired X% and not 100%?

A

The FV of Acquisition needs to be adjusted.

Acquisition cost / X%

47
Q

What happens when a company initially acquires X% and it is a NCI, but then later acquires Y% and it makes it a controlling interest?

A 
There will be a gain. 
New FV (@ date of new acquision)
(*) Original % (X%)
(-) FV of original investment 
(=) Gain
FV of original investment needs to be calculated under the equity method: 
Acq Cost 
(+) Share of net income 
(-) Share of dividends 
(=) FV of original investment
48
Q

How do you calculate IC profit to be eliminated from ending inventory?

A

IC profit to be eliminated from ending inventory = A * C

A. Calculate GP of seller (or entity that sells 100% to parent/sub)
B. Use Inventory formula on Parent
C. With B, Calculate what % of purchases belongs to Ending Inventory.

49
Q

How do you calculate IC profit to be eliminated from COGS?

A

IC profit to be eliminated from ending inventory = A * C

A. Calculate GP of seller (or entity that sells 100% to parent/sub)
B. Use Inventory formula on Parent
C. With B, Calculate what % of purchases belongs to COGS.

50
Q

How do you calculate carrying amount of inventory that I bought from Parent/Sub?

A

A. Check Profit accounts (Revenues/Sales)
B. Use master formula for IC elims.
C. Check GP, and calculate COGS%.
D. IC Elims * COGS% (B * C)
E. If needed, adjust for inventory on hand. (D * % of inventory on hand/ending inventory).

51
Q

What is Gain on extinguishment of debt?

A

NBV of Bond
(-) Acquisition Cost of Bond
(=) Gain on Extinguishment of Debt

When Sub buys buys debt of Parent from a 3rd party, parent has to eliminate bond from its FS.

The way to do it is to record a Gain on Extinguishment of Debt (through IS, it would go to RE on the BS).

52
Q

What happens when an affiliate sells fixed assets at a gain to another affiliate and they ask you about Cost and Accum Depr on Consolidated BS?

A

Just remember it comes back to Parent’s Original Dep Exp!!!

53
Q

What happens when an affiliate sells fixed assets at a gain to another affiliate and they ask you by what amount does depreciation decrease?

A

3 steps!

  1. Calculate Parent’s Depr Exp
  2. Calculate Sub’s Depr Exp (with new cost)
  3. Parent’s Depr Exp - Sub Depr Exp; if negative, result would decrease Sub’s depr exp as an IC Elim.
54
Q

What is the master formula for IC elim?

A

Total Parent’s Account Balance
(+) Total Sub’s Account Balance
(-) Consolidated Account Balance
(=) IC Elimination

Can be used for any account…even reverse accounts (AR/AP)

55
Q

How do you calculate inventory reported on a COMBINED balance sheet for two subs?

A
  1. Sub1 + Sub2 Table
    2 Add IC Inventory to table
  2. Less Sub GP% * IC Inventory
56
Q

How do you calculate inventory reported on a combined balance sheet for two subs?

A
  1. Sub1 + Sub2 Table
    2 Add IC Inventory to table
  2. Less Sub GP% * IC Inventory
57
Q

What dividends does a Parent company report on the consolidated FS?

A

Only report % of NCI

Dividends declared (3rd party only)
(*) NCI%
(=) Dividends Paid

58
Q

What is the formula for investment in sub?

A

Beg Investment in Sub
(+) Share of sub income
(-) Share of sub dividends paid
(=) End Investmet in Sub

59
Q

What is another way to calculate NCI?

A

Beg NCI —>NCI = FV of Acq * (100% - Acquired %)
(+) Share of NCI income
(-) Share of NCI dividends paid
(=) End NCI

60
Q

What is the formula for consolidated Equity?

A 
Parent Common Stock
(+) Parent APIC 
(+) NCI
(+) Parent RE
(=) Consolidated Equity
61
Q

What do I need to know about Consolidated Equity?

A

Consolidated Equity = Parent’s Equity + NCI

62
Q

How do we report consolidated assets?

A

Cons Assets = NBV of Parent Assets + FV of Sub Assets

63
Q

What is the difference between Goodwill Equity Method, Goodwill Acquisition Method, and Goodwill impairment?

A

Goodwill Equity Method and Goodwill Acquisition Method is calculated at entity level, and Goodwill impairment is calculated at reporting unit level (segment).

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