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Flashcards in FAR 10 Deck (124):
1

FV: Define Fair Value

price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal (or most advantageous) market

Market-Based
Includes: transportation costs
Excludes: transaction costs

2

FV: Fair Value does not apply to

(1) pensions, (2) leases, (3) share-based compensation, and (4) vendor- specific objective evidence

3

FV: Define Principal Market for Fair Value Measurement

Market greatest volume or level of activity for asset or liability

4

FV: List the 3 valuation techniques for Fair Value

1. Market Approach (quoted prices)
2. Income Approach (PV of discounted cash flows)
3. Cost Approach = current replacement cost

5

FV: List the 3 levels of inputs for Fair Value

Level 1: quoted prices for identical A&L
Level 2: observable inputs for similar A&L
Level 3: Unobservable, reporting entity's assumptions

Fair value classified based on lowest level input

6

Partnership: What is the journal entry used to record purchase or sale of existing partnership interest?

No JE required

7

Partnership: Upon formation of a partnership, how are assets, liabilities, and capital accounts recorded?

Assets = fair value
Liabilities = present value
Capital = assets - liabilities

Note: Tax rule = rollover cost

8

Partnership: Creation of a new partnership interest - describe the exact method

Equal to book value of capital account purchase

9

Partnership: Creation of a new partnership interest - describe the bonus method

Based on balance in total capital account after contribution.

Allocate G/L to old partners based on P&L ratio

10

Partnership: Creation of a new partnership interest - describe the goodwill method

Recognize an intangible asset implied by the new partner's contribution

Allocate to OLD partners according to P&L ratio

11

Partnership: Partnership P&L distribution - what costs are always provided for in full even in a loss situation

1. Bonus
2. Interest on capital account
3. Salaries

Distribute remaining P or L according to P&L ratio

12

Partnership: Withdrawal of a partner - describe the bonus method

1. Revalue assets to reflect fair value
2. Bonus = Difference between balance of withdrawing partner's capital account and the amount that person is paid

Allocated to remaining partners based on REMAINING P&L ratio

13

Partnership: Withdrawal of a partner - describe the goodwill method

1. Revalue assets to reflect fair value
2. Record goodwill to make withdrawing partner's capital account equal payoff
3. Payoff withdrawing partner

14

Partnership: Liquidation of a Partnership - order of preference regarding distribution of assets

1. Distribute G/L on sale of assets (conversion to cash)
2. Pay off creditors
3. Offset partner's capital accounts
Note: if capital deficiency then remaining partners are charged according to their remaining P&L ratios

All possible losses must be charged to the partners' capital accounts in their income and loss ratios before any distribution is made.

15

VIE: what are the characteristics of a VIE

1. variable interest
2. variable interest entity
3. primary beneficiary

16

VIE: define a Variable Interest criteria

1. company and business entity have an arrangement (any one of 4)

2. business entity is a legal entity (not a person)
3. business entity fails to qualify for exclusion
4. Interest is more than insignificant
5. company has explicit or implicit variable interest in the entity (absorbs loss/receives returns)

17

VIE: what constitutes an agreement in defining a Variable Interest

Any one of the following 4:
(a) company participated in entity's design
(b) substantially all entity's activities involve or are conducted on behalf of the company
(c) > 50% total equity, subordinated debt, and other forms of financial support is provided by company
(d) securitizations or other forms of asset-backed financing agreements or single-lessee leasing arrangements are the primary activities of the entitiy

18

VIE: What are examples of variable interest

1. explicit investments at risk
2. explicit guarantees of debt, the values of assets, or residual values of leased assets
3. implicit guarantees with related party involvement
4. most liabilities EXCLUDING short-term trade payables
5. most forward contracts to sell assets owned by the entity
6. options to acquire leased assets at the end of the lease terms at specified prices

Note: explicit means in writing or legally enforceable

19

VIE: list the characteristics of a Variable Interest Entity

1. insufficient level of equity investment at risk (cannot operate on own without additional subordinated financial support)

2. holders of equity investment at risk have inability to make decisions or direct activities

3. holders of equity investment at risk have no obligation to absorb entity's expected losses

4. holders of equity investment at risk have no right to receive expected residual returns

5. disproportional voting rights (assumed when all 3 exist:
(a) substantially all activities conducted on behalf of or involve an equity investor
(b) voting rights of that equity investor are small in comparison with the focus on that investor, and
(c) voting rights of one or more equity investors are out of line with the investor's obligation to absorb losses or right to receive returns)

20

VIE: when does an entity have sufficient equity investment at risk (and is therefore not a VIE)

1. entity can finance its own activities
2. entity's equity investment at risk is at least as much as the equity investment of other non-VIE entities that hold similar assets of similar quality
3. other facts and circumstances indicate that equity investment at risk is sufficient
4. Fair value of equity investment at risk is greater than expected losses

21

VIE: who is the primary beneficiary

1. has power to direct activities of a VIE that most significantly impact the entity's economic performance and
2. absorb losses or receive VIE returns

Note:
1. party that absorbs losses = primary beneficiary
2. it is possible for an entity to be a VIE without a primary beneficiary

22

VIE (IFRS): define a special purpose entity

Sponsoring company controls and must consolidate an SPE when:
1. it is benefited by the SPE's activities
2. it has decision-making powers that allow it to benefit from the SPE
3. absorbs the risks and rewards of the SPE
4. has a residual interest in the SPE

23

ARO: define an asset retirement obligation

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

Exception: certain lease obligations

24

ARO: what approach is used to value and recognize an ARO

Balance Sheet Approach

25

ARO: When is an ARO recognized

When is meets the definition of a liability
1. duty or responsibility
2. little or no discretion
3. obligating event

Note: uncertainty about whether performance will be required does not defer the recognition of a retirement obligation

Note: IFRS refers to an ARO as a "decommissioning liability"

26

ARO: how is the ARO initially recorded

1. At the fair value of the ARO (PV of future obligation) or when a reasonable estimate of fair value can be made

2. Journal Entry:
Dr. Asset Retirement Cost (asset)
Cr. Asset Retirement Obligation (Liab.)

Note: IFRS records decommissioning liability at best estimate of the expenditure required (not fair value)

27

ARO: what expenses are recognized

1. Accretion Expense (using the credit-adjusted tax-free rate)
2. Depreciation expense

Note: asset should be fully depreciated by end of accretion period

28

ARO: what rates are used for revisions to cash flow estimates

GAAP:
1. Upward revisions to undiscounted cash flows = use current discount rate
2. Downward revisions = use historical (or weighted average) discount rate

IFRS: remeasure obligation each period for changes in BOTH
1. amount or timing of cash flows and
2. changes in discount rate

29

ARO: does ARO accounting apply to leases

Yes.

1. Lessees:
(a) ARO included in minimum payments = no further action
(b) ARO imposed otherwise, ARO accounting applies

2. Lessors: ARO accountign applies

30

ARO: how are additional costs at retirement recognized

As an expense in the period of retirement

31

Debt Restructuring - Debtors: how is the carrying amount of the payable calculated

carrying amount =

1. face of payable PLUS
2. accrued interest PLUS
3. premiums MINUS
4. discounts
etc.

32

Debt Restructuring - Debtors: how is the transfer of an asset recorded

1. Recognize ordinary gain/loss on revaluation of asset to fair value
2. Recognize possible extraordinary GAIN for difference between carrying value of payable - FV asset

33

Debt Restructuring - Debtors: how transfer of equity interest recorded

1. Recognize possible extraordinary GAIN on difference b/t carrying value of payable over FV of equity transferred

34

Debt Restructuring - Debtors:in a modification of terms, what is the interest expense

computed by the Effective Interest Method,

the new effective rate of interest is the discount rate at which the carrying amount of the debt is equal to the present value of future cash payments

35

Debt Restructuring - Debtors: in a modification of terms, what are the total future cash payments

principal and any accrued interest at the time of the restructuring that continues to be payable by the new terms

36

Debt Restructuring - Debtors: in a modification of terms, when is a gain recognized

when the total future cash payments (NOT PV) are less than the carrying amount

gain is possibly extraordinary

Note:
1. allocate reduction over several accounts (premium, discount, etc.)
2. all cash payments after the restructuring reduce the carrying amount
3. NO interest expense is recognized after the date of restructure
4. ALL future payments (principal and interest) reduce the not payable

37

Debt Restructuring - Debtors: what is the order of preference when a combination of methods is used

1. first reduce carrying amount of payable by the fair value of any asset or equity used
2. recognize G/L for difference b/t FV and NBV of any asset transferred
3. No gain on restructuring is recognized unless the carrying amount of payable exceeds total future cash payments

38

Debt Restructuring - Creditors: when is a loan considered impaired

when it is probable that the creditor will be unable to collect all amounts due under the original contract

39

Debt Restructuring - Creditors:how is impairment measured when assets or equity are received

1. full settlement:
- fair value of asset/equity
- fair value of receivable satisfied
2. partial payment: fair value of asset or equity

40

Debt Restructuring - Creditors: what type of loss does a creditor recognize

ORDINARY LOSS = recorded receivable over FV of asset/equity received

41

Debt Restructuring - Creditors:how is impairment measured using the modification of terms method

based on loans present value of expected future cash flows discounted at loan's HISTORICAL effective interest rate

Note: other rates that may be used =
1. observable market rate
2. fair value of collateral received

Note: any costs to sell should be estimated and should reduce the cash flows

42

Debt Restructuring - Creditors:how is impairment recorded using the modification of terms method

Create a valuation account with a corresponding charge to bad debt expense

43

Debt Restructuring - Creditors:what are the exceptions to troubled debt restructuring

1. groups of loans collectively evaluated for impairment (credit cards)

2. loans measured at market value

3. leases

4. held-to-maturity debt securities

44

Liabilities: how are current liabilities measured

at settlement values (a.k.a. net realizable value)

45

Liabilities: how are cash discounts associated with Trade Accounts Payable recorded

1. Gross Method
- if discount is earned: credit "Purchase Discount"

2. Net Method
- if discounts is NOT earned: debit "Purchase Discount Lost"

46

Liabilities: are Sales Taxes Payable considered expenses

No

47

Liabilities: how are Use Taxes Payable recorded

Use Taxes: taxes collected from the buyer of goods purchased outside the taxing jurisdiction

accrued by the buyer until remitted

48

Liabilities: how are Property Taxes Payable recorded

2 Methods: (requires consistency)

1) Accrue prior to receipt of tax invoice and match in year for which invoice pertains

2) Record as payable upon receipt of tax invoice and expense in year of receipt

Note: property taxes are often invoiced in arrears

49

Liabilities: are Payroll Deductions considered an expense of the company

No

50

Liabilities: how are Unemployment Taxes and the Employer's Share of Payroll Taxes recorded

Accrue by the employer as an expense

Note: employer's share of payroll taxes includes Social Security and Medicare

51

Liabilities: how should notes payable and receivable be recorded

1. At present value on date of issuance

2. Unreasonable interest rate or non-interest bearing: impute the MARKET RATE using the effective interest method

52

Liabilities: how are notes treated when rights or privileges are attached

they must be evaluated separately

Note:
if no rights or privileges are attached and the IR on the note reflects prevailing rates, record note PAYABLE at face WITHOUT any present value consideration

53

Liabilities: what interest rate is presumed when ntoes are issued or received solely for cash equal to its face amount

stated interest rate

54

Liabilities: what view is used when notes are issued with unreasonably low or absent interest factors

substance over form

55

Liabilities: what is involved in recognizing the substance of a note over its form

1. determine the present value of the obligation at the appropriate market IR and
2. record the receivable or payable at FACE
3. record the sale of the asset at the present value of the obligation
4. record any difference as a discount or premium that must be amortized over the LIFE of the note

56

Liabilities: what note transactions do NOT require the present value calculation

1. arising in ordinary course of business and terms do not exceed one year (short-term notes)

2. paid in property or services (not in cash)

3. representing security or retain age deposits

4. bearing an IR determined by a govt. agency

5. arising from transactions b/t a parent and its subsidiaries

57

Liabilities: what characteristics should be considered in determine the appropriate IR of a ntoe

1. credit rating of the issuer

2. restrictive covenants or collateral involved

3. prevailing market rates

4. rate at which debtor could borrow funds

58

Liabilities: what method is used to amortize the discount or premium of a note

Effective Interest Method

1. Payment = Face X Stated Rate
2. Interest = Carrying Value X Effective Rate
3. Principal = Payment - Interest

59

Liabilities: how are notes presented in the F/S

at Net value

premium or discount is added or subtracted from the related asset or liability

Note: NO deferred charges or credits are recognized

60

Liabilities: what are the disclosure requirements for notes

1. full description of N/P or N/R

2. effective interest rate

3. face amount

61

Liabilities: how are note issue costs reported

separately in B/S as deferred charges

amortize over life of the note

62

Liabilities: what is the purpsoe of debt covenants

covenants by creditors used to protect their interest by limiting or prohibiting the actions of debtors that might negatively affect the creditor's position

63

Liabilities: what type of default occurs from the violation of debt covenants

technical default

Note: usually concessions are negotiated to avoid actual default

64

Liabilities: what are some examples of debt covenants

Disclose:

1. limitations on issuing additional debt
2. restrictions on payment of dividends
3. limitations on the disposal of certain assets (collateral)
4. minimum working capital requirements
5. Collateral requirements
6. Limitations on how the borrowed money can be used
7. Maintenance of specific financial ratios
- debt to equity
- debt to total capital
- interest coverage (times interest earned)

65

Estimated Liabilities: define an estimated liability

recognition of a probable future charge that results from a prior act

examples;
1. warranties
2. trading stamps
3. coupons

66

Estimated Liabilities: how is the cost of a premium recognized

charged to sales in the period that benefits from the premium offer

67

Estimated Liabilities: how is the premium liability recorded

1. outstanding estimated redemption
2. multiply by cost of premium (net of amount paid by customers for the premium)

68

Estimated Liabilities: define a warranty and when a seller recognizes the warranty

warranty = seller's promise to 'correct" any product defects

accrued in year of sale as liability when cost can be reasonably estimated

Note: contingency = probably and reasonably estimable)

69

Estimated Liabilities: how are service contracts recognized

unearned revenue

Note: service contracts usually include cash received prior to the period in which the related expense occurs

70

Accrued Liabilities: define an accrued liability and give examples

accrued liability (accrued expense) = expense recognized or incurred (through passage of time or other criteria) but not yet paid

examples:
1. accrued interest
2. accrued wages
3. accrued unemployment taxes
4. accrued employer's portion of FICA taxes

71

Accrued Liabilities: how does Becker suggest tacking questions related to the accrual of bonuses paid to key employees

select the "middle answer" and work your way backwards

72

Contingencies: define a contingency and give examples of loss contingencies

contingency = existing condition, situation, set of circumstances involving varying degrees of uncertainty that may result in the increase or decrease in an asset or the incurrence or avoidance of a liability

examples:
1. conductibility of receivables
2. obligations regarding product warranties and defects and unredeemed coupons
3. risk of loss of property by fire, explosion, or other hazards
4. pending or threatened litigation
5. actual or possible claims and assessments
6. risk of loss from catastrophes assumed by property and casualty insurance companies
7. guarantees of indebtedness of others
8. obligations of commercial banks under standby letters of credit
9. agreements to repurchase receivables (or related property) that have been sold
10. environmental damages

73

Contingencies: list the classifications of contingencies

1. probable - likely to occur
2. reasonably possible - more than remote but less than likely
3. remote - slight change of occurring

Note: IFRS defines
1. probable as "more likely than not" (> 50%)
2. possible as "may but probably will not occur"

74

Contingencies: when is a contingent liability recognized

loss is probable and reasonably estimated (recognize liability and expense)

75

Contingencies: what amounts are recognized when only a range of reasonably possible estimates is anticipated

GAAP: best estimate or minimum amount of range
- Note disclosure required for possibility of additional amount over amount accrued

IFRS: expected value (midpoint of range)

76

Contingencies: how is a reasonably possible loss recogniezed

as a note disclosure including:
1. nature of contingency
2. nature of possible loss or range of losses or that an estimate cannot be made

NO J/E or accrual

77

Contingencies: what are the exceptions to ignoring remote losses and how are they recognized

exceptions are "guaranteed type": (DOG)
1. debts of others guaranteed (officers/related parties)
2. Obligations of commercial banks under standby letters of credit
3. Guarantees to repurchase receivables (or related property) that have been sold or assigned

recognition: disclosure of nature, amount, and any expected recovery

78

Contingencies: how are unasserted claims treated

like any other contingency

79

Contingencies: are general or unspecified business risks recognized as contingencies

No

80

Contingencies:how are appropriations of retained earnings treated

1. shown within stockholders' equity and clearly identified
2. costs or losses are NOT charged to appropriation and no amount is transferred to income
3. Restore to retained earnings when no longer necessary

81

Contingencies:what rule governs the recognition of gain contingencies

conservatism

82

Contingencies: how are gain contingencies recorded

note disclosure of amount and nature if probable or reasonably possible as long as F/S do not become misleading

83

Subsequent Events: define a subsequent event and list the 2 types

subsequent event = event or transaction that occurs after the B/S date but before the F/S are issued or available to be issued

two types:
1. recognized subsequent events
2. nonrecognized subsequent events

84

Subsequent Events: define recognized subsequent events and give examples

subsequent events that provide additional information about conditions that existed at the B/S date

1. settlement of litigation that arose before B/S date
2. loss on uncollectible receivable (customer files bankruptcy after B/S date)

85

Subsequent Events: how are recognized subsequent events recorded

entities must recognize effects of all recognized subsequent events in the financial statements

86

Define nonrecognized subsequent events and give examples

subsequent events that provide info. about conditions that occurred after the B/S and did NOT exist at the B/S date

1. sale of bond or capital stock
2. business combination
3. settlement of litigation arising after B/S date
4. loss of plant or inventory due to fire or natural disaster
5. change sin the fair value of assets or liabilities or foreign exchange rates
6. entering into significant commitments or contingent liabilities

87

Subsequent Events: what is the evaluation period

1. public companies and other entities that intends to widely distribute the F/S: through the date the F/S are issued
- issued: when F/S have been widely distributed to users in form and format that complies with GAAP

2. Others: through date F/S are available to be issued
- available: when inform and format that complies with GAAP and all approvals for issuance have been obtained

88

Subsequent Events: what are the required disclosures

1. Non-SEC entities: date through which subsequent events have been evaluated and if date is "issued" or "available" date

2. Nonrecognized subsequent: disclose nature and estimate if necessary to keep F/S from being misleading

Optional: pro forma F/S showing effect if subsequent had occurred at B/S date

89

Subsequent Events: IFRS treatment

1. Subsequent events = "Events After The Reporting Period"

2. Evaluation period = from reporting period through date F/S are authorized for issuance

3. Recognized = "Adjusting Events After Reporting Period"

4. Nonrecognized = "Nonadjusting Events After Reporting Period"

5. Specifically addresses going concern issues (impossible if mgmt determines after yr-end that it intends to liquidate the company or cease trading)

90

Subsequent Events: what are revised F/S and how are they recognized

Definition: F/S that have been revised to correct an error or to reflect the retrospective application of US GAAP

Considered "Reissued F/S"

91

Subsequent Events: what events are recognized when a company reissues F/S

- do NOT recognize events that occurred b/t the date of the original F/S issuance or available to be issued and the date the F/S were reissued

- UNLESS required by GAAP or other regulatory requirement

92

Financial Instruments: list the 4 types of financial instruments

1. cash, foreign currency, and demand deposits

2. evidence of an ownership interest in an entity (stock certificate, partnership interest, or LLC interest)

3. Contracts (or series of linked contracts) which result in an exchange of cash or ownership interest in an entity (i.e. Bonds)

4. Derivatives (financial instruments whose value or settlement amount is derived from the value of another unit of measure)
- Options
- Futures
- Forwards
- Swaps

93

Financial Instruments: when are gains and losses recognized under the Fair Value Option

unrealized gains and losses are reported in earning in the period in which they occur

94

Financial Instruments: how is the Fair Value Option applied

- individual financial instruments

- irrevocable

95

Financial Instruments: what instruments are eligible for the Fair Value Option recognition

1. recognized financial assets and financial liabilities
- AFS investment
- investment otherwise accounted for using the equity method

2. NOT ALLOWED:
- investments in subsidiaries or VIE
- pension benefit assets and liabilities
- financial instruments classified as equity
- financial assets or liabilities recognized under leases
- deposit liabilities of financial institutions

96

Financial Instruments:when is the Fair Value Opetion allowed under IFRS

when doing so eliminates or significantly reduces a measurement or recognition inconsistency

or

group of financial assets or liabilities is managed and its performance is evaluated on a fair value basis and the information on the group is provided to key mgmt personnel

97

Financial Instruments:what are the required fair value disclosures

1. fair values for all financial instruments for which it is practicable to estimate
2. carrying value of all financial instruments showing whether the amounts represent assets or liabilities
3. methods and significant assumptions used to estimate fair value
4. description of any changes in methods or significant assumptions during the period
5. reasons why it is not practicable to estimate fair value and pertinent info. to estimating it

GAAP: apply to all entities except private w/ < $100M in assets with no derivatives

98

Financial Instruments: describe the "concentration of credit risk" disclosure and "market risk" disclosures

1. Concentration of Credit:
- credit risk: other party will not perform
- concentration: entity has material contracts with 1+ parties in same industry or region with similar economic characteristics
- GAAP & IFRS: REQUIRED: for all financial instruments

2. Market Risk
- risk = possibility of loss from changes in economic circumstances (stock market)
- GAAP: OPTIONAL
- IFRS: REQUIRED (along with Liquidity Risk)

99

Financial Instruments:what are the required risk disclosures under IFRS

1. concentration of credit risk
2. liquidity risk
3. market risk

100

Financial Instruments: define a derivative and its 3 requirements

financial instrument that derives its value from the value of other instruments and has ALL 3:

1. 1+ underlying and notional amounts or payment provisions (or both)

2. Requires no initial net investment or one that is smaller than would be required for other types of similar contracts

3. Terms require or permit (a) a net settlement or (b) it can be readily settled net outside the contract or (c)by delivery of an asset that gives substantially the same results

101

Financial Instruments:define a derivative underlying

specified price, rate, or other variable including a scheduled event that make or may not occur (i.e. strike price)

102

Financial Instruments:define a derivative notional amount

specified unit of measure (currency units, shares, bushels, points, etc.)

103

Financial Instruments: define a derivative value or settlement amount

underlying X notional amount

104

Financial Instruments: define a derivative's payment provision

specified (fixed) or determinable settlement that is to be made if the underlying behaves in a specified way

105

Financial Instruments: define hedging

use of derivative to offset anticipated losses or reduce earnings volatility

when effective: no gain or loss or changes in value of hedged item b/c offset by hedge

106

Derivatives: what is an Option Contract

- contract b/t 2 parties that gives one party the right (not obligation) to buy or sell something to the other party at a specified price during a specified period of time

- buyer/holder must pay a premium to option seller/writer

- call option: right to buy from seller
- put option: right to sell to seller

107

Derivatives: what is a Futures Contract

- agreement b/t 2 parties to exchange a commodity or currency at a specified price on a specified future date

- publicly traded

- one party takes a long position and agrees to buy a particular item

- other party takes a short position and agrees to sell that item

- BOTH parties are obligated to perform

108

Derivatives: what is a Forward Contract

a private Futures Contract

109

Derivatives: what is a Swap contract

- private agreement b/t 2 parties to exchange future cash payments

- common swaps: (1) interest rate, (2) currency, (3) equity, (4) commodity

- equivalent to a series of forward contracts

110

Derivatives: what are the risks inherent in all derivative instruments

1. Market Risk: risk that entity will incur a loss ("zero sum game")

2. Credit Risk: risk that other party will not perform according to the terms

111

Derivatives: how are derivatives recorded on the B/S

- at fair value

- as an asset or liability

- classification depends on whether or not the derivative is a hedge
1. not designated as a hedge
2. Fair Value Hedge
3. Cash Flow Hedge
4. Foreign Currency Hedge

112

Derivatives: how are derivatives not designated as a hedge recognized

- similar to trading securities

- recognize G/S in earnings

113

Derivatives: how are Fair Value Hedges recorded

Definition: hedge the exposure to changes in FV of recognized A/L or unrecognized firm commitment

Recognition: G/L on instrument AND G/L ON HEDGED ITEM are recognized in earnings

Note: derivative must be expected to be highly effective

114

Derivatives: how are Cash Flow Hedges recorded

Definition: hedges exposure to variability in expected future cash flows

Definition of effective: w/in 1/5 of actual (80% - 120%)

Recognition:
1. Ineffective: report G/L in current earnings
2. Effective: report in OCI until hedged transaction impact earnings

115

Derivatives: when to the various effective Cash Flow Hedges impact earnigns

1. foretasted sale or expense is hedge: when sale or expense is recognized in earnings

2. forecasted inventory purchase is hedged: G/L reclassified when inventory is sold to customers

3. forecasted fixed asset purchase is hedged: G/L reclassified as fixed asset is depreciated

4. existing asset or liability is hedged: G/L reclassified when A/L impacts earnings

116

Derivatives: what are the 3 types of Foreign Currency Hedges and how are the recorded

1. Foreign Currency Fair Value Hedge = in income statement

2. Foreign Currency Cash Flow Hedge:
- ineffective = in income statement
- effective = in OCI

3. Foreign Currency Net Investment (in Foreign Operations) Hedge =
- Effective Portion: OCI as part of the cumulative translation adjustment
- Ineffective Portion: income statement

117

Derivatives: how are derivatives reported in the Statement of Cash Flows

1. no hedging designation should be accounted for in Investing Activities unless held for trading purposes

2. Derivative with NO hedging designation and held for trading: OPERATING

3. Derivative held as a hedge: same category as item being hedged

4. Derivative is "other than insignificant financing element" at inception: ALL cash flows recognized in FINANCING

118

Financial Instruments: what are the required disclosures

- description of the entity's objectives and strategies
- each instrument's primary risk exposure and classification
- segregate derivatives used for hedging purposes and those not
- info. about the volume of derivative activity
- location and fair values in F/S
- locations and amounts of G/L reported in income and OCI separately for each type of hedge
- Fair Value Hedges and related hedged item: net G/L recognized in earnings during the current period, effective portion of hedge, and portion of G/L excluded
- Cash Flow Hedges and related hedged item: description of events that will result in reclassification of G/L from OCI

119

Financial Instruments: what financial instruments MUST be classified as liabilities

1. those in the form of shares that are mandatorily redeemable

2. those, other than outstanding shares, that represent an obligation to repurchase the issuer's equity shares by transferring assets

3. those that represent an obligation to issue a variable number of shares

120

Financial Instruments: how are financial assets classified and measured under IFRS 9

Initially recorded at fair value and then subsequently measured at either amortized cost or fair value:

1. Debt instruments:
- (a) amortized cost if both (1) asset held to collect contractual cash flows and (2) contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest
- (b) fair value if conditions above are NOT met or entity elects at initial recognition

2. Equity instruments (investments in another co.): recognize at fair value with G/L in earnings UNLESS:
- (1) part of a hedging relationship or
- (2) entity makes an irrecovable election on initial recognition to present G/L in OCI


****Note: G/L recognized in OCI are NEVER recognized in earnings but MAY be reclassified in equity

121

Financial Instruments: when are measurement reclassification allowed in IFRS 9 for financial assets

when the entity changes the business model under which it manages financial instruments

Note: accounted for prospectively

122

Financial Instruments: how are financial liabilities classified and measured under IFRS 9

Initially recorded at fair value then subsequently recognized at either amortized cost or fair value:

1. amortized cost: general measurement using effective interest method

2. fair value permitted in certain circumstances (when entity at initial recognition irrevocably designates a financial liability as measured at FV through Profit or Loss)
- gains and losses recognized in earnings UNLESS entity is required to present effects of changes in the liability's credit risk in OCI

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Financial Instruments; how are reclassification of the measurement method recorded for financial liabilities under IFRS 9

reclassification is never allowed

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NOTE: when is the Liquidation Basis of Accounting testable

Jan. 1 2014