FAR 10 Flashcards by Trinh Dang

Fair value is…

Exit price

Price that is received for sell of asset

Price paid to transfer liability

Market based

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Fair value DOES NOT include

Transaction costs

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What determine the most advantageous market?

Transaction cost

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Most advantageous market is…

The best price of asset/liability, after considering transaction costs

Quoted stock price - transactions costs

(2nd option)

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Principal market

Market with greatest volume or level of activity

1st option

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Valuation Techniques of Fair value measurement

Market approach
Income approach - PV or discounted CF
cost approach - replacement cost

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Level 1 Input

Use identical prices/value

Market approach is best
‘Most reliable’

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Level 2 input

Inputs other than quoted market prices

Quote prices for similar assets/liabilities in an active market

Quote prices for identical assets/liabilities in a not active market

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Level 3 Input

Unobservable Input
Discounted Cash flow

‘Management assumption’ - internally generated CF

Lease reliable

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If multiple levels are used, the level of hierarchy is based on..

The lowest level significant input

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Change in valuation technique is considered to be what type of accounting change?

Change in estimate

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Purchase/sale of exisitng partnership interest is

Merely a swap of the partners

NO JOURNAL ENTRY

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Treatment of Assets/ Liabilities of Formation of partnership

Assets - at fair value
Liabilities - record at PV

Tax rule is NBV assets contributed

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3 ways for Creation of new partnership interest

Exact
Bonus
Goodwill

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Exact

‘Creation of new partnership interest’

When purchase price = B/V of capital account purchased

Old partners’ capital account ‘dollars’ stay the same

NO BONUS/GOODWILL

Fraction of the required interest % (e.g. if it asks for 25% interest in the partnership, then it is 1/4)
1/4, 4-1 = 3, total $ in partnership/3

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Bonus

‘Creation of new partnership interest’

Bonuses are adjusted between old and new partners’ capital accounts and do not affect partnership assets.

Calculation
Step 1: Calculate the total capital account, including new capital account
Step 2: total capital account x new partner’s interest= how much new partner gets

If new partner pays > gets, bonus is for existing partner

Increase existing partners’ capital accounts

DR Cash
CR Capital A
CR Capital B
CR capital C

If new partner pays

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Goodwill

‘Creation of new partnership interest’

GOODWILL GO TO OLD PARTNERS
Same capital amount as investment for new partner

Calculation
Step 1: compute implied value = investment amount of new partner/new partnership interesr
Step 2: Total partner’s capital accounts = sum up all the partner’s capital amount
Step 3: Goodwill = implied value - partners’ capital account

DR Cash
DR Goodwill
CR Old partner
CR old Parter
CR Capital (amount contributed)

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Profit & Loss Allocation

Total profit and loss
SUBTRACT: Interest
SUBTRACT: salaries
SUBTRACT: bonus
Equal : Total profit &amp; loss to allocate per profit and loss ratio

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Withdraw of partner

‘Bonus Method’

Implied goodwill is allocated to existing partner

Step 1: Revalue Asset

DR Asset Adjustment
CR: Capital A
CR: Capital B

STep 2: Payoff withdraw partner

DR Capital A
DR Capital B
CR Cash

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Withdraw of partner

‘Goodwill Method’

Implied goodwill is allocated to ALL partner

Step 1: revalue assets to reflect FV
DR asset adjustment
CR Capital A
CR Capital B

Record goodwill
DR Goodwill
CR Capital A
CR capital B (equal to the exact buyout amount)

Payoff withdraw partner
DR capital B
CR Cash

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Liquidation of partnership

Creditors, including partner who are creditors, MUST BE PAID FIRST
All partners’ capital account

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Loss on liquidation of partnership

Must be SUBTRACTED from total partnership account before any distribution is made to partners

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Assets contributed by the partner are valued at…

FV - any related liabilities

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Variable interest entities

‘Consolidation required even if company owns no stock if 3 conditions met’

Variable interest - have financial stake in another company
variable interest entities
primary beneficiary - power to direct activities of variable interest entity, get P&L

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Identifying a variable interest in a business entity | Step 1

1 Company and business entity have an arrangement | 2. Business entity is a legal entity

Characteristics of variable interest entities | Step 2

1. Insufficient level of equity investment 2. Inability to make decisions 3. Cannot absorb loss or obtain gain 4. Disproportional voting rights

Primary Beneficiary Consolidates

1. Has power to direct activities | 2. Get loss/gain

Private company may elect

NOT to consolidate

Asset Retirement Cost 'Journal Entry'

DR Asset retirement Cost (asset) CR Asset retirement obligation (liability) Asset & Liability at PV

Accretion cost | 'Asset Retirement Obbligation'

Interest Expense DR Accretion Expense CR Asset Retirement Obligation

Depreciation Expense | 'Asset Retirement Obligation'

DR depreciation Expense | CR Accumulated Depreciation (decrease asset retirement cost)

Asset retirement obligation formula

accumulative accretive expense + cumulative depreciation expense

Upward revision to undiscounted cash flows | "new" liabilities

Increase Current discount rate

Downward revision to undiscounted cash flows | "old" liabilities

Decrease Use historical (weighted average) discount rate

Accretion Expense is

Interest Expense | Increase obligation

Depreciation expense

Decrease asset

Accounting & Reporting by Debtor | 'Transfer of Assets - Adjust to FV'

Simply a transfer of real estate/ Revaluate asset to fair value Ordinary Gain/Loss FV asset transferred = Ordinary gain/loss

Accounting & Reporting by Debtor | 'Transfer of Assets - Recognize possibly extraordinary gain/loss'

Restructing of payable Carrying amount of the payable =Gain (possibly extraordinary)

Accounting of restructing of debt Reporting by Debtor 'Transfer of Equity - Recognize possibly extraordinary gain/loss'

Restructing of payable Carrying amount of the payable =Gain (possibly extraordinary)

Modification of Terms is accounted for as

Prospectively

JEs for restructure of debt | 'Transfer of asset'

``` DR N/P DR Interest Payable CR Land CR Gain on disposal of land CR gain on restructing ```

JEs for restructure of debt | 'Transfer of equity'

``` DR N/P DR Interest payable CR C/S CR APIC CR Gain on restructing ```

JEs for restructure of debt | 'Modification of term'

DR NP DR Interest payable CR N/P CR gain on restructing

Accounting of restructing of debt | Reporting by Creditor

Receipt of assets & equity - FV recorded Receipt of Modification Terms - PV

Large write-down and write-offs are NOT

Extraordinary item

Accounting of restructing of debt - Creditor report | Receipt of Modification Terms

Record as PV Carrying amount of debt = Bad debt DR Bad Debt expense CR Allowance for credit losses

Accounting of restructing of debt Reporting by Debtor 'Modification of terms'

Carrying amount of the debt =Gain

Accounts Payable | 'Gross amount'

Record without discount If discount was taken, then DR discount account

Accounts Payable | 'Net Method'

Recorded at net of discount If payment made after discount period, discount lost account is DR

Interest Revenue Earned Formula

Total cash received Total interest revenue

If N/P & A/P does not exceed one year, then it is recorded as

Face Amount

Contingencies - Probable | U.S GAAP

Likely to occur

Contingencies - Reasonably possible | U.S GAAP

More than remote, but less than likely

Contingencies - Remote | U.S GAAP

Slight chance of occurring

Contigencies - Probable | IFRS

More likely than not to occur | > 50%

Contigencies - POssible | IFRS

May but probably will not occur

Provision for loss contingency should accrued, must meet these two conditions GAAP

1. Loss is probable 2. Amount of loss can be reasonably estimated Record JE DR Expense CR Liability If no amount in the range is a better estimate than any other amount within the range, then MINIMUM = ACCRUED EXCESS = DISCLOSE NOTE

Provision for loss contingency should accrued, IFRS

Mid point of the loss range

Contingency loss is reasonably possible should be GAAP

Disclosed | Do not record JE/accrue

Loss is Remote | GAAP

Ignore, but disclose if these conditions are met 1. Debts of others guaranteed (officers/related parties) 2. OBligation of commercial banks under standby letters of credit 3. guarantees to repurchase receivables (or related property) that have been sold or assigned

Gain contingencies | 'Probable or reasonably possible'

Do not record JE Must disclose

Contingent Liability when all range in value are equally likely, should pick

The lowest amount

Subsequent event is an event

that is occured after the B/S date but before theF/S issued or available

Subsequent event should be...

Disclosed and record JE

Recognized subsequent events is

Events that existed at balance sheet date

Nonrecognized subsequent event is event that

Occurred after the B/S date Did not exist at B/S Date Disclose

Recognized subsequent events are referred to as.. | IFRS

Adjusting events after the reporting period

Non-recognized subsequent events are referred to as.. | IFRS

Non-adjusting events after reporting period

When liquidation is imminent, then it is accout for...

Prospectively

Criteria to qualify as 'imminent'

1. Likelihood of the entit return from liquidation is REMOTE AND 2. either - liquidation plan is approved by the individual who have authority - liquidation plan is imposed by other forces,

F/S for liquidation basis of accounting

1. Statement of Net Assets in Liquidation | 2. Statement of Changes in net assets of liquidation

IFRS - Fair value option is only used when

it can be elected for financial assets if doing so eliminates or significantly reduces a measurement or recognition inconsistency

Fair value must be

Disclosed

All credit/concentration risk must be

Disclosed in the notes to the financial statements

Disclosure - IFRS

Disclose credit risk, liquidity risk, market risk

Market risk is

Encourage to disclose, but not require

Option Contract types

The right to buy/sell something to the other party at a specified price Call - right to buy Put - right to sell

Future contract types

Public agreement 1. Long - buy and profit when price increases 2. Short - sell, profit when price decreases

Forward contract is

Similar future contracts, but they are private agreement

Swap contract is

Private agreement between 2 parties Hope what you received > what you pay

Treatment of gain/loss of derivation | 'No hedging designation - Speculative'

Recognize in I/S

Treatment of gain/loss of derivation | 'Fair value hedge'

Recognize in I/S

Treatment of gain/loss of derivation | 'Cash flow hedge - ineffective'

Recognize in I/S

Treatment of gain/loss of derivation | 'Cash flow hedge - Effective'

Recognize in OCI

Foreign currency fair value hedge

Recognize in I/S

Foreign currency net Investment Hedge

Recognize in OCI

Criteria for Debt Instrument to measure at cost: | Similar to Held-to-Maturity

1. Hold assets in order to collect contractual cash flows | 2. Solely payments of principal and interest

Under IFRS, reclassification of equity instrument is

1. Permitted | 2. Account for as prospectively

Under IFRS, reclassification of debt instrument is

Cannot reclassify

Fair value of financial instruments may be disclosed in

1. Body of the F/S | 2. Footnotes of F/S

Perfect hedge results in

No possibility of future gain/loss

Calculating gain/loss of stock investment when FV is elected, should include

1. Dividend Income | 2. The gain/loss from the investment

FAR 10 Flashcards

(92 cards)