FRA intercorporate

Question 1

What are the categories of business combination under US GAAP

Answer 1

MERGER

ACQUISITION

CONSOLIDATION

Question 2

Describe Pooling (Uniting) of Interests

Answer 2

1. The book value of both companies is used.

Question 3

What 3 types of assets are combined on the acquirers balance sheet with the Acquisition method

Answer 3

All the following, on or off balance sheet at Fair Value:

(a) Tangible and Intangible assets
(b) indemnification assets
(c) In-process R&D

Question 4

What is the IFRS criteria to include a Contingent liability in the Acquisition method?

Answer 4

1. A present obligation that arises from past events

2. Can be measured reliably.

Question 5

What is the criteria to recognise an indemnification asset in the Acquisition method?

Answer 5

If the Target indemnifies the Acquirer for:

a. Contingency
b. Uncertainty related to any of the Acquirees specific assets or liabilities
c. losses above a specified amount for a particular contingency.

Question 6

How is a Bargain Acquisition established and recognised in the Acquisition method.

Answer 6

If the Purchase price is less than the fair value of the net assets acquired.

Recognised immediately as a gain on the Income Statement.

Question 7

Where are unrealised gains and losses reported in FVPL?

Answer 7

Income statement

Question 8

If a bond is held with the intention to sell for liquidity reasons what is the classification?

Answer 8

Not Amortised Cost

Amortised Cost requires an intention to collect all contractual cash flows

Question 9

Equity Method -

1. How is carrying value calculated
2. What elements go on income statement

Answer 9

Beginning value (at purchase date, the purchase price)

a) plus % share of Net Income of affiliate
b) minus % share of excess depreciation= % share (FV-BV+Residual)/time
c) minus % share of derecognised profits with affiliate
d) minus % share of dividends from affiliate

Equity Income = (a) + (b) + (c) = this goes on income statement

(d) Dividends do not go on income statement, it is return of capital

Question 10

Equity Method -

1. How is goodwill measured?
2. Where is goodwill recorded?

Answer 10

Goodwill =
Price paid for % share
minus
FV (identifiable net assets (on and off balance sheet)

Goodwill is embedded in the carrying value

Question 11

Equity Method -

1. How is Goodwill impairment tested?
2. How does IFRS measure impairment?
3. How does US GAAP measure impairment?

Answer 11

1. Goodwill is embedded in carrying value and not separately tested for impairment.
   Goodwill is part of the “total fair value of impairment test”
2. Impairment loss (IFRS) = (Recoverable Value minus Carrying Value)

US GAAP

STEP 1

3. (Carrying Value > Fair Value)

STEP 2

4. Impairment of Goodwill = [ Carrying Value of Goodwill - (FV_unit - FV Net Assets_unit) ]

Question 12

Equity Method -

1. Reversal of impairment losses (IFRS)
2. Reversal of impairment losses (US GAAP)

Answer 12

1. IFRS reversal of impairment loss not allowed, except for non-good will items
2. US GAAP - reversal not allowed

Question 13

What happens to Sponsors receivables when an SPE is consolidated?

Answer 13

Receivables sold to SPE are reversed onto the Sponsor consolidated balance sheet

Question 14

How would an analyst adjust CF for Sponsor of a SPE that has securitised the Sponsors receivables?

Answer 14

CFO would go down
CFF would go up
Total CF remains the same

Question 15

Equity Method -

1. Balance Sheet recognition of investee.
2. Income statement recognition of investee.

Answer 15

1. BS=Single line item on balance sheet CV = previous CV
A) + %NI
B) - % excess depreciation
C) - derecognised profits
D) - % dividends

2. IS=single line item for Investee income (equity income) = A-B-C

Question 16

How is the price of acquisition shown in Pooling of interests?

Answer 16

1. The price paid for the acquisition is not evident on financial statements.

Question 17

Compare ratios for Pooling of Interests vs Purchase method

Answer 17

This acquisition is shown at Book Value for Pooling of interests.

When compared with Purchase method (acquisition is at fair value) for Pooling of interests:

(a) ROA is higher - because Assets are lower (all assets at BV not FV)
(b) Expenses are lower - because Depreciation expense is lower (less depreciation due to BV not FV)

Question 18

Describe a US GAAP Merger

Answer 18

MERGER - acquirer A absorbs all assets of B.

A + B = > A

Question 19

Describe a US GAAP Acquisition

Answer 19

ACQUISITION - results in a Parent - Subsidiary structure.

A + B => Group A (A and B)

Question 20

Describe a US GAAP Consolidation

Answer 20

CONSOLIDATION - a new company, C, is formed that swallows A and B.
A + B => C

Question 21

How may contingent consideration be classified?

Answer 21

At fair value as:

a) Asset
b) Liability
c) Equity

Question 22

How are changes in fair value of contingent consideration recognised for IFRS?

Answer 22

Asset and liability classified contingent consideration is recorded on the consolidated income statement:

1. IFRS - the change in FV of liability classified contingent consideration

Equity contingent consideration is not remeasured and is settled within equity.

Question 23

How is in-process R&D treated after Acquisition?

Answer 23

1. Amortised - if completed and economically viable.

2. Impaired - if not completed or not economically viable.

Question 24

How are Restructuring costs of a business combination measured?

Answer 24

1. IFRS and US GAAP do not recognize these costs at acquisition.
2. Recognised subsequently as the costs are incurred.

Question 25

Under IFRS 9 FVOCI where is Dividend income booked?

Answer 25

Income statement

Question 26

Under IFRS 9 FVOCI where are unrealised Gains and losses booked?

Answer 26

OCI section of Equity

Question 27

Under IFRS 9 FVOCI where are realised gains and losses booked?

Answer 27

INCOME STATEMENT

Question 28

What is booked differently between FVPL and FVOCI

Answer 28

In FVOCI unrealised Gains and losses are booked in OCI section of equity and not booked on the income statement (as in FVPL)

Question 29

How is excess depreciation in Equity Method calculated?

Answer 29

``` %Share of FV of (depreciable assets minus BV of depreciable assets plus residual assets) . ``` % share (FV-BV+Residual)/time

Question 30

How is excess depreciation in Equity Method calculated?

Answer 30

``` %Share of FV of (depreciable assets minus BV of depreciable assets plus residual assets) . ``` [% share (FV-BV) minus Investors Residual] /time

Question 31

Calculate profit derecognition downstream

Answer 31

%share of Investee x (Profit on 100% sale to Investee x % of sale not made to third Party) E. G. INVESTOR MY MAKES £100 ON SALE TO Affiliate of which it owns 40% Affiliate sells on 80% 1. Derecognised Profit= 20% of £100 x Investors % share of Affiliate (40%) = £8

Question 32

Compare Leverage Ratio between Equity and Acquisition method

Answer 32

Liabilities and Equity both lower in Equity method | Due to non recognition of Investee debt

Question 33

Compare assets, liabilities, revenues and expenses between Equity Method and Acquisition method

Answer 33

All higher under Acquisition method (Real)

Question 34

Compare Net Income between Equity and Acquisition methods

Answer 34

Net Income is the same

Question 35

Compare Profit Margin between Equity and Acquisition methods

Answer 35

1. Income is the same for both methods 2. Sales are lower in Equity method because affiliate sales are not included 3. Profit Margin is higher in Equity method since Income is a percentage of a smaller amount of sales

Question 36

Compare ROE between Equity and Acquisition method

Answer 36

1. Income is the same 2. Equity of acquiree is not included in Equity method 3. Equity is lower for the same income in Equity method Therefore ROE is Higher in Equity method

Question 37

Compare ROA between Equity and Acquisition method

Answer 37

1. Income is the same 2. Assets are lower in Equity method (assets of Investee not included in Equity method) 3. ROA is Higher under Equity method.

Question 38

How is Goodwill Reported in the Equity method?

Answer 38

It is Not separately reported. It is embedded in the carrying value. Goodwill is implied.

Question 39

How are changes in contingent consideration measured in US GAAP

Answer 39

Asset and liability classified contingent consideration is recorded on the consolidated income statement: 1. US GAAP - both assets and liability classified contingent consideration Equity contingent consideration is not remeasured and is settled within equity.

Question 40

Equity method What impairment losses can be reversed under (a) US GAAP (b) IFRS

Answer 40

(a) No reversals - US GAAP | (b) non Goodwill reversals only - IFRS

Question 41

Reversal of Equity Method impairment losses under IFRS?

Answer 41

Not allowed page p22 curriculum vol 2

Question 42

Under IFRS what securities are considered along with voting shares?

Answer 42

1. Exercisable Warrants 2. Convertible Warrants / Securities 3. Call Options

Question 43

Under IFRS which type of Associate can be recorded as financial asset under Fair Value?

Answer 43

1. Venture Capital co's 2. Mutual Funds 3. Unit trusts 4. Investment related insurance funds

Question 44

Explain no arbitrage of bid-ask spread

Answer 44

Bid= Dealer buys, clients sells Ask=Dealer offers to sell, Client buys No arbitrage 1. Bid

Question 45

What two class of liabilities are included on Acquirers balance sheet under acquisition method

Answer 45

On or Off balance sheet at Fair Value: (b) liabilities (c) contingent liabilities at acquisition

Question 46

What is the translation rate for a Dividend under the Current Rate Method

Answer 46

The rate on the date the Dividend was DECLARED

Question 47

What translation rate is used for Income Statement, Retained Equity and Equity under the Current Rate method

Answer 47

Historical (Average rate)

Question 48

Which balance sheet items are NOT translated at the Current Rate under All current rate method?

Answer 48

Equity, Retained Earnings

Question 49

Where does Cummulative Translation Gain/Loss end up under the All Current Rate Method

Answer 49

CTA is in Equity side of Balance Sheet

Question 50

Changes to what type of security classification violates the clean surplus rule

Answer 50

AFS or held for sake because changes Equity without going through Income Statement.