FRA2

Question 1

Debt, equity or both, which can be recorded at amortized cost when you hold a minority interest

Answer 1

Debt only

Question 2

Name/explain how each % interest in another company is called

Answer 2

0-20% = no influence
20-50% = Associates, significant interest
50%+ = controlling interest

Question 3

When you have a non-controlling interest, explain the 3 ways you record your interest in your financial statements

Answer 3

Amortized cost, only used for debt, unrealized gains and losses are not recorded anywhere. You treat these securities like a held to maturity security

Fair Value through Profit and Loss: All realised gains and losses are recorded on income statement. The asset itself sits on the balance sheet.

Fair value through OCI: All realised gains are put on the income statement, all unrealised gains are put on the balance sheet (OCI).

Question 4

Can a equity security be held at amortized cost?

Answer 4

No way

Question 5

Can you reclassify equity securities from FV OCI to FV PL

Answer 5

No way

Question 6

Can you reclassify debt securities from Amortized cost to another?

Answer 6

Yes, you must immediately recognize gains and losses.

Question 7

What do we do with PPE when it can be revalued upward when a company takes a significant position in it

Answer 7

The value of the PPE is revalued upward to its fair value

Question 8

How to calculate Goodwill within the equity method

Answer 8

So, think about it. You take your purchase price, minus the original book value (* % owned) then minus the INCREASED changed value of PPE (*% owned)

So if PPE went up by 300$, and you own 10% of the company, you would subtract….$10 correct

Question 9

How do you calcualte what you put on the income statement using the equity method of accounting

Answer 9

If there is no funny business with writing up assets, it is the net income off the affiliate times the % owned. Simple.

If the affliliates assets are written up, you have to DEPRECIATE the valued up value (not the whole value, just the uped value) and this is all times the % owned.

So if the value of a PPE goes up by 300$, and you own 10%, and it is depreciated for 10 years straight line, you would subtract an additional $3 from net income.

Question 10

Where are gains and losses put for FVPL when holding no significant interest of a company?

Answer 10

On the income statement. The market value of the security is what it is recorded at on the balance sheet

Question 11

FV for OCI, where do you record realised and unrealsied gains or losses

Answer 11

Realised IS, Unrealised Balance sheet

Question 12

What is interest income?

Answer 12

Cash pmts plus amortization up or down of premium or discounts to pat value of bond purchased

Question 13

How do you calculate full goodwill (US GAAP) and Partial Goodwill (IFRS)

Answer 13

Full goodwill is the = FV of subsidiary - FV of all net tangible assets

IFRS = Purchase price - (% owned * net tangible assets)

Question 14

Can goodwill be amortized?

Answer 14

No

Question 15

Which is bigger, full or partial goodwill?

Answer 15

Full

Question 16

Explain how you consolidate a balance sheet

Answer 16

Assets + Assets
Liabilities + Liabilities
Net assets = Net assets - (% NOT owned Net assets) . This will be minority share

Question 17

Explain how you consolidate an income statement

Answer 17

Put all line items together, then on net income you subract the % attributable to other interests

Question 18

With FVPL, at what price and where do you record the asset itself.

Answer 18

The fair value is recorded on the balance sheet, same with OCI

Question 19

What is the carrying value of a controlled entity at the time of sale

Answer 19

In the year of acquisition, the investor company reports its investment in the investee at the acquisition cost

Question 20

What is the carrying value of a controlled entity a year post purchase

Answer 20

Purchase price (which is last years carrying value) + Net income - divs - amoritization

Question 21

To what value do you write down cash generating units

Answer 21

To their recoveravble amount

Question 22

How do you calculate minority interest

Answer 22

Net assets of acquiree * % not owned

Question 23

For a SPE, how do you calcualte what is added to the parent’s balance sheet?

Answer 23

It is everything that is not invested into the SPE itself, anything going out, or anything that the firm could have done itself, but instead just did through an SPV

Question 24

WHen is something is carried at amoritized cost, when would it not be recorded at historic cost?

Answer 24

if it is pruchased at premium or discount

Question 25

Durbin watson test and serial correlation. If the number is less than 2, what does that mean

Answer 25

THERE IS SERIAL CORRELATION

Question 26

How is GDP growth linked with the intertemporal rate of substitution

Answer 26

Inversly. More consumption = higher gdp growth

Question 27

What is the CDS Spread

Answer 27

A periodic premium paid by the buyer to the seller that serves as a return over Libor required to protect against credit risk.

Question 28

Explain basis trading

Answer 28

A trade based on the pricing of credit in the bond market versus the price of the same credit in the CDS market. To execute a basis trade, go long the “underpriced” credit and short the “overpriced” credit. A profit is realized when the price of credit between the short and long position converges.

Question 29

if the durbin watson stat is higher than the critical value, is there serial correlation

Answer 29

NO

Question 30

Explain pairwise modeling?

Answer 30

it gets you the same answer as binomial modeling, the only difference is you do something like this. Coupon / Spot Value 1 + Coupon/Spot value 1+Spot Value 2 etc etc.

Question 31

For random walks, B0 should equal what and B1 should equal what? Think about it

Answer 31

B0 = 0 and B1 =1, think of the formula of x-1=x+e

Question 32

What does an increased discount rate do to the service cost?

Answer 32

Decreases it

Question 33

identify components of Periodic Pension Expense, Peridoic Pension Cost, TPPC for both USGAAP and IFRS.

Answer 33

PERIODIC pension expense - SIEA for USGAAP and Spin for ifrs. SIEA = service + interest - expected + amortisation. Spin is Serice + past + net interest. Periodic pension cost is everything on the income and oci statements, but uses actual return instead of expected return. Change in the PBO is SIPABEER change in assets is CAB Total cost can also be found as Ending funded status - beginning - contributions