Specific Transactions & Events Flashcards
1
Q
What is the date of application used by firms for accounting changes?
A
First day of the year of change.
2
Q
What accounting approach is used for a change in reporting entity?
A
Retrospective method.
3
Q
List the two accounting approaches for recording accounting changes.
A
- Retrospective; 2. Prospective.
4
Q
What accounting approach is applied to principle changes?
A
Retrospective.
5
Q
What concept is displayed when there is restatement of prior year financial statements?
A
Comparability
6
Q
What accounting approach is applied to error corrections?
A
Retrospective (Restatement).
7
Q
List the three types of accounting changes.
A
- Change in accounting principle; 2. Change in accounting estimate; 3. Change in reporting entity.
8
Q
What accounting approach is applied to estimate changes?
A
Prospective.
9
Q
What is a change in accounting principle?
A
A change from one generally accepted accounting principle to another when there are at least two acceptable principles or when the current principle used is no longer generally accepted.
10
Q
What type of changes and events are comparative financial statements of prior periods changed for?
A
Accounting principle changes and error corrections.
11
Q
How is a change in method that is indistinguishable from a change in estimate accounted for?
A
Change in estimate.
12
Q
What account records the effect of principle change on prior years?
A
Retained earnings.
13
Q
What accounting change is often impracticable to compute a cumulative effect?
A
Change to Last In First Out (LIFO).
14
Q
What account is debited when an accounting principle change causes income in prior years to decrease?
A
Retained earnings (cumulative effect of change).
15
Q
What is the amount of the cumulative effect reported in the earliest reported year of the retained earnings statement?
A
The effect of the change on years before the earliest year reported.
16
Q
What is the pretax amount of the cumulative effect of a change in inventory method?
A
The difference in inventory balance for the new and old methods, at the beginning of the year of change.
17
Q
What is the amount recorded for the change in deferred taxes for a change in accounting principle?
A
The pretax cumulative effect multiplied by the tax rate.
18
Q
What is the first computation in accounting for an estimate change involving a depletable resource?
A
Compute book value at the beginning of the year of change.
19
Q
What is the most frequent type of accounting change?
A
Estimate change.
20
Q
How is a change in depletion method accounted for?
A
Prospective approach (same as estimate change).
21
Q
What accounting approach is applied to changes in depreciation method?
A
Prospective.
22
Q
What is the amount of cumulative effect recorded for change in depreciation method?
A
None (prospective approach is applied).
23
Q
What disclosures are required for estimate changes?
A
Effect of the change on income from continuing operations and net income for the year of change.
24
Q
What is the rationale for applying the prospective method to estimate changes?
A
The new information triggering the change is not applicable to prior years.
25
What financial statement errors will remain if an error counterbalances?
All account balances affected by the error are still erroneous, except for retained earnings.
26
How many years should be considered when computing the adjustment to the earliest year in the retained earnings statement?
All years before the earliest year in the statement affected by the error.
27
Define "prior period adjustment."
Change in retained earnings for error corrections.
28
What accounting approach is applied to corrections of errors affecting prior year net income?
Accounting approach applied is retrospective.
29
What is the change in retained earnings for an error correction called?
Prior period adjustment.
30
Define "counterbalancing error."
An error whose effect on retained earnings automatically corrects itself after a number of years.
31
How many years should be considered in the journal entry to correct retained earnings?
All years affected by the error through the beginning of the year of change.
32
What happens to the net book value of the asset?
Depreciated or depleted.
33
How is the annual accretion expense and corresponding increase to asset retirement obligation (ARO) found?
Multiplying the interest rate used in capitalizing the initial amount, by the beginning balance in the ARO.
34
What amount does the asset retirement obligation increase to over time?
The final amount expected to be paid.
35
List the components of asset retirement obligation (ARO) costs.
Costs to dismantle, reclaim, remove, etc.
36
When does an environmental liability need to be accrued?
When the liabilities are both probable and reasonably estimable.
37
How much is capitalized to the asset retirement obligation?
The present value of the estimated future payments (initial fair value).
38
Define/describe a "legal consolidation".
A new entity is formed to combine (consolidate) two or more preexisting entities.
39
Define/describe a "legal merger".
One entity acquires either a group of assets constituting a business or a controlling interest of another entity and "collapses" the acquired assets/entity into the acquiring company.
40
Define "parent company" as it relates to business combinations.
Designation of the Investor in a business combination.
41
List the primary mean of accomplishing a business combination.
The acquisition by one entity of the common stock of another entity to gain control of the investee.
42
Describe how income is determined at the date of a combination.
Only acquirer's operating results up to the date of combination enter into determination of "consolidated" net income.
43
Define/describe a "legal acquisition".
One entity acquires controlling interest of another entity, but both continue to exist and operate as separate legal entities.
44
Identify the legal forms of business combination that will not require preparation of consolidated financial statements.
A legal merger or a legal consolidation will not require preparation of consolidated financial statements. Only a legal acquisition will require preparation of consolidated financial statements.
45
What is the designation of the investee in a business combination?
Subsidiary company.
46
What may be acquired in a business combination?
A business entity either acquires a group of net assets that constitutes a business or acquires equity interest in an entity.
47
List the three legal forms of business combinations.
1. Merger; 2. Consolidation; and 3. Acquisition.
48
Describe how income is determined at the end of the year for a combination.
Acquirer's operating results for the year plus acquiree's operating results after the combination enter into the determination of consolidated income for the year of combination.
49
Describe how income is determined for subsequent years of a combination.
Acquirer's and Acquiree's operating results enter into determination of consolidated net income.
50
List the business combinations for which the acquisition method of accounting does not apply.
1. Joint ventures; 2. Entities under common control; 3. Between not-for-profit organizations; 4. For-profit entity acquired by a not-for-profit organization; 5. Acquisition of assets that do not constitute a business.
51
Define "measurement period".
The period after the acquisition date during which the acquirer may adjust any provisional amounts recorded at the acquisition date. It provides the acquirer reasonable time to obtain information needed to identify and measure accounts and amounts that existed as of the acquisition date. It ends when the acquirer obtains that information or determines that no additional information is available, but in no case should it exceed one year.
52
List the five elements (or steps) involved in applying the acquisition method of accounting to a business combination.
1. Identify the acquirer; 2. Determine the acquisition date and measurement period; 3. Determine the cost of the acquisition; 4. Recognize and measure the identifiable assets acquired, liabilities assumed, and any noncontrolling interest in the acquired entity; 5. Recognize and measure Goodwill or a gain from a bargain purchase.
53
Define "acquisition date".
The date on which the acquirer obtains control of another business (i.e., group of assets that constitute a business or a separate legal entity). It usually is also the "closing date" for the combination.
54
When a business combination is effected through an exchange of equity interest, what are five factors to consider that indicate which entity is the acquirer?
Which combining entity/entities 1. Issued new equity interest; 2. Owners have the larger portion of the voting rights; 3. Owners can select or remove a voting majority of the governing body; 4. Former management dominates that of the combined entity; 5. Paid a premium over the precombination fair value of the equity interest of the other combining entities.
55
For the purposes of applying the acquisition method to a business combination, what may constitute a "business?"
A business may be: 1. A group of assets or a group of net assets (that constitute a business); 2. A separate legal entity (that is a business).
56
What is the method that is required to be used in accounting for most business combinations?
Acquisition method.
57
Under what circumstance is fair value not used to measure assets and liabilities transferred in a business combination?
When the assets and liabilities are transferred to the acquiree but remain under the control of the acquirer because the acquirer obtained control of the acquiree (which holds the transferred asset or liability). In such a case, the asset or liability should be transferred at carrying value, not fair value.
58
Describe the nature of contingent consideration in a business combination.
Contingent consideration is either: 1. An obligation of the acquirer to transfer additional assets or equity to the former owners of the acquired business if future conditions are met; or 2. A right of the acquirer to a return of previously transferred consideration if future conditions are met. Contingent consideration is recognized at fair value as of the acquisition date as part of the cost of the acquiree.
59
List the elements that make up the cost of an acquired business.
Fair value of: 1. Assets transferred; 2. Liabilities incurred; 3. Equity interest issued.; 4. Contingent consideration obligations of the acquirer; 5. Required share-based employee awards for precombination services.
60
How is the exchange of share-based employee awards treated in a business combination?
If the exchange is required: 1. The portion of the value of the replacement awards that relates to precombination services is part of the cost of the acquired business; 2. The portion of the value of the replacement awards that relates to post-combination services is expensed. If the exchange is voluntary, the value of the replacement awards is expensed.
61
Identify at least three items acquired in a business combination for which the acquirer has to make a decision as to the classification or designation of the item.
1. Investments, as to whether held-to-maturity, held-for-trading, or available for sale; 2. Derivative instruments, as to whether used for hedging or speculation; 3. Embedded derivatives, as to whether they will be separated from the host instrument or not; 4. Long-term assets, as to whether they will be used or held for sale.
62
Describe the requirements of the acquisition when a business combination is carried out in stages (or steps).
Equity interest in the acquiree which is acquired by the acquirer prior to the business combination is remeasured to fair value at the date of the combination (acquisition date). Any difference between the precombination carrying value and the acquisition date fair value is recognized as a gain or loss in income of the period of the combination. The fair value of the precombination investment is included as part of the cost of the investment value (i.e., cost of the investment in the acquiree) to the acquirer.
63
Identify at least five items acquired in a business combination that would be measured at something other than fair value.
1. Income tax items, use ASC 740 and other guidelines; 2. Acquiree's employee benefit liability/asset, use various related GAAP; 3. Indemnification assets, use the same measurement basis as indemnified item; 4. Reacquisition rights, use unamortized balance; 5. Share-based employee awards, use ASC 718; 6. Long-term assets held for sale, use ASC 360.
64
Identify the general acquiree-related elements that must be recognized and measured by the acquirer in a business combination.
1. Identifiable assets acquired; 2. Liabilities assumed; 3. Noncontrolling interest, if any.
65
What values are compared to determine if there is Goodwill or a bargain purchase in a business combination?
The fair value of the total investment in the acquiree (including the acquirer's consideration transferred and the noncontrolling interest in the acquiree), and the fair value of the net assets (assets - liabilities) of the acquiree.
66
Under what conditions will a bargain purchase be recognized in a business combination?
A bargain purchase is recognized when the fair value of the total investment in an acquiree (both the investment of the acquirer and that of any noncontrolling interest) is less than the fair value of the acquiree's net assets.
67
Under what conditions will Goodwill be recognized in a business combination?
Goodwill is recognized when the fair value of the total investment in an acquiree (both the investment of the acquirer and that of any noncontrolling interest) is greater than the fair value of the acquiree's net assets.
68
How should contingent consideration be measured and reported subsequent to a business combination?
Contingent consideration should be measured and reported at fair value until settled. 1. If changes are of fair value as it existed at acquisition date, the change is an adjustment to the cost of the investment; 2. If changes result from events after the acquisition date: (1) Changes in contingent assets or liabilities are recognized in earnings in the period of change; (2) Changes in contingent equity is an adjustment to equity accounts; not an earnings item.
69
What assets or liabilities recognized in a business combination require "specialized" post-combination accounting treatments?
1. Reacquired rights asset; 2. Assets and liabilities arising from contingencies; 3. Indemnification assets; 4. Contingent consideration as asset or liability (or equity).
70
How should assets and liabilities arising from contingencies be measured and reported subsequent to a business combination?
1. If the contingency is a liability, measure and report at the higher of: a. Its acquisition-date fair value; or b. the amount that would be recognized if the requirements of FASB #5 were followed. 2. If the contingency is an asset, measure and report at the lower of: a. Its acquisition-date fair value; or b. The best estimate of its future settlement amount.
71
What information must be disclosed about Goodwill recognized in a business combination?
1. A quantitative description of the factors that make up the Goodwill; 2. The amount of Goodwill expected to be deductible for tax purposes; 3. The amount of Goodwill assigned to each reportable segment; 4. During the measurement period, a reconciliation of the beginning and ending balance in Goodwill.
72
In which periods does an acquirer have to disclose information about a business combination in its financial statements?
In the reporting period in which the combination occurs and in each reporting period that includes the measurement period.
73
Identify the most significant general information about a business combination that must be disclosed.
1. Name and description of the acquired business; 2. The acquisition date; 3. The percentage voting interest acquired (if relevant); 4. How the acquirer gained control of the acquired business; 5. The primary reason for the business combination.
74
When provisional amounts for a business combination are reported in financial statements, what must be disclosed about those amounts?
1. Identification of the items (assets, liabilities, equity or consideration) for which accounting is not complete; 2. The reasons why the accounting is not finalized; 3. The nature and amounts of any measurement period adjustments made to the provisional amounts during the reporting period.
75
What method is used by a parent company to carry "investment in subsidiary" on its books?
Cost, Equity or other method.
76
What is the journal entry by an investor to record an acquisition?
DR: Investment in Subsidiary CR Cash/Other Consideration (Cost)
77
Where is a Subsidiary reported?
Reported in consolidated statements, unless the parent lacks effective control.
78
What accounting transaction is required when cost of the Investment is \> fair market value of net assets acquired (Acquisition method)?
Recognize (write on) Goodwill.
79
List the journal entry by the investor to record a merger/consolidation using the acquisition method.
DR: Assets acquired (at FMV) CR: Liabilities assumed (at FMV) CR: Cash/Other Consideration Paid (Cost)
80
What method is used to record a merger/consolidation?
Acquisition Method.
81
What accounting transaction is required when cost of the investment is
Recognize gain for bargain purchase amount.
82
When are consolidated statements required?
Under two major circumstances: 1. When a firm is the primary beneficiary of a variable-interest entity (VIE), the VIE must be consolidated with the primary beneficiary; 2. When a firm has a majority owned (\>50% of voting stock) subsidiary, the subsidiary must be consolidated with its parent unless the parent lacks actual effective operating or financial control.
83
What is the only legal form of business combination requiring consolidated statements?
Business Combination resulting from a legal acquisition.
84
What is a majority-owned subsidiary that is not consolidated called and how is it accounted for?
A majority-owned subsidiary that is not consolidated is an "unconsolidated subsidiary" and would be accounted for as an investment asset by the parent, using either fair value or the equity method of accounting.
85
What are the differences between a legal merger or legal consolidation and a legal acquisition that determine whether or not consolidated statements will be required?
In a legal merger or legal consolidation only one entity exists after the combination; therefore, there is no need for a consolidated statement. In a legal acquisition two separate legal entities survive, but under common control. Their financial statements must be consolidated.
86
Under IFRS, are you required to disclose assumptions related to acquired contingences?
Yes, you are required to disclose these assumptions.
87
Under IFRS, goodwill is allocated to \_\_\_\_\_\_\_\_\_?
Cash generating units.
88
Contingent assets are recognized in a business combination under U.S. GAAP or IFRS?
These assets are recognized under U.S. GAAP.
89
What is the requirement and justification for the use of consolidated financial statements?
Consolidated financial statements are required when one entity has effective control of another entity. Because the entities are under common control, GAAP requires that consolidated financial statements be the primary form of financial reporting for the affiliated entities. While in form the entities may be separate legal entities, because of the common control, in substance they are a single economic entity and their financial statements should be presented as a single economic entity.
90
What are the alternative circumstances that affect adjustments and eliminations made in the consolidating process? (Disregard pooling of interests consideration.)
1. Whether the parent carries its investment using the cost or equity method; 2. Whether the consolidation is carried out at the date of the business combination or at a subsequent date; 3. Whether the parent owns 100% (all) of the voting stock of a subsidiary or less than 100% of the stock; 4. Whether transactions between the affiliated companies originate with the parent or subsidiary.
91
Under U.S. GAAP, what process must be followed to determine if an entity should be consolidated?
First, it must be determined if the entity is a variable-interest entity (VIE). If it is, the reporting entity must determine if it is the primary beneficiary of the VIE and, if so, consolidate the VIE. Then, if the entity is not a VIE, the reporting entity must determine if it has controlling voting interest in the entity. If so, and nothing prevents the exercise of that control, the reporting entity (parent) must consolidate the entity (subsidiary).
92
List the methods a parent may use to carry investment in subsidiary to be consolidated.
1. Cost; 2. Equity; 3. Any other method it chooses.
93
Identify the general kinds of eliminating entries made in the consolidating process.
1. Investment eliminating entry. (Always); 2. Intercompany Receivables/Payables elimination(s); 3. Intercompany Revenues/Expenses elimination(s); 4. Intercompany Profit elimination(s).
94
What are the kinds of information needed to prepare consolidated financial statements?
1. Financial statements/Adjusted trial balances of affiliated entities; 2. Data as of date of acquisition, including: a. Book values of subsidiary's assets and liabilities; b. Fair values of subsidiary's assets and liabilities; c. Fair value of noncontrolling interest, if any; d. Fair value of precombination equity interest, if any. 3. Intercompany transaction data and balances.
95
How does a parent company record a subsidiary?
As an "Investment".
96
Define "consolidated financial statements".
Consolidated financial statements present the financial information of two or more separate legal entities, usually a parent company and one or more of its subsidiaries, as though they were a single economic entity.
97
What is the basic sequence of steps in the consolidating process?
1. Record trial balances on consolidating worksheet; 2. Record adjusting entries, if any; 3. Record eliminating entries; 4. Complete consolidating worksheet; 5. Prepare consolidated financial statements.
98
Where is the consolidating process carried out?
On a consolidating worksheet; not on the books of any entity.
99
Where will a noncontrolling interest account show in consolidated financial statements?
On Consolidated Balance Sheet as a separate item within Shareholders' Equity.
100
What is the effect on an Investment in Subsidiary account when the parent accounts for its investment using the equity method?
The carrying amount of the investment would change with changes in the equity accounts of the subsidiary, including: 1. Increasing with reported subsidiary profits/decreasing with reported subsidiary losses; 2. Decreasing with the payment of dividends by the subsidiary; 3. Decreasing for "depreciation/amortization" of the excess of fair value over book value at the date of investment.
101
What steps should be followed to make adjusting entries to help derive the consolidated financial statements?
1. Determine if any transactions are in transit between the affiliated entities; 2. Record entry on consolidating worksheet to treat in transit transactions as though they were completed.
102
What will be the difference(s) in the consolidated statements resulting from the parent using the cost method or the equity method to account for an investment in a subsidiary to be consolidated?
There will be no difference in the final consolidated statements based on which method the parent uses to account for its investment in a subsidiary. The consolidated statements will be the same regardless of which method is used, only the consolidating process will be different.
103
How is an "in-transit" intercompany transaction handled?
Make an adjusting entry on the consolidating worksheet to complete the transaction as though it had been received by the receiving company.
104
What is the amount at which any noncontrolling interest is recognized in eliminating entry at the date of business combination?
Fair value of Noncontrolling Interest percentage claim to consolidated net assets attributable to the subsidiary. This would include its claim to the Sub's net assets at fair value and any Goodwill recognized in the combination.
105
List some examples of intercompany amounts to be eliminated during a consolidation.
1. Receivables/payables; 2. Interest; 3. Dividends; 4. Bonds.
106
What are the possible accounting methods a parent can use to carry on its books an investment in a subsidiary that will be consolidated?
The parent can use: 1. Cost method; 2. Equity method; 3. Any other method it chooses. Whatever method it uses, the investment account will be eliminated on the consolidating worksheet. (Only the cost and equity methods have been used on prior exams.)
107
When a parent uses the cost method to carry on its books an investment in a subsidiary that it will consolidate, what entries does the parent make on its books related to the subsidiary?
After recording the investment in the subsidiary on its books, in normal circumstances the parent will only recognize its share of the subsidiary's dividends declared/paid as dividend income. It will NOT recognize on its books its share of the subsidiary's reported net income/loss, nor will it adjust its investment account for the subsidiary's income/loss or dividends.
108
When a parent uses the cost method to carry on its books an investment in a subsidiary that it will consolidate, what is the purpose of the reciprocity entry made on the consolidating worksheet?
The reciprocity entry adjusts the parent's investment account for changes in the subsidiary's retained earnings since the business combination up to the beginning of the period being consolidated that have not been recognized in the parent's investment account because it is using the cost method of accounting.
109
What does the investment eliminating entry on the consolidating worksheet accomplish?
It (1) eliminates the investment account (in the subsidiary) brought on to the worksheet by the parent against the shareholders equity accounts (of the subsidiary) brought on to the worksheet by the subsidiary, (2) in the process, it adjusts the subsidiary's identifiable assets and liabilities to fair value at the date of acquisition, and (3) recognizes Goodwill, if any.
110
When a parent uses the equity method to carry on its books an investment in a subsidiary that it will consolidate, what entries does the parent make on its books related to the subsidiary?
Adjusts on its books the carrying value of its investment in the subsidiary to reflect: 1. The parent's share of the subsidiary's income or loss; 2. The parent's share of dividends declared by the subsidiary; 3. The amortization/depreciation of the difference between the FMV of identifiable assets (but not Goodwill) and the book value of those assets.
111
What is the effect on consolidated values when the fair values of a subsidiary's identifiable assets are less than the subsidiary's book values for those assets at the date of a business combination?
On the consolidating worksheet: 1. The identifiable assets are written down to fair value at the date of the business combination; 2. Any depreciation/amortization expense on those assets taken by the subsidiary will be reduced on the consolidating worksheet to an amount based on the lower fair values.
112
How does the noncontrolling interests in a subsidiary's income/loss and assets/liabilities get reported in consolidated financial statements?
Noncontrolling interest in a subsidiary's net income or net loss gets reported as a separate line item in the consolidated income statement; the consolidated income/loss is allocated between the parent and the noncontrolling interest. Noncontrolling interest in a subsidiary's assets and liabilities gets reported as a separate line item in shareholders' equity in the consolidated balance sheet.
113
Under what conditions will a bargain purchase gain be recognized by a parent?
When, at acquisition, the fair value of subsidiary's identifiable net assets is greater than the investment value to acquire those net assets. Investment value is the parent's investment cost plus the fair value of any noncontrolling interest in the subsidiary.
114
What amount of intercompany revenues and expenses must be eliminated on the consolidating worksheet?
The full amount (100%) of revenues and expenses that resulted from intercompany transactions must be eliminated, even if the transaction did not result in a profit to the "selling" affiliate.
115
What amount of intercompany receivables and payables must be eliminated on the consolidating worksheet?
The full amount (100%) of receivables and payables that resulted from intercompany transactions must be eliminated on the consolidating worksheet.
116
What are the only types of transactions recognized for consolidation?
Transactions with non-affiliates.
117
List the main types of intercompany transactions and intercompany balances.
1. Receivables/payables; 2. Revenues/expenses; 3. Inventory; 4. Fixed assets; 5. Bonds.
118
What is the treatment of intercompany transactions and balances on the consolidating worksheet?
Eliminate all Intercompany transactions and balances.
119
What are the accounts (on a consolidating worksheet) that may be affected by an intercompany inventory transaction?
1. Sales/Purchases; 2. Net income/loss; 3. Ending Inventory; 4. Beginning Inventory.
120
What is the entry on the consolidating worksheet to eliminate intercompany inventory profit that is in ending inventory?
DR: COGS (or Inventory) - I/S CR: Ending inventory - B/S The entry eliminates the profit brought on the worksheet by the selling affiliate and reduces the ending inventory brought on the worksheet by the buying affiliate to cost from an outsider.
121
What is the entry to eliminate intercompany inventory sales and intercompany inventory purchases on the consolidating worksheet?
DR Intercompany Sales CR: Purchase (Inventory) The entry would be for the full amount of intercompany sales/purchases during the period.
122
What is an intercompany inventory transaction?
When one affiliated entity sells goods to be resold (merchandise inventory) or used (raw materials inventory) by the buying affiliate an intercompany inventory transaction has occurred.
123
Since intercompany inventory sales and intercompany inventory purchases exactly offset each other, resulting in no net effect on consolidated income, why must they be eliminated?
Intercompany inventory sales and intercompany inventory purchases must be eliminated so that the absolute amount of sales and purchases will not be overstated on the consolidated income statement. Such overstatements would misrepresent the level of operating activity for the firms.
124
What are the differences between when a 100%-owned subsidiary sells goods for a profit to a parent and when a less-than-100%-owned subsidiary sells goods for a profit to a parent?
In both cases, the full amounts of the intercompany sales and purchases have to be reversed and the full amount of profit in ending inventory has to be eliminated (by reducing profit and reducing inventory carrying value). When the subsidiary is 100% owned, the parent (and parent shareholders) absorb the entire effect of the reductions. When the subsidiary is less than 100% owned, the reductions (in profit and asset value) are allocated between the parent and the noncontrolling interest based on percentage ownership.
125
What amount of intercompany inventory sales and intercompany inventory purchases must be eliminated?
The full amount (100%) of intercompany inventory sales and intercompany inventory purchases must be eliminated (against each other) on the consolidating worksheet, even if the sale was at no profit to the selling affiliate.
126
If not eliminated, what effect will the intercompany sale of a fixed asset at a loss have on the reported value of the fixed asset for consolidated statement purposes?
Unless the appropriate eliminating entry is made, the intercompany sale of a fixed asset at a loss will result in an understatement of the value of the fixed asset on consolidated financial statements.
127
How is a gain or loss on an intercompany sale of a fixed asset confirmed (recognized) for consolidated statement purposes?
A gain or loss on an intercompany sale of a fixed asset is confirmed through the depreciation expense taken each period by the buying affiliate on the intercompany profit or loss. When the sale was at a gain (loss), the buying affiliate will take more (less) depreciation than the selling affiliate would have taken. That difference (each period) confirms a part of the gain or loss each period.
128
What is the eliminating entry for consolidating purposes that would be necessary immediately following an intercompany sale of a fixed asset at a gain?
DR: Fixed Asset to reestablish original cost from non-affiliate. DR: Gain to eliminate intercompany gain on sale. CR: Accumulated Depreciation to reestablish accumulated depreciation written off by selling affiliate.
129
List the consolidation accounts affected by intercompany fixed asset transactions.
1. Net Income; 2. Fixed Asset; 3. Accumulated Depreciation; 4. Depreciation Expense/Accumulated Depreciation.
130
If not eliminated, what effect will the intercompany sale of a fixed asset at a gain have on the reported value of the fixed asset for consolidated statement purposes?
Unless the appropriate eliminating entry is made, the intercompany sale of a fixed asset at a gain will result in an overstatement of the value of the fixed asset on consolidated financial statements.
131
What effect does an intercompany sale of a fixed asset by a less than 100% owned subsidiary to a parent have on the consolidated financial statements that is different than the sale by a parent to a subsidiary or by a 100% owned subsidiary to a parent?
In all cases the full amount of any intercompany gain or loss will be eliminated; however, if the sale is from a less-than-100%-owned subsidiary, the gain or loss (and subsequent elimination adjustments of depreciation expense) will be allocated on the worksheet between the parent and the noncontrolling interest in proportion to their ownership percentages.
132
When do intercompany bonds exist?
When one affiliate owns (as an investment) the bonds issued by another affiliate (a liability).
133
What determines the amount of any net gain or loss resulting from bonds becoming intercompany?
The sum or difference between the premium or discount on the bond investment (of the buying affiliate) and the premium or discount on the bonds payable (of the issuing affiliate). Gain would result from eliminating: 1. Premium on Bond Payable or 2. Discount on Investment. Loss would result from eliminating: 1. Discount on Bond Payable or 2. Premium on Investment.
134
How does the gain or loss on constructive retirement of intercompany bonds get recognized on the books of the separate affiliated companies?
The gain or loss on constructive retirement of intercompany bonds get recognized on the books of the separate affiliated companies through the amortization on their separate books of the premium(s) and/or discount(s) on the bond investment and/or the bonds payable.
135
For consolidated purposes, what accounts can be affected by intercompany bonds?
1. Bonds Payable; 2. Premium or Discount on Bonds Payable; 3. Investment in Bonds; 4. Premium or Discount on Investment in Bonds; 5. Interest Income/Interest Expense; 6. Interest Payable/Interest Receivable.
136
What eliminating entry would be required for consolidating purposes immediately following an intercompany bond purchase that involved a discount on bonds payable and a premium on bond investment?
DR: Bonds Payableat face amount Loss on Constructive Retirement - sum of Premium on B/I + Discount on B/P CR: Investment in I/C Bonds at face amount CR: Premium on I/C Bond Investment - for full amount CR: Discount on I/C Bonds Payable - for I/C amount.
137
What are two objective differences between U.S. Generally Accepted Account Principles (GAAP) and International Financial Reporting Standards (IFRS) in determining control?
Under U.S. GAAP only outstanding voting rights are used to measure control; under IFRS securities currently exercisable or convertible into voting rights are used in assessing control. Under U.S. GAAP only if an entity has more than 50% voting ownership can it have control. Under IFRS an entity may have control even when it does not have more than 50% voting control.
138
What is the main difference in the preparation of financial statements between consolidating financial statements and combining financial statements?
In consolidating financial statements, the investment accounts of the parent company in the other companies being consolidated are eliminated against the parent's percentage ownership of the equity of those companies. In combining financial statements, any investment one combining company has in another combining company is eliminated against the owned company's equity in the amount of the investment, not in the amount of percentage ownership. Therefore, there can be no difference between the dollar amount of the investment and the dollar amount of equity eliminated.
139
What is the main different between when combined financial statements would be appropriate and when consolidated financial statements would be appropriate?
Consolidated financial statements must be prepared only when one of the companies being consolidated (a parent company) has controlling interest, either directly or indirectly, in the other companies being consolidated. Combined financial statements can be prepared when there is no single company (parent company) that has control of the companies being combined.
140
Identify at least five financial liabilities.
1. Accounts payable; 2. Notes and Bonds payable; 3. Option contracts (with unfavorable terms); 4. Futures and forward contracts (with unfavorable terms); 5. Swap contracts (with unfavorable terms).
141
What are the basic types or categories of financial instruments?
1. Cash; 2. Evidence of an ownership interest in an entity; 3. Contracts that result in an exchange of cash or ownership interest in and entity that: a. Imposes on one entity a contractual obligation (liability); and b. Conveys to a second entity a contractual right (asset).
142
Identify at least five financial assets.
1. Cash and cash equivalents; 2. Accounts receivable; 3. Investments in debt or equity securities; 4. Ownership interest in a partnership, joint venture, or other entity; 5. Option contracts (with favorable terms); 6. Futures and forward contracts (with favorable terms); 7. Swap contracts (with favorable terms).
143
What are the categories of financial liabilities identified under International Financial Reporting Standards (IFRS)?
1. Financial liabilities measured at fair value with changes reported through profit/loss, including: a. Liabilities held for trading; b. Derivatives (that are liabilities); c. Financial liabilities for which the fair value option is elected. 2. Other liabilities.
144
What are the categories of financial assets identified under International Financial Reporting Standards (IFRS)?
1. Financial assets measured at fair value with changes reported through profit/loss; 2. Loans and receivables; 3. Instruments held to maturity (other than loans and receivables); 4. Instruments available for sale.
145
How are financial assets that are classified as "Loans and Receivables" measured and reported under International Financial Reporting Standards (IFRS)?
Financial assets classified as "Loans and Receivables" under IFRS are measured at amortized cost, with related interest and amortization recognized in current income.
146
Under International Financial Reporting Standards (IFRS), how is an impairment of a financial asset determined and reported?
Under IFRS, an impairment loss is determined as the difference between the carrying amount of the asset and its recoverable amount. The amount of any impairment loss is recognized in current income.
147
What must be disclosed about each significant concentration of credit risk?
1. Information about the common activity, region, or economic characteristic that identifies the concentration; 2. The maximum (gross) amount of loss due to the credit risk; 3. The entity's policy of requiring collateral or other security to support financial instruments subject to credit risk; 4. The entity's policy of entering into master netting arrangements to reduce the credit risk associated with financial instruments.
148
If it is not practicable to estimate the fair value of a financial instrument, what must be disclosed?
1. The reasons why it is not practicable to estimate fair value and 2. Information pertinent to estimating fair value, such as carrying amount, effective interest rate, maturity date, etc.
149
Define "market risk"
Market risk is the possibility of loss from changes in market values due to changes in economic circumstances, not necessarily due to the failure of another party to perform.
150
Define "credit risk".
Credit risk is the possibility of loss from the failure of another party (or parties) to perform according to the terms of a contract.
151
List the disclosure requirements for financial instruments where it is practicable to estimate fair value.
1. Fair Value; 2. Related carrying amount; 3. Whether instrument/amount is an asset or liability.
152
What is the "underlying" element of a derivative instrument?
A specified price, rate, or other variable (e.g., a stock price, interest rate, currency exchange rate, etc.).
153
Define "hedging".
A risk management strategy that involves using offsetting (or counter) transactions or positions.
154
What are the three basic elements of a derivative?
1. One or more underlying and one or more notional amounts; 2. Requires no initial net investment; 3. Terms require or permit a net settlement.
155
What is an embedded derivative?
An embedded derivative is a portion of, or term in, a contract (host contract that is not itself a derivative) that behaves like a derivative.
156
What is the "notional" amount element of a derivative instrument?
A specified unit of measure (e.g., number of shares of stock, pounds or bushels of a commodity, number of foreign currency units, etc.).
157
How is the value or settlement amount of a derivative determined?
By the multiplication (or other calculation) of the notional amount and the underlying.
158
List the four different possible uses of derivatives.
1. Derivatives not used as a hedge; 2. Fair value hedges; 3. Cash flow hedges; 4. Foreign currency hedges.
159
What is the formal documentation required at the inception of a fair value hedge?
1. The hedging relationship; 2. The objective and strategy for undertaking the hedge; 3. Identification of the hedging instrument; 4. Nature of the risk being hedged; 5. How effectiveness of the hedge will be assessed.
160
Define a "fair value hedge."
The hedge of exposure to changes in fair value of a recognized asset, recognized liability, or an unrecognized firm commitment from a particular risk.
161
List the conditions under which an "unrecognized firm commitment" exists.
When an entity enters into a contract to buy or sell but has not yet booked the transaction.
162
What are the accounting requirements for a change in the fair value of a fair value hedging instrument and the asset, liability, or firm commitment being hedged?
1. Adjusting carrying amount of the derivative and hedged item to fair value; 2. Recognizing gains/losses from revaluing the derivative and the hedged item in current income.
163
Define a "cash flow hedge".
The hedge of an exposure to variability (changes) in the cash flow associated with a (recognized) asset, liability, or a forecasted transaction due to a particular risk.
164
Define a "forecasted transaction".
A forecasted transaction is a planned or expected transaction for which there is not yet either a firm commitment or any rights or obligations established.
165
What are the conditions necessary for a forecasted transaction to be the hedged item in a cash flow hedge?
The forecasted transaction is: 1. Specifically identified as a single transaction or group of individual transactions with the same risk exposure; 2. Probable of occurring; 3. With an external party (with limited exceptions); 4. Capable of affecting cash flows and earnings; 5. Not for acquisition of an asset or incurrence of a liability accounted for at fair value with the change reported in current income.
166
How are changes in the fair value of derivatives used to hedge cash flows treated?
Each period the change in fair value of the derivatives is used to: 1. Adjust the derivative instrument to fair value; 2. Recognize in other comprehensive income an amount equal to the change in present value of expected cash flows of the hedged item; 3. Recognize any difference between change in fair value and change in present value of expected cash flows in current income.
167
Identify five (5) kinds of foreign currency exposure that may be hedged.
1. Forecasted foreign-currency-denominated transactions; 2. Unrecognized foreign-currency-denominated firm commitments; 3. Foreign-currency-denominated recognized assets or liabilities; 4. Investments in AFS Securities; 5. Net investments in foreign operations.
168
Define "foreign currency hedge".
The hedge of an exposure to changes in the dollar value of assets or liabilities (including certain investments) and planned transactions that are denominated (to be settled) in a foreign currency.
169
What should disclosures for derivatives designated as fair value hedges distinguish between?
Fair value hedges, cash flow hedges, hedges of investments in foreign operations, and other derivatives.
170
List the required disclosures for derivatives designated as fair value hedges.
1. Net gain/loss recognized in earnings and where net gain/loss is reported in the financial statements; 2. Net gain/loss recognized in earnings from hedged firm commitments that no longer qualify for hedge treatment.
171
Are part term hedges allowed under IFRS?
Part term hedges are allowed.
172
Which U.S. GAAP characteristic of a derivative is not included in the definition of a derivative under IFRS?
Notional Amount.
173
What is the control determination concept?
The determination of whether or not a party transferring a financial asset has surrendered control over the asset.
174
What are the basic criteria for transfer of control over a financial asset?
1. The transferred asset has been isolated from the transferor and its creditors; 2. Each transferee has the right to pledge or exchange the asset received; 3. The transferor does not maintain effective control over the transferred assets.
175
What are the three basic concepts that underlie accounting for transfers of assets and servicing of assets?
1. Control determination concept; 2. Financial-components concept; 3. Participating interest concept.
176
What is a participating interest?
It is a relationship between one entity (commonly the transferor) with an interest in an entire financial asset and other entities that have an ownership interest in that financial asset. For the relationship to be a participating interest, the interest of all parties must be in an entire financial asset and those interests must have the same priorities and be proportional to ownership with respect to cash flows. Further, the pledging or exchanging of the asset can occur only if all parties agree.
177
Define the "financial-components concept".
Financial assets and liabilities can be disaggregated into components becoming separate assets/liabilities.
178
Under what conditions will a transferor write off (and a transferee recognize) a non-cash financial asset transferred as collateral in a secured borrowing?
When the transferor has defaulted under the terms of the contract and is no longer entitled to redeem the pledged asset. In that case, the transferor will write off the financial asset and the transferee will recognize the financial asset (collateral).
179
What are the requirements for accounting for the transfer of a financial asset as a sale by the transferor?
1. Write off asset sold (or portion thereof); 2. Write on assets obtained and liabilities incurred; 3. Measuring assets and liabilities at fair value; 4. Recognizing gain/loss on the sale in current earnings.
180
Under what conditions is the transfer of a financial asset treated as a secured borrowing with the pledge of collateral?
The transfer of a financial asset is treated as a secured borrowing with pledge of collateral when either: 1. The criteria for surrender of control are not met; or 2. A portion (component) of a financial asset that is not a participating interest is transferred.
181
Describe the accounting treatment for a transfer of a financial asset if criteria for surrender of control are met.
The criteria for surrender of control must be met and either: 1. An entire asset transferred; or 2. A component of an asset that qualifies as a participating interest is transferred.
182
If a portion of a financial asset is sold and another portion retained, how is the amount to be initially recognized for each portion determined?
The carrying value of the entire asset (pre-transfer) is allocated between the portion sold and the portion retained based on their relative fair values at the date of transfer.
183
List the accounting requirements for the purchase of financial assets by the transferee.
1. Writing on all assets obtained and liabilities incurred; 2. Measuring all assets and liabilities at fair value.
184
What does the appropriate accounting for the transfer of a non-cash financial asset as collateral in a secured borrowing depend on?
1. Whether secured party has the right to sell or repledge the collateral; 2. Whether debtor has defaulted.
185
For transfers of financial assets that are appropriately either a sale or secured borrowing with pledge of security, what are the basic guidelines for accounting treatment?
Basic accounting guidelines: 1. Derecognize a transferred asset or portion thereof that qualifies as a sale; 2. Continue to recognize a transferred asset or portion thereof (i.e., a retained interest) that does not qualify as a sale; 3. Recognize any assets or liabilities that result from the transfer.
186
How is the gain or loss on the transfer of a financial asset (or portion thereof) treated as a sale determined?
The gain or loss is measured as the difference between the proceeds received from the sale and the carrying value of the asset (or portion thereof) sold. Proceeds of the sale include any assets obtained and (less) any liabilities incurred in the transfer.
187
What condition results in a servicing liability?
Estimated future revenues are expected to be less than estimated costs of servicing the assets, as reflected in fair value.
188
At what amount are separate servicing assets and servicing liabilities initially recognized?
At fair value at the date of separation from a transferred financial asset or at date of acquisition.
189
What methods may a holder use to measure a servicing asset or a servicing liability after initial recognition?
Subsequent to initial recognition, a servicing asset or servicing liability may be measured at either: 1. Amortized in proportion to and over the period of estimated net income or net loss; or 2. At fair value, with changes in fair value recognized in current income. In either case, a servicing asset should continue to be assessed for impairment.
190
What condition results in a servicing asset?
Estimated future revenues are expected to exceed estimated costs of servicing the assets, as reflected in fair value.
191
What are some common terms used in Transfers of Financial Assets?
Common Terms include: 1. Interest only strip 2. Cleanup call 3. Securitization 4. Wash Sales 5. Factoring
192
What are some major disclosure requirements for a transferor that transfers financial assets in a securitization treated as a sale?
For securitized financial assets accounted for as a sale, disclose information for each major type about: 1. Accounting policies; 2. Characteristics of the securitizations and gain/loss on assets securitized; 3. Key assumption used in measuring fair value at securitization and sensitivity of those measures to changes in key assumptions.
193
What are some major disclosure requirements for a transferee in a secured borrowing with pledge of collateral?
1. Policy for requiring collateral; 2. For collateral that it is permitted to sell or replete: a. Information about sources and uses of collateral; b. Fair value; c. Portion of such collateral that has been sold or repledged.
194
Under what conditions will a debtor write-off (derecognize) a liability?
The debtor pays the creditor and is relieved of its obligation for the liability. OR The debtor is legally released from being the primary obligator under the liability either by the creditor or by law/courts.
195
If a debtor is released as being primarily responsible for a liability but becomes secondarily responsible for the liability, what should be its accounting related to that change?
It will: 1. Derecognize the original liability and the consideration paid for release; 2. Recognize at fair value any liability associated with being secondarily liable for the obligation; 3. Recognize a gain or loss as the difference between the original liability written off and the consideration paid plus the fair value of the secondary liability.
196
When determining whether a debt extinguishment results in a gain or a loss, what are the financial statement adjusting items?
Reacquisition items to be accounted for: Debt issue costs Any unamortized discount/premium Difference between debt's face value and reacquisition amount
197
When determining whether a debt extinguishment results in a gain or a loss, how is that calculated?
Gain/Loss = Reacquisition price - Net Carrying Amount
198
What are two the major U.S. GAAP - IFRS differences related to servicing rights?
1. IFRS considers servicing rights retained in the transfer of a financial asset as a retained interest in the transferred asset, not as a new separate asset as done under U.S. GAAP. 2. Under IFRS the servicing asset would be recognized based on its allocated portion of the carrying value of the entire financial asset before transfer. Allocation is done based on relative fair values.
199
Under IFRS what are the two steps needed for derecognition of a financial asset?
1. Determine whether the financial asset transfer involves the transfer of substantially all of the risks and rewards of ownership. If so, account as a sale of the asset. If not, go to step 2. 2. If the financial asset transfer does not involve substantially all of the risks and rewards of ownership, then determine whether control has been transferred. If so, account for the transfer as a sale; if not account for it as a secured borrowing.
200
How is surrender of control determined under IFRS?
Under IFRS, financial assets are derecognized when the entity loses control of the contractual benefits that comprise the financial asset. Loss of control focuses on the transfer of risks and rewards associated with the financial asset.
201
Define "contingency".
An existing condition (at the balance sheet date) involving uncertainty as to a possible gain or loss that will be resolved when a future event occurs or fails to occur.
202
Describe the accounting treatment when a loss contingency is probable but not reasonably estimable.
Disclose in footnotes.
203
What is the meaning of reasonably possible in the context of contingent liabilities?
Based on professional judgment, the probability of occurrence is neither very high nor remote.
204
What is the meaning of remote in the context of contingent liabilities?
Based on professional judgment, the probability of occurrence is considered to be very low, or as the title implies, remote.
205
Describe the accounting treatment when a loss contingency is reasonably possible.
Disclose in footnotes.
206
Describe the accounting treatment when a loss contingency is remote.
Can be disclosed in footnotes, but not required.
207
Describe the accounting treatment when a loss contingency is probable and can be reasonably estimated.
1. Record loss and liability; 2. If only a range is estimable, must recognize liability for lowest amount in range.
208
What is the meaning of probable in context of contingent liabilities?
Based on professional judgment, the probability of occurrence is considered very high or a near certainty.
209
List the contingency's probability of occurrence categories.
1. Probable; 2. Reasonably Possible; 3. Remote.
210
What is the source of contingent liabilities not requiring a current claim by an outside entity for recognition?
Unasserted claim.
211
What account is debited when premiums are redeemed by customers?
Premium liability.
212
What is the accounting treatment of excess actual loss over recognized loss on a contingent liability?
Additional loss in period of lawsuit resolution (estimated loss was recognized previously).
213
Describe the accounting treatment when a gain contingency is probable.
Disclose in footnote.
214
Describe the accounting treatment when a gain contingency is possible.
Disclose in footnote.
215
Describe the accounting treatment when a gain contingency is remote.
Disclosing in a footnote is not recommended.
216
In what period is a premium expense recognized?
Year of sale.
217
List examples of US contingent liabilities equivalent to provisions under International Standards.
1. Warranty Liability; 2. Premium Liability.
218
What is the definition of provision for International Standards?
Liability that is uncertain in terms of timing and amount but is not of uncertain existence.
219
What is meant by "more likely than not" with respect to the probability for a provision?
Greater than 50%.
220
When are contingent liabilities recognized under International Standards?
They are not recognized.
221
For a range of equally probable amounts for a provision, what amount is used for recognition under International Standards?
Midpoint of range.
222
How is diluted earnings per share calculated?
(Net income available to common adjusted for effects of potential common stock) / (weighted average common shares plus shares issuable from potential common stock).
223
Where must earnings per share (EPS) be disclosed?
On the face of the financial statements.
224
What is the term that refers to the following concept?: If a year's preferred dividend is not paid (skipped), no other dividends may be paid before the skipped dividends (dividends in arrears) are paid.
Cumulative.
225
What does a complex capital structure include?
Typically includes common stock, along with equity contracts and convertible securities.
226
List the two types of earnings per share.
Basic and Diluted.
227
What is a simple capital structure?
One in which the corporation only has common stock outstanding or one in which the corporation has common stock and nonconvertible preferred stock outstanding.
228
What amount of preferred dividend is subtracted for cumulative preferred stock?
One full year's dividends regardless of amount declared or paid.
229
What is the tax effect for preferred stock dividends?
There is no tax effect.
230
How is basic earnings per share calculated?
(Net Income) / (Weighted Average Common Shares Outstanding).
231
What amount of preferred dividends is subtracted for noncumulative preferred stock?
Amount declared.
232
What is the accounting effect of a stock split dividend between balance sheet date and issuance?
Adjustment of all earnings per share (EPS) amounts for stock split or dividend.
233
Define "contingent shares".
Shares issuable for little or no cash consideration upon satisfaction of certain conditions.
234
When are contingent shares considered outstanding?
When their conditions have been met.
235
How is basic earnings per share calculated if common stock and nonconvertible preferred stock are outstanding?
(net income - preferred dividends) / (weighted average common shares outstanding).
236
What is the general rule for stock splits and dividend in the weighted average share calculation?
Treat as outstanding from inception of firm ("AS IF").
237
What is an antidilutive potential common stock?
One that increases earnings per share (EPS) when added into basic EPS.
238
When bonds are sold at premiums, what will interest expense reflect?
It will reflect periodic amortization.
239
What does diluted earnings per share (EPS) include?
Includes securities that may become common stock in the future, such as convertible stock and stock options, in addition to actual shares of common outstanding.
240
What is the order of inclusion of preferred common stock into diluted earnings per share?
In order of most dilutive first.
241
Describe the diluted earnings per share formula.
(Net income available to common adjusted for effects of potential common shares) / (weighted average common shares plus shares issuable from potential common shares).
242
What is the treatment of antidilutive preferred common stock in earnings per share (EPS)?
It is ignored.
243
Which potential common stock (PCS) is the most dilutive when there are multiple PCS?
The one with the lowest ratio of numerator effect/denominator effect.
244
When are options antidilutive?
When the option price exceeds the market price.
245
Are diluted potential common stock incorporated into diluted earnings per share?
Yes, they are incorporated.
246
When are diluted earnings per share dilution-potential determined for ordinary shares under the International Financial Reporting Standards?
Determined independently each year.
247
What are the earnings per share (EPS) for extraordinary items in IFRS?
There are none, extraordinary items do not exist.
248
Where is gain/loss on disposal shown?
In a separate line item in the DOP section of the income statement or netted against the discontinued component's operating income with a footnote disclosure showing both.
249
What is the amount of disposal gain from a discounted operation disclosed in the income statement?
The actual amount for the period.
250
Define "loss on disposal".
Actual losses and estimated losses when book value \> fair value less cost to sell.
251
Where is the discontinued operations disclosure located in the income statement?
Below income from continuing operations, above extraordinary items.
252
What level within an entity is subject to discontinued operations reporting?
The components of an entity with operations and cash flows that are distinguishable from the rest of the entity for operational and financial reporting purposes.
253
Under International Financial Reporting Standards (IFRS), how are discontinued operations identified?
A component with operations that are a separate major line of business or geographical area, part of a coordinated plan to sell or and subsidiaries acquired with the intent to resell.
254
What is the amount of operating income from a discontinued operation that must be disclosed in the income statement?
Actual amount for the period.
255
List the two values to report for discontinued operations.
Income from discontinued operations; Gain or loss on disposal.
256
Define "gain on disposal".
Actual gains are recognized but estimated gains are not.
257
List some examples of items that are not considered extraordinary.
Write-down of inventory and other assets; Discontinued operations gains and losses; Accounting changes; Investment losses and gains; Effects of a strike.
258
Does International Financial Reporting Standards (IFRS) permit the presentation of extraordinary items?
No, it is not permitted.
259
List the environmental elements that must be considered when classifying an item as extraordinary.
General business environment; Specific industry environment; Geographical environment.
260
List some examples of items that are always extraordinary by definition.
Direct result of a major casualty.; Expropriation of assets by a foreign government; Result of a new law that meets the two criteria.
261
What criteria must be met for an item to be considered extraordinary.
Unusual and infrequent.
262
Define "functional currency".
The currency of the primary economic environment in which an entity operates and generates cash flows.
263
Define "exchange rate".
The price of one unit of a country's currency expressed in units of another country's currency.
264
How do you determine the dollar amount to settle a transaction denominated in a foreign currency?
Multiply the number of foreign currency units specified by the terms of the transaction by the spot exchange rate at the current date.
265
Define "spot rate".
The exchange rate at current date.
266
Define "foreign currency translation".
Financial statements denominated in (expressed in terms of) a foreign currency but to be reported in the domestic currency (on financial statements).
267
What is the general rule for handling a foreign currency denominated account that is outstanding as of a balance sheet date?
1. Determine Dollar Amount to Settle Transaction at Balance Sheet Date (# of foreign currency units X exchange rate/Spot = $ Value). 2. Determine Difference Between Recorded Amount and Settlement Amount. 3. Record Difference as adjustment to foreign currency denominated account and as exchange gain/loss for the period.
268
Define "foreign currency transactions".
Transactions of a domestic entity denominated in a foreign currency but to be recorded on the domestic entity's books in the domestic currency.
269
Define "indirect exchange rate".
The foreign price of one domestic unit of currency.
270
Define "forward rate".
The exchange rate (existing now) for a specified future date.
271
What is the general rule for recording a foreign currency operation transaction at the date the transaction is initiated?
1. Translate Transaction into Dollars using Current Spot Exchange Rate (# of foreign currency units X exchange rate/Spot = $ Value). 2. Record Asset, Liability, Revenue, Expense, Loss and/or Gain at Dollar Amount.
272
What is a foreign currency operating transaction?
A transaction that is denominated (will be settled) in a foreign currency (i.e., other than the recording entity's currency).
273
What is the general rule for handling a foreign currency denominated account at the settlement date of the account?
1. Determine Dollar Amount to Settle Transaction at Balance Sheet Date (# of foreign currency units X exchange rate/Spot = $ Value). 2. Determine Difference Between Recorded Amount and Settlement Amount. 3. Record Difference as adjustment to foreign currency denominated account and as exchange gain/loss for the period. 4. Record settlement of foreign currency denominated account
274
What are the general rules for treatment of a foreign currency operating transaction?
1. Measure and record the transaction on books in terms of the functional currency; 2. Convert foreign currency units to functional currency units using the spot exchange rate; 3. Recognize the effect of exchange rate changes as gains/losses in period of exchange rate change.
275
At what dates can a gain or loss be recognized on a foreign currency denominated operating transaction account balance?
1. At balance sheet date, if one occurs between the date the transaction is initiated and settled. 2. At settlement date of the foreign currency denominated account balance.
276
List the two general purposes for entering into a forward contract.
Hedging and Speculation.
277
What is a forward contract?
Agreements (contracts) to buy or sell (or that give the right to buy or sell) a specified commodity in the future at a price (rate) determined at the time the forward contract is executed.
278
What is the nature of a foreign currency option contract?
An agreement that gives the right (option) to buy or sell a specified amount of a foreign currency at a specified (forward) rate during or at the end of a specified time period.
279
What is the difference between a foreign currency forward exchange contract and a foreign currency option contract?
In a foreign currency forward contract an exchange of currencies (or comparable settlement) must occur as provided by the terms of the contract. In a foreign currency option contract an exchange of currencies may occur at the option of the option holder. If the option is exercised, an exchange of currencies will occur; if it is not exercised, no exchange of currencies will occur.
280
Define "foreign currency transaction".
When a domestic entity engages in a transaction with a foreign entity and the transaction is denominated in (i.e., to be settled in) a foreign currency.
281
Define "forward exchange contract".
Agreement to exchange units of currencies at a specified future date at an exchange rate set now.
282
What does a forward contract hedge against?
Hedges against possible loss in dollar value of foreign currency received in the future by selling that foreign currency now at a specified rate for delivery received in future.
283
Define "hedging".
A risk management strategy which generally involves offsetting or counter transactions so that a loss on one transaction would be offset (at least in part) by a gain on the other transaction.
284
List the criteria for designation of hedging forecasted transactions.
1. The forecasted transaction must be identified, probable of occurring, and present an exposure to foreign currency price changes; and 2. Use of a forward contract to hedge must be consistent with company risk management policy.
285
List the criteria for designation of hedging foreign currency commitments.
1. The commitment being hedged must be firm, be identified, and present exposure to foreign currency price changes; 2. The forward contract must be designated and effective as a hedge of a commitment and must be in an amount that does not exceed the amount of the commitment.
286
What kind of hedge is the hedge of a firm commitment?
The hedge of a firm commitment can be either a fair value hedge or a cash flow hedge.
287
What kind of a hedge is the hedge of a forecasted transaction?
A Cash Flow Hedge.
288
What purpose does hedging of unrecognized firm commitments serve?
Offsets the risk of exchange rate changes on firm commitments for a future purchase or sale to be denominated in a foreign currency.
289
What purpose does hedging of a forecasted transaction serve?
Offsets the risk of exchange rate changes on non-firm but budgeted transactions denominated in a foreign currency.
290
What purpose does hedging of forecasted transactions serve?
Offsets risk of exchange rate changes on non-firm but budgeted foreign currency transactions between the time the transaction is planned and when it becomes firm.
291
What purpose does hedging of recognized assets or liabilities serve?
Hedges exposed receivables or payables to offset the risk of exchange rate changes on already booked assets and liabilities denominated in a foreign currency.
292
What purpose does hedging of foreign currency commitments serve?
Offsets the risk of exchange rate changes on a firm commitment denominated in a foreign currency for a future purchase or sale.
293
What purpose does hedging of available-for-sale investments serve?
Offsets the risk of exchange rate changes on this class of investments denominated in a foreign currency.
294
If change in the value of the hedge is ineffective in offsetting the change in the expected cash flow of the forecasted transaction, how should that loss or gain be reported?
The loss or gain should be reported in current income.
295
What purpose does hedging of net investment in foreign operations serve?
Offsets risk of exchange rate changes on an investment in a foreign operation.
296
If the change in value of the forward contract is effective in offsetting a decrease or an increase in the expected cash flow of the forecasted transaction, how should the gain or the loss be deferred and reported?
The gain or the loss should be deferred and reported as a component of "other comprehensive income."
297
What is the purpose of a hedge of a foreign-currency-denominated investment classified as available-for-sale?
Offsets the risk of exchange rate changes on a foreign-currency-denominated investment in securities classified as available-for-sale.
298
A Hedge of a Net Investment in a Foreign Operation is what type of hedge?
An Economic Hedge.
299
What purpose does hedging of a recognized asset/liability serve?
Offsets the risk of exchange rate changes on an existing asset or liability.
300
List the criteria for designation of hedging investments in foreign operations.
Use of hedge instrument to hedge net investment in foreign operation requires the contract be designated as a hedge of net investment and be highly effective as an economic hedge.
301
What hedge form can a hedge of a recognized asset or liability be designated as?
Either a cash flow hedge or a fair value hedge.
302
List the criteria for designation of hedging recognized assets/liabilities.
1. The asset or liability is denominated in a foreign currency and has already been booked; 2. The gain or loss on the hedged asset or liability must be recognized in earnings.
303
What kind of hedge is a hedge of an investment available-for-sale?
A Fair Value Hedge.
304
What purpose does hedging of an investment in foreign operations serve?
Offsets risk of exchange rate changes on translation of financial statements of foreign operation, from foreign currency to dollars.
305
List the criteria for designation of hedging investments available for sale.
1. The securities being hedged must be identified and must not be traded in the investor's currency; 2. The forward contract must be designated and highly effective as a hedge of the investment, and in an amount that does not exceed the amount of the investment being hedged.
306
What is the risk being hedged when using a forward contract for speculation?
There is no separate risk being hedged. The forward contract and the resulting loss or gain stand alone.
307
What purpose does foreign currency speculation serve?
To make a gain as a result of exchange rate changes by buying foreign currency for future delivery at a price lower than its value when delivered, or by selling foreign currency for future delivery at a price higher than it can be bought at delivery date.
308
How are forward contracts entered into for speculative purposes accounted for?
The forward exchange contract is measured (valued) and recorded at the forward exchange rate (quoted now) for exchanges that will occur at the maturity date of the contract. Any change in value resulting from changing forward exchange rates will be recognized in current income.
309
What is a recording currency?
The currency in which an entity maintains its books of accounts. Normally, the recording currency is the local currency of the country in which an entity is located.
310
Why might an entity need to translate financial statements expressed in a foreign currency?
Translation may be needed to: 1. Apply the equity method of accounting to an investee; 2. Prepare combined financial statements; 3. Prepare consolidated financial statements.
311
What is a reporting currency?
It is the currency in which final financial statements are expressed.
312
What is a functional currency?
It is the currency of the primary economic environment in which an entity operates and generates net cash flows. It can be the recording currency, an affiliate's reporting currency, or another currency.
313
What is foreign currency translation?
It is the conversion (translation) of financial statements expressed in one currency into comparable financial statements expressed in another currency.
314
When does Functional Currency = (Local, foreign) Recording Currency?
When operations of the foreign entity are relatively self-contained and integrated within the country in which it is located, and the economy of that country is not in hyperinflation.
315
When does Functional Currency = Another Foreign Currency?
When a foreign entity generates most of its cash flows in currency of another foreign country or when it is required to use another currency by law or contact.
316
When does Functional Currency = Reporting Currency ($)?
The functional currency would be the reporting currency: 1. When the foreign entity is a direct and integral component or extension of a U.S. entity's operations; or 2. When the local economy of the foreign entity is highly inflationary.
317
How is retained earnings converted from one currency to another when translation (not remeasurement) is used?
Retained earnings is not translated, but rather is calculated as of the balance sheet date. The calculation is: Beginning Retained Earnings ($) + Translated Net Income/-Net Loss ($) - Dividends declared translated at the spot rate at date of declaration = Ending Retained Earnings ($).
318
What exchange rate or rates should be used to translate (not remeasure) paid-in capital accounts from one currency to another currency?
The historic exchange rate, that existed when the paid-in capital items arose, but not earlier than when the investment in the entity was initially made.
319
What exchange rate or rates should be used to translate (not remeasure) asset and liability accounts from one currency to another currency?
The spot exchange rate (closing rate) as of the balance sheet date.
320
What current exchange rates are used when applying a conversion using translation for revenues, expenses, gains, and losses?
Either: 1. The exchange rate that existed when the items was earned or incurred; or 2. The average exchange rate for the period, if that is not materially different than the actual rates when earned or incurred.
321
What is the name of the method used when financial statements are remeasured?
Conversion Method Used to Convert Accounts from Foreign Currency Units to Dollars.
322
How is the conversion adjustment reported when the remeasurement (not translation) method of converting financial statements from one currency to another is used?
Adjustment is reported as a Translation Gain or Loss in the Income from the Continuing Operations section of the Income Statement.
323
When is the remeasurement method of converting financial statements from one currency to another currency used?
Remeasurment is used when converting from a recording currency (that is not the functional currency) to the functional currency. This might occur, for example, when: 1. The recording currency is in a highly inflationary economy; 2. The operations of the foreign entity are a direct and integral component or extension of its parent; 3. The functional currency is not the local foreign currency, but another foreign currency (other than the reporting currency).
324
What exchange rate or rates should be used to remeasure (not translate) non-monetary accounts from one currency to another currency?
Historic exchange rate.
325
What exchange rate or rates should be used to remeasure (not translate) monetary accounts from one currency to another currency?
Current (spot) exchange rate.
326
How are financial statements converted when the functional currency is neither the recording currency nor the reporting currency but the currency of another (third) country?
The financial statements are first remeasured from the recording currency to the functional currency and then translated from the functional currency to the reporting currency.
327
List the general test for impairment.
Book value \> Recoverable Cost.
328
What items must be reported for impairment losses?
Report the loss as part of ordinary income and also disclose. 1. The asset impaired; 2. The events leading to impairment; 3. The amount of the impairment loss; 4. The method of determining fair value, including interest rate.
329
How is the amount of impairment loss on assets held for disposal determined?
Fair value less cost to sell.
330
How are assets grouped for impairment testing?
Assets are grouped at the lowest possible organizational level where cash flows can be identified.
331
List the impairment tests for assets in use
1. Sum net future cash flows from asset (recoverable cost); 2. If sum \> book value, no impairment; 3. If sum
332
When is a held for sale asset impaired?
Impaired when book value exceeds its fair value less cost to sell at the end of the reporting period.
333
How is the amount of impairment loss on asset in use determined?
The amount by which the carrying value of the asset exceeds its market value.
334
What is the value in use?
The present value of the future cash flows generated from the asset or cash generating unit.
335
Are reversals of impairment allowed under International Financial Reporting Standards (IFRS)?
Yes, they are allowed.
336
What is the recoverable amount under IFRS?
The higher of the fair value less the cost to sell or the assets value in use.
337
How are assets grouped for impairment testing under International Financial Reporting Standards (IFRS)?
At the "cash generating unit" level.
338
What is a cash generating unit?
The smallest identifiable group off assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets.
339
Under IFRS, how is the impairment loss presented if the asset is carried at fair value?
Any impairment loss would be classified out of other comprehensive income and into earnings.
340
What are temporary declines in inventory?
Inventory declines that are expected to reverse by year-end.
341
When are revenues recognized in interim reporting?
Revenues are recognized in each interim period as they would be in an annual period.
342
Describe the general rule for expense recognition in interim reporting when expense is directly related to revenue.
Recognized in the same period as the related revenue.
343
List the steps in estimating income tax for interim reporting.
1. Annual rate is reestimated; 2. Rate is applied to total interim income through the end of the current period; 3. The income tax reported in previous periods is subtracted from the results in the second step to yield the income tax expense for the current period.
344
What are permanent declines in inventory?
Inventory declines that are not expected to reverse in the current year.
345
Describe the general rule for expense recognition in interim reporting when expense is not directly related to revenue.
1. If the cost or expense has no relationship to other quarters, recognize the entire expense in the quarter in which the cost was incurred; 2. If the cost or expense benefits other quarters, allocate the cost to those other quarters and recognize the appropriate amount of expense in those quarters.
346
How are permanent declines in inventory value accounted for?
1. Recognized as losses in the interim periods in which they occur; 2. Later recoveries are recognized as gains only to the extent of previous losses; 3. Cannot be written up above cost.
347
How are temporary declines reported at interim?
Not recognized as losses in the interim periods in which they occur.
348
Describe the overall guideline for interim reporting under U.S. accounting standards.
Integral view. Interim periods are an integral part of the annual period.
349
How is Last In First Out (LIFO) liquidation in an interim period accounted for when restoration is expected?
The interim period cost of goods sold should reflect the estimated cost of the replacement.
350
Is the gross margin method acceptable for annual reporting?
Gross margin method is acceptable for interim reporting but not for annual reporting.
351
Describe the overall guidelines for interim reporting under international accounting standards.
Discrete view. Interim periods are stand-alone periods.
352
How are cost accounting variances accounted for in interim reporting?
Those expected to be absorbed by the end of the current year are deferred.
353
How is Last In First Out (LIFO) liquidation in an interim period accounted for when restoration is not expected?
The interim period cost of goods sold should reflect the actual cost of the layer liquidated.
354
How are accounting principle changes accounted for in interim reporting?
Accounting is the same as for an annual period. Disclosures are required for the interim period of change and for subsequent interim periods.
355
List the required interim information that must be reported for segments.
1. External revenues (other than from intersegment sales); 2. Intersegment revenues; 3. Segment profit or loss.
356
When is the gross margin method for inventory permitted?
1. Permitted for interim reporting but not annual reporting; 2. Use must be disclosed in footnote.
357
How is a change in estimate accounted for during an interim period?
Accounted for in the interim period in which it is made.
358
How is depreciation recorded by the lessor in a capital lease?
No asset on books to depreciate.
359
Define "capital lease".
A lease that transfers the risks and rewards of ownership to the lessee.
360
What is the annual rent expense or revenue calculation for operating leases?
Total rental over lease term/number of years in lease term.
361
How is depreciation recorded by the lessee in an operating lease?
Lessee has no asset to depreciate.
362
How is depreciation recorded by the lessor in an operating lease?
Depreciates asset over economic life.
363
Define "operating lease".
The lessee has no asset to depreciate in this lease.
364
List the criteria for a lessee to classify a lease as a capital lease.
Meet one of the following 1. Lease transfers ownership; 2. Lease contains a bargain purchase option; 3. Lease term is 75% or more of useful life; 4. PV is 90% or more of market value.
365
List the two classifications of capital leases for the lessor.
1. Direct Financing; 2. Sales-Type.
366
Define "executory costs".
Costs for insurance, maintenance, and taxes.
367
Define "lessee's incremental borrowing rate".
The rate, at lease inception date, the lessee would have incurred to borrow the funds necessary to purchase the leased asset.
368
List the criteria for a lessor to capitalize a lease.
Must meet one of the four lessee criteria, plus 1. There are no important unreimbursable cost uncertainties yet to be incurred by the lessor; 2. Collectability of the minimum lease payments is reasonably assured.
369
Define "implicit interest rate".
The lessor's desired rate of interest.
370
Define "lease term".
The fixed noncancelable term of the lease plus periods covered by bargain renewal options and plus all periods covered by renewal options during which there is a loan outstanding from the lessor to the lessee.
371
What rate is the lessor required to use to calculate the present value in a capital lease?
Interest rate implicit in the lease.
372
How is a lessee's minimum lease payment calculated?
Rental payments + Bargain Purchase Option + Lessee Guarantee of Residual Value.
373
How is a lessor's minimum lease payments calculated?
Lessee minimum lease payments + any residual value guaranteed by a third party.
374
Define "bargain purchase option (BOP)".
An option whereby the lessee has the opportunity to purchase the asset at an amount that is significantly less than the asset's fair market value on that future date.
375
List the items included in a lease receivable balance for the lessor.
1. Annual lease payments; 2. Bargain purchase option; 3. Unguaranteed residual; 4. Lessee guarantee of residual; 5. Third party guarantee of residual.
376
What rate is the lessee required to use to calculate the present value in a capital lease?
Lower of implicit rate or incremental borrowing rate.
377
What is the contra account for lessor using the gross method?
Unearned interest.
378
What amount of revenue is recognized by the lessor on a direct financing lease (DFL)?
Interest only: sum of lease payments less fair value of asset.
379
How is the reported balance of lease receivables under the gross method computed?
Sum of remaining lease payments.
380
Sum of remaining lease payments.
Fair value of asset leased.
381
List the items included in a lease liability balance for lessee.
1. Annual lease payments; 2. Bargain purchase option; 3. Lessee guarantee of residual.
382
What is the basis for the lessor's computation of periodic interest revenue?
The basis is beginning net lease receivable for the period.
383
To which party does a direct financing lease or sales-type lease distinction make a difference on accounting for the lease?
It makes a difference for the Lessor.
384
List the two ways to compute net lease receivable under the gross method.
Gross lease receivable less unearned interest, and present value of remaining lease payments.
385
List the international lease capitalization criterion involving magnitude of present value of lease payments.
Capitalize if the present value of lease payments is substantially all of the asset's fair value.
386
What is the effect of a sales-type lease on a lessor's pretax income over the lease term?
Increase by total interest (sum of lease payments less fair value of asset) + gross profit (fair value of asset less book value of asset).
387
In what period is sales revenue for a sales-type lease recognized?
Immediate recognition of full sales amount (fair value of asset).
388
What income is derived from a sales-type lease for the lessor?
Interest income and gross profit.
389
List the international lease capitalization criterion involving length of lease term.
Capitalize if the term is for a major portion of the asset's life.
390
List the two international lease capitalization criteria which are the same as US standards.
Title transfer and Bargain Purchase Option (BPO).
391
List the amount on which interest expense is based (for first payment, assume ordinary annuity).
Fair value of asset.
392
What is the amount of cost of goods sold recognized on a sales-type lease (STL)?
The amount recognized is book value of asset under lease.
393
What amount is the lease payment based on for a simple sales-type lease?
Fair value of asset leased.
394
How are the initial direct costs for operating leases accounted for?
Capitalize the initial direct costs and amortize to expense over the term of the lease in proportion to revenue recognized.
395
How are the initial direct costs for sales-type capital leases accounted for?
Recognize the initial direct costs immediately as a selling expense.
396
What is the accounting treatment of contingent rentals?
Record as revenue (lessor) or expense (lessee) in period of occurrence.
397
How is lease of land and building without title transfer or Bargain Purchase Option (BPO) when fair value of land is less than 25% of total fair value accounted for?
Record single lease.
398
List the capitalization criteria applicable for a lease of land.
Only title transfer and Bargain Purchase Option (BPO).
399
How are the initial direct costs for direct financing capital leases accounted for?
The initial direct costs are included in the lessor's gross receivable. Cash and other assets are decreased as a result of the costs.
400
How is a lease of land and building with Bargain Purchase Option (BPO) accounted for?
Record separate capital leases based on fair value; land lease is not depreciated.
401
How are executory costs included in the lease payment accounted for?
Parties to the lease subtract the executory costs before capitalizing the remaining lease payment; executory costs are expensed by lessee.
402
Describe the general computation of a lease payment when an asset with an estimated residual value reverts to lessor?
(Fair value of asset under lease - present value of residual)/(present value factor for lease payment)
403
What effect does a Bargain Purchase Option (BPO) and residual value at the end of a lease term have on computation of lease payment?
Reduces the payment because BPO and residual values provide value to lessor.
404
What is the period of depreciation of an asset that is leased when there is a bargain purchase option?
Remaining useful life of asset at inception.
405
Is an unguaranteed residual included in the capitalized lease accounts for both parties?
No, it is only included in the lessor's account.
406
What residual value is used for depreciation when the lessee guarantees the residual?
The amount of the guarantee.
407
Is a third party guarantee of residual included in the minimum lease payments of both parties?
No, only in the lessor's payments.
408
Is an unguaranteed residual included in the minimum lease payments of both parties?
No, it is not included for either party.
409
Is a lessee guarantee of residual included in the minimum lease payments of both parties?
Yes, it is included.
410
What period of depreciation is there an unguaranteed residual?
Lease term.
411
What amount is capitalized by the lessee when the lease includes a bargain purchase option (BPO)?
Sum of present value of lease payments and present value of BPO.
412
List the two ways of describing the amount of sales revenue recognized when the lessor capitalizes a sales-type lease with a bargain purchase option.
Sum of present value of lease payments and present value of BPO; fair value of asset sold.
413
List the two ways of computing the current portion of a lease liability.
Present value of next payment; change in total lease liability for the year following the balance sheet date.
414
What is the initial recorded amount for a lease receivable under the gross method for a lease with bargain purchase option (BPO)?
Sum of all lease payments and BPO (all nominal amounts).
415
What is the initial recorded amount for a lease receivable under the gross method for a lease with a leasee guarantee of residual value?
Sum of lease payments and lessee guarantee amount (all nominal amounts).
416
What is the total interest revenue recognized over the term of a sales-type lease with an unguaranteed residual?
Sum of lease payments and unguaranteed residual (nominal amounts) less fair value of asset.
417
What amount should be recorded for sales for a sales-type lease with an unguaranteed residual?
Fair value of asset less present value of unguaranteed residual.
418
What gross margin should be reported for a sales-type lease with an unguaranteed residual?
Fair value of asset less book value of asset.
419
What amount is capitalized by a lessee when the lessee guarantees residual value at the end of the term?
Sum of present value of lease payments and present value of guaranteed amount.
420
Define "sale-leaseback transaction".
The owner of property sells its asset and immediately leases it back.
421
Describe the general rule regarding deferral of gain in a sale-leaseback for a capital lease.
The Seller/Lessee will record the gain as an asset valuation allowance account (contra to the leased asset), and amortize the deferred gain over the lease term by reducing the recorded depreciation expense.
422
Describe the deferral of gain on a lease transaction when the seller does not maintain total use of the asset.
When PV of lease payments is more than 10% but less than 90% of asset's FV, losses will be immediately recognized, and gains will be recognized to the extent that they exceed the present value of minimum lease payments. Remaining gain is amortized under general rule.
423
Describe the general rule regarding deferral of gain in a sale-leaseback for an operating lease.
The Seller/Lessee records the gain in a deferred credit and amortizes the deferred gain over the lease term by reducing the recorded rent expense in proportion to the amount of rent expense recognized.
424
What must a lessee disclose for financial reporting purposes?
1. Gross amount of assets recorded under capital leases; 2. Future minimum lease payments in the aggregate, and for each of the five succeeding years; 3. Future minimum rentals in the aggregate, and for each of the five succeeding years.
425
Describe the exceptions to the general rule of deferring gains on sale-leaseback transactions.
1. Seller/lessee retains a minor portion of the use of the asset; 2. Seller/lessee does not retain all use of an asset.
426
Describe the situation in which there is no deferral of gain when seller/lessee retains only minor use?
When PV of lease payments is 10% or less of FV of asset, no gain or loss is deferred.
427
What must a lessor disclose for financial reporting purposes?
1. The components of the net lease receivable including future minimum lease payments to be received, unguaranteed residual values, and unearned interest revenue; 2. Minimum future rentals on noncancelable operating leases in the aggregate and for each of the five succeeding fiscal years.
428
How is an obligation to issue a fixed number of shares valued?
Fair Value of shares at time of agreement.
429
How is an option written by a firm allowing other entities to purchase the firm's stock at a fixed price classified?
The classification is Liability.
430
How is an obligation to issue shares of a fixed dollar value valued?
The fixed dollar value agreed upon by the parties.
431
How should an obligation to issue shares of a fixed dollar value be classified?
The classification is Liability.
432
How should an obligation to issue fixed number of shares be classified?
The classification is Equity.
433
When are mandatorily redeemable financial instruments classified as debt?
When they are obligations to repurchase equity shares and require the issuer to settle the obligation by transferring assets.
434
Which aspect of a compound financial instrument with characteristics of both debt and equity is measured first under International Standards?
The aspect is Debt.
435
What is the fair value of acquired assets if cash is paid in exchange?
Fair value of acquired asset = fair value of asset exchanged + cash paid.
436
When do you use list price?
List price should not be used for fair value-list prices because they are notoriously inflated.
437
What is the preferred valuation for an acquired asset in a nonmonetary exchange?
The fair value of assets given in the exchange.
438
What is the fair value of acquired asset if cash received on exchange?
Fair value of acquired asset = fair value of asset exchanged - cash received.
439
Under what circumstances is fair value not used to value an asset.
1. Fair value of either asset is not determinable; 2. Exchange is made to facilitate a sale; 3. Exchange lacks commercial substance.
440
Define "nonmonetary asset".
An asset that does not have a fixed nominal or stated value, as is the case with cash, accounts receivable, and other monetary assets.
441
List the characteristics of an exchange that indicate commercial substance.
The amount of cash paid or received on exchange is significant in relation to the fair value of the assets exchanged and the functions of the assets exchanged are different.
442
When is there a lack of commercial substance in a nonmonetary exchange?
When the cash flows to the firm are not significantly changed.
443
When gain is evident and cash is received, what is the accounting treatment?
The gain is recognized in proportion to the amount of cash received.
444
What is the accounting treatment for the valuation of an asset when the fair value is not determinable?
Recognize no loss or gain, and record the acquired asset at book value of old asset + cash paid or - cash received.
445
When loss is evident, what is the accounting treatment?
It is always recognized.
446
What guidance does International Financial Reporting Standards (IFRS) give when assets or resources are donated?
No guidance.
447
How are assets transferred to an entity by the government accounted for under International Financial Reporting Standards (IFRS)?
Recognized as a government grant.
448
Under International Financial Reporting Standards (IFRS), how are gains and losses recognized in barter transactions?
Gains or losses are determined by reference to a non-barter transaction.
449
Where are materials related to party transactions disclosed?
In the footnotes to the financial statements.
450
Define "related parties".
Parties are related if one of the transacting parties can significantly influence the policies of the other.
451
What is the objective of related party transactions disclosures?
Fully inform the financial statement user that these transactions exist.
452
Is International Financial Reporting Standards (IFRS) disclosure of management compensation required?
It is not required.
453
What is the International Financial Reporting Standard (IFRS) definition of related parties pertaining to joint ventures?
IFRS definition of related party does not include an entity that is a joint venture or an associate of the parent or ultimate parent of the reporting entity.
454
How are fixed assets used temporarily in a research and development (R&D) project accounted for?
Depreciation related to time period included in R&D expense.
455
List the items excluded from research and development (R&D).
Engineering follow-through; Quality control and routine testing; Trouble shooting; Adaptation of existing capability to customer's needs; Routine design of tools, jigs, molds, and dies; Legal work in connection with patent applications.
456
What is the International Financial Reporting Standard (IFRS) treatment of research costs?
Expense research costs.
457
What is the International Financial Reporting Standard (IFRS) treatment of development costs?
Capitalize development costs.
458
Define "research".
The attempt to discover new knowledge aimed at the development of new products, services, processes, or techniques, or the significant improvement in an existing product.
459
What is the general rule regarding research and development (R&D) costs?
Expense costs as incurred.
460
How are assets used in several research and development (R&D) projects accounted for?
Capitalized and depreciated to R&D expense.
461
How are fixed assets used in a single research and development (R&D) project with no alternative use accounted for?
Entire cost expensed as R&D immediately.
462
List the items that are included in research and development (R&D).
Laboratory research; Conceptual formulation and design of products or process alternatives; Modification of current design; Design, construction, and testing of preproduction prototypes and models; Design of tools, jigs, molds, and dies involving new technology; Design of a pilot plant.
463
List the aspects of risk due to use of estimates.
1. Estimates are unavoidable in preparing Financial Statements; 2. Estimates are not exact; 3. Estimates involve assumptions about the future.
464
When are disclosures required about certain significant estimates?
When it is reasonably possible an estimate will change within one year of the Financial Statement, and effect of the change will be material.
465
List the four concentrations to which a firm can be vulnerable.
1. Volume of business with a specific customer; 2. Revenue from a specific product or service; 3. Source of supply; 4. Geographical market.
466
Define "Severe Impact".
Significant financial disruption due to vulnerability to significant concentration.
467
List the four sources of risk and uncertainty for a firm.
1. Nature of Firm's operations; 2. Uses of estimates in Financial Statements; 3. Certain significant estimates; 4. Vulnerability to concentrations.
468
Which items should be included in disclosures about risk due to certain significant estimates?
1. Estimate affected; 2. Nature of uncertainty; 3. Effect of change in estimate on Financial Statements.
469
List the aspects of risk due to a firm's operations.
1. Products and services; 2. Geographical locations; 3. Principal markets.
470
Describe the identifiable asset test for operating segments.
The operating segment's identifiable assets are 10% or more of the combined assets of all reported operating segments.
471
List the three characteristics of operating segments.
1. The segment is involved in revenue producing and expense-incurring activities; 2. The operating results of the operating segment are reviewed by the company's chief operating decision maker on a regular basis; 3. There is discrete financial information available for the operating segment.
472
Describe the 75% rule for segments.
The total external revenue reported by reportable segments must be at least 75% of the company's total consolidated revenues.
473
Describe the operating profit or loss test for operating segments.
The operating segment's operating profit or loss(absolute value) is 10% or more of the greater of the following two amounts (absolute value): 1. Combined operating profit of all segments not reporting losses; 2. Combined loss of all segments that reported operating losses.
474
Describe the revenue test for operating segments.
The operating segment's revenue from all sources (internal and external) is 10% or more of the combined (internal and external) revenues of all of the company's operating segments.
475
List the requirements for aggregation of segments.
Similar in each of the following areas: 1. The nature of products and services; 2. The nature of the production processes; 3. Customer Type or Class; 4. Distribution Methods for products and services; 5. The nature of the regulatory environment.
476
List the quantitative tests for operating segments.
1. Revenue; 2. Operating profit or loss; 3. Identifiable assets.
477
How is customer support and maintenance accounted for?
Expense as incurred.
478
Describe the straight-line method of accounting for software.
Book value at beginning of year / number of years remaining in product sales life at beginning of year.
479
How are software costs handled in International Financial Reporting Standards (IFRS)?
IFRS treats software costs the same as research and development.
480
Describe the revenue method for computer software.
Book value at beginning of year x proportion of current year revenues to total remaining expected revenues including current year revenues.
481
How are software production costs accounted for?
Capitalize to inventory and expense as cost of goods sold.
482
What is meant by technological feasibility of a software?
When the program model or working model of the software is complete.
483
How are costs incurred before technological feasibility accounted for?
Expense as incurred.
484
How are capitalized computer software costs amortized?
Higher of Revenue method; or Straight-line method.
485
How are costs incurred after technological feasibility accounted for?
Capitalize as computer software costs and amortize.
486
A subsequent event that did not exist at the Balance Sheet date requires what kind of disclosure?
Footnote disclosure.
487
What are the two categories of subsequent events?
Existed at the balance sheet date and did not exist at the balance sheet date.
488
A subsequent event existing at the Balance Sheet date requires what kind of disclosure?
Recognition in the financial statements.
489
When can refinancing current debt be classified as noncurrent?
The following are issued 1. Issue stock to extinguish the debt; 2. Refinance the current liability with a noncurrent liability; 3. Enter into an irrevocable agreement to refinance the current liability with a noncurrent liability.
