CFA II FRA

Periodic: compute COGS along with financial reporting

Perpetual: compute COGS every time a sale is made

FIFO inventory = LIFO inventory + LIFO inventory

FIFO COGS = LIFO COGS - (end LIFO reserve - beg LIFO reserve)

Firm sells more assets than purchased, so its COGS include values from years past (which could have substantially lower costs). A disclosure must be made in the financial statements about what COGS would have been if there had been no liquidation.

• Capitalizing = CFI
• Expensing = CFF

• Capital (finance) lease = CFF (principal) and CFO (interest)
• Operating Lease = CFO

US: Lower of cost* and market value, where NRV > market value > NRV - normal profit margin.

IFRS: Lower of cost* and NRV. NRV = selling price - sales costs

*cost does NOT include storage, overhead, admin, abnormal costs

US: Impaired if BV > Undiscounted future cash flows.

   Write down to fair value, or PV of future cash flows if fair value is unknown

IFRS: Impaired if BV > Recoverable Amount, where Recoverable Amount = GREATER of NRV (ie fair value - selling costs) and PV future cash flows.

   Write-down to Recoverable Amount

• US: Any of the following:
• 1. Ownership transfered at the end of the lease
• 2. Bargain purchase option at the end of the lease
• 3. Lease lasts > 75% of the asset's useful life
• 4. PV lease payments > 90% of asset fair value

IFRS: "Substantially all rights and risks of ownership are transferred to lessee."

lower of fair value or PV future payments

• Principal: CFF
• Interest: CFO

Operational lease: all CFO

• Assets: higher
• Liabilities: higher
• NI (early): lower
• NI (later): higher
• Total NI: same
• CFO: higher
• CFF: lower
• Total CF: same

financial assets: no significant influence, <20%

investments in associates: sign infl, 20-50%

business combinations: >50%

joint venture: shared control

financial assets: both amortized cost or fair value

inv. in assoc.: both equity

business combinations: both acquisition

joint venture: equity in GAAP, proportional combination (preferred) in IFRS. Can use equity in IFRS as well.

HTM: IS = coupon + amortization of discount/premium = beginning value*original YTM AND any realized gains, BS = amortized cost

AFS: IS = coupon + amortization of discount/premium = beginning value*original YTM AND any realized gains, BS = Fair value in assets, unrealized G/L to equity

Trading: IS = coupon + amortization of discount/premium + unrealized G/L, BS = fair value

to or from Trading the trading classification

moved to place dictated by the new classification. If going to HTM from AFS, cost is amortized out of OCI account. If going from trading to any, previously unrecognized amount goes to IS. All transfers at fair value on transfer date.

Investment is listed as an asset (reduce funding method asset or stock (ex. cash))

Investment is is changed by %owned*NI-%owned*dividends paid - amortization

IS shows %owned*earnings (dividends not subtracted out bc part of "earnings," increase cash on BS) - amortization

Amortization: If Purchase Price > BV, must amortize difference between BV and FV (excess of Purchase Price over FV is implied goodwill, but not recorded anywhere).

Transfer costs between companies must be backed out at proportion of ownership if they have not realized value. Ex. A sells B 10M, B has resold 8M, take away 2M*%ownership on IS and BS.

BS: combine all assets and liabilities (not equity!) and add a minority interest account in equity. Goodwill (full or partial, explained on different card) in separate account.

IS: combine all line items, subtract minority interest income and amortization

Proportionate consolidation: Same as acquisition, only add proportion owned, not all, and no minority interest account. Goodwill is the exact same under both if using partial goodwill. 

• Full: Required by GAAP.
• Goodwill on BS in assets = Total FV subsidiary (ie. total purchase price) - FV subsidiary net assets
• minority interest in equity = %notOwned*FVsubsidiary

• Partial: Option under IFRS (most common). Goodwill on BS in assets = (Net purchase price - FV subsidiary)*%owned
• minority interest = %notowned*FVsubsidiaryAssets

• Equity; Prop Cons; Acquisition
• Sales: lowest; middle; highest
• NI: same; same; same
• Assets & Liab: lowest; middle; highest
• Total equity: lowest; same as equity; highest bc includes minority interest
• Leverage: lowest; middle; depends on measure
• Net profit margin: highest; middle; lowest
• ROE: highest; same as equity; lowest
• ROA: highest; middle; lowest

• GAAP
• Considered VIE and must be consolidated if:
• insufficient at risk investment (less than 10% equity capital)
• shareholders lack decision-making rights
• shareholders do not absorb losses
• shareholders do not receive residual returns

• IFRS
• Consolidate when sponsor retains control and earns benefits/absorbs losses

• discount rate
• rate of compensation increase
• expected rate of return on assets

• Service cost: change in PBO due to additional work performed
• Interest cost: change in PBO due to passage of time. = beginning PBO*discount rate
• Actuarial gains/losses: changes in assumptions. Also, expected returns <> actual returns
• Prior service cost: changes due to change in plan rules (offer 3% instead of 2%) 

• Beginning FV
• + Actual Returns
• + Employer contributions
• - Benefits paid

• Beginning PBO
• + Service cost
• + Interest cost
• +/- Actuarial gains (losses); includes difference between expected and actual return on assets
• + Prior service cost
• - Benefits paid

• Overfunded: FV plan assets > PBO
• Underfunded: FV plan assets < PBO

on BS reported as net FV assets - PBO; positive as asset, negative as liability (change last year for GAAP, prev. had to report FV assets and PBO separately as asset and liability)

NOT REPORTED ANYWHERE

= contribution amount - change in funded status

• Pension cost on IS for GAAP = 
• + Service Cost
• + Interest Cost (previous PBO*disc rate)
• - Expected return on assets (GAAP only!)
• +/- amortization of actuarial gains/losses
• + amortization of prior service costs

• Pension cost on IS for IFRS =
• + Service cost
• +/- net interest expense(income) = beg funded status*discount rate (same as GAAP, but combined in one line item bc disc rate = exp return)
• + prior service costs
• (note actuarial gains/losses not included. They stay in OCI)

• PBO; Pension expense; NI
• Increase Discount rate: lower; lower for GAAP, depends on funded status for IFRS; higher
• Increase Wage increase rate: higher; higher; lower
• expected returns plan assets (GAAP ONLY): not affected; lower; higher

take 10% of PBO and FV Plan Assets separately, and determine which is larger

amortize amount of actuarial gain/loss above than the amount found in step one over service life of plan

• Ex. PBO = 100, Plan Assets = 120, beginning period actuarial gain of 13:
• 10%PBO = 10, 10%Plan Assets = 12, so use 12
• 13 - 12 = 1, so amortize 1 over average service life of plan participants. This amount does not include current year act gain/loss, these are added to OCI, then amortized out the following year. 

• IS
• All is originally reported as operating expense (SG&A)
• Take out total pension expense as an operating expense and replace it with service cost only
• Add interest cost to interest expense
• Add actual return on assets to non-operating income
• Ignore amortization

• CF
• Originally pension expense is all reported as CFO
• To adjust, only report Total Periodic Pension Cost as CFO, and difference between contribution and change in funded status as CFF (contribution > change funded status = CFF outflow)

= service cost + interest expense - actual asset returns

Temporal: local currency -> functional currency = presentation currency

Current Rate: local currency = functional currency -> presentation currency

Possible to have to do both if 3 currencies are involved (1 local, 1 func, 1 pres)

• BS
• Monetary assets (cash, A/R): current rate
• Other Assets: historic rate
• Monetary Liabilities (usually all liabilities): current rate
• Other Liabilities (usually n/a): historic rate
• Common Stock: historic rate
• RE: determined based on rest

• IS
• COGS: hist rate
• Depr: hist rate
• Rest: avg rate
• Dividends: hist rate
• Foreign Currency Gain/Loss: based on difference in necessary adjustment to RE in BS and NI calculated

• IS
• All items: avg rate

• BS
• All Assets and Liab: current rate
• Common Stock: historic rate
• RE: bring NI from IS, then add/subtract adjustment from foreign currency so that it balances

IFRS: first translate adjusting for inflation, then use current rate method

US: use temporal method at all times

• BS
• Temporal: since monetary assets and liab are at current rate, expect net liability exposure. Appreciation would cause loss on IS.

Current rate: since all assets and liab are at current rate, expect net asset exposure. Appreciation would cause gain in RE.

• IS
• Temporal (as compared to current rate): some items at historic rates, so lower NI, made even lower by loss from BS

Current rate: higher because all items at average rate. Unaffected by BS effect.

Fair value hedge: net changes in asset vs derivative reflected in IS

Cash flow hedge: effective portion initially reported in equity, then to IS when resolves. Any ineffective portions (not related to underlying CF) are reported on IS

Foreign currency hedges: reported with translation g/l

same as sustainability. Cash earnings are considered more persistent than accruals earnings

accruals mean revert faster than cash (both are expected to mean revert eventually)

Net Oper Assets (NOA) = (Total Assets - Cash&equivalents) - (Total Liab - Debt) = All non-cash(&equivalent) assets - (A/P, unearned rev)

• Agg Accruals (BS): NOAt - NOAt-1
• Agg Accruals (CF): NI - (CFO + CFI)
• Note that CFO is usually positive and CFI is usually negative

Accruals Ratio: AggAcc/(Avg NOAt & NOAt-1)

ROE = tax burden * interest burden * EBIT margin * asset turnover * financial leverage

ROE = NI/EBT * EBT/EBIT * EBIT/Revenue * Revenue/AvgAssets * AvgAssets/AvgEquity

If company used equity method, remove equity income and equity asset