Financial F3

• Trading securities
• Available for sale securities
• Held to maturity securities

Securities (debt or equity) bought and held principally for the purpose of selling them in the near term. Current asset

Security (debt or equity) that cannot fall into the other two categories. Current or non current asset depending on the intent of the corporation. General rule non current asset

Debt security that the corporation has the positive intent and ability to hold to maturity. Current or non current based on the time to maturity

Financial asset at fair value through profit or loss (like GAAP trading, must meet one of two conditions, 1. classified as held for trading 2. designated as investment at fair value through profit and loss using the fair value option)

Available for sale

Held to maturity

• Reported at fair value (mark to market)
• maintain two general ledger acounts (original cost and valuation account) and BS shows one net amount

Included in earnings and shown on income statement

• Journal Entry
• D to unrealized loss on trading securities
• C to valuation account (fair value adjustment)

IDEA=Income from continuing operations

Reported in other comprehensive income on the balance sheet.

• Journal Entry
• D to unrealized loss on available for sale security
• C to valuation account (fair value adjustment)

PUFE=unrealized gains and losses from available for sale securities

Usually in OCI

Except foreign exchange g/l on avaible for sale debt sec.=reported directly on the income statement

Valued at amortized cost

1. From trading=unrealized g/l at date of transfer is already recognized in earnings and shall no be reversed

2. To trading=unrealized g/l at date of transfer shall be recognized immmediately

3. Debt sec. classified as held to maturity to available for sale=unrealized g/l at date of transfer reported in OCI

4. Debt. sec. classified as available for sale to held to maturity=unrealized g/l is amortized over remaining life as an adjustment yield. (amortized into IS any g/l that was in OCI)

If decline in value is permanent, write down cost basis to fair value and new cost basis. The amount of the write down is realized on the IS

GAAP=can't write new basis back up if there is ever a recovery

IFRS=previously recognized write downs may be reversed and recognized on IS to the extent of the reversal

Recognized gain or loss on income statement, remove valuation account

realized g/l=sell price-adjusted cost(original cost +/- unrealized g/l previously recognized on IS)

• Journal Entry
• D to Cash
• C to trading security
• C to realized gain(IDEA)
• .

realized g/l=selling price-original cost

recognized gain or loss on IS and reverse any unrealized g/l from OCI

• Journal Entry
• D to Cash
• D to unrealized g/l on available for sale sec. (out of OCI)
• C to available for sale sec.
• C to realized gain on available for sale security (IDEA)

• 1. Consolidate all majority owned subs (>50% of voting interest is owned by parent)
• 2. No consolidation when control is not with owners (under legal reorg or when control is sub is with trustee)
• 3. In vertical chain start at bottom and work up (ex. consolidate 3rd co into 2nd co, the 2nd co into first)

• GAAP=significant transactions during gap period require disclosure
• IFRS=subs fin stmts must be adjusted for significant transactions during gap period.

• 1. Cost method, no consolidation=no significant influence (generally <20% control)
• 2. Equity method, no consolidation=significant influence, but <=50% control
• 3. Consolidate=control >50% ownership

Investment account is original cost, or fair value of all consideration given including legal fees

• Journal Entry
• D to investment account
• C to Cash

Adjust investment account to account for change in marketable security value at year end

• Journal Entry for losses (reverse for gains)
• D to unrealized holding losses (usually OCI)
• C to Investment account

amount over RE is not income but return of capital reducing your investment

• Journal Entry
• D to cash
• C to investment account

Only record cash dividends from RE. Stock dividends are not recognized (memo entry only)

• Journal Entry
• D to cash
• C to dividend income

• Like a bank account
• Record at cost, fair value plus legal fees

• Journal Entry
• D to investment account
• C to cash

Earnings increase investment account and investor realizes income

• Journal Entry
• D to investment account
• C to equity earnings/investee income

Cash dividends decrease investment account (withdrawal)

• Journal Entry
• D to cash
• C to investment account

• Significant influence is determined by common stock
• Calculate income from investee starts with preferred stock dividends, then investors share of earnings available to common shareholders (NI-preferred dividends)

If fair value>BV, amortize difference over life of asset. Investors share of NI is reduced.

• Journal Entry
• D to investee income (reduces income)
• C to investment account (reduces inv. account)

• No amortization or separate impairment test.
• Total investment must be tested annually for impairment

• GAAP=generally use equity method
• IFRS=allow equity method or proportionate consolidation (might discontinue proportionate consolidation soon)

When investment is aquired in more that one transaction, goodwill is computed at the time of each transaction.

• Use equity method now, and retrospectively adjust previous periods that cost was used.
• Apply the new method to the prior periods investment

• used for control (>50% ownership)
• aquisition method is used to record control
• GAAP requires consolidation expect when significant doubt exists to parents abililty to control entity:
• 1. sub is in legal reorg
• 2. bankruptcy
• 3. sub operates under severe foreign restrictions

• 1. Recgonition principle=investor recognizes all subs A and L including identifiable intangible A.
• 2. Measurement principle=each recognized A and L and any NCI is measured at fair value at aquisition date

aquisition paid with cash Journal Entry

• D to investment in sub
• C to cash

aquisition paid with parent's common stock (use fair value at date of transactions close)

• D to investment in sub
• C to common stock (parent at par)
• C to APIC (parent FV-par)

• 1. 100% of net A aquired (regardless of % acquired) are recorded at air value with any excess creating goodwill
• 2. upon consolidation, subs entire equity (CAR) is eliminated/not reported.

• C=common stock
• A=APIC
• R=retained earnings
• I=investment in sub
• N=non controlling interest
• B=balance sheet
• I=identifiable intangible assets
• G=goodwill (or gain)

• eliminate subs old c/s, APIC, and RE
• A-L=CAR

• Journal Entry
• D to subs common stock
• D to subs APIC
• D to subs RE

• Parent company eliminates their investment in sub account
• NCI account is created. Fair value of portion not obtained by parent is NCI in equity sec of parents book

• Journal Entry
• C to Investment in sub
• C to NCI

• Adjust subs old BS to fair value. Adjust for full 100% of fair value even if there is NCI
• Record subs identifiable intangible assets at fair value, even if no amount was incurred to acquire them in acquisition
• Goodwill is created based on excess of fair value of sub (acquisition cost +and NCI) over fair value of subs assets. If there is a shortage it is a gain.

• Journal Entries
• D to BS accounts to bring assets up to fair value
• D to identifiable intangible assets at fair value
• D to goodwill (if there is a surplus) (C to gain if there is a shortage)

• CAR computed at acquisition date
• If fin stmts after acquisition date is used, convert to acquisition date.

• Beginning RE (acquisition date)
• Add income
• Subtract dividends
• Ending RE (fin stmts given)

Nothing is capitalized to investment in sub

• Direct out of pocket expenses (finders or legal fees)
• expensed (D to expense)
• Stock registration and issuance costs reduce value of stock issued (D to APIC of parent)
• Indirect costs expensed as incurred (D to expense)
• Bond issue costs capitalized and amortized (D to bond issue costs)

• Portion of subs equity that parent does not own
• Reported at 100% fair value in equity of BS separate from parents equity
• Computation=fair value of sub * NCI %=amt of NCI interest reported in equity

Accounted for using the equity method. Can have (-) balance if losses allocated exceed the account balance.

• Beginning NCI
• Add NCI share of sub NI
• Subtract NCI share of sub div
• Ending NCI balance

separately states consolidated NI, NI attributable to NCI, and NI attributable to parent

• subs income
• (subs expenses)
• subs NI
• x NCI %
• NI attributable to NCI (goes to NCI RE in general ledger)

• GAAP, but can elect under IFRS
• NCI on BS=fair value of sub*NCI %
• goodwill=fair value of sub-fair value of subs net assets

• preferred under IFRS
• NCI=fair value of subs net identifiable assets*NCI %
• goodwill=acquisition cost-fair value of subs net assets acquired.

• BS records are adjusted to fair value
• Identifiable intangible assets recorded at fair value
• Goodwill recognized for excess of fair value of sub over fair value of subs net assets. If fair value of sub is less than fair value of net assets gain is recognized.

• Recognized as intangible asset separate from goodwill, not written off right away.
• Expense continuing R&D to complete project.
• Later
• if successful=amortize in process R&D
• if not successful=write off in process R&D

allocate acquisition cost to fair value of 100% of BS

• allocate remaining acquisition cost to fair value of 100% of the assets acquired.
• Finite lives=amortize
• Indefinite lives=one step impairment test

• Any remaining acqisition cost is allocated to goodwill
• don't amortize, test for impairment. When impaired, expensed on income statement
• Partial or full goodwill method only different when parent acquires less than 100%

• 1. net cash spent or received reported in investment section
• 2. A and L of sub on acquisition date added to parents A and L at beginning of year to determine change in cash during period

• div paid to NCI s/h shown in financing section. Div paid to parent not reported
• total NI (attributable to parent and NCI interest) used

non control to control=remeasure previously held equity to fair value. shows up on income statement

more or less control=equity transaction treat like treasury stock transaction (no affect on IS, adjust APIC)

control to non control=sale of stock with gain/loss on income statement. Remeasure remaining to fair value and recognized adjustment on IS

• D to a/p
• C to a/r

• D to bonds payable
• C to bonds investment

• D to accrued bond interest payable
• C to accrued bond interest receivable

• D to dividends payable
• C to dividends receivable

eliminate amount of sale, COGS, a/r, a/p, and profit

• Journal Entry
• D to interco sales
• D to RE (profit in BI)
• C to interco COGS
• C to COGS (interco profit included in COGS of purchaser)
• C to EI (interco profit in inventory remaining)

• 1. calculate interco profit on sale of inventory
• 2. allocate profit between purchasers EI and COGS

if one member acquires another members debt from an outside, it is considered retired and g/l is recognized.

• g/l=carrying value-purchase price
• g/l is recorded through eliminating entry
• D to bonds payable
• D to premium
• C to investment in bonds
• C to gain on extinguishment

• g/l is unrealized until land is sold to an outsider
• Journal entry eliminates g/l and adjusts land to original cost

• D to interco gain on sale of land
• C land

• ownership or interest in another co that change with changes in value of entities net A
• options
• loans
• leases
• derivatives
• services contracts...

business structure without equity investors structure that lacks sufficient financial resources to support itself

has power to direct activities of VIE and absorb profits and losses

• 1. use VIE model. If consolidation is not required, use voting interest model
• 2. voting interest model=consolidate if ownership is >50% of voting stock

• holders of equity don't have power to make decisions
• holds don't absorb losses or receive benfits
• disproportional voting rights