Financial F3

  1. What are the 3 classifications of securities?
    • Trading securities
    • Available for sale securities
    • Held to maturity securities
  2. What is a trading security?
    Securities (debt or equity) bought and held principally for the purpose of selling them in the near term. Current asset
  3. What is an available for sale security?
    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
  4. What is a held to maturity security?
    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
  5. IFRS marketable security classification
    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
  6. Valuation of trading and available for sale securities
    • Reported at fair value (mark to market)
    • maintain two general ledger acounts (original cost and valuation account) and BS shows one net amount
  7. Trading securities unrealized gains and losses
    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
  8. Available for sale securities unrealized gains and losses
    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
  9. IFRS unrealized gains and losses on available for sale securities
    Usually in OCI

    Except foreign exchange g/l on avaible for sale debt sec.=reported directly on the income statement
  10. Valuation of held to maturity securities
    Valued at amortized cost
  11. Reclassification between categories
    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)
  12. Impairment of Securities
    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
  13. IFRS vs. GAAP impairment of securities
    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
  14. Sale of a Trading security
    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)
    • .
  15. Sale of available for sale security
    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)
  16. To consolidate or not to consolidate? That is the question...
    • 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)
  17. Consolidate different year ends, GAAP vs. IFRS
    • GAAP=significant transactions during gap period require disclosure
    • IFRS=subs fin stmts must be adjusted for significant transactions during gap period.
  18. Degree of control, how does investor account for investment?
    • 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
  19. How is investment initially recorded under cost method?
    Investment account is original cost, or fair value of all consideration given including legal fees

    • Journal Entry
    • D to investment account
    • C to Cash
  20. What do you do with investees marketable securities under cost method?
    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
  21. Dividend in excess of investors share of RE (cost method)
    amount over RE is not income but return of capital reducing your investment

    • Journal Entry
    • D to cash
    • C to investment account
  22. Recording dividends (cost method)
    Only record cash dividends from RE. Stock dividends are not recognized (memo entry only)

    • Journal Entry
    • D to cash
    • C to dividend income
  23. Recording an investment using equity method
    • Like a bank account
    • Record at cost, fair value plus legal fees

    • Journal Entry
    • D to investment account
    • C to cash
  24. Changes in investment account (equity method)
    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
  25. If common stock and preferred stock are owned
    • 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)
  26. If book value and fair value of assets are different (equity method)
    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)
  27. Fair value difference attributable to goodwill (equity method)
    • No amortization or separate impairment test.
    • Total investment must be tested annually for impairment
  28. How are joint ventures accounted for?
    • GAAP=generally use equity method
    • IFRS=allow equity method or proportionate consolidation (might discontinue proportionate consolidation soon)
  29. Step by Step aquisition
    When investment is aquired in more that one transaction, goodwill is computed at the time of each transaction.
  30. Change from equity to cost
    • Use equity method now, and retrospectively adjust previous periods that cost was used.
    • Apply the new method to the prior periods investment
  31. Consolidated financial statements
    • 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
  32. Two principles of aquisition method
    • 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
  33. Recording the investment under the aquisition method
    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)
  34. 2 characteristics of acquisition method
    • 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.
  35. Investor must adjust following during consolidation
    • 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)
  36. CAR adjustement
    • 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
  37. IN adjustment
    • 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
  38. BIG adjustment
    • 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)
  39. Calculation of CAR
    • 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)
  40. How do you treat costs to acquire sub in acquisition method?
    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)
  41. NCI what and where?
    • 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
  42. NCI after acquisition
    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
  43. 3 things consolidated income statement shows
    separately states consolidated NI, NI attributable to NCI, and NI attributable to parent
  44. NI attributable to NCI
    • subs income
    • (subs expenses)
    • subs NI
    • x NCI %
    • NI attributable to NCI (goes to NCI RE in general ledger)
  45. Full goodwill method
    • 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
  46. Partial goodwill method
    • preferred under IFRS
    • NCI=fair value of subs net identifiable assets*NCI %
    • goodwill=acquisition cost-fair value of subs net assets acquired.
  47. BS adjustments "BIG"
    • 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.
  48. In process R&D
    • 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
  49. BS adjustments
    allocate acquisition cost to fair value of 100% of BS
  50. Identifiable intangible assets
    • allocate remaining acquisition cost to fair value of 100% of the assets acquired.
    • Finite lives=amortize
    • Indefinite lives=one step impairment test
  51. Goodwill
    • 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%
  52. Adjustments to consolidated CFS when sub is acquired
    • 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
  53. Issues on consolidated CFS
    • 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
  54. Step acquisition (to or from control)
    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
  55. Journal Entry to eliminate intercompany payables/recievables
    • 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
  56. Intercompany inventory sales
    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)
  57. Steps to reverse interco inventory sales
    • 1. calculate interco profit on sale of inventory
    • 2. allocate profit between purchasers EI and COGS
  58. How are interco bond transactions treated?
    if one member acquires another members debt from an outside, it is considered retired and g/l is recognized.
  59. gain/loss on interco bond transaction
    • 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
  60. Interco sale of land
    • 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
  61. Variable interests
    • ownership or interest in another co that change with changes in value of entities net A
    • options
    • loans
    • leases
    • derivatives
    • services contracts...
  62. variable interest entity
    business structure without equity investors structure that lacks sufficient financial resources to support itself
  63. Primary benficiary
    has power to direct activities of VIE and absorb profits and losses
  64. GAAP primary beneficiary consolidation decision
    • 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
  65. signs of VIE
  66. insufficient level of equity investment at risk
    • holders of equity don't have power to make decisions
    • holds don't absorb losses or receive benfits
    • disproportional voting rights
Card Set
Financial F3
Marketable Securities and Business Combinations