What does fair value include and exclude?
Includes: transportation costs
Excludes: transaction costs (used to calculate advantageous market)
Fair value is _____________ -based measure
market
*uses exit price
Fair value is the price that….
would be received to sell an asset and paid to transfer a liability
Most Advantageous Market
*use FMV of market where net of transaction costs is highest
Three Valuation Techniques for Fair Value Measurement
- Market approach = prices or market information
- Income approach = PV
- Cost approach = replacement cost
Levels for FMV
- identical assets in an active market
- nonidentical assets or identical without active market
- management estimate and judgment
*reported using the lowest level used
Partnerships: Distinguishing between Bonus and Goodwill
Bonus: Balance
Goodwill: implied value (existing partners only)
Three Methods for Creating Partnership
- exact method (finger counting)
- bonus method
- goodwill method
How to account for partner’s loan to partnership?
*decrease the loan balance and the equity account in the same transaction
Methods for Withdrawal of Partner
- Bonus Method
* revalue assets to fair value and then payout (difference is deducted from remaining partners) - Goodwill Method
* revalue assets to fair value
* recognize goodwill proportionately to bring exiting partner’s total to payout amount
* decrease exiting partner’s capital account only
Variable Interest Entities
- variable interest = financial stake
- variable interest entity = that company’s equity characteristics are strange
- primary beneficiary = we have power over them and get P&L
* *absorbs expected losses and receives residual returns
VIE’s CANNOT BE PERSONS
IFRS & Variable Interest Entities
*consolidate when there is control
Asset Retirement Obligations
ARC & ARO
- recorded initially at PV
- ARC is DEPRECIATed over life of accretionary period (ACCUMULATED DEPRECIATION)
- accretion expense uses discount rate
- ARC + accretion expense = total cost
- difference is plugged to an additional expense
New/Increase = new interest rate Old/Decrease = old interest rate
Troubled Debt Restructuring
Transfer of Assets
- gain/loss on asset (FV vs book)
- gain (possibly extraordinary) carrying amount - FV
Transfer of Equity Interst
1. carrying amount of payable - FV of equity
Modification of Terms
- prospectively
- FV < carrying value = gain
Modification of Terms Example - Troubled Debt Restructuring
- compare total future cash payments with carrying amount of payable (including any interest)
- get rid of old NP and recognize new NP
Troubled Debt Restructuring - Creditor Accounting
GR: not extraordinary
*Receipt of Assets or Equity = ordinary loss
Modification of Terms
*bad debt expense and allowance for credit loss
Payroll Deductions and Expenses
- be sure to double FICA
* the second half of FICA is a business expense for the employer
Premiums & Estimated Liabilities
Total number coupons issued x estimated redemption rate = total estimated coupon redemptions
*can subtract out any funds that would be received along with the coupons
If warranty expenses are incurred evenly throughout the year, how should the expense be calculated?
*use half of the amount that normally would be attributed to that full year
Classification of Contingencies
Probable = likely
Reasonably possible = more than remote, less than likely
Remote = slight chance of occurring
IFRS & Definition of Probable
More likely than not
If a range of losses is given, which amount is chosen?
- the one that is most reasonably likely or the lowest amount
- IFRS uses the midpoint in the range
Types of Subsequent Events
Type I: relate to pre-existing items
Type II: important new event
Are gain contingencies reported?
- no journal entry is made, but a disclosure will be made
* avoid misleading implications
