On the balance sheet, marketable securities classified as trading or available-for-sale are valued…
at fair value
On the balance sheet, marketable securities classified as held-to-maturity are valued….
at amortized cost
How are unrealized gains/ losses on trading securities recognized?
Unrealized gains and losses on trading securities are recognized on the income statement.
How are unrealized gains/losses on available-for-sale securities recognized?
Unrealized gains and losses on available-for-sale securities are reported in other comprehensive income (OCI).
List three conditions when losses on marketable securities classified as available-for-sale are recognized in income
- Sale of the security
- Transfer of the security to trading classification
- Other than temporary decline of individual security below cost (impairment)
When a marketable equity security is transferred from trading to available-for-sale, or vice versa, at what cost is it transferred?
- Transferred at fair value, which then becomes new basis
- For a security transferred into the trading category, the difference is treated as a realized gain or loss and recognized on the income statement
- For a security transferred from the trading category, the unrealized holding gain or loss will already have been recognized in earnings
NOTE: transfers to and from the trading category should be rare
How are gains and losses on financial instruments that hedge trading securities reported?
Reported in earnings, consistent with reporting unrealized gains and losses on trading securities
How are gains and losses on financial instruments that hedge AFS securities reported?
Reported in earnings together with the offsetting gains or losses on the available for sale securities attributable to the hedge risk.
What disclosures should be made for AFS and HTM securities?
- Aggregate fair value
- Gross unrealized holding gains and losses
- Amortized cost basis by type
- information about the contractual maturity of debt securities
State the criteria to consolidate subsidiaries
- Consolidate when the parent is able to control the subsidiary. Usually this is indicated by greater than 50% ownership of the voting stock of the subsidiary
- Do not consolidate when control is not with owners ( as in bankruptcy of subsidiary)
Identify the three levels of control and the appropriate accounting method for each
1) No significant influence - cost method: trading or available for sale securities, at fair value
2) Significant influence but 50% of less ownership - equity method
3) Control
* cost or equity method (internal accounting)
* consolidated financial statements (external reporting)
When is the cost method of accounting for investments used?
- The cost method, also known as the fair value method or the available for sale method, should be used when the investor owns less than 20% of the investee’s voting stock and does not exercise significant influence
- Lacking evidence to the contrary, it is assumed that no significant influence can be exercised from 0% - 20%
- The original investment under the cost method is accounted for in the same manner as marketable equity securities, generally as an available for sale investment
How are dividends distributed by the investee treated by the investor receiving them?
- stock dividends issued by the investee are not recognized by the investor
- Cash dividends received by the investor are accounted for as dividend income
How is the year end “investment in investee” reported on the balance sheet calculated under the equity method?
Beginning investment in investee \+ Investor's share of investee earnings - Investor's share of investee dividends - Amortization of FV differences = Ending investment in investee
How is an investor’s equity method investment reported on the income statement?
Investor’s share of investee earnings
- Amortization of FV differences
= Equity in earnings / investee income
How are joint ventures accounted for under IFRS and US GAAP?
Joint ventures are accounted for using the equity method under both US GAAP and IFRS
In a step by step acquisition, what is the accounting treatment when significant influence is acquired?
- Going from the cost method to the equity method is handled like a change in accounting principle - retroactively.
- Go back retroactively with the equity method but not with the new ownership percentage.
- Prior period financial statements are restated
When are consolidated financial statements prepared?
When the parent company has CONTROL over the subsidiary company. Control is achieved when more than 50% of the voting stock of the subsidiary is owned directly or indirectly by the parent and no other factors are present that would indicate a lack of control (bankruptcy, reorganization)
In acquisition accounting, state the consolidating workpaper elimination entry.
*CAR IN BIG
DR Common stock - subsidiary
DR APIC - subsidiary
DR Retained earnings - subsidiary
CR Investment in subsidiary
CR Noncontrolling interest
DR Balance sheet adjustment to fair value
DR Identifiable intangible assets to fair value
DR GoodwillHow are expenses relating to the combination treated under the acquisition method?
- Direct out of pocket costs are expensed
- Stock related costs are a reduction in value of the stock issued (normally a debit to additional paid in capital)
- Indirect costs are expensed
- Bond issue costs are capitalized and amortized
In an acquisition, how are acquired identifiable intangible assets amortized?
- Finite useful life: Amortized to residual value over expected useful life
- Indefinite useful life: do not amortize
How is goodwill calculated under the US GAPP acquisition method?
US GAAP:
- Goodwill is the excess of the fair value of the subsidiary (acquisition cost plus noncontrolling interest) over the fair value of the subsidiary’s net assets, including identifiable intangible assets at FV
- Goodwill = Fairvalue of subsidiary - Fairvalue of subsidiary’s net assets
- Goodwill recorded in a business combination is not amortized. The entire investment is subject to the impairment test.
How is goodwill calculated under the IFRS acquisition method?
IFRS:
- Goodwill is recognized using the full goodwill method (same as US GAAP) or the partial goodwill method
- Under the partial goodwill method, goodwill is the excess of the acquisition cost over the fair value of the subsidiary’s net assets acquired
- Partial goodwill = Acquisition cost - Fair value of subsidiary’s net assets acquired
How is noncontrolling interest (balance sheet) calculated under US GAAP?
Noncontrolling Interest (NCI) = FV of subsidiary x NCI %
