FSA MODULE 29

Question 1

29.1 What are identifiable and unidentifiable intangible assets?

Answer 1

KEY - identifiable IA can be separated form and controlled by the firm (the firm could sell on the asset to another firm if they wished)

REMEMBER asset = a probable flow of future benefit to the firm

Unidentifiable - cannot - eg GOOD WILL

Question 2

29.1 what does the CFA institute think about ignoring unidentifiable intangible assets from the balance sheet?

Answer 2

That to ignore all would be too extreme.

And that analysts should assess them all on a case by case basis in terms of determining if they lead to future benefit

I future benefits are uncertain - often we will remove them from the balance sheet

Question 3

29.1 What are purchased intangibles?

Answer 3

Question 4

29.1 What are intangibles obtained in a business acquisition?

Answer 4

Question 5

29.1 What is amortisation?

Answer 5

Amortization is the accounting process of gradually writing down the cost of an intangible asset over its useful life, or the mechanism of paying off a loan’s principal and interest in regular, scheduled installments.

Question 6

29.1 How do we calculate good will? And do we amortise it?

Answer 6

difference between purchase price and fair value of identifiable net assets reported as good will

No we do not amortise, because the lifetime of goodwill is technically infinite

Question 7

29.1 What is the general rule for internally created intangible assets?

Answer 7

We expense rather than capitalise.

Because it is harder to establish what he true cost of that asset is, and therefore harder to capitalise and amortise

Question 8

29.1 Under IFRS, a firm may capitalise the costs of development, but not research. What are the requirements of this development phase?

Answer 8

1) need to be Abel to identify all the costs of the product development
2) need to be intending to launch the product
3) need to have the resources to finish the development
4) need to have a market to establish the product

If we get the above it is likely we will see the benefits from the product, and therefore we can capitalise and amortise

Question 9

29.1 How is internally developed software an exception for US GAAP?

Answer 9

WHEN FOR SALE: expense up until TECHNICAL FEASIBILITY is established - then capitalise special effects for website, eg

Question 10

29.1 Under any development/research criteria, can you capitalise on admin?

Answer 10

NO

Question 11

29.1 OVERVIEW OF expense vs capitalise US GAAP and IFRS

Answer 11

IFRS - expense research until feasibility established, capitalise after that

US GAAP - expense all research and development, until feasibility established

Question 12

29.1 What is good will?

Answer 12

Question 13

29.1 How do we calculate good will?

Answer 13

Question 14

29.2 When considering Assets, what is ‘held at fair value’?

Answer 14

Question 15

29.2 If an available for sale asset changes in value, where does this change get recorded?

Answer 15

NOT in the income statement, this goes directly to stockholders equity

Question 16

29.2 What happens to derivatives in the balance sheet if the asset changes in value?

Answer 16

record the derivative at fair value in the balance sheet and take the changes to the income statement

Question 17

29.2 What is held at cost, or amortised cost? (+what is the difference between the two)?

Answer 17

cost = purchase price
amortised cost = Amortised cost is an accounting method that measures financial assets or liabilities at their initial recognition amount, adjusted for principal repayments, impairment, and the cumulative amortization of any difference between the initial amount and maturity amount.

Held to maturity instruments are held not at fair value, but at amortised cost

Question 18

29.2 What are the two types of equity we can hold on the balance sheet?

What are they for? And how are they noted on the balance sheet and income statement?

Answer 18

FVPL = Fair value profit or loss
- they are passive, we dont have influence or control over them. We hold them to realise gains so likely to be traded again in future.

FVOCI = fair value through other comprehensive income (ONLY ALLOWED BY IFRS)

Question 19

29.2 FVOCI is…

Answer 19

NOT ALLOWED UNDER US GAAP

Everything is held for trading under us gaap - I think?

Question 20

29.2 Under IFRS, and in FVOCI, where does a change in value get recorded?

Answer 20

straight into stockholders equity (B/S)
- not going through the income statement!

Question 21

29.2 How does IFRS/GAAP treat different types of debt instruments?

Answer 21

Question 22

29.2 UNDER IFRS/GAAP: how is a debt securities held to collect contractual cash flows until maturity treated as opposed to debt securities held to collect contractual cash flows but may be sold before maturity?

Answer 22

first that is held will have no change in value of the security - therefore we mark it as an amortised cost (as we know the benefits of it to be paid int he future)
- AND EFFECTIVE INTEREST GOES INTO THE INCOME STATEMENT
- SAME AS FOR GAAP

IFRS for the second says that we will treat it as fair value under other comprehensible income
- then the fair value in the balance sheet changes and it goes into OCI in stockholders equity
- I/S effective interest, and realised gains and losses

Question 23

29.2 What is the US GAAP’S third classification of treatment of debt securities?

Answer 23

Question 24

29.2 When a company issues a bond, how is it noted on the balance sheet?

How is the bond treated in subsequent periods?

Answer 24

Create a liability equal to the process received less issuance costs (underwriting etc - is netted against the process of the bond)

subsequent periods, B/S carrying value = amortised cost

Question 25

29.2 What does interest expense equal on the income statement?

Answer 25

interest expanse = beginning liability x effective interest rate effective interest rate = internal return that means the PV of the future cash flows (coupons) and par value at maturity, = the PV of any cash inflows when the bond was issued (in the absence of any issuance costs, the EIR is just the YTM of the bond when it is first issued)

Question 26

29.2 what are the impact of issuing bonds (long-term financial liabilities) on the cash flow statement?

Answer 26

Question 27

29.2 Under the amortised method, what is the interest expense made up of?

Answer 27

Coupon, and the amortisation of the discount on the bond from par value

Question 28

29.2 How is the balance sheet liability impacted by whether a bond is issued at a premium or at a discount?

Answer 28

In both, the balance sheet liability slowly moved to par value at redemption point. discount = interest expense is coupon + discount premium = interest expense - the amortisation premium

Question 29

29.2 In common size statements how are metrics changed?

Answer 29

Time series = analyst compares how the metric changes over time cross-sectional = look at one moment in time and compare common size numbers

Question 30

29.2 What are the three liquidity ratios in the abalone sheet?

Answer 30

Question 31

29.2 What odes the quick (acid test) do?

Answer 31

It reworks the current ratio, but essentially ignores inventory

Question 32

29.2 what are solvency ratios?

Answer 32

Question 33

29.2 Under the 2024 syllabus, do we include leases in 'debt'

Answer 33

NO

Question 34

29.2 Goodwill developed internally is..

Answer 34

Expensed as incurred

Question 35

30.1 How do we treat accounts receivable?

Answer 35

Question 36

30.1 How do we treat unearned revenue?

Answer 36

Question 37

30.1 What is the equation for purchases?

Answer 37

Question 38

30.1 "what was the cash paid in year x" - what stages do you need to go through to work this out?

Answer 38

1 - start with the tax expense figure from the IS 2 - adjust this to remove the impact of any changes to deferred tax assets and liabilities to arrive at tax payable - (tax payable represents the taw owed to authorities on this period's earnings) 3 - the tax payable figure must then be adjusted for changes in tax-payable liabilities to arrive at the cash tax paid (remember increase in liability = ADD)(and increase in asset = DEDUCT)

Question 39

30.1 "What was the cash paid to suppliers in year X? how do we work this out?

Answer 39

COGS need to be adjusted for both change in inventory and changes in accounts payable 1. (SUBTRACT INVENTORY) - this gives us a 'purchases figure' 2. Then mark and increase/decrease in accounts payable 3. this gives us the cash paid to suppliers figure

Question 40

29 TRAINING COSTS are always...

Answer 40

EXPENSED - regardless of whether they are incurred during research or development.

Question 41

29

Answer 41

80,000

Question 42

29. Under U.S. GAAP, the balance sheet value of a debt security classified as held-to-maturity is its:

Answer 42

Amortised cost

Question 43

29. WORKING CAPITAL =

Answer 43

CURRENT ASSETS - CURRENT LIABILITIES

Question 44

29.

Answer 44

Proceeds from the issuance of common stock are 20% of total assets Common-size balance sheets express each balance sheet item as a percentage of total assets. Contributed capital from issuing common shares may be included in common stock (at par value) or additional paid-in capital (for proceeds in excess of par value). Shareholders' equity is unlikely to consist only of common and preferred stock, as it also includes components such as retained earnings and accumulated other comprehensive income.

Question 45

29. What does the carrying value of goodwill consider?

Answer 45

NOTE: The carrying value of goodwill is the amount of goodwill currently recorded on the balance sheet after any impairment losses. The carrying value considers both the past acquisition cost and the future expected performance. While the initial recognition of purchased goodwill is based on the acquisition cost compared to the net identifiable assets obtained, goodwill must be tested for impairment at least annually. One key indicator of impairment would be where the expected future excess returns to be earned from the acquired business have fallen compared to when initially purchased. Therefore, the carrying value considers both the past and the future.

Question 46

29. James Alexander, Inc., paid par of $220,000 for 5% coupon bonds in Charles Michael, Inc. By the end of the accounting period, the fair value of the bonds was $212,000. The firm plans to hold these bonds for a few years but sell them before maturity. What will be the most likely impact on net income at the end of the first year?

Answer 46

NET INCOME WOULD INCREASE This question marks an important difference between where various losses and gains end up in the financial statements. Income from the coupon payment here would go to net income ... therefore increase. The 8000 loss due to fair value change is an unrealised loss, and does not go into net income as the bonds are treated as 'Available for sale'. Instead, it goes into other Comprehensible income (OCI) - which is part of equity in the BALANCE SHEET, not net income.