Flashcards

The fair value option is the alternative for a business to record its financial instrument at their fair value. An entity may choose to measure eligible financial instruments at fair value with unrealized gains and losses reported in earnings. This option is irrevocable.

At Fair value.

Unrealized gains and losses on trading securities are recognized on the income statement.

Unrealized gains and losses on available-for-sale securities with no expected credit loss are reported in other comprehensive income (OCI)

At amortized cost.

• When the security is solid.

• When the security is transferred to trading security

• Transfer of the security to trading classification.

• When there is an expected credit loss on the available-for-sale security. 

• The credit loss cannot exceed the difference between fair value and amortized cost. 

• Transferred at fair value, which then becomes a new basis.

• For a security transferred into the trading category, the difference is treated as s realized gain or loss and is 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.

A credit loss must be reported on an available-for-sale or held-to-maturity debt security when it is probable that the amounts due (principal and interest) will not be collected. 

When there is an expected credit loss, the investment should be reported at the present value of the principal and interest that is expected to be collected. The credit loss is the difference between amortized cost and the present value. For available-for-sale security, the credit loss cannot exceed the amount by which is below amortized cost, because the investor has the option to sell an available-to-sale investment if the loss on the sale will be less than the expected credit loss.

Trading Securities

realized gain/loss = Selling price versus the adjusted cost (original cost +/- unrealized gain or losses previously recognized in net income)

Available -For-Sale Securities

Realized gain/loss = Selling price versus the original cost, adjusted for any credit losses recorded on the income statement from the previous periods (note that any unrealized gains or losses in AOCI must be reversed)

Equity securities are typically carried at fair value through net income (FVTNI), with unrealized gains and losses included in earnings.

Applies to equity investments that do not have a readily determinable fair value. These investments may be measured at cost, adjusted for changes in observable prices minus impairment.

Nonliquidating dividends received by the investor are accounted for as dividend income.  Liquidating dividends received by the investor are accounted for as a return of capital.

If impairment exists, the cost basis of the security will be written down to fair value with the write-down reflected as a realized loss and included in earnings.

Realized gain /loss = selling price versus the adjusted cost (original cost +/- unrealized gains or losses previously recognized in net income)

Beginning investment in investee 01/01/x1

+ Investor's share of investee earnings (From NI)

- Investor's share of investee dividends (Declared)

- Amortization of FV differences/ Ending Investment in Investee

Beginning investment in investee 01/01/x1 + Investor's share of investee earnings (From NI) - Investor's share of investee dividends (Declared) - Amortization of FV differences/ Ending Investment in Investee

Investor's share of investee earnings - Amortization of FV Differences/ Equity In Earning/Investee Income

When significant doubt exists regarding the parent's ability to control the subsidiary such as when

1. The subsidiary is in a legal reorganization

2. Bankruptcy and/or the subsidiary operate under severe foreign restrictions

When the parent is able to control the subsidiary

Usually 50 percent ownership of the voting stock(common stock) of the subsidiary

1. Insufficient level of equity investment at risk

2. Inability to make decisions or direct activities. A corporation, partnership, trust, LLC, or legal structure used for business purposes that either does not have equity investors with voting rights or lacks sufficient financial resources to support its activities.

3. No obligation to absorb entity expected losses

4. No right to receive expected residual returns

5. Disproportionately few voting rights

The entity with the power to direct the activities of the VIE that most significantly impact the entity's economic performance and: 

1. Absorbs the expected VIE losses; or 

2. Receives the expected VIE residual returns

3. The primary beneficiary must consolidate the VIE

The entity that absorbs the expected losses consolidates.

Dr APIC - Sudsidiary 

Dr Comon stock - Subsidiary

DrRetained Earning - Subsidiary

Cr Investment  Subsidiary

Cr Noncontrolling 

Dr Balance sheet adjustment to fair value

Dr Identification intangible assets to fair value

Dr Goodwill

• Direct out-of-pocket costs and indirect costs are expensed.

• Stock-related costs are a reduction in the value of the stock issued (debt to additional paid-in-capital)

Beginning  noncontrolling interest + NCI share of subsidiary net income  - NCI share of subsidiary dividends/Ending noncontrolling interest

Subsidiary net income x Noncontrolling interest %/ NCI in net income

• Finite useful life: Amortized over the remaining life. Subject to the two-step impairment test. 

• Indefinite useful life: Do not amortize. Subject to the one-step impairment test.

U.S. GAAP 

Goodwill = Fair value of subsidiary - Fair value of subsidiary's net assets.

The acquisition cost is allocated to the fair value of 100% of the balance sheet accounts and the fair of 100% of the identifiable intangible assets. This creates a negative balance in the acquisition account, which is recorded as a gain.

• Accounts payables/accounts receivable

• Accrued bond interest payable/accrued bond interest receivable

• Bonds payable/bonds receivable

• Dividends payable/dividends receivable

The parent's consolidated balance sheet will include 100% of the subsidiary's assets and liabilities (along with the parent's). However, it will not include the subsidiary's equity. 

When considering goodwill, both the Acquisition Method and the Equity Method must be considered.

A. Acquisition Method: Goodwill is the excess of the fair value of a subsidiary over the fair value of the subsidiary's net assets, including identifiable intangible assets. 

B. Equity Method: Goodwill is the excess of the stock purchase price over the fair value of the net assets acquired.

Goodwill impairment is calculated at the Reporting Unit Level (RU). 

Goodwill impairment is analyzed by comparing the carrying value of the reporting unit (including goodwill) to the fair value of the reporting unit (including goodwill).

If Fair value > Carrying value, then there is no impairment.

If Fiar value < Carrying value, then there will be an impairment charge equal to the difference between fair value and carrying value.

Note: The impairment charge cannot exceed the value of the goodwill allocated to the reporting unit.

1. Goodwill is amortized on a straight-line basis over 10 years, or less than 10 years if the entity can demonstrate that another useful life is more appropriate.

2. The Company makes an accounting policy election to test goodwill for impairment at either the entity level or the reporting unit level when a triggering event occurs that indicates that the fair value of the entity (or reporting unit) may be below its carrying amount.

3. This alternative method must be applied to all existing goodwill and any goodwill generated in future business combinations.

Note: with this method, goodwill impairment is less likely to occur.