Fa4 Study Notes

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Module 1 – 3 (Chapter 1 – 4)
Chapter 1 Survey of International Accounting
* Purposes for financial statements: comparability, information usefulness -> accounting harmonization * Factors that influence a country’s accounting standards: 1. Role of Taxation
2. Level of Development of Capital Markets – fairly sophisticated investors demand current and useful information from those who have received their capital 3. Different Legal Systems
4. Ties between Countries
5. Inflation Levels

Chapter 2 Investments in Equity Securities
* 5 types of share investments
* Strategic Investments (Investor intends to establish or maintain a long-term operating relationship with the entity in which the investment is made): * Control – Full Consolidation

* Significant Influence – Equity Method
* Joint Ventures – Proportionate Consolidation
* Non-Strategic Investments:
* Fair Value through Profit and Loss (FVTPL) – Fair Value Method * Available-For-Sale (AFS) – Cost Method
* IFRS 9 requires all nonstrategic equity investments be valued at fair value; IAS 9 is no longer exists to quote investments at cost if no fair value be reliably measured * Available-for-sale is now a separate category of equity investment and the initial recognition can elect to present the fair value changes on an equity investment that is not held for short-term trading in other comprehensive income (OCI) – Gain or losses are cleared out of OCI and credited or charged directly to retained earnings when the investment is sold and are never recycled through net income

Control (over 50% voting shares)
* Investment in Sub will be removed from Parent’s balance sheet and replacing it with assets & liabilities from the sub’s balance sheet * Control exists if parent company has the power to direct the activities of sub to generate returns for the parent company – can determine the key operating and financing policies of sub * Consists majority of the sub’s voting shares

* Business combination – acquire control thru investing in voting shares or purchasing the net assets Significant Influence (20% - 50% voting shares)
* An investment does not convey control or joint control, but allow the investor to exercise significant influence over the strategic operating and financing policies of the investee * Equity method – initially recorded at cost then adjusted after to include associate’s acquisition differentia, elimination and subsequent recognition of all unrealized intercompany profits * Dividends received from the associate are recorded as a reduction of the investment Joint Ventures

* The venturer reports its investment in venturee by either proportionate consolidation or equity method

* Cost method: income is recognized when dividends are received or receivable DR Investment in company $95,000
CR Cash$95,000

DR Cash$7,500
CR Dividend Income$7,500
* Equity method: income is recognized based on the income reported by the associate, and dividends are reported as a reduction of the investment account DR Investment in company$95,000
CR Cash$95,000

DR Investment in company$10,000
CR Investment Income$10,000
(10% of the company’s net income – significant influence)

DR Cash$7,500
CR Investment in company$7,500
* One of the major tasks for consolidation is to eliminate all intercompany transactions, especially intercompany profits, so that the consolidated statements reflect only transactions with outsiders - “you can’t make a profit selling to yourself” – “unrealized profits” from intercompany transfers of inventory or other assets must be held back until the specific assets are sold to outside entities

Chapter 3 Business Combinations
* Methods of Accounting for Business Combinations:
1. The Purchase Method (Required by GAAP prior January 1, 2011) 2. The Acquisition Method...
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