Advanced Financial Reporting - Exam 1 Review || with
Authenticated Answers.
Changes from FASB ASU 2016-07 correct answers There is no more Trading Security or AFS
classification for equity investments
Required to classify as Fair Value if there is a readily determinable market value
Why do I care about the relationship between companies? correct answers The accounting for
investments in other companies' equity (stock) depends on the relationship between the investor
and investee
No Influence correct answers Accounting Method: Fair Value
Accounting for Dividends Received:
DR Cash xxx
CR Dividend Income xxx
Accounting for Sub Net Income:
N/A
Accounting for Changes in Market Value:
Gain or loss in net income, market to market
Significant Influence correct answers Accounting Method: Equity Method
Accounting for Dividends Received:
DR Cash xxx
CR Equity Investment xxx
Accounting for Sub Net Income:
(Equity Pickup)
DR Equity Investment xxx
CR Equity Income xxx
Accounting for Changes in Market Value:
N/A
Control correct answers Accounting Method:
Consolidation
Internal Accounting:
Parent's bookkeeping for subsidiary is whatever they want
External Accounting:
Must be consolidation in accordance with GAAP
Investor and Investee: Legal Entities correct answers Investor and Investee companies are
separate legal entities. Their operations must be accounted for separately.
When to use Equity Method: External Reporting correct answers (FASB ASC 323) According to
GAAP, equity method should be used for equity investments when the investor has ability to
excercise "significant influence" over financial and operating policies of an investee
,What is Significant Influence? correct answers (TIPMOR)
T - Technological Dependency
I - Interchange of managerial personell
P - Participation in investee's policy making process
M - Material intra-entity transactions
O - Other investor ownership percentages
R - Representation on investee's board of directors
Only one of the above is needed. (also see pg 6 of textbook for indicators of no significant
influence)
Criticism of the Equity Method correct answers 1. Single line consolidation - can't really see any
details
2. Carrying value is less than fair value
3. Accruing income with no expectation of actual cash receipt
Consolidation Process correct answers (CEADI) - "Seedy"
C - Eliminate the Changes in the equity investment account during the year
E - Eliminate stockholder's Equity of the subsidiary as of beginning of the year
A - Eliminate the AAP (acquisition accounting premium) as of beginning of the year
D - Depreciation for current year AAP
I - Eliminate Intercompany transactions during the periods and remaining balances
Why do I care about CEADI?: Part 1 correct answers When control is obtained the parent cannot
publish financial statements to outside parties reporting its subsidiary as an equity investment. It
must consolidate financial statements with subsidiary.
Why do I care about CEADI: Part 2? correct answers The consolidation process combines the
financial statements of the parent and subsidiary by eliminating the equity investment related
balance sheet and income statement accounts and replaces them with the assets, liabilities,
revenues, and expenses of the subsidiary
Business Combinations correct answers When obtaining control over a group of net assests
qualifies as the acquisition of a business a special set of accounting principles called Acquisition
Method applies
How to qualify as a business combination? correct answers Needs to include:
Inputs - economic resource contributing to creating outputs
Substantive processes - when applied to inputs creates outputs
Outputs - the result of inputs and substantive processes providing goods or services to customers,
other revenue, or investment income
When substantially all of the fair value of gross assets acquired is concentrated in a single asset
(or group of similar assets), the assets acquired would NOT represent a business
, Why do I care about business combinations? correct answers Because in an acquisition of a
business, we must use the Acquisition Method of accounting
Stock vs Stuff correct answers Stock:
Buying stock results in equity investments
Stuff:
Buying stuff results in one time consolidations
True Under Acquisition Method correct answers 1. Acquired net assets are recorded on the
balance sheet at their fair value, regardless of amount paid
2. All transaction costs are expensed in the period they are incurred
3. Any difference between the FV of those identifiable net assets and consideration paid will be
recorded as goodwill, which is an intangible assets that is only recorded in transactions that
qualify as business combinations
Key Consolidation Concepts correct answers It's all about Control
Consolidation is a 2 step process of replacement. First you remove, then you input new
information.
The goal is to show the financials of the single economic entity
Steps in Acquisition Method correct answers 1. Who bought who?
Who has control
2. When did we get control?
Birth date of acquisition is the date consideration transfers
3. What did we get?
Assets, liabilities, noncontrolling interests... all at fair value
4. Does that result in goodwill or bargain purchase gain?
Residual asset or gain (this is pretty rare)
Recognition Principle correct answers (FASB ASC 805-20-25-1)
As of the acquisition date, the acquirer shall recognize, separately from goodwill, the identifiable
assets acquired, the liabilities assumed, and any noncontrolling interests
Measurement Principle correct answers (FASB ASC 805-20-30-1)
The acquirer shall measure the identifiable assets acquired, the liabilities assumed and any
noncontrolling interests in the acquiree at their acquisition date fair values
Separately Identifiable Intangible Assets correct answers FASB ASC 805 requires intangible
assets to be considered separately identifiable if they are either backed by a legal document or
separable/able to be sold
Intangibles and Acquisitions correct answers The existence of significant unrecorded intangible
assets may be both a major reason why a given acquisition occurs and a major factor in
determining the purchase price
Authenticated Answers.
Changes from FASB ASU 2016-07 correct answers There is no more Trading Security or AFS
classification for equity investments
Required to classify as Fair Value if there is a readily determinable market value
Why do I care about the relationship between companies? correct answers The accounting for
investments in other companies' equity (stock) depends on the relationship between the investor
and investee
No Influence correct answers Accounting Method: Fair Value
Accounting for Dividends Received:
DR Cash xxx
CR Dividend Income xxx
Accounting for Sub Net Income:
N/A
Accounting for Changes in Market Value:
Gain or loss in net income, market to market
Significant Influence correct answers Accounting Method: Equity Method
Accounting for Dividends Received:
DR Cash xxx
CR Equity Investment xxx
Accounting for Sub Net Income:
(Equity Pickup)
DR Equity Investment xxx
CR Equity Income xxx
Accounting for Changes in Market Value:
N/A
Control correct answers Accounting Method:
Consolidation
Internal Accounting:
Parent's bookkeeping for subsidiary is whatever they want
External Accounting:
Must be consolidation in accordance with GAAP
Investor and Investee: Legal Entities correct answers Investor and Investee companies are
separate legal entities. Their operations must be accounted for separately.
When to use Equity Method: External Reporting correct answers (FASB ASC 323) According to
GAAP, equity method should be used for equity investments when the investor has ability to
excercise "significant influence" over financial and operating policies of an investee
,What is Significant Influence? correct answers (TIPMOR)
T - Technological Dependency
I - Interchange of managerial personell
P - Participation in investee's policy making process
M - Material intra-entity transactions
O - Other investor ownership percentages
R - Representation on investee's board of directors
Only one of the above is needed. (also see pg 6 of textbook for indicators of no significant
influence)
Criticism of the Equity Method correct answers 1. Single line consolidation - can't really see any
details
2. Carrying value is less than fair value
3. Accruing income with no expectation of actual cash receipt
Consolidation Process correct answers (CEADI) - "Seedy"
C - Eliminate the Changes in the equity investment account during the year
E - Eliminate stockholder's Equity of the subsidiary as of beginning of the year
A - Eliminate the AAP (acquisition accounting premium) as of beginning of the year
D - Depreciation for current year AAP
I - Eliminate Intercompany transactions during the periods and remaining balances
Why do I care about CEADI?: Part 1 correct answers When control is obtained the parent cannot
publish financial statements to outside parties reporting its subsidiary as an equity investment. It
must consolidate financial statements with subsidiary.
Why do I care about CEADI: Part 2? correct answers The consolidation process combines the
financial statements of the parent and subsidiary by eliminating the equity investment related
balance sheet and income statement accounts and replaces them with the assets, liabilities,
revenues, and expenses of the subsidiary
Business Combinations correct answers When obtaining control over a group of net assests
qualifies as the acquisition of a business a special set of accounting principles called Acquisition
Method applies
How to qualify as a business combination? correct answers Needs to include:
Inputs - economic resource contributing to creating outputs
Substantive processes - when applied to inputs creates outputs
Outputs - the result of inputs and substantive processes providing goods or services to customers,
other revenue, or investment income
When substantially all of the fair value of gross assets acquired is concentrated in a single asset
(or group of similar assets), the assets acquired would NOT represent a business
, Why do I care about business combinations? correct answers Because in an acquisition of a
business, we must use the Acquisition Method of accounting
Stock vs Stuff correct answers Stock:
Buying stock results in equity investments
Stuff:
Buying stuff results in one time consolidations
True Under Acquisition Method correct answers 1. Acquired net assets are recorded on the
balance sheet at their fair value, regardless of amount paid
2. All transaction costs are expensed in the period they are incurred
3. Any difference between the FV of those identifiable net assets and consideration paid will be
recorded as goodwill, which is an intangible assets that is only recorded in transactions that
qualify as business combinations
Key Consolidation Concepts correct answers It's all about Control
Consolidation is a 2 step process of replacement. First you remove, then you input new
information.
The goal is to show the financials of the single economic entity
Steps in Acquisition Method correct answers 1. Who bought who?
Who has control
2. When did we get control?
Birth date of acquisition is the date consideration transfers
3. What did we get?
Assets, liabilities, noncontrolling interests... all at fair value
4. Does that result in goodwill or bargain purchase gain?
Residual asset or gain (this is pretty rare)
Recognition Principle correct answers (FASB ASC 805-20-25-1)
As of the acquisition date, the acquirer shall recognize, separately from goodwill, the identifiable
assets acquired, the liabilities assumed, and any noncontrolling interests
Measurement Principle correct answers (FASB ASC 805-20-30-1)
The acquirer shall measure the identifiable assets acquired, the liabilities assumed and any
noncontrolling interests in the acquiree at their acquisition date fair values
Separately Identifiable Intangible Assets correct answers FASB ASC 805 requires intangible
assets to be considered separately identifiable if they are either backed by a legal document or
separable/able to be sold
Intangibles and Acquisitions correct answers The existence of significant unrecorded intangible
assets may be both a major reason why a given acquisition occurs and a major factor in
determining the purchase price
