CFA Level 2 FRA

Direct Financing Lease (Financing lease)

-Lessor is not the manufacturer or dealer -PV of leased payments = carrying value of leased asset -No gross profit is recognized at lease inception -Lessor recognizes interest rev over lease term -Difference in interest rev (CFO) and lease payment reduces the lease receivable (CFI)

Sales-Type Lease (Financing lease)

-Lessor is typically manufacturer or dealer of the leased equipment -PV of lease payments > carrying value of leased asset -At lease inception, lessor recognizes "gross profit" *Sales = PV of lease payments *COGS = carrying value of asset -Interest rev recognized over lease term - Difference in interest revenue (CFO) and payment reduces the lease receivable (CFI)

Defined Benefit Accounting

-Non-pay-related Plans: Pension benefits are unrelated to employee's salary level - Pay-related plans: Pension benefits are based on future comp - Employer needs to estimate future benefit payments to determine contribution, making accounting hard.

Pension Expense IFRS

+ Service Cost +/- Net Interest Expense/ (Income)* +/- Past Service Cost Re measurements (Actuarial gains/loss) are reflected in OCI and not amortized *Net interest expense/(income) = beg funded status * Discount rate

Financial Assets

- <20% ownership -IFRS classifies investments in financial assets at HTM, AFS, or Fair Value through profit or loss

Business Combinations

- >50% ownership with control - Acquisition Method is used

Reverse Effects of Capitalizing Interest

- Add CI to IE - Remove CI net of depreciation from earnings (NI) - Deduct CI net of related depreciation from fixed assets -Add CI to CFI -Deduct CI from CFO - Recalculate interest coverage and profitability ratios

Adjustments from LIFO to FIFO

- Add to inventory -Subtract from cash the tax consequence of higher inventory (inventory * tax rate) - Add LIFO reserve net of tax to SE - Adjust COGS - Adjust Gross profit - Adjust EBT & Taxes

Temporal Method (Remeasurement)

- Also known as monetary/nonmonetary method - Overseas operations considered as an extension of the parent companies activities - If functional currency and parents presentation are the same we REMEASURE - Assets and liabilities translated at rates that preserve the measurement bases after translation: 1. Current Value 2. Historic Cost (fluctuating rates do not have an impact) Remember: Inventory is a nonmonetary asset Exchange rate gain/loss go through I/S. Retained earnings is figure that makes accounting equation balance: A - L - Common Stock = Retained earnings

Uses of Fixed Asset Disclosures

- An analyst can use financial statement disclosures to estimate the avg age of fixed assets and the average depreciable life of fixed assets in order to: * Identifiy firms with older, inefficent assets * Identify when major capital investments are required * Idnetify firms with inflated earnings

Impairment of Long-Lived Assets (PP&E) Under IFRS

- Annually check for impairment - Impaired if BV (original cost - accum. deprec) > Recoverable amount - Recoverable amount is greater of fair value less selling costs or value in use (PV of future CF) - If impaired, write down asset to recoverable amount and record loss in I/S - Loss reversal is allowed up to original loss

Analyst Issues - Equity Method

- B/S : Netting assets against liabilities may obscure liabilities and understate leverage (we are doing one line; %A, %L, GW). Distorts equity. -I/S: We only see share of NI, not rev, costs, etc.

Impact of Impairment on Financial Statements

- B/S: Reduces assets, liabilities (deferred taxes), and SE - I/S: Loss decreases current period income, in future periods, reduced depreciation results in higher net income. - CFs: No affect

Contingent Consideration

- Contingent consideration is an obligation of the acquiring entity to transfer additional assets or equity interests to the former owners of an acquiree. The amount of this consideration can be significant, depending on the subsequent performance of the acquiree. IFRS/GAAP - Recognize estimated fair value at acquisition and any other contingent consideration (discount back) - Change in fair vair value of liabilities go to I/S - Change in fair value of equity settled in equity GAAP Only - Changes in fair value of asset to income statement

HTM (Financial Asset)

- Debt securities where company has intent AND ability to hold to maturity - Interest income reported on income statement - Interest = Coupon +Amort. Discount - Amort. Premium - Reported as carried on B/S at amortized cost (+ any discounts, - any premium; which is difference between interest and coupon rate*face value), carried at HISTORICAL -Cant sell before maturity, except for in unusual circumstance - Income statement sees the interest income, not the unrealized gain because we hold to maturity

Stock Option (share base compensation)

- Fair value at grant date = estimated option premium - Service period equals time between grant date and vesting date (first date options can be exercised) - Option value is based on observable market price of an option with the same or similar terms and conditions, if one is available. -In absence of a market based instrument, fair value is determined by option valuation model: Black Shoels, binomial model, monte carlo simulation Option Model Assumptions: 1. Exercise price 2. Stock price at grant date 3. Implied vol 4. Rf rate 5. Expected term 6. Dividend yield

Impact of Impairment on Ratios

- Fixed asset and total asset turnover ratios: Increase due to reduced assets -Debt to Equity: Increase due to reduced equity - Current year ROA and ROE: decrease, % reduction in net income > % reduction in assets/equity - Future ROA and ROE: increase due to lower assets and equity, higher NI with lower depre

Other Adjustments

- Full pension expense is taken through Op expenses (SG&A) under GAAP - Only service is operating - Remove pension expense from operating expenses and include service cost - Add interest cost to interest expense - Add actual return on plan assets to non-operating income - Amortization ignored ***Total I/S effect = service + interest - actual return***

Capitalized Interest

- Interest inccured during construction is capitalized so we can accurately measure asset's cost and better match costs with revs - Interest rate is based on project specific debt, if not then unrelated debt - Capitalized interest is a CFI while interest expense is a CFO -After completion of construction, capitalized interst i depreciated in the I/S - Capitalizing interest costs results in higher interest coverage ratio (lower interest expense ~ (EBIT/Interest Exp), but lower in subsequent years

Special Purpose Entity

- Legal structure created to isolate certain assets and obligations of sponsor - Does specific purpose: buy assets, fund R&D, lease assets, enhance B/S - Purpose if for low-cost financing Typical Uses: - Synthetic lease - sell to SPE and leaseback - Secularized Loans -loans or mortgages sold to SPE which issues MBS -Sale of Receivables - company sells AR to SPE, which uses AR as collateral to borrow R&D Cost - established to fund R&D, avoids recognition of R&D expense or liabilities so if R&D makes losses, doesn't impact company.

B/S Asset/Liability of Defined Benefit Obligation

- Net of PBO and fair value of plan assets - Asset/liability = funded status - If net asset > PBO - overfunded and we create asset - If net asset < PBO - underfunded and we create liability

Translated (Current Rate) Vs. Local Currency Ratio

- No change from translation using current rate method for pure income statement and b/s ratios - Mixed ratios are distorted (1 b/s item, 1 i/s item (which will be an average)) - FX rate changes affect consolidated ratio, even when no "real" change occurs

Lessor (owner) Financial Reporting

- Operating Lease: *Lessor reports leased asset on B/S *Recognize lease payments as rental income *Recognize depreciation expense on asset - Financing Lease *Reports lease receivable on B/S *Recognize lease pmts as part interest rev and part of return of capital * Treat as either sales type lease or direct financing lease

PBO (Projected Benefit Obligation)

- PV of all future pension pmts earned to date (current) based on expected salary increase over time. - Assume work until retirement - Estimate of liability on a going concern basis -PVDBO is what IFRS calls PBO

Available for Sale (Financial Asset)

- Reported on B/S at fair value (Amortized Cost & Unrealized Gain), CARRIED AT MARKET VALUE - Realized gains/losses/dividends/interest income reported on I/S - Unrealized gains/losses net of tax are reported in OCI, NOT I/S. When sold, these transfer to I/S. -Unrealized gain is difference between Fair Value and amortized cost [PV - amort. disc + amort. premium] Foreign Exchange gains/losses recognized in I/S for IFRS, equity for GAAP.

Effect of SPE Consolidation

-Receivables added back to sponsor B/S - Debt added to sponsor's liabilities - Leverage increases, receivables increase, recieveable turnover decreases, ROA decreases - No longer off balance sheet financing

Operating Lease

-Rental, no impact to A or L - Periodic payment are rental expense in I/S - PV of lease payments are added to L on B/S and reduced as paid over time

Financial Assets

1, Held-to-maturity 2, Fair value through profit or loss (held-for-trading or designated at fair value) Held-for-trading Designated at fair value 3,Available-for-sale

IFRS 9 New Standards

1. Amortized Cost (HTM debt securities) Conditions: - Business model (How business model is managed- do you htm?) - Cash flow characteristic test( are the payments soley interest and principal) Accounting treatment same as HTM; store purchase price, then amortize disc/premium till asset converges to face value at maturity 2. Fair value through profit or loss (debt & eequity) Same accounting treatment as HFT 3. Fair value through OCI (ONLY equity securities/ AFS)

Current Rate Steps

1. Convert the I/S - all rev and expenses are translated at average rate 2. Derive closing RE, but no plug figures involved ( Begin RE + NI - Dividend = End RE ) 3. Convert the B/S - all A&L are translated at the current rate 4. B/S will not balance. The difference is the translation gain/(loss). Difference is the CTA to make balance. 5. Force the B/S to balance by including the adjustment in the shareholders' equity (cumulative translation adjustment) NOTE: the exchange rate gain or loss for the period is the change in the CTA CTA makes accounting equation balance = A - L - Common - Retained earnings = CTA

Exchange Rate Definitions

1. Current rate = Foreign Exchange (FX) rate as of balance sheet date (i.e., closing rate) 2. Average rate = Average FX rate over reporting period 3. Historical rate = FX rate that existed when a particular transaction occurred

Temporal Method Steps

1. Produce top of balance sheet (total asset) 2. Produce SE and liabilities (Retained earnings = plug figure to ensure B/S balances) 3. Derive NI from reconciliation of retained earnings ( Begin RE + NI - Dividend = End RE) 4. Produce the income statement. Net Income (NI) in the income statement will be different from NI in retained earnings 5. Force the NI in I/S to agree to the NI in retained earnings by adding a gain or loss.

Average age ( in years)

Accum. Depreciation / Annual Depreciation Expense

Cash Flow Adjustments

Adjust CFO and CFF for the after-tax difference in economic pension expense and cash contributions. - Contributions > TPPC = Princiapl PMT (Contribution - TPPC)(1-T) CFF down, CFO up - Contributions < TPPC = Borrowing (contribution - TPPC)(1-T) CFF up, CFO down

Stock appreciation rights (cash bonuses linked to stock performance)

Advantages: - avoid dilution - less risk aversion Disadvantages: - cash outflows -expense - valued at fair value and spread over service life.

Share-Based Compensation

Advantages: 1. No cash outlays - no cash leaving the firm 2. Aligns management and shareholders interest (reduces agency cost) Disadvantage: 1. Employees have limited influence over stock price 2. Increases stock ownership, more risk aversion 3. Option award may increase risk taking 4. Existing shareholders diluted Disclosures required: must disclose nature and extent of share-based comp arrangements, how fair value determined, and impact on income for the period. Accounting: Allocate fair value over service period.

Actuarial Pension Plan Assumptions

All plans must disclose at least these 3 assumptions: 1. Discount Rate 2. Rate of compensation increase 3. Expected return on plan assets ( GAAP Only) These assumptions can affect: - Balance Sheet (through effect on PBO) - Incomes Statement (pension cost) Pension accounting can be manipulated when change actuarial assumptions.

Impairment of Long-Lived Assets (PP&E) Under GAAP

Assess only when indication that BV may not be recoverable through future use - Indiciation of impairment - asset is impaired when BV > asset's estimated future undiscounted CFs - Loss Recognition: If impaired, write down asset to FV or discounted future CFs if FV unknown. - Recognize loss in I/S - Loss reversal prohibited for "held for use" assets'

Acquistion Method (Business Method)

Balance Sheet: 1. Eliminate investment account (purchase price) of parent and equity accounts of subsidiary 2. Create minority interest (share of equity not owned and net assets they own) 3. Calc goodwill 4. Combine 100% of assets and liabilities of both firm, not the percent of company owned. Income Statement: 4. Eliminate subsidiary earnings from parent (dividends) 5. Subtract minority share of earnings (share of earnings not owned) 6. Combine rev & exp. of both firms ( net of intercompany transactions and only include post acquisition results)

Capitalization vs Expensing

Capitalization: - Depreciating/amortizing assets cost over useful life, higher NI (Higher ROA/ROE in first year) - Expected to provide future benefit. - CFI outflow Expensing: - Immediate reduction of net income by after tax amount, lower NI (Lower ROA/ROE in first year) - Uncertain economic benefit - CFO outflow

Impairment of Goodwill

- Tested for impairment annually, can't be amortized. - Impaired when carrying value (BV) > fair value -Impairment gain is reported on I/S as separate line -Cannot reverse impairments IFRS impairment is allocated across cash generating units that will benefit from acquisition. One Step: - If recoverable of cash generating unit < carrying value, difference is impairment Note: If impairment is greater than goodwill, remainder is allocated to other assets in the unit. GAAP impairment is allocated across reporting units; operating segment or component Two Step (Have to recalc goodwill): -If fair value of reporting unit < carrying value, impaired. - Amount of impairment in unit's reported goodwill - current fair value of unit's goodwill Note: If loss is greater than remaining goodwill, remainder is thrown away.

STOCK GRANTS (share base compensation)

- comp expense equals market value at grant date - allocated over period benefited by empolees service - restricted stock: ownership returned to firm if conditions are not met - performance shares: granted on meeting performance goals, not based on how long you've worked there

Joint Venture

- control shared by 2 or more investors - requires equity method

Fair Value of Plan Assets

Employer contribution - amount they will put into plan ROA - actual capital gains/dividends/interest. Will fluctuate with market Benefits paid - payments made from the fund to existing retirees

Average Depreciable Life

Ending Gross Investment is original cost.

Remaining Useful Life

Ending net investment is original cost - accum. depreciation

Calculating Currency Exposure

Exposure to closing rate: - Temporal Method Exposures: = (Cash + A/R) - (A/P + Current Debt + LTD) = Monetary Assets - Monetary Liabilities - Current rate method exposures = Assets - liabilities = Shareholders' equity These are the B/S accounts that are affected by the current rate(closing rate) for each method Appreciating overseas currency - buys more of reporting currency. Depreciating overseas currency, buys less of reporting currency.

Funded Status of PBO

Fair value of Plan Assets - PBO = Funded Status FV>PBO = Overfunded FV<PBO = Underfunded Funded Status= Economic Position of the Plan

Delayed Recognition of Pension Costs

IFRS allows for recognition of certain events that affect the pension cost in OCI Under GAAP, the events are amortized in the I/S over time (OCI until then) IFRS: Remeasurement gains and losses = actuarial gains and losses plus differences in actual and expected return on assets. GAAP: Actuarial gains and losses = IFRS definition of remeasurement gains and losses 1. Remeasurements( IFRS & GAAP) - Changes in actuarial assumptions affecting the PBO - From differences in the actual and expected return on plan assets 2. Past Service costs (GAAP) Changes in PBO due to plan amendments, sit in OCI.

Associates

-20-50% ownership -Significant influence can be evidence by: BoD representation, involvement in policy making, material intercompany transactions, interchange of managerial personnel, dependence on tech. -Equity Method is used - Influence in financing, operating, and amount and timing of dividends.

Finance Lease (Capital Lease in U.S.)

-Asset is purchased with debt -At inception lessee adds equal amount to A and L on B/S (lower of fair value or PV of future lease payments) - Recognize depreciation expense on the Asset and Interest expense on the liability overtime - Each lease payment treated like amortizing debt - each payment is part interest (CFO) and part principal (CFF) - Depreciation (principal part of expense) will decrease the liability.

Units of Production Depreciation

-Based on units rather than time - (Cost - Est. Salvage Value) / # Units - Take this number and multiply by units produced each year for the depreciation

Reasons to Lease (operating lease)

-Cheaper financial (little down, fixed interest rate) - May have fewer restrictions (covenants) - Less risk of obsolescence - Off-balance sheet financing (operating lease) - Tax advantages - synthetic leases

Fair Value Option - Equity Method

-Election to treat equity method investments at Fair Value (HFT) - GAAP allows all entities - IFRS allows venture capital, mutual funds, unit trusts only - Cant change back to equity accounting from Fair value -Unrealized g/l on I/S

Intercorporate Investment Classifications

-Financial Assets: <20% ownership, no significant control over operations of investee firm. Passive. -Associates: 20% to 50% ownership,investing firm has significant influence over operations, but not control. Influence. -Business combinations: >50% ownership with control. Classifications depends on whether they are passive, influence, or control. Percentage ownership is irrelevant

IFRS vs GAAP

-GAAP expected return and discount rate may differ, IFRS expected return = discount rate - GAAP interest and $ expected return shown separately. IFRS netted. - IFRS remasurements taken OCI. GAAP actuarial gains and losses either recognized in the I/S or taken into OCI. - GAAP open OCI balances subject to potential amortization (corridor approach). IFRS no amortization. - IFRS past service costs taken to I/S - GAAP past service costs taken to OCI and amortized over remaining service life - GAAP uses 10% corridor approach for amortizing actuarial gains and losses - IFRS discount rate = yield on high quality corporate debt with similar duration to plan liabilities - GAAP discount rate = rate at which pension benefits can be settled.

Consolidation of SPEs

IFRS consolidation when sponsor has control, indicated by: - SPE benefits sponsor - Sponsor makes decisions - Sponsor absorbs rewards and risks - Sponsor has residual interest GAAP says an SPE is a VIE (and must be consolidated) if any are met: - Insufficient risk. Investment in equity is less than 10% of assets - Major shareholders lack decision making rights, and don't absorb expected losses, and do not receive expected residual retirms

Reclassification of Financial Assets

IFRS does not allow reclassification into or out of fair value designated categories

Recognition & Measurement in Acquistion

Identifiable assets & liabilities: - record at fair value - acquirer must recognize assets and liabilities that the acquiree had not recognized Contingent Liabilities: obligations from past - IFRS: Recognize fair value at acquisition - GAAP: Recognize fair value at acquisition if probable and can be reliably estimated Indemnification Assets: Acquirer must recognize an indemnification asset if seller contractually indemnifies a contignency, uncertainty, or future loss Financial Assets and Liabilities: Acquirer reclassifies at date of acquisition to bring in line with parent accounting policies In Process R&D: - In process R&D: Cap at acquisition then amortize as completed or impaired (IFRS & GAAP) - Restructing costs - not part of acquisition cost, expense when incurred (IFRS & GAAP)

Corridor Approach

If actuarial gain/loss in OCI is > 10% PBO or Plan assets, have to amortize over the remaining service life

Treatment as Finance Lease (GAAP)

If any one of the following criteria is met: 1. Title is transferred to lessee at end of lease 2. BPO exists 3. Lease term is > 75% economic life 4. PV of lease payments > 90% of the leased asset's fair value

Transaction Exposure

Imports and exports denominated in overseas currencies. - Transactions recorded at spot rate on date of transaction - Receipt or payment at a later date - Issue is change in spot rates between transaction and settlement date. - Record realized gain/loss at settlement date in income statement Settlement date B/S date -Record unrealized gain (loss) at B/S - When we settle, record further gain (loss) in subsequent year

Periodic System/Perpetual System

In a periodic system inventory values and COGS are determined at end of account period. In a perpetual, inventory values and COGS are updated continuously. Get same results

Valuing Inventory IFRS

Inventory is reported at lower of COST or NRV -NRV = estimated sales price - estimated selling costs - completion costs -If NRV is less than cost, invetory is written down to NRV and loss is reported - Can be written back up to original level, but gain cannot be greater than original loss

Valuing Inventory GAAP

Inventory is reported on the B/S at lower of cost or market - Market = replacement cost - Market cant be greater than NRV or less than NRV - normal profit margin, range bound. - If cost > market, inventory is "written down" and a loss is recognized - If recovery in value, no "Write up" is allowed under GAAP and market value becomes new cost **If active market exists, quoted market price is used**

LIFO Liquidation

LFIO firm's inventory quantities are declining. This results in higher profit margins, higher income taxes. This higher profit is artificial because they will eventually run out of inventory. LIFO liquidation can be intentional - want to manipulate earnings, or from strikes, recessions, or declining customer demand.

LIFO Resreve

LIFO Reserve = FIFO Inventory - LIFO Inventory - Once LIFO Inventory is converted to FIFO Inventory, accounting equation is out of balance. Need to adjust, assets and liabilities increase by same amount. - Income tax adjustment is needed because LIFO firms pays lower taxes (higher expense) than the FIFO Firm in inflationary environment - Also important to convert LIFO COGS to FIFO COGS, the difference is equal to change in LIFO Reserve FIFO COGS = LIFE COGS - (ending LIFO Reserve - Beginning LIFO Reserve)

Accelerated Depreciation

Lower NI early years, greater later on. Most common accelerated depreciation is double declining balance

Designated at Fair Value (Fair Value Through Profit or Loss)

Management can report financial assets & liabilities that would be classified as HTM or AFS at Fair value - Treat like trading security, report on B/S at fair value -IFRS DOES NOT ALLOW RECLASSIFICATION OF THIS

GAAP Business Combinations (different from corp. finance)

Merger: A + B = Co A net assets transferred from B to A Acquisition: A + B = (Co A + Co B). Co A = parent, Co B = sub Consolidation: A + B = Co. C made and A&B cease to exist, C is new Variable Interest Entity (VIE): Control is not based on equity ownership

Current Rate Method (Translation)

Overseas operation considered as an investment - All assets and liabilities are exposed to exchange rate risk - All I/S accounts translated at average rate, all B/S accts are translated at current rate (common stock at historical) - Exchange rate gains and losses are unrealized and stored in equity until the overseas operation is disposed of -CTA (cumulative translation adjustment) realized in I/S on disposal, carry's FX change Cumulative FX Gain/Loss is the plug figure to help shareholder equity balance because A & L are converted to current/closing rate,

Periodic Pension Cost

Total Periodic Pension Cost = Contributions - Change in Funded Status TPPC = Income Statement Expense + Change in OCI SAME UNDER IFRS/GAAP. Differ on where cost is reflected (Income Statement for GAAP, OCI for IFRS)

Translation Exposure

Translation of foreign currency financial statements: -Converting the accounts of overseas subsidiaries to reporting currency -Three step process 1. Identify subsidiaries functional currency 2. Convert foreign currency into functional currency 3.Convert functional currency balances to parent's reporting currency using closing rates (if there is a difference)

Internal Development Costs - R&D

IFRS - Research costs are expensed as incurred - Development costs are capitalized GAAP - R&D are expensed as incurred, except for software development costs

Straight Line Depreciaiton

Cost - Salvage Value / Depreciable Life

Presentational Currency

Currency in which the multi-national firm prepares financial statements

Local Currency

Currency of country in which the foreign subsidiary is located

Functional Currency

Currency of the PRIMARY economic environment in which the subsidiary operates. This is the currency in which the firm generates and spends cash (some subjectively) -Currency that influences sales price & cost of production -Currency of country whose competitive forces and regulations determine sales price -Currency in which funds from financing activities are generated - Currency in which receipts from operating activities are retained - Subsidiary's autonomy - Financing from parent (reliance) to service debt

LIFO to FIFO Adjustments: Ratios

Current ratio - Increases (Higher inv) Inventory Turnover - Decrease (lower COGS and higher inv) Lower long-term debt-to-equity (higher equity from LIFO reserve net of tax) Higher gross profit and net profit (lower COGS, higher net profit offset by higher taxes) **If active market exists, quoted market price is used**

Finance vs. Operating Lease

Current ratio and working capital are higher for Financing lease because current year principal amortization for a finance lease is added to current liabilities, no increase to CA. D/A increases for financing lease because the numerator will increase by a greater proportion than the denominator.

Unrealized Gains/Losses Calc

Debt: Fair Value - Amortized cost = Cumulative Unrealized Gains Equity: Fair Value - Purchase Price = Cumulative Unrealized Gains

Defined Benefit Pension Plan Vs. Defined Contribution Pension Plan

Defined Benefit (We all wish we had Denise Brennan) - Employer agrees to pay monetary benefits to employees on their retirement from active service. Based on age, years of service, etc. - Employer carries risk - Employer owns assets - Prefunding allowed Defined Contribution -Employer will pay fixed % of salary into pension plan per year you work. - Employee carries the risk - Employee owns assets, employer is agent - Cant prefund

Asset Revaluation

GAAP - can revaluing long lived assets up to fair value IF it is a long lived asset for sale. IFRS - depreciated historic cost or fair value Revaluation gains are taken directly to equity (OCI) Revaluation upward results in: - Higher A and SE - Lower leverage ratios - Higher earnings - Higher deprec expense and lower profitability in periods after revaluation - Lower ROA and ROE in later periods

Partial vs. Full Goodwill

GAAP - requires goodwill IFRS - either full or partial goodwill Full Goodwill: Total Fair value of Subsidiary - FV of net identifiable assets -noncontrolling interest is % not owned times fair value Partial good will: Goodwill is purchase price (of partial interest) - %owned*Fair Value of Net Assets NonControlling (minority interest) is % not owned times fair value of net identifiable asset Difference kicks in when have there is minority interest.

Currency Exposures

Gains/Losses hit income statement Analysis issue of: No guidance on WHERE on I/S to place, making comparability between companies difficult

Fair Value Through Profit or Loss(HFT or Designated at Fair Value) (Financial Asset)

HFT (GAAP) & Designated for Fair Value (IFRS) - Sell in less than 3 months - Reported at FAIR VALUE, CARRIED AT MARKET VALUE - Interest = Coupon +Amort. Discount - Amort. Premium - Change in value (realized/unrealized) reported in I/S - Income statement includes interest income AND the unrealized gain - Cumulative unrealized gain is the differential from unrealized gain period over period.

Other Post Employment Benefits

Healthcare - classified as DBP, liability is PV of expected future payments for health insurance - Assume healthcare costs rise then taper off to lower constant rate (ultiamte healthcare rate) -Need to disclose near term increase in HC costs, ultimate HC trend rates, year in which ultimate trend rate is reach.

Defined Contribution Accountingt

I/S: Employer contribution B/S: Asset - they paid you too much, Liabilities - paid you too little

IFRS 9 Reclassification

Reclassification of debt (not equity) securities from HTM to FVPL (or vice versa) amortized cost allowed IF BUSINESS MODEL HAS CHANGED

Lease Disclosures

Required to disclose: - Lease payments for each of the next five years - Aggregated payments beyond 5 years Interest rate disclosure NOT required, thus: - Implicit interest rate can be estimated by calculating the IRR of the finance lease payments - Implicit rate can then be used to get PV of operating lease payments (goes on liability)

Comparison of Equity Method Vs Acquisition Method

Sales/Expenses: EM - 1 line consolidation, comes after tax expense. Only see parent company's sells AM - parent company's sales and subsidiaries sales NI: same for both, arrive at different ways A&L: EM - lower b/c see only 1 line AM - higher combine assets & liabilities of parent and subsidiary SH: EM - Lower if minority interest exists AM- Higher if minority interest exists (even tho doesn't belong to shareholders) Leverage: EM/AM- Depends on debt relative to minority interest Current Ratio, Gross Profit margin: EM/AM - depends on whether sub has a higher or lower ratio compared to parent ROE: EM: Higher because equity is lower AM: Lower because if minority interest exists, shareholder equity is greater.

Calculation of PBO

Service Cost - increase in PBO due to employee's effort over the year (PV of additional value from working another year) Interest cost - increase in the PBO resulting from passage of time. PBO at start of period * discount rate GAAP - Discount rate and % expected return rate can be different rates IFRS - expected return rate must equal discount rate Actuarial G/L - Gains or losses from change in actuarial assumptions affecting PBO (discount rate, life expectancy, increase in salary). If increases PBO, it is an actuarial loss. Past Service Costs - Retroactive impact on past benefits awarded to employees resulting from plan amendments. Example: Changing payout from 60% to 65% of final salary Benefits Paid - payments made from the fund to existing retirees

Software Development Costs

Software developed for sale - IFRS & GAAP: Expensed as incurred until tech feasibility is reached - Issue in determining feasibility, requires judgement Software for internal use: -GAAP: Capitalize all software development costs

Transaction with Associates - Equity Method

Upstream transfer - profit on transaction in associates account Downstream transfer - profit on transaction in parents (investor's) account Pro-rata shares of profit not confirmed through resale or use is eliminated from equity income

Pension Expense GAAP

Use EXPECTED return on plan assets to smooth events. Unamortized past service cost and actuarial gains and losses in OCI

Equity Method

Used in Associates and Joint Ventures, have influence but not outright control. B/S: Report at Cost + Earnings - Dividends I/S: Earnings Balance Sheet investment: % Share in company * Change in Retained Earnings Impairment under IFRS: Fair value < Carrying Value and not temporary (loss event, impact on future CFs, reliable measurement). Must be written down. Impairment under GAAP: Fair Value < Carrying and permanent No reversal for GAAP or IFRS, which is odd because IFRS usually allows reversal. Goodwill not separately tested, already included.