Post on 23-Mar-2018
transcript
CHAPTER 1Introduction
Abbreviations Used In This Text . . . . . . 1
What Is “Advanced” Financial Accounting? . 1A Definition Based On Tradition . . . . . . 1
The Coverage Of This Text . . . . . . . . 1
Overview Of InvestmentsIn Equity Securities AndBusiness Combination Transactions . . . 2Our Objective . . . . . . . . . . . . . 2
Investments In Equity Securities . . . . . . 2
Business Combinations . . . . . . . . . . 4
The Overlap . . . . . . . . . . . . . . 5
International Convergence . . . . . . . . . 6The Problem . . . . . . . . . . . . . 6
The Solution: International Financial ReportingStandards . . . . . . . . . . . . . . 7
The AcSB’s Strategic Plan . . . . . . . . . . 9Background . . . . . . . . . . . . . . 9
Strategy For Publicly Accountable Enterprises 10
Strategy For Non-Publicly AccountableEnterprises . . . . . . . . . . . . . 11
Strategy For Not-For-Profit Organizations . . 12
Strategy For Public Sector Entities . . . . . 12
Relevant IASB and AcSB Standards ForPublicly Accountable Enterprises . . . . 13Introduction . . . . . . . . . . . . . 13
Business Combinations . . . . . . . . . 14
Investments In Equity Securities . . . . . . 14
Summary Of Relevant Standards . . . . . 16
Additional Points On IASB and AcSB Standards 16
CHAPTER 2Investments In Equity Securities
Introduction . . . . . . . . . . . . . . . . 17Types Of Investments . . . . . . . . . . 17
Accounting Methods . . . . . . . . . . 17
Relevant Standards . . . . . . . . . . . 18
The Conceptual Basis For Classification . . 19
Held-For-Trading Investments(a.k.a. Investments At Fair ValueThrough Profit Or Loss) . . . . . . . . . 20Definition . . . . . . . . . . . . . . 20
Required Accounting Procedures . . . . . 21
Fair Value Method With Changes In Net Income 22
Held-For-Trading Investments - InternationalConvergence . . . . . . . . . . . . 23
Available-For-Sale Investments . . . . . . 23Definition . . . . . . . . . . . . . . 23
Required Accounting Procedures . . . . . 23
Available-For-Sale Investments With KnownMarket Values (Fair Value Method WithChange In Comprehensive Income) . . . 24
Available-For-Sale Investments WithoutKnown Market Values (Cost Method) . . . 25
Available-For-Sale Investments - InternationalConvergence . . . . . . . . . . . . 27
Subsidiaries . . . . . . . . . . . . . . . . . 28Definition . . . . . . . . . . . . . . 28
The Concept Of Control . . . . . . . . 28
Required Accounting Procedures For Subsidiaries 31
Consolidation Described . . . . . . . . 32
Variable Interest Entities . . . . . . . . . 32
Subsidiaries - International Convergence . . 33
(continued)
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CONTENTSCONTENTS
CHAPTER 2, continued
Significantly Influenced Companies(a.k.a. Associated Companies) . . . . . . 34Definition . . . . . . . . . . . . . . 34
Required Accounting Procedures . . . . . 35
Equity Method . . . . . . . . . . . . 36
Impairment . . . . . . . . . . . . . 43
Gains And Losses On The Sale OfSignificantly Influenced Companies . . . . 44
Disclosure For Significantly InfluencedCompanies . . . . . . . . . . . . . 44
Significantly Influenced Companies -International Convergence . . . . . . . 45
Joint Ventures . . . . . . . . . . . . . . . . 46Definition . . . . . . . . . . . . . . 46
Required Accounting ProceduresFor Joint Ventures . . . . . . . . . . 46
Proportionate Consolidation Described . . . 47
Joint Ventures - International Convergence . 47
Accounting Methods Summarized . . . . . 47
Standards For Non-Publicly AccountableEnterprises . . . . . . . . . . . . . . . . 48
Differential Reporting For Investments . . 49Held-For-Trading And Available-For-Sale
Investments . . . . . . . . . . . . . 49
Subsidiaries . . . . . . . . . . . . . 49
Significantly Influenced Companies . . . . 50
Joint Ventures . . . . . . . . . . . . 51
References . . . . . . . . . . . . . . . . . 52Official Pronouncements - Canada . . . . 52
Official Pronouncements - International . . 53
Problems For Self Study . . . . . . . . . . 54
CHAPTER 3Business Combinations
A Note On Relevant Accounting Standards 59
Business Combinations Defined . . . . . . 59
Legal Avenues To Combination . . . . . . 60Example . . . . . . . . . . . . . . . 61
Basic Alternatives . . . . . . . . . . . 62
Acquisition Of Assets By Alpha Company . . 62
Acquisition Of Assets By Sigma Company . . 64
Acquisition Of Shares By Alpha Company . . 65
Acquisition Of Shares By Sigma Company . . 66
Legal Avenues And Tax Considerations . . 68Acquisition Of Assets . . . . . . . . . . 68
Acquisition Of Shares . . . . . . . . . . 69
Alternative Accounting Methods . . . . . . 70The AcSB’s Choice . . . . . . . . . . . 71
A Potential Problem . . . . . . . . . . 72
Application Of The Acquisition Method . . 72Acquisition Date . . . . . . . . . . . 72
Identification Of An Acquirer . . . . . . . 72
Determining The Cost Of The Acquisition . . 76
Contingent Consideration . . . . . . . . 77
Recognition Of Acquired Assets . . . . . . 80
Measurement Of Identifiable AssetsAnd Liabilities . . . . . . . . . . . . 81
Exceptions To Recognition And MeasurementPrinciples . . . . . . . . . . . . . . 82
Tax Considerations In AllocatingThe Investment Cost . . . . . . . . . 83
Measurement Of The Non-Controlling Interest 84
Acquisition Method and Net Income . . . . 87
Acquisition Method And Shareholders’ Equity 87
Goodwill . . . . . . . . . . . . . . . . . . 87The Concept . . . . . . . . . . . . . 87
Measurement Under Section 1582 . . . . 88
General Accounting Procedures . . . . . . 89
Differential Reporting Option . . . . . . 90
Goodwill Impairment Losses . . . . . . . 90
Goodwill Presentation and Disclosure . . . 91
Evaluation of Goodwill Procedures . . . . 92
Bargain Purchase (a.k.a., Negative Goodwill) . 92
Step Acquisitions . . . . . . . . . . . 93
International Convergence . . . . . . . . 94
Acquisition Method Example . . . . . . . . 94
Problems For Self Study . . . . . . . . . . 98
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CHAPTER 4Consolidated Balance Sheet
At Acquisition
Introduction To Consolidations . . . . . . 105The Objective Of Consolidation . . . . . 105
Consolidated Financial Statements AndUser Needs . . . . . . . . . . . . 105
Consolidation Policy . . . . . . . . . 106
A Note On Terminology . . . . . . . . 106
Conceptual Alternatives In Consolidation 106Basis For Alternatives . . . . . . . . . 106
The Entity Concept . . . . . . . . . . 107
The Proprietary Concept . . . . . . . . 110
The Parent Company Concept . . . . . . 111
Evaluation Of The Conceptual Alternatives . 113
Conceptual Approach Of The CICA Handbook 114
A Procedural Approach To PreparingConsolidated Financial Statements . . 116Use Of Worksheets . . . . . . . . . . 116
Direct Definitional Calculations AndJournal Entries . . . . . . . . . . . 116
General Approach Outlined . . . . . . . 117
Consolidated Balance Sheet At Acquisition 117Consolidations And Business Combinations . 117
Examples To Be Used . . . . . . . . . 118
Example One - 100 Percent OwnershipWith No Fair Value Changes . . . . . . 118
Example Two - 100 Percent OwnershipWith Fair Value Changes And Goodwill . 122
Example Three - Fractional OwnershipWith No Fair Value Changes Or Goodwill . 127
Example Four - Fractional OwnershipWith Fair Value Changes And Goodwill . 131
Summary Of Consolidation Procedures . 135Chapter 4 . . . . . . . . . . . . . . 135
Summary Of Definitional Calculations . . 136Balance Sheet . . . . . . . . . . . . 136
International Convergence . . . . . . . . 137
Appendix A: Push-Down Accounting . . 138
Appendix B: Reverse Acquisitions . . . . 144
Walk Through Problem . . . . . . . . . . 151
Problems For Self Study . . . . . . . . . . 152
CHAPTER 5Consolidation Subsequent ToAcquisition (No Unrealized
Intercompany Profits)
Procedures Subsequent To Acquisition . . 159
Conceptual Alternatives For TheConsolidated Income Statement . . . . 160Proprietary Concept Solution . . . . . . 160
Parent Company Concept Solution . . . . 161
Entity Concept Solution . . . . . . . . 162
CICA Handbook Requirements . . . . . 162
General Approach To Problem Solving . . 164
Comprehensive Example -Open Trial Balance, Investment At Cost 169Step A Procedures . . . . . . . . . . 170
Step B Procedures . . . . . . . . . . 170
Summary Of Step B Adjustments . . . . 177
Step C - Distribution Of TheSubsidiary Retained Earnings . . . . . . 177
Consolidated Income Statement . . . . . 179
Consolidated Statement Of Retained Earnings 180
Non-Controlling Interest . . . . . . . . 181
Consolidated Balance Sheet . . . . . . . 182
Comprehensive Example -Closed Trial Balance, Investment At Cost 183
Application Of The Equity Method . . . . 189Basic Concepts . . . . . . . . . . . . 189
Application To Comprehensive Example . . 189
Consolidated Cash Flow Statement . . . 193Differences In Procedures . . . . . . . 193
Section 1540 On Business Combinations . . 193
Example - Consolidated Cash Flow Statement 194
Step Acquisitions . . . . . . . . . . . . . 200Basic Approaches . . . . . . . . . . . 200
Accounting Recommendations . . . . . . 201
Example - Available-For-Sale To Control . . 201
Example - Significant Influence To Control . 203
Summary Of Consolidation Procedures . 205
Summary Of Definitional Calculations . . 206
International Convergence . . . . . . . . 209
Walk Through Problem . . . . . . . . . . 210
Problems For Self Study . . . . . . . . . . 213
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CHAPTER 6Consolidation Subsequent To
Acquisition (Including UnrealizedIntercompany Profits)
Unrealized Intercompany Profits . . . . . 223Basic Concepts . . . . . . . . . . . . 223
Types Of Unrealized Intercompany Profits . 224
Conceptual Alternatives For TheConsolidated Income Statement . . . . 224Downstream Unrealized Profits . . . . . 224
Upstream Unrealized Profits . . . . . . 224
Proprietary Concept Solution . . . . . . 225
Parent Company Concept Solution . . . . 225
Entity Concept Solution . . . . . . . . 226
CICA Handbook Requirements . . . . . 227
Comprehensive Example -Open Trial Balance, Investment At Cost 229Basic Data . . . . . . . . . . . . . 229
Procedural Approach . . . . . . . . . 230
Step A Procedures . . . . . . . . . . 231
Step B(1) to B(5) Procedures . . . . . . . 231
Step B(6) - Unrealized Intercompany Profits 232
Step C - Distribution Of The SubsidiaryRetained Earnings . . . . . . . . . . 242
Consolidated Income Statement . . . . . 243
Consolidated Statement Of Retained Earnings 244
Consolidated Balance Sheet . . . . . . . 245
Comprehensive Example -Closed Trial Balance, Investment At Cost 247
Application Of The Equity Method . . . . 254Basic Concepts . . . . . . . . . . . . 254
Application To Comprehensive Example . . 255
Consolidated Cash Flow Statement . . . . 258
Step Acquisitions . . . . . . . . . . . . . 261
Summary Of Consolidation Procedures . 262
Summary Of Definitional Calculations . . 264
International Convergence . . . . . . . . 267
Walk Through Problem . . . . . . . . . . 268
Problems For Self Study . . . . . . . . . . 271
CHAPTER 7Advanced TopicsIn Consolidations
Introduction To Advanced Topics . . . . 283
Multiple Investment Situations . . . . . . 284Multi-Company Affiliation . . . . . . . 284
Multi-Level Affiliation . . . . . . . . . 284
Reciprocal Holdings . . . . . . . . . . 285
Multi-Level Affiliations . . . . . . . . . . 285Approach . . . . . . . . . . . . . . 285
Basic Data . . . . . . . . . . . . . 285
Case One . . . . . . . . . . . . . . 286
Case Two . . . . . . . . . . . . . . 290
Reciprocal Shareholdings . . . . . . . . . 293The Basic Problem . . . . . . . . . . 293
Case One . . . . . . . . . . . . . . 293
Case Two . . . . . . . . . . . . . . 295
Case Three . . . . . . . . . . . . . 296
Intercompany Bondholdings . . . . . . . 300Comprehensive Example . . . . . . . . 301
Subsidiary Preferred Stock . . . . . . . . 314Classification Of Preferred Stock . . . . . 314
Issues Raised By Consolidation . . . . . 314
Example One - Non-Cumulative Case . . . 316
Example Two - Cumulative Case . . . . . 319
Example Three - Participating Case . . . . 322
Subsidiary Share Transactions . . . . . . 326Internationally Converged Standards . . . 326
Basic Concepts . . . . . . . . . . . . 326
Accounting Standards . . . . . . . . . 327
Comprehensive Example . . . . . . . . 330
Case One - Parent Purchases Additional Shares 333
Case Two - Parent Sells Subsidiary Shares . 334
Case Three - Subsidiary Sells Additional Shares 335
Case Four - Loss Of Control . . . . . . . 336
Consolidation With Investment At Equity 337Basic Data . . . . . . . . . . . . . 337
Equity Method Data . . . . . . . . . . 339
Preparation Of ConsolidatedFinancial Statements . . . . . . . . . 344
Consolidated Income Statement . . . . . 345
Consolidated Statement Of Retained Earnings 345
Consolidated Balance Sheet . . . . . . . 346
Problems For Self Study . . . . . . . . . . 347
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CHAPTER 8Interests In
Joint Ventures
Introduction . . . . . . . . . . . . . . . . 365Coverage . . . . . . . . . . . . . . 365
Purpose And Scope Of Section 3055 . . . 365
Joint Ventures Defined . . . . . . . . . . 366General Rules . . . . . . . . . . . . 366
Forms Of Organization . . . . . . . . 367
Classification Example . . . . . . . . . 368
Accounting Methods . . . . . . . . . . . 368Joint Venture Recommendations . . . . . 368
Proportionate Consolidation InAlternative Legal Forms . . . . . . . . 369
Cessation Of Joint Control . . . . . . . 370
Differential Reporting . . . . . . . . . 370
Non-Cash Capital Contributions . . . . . 371The Problem . . . . . . . . . . . . 371
Relevant Handbook Sections . . . . . . 372
Losses On Non-MonetaryCapital Contributions . . . . . . . . 375
Gains On Non-MonetaryCapital Contributions . . . . . . . . 376
Transactions Between A Venturer AndA Joint Venture . . . . . . . . . . . . . 380Background . . . . . . . . . . . . . 380
Section 3055 Recommendations . . . . . 381
Comprehensive Example . . . . . . . . . 388
Disclosure . . . . . . . . . . . . . . . . . 393
International Convergence . . . . . . . . 394Standards . . . . . . . . . . . . . . 394
Current Differences In Standards . . . . . 394
IFRS Exposure Draft, Joint Arrangements . . 395
Problems For Self Study . . . . . . . . . . 396
CHAPTER 9Translation of
Foreign Currency Transactions
Introduction ToForeign Currency Translation . . . . . 403The Need For Translation . . . . . . . 403
Foreign Exchange Rate Terminology . . . 404
Methods of Translation . . . . . . . . . . 405Alternative Methods . . . . . . . . . . 405
Temporal Method . . . . . . . . . . 406
CICA Handbook Recommendations . . . 407
Exchange Gains And Losses . . . . . . . . 409Nature Of Exchange Gains And Losses . . . 409
Required Treatment- Foreign Currency Transactions . . . . 410
Required Treatment- Foreign Currency Financial Statements . 411
Disclosure . . . . . . . . . . . . . . . . . 411
Specific Types Of Transactions . . . . . . 412Foreign Currency Purchases And Sales . . . 412
Foreign Currency Capital Transactions . . . 414
Non-Strategic Investments . . . . . . . 415
Hedging Foreign Currency Risk . . . . . . 418A Word Of Caution . . . . . . . . . . 418
Hedging Relationships . . . . . . . . . 419
Hedged Items . . . . . . . . . . . . 419
Hedging Items . . . . . . . . . . . . 420
Derivatives . . . . . . . . . . . . . 421
Forward Exchange Contracts . . . . . . 423
Hedge Accounting . . . . . . . . . . 425
Hedges Of Exposed Monetary Balances . 426Treatment Without Hedging . . . . . . 426
Hedging With A Monetary Asset . . . . . 427
Hedging With A Forward Exchange Contract 428
Hedges Of Anticipated Transactions . . . 430Applicability Of Hedge Accounting . . . . 430
Hedge Of An Anticipated Transaction . . . 431
Hedge Of Net InvestmentsIn Self-Sustaining Foreign Operations . . 433
Discontinuance Of Hedge Accounting . . 435
International Convergence . . . . . . . . 436
Problems For Self Study . . . . . . . . . . 437
Table Of Contents xiii
CHAPTER 10Translation Of Foreign Currency
Financial Statements
Introduction . . . . . . . . . . . . . . . . 443
Accounting Principles . . . . . . . . . . . 445
Classification Of Foreign Operations . . . 446Current Canadian Approach . . . . . . 446
Functional Currency Approach - IAS No. 21 447
Methods Of Translation . . . . . . . . . . 449Integrated Foreign Operations . . . . . . 449
Self-Sustaining Foreign Operations . . . . 452
Exchange Gains And Losses . . . . . . . . 457Integrated Foreign Operations . . . . . . 457
Self-Sustaining Foreign Operations . . . . 458
Calculation Of Exchange Gains And Losses . 459
Foreign Currency Financial Statements- Example . . . . . . . . . . . . . . . . 460Basic Data . . . . . . . . . . . . . 460
Integrated Foreign Operation . . . . . . 462
Self-Sustaining Foreign Operation . . . . 464
Consolidated Financial Statements . . . . 466
Changes In Classification OfForeign Operations . . . . . . . . . . . 468
Disclosure And Financial StatementPresentation . . . . . . . . . . . . . . 469
Translation Of An InvestmentAccounted For By The Equity Method . 469
Other Issues . . . . . . . . . . . . . . . . 470Transactions Of Foreign Operations
Denominated In Another Currency . . . 470
Intercompany Balances . . . . . . . . 470
Elimination Of Intercompany Profits . . . 470
Differences In Financial Statement Dates . . 471
Non-Controlling Interest . . . . . . . . 471
Preference Shares . . . . . . . . . . 471
Application Of Lower Of Cost And Market . 471
Future Income Tax Assets And Liabilities . . 472
Cash Flow Statement . . . . . . . . . 472
International Convergence . . . . . . . . 472AcSB Strategic Plan . . . . . . . . . . 472
Differences . . . . . . . . . . . . . 473
Problems For Self Study . . . . . . . . . . 474
CHAPTER 11Accounting For
Not-For-Profit Organizations
The Way Ahead . . . . . . . . . . . . . . 485The Current Situation . . . . . . . . . 485
International Convergence . . . . . . . 486
Not-For-Profit Organizations Defined . . 487
GAAP For Not-For-Profit Organizations . 487General Approach . . . . . . . . . . 487
Overview Of Handbook Sections ForNot-For-Profit Organizations . . . . . . 488
Fund Accounting . . . . . . . . . . . . . 490Basic Concepts . . . . . . . . . . . . 490
Example . . . . . . . . . . . . . . 491
The Need For Fund Accounting . . . . . 492
CICA Recommendations . . . . . . . . 492
Revenue Recognition- Handbook Section 4410 . . . . . . . 493The Matching Principle Revised . . . . . 493
Recognition Alternatives ForNot-For-Profit Organizations . . . . . . 494
Revenues Of Not-For-Profit Organizations . 495
Application Of The Deferral Method . . . 496
Application Of The Restricted Fund Method 497
Contributions Receivable (Section 4420) . . 498
Non-Monetary Contributions . . . . . . 499
Revenue Related Disclosure . . . . . . . 499
Financial Statement Presentation- Handbook Section 4400 . . . . . . . 500Required Financial Statements . . . . . . 500
Statement Of Financial Position . . . . . 501
Statement Of Operations . . . . . . . . 502
Statement Of Changes In Net Assets . . . 503
Statement Of Cash Flows . . . . . . . . 503
Example 1 (No Capital Assets) . . . . . . 504Basic Data . . . . . . . . . . . . . 504
Case One - No Fund Accounting . . . . . 505
Case Two - Restricted Fund Accounting . . 507
Case Three - Fund Accounting On Other Basis 510
(continued)
xiv Table Of Contents
CHAPTER 11, continued
Capital Assets Of Not-For-Profit Organizations -Handbook Sections 4430 And 4440 . . 513Background To The Problem . . . . . . 513
Exceptions To Capital Assets Rule . . . . 513
Recognition And Measurement . . . . . 514
Presentation And Disclosure . . . . . . 516
Example 2 (Includes Capital Assets) . . . 517Basic Data . . . . . . . . . . . . . 517
Case One - No Fund Accounting . . . . . 518
Case Two - Restricted Fund Accounting . . 520
Case Three - Fund Accounting On Other Basis 523
Reporting Controlled And Related Entities -Handbook Section 4450 . . . . . . . . 527Background . . . . . . . . . . . . . 527
Related Entities Defined . . . . . . . . 527
Controlled Not-For-Profit Organizations . . 529
Controlled Profit Oriented Enterprises . . . 530
Joint Ventures . . . . . . . . . . . . 530
Significantly Influenced Not-For-ProfitOrganizations . . . . . . . . . . . 531
Significantly Influenced Profit OrientedEnterprises . . . . . . . . . . . . . 531
Disclosure Of Economic Interest . . . . . 531
Information At Different Dates . . . . . . 531
CHAPTER 11, continued
Related Party Transactions (Not-For-ProfitOrganizations) - Handbook Section 4460 532Purpose . . . . . . . . . . . . . . 532
Definitions . . . . . . . . . . . . . 532
Identification Of Related Parties . . . . . 532
Disclosure . . . . . . . . . . . . . 533
Disclosure Of Allocated Expenses- Handbook Section 4470 . . . . . . . 534Purpose And Scope . . . . . . . . . . 534
Background . . . . . . . . . . . . . 534
Recommendation . . . . . . . . . . . 535
Other Concepts . . . . . . . . . . . . . . 535Budgetary Control . . . . . . . . . . 535
Encumbrance System . . . . . . . . . 536
Problems For Self Study . . . . . . . . . . 537
Index . . . . . . . . . 545
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