CFA
Depreciation Methods and Calculation of Depreciation Expense - answer
The Code of Ethics - answer The Code of Ethics contains six components that address
general areas of ethical behavior. The Standards of Professional Conduct are seven
areas of Professional Conduct that deal with specific types of behavior in certain
situations, e.g., Market Manipulation.
The CFA Institute Board of Governors - answer The CFA Institute Board of Governors
maintains oversight and responsibility for the Professional Conduct Program (PCP),
which, in conjunction with the Disciplinary Review Committee (DRC), is responsible for
enforcement of the Code and Standards.
- answer IFRS, identifiable intangible assets may only be recognized if it is probable
that future economic benefits will flow to the company and the cost of the asset can be
measured reliably.
A company may develop intangible assets internally, but such assets can only be
recognized under certain circumstances. Under both IFRS and U.S. GAAP, costs
related to the following are usually expensed - answer Start-up and training costs.
Administrative and overhead costs.
Advertising and promotion costs.
Relocation and reorganization costs.
Acquired intangible assets may be reported as separately identifiable intangibles (rather
than goodwill) if: - answer They arise from contractual rights (e.g., licensing
agreements), or other legal rights (e.g., patents); or
Can be separated and sold (e.g., customer lists).
Goodwill - answer Goodwill (an example of an asset that is not separately identifiable) is
the excess of the amount paid to acquire a business over the fair value of its net assets.
The purchase price may exceed the fair value of the target company's identifiable
(tangible and intangible) net assets because of the following reasons: - answer Certain
items of value (e.g., reputation, brand) are not recognized in a company's financial
statements.
The target company may have incurred research and development expenditures that
may have not been recognized on its financial statements but do hold value for the
acquirer.
The acquisition may improve the acquirer's position against a competitor or there may
be possible synergies.
, - answer Note that goodwill is only created (recognized) in a purchase acquisition.
Internally generated goodwill is expensed.
Accounting goodwill - answer accounting goodwill is based on accounting standards
and is only reported for acquisitions when the purchase price exceeds the fair value of
the acquired company's net assets.
Economic goodwill - answer Economic goodwill, which is not reflected on the balance
sheet, is based on a company's performance and its future prospects. Analysts are
more concerned with economic goodwill as it contributes to the value of the firm and
should be reflected in its stock price.
- answer Under U.S. GAAP and IFRS, accounting goodwill resulting from acquisitions
is capitalized.
- answer under both sets of standards, goodwill is not amortized, but is tested for
impairment annually. An impairment charge reduces net income and decreases the
carrying value of goodwill to its actual value. Impairment of goodwill is a non-cash
expense and therefore does not affect cash flows.
- answer Goodwill can significantly affect the comparability of financial statements of
companies. When performing ratio analysis, income statement values should be
adjusted by removing impairment expense (so that operating trends can be identified),
and balance sheet values should be adjusted by excluding goodwill when computing
financial ratios
- answer Companies are required to disclose information that assists users in
evaluating the nature and financial impact of business combinations. Information such
as the purchase price paid relative to the fair value of a company's net assets and
earnings prospects of the acquired company help analysts to develop expectations
about the company's performance following an acquisition.
- answer Under IFRS, a financial instrument is defined as a contract that gives rise to a
financial asset for one entity, and a financial liability or equity instrument for another
entity.
- answer Mark-to-market is a process of adjusting the values of trading assets and
liabilities to reflect their current market values
marketable and non-marketable financial instruments according to the measurement
base used to value them - answer Measured at Fair Value
Financial Assets
Financial assets held for trading (stocks and bonds).
Available-for-sale financial assets (stocks and bonds).
Derivatives.
Non-derivative instruments with face value exposures hedged by derivatives.
,Measured at Cost or Amortized Cost
Financial Assets
Unlisted instruments.
Held-to-maturity investments.
Loans and receivables.
Marketable investment securities can be classified under the following categories -
answer Available-for-sale securities: These are debt or equity securities that are neither
expected to be traded in the near term, nor held till maturity. They may be sold to
address the liquidity needs of the company.
These securities are reported at fair market value on the balance sheet.
While dividend income, interest income, and realized gains and losses on AFS
securities are reported on the income statement, unrealized gains and losses are
reported in other comprehensive income as a part of shareholders— equity.
- answerHeld-to-maturity securities: These are debt securities that are purchased with
the intent of holding them till maturity.
Held-to-maturity securities are carried at amortized cost (Amortized cost = Face value −
Unamortized discount + Unamortized premium). For these securities, unrealized gains
or losses from changes in market value are ignored and not recognized on the financial
statements.
Only interest income and realized gains and losses (gains and losses when these
securities are sold) are recognized on the income statement.
- answerTrading securities: These are debt and equity securities (e.g., stocks and
bonds) that are acquired with the intent of earning trading profits over the near term.
These securities are measured at fair market value on the balance sheet.
Dividend income, interest income, realized gains and losses, and unrealized gains and
losses are all reported on the income statement.
Non-current liabilities include the long-term financial liabilities and deferred tax liabilities
- answerLong-term financial liabilities:These may either be measured at fair value or
amortized cost.
Measured at Fair Value
Financial Liabilities
Derivatives.
Financial liabilities held for trading.
Non-derivative instruments with face value exposures hedged by derivatives.
, Measured at Cost or Amortized Cost
Financial Liabilities
All other liabilities (bonds payable and notes payable).
Deferred tax liabilities - answerThese usually arise when a company's income tax
expense exceeds taxes payable.
The company pays less taxes based on its tax return than it should pay according to its
financial statements.
These unpaid taxes will be paid in future periods and are therefore a liability for the
company. Deferred tax liabilities have current and non-current portions.
- answerIf an analyst wants to evaluate a company's operating activities, she is likely to
review its current assets including accounts receivable.
- answerThe measurement bases of assets and liabilities include fair value, historical
cost, current cost, and present value.
current liabilities - answerInternational Accounting Standards allow some liabilities such
as trade payables and accruals for employees to be classified as current liabilities even
though they might not be settled within 1 year.
Financial liabilities expected to be settled within 1 year are classified as current liabilities
even if their original term was more than 1 year.
If the entity has an unconditional right to defer the settlement of the liability for at least 1
year after the balance sheet date, it must recognize it as a noncurrent liability.
- answerRevenue reported on the income statement before cash is received results in
accrued revenue or accounts receivable, which is an asset.
- answerThe first five components represent equity attributable to owners of the parent
company, while the sixth component represents equity attributable to non-controlling
interests.
- answerU.S. GAAP and IFRS define equity as the owners' residual claim on the assets
of an entity after deducting all liabilities
Equity - answerCapital contributed by owners (common stock or issued capital): Owners
contribute capital to an entity by investing in common shares
Preferred shares - answerPreferred shareholders receive dividends (at a specified
percentage of par value) and have priority over ordinary shareholders in the event of
liquidation