Omricon Capital Associates specializes in making investments in the small cap market sector. In some cases the firm operates as a supplier of private equity for restructurings. In this instance, the firm views itself as having a value investment focus. In others, it acts as a venture capital firm. Here, the investment focus is usually growth. Finally, in some cases it simply takes passive investment positions in publicly-traded firms. The positions in marketable securities are sometimes considered trading positions, and other times the view is to hold for a longer period until valuation parameters are met or exceeded.
Omricon’s chief compliance officer, Raymond “Buzz” Richards has recently become concerned that the firm may not be correctly following the relevant accounting standards for these investments. To ensure that the rules are being effectively adhered to, he is seeking advice from the accounting firm of Merz-Brokaw and Associates on the matter. Sally Lee is the Merz-Brokaw partner heading up the consulting team assigned to review the situation.
The size of the investments ranges from a few percent of the firm’s outstanding equity, to positions of greater than 50%. Richards says that it has always been his understanding that the percentage of the equity held is the major determinant with respect to which accounting method applies. Lee reminds him that the firm’s intent for its investments also plays a role in determining how they are accounted for.
Some of the firm’s investments have not worked out as planned. Richards has conferred with the firm’s portfolio managers regarding securities being held by the firm that are worth less than when they were acquired, and has presented a list of these investments to Lee. His concern is what this implies for the accounting for these investments. Lee tells him that the issue here is whether or not the security can be considered impaired, and that designating a security as impaired implies that the decline in value is permanent.
Top managers at Omricon have asked Lee to help them evaluate the impact of the choice of accounting method on the firm’s profitability. Some members of the management team are of the belief that the accounting method does not affect financial measures because these are driven by underlying economic factors. Others believe that these measures can be affected by the accounting method chosen.
Which of the following statements concerning percentage ownership and accounting method is most accurate?
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A) |
When the ownership is less than 20%, US GAAP requires the cost or market method, IAS the equity method. | |
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B) |
When the ownership is less than 20%, both US GAAP and IAS require the cost or market method. | |
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C) |
When the ownership is less than 20%, both US GAAP and IAS require the equity method. | |
When the percentage ownership is less than 20% (with no significant influence over the investee firm), both US GAAP and IAS require the cost or market method. (Study Session 5, LOS 21.b)
For instances in which Omricon holds exactly 50% of the outstanding equity of the investee firm’s equity (i.e., the investee firm is a joint venture), which of the following statements is most accurate?
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A) |
IAS and US GAAP both permit a choice between the equity method and proportional consolidation. | |
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B) |
IAS requires that the equity method be used; US GAAP permits a choice between the equity method and proportional consolidation. | |
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C) |
US GAAP requires that the equity method be used; IAS permits a choice between the equity method and proportional consolidation. | |
When the percentage ownership is exactly 50% (i.e., the investment is a joint venture), IAS allows for the choice between the equity method and proportionate consolidation, while US GAAP requires the equity method. (Study Session 5, LOS 21.b)
The three classifications for passive investments in securities that trade in secondary markets are:
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marketable securities, available-for-sale securities, held-to-maturity securities. | |
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B) |
trading securities, available-for-sale securities, held-to-maturity securities. | |
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C) |
trading securities, marketable securities, held-to-maturity securities. | |
The three classifications for passive investments in securities that trade in secondary markets (i.e., marketable securities) are trading securities, available-for-sale securities, and held-to-maturity securities. (Study Session 5, LOS 21.b)
When a passive investment in marketable equity securities is classified as available-for-sale:
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A) |
US GAAP requires that unrealized gains and losses are reported on the income statement, while under IAS the firm can elect to report on either the income statement or in comprehensive income on the balance sheet. | |
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B) |
US GAAP requires that unrealized gains and losses are reported in comprehensive income on the balance sheet, while under IAS the firm can elect to report on either the income statement or in comprehensive income on the balance sheet. | |
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C) |
IAS requires that unrealized gains and losses are reported in comprehensive income on the balance sheet, while under US GAAP the firm can elect to report on either the income statement or in comprehensive income on the balance sheet. | |
When a passive investment in marketable equity securities is classified as available-for-sale, US GAAP requires that unrealized gains and losses are reported on the balance sheet in comprehensive income in shareholders’ equity, while under IAS the firm can elect to report on either the income statement or as comprehensive income on the balance sheet. (Study Session 5, LOS 21.b)
With respect to Lee’s statement concerning securities that are currently worth less than when they were acquired, a security should be considered impaired when the:
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A) |
decline in value is other than temporary, its value should be written down to the new fair value, and a loss reported on the income statement. | |
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B) |
decline in value is permanent, its value should be written down to the new fair value, and a loss reported on the income statement. | |
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C) |
decline in value is other than temporary, its value should be written down to the new fair value, and a loss reported in comprehensive income in equity on the balance sheet. | |
A security should be considered impaired when the decline in value is “other than temporary”. That is to say that it is obviously not due to a temporary decline in the market. No one knows for sure if any decline in value is permanent, but in most cases it is obvious that it is not simply a market phenomenon. When this is the case, the asset’s value should be written down to the new fair value, and a loss reported on the income statement. (Study Session 5, LOS 21.b)
In most situations, when the IAS accounting method allows for a choice between the equity method and proportionate consolidation, the use of the equity method will result in:
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A) |
ROA being higher and leverage being higher than under proportionate consolidation. | |
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B) |
ROA being lower and leverage being higher than under proportionate consolidation. | |
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C) |
ROA being higher and leverage being lower than under proportionate consolidation. | |
In most cases, the choice of the equity method will result in leverage being lower, net profit margin being higher, and ROA being higher than would be the case under proportionate consolidation. (Study Session 5, LOS 21.d) | 
发表于 2010-4-14 11:41
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