Professional Documents
Culture Documents
• When to use
• Accounting treatment
• The methods of accounting for
investments in equity securities
are summarized in the following
graph
Accounting for Investments
in Equity Securities
Percentage of 0 20 50 100
ownership
Market Value
Method (for certain
companies)
SFAS No. 159
• Most financial assets & liabilities
may be measured at fair value.
• Measured using exit prices on
balance sheet date.
• Fair value is price a company
would receive to sell an asset or
pay to transfer a liability.
• Unrealized holding costs most
be reported.
Investment in Debt
Securities
• Trading
• Available-for-sale
• Held-to-maturity
• Trading and available-for-sale accounted for in
a manner similar to equity securities - fair
value
Held-to-Maturity
• Criteria
• Initial measurement
• Subsequent accounting
• Transfers
– Trading
– Available-for-sale
• Problem - Criteria permit earnings
management
Permanent Decline in Value of Available-
for-Sale and Held-to-Maturity Securities
• Financial assets:
debt and equity securities
• Accounting for financial assets was first
outlined in SFAS No. 125
– Recently replaced by SFAS No. 140.
Transfers of Financial Assets
• According to SFAS No. 140, the investor
transfers or surrenders control over
transferred assets if and only if all of the
following 3 conditions are met:
1. The transferred assets have been isolated from the
transferor
2. Each transferee has the right to pledge or exchange
the assets it received
no condition both constrains the transferee from
taking advantage of its right to pledge or exchange
and provides more than a trivial benefit to the
transferor.
Transfers of Financial Assets
3. The transferor does not
maintain effective control
over the transferred asset
• Disclosure Requirements
– test for goodwill impairment is a two-step process
that involves:
1. A comparison of the fair value of the reporting unit to
its carrying value.
In the event fair value exceeds carrying value, no
further testing is required.
If the carrying value of the reporting unit exceeds its
fair value, step two is required.
2. A calculation of the implied fair value of goodwill by
measuring the fair value of the net assets other than
goodwill and subtracting this amount from the fair
value of the reporting unit.
Research and Development
Costs
• Definition
– Research
– Development
• Accounting
International Accounting
Standards
• Revaluation increases
– recorded in stockholders’ equity, decreases
in income unless they are recoveries
• Recognize non-temporary declines in
value
SFRS No 3: Business
Combinations
• IASB indicated that goodwill
– should be recognized by the acquirer as an asset from the
acquisition date
– and be initially measured
• as the excess of the cost of the business
combination over the acquirer's share of
the net fair values of the acquiree's
identifiable assets, liabilities and
contingent liabilities.
• Prohibits the amortization of goodwill.
– Goodwill must be tested for impairment
at least annually in accordance with
IAS No. 36, “Impairment of Assets.”
IAS No. 38: Intangible Assets
• The original exposure draft was withdrawn and a
new ED was issued in August, 1997.
• Applies to purchased and internally developed
intangible assets.
• Recognize an intangible asset only if
a)
b)
the asset is identifiable
the future economic benefits specifically attributable to
™
the asset will flow to the enterprise, and
c) cost is reliably measurable.
• Recognition criteria apply to both purchased and
internally generated intangibles.
IAS No. 38: Intangible Assets
• After initial recognition in the financial statements, an intangible
asset should be measured under one of the following two
treatments:
1. Benchmark treatment: historical cost less any amortization and
impairment losses; or
2. Allowed alternative treatment: revalued amount (based on fair
value) less any subsequent amortization and impairment losses.
• The main difference from the treatment for revaluations of
property, plant and equipment under IAS 16:
– revaluations for intangible assets are permitted only if fair value
can be determined by reference to an active market.
– Active markets are expected to be rare for intangible assets
IAS No. 38: Intangible Assets
• The statement requires intangible assets to be amortized over the
best estimate of their useful life
– includes the presumption that the useful life of an intangible asset
will not exceed 20 years from the date when the asset is available
for use.
• In rare cases, where persuasive evidence suggests that the useful
life of an intangible asset will exceed 20 years
– amortize the intangible asset over the best estimate of its useful
life and:
1. Test the intangible asset for impairment at least annually in
accordance with IAS 36, Impairment of Assets
2. Disclose the reasons why the presumption that the useful life of an
intangible asset will not exceed 20 years is rebutted and also the
factor(s) that played a significant role in determining the useful life of
the asset.
IAS No. 9
• Research
– ongoing investigations with the prospect of
gaining new knowledge
• Development
– applications of research findings to a plan of
production
• Research costs are recognized as expenses
• Development costs may be capitalized if certain
criteria are met
• If capitalized - amortized to reflect pattern of
benefits
IAS No. 22
• Outlined accounting treatment
for investments with the ability
to significantly influence.
• Requirements similar to U. S.
GAAP
IAS No. 32: Financial Instruments:
Disclosure and Presentation
• Financial asset
a) Cash
b) Right to receive cash
c) Right to exchange financial asset
under
favorable conditions or equity