Question 1 (25 marks) Several accounting standards include ceiling tests (also called impairment tests). Required: a. What is a ceiling test? Identify two IASB accounting standards that contain a ceiling test and describe the test. (7 marks) The ceiling test is an accounting standard that stipulates that capital assets such as property, plant and equipment must be written down if their net carrying value exceeds the net recoverable amount. This is to prevent overvaluation of capital assets. b. Ceiling tests are usually regarded in this course as one-sided examples of the measurement approach. However, they can also be regarded as examples of conservative accounting, as assets are written down but not written up. Ceiling tests are …show more content…
This accounting is considered conservative and it is done this way since some company can mark up numbers or simply make up non-existent numbers to enhance the financial statements. Question 2 (25 marks) Most firms hedge at least some of their risks. Hedging can take two basic forms—namely, natural hedging and hedging by means of derivative instruments. The use of derivatives as hedges has expanded greatly in recent years. Generally, under accounting standards (IAS 39 and related U.S. standards), derivative instruments are fair-valued with any unrealized gain or loss included in net income. However, hedge accounting provides some exceptions to this rule. Required: a. A firm has a large amount of long-term debt (valued on a cost basis) and decides to set up a natural hedge of this debt. However, a natural hedge can lead to excess net income volatility—that is, net income volatility greater than the actual volatility of the firm’s operations. Explain how this can happen. (5 marks) This can happen in the case of mismatch. It happens when some assets or liabilities are fair valued but connected liabilities or assets are not fair valued. When firms hold long-term debt with fixed interest rates and may also hold fixed interest bearing securities of similar amount and maturity. If the interest rates vary the fair value of the interest bearing securities will also vary in the
B. Acid Test Ratio: Determining the volume of short-term assets to cover immediate liabilities without selling inventory is the purpose for the Acid Test Ratio. Numbers below 1 could mean liabilities cannot be paid. A dive from 0.64
Also a sales type lease must involve a dealer or manufacturer’s profit or loss. This exists if the assets fair value at inception of the lease differs from the cost or carrying value.
Based on the 1988 Supreme Court case of Corn Product Refining Co. v. Commissioner (350 U.S. 46; 76 S.Ct. 20; 100 L.Ed. 29), hedging transactions were determined to be used to support business practices of certain commodities. Such hedging transactions are normal for businesses engaged in commodity sales such as coal or corn to protect against market
Please complete the following 7 exercises below in either Excel or a word document (but must be single document). You must show your work where appropriate (leaving the calculations within Excel cells is acceptable). Save the document, and submit it in the appropriate week using the Assignment Submission button.
ACC 201 (Principles of Financial Accounting) Complete Class All Discussion Questions , Chapters Problems and Assignments
Since the financial crisis investors have become less confident in the companies within the market. In order to restore confidence within the market and the audits of their financial statements Senator Sarbanes and Representative Oxley created the legislation known as the Sarbanes Oxley Act which came into effect in 2002. The legislation created major regulations on company financial reporting and the regulation of it. Forcing management to be accountable for the financial reporting and internal controls within their company and requiring the audit committees to report on their opinion of the company’s internal processes. (Soxlaw.com)
The fair value of an asset is defined as ‘the price that would be received to sell an asset paid to transfer a liability in an orderly transaction between market participants at the measurement date” (Kieso, Weygandt, & Warfield, 2012). It is a market based measure (Averkamp, 2014). Over the past few years, Generally Accepted Accounting Principles has called for the use of fair value measurement in a company’s financial statements. This is what is referred to as the fair value principle (Kieso, Weygandt, & Warfield, 2012). The fair value of an asset or liability is based on an estimate of what the asset should be worth at the time of sale. This gives rise to some conflict among accounting professionals. It is believed that fair value may not be as accurate
Similar to those which use Level 1 inputs, several of the above items are measured using both level 2 and level 3 information (JPMorgan Chase, 2013).
According to this concept the asset is recorded in the books of accounts at the price paid for it and not at its market value. For example: if a business entity purchases a building valued at $15 million from a friend for $12 million, this asset would be recorded at $12 million and not at $ 15 million, because for the business entity the cost was $12 million and not $15 million.
1 The system of the market is not perfect enough. For the lack of effective management of listed companies, the false accounting information disclosure, application of fair value is facing high risk. The government's intervention on the market also is relatively common, causing the price of resources often deviate from the market. Market information can't fully reflect the real
ACC307 INDIVIDUAL ASSIGNMENT TASK 1: Contemporary Issues of Accounting Theory Fair Value Measurement Overview After the International Accounting Standards Board (IASB) released the IFRS 13 Fair Value Measurement in May 2011 for the purpose of completing its joint project with the US Financial Accounting Standards Board (FASB) on fair value, the Australian Accounting Standard Board (AASB) released the Australian equivalent - AASB 13 Fair Value Measurement in the September of the same year. This standard permitted early adoption but generally started to take effect for the financial reporting periods beginning from 1 January 2013. This new standard requires no new requirement for the adoption and but it was accompanied with the issuing of AASB 2011-8 Amendments to Australian Accounting Standards arising from the AASB 13 which has made consequential changes to 32 standards and 9 interpretations for the adoption in Australia. The new standard attempts to unify IFRS and US GAAP by specifying how entities should apply the fair value measurements that applied in previous IFRS standards. It clarifies and redefines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date”, sometimes referred to as an “exit price”. It also sets out a single source guidance for a robust measurement framework to ensure that the requirements are applied consistently and have clear
In Note 1 of the footnotes, which is the Summary of Significant Accounting Policies section in the use of estimates subsection, Pinnacle expressed the preparation of financial statements in conformity with U.S. generally accepted accounting principles which requires management to make estimations and assumptions that could affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the balance sheet dates and the reported amounts of revenues and expenses during the reporting periods. However, the actual results could differ from those estimates due to an overestimation or an underestimation. More times than not, a mathematical equation is used to determine an estimation but estimations are not always right, they are supposed to provide a roundabout number. Material estimates that are particularly susceptible to significant change in the near term include the determination of the allowance for loan losses, determination of any impairment of intangible assets and the valuation of deferred tax assets. (Pinnacle Financial 2017).
Continued use of current (fair) values is consistent with FASB’s and the IASB’s conceptual preference for the primacy of the balance sheet over the income statement. Fair value represents measurements related to the present. Historical cost represents measurements relating to the past. Current GAAP requirements for fair value measurement of select assets and liabilities hark back to the banking and Savings & Loan crisis of the 1980s. At that time, many financial institutions were paying higher interest on deposits than they were earning on long-term fixed-rate mortgage loans. The historical cost model, the prevailing measurement attribute under GAAP at that time, masked the problem by recognizing losses gradually through negative net interest income. The current value of the institutions’ assets was less than the current value of the liabilities, effectively making the institutions insolvent. The historical cost model obscured the problem due to the requirement of carrying assets at inflated cost figures. Therefore, transparency was greatly diminished. Existing fair value and mark-to-market requirements were developed over several decades to address specific market events or conditions as noted above. These standards were the result of an extensive due process, and their
Derivatives are financial instruments used to transfer the risk associated with the variation in the underlying asset to a third party inclined at accepting that risk, but in exchange for a premium ; thus, the payoff from derivatives depends on the value of this underlying asset. Consequently, the protection or insurance paid from a certain derivative depends on the level of an index, as opposed to traditional insurance that depends on real losses.