Student Class Notes (ACCT3102)

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This page is designed for students to collaborate in creating a set of notes and discussion for ACCT3102. You may find it useful to refer to the Shared:How-to Guides to create and edit notes and the discussion (talk) board.


Chapter 13: Current Liabilities and Contingencies


Liabilities have three characteristics:

  1. is a present obligation that
  2. entails settlement by probable future transfer or use of cash, goods, or services resulting from
  3. past transactions or other events

Valuation, transaction recording methods, and disclosure requirements are guided by:

  • U.S. GAAP - Generally guided by SFAC #6, FAS #5 and #6
  • IFRS - Generally guided by IAS #37

Current Liabilities

  • Current Liabilities - obligations expected to be satisfied (paid) within one year or one operating cycle, whichever is longer
Liability Type Valuation Basis Notes
Accounts Payable Fair value of goods received Arising from normal trade events resulting in amounts owed for goods, supplies, or services purchased on open account
Notes Payable Face value less discount (for non-interest bearing notes) May be classified as either current or long-term, based on timing of repayment of principal. Interest expense must be accrued for both interest bearing and non-interest bearing notes.
Current Maturities of Long-Term Debt Amount actually due within one year Generally, accounting for current maturities does not require a journal entry. Rather, a worksheet is created to separate the current portion from the non-current portion.
Short-term Obligations expected to be Refinanced amount actually due on note Exclude short-term obligations only if:
  • intent to refinance the obligation on a long term basis, AND
  • demonstrates the ability to consummate that refinancing
US GAAP permits firms to classify liabilities as long-term if the obligation has actually been refinanced long-term after the balance sheet date but prior to issuing the financial statements (thus satisfying the "demonstrates the ability to refinance).

IFRS does NOT permit reclassification under these circumstances - refinancing must be completed prior to the balance sheet date.

Dividends Payable Cash amount declared by board of directors Dividends in arrears but not yet declared are a footnote disclosure only
Unearned Revenues Amount collected in advance of providing goods or services
Sales Taxes Payable, Income Taxes Payable, and Employee-Related Liabilities Amount accrued based on appropriate formula as determined by taxing authorities
Warranty Costs Cash basis (expense as paid) or Accrual Basis (accrue liability in year of sale based on experience of satisfying warranty obligations) Accrual method is the preferred approach
Asset Retirement Obligation Net present value + interest expense accrual Anticipated costs required to be expended because of existing legal obligations (decommissioning, reclamation, etc.)

General guidance provided by FAS #5

Loss contingencies accrued only when liability is probable and can be reasonably estimated. Gain contingencies are not accrued until virtually certain but may be disclosed in footnotes under certain circumstances:
                                      Reasonably  Not Reasonably
Likelihood              Known          Estimable       Estimable
             Liab accrued and   Liab accrued and      Disclosure
  Probable    disclosure note    disclosure note       note only
Reasonably         Disclosure         Disclosure      Disclosure
  Possible          note only          note only       note only
    Remote      No disclosure      No disclosure   No disclosure
Measuring Liquidity Risk Two common methods for measuring liquidity risk:

Ratio Analysis
Trend Analysis

Current Ratio = Total Current Assets / Total Current Liabilities

Quick Ratio = (Cash + Marketable Securities + A/R) / Total Current Liabilities

Trend Analysis = compares balance sheet line items as a percent of total assets over two or more time periods

Chapter 13: Other Resources

A recent article in CFO Magazine discussing limitations of FAS #5 and environmental liabilities and disclosure Dirty Secrets Solution pages from chapter 13

Chapter 14: Bonds and Long-Term Notes

Long-Term Liabilities

  • Long-Term Liabilities - obligations expected to be satisfied (paid) in more than one year in the future
Liability Type Valuation Basis Notes
Bonds Payable Present value of all future cash flows (interest and principal payments) discounted at market yield (return)
  • If Stated rate = Market rate <> Bonds issued at face value
  • If Stated rate > Market rate <> Bonds issued at Premium
  • If Stated rate < Market rate <> Bonds issued at Discount
  • Amortization of premium or discount using the effective interest method is preferred over the straight line method.
    • Interest expense = market rate x unamortized balance of bond payable account
    • Cash paid = coupon rate x face value of bond
    • difference represents amortization of premium or discount
Bonds and Fair Value Reporting FAS #159 The Fair Value Option for Financial Assets and Financial Liabilities gives companies the option (but does not require) to value financial assets and liabilities at fair market value rather than amortized book value.
  • Fair value can be effected by changes in interest rates, economic conditions, risk, etc.
    • For liabilities such as bonds, adjustments to fair value are made via an income statement account (Unrealized holding loss/gain) and a contra liability account (Fair-value adjustment)
    • If a liability increases in value, then a loss is recognized
    • If the liability decreases in value, then a gain is recognized
  • Similar but mirror image transactions are recognized in the case of financial assets
Long-Term Notes Payable Present value of all future cash flows (interest and principal payments) discounted at market yield (return)
  • Amortization of premium or discount using the effective interest method is preferred over the straight line method.
  • The effective rate of return (yield) for noninterest bearing notes must be computed such that the present value of the note (cash/goods received) equals the future value (face value of the note). Amortize the premium or discount to interest expense using the effective interest method.
Mortgage Notes Payable Present value of cash received
  • No discount or premium exists
  • Payable in installments or payable at maturity determines if any portion is current vs. long-term liablity
Off-Balance Sheet Financing
  • Non-Consolidated Subsidiary
  • Special Purpose Entities
  • Operating Leases
  • Non-Consolidated Subsidiary - parent owns <50% of subsidiary, parent only reports investment on the asset side of the balance sheet
  • SPEs being eliminated by FASB and IASB
  • Operating leases - no reporting of liabilities or associated assets on B/S, only reports lease payment as part of current operating expenses

Chapter 14: Other Resources

Chapter 15: Leases

Accounting for Leases

Lease Issue Notes
A lease is a contractual agreement between a lessor and a lessee that gives the lessee the right to use specific property, owned by the lessor, for a specified period of time. In return for this right, the lessee agrees to make rental payments over the lease term to the lessor. Advantages of leasing for the lessee include:
  • 100% financing
  • protection against obsolescence
  • flexibility
  • less costly financing
  • tax advantages, and
  • off-balance sheet financing (under some circumstances)
For accounting purposes of the lessee, all leases may be classified as operating leases or capital leases. For a lease to be recorded as a capital lease, the lease must be non-cancelable and meet one of the following four criteria:
  1. The lease transfers ownership of the property to the lessee.
    • if at any point in the contract ownership transfers to the lessee then this condition is met.
  2. The lease contains a bargain purchase option.
    • A bargain purchase option is a provision allowing the lessee to purchase the leased property for a price that is significantly lower than the property’s expected fair value at the date the option becomes exercisable.
  3. The lease term is equal to 75% or more of the estimated economic life of the leased property.
    • The 75% of economic life test is based on the belief that when a lease period equals or exceeds 75% of the asset’s economic life, the risks and rewards of ownership are transferred to the lessee and capitalization is appropriate.
  4. The present value of the minimum lease payments (excluding executory costs) equals or exceeds 90% of the fair value of the leased property.
    • The reason for the 90% of fair market value test is that if the present value of the minimum lease payments are reasonably close to the market price of the asset, the asset is effectively being purchased.
Present value of the minimum lease payments test The present value of minimum lease payments test is one of the more complex tests to apply in determining whether a lease should be capitalized or treated as an operating lease. We can use the following flow-chart as a guide to apply this test:

Lease Payments - Executory Costs = Minimum Lease Payments

--> apply term and discount rate to minimum lease payments and guaranteed residual value

Present Value of Lease Payments + Present Value of Guaranteed Residual Value = PV of Minimum Lease Payments

--> apply test criteria

If PV of Minimum Lease Payments => 0.90(FMV of Asset) --> lease is a capital lease

Capital Leases for lessee Under the capital lease method the lessee treats the lease transaction as if an asset were being purchased on time (installment basis). For a capital lease, the lessee records an asset and a liability at the lower of
  1. the present value of the minimum lease payments during the term of the lease or
  2. the fair market value of the leased asset at the inception of the lease.

In determining the present value of the minimum lease payments, three important concepts are involved: (a) minimum lease payments, (b) executory costs, and (c) the discount rate.

When the lessee uses the capital lease method, each lease payment is allocated between a reduction of the lease obligation and interest expense applying the effective interest method. The lessee should amortize the leased asset by applying one of the conventional depreciation methods.

Operating Leases for Lessees
  • Lease payments are accounted for as an operating expense (rent or lease expense) in the period benefited by the lease
  • Under this method, the commitment to make future rental payments is not recognized in the accounts. Only footnote recognition is given to the commitment to pay future rentals.
Direct financing lease or a Sales-type lease accounting for Lessors Three benefits available to the lessor are (a) competitive interest margins, (b) tax incentives, and (c) high residual values. For lessor accounting purposes, all leases may be classified as: (a) operating leases, (b) direct financing leases, or (c) sales-type leases. The lessor should classify and account for an arrangement as a direct financing lease or a sales-type lease if at the date of the lease agreement one or more of the following Group I criteria are met and both of the following Group II criteria are met.

Group I

  1. The lease transfers ownership of the property to the lessee.
  2. The lease contains a bargain purchase option.
  3. The lease term is equal to 75% or more of the estimated economic life of the leased property.
  4. The present value of the minimum lease payments (excluding executory costs) equals or exceeds 90% of the fair value of the leased property.

Group II

  1. Collectibility of the payments required from the lessee is reasonably predictable.
  2. No important uncertainties surround the amount of unreimbursable costs yet to be incurred by the lessor under the lease.

Sales type lease

  • involves manufacturer’s or dealer’s profit (or loss) - generally means the asset is owned by the manufacturer or dealer is using leasing as a means of financing the transaction

Direct-financing lease

  • does not involve manufacturer’s or dealer’s profit (or loss) - generally means the asset is being leased by an independent (third) party such as a bank.
Operating leases for Lessors
  • Operating leases are accounted for as simply rental revenue
  • Depreciation expense on the asset is recognized as normal

Chapter 15: Additional Resources

Exercise 15-3 Demo Video

Chapter 16: Accounting for Income Taxes

Income Tax Issue Notes
Deferred Tax Assets and Deferred Tax Liabilities Temporary Differences
  • Revenues and expenses included on a company’s income tax return usually are the same as those reported on the company’s GAAP income statement for the same period.
  • If GAAP and tax rules differ, tax payments might occur in years different from when the revenues and expenses that cause the taxes are generated. This would produce a difference between pretax accounting income and taxable income and, consequently, between the reported amount of an asset or liability in the financial statements and its tax basis.
  • The difference is a temporary difference if it originates in one period and reverses, or "turns around," in one or more later periods. (T16-1)
  • Income tax expense includes both the current and deferred tax consequences of the activities of the reporting period.
Deferred Tax Liabilities A temporary difference causes a future taxable amount if:
  • the taxable income will be increased relative to accounting income in the year(s) when the difference reverses.
  • Such differences create deferred tax liabilities for the taxes to be paid on the future taxable amounts.
    • Revenues or gains reported on the tax return after the income statement. (T16-2 through T16-4)
    • Expenses or losses reported on the tax return before the income statement. (T16-5 through T16-11).
Deferred Tax Assets A temporary difference causes a future deductible amount if
  • the taxable income will be decreased relative to accounting income in the year(s) when the difference reverses.
  • Such differences create deferred tax assets for the taxes to be paid on the future taxable amounts.
    • Expenses or losses reported on the tax return after the income statement. (T16-12 through T16-14)
    • Revenue or gains reported on the tax return before the income statement.
Revenues (or Gains) Expenses (or Losses)
Items reported on tax return after GAAP income statement Deferred Tax Liability
  • Installment sales of property (installment sales method)
  • Unrealized gains from recording investments at fair value (taxable when asset is sold)
Deferred Tax Asset
  • Estimated expenses and losses (tax deductible when paid)
  • Unrealized losses from recording investments at fair value or inventory at LCM (tax deductible when asset is sold)
Items reported on tax return before GAAP income statement Deferred Tax Asset
  • Rent or subscriptions collected in advance
  • Other revenue collected in advance
Deferred Tax Liability
  • Accelerated depreciation on tax return (straight-line on GAAP income statement)
  • Prepaid expenses (tax deductible when paid)

Chapter 16: Additional Resources

Solutions pages from chapter 16

Chapter 17: Pensions and Other Postretirement Benefits

Accounting for Pensions and Other Post-retirement Benefits

Accounting for pension costs is somewhat complicated because of the variety of social concepts, legal considerations, actuarial techniques, income tax regulations, and varying business philosophies that affect the development and maintenance of pension plans. This chapter relates these issues to the recommended accounting treatment for the costs associated with a pension plan as described in FASB Statements No. 87, 88, 112, 132, and 158. IFRS guidelines are contained primarily in IAS 19.

Pension Issue Notes
Nature of Pension Plans A pension plan is an arrangement whereby an employer provides benefits (payments) to employees after they retire for services they provided while they were working.
  • Because the problems associated with pension plans involve complicated actuarial considerations, actuaries are engaged to ensure that the plan is appropriate for all employee groups covered. Actuaries make predictions (actuarial assumptions) of mortality rates, employee turnover, interest and earnings rates, early retirement frequency, future salaries, and other factors necessary to operate a pension plan. Thus, accounting for defined benefit pension plans is highly reliant upon information and measurements provided by actuaries.
  • A pension plan is said to be funded when the employer sets funds aside for future pension benefits by making payments to a funding agency that is responsible for accumulating the assets of the pension fund and for making payment to the recipients as the benefits come due.
Pension plans can be contributory or noncontributory.
  • In a contributory plan, the employees bear part of the cost of the stated benefits or voluntarily make payments to increase their benefits.
  • If the plan is noncontributory, the employer bears the entire cost.
Types of Plans The most common types of pension arrangements are defined contribution plans and defined benefit plans.
  • In a defined contribution plan, the employer agrees to contribute a certain sum each period based on a formula.
    • The formula might consider such factors as age, length of service, employer’s profits, and compensation level.
    • The accounting for a defined contribution plan is straightforward. The employer’s responsibility is simply to make a contribution each year based on the formula established in the plan. Thus, the employer’s annual cost is the amount it is obligated to contribute to the pension trust.
      • If the contribution is made in full each year no pension asset or liability is reported on the balance sheet.
  • A defined benefit plan defines the benefits that the employee will receive at the time of retirement.
    • The formula that is typically used provides for the benefits to be a function of the level of compensation near retirement and of the number of years of service.
    • The accounting for a defined benefit plan is complex. Because the benefits are defined in terms of uncertain future variables, an appropriate funding pattern must be established to insure that enough monies will be available at retirement to meet the benefits promised.
Measurement of the Pension Liability

The pension liability bases the computation on both vested and nonvested service using future salaries. Because future salaries are expected to be higher than current salaries, this approach, known as the projected benefit obligation.

The Pension Liability reported on the balance sheet of the employer is equal to Plan Assets - Projected Benefit Obligation.

  • Total prior service costs are included with projected benefit obligations, thus the unamortized prior service costs can be viewed as a contra account.
  • The Pension Liability represents the amount by which the pension plan is underfunded.
  • If plan assets exceed the liability, a pension asset is reported on the balance sheet of the employer.

Additionally, details about each element noted above must be disclosed in the footnotes to the financial statements. The current financial statement disclosure requirements for pension plans are as follows:

  1. A schedule showing all the major components of pension expense.
  2. A reconciliation showing how the projected benefit obligation and the fair value of the plan assets changed from the beginning to the end of the period.
  3. The funded status of the plan (difference between the projected benefit obligation and fair value of the plan assets) and the amounts recognized and not recognized in the financial statements.
  4. A disclosure of the rates used in measuring the benefit amounts (discount rate, expected return on plant assets, rate of compensation).
  5. In addition, disclosure of the reconciling schedule of the off-balance sheet assets, liabilities and unrecognized gains and losses with the on-balance sheet asset or liability should be provided.

Measurement of the Pension Expense The pension expense consists of several components:
  • Service Cost. The expense caused by the increase in pension benefits payable (the projected benefit obligation) to employees because of their services rendered during the current year.
    • Actuaries compute service cost as the present value of the new benefits earned by employees during the year.
  • Interest. Because a pension is a deferred compensation arrangement, it is recorded on a discounted basis.
    • Interest expense accrues each year on the projected benefit obligation based on a selected interest rate called the settlement rate.
  • Actual Return on Plan Assets. Annual expense is adjusted for interest and dividends that accumulate within the fund as well as increases and decreases in the market value of the fund assets.
  • Amortization of Unrecognized Prior Service Cost. Because plan amendments are granted with the expectation that the employer will realize economic benefits in future periods, the cost (prior service cost) of providing these retroactive benefits is allocated to pension expense in the future, specifically to the remaining service-years of the affected employees.
    • Annual amortization is generally based on a "years of service" basis similar to "units of production" used for depreciation of fixed assets.
  • Gain or Loss. Two items comprise gain or loss: (1) the difference between the actual return and the expected return on plan assets and (2) amortization of the unrecognized net gain or loss from previous periods.
Journal Entries Generally, a single journal entry can be created to record the Debit to Pension Expense, Credit to Cash, and Debit/Credit to Pension Asset/Liability.
  • Pension Expense is debited for (Service Cost + Interest Cost + Amortization of Unrecognized Prior Service Costs - Actual Return on Plan Assets - Plan Gains + Plan Losses).
  • Cash is credited for the amount contributed by the employer to plan assets
  • Accrued Pension Asset/Liability is debited/credited for Pension Expense - Cash Contribution.
    • If a Pension Expense exceeds the cash contributed, the Accrued Pension Asset/Liability is credited thus reducing the Accrued Pension Asset or increasing the Accrued Pension Liability on the balance sheet.
      • After this journal entry is recorded, the accumulated balance in Accrued Pension Asset/Liability account should reconcile with the computation in "Measurement of the Pension Liability" noted above.
  • The Projected Benefit Obligation can be computed as Beginning Balance of PBO + Service cost + Interest cost + Prior year service costs from an amendment +/- Loss or Gain on PBO - Benefits paid = Ending Balance of PBO.
Additional Explanation of the Global Communications example in the textbook The 3 journal entries illustrated on page 900 - 902 can be consolidated into a single journal entry based on the worksheet in illustration 17-11 (page 905) as follows:
 Pension Expense         43
 AOCI - Pension Loss     19
     Cash                     48
     AOCI - PSC                4
     Pension Liability        10
  • The worksheet identifies the debit entry to Pension Expense as $43
  • AOCI - Pension Loss is a contra S/E account (has a debit balance) and the worksheet shows a net increase in that debit balance of $19 (from $55 to $74).
  • Cash was credited for $48 to fund the plan assets
  • AOCI - PSC is a contra S/E account (has a debit balance) and the worksheet shows a net decrease in that debit balance of $4 (from $56 to $52).
  • The Pension Liability balance can be computed as the difference between year end plan assets and PBO. In this case PBO $450 - Plan asset $340 = Net Liability of $110. The beginning balance of the Net Liability is $100 so a $10 credit is needed to adjust the liability account.
US GAAP vs. IFRS Link to Ernst & Young “US GAAP vs. IFRS: The basics January 2009”

The link to the pdf document is near the top of the page in the IFRS: a strategic opportunity section.

Chapter 17: Additional Resources

Use the Defined Benefit Pension Plan Worksheet to determine the journal entry to record pension expense for the year and to determine the balance sheet disclosure of the net pension liability/asset.

Chapter 18: Shareholders' Equity

Shareholders' Equity

Shareholders' Equity - The net assets (Assets - Liabilities) are the owners' residual interest in the company, share of which is represented by shares of stock.

Shareholder Type Valuation Basis Notes
Capital Stock or Share System If only one class of stock exists, must be common stock. General rights of common stock
  • share proportionately in profits and losses
  • share proportionately in management
  • share proportionately in corporate assets upon liquidation
  • share proportionately in new issues of stock of same class

Stockholders’ equity is the difference between the assets and the liabilities of the company - also known as the residual interest. Stockholders’ equity is not a claim to specific assets but a claim against a portion of the total assets.

Preferred Stock

Preferred stock is the term used to describe a class of stock that possesses certain preferences or features not possessed by the common stock. The following features are those most often associated with preferred stock issues:

  • Preference as to dividends.
  • Preference as to assets in the event of liquidation.
  • Convertible into common stock.
  • Callable at the option of the corporation.
  • Nonvoting.

Some features used to distinguish preferred stock from common stock tend to be restrictive. For example, preferred stock may be nonvoting, noncumulative, and nonparticipating. A corporation may attach whatever preferences or restrictions in whatever combination it desires to a preferred stock issue so long as it does not specifically violate its state incorporation law.

Preferred stock generally has no maturity date and therefore no legal obligation exists to pay preferred stock. As a result, preferred stock is classified as part of stockholder’s equity. Mandatory redeemable preferred stock, however, is to be reported as a liability.

Transfer of ownership The transfer of ownership between individuals in the corporate form of organization is accomplished by one individual selling or transferring his or her shares to another individual. The only requirement in terms of the corporation involved is that it be made aware of the name of the individual owning the stock. A subsidiary ledger of stockholders is maintained by the corporation for the purpose of dividend payments, issuance of stock rights, and voting proxies. Many corporations employ independent registrars and transfer agents who specialize in providing services for recording and transferring stock.
Contributed Capital Fair value of assets received at time of issuance Consists of par value (or stated value) of common stock plus additional paid-in capital
Earned Capital (Retained Earnings) Beginning balance of retained earnings + income - loss - dividends Accumulation of undistributed income that remains invested in the company
Dividends and Stock Splits Fair market value guides distribution of cash, property, and ordinary stock dividends. Par value is used for large stock dividends. Only memorandum entries are used for stock splits.
  • Cash dividends. Once declared, a dividend (except a stock dividend) is a liability (usually current). Dividends are not declared and paid on treasury stock. Cash dividends recorded as a reduction to Retained Earnings.
  • Property dividends. These are dividends payable in assets of the corporation other than cash. The fair value principle is used in valuing the assets distributed as dividends. Property dividends recorded as a reduction to Retained Earnings.
  • Liquidating dividends. Dividends not based on earnings are liquidating dividends, which reduce paid-in capital.
  • Stock dividends. No assets are distributed and each stockholder retains the same proportionate interest in the corporation.
    • Small (ordinary) stock dividends. The market value of the stock issued is used to record the stock dividend by debiting retained earnings and crediting common stock and paid-in capital on common stock.
    • Large stock dividends. If the dividend is more than 20-25% of the outstanding shares, then the par value of the stock issued is used to record the stock dividend by debiting retained earnings and crediting common stock.
  • Stock splits. No entry is made, only a memorandum note to indicate that the par value of the shares has changed.
Treasury Stock

Treasury stock is a corporation’s own stock that (a) was outstanding, (b) has been reacquired by the corporation, and (c) is not retired. Treasury stock is not an asset and should be shown in the balance sheet as a reduction of stockholders’ equity. Treasury stock is essentially the same as unissued stock. The reasons corporations purchase their outstanding stock include:

  1. to provide tax efficient distributions of excess cash to shareholders;
  2. to increase earnings per share and return on equity;
  3. to provide stock for employee stock compensation;
  4. to contract operations or thwart takeover attempts; and
  5. to make a market in the stock.

Two methods are used in accounting for treasury stock, the cost method and the par value method. Under the cost method, treasury stock is recorded in the accounts at acquisition cost.

General organizational structure of Stockholders' Equity on the balance sheet Firms have some discretion on exact organization

Stockholders' (Shareholders' Equity)

  • Paid-in Capital
    • Preferred Stock
    • Common Stock
    • Additional Paid-in Capital
  • Retained Earnings
  • Accumulated other Comprehensive Income (Loss)
  • Less: Treasury Stock

Total Stockholders' Equity

Additional Resources

Chapter 19: Share-Based Compensation and Earnings Per Share

Dilutive Securities and EPS

Equity vs. Debt security - if an "obligation" to repay the investor exists, security is generally treated as debt. Without an obligation, security generally treated as equity.

Dilutive Security Valuation Basis Notes
Convertible Securities (Preferred Stock, Bonds)

Book value method is used at time of conversion - simple exchange of related preferred stock accounts for common stock accounts using Retained Earnings, if necessary, to balance transaction.

Converting bonds into common stock is also accomplished at book value by exchanging bonds and associated premium or discount account for capital stock and paid-in capital in excess of par.

Convertible Preferred Stock:

  • At issuance - convertible preferred stock accounted for as normal
  • At conversion - exchange at book value

Convertible Bonds:

  • At issuance - convertible bonds accounted for as normal
  • At conversion
    • Normal conversion at investor's will - bonds payable (principle and associated premium/discount) exchanged for common stock and additional paid-in capital.
    • Induced conversions - value of inducement debited to expense
    • Retirement of bonds - difference between cash acquisition price of the bonds and book value of bonds accounted for as a gain/loss on retirement.
Stock Warrants - right (but not obligation) to purchase shares of stock at a stated price within a stated period of time Proportional or incremental valuation
  • If market value of both security and detachable warrant are known, use proportional allocation
  • If market value of only one of the securities is known, use incremental allocation
Stock Options (Stock Compensation Plans) - options issued as deferred compensation with right (but not obligation) to purchase stock at a stated price within a stated period of time SFAS #123 now requires use of fair-value method of accounting for stock option plans.
  • Determine fair-value of options (using black-scholls or lattice model) and record compensation expense and paid-in capital on stock options in the period of time for which the benefit applies.
    • Allocating Compensation Expense: recognized over the service period (the time between the grant date and the vesting date).
      • On Date of grant: no journal entry required.
      • Compute total compensation expense using an acceptable fair value option-pricing model.
      • Allocate amount of compensation expense evenly over the service period.
  • At exercise exchange paid-in capital on stock options for appropriate common stock accounts
Basic Earnings Per Share (EPS) - simple capital structure In general, EPS = earnings available to the common stockholders / weighted average number of common shares outstanding
  • Earnings available is determined after preferred dividends
    • earnings from continuing operations, gain (loss) from discontinued operations, gain (loss) from extraordinary items, and net income (loss) each reported separately.
  • Weighted average number of common share outstanding may be different from share issued
    • shares held in treasury are excluded
  • All EPS reported on body of Income Statement
  • SFAS #128
Diluted EPS - complex capital structure In general, diluted EPS = basic EPS - impact of convertibles - impact of options, warrants, and other dilutive securities
Impact of convertibles Accounted for on "if-converted" method
  • Additional shares increase the weighted average number of shares outstanding and are assumed to be converted at the beginning of the fiscal period
  • Elimination of after-tax interest expense increases the income available to common shareholders
Impact of options, warrants, and other dilutive securities Measured only if average exercise price is less than average market price of common stock
  • Security is "in the money" and potentially exercisable
  • Use treasury-stock method
Shares issued upon exercise - shares purchased through proceeds of exercise = incremental shares outstanding
  • Exercise assumed to occur at the beginning of the fiscal period

Chapter 20: Accounting Changes and Error corrections

Chapter 21: The Statement of Cash Flows Revisited

International Financial Reporting Standards - Current Status

Ernst & Young Update

The current status of world-wide adoption of International Financial Reporting Standards is summarized in a recent Webcast from Ernst & Young, LLP, originally broadcast September 2009.

KPMG Update

KPMG, LLP also produced a webcast summarizing the current status of IFRS adoption - originally broadcast in April 2009.

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