Financial Instruments, Consolidations, and Income Tax Accounting

Flashcards covering fair value measurements, debt and equity security classifications, consolidation procedures, partnership accounting, and corporate tax allocations/NOL rules.

Fair Value Option

An irrevocable election applied to individual financial instruments where unrealized gains and losses are reported in earnings.

Ineligible Instruments for Fair Value Option

Includes investments in subsidiaries or VIEs required for consolidation, pension benefit assets/liabilities, lease-related assets/liabilities, deposit liabilities, and equity-classified instruments.

Trading Securities

Debt securities bought and held principally for the purpose of selling them in the near term, with unrealized holding gains and losses recognized in net income.

Available-for-Sale (AFS) Securities

Debt securities held for an indefinite period of time, with unrealized holding gains and losses recognized in Other Comprehensive Income (OCI).

Held-to-Maturity (HTM) Securities

Debt securities where the corporation has the positive intent and ability to hold them until their maturity date.

Realized Gains and Losses

Recognized in net income when a debt security is sold or when an AFS debt security is deemed to be impaired.

Transfer to Trading Category

The unrealized gain or loss at the date of transfer shall be recognized in earnings immediately.

Transfer: HTM to Available-for-Sale

The unrealized holding gain or loss at the date of transfer shall be reported in OCI.

Transfer: Available-for-Sale to HTM

The unrealized holding gain or loss is amortized over the remaining life of the security as an adjustment of yield, consistent with premium or discount amortization.

Impairment of Held-to-Maturity Securities

Reported at the PV of principal and interest expected to be collected; the credit loss is the difference between this PV and the amortized cost.

Practicability Exception (Equity Securities)

Allows measuring an equity investment without a readily determinable fair value at cost minus impairments, plus or minus observable changes of identical/similar investments from the same issuer.

Liquidating Dividend

A distribution exceeding the investor's share of retained earnings, treated as a return of capital that decreases the investor's basis.

Equity Method Usage

Used when a company owns $20\% - 50\%$ of voting stock or otherwise exerts significant influence over the investee.

Goodwill (Equity Method)

$$\text{Purchase price of investment} - \text{Fair value of equity acquired}$$

Consolidation Adjustments

Includes eliminating common stock, APIC, Retained Earnings, and the Investment in Subsidiary; creating NCI; adjusting the subsidiary BS to fair value; recording identifiable intangibles; and recording Goodwill or Gain.

Intercompany Bond Transactions

If a consolidated group member acquires an affiliate's debt from an outsider, the debt is considered retired and a gain/loss is recognized on the consolidated income statement.

Partnership Formation (GAAP vs. Tax)

Under GAAP, assets are recorded at Fair Value (FV); under Tax rules, assets are recorded at Net Book Value (NBV).

Bonus Method (Partnerships)

Used when the purchase price differs from the book value; bonuses are allocated to either old or new partners depending on if the interest acquired is less than or greater than the contribution.

Goodwill Method (Partnerships)

The total capital account is subtracted from the implied value of the partner contribution to determine and recognize goodwill.

Indirect Method: Net Cash Flows from Operating Activities

$$\text{Net Income} + \text{Noncash expenses/losses} - \text{Noncash income/gains} + \text{Changes in operating liabilities} - \text{Changes in operating assets}$$

Intraperiod Tax Allocation

Apportioning total tax provision for financial accounting purposes within a single period between income or loss components.

Permanent Difference

Items entering GAAP financial income but never taxable income (or vice versa); they only affect the period they occur and do not impact deferred tax computations.

Temporary Difference

Items reported in GAAP financial income in a different period than taxable income; they affect deferred tax computations until the difference reverses.

Total Income Tax Expense/Benefit

$$\text{Current income tax payable/refundable} \pm \text{Change in deferred income tax asset/liability}$$

Deferred Tax Liability (DTL)

Created when revenues are in financial income before taxable income, or expenses are deducted from taxable income before financial income.

Deferred Tax Asset (DTA)

Created when revenues are in taxable income before financial income, or expenses are deducted from financial income before taxable income.

Uncertain Tax Positions: Two-Step Approach

1. Recognition (test 'more-likely-than-not') and 2. Measurement (recognize the largest amount with $> 50\%$ likelihood of realization).

NOL Carryforwards (Post-2018)

NOLs arising in 2018 or later can be carried forward indefinitely, but usage in years beginning 2021 or later is limited to $80\%$ of taxable income.

Dividends-Received Deduction (DRD) Percentages

$0 - 19\%$ ownership = $50\%$ exclusion; $20\% - 80\%$ ownership = $65\%$ exclusion; Over $80\%$ ownership = $100\%$ exclusion.