Advanced Financial Reporting
FMT
Week 15: Revision
Foreign currency transaction
• Foreign currency transactions are converted at
the exchange rate ruling on the transaction date
• Unhedged assets and liabilities are remeasured at
each period-end at the period-end exchange rate
and the resulting conversion difference is
recorded below operating margin
• Financial Instruments: all derivative instruments
are recognized in the balance sheet at fair value.
Foreign currency transaction
• Derivative instruments may be designated as fair
value or cash flow hedges.
– Fair value hedges protect against a change in the fair
value of assets and liabilities,
– while cash flow hedges protect against a change in the
value of future cash flows generated by existing or
future assets or liabilities.
– Cash flows hedge: Gains/losses are
recorded as Comprehensive Income
– Fair value hedge: Gains/losses are
recorded on the Income Statement
Foreign currency translation
• Current rate method: All asset and liability balances are translated
at the current exchange rate. All revenue and expense items are
translated at their historical exchange rate, or at an average rate if
there are multiple transactions of similar kind. The transaction
adjustment is taken directly to translation adjustment in
stockholders’ equity (on BS)
• Temporal method: Assets and liabilities that are recorded in the
accounts at historical cost are translated at their historical exchange
rates. Assets and liabilities that are recorded in the accounts at
current value are translated at the current exchange rate. All
revenue and expense items are translated at the historical exchange
rate, or at an average rate if there are multiple transactions of
similar kind. The remeasurement gain or loss is taken to the
income statement
Foreign currency translation
• The concept of functional currency
• Integrated or independent subsidiary
Liquidation and Reorganization
• Insolvency and going concern
• Voluntary (chapter 11) and Involuntary
petitions (chapter 7 or chapter 11)
• Classification of creditors:
– Fully secured
– Partially secured
– Unsecured with priority
– Unsecured
Liquidation and Reorganization
• Statement of Financial Affairs
• Role of the Trustee
• Statement of Realization and Liquidation
Liquidation and Reorganization
• Reorganization: reorganization plan
• Fresh start reporting for company emerges
from chapter 11
– Assets are restated to current market value
– Liabilities are stated at PV of future cash pmts
– RE set to zero
– APIC is adjusted to balance
Partnership
• Partnerhip advantages and disadvantages
• Alternative legal forms
• Capital account:
– Contribution
– Profit and loss allocated
– Withdrawal
Partnership
• Capital contribution: intangible asset using bonus and
goodwill method
• Allocation of income
–
–
–
–
Interest on beginning balance
Allocated compensation
Bonus
Sharing remaining income
• Admission of new partner
– Purchase of a current interest: BV and Goodwill method
– Contribution to the partnership: Bonus and Goodwill
method
Partnership: Termination and
liquidation
• Termination of partnership: gains and losses
on disposal of assets allocated to partner’s
capital account according to profit sharing
ratios
• Schedule of Liquidation
• Preliminary cash distribution:
– Calculation of safe balances
Partnership: Termination and
liquidation
• Deficit Capital balance
– Contribution made
– Absorption by other partners
• Marshalling of Assets: raking of debts
• Predistribution plan
Exam Format
• 2 hours exam
• Closed book
• Format:
– 20 multiple choice
– 4 short answer questions