US-CN Companies & Securities Law Assignment

Segment and Interim Financial Reporting 1. What is an operating segment? An operating segment is a component of an enterprise: (1) that engages in business activities from which it may earn revenues and incur expenses, either internal or external; (2) whose operating results are regularly reviewed by the enterprise’s chief operating decision maker and (3) for which discrete financial information is available. 2. What is a reportable segment according to FASB ASC Topic 280? What criteria are used in determining what operating segments are also reportable segments? A reportable segment is an operating segment, either single or aggregated, for which information has to be reported under FASB ASC Topic 280. An operating segment is a reportable segment if (a) its revenue is 10 percent or more of the combined revenue of all operating segments, (b) its absolute profit or loss is 10 percent or more of the greater of combined profit of all segments that have profit or combined losses...

Foreign Currency Financial Statements 1. Define the functional currency concept and briefly describe how a foreign entity’s functional currency is determined. Why is this definition critical from a financial reporting perspective? A company’s functional currency is the currency of the primary economic environment in which it operates. It is normally the currency in which it receives most of its payments from customers and in which it pays most of its liabilities. Other factors that are considered in determining the functional currency include whether its sales prices are determined primarily by local competition or local government regulation instead of short-run exchange rate changes or worldwide markets. The functional currency determination (local currency or parent currency or some other currency) is critical in determining what approach to converting financial statements to the ultimate reporting currency is used: the current rate or the temporal method. If the functi...

Accounting for Derivatives and Hedging Activities 1. Explain the objective of hedge accounting and how this objective should improve the transparency of financial statements. Hedge accounting refers to accounting designed to record changes in the value of the hedged item and the hedging instrument in the same accounting period. This enhances transparency because the hedged item and hedging instrument accounting are linked. Prior to hedge accounting, the financial statement effect of the hedged item and hedging instrument were not linked. Since companies enter into hedges to mitigate risks, the accounting should reflect the effect of this strategy and should clearly communicate the strategy. The accounting and footnote disclosures required for derivatives attempt to do this. 2. Explain the differences between options, forward contracts, and futures contracts and the potential benefits and potential costs of each type of contract. An option is a contract that allows the ...

Consolidation Theories, Push-Down Accounting, and Corporate Joint Ventures 1. Compare the traditional, parent-company, and entity theories of consolidated financial statements. Parent company theory views consolidated financial statements from the viewpoint of the parent and entity theory views consolidated financial statements from the viewpoint of the business entity under which all resources are controlled by a single management team. By contrast, traditional theory sometimes reflects the parent viewpoint and at other times it reflects the viewpoint of the business entity. A detailed comparison of these theories is presented in Exhibit 11–1 of the text. 2. Which, if any, of the consolidation theories would be changed by FASB pronouncements? (E.g., assume that a new FASB statement requires noncontrolling interest share to be computed as the noncontrolling interest share of subsidiary dividends declared.) Only contemporary theory is changed by current pronouncements of th...

Subsidiary Preferred Stock, Consolidated Earnings per Share, and Consolidated Income Taxation 1. Sam Corporation has 100,000 outstanding shares of $10 par common stock and 5,000 outstanding shares of $100 par, cumulative, 10 percent preferred stock. Sam's net income for the year is $300,000, and its stockholders' equity at year-end is as follows (in thousands): 10% cumulative preferred stock, $100 par      $ 500 Common stock, $10 par                                   1,000 Additional paid-in capital                                   600 Retained earnings           ...

Consolidations—Changes in Ownership Interests 1. Explain the terms preacquisition earnings and preacquisition dividends. Preacquisition earnings and dividends are the earnings and dividends applicable to an investment interest prior to its acquisition during an accounting period. Assume that P purchases an 80 percent interest in S on July 1, 2011 and that S has earnings of $100,000 between January 1 and July 1, 2011 and pays $50,000 dividends on May 1, 2011. In this case, preacquisition earnings and dividends are $100,000and $40,000, respectively. Historically, preacquisition earnings purchased were shown as a deduction on the income statement to arrive at consolidated net income. Under current GAAP, this is no longer the case. Instead, the consolidated income statement should only report revenues, expenses, gains and losses subsequent to the acquisition. For example, in a March 31 acquisition, the consolidated income statement would only include income of the subsidiary from Ap...

Intercompany Profit Transactions—Bonds Transactions in which a corporation acquires the outstanding bonds of an affiliate on the open market result in constructive gains and losses except when an affiliate purchases bonds at book value. The consolidated entity realizes constructive gains and losses when an affiliate purchases another affiliate’s bonds. The constructive gains and losses should be reflected in the income of the parent (under the equity method) and consolidated net income in the year of purchase. Constructive gains and losses on parent bonds purchased by a subsidiary are similar to unrealized gains and losses on downstream sales and do not require allocation between non-controlling and controlling interests. However, constructive gains and losses on subsidiary bonds purchased by the parent company should be allocated between the controlling and non-controlling interests. Constructive gains or losses on intercompany bonds are recognized on the books of the purchaser and...

Exchange Act §14(a) The Exchange Act authorizes the SEC to promulgate rules to curb management abuses in the solicitation of proxies identified during congressional hearings leading up to the Exchange Act. Rule 14a-3(a) Any person (including management) who solicits proxies from public shareholders must file with the SEC and distribute to shareholders (whether record or beneficial owners) specified information in a stylized proxy statement. Rule 14a-6 Definitive copies of proxy materials must be filed with the SEC when first mailed to shareholders. In addition, preliminary proxy materials must be submitted for SEC review at least 10 days before being sent to shareholders. Liability for Proxy Fraud Federal courts have laid out the elements of a federal proxy fraud case: Misrepresentation or omission There must be a misrepresentation or misleading omission of fact. Opinions are also actionable if they misstate the speaker's true beliefs and mislead about the subject ma...

The civil liability scheme of the Securities Act draws on and always motifies the elements for securities fraud and equitable rescission. The elements of securities fraud Misrepresentation of material fact The misrepresentation must be material. That is a reasonable person would attach importance to it in deciding whether to enter into the transaction. The legislation requires that the misrepresentation is affirmative and factual. However, failing to disclose material information is not actional unless the silent party has a fiduciary or similar relationship that triggers a duty to disclose. Scienter The maker of the misrepresentation must have been culpable. That is, he either knew or believed the facts were otherwise or lacked a reasonable basis for the representation. Under the Securities Act, incomplete or misleading half-truths were not actionable. Reliance The person who seek to recover must have actually and justifiably relied on the fraudulent misrepresentation. ...

 Fraud in Connection with the Purchase or Sale of Securities The principal tool for promoting the informational integrity of securities transactions is Rule 10b-5. Scienter The Supreme Court held in Ernst & Ernst v. Hochfelder, that private actions under Rule 10b-5 must show that the defendant acted with scienter in order to succeed. Fraud elements of private 10b-5 actions Although neither §10(b) nor Rule 10b-5 specifies the elements a plaintiff must show to be entitled to relief, the Supreme Court has understood a 10b-5 action to bear a strong resemblance to its forbearer—old-fashioned common law deceit. The plaintiff has the burden of showing the following elements Material misinformation The defendant affirmatively misrepresented a material fact, or omitted a material fact that made his statement misleading, or remained silent on the face of a fiduciary duty to disclosure a material fact. Scienter The defendant knew (or was reckless in not knowing) the...

Market manipulation araise when a pool of investors holding securities in a particular stock accomplish real and sham transactions to create the appearance of rising price in that stock. When investors enticed by the price movement began to buy at the inflated price, the pool would sell. Eventually, the emptiness of the price rise would be exposed and the price would be collapse. The pool would obtain handsome profit (buy low, sell high), while the investors would bear loss (buy high, sell low).  The Exchange Act addresses market manipulation in a variety of ways: Specific prohibitions Exchange Act §9(a) The Exchane Act prohibits creating misleading appearances of active trading in all securities, and OTC securities amended by Dodd-Frank to include Express private action Exchange Act §9(e) The Exchange Act authorizes a private cation for persons injured by market manipulation prohibited by Exchange Act §9. The plaintiff must prove that the defendant acted willfully and ...

US Securities Exempt Transactions The exemptions fall into two classes. Transaction exemptions provide an exemption only from the registration provisions of Section 5 of the 1933 Securities Act. Securities placed under one of these exemptions remain subject to both the Securities Act and the Exchange Act and, importantly, cannot be resold unless either they are registered or another exemption is available. Exempt securities, on the other hand, need not be registered, but also may be resold free of registration burdens. Determining that a security is exempt, however, does not negate application of the securities acts in their entirety, for exempt securities remain subject to the antifraud provisions of the Securities Act and the Exchange Act. The 2012 Jumpstart Our Business Startups Act (JOBS Act) expanded SEC exempting authority through a new Section 3(b)(2) directing SEC to develop a new exemption for offerings not exceeding an aggregate offering amount of 50 million. Privat...

Requirements of Class Action by Federal Rule of Civil Procedure 23 The standard of proof governing class action described by the Second Circuit: (1) A district judge may certify a class only after making determinations that each of the Rule 23 requirements has been met; (2) Such determinations can be made only if the judge resolves factual disputes relevant to each Rule 23 requirement and finds that whatever underlying facts are relevant to a particular Rule 23 requirement have been established and is persuaded to rule, based on the relevant facts and the applicable legal standard, that the requirement is met; (3) The obligation to make such determinations is not lessened by overlap between a Rule 23 requirement and a merits issue, even a merits issue that is identical with a Rule 23 requirement; (4) In making such determinations, a district judge should not assess any aspect of the merits unrelated to a Rule 23 requirement The prerequisites of numerosity, commonality, typ...