US-CN Companies & Securities Law Assignment

Consolidation: Non-Controlling Interest 1. What is meant by the term ‘non-controlling interest’ (NCI)? 2. Explain whether the NCI is better classified as debt or equity. NCI is the term used for the ownership interest in a subsidiary other than the parent. It is defined in AASB 10/IFRS 10 Consolidated Financial Statements as: • The equity in a subsidiary not attributable, directly or indirectly, to a parent. The non-controlling interest is still regarded as equity of the group. Hence there are effectively two equity parties in the group: the owners of the parent and the NCI. Classification of the NCI as equity affects both the calculation of the NCI as well as how it is disclosed in the consolidated financial statements. Measurement and disclosure of the NCI are mainly determined by AASB 10/IFRS 10 and AASB 101/IAS 1 Presentation of Financial Statements. 2. Explain whether the NCI is better classified as debt or equity. The non-controlling interest is regarded as equity o...

Consolidation: Intragroup Transactions 1. Why is it necessary to make adjustments for intragroup transactions? The consolidated financial statements are the statements of the group, i.e. an economic entity consisting of a parent and its subsidiaries. These consolidated financial statements then can only contain revenues, expenses, profits, assets and liabilities that relate to parties external to the group. Adjustments must be made for intragroup transactions as these are internal to the economic entity, and do not reflect the effects of transactions with external parties. This is consistent with the entity concept of consolidation, which defines the group as the net assets of the parent, together with the net assets of the subsidiaries. Transactions between these parties internal to the group must be adjusted in full. 2. Why is it important to identify intragroup transactions as current or previous period transactions? Current period intragroup transactions affect differen...

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           ...