Lower of Cost or Market (LCM)

Lower of Cost or Market (LCM)

1. At the end of each period, inventory is measured at the lower of cost or market.

2. Market = Current replacement cost

3. If current replacement cost > Net realizable value (NRV) of inventory, then
Market = Net realizable value (NRV) of inventory

4. If current replacement cost < (NRV - Normal profit margin), then
Market = NRV – Normal profit margin

5. Net realizable value (NRV) = Selling price – Costs to complete and sell

 

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Property, Plant and Equipment, ASC 360

Initial measurement of property, plant and equipment
1. Measured at cost
2. Cost includes (A)
(A) all costs necessary to make the asset ready for intended use
3. During the construction period
–> certain interest costs are also capitalized

Subsequent measurement of property, plant and equipment
1. Depreciation
2. Impairment of long-lived assets
3. Disposal of long-lived assets

Impairment and disposal of long-lived assets
SFAS 144, August 2001
“Accounting for the Impairment or Disposal of Long-Lived Assets”

Classification of long-lived assets
1. Long-lived assets held for sale
2. Long-lived assets to be held and used

Long-lived assets “held for sale”
1. Presented separately in the statement of financial position
2. An asset is not depreciated while classified as “held for sale”
3. Measured at the lower of (B) and (C)
(B) carrying amount
(C) fair value less cost to sell
4. Newly acquired long-lived assets held for sale
–> measured at fair value less cost to sell, at the acquisition date
5. If (C) < (B)
–> a loss is recognized
6. If (B) > (C)
–> a gain is recognized up to “the cumulative loss” previously recognized
7. A gain or loss
–> adjusts the carrying amount of the asset

Discontinued operations
The results of operations of (1) and (2) are
–> reported separately as discontinued operations
(1) component that has been disposed of
(2) component that is classified as “held for sale”

Long-lived assets to be ‘held and used” are
–> tested for impairment

Impairment test
1. Step 1: Test for recoverability
–> when there is an indication that carrying amount may not be recoverable
2. Step 2: Measurement of impairment loss
–> if Step 1 shows that carrying amount is not recoverable

Recoverability test
Carrying amount is not recoverable
–> if (D) < (B)
(B) carrying amount
(D) sum of “undiscounted” cash flows from the asset

Impairment loss
1. An asset is impaired when (E) < (B)
2. Impairment loss = (B) – (E)
(B) carrying amount
(E) fair value

Impairment loss is not reversed
1. If an impairment loss is recognized
–> adjusted carrying amount becomes “new cost basis”
2. Impairment loss is “not” reversed
–> when there is a subsequent increase in fair value

 

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Real Estate Sales, ASC 360

Real Estate Sales
SFAS 66, October 1982
“Accounting for Sales of Real Estates”

FASB Interpretation (FIN) 43, June 1999
“Real Estate Sales
an interpretation of FASB Statement No. 66”

Full accrual method
–> profit is recognized in full
–> when real estate is sold

Installment method
–> allocates each cash receipt
–> between “cost recovered” and “profit”

Cost recovery method
–> profit is not recognized
–> until cash payments exceed the seller’s cost of property

Deposit method
–> cash receipts are recorded as a “deposit”
–> until the sale is consummated

Reduced profit method
–> receivable from buyer is discounted to present value
–> profit is recognized from level payment on the buyer’s debt
–> over the maximum term

Two types of real estate sales
1. Retail land sales
2. Real estate sales “other than retail land sales”

Retail land sales
1. Full accrual method is used
–> if all of the conditions (A) are satisfied

2. Percentage-of-completion method is used
–> if all of the conditions (B) are satisfied
3. Installment method is used
–> if all of the conditions (C) are satisfied

Conditions (A)
a1. Refund period has expired
a2. Cumulative payments are sufficient
a3. Receivable are collectible
a4. Receivables are not subject to subordination
a5. Seller is not obligated to complete improvements

Conditions (B)
b1. Refund period has expired
b2. Cumulative payments ≥ 10%
b3. Receivables are collectible
b4. Receivables are not subject to subordination
b5. Progress on improvements
b6. Development is practical

Conditions (C)
c1. Refund period has expired
c2. Cumulative payments ≥ 10%
c3. Seller is financially capable

Real estate sales “other than land sales”
1. Full accrual method is used
–> if all of the conditions (D) are satisfied

2. Deposit method is used
–> if the sale is not consummated
–> sale is consummated when the conditions (E) are satisfied

3. When the buyer’s initial investment
–> does not meet the conditions (F)

3a. if the recovery of the property cost is reasonably assured
–> use installment method

3b. if the recovery of the property cost is not reasonably assured
–> use cost recovery method or deposit method

4. When the buyer’s initial investment
–> meets the conditions (F)

4a. if buyer’s continuing investment is qualified
–> but meets the conditions (G)
–> use reduced profit method

4b. if buyer’s continuing investment is not qualified
–> and does not meet the conditions (G)
–> use installment method or cost recovery method

5. If seller’s receivable is subject to future subordination
–> use cost recovery method

6. If seller has continuing involvement with the property
–> use appropriate method
–> to reflect the nature of extent of the seller’s continuing involvement

Conditions (D)
d1. Sale is consummated
d2. Buyer’s initial and continuing investments are adequate
d3. Receivable is not subject to future subordination
d4. “Risks and rewards” of ownership have been transferred

Conditions (E)
e1. the contract is binding
e2. considerations have been exchanged
e3. permanent financing has been arranged
e4. closing conditions have been met

Conditions (F)
f1. buyer’s initial investment is adequate
f2. buyer’s initial investment includes appropriate items only

Conditions (G)
buyer’s payments cover both g1 and g2
g1. “principal and interest” amortization on the maximum first mortgage loan
g2. “interest” on the debt in excess of first mortgage loan

 

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Intangibles Other than Goodwill, ASC 350

Intangible Assets
–> Type 1: Intangible assets with “finite” useful life
–> Type 2: Intangible assets with “indefinite” useful life

Intangible assets with “finite” useful life
–> amortized over useful life

Intangible assets with “indefinite” useful life
–> not amortized

Impairment Loss
All intangible assets
–> tested for impairment
–> impaired if (a) < (b)
(a) carrying amount
(b) fair value
–> impairment loss = (b) – (a)

“Reversal” of impairment loss is not allowed.
[asc 350-30-35-14, 350-30-35-20]

 

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Derivatives and Hedging, ASC 815

Derivatives and Hedging

SFAS 133, June 1988
“Accounting for Derivative Instruments and Hedging Activities”

Derivatives
1. Derivative instruments are recognized in financial statements
2. Derivative instruments are measured at fair value

Characteristics of Derivative Instruments
1. Underlying and notional amounts
2. No initial net investment or smaller than usual initial net investment
3. Require or permit net settlement

SFAS 133 does not apply to the following:
1. Regular way security trades
2. Normal purchases and normal sales
3. Certain insurance contracts
4. Certain financial guarantee contracts
5. Certain contracts not traded on an exchange
6. Derivatives as impediments to sales accounting
–> e.g., guarantee of residual value to avoid sales-type lease
7. Investments in life insurance
8. Certain investments by defined benefit pension plans
9. Loan commitments
10. Registration payment arrangements, FSP EITF 00-19-2

Embedded derivative instruments
–> are separated from the host contract
–> and apply SFAS 133 as a derivative instrument

Measurement of derivatives
–> derivative instruments are measured at fair value

Gains and losses on derivative instruments

1. No hedging designation
–> gains and losses are recognized in earnings

2. Fair value hedge
–> gains and losses are recognized in earnings

3. Cash flow hedge
–> effective portion of the gains and losses are recognized in other comprehensive income
–> ineffective portion of the gains and losses are recognized in earnings

4. Foreign currency hedge
(a) hedge of a foreign currency denominated firm commitment
–> gains and losses are recognized in earnings
(b) hedge of an available-for-sale security
–> gains and losses are recognized in earnings
(c) hedge of a forecasted foreign currency denominated transaction
–> gains and losses are recognized in other comprehensive income
(d) hedge of a net investment in a foreign operation
–> gains and losses are recognized in other comprehensive income

If the hedged item is denominated in foreign currency
–> designate as one of the following:

1. Fair value hedge of
–> an unrecognized firm commitment
–> recognized asset or liability

2. Cash flow hedge of
–> an unrecognized firm commitment
–> a forecasted transaction

3. Hedge of a net investment in a foreign operation

 

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Research and Development Arrangements, ASC 730

Research and Development Arrangements

SFAS 68, October 1982
“Research and Development Arrangements”

Research and development arrangements
Research and development is funded by other parties

Forms of research and development arrangements
1. Liability to repay to other parties
2. Obligation to perform contractual services
3. Loan to other parties
4. Issuance of warrants

Liability to repay to other parties
1. If repayment is required regardless of the result of R&D activities
–> recognize it as a liability

2. R&D costs are expensed as incurred

Obligation to perform contractual services
1. If repayment of loan depends on the result of R&D activities
–> this obligation is a contract to perform R&D for others

2. Apply accounting for contract revenue and costs

Loan to other parties
If repayment of loan depends on the result of R&D activities
–> the loan is charged to R&D expenses

Issuance of warrants
If warrants are issued by R&D arrangement
–> the fair value of the instrument is
–> reported as paid-in capital

 

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