Cost of Goods Sold

(COGS)
+ Inventory beginning
+ Purchases/completed
− Inventory ending
COGS
How do LIFO Reserve
+ FIFO inventory
− LIFO inventory
LIFO reserve
Convert LIFO COGS to FIFO COGS
 + LIFO COGS
− ∆ LIFO reserve*
FIFO COGS

*LIFO reserveEnd – LIFO reserveBeg

Valuing Inventory (GAAP)
valued at the lower of cost(carrying value) or market

1. IF replacement cost > net realizable value*

market = NRV
2. IF replacement cost < NRV – normal profit margin
market = NRV – nPM
3. IF between market = replacement cost
4. CV > market, write down, recognize loss in IS

*+ Est. selling price

− Selling costs
− Completion costs
NRV
Valuing Inventory (IFRS)
valued at the lower of cost(carrying value) or net realizable
value*

1. CV > NRV, write down, recognize loss in IS

2. IF previously written down AND CV < NRV,
write up(no higher than original cost),
recognize gain in IS

*+ Est. selling price

− Selling costs
− Completion costs
NRV
Straight-line Depreciation Expense
Original cost – Salvage value
Depreciable life
Double-declining Balance Depreciation Expense
 2
× Carrying ValueBeg
Useful life
Long-lived Asset Impairment (IFRS)
 annual assessment required, but also after adverse events or
circumstances

1. CV > recoverable amount*, write down,

recognize loss in IS
2. IF previously written down AND CV < fair value,
write up, recognize gain in IS
3. IF mgmt uses revaluation model, may write up higher
than original cost, recognize gain in OCI (upon
disposal
if gain remains goes directly to RE)
*higher of fair value – selling costs OR value in use
(disc. expected CFs)

Long-lived Asset Impairments (GAAP)

 after adverse events or circumstances

1. Recoverability test: IF CV > undisc. expected CFs,

write down to fair value*, recognize loss in IS
2. Loss recovery is prohibited

*FV is either market value OR disc. expected CFs

Long-lived Assets Average Age (in years)
 Accumulated depreciation
Annual depreciation expense

more accurate when mgmt uses straight-line, mix of assets has

large impact
Long-lived Assets Average Depreciable Life
 Ending gross investment
Annual depreciation expense

more accurate when mgmt uses straight-line, mix of assets has

large impact
Long-lived Assets Average Remaining Useful Life
 Ending net investment*
Annual Depr exp

more accurate when mgmt uses straight-line, mix of assets has

large impact

*Gross investment – Accumulated depreciation

Operating Lease (lessee)
 rental arrangement

IS: “Rent exp” over life of lease

BS: NO asset or liability recognized
CS: CFO only
Finance/Capital Lease (lessee)
 in substance a purchase arrangement*

IS: Amort Int exp, Depr exp

BS: BOTH asset and liability recognized (PV of pmts)
CS: CFO Int & Depr exp, CFF Amort Prin(out)

*GAAP: any 1 condition qualifies arrangement as a purchase:

1. Title to asset is transferred at end of lease period
2. Bargain purchase option (sig < asset’s future FV)
3. Lease period is ≥ 75% of asset’s economic life
4. PV of lease pmts ≥ 90% of the FV of asset
IFRS: substantially all rights & risks of ownership transferred

Operating Lease (lessor)

 rental arrangement

IS: “Rent rev” AND Depr exp over life of lease

BS: Asset owned
CS: CFO only
Finance/Capital Lease (lessor, Sales-Type)
in substance a sale arrangement*, PV of pmts > CV of asset

IS: Initial gain (PV-CV), Amort Int Rev

BS: Asset(PV of pmts) becomes Lease Recs
CS: CFO Initial gain & Int Rev CFI Initial gain(out),
Amort Prin(in)

*GAAP: same qualification as lessee PLUS

1. Collectability of pmts reasonably certain
2. Lessor has substantially completed performance
 IFRS: same qualification as lessee

Finance/Capital Lease (lessor, Direct Financing)

in substance a sale arrangement*, PV of pmts = CV of asset

IS: Amort Int Rev, NO gain

BS: Asset(PV of pmts) becomes Lease Recs
CS: CFO Int Rev Amort Prin(in)

*GAAP: same qualification as lessee PLUS

1. Collectability of pmts reasonably certain
2. Lessor has substantially completed performance
IFRS: same qualification as lessee
What are the categories of corporate investments? and
corresponding level of influence/interest?
Financial assets no significant influence, <20%
Investment in associates significant influence, 20%-50%
Business combinations control, >50%
Joint ventures 2 or more shared control
VIEs and SPEs bear risk/return, benefit
What are the financial asset classifications based on mgmt intent?
valuation? accounting entries?
 Classification Criteria Initial Chg in Val**
intent to sell FV no
Held-for-trading* unreal G/L in IS
in ST trx
Designated at FV mgmt FV no
unreal G/L in IS
through P/L* discretion trx
unreal G/L in
Available-for-sale in between FV+trx
OCI net tax***
strict, intent
Held-to-maturity FV+trx amort cost
& ability
*IFRS doesn’t distinguish, called FV through P/L
**Int and Div recognized in IS
***IFRS debt FX G/L recognized in IS
1. Held-for-Trading: D/E, 1st FV no trx, Nxt FV, unreal IS
2. Available-for-Sale: D/E, 1st FV & trx, Nxt FV, unreal OCI
3. Held-to-Maturity: D, 1st FV & trx, Nxt Amort, no unreal
4. Designated* FV-P/L, D/E, 1st FV & trx, Nxt FV, unreal IS

NOTE: all int, divs, etc real in IS

*might otherwise be Available-for-Sale or Held-to-Maturity

Criteria for Investment in Associates