Unit 3: Select Transactions

• Topic 01

  Business Combinations

  15 questions
• Topic 02

  Consolidation

  15 questions
• Topic 03

  Foreign Currency Transactions and Translation

  14 questions
• Topic 04

  Derivatives and Hedging

  14 questions
• Topic 05

  Fair Value Measurement

  15 questions
• Topic 06

  Income Taxes

  15 questions
• Topic 07

  Pension and Post-Retirement Benefits

  15 questions
• Topic 08

  Share-Based Compensation

  36 questions
• Topic 09

  Software Costs

  39 questions
• Topic 10

  Research and Development Costs

  12 questions
• Topic 11

  Asset Retirement Obligations

  27 questions
• Topic 12

  Related Party Transactions and Disclosures

  15 questions

A few questions from this unit, with the answer and a full explanation. The complete bank is available when you start practising.

1. What is the expected present value technique used for when measuring an ARO?

   • A
     To determine the historical cost of comparable past retirement activities at similar facilities
   • B
     To measure the annual accretion expense by applying a risk-free rate to the ARO balance
   • C
     To compute straight-line depreciation of the asset retirement cost over the asset's useful life
   • D
     To estimate the fair value of the ARO using probability-weighted cash flows discounted to present value when no observable market exists
     Correct answer
   Explanation

   Under ASC 820 (applied through ASC 410-20), when no market price exists for transferring an ARO, fair value is estimated using the expected present value technique: multiple possible cash flow scenarios are weighted by their probabilities, and the resulting expected cash flows are discounted at the credit-adjusted risk-free rate. This is not the same as using a single best estimate — it explicitly incorporates the probability distribution of outcomes.

2. Under ASC 805, how is the noncontrolling interest (NCI) measured at the acquisition date?

   • A
     At the NCI's proportionate share of the acquiree's book value
   • B
     At fair value at the acquisition date (full goodwill method)
     Correct answer
   • C
     At the par value of shares held by minority shareholders
   • D
     At the historical cost of the NCI's original investment in the acquiree
   Explanation

   Under US GAAP (ASC 805), NCI is measured at its fair value at the acquisition date — the full goodwill method. This means goodwill is attributed to both the parent and NCI. The proportionate share approach (NCI = NCI% × fair value of net identifiable assets) results in only the parent's portion of goodwill being recognised and is an IFRS option (IFRS 3), not permitted under US GAAP.

3. A company enters into an interest rate swap to convert its fixed-rate debt to variable-rate. The swap is properly designated and documented as a fair value hedge. During the year, the swap gains 50,000 in value and the hedged debt's fair value decreases by 47,000 (attributable to the hedged risk). What is the net income effect?

   • A
     Net income is increased by 50,000 and OCI is reduced by 47,000
   • B
     Net income has zero effect; both items go to OCI until the debt matures
   • C
     Net income is increased by 3,000 (the ineffective portion: 50,000 gain on swap less 47,000 loss on debt)
     Correct answer
   • D
     Net income has zero effect because fair value hedges produce perfect offset when the relationship is highly effective
   Explanation

   In a fair value hedge under ASC 815-25, both the derivative gain/loss and the hedged item's fair value change (attributable to the hedged risk) are recognised in income:

   • Swap gain: +50,000 to income
   • Hedged debt fair value decrease: −47,000 to income (increases debt carrying value by 47,000)

   Net income effect = 50,000 − 47,000 = +3,000 (reflecting the ineffective portion of the hedge).

   In a perfect fair value hedge, the net income effect would be zero. Here, 3,000 represents hedge ineffectiveness. Fair value hedges never defer amounts to OCI — both sides hit income immediately.