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Chapter 14: 3IFRS (page 718)

Describe the two criteria for determining the valuation of financial assets.

Short Answer

Expert verified

Managing and cash flow are two criteria for the valuation of financial assets.

Step by step solution

01

Definition of financial asset

A financial asset is a liquid asset that gets value when transferred from one party to another party.

02

Two criteria for determining the valuation of the asset

  1. When the company’s business model is for managing the financial asset.
  2. When cash flow is the characteristic of a financial asset.

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Most popular questions from this chapter

How should discounts on bonds payable be reported on the financial statements? Premium on bonds payable?

Question: Wie Company has been operating for just 2 years, producing specialty golf equipment for women golfers. To date, the company has been able to finance its successful operations with investments from its principal owner, Michelle Wie, and cash flows from operations. However, current expansion plans will require some borrowing to expand the company’s production line

As part of the expansion plan, Wie will acquire some used equipment by signing a zero-interest-bearing note. The note has a maturity value of $50,000 and matures in 5 years. A reliable fair value measure for the equipment is not available, given the age and specialty nature of the equipment. As a result, Wie’s accounting staff is unable to determine an established exchange price for recording the equipment (nor the interest rate to be used to record interest expense on the long-term note). They have asked you to conduct some accounting research on this topic.

Instructions

If your school has a subscription to the FASB Codification, go to http://aaahq.org/ascLogin.cfm to log in and prepare responses to the following. Provide Codification references for your responses.

  1. Identify the authoritative literature that provides guidance on the zero-interest-bearing note. Use some of the examples to explain how the standard applies in this setting.
  2. How is present value determined when an established exchange price is not determinable and a note has no ready market? What is the resulting interest rate often called?
  3. Where should a discount or premium appear in the financial statements?

Differentiate between a fixed-rate mortgage and a variable-rate mortgage.

Question: How are gains and losses from extinguishment of a debt classified in the income statement? What disclosures are required of such transactions?

What is the fair value option? Briefly describe the controversy of applying the fair value option to financial liabilities.
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