978-1259722660 Chapter 12 Solution Manual Part 15

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International Case 12–4

Requirement 1

P. 140 of the 10K includes the following note:

“Interests in other companies

Interests in other companies are measured at fair value. Investments in equity

investments that do not have a quoted market price in an active market and whose

fair value cannot be reliably measured are recognized at cost. For investments

Thus, FCA carries some equity investments as available-for-sale investments.

Prior to ASU 2016-1, U.S. GAAP allowed classification of equity investments as

Research Case 12–5

Answers to the questions will, of course, vary because students will research

The responses should identify securities held that are classified as trading

securities, available-for-sale, or held-to-maturity. If the financial statements were

Although a company is not required to report individual amounts for the three

If securities available-for-sale are held, there may be accumulated unrealized

gains or losses reported in AOCI in the shareholders’ equity section of the balance

Unlike the treatment of securities available-for-sale, unrealized holding gains

The statement of cash flows will report acquisitions or disposals of available for

Real World Case 12–6

Requirement 1

Merck’s 2015 balance sheet lists $13,039 million of investments as

Requirement 2

Accounting for unrealized gains and losses (both temporary and OTT):

“Investments — Investments in marketable debt and equity securities

classified as available-for-sale are reported at fair value. Fair values of the

Company’s investments are determined using quoted market prices in active

markets for identical assets or liabilities or quoted prices for similar assets or

liabilities or other inputs that are observable or can be corroborated by

observable market data for substantially the full term of the assets or

liabilities. Changes in fair value that are considered temporary are reported

net of tax in Other Comprehensive Income (OCI). For declines in the fair

value of equity securities that are considered other-than-temporary,

impairment losses are charged to Other (income) expense, net. The Company

considers available evidence in evaluating potential impairments of its

investments, including the duration and extent to which fair value is less than

cost and, for equity securities, the Company’s ability and intent to hold the

investments. For debt securities, an other-than-temporary impairment has

occurred if the Company does not expect to recover the entire amortized cost

basis of the debt security. If the Company does not intend to sell the impaired

debt security, and it is not more likely than not it will be required to sell the

debt security before the recovery of its amortized cost basis, the amount of

the other-than-temporary impairment recognized in earnings, recorded in

Other (income) expense, net, is limited to the portion attributed to credit loss.

The remaining portion of the other-than-temporary impairment related to

other factors is recognized in OCI.”

Case 12–6 (concluded)

Accounting for realized gains and losses:

“Realized gains and losses for both debt and equity securities are

included in Other (income) expense, net.”

Requirement 3

Investments accounted for using the equity method are described in Note 8,

Requirement 4

Requirement 5

Operating activities section: Cash inflows from dividends are shown in

operations on the statement of cash flows, and equal $50 million for 2015.

Investing section: Cash outflows from acquiring investments or inflows

from selling them are reported as investing activities in the company’s

comparative statements of cash flows. Whether they are specifically

Real World Case 12–7

Requirement 1

Requirement 2

Trueblood Accounting Case 12–8

A solution and extensive discussion materials accompany each case in the

Deloitte & Touche Trueblood Case Study Series. These are available to instructors

at:

http://www2.deloitte.com/us/en/pages/about-deloitte/articles/trueblood-case-studie

s-deloitte-foundation.html.

Research Case 12–9

From “Recognition and Presentation of Other-Than-Temporary Impairments,”

FASB Staff Position (FSP) No. 115-2 and 124-2 (Norwalk, Conn.: FASB April 9,

2009), pp. 17–19,

1. Need to reduce net income for the full difference between amortized

cost and fair value for debt investments, rather than only for credit

losses, because that better suits the needs of investors: “Messrs.

Linsmeier and Siegel …believe that to the extent there is an

other-than-temporary impairment, it should be measured as the entire

difference between the fair value and the carrying value of the impaired item

with that change fully reflected in net income as an unrealized loss.

a. Messrs. Linsmeier and Siegel believe that investors generally have

opined that their preference is for the fair value of financial

instruments to be reflected in net income. … Messrs. Linsmeier and

b. Messrs. Linsmeier and Siegel also object to bifurcating (dividing) the

2. Likely that there will be fewer OTT impairments given the new

recognition criteria: “Second, Messrs. Linsmeier and Siegel object to the

change in the trigger for the nonrecognition of the full impairment loss in net

income. The previous GAAP requirements permitted nonrecognition of the

Case 12–9 (concluded)

3. Lack of convergence with the IASB: Finally, Messrs. Linsmeier and

Siegel believe that there potentially may be other standard-setting issues that

need to be addressed within the current other-than-temporary impairment

model. However, they would prefer to address those concerns in the joint

Note: This dissent offers interesting opportunities for classroom discussion. Points

that might come up include:

1. Political pressures on the FASB (banks were pushing hard for flexibility in

Target Case

Requirement 1

a. Per Note 1, the investments are classified as available-for-sale securities.

b. Per the balance sheet, the investments had a balance of $88 and $34 at

December 31, 2015 and 2014, respectively.

Short-term Investments

__________________________________________

($ in thousands)

Beg. Bal. 34

Purchases 267

Requirement 2

a. CVS’s income would increase by CVS’s percentage share of Heartland’s

income.

Air France-KLM Case

Requirement 1

a. Per note 24 (“Other financial assets”), the balance of investments accounted

for at FVPL is $877 (including “Cash secured” portion) as of December 31,

2015, equal to $406 current marketable securities, $60 non-current

c. Per note 36.4 (“Valuation methods for financial assets and liabilities at their

fair value”), $37 of the $877 balance is estimated using level 1 inputs, and

Requirement 2

a. Per note 24 (“Other financial assets”), the balance of investments accounted

for as available for sale is $432 as of December 31, 2015, including $29

c. Per note 36.4 (“Valuation methods for financial assets and liabilities at their

fair value”), $429 of the $432 is estimated using level 1 inputs, and the

Air France-KLM Case (concluded)

Requirement 3

a. Per note 4.3, “In accordance with IAS 28 “Investments in Associates and

Joint Ventures”, companies in which the Group has the ability to exercise

b. Per note 4.3, “In accordance with IFRS 11 “Join arrangements”, the Group

c. Per note 22 (“Equity affiliates”) and the balance sheet, the carrying value of

Per note 22 and the income statement, AF’s equity-method investments reduced its net income

from continuing operations by $30 during 2015