Investorsbuzz

Compensating balances

admin — Sun, 20 Feb 2011 20:19:18 +0000

Compensating balances refers to the balance that a borrower is required to maintain in an account in order to fulfill the requirements for the loan. Often more favourable interest rates for the borrower are associated with these kinds of loans.

Cash Equivalents

admin — Sun, 20 Feb 2011 20:04:49 +0000

According to ASC Topic 305, cash equivalents are short-term, highly liquid investments which are readily convertible into cash and have maturities of 3 months or less from the date of the entity has purchased them. Examples are interest bearing instruments like treasury bills, commercial paper, money-market funds, and short term municipal bonds. On the balance sheet they are usually included in the line item Cash and Cash Equivalents (CCE).

Software developed for sale or lease (SFAS 86)

admin — Mon, 17 Jan 2011 21:10:46 +0000

ASC Topic 985 (SFAS 86) outlines the standards to account for internally developed or purchased computer software, which are either leased, sold, or marketed as an individual product or as a part of a process.

In summary, internally incurred costs to develop the software should be expensed up to the point where technological feasibility is established. After that point, costs should be capitalized and reported at the lower of unamortized cost or net realizable value. When the software is available for general release to customers, capitalization should not occur anymore. Also, once it is available for general release to customers, the costs for packaging and reproduction of the software are included in the inventory costs. Maintenance costs and customer support costs are expensed in the period occurred.

Current Assets (Current Accounts)

admin — Fri, 14 Jan 2011 22:56:04 +0000

Usually cash and other liquid assets (e.g. accounts receivable, inventory, marketable securities) or resources which are realized within an operating cycle (generally 12 months).

Monopsony

admin — Sat, 25 Dec 2010 01:38:01 +0000

A situation where there is a single buyer facing many suppliers is called monopsony. It is similar to a monopoly, except that the company acts as a buyer instead of a seller. Since there is only a single buyer it dominates the industry and has market power and can dictate terms to its suppliers and influence prices.

Capitalization of Interest

admin — Sat, 06 Nov 2010 17:52:28 +0000

The capitalization of interest as part of the cost is required for certain assets under US GAAP (SFAS 34). Also the IASB was in the process of amending its IAS 23 on borrowing costs in an attempt to bring it closer to FASB’s 34 on interest costs. The major change proposed in IAS 23 was the elimination of the optional treatment of expensing borrowing costs for the construction, acquisition, or production of a qualifying assets. Nevertheless, even though both standards would require capitalization, differences in the application of the standards can arise.

Under SFAS 34 qualifying assets for interest capitalization include assets constructed for sale which are proudced as discrete projects and require an extended period of time to construct, such as a large machinery, buildings, or plants. So a building purchased would not qualify, but one constructed over a period of time would. Also, assets that are in use or ready for intended use or assets that are not being used in the company’s earnings activities and are not being handled with activities to get them ready for use (e.g. land that is not being developed) would not be qualifying assets.

Another example would be if land is being developed for sale as lots, the interest would be capitalized and would become part of the developed land’s acquisition cost. However, the interest consts incurred in purchasing land which is held for speculation is not capitalized, as the land is already ready for its intended use when bought.

The amount of interest to be capitalized is the amount which could have been avoided if the activity had not been undertaken. Summarized in a formula, the avoidable amount would have been:

avg accumulated expenditures during construction x interest rate x construction period

Amortization

admin — Sat, 16 Oct 2010 21:34:09 +0000

Amortization, also called depreciation, is a matter of cost allocation. The cost of property, plant, and equipment, and natural resources, the assets costs is charged to amortization expense (or depletion expense in case of natural resources) over its estimated life, as opposed to amortizing based on their decline in fair values.

After determining what the useful life of an asset is and the amount of the assets cost to be amortized (depends on assets acquirsition cost and residual value), one has to determine the method and pattern of allocating the cost to the accounting periods. The different amortization methods include:

1. Straight-line method

2. Activity methods (units of use or production)

3. Increasing charge methods

4. Decreasing charge (or accelerated) methods:

a) declining-balance

b) sum-of -the years’ digits

5. Special depreciation methods:

a) Hybrid or combination methods

b) Group and composite methods

The method to be chosen should be based on the pattern that best matches the the expense to the benefits received by the entity from the assets.

Criteria for Treatment as a Sale

admin — Sun, 27 Jun 2010 19:31:27 +0000

Before the Accounting Standards Board published additional clarifying rules, it was not untypical for companies to account for transactions as sales, despite continuing interests in and control over the transferred assets (i.e. receivables or financial assets in security lending/repo transactions). In essence those transactions would rather have to be treated as secured borrowings as opposed to sales, and therefore be reported on balance sheet as opposed to off balance sheet.

Under Fas 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, a sale occurs if the following three conditions are met:

Legal isolation of transferred assets. The transferred assets should be beyond the reach of the tranferor and its creditors, even in the case of bankruptcy or receivership.
Right to sell or repledge. The transferee (party receiving the assets) has the right to sell or repledge the assets or beneficial interest (debt or equity claim to the cash flows). There should be no conditions that limit the ability to take advantage of this right or give more than a trivial benefit to the transferor.
Effective control. The transferor does not maintain effective control over the transferred assets through a repurchase agreement or redeem them before their maturity or through an ability to unilaterally cause the holder to return specific assets.

Cost Recovery Method

admin — Mon, 23 Nov 2009 16:50:02 +0000

In the cost recovery method provid is not recognized until the sum of the cash receipts exceed the costs of the asset sold. If for example a company sells a specific assets costing USD 40 000 for the price of USD 60 000 in year one, but the cash receipt is only USD 30 000 in the current year, the revenue will not be recognized until the next year, to the extent that in year two the sales exceed USD 10 000 (cost of 40 000 – cash collected 30 000) . The cost recovery method is used when the collection is so uncertain that even the installment method is not allowed.

Instalment Sales Method

admin — Mon, 23 Nov 2009 13:10:49 +0000

With the instalment sales method revenue is recognized at the point where cash is collected as opposed to when the sale occurs. That way gross profit is deferred and recognized proportionately to the collection of receivables. This method of accounting can only be used in cases where “the collection of the sale price is not reasonably assured” (APB 10).