Debt vs Equity
True or False: Debt Instruments have payments that depend on company performance.
False: Debt instruments have fixed dividends and interest, and the accumulation of unpaid amounts.
What is the definition of an asset?
A present right of an entity to an economic benefit
True or false: A liability must be recorded at amortized cost
False; A liability can be measured at amortized cost or fair value
Give an example of a possible contingency that would be recognized on the financial statements under US GAAP
A loss from a pending lawsuit with 80% probability
True or False: Debt Securities have no preemptive right
True
What is the definition of a liability?
A present obligation of an entity to transfer an economic benefit
If a liability is recorded at fair value, where are the changes in fair value recorded?
Other Comprehensive Income
True or False: Under US GAAP contingent liabilities should not be recognized but should instead be disclosed in the notes, if the possibility of an outflow of economic benefits is remote.
False; Remote possibility is not usually recognized or disclosed
True or false: ASU 2020-06 changed the accounting for convertible securities by eliminating the requirement to record the conversion feature separately.
True
What is the definition of equity?
The residual interest in the assets of an entity that remains after deducting its liabilities. In a business enterprise, the equity is ownership.
Give one argument for recording a liability at fair value and one argument for recording a liability at amortized cost.
For Fair value: Relevant; Timely; improves comparability, transparency
For Amortized value: reflects true obligation; reduces volatility; cost efficient
What are the requirements under US GAAP and IFRS for a contingent liability to be recognized?
There must be a present obligation; probable outflow of resources; a reliable estimate can be made