For *CMA Part 1 - Section A - Topic: Investments [ASC 320, 321, 323]* - This is a 100% tested topic. Here are FINAL revision points as per CURRENT US GAAP for CMA Exam:
*PART 1: DEBT vs EQUITY - CMA's Biggest Trap*
*CMA Exam follows NEW US GAAP:*
- *For DEBT Securities:* 3 Categories -> Trading, Available-for-Sale [AFS], Held-to-Maturity [HTM]
- *For EQUITY Securities:* Concept of Trading / AFS is *GONE*. All equity investments with readily determinable fair value are measured at *Fair Value through Net Income [FV-NI]*.
> *If Question says "Equity - AFS" - Answer as per new GAAP: It goes to Net Income, not OCI.*
*PART 2: DEBT INVESTMENTS [ASC 320] - 3 Categories*
*1. TRADING Debt Securities*
- Purpose: Bought to sell in short term.
- Valuation: *Fair Value* on Balance Sheet.
- Unrealized Gain/Loss: *Goes to Income Statement [Net Income]*.
- Interest: Interest Revenue + Amortization of Premium/Discount using Effective Interest Method.
*2. AVAILABLE-FOR-SALE [AFS] - Debt Only*
- Purpose: Neither Trading nor HTM.
- Valuation: *Fair Value* on Balance Sheet.
- Unrealized Gain/Loss: *Goes to Other Comprehensive Income [OCI]*, accumulated in *AOCI* in Equity. *NOT in Net Income.*
- When sold: Reclassify from AOCI to Net Income as Realized Gain/Loss.
*3. HELD-TO-MATURITY [HTM] - Debt Only*
- Purpose: Has Positive Intent AND Ability to hold till maturity. Only for Debt.
- Valuation: *Amortized Cost*, NOT Fair Value. So NO unrealized gain/loss in statements.
- Amortization: Must use Effective Interest Method.
- Fair Value is disclosed in Footnotes only.
*CMA TRAP:* If company sells HTM security before maturity [tainting rule], entire HTM portfolio must be reclassified to AFS.
*PART 3: EQUITY INVESTMENTS [ASC 321]*
*Case A: <20% - No Significant Influence*
- If Fair Value Readily Determinable: *Fair Value through Net Income [FV-NI]*
- Unrealized Gain/Loss -> *Income Statement*.
- Dividend -> Dividend Income in Net Income.
- If Fair Value NOT Determinable - Measurement Alternative:
- At Cost - Impairment + Observable Price Changes.
*Case B: 20% to 50% - Significant Influence = EQUITY METHOD [ASC 323] - Highly Tested*
This is *Investment in Associates*.
- *At Acquisition:* Record at Cost.
- *During Year - 3 Entries you MUST know:*
1. *Share of Income:* `Dr. Investment in Associate / Cr. Equity Income` [Investee Net Income x %]
2. *Dividends Received:* `Dr. Cash / Cr. Investment in Associate` [NOT Dividend Income - it reduces investment]
3. *Amortization of Excess FV:* `Dr. Equity Income / Cr. Investment` - If FV of investee assets > Book Value at acquisition, amortize it.
- *Unrealized Inter-company Profit:* Eliminate proportionately, same as consolidation.
- If Investee reports Loss, reduce Investment. If Investment becomes zero, stop equity method, unless you have guaranteed obligations.
*Case C: >50% = Consolidation - ASC 810*
*PART 4: IMPAIRMENT & RECLASSIFICATION - CMA LOVES THIS*
*1. Debt - AFS Impairment:*
- If Credit Loss -> Allowance for Credit Loss in Net Income, remaining in OCI.
- HTM - Allowance for Expected Credit Loss under CECL model.
*2. Equity Method Impairment:*
- Other-than-temporary decline -> `Dr. Loss / Cr. Investment` - Cannot be reversed.
*3. Transfer Between Categories:*
- Transfer at Fair Value on transfer date.
- HTM to AFS: Unrealized Gain/Loss goes to OCI.
- AFS to HTM: Unrealized Gain/Loss in AOCI amortized over remaining life.
*FINAL EXAM TABLE - Memorize This*
Category Balance Sheet Unrealized G/L Dividend/Interest
**Debt - Trading** Fair Value **Net Income** Income Statement
**Debt - AFS** Fair Value **OCI [AOCI]** Income Statement
**Debt - HTM** **Amortized Cost** No G/L Income Statement
**Equity <20%** Fair Value **Net Income** Dividend Income
**Equity 20-50% [Equity Method]** **Cost + Share of Income - Dividends** No Unrealized - Equity Income instead Reduces Investment
*Golden Rule for CMA MCQ:*
> *Where does Unrealized go?*
> Debt Trading = Net Income
> Debt AFS = OCI
> Debt HTM = Nowhere
> Equity <20% = Net Income
> Equity 20-50% = No Unrealized, use Equity Income
For *CMA Part 1 - Section A: External Financial Reporting - Topic: Consolidation [ASC 810 & 805]* — this is a high-weightage, high-trick area. Here are the final revision points you MUST remember:
*1. CONSOLIDATION RULE - When to Consolidate?*
- Consolidate when Parent has *>50% voting control* OR control over VIE.
- From date of acquisition till date control is lost. Pre-acquisition income of Sub is *NEVER* included.
- Use *Single Line Consolidation* method - 100% of Sub's Assets/Liabilities added.
*2. INVESTMENT IN SUBSIDIARY - Acquisition Method*
- Record at *FAIR VALUE of Consideration Paid*, not Book Value.
- Subsidiary's identifiable assets & liabilities are recorded at *Fair Value on Acquisition Date*.
- Difference between FV and Book Value is called *Excess* - must be allocated and amortized.
> *Goodwill Formula [CMA MUST MEMORIZE]:*
> *Goodwill = (FV of Consideration + FV of NCI + FV of Previously Held Equity) - FV of Identifiable Net Assets*
*3. GOODWILL - Most Tested Concept*
- *Goodwill is NOT Amortized under US GAAP.* It is Indefinite Life Intangible.
- CMA follows *Full Goodwill Method*. Goodwill includes both Parent and NCI portion because NCI is measured at Fair Value.
- Goodwill appears only in Consolidated Balance Sheet, never in Parent's standalone books.
*4. IMPAIRMENT OF GOODWILL [ASC 350] - Current One-Step Model*
- Tested at least *annually at Reporting Unit level*.
- *Step:* Compare *Fair Value of Reporting Unit vs Carrying Amount of Reporting Unit*.
- If FV < Carrying Amount -> *Impairment Loss = Carrying Amount - Fair Value*, capped to Goodwill balance.
- Loss goes to Consolidated Income Statement.
- *Impairment can NEVER be reversed* - Major exam trap.
- For Private Company option to amortize over 10 years - *IGNORE for CMA Exam*.
*5. ELIMINATION OF INTER-COMPANY TRANSACTIONS - 100% Elimination*
This is where IMA gives 15/20 scale MCQs:
*a) Investment vs Equity Elimination:* Eliminate Parent's Investment A/c with Sub's Equity at acquisition date.
*b) Inter-company Sales:*
`Dr. Sales / Cr. COGS` with full inter-company sale value.
*c) Unrealized Profit in Ending Inventory - SUPER IMPORTANT:*
If goods still unsold at year-end, eliminate profit included in inventory.
`Dr. COGS / Cr. Inventory` [If current year sale]
`Dr. Retained Earnings / Cr. Inventory` [If prior year sale]
- *Upstream Sale [Sub -> Parent]:* Unrealized profit elimination *affects NCI*. Reduce NCI's income.
- *Downstream Sale [Parent -> Sub]:* Unrealized profit elimination *does NOT affect NCI*.
*d) Other Eliminations:* Inter-company Loans, Interest, Dividends, Management Fees, Bonds - 100% Eliminate.
*6. NON-CONTROLLING INTEREST [NCI] - Not Minority Interest*
- *Do not use word Minority Interest in exam.* Use *Non-Controlling Interest*.
- *Balance Sheet:* Presented separately *within Consolidated Equity*, not as liability.
- *Income Statement:*
Consolidated Net Income
(-) Income attributable to NCI
= Income attributable to Controlling Interest
- *NCI Calculation at Year-End:*
NCI at Acquisition FV
- NCI % of Post-Acquisition Net Income of Sub
- NCI % of Dividends paid by Sub
- NCI % of Amortization of FV Excess
- NCI % of Upstream Unrealized Profit
*7. TWO ADJUSTMENTS THAT REDUCE CONSOLIDATED NET INCOME*
Always remember to deduct these from combined income:
1. *Amortization of Excess Fair Value:* (FV of Asset - Book Value) / Remaining Life
2. *Unrealized Inter-company Profit*
> *Final Formula for Exam:*
> *Consolidated Net Income = Parent's Net Income + Sub's Post-Acquisition Income - Amortization of FV Excess - Unrealized Profit + Realized Profit of prior year.*
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