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Study Session 5: Financial Reporting and Analysis: Intercorporate Investments, Post-Employment and Share Based Compensation, and Multinational Operations

Basel III Tier 1 and Tier 2 Capital

On Tier 1 and Tier 2 capital, would these be equity and liability accounts for a bank?

For example, Tier 2 capital (sub instruments with original maturity >5 years) would be sub debt issued by the bank, and therefore is a liability on the bank’s balance sheet and a source of cash; it would not be sub debt assets that were purchased by the bank.

My intuition is that you can’t use assets to fund RWA - it would have to be from the other side of the balance sheet. Am I thinking about this correctly?

doubt in fra question

can someone explain the adjustments needed for retained earning and current assets when the effect of acquiring a company is removed? 

Adding back receivables from SPE

In one of the mocks, Company A sold and securitized finance receivables in a SPE. The question asked what would be the effect of adding back the receivables on its leverage ratios. The answers shows that assets and liabilities increased by the same amount of the receivables…why would this be the case? Shouldn’t receivables only increase assets, and not liabilities? 


The Statement:if one entity absorbs the majority of the variable interest entity residual income and another entity absorbs the majority of the VIE’s losses, then the entity that is absorbing the residual income needs to consolidate the VIE

Correct answer:the statement is incorrect as it should be the entity that is absorbing the majority of the VIE’s losses that needs to consolidate the VIE.

Why?isn’t SPE regarded as VIE and must consolidated when

1. Equity less than 10%

2. Shareholder don’t have decision making

3. Shareholder don’t absorbs losses

Confused about past service costs and actuarial gains/losses

I’m confused as to which factors exactly affect those two. It seems like it’s unclear in Schweser. For example, life expectancy, salary increase assumptions, years of service, and so on. I’m confused as to which of these types of factors would go under past service costs vs. actuarial gains/losses.


Any idea on how the Equity portion of the SPE is accounted for? In the curriculum Blue Box example (last example of the Intercorporate reading), they have shown that AR comes back, when we consolidate. But Equity? That is not considered while consolidating. Why?


In GAAP Reclassification, when we re-classify from HFT to AFS, why unrealized Gains/ Losses go to Income Statement and not to OCI?