Receivables with recourse (SPE)

Quick question regarding receivables with recourse. Correcting for this we should increase Accounts Receivable but shouldn’t we also deduct cash? Or isn’t that the case for an unconsolidated SPE? Relates to Question 13-18 on Exam 3AM Schweser. I messed it all up. Partly because of this. :frowning:

increase receivables and increase liabilities by the same amount to make BS balance leave cash as it is

guilleku1 Wrote: ------------------------------------------------------- > increase receivables and increase liabilities by > the same amount to make BS balance > > leave cash as it is very tempting to adjust the cash …thanks!

Thanks, honestly thought we had to increase cash. At least now when it comes up in an exam I don’t go 2/6 for the vignette. :slight_smile: I really thought I had read somewhere cash had to be increased. Let’s make sure I forget that and do it the right way!

you are adjusting your liabilities upward for the possibility of having to pay cash in the future if some of the receivables come back to you…

That seems to make sense Guilleku1… Thanks! One additional question from the same exam (question 55). Why is Goodwill accounted for under the equity method? Somehow I was under the impression (probably made that up myself, I tend to do that) that goodwill was only acknowledged under consolidation.

Goodwill is accounted when you pay more for your fair share of assets. Let’s say you buy a 50% share of a firm worth 1,000. You pay 1,200 for that 50% share, which is a 200 premium.

you are right…you would not recognize goodwill with equity method…it’s simply a one-line consolidation method…just show the fair value of your investment I think the vignette is not properly worded… the answer is based on proportionate consolidation method.

So, bpdulog you are saying you have to account for Goodwill under the equity method en guilleku1 you say you shouldn’t? Now I am confused. One more thing: Why care about the depreciation of written up assets under the Equity method? That was in the same vignette (also got that wrong of course!). They calculated the new carrying value and included depreciation of PP&E (which for fair value had to be written up 20m).

The depreciation affects the net income of the acquired company…the higher the depreciation in the acquired company the lower the net income…and that net income is what you recognize under the equity method…

Lurky Wrote: ------------------------------------------------------- > So, bpdulog you are saying you have to account for > Goodwill under the equity method en guilleku1 you > say you shouldn’t? Now I am confused. > > One more thing: Why care about the depreciation of > written up assets under the Equity method? That > was in the same vignette (also got that wrong of > course!). They calculated the new carrying value > and included depreciation of PP&E (which for fair > value had to be written up 20m). That is what I read from my John Harris notes. To be totally correct, the excess is allocated to the target’s identifiable assets and liabilities based on fair value. The rest goes to goodwill.

guilleku1 Wrote: ------------------------------------------------------- > you are right…you would not recognize goodwill > with equity method…it’s simply a one-line > consolidation method…just show the fair value of > your investment > > I think the vignette is not properly worded… the > answer is based on proportionate consolidation > method. However, you have to acknowledge that the equity investment line item may include a portion of value for goodwill which would need to be tested for impairments.

All investments that have a fair value lower than their carrying value on the balance sheet would be written down. So you test the entire investment for impairment (is the value on my balance sheet what it should be?) under the equity method you record only 1 line for your investment (and yes, you usually pay more for your investment over book value) so you could argue that part of that payment is goodwill but recorded as part of the investment in the balance sheet… you would split that goodwill in the case of consolidation…

Damn. Just hoping they won’t throw one of these things in Saturday. If it’s basic I’ll be fine. if they do this I’ll hunt them down since I have a sincere dislike for FSA.