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How does a pension plan curtailment affect the projected benefit obligation (PBO) and the income statement?
A pension curtailment reduces the PBO when future benefit accruals are significantly reduced or eliminated. The curtailment gain or loss is recognized immediately in P&L, along with any unrecognized prior service cost related to the curtailed benefits.
When is revenue recognized under the completed contract method, and how does it compare to percentage of completion?
Under the completed contract method, all revenue and profit are deferred until the contract is substantially complete. This contrasts with percentage of completion which recognizes revenue proportionally. Total revenue and profit are identical over the contract life — only timing differs.
How does the percentage-of-completion method recognize revenue on long-term construction contracts?
The percentage-of-completion method recognizes revenue proportionally as work progresses on long-term contracts. The percentage complete is typically calculated as costs incurred to date divided by estimated total costs, and revenue for each period is the incremental amount.
How does the gross profit method estimate inventory, and when is it used in practice?
The gross profit method estimates ending inventory by subtracting estimated COGS (calculated from sales and historical gross profit margin) from goods available for sale. It is commonly used for insurance claims after inventory destruction and for interim estimates.
How does the retail inventory method work for estimating ending inventory?
The retail inventory method estimates ending inventory at cost by calculating a cost-to-retail ratio from goods available for sale data, then applying that ratio to ending inventory measured at retail selling prices. It is commonly used for interim reporting.
What are the key limitations of the Sharpe ratio as a performance measure?
The Sharpe ratio assumes normal returns, treats upside and downside volatility equally, is susceptible to manipulation through return smoothing or option selling, gives meaningless rankings when negative, and ignores benchmark-relative performance.
How do I construct a bull spread with call options, and when is it better than buying a naked call?
A bull call spread combines buying a lower-strike call and selling a higher-strike call on the same underlying. It reduces cost versus a naked call but caps the upside. Max gain equals the strike difference minus net premium, and max loss equals the net premium paid.
What does the swap spread tell us about the market, and why can it sometimes go negative?
The swap spread (swap rate minus Treasury yield) reflects banking sector credit risk, liquidity conditions, and supply/demand dynamics. Negative swap spreads occur when heavy Treasury supply or regulatory demand for swaps pushes Treasury yields above swap rates.
What is yield to worst, and why is it the most conservative yield measure for callable bonds?
Yield to worst is the minimum yield across all possible call dates and maturity, representing the most conservative return estimate for callable bonds. For premium bonds, YTW is typically the yield to the nearest call date.
How do clean surplus violations affect the residual income model, and how should I adjust?
Clean surplus violations occur when items bypass net income and go directly to Other Comprehensive Income, distorting the residual income model. Common violations include foreign currency translation adjustments, unrealized securities gains, and pension adjustments.
What is the real difference between GDRs and ADRs, and when would a company choose one over the other?
Both ADRs and GDRs are negotiable certificates representing shares in a foreign company, but they differ in where they trade, how they're regulated, and which investors they target. ADRs trade on US exchanges under SEC oversight, while GDRs typically list in London or Luxembourg with lighter regulation.
What is an onerous contract under IAS 37, and how is the provision calculated when a company is locked into a loss-making agreement?
An onerous contract under IAS 37 exists when the unavoidable costs of fulfilling a contract exceed the economic benefits expected. The unavoidable cost is the lower of the cost to fulfill or the penalty to exit. A provision for the net loss is recognized immediately when the contract becomes onerous.
When must a company recognize a provision under IAS 37, and how is the provision measured?
Under IAS 37, a provision is recognized when three criteria are all met: a present obligation exists from a past event, an outflow of economic benefits is probable (>50% under IFRS), and a reliable estimate can be made. A key GAAP vs. IFRS difference is the probability threshold — IFRS 'probable' means more likely than not (>50%), while US GAAP 'probable' implies a higher ~70-80% likelihood.
What are the key accounting differences between defined contribution and defined benefit pension plans?
Defined contribution plan accounting is simple: pension expense equals the employer contribution, and no pension asset or liability appears on the balance sheet. Defined benefit plans are far more complex, requiring actuarial estimation of future obligations, and the balance sheet shows the funded status (plan assets minus projected benefit obligation).
What happens to borrowing cost capitalization when construction of a qualifying asset is suspended for an extended period?
Under IAS 23, borrowing cost capitalization must be suspended during extended periods when active development of a qualifying asset is interrupted. However, capitalization continues if technical/administrative work is ongoing or if the delay is a normal seasonal interruption inherent to the construction process.
How are government grants accounted for under IAS 20, and what is the difference between the income approach and the capital approach?
IAS 20 allows two methods for government grants related to assets: the deferred income approach (recording the grant as a liability amortized over the asset's life) and the capital approach (netting the grant against the asset's cost). Both produce the same net income effect, but differ in balance sheet presentation.
How does the revaluation surplus for land and buildings work under IFRS, and what goes to OCI vs. profit or loss?
Under IAS 16's revaluation model, increases in fair value of land and buildings go to OCI as a revaluation surplus, unless they reverse a prior P&L impairment loss. Decreases are first charged against any existing revaluation surplus in OCI, with any excess recognized as a loss in profit or loss.
What are real options in capital budgeting, and how does project sequencing create value?
Real options capture the value of managerial flexibility to delay, expand, contract, or abandon projects. Project sequencing creates value by staging investments and creating options to continue or quit based on new information.
What are the mandatory composite construction rules under GIPS, and why do composites matter?
GIPS composites must include all actual, discretionary, fee-paying portfolios that follow a similar strategy. Firms cannot cherry-pick portfolios based on performance, must define composites before the reporting period, and must keep terminated portfolios in historical records.
How do futures margin accounts and daily settlement (mark-to-market) actually work?
Futures margin accounts work through daily mark-to-market settlement. When your account falls below the maintenance margin, you must deposit enough variation margin to restore the account to the initial margin level.
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