F5

Question 0

Identify and define two types of leases from the lessee’s perspective under IFRS and US GAAP.

Answer 0

Capital (GAAP) Finance (IFRS): Transfers substantially all of the benefits and risks inherent in ownership of property to the lessee. In substance, an installment purchase. The lessee accounts for the lease as an acquisition of an asset and a related liability. Operating (GAAP & IFRS) - All other leases are simple rental agreements in which the lessee debits rent expense and credits cash/rent payable.

Question 1

What is the difference between an ordinary annuity and an annuity due?

Answer 1

Timing of payment: Ordinary annuity - payments are at the end of each period. Annuity due - payments are at beginning of each period.

Question 2

Identify and define types of leases from the lessor’s perspective under IFRS and US GAAP

Answer 2

Capital (Finance) Leases: Sales-type: Gives rise to manufacturers or dealers profit or loss. Fair value differs from cost or carrying value. Direct financing: FV is the same as cost or carrying value at the beginning of lease term. IFRS does not use the terms sales type and direct financing. Operating: All other leases are simple rental agreements in which the lessor debits cash/rent recieveable and credits rental income.

Question 3

In an operating lease, give the treatment of a lease bonus, from both the lessors and lessees perspective.

Answer 3

Lessor: Lease bonus is deferred and amortized as income over the life of the lease.

Lessee: Lease bonus is capitalized and amortized as an expense over the life of the lease.

Question 4

Name the criteria for determining if a lease is a capital lease for the lessee under US GAAP. OWNS

Answer 4

Ownership transfers
Written bargain purchase optio
Ninety percent of FV asset (minimum lease payments)
(seventy-five) lease term exceeds/equals estimated useful life.

Question 5

Name the criteria for determining if a lease is a finance lease for the lessee and the lessor under IFRS

Answer 5

The lessee and lessor classify a lease as a finance lease if the lessor transfers substantially all of the risks and rewards of ownership to the lessee.

Question 6

How does the lessee record the capital lease?

Answer 6

At lower of FV Or present value of minimum lease payments using the lower of lessee’s incremental borrowing rate or the rate implicit in the lease agreement. Minimum lease payments include BPO, and guaranteed residual value. They do not include executory costs or an optional purchase. Under IFRS, initial direct costs are recognized as part of the finance lease asset.

Question 7

Name the criteria for determining if a lease is a capital lease for the lessor under US GAAP, LUC.

Answer 7

Lessee “owns” the leased property
Uncertainties do not exist regarding any non reimbursable costs to be incurred by the lessor.
Collectability of lease payments is reasonably predictable.

Question 8

What is the difference between sales-type and direct-financing leases (lessor finance leases)?

Answer 8

Sales type: Gives rise to manufacturers or dealers profit or loss. Fair Value differs from cost / carrying value.

Direct Financing - Fair Value is the same as cost or carrying value at the Begining of the lease term. I profit from my sales(-type) lease not from my (direct-)financing lease.

Question 9

What period of benefit does the lessee use to deperciate the leased asset under a capital lease?

Answer 9

The estimated economic life of the asset is used if the lessee takes ownership or there is a bargain purchase option. Otherwise, the lease term is used.

Question 10

Identify the three classifications used with respect to the seller-lessee’s rights retained in a sales leaseback under US GAAP

Answer 10

Substantially all rights retained - PV of rent payments is equal to or greater than 90% of the FV of property. Gain deferred & amoritzed. Rights retained are less than substantially all but greater than minor : PV of rent payments is less than 90% but greater than 10% of the FV of property. Gain deferred up to the PV of lease payments (operating lease or capitalized asset) Losses are recognized immediately.

Question 11

Outline the accounting by the seller-lessee in a sales-leaseback transaction under IFRS.

Answer 11

If sale-leaseback results in a finance lease, defer profit and amortize over the lease term. If sale-leaseback results in an operating lease, profit or loss is recognized based on the relationship between the leased assets carrying amount, fair value, and selling price.

Question 12

What are the lessee’s major footnote disclosures for capital leases under US GAAP?

Answer 12

1. Gross amount of assets capitalized by major property categories. 2. Future minimum lease payments in the aggregate and for each of the next five years. 3. Amounts of imputed interest to reduce net minimum lease payments to present value.

Question 13

When is a bond issued at a discount? A premium?

Answer 13

A bond is issued at a discount when the coupon/stated interest rate is less than the market/effective rate of interest. A bond is issued at a premium when the bond interest rate is greater than the market rate of interest.

Question 14

How is the bonds selling price computed?

Answer 14

The price is the sum of the present value of the future principal payment plus the present value of the periodic interest payments discounted using the market/effective rate on the date the bonds are issued.

Question 15

Name two methods of amortizing bond premium (discount).

Answer 15

Straight Line Method - Premium(Discount) / Number of periods outstanding
Interest(Effective rate) Method (GAAP/IFRS) - Premium(discount) amortized = CV x effective rate - (FV x stated rate) Interest expense = (Face value x stated rate) + Discount amortized - Premium amortized = CV x effective rate. The SL method is permitted under us gaap if not materially different from the effective interest method. It is prohibited under iFRS.

Question 16

What is the preferred method of accounting for bond issue costs under US GAAP / IFRS?

Answer 16

US GAAP - Capitalized as a deffered charge (asset) and amortized to expense over the period of bond is outstanding using the straight line method.

IFRS - Deducted from the carrying value of the liability and amortized using the effective interest method.

Question 17

How are convertible bonds accounted for when issued under IFRS and US GAAP?

Answer 17

US GAAP - Like nonconvertible bonds. No separate recognition of the conversion feature.

IFRS - Both a liability (bond at Fair value) and equity (difference between proceeds and fair value) recognized.

Question 18

Describe the two methods of accounting for the conversion of convertible bonds.

Answer 18

Book value method (GAAP) No Gain/Loss recorded.

Market Value Method (not GAAP) Gain/Loss is recognized for the difference between market value of stock and book value of bond.

Question 19

Define stock warrants.

Answer 19

Option contracts that are issued with, and are usually detachable from, bonds and notes. Gives the bondholder the right to buy stock at a fixed price within a specific time period.

Question 20

Describe the two methods of accounting for bonds with detachable stock purchase warrants.

Answer 20

Warrants only method - Warrants are valued at fair value in stockholders equity. Residual of bond proceeds is assigned to the bonds.

Market Value Method - Bond proceeds are allocated to the bonds and warrants according to their relative fair values.

Question 21

When is a liability considered extinguished?

Answer 21

If either one of the following conditions is met : if the debtor pays the creditor and is relieved of its obligations for the liability. If the debtor is legally released from being the primary obligor under the liability, either judicially or by the creditor.

Question 22

Define in-substance defeasance.

Answer 22

An arrangement in which a company places purchased securities into an irrevocakable trust and pledges them for the future principal and interest payments of its LT debt. The company remains the primary obligor; therefore, the liability is not considered extinguished.

Question 23

How is the gain or loss on early extinguishment of debt treated?

Answer 23

Ordinary GL on IS shown as separate line item. If material , in income from continuing ops, unless it meets the criteria of unusual in nature and infrequent in occurance in which case extraordinary item and reported net of taxes below income from continuing ops. The GL is the diff between net CV including unamortized bond issue costs asset and the reacquisition price of the debt.

Question 24

What are the major disclosures for long term debt?

Answer 24

Maturity dates, interest rates, call and conversion privileges, assets pledged as security, future sinking fund payments, maturities for each of the next five years.