F5 Flashcards
Present Value Formula
PV = FV x PV Factor
How are bond issuance costs treated?
They are capitalized and must be proportionately removed for any amount of debt that is retired or extinguished early
How are bond issuance costs treated under IFRS?
*they decrease both cash and the carrying amount of the bond (through the discount or premium)
Shortcut to find payable or note amount when annuity is an annuity due
- minus one from n and use n-1 periods under the ordinary annuity rate
- add one to the PV factor of an ordinary annuity to compute the amount of the annuity due
Operating Lease: Lessee Rent Expense
*expensed over the lease term
Operating Lease: Lessee Bonus
*prepaid expense and amortized over the life of the lease
Operating Lease: Lessee Leasehold Improvements
*capitalize over the lesser of the useful life or lease life
Operating Lease: Rent Kicker
*period expense
Operating Lease: Lessee Refundable Security Deposit
*reported as an asset
Operating Lease: Lessor Rental Income
*over the life of the lease
Operating Lease: Lessor Fixed Asset
*keep asset on books and depreciates it normally
Operating Lease: Lessor Nonrefundable Security Deposit
*recorded as unearned revenue until it is deemed earned; doesn’t matter how many deposits are estimated to be kept; revenue from deposits cannot be estimated and recognized in this manner
Operating Lease: Lessor Lease Bonus
*recorded as unearned income and earned over the life of the lease on a straight-line basis
What expense should be included in calculating operating lessor income?
*depreciation expense
Lessee Capital Lease Criteria
O wnership transfers at the end of the lease
W ritten option for bargain purchase
N inety percent of the leased property FV s useful life
Lessor Capital Lease Criteria
L essee meets the capital lease criteria
U ncertainties do not exist as to unreimbursed expenses
C ollectibility is reasonably predictable
IFRS Finance Lease Criteria
O wnership W ritten bargain purchase E conomic life (major) S ubstantially all of the fair value F luctuation gains and losses accrue to lessee A bility to continue the lease C an be canceled by the lessee S pecialized nature of the assets involved in the lease
Sales Type vs Direct Financing Lease
Sales Type = record profit from sale and rental income
Direct Financing Lease = only record rental income
Executory Cost Treatment
- not included in the PV of the minimum payments
* period expense
Initial direct costs of the lease paid by lessee: treatment by IFRS
*capitalized to the asset which may cause it to carry at a higher value than the corresponding liability
Items included in determining minimum lease payments
- periodic payments
- GUARANTEED residual value
- bargain purchase option (payment amount)
Depreciation Period for Lessee Under Capital Lease
O & W = economic life of asset
N & S = life of the lease (ONLY)
Depreciation Period for Lessee under Capital Lease - IFRS
*shorter of lease or economic life of the asset
Special Disclosure Rule under GAAP for Leases
FIVE YEAR RULE: show a period of at least the next five payments whether it is a capital lease or an operating lease
Sales-Type Lease for Lessor
Gross Investment (lease receivable)
Lease Payment
+unguaranteed residual value
= gross investment
Net Investment
Gross Investment x PV
= net investment
Unearned Interest Revenue (contra-lease receivable)
Gross investment - net investment
= unearned interest revenue
COGS
COGS - PV of unguaranteed residual value (get it back)
= COGS
Sales Revenue Rule for Sales-Type Lease
Cost + Profit = Selling Price = FV = PV
PV = __________ in Sales-Type Lease
= Sales Revenue / Selling Price
Direct Financing Lease for Lessor
*same as Sales-Type except no revenue or COGS
Gross investment (lease receivable)
Lease Payments
+ Unguaranteed residual value
Net Investment
PV of Gross Investment
Unearned Interest Revenue
Gross investment - Net Investment
PV = ____________ in Direct Financing Lease
= Asset
Rule for PV of Direct Financing Lease
PV = Carrying amount of receivable = cost of the asset
Amount of Deferred Gain for Sale-Leasebacks
- Substantially All Rights Retained (PV >= 90% of FV of property) = DEFER ALL GAIN
- Middle (10% - 90%) = DEFER GAIN IN EXCESS OF PV
- Minor (< 10%) = RECOGNIZE ALL GAIN
*compare PV to FAIR VALUE (SALES PRICE) of property
When do you recognize losses on Sale-Leasebacks?
Immediately
Two Times Gain is Deferred for Sale-Leaseback under IFRS
- financing lease
* operating lease where sales price exceeds the fair value
Amortization of Deferred Gain for Sale Leaseback
DECREASES RENTAL EXPENSE
- Capital = proportion to the amortization of the leased asset
- Operating = proportion to the gross rental expense over the life of the lease
What if no PV information is provided for a Sale-Leaseback problem?
*probably means it is either all deferred or all recognized
Subleases and Lease Classification
Operating: also operating
Capital:
*O & W = capital
*N & S = operating
Term Bond vs Serial Bond
Term = set maturity date Serial = redeemed pro rata
What is an indenture?
A contract for a purchase of a bond
To PV Components of Bonds
- PV of lump sum (face)
2. PV of annuity (interest payments)
Two Things to Remember for Bonds
- divide interest rate by two
* double the period to allow for semiannual payments
How are bond issue costs amortized?
Straight-line over term of bonds
Is the straight-line method of discount/premium amortization allowed under IFRS?
No
How are bonds recorded by an investor?
*amortized cost; discount amortization for issuer will increase the asset for the holder
Bonds issued between interest dates
*amount of interest accrued decreases interest expense (or is a payable); customer pays that much more to have the bond now
Two items to accrue for at year-end for bonds
Interest Expense & Discount/Premium
What is a bond sinking fund?
*account used to accrue payments for bond redemption at maturity; also will include interest revenue on funds in the account
Bonds Outstanding Method for Amortization of Serial Bonds
- add up outstanding value at each payment date (similar to sum of the years digits)
- divide outstanding value by the summed value above and multiply it by the premium/discount
Convertible Bonds = Two Methods
- Book Value Method
2. Market Value Method (will be a gain/loss)
IFRS and Convertible Debt
*must show equity component based upon difference between FV and carrying value
Two Methods for Accounting for Detachable Warrants
- warrants only
2. market value method
Is it possible for bond extinguishment to be an extraordinary item?
Yes
