F5 Flashcards
Timing of Payments- Ordinary annuity-Payments are at end of each period. Annuity due- Payments are at beginning of each period.
Present Values and Annuities
Capital (U.S. GAAP) / Finance (IFRS)- Transfer 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 (IFRS AND U.S. GAAP)- All other leases are simple rental agreements in which the lessee debits rent expense and credits cash/rent payable.
Accounting for Leases
Capital (Finance) Leases- Sales-type: Gives rise to manufacturer’s or dealer’s profit or loss. Fair value differs from cost or carrying value. Direct-Financing: Fair value 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 receivable and credits rental income.
Accounting for Leases
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.
Accounting for Leases
To be classified as a capital lease under U.S. GAAP, the transaction must meet one or more of the following criteria: Ownership transferred, Written bargain purchase option, Ninety - Present value of minimum lease payments is equal to be greater than 90% of FMV of asset. Seventy-five-Lease term equals or exceeds 75% of estimated useful life. Last two items are qualifying criteria as long as asset is not in last 25% of original estimated life.
Accounting for Leases
The lessee and lessor classify a lease as a finance lease if the lessor transfers substantially all the risks and rewards of ownership to the lessee.
Accounting for Leases
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, if known by lessee. Note: Minimum lease payments include payments, bargain purchase option, 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.
Accounting for Leases
To be classified as a capital lease, the transactions must meet all 3 of the following criteria: 1. Lessee “owns” the leased property, 2. Uncertainties do not exist regarding any nonreimbursable costs to be incurred by the lessor, 3. Collectability of the lease payments is reasonably predictable.
Accounting for Leases
Sales-type Lease: Give rise to manufacturer’s or dealer’s profit or loss. Fair Value differs from cost or carrying value. Direct Financing Lease: Fair value is the same as cost or carrying value at the beginning of lease term. I profit from my sales (-type) leases, not from my (direct-) financing lease.
Accounting for Leases
Estimated economic life of asset if lessee takes ownership or there is a bargain purchase option. Otherwise, lease term.
Accounting for Leases
Substantially all rights retained: PV of rent payments to or greater than 90% of the fair value of the property. Gain deferred and amortized.; 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 fair value of the property, Gain recognized to extent gain exceeds present value of lease payments. ; Minor portion of rights retained: PV of rent payments is 10% or less of the fair value of the property, Entire gain recognized. In all cases, losses (NBV > FV) are recognized immediately.
Accounting for Leases
If sale-leaseback results in a finance lease, defer profit and amortize over the lease ter. If sale-leaseback results in an operating lease, profit or loss is recognized based on the relationship between the leased asset’s carrying amount, fair value, and selling price.
Accounting for Leases
- Gross amount of assets capitalized by major property categories. 2. Future minimum lease payments in the aggregate and for the next five years. 3. Amount of imputed interest to reduce net minimum lease payments to present value.
Accounting for Leases
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.
Long-Term Liabilities and Bonds Payable
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.
Long-Term Liabilities and Bonds Payable
Straight-Line Method: Premium (Discount) divided by number of periods outstanding; Interest (Effective Rate) Method (U.S. GAAP/IFRS): Premium (Discount) amortized = (Carrying value times Effective rate) minus (Face value times Stated rate); Interest Expense = (Face value times stated rate) plus Discount amortized minus Premium amortized = Carrying value times Effective rate. Note: The straight line method is permitted under U.S. GAAP if not materially different from the effective interest method. It is prohibited under IFRS.
Long-Term Liabilities and Bonds Payable
U.S. GAAP: Capitalized as a deferred charge (asset) and amortized to expense over the period the bond is outstanding using straight line method. IFRS: Deducted from the carrying amount of the liability and amortized using the effective interest method.
Long-Term Liabilities and Bonds Payable
U.S. 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.
Long-Term Liabilities and Bonds Payable
Book Value Method (GAAP): No gain/loss is recognized. Market Value Method (not GAAP); Gain/loss is recognized for the difference between market value of stock and book value of bond.
Long-Term Liabilities and Bonds Payable
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.
Long-Term Liabilities and Bonds Payable
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.
Long-Term Liabilities and Bonds Payable
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.
Long-Term Liabilities and Bonds Payable
An arrangement in which a company places purchased securities into an irrevocable trust and pledges them for the future principal and interest payments on its long-term debt. The company remains the primary obligor; therefore, the liability is not considered extinguished.
Long-Term Liabilities and Bonds Payable
Ordinary gain or loss on the income statement, shown as a separate line item, if material, in income from continuing operations, unless it meets the criteria of unusual in nature and infrequent in occurrences, in which case if it treated as an extraordinary item and reported net of taxes, below income from continuing operations. The gain or loss is the difference between carrying value (including unamortized bond issue costs asset (U.S. GAAP only) and premium or discount) and reacquisition price of the debt.
Long-Term Liabilities and Bonds Payable
