F6 Flashcards
What rate is used to calculate the PV of the lease?
Implicit rate (when known)
How do you calculate the current portion of income tax expense?
Taxable income * Effective tax rate for the current year
How do you calculate the deferred tax liability?
Temporary differences * effective tax rate for Future years
How are Deferred Tax Assets and Deferred Tax Liabilities reported on the Balance sheet?
Net of tax
ALWAYS NONCURRENT (asset/liability)
What is a Deferred tax asset
Deferred Tax benefit –> (Financial expense now, Tax expense later)
In a lease, what useful life is used to depreciate a capitalized equipment?
Depreciated with normal depreciation life
In a lease, what useful life is used to depreciate a leasehold improvement?
Shorter of:
1. Remaining life of the lease
2. life of the improvements
What is the primary objective of accounting for income taxes?
To recognize the amount of deferred tax liabilities and deferred tax assets reported for future tax consequences
How are lease expenses allocated in an operating lease for lessee?
Lessee records lease expense on straight line basis (total pmts/total periods)
When translating foreign currency FS into reporting currency FS - what is items are not translated using the y/e exchange rate?
Common Stock and APIC - use the historical exchange rate
What are the 3 conditions for a sub entity to have the functional currency? (foreign currency = functional currency)
- They USE that currency
- Do their own banking
- not hyper inflationary`
IF ALL IS YES –> Translation
Where does the G/L from remeasurement go?
Income statement
Where does the G/L from Translation go to?
OCI
Where is the change in exchange rate G/L recorded?
In the IS
In remeasurement - what are the rates used in the B/S and I/S
BS: 1. If monetary (LT debt) = Year end rate 2. Non-monetary (inv, FA, CS) = historical (begininng)
I/S: If not B/S related (Sales)–> WA… if B/S related (depreciation, COGS) –> Historical cost
In translation - what are the rates for BS and IS?
B/S - Asset/Liab –> Y/E rate
CS –> Historical rate
IS –> Weighted Avg rate
What is the Criteria for a Lease?
Ownership transfer of the lease
Written purchase option for the lessee to purchase the lease at the end of the lease
the NPV of the FCF is 90% of the Fair Value
Lease is a substantial portion of the economic life of the asset (75% +)
Specialized asset
IF YES TO ANY –> Finance lease for lessee, Sales type lease to Lesor
IF NO TO ALL –Operating
When is there a direct financing lease for the lessor
Where the PV minimum lease pmts + residual value (guaranteed by third party, not lessee) >= 90%FV of the asset at lease inception
What are the 4 requirements for combination of contracts?
- 1+ contracts is a lease
- Contracts are for approx same time period
- same related party
- one contract affects consideration paid , contracts have same commcial objective
What are 3 things NOT included in Lease payments? (NGO)
Nonlease components
Guarantees of lessor debt by lesse
Other variable lease pmts
What rate is used for the discount rate?
Implicit rate if known (if not –> incremental borrowing rate)
What are the 2 criteria for sale-leaseback transaction sale?
Contract exists and Control has transferred to buyer
IF no transfer –> financing transaction
What are the two criteria to be a sale for lease back transaction?
Repurchase option
1. Options exercise price is same as underlying assets FV at time
2. Alt assets are sub equal to underlying asset a
If sale is met –> what is the FV of the asset?
- Determine which is more readily available
–> Asset Sale price and FV OR PV of Lease pmts and PV of mkt rentaal pmts
whichever one is –> use diff to ID diff in data
What is the difference b/n operating and finance entries for the payment annual pmts by lessee?
Operating:
DR: Lease expense
CR: Cash/ Lease Liab
DR: Lease liab
CR: Accum Amort - ROUA
Finance
DR: Interest exp
DR: Lease liab
CR: Cash/ Payable
DR: Amort exp
CR: Accum Amort - ROUA
What are the three qualifications of a derivative?
- financial instrument that has underlying and notional amt
- No initial investment (or smaller than rec)
- Settled in cash or delivery of asset
What is a main difference between future and forward contracts?
Future are public
Forward are private
What are the two risks with using derivatives?
Market risk (risk market goes the way they do not want
Credit risk (risk that loser will not perform)
what are the 3 types of hedges?
- FV hedge (hedge exposure of FV of A/L, G/L in IS)
- CF hedge (OCI) hedge risk of FCF
- Foreign currency hedge
If buyer purchases a call option when will they benefit
If seller is in a call option when will they benefit?
Benefit when the price goes up bc the mkt price will then be higher than what they will pay for
Seller benefits when prices go down –> purchaser wont exercise
When does the buyer and seller benefit from a put option
Buyer benefits when stock goes down (stock goes down –> can sell for a higher price)
Seller benefits when stock goes up (stock goes up –> they wont exercise the right)
What are the two criteria in determine whether or not lease components are separate?
When BOTH are met:
1. Rights are not highly inter related or inter dependent
2. rights benefit lessee on standalone basis or combined
What is the difference in allocating price of separate lease components vs combined? (i.e there is machine and maintenance)
Separate –> allocate consideration at standalone selling prices of lease and nonlease components (i.e Machine and maintenance would be separate)
Combined – allocated combined (machine and maintenance will be allocated together)
In a direct financing lease - what are the components of the lease receivable for a lessor involved in a direct- financing lease?
Minimum lease pmt PLUS any residual value
What is the concept that justifies determining periodic deferred tax expense?
Recognition of assets and liabilities
What is the initial entry for lessor in Operating lease (also sub entries
Initial:
DR: Lease receivable
CR: Unearned income
1st pmt rec:
DR: Cash
CR: Rental income
DR: Unearned income
CR: Lease Receivable
DR: depreciation expense (useful life)
CR: A/D
What is the underlying and notional amount in a derivative?
How do you calc the settlement amount
Underlying - $ of what could occur (ability to buy or sell at a certain price)
Notional - how many are we buying
Underlying * notional
Where is the impact of
Cash flow hedge
Fair value hedge
Foreign currency hedge of a net investment
CF –> OCI
FV –> I/S
FCHNI -> OCI
If first lease pmt is made at the beginning of the lease - what is the JE?
DR: Lease liab
CR: Cash (cash pmt amt)
**not interest
What is the result of income taxes if a deduction is disallowed in the CY?
Tax income will be higher –> deferred liability
In calc the initial value of a finance lease - how do you calc the PV of the lease with given the annual int pmt and written purchase price?
Annual Pmt * PVAD (or PVOA) = X
Written purchase option * PV of 1 = y
X+Y = PV of lease at inception
In a sales type lease - how is the profit to the lessor recorded at inception?
PV of Lease pmts
- Carrying cost of the equipment
For an operating lease - how would the lessee calc rent expenses?
Operating lease –> fixed rent expense –> therefore should charge rent of total rent expense over the total periods
If a deferred tax asset is more likely than not to be realized in the future –> what is the result and the corresponding JE
Write down the DTA asset
DR: Income tax expense
CR: DTA Valuation allowance account by the full amount
What is the impact of a permanent difference?
Will impact CY but no future impact (hence no Deferred tax on this)
I.e 750k income, 500k in muni bond int… Tax income = 250*current tax rate = Current year tax expense
How is the classification different for: Life insurance proceeds for corporate officer vs Life insurance where company is not the benficiary
- Life insurance paid/proceeds to company beneficiary = PERMANENT DIFFERENCE
- Life insurance paid/proceeds not to company beneficiary –> no difference
What is the difference between US bond income vs. City of MD bond income
City bond = municipal bond –> permanent difference
US bond is not
If there is no more taxable income in the future –> what is the impact on DTA and what is the JE?
Will need to increase the allowance to get rid of remaining DTA
DR: Income tax expense
CR: DTA Allowance
What is the difference in calculation of Current tax expense and deferred tax expense?
Current = TI * Current tax rate
Deferred = TEMPORARY DIFF * FUTURE TAX RATE
How would cash received in advance classified (DTA OR DTL)
Deferred tax Asset (tax income now –> financial income later)
What is the JE to record DTA and what is the impact on income tax expense?
DR: DTA
CR: Deferred Tax benefit (decrease expense)
Decrease Income tax expense
When is a valuation allowance recognized?
If it is more likely than not (likelihood of more than 50%) that part or all of the DTA will not be realized (contra asset)
How much net operating loss can be CFWD?
PY NOL can offset CY NI up to 80%
How is the income tax liability impacted by estimated tax payments?
Current tax liab = TI * tax rate LESS Estimated tax pmt
How is the TOTAL income tax for the year calculated
Current Tax liability (TI * Cy tax rate)
+ deferred tax Liability ( Temp DTL * Future tax rate)
- DTA (Temp DTA * Future tax rate)
If tax income is higher than FS income now –> what does this create?
Deferred tax asset (lower tax income in future)
What is the JE for Company A that sold equipment to company B for a Gain however is leasing back at an operating lease
Record Sale
DR: Cash (SP)
CR: Equipment (CV)
CR: Gain (SP-CV)
Record lease:
DR: ROUA for PV lease pmt
CR: Lease liab
What is disclosed in the FS for deferred taxes?
- Type and amount of temporary differences
- Nature and amount of each type of operating loss and tax credit carryforward
If title passes in a lease (hence finance lease) what is the useful life to be used in the lease?
the useful life of the asset (not the lease)
