F6 Flashcards
What are the two options that a lessee has for accounting for a contract that has lease and nonlease components
1: lease components are treated as seperate units from nonlease components
2: lease component may be combined with a related nonlease component within the same contract and be treated as a single unit
What type of lease clasifications are applicable to lessees
lessees will treat the lease as either an operating or finance lease
What type of lease clasifications are applicable to lessors
Lessors will treat a lease as either operating, sales-type, or direct financing lease.
What is the criteria for determining whether a lease is Finance Lease for the Lessee and a sales-type lease for the lessor
if one of the following is met: OWNES
Ownership transfer at end of lease term
Written option to purchase the option
Net present value of all lease ayments is equal to or substancially exceeds assets FV (90%)
Economic life remaining on asset is made up by a major part of the lease term (75%)
Specialized asset which indicates it will not have an alternate use after the lease ends
What happens if none of OWNES is met? how would the lessee classify it
It’s an operating lease
What happens if none of OWNES is met? Before claling it an operating lease the LESSOR would have to do this other test…
if none of OWNES is met, We go to the PC rule.
Where both the Present value of the sum of payments and guaranteed residual payments is = to or exceeds the assets Fair Value AND the Colleciton of lease payments is probable…THEN it’s considered a Direct Financing Lease
BUT IF only one/none of those is prevalant then its an operating lease
What is the date when the lease begins
the commencement date
What components will be included and excluded from lease payments
REPORT N GO
Lessee lease payments include: REPORT Required contractual fixed payment Exercise option Purchase price at end of lease Only indexed or rate variable payments Residual guarantees likely to be owned Termination penalites
Lessee lease may or may not include (at lessee option): N
Nonlease components
Lessee lease payments specifically exclude: GO
Guarantess of lessor debt by lessee
Other variable lease payments
What rate is used to calculate the present value of minimum lease payments
the implicit rate
If the implicit rate is not known for calculating present value of payments, what rate will the lessee use in that case?
incremental borrowing rate
Can you list a couple initial Direct Costs that are included or excluded in the valuation of a Right-Of-Use Asset
Any direct costs that are incurred as a result of the execution of the lease is INCLUDED
Any direct costs incurred prior to signing the lease are EXCLUDED
Go ahead and list the initial and subsequent journal entries recorded by the LESSEE when the lease qualifies as an operating lease
Initial:
DR: ROU Asset
CR: Lease Liability
Subsequent:
DR: Lease Expense
CR: Cash/Lease Liability
DR: Lease Liability
CR: Accumulated Amortization - ROU asset
Go ahead and list the initial and subsequent journal entries recorded by the LESSEE when the lease qualifies as an Finance lease
Initial:
DR: ROU Asset
CR: Lease Liability
Subsequent:
DR: Interest Expense
DR: Lease Liability
CR: Cash/Lease Payable
DR: Amortization Expense
CR: Accumulated Amortization - ROU asset
How can a lessee handle accounting for leases on the BS
They can choose note to recognize ROU assets or lease liabilities for leases with terms under 12 months,
Can you identify a few ways in which the sales-type leases are different from direct finance leases
in a sales-type lease, the lessee gains control of the asset and the lessor will remove the asset from its books and recognize a profit or loss.
Whereas, in a direct finance lease, the lessee does not gain control of the asset. The lessor will remove it from the books but will instead recognize a net investment in the lease
Go ahead and list the initial and subsequent journal entries recorded by the LESSOR when the lease qualifies as an OPERATING lease
DR: Cash
CR: Rental Income
DR: Depreciation Expense
CR: Acc. Depr.
Over what period is the lessee depreciating the leased asset under a FINANCE Lease
The assets useful life (O or W): if ownership transfers to lessee, or lessee is reasonably certain to exercise an option to purchase
The shorter of lease term or asset useful life (N,E,S): if any other criteria are met
How do you report gains or losses on hedge trading securities
they are reported in earnings
How would you define a derivative instrument
One which derives its value from another. And has the following three criteria: at least one Underlying and/or notional amount. requires no initial investment, and terms require or permit a settlement
What the heck is a underlying and notional amount as they relate to derivative instruments
Underlying: is a specified price or rate
Notional amount: specified unit of measure
What are the four most common types of derivatives
Options
futures
forwards
swaps
How do you handle a change in fair value for a fair values hedge
the change is included in current earnings
How do you handle a change in fair value for a cash flows hedge
Effective portion-included in OCI until you realize the hedged item,
Ineffective portion is included in current earnings
How do you handle a change in fair value for a net investment hedge
included in OCI as a translation adjustment
What is an entity’s functional currency under GAAP
this is the currency of the primary economic environment in which the entity operates. All of the following must be met: foreign operations are contained and integrated within the country, day-to-day operations dont rely on parent’s currency, local economy is not overly inflationary
When is the translation method used
its used to restate the FS denominated in the functional currency to the reporting currency
When is the remeasurement method used
its uses when ‘dysfunctional’ currency is used by the sub.
Can you identify the exchange rate to be used when remeasuring different components of the balance sheet and income statement? For the following:
BS: Monetary and Nonmonetary
IS: Balance Sheet Related and Non-Balance Sheet Related
BS: Monetary : Current Exchange Rate
NonMonetary: Historical rate
IS: Balance sheet related- historical rate
Non-BS related: weighted Average
Can you identify the exchange rate to be used when translating different components of the BS and IS?
Assets and Liabilities: Current Exchange Rate
Common Stock and APIC: Historical rate
Revenue and expenses: Weighted Average exchange rate
What financial statement includes remeasurement gains and losses?
income statement
What financial statement includes translation adjustments?
OCI, they are treated as unrealized gains and losses
Can you state two types of foreign currency transactions
operating transactions (importing exporting lending etc..)
Forward exchange contracts which are agreements to exchange two different currencies at a specific future date and specific rate
What financial statement includes foreign currency transaction gains or losses?
included in NI for a period
For operating transactions in a foreign currency, can you detail the process of the 3 JE’s
Record the original transaction at exchange or spot rate on the date of transaction
At the BS date, compute the G/L on the transaction by recalculating using the exchange or spot rate
On payment date compute the G/L on the transaction by using the exchange rate on payment date
Define a permanent difference
transactions that affect either taxable income or financial income, BUT NOT BOTH. and only in the period they occur, they do not affect future financial or taxable income
Example would be a muni bond bc GAAP recognizes it, but not recognized for tax purposes.
OR another could be the DRD bc its recognized for tax purposes but it is not GAAP
Give 5 examples of permanent differences.
Premiums and/or proceeds on key-officer life insurance when entity is owner and beneficiary
Tax-exempt interest on municipal bonds
nondeductible portion of meals and entertainment
fines/expenses for breaking the law
Dividend Received Deduction
Define a temporary difference
differences between taxable income and financial income that result in taxable or deductible amounts in future years and require the recognition of deferred tax assets/liabilities
Give 5 examples of temporary differences.
Deprecation (Financial vs. MACRS)
Gross profit on long term construction (% complete vs. completed contract)
Estimated Warranty Costs
Gross profit on installment sale (accrual vs. Cash)
BDE using the allowance method vs. actual BDE
Can you define a deferred tax liability
It is an anticipated future tax liability which comes from a situation where future taxable amount will be GREATER than future financial amount due to TEMPORARY Differences
How do you measure a deferred tax liability
apply the applicable ENACTED tax rate and provisions of enacted tax rate to the temporary differences in the periods in which they are expected to reverse.
Can you define a deferred tax asset
future taxable amount will be LESS than future financial amount due to TEMPORARY Differences
How do you measure a DTA, and how is it measured
recognized for all deductible temporary differences, operating losses, and tax credit carry forwards by applying the applicable ENACTED tax rate and provisions of enacted tax rate to the temporary differences in the periods in which they are expected to reverse.
Unlike a DTL, when recording a DTA, what can it give rise to
having to record a valuation allowance to reduce the asset to its NRV, only if it is more likely then not (>50%) that its full value will not be recognized
Where do DTA’s and DTL’s show up on the BS?
as non-current!!!
How do use use OWNES PC to determine if the Lessor has an operating or direct financing lease
its a direct financing lease if non of OWNES is met, but BOTH P and C are met
Its an operating lease if none of the OWNES criteria are met, but ONE or NO P or C criteria are met
What would be the JE for the inception of a sales type lease for the lessor
DR: Lease Receivable
CR: Fixed Asset
CR: Gain (or debit loss)
What would be the JE for the inception of a Direct Financing Lease for the lessor
DR: Lease Receivable
DR: Residual Asset (PV at implicit rate)
CR: Fixed Asset
What do you do if you want to find the total value of an asset and there is a residual value estimated
you multiply the residual value by the PV of $1 and add it to the PV of the asset
For a finance lease, over what time do you amortize the leased property
the properties economic life
When thinking about how much the Payment amount, interest and amortization amount is for a lease..what equation can you use to find the carrying amount of the ROUA at a point in time
You have the total lease liability (carrying value of ROUA)
do the Payment (lease expense) - Interest (implicit rate x lease liability) = Amortization
The amortization is how much the ROUA is decreased
So the lessee of a finance lease is recording depreciation, when would they depreciate over the lease term instead of the useful life?
if they had no intent to buy it or take ownership at the end of the lease.
So you would use the PV of lease payments / lease term
In terms of the statement of cash flows, what are the Variable lease payments not included in the lease liability considered to be?
a cash outflow
What do you do if you want to find the total value of an asset and there is a residual value estimated
you multiply the residual value by the PV of $1 and add it to the PV of the asset
When would you not use the implied rate?
if the rate is specified in the lease and known by all
Where are the effective portion of CASH FLOW hedges reported, what about the ineffective prtion
effective portion goes to OCI, ineffective goes to current earnings
its the E of pufier
What makes a currency ‘Dysfunctional’ meaning we need to do remeasurement
if the sub is highly integrated, and/or they operate in a highly inflationary environment
What are the 3 steps for the Translation method when functional currency is used? this is in terms of what FS is done first
1: Income Statement: at weighted average
2: Balance Sheet: at year-end rate, stock and APIC historical, rollforward RE
3: Equity: plug AOCI
Gains and losses to OCI (F in PUFER)
What are the 3 steps for the remeasurement method when dysfunctional currency is used? this is in terms of what FS is done first
1: Balance Sheet: monetary at year-end rate, non-monetary at historical stock and APIC historical, rollforward RE
2: Income Statement: at weighted average
3: Equity: Gain/loss so that net income is at amount for RE plug
Gains and losses to NI
How do you find the current liability as it relates to taxes
Tax return amount x current tax rate
How do you find the deferred asset as it relates to taxes
Temporary difference(s) x Future (enacted) tax rate
What is the total tax expense equation
Current Liability - Deferred Asset
When talking about permanent differences, do we focus on the current year or future years?
the CURRENT year only, there is NEVER anything deferred
What do temporary differences cause?
Deferred taxes (DTA’s and DTL’s)
What has to be greater than what to give rise to a DTL
Future Tax Accounting Income GREATER THAN Future Financial Accounting Income
What has to be greater than what to give rise to a DTA
Future Tax Accounting Income is LESS THAN Future Financial Accounting Income
What account do you use if it is more likely than not (>50%) that part of or all of the DTA will not be realized? is this method allowed under IFRS
The Valuation Allowance Account is used (contra account)
NOT ALLOWED UNDER IFRS
What is the initial entry for a deferred tax asset
DR: DTA
DR: ITE-Current
CR: Income tax Payable
CR: Income tax benefit-deferred
What is the initial entry for a deferred tax Liability
DR: ITE-Current
DR: ITE-Deferred
CR: Income Taxes Currently Payable
CR: DTL
If the book basis is larger than the tax basis, resulting from depreciation methods, do you recognize a DTA or a DTL
A DTL
What is the easy equation to find the income tax expense-current portion
Taxable income x Tax rate
what tax rate is used for temporary differences? What about if it has future impacts
the ENACTED RATE ONLY, use the enacted rate of relative future years
The DRD is a permanent difference, what were the deductions for if you owned less than 20%, between 20-80% and over 80%?
50% exclusion if <20%
65% exclusion if 20%-80%
100% exclusiion if >80%
All DTA’s or DTL’s are classified as either Current or NonCurrent, which one?
NONCURRENT
You are given the Q1 income, and a bunch of different tax rates…which one would you always use
at the end of Q1, use the anticipated enacted tax rate to be applicable at the end of year 1…so you are using the same anticipated rate all year ya know
Why isnt there an interest entry for an operating lease for the lessee?
The interest is lumped into the lease expense
So when making an amortization table think from left to right it goes how?
Lease Liability, Total Lease Expense, Interest Expense, Amortization Expense and Carrying Amount of Asset.
So we know how the amortization table is set up, but for an operating lease for the lessee what is constant and for a finacing lease for the lessee what is constant
For operating lease, the lease expense is constant
For financing lease, the amortization expense is constant
Does the LESSOR book interest at all?
NO REMEMBER IT IS LUMPED INTO LEASE EXPENSE FOR THE LESSEE SO WHY WOULD THEY RECOGNIZE IT
