F6 - Lease, Derivatives, Foreign Currency And Income Tax

Question 1

What is a Derivatives?

Answer 1

A Derivatives is a security has a price depending on the underlying assets.
Derivatives it’s self is a contract between two or more parties.

It’s Value is determined by the fluctuations of the underlying assets.

Question 2

What is the underlying?

Answer 2

The price or rate that could occur.

Question 3

What is the notional amount?

Answer 3

Notional amount Is how many

Question 4

What is the settlement amount?

Answer 4

It is the Notional amount multiplied by underlying amount.

Question 5

What are the Risks in inherent in an interest rate swap agreement?

Answer 5

= Risks of exchange a lower interest rate to a high intest rate.

= Risk of non-performance by counter part of the agreement.

Question 6

How do you categories a lease as an FINANCE LEASE for Lessee and Lessor?

Answer 6

Finance Lease for Lessor - OWNES
= Ownership - transfer of asset at the end
= Written option - option to purchase “reasonably” certain to exercise
= Net present value - any guarantee residual value N - 90%
= Economic life - 75% or more
= Specialized

Finance Lease for Lossor
If lesse meet any of OWNES than Lessor will categorized finance lease as a Sales- type lease

Question 7

How do you categories a lease as an OPERATING LEASE for Lessee and Lessor?

Answer 7

Operating Lease for Lessor if none of criteria of OWNES are met for Lessor is an operating lease or if the lease is a short term (less than 12 months)

Finance or Operating lease for Lessor -

1- if PC (both) is met is clasified as DIRECT FINANCE LEASE.
2. If one or none of PC isn’t met is classified as an OPERATING LEASE.

Present value - of lease paymet to not included residual value, third party guarantee or exceed the underlying assets FV

Collection- of lease payment and any amount to satisfy residual value guarantee is probable.

Question 8

Sale-Leaseback sale criteria MET

Step are

Answer 8

Step 1 - Determine which of the two sets of info. below are more readly determinable.
Set 1 Asset sale price and FV
Set 2 PV of lease payments and PV of market rental payments

Step 2 - of the one that more determinable, identify any differences between the two data points.

Question 9

Rules and rates on foreign curreny remeasurement and translation

Answer 9

Remeasurement
BS
Monterey = year end rate
Non Monterey = historical rate
Common stock = historical rate

IS
= Weighted average
If related to BS = historical rate

Translation
BS
All Assets and Liabilities = year end rate
Common stock = historical rate

IS
= Weighted average

Question 10

What does it mean the option type of

• Call
• Put

Answer 10

= Call option give the right to purchase at a fix rate.

= Put option give the right to sale at a fix rate.

Question 11

Deferred tax Liabilities DTL

Deferred tax Assets DTA

Answer 11

DTL = future tax accounting income > future financial accounting income = PAY TAX LATER

DTA = future tax accounting income < future financial accounting income = PAY TAX NOW

Question 12

What are the 3 characteristics of a Derivative?

Answer 12

1 Has one or more underlying or one or more notional amount or payment provisions

2 No initial investment required or a smaller required payment vs a similar contract

3 required terms or permit are net settlement or can be net settled outside the contract or deliver the asset

Question 13

DTA and DTL
Depreciacion

1 If taxes are higher in taxes than books it’s?

2 If taxes are lower in taxes than books it’s?

Answer 13

1 DTL

2 DTA

Question 14

Tax Rate. - Temporary Diff. - FS
× tax rate. × (enacted) tax rate
=

Answer 14

= current Liability + DTL or - DTA = tax expenses

Question 15

How to calculate Unearned interest revenue from a sale-type lease?

Answer 15

PV @ inception or selling price - initial payment

= balance first year * interest

= interes revenue / months if you need to adjust period of the year.

example =6/12 = .50

Question 16

What is the amortized life that is used in OWNES?

Answer 16

Useful life is used in:
O = Ownership
W = Written option

The shorter between lease term or useful life is used in:
N = Net present value
E = Economic life
S = Specialized asset

Question 17

The functional currency of a company may be:

Answer 17

1. A foreign entity local currency, which typically the one Co. Keep the books.
2. The currency in which the FS will be presented, which is the currency of the parent Co.
3. Foreign curreny other than the one in which foreign Co. Maintains it books.
   RULE: the function currency of a Co. Generally depends on the environment in which the Co. Generates and expenses cash.

Question 18

A sale-leaseback will be considered a failed sale?

Answer 18

If the underlying lease in the sale-leaseback is finance lease, it is considered equivalent to a repurchase and will therefore be considered a failed sale.