F6 - Leases, Derivatives, Foreign Currency Accounting, and Income Taxes

Question 1

What is the meaning of OWNES?

Answer 1

If any of these applies, then it is a finance lease. If none of them apply, it is an operating lease.
O = Ownership: Assets are transferred at the end of the lease.
W = Written option: to purchase the asset.
N = Net PV: PV of min lease pmts = FV of asset (at least 90% of PV of lease).
E = Economic Life: Lease term is at least 75% of the usefull life of the asset.
S = Specialized asset: lessor can’t use it again.

Question 2

What are the basic bitches of leases for lessors?

Answer 2

a. Sales-type: At least one of OWNES is met.
b. Direct-Financing: None of OWNES is met, but has PC.
c. Operating: When its not sales-type or direct-financing.

Question 3

What is PC?

Answer 3

P = PV of lease pmts, guaranteed residual value is equal or substantially exceeds the asset FV. 
C = Collection of lease pmts is probable.

Question 4

What are the basic bitches of leases for lessees?

Answer 4

a. Finance: At lease one of OWNES is met.

b. Operating: None of OWNES is met, but has PC.

Question 5

What is a failed sale?

Answer 5

When I buy an asset, but then lease it back to the old owner. This is not a sale.

Question 6

How does the buyer record a failed sale?

Answer 6

Buyer records a Financing receivable.

Question 7

How does the seller record a failed sale?

Answer 7

Seller keeps recognizing the asset as if it didn’t sell (record depreciation expense and accum depreciation).

Question 8

What is the financing liability of a lessee on sale-leaseback that qualifies as a sale?

Answer 8

Sales Price - FV

Question 9

What is the lessee’s gain on disposal of asset on sale-leaseback that qualifies as a sale?

Answer 9

Sales Price - NBV

Question 10

What is the basic bitch of leases and cash flow statements?

Answer 10

Operating leases = all payments are cash flow from operations.
Finance leases = Principal pmt is cash flow from financing, and interest pmt is cash flow from operations. Variable pmts and ST lease pmts not included in the liability are cash flows from operations.

Question 11

How should a lessee amortize a finance lease?

Answer 11

OW - NES
OW = Useful life of asset.
NES = Shorter of useful life or lease term.

Question 12

What is the amortization table for leases?

Answer 12

BLILE!
Beg Lease || Lease Pmt || Interest Pmt || Lease Amtz End Lease
Just like bonds, but with leases!

Question 13

How do you amortize leasehold improvements?

Answer 13

Shorter of:
1. Useful life
OR
2. Remaining term of the lease.

Question 14

What is the formula for beg lease liability or ROU asset?

Answer 14

PV of annual payments
(+) PV of written option OR PV of Guaranteed residual
(=) Lease Liability

Question 15

How do you depreciate an asset on a finance lease that has a bargain purchase option (buy for cheap)?

Answer 15

The asset gets depreciated over the useful life and NOT over the lease term.

Question 16

What is another useful equation for leases?

Answer 16

PV = Annual Lease Pmts * PV Factor

You can find X, when question gives you crap you don’t know!

Question 17

What is another way to calculate interest expense on leases?

Answer 17

Interest Expense = Total annual payments - Total PV of Lease

Question 18

What is the gain on a sales-type lease?

Answer 18

PV of equipment - NBV

OR

Selling price - NBV

Question 19

What is the criteria that must be met for a derivative to be designated and qualify as a fair value hedge?

Answer 19

DESP….ERATE HOUSEWIVES!!!

1. D = Documentation for hedging relationship exists.
2. E = Expected to be highly effective in offsetting changes in FV and is assessed every 3 mos.
3. S = Specifically identified.
4. P = Presents exposure in FV that could affect income.

Question 20

How do you calculate the value or settlement of a derivative?

Answer 20

Notional amount * Underlying

These words are KEY!!!!!!!!

Question 21

What are the characteristics of a derivative?

Answer 21

1. Has 1+ underlyings and/or 1+ notional amts.
2. Does not require initial investment or a smaller investment than other similar contracts.
3. Can be net settled, outside of contract or barter.

Question 22

How are gains and lossses from FV hedges recognized?

Answer 22

As part of net income, in the current period.

Question 23

What changes (gains/losses) in FV are reported on OCI and what changes are reported as part of net income?

Answer 23

OCI = E in PUFIE: Effective cash flow from hedges.

Net income = Ineffective cash flow from hedges.

Question 24

What is a put option?

Answer 24

When holder has option to sell @ specified price @ specified time.
* Protects you from declining prices.

Question 25

What is a call option?

Answer 25

When holder has option to buy @ specified price @ specified time. * Protects you from climbing prices.

Question 26

What are the derivative risks?

Answer 26

Market risk = The market will betray you...There is always a winning party and a losing party. Credit risk = One party not doing their part of the deal.

Question 27

What is a perfect hedge?

Answer 27

No possibility of gain or loss.

Question 28

Where are changes in FV reported?

Answer 28

As part of net income: - No hedge designation. - FV hedge and FX FV hedge. - Ineffective portion of Cash Flow hedges. As part of OCI: - Effective portion of Cash Flow hedges, and FX CF hedges. - FX Net investment hedges.

Question 29

Where are changes in FV reported?

Answer 29

As part of net income: - No hedge designation (speculative). - FV hedge and FX FV hedge. - Ineffective portion of Cash Flow hedges. As part of OCI: - Effective portion of Cash Flow hedges, and FX CF hedges. - FX Net investment hedges.

Question 30

What is the difference between the remeasurement method and the translation method?

Answer 30

Remeasurement method = used when the FS are not in the sub's FC. Translation method = used when the FS are in the sub's FC.

Question 31

What is the exception on BS accounts under the remeasurement method?

Answer 31

Use historical rates on exceptions. All accounts on the BS are translated using the spot rate EXCEPT: 1. Sub with hyperinflation (Venezuela). 2. Foreign subs that do not maintain their accounts in a foreign FC.

Question 32

What gains (losses) on FX are reported as part net income?

Answer 32

Remeasuring the foreign sub FS from LC to FC are paret of net income.

Question 33

What gains (losses) on FX are reported on OCI?

Answer 33

Translation of FS.

Question 34

What items create a DTL?

Answer 34

``` Income I book first, and get taxed later! ICE 1. Installment sales. 2. POC. 3. Equity Method. Expenses that get taxed first, but I book later. DAP 1. Tax Depreciation. 2. Amortization of franchise. 3. PP Exp. ```

Question 35

What items create a DTA?

Answer 35

Income that get taxed first, but I book later. 3P 1. Unearned revenues (rent, interest, royalties). ``` Expenses I book first, and get taxed later! BES 1. Bad Debt (tax uses write off). 2. Est Liability/Warranty Exp. 3. Start up Exp. ```

Question 36

What are things to know about DTL?

Answer 36

Increase in PP expenses = Increase DTL Increase in AR = Increase DTL Increase in Payables = Increase DTL

Question 37

How do you calculate VA/VA Activities?

Answer 37

Beg DTA (-) VA Estimate (% of DTA that will not be realized) (+/-) DTA Activity (Plug) (=) End DTA

Question 38

What is income tax expense when I have VAs?

Answer 38

Income Tax Expense = Current Tax Exp + Def Tax Exp - VA Current Tax Expense = Taxable income * Tax Rate % Deferred Tax Expense = Temps * Tax Rate %

Question 39

What is income tax payable?

Answer 39

Income Tax Payable = Taxable Income * Tax Rate % | What I actually pay to the IRS!!!

Question 40

What is the basic bitch for DTA/DTLs?

Answer 40

ALL ARE NONCURRENT!!! Remember from work!

Question 41

What is the impact of net changes in DTA/DTLs on Deferred Tax Expense/Benefit?

Answer 41

Deferred Income Tax Exp (Benefit) = Sum of net changes in DTA/DTLs

Question 42

What amount is recognized as tax benefit if there is a tax position that has a possible outcome?

Answer 42

Must have >50% of probability of occurring. | If more than one amount with >50%, then choose highest number.

Question 43

What is income tax expense when I have NOLs?

Answer 43

Income Tax Expense = Current Tax Exp + Def Tax Exp Current Tax Expense = Taxable income * Tax Rate % Deferred Tax Expense = NOL * Tax Rate %

Question 44

What is a tax benefit for NOL purposes?

Answer 44

NOL utilized * Tax Rate%