F6- Leases, Derivatives, Foreign Currency and Income Taxes Flashcards
Operating Leases: Rental Revenue
= (Total Revenue to be collected / Full Life of lease)
Operating Leases: Bonuses to obtain leases
Amortize over total life of lease (monthly)
Operating Leases: Leasehold Improvements
Amortize over the “lesser of”
- Remaining Useful Life of Improvements
- Remaining Lease
Operating Leases: Different payments at the beginning of each year
Take Average of the payment
-Amortize over the year
-JE: Beg of Year = dr Prepaid Rent
cr Cash
-JE: Throughout year (AJE) = dr Rent Expense
cr Prepaid Rent
-JE: End of Year (AJE) = dr Rent Expense
cr Rent Payable - (liability at
the beg of the next year)
Operating Leases: Security Deposits
Recorded as an asset until refunded at the end of the lease term.
Operating Leases: Free or reduced rent
Lessee take total rent expense to be paid and divides it evenly over the entire lease period
Example:
Payments for 5 year lease are paid in 56 months (60 months for 5 year lease)
First 4 months are “rent free”
-so you take the total rent to be paid (payment per month * 56 months) / 60 months = New payment per month
Operating Leases: Lessee Recording of Rental Expense
Lessee records an operating lease as rental expense on a straight line basis, even if payments are made on another basis (no interest is involved)
Operating Leases: Lessor Recording Revenue (giving incentives)
If first 6 months are given free = Rental Income for the year is half.
Thus:
5 year lease with first 6 month free:
Yr1: rental payment/2 = Income
Yr2-5: normal rental payment
-Add all payments together and divide by 5 to get
actual payment per year.
Operating Leases: Remaining Lease Terms in excess of one year
The total minimum lease payments for the next 5 years should be disclosed in aggregate in the notes of the F/S
Capital Leases: PV and Interest Revenue
PV = Annual Payments x Annuity (Due) PV Factor
Interest Revenue = (Total Payments - PV of lease)
Capital Leases: Interest Revenue contd…
Lease Receivable (net of payments made during the year)
- Discount%
- o/s part of the year (5/12)
= Interest Revenue for the year
Capital Leases: Guaranteed Residual Value
Included in calculation of PV of minimum lease payments
Capital Leases: Amortization tables!!
Payment - Interest Payment = Reduction in Principal
- New interest payment is based on new Principal amount
- so on and so on
Capital Leases: Initial Payments and Interest
If a initial payment is made:
Subtract from total value before calculating interest revenue
Capital Leases: Recording Initial Liability
Lessee records lease at “lesser of”:
PV of Minimum Lease Payments (PV of annuity (due)
or
FV of asset acquired
Bargain Purchase option is also capitalized at its PV (PV of $1) as a part of the initial liability
Capital Leases: Interest Rate to use
Lessor is used if “lower or implicit rate is unknown”
Capital Leases: If the lessee doesn’t take ownership/no bargain purchase option at the end of lease
Lessee should depreciate the lease over its total life (use PV of minimum lease payments as basis for depreciation)
Capital Leases on Lessee Books: OWNS
Lease only needs to meet one!!!
Ownership: transfers at end of lease
Written: bargain purchase
Ninety % (90): PV of minimum lease payment is >=90% of FV of leased property
Seventy-Five % (75): Lease term is 75% of assets economic life
Capital Leases (IFRS):
Initial Direct Costs are added to total lease cost.
Depreciate lease over term life
Capital Leases: Depreciation/Title Transfer/Bargain Purchase Option
If title is transferred Lessee records depreciation.
Bargain Purchase option: depreciate over the useful life of the asset not term of lease
Capital Leases: Lessor Initial Recording of Financing Lease
Lessor Records: ((PV of min lease payments) + Residual Value)
Capital Leases: Current Liabilities
Payment - Interest (calculated on most recent carrying value) = Current liability at the end of the year
Example: Payments on 12/31 but payment was made on 12/30 at start of lease
(Total Lease - first payment) = New Carrying Value
- (Next Payment - interest (from new carrying value))
=Current Liability (payment applied to principal)
=remainder is long-term liability
Capital Leases: Note
Always subtract Insurance and Taxes from lease amount before calculating anything
Capital Leases: Note
DON’T FORGET FIRST PAYMENT AT INCEPTION OF LEASE!!!!!!!!!
Capital Leases: Balance in Liability Account at YE (lease liability)
Difference Between:
Total Payment and Interest for the Year
= Amount applied to principal
subtract that from lease balance
= New carrying value (balance at YE)
Capital Leases: Initial Payment Made (Full Calc)
PV of entire lease
-Initial Payment
=Liability Under Capital Lease**
*Interest Rate
=Interest for the year
-Normal Lease Payment
=Net payment applied to principal ( - from **)
Capital Leases: IFRS Finance Leases
+Direct Costs to Lease amount
then
Depreciated over the life of the lease
Capital Leases: Sales-type lease and COGS
COGS = Historical Cost of Asset - PV of Non-guaranteed residual value discounted over life of lease.
So COGS by definition is less than the historical cost of the asset
Sales/Leaseback: Capital
Any profit/loss on sale/leaseback shall be deferred and amortized in proportion to depreciation taken on the leased back asset.
Sales/Leaseback: IFRS
Capital/Finance = Substantially all risk and reward is transferred to lessee.
-PV of lease payments is “substantially all of
the FV of the asset and the lease term is the life of
the asset
Any profit/gain is deferred and amortized over the life of the lease
Twist:
IF the lease is “operating” but the FV is greater than the sale price, defer and amortize a gain
Sale/leaseback: US GAAP
If PV of lease payments is <10% of FV of asset or term of leas is <10% of asset useful life recognize any profit/loss immediately (none is deferred)
If FV is less than BV at time of sale/leaseback transaction, recognize a loss immediately.
Gain would be deferred if lessee-seller remains in control of asset for the rest of the useful life of the asset
Derivatives: Forward Contracts (Speculation)
Gain/loss from Forward Contract entered into for speculation is calculated as:
=Forward Rate at date of transaction - Forward Rate at
B/S date
Derivatives: Definition (per SFAS No.133)
Derivative:
- Must have more than one underlying (value)
- Does not require an initial investment
Derivatives: Gain/Losses from Changes In FV
Should be recognized in period FV changed
Qualified Derivatives can be used to hedge cash flow of what?
assets and forcasted transactions
Cash flow hedges: Effective/Non-Effective Portion
Gains/Losses on Effective portion = OCI
-must be reclassified and recognized in income
during the period in which the hedged items affect
income
Gains/Losses on Non-Effective portion = Current Income
FV and Speculative Cash Flows Derivatives: Gains/Losses
Flow to the income statement
Foreign Currency Exchange: Historical Exchange Rates
Historical exchange rates are used for items like:
Inventory carried on the B/S at cost
Functional Currency for Foreign F/S:
If a subsidiary’s functional currency isn’t their local currency then:
The F/S have to be “re-measured” into its functional currency. (gain/loss flows to income - part of continuing operations)
Functional Currency = Local Currency (non-inflationary economy)
Current Rate is used to translate currencies
-I/S account used WA Exchange Rate for the year
Conversion Adjustments: Translation Gains/losses vs Financial Statement Remeasurement
Translation gains/losses flow to OCI
Financial Statement Re-measurement flows to I/S
Translating from Foreign Currency: APIC and C/S
Translated using Historical Exchange Rates
IFRS Exchange Rates: Which rates to compare in a transaction for gain/loss at YE
Rate at delivery of goods vs Rate at YE = Gain/Loss
Income Taxes: Permanent vs Temporary Differences
Book Income minus:
Permanent include:
-Tax Exempt Municipal Bonds
-Insurance proceeds from death of officer
-Penalties paid for legal obligations
+Insurance Premiums paid for officers
=Income Before Taxes and Temporary Differences
Temporary include:
-Excess Tax Depreciation
+Rent received
=Taxable Income
When subtracting these differences, subtract total amount not “net of tax”
DTL: Computation
Net of:
Future taxable amounts (temporary differences) - DTL
and
Future deductible amounts (long-term loss accrual) -DTA
Income Tax Liability: Note
Whenever income is reported in the financials before it is reported as taxable income you must:
Report a deferred tax liability
Reversal of Current Temporary Differences will result in what?
- Deferred tax deduction (deferred tax asset = future savings)
- Deferred taxable amount (deferred tax liability = future tax payments)
Tax Provision: Calculation
=Book income - (temporary/permanent differences)
then
- Estimated tax payments made
= Current tax liability
Book Basis vs Tax Basis: Assets
Book Basis > Tax Basis = Deferred Tax Liability
DTA vs DTL for expenses:
Tax Record of expense > Book Expense = DTL
-Future Tax Liability
Tax Record of expense < Book Expense = DTA
-Future Tax Deduction
NOTE: Use “future enacted tax rate”
Ending Balance in DTA:
Total Balance at YE
- Allowance (amount not to be realized)
= Net Ending
- Beg Balance
= Balance (reduces tax expense)
Temporary Difference: Definition
When an asset/liability is recognized in GAAP income before or after it is entered into taxable income.
Temporary Differences: DTL/DTA
Only temporary differences create DTL/DTA
Operating Income: Income Taxes
Not shown “net of tax” on I/S (intra-period income tax allocation)
DTL - DTA = Does what to tax expense?
Increases/Decreases Income Tax Expense
Valuation Allowance: What do they affect?
Only affect DTA.
NOTE: Change in the opening balance because of a change in circumstances is shown in “income from operations”
Interim Tax Expense: What rate to be used?
Use estimated “annual tax rate” to calculate quarter tax expense
Interim Tax Expense: Calculation
(YTD Income * Annual Effective Tax Rate)
- Income Tax Expense from Previous Quarter
DTL Calculation:
=Future enacted tax rate * future taxable amounts (temporary differences)
When calculating DTL/DTA: What tax rate do you use?
Rate used when the temporary difference will reverse.
Temporary Difference for Year 1 (reversed in year 2): Calculated using what rate?
Enacted Tax for Year 1
Losses carried forward that reduce tax payables should be recorded where (the benefit from the loss)?
Income from continuing operations.
Net operating loss carry-forward and its effect on NI:
Net Operating losses can’t be recognized in year of loss.
The deferred asset should be reduced by a “valuation allowance”
Depreciation or other temporary difference reversing evenly over the next XX years: Calculation
= (Total Temporary Difference / #of years) * Enacted Tax Rate for each year
Tax Expense and NOLs
If total Income Tax Expense > NOL = Recognize the entire NOL that year (net of tax)
Loss Carry Back vs Carry Forward
Carry Back = “Tax Fund Receivable”
Carry Forward = “DTA”
Income Taxes: Equity Earnings Calculation
Book:
Equity in Earnings
-Dividends Received Deduction (% of earnings deducted)
=Book Total
Tax:
0 in Equity Earnings
- Dividends Received from Investee
- Dividends Received Deduction (% of dividends received from investee (same used for book))
=Tax Total
= (Book Total - Tax Total) = Temporary Difference (*Tax Rate) - taxable in the future
Temporary vs Permanent Differences: NOTE
Must subtract permanent differences before temporary ones
