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FAR > F6- Leases, Derivatives, Foreign Currency and Income Taxes > Flashcards

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

1
Q

Operating Leases: Rental Revenue

A

= (Total Revenue to be collected / Full Life of lease)

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2
Q

Operating Leases: Bonuses to obtain leases

A

Amortize over total life of lease (monthly)

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3
Q

Operating Leases: Leasehold Improvements

A

Amortize over the “lesser of”

  • Remaining Useful Life of Improvements
  • Remaining Lease
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4
Q

Operating Leases: Different payments at the beginning of each year

A

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)

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5
Q

Operating Leases: Security Deposits

A

Recorded as an asset until refunded at the end of the lease term.

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6
Q

Operating Leases: Free or reduced rent

A

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

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7
Q

Operating Leases: Lessee Recording of Rental Expense

A

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)

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8
Q

Operating Leases: Lessor Recording Revenue (giving incentives)

A

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.

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9
Q

Operating Leases: Remaining Lease Terms in excess of one year

A

The total minimum lease payments for the next 5 years should be disclosed in aggregate in the notes of the F/S

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10
Q

Capital Leases: PV and Interest Revenue

A

PV = Annual Payments x Annuity (Due) PV Factor

Interest Revenue = (Total Payments - PV of lease)

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11
Q

Capital Leases: Interest Revenue contd…

A

Lease Receivable (net of payments made during the year)

  • Discount%
  • o/s part of the year (5/12)

= Interest Revenue for the year

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12
Q

Capital Leases: Guaranteed Residual Value

A

Included in calculation of PV of minimum lease payments

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13
Q

Capital Leases: Amortization tables!!

A

Payment - Interest Payment = Reduction in Principal

  • New interest payment is based on new Principal amount
  • so on and so on
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14
Q

Capital Leases: Initial Payments and Interest

A

If a initial payment is made:

Subtract from total value before calculating interest revenue

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15
Q

Capital Leases: Recording Initial Liability

A

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

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16
Q

Capital Leases: Interest Rate to use

A

Lessor is used if “lower or implicit rate is unknown”

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17
Q

Capital Leases: If the lessee doesn’t take ownership/no bargain purchase option at the end of lease

A

Lessee should depreciate the lease over its total life (use PV of minimum lease payments as basis for depreciation)

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18
Q

Capital Leases on Lessee Books: OWNS

A

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

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19
Q

Capital Leases (IFRS):

A

Initial Direct Costs are added to total lease cost.

Depreciate lease over term life

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20
Q

Capital Leases: Depreciation/Title Transfer/Bargain Purchase Option

A

If title is transferred Lessee records depreciation.

Bargain Purchase option: depreciate over the useful life of the asset not term of lease

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21
Q

Capital Leases: Lessor Initial Recording of Financing Lease

A

Lessor Records: ((PV of min lease payments) + Residual Value)

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22
Q

Capital Leases: Current Liabilities

A

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

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23
Q

Capital Leases: Note

A

Always subtract Insurance and Taxes from lease amount before calculating anything

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24
Q

Capital Leases: Note

A

DON’T FORGET FIRST PAYMENT AT INCEPTION OF LEASE!!!!!!!!!

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25
Q

Capital Leases: Balance in Liability Account at YE (lease liability)

A

Difference Between:

Total Payment and Interest for the Year

= Amount applied to principal

subtract that from lease balance

= New carrying value (balance at YE)

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26
Q

Capital Leases: Initial Payment Made (Full Calc)

A

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 **)

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27
Q

Capital Leases: IFRS Finance Leases

A

+Direct Costs to Lease amount

then

Depreciated over the life of the lease

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28
Q

Capital Leases: Sales-type lease and COGS

A

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

29
Q

Sales/Leaseback: Capital

A

Any profit/loss on sale/leaseback shall be deferred and amortized in proportion to depreciation taken on the leased back asset.

30
Q

Sales/Leaseback: IFRS

A

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

31
Q

Sale/leaseback: US GAAP

A

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

32
Q

Derivatives: Forward Contracts (Speculation)

A

Gain/loss from Forward Contract entered into for speculation is calculated as:

=Forward Rate at date of transaction - Forward Rate at
B/S date

33
Q

Derivatives: Definition (per SFAS No.133)

A

Derivative:

  1. Must have more than one underlying (value)
  2. Does not require an initial investment
34
Q

Derivatives: Gain/Losses from Changes In FV

A

Should be recognized in period FV changed

35
Q

Qualified Derivatives can be used to hedge cash flow of what?

A

assets and forcasted transactions

36
Q

Cash flow hedges: Effective/Non-Effective Portion

A

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

37
Q

FV and Speculative Cash Flows Derivatives: Gains/Losses

A

Flow to the income statement

38
Q

Foreign Currency Exchange: Historical Exchange Rates

A

Historical exchange rates are used for items like:

Inventory carried on the B/S at cost

39
Q

Functional Currency for Foreign F/S:

A

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)

40
Q

Functional Currency = Local Currency (non-inflationary economy)

A

Current Rate is used to translate currencies

-I/S account used WA Exchange Rate for the year

41
Q

Conversion Adjustments: Translation Gains/losses vs Financial Statement Remeasurement

A

Translation gains/losses flow to OCI

Financial Statement Re-measurement flows to I/S

42
Q

Translating from Foreign Currency: APIC and C/S

A

Translated using Historical Exchange Rates

43
Q

IFRS Exchange Rates: Which rates to compare in a transaction for gain/loss at YE

A

Rate at delivery of goods vs Rate at YE = Gain/Loss

44
Q

Income Taxes: Permanent vs Temporary Differences

A

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”

45
Q

DTL: Computation

A

Net of:

Future taxable amounts (temporary differences) - DTL

and

Future deductible amounts (long-term loss accrual) -DTA

46
Q

Income Tax Liability: Note

A

Whenever income is reported in the financials before it is reported as taxable income you must:

Report a deferred tax liability

47
Q

Reversal of Current Temporary Differences will result in what?

A
  • Deferred tax deduction (deferred tax asset = future savings)
  • Deferred taxable amount (deferred tax liability = future tax payments)
48
Q

Tax Provision: Calculation

A

=Book income - (temporary/permanent differences)

then

  • Estimated tax payments made

= Current tax liability

49
Q

Book Basis vs Tax Basis: Assets

A

Book Basis > Tax Basis = Deferred Tax Liability

50
Q

DTA vs DTL for expenses:

A

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”

51
Q

Ending Balance in DTA:

A

Total Balance at YE

  • Allowance (amount not to be realized)

= Net Ending

  • Beg Balance

= Balance (reduces tax expense)

52
Q

Temporary Difference: Definition

A

When an asset/liability is recognized in GAAP income before or after it is entered into taxable income.

53
Q

Temporary Differences: DTL/DTA

A

Only temporary differences create DTL/DTA

54
Q

Operating Income: Income Taxes

A

Not shown “net of tax” on I/S (intra-period income tax allocation)

55
Q

DTL - DTA = Does what to tax expense?

A

Increases/Decreases Income Tax Expense

56
Q

Valuation Allowance: What do they affect?

A

Only affect DTA.

NOTE: Change in the opening balance because of a change in circumstances is shown in “income from operations”

57
Q

Interim Tax Expense: What rate to be used?

A

Use estimated “annual tax rate” to calculate quarter tax expense

58
Q

Interim Tax Expense: Calculation

A

(YTD Income * Annual Effective Tax Rate)

  • Income Tax Expense from Previous Quarter
59
Q

DTL Calculation:

A

=Future enacted tax rate * future taxable amounts (temporary differences)

60
Q

When calculating DTL/DTA: What tax rate do you use?

A

Rate used when the temporary difference will reverse.

61
Q

Temporary Difference for Year 1 (reversed in year 2): Calculated using what rate?

A

Enacted Tax for Year 1

62
Q

Losses carried forward that reduce tax payables should be recorded where (the benefit from the loss)?

A

Income from continuing operations.

63
Q

Net operating loss carry-forward and its effect on NI:

A

Net Operating losses can’t be recognized in year of loss.

The deferred asset should be reduced by a “valuation allowance”

64
Q

Depreciation or other temporary difference reversing evenly over the next XX years: Calculation

A

= (Total Temporary Difference / #of years) * Enacted Tax Rate for each year

65
Q

Tax Expense and NOLs

A

If total Income Tax Expense > NOL = Recognize the entire NOL that year (net of tax)

66
Q

Loss Carry Back vs Carry Forward

A

Carry Back = “Tax Fund Receivable”

Carry Forward = “DTA”

67
Q

Income Taxes: Equity Earnings Calculation

A

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

68
Q

Temporary vs Permanent Differences: NOTE

A

Must subtract permanent differences before temporary ones

FAR (10 decks)

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