FAR 5

Question 1

1- What is the difference between an ordinary annuity and an annuity due?

Answer 1

Timing of Payments.

• Ordinary annuity-Payments are at end of each period.
• Annuity due-Payments are at beginning of each period.

Question 2

2-

Answer 2

2

Question 3

3- Identify and define types of leases form the lessor’s perspective under IFRS and U.S. GAAP.

Answer 3

CAPITAL (finance) Leases:
-Sales-type: Gives rise to manufacturer’s or dealer’s profit or loss. Fair Value differs form cost or carrying value.
-Direct-financing:Fair Value is the same as cost or carrying value at the beginning of lease term.
(IFRS does not use the terms “sales type” and “direct Financing”)
OPERATING: all other leases are simple rental agreements in which the lessor debits cash/rent receiver and credits rental income.

Question 4

4- In an operating lease, give the treatment of a lease bonus, from both the lessor’s and lessee’s perspective.

Answer 4

• Lessor: lease bonus is deferred and amortized as income over the life of the lease.
• Lessee: lease bonus is capitalized and amortized as an expense over the life of the lease.

Question 5

5- Name the criteria for determining if a lease is a capital lease for the lessee under U.S.GAAP? “OWNS”

Answer 5

To be classified as a capital lease under U.S.GAAP, the transaction must meet one or more of the following criteria.
-Ownership transferred.
-Written bargain Purchase option.
-(Ninety)present value of minimum lease payments is equal to or greater than 90% of FMV of asset.
-(Seventy-Five) Lease term equals or exceed 75% of estimated useful life.
(last two items are qualifying criteria as long as asset is not in last 25% of original estimated life.)

Question 6

6- Name the criteria for determining if a lease is a finance lease for the lessee and the lessor under IFRS.

Answer 6

The lessee and lessor classify a lease as a finance lease if the lessor transfers substantially all the risk and rewards of ownership to the lessee.

Question 7

7- how does the lessee record the capital lease?

Answer 7

• At lower of FV or present value of minimum lease payments, using the lower of lessee’s incremental borrowing rate or the rate implicit in the lease, if Known by lessee.
• Note: Minimum lease payments include payments, bargain purchase option, and guaranteed residual value. They do not include executory costs or an optional purchase.
• Under IFRS, initial direct cost are recognized as part of the finance lease asset.

Question 8

8- Name the criteria for determining if a lease is a capital lease for the lessor under U.S.GAAP. “LUC”

Answer 8

To be classified as a capital lease, the transaction must meet all three of the following criteria.

• Lessee “wons” the leased property.
• Universities do not exist regarding any non-reimbursable costs to be incurred by the lessor.
• Collectivity of the lease payments is reasonable predictable.

Question 9

9- What is the difference between sales-type and direct-financing leases (lessor finance leases)?

Answer 9

-Sale-Type: Gives rise to manufacturer’s or dealer’s profit or loss. Fair Value differs from cost or carrying value.
- Direct-financing: Fair value is the same as cost or carrying value at the beginning of lease term.
(I profit from my sales(-type) leases, NOT from my(direct-) financing lease.

Question 10

10- What period of benefit is used to depreciate the leased asset by the lessee?

Answer 10

-Estimated economic life of asset if lessee takes ownership or there is a bargain purchase option.
(otherwise, lease term).

Question 11

11- Identify the three classifications used with respect to the seller-lessee’s rights retained in a sale-leaseback under U.S.GAAP.

Answer 11

*Substantially all rights retained:
1. PV of rent payments is equal to or greater than 90% of the fair value of the property.
2.Gain deferred and amortized.
*Rights retained are less than substantially all but greater than minor:
1. PV of rent payments is less than 90%, but greater than 10% of the fair value of the property.
2. Gain recognized to extent gain exceeds present value of lease payments.
* Minor portion of right retained:
1. PV of rent payments is 10% or less of the fair value of the property.
2. Entire gain recognized.
(In all cases, losses (NBV>FV) are recognized immediately)

Question 12

12- Outline the accounting by the seller-lessee in a sale-leaseback transaction under IFRS.

Answer 12

• If sale-leaseback result in a finance lease, defer profit and amortize over the lease term.
• If sale-leaseback results in an operating lease, profit or loss is recognized based on the relationship between the leased asset’s carrying amount, fair value, and selling price.

Question 13

13- What are the lessee’s major footnote disclosures for capital leases under U.S. GAAP?

Answer 13

1- Gross amount of assets capitalized by major property categories.

2. Future minimum lease payments in the aggregate and for each of the next five years.
3. Amount of imputed interest to reduce net minimum lease payments to present value.

Question 14

14- When is a bond issued at a discount? A premium?

Answer 14

• A bond is issued at discount when the coupon/stated interest rate is less than the market/effective rate of interest.
• A bond is issued at a premium when the bond interest rate is greater than the market rate of interest.

Question 15

15- How is the bond selling price computed?

Answer 15

The price is the sum of the present value of the future principal payment plus the present value of the periodic interest payments discounted using the market/effective rate in the date the bonds are issued.

Question 16

16- Name two methods of amortizing bond premium (discount).

Answer 16

*Straight-Line Method:
Premium(Discount) / # of periods outstanding.
*Interest(Effective Rate) Method (U.S.GAAP/IFRS