FAR 6

Question 1

Criteria for a lease to be capitalized (OWNES)

Answer 1

Ownership transfers at the end of the lease
Written purchase option the lessee is reasonably certain to exercise
PV of minimum lease payments = Fair value of asset (approximately 90% of FV of leased property)
Lease term = Major part (75%) of the asset’s useful life
Asset is specialized such that it has no alternative use to the lessor

Question 2

How is an operating lease recorded

Answer 2

lease expense using the straight-line basis. Even if there is a variable payment, the payment is known at commencement of the lease term; therefore, the variable payments will be used in calculation of the present value of the lease liability. There is no separately recorded interest component for an “operating lease.”

Question 3

Criteria for a FV hedge

Answer 3

There is formal documentation of the hedging relationship between the derivative and the hedged item.
The hedge must be expected to be highly effective in offsetting changes in the fair value of the hedged item and the effectiveness is assessed at least every three months.
The hedged item is specifically identified.
The hedged item presents exposure to changes in fair value that could affect income.

Question 4

Value of a derivative is determined by

Answer 4

notional amount times the value of an underlying