FAR Module 13A Flashcards
When interest is compounded more than once a year what two extra steps are needed
1) multiply “N” by the number of times interest is compounded annually. This will give you the total number of interest periods
2) divide “I” by the number of times interest is compounded annually. This will give you the appropriate interest rate for each interest period
Define “compounding”
Earning interest on interest
Define “annuity”
A stream of equal payments
When is the payment paid for an Annuity Due
The beginning of the period
When is the payment paid for an Ordinary Annuity
At the end of the period
What is another term for an Ordinary Annuity
An annuity in arrears
This is a “less than” concept
Present value
What is the formula to calculate PV
1/(1+i)^n
How do you make your own PV table for an Ordinary Annuity? How do you change from PV$1 to PVOA$1?
Use the PV formula [1/(1+i)^n] to calculate the PV for each period - this is the PV of $1 (does not account for annuity)
The PVOA$1 for period 1 will be the same as the PV$1 for period one. For each period after that you add the previous pd of PVOA$1 + the current pd of PV$1
How do you convert the Ordinary Annuity table PV factors to an Annuity Due PV factor?
Multiply the ordinary annuity factor by (1+i)
When a note is exchanged for cash and no other rights or privileges are exchanged what is the present value of the note
The present value of the note is equivalent to the cash exchanged
The cash exchanged may not always be equal to the face amount of the note (the amount paid at maturity)
When the face amount of the note does not equal the present value, the difference is what
Recognized as either a discount or premium
This results when the face of the note exceeds its present value
A discount
This results when the present value of the note exceeds the face value
A premium
Loan origination costs are recognized by who
The lender only
There is no effect on the borrower
What are loan origination costs
costs incurred by the lender (bank) when originating/acquiring a loan
What are the two loan origination costs and how are they treated
1) direct -> defer and recognize these costs over the life of the loan
2) indirect -> expensed as incurred
How are loan origination fees assessed
In the form of points, where the point is 1% of the face amount of the loan
What are loan origination fees
Additional bank revenue that reduces what the borrower gets. This is usually nonrefundable
Loan origination fees affect who
Both the lender and the borrower
How do loan origination fees affect the lender and borrower
Decreases the loan on both sides - defer and recognize the nonrefundable fee over the life of the loan
What disclosures are required for long-term borrowings? How far out must this information be disclosed?
1) aggregate amounts of maturities
2) sinking fund requirements
These must be made for each of the five years following the balance sheet date
For financial assets and financial liabilities using the fair value option, how often is the fair value reported?
At the end of each reporting period
When financial assets and liabilities are reported at the end of each reporting period at fair value, the resulting gain or loss is reported where
In earnings of the period
T/F
under the fair value option there is no “discount” or “premium”. Instead you will recognize an unrealized holding gain or loss
TRUE
Under IFRS, borrowing costs must be capitalized if…
they are related to the acquisition, construction, or production of a qualifying asset
Borrowing costs that do not meet the rules for capitalization are expensed in the current period.
Note that finance costs, such as interest expense, must be disclosed separately
What is a qualifying asset under IFRS? List examples (6)
An asset that takes a substantial period of time to get ready for its intended use.
Examples include inventory, plant, property, equipment, intangible assets, or investment property
