FAR5 Flashcards
Ordinary Annuity (in arrears)
of payments is equal to the number of interest periods (start at end of year)
Annuity Due
of interest periods is one less than the number of payments (start at beg. of year)
Present Value of $1
Amount that must be invested now at a specific interest rate so that $1 can be paid or received in future
(capital lease buyout, bond principal payoff @ end of lease/term)
Future Value of $1
Compound interest (bank savings account)
Guaranteed residual value
An additional lease payment
Must be included in the calculation of the present value of the minimum lease payments
Annual rental revenue
= the total rental revenue from the lease allocated over the full life of the lease
(subtract out free rent first)
Initial direct costs, IFRS
(added) + the finance lease asset at lease inception
Amortization of leasehold improvements
Amortized over the life of the improvements or the remaining life of the lease, whichever is shorter
Sales-type lease, COGS relationship to historical cost
By definition, cost of goods sold will be less than the historical cost of the asset sold
Interest expense, recognized
For the entire period from bond issuance through the fiscal year end
Capital Lease, Lessee (GAAP)
Must meet just one condition to capitalize
- Ownership transfers at end of lease
- Written option for bargain purchase
- Ninety (90%) percent of leased property FV is less than or equal to PV of lease payments
- Seventy-five (75%) percent or more of asset economic life is being committed in lease term
Finance Lease, Lessee (IFRS)
O - Ownership transfer W - Written bargain purchase option E - Major part of economic life S - PV of lease payments substantially all of FV F - Gains and losses from the fluctuation in FV A - Ability to continue the lease C - Lessee can cancel the lease S - Specialized nature
Sales-Type/Direct Financing Type, Lessor (GAAP)
Meets all three conditions: (LUC)
L - Lessee owns the leased property
U - Uncertainties do not exist regarding any unreimbursable costs to be incurred by the lessor
C - Collectability of the lease payments is reasonably predictable
Sales-Type Lease Profits
Gain on Sale and Interest income
Direct Financing Lease Profits
Gain only Interest income
Capital (Finance) Lease, Capitalized Amount - Lessee (buyer)
Lesser of: (cost or market)
FV of the asset at the inception of the lease OR cost = PV of the minimum lease payments
Include: required payments, bargain purchase option, guaranteed residual value
Exclude: Executory costs, optional buyout
Recording the Lease, interest rate
Lessor of:
Implicit interest rate
OR incremental borrowing rate
Depreciation Method of the asset
Capitalized lease assets - salvage value
= Depreciable Basis/Period of benefit
= Depreciation Expense (per period)
Period of Benefit (Depreciable Life) GAAP
Ownership Transfer and Written Bargain
= estimated economic life of the asset
90% FV and 75% Life
= Lessee uses the lease term
Period of Benefit (Depreciable Life) IFRS
The depreciation period is the SHORTER of the lease term and the useful life of the asset
Lessee’s F/S Disclosures of Leases
Disclose everything (the more the better)
Capital Lease: future min. lease payments and for each of the next five years
Operating Lease: min. future rental payments in total, and for each of next five years
Gross Investment, Lessor
Lease payment + unguaranteed residual value
Net Investment, Lessor
Lease payment + unguaranteed residual value
= Gross investment x PV
= Net Investment (net principal)
Unearned Interest Revenue, Lessor
Gross investment - net investment
= future interest
COGS, Lessor
Cost of asset - PV unguaranteed residual value
= Net given up
Sale-Leaseback
General Rule:
Over 90% = Loan (defer all gains and amortize)
10% - 90% = Defer up to PV of min leaseback payments or capitalized asset, gain in excess recognize immediately
0% - 10% = Recognize gain or loss immediately
Real Economic Loss
Recognize immediately (FV is less than BV)
Amortization of Deferred Gain
Capital leaseback = over asset life
Operating leaseback = over lease life
Sublease Classification
If original lease is an operating lease then sublease is an operating lease
If original lease is an capital lease then either:
Due to ownership transfer or written bargain it is a capital lease
Due to 90% FV or 75% of life then operating lease
Bonds’ carrying amount, Discount - YR2
Ending carrying amount of the bond is equal to the beginning carrying amount PLUS discount amortized during the current period.
Convertible debt securities
An interest rate that is lower than nonconvertible debt, issuance price is allocated to bonds with no recognition of the conversion feature is because it is difficult to assign a specific value to
Discount amortization
Will increase interest expense for the period so that interest expense > interest payment to bondholders
Convertible debt under IFRS
An equity component should be recognized upon issuance equal to the difference between the proceeds received and the fair value of the bond liability
Effective interest method of amortization is used for bonds issued at a premium, the amount of interest payable for an interest period is calculated
Face value of the bonds at the beginning of the period by the contractual interest rate
Serial Bonds
Mature in installments, redeemed pro-rata over the life of the issue
Debenture Bonds
Unsecured bonds
Detachable Warrants
Bond is not surrendered upon conversion, only the warrants plus cash representing the exercise price of the warrants
Term Bonds
A single fixed maturity date (entire principal is paid at the end of the term/period)
Bonds issued at a Discount
Low interest rate: (debited on first JE)
stated/issued rate
Bonds issued at a Premium
High interest rate: (credited on first JE)
stated/issued rate > market (effective) rate
Unamortized Discount
Contra account to bonds payable, presented on B/S as a direct reduction from the face value of the bonds to arrive at the bond’s carrying value (SUBTRACT)
Unamortized Premium
Presented on B.S as a direct addition to the face value of the bonds to arrive at the bond’s carrying value (ADD)
Bond Issuance Costs
Presented on B/S as a direct reduction to the carrying amount of the bond
When bonds are issued, the bond proceeds are recorded net of the bond issuance costs
Amortized as interest expense over the life of the bond using the effective interest method
Interest Expense, Straight Line Method
(face value x stated interest rate) - Premium amortization
(face value x stated interest rate) + Discount amortization and bond issuance cost amortization
Interest Expense, Effective Interest Method
Carrying value at the beginning of the period x effective interest rate (I/S)
Interest Paid, Effective Interest Method
B/S: Bond face x coupon rate
Amortization, Effective Interest Method
Premium: Interest paid (I/S) + Interest expense
Discount: Interest expense (B/S) - Interest paid
Bond Sinking Funds
Generally a non-current asset
current asset only to the extent that it offsets a current liability
Convertible Bonds, Book Value method
No gain or loss is recognized, Bonds payable and related premium or discount is written off and common stock is credited (at par) and APIC is credited for the excess of the bond’s carrying value over the stock’s par value less any conversion costs
Convertible Bonds, Market Value method
Non-GAAP, recognize gain or loss (I/S impact)
Extinguishment of Debt (gain or loss)
(Gain) or loss = reacquisition price - net carrying amount
net carrying amount of the bond is the carrying value + unamortized premium OR - unamortized discount - unamortized bond issuance costs
