Financial instruments equity and leases Flashcards
Debt v equity
debt - a contractual obligation to make a payment
lender has right to receive interest and repayment of amount lent to company
equity- A residual interest in the net assets of the entity
investor has a share of the company’s net assets
financial liability
obligation to pay cash for a financial asset
- trade payables
- Loans/bonds payable
- redeemable shares
- shares with fixed dividend
sale and repurchase
repurchase price > original selling price= cash received is a loan (financial liability)
convertible Instruments
- Loans/bonds where lender has option to convert the debt into equity
- Rather than having debt repaid in cash, they can receive shares instead
- Company has a liability because obligation to make interest payments
- If lender has paid > PV of payments (FV of bond): difference is what they have paid for equity option
convertible instruments initial recognition
Liability initially measured at FV:
- future payments discounted to PV
- Use EIR for a similar bond without conversion option (given in q)
yr payment discount factor/eir PV/FV
1 x x x
2 x x x
x liability cr
(x) cash Dr
x equity cr
equity = difference between what lender paid and pv of payments (FV)
Earnings per share
listed companies
profit/no. shares
deduct dividend paid on irredeemable pref shares if not included in PL
New issue at market price
-include new shares from date of issue
bonus issue
-comparatives restated as if the new shares have always been in issue
rights issue (new issue below market price) -adjustment factor to increase number of shares before rights issue
adjustment factor and share price after rights issue
adj factor
share price (before rights issue)/share price (after rights issue)
share price (after RI)
share price (before RI) + cash from share issue/ new number of shares
treasury shares and distributable reserves
treasury shares
-company repurchase own shares
Dr tre. shares (equity) cr cash
-reduce number of shares for eps
Distributable reserves
- dividends paid from RE subject to company having cash to make payment
- listed companies cannot pay a dividend if it will cause net assets< undistributable reserves (share cap,SP,Reval reserve)
Lease what is and isnt a lease
lease :
- Right to control
- An identifiable asset
- Obtain economic benefits
not lease if:
-Lessor can substitute asset for their own benefit : no identifiable asset
lease exemption election
- Leases <12m with no purchase options
- Low value and not part of bigger asset (phones,laptops)
- Rent expensed to P&L
Lease liability
Initial recognition
Future payments discounted to PV
yr payment discount factor/eir PV/FV
1 x x x
2 x x x
X
subsequent
bf Interest expense Cash C/F
PV of LP discount factor/EIR payment made
X x (x) X
EIR rate will increase the initial liability to the actual amount of cash paid
right of use asset
Initial recognition
capitalised as part of PPE (ROU)
- Future payments discounted to PV (lease liability)
- Costs directly attributable to leasing asset and restore land (provision)
- Deduct any payments (lease incentives) from lessor
subsequent measurement
-depr over period company will use asset
Sale and leaseback
- Company sells an asset and immediately leases it back
- Sells an asset: profit/loss on disposal
- Leases an asset: ROU asset and lease liability
Has only sold part of the asset because has retained an ROU for the asset
- can only recognise profit/loss on disposal for part sold
- Example: sold freehold but now has a leasehold- the difference is the part disposed
part of the asset which has been retained and part which has been sold calculated as:
PV of future lease payments/FV = part retained
eg
pv of LP = 80k
FV=100k
80% retained 20% sold
profit/loss on disposal proceeds x Ca (x) P/L x/(x) 20% x / (x)
ROU asset
CA x 80%
