Leases & Financial instruments Flashcards
What value is recognised as a lease liability
The present value of future payments
What should be included in the initial recognition cost of a ROUA?
How would this be reflected in a journal?
- Initial measurement of lease liability
- Deposits
- Advanced payments
- Estimations of dismantling costs
DR ROUA
CR Lease Liability
CR Cash (with any costs in addition to lease liability)
Why would an entity enter into a sale and leaseback arrangement?
As a way of raising finance - releasing capital caught up in the business
When a sale and leaseback transaction takes place, the asset needs to be derecognised as a non current asset and re-recognised as a ROUA.
a) How do you calculate the ROUA value that should be recognised?
b) How do you work out the gain in the sale relating to the rights retained by the lessee?
a) Carrying amount of asset * (PVFLP/Proceeds)
b)
1. Firstly, calculate the total gain on the sale;
Proceeds - CA = total gain
- Then calculate the gain relating to the rights retained by seller
Total gain (w1) * (PVFLP/Proceeds) = Gain relating to rights retained by seller
- Calculate the gain relating to rights transferred to lessee
Total gain (w1) less Gain relating to rights retained by seller (w2)
How are ROUA depreciated
Depreciation is caluclated on the shorter of the lease term or the useful economic life of the ROUA
Are warranty provisions & prepaid expenses financial assets and liabilities?
No, to be classed as a financial asset/liability the contract needs to oblige to deliver cash, not goods/services.
Financial instruments and liabilities are a chain of contractual rights/obligations that lead to the reciept or payment of cash or the issue of an equity instrument
How is a financial instrument identified?
Financial instruments and liabilities are a chain of contractual rights/obligations that lead to the reciept or payment of cash or the issue of an equity instrument
- Contract needs to stand
- Obligation to deliver cash
- Exchanges at a gain/loss
What are equity instruments?
Shares
What are derivatives?
FUN
Future settlement date
Underlying variable - e.g. something will change; exchange rates
No initial settlement
How do you identify whether a loan, bond, debenture is a financial asset or a financial liability?
Bonds, Debentures, Loan stock, Convertible preference shares are all types of loans
Liability if the entity
* Issues
* Sells
* Borrows
Asset if the entity
* Subscribed
* Purchased
* Acquired
* Invested in
How are financial assets / liabilities initially recognsed in FS?
Measured at FV
* PLUS transaction costs for assets
* LESS transaction costs for liabilities
How are financial assets / liabilities subsequently measured in FS?
-
All financial assets are measured at amortised cost using the effective interest rate method
> For assets, the effective interest is finance INCOME (higher percentage)
> Changes based on b/f value
> The coupon rate is the interest recieved but does NOT hit P/L (lower percentage)
> Coupon rate is consistent, calculated on net value of asset -
Most financial liabilities are measured at amortised cost using the effective interest rate method
>
>Effective interest rate is a finance cost in P/L & increases liability. Based on b/f
>Coupon rate is based on nominal value, not b/f. Reduces liability and paid in cash - does not hit P/L
Should the following shares be classified equity or liabilites? How are dividends presented for each
- Redeemable preference shares
- Irredeemable preference shares with no obligation to repay with non-cumulative discrecionary dividends
- Irredeemable preference shares with no obligation to repay with cumulative dividends
- Redeemable preference shares - company has an obligation to pay back for shares in future so is a financial libaility. Dividend is a fincnace cost
- No obligation to pay back for shares & no demand to dividends - equity. if dividends are issued these are charged against retained earnings shown in SOCIE (as are an appropriation of profit)
- Even though these shares are irredeemable, the fact that there is a demand to dividends means the company has an obligation to pay and therefore are a finacnial liability & dividend is a P/L finance cost
Obligation - Liability
No obligation - Equity
What is a compund financial instrument?
How should they be reflected in FS at redemtion date?
How should this be reflected in CY?
Has elements of both debts and equity
E.g. at the end of the loan’s life, the issuer can either be repaid, or be issued shares in borrower’s company
At redemtion date
- DR Cash with total value of loan/bonds
- CR Liability with NPV of repayments (interest on own bonds discounted by interest at MV)
- CR Equity is always the balancing figure (ignore any convertible bond value given)
At YE
Need to unwind one year’s interest by taking NPV of liability from earlier working, plis interest at MV less repayment
* Equity figure stays the same
What are treasury shares
Equity instruments that have been required by the entity that issued them
Company buys back shares & gives money in exchange
Shares are not cancelled - become treasury shares that are a negative in equity section
CR Cash
DR Treasury Shares
