LM 7: Topics in Long-Term Liabilities & Equity Flashcards
What is a lease?
financing the purchase to use an asset
What is lessor?
owner of asset
What is lessee?
user of asset that makes periodic payments to lessor
What are 4 common types of non-current liabilities? LFPD
- long term debt
- finance leases
- pension liabilities
- deferred tax liabilities
What are 3 advantages of leasing an asset? LLL
- less cash is needed up front
- lower lease interest than loan
- lower risk of becoming outdated
What are the 3 standards a lease contract must include? ILL
- identify a specific underlying asset
- lessee has right to mostly all economic benefits from asset over contract term
- lessee has right to determine how and for what objective the underlying asset is used
Whats the difference between finance lease and operating lease?
finance lease resembles a purchase
operating lease is a rental contract
Under IFRS what are 5 things a lessee must disclose? TCTID
- Total carrying values of asset
- Carrying value of leased assets added during the reporting period
- Total cash outflow from lease payments
- Interest expense attributable to leases
- Depreciation expense attributable to leased assets
Under IFRS what are 3 things a lessor must disclose for finance leases? PII
- Profit or loss of lease
- Interest income from lease transactions
- income that has not been captured in the measurement of leases
Under IFRS what are 2 things a lessor must disclose for operating leases? LS
- lease income
- Separate disclosure of income related to variable lease payments
How are lease liability and right of use modeled under US GAAP operating leases?
lease liability is reduced by each lease payment using the effective interest method
amortization for right to use is equal to the lease payment minus interest expense
Which standard allows you to expense the lessee’s short-term lease payments on a straight-line basis?
both IFRS and US GAAP
Which standard allows you to expense the lessee’s low-value assets lease payments on a straight-line basis?
IFRS but not US GAAP
What 2 things must the lessee record at the inception of a lease? RL
right of use (ROU) asset
lease liability recorded at present value
both must be shown at the present value of future lease payments discounted
How are finance leases recorded for lessor accounting?
- lessor removes the leased asset from the balance sheet
- creates a lease receivable assets
lease receivable = PV of future lease payments
How are operating leases recorded for lessor accounting?
- leased asset remains on lessor’s balance sheet and depreciated over over its useful life
- lease revenue is recognized on a straight line basis on the income statement
What is a pension trust fund?
separate legal entity from company that pays out pension.
How are lease liability and right of use modeled under US GAAP under finance leases?
lease liability is reduced by each lease payment using the effective interest method
right of use asset is amortized on a straight line bases over lease term
If fund assets are greater than estimated pension obligations what will be recorded on the balance sheet?
net pension asset
If fund assets are less than estimated pension obligations what will be recorded on the balance sheet?
net pension liability
What will be recorded on the balance sheet if the fair value of a pension fund is greater than the present value of estimated pension obligations or less than the present value of estimated pension obligations?
net asset is recorded
Under IFRS change in net pension asset or liability is split into what 3 components and describe them? ENR
- employee service cost (increase in pension benefit if one more year of service)
- net interest expense (net pension asset/liability multiplied by the discount rate)
- remeasurements (actuarial gains and losses)
Under US GAAP change in net pension asset or liability is split into what 5 components and describe them? ENEPA
- employee service cost (increase in pension benefit if one more year of service)
- net interest expense (net pension asset/liability multiplied by the discount rate)
- Expected return on plan assets, which is a reduction in the amount of expense recognized.
- Past service costs
- Actuarial gains/losses
For defined benefit pension plans under US GAAP where are past service costs and actuarial gains/ losses recorded?
OCI (Other comprehensive income)
For defined benefit pension plans under IFRS where are remeasurements (actuarial gains/ losses) recorded?
OCI (Other comprehensive income)
What is the different between an outright stock grant and a restricted stock grant?
outright stock grant: given by company no requirements
restricted stock grant: must meet certain requirements to receive stock grant
What is a stock option?
gives employees the right to purchase a company’s shares at a specified price
What is the grant date of stock options?
Grant date – the date the options are granted to employees
What is the vesting date of stock options?
Vesting date – the date employee is first eligible to exercise the options
What is the service period of stock options?
Service period - period between the grant date and vesting date
What is the exercise date of stock options?
Exercise date – the date the employee exercises the options
How must stock options be recorded?
must be quantified for accounting purposes using an option pricing model. eg. black-scholes
What are stock appreciation rights (SARs)?
compensate employees based on changes in share price without transferring ownership (cash for the positive difference in stock)
What are phantom shares?
contract between an employer and an employee that grants the employee the right to receive a payment based on the value of the employer’s stock
Under IFRS what 4 things must a company disclose for stock option programs? OOEO
- options outstanding at beginning of the period
- options outstanding at end of the period
- exercisable options at end of the period
- options that were granted, forfeited, exercised, or that expired during the period
What is bond indenture?
Describes obligations of bond issuer and rights of bond holder.
What is the market value of a bond?
present value of future payments discounted at the market interest rate
Whats the difference between bond selling at discount and bond selling at premium in terms of market price and face value?
market price < face value = discount
market price > face value = premium
What is effective interest rate (EIR) and formula?
the rate on which the actual return on investment and rate of interest on a loan is calculated, considering compounding over a period
((1 + (i / n)) ^ (n)) - 1
i = nominal rate
N = number of compounding periods
What are 3 examples of issuance costs incurred when bonds are issued? PLC
- printing
- legal fees
- commissions
How does IFRS vs US GAAP handle issuance costs?
IFRS: all debt issuance costs are included in liability
US GAAP: amortizes debt issuance costs as an asset (usually on a straight line basis)
What are 2 methods to amortize bonds?
- effective interest rate method
- straight line method
Which amortization method for bonds does IFRS require?
effective interest rate method
What is there difference between the interest expense and the interest payment?
amortization
What is the straight-line method for bond amortization?
evenly amortizes the premium or discount over life of the bond
What is the formula for interest expense under the effective interest rate method of bond amortization?
carrying value * market interest rate
Will total interest expense be the same under both methods of bond amortization?
yes
What are 2 ways bonds can reported at?
- amortized historical cost
- fair value
Why do banks and insurance companies use fair value reporting even if not recommended?
due to their assets and liabilities going up and down in the same direction.
Under IFRS and US GAAP what disclosure is required?
fair value disclosures
What are debt convents?
protect the creditors by limiting a borrowers action
What is an affirmative covenants?
require actions for the borrowers
What is negative covenants?
restricts actions for borrowers
What is derecognition of debt?
if issuer redeems a bond before maturity
What are actuarial gains and losses?
difference between the pension payments actually made by an employer and the expected amount.
What are leverage ratios?
ratios measure how much company uses liabilities rather than equity to finance the assets
What are coverage ratios?
measure ability of company to cover debt- related payments
If market interest rate is greater than coupon rate does bond sell a discount or premium, and coupon rate is greater than market interest rate does bond sell at discount or premium?
Market interest rate > coupon rate =discount
Coupon rate > market interest rate = premium
