Module 13: Present Value, Bonds, Debt Restructure, Pensions, and Leases Flashcards
Discounts & Premiums on a note
A discount results when the face of the note exceeds its present value, and a premium results when the present value of the note exceeds its face.
IFRS Borrowing Costs
IAS 23 requires borrowing costs to be capitalized if they meet certain criteria. Borrowing costs must be capitalized if they are related to the acquisition, construction, or production of a qualifying asset.
(1) A qualifying asset is one that takes a substantial period of time to get ready for its intended use. Qualifying assets include inventory, property, plant, and equipment, intangible assets, or investment property.
(2) Borrowing costs that do not meet the rules for capitalization are expensed in the current period. Note that finance costs (interest expense) must be disclosed separately in the income statement.
Extinguishment of Debt
All gains (losses) resulting from the extinguishment of debt should be recognized in the period of extinguishment. The gain (loss) is the difference between the bond’s reacquisition price and its net book value [face value plus (minus) any unamortized premium (discount) and issue costs]. The rule is not affected by the reissuance of debt before or after the refunding. Furthermore the rule applies to convertible bonds when required with cash.
Annuity Due
An annuity with the first payment occurring at the beginning of the first period.
Ordinary Annuity
An annuity with the first payment occurring at the end of the first period.
Debt Issued with Detachable Purchase Warrants
The proceeds of debt issued with detachable stock purchase warrants are allocated between the debt and stock warrants based on relative market values.
FMV of bonds without warrants/FMV of bonds and warrants
x
Purchase Price
= Amount assigned to bonds
Present Value of Ordinary Annuity
The present value of ordinary annuity is the value today, given a discount rate, of a series of future payments. A common application is the capitalization of lease payments by either lessors or lessees. Payments “1” through “n” are assumed to be made at the end of the years “1” through “n”, and are discounted back to the present.
(payment x PV of ordinary annuity)
Bond Issue Costs
Printing and engraving, accounting and legal fees, commissions, promotion cost, and other similar cost.
SFAC 6 states that bond issue cost can be treated as either an expense or a reduction of related bond liability.
Book Value Method of accounting for bond conversions
No gain or loss is ever recognized on conversions. The bonds are simply removed from the books at their book value and the stock is recorded at the book value of the bonds.
Market Value Method of accounting for bond conversions
Under the market value method, the stock is recorded at its market value on the date of conversion and bonds are removed at book value. Any differences between these amounts is the gain or loss recognized upon conversion.
Bond Sinking Fund
The sinking fund is increased when periodic additions are made to the fund and when revenue is earned on the investments held in the fund. When cash is used to purchase investments, the components of the fund change, but the fund balance is not affected.
Pensions: Actual Return on Plan Assets
The difference in the fair value of plan assets at the beginning and the end of the period adjusted for contributions made to the plan and benefit payments made by the plan during the period. The formula for determining the actual return is as follows:
Actual Return = (End. Bal. of plan assets at fair value - Beg. bal. of plan assets at fair value) + Benefits - Contributions
Pensions: Pension Expense
The net amount calculated by adding together five factors. These factors are (1) service cost, (2) interest on the projected benefit obligation, (3) return on plan assets, (4) amortization of unrecognized prior service cost or credit, and (5) the effect of gains and losses.
Pensions: Pension Asset/ Liability
The cumulative excess of the amount funded over the amount recorded as pension expense. If funding exceeds pension expense, it is an increase to pension asset/ liability.
Pensions: IFRS Discount Rate
Under US GAAP, the discount rate used is the “settlement rate” (the rate at which the plan’s obligations could be settled). With IFRS the discount rate is determined by the market yields at the end of the reporting period for high-quality corporate bonds having a similar term of maturity. .
Pensions: Accumulated Benefit Obligation
Per ASC Topic 715, the present value of future retirement payments attributed by the pension benefit formula to employee services rendered prior to that date based on current salaries.
Pensions: IFRS Discount Rate
IFRS has specific rules for netting the balances of pension plan assets and pension liabilities. Netting of plan assets and liability balances is only permissible when there is legally enforceable right to use the assets of one plan to settle the obligations of another plan.
Leases: Capital Lease - Lessee
OWNS
Must meet just one condition to capitalize:
O - Ownership transfers at end of lease
W - Written option for Bargain Purchase
N - Ninety(90%) percent of leased property FMV < PV of Future Lease Payments
S - Seventy-Five (75%) percent PF Asset economic life is being committed in lease term
Leases: How should the Lessee capitalize a lease?
Per ASC Topic 840, the lessee records the asset at the lower of (1) the present value of the minimum lease payments or (2) the fair market value of the leased asset.
Fair Value Option
A company may elect the fair value option for reporting financial assets and financial liabilities. The financial liability is reported at fair value at the end of each reporting period, and the resulting gain or loss is reported in earnings of the period. A company may calculate interest expense in various ways, but must disclose in the notes to the financial statements the method used to determine interest expense.
Term Bonds
Bond issues that mature on a single date.
Pensions: Defined Contribution Plan
Under a defined contribution plan the employer agrees to make a defined contribution to a pension plan as determined by the provisions of the plan. Consequently, plan participants will receive at retirement whatever benefits (i.e payments) the contributions can provide.
Pensions: Defined Benefit Plan
Under a defined benefit plan the employer agrees to provide a benefit at retirement that is defined or fixed by a formula. Because the benefits are defined, the employer accepts the risk associated with changes in the variables that determine the amounts needed to meet the obligation to plan participants.
Pensions: Change in PBO (projected benefit obligation) formula
Beginning of year PBO
+ Service Cost
+ Interest Cost
+/- Prior Service Cost or credit (from changes to plan in current year)
+/- Actuarial gain or loss (from changes in actuarial or underlying assumptions)
- Benefits paid
= End of year PBO
