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FAR > F6 - Leases, Derivatives, Foreign Currency Accounting, and Income Taxes > Flashcards

F6 - Leases, Derivatives, Foreign Currency Accounting, and Income Taxes Flashcards

1
Q

What is the meaning of OWNES?

A

If any of these applies, then it is a finance lease. If none of them apply, it is an operating lease.
O = Ownership: Assets are transferred at the end of the lease.
W = Written option: to purchase the asset.
N = Net PV: PV of min lease pmts = FV of asset (at least 90% of PV of lease).
E = Economic Life: Lease term is at least 75% of the usefull life of the asset.
S = Specialized asset: lessor can’t use it again.

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2
Q

What are the basic bitches of leases for lessors?

A

a. Sales-type: At least one of OWNES is met.
b. Direct-Financing: None of OWNES is met, but has PC.
c. Operating: When its not sales-type or direct-financing.

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3
Q

What is PC?

A 
P = PV of lease pmts, guaranteed residual value is equal or substantially exceeds the asset FV. 
C = Collection of lease pmts is probable.
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4
Q

What are the basic bitches of leases for lessees?

A

a. Finance: At lease one of OWNES is met.

b. Operating: None of OWNES is met, but has PC.

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5
Q

What is a failed sale?

A

When I buy an asset, but then lease it back to the old owner. This is not a sale.

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6
Q

How does the buyer record a failed sale?

A

Buyer records a Financing receivable.

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7
Q

How does the seller record a failed sale?

A

Seller keeps recognizing the asset as if it didn’t sell (record depreciation expense and accum depreciation).

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8
Q

What is the financing liability of a lessee on sale-leaseback that qualifies as a sale?

A

Sales Price - FV

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9
Q

What is the lessee’s gain on disposal of asset on sale-leaseback that qualifies as a sale?

A

Sales Price - NBV

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10
Q

What is the basic bitch of leases and cash flow statements?

A

Operating leases = all payments are cash flow from operations.
Finance leases = Principal pmt is cash flow from financing, and interest pmt is cash flow from operations. Variable pmts and ST lease pmts not included in the liability are cash flows from operations.

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11
Q

How should a lessee amortize a finance lease?

A

OW - NES
OW = Useful life of asset.
NES = Shorter of useful life or lease term.

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12
Q

What is the amortization table for leases?

A

BLILE!
Beg Lease || Lease Pmt || Interest Pmt || Lease Amtz End Lease
Just like bonds, but with leases!

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13
Q

How do you amortize leasehold improvements?

A

Shorter of:
1. Useful life
OR
2. Remaining term of the lease.

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14
Q

What is the formula for beg lease liability or ROU asset?

A

PV of annual payments
(+) PV of written option OR PV of Guaranteed residual
(=) Lease Liability

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15
Q

How do you depreciate an asset on a finance lease that has a bargain purchase option (buy for cheap)?

A

The asset gets depreciated over the useful life and NOT over the lease term.

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16
Q

What is another useful equation for leases?

A

PV = Annual Lease Pmts * PV Factor

You can find X, when question gives you crap you don’t know!

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17
Q

What is another way to calculate interest expense on leases?

A

Interest Expense = Total annual payments - Total PV of Lease

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18
Q

What is the gain on a sales-type lease?

A

PV of equipment - NBV

OR

Selling price - NBV

19
Q

What is the criteria that must be met for a derivative to be designated and qualify as a fair value hedge?

A

DESP….ERATE HOUSEWIVES!!!

  1. D = Documentation for hedging relationship exists.
  2. E = Expected to be highly effective in offsetting changes in FV and is assessed every 3 mos.
  3. S = Specifically identified.
  4. P = Presents exposure in FV that could affect income.
20
Q

How do you calculate the value or settlement of a derivative?

A

Notional amount * Underlying

These words are KEY!!!!!!!!

21
Q

What are the characteristics of a derivative?

A
  1. Has 1+ underlyings and/or 1+ notional amts.
  2. Does not require initial investment or a smaller investment than other similar contracts.
  3. Can be net settled, outside of contract or barter.
22
Q

How are gains and lossses from FV hedges recognized?

A

As part of net income, in the current period.

23
Q

What changes (gains/losses) in FV are reported on OCI and what changes are reported as part of net income?

A

OCI = E in PUFIE: Effective cash flow from hedges.

Net income = Ineffective cash flow from hedges.

24
Q

What is a put option?

A

When holder has option to sell @ specified price @ specified time.
* Protects you from declining prices.

25
Q

What is a call option?

A

When holder has option to buy @ specified price @ specified time.
* Protects you from climbing prices.

26
Q

What are the derivative risks?

A

Market risk = The market will betray you…There is always a winning party and a losing party.
Credit risk = One party not doing their part of the deal.

27
Q

What is a perfect hedge?

A

No possibility of gain or loss.

28
Q

Where are changes in FV reported?

A

As part of net income:

  • No hedge designation.
  • FV hedge and FX FV hedge.
  • Ineffective portion of Cash Flow hedges.

As part of OCI:

  • Effective portion of Cash Flow hedges, and FX CF hedges.
  • FX Net investment hedges.
29
Q

Where are changes in FV reported?

A

As part of net income:

  • No hedge designation (speculative).
  • FV hedge and FX FV hedge.
  • Ineffective portion of Cash Flow hedges.

As part of OCI:

  • Effective portion of Cash Flow hedges, and FX CF hedges.
  • FX Net investment hedges.
30
Q

What is the difference between the remeasurement method and the translation method?

A

Remeasurement method = used when the FS are not in the sub’s FC.
Translation method = used when the FS are in the sub’s FC.

31
Q

What is the exception on BS accounts under the remeasurement method?

A

Use historical rates on exceptions.
All accounts on the BS are translated using the spot rate EXCEPT:
1. Sub with hyperinflation (Venezuela).
2. Foreign subs that do not maintain their accounts in a foreign FC.

32
Q

What gains (losses) on FX are reported as part net income?

A

Remeasuring the foreign sub FS from LC to FC are paret of net income.

33
Q

What gains (losses) on FX are reported on OCI?

A

Translation of FS.

34
Q

What items create a DTL?

A 
Income I book first, and get taxed later!
ICE
1. Installment sales.
2. POC.
3. Equity Method.
Expenses that get taxed first, but I book later.
DAP
1. Tax Depreciation.
2. Amortization of franchise. 
3. PP Exp.
35
Q

What items create a DTA?

A

Income that get taxed first, but I book later.
3P
1. Unearned revenues (rent, interest, royalties).

Expenses I book first, and get taxed later!
BES
1. Bad Debt (tax uses write off).
2. Est Liability/Warranty Exp.
3. Start up Exp.
36
Q

What are things to know about DTL?

A

Increase in PP expenses = Increase DTL
Increase in AR = Increase DTL
Increase in Payables = Increase DTL

37
Q

How do you calculate VA/VA Activities?

A

Beg DTA
(-) VA Estimate (% of DTA that will not be realized)
(+/-) DTA Activity (Plug)
(=) End DTA

38
Q

What is income tax expense when I have VAs?

A

Income Tax Expense = Current Tax Exp + Def Tax Exp - VA

Current Tax Expense = Taxable income * Tax Rate %
Deferred Tax Expense = Temps * Tax Rate %

39
Q

What is income tax payable?

A

Income Tax Payable = Taxable Income * Tax Rate %

What I actually pay to the IRS!!!

40
Q

What is the basic bitch for DTA/DTLs?

A

ALL ARE NONCURRENT!!!

Remember from work!

41
Q

What is the impact of net changes in DTA/DTLs on Deferred Tax Expense/Benefit?

A

Deferred Income Tax Exp (Benefit) = Sum of net changes in DTA/DTLs

42
Q

What amount is recognized as tax benefit if there is a tax position that has a possible outcome?

A

Must have >50% of probability of occurring.

If more than one amount with >50%, then choose highest number.

43
Q

What is income tax expense when I have NOLs?

A

Income Tax Expense = Current Tax Exp + Def Tax Exp

Current Tax Expense = Taxable income * Tax Rate %
Deferred Tax Expense = NOL * Tax Rate %

44
Q

What is a tax benefit for NOL purposes?

A

NOL utilized * Tax Rate%

FAR (12 decks)

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