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Question 1

how do we treat guaranteed RV at inception of a cap. lease?

Answer 1

add it to min. lease pmt at PV

• Do not add if RV is paid by 3rd party
• remember to subtract SV to calc. depreciable base

Question 2

how is cap. lease obl. reported for a certain YE period?

Answer 2

• cash pmt (fixed) - int exp [lower of implicit/borrowing rate] = “P” reduction)
• lease obl. - “P” reduction = CV lease

**“P” reduction = STD, YE = LTD

Question 3

do we cap. executory costs (taxes, ins.) to find PV of liability?

Answer 3

no, we exp them as incurred

Question 4

what is the rule for sales-type lease?

Answer 4

PV = SP = FV

*profit = cash SP - cost of FA at inception

Question 5

what is the rule for direct-fin. leases?

Answer 5

PV = CV receivable = cost of asset sold

Question 6

what is the “OWNS” rule for dep’ing cap. leases? (depreciable amt is the PV of min lease pmt)

Answer 6

• “O” and “W” are ownership transfer and BPO. If these exist, then dep. over asset life
• “N” and “S” are 90% (PV > 90% FV) and 75% lease life. if these exist then dep. over lease life
• IFRS allows min lease pmt to be substantially all of FV/PV (more lenient)

Question 7

under IFRS, are initial direct costs cap’d to the fin. lease?

Answer 7

yes, they are cap’d and depreciated

Question 8

does lessor have DE if lessee capitalizes the lease?

Answer 8

no, lessor does not have DE, lessee does

Question 9

what method is used to recognize int. rev. for a sales type (fin) lease?

Answer 9

the effective int. method is used

• (better over SL)
• int rev should be def’d

Question 10

should COGS be generally sold for less than HC of asset sold?

Answer 10

yes, by definition it should

Question 11

what amt should cap. lease obl. be reported?

Answer 11

at the lower of FV of asset at inception or PV min lease pmt

Question 12

what is the rule for P/L in a sales leaseback?

Answer 12

• a gain goes to asset VA account

* any P/L class’d as cap lease is def’d and amort’d in proportion to dep. taken on leased back asset

Question 13

what is the treatment of P/L imder IFRS for cap. and op. leases?

Answer 13

• cap lease = all def’d G/L

* op lease = recog. P/L immediately (no def’d)

Question 14

when lessee retains only a minor portion (PV 10% or less of FV asset sold), what is the treatment of gain?

Answer 14

gain is recog’d immediately and none def’d

*losses are also recog’d immediately

Question 15

when does a sales-leaseback trans occur?

Answer 15

when seller/lessee retains right to subs. all remaining use of the property

Question 16

what is the G/L from a forward exch. contract for speculation?

Answer 16

diff b/w forward rate at date contract purch’d and at BS date

*same w/ forward contract hedge

Question 17

in order for a fin. insturment to be a derivative, it must:

Answer 17

• have 1+ underlyings and 1+ notional amt’s

* does not req. an initial net investment

Question 18

where does G/L on FV hedge go?

Answer 18

goes to NI in current period of change

Question 19

can qualified derivatives be used to hedge CF’s of an asset and forecasted trans’?

Answer 19

yes, they can hedge both

Question 20

criteria for FV hedge is:

Answer 20

(1) formal documentation of hedging relationship b/w dervative and hedged item
(2) hedge must be expected to be highly effective and is assessed every 3 mo’s
(3) hedge item is spec. ID’d
(4) hedge item presents exposure to changes in FV that could affect income