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F6

Terms in this set (15)

Steps to convert financial statements (3 steps)
1. Adjust books to GAAP
2. Remeasurement Method (Foreign/Local -> Functional)
3. Translation Method (Functional -> Reporting)
Remeasurement Method Steps
1. Balance Sheet - monetary items at YE/current; nonmonetary at historical
- plug amount to RE to make BS balance
- monetary items: cash & equivalents, AR, AP, debt
- nonmonetary items: inventory, investments, PPE, AD, CS, APIC
2. Income Statement - non-BS items at weighted average; BS items (depreciation) at historical
- BS's RE plug becomes net income
- plug remeasurement gain/loss to make net income equal the plug
Translation Method Steps
1. Income Statement - all items at weighted average
- plug translated net income into RE
2. Balance Sheet - all items at YE/current except CS/APIC - at historical
- plug translation G/L to AOCI to make BS balance
Criteria to Determine Categorization of a lease
OWNES PC:
- Ownership transfer
- Written option to purchase (must be reasonably certain to exercise)
- NPV of lease pmts (and guarenteed residual value) greater than/= 90% of FV
- Economic life greater than/= 75% of lease term
Specialized (won't have alternate use to lessor when lease ends)

- PV of sum of lease pmts & GRV greater than/= asset FV
- Collection of lease payments is probable

If any 1 OWNES met, lessee = finance and lessor = sales-type finance

If no OWNES met, lessee = operating and lessor uses PC

If both PC met, lessor = direct financing
If neither/one PC met, lessor = operating
Lessee accounting for a finance lease
- Recognize ROU asset and Lease Liability (PV of pmts)
- ROU amortized straight line, liability effective interest
- Depreciate equipment over lease term if equipment doesn't transfer ownership, economic life if it does
- interest and amortization expense on IS
Lessee accounting for operating lease
- Recognize ROU asset and Lease Liability (PV of pmts)
- Both amortized using effective interest
- Payment JE: lease exp and cash for actual payment (interest expense part of lease exp), Lease liability and ROU amor using effective int
Lessor accounting for operating lease
- Keep asset on BS and depreciate
- Lease Income recog on straight line basis
- @ inception, lease receivable/UE lease inc = pmts x amount of payments
- Payment JE: cash/UE income/Income/receivable for amount received, normal depreciation
- a refundable security deposit is booked as a liability until refunded to lessee
Lessor accounting for sales-type lease
- Derecognize asset
- Recognize lease receivable on BS
- Lease rec amor and int income recog using eff int method
- the diff btwn the fair value and book value of lease asset is recognized as a gain
- JE of a sales type financing lease with a residual asset (salvage value discounted), and cash paid for direct costs:
- DR: lease exp, residual asset, lease rec
- CR: cash, gain, equip
- "cash selling price" = present value at inception of lease
Lessor accounting for direct financing lease
- Recognize lease receivable on BS
- Lease rec amor and Interest income recognized using effective interest method
- if no direct costs involved, minimum lease pmts + residual value = lease rec for direct financing
Failed Sale
If the underlying lease in a sale-leaseback is a financing lease, its considered equivalent to a repurchase and classified as a failed sale
Items that create a DTL (tax income later)
- installment sales
- construction contract accounting
- equity method (undistributed dividends)
- unrealized holding G/L on trading securities (recognized in NI, but not taxed until sold, represents future taxable income)
Items that create a DTA (tax deduction later)
- estimated liability/warranty expense
- bad debt exp (allowance vs direct write off)
- if direct write off is used for tax purposes & no allowance is recorded, the temporary diff = the allowance balance for GAAP
Items that create a DTL (tax deduction first)
- depreciation expense
- amortization of franchise
- prepaid expenses (cash basis for tax)
Items that create a DTA (tax income first)
- prepaid rent
- prepaid interest
- prepaid royalties
Permanent taxable differences
- life insurance premiums
- life insurance payouts
- municipal bond interest
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