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[FINANCIAL STATEMENT ANALYSIS]
CHAP 2: BALANCE SHEET
(4) NON-CURRENT…
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Restrictions imposed by the lender on the borrower to protect the lender's position
-> Reduce default risk & borrowing costs
=> Technical default: The lender/ bondholders can demand immediate repayment of principal if the firm violates a covenant.
- Less initial cash flow
- Less costly financing
- Less risk of obsolescence
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- BS: Record a right-of-use asset & lease liability (both equal to PV of lease payments)
- IS:
+) Right-of-use asset is amortized (straight-line) => Amortized expense
+) Interest expense
- CFS:
+) Principal repayment: CF from financing;
+) Interest payment: Operating/ Financing Cash outflow (IFRS); Operating Cash outflow (GAAP)
- BS: Record a right-of-use asset & lease liability (both equal to PV of lease payments)
- IS:
+) Amortized expense & Interest expense are combined (Right-of-use asset is amortized by the same amount each period as lease liability)
- CFS:
+) Principal repayment: CF from financing;
+) Interest payment: Operating/ Financing Cash outflow (IFRS); Operating Cash outflow (GAAP)
- No Lease asset or liability is reported on BS
- But Lease payment is reported as Rental expense on IS
- BS: Remove Leased asset & add Lease receivable. IF not equal -> Record gains/ losses.
- IS: Lease receivable is amortized using effective IR -> Interest portion of lease payment as Income
- CFS: Operating Cash outflow
- BS: NOT remove Leased asset, continue to record Depreciation expense
- IS:
+) Lease payment as Income
+) Depreciation & other costs associated with leasing as Expenses
- CFS: Operating Cash outflow