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8.0. LONG-TERM LIABILITIES AND EQUITY - Coggle Diagram
8.0. LONG-TERM LIABILITIES AND EQUITY
Finance lease vs Operating lease
Definition
A
lease
is a contract between the owner of the asset (lessor) and another party that wants to use the asset (
lessee
).
The lessee gains the right to use the asset for a period of time in return for periodic lease payments
3 requirements for a lease contract
refer to a specific asset
give the lessee effectively all the asset's economic benefits during the term of the lease
give the lessee the right to determine how to use the asset during the term of the lease
The advantages of leasing rather than purchasing an asset
Less initial cash outflow
Less costly financing
Convenience and less risk of obsolescence (lỗi thời)
The advantage on lessor's view
leasing has
advantages over selling outright
, which include
earning interest income
over the lease term and
increasing the addressable market
for its product by offering customers the ability to use or control an asset while paying smaller amounts over time
Types
Finance lease
: Transferred
substantially
all the benefits and risks of ownership to the lessee.
Operating lease:
Does not transferred substantially
all the benefits and risks of ownership to the lessee
P.170 SLIDE and P.48 in notebook
Finance lease criteria (same for IFRS and US,
meet any in 5
) / Not meet -> operating lease
Lessee
Finance lease (GAAP) & Lease (IFRS)
ROU Assets (quyen su dung)
ROU asset = PV of future lease payment (at lease inception)
Straight-line amortization
of ROU asset - Cost model (after the inception)
Lease liability
Lease liability = PV of future lease payments (at lease inception)
Reduction of lease liability from lease payment each period - Amortized cost (after the inception)
Income statement
Interest expense on lease liability
Amortization expense on leased asset
Cash flow statement
Interest expense =
CFO/CFF outflow under IFRS
CFO outflow under GAAP
Reduction of lease liability = CFF outflow
Operating lease (GAAP)
ROU Assets & Lease Liability
Record as finance lease
. But the ROU asset is
not straight-line
amortized:
Amortization = reduction of lease liability
Income statement
Rental expense = Lease payment
Cash flow statement
Lease payments = CFO outflow
Lessor
Finance lease
Assets
Remove assets
Lease receivables = PV of furture lease payments (at lease inception)
Reduction of lease receivable from lease payment received each period - Amortized cost (after the inception)
Liability
N/A
Income Statement
Interest income on lease receivables
Gain/loss = PV of future lease payments (sales) - book value of leased asset (COGS)
Gian mean: sales-type, Nil means: direct financing
CF statement
Lease payments = CFO inflow
Operating lease
Assets
Retain assets (at least inception)
Depreciation on leased assets (after the inception)
Liability
N/A
Income statement
Lease revenue = lease payment
Depreciation expense on leased assets
CF statement
Lease payments = CFO inflow
Advantage
Advantage of lease from lessee's view point
Operating lease
Risk of ownership remains with lessor
Net income is higher than early yrs
Leverage ratios are lower
Asset turnover ratios in later year
and ROA are higher
Finance lease
Tax advantage due to
lower net income in early years
Depreciation + interest expense > lease payment
CFO is higher
Advantage of lease from lessor's view point
Early year
Later year
Defined Contribution plans and defined benefit pension plans
Contribution plans
Definition
Pension plans in which the employee and the company is required to contribute and invest a certain of funds into the plan. However, the company makes no promise to the exployee regarding the furture vaue of the plan assets
Contribution from employer
:
Amount is defined each period
Amount of future benefit to employee:
Depends on investment performance of plan's asset
Investment risk goes to
:
Employees
Accounting
On BS:
Recoeds a decrease in cash
If the agreed-upon amount is not deposited into the plan during a particular period -> the outstanding amount is recognized as a liability
On IS:
Employer's contribution is reported as pension expense
On CF:
Employer's contribution is reported as CFO outflow
Benefit plans
Definition
Pension plans in which the company contributes into the plan and promises to pay future benefits to the employee during retirement
Contribution from employer
:
Depends on current period estimate and investment performance of assets
Amount of future benefit to employee
:
Based on plan's formula: the firm promises to make periodic payments to employees after retirement
Investment risk goes to:
the employers
Accounting
(1) Pension benefit = a% x final salary at retirement x number of years of services
(2) Pension obligation = PV of annual pension payment
Allocated over the years of services: Pension expense included in COGS/SG&A in the IS
(2) Assumption to determine the
pension obligation
Expected salary at date of retirement
Number of yrs the employee is expected to live after retirement
The discount rate (typically assumed to be the high-quality corporate bond yield)
(3) Fair value of plan asset - Pension obligation = Net pension asset/ liability
(3)
On BS
: fair value of plan asset > / < the pension obligation => surplus / deficit => net pension asset / net pension liability
On IS
: The
change in net pension liability/asset
is recognized either in profit and loss or in other comprehensive income
The change in the pension obligation
IFRS
On IS:
Employees' service costs
The net interest expense or income
On OCI:
Change in the net pension asset or liability during a period (remeasurements)
Actuarial gains & losses
Actual return on plan assets - any return in the net interest expense or income
GAAP
On IS:
Employees' service costs for the period
Interest expense accrued on the beginning pension obligation
Expected return on plan assets, which is a reduction in the amount of expense recognized
On OCI:
Past service cost
Actuarial gains and losses (amortized into pension expense over the future service period of the employees covered by the plan)
Defition
Employee's service cost = PV of the increase in pension benefit earned by the employee as a result of providing 1 more year of service to the company
Net interest expense/income (IFRS) = beginning net pension liability/asset x discount rate used to estimate the pension obligation
Interest expense (GAAP): the company does not pay out service costs earned by the employee over the year until retirement
Expected return on plan asset: is an explicit assumption for the expected long-term rate of return on plan assets
Actuarial losses/gains: (IFRS & GAAP): occure when changes are made to the assumptions on which firm bases its estimated pension obligation
Actual return (IFRS): on plan assets includes: interest, dividends, and other income derived from the plan asset, including realized and unrealized gains or losses
Past service costs (GAAP): retroactive benefits awarded to employees when a plan is initiated or amended
Share-based compensation
Accounting treatment
An expense and thus as a reduction of earnings even when no cash changes hands
IFRS & GAAP giống nhau
Stock Grants
Vest immediately:
Compensation expense is measured as the
fair value
(usually market value) of
the shares issured
at the
grant date
Vest (thực hiện) not immediately:
Is allocated over the employess's service period. (from grant to vest day)
Restricted stock grant:
requires the employee to return shares to company if some conditions are
not
met.
recognized same to stock grant => gain in IS
Stock option
Compensation expense is measured as the
estimated fair value
, using an appropriate valuation model:
Consistent with fair value measurement
Based on estiablished principles of ginancial economic theory
Reflext all substantive characteristics of the award
This compensation expense is allocated over the employee's service period
Black-Scholes-Merton or binomial models
Grant date
Vesting date
Exercise date
Expiration date
Performance shares: được nhận hay ko thì phụ thuộc vào performance (ROE) => create incentives for managers to manipulate FS
Stock appreciation rights (SARs) or phantom stock
:
changes in the value of shares without requiring the employee to hold the shares (cash settled)
Advantages:
(1) The potential for risk aversion is limited
(2) Ownership is not diluted
Valued at
fair value
and compensation expense is allocated over the service period of the employee
Definition
Is intended to align employee's interests with those of the shareholders and is another common type of deferred compensation, tends to be highly concentrated among more senior-level, such as executives, directors
Types
(3) Cash-settled, which can be accrual of a liability
(1) Stock grants
(2) Stock options
Advantage
(1) It aligns (liên kết) manager's interests with those of the shareholders
(2) No cash outlay
Disadvantages
(1) Issuing shares to employees dilutes existing shareholders
(2) The increased ownership may
lead managers
to be
risk averse
or
excessive risk taking
, can also occur with the awarding of stock options
(3) It doest'n necessarily provide the desired incentives and may improperly reward or punish employeee performance
Presentation and disclosure