36 Topics in Long-Term Liabilities and Equity

IAS 19 Disclosures for Defined Benefit Plans

• Describing how defined benefit plans affect amounts, timings, and uncertainties relating to future cash flows is an objective set out in IAS 19
• Objectives of IAS 19 include explaining the characteristics and risks of a firm's defined benefit plan, and identifying amounts in the financial statements relating to defined benefit plans.

Leasing vs. Buying Fixed Assets

• A lessee isn't usually concerned with the value of an asset at the end of a lease unless there's an option to buy
• Leases typically require a small down payment, if any, at lease inception
• Financing costs may be lower with a lease than with a loan to purchase the asset because the lease is secured by an asset

Finance Leases

• ABC Company's lease of equipment for five years with $20,000 annual payments is a finance lease under U.S. GAAP because its term equals the equipment's useful life
• The company recognizes the lease's present value as a right-of-use asset and amortizes it straight-line over the lease term.

Finance Leases and Lessors

• Only if the lease value exceeds the lessor's asset net book value will the lessor recognize a profit or loss when entering a finance lease
• At the beginning of the term, the lessor adds a lease receivable to the balance sheet and amortizes it over the term of the lease

Pension Plans

• Difference between the fair value of a defined benefit pension plan's assets and estimated benefit obligation is recognized on the balance sheet as a net pension asset or liability
• A plan with a net pension asset is overfunded, whereas a plan with a net pension liability is underfunded

Operating Leases and Lessors

• A lessor must disclose impairments of a leased asset for an operating lease
• Interest recognized in the income statement relating to the lease receivable asset and selling profit or loss on derecognition of the leased asset are finance leases

Operating Leases

• For an operating lease, the leased physical asset appears on the lessor's balance sheet.
• The lessor recognizes depreciation expense on the asset
• The lessee recognizes an asset and a liability

Balance Sheet and Lease Liability

• The lessee records the asset and liability at the same value, equal to the present value of the promised lease payments

Leases

• For financial reporting, both IFRS and U.S. GAAP require airlines to record an asset and a liability on its balance sheet, for finance and operating leases
• Condition doesn't apply for leases that are short-term or low-value under IFRS

Employer Contributions under IFRS

• Under IFRS minimum disclosure requirements for defined benefit plans include expected future employer contributions
• The only disclosure required for defined contribution plans is the separate disclosure of the employer's contribution expensed in the income statement

Balance Sheets and Pension Plans

• Only a defined benefit plan has a funded status, and appears on the balance sheet as an asset or liability
• Employer payments into a defined contribution plan are recognized as expenses in the period incurred

Determining Finance Leases

• A lease is reported as a finance lease when ownership of the leased asset transfers to the lessee
• Among the other conditions for a finance lease are that the present value of the lease payments is greater than or equal to the asset's fair value, and that the lessor has no other use for the asset.

Share-Based Compensation

• Both IFRS and U.S. GAAP require companies to estimate share-based compensation's fair value at the grant date
• The company expenses it to the income statement over the vesting period

Share-Based Compensation Reporting

• Required disclosures are the nature of the plan and key details like grant date, vesting date, service period, and settlement characteristics
• Also needed is how the fair value at the grant date was determined, and the effect on earnings and the financial position

Operating Leases and Lessors

• From a lessor's perspective, the lease payments are recognized as income
• The leased asset isn't removed from the balance sheet because depreciation is recorded over the asset's useful life

Leases and Risk

• Both the lessee and lessor report a lease as an operating lease when the risks of ownership aren't substantially transferred to the lessee

Lease Classification

• A lessor removes the leased asset from its balance sheet and records interest income from the lease only if it's classified as a finance lease

Finance Lease Classification for Lessees

• A lessee classifies a lease as a finance lease if the lessor has no other use for the asset
• Leases must be classified as a finance lease if the present value of the lease payments equals the leased asset

Leased Assets

• For an operating lease, the lessor retains the leased asset on its balance sheet and recognizes depreciation expense over its life
• For a finance lease, the lessor removes the asset from its balance sheet, recognizing a lease receivable

Lease Payments and Cash Flow

• Repayment of principal is a cash outflow from financing on the lessee's cash flow statement
• The interest portion is an operating cash outflow under U.S. GAAP
• Under IFRS the interest portion can be treated as an operating or financing outflow

Long-Term Leases

• For a long-term lease, the amount recorded initially by the lessee as a liability is the present value of the lease payments
• With a finance lease, both an asset and liability are reported on the lessee's balance sheet, equal to the present value of the promised lease payments

Disclosures under IFRS 16

• Under IFRS 16, both the lessee and lessor must disclose a maturity analysis of future payments
• The lessee discloses lease liabilities and the lessor discloses lease-payment receivables
• Only the lessee discloses the restrictions and covenants imposed by the lease, along with the interest expense