Lesson 23 March 2016 Accounting BONDS ISSUE Corporate

Lesson 23 March 2016 Accounting

BONDS ISSUE Corporate bonds are debt instruments created by companies for the purpose of raising capital. They are called fixedincome securities because thay pay a specified amount of interest on a regular basis. In exchange, the bondholder receives the principal amount back on a maturity date. In addition, the bondholder has the right to receive coupons on the bond’s interest

BONDS ISSUE A bond can be issued at par, at premium or at a discount. When the terms premium and discount are used in reference to bonds, they are telling investors that the purchase price of the bond is either above or below its par value.

BONDS ISSUE 100

BONDS ISSUE A bond is issued at discount when it is sold for less than its par value. Example: par value = 100; issue price: 98 A bond is issued at premium when it is sold for more than its par value. Example: par value = 100; issue price: 103

THE LEASING A lease agreement is a contract between two parties, the lessor and the lessee. The lessor is the legal owner of the asset, the lessee obtains the right to use the asset in return for rental payments.

TWO TYPES OF LEASING FINANCING LEASING (or Capital Lease) OPERATING LEASING For the international accounting standards, the Financing Leasing and the Operating Leasing have different recording methods.

FINANCING LEASE A Financing Lease is a lease that transfers substantially all the risks and rewards to ownership of an asset to the lessee. A Financing Lease should be recorded by the lessor as a sale of property and by the lessee as a purchase.

OPERATING LEASE An Operating Lease is defined as being any lease other than a finance lease. Here, the risks and rewards are not transferred to the lessee.

CLASSIFICATION OF A LEASE In order to gain classification of the type of lease you are dealing with, you must first look at the information provided within the scenario and determine if the risks and rewards associated with owning the asset are with the lessee or the lessor. If the risks and rewards lie with the lessee then it is said to be a financing lease, if the lessee does not take on the risks and rewards, then the lease is said to be an operating lease. If the lease term is equal to 75% or more of the estimated economic life of the leased property, the lease is a financing lease.

FINANCING LEASE INDICATORS There are many risks and rewards outlined within the standard. The main reward is where the lessee has the right to use the asset for most of, or all of, its useful economic life. The primary risks are where the lessee pays to insure, maintain and repair the asset. When the risks and rewards remain with the lessee, the substance is such that even though the lessee is not the legal owner of the asset, the commercial reality is that they have acquired an asset with finance from the leasing company and, therefore, an asset and liability should be recognised.

FINANCING LEASE INDICATORS Other indicators that a lease is a financing lease include: • The lease agreement transfers ownership of the asset to the lessee by the end of the lease; • The leased asset is of a specialised nature; • The lessee has the option to purchase the asset at a price expected to be substantially lower than the fair value at the date the option becomes exercisable.

FINANCING LEASE ACCOUNTING Initial Accounting The initial accounting is that the lessee should capitalise the finance leased asset and set up a lease liability for the value of the asset recognised. The accounting for this will be: • Non-current assets (or Fixed Assets) • Finance lease liability (in the Financial Debts)

OPERATING LEASE ACCOUNTING When the lesson gives the lessee the right to use leased property for a limited period of time but retains the usual risk and rewards the ownership, the contract is known as an operating lease. An operating lease is the most common type of lease, where the lessor continues to own the leased asset, and the lessee uses the asset over a fixed period of time, with the intent of eventually returning the asset to the lessor. The lessor is the owner of the property; the lessee is a tenant or renter. Examples of assets frequently acquired by lease include automobiles, building space, computers and equipment.

OPERATING LEASE ACCOUNTING Operating Lease Accounting by Lessee The lessee classifies each lease payment as an rental expense. No asset or liability (other than a short-term liability for accrued rent payable) relating to the lease appears in the lessee’s balance sheet.

OPERATING LEASE ACCOUNTING Operating Lease Accounting by Lessor The lessor accounts for the monthly leases payments received as rental revenue

UNEARNED REVENUES Unearned revenues occurs when a company receives money before the money is earned. In essence, the customer pays in advance for services that have not yet been performed by the recipient of the payment, or for goods that have not yet been transferred. Unearned revenue is a liability for the recipient of the payment, so the initial entry is a debit to the cash account and a credit to the unearned revenue account.

UNEARNED REVENUES As a company earns the revenue, it reduces the balance in the unearned revenue account (with a debit) and increases the balance in the revenue account (with a credit).

PREPAID EXPENSES Prepaid expenses are future expenses that have been paid in advance. You can think of prepaid expenses as costs that have been paid but have not yet been used up or have not yet expired. A prepaid expense is an expenditure paid for in one accounting period, but for which the underlying asset will not be consumed until a future period.

PREPAID EXPENSES A common prepaid expense is the sixmonth premium for insurance on a company's vehicles. Since the insurance company requires payment in advance, the amount paid is often recorded in the current asset account Prepaid Insurance.