Liabilities Accounting-Based Liability Restrictions(Covenants) Aim: Safequard creditors' investments Common restrictions include: Dividend distribution restrictions Working capital restrictions Debt-to-equity ratio restrictions Seniority of asset claim restrictions Acquisition and divestment restrictions Liability issuance restrictions Potential information sources: Liability prospectus, annual report, SEC filings, and creditor information services(e.g, Moody's)
Liabilities Accounting-Based Liability Restrictions (Covenants) Aim: Safeguard creditors’ investments Common restrictions include: n Dividend distribution restrictions n Working capital restrictions n Debt-to-equity ratio restrictions n Seniority of asset claim restrictions n Acquisition and divestment restrictions n Liability issuance restrictions Potential information sources: Liability prospectus, annual report, SEC filings, and creditor information services (e.g., Moody’s)
Leases Leasing Facts Lease- contractual agreement between a lessor (owner) and a lessee(user or renter) that gives the lessee the right to use an asset owned by the lessor for the lease term MLP- minimum lease payments (MLP) of the lessee to the lessor according to the lease contract
Leases Leasing Facts Lease – contractual agreement between a lessor (owner) and a lessee (user or renter) that gives the lessee the right to use an asset owned by the lessor for the lease term MLP – minimum lease payments (MLP) of the lessee to the lessor according to the lease contract
Leases Lease Accounting and Reporting (1)Capital Lease Accounting For leases that transfer substantially all benefits and risks of ownership-accounted for as an asset acquisition and a liability incurrence by the lessee, and as a sale and financing transaction by the lessor A lessee classifies and accounts for a lease as a capital lease if at its inception, the lease meets any of four criteria lease transfers ownership of property to lessee by end of the lease term (t lease contains an option to purchase the property at a bargain price (iti) lease term is 75% or more of estimated economic life of the property (iv) present value of rentals and other minimum lease payments at beginning of lease term is 90% or more of the fair value of leased property less any related investment tax credit retained by lessor (2)Operating Lease Accounting For leases other than capital leases-the lessee (lessor) accounts for the minimum lease payment as a rental expense(income)
Leases Lease Accounting and Reporting (1) Capital Lease Accounting For leases that transfer substantially all benefits and risks of ownership—accounted for as an asset acquisition and a liability incurrence by the lessee, and as a sale and financing transaction by the lessor A lessee classifies and accounts for a lease as a capital lease if, at its inception, the lease meets any of four criteria: (i) lease transfers ownership of property to lessee by end of the lease term (ii) lease contains an option to purchase the property at a bargain price (iii) lease term is 75% or more of estimated economic life of the property (iv) present value of rentals and other minimum lease payments at beginning of lease term is 90% or more of the fair value of leased property less any related investment tax credit retained by lessor (2) Operating Lease Accounting For leases other than capital leases—the lessee (lessor) accounts for the minimum lease payment as a rental expense (income)
Leases Lease Disclosure and Off-Balance-Sheet Financing Lease Disclosure Lessee must disclose: (1) future MLPs separately for capital leases and operating leases--for each of five succeeding years and the total amount thereafter, and(2 )rental expense for each period an income statement is reported Off-Balance-Sheet Financing Off-Balance-Sheet financing is when a lessee structures a lease so it is accounted for as an operating lease when the economic characteristics of the lease are more in line with a capital lease-neither the leased asset nor its corresponding liability are recorded on the balance sheet
Leases Lease Disclosure and Off-Balance-Sheet Financing Lease Disclosure Lessee must disclose: (1) future MLPs separately for capital leases and operating leases—for each of five succeeding years and the total amount thereafter, and (2) rental expense for each period an income statement is reported Off-Balance-Sheet Financing Off-Balance-Sheet financing is when a lessee structures a lease so it is accounted for as an operating lease when the economic characteristics of the lease are more in line with a capital lease—neither the leased asset nor its corresponding liability are recorded on the balance sheet
Leases Frequency of Capital and Operating Leases Operating Only 43% Capital Only 3% Both Capital Operating Neither 44% 10%
Leases Frequency of Capital and Operating Leases Capital Only 3% Operating Only 43% Both Capital & Operating Neither 44% 10%