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Topics in Long-Term Liabilities and Equity

Financial Statement Analysis

Financial Reporting for Postemployment and Share-Based Compensation

Learning Outcome Statement:

explain the financial reporting of defined contribution, defined benefit, and stock-based compensation plans

Summary:

This LOS covers the financial reporting aspects of various compensation plans including defined contribution plans, defined benefit pension plans, and stock-based compensation plans. It discusses the accounting treatments, recognition, and measurement of these plans under different accounting standards (IFRS and US GAAP), and highlights the complexities involved in measuring obligations and expenses related to these compensation schemes.

Key Concepts:

Employee Compensation

Employee compensation packages may include salary, bonuses, health and life insurance, pension plans, and share-based compensation. The structure of these packages is influenced by labor markets, business cycles, and labor laws.

Deferred Compensation

Deferred compensation includes plans where benefits are vested over time, such as pension plans and stock options. These plans are complex to report financially due to the timing of recognition and measurement challenges.

Defined-Benefit Pension Plans

Defined-benefit plans promise future benefits to employees based on formulas that often depend on salary and service years. Financial reporting requires assumptions about salary, lifespan, and discount rates to measure present obligations.

Accounting for Defined-Benefit Plans under IFRS

Under IFRS, changes in pension assets or liabilities include components like service costs and net interest expenses, which impact the income statement, and remeasurements, which are recognized in other comprehensive income.

Accounting for Defined-Benefit Plans under US GAAP

US GAAP views changes in pension assets or liabilities through components such as service costs, interest expenses, expected return on plan assets, and actuarial gains and losses, some of which are amortized over time.

Share-Based Compensation

This includes options and stock grants intended to align employee interests with shareholders. The fair value of these compensations is recognized over the vesting period, and changes in stock price after the grant date do not affect the expense recognized.

Formulas:

Pension Obligation

Pension Obligation=Present Value of Liabilities−Fair Value of Plan AssetsPension\ Obligation = Present\ Value\ of\ Liabilities - Fair\ Value\ of\ Plan\ Assets

This formula calculates the net pension obligation or asset, which is reported on the balance sheet. A positive value indicates a net pension liability, while a negative value indicates a net pension asset.

Variables:
PresentValueofLiabilitiesPresent Value of Liabilities:
The discounted future pension payments
FairValueofPlanAssetsFair Value of Plan Assets:
The current market value of the fund's assets
Units: currency (e.g., USD, GBP)

Leases

Learning Outcome Statement:

explain the financial reporting of leases from the perspectives of lessors and lessees

Summary:

Leases are contracts that allow a lessee to use an asset owned by a lessor for a period of time in exchange for consideration. The financial reporting of leases varies depending on whether the lease is classified as a finance lease or an operating lease, and whether the reporting is under IFRS or US GAAP. Lessees and lessors must follow specific accounting treatments for each type of lease, which affects their financial statements differently.

Key Concepts:

Lease Definition

A lease is a contract where the lessor allows the lessee to use an asset in exchange for payment over a specified period. The lessee gains economic benefits from the asset, and has control over its use.

Advantages of Leasing

Leasing requires less upfront cash, offers cost-effectiveness due to secured borrowing, and reduces risks associated with asset ownership like obsolescence.

Lease Classification

Leases are classified as either finance leases or operating leases based on criteria such as transfer of ownership, lease term, and the present value of lease payments.

Financial Reporting of Leases

The reporting of leases involves recognizing assets and liabilities on the balance sheet and affects income statements and cash flows differently for finance and operating leases.

Lessee and Lessor Accounting

Both lessees and lessors must account for leases on their financial statements. Lessees record a right-of-use asset and lease liability, while lessors record lease receivables or continue to recognize the leased asset.

Formulas:

Present Value of Lease Payments

PV=∑t=1nPt(1+r)tPV = \sum_{t=1}^{n} \frac{P_t}{(1 + r)^t}

This formula calculates the present value of future lease payments, discounted back at the lease's interest rate. It is used to determine the initial recognition of lease liabilities and assets.

Variables:
PVPV:
Present value of the lease payments
PtP_t:
Payment in period t
rr:
Discount rate
tt:
Time period
nn:
Total number of periods
Units: currency

Presentation and Disclosure

Learning Outcome Statement:

describe the financial statement presentation of and disclosures relating to long-term liabilities and share-based compensation

Summary:

This LOS covers the requirements and practices for presenting and disclosing information about leases, post-retirement benefits, and share-based compensation in financial statements. It includes details on how lessees and lessors should report leases under IFRS and US GAAP, the extensive disclosures required for defined benefit and defined contribution pension plans, and the necessary disclosures for share-based compensation arrangements.

Key Concepts:

Lease Disclosure

Both lessees and lessors must provide quantitative and qualitative information about their leases, including the carrying amount of right-of-use assets, total cash outflow for leases, and a maturity analysis of lease liabilities. This helps users assess the cash flows, uncertainties, and financial impact of leases.

Postemployment Plans Disclosure

Defined benefit and defined contribution plans require disclosures such as the nature of the benefits, risks associated, and the impact on future cash flows. Defined benefit plans need extensive disclosures including the reconciliation of net pension assets/liabilities and a sensitivity analysis of significant assumptions.

Share-Based Compensation Disclosure

Companies must disclose information about share-based compensation arrangements, including the types of awards, terms and conditions, and the fair value of these awards. This includes details on the number and fair value of options granted, exercised, and outstanding, as well as the expected future cash flows and expenses related to these plans.

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