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Financial Statement AnalysisModule 8 of 9

Topics in Long-Term Liabilities and Equity

4

Concepts

2

Formulas

1

Decisions

3

Quiz Questions

Key Concepts

4 concepts covered in this module.

Finance Lease (Lessee)

Recognize right-of-use asset and lease liability on BS. Depreciate asset, record interest on liability. Front-loaded expense.

Operating Lease (US GAAP)

US GAAP: right-of-use asset and liability on BS, but single straight-line lease expense. IFRS: treats nearly all leases as finance.

Defined Benefit Pension

Employer promises specific retirement benefit. Pension obligation and plan assets on BS. Net funded status = Plan assets - PBO.

Share-Based Compensation

Stock options: fair value at grant date expensed over vesting period. Dilutes EPS. Stock grants vest based on time/performance.

Formulas

2 essential formulas for this module.

Net Pension Liability

Net Pension = PBO - Fair Value of Plan Assets

Where: Positive = underfunded, Negative = overfunded

Pension Expense

Pension Exp = Service Cost + Interest Cost - Expected Return on Plan Assets + Amortization of prior items

Where: Per income statement

Decision Frameworks

1 decision frameworks to guide your analysis.

Finance vs Operating lease impact?

  • Finance: higher assets/liabilities, higher early expense (front-loaded), EBITDA appears higher
  • Operating (GAAP): same BS treatment but straight-line expense, lower EBITDA

Mind Map

Visual overview of how concepts connect in this module.

LT Liabilities & Equity
Leases
Finance: asset + liability on BS
Operating (GAAP): same BS, SL expense
IFRS 16: all finance for lessee
Depreciation + interest vs rent
Pensions
Defined benefit: employer risk
PBO vs plan assets
Net funded status
Assumptions matter
Share-Based Comp
Stock options
Restricted stock
Fair value at grant
Expense over vesting
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Flashcard

Finance Lease (Lessee)

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Answer
Recognize right-of-use asset and lease liability on BS. Depreciate asset, record interest on liability. Front-loaded expense.
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