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CFA® Level I · Financial Statement Analysis · free lesson
Topics in Long-Term Liabilities and Equity
Leases, pensions and share-based pay create obligations and costs that stretch over many years, and the accounting for each decides how much debt, expense and equity a company reports. This module covers lessee and lessor accounting under IFRS 16 and ASC 842, defined contribution and defined benefit pension plans, stock grants and options, and the disclosures and ratio adjustments an analyst needs to compare companies on a like-for-like basis.
What you will learn
1. Explain how a lessee accounts for leases under IFRS 16 and ASC 842, and calculate the lease liability, right-of-use asset and lease expense.
- Lease liability = present value of lease payments; ROU asset = liability plus prepaid payments and initial direct costs less incentives.
- IFRS 16: single model with depreciation plus interest, so expense is front-loaded.
- ASC 842 finance lease: same as IFRS 16. Operating lease: single straight-line lease cost in operating expenses.
- IFRS exempts short-term and low-value leases; US GAAP exempts only short-term leases.
- Principal repayments are financing cash flows; US GAAP operating lease payments are entirely operating cash flows.
2. Explain how a lessor accounts for finance (including sales-type) leases and operating leases, and describe the effects on its financial statements.
- IFRS lessor: finance lease if substantially all risks and rewards transfer; otherwise operating lease.
- US GAAP lessor: sales-type (meets any of the five tests), direct financing, or operating.
- Finance or sales-type lease: derecognize the asset, record a net investment in the lease and earn interest income.
- Manufacturer or dealer lessors recognize selling profit at commencement on sales-type or finance leases.
- Operating lease: lessor keeps and depreciates the asset and recognizes lease income straight-line.
3. Explain the financial reporting of defined contribution and defined benefit pension plans and calculate the funded status and pension cost.
- DC plan: expense = contribution; no further obligation for the employer.
- DB plan: funded status = plan assets - DBO, reported as a net pension liability or asset.
- Total periodic pension cost = service cost + interest cost - actual return +/- actuarial losses (gains) = change in net liability + contributions.
- IFRS: service cost and net interest in profit or loss; remeasurements in OCI, never recycled.
- US GAAP: expected return on assets and amortization of OCI amounts enter pension expense.
4. Explain the accounting for share-based compensation, including stock grants and stock options, and its effects on the financial statements.
- Measure at grant-date fair value; expense over the vesting period; credit equity.
- Stock grants are valued at the grant-date share price; options use an option pricing model.
- Higher volatility, longer term and higher risk-free rate raise option value; higher dividends lower it.
- Equity-settled awards are not remeasured; cash-settled awards are liabilities remeasured each period.
- The expense is non-cash (added back in CFO), and exercise or vesting dilutes existing shareholders.
5. Analyze lease, pension and share-based compensation disclosures and adjust leverage, coverage and profitability measures to compare companies.
- IFRS 16 lessees show higher EBITDA and interest expense than US GAAP operating lessees; coverage ratios are usually lower.
- Make lessees comparable by treating all lease liabilities as debt and using pre-lease-cost EBITDA (or EBITDAR) consistently.
- A net pension liability is debt-like; check discount-rate and return assumptions against peers.
- Share-based compensation is a real cost even when excluded from non-GAAP earnings.
- Read maturity schedules and covenants for refinancing risk.
Module at a glance
- Lessees record a lease liability at the present value of payments and a matching right-of-use asset.
- IFRS 16 and ASC 842 finance leases: depreciation plus interest (front-loaded); ASC 842 operating leases: straight-line single cost.
- Lessors keep a two-model approach: finance or sales-type leases create a receivable; operating leases keep the asset.
- DB plans report funded status (plan assets - DBO); IFRS puts remeasurements in OCI permanently.
- Share-based pay is expensed at grant-date fair value over the vesting period and is non-cash.
- Adjust leases, pensions and SBC consistently before comparing leverage, coverage and margins.
This free module has 5 lessons, 14 practice questions with full explanations.