Tài chính doanh nghiệp - Chapter 10: Noncurrent (long - Term) liabilities

Chapter 10NONCURRENT (LONG-TERM) LIABILITIESPresenter’s namePresenter’s titledd Month yyyyBonds: contentsPricing of debt based on present value of future cash payments.How an issuer accounts for debt:Issued at par Issued at a price other than parIssuance, periodic interest payments, repaymentRole of debt covenants in protecting creditors.Copyright © 2013 CFA Institute2Bonds: borrowers’ cash flowsCopyright © 2013 CFA Institute3At issuance (Time 0), borrower receives cash in exchange for bonds.Issue price equals present value of future cash flows.12345Pays periodic interest at the coupon rate.At maturity, pays principal amount.0Determining the value of a bond: exampleAssumptions about the debt instrument (the bond):Principal = $1,000; Coupon interest rate = 10%; Maturity = 5 years Future cash flows for a five-year, 10% bond, $1,000 principal.Payments include periodic interest payments and principal payment.The market value of a bond is equal to the present value of its future cash flows. Copyright © 2013 CFA InstituteDiscount each payment at the appropriate discount ratePV = ?4Accounting for debt by the issuer: example Assumptions about the bond:Principal = $1,000.Coupon interest rate: Stated or contractual rate of interest to be paid to the bondholders = 10%, annual.Maturity = 5 years.Assumption about the debt market on the day of valuing:Market rate (yield or effective rate): Return the market demands on that bond on day we are valuing it = 10%.For simplicity, assume a flat interest rate yield curve.Copyright © 2013 CFA Institute5TimeInterest PaymentPrincipal PaymentTotal PaymentPresent Value of Total Payment01 100 - 100 91 2 100 - 100 83 3 100 - 100 75 4 100 - 100 68 5 100 1,000 1,100 683 Total 500 1,000 1,500 1,000 Accounting for debt: examplePrincipal = $1,000; Coupon interest rate = 10%; Maturity = 5 years.Market rate on the day we are valuing the bond = 10%. Bond will be issued at par (i.e., 100% of face value). PV = FV/[(1+i)n]Copyright © 2013 CFA Institute6Issuer’s Accounting for debt at issuance: examplePrincipal = $1,000; Coupon interest rate = 10%, annual payments; Maturity = 5 years.Market rate on issuance date = 10%. Issued at par. Recorded in the long-term liability section of the balance sheet because maturity date is > one year awayIssuer’s balance sheet: Increase cash for $1,000 and increase bond payable for $1,000.Issuer’s journal entry: Debit cash and credit bonds payable.ASSETS = LIABILITIES +OWNERS’ EQUITY+ $1000Cash+ $1000Bond payableCopyright © 2013 CFA Institute7Issuer’s Accounting for debt at interest payment: examplePrincipal = $1,000; Coupon interest rate = 10%, annual payments; Maturity = 5 years.Issued at par.For simplification, assume each interest payment occurs on the last day of the fiscal year.Issuer’s balance sheet when interest paid: Decrease cash and increase interest expense (which reduces owners’ equity). Issuer’s journal entry: Debit interest expense, credit cash.ASSETS = LIABILITIES +OWNERS’ EQUITY– $100Cash– $100Interest expenseCopyright © 2013 CFA Institute8Issuer’s Accounting for debt repaymentPrincipal = $1,000; Coupon interest rate = 10%, annual payments; Maturity = 5 years.Issued at par. For simplification, assume principal repayment occurs on the last day of the fiscal year.Issuer’s balance sheet when principal repaid: Decrease cash and decrease bonds payable.Issuer’s journal entry: Debit bonds payable and credit cash.ASSETS = LIABILITIES +OWNERS’ EQUITY– $1000Cash– $1000Bonds payableCopyright © 2013 CFA Institute9Issuer’s Accounting for debt over its life: examplePrincipal = $1,000; Coupon = 10%; Maturity = 5 years; Issued at par.    Bonds Premium orCommonRetainedTransactionYearCash Payable (Discount) StockEarningsInitial borrowBegin 1$1,000  $1,000 0   Pay interest 1 –100  0  –100Pay interest 2 –100  0  –100Pay interest 3 –100  0  –100Pay interest 4 –100  0  –100Pay interest 5 –100  0  –100Pay principal 5 –1,000 –1,000   Copyright © 2013 CFA Institute10Discount or premium on bondsCopyright © 2013 CFA InstituteOften, the contractual interest rate and the market rate differ. Therefore, bonds sell above or below face value.Coupon RateMarket Rate (examples)Bonds Sell At a10%8%Premium10%Par12%Discount11Issuer’s Accounting for bonds issued at a discount Principal = $1,000; Coupon interest rate = 10%, paid annually; Maturity = 5 years.Return the market demands on the bond on the day we are valuing it = 12%. Issued at 92.8 (i.e., 92.8% of face value).At issuance, cash increases by $928 and bonds payable increases by $1,000. What do we do with the difference?We show it as a discount to bonds payable.ASSETS = LIABILITIES +OWNERS’ EQUITY+ $928Cash+ $1,000– $72Bond payableBond discountCopyright © 2013 CFA Institute12Bonds issued at a discountCopyright © 2013 CFA InstituteIssuer’s Balance Sheet PresentationBook value (also known as carrying value)13Issuer’s accounting for Bond issued at a discountPrincipal = $1,000; Coupon rate = 10%; Maturity = 5 years.Issue price 92.8% of par to yield 12% (effective rate).Each year:Cash interest payment = Principal x Coupon rate x Time = $1,000 × 10% × 1 year = $100Interest expense = Carrying value × Effective rate × TimeAmortization of discount = Interest expense – Cash interest paymentTransactionYearCash Bonds Payable Discount CommonStockNet Inc. to Ret. Earnings Initial borrowingBegin 1$928  $1,000 –72   Pay interest 1 –100  11  –111Interest expense$928 × 12% × 1Copyright © 2013 CFA Institute14Issuer’s accounting for Bond issued at a discountPrincipal = $1,000; Coupon rate = 10%; Maturity = 5 years.Issue price = 92.8% of par to yield 12% (effective rate).Year 2, Cash interest payment = $100.Interest expense = Carrying value × Effective rate × Time.Amortization of discount = Interest expense – Cash interest payment.TransactionYearCash Bonds Payable DiscountCommonStockNet Inc. to Ret. Earnings Initial borrowingBegin 1928  1,000 –72   Pay interest 1 –100  11  –111Interest expensePay interest 2 –100  13  –113Interest expense($928 + $11) × 12% × 1Copyright © 2013 CFA Institute15Issuer’s accounting for Bond issued at a discountPrincipal = $1,000; Coupon = 10%; Maturity = 5 years.Issued at 92.8 to yield 12%.TransactionYearCash Bonds Payable DiscountCommonStockNet Inc. to Ret. Earnings Initial borrowingBegin 1928  1,000 –72   Pay interest 1 –100   11  –111Interest exp.Pay interest 2 –100   13  –113Interest expPay interest 3 –100   14  –114Interest expPay interest 4 –100   16  –116Interest expPay interest 5 –100   18  –118Interest expPay principal 5 –1,000 –1,000    Copyright © 2013 CFA Institute16Issuer’s Accounting for bond issued at a premiumPrincipal = $1,000; Coupon interest rate = 10%, paid annually; Maturity = 5 years.Return the market demands on the bond on the day we are valuing it = 8%. Issued at 108 (i.e., 108% of face value).At issuance, cash increases by $1080 and bonds payable increases by $1,000. What do we do with the difference?We show it as a premium to bonds payable.ASSETS = LIABILITIES +OWNERS’ EQUITY+ $1080Cash+ $1000+ $80Bond payableBond premium17Copyright © 2013 CFA InstituteAccounting for bond issued at a premiumPrincipal = $1,000; Coupon interest rate = 10%; Maturity = 5 years. Issue price = 108% of par to yield 8%.   Assets = Liabilities + Owners’ Equity TransactionYearCash Bonds PayablePremiumCommonStock Net Inc.to Ret. Earnings Initial borrowingBegin 11,080  1,000 80    Pay interest 1 –100  –14 –86Interest expensePay interest 2 –100  –15 –85Interest expensePay interest 3 –100  –16 –84Interest expensePay interest 4 –100  –17 –83Interest expensePay interest 5 –100  –19 –81Interest expensePay principal 5 –1,000 –1,000    Copyright © 2013 CFA Institute18Bond Prices Subsequent to IssuanceBonds may be issued:At face value.Below face value: discount.Above face value: premium.Subsequent to issuance, bonds may trade at face value, at a discount, or at a premium depending on the market rates at that time. Changes in value subsequent to issuance do not affect the value of the bond on the issuer’s statement unless the issuer has chosen the fair value option (much less common).Copyright © 2013 CFA Institute19Payment of bondsMay be redeemed at maturity or before maturityA firm may decide to retire bonds earlyTo reduce interest costs or to remove debt from balance sheetBut only if it has sufficient cashTo account for retiring bonds earlyEliminate carrying value of bonds at redemption dateRecord cash paidRecognize gain or loss on redemptionGain or loss on bond repurchase = Net bonds payable − Repurchase payment Amount of repurchase payment will depend on market rates at the time of repurchaseCopyright © 2013 CFA Institute20debt covenantsCovenants protect creditors by restricting activities of the borrower.Affirmative covenantsNegative covenantsIf a borrower violates a debt covenant, depending on the severity of the breach and the terms of the contract, lenders may choose to waive the covenant, be entitled to a penalty payment or higher interest rate, renegotiate, or call for immediate repayment of the debt. Copyright © 2013 CFA Institute21Issuer’s financial statement presentation of debtCopyright © 2013 CFA Institute22Excerpt from 2011 and 2010 balance sheets of Colgate-Palmolive Inc.Issuer’s Note disclosures relating to debtCopyright © 2013 CFA Institute23Brief excerpt from Note 5 of Colgate Palmolive’s 2011 financial statements.LeasesLeasing an asset is an alternative to purchasing.Rather than borrowing and buying the asset, a company arranges to lease the asset.Advantages to leasing an asset compared with purchasing it: Leases can provide less costly financing; usually require little, if any, down payment; and are often at fixed interest rates. The negotiated lease contract may contain less restrictive provisions than other forms of borrowing. Leasing can reduce the risks of obsolescence, residual value, and disposition to the lessee.Certain types of leases have perceived financial reporting advantages.Copyright © 2013 CFA Institute24LeasesThere are two main classifications of leases: finance (or capital) and operating leases. “Finance lease” is IFRS terminology, and “capital lease” is U.S. GAAP terminology.A lessee treats capital leases as on-balance-sheet obligations.A lessee does not show operating leases on the balance sheet.Copyright © 2013 CFA Institute25Leases from lessee’s perspective Balance SheetIncome StatementStatement of Cash FlowsLessee   Operating LeaseNo effect.Reports rent expense.Rent payment is an operating cash outflow.Finance Lease under IFRS (capital lease under U.S. GAAP)Recognizes leased asset and lease liability.Reports depreciation expense on leased asset. Reports interest expense on lease liability.Reduction of lease liability is a financing cash outflow. Interest portion of lease payment is either an operating or financing cash outflow under IFRS and an operating cash outflow under U.S. GAAP.Copyright © 2013 CFA Institute26Leases from lessor’s perspective Balance SheetIncome StatementStatement of Cash FlowsOperating Lease Retains asset on balance sheet.Reports rent incomeand depreciation expense on leased asset.Rent payments received are an operating cash inflow.Copyright © 2013 CFA Institute27 Balance SheetIncomeStatementStatement of Cash FlowsFinance Lease: When present value of lease payments equals the carrying amount of the leased asset (called a “direct financing lease” in U.S. GAAP)Removes asset from balance sheet. Recognizes lease receivable.Reports interest revenue on lease receivable. Interest portion of lease payment received is either an operating or investing cash inflow under IFRS and an operating cash inflow under U.S. GAAP. Receipt of lease principal is an investing cash inflow. Copyright © 2013 CFA Institute28Leases from lessor’s perspective Balance SheetIncome StatementStatement of Cash FlowsFinance Lease: When present value of lease payments exceeds the carrying amount of the leased asset (called a “sales-type lease” in U.S. GAAP)Removes asset.  Recognizes lease receivable.Reports profit on sale. Reports interest revenue on lease receivable. Interest portion of lease payment received is either an operating or investing cash inflow under IFRS and an operating cash inflow under U.S. GAAP.  Receipt of lease principal is an investing cash inflow.Copyright © 2013 CFA Institute29Leases from lessor’s perspectiveLessee’s Lease disclosures: example30Copyright © 2013 CFA InstituteLessee’s Lease disclosures: example“We have subleases related to certain of our operating leases. During fiscal 2011, 2010, and 2009, we recognized sublease income of $13.7 million, $10.9 million, and $7.1 million, respectively.”“We had capital lease obligations of $1.4 million and $2.6 million as of October 2, 2011, and October 3, 2010, respectively. Capital lease obligations expire at various dates, with the latest maturity in 2014. The current portion of the total obligation is included in other accrued liabilities and the remaining long-term portion is included in other long-term liabilities on the consolidated balance sheets. Assets held under capital leases are included in net property, plant, and equipment on the consolidated balance sheets.”31Copyright © 2013 CFA Institutetypes of postemployment benefits: pension plans Copyright © 2013 CFA Institute32Amount ofFuture Benefit to EmployeeContribution from EmployerDefined contribution pension planDefined benefit pension planDepends on investment performance of plan assetsAmount (if any) is defined in each periodDepends on current period estimate and investment performance of plan assetsDefined based on plan’s formulapresentation and disclosure for pension plans Copyright © 2013 CFA Institute33Type of Pension PlanBalance SheetIncome StatementFootnote DisclosureDefined contributionNoneCompany's contributionMinimalDefined benefitNet funded positionPeriodic expenseExtensiveleverage and coverage ratiosCopyright © 2013 CFA Institute34Solvency: Company’s ability to meet its long-term debt obligations.Two types of commonly used solvency ratios: Leverage ratios Focus on the balance sheet Measure relative amount of debt in the company’s capital structureCoverage ratiosFocus on the income statement and cash flowsMeasure the ability of a company to cover its debt-related paymentsleverage and coverage ratiosSolvency RatiosNumeratorDenominatorLeverage ratios  Debt-to-assets ratioTotal debtTotal assetsDebt-to-capital ratioTotal debtTotal debt + Total shareholders’ equityDebt-to-equity ratioTotal debtTotal shareholders’ equityFinancial leverage ratioAverage total assetsAverage shareholders’ equityCoverage ratios  Interest coverage ratioEBITInterest paymentsFixed charge coverage ratioEBIT + Lease paymentsInterest payments + Lease paymentsCopyright © 2013 CFA Institute35Evaluating Solvency Ratios Nokia(€ millions)Ericsson(SEK millions) 2008200720082007Short-term borrowings3,5787141,6392,831Current portion of long-term interest bearing debt131733,9033,068Long-term interest bearing debt86120324,93921,320Total shareholders’ equity14,20814,773140,823134,112Total assets39,58237,599285,684245,117EBIT4,9667,98516,25230,646Interest payments155591,6891,513Copyright © 2013 CFA Institute36Debt to assets for 2008: 11.2%. Debt to assets for 2007: 2.9%.Debt to assets for 2008: 10.7%.Debt to assets for 2007: 11.1%. Evaluating Solvency Ratios Nokia(€ millions)Ericsson(SEK millions) 2008200720082007Short-term borrowings3,5787141,6392,831Current portion of long-term interest bearing debt131733,9033,068Long-term interest bearing debt86120324,93921,320Total shareholders’ equity14,20814,773140,823134,112Total assets39,58237,599285,684245,117EBIT4,9667,98516,25230,646Interest payments155591,6891,513Copyright © 2013 CFA Institute37Interest coverage ratio for 2008: 32.0Interest coverage ratio for 2007: 135.3 Interest coverage ratio for 2008: 9.6Interest coverage ratio for 2007: 20.3SummaryBonds are valued as the present value of future cash flows.Market interest rates reflect the risk of the issuer and the instrument.A bond discount or premium is amortized by using the effective interest method.Analysts treat noncancellable operating leases as equivalent to on-balance-sheet debt.Defined benefit pension plans with a net unfunded position give rise to liabilities.Leverage and coverage ratios are used in assessing a company’s solvency.Copyright © 2013 CFA Institute38