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【正文】 issue, the APB selected the immediate recognition of a gain or loss for all early extinguishment of debt. 1256 Fair Value Option ? SFAS No. 159 allows a pany to report, at each balance sheet date, any or all of its financial assets and liabilities at their fair market value on the balance sheet date. ? The FASB reasoned that the objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings. 1257 OffBalanceSheet Financing ? Offbalancesheet financing procedures to avoid disclosing all debt on the balance sheet in order to make the pany’s financial position look stronger. ? Common techniques used: ? Leases ? Unconsolidated subsidiaries ? Variable interest entities (VIEs) ? Joint ventures ? Research and development arrangements ? Project financing arrangements 1258 Leases Leases are considered to be either rentals (operating leases) or asset purchases with borrowed money (capital leases). The four classification criteria are as follows: 1. Lease transfers ownership 2. Lease includes a bargain purchase option 3. Lease covers 75% or more of the economic life of the asset 4. Present value of lease payments is 90% or more of the asset value 1259 Unconsolidated Subsidiaries ? The FASB issued Statement No. 94 in 1987, effectively eliminating one opportunity that panies have used for offbalancesheet financing. ? Companies are able to avoid recognizing debt associated with subsidiaries that are less than 50% owned by the pany. 1260 Joint Ventures ? When panies join forces with other panies to share the costs and benefits associated with specifically defined projects, it is called a joint venture. ? Because the benefits of joint ventures are uncertain, panies could incur substantial liabilities with few, if any, assets resulting from their efforts. 1261 Research and Development Arrangements ? These arrangements involve situations in which an enterprise obtains the results of research and development activities funded partially or entirely by others. ? Accounting issue: Is this arrangement, in essence, a means of borrowing to fund research and development or is it simply a contract to do research for others? 1262 Analyzing a Firm’s Debt Position The term leverage refers to the relationship between a firm’s debt and assets or its debt and stockholders’ equity. A mon measure of a firm’s leverage is the debttoequity ratio. Total Liabilities Total Stockholders’ Equity DebttoEquity Ratio = 1263 Analyzing a Firm’s Debt Position Another measure of a pany’s performance relating to debt is the number of times interest is earned. Times interest earned is calculated using the following formula: Ine Before Taxes + Interest Expense Interest Expense Times Interest Earned = 1264 Accounting for Troubled Debt Restructuring ? A significant accounting problem is created when economic conditions make it difficult for an issuer of longterm debt to make the payments under the terms of the debt instrument. ? The revision of debt terms to avoid bankruptcy proceedings or foreclosure on the debt is referred to as troubled debt restructuring. 1265 Transfer of Assets in Full Settlement (Asset Swap) A debtor that transfers assets, such as real estate or inventories, to a creditor to fully settle a payable will recognize two types of gains or losses: 1. A gain or loss on disposal of the asset 2. A gain arising from the concession granted in the restructuring of the debt (continues) 1266 Transfer of Assets in Full Settlement (Asset Swap) The putation of these gains and/or losses is made as follows: Carrying value of assets being transferred Major value of asset being transferred Carrying value of debt being liquidated Difference represents gain or loss on disposal Difference represents gain on restructuring (continues) 1267 Transfer of Assets in Full Settlement (Asset Swap) An investor always recognizes a loss on the restructuring due to concessions granted. Carrying value of investment liquidated Market value of asset being transferred Difference represents loss on restructuring 1268 Modification of Debt Terms