Interest rate fluctuationLike all fixed income securities, CD valuations and secondary market prices are susceptible to fluctuations in interest rates. If interest rates rise, the market price of outstanding CDs will generally decline, creating a potential loss should you decide to sell them in the secondary market. Since changes in interest rates will have the most impact on CDs with longer maturities, shorter-term CDs are generally less impacted by interest rate movements.
a government, corporation, municipality, or agency that has issued a security (e.g., a bond) in order to raise capital or to repay other debt; the issuer goes to an underwriter to get their securities sold in the new issue market; for certificates of deposit (CDs), this is the bank that has issued the CD; in the case of fixed income securities, the issuer of the security is the primary determinant of the security's characteristics (e.g., coupon interest rate, maturity, call features, etc.)
the date on which the principal amount of a fixed income security is scheduled to become due and payable, typically along with any final coupon payment. It is also a list of the maturity dates on which individual bonds issued as part of a new issue municipal bond offering will mature
Fixed price buy-sell agreements are seemingly simple from a valuation viewpoint. All the owners and a company have to do are agree on a value for the business and record that value in their buy-sell agreement. Most of the time, the owners do agree on a fixed price when agreements are initially signed.
If the current value is higher than the original fixed price, the company and remaining shareholders would achieve a windfall with the bargain purchase from a triggered shareholder. However, if the current value is lower than the original fixed price, the selling shareholder would achieve a windfall.
That process is called the Single Appraiser, Select Now and Value Later valuation process. The appraiser is selected and written into the fixed price agreement. If the buy-sell agreement is triggered and the fixed price is outdated, the selected appraiser is called upon to provide the (binding) valuation for purposes of the agreement.
Because inflation can go up or down, we can have deflation (the opposite of inflation). Deflation can bring the combined rate down below the fixed rate (as long as the fixed rate itself is not zero). However, if the inflation rate is so negative that it would pull the combined rate below zero, we don't let that happen. We stop at zero.
Because of the low interest rate environment, finance experts like Dr. Wade Pfau (opens in new tab) and economist Roger Ibbotson (opens in new tab) have recommended that financial advisers and their clients think of FIAs as another asset class, framing them as an alternative to fixed-income investments like bond funds. Dr. Pfau believes that the guarantees afforded by FIAs may be especially beneficial for retirees during volatile conditions, saying that "This protection may make it easier to retire successfully in down market environments."
If they are right, the low-interest piper may be coming to collect because as markets begin to grow volatile, or a correction seems imminent, the fixed income investments most folks would turn to for safe harbor are most sensitive to interest rate risk. Which is to say that interest rates and bond prices have an inverse relationship. With rates so low, bonds may not offer the ability to de-risk as they have in the past.
One of the primary confusions about fixed-indexed annuities is how they earn money for their owners. Folks selling them may sometimes say things like, "They offer equity exposure without any of the risk." It's important to understand that there are no underlying investment options in a fixed-indexed annuity, so there is no actual exposure to equities.
Built to offer better returns than CDs (certificates of deposit), fixed-indexed annuities are a fairly conservative investment. If you are nervous about upcoming market volatility, and want to take some risk off the table, then a fixed-indexed annuity may be a good option. Like investments in bonds and CDs, they may require locking your money away for a prescribed period of time. Make sure you consider liquidity needs over the next five to 10 years before making a decision.
No-load fixed-indexed annuities are likely your best bet. By removing commissions, insurers can afford to shorten surrender periods, raise caps, sweeten participation rates and minimize spreads. Improving upside potential can help you meet your retirement investing goals easier.
Before we get to the case: A fixed price buy-sell agreement is one in which co-owners of a business select a specific dollar amount, expressed either as enterprise or per-share value, for calculation of the future buyout price to be paid an exiting owner or his or her estate upon the happening of specified trigger events such as death, disability, retirement, or termination of employment. Such agreements can take the form of a stand-alone buy-sell agreement or may be included in a more comprehensive shareholders, operating, or partnership agreement.
This article will explore the intersection of fixed asset accounting and accounting for leases under ASC 842, largely focusing on accounting for finance (capital) leases with purchase options. A full example on how to account for lease-to-own transactions is included as well. Other overlaps discussed throughout the article include capitalization, leasehold improvements, and lessor accounting.
A fixed asset is recognized as a long-term asset and depreciated over its useful life. The initial journal entry to record a fixed asset is generally a debit to fixed assets and a credit to payment or liability for payment. Under ASC 840, fixed assets and capital lease assets were reported on the balance sheet.
Entities will need to implement new policies under ASC 842. Decisions requiring judgment are specific to an organization and must be documented with the reasoning for the policy. Many organizations are leveraging their policies for fixed asset accounting as a starting point for lease accounting policies.
Outside of a few specific scope exclusions, the guidance has some subjectivity around what other lease arrangements may be excluded. Organizations have the ability to set a materiality threshold for lease capitalization, as no explicit threshold is stated in the guidance. It is common for organizations to begin with their policy for fixed asset capitalization when determining their lease capitalization threshold. However, entities must determine their lease capitalization threshold using the standalone impact of their leases on operations.
It is common for organizations to lease assets and then purchase them at a later date. In these lease-to-own arrangements, an asset is originally accounted for as a right to use asset, then subsequently treated as a fixed asset. This may be preferable to an organization as opposed to purchasing the asset outright for a number of reasons.
The lease term used for the initial lease liability and ROU asset measurement is based on when the purchase option is likely to be exercised. If the purchase option is exercised at the end of the lease, the lessee accounts for an ROU asset through the entirety of the contract. Once the underlying asset is purchased, the lease liability and ROU asset are fully derecognized and a fixed asset is recorded in their place. Subsequent to the purchase, the asset will be accounted for as a fixed asset that is depreciated over its remaining useful life.
Once the underlying asset is purchased at the end of the lease term, the remaining ROU asset balance is reclassed and accounted for as a fixed asset. The new fixed asset balance will be equal to the unamortized balance of the ROU asset at the time of purchase, the contract end date.
At the end of the lease, ABC Company will purchase the forklift and record a fixed asset. They will pay XYZ Company the agreed upon price for the forklift and derecognize the ending lease liability balance, which will be in the amount of the purchase price. Then ABC Company will reclass the ending ROU asset balance to fixed assets to record the transfer of title of the forklift from XYZ Company. The asset will continue to be depreciated at the same rate it was amortized at as the ROU asset throughout the lease term.
Cash will be credited in the amount of the purchase price of $20,000. The ending lease liability balance will also be equal to the $20,000 purchase price and will be debited once XYZ Company is paid, clearing out the lease liability account. The ending ROU asset balance of $24,224 will be reclassed to the fixed asset account. The ROU asset was amortized over the useful life throughout the lease term, so the ending balance is equal to the book value left to be depreciated in the fixed asset account.
Accounting for leasehold improvements does not change with the adoption of ASC 842. Leasehold improvements owned by the lessee are accounted for as fixed assets and depreciated over the lesser of their useful life or the remaining lease term. However, leasehold improvements should be amortized to the end of their useful life in the following scenarios:
Lease accounting under ASC 842 intersects with fixed asset accounting in several ways. Many organizations have a mix of owned and leased assets to reap the benefits of each asset type. Both leases and fixed assets are recognized on the balance sheet.
It is common for a company to originally lease an asset, but exercise an option to purchase the asset at a later date. In those cases, the ROU asset would originally be accounted for with the lease under ASC 842. Subsequently, the ROU asset would be derecognized and a fixed asset would be recognized. Other ways lease accounting and fixed accounting overlap are when an organization has leasehold improvements or they own an asset and also lease the asset to others as a lessor. 041b061a72