300496 S-T and L-T Obligations 2G Flashcards
FASB ASC 470-10-45-14
Verona Co. had $500,000 in short-term liabilities at the end of the current year. Verona issued $400,000 of common stock subsequent to the end of the year, but before the financial statements were issued. The proceeds from the stock issue were intended to be used to pay the short-term debt. What amount should Verona report as a short-term liability on its balance sheet at the end of the current year?
$500,000
$100,000
$0
$400,000
Question #300496
$100,000
FASB ASC 470-10-45-14 requires that short-term obligations be reported as long-term liabilities if a company (1) intends to refinance the short-term obligation on a long-term basis and (2) demonstrates the ability to refinance it a long-term basis. The intent is stated in the problem. Verona’s issuance of common stock for $400,000 before the statements were issued demonstrates the ability to refinance $400,000 of the short-term obligations on a long-term basis. The balance of the obligation ($100,000) must be reported as a current liability.
FASB ASC 470-10-45-5
Long-Term Obligation
Long-term obligations are those obligations whose liquidation is reasonably not expected to require the use of existing resources properly classified as current assets, or the creation of another current liability. The maturity exceeds one year. Long-term obligations include long-term notes payable, bonds, and other obligations (e.g., under finance leases). Short-term obligations that are expected to be refinanced (and which meet specific conditions) are also classified as long term.
FASB ASC Glossary
Short-Term Obligation
Short-term obligations are those obligations whose liquidation is reasonably expected to require either the use of existing resources properly classified as current assets or the creation of other current liabilities (FASB ASC 210-10-45-6). Maturity is within one year for a short-term obligation, or the operating cycle, if it is longer. Obligations for those items that have entered into the operating cycle (e.g., materials), collections received in advance of delivery of goods or performance of services, and debts that arise from operations directly related to the operating cycle (e.g., wages, commissions, rents, royalties, taxes) (FASB ASC 470-10-45-13) are considered short-term obligations, as well as those long-term obligations that are or will be callable (due on demand) by the creditor (FASB ASC 470-10-45-13).
Short-term obligations include accounts (trade) payable, short-term notes payable, current maturity amounts of long-term obligations, unearned revenue, accrued expenses (salaries, interest, and taxes), and obligations that by their terms are callable.
2271.03
Short-Term Obligations Expected to Be Refinanced
Short-term obligations arising from transactions in the normal course of business that are due in customary terms must be classified as current liabilities. Other short-term obligations may be excluded from current liabilities, but only if the enterprise:
a. intends to refinance the obligation on a long-term basis and
b. demonstrates the ability to consummate the refinancing.
2271.04
Refinancing a short-term obligation on a long-term basis means:
a. replacing it with a long-term obligation or equity securities or
b. renewing, extending, or replacing it with short-term obligations for an uninterrupted period extending beyond one year (or the operating cycle, if applicable) from the date of an enterprise’s balance sheet.
2271.05
The ability to consummate the refinancing may be demonstrated in either of the following two ways:
- By actual issuance of a long-term obligation or equity security after the balance sheet date, but before the balance sheet is issued, for the purpose of refinancing the short-term obligation
- By entering into a financing agreement, before the balance sheet is issued, that clearly permits the enterprise to refinance the short-term obligation on a long-term basis on terms that are readily determinable
In the latter case (financing agreement), the following conditions must also be met:
a. The agreement does not expire within one year (or operating cycle, if applicable) from the enterprise’s balance sheet date, and during that period the agreement is not cancelable by the lender except for violation of a provision with which compliance is objectively determinable or measurable.
b. No violation of any provision in the agreement exists prior to the issuance of the balance sheet or, if one exists, a waiver has been obtained.
c. The lender is expected to be financially capable of honoring the agreement.
2271.06
The amount of the short-term obligation to be excluded from current liabilities is the lesser of the amount of the short-term obligation or:
- the proceeds of the new long-term obligation or the equity security issued where the ability to refinance is demonstrated by actual issuance or
- the minimum amount expected to be available at any date from the scheduled maturity of the short-term obligation to the end of the fiscal year where the ability to refinance is demonstrated by entering into a financing agreement.
2271.07
The FASB specifies that the repayment of a short-term obligation before funds are obtained through long-term financing requires that the short-term obligation be classified as a current liability. For example, assuming a balance sheet date of December 31, 20X1, and a financial statement issuance date of April 1, 20X2, the payment of a short-term obligation (i.e., one that existed as of the balance sheet date) on February 1, 20X2, would require that the short-term obligation be classified on the December 31, 20X1, balance sheet as a current liability unless it were refinanced on a long-term basis and the proceeds from the long-term financing were received on or before February 1, 20X2.
2283.01
An exchange of debt instruments with substantially different terms is a debt extinguishment and shall be accounted for in accordance with FASB ASC 405-20-40-1. A debtor could achieve the same economic effect as an exchange of a debt instrument by making a substantial modification of terms of an existing debt instrument. Accordingly, a substantial modification of terms shall be accounted for like an extinguishment.
2283.02
If it is determined that the original and new debt instruments are not substantially different, then a new effective interest rate shall be determined based on the carrying amount of the original debt instrument, adjusted for an increase (but not a decrease) in the fair value of an embedded conversion option (calculated as the difference between the fair value of the embedded conversion option immediately before and after the modification or exchange) resulting from the modification, and the revised cash flows.
