55 SURGENT 2271

Question 1

2271.01

Answer 1

Current liabilities represent obligations whose liquidation is expected to require the use of current assets or the creation of other current liabilities, and include the following:

a. Obligations for items that have entered into the operating cycle
b. Collections received in advance of the delivery of goods or performance of services
c. Debts arising from operations directly related to the operating cycle (e.g., accruals for wages, salaries, commissions, rentals, royalties, and income and other taxes)
d. Other liabilities whose regular and ordinary liquidation is expected to occur within one year or less (e.g., dividends payable, warranty payable, interest payable)

Question 3

2271.03

Answer 3

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.

Question 4

2271.04

Answer 4

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.

Question 5

2271.05

Answer 5

The ability to consummate the refinancing may be demonstrated in either of the following two ways:

1. 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
2. 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.

Question 6

2271.06

Answer 6

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.

Question 7

2271.07

Answer 7

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.