Chapter 1 - Liabilities Flashcards
What are the essential characteristics of an accounting liability (3)
A. The liability is the present obligation of a PARTICULAR ENTITY. The entity liable MUST BE IDENTIFIED. It is not necessary that the payee to whom the obligation is owed be identified.
B. The liability arises from PAST TRANSACTION OR EVENT. This means that the liability is not recognized until it is incurred.
C. The settlement of the liability requires an OUTFLOW of resources embodying economic benefits.
The obligation must be to PAY CASH, TRANSFER NON-CASH ASSET or PROVIDE SERVICE at some future time.
Conceptually, the fair value is equal to the _____ of future cash payment to settle the obligation.
Present Value
The term “present value” is the _____ of the future cash outflow in settling an obligation using the market rate of interest.
Discounted Amount
READ: Accordingly, conceptually, all liabilities are measured at present value or discounted amount.
Okay
Current Liabilities or short-term obligations are not discounted anymore but measured, recorded, and reported at their _____.
Face Amount
The reason for this is that the discount or the difference between the face amount and the present value is usually not material and therefore ignored.
Non-current liabilities or long-term obligations are measured at face amount or present value depending on whether they are _____ or _____.
Interest-bearing
Noninterest-bearing
If the non-current liability is interest-bearing, it is measured at _____.
Face Amount
Because in this case, the face amount is already the present value of the obligation
If the noncurrent liability is noninterest-bearing, it is measured at _____.
Present Value
This requires amortization of the discount or the difference between the face amount and the present value using the effective method.
Under PaS 1 on presentation of financial statements, liabilities are classified into two, namely:
Current Liabilities
Noncurrent Liabilities
PAS 1, paragraph 69, provides that an entity shall classify a liability as current when:
A. The entity expects to settle the liability within the entity’s operating cycle
B. The entity holds the liability primarily for the purpose of trading
C. The liability is due to be settled within twelve months after the reporting period
D. The entity does not have an unconditional right to defer settlement of the liability for at least twelve months after the reporting period
Trade payables and accruals for employee and other operating costs are part of the working capital used in the entity’s normal operating cycle. Such operating items are classified as _____ even if they are settled more than 12 months after the reporting period.
Current Liabilities
When the entity’s normal operating cycle is not clearly identifiable, its duration is assumed to be _____.
Twelve months
Other _____ are not settled as part of the normal operating cycle but are due for settlement within 12 months after the reporting period or held primarily for the purpose of trading.
Current Liabilities
Examples:
Financial liabilities held for trading, bank overdraft, dividends payable, income taxes, other nontrade payables and current portion of noncurrent financial liabilities
Financial liabilities _____ are financial liabilities that are incurred with an intention to repurchase them in the near term.
Held for trading
An example is a quoted debt instrument that the issuer may buy back in the near term depending on charges in fair value.
Noncurrent liabilities include:
A. Noncurrent portion of long-term debt B. Finance lease liability C. Deferred tax liability D. Long-term obligation to entity officers E. Long-term deferred revenue
A liability which is due to be settled within 12 months after the reporting period is classified as current, even if:
A. The original term was for a period longer than 12 months
B. An agreement to refinance or to reschedule payment on a long-term basis is completed after the reporting period and before the financial statements are authorized for issue.
If the refinancing on a long-term basis is completed ON OR BEFORE THE END OF THE REPORTING PERIOD, the refinancing is an adjusting event and therefore the obligation is classified as _____.
Noncurrent
Often attached to borrowing agreements which represent undertakings by the borrower.
Covenants
These are actually restrictions on the borrower as undertaking further borrowings, paying dividends, maintaining specified level of working capital and so forth.
Covenants
Under covenants, if certain conditions relating to the borrower’s financial situation are breached, the liability becomes _____.
Payable on demand
PAS 1, paragraph 74, provides that such a liability is classified as _____ even if the lender has agreed, after the reporting period and before the statements are authorized for issue, not to demand payment as a consequence of the breach.
Current
Because AT THE END OF THE REPORTING PERIOD, the entity does not have an unconditional right to defer its settlement for at least 12 months after that date.
The liability is classified as _____ if the lender has agreed on or before the end of the reporting period to provide a grace period ending at least twelve months after that date.
Noncurrent
A _____ is a period within which the entity can rectify the breach and during which the lender cannot demand immediate repayment
Grace period
With respect to loans classified as current liabilities, the following events occurring between the end of the reporting period and the date the financial statements are authorized for issue shall qualify for disclosure as nonadjusting events, meaning, the loans remain as current liabilities:
- Refinancing on a long-term basis
- Rectification of a breach of a long term loan agreement
- The granting by the lender of a grace period to rectify a breach of a long-term loan arrangement ending at least twelve months after the reporting period
Under paragraph 54 of PAS 1, as a minimum, the face of the statement of financial position shall include the following line items for current liabilities:
A. Trade and other payables B. Current provisions C. Short-term borrowing D. Current portion of long-term debt E. Current tax liability
The term _____ is a line item for accounts payable, notes payable, accrued interest on note payable, dividends payable and accrued expenses.
Trade and other payables
Obligations which exist at the end of the reporting period although their amount is not definite.
Estimated liabilities
Under PAS 37, an estimated liability is considered as a _____ which is both probable and measurable.
Provision
The obligation must be to pay _____, _____, or _____ at some future time.
Cash
Transfer non-cash asset
Provide service
A present obligation may he a _____ or a _____.
Legal obligation
Constructive obligation
a duty or responsibility to act or perform in a certain way.
Obligation
Obligations may be _____ as a result of _____ or _____.
Legally enforceable
Contract
Statutory requirement
Give rise to liabilities by reason of normal business practice, custom, and a desire to maintain good business relations or act in an equitable manner.
Constructive obligations
The past event that leads to a legal or constructive obligation is known as the _____.
Obligating event
Creates a present obligation because the entity has no realistic alternative but to settle the obligation created by the event.
Obligating event
READ: Without payment of money, transfer of non-cash asset, or performance of service, there is no accounting liability.
Okay
PFRS 9, paragraph 5.1.1, provides that an entity shall measure INITIALLY a financial liability at _____.
Fair value minus, in the case of financial liability NOT DESIGNATED AT FAIR VALUE THROUGH PROFIT OR LOSS, transaction cost that are not directly attributable to the issue of financial liability.
The Conceptual Framework for Financial Reporting provides the following definition of liabilities:
Liabilities are present obligations of an entity arising from past transactions or events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.
The more common types of liabilities inclide the following:
A. Accounts payable to suppliers for the purchase of goods or services
B. Amounts withheld from employees or other parties for taxes and for contributions to the Social Security System or to pension funds
C. Accruals for wages, interest, royalties, taxes, products warranties, and profit sharing plans
D. Dividends (not stock dividends) declared but not paid
E. Deposits and advances from customers and officers
F. Debt obligations for borrowed funds - notes, mortgages, and bonds payable
G. Income tax payable
H. Unearned revenue
The transaction costs are included in the initial measurement of a financial liability measured at _____.
Amortized cost
Incremental costs that are directly attributable to the issue of financial liability.
Transaction costs
An incremental cost is one that would not have been incurred if the entity had not issued the financial liability.
Transaction costs include:
A. Fees and commissions paid to agents, advisers, brokers, and dealers
B. Levies by regulatory agencies and securities exchanges
C. Transfer taxes and duties
Transaction costs do not include:
A. Debt premiums or discounts
B. Financing costs
C. Internal administrative or holding costs
Under PFRS 13, the _____ of a liability is the amount that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Fair value
PFRS 9, paragraph 5.3.1, provides that after initial recognition, an entity shall measure a financial liability:
A. At amortized cost, using the effective interest method
B. At fair value through profit or loss
The amount at which the financial liability is measured at initial recognition minus principal repayment, plus or minis the cumulative amortization using the effective interest method of any difference between the initial amount and the maturity amount
Amortized cost
The difference between the FACE AMOUNT and PRESENT VALUE of the financial liability is amortized through interest expense using the effective interest method.
Actually, the difference between the face amount and present value is either _____ or _____ on the issue of financial liability.
Discount
Premium
PFRS 9, paragraph 4.2.2, provides that AT INITIAL RECOGNITION, an entity may irrevocably designate financial liability at _____ when doing so results in more relevant information.
Fair value through profit or loss
Under the fair value option, the financial liability, for example, bond payable, is measured at _____.
Fair value and any change in fair value at every year end and any change in fair value is recognized in profit or loss
The change in fair value of financial liability attributable to credit risk is recognized in _____.
Other comprehensive income.
The amortization rules for discount or premium no longer apply.
Accordingly, under the fair value option, the interest expense is recognized using the _____.
Nominal or stated rate.
Estimated liabilities are either _____ or _____ in nature.
Current
Non-current
PFRS 9, paragraph 4.2.2, provides that AT INITIAL RECOGNITION, an entity may irrevocably designate financial liability at _____ when doing so results in more relevant information.
Fair value through profit or loss
Under the fair value option, the financial liability, for example, bond payable, is measured at _____.
Fair value and any change in fair value at every year end and any change in fair value is recognized in profit or loss
The change in fair value of financial liability attributable to credit risk is recognized in _____.
Other comprehensive income.
The amortization rules for discount or premium no longer apply.
Accordingly, under the fair value option, the interest expense is recognized using the _____.
Nominal or stated rate.
Estimated liabilities are either _____ or _____ in nature.
Current
Non-current
