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
