Chapter 12 Flashcards
definition of a liability
a present obligation of the entity arising form past events or transactions
- settlement of which will result in future outflow of economic benefits
settlement of a liability can be
- future transfer or use of assets
- provision of services
- or other yielding of economic benefits
what are the 3 elements of a liability
- a future sacrifice
- present obligation
- past event
- all 3 are necessary for a liability to be recognized
what is an obligating event
event that creates an obligation where there is no other realistic alternative but to settle the obligation
what are legal obligations
liabilities that arise from contract or legislation
- most liabilities are legal obligations
what are some examples of legal obligations
a/p and borrowings
what are constructive obligations
a liability exists because there is a pattern of past practice or established policy
what is a constructive obligation
a company can create a constructive obligation if it makes a public statement that the company will accept certain responsibilities because the statement creates a valid expectation that the company will honor those responsibilities
what are the 2 categories of liabilities
- financial
2. non-financial
what is a financial liability
- is a financial instrument
- a contract that gives rise to a financial liability of one party and a financial asset of another party
ie A/P and A/R
or
loan payable and loan receivable
give some examples of a financial liability
ie A/P and A/R
or
loan payable and loan receivable
give some examples of a financial liability
ie A/P and A/R
or
loan payable and loan receivable
what is a non-financial liability
- defined by what is NOT
- not a financial liability
- no offsetting financial asset on the books of another party
what is a type of a non-financial liability
provisions
what are provisions
or liabilities that have uncertainty surrounding timing or amount are a major category of non-financial liabilities
what are some examples of non-financial liabilities
- unearned revenues
- cash outflows that are expected to arise in the future but that are related to transactions, decisions or events of the current period
- ie a decommissioning obligation
what are some examples of non-financial liabilities
- unearned revenues
- cash outflows that are expected to arise in the future but that are related to transactions, decisions or events of the current period
- ie a decommissioning obligation
what are the two categories of financial liabilities
- other and
2. Fair value through profit or loss )FVTPL)
what are other financial liabilities
most financial liabilities
- all those except those in FVTPL
how do you initially value other financial liabilities
at fair value
- this is the transaction value
- add any transaction costs if any
how do you know if the financial liability is FVTPL and not other
a. the liability will be sold or transferred in the short term
or
b. designated FVTPL by management
- to avoid an accounting mismatch
- related/hedged financial instruments are FVTPL)
how do you know if the financial liability is FVTPL and not other
a. the liability will be sold or transferred in the short term
or
b. designated FVTPL by management
- to avoid an accounting mismatch
- related/hedged financial instruments are FVTPL)
What is discounting for
all liabilities must be valued at Present value
- time value of money
what should a discount rate be
discount rate chosen must reflect the current market rate, specific to the risk level of the liability
discounting is not possible if
the amount and timing or cash flows is highly uncertain then undiscounted amounts are recorded
if you can’t use discount what do you use
undiscounted amounts
how do you record interest expense on the discounted liablitiy
recorded as time passes
how do you record interest expense on the discounted liablitiy
recorded as time passes
how do you record interest expense on the discounted liability
recorded as time passes
how do you measure other financial liabilities
- Initial measured - fair value of the consideration plus transition costs
- then carried at Fair value (which is cost) or amortized cost over their lives
What is discounting
time value of money
what should the discount rate being chosen be
must reflect the current market rate, specific to the risk level of the liability
How do you recognize provisions
recognize if, as the result of a past event, the company has a PRESENT LEGAL OR CONSTRUCTIVE OBLIGATION that can be estimated reliably and that it is PROBABLE that an outflow of economic benefits will be require dto settle the obligation
when recognizing a provision the estimate of the amout to recognize is based on what
- risk
2. uncertainty of cash flows
if effect of discounting is material then they must determine by
discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of TVM and the risk specific to the liability
common financial liabilities are classified as and initially measured as
- classified as other financial liabilities
- initially measured as fair value plus transaction costs
what are some common financial liabilities
- a/p
- Notes payable
- Loan gurantees??
what sort of adjustments need to possibly be done for A/P
- purchase discounts
- allowances
- returns
How do notes payable come about
usually form borrowing from a lender
- other notes payable are form suppliers as part of a purchase agreement
what is a note payable
a written promise to pay a specified amount at a specified future date (or a series of amoutns over a series of payment dates)
what is a note payable
a written promise to pay a specified amount at a specified future date (or a series of amoutns over a series of payment dates)
some notes formalize what
collateral security for the lender, assets of the borrower that the secured lender can seize if the note goes into default
what is the stated interest rate in a note
may not equal the market rate prevailing on obligations involving similar credit rating or risk
What is the market interest rate
the rate accepted by 2 parties for loans or equal profile - identical amounts, with identical credit risk, terms and conditions
what are the two categories of notes
- interest bearing and
2. non-interest bearing
what are interest bearing notes
- do not state an interest rate but command interest through the difference b/w lent and (higher) cash paid
a note with stated interest rate that is below market rates may be used why
may be used by suppliers as a sales incentive
how do you initial value a note
at fair value (usually loan amount)
if the state rate and market rates are different on a note and the term is more than a year (ie not short term)
the present value discounting must be used to establish initial fair value
- use market rate for calculations
what is a loan guarantee
requires a guarantor to pay the loan principal and interest if the borrower defaults
a loan guarantee is a financial liability of the gurantor, how do you record it
at fair value
what are cash dividends payable
declared but not year paid
how are cash dividends payable reported
reported as a current liability b/w date of declaration and payment because it gives rise to an enforceable contract
What do monetary accrued liabilities include
wages and benefits earned by employees,
interest earned by creditors but not yet paid
COG and Services received but not yet invoiced by the supplier
what are advances and returnable deposits
guarantees for payment of future obligations or to guarantee performance on a contract or service
- deposits may also be made as guarantees in case of noncollection or for possible damage to property (unearned revenue)
how do you report advances and returnable deposits
- as a current liability or long-term liability
- if they are interest bearing, an annual adjusting entry is required to accrue interest expense and to increase the related liability
