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FA3 financial liabilities > Chapter 12 > Flashcards

Chapter 12 Flashcards

1
Q

definition of a liability

A

a present obligation of the entity arising form past events or transactions
- settlement of which will result in future outflow of economic benefits

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2
Q

settlement of a liability can be

A
  1. future transfer or use of assets
  2. provision of services
  3. or other yielding of economic benefits
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3
Q

what are the 3 elements of a liability

A
  1. a future sacrifice
  2. present obligation
  3. past event
    - all 3 are necessary for a liability to be recognized
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4
Q

what is an obligating event

A

event that creates an obligation where there is no other realistic alternative but to settle the obligation

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5
Q

what are legal obligations

A

liabilities that arise from contract or legislation

- most liabilities are legal obligations

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6
Q

what are some examples of legal obligations

A

a/p and borrowings

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7
Q

what are constructive obligations

A

a liability exists because there is a pattern of past practice or established policy

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8
Q

what is a constructive obligation

A

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

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9
Q

what are the 2 categories of liabilities

A
  1. financial

2. non-financial

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10
Q

what is a financial liability

A
  • 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
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11
Q

give some examples of a financial liability

A

ie A/P and A/R
or
loan payable and loan receivable

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12
Q

give some examples of a financial liability

A

ie A/P and A/R
or
loan payable and loan receivable

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13
Q

what is a non-financial liability

A
  • defined by what is NOT
  • not a financial liability
  • no offsetting financial asset on the books of another party
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14
Q

what is a type of a non-financial liability

A

provisions

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15
Q

what are provisions

A

or liabilities that have uncertainty surrounding timing or amount are a major category of non-financial liabilities

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16
Q

what are some examples of non-financial liabilities

A
  1. unearned revenues
  2. 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
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17
Q

what are some examples of non-financial liabilities

A
  1. unearned revenues
  2. 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
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18
Q

what are the two categories of financial liabilities

A
  1. other and

2. Fair value through profit or loss )FVTPL)

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19
Q

what are other financial liabilities

A

most financial liabilities

- all those except those in FVTPL

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20
Q

how do you initially value other financial liabilities

A

at fair value

  • this is the transaction value
  • add any transaction costs if any
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21
Q

how do you know if the financial liability is FVTPL and not other

A

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)

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22
Q

how do you know if the financial liability is FVTPL and not other

A

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)

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23
Q

What is discounting for

A

all liabilities must be valued at Present value

- time value of money

24
Q

what should a discount rate be

A

discount rate chosen must reflect the current market rate, specific to the risk level of the liability

25
Q

discounting is not possible if

A

the amount and timing or cash flows is highly uncertain then undiscounted amounts are recorded

26
Q

if you can’t use discount what do you use

A

undiscounted amounts

27
Q

how do you record interest expense on the discounted liablitiy

A

recorded as time passes

28
Q

how do you record interest expense on the discounted liablitiy

A

recorded as time passes

29
Q

how do you record interest expense on the discounted liability

A

recorded as time passes

30
Q

how do you measure other financial liabilities

A
  1. Initial measured - fair value of the consideration plus transition costs
  2. then carried at Fair value (which is cost) or amortized cost over their lives
31
Q

What is discounting

A

time value of money

32
Q

what should the discount rate being chosen be

A

must reflect the current market rate, specific to the risk level of the liability

33
Q

How do you recognize provisions

A

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

34
Q

when recognizing a provision the estimate of the amout to recognize is based on what

A
  1. risk

2. uncertainty of cash flows

35
Q

if effect of discounting is material then they must determine by

A

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

36
Q

common financial liabilities are classified as and initially measured as

A
  • classified as other financial liabilities

- initially measured as fair value plus transaction costs

37
Q

what are some common financial liabilities

A
  1. a/p
  2. Notes payable
  3. Loan gurantees??
38
Q

what sort of adjustments need to possibly be done for A/P

A
  1. purchase discounts
  2. allowances
  3. returns
39
Q

How do notes payable come about

A

usually form borrowing from a lender

- other notes payable are form suppliers as part of a purchase agreement

40
Q

what is a note payable

A

a written promise to pay a specified amount at a specified future date (or a series of amoutns over a series of payment dates)

41
Q

what is a note payable

A

a written promise to pay a specified amount at a specified future date (or a series of amoutns over a series of payment dates)

42
Q

some notes formalize what

A

collateral security for the lender, assets of the borrower that the secured lender can seize if the note goes into default

43
Q

what is the stated interest rate in a note

A

may not equal the market rate prevailing on obligations involving similar credit rating or risk

44
Q

What is the market interest rate

A

the rate accepted by 2 parties for loans or equal profile - identical amounts, with identical credit risk, terms and conditions

45
Q

what are the two categories of notes

A
  1. interest bearing and

2. non-interest bearing

46
Q

what are interest bearing notes

A
  • do not state an interest rate but command interest through the difference b/w lent and (higher) cash paid
47
Q

a note with stated interest rate that is below market rates may be used why

A

may be used by suppliers as a sales incentive

48
Q

how do you initial value a note

A

at fair value (usually loan amount)

49
Q

if the state rate and market rates are different on a note and the term is more than a year (ie not short term)

A

the present value discounting must be used to establish initial fair value
- use market rate for calculations

50
Q

what is a loan guarantee

A

requires a guarantor to pay the loan principal and interest if the borrower defaults

51
Q

a loan guarantee is a financial liability of the gurantor, how do you record it

A

at fair value

52
Q

what are cash dividends payable

A

declared but not year paid

53
Q

how are cash dividends payable reported

A

reported as a current liability b/w date of declaration and payment because it gives rise to an enforceable contract

54
Q

What do monetary accrued liabilities include

A

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

55
Q

what are advances and returnable deposits

A

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)

56
Q

how do you report advances and returnable deposits

A
  • 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

FA3 financial liabilities (6 decks)

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