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FA3 Liabilities Intermediate > Chapter 12: > Flashcards

Chapter 12: Flashcards

1
Q

what is the definition of a liability

A

A present obligation of entity, arising from past events, the settlement of which is expected to result in an outflow of economic benefits.

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2
Q

what are the characteristics of a liability

A
  1. is an expected future sacrifice of assets or services;
  2. constituting a present obligation;
    3.and
    is the result of a past transaction or event.
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3
Q

legal Obligations arise due to

A

contract or legislation

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4
Q

example of contract or legislation legal obligations

A

trade payables

borrows

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5
Q

constructive obligations arise due to

A

a pattern of past practices or established policy

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6
Q

example of constructive obligation

A

company makes a statement that will accept certain responsibilities and creating an expectation

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7
Q

What are the two types of liabilities

A
  1. financial liabilities

2. non-financial liabilities

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8
Q

what is a financial liability

A

a financial instrument
- a contract that gives rise to a financial asset of one party and a financial liability or equity instrument of another party
Includes: a/p and notes payable

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9
Q

what is a non-financial liability

A

any liability that is not a financial liability (ie it has no offsetting financial asset on the books of the other party)

Include: unearned revenue, warranty liabilities
provisions - liability with certain timing or amount

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10
Q

understand slide 12

A

understand slide 12

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11
Q

what is discounting

A

financial liabilities must be valued at present value of future cash flows

  • discount value if liability is due beyond one year
  • discounted at current market (effective) interest rate specific to risk level
  • interest is recorded as time passes
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12
Q

when do you not discount

A

if it is under one year and

- if amount and timing is highly uncertain

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13
Q

what are trade accounts payable

A

obligations to suppliers arising from operations

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14
Q

what kind of adjustments may be necessary for trade accounts payable

A

adjust for

  1. purchase discounts
  2. allowances
  3. returns
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15
Q

what do you report separately with regards to trade payables

A

income taxes payable are reported separately

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16
Q

what are notes payable

A

written promise to pay a specified amount (or series of amounts) a t specified date (or series of dates)

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17
Q

Notes payable can be secured with

A

collateral

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18
Q

what are the sources of notes payable

A
  1. borrowing from lenders
  2. purchase agreements with suppliers

** stated interest rate may be different form market interest rate

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19
Q

what is stated interest rate

A

the interest rate STATED in the loan agreement

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20
Q

what is the market interest rate, or yield

A

the rate accepted by two parties for loans of equal amounts , identical credit risks and conditions

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21
Q

what is interest bearing

A

specify a stated rate applied to face value

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22
Q

what is non-interest bearing

A

non stated rate, but get interest thorough difference between cash lent and the higher amount of cash repaid

notes with stated rates less than market rates may be used by suppliers as sales incentives

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23
Q

how are notes payable initially recorded

A

at fair value
- stated value if short term
- stated value if stated rate = market rate
- discounted value if stated rate is different from market rate
(market rate is used for discounting)

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24
Q

Notes payable Example:
notes payable issued august 1, 20x4 and due July 31,x 20x6 for $700,000
- stated rate is 5% which is equal to market rate
- interest Is payable annually on July 31
company has dec 31 year end

A

Entries:
Aug 1, 20x4 initial entry
cash 700,000
notes payable 700,000

Dec 31, 20x4 -accrue interst
700,000 x5% x 5/12
interest exp 14,583
accrued int. payable 14583

July 31, payment of annual interest

int exp 20,417b
accrued int pay 14,583
cash 35,000

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25
Q

loan guarantee - what is it

A
  1. requires a guarantor to pay loan principal and interest if borrower defaults
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26
Q

how do you record a loan guarantee

A

at fair value using probabilities

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27
Q

example of loan guarantee of $600,000 has a 20% probability that it will have to be honoured

A

record:
provision for $120,000
extensive disclosure required

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28
Q

other financial liabilities: cash dividends payable

A

dividends declared but not yet paid

  • undeclared for dividends
  • disclosure required for dividends in arrears for cumulative preferred shares
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29
Q

other financial liabilities: monetary accrued liabilities - what are they

A
  1. accrued wages and benefits
  2. accrued interest payable
  3. accrued goods and services received but not yet invoiced
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30
Q

other financial liabilities; advances what are they

A

represent guarantees for:

  1. future obligations
  2. performance on contract or service
  3. in case of non-collection
  4. for possible damage to property
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31
Q

other financial liabilities: returnable deposits - what are they

A

received form customers or employees

- company property, club memberships

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32
Q

other financial liabilities; advances and returnable deposits

A
  1. current or long-term depending on when the deposit is likely to be returned or the obligation or performance is completed
    - terms of contract dictates what happens if the sale is not completed
    - recorded as a customer deposit liability when received
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33
Q

financial liabilities - taxes

A

business collect taxes from customers and employees that are remitted to government

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34
Q

what does sales tax include

A

GST, PST, HST

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35
Q

how are revenues and purchases recorded with regards to tax

A
  1. revenue recorded net of taxes collected

2. purchases recorded net of GST/HST recoverable (PST is part of costs)

36
Q

tax example:

sales $350,000 are made and GST is 5% collected $17,500 and PST (8%) collected of $28,000

A

A/R 395,500
revenue 350,000
gst payable 17,500
pst payable 28,000

37
Q

tax example continued

company also purchased inventory for $282,500 including gst (5%) AND pst (8%)

A

inventory 270,000
gst payable 12,500
a/p 282,500

38
Q

company pays taxes collected

A

gst payable 12,500
pst payable 28,000
cash 40,500

39
Q

payroll taxes

what are they

A

withheld form employees pay and remitted to government

40
Q

what are the payroll taxes

A
  1. personal income tax (federal and provincial)
  2. cpp
  3. ei
  4. other : insurance premiums, group insurance, medical insurance , pension plans
41
Q

what are property taxes based on

A

assed values

- estimate of property tax accruals monthly as tax rates are set during the year

42
Q

what are conditional payments

A

may be legal or constructive liabilities

- estimated throughout the year for interim reports and adjusted at year end as required

43
Q

how do you record foreign currency payables

A

must be restaed to cdn$ at the CURRENT EXCHANGE RATE at year end date

  • when initially recognized is translated using spot rate on the date of purchase
  • at report date - must translate based on exchange rate at date of report
  • when settled, and exchange gain or loss will be recognized
44
Q

example of foreign currency do slide 34 - 35

A

example do

45
Q

what is provision

A
  • non-financial liability
  • a liability of uncertain timing or amount
  • caused by legal and constructive obligations?
46
Q

terminology of provisions
degree of certainty / classification

  1. certain
  2. probable
  3. not probable
A
  1. payables, accruals (recorded)
  2. provision (recorded)
  3. contingency (disclosed only)
47
Q

how do you measure a provision

A

recorded at the best estimate or expected value

48
Q

what if there is a range of outcome possible for a provision - Large population
and small population

A

determine the expected value
Large population
- the sum of the outcomes multiplied by their probability

(30%) ($0) + 70% ($500,000) = 350,000

small population
-use the most likely outcome (ie 30% chance of $100,000 payout, 55% chance of $250,000 payout and 15% $310,00 payout. therefore record the $250,000

49
Q

how do you record provisions

A
  1. re-estimate annually
  2. discount when the liability is due beyond one year (if amount and timing of cash flows is HIGHLY UNCERTAIN, the record on undiscounted basis
    - if an estimate cannot be made - then this is a contingency and disclosed only
50
Q

when does a contingency exist

A
  1. obligation is possible but NOT PROBABLE
  2. there is a present obligation BUT NOT ECONOMIC RESOURCES ATTACHED OR
  3. there is a present obligation but rate circumstances dictate than ESTIAMTE CANNOT BE MADE
  4. disclose only
51
Q

how are contingencies recognized

A

they are only disclosed in the notes

52
Q

what are contingent assets

A

arise form past events, but existence is confirmed with a future event
- not recorded until virtually certain

53
Q

How are lawsuits recorded

A
  1. probability assessed by lawyers
  2. certain - probable -record as a provision
  3. not probable - contingency and disclose only
    - a constructive liability may still be present
54
Q

what are executor contracts

A

contracts that become liabilities once they have been executed
- a future commitment that is not a liability until the other party has performed a service

55
Q

what is an onerous contract

A
  • unavoidable costs of meeting a contract exceed the economic benefits
  • record a provision for the net loss
  • example, purchase contract to buy 10,000 kg of ore at $1.00per kg. the selling price is now $0.80 per kg.
  • record a provision for 10,000 kg x $0.20 = $2,000
56
Q

Provision - restructuring plan

A

a plan of action controlled by management that will materially change the scope of the business

57
Q

how do you record a restructuring provision

A
  • estimate of payments required under a future restructuring program
  • recorded when the company has a detailed formal plan and has implemented or announced the commencement of the plan
  • announcement must include specific facts and details
58
Q

provision - warranties

what are warranties

A

assurance that he product will operate as intended and meet speciation
- can be legal or constructive (constructive because of actions by the company)

59
Q

how do you record warranties

A
  • cost deferral method is used
  • estimate of all expected future claims is recorded at time of sale
  • record warranty expense and provision for warranty
  • adjust annually as estimates change
  • as cash is paid out, reduce the provision for warranty
60
Q

provisions - restoration and environmental obligations

A

may be constructive or legal (legislated)

- if pending legislation - provision accrued only if virtually certain

61
Q

provisions - sales returns and refunds

A

may be constructive or legal

  • estimate and record at time of sale
  • review for reasonableness
62
Q

provisions - coupons, refunds and gift cards

A
  • if coupon is redeemed in cash, or products are sold at a loss -record a provision for the estimated obligation
  • estimate breakage (unused) rate of coupons or gift cards
  • discounted if the time period is long
63
Q

provisions - loyalty programs

A

allocate portion of original sale that gives rise to the points and record as a provision for rewards

64
Q

provision - repairs and maintenance

A

may NOT ACCRUE major overhaul repairs since not arising form a past event

65
Q

provision - self insurance

A

accrue a provision for estimated losses for loss events that have taken place during the year

66
Q

provisions - compensating-absence liabilities

A
  • used only when employees can carry unused time to future years
  • accrue in the year it is earned
  • adjust at year -end all of the vacation and medical leave that can be carried over
67
Q

what is the impact of discounting

A
  1. discounting required when liabilities have terms greater than one year
  2. discounting not required when for liabilities with initial term less than one year or if timing and amounts are uncertain and discounting is not practical
68
Q

what is nominal interest rate

A

interest rate stated for the liability

- may be 0%

69
Q

effective interest rate

A

also called the yield

- market interest rate for debt of similar term, security and risk

70
Q

present value

A

is the discounted amount of the future cash flows (both interest and maturity amounts) using the effective interest rate (market rate)

71
Q

if nominal rate = effective rate

A

the PV is equal to maturity amount and there is no need to discount

72
Q

what is decommissioning provision

A

?

73
Q

impact of discounting: example of decommissioning obligation with changes in estimates

A
  1. changes in amount or timing or discount rate of obligation must be recognized
  2. record interest expense of the year and then recognize changes in estiamtes
  3. assume market rate changes at end of year 3 to 6%
74
Q

what is a current liability

A

settled with the next operating cycle or the next 12 months

75
Q

what is an operating cycle

A

time between purchase of materials for processing into inventory and collection of cash form sale

76
Q

when operating cycle cannot be identified what do you do

A

use 12 months

77
Q

notes payable that are classified as current include:

A
  1. loans due on demand
  2. loans due within the next year
  3. current portion of long-term notes payable
  4. long-term debt in violation of covenants and callable at any time
78
Q

what are loans due on demand

A

demand loans payable on demand (or short delay)

79
Q

what are loans due within the next year

A

if loan has a due date within the next 12 months

80
Q

if refinancing long-term debt what do you do

A

the contractual arrangement must be in place at the year end date in order to classify debt as long term

81
Q

provisions are classified as current or long term based on

A

timing or expected future cash flows

- classification based on legal terms

82
Q

what do you disclose

A
  1. carrying amounts in each category
  2. fair values and description of method used
  3. components of each category
  4. legal terms - maturity, interest rate, collateral
  5. any defaults or breaches and any resolution; and carrying amount
  6. financial risk exposure - credit, liquidity, market and objectives for managing risk
  7. related accounting policies
83
Q

Statement of cash flows

on statement of cash flows report:

A
  1. operating activities - changes in liabilities and provisions related to earnings
  2. financing activities - cash cahgnes in borrowing
  3. interest paid - either operating or financing
  4. operating activity - interest due to unwinding a discount is a non-cash expense and is added back
  5. non-cash transactions are excluded form SCF and disclosed
84
Q

Accounting standards for Private enterprises

A
  1. does not use the term “provision”
  2. recognize non-financial liabilities when:
    • meet the definition of a liability, are measureable and if future economic sacrifices are probable
      - some differences in measuring these between IFRS and ASPE
      - constructive
  3. constructive liabilities are NOT recorded under ASPE
  4. no ASPE standard for recording customer loyalty points - may use the IFRS approach or not
85
Q

ASPE - contingent liability

A

a liability that will result in the outflow of resources only is another event happens

  • If likely – record and disclose if measureable; if not measureable, disclose only
  • If undeterminable – disclose
  • If unlikely – Do not record or disclose unless material
86
Q

ASPE - classification and disclosure

A
  • If long-term loan is coming due and refinancing agreement is in place by date of release of financial statements
  • May classify as long-term

FA3 Liabilities Intermediate (7 decks)

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