Chapter 12: Liabilities Flashcards
A present obligation arising from a past event, the settlement of which is expected to result in an outflow of resources embodying economic benefits or service potential.
Liability
An obligation resulting from a contract, legislation, or other operation of law.
Legal Obligation
An obligation that results from an entity’s actions that create a VALID EXPECTATION from others that the entity will accept and discharge certain responsibilities.
Constructive Obligation
Liability Recognition Criteria:
- It meets the definition of a liability.
- It is probable that there’d be an outflow of resources.
- Cost or value can be measured reliably.
A contractual obligation to deliver cash/financial asset to another entity. It is also the obligation to exchange financial assets/liabilities with another entity under POTENTIALLY UNFAVORABLE conditions.
Financial Liabilities
When is a financial liability RECOGNIZED?
When an entity becomes a party to the contractual provisions of the instrument.
Initial Measurement of Financial Liabilities
Fair Value - Transaction Costs, except for financial liabilities for financial liabilities at FV through surplus/deficit.
Subsequent Measurement of Financial Liabilities
Amortized Cost
How to compute for the initial carrying amount of bonds?
Net issuance proceeds - Bond issue costs
How to compute for the initial carrying amount of bonds?
Net issuance proceeds - Bond issue costs
These are not expensed outright, but rather a deduction when determining the carrying amount of the bonds. Also, these are amortized to interest expense over the term of the bonds.
Bond Issue Costs
Does the amortization of bond issue costs increases interest expense?
Yessir.
Amortization is allocated to:
- Bond discount
- Bond issue costs
When is a financial liability DERECOGNIZED?
When it is extinguished, discharged, waived, cancelled, or it expires.
A liability of uncertain timing or amount.
Provision
A provision is RECOGNIZED when:
When ALL the recognition criteria for a liability are met.
If one or more of the recognition criteria are not met, the item is considered as a:
Contingent Liability
A POSSIBLE obligation that arises from past events, and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity.
Contingent Liability
A POSSIBLE asset that arises from past events, and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity.
Contingent Asset
If CONTINGENT liability is PROBABLE:
Recognize and disclose.
If CONTINGENT liability is POSSIBLE:
Disclose
If CONTINGENT liability is REMOTE:
Ignore
If a CONTINGENT asset is PROBABLE:
Disclose
If a CONTINGENT asset is POSSIBLE:
Ignore
If a CONTINGENT asset is REMOTE:
Ignore
Measurement of Provision
Entity’s best estimate of the amount needed to settle the liability at the reporting date.
If the effect of the time value of money is MATERIAL, the provision shall be measured at:
Present value of the settlement amount discounted at a pre-tax rate.
Can a provision be used for things other than what was originally recognized as a provision?
Naur.
No provision shall be recognized for this because such expectation indicates that certain assets used in these activities may be impaired. Thus, these assets shall be tested for impairment instead.
Future Operating Net Deficits
A contract in which the unavoidable costs of settling the obligations under the contract exceed the economic benefits expected to be received from it.
Onerous Contract
The obligation under an onerous contract is recognized as:
Provision
A program that is planned and controlled by management, and materially changed either the scope of activities or the manner in which these activities are carried out.
Restructuring
A legal obligation to restructure EXISTS if:
If at the reporting date, the entity has entered into a binding agreement to sell or transfer an operation.
A constructive obligation to restructure exists if, at the reporting date, both the following are present:
- Detailed formal plan
- Plan is announced to those affected by it.
Does a restructuring provision includes ONLY the direct costs?
Yessir.
Does a restructuring provision includes costs associated with the ongoing activities of the entity?
Naur.
