chapter 13 part 3 Flashcards
what is derecognition also called
extinguishment
what is derecognition
debt is removed from accounts
what is derecognition
when a debt is recorded in the accounts it is recognized
- when it is removed, it is derecognized
how is debt derecognized or extinquished
usually by paying the amoutn of the liability to the creditor
sometimes can debt be repaid and derecognized before its maturity
yes
How is debt derecognized at maturity
by the time debt reaches full maturity, all the discount or premium is fully amortized
- making the carrying value equal to the face value
- with no gains and losses being recorded
why would you want to derecognize prior to maturity
- to improve ratios
- eliminate debt covenants
bonds: may be pruchased on the open makret at any time
some reasons bonds may be retired early
- bonds may be redeemable (the borrower may pay back the loan using a Call option at a specific price and time
- investors can force repaymetn of a bond if the bond is retractable
a bond carries a call prvilege, the issuer may do what
may retire the debt by paying the call price or redemption price, during a speciied period
- typcially the call price exceeds fave value by a certain percent
Retirement decision with regards to a bond result in recording what
a gain or loss that reflects the changed fair value of the bond that is caused when market yield rates change
- whether the retirmenet happens or not, the fiar value of the bond has still changed ?????
-
accounting for early debt retirement involves what
- updating interet expense, discount premium, and related issue costs to the retirement date
- removing the liability accounts
- recording the transfer of cash, other resources, or the issuance of new debt sercurities
- reocrding a gain or loss
gains or losses on bond retirmens are either what
- ordrinary or
- unsual items
- depends on the circumstances
how are gains and losses dealth with replacement debt
they are deferred and amortized over the term of any repalcement debt
- if and only if, the transaction is a substitution or modificaiton of debt
what happens when bons are dercognized for an amount different than the amortized cost
gain or loss results
How do you record derecognition of a bond prior to matuirty
- update interest expense to retirement date, discount/premium amortization and related debt issue costs
- remove disocunt/premium and loan payable accounts
- record apyment of cash or other consideration
- record gain or loss
the classification of a gain or loss can be
- . unusual or
- ordinary
- on SCI
- may be deferred and amortized if new “replacemnet” debt is a substiution or modificaiton of old debt
how does extinguisment of debt (derecognition) accomplished
by defeasance
what is defeasance
requires a company to place assets in an irrecvocable trust sufficient to pay the debt and obtaining agreemnt from the creditor tha the liability is extinguished when the debtor makes the payments to the trust
- the liability will no longer appear on the SFP
- the defeasance gain/ loss is the difference between the book value of hte liability and the payment required by the defeasance agreement
defeasance simple what it is
- requires company to palce assets in an irrevocable trust sufficient to pay te debt interst and principal
- credotr has approved this, and copany no longer has obligaton to the creditor
- thefore can derecognize the liability (with an entry that removes the assets(funding), liaibity, and related accoutns, and records a gain or loss
what is in-substance defeasance
similar to defeasance except that the trust is not irrevocable
- creidtor has not approved and therofre the compay still has an obligation
- liability is not removed form the balance sheet
- and a seperate investment account is recorded for funds transferred to the trustee
is in-substance defeasance allowed
this practice is no longer avialalbe as a means of removing debt from the SFP
- because there is no legal relase provided by the creditor
what was the concern wth in-substance defeasance
standard-setters were concerned that compaies set up in-substance defeasnce if interest rates increased.
- the increased reduces the amoutn of investment needed to service the debt, and reduced the fair value of hte debt, resulting in gain
- this might allow management a way to manipulate earnings
- another concern was that the borrowing company would have debt legally outstanding but was not reported on SFP
what is substiution or modificaiton of debt
repay and revorrow in the same transaction
- replacng an existing loan prior to its due date
with regards to substitution or modification of debt, if present value of new loan is at least 10% different form the presnet value of old loan, then
- extinguish the old loan recognizing a gain or loss
- record the new loan
with regards to substitution or modification of debt, if the present value of new loan difference is less than 10%
in substance, there is no difference
- no gain or loss is recorded
- on the SCF, financing section inludes with regards to bonds :
1, cash inflow form issuance of bonds
- cash outflow to repay bonds
on the SCF, with regards to bonds, the operation section inlcudes(assuming indirect method) :
- loss (gain) on bond retiremnet is added back (deducted)
- discount or premium amortization is added back
- interest expenses is added back
- interest paid may be shown as a financing or operating acitivity
What do you disclose with regards to liabilities
- accounting polciies, fair value and methods used to determine fair values
- title, interest rate, interest expense, maturity date, amount outstanding, security, redepmtion or conversion privileges
- aggregate amount of payments due in next 5 years
- foreign currency
- show secured liablities separately and the fact htey are secured
- details of defaults
- objectives, polices and processes to manage risk and captial
what are the treatment fo long-term liabilities under IFRS and ASPE
the are similar
ASPE
- may use either the effective interest method or the stright line mtheod
- may choose to capitalize borrwoing costs, but no guidleness are provided - disclose accounting policy
- disclosure is less extensive under ASPE
under IFRS and ASPE
if a long-term loan is coming due but is being renegotitead
IFRS
- requries that a legally enforceable agreement be in palce by the end of the fiscal year (the reporting date) if the laon is to be classified as long-term
ASPE
- classification as long-term is permitted if renegotated resulted in agreemnt by the date the fincnial statements are released
IFRS vs ASPE
cpatialization of borrowing costs
IFRS
- required to capitalize borrowing costs
ASPE
- copanies may choose to capitalize or not
- although imputed interst may not be capitalized
IFRS vs ASPE
disclsoure
disclsoure is less onerous in all reas under ASPE
