Chapter 5 International Financial Reporting Standards Part 2 Flashcards
IAS 1 Presentation of Financial Statements, requires
classification of liabilities:
-current liabilities
-non-current liabilities
Current Liabilities
- Expected to settle in normal operating cycle
2.. Held primarily for purpose of trading - Settled within 12 months of the balance sheet date
- No right to defer until 12 months after the balance sheet date.
Refinanced short -term debt under IFRS
Long-term if refinanced prior to the balance sheet date
Refinanced short-term debt under GAAP
Long-term if refinancing is agreed prior to the balance sheet being issued
Accounts payable on demand due to violation of debt covenants under IFRS
Current liability, unless lender issued waiver of 12 months by the balance sheet date
Accounts payable on demand due to violation of debt covenants under GAAP
Current liability, unless lender issued waiver obtained by the annual report issuance date.
Bank overdrafts under IFRS
Long-term if integral part of cash management netted against cash
Bank overdrafts under GAAP
always treated as current liabilities
IAS 37 Provisions, Contingent Liabilities and Contingent Assets
Reporting liabilities and assets of uncertain timing, amount, or existence
Onerous contracts and restructuring costs
Environmental costs and nuclear decommissioning costs
Under IFRS contingent liabilities are not on the balance sheet they are a
provision of liability with uncertain timing or amount.
Under IFRS, Contingent liabilities are recognized on the balance sheet only when
- There is a present obligation from past events
- It is probable that there will be an outflow of resources.
- A reliable estimate of the obligation can be made.
Constructive obligation arises from
past actions or current statements indicating that a company will accept certain responsibilities
*No concept of constructive obligation in U.S. GAAP
IAS 37 defines a contingent liability as a
- Possible obligation confirmed by occurrence or non-occurrence of a future event
-Present obligation that is not recognized because: 1. No probable outflow of resources
2. Amount of the obligation cannot be measured reliably
A contingent liability is recognized under U.S. GAAP when
outflow is probable
only disclosed if outflow is possible, but not probable
Under U.S. GAAP probable usually means
70-90%
Under IFRS probable usually means
more likely than not, implying a threshold of just over 50%
What is a provision?
liability of uncertain timing or amount
Liability is a
present obligation from a past event that will arise in an outflow of benefits
If there is no passed event, then
there is no obligation
no liability
Past Events create two types of obligations
Legal obligation
Constructive Obligation
When to recognize a provision
3 conditions need to be met
- Present obligation whether legal or constructive a as result of some past event or obligating event
- The outflow of economic benefits required to settle the obligation must be probable; probable is more than 50%; possible means less than 50%
- There must be reliable estimate of outflow of economic benefits that is required to settle the obligation.
If not, then entity discloses contingent liability or nothing if probability of outflow of benefits is remote
How to measure provisions
Best estimate of the expenditure required to settle the obligation at the end of the reporting period
This estimate of outcome and financial effect are determined by the judgment of the management of an entity, supplemented by experience of similar transactions, sometimes reports of independent experts
Two ways to measure provisions
- Expected Value: when measurement of provision involves a large population of items, then the provision is measured as weighted average of all possible outcomes by their probabilities
- Single obligation is measured: provision would be set as most likely outcome
Several considerations to look at when measuring provisions
risk and uncertainties: inflation
present value after 12 months
Future events
gains from disposals shall not be taken into account