debt and liabilities Flashcards
how are provisions estimates usually done?
similar to the BS method for bad debt expense. each year you estimate the required ending balance and compute expense as a plug number.
how are contingent liabilities reported?
Contingent losses are only recognized as liabilities if they are reasonably estimable and their occurrence is probable (US GAAP) or ‘more likely than not’ (IFRS).
Otherwise, they are disclosed in a footnote (if the contingency is reasonably possible) or not at all (if the probability is remote).
what are the main entries affecting the balance of contingent liabilities?
-payments
-additions
-releases (when you decrease the balance without a need for cash to exit, for example, losses related to a suit were lower than expected and so you reverse part of the loss you recognized previously)
For large companies, notes/bonds tend to be the predominant form of debt financing. (Why?)
banks cannot afford high exposures to individual clients such as large companies.
how is the book value for a debt issue determined?
by discounting future payments at current interest rate (which is the price paid by investors)
