FAR 5 - Liabilities Flashcards
Exit or disposal activities
1) A liability must be recognized for these activities (severance pay, costs to terminate a contract, etc.).
2) Footnote until announced, then it gets recorded in the FS.
3) Future operating losses expected to be incurred due to these activities are recognized in the period(s) incurred.
4) Recognized at fair value (discounted cash flows) in continuing operations
Asset Retirement Obligation (ARO)
The obligation (liability) associated with the retirement of a tangible long-lived asset. Recorded at fair value which is generally equal to the present value of the future obligation (discounted amount)
Asset Retirement Cost (ARC)
The amount capitalized (asset) that increases the carrying amount of the long-lived asset when an ARO is recognized
Adjustments to AROs and ARCs at year-end
ARO = accretion expense ARC = depreciation expense
Cumulative accretion expense + cumulative depreciation expense = ARO over the life
Dr Accretion expense
Cr ARO
Dr Depreciation expense
Cr Accumulated depreciation
Gain Contingencies
Not recognized, DO NOT record JE. Disclose in notes and state amount and nature. Ignore if likelihood is remote
Loss Contingencies
1) Probable and amount can be reasonably estimated = Record JE
1a) Probable and amount cannot be reasonably estimated = Disclose range and nature
2) Reasonably possible = Record JE
3) Remote = Ignore
Reasonably estimated range of loss contingency
Accrue for the best estimate of the loss. If range given and no amount is better than another, accrue for the minimum and disclose the possibility of an additional loss
Premiums and Warranties
Loss contingencies that are probable and reasonably estimated.
Dr Premium/Warranty Exp
Cr Premium/Warranty Liability
*For warranty expense add up yearly estimated expenses and multiply by sales each year to get your total exp/liability estimate
Annuities
Multiple cash flows of identical value.
Ordinary annuity - payments are made at the end of each period
Annuity due - payments occur at the beginning of each period
OA vs. AD
PV AD for 3* periods = PV OA for 2* periods + 1
Long-Term Liabilities
Record at PV
Imputing interest
When no interest or an unreasonable rate of interest is given interest must still be recorded. Not required for short term notes
Effective interest method
1) Find CV of liability (PV)
2) Multiply by appropriate interest rate (=interest expense)
3) Difference between cash payment and interest expense is your principal payment (reduce discount)
* The amount allocated to principal and interest charges changes as the carrying value decreases
Bond interest exp vs. cash payment
Cash payment is constant at stated rate x face value.
If interest exp > cash paid = discount
If interst exp < cash paid = premium
Bond Issuance Costs
Decreases initial carrying value. Acts like a discount (will be added to discount and amortized)
**Will lead to borrower and investor having different JEs as borrower uses effective rate while investor uses market rate to account for interest payments. Investor also ignores issuance costs when investment is initially booked