International accounting standards 10 Flashcards
Non-current Liabilities (znaczenie):
Zobowiązania długoterminowe
Non-current liabilities:
- Non-current liabilities (long-term debt) consist of an expected outflow of resources arising from present obligations that are not payable within a year or the operating cycle of the company, whichever is longer.
- Long-term debt has various covenants or restrictions.
Examples of non-current liabilities:
- Bonds payable (obligacje)
- Long-term notes payable (Obligacje długoterminowe płatne)
- Mortgages payable (kredyty hipoteczne do spłaty)
- Pension liabilities (zobowiązania emerytalne)
- ## Lease liabilities (Zobowiązania leasingowe)
Overview of bonds:
- Bonds are a form of interest-bearing (oprocentowane) notes payable issued by corporations, universities, and governmental agencies.
- Sold in small denominations (usually $1,000 or multiples of $1,000).
- When a company issues bonds, it is borrowing money. The person who buys the bonds (the bondholder) is investing in bonds
Types of Bonds:
Secured and Unsecured Bonds
* Secured bonds have specific assets of issuer (emiter) pledged (zobowiązał się) as collateral (zabezpieczenie) for bonds
* Unsecured bonds are issued against general credit of borrower (Jest więcej unsecured)
Convertible and Callable Bonds
* Convertible bonds can be converted into ordinary shares at bondholder’s option
* Callable bonds (płatne na żądanie) can be redeemed (bought back), by issuing company, at a stated dollar amount prior to maturity (terminem zapadalności)
Bonds:
- Bond certificate
- Issued (wydane) to investor
- Provides name of the issuer, face value, contractual interest rate, and maturity date
- Face value - principal due at maturity (how much will be pay in maturity)
- Maturity date - date final payment is due (należny)
- Contractual interest rate – annual rate used to determine cash interest paid, also referred to as the stated rate
Bearer bonds (znaczenie):
na okaziciela
Bond Trading:
- Bondholders can sell their bonds at any time on national securities exchanges
- Bonds prices are quoted as a percentage of face value
- Corporation makes journal entries only when it issues or buys back bonds, or when bondholders convert bonds into common stock
How do you calculate the amount of interest that is paid to the bondholder each period?
Stated rate x Face Value of the bond
How do you calculate the amount of interest that is recorded as interest expense by the issuer of the bonds?
Market rate x Carrying Value of the bond
If market rate is lower than the stated rate, bonds sold at
premium
If market rate equals the stated rate bonds sold at
par
If market rate is higher than the stated rate bonds sold at
discount
Extinguishment of non-current liabilities (znaczenie):
wygaśnięcie zobowiązań długoterminowych
Three common situations besides payment at maturity:
- Extinguishment with cash before maturity,
- Extinguishment by transferring assets or securities, and
- Extinguishment with modification of terms.
Extinguishment with cash before maturity
Net carrying amount (wartość bilansowa) > Reacquisition price (cena odkupu)= Gain (zysk)
Reacquisition price > Net carrying amount
= Loss
Non-Current Liabilities: Measurement
- Non-current liabilities are measured at their fair value. It is used not only for non-current liabilities, but for most most financial assets and liabilities.
- The IASB believes that fair value measurement for financial instruments, including financial liabilities, provides more relevant and understandable information than amortized cost (skorygowana cena nabycia).
Off-Balance-Sheet Financing (finansowanie pozabilansowe)
- Non-Consolidated Subsidiary
- Special Purpose Entity (SPE) / Special Purpose Vehicle (SPV)
Off-Balance-Sheet Financing: Rationale
- Removing debt enhances the quality of the balance sheet and permits credit to be obtained more readily and at less cost.
- Loan covenants often limit the amount of debt a company may have. These types of commitments might not be considered in computing the debt limitation.
- Some argue that the asset side of the balance sheet is severely understated.
Leases:
- A lease is a contractual agreement between a lessor (owner of a property) and a lessee (renter of the property).
- Gives lessee the right to use specific property for a specified period of time
- Lessee makes rental payments over the lease term to the lessor
- Under IFRS 16 almost all leases are capital leases.
- A contract is, or contains, a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration. [IFRS 16:9]
- Control is conveyed where the customer has both the right to direct the identified asset’s use and to obtain substantially all the economic benefits from that use. [IFRS 16:B9]
-
A lessee may elect to account for lease payments as an expense on a straight-line basis over the lease term or another systematic basis for the following two types of leases:
i) leases with a lease term of 12 months or less and containing no purchase options – this election is made by class of underlying asset
ii) leases where the underlying asset has a low value when new (such as personal computers or small items of office furniture) – this election can be
made on a lease-by-lease basis
Accounting for lease liabilities
- Right-of-use asset is reported on the statement of financial position under non-current assets
- Lease liability is reported on the statement of financial position as a liability
- Portion of lease liability expected to be paid in the next year is a current liability with the remainder classified as a non-current liability
Two ratios that provide information about debt- paying ability and long-run solvency are:
- Debt to Total Assets Ratio
- Times Interest Earned Ratio
Debt to Assets Ratio =
Total Liabilities ÷ Total Assets
Times Interest Earned =
(Net Income + Interest Expense + Income Tax Expense) / Interest Expense
Advantages of bond financing over equity financing:
- Shareholder control is not affected.
- Bondholders do not have voting rights, so current owners (shareholders) retain full control of
the company. - Tax savings result.
- Bond interest is deductible for tax purposes; dividends on stock are not.
- Return per share (EPS) may be higher.
- Although bond interest expense reduces net income, earnings per share is higher under bond financing because no additional shares are issued.
