Liabilities

Question 1

Characteristics of Liability

Answer 1

• Present obligation from past event
• Transfer a resource

Question 2

Present Obligation

Legal and Constructive

Answer 2

Constructive Obligation
- Stipulated will accept certain responsibility
- Valid expectation

Question 3

Classification

Current or Noncurrent

Answer 3

Current
- Expected to be settled w/i the normal operating cycle
- For trading
- 12 months after reporting period
- Does not have an unconditional right to defer the liability for at least 12 months after the period

Question 4

Recognition as a Liability

What if we use estimate?

Answer 4

Must be BOTH probable AND reliably measurable

If probable but not reliably measured = disclose
If reliably measurable yet only possible = contingent

Estimate doesn’t affect recognition = provision

Question 5

Currently Maturing LTD and Breach of Covenant

Current or Noncurrent?

Answer 5

CURRENT

Noncurrent if :
- agreement to refinance / grace period was agreed on or before December 31
- has a discretion to refinance on a long term basis after December 31

Question 6

Premiums

How to compute premium expenses? premium liability?

Answer 6

Expense
- premium expense/unit x premiums to be delivered

Liability
- premium expense/unit x premiums outstanding

Question 7

Points

how to allocate?

Answer 7

Allocate based on stand-alone selling price of points and product itself

Question 8

Warranty

What to do if more than 1 year?

Answer 8

Warranty Expense - this year
Estimated Warranty Liability - next years

Just add the percentage of warranty

Question 9

Current or Noncurrent

Advances from Employee
Advances from Officer/Shareholder
Deferred Tax Liability

Answer 9

Advances from Employee = current
Advances from Officer/Shareholder = noncurrent
Deferred Tax Liability = noncurrent

Question 10

Notes Payable (Initial Measurement)

Short-term
Long-term IB and NIB
Other
@FVPL

Answer 10

Short-term = Face Amount
Long-term IB = Face Amount
Long-term NIB = Present Value
Other = FV less Transaction Cost
@ FVPL = FV (TC is expensed)

Question 11

Notes Payable (Subsequent Measurement)

Short-term
Long-term IB and NIB
Other
@FVPL

Answer 11

Short-term = Face Amount
Long-term IB = Face Amount
Long-term NIB = Amortized Cost
Other = Amortized Cost (minus repayment)
@ FVPL = FV

Question 12

Notes Payable (Interest Expense)

Short-term
Long-term IB and NIB
Other
@FVPL (no discount/premium since not amortized)

Answer 12

Short-term = FA x Nominal %
Long-term IB = FA x Nominal %
Long-term NIB = CA x Effective %
Other = CA x Effective %
@ FVPL = FA x Nominal %

Question 13

Notes Payable (Interest Payable)

Short-term
Long-term IB and NIB
Other
@FVPL

Answer 13

ALL = FA x Nominal %

Question 14

Observation to the Amount of Amortization

Answer 14

amortization ALWAYS increases (be it discount or premium)

Question 15

Remember in Bonds

Two Scenarios

Answer 15

1. On interest date
2. Between interest dates (with accrued interest)

Question 16

Retirement of Bonds

when is it gain? loss?

Answer 16

Gain - CA > Retirement Price

always consider accrued interest

Question 17

Provision

Answer 17

uncertain timing or amount
certain liability

Question 18

Requisites of Provision

Answer 18

• present obligation due to past event
• PROBABLE (more than 50%)
• reliably measurable (even if estimate)

Question 19

Measurement of Provision

Single Obligation
Range of Outcomes (as likely as other)
Large Population of Items

Answer 19

Single Obligation - most likely amount
Range of Outcomes (as likely as other) - midpoint
Large Population of Items - expected value (weigh by % each items)

Question 20

Reimbursement in Provision

What if in balance sheet? in income statement?

Answer 20

recognized only when virtually certain

BS - not netted
IS - expense net of reimbursement

Question 21

Change in Provision

Answer 21

• change in accounting estimate (P/L and prospectively)

Question 22

Remember the picture you created.

Contingent Asset and Liability

Answer 22

=)

Question 23

Compound Financial Instrument

Examples

Answer 23

1. Bonds Payable with Share Warrants
2. Convertible Bonds

Question 24

How to Separate Compound Financial Instrument?

Answer 24

1. Liability = FV (Present Value)
2. Equity = excess