notes i Statements W4 Liabilities Flashcards
Liabilities-
Def
Liabilities-
External claims on resources
Stocks at reporting date
Liability and equity reflect financial decision (mix of debt of equity)
Current vs non current
Current vs non current
Expected to settle in normal operating cycle
Primary purpose held for trading
Settled within 12 months after reporting period
All others
Classes
Classes
Grouping similar nature
Notes may provide details
Sub classes
Payables Accruals Unearned revenue Current tax payables Borrowings Other financial liabilities Lease liabilities Provision Contingent liabilities
Payables
Def
Payables
Liability to pay for good or service received or supplied + invoiced or formally agreed with supplier
Short term 30-60 days
Non interest bearing
Def
Trade payables
Other payables
Trade payables
From credit purchase of inventory
e.g. regular inventory suppliers
Other payables
Credit purchase from non-inventory suppliers
Trade & other payables
Recognition
Trade & other payables
Recognition
O T P EU MU
Obligation
(present)
Received G&S but not paid
Transfer
Econ resources
Payment of cash required to settle
Past event
Received G&S
EU
Low, legal obligation to settle
MU
Low, transaction/ agreed price from past event
Trade & other payables
Disclosure
Trade & other payables
Disclosure Prescribed line item Trade and other payables Separate Current tax payables
Notes
Dissaggreate between trade payables vs other
Relevant information regarding payables
e.g. JB: loyalty programs
Unearned revenue-/ deferred/ revenue received in advance
Def
Unearned revenue-/ deferred/ revenue received in advance
Def
Payment received in advance for G&S that firm yet to provide
Receive cash prior to providing
e.g. insurance, commercial property (recivede rent before at or before rental period)
Not yet earned e.g. lay-by sales, prepaid orders (JB delivers larger goods later)
Unearned revenue-/ deferred/ revenue received in advance
Recognition
Unearned revenue-/ deferred/ revenue received in advance
Recognition
O T P EU MU
Obligation
(present)
Received G&S but not paid
Transfer
Econ resources
Payment of cash or other considerations required to settle
Past event
Received G&S
EU Low, legal obligation to settle Contractual nature MU Low, cash received/ agreed value of transaction
A retail store sells gift cards whereby the purchaser pays an amount in exchange for a card that then carries that value.
• The cardholder may then present the card to any of the retail chain’s outlets in exchange for goods to the value of the card.
• The card’s expiry date is 6 months from the date of purchase.
Discuss how a $100 gift card should be recorded by the store at each of the following dates
Sale
Redemption
Expiry
Assume redeemed all $100
Expiry
Assume remaining $50 balance at expiry date
A retail store sells gift cards whereby the purchaser pays an amount in exchange for a card that then carries that value.
• The cardholder may then present the card to any of the retail chain’s outlets in exchange for goods to the value of the card.
• The card’s expiry date is 6 months from the date of purchase.
Discuss how a $100 gift card should be recorded by the store at each of the following dates
Sale
↑ Cash
$100
Asset
↑ Unearned revenue
Liability
$100
No G&S provided
Gift card entails holder to claim goods up to $100 at a future date
Payment in advance for goods to be collected at future dates
Firm: obligation to provide goods when gift card presented for redemption
Redemption ↓ Unearned revenue $ 100 No remaining obligation ↑ Sales revenue $100 Gift card presented & goods provided *↓ Inventory As goods exchange hands, movement Asset *↑ Cost of sales Expense Inventory down, no change in liability, equity down
Expiry Assume redeemed all $100 0$ balance remaining at date of expiry All possible revenue and expenses have already been recorded No inventory movement
Expiry Assume remaining $50 balance at expiry date Firm no longer obligation ↑ Sales revenue $50 ↓ Unearned revenue $50 No change inventory & cost of sales Ideal outcome for firm Earn revenue w/o incurring cost of sales expenses
The store has an “unofficial policy” of honouring expired gift cards if they are presented within a reasonable time after the expiry date.
Discuss how the entity would record such an event after expiry assuming all expired cards are recognised as revenue at the expiry date.
At expiry
After expiry
The store has an “unofficial policy” of honouring expired gift cards if they are presented within a reasonable time after the expiry date.
Discuss how the entity would record such an event after expiry assuming all expired cards are recognised as revenue at the expiry date.
At expiry
↑ Sales revenue
↓ Unearned revenue
After expiry *↓ Inventory As goods exchange hands, movement Asset *↑ Cost of sales Expense Inventory down, no change in liability, equity down Can’t recognize revenue or derecognize unearned rev because it’s already recognized at expiry date
How might this “unofficial policy” impact on how revenue should be recognised if there was such a widespread practice that customers routinely presented gift cards after the due date?
If widespread:
Constructive obligation for store
Holder of card expect to be able to redeem after expiry because of past practices
Valid expectation, given previously established pattern
Has to honor expired cards in the future, consistent with past practices
Either delay recognition of revenue until later
Faithful
Wait till pass reasonable time after expiry before recognizing revenue e.g. 1 month after expiry
Ensure no obligation still exists from expired cards redemptions
Currently recognizing revenue too early at expiry because rev is actually earned
Store knows it will honour gift cards in future suggests that rev is not earned on expiration date
Obligation still exists
Or raise a provision for best estimate of related cost of sales
Faithful
At expiry: still recognizing rev & derec unearned rev
At expiry: addition ↑ Provision for possibility of use of expired cards & ↑ contra sales (negative sales)
Calculation methods: based on past trends
The store’s experience is that one-third of its cards are never redeemed. Accordingly, management has a desire to recognise one-third of the value of unredeemed cards at June 30 as revenue even though they have not expired.
Discuss why management may wish to recognise these unexpired cards as revenue early
The store’s experience is that one-third of its cards are never redeemed. Accordingly, management has a desire to recognise one-third of the value of unredeemed cards at June 30 as revenue even though they have not expired.
Discuss why management may wish to recognise these unexpired cards as revenue early
Earning management
Biases profits to achieve certain outcome
Better rev and profit figures
Management’s Bonuses, attract shareholders, higher profits & share prices
Make FS look better
The store’s experience is that one-third of its cards are never redeemed. Accordingly, management has a desire to recognise one-third of the value of unredeemed cards at June 30 as revenue even though they have not expired.
Discuss whether or not this accounting policy would be appropriate
The store’s experience is that one-third of its cards are never redeemed. Accordingly, management has a desire to recognise one-third of the value of unredeemed cards at June 30 as revenue even though they have not expired.
Discuss whether or not this accounting policy would be appropriate
FOR:
if no expectation of redemption => no PO
If in reality 1/3 never redeemed, technically X obligation with respect to those 1/3
Rev earn & can be recognized
advantage
AGST: perhaps not prudent to recognise Aggressive form of reporting, inappropriate reporting Goes against conservative accounting Might overstate income, asset drawback
Other financial liabilities
Commercial bills def
Other financial liabilities
Commercial bills
Written order to one party to make a specific payment to the signatory or a named payee
Used to obtain immediate and significant cash injections to mange CF
Interest-bearing and short term 30-69 days can roll over
Lender provides amount less than face value which incorporates interest component
