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Lecture 1

ACTG 3120 Lecture Notes - Lecture 1: Financial Instrument, Capital Asset, Equity Method

Course Code
ACTG 3120
Elizabeth Farrell

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Week 1 Lecture
Expected future sacrifice of assets or services
Present obligation
Result of past transaction or event
Constructive Obligation: public statement that public expects will honor certain responsibilities in the
Different from legal obligation because no law enforced
ASPE: does not exists
Financial Instrument: Any contract that gives rise to financial asset of one party and a financial liability
or equity instrument another party
Financial Liabilities: contract that gives rise to a financial liability and a financial asset to another party
Ex. Bank loan, bonds, derivatives
Choice between using other liabilities or FVTPL
Other Liabilities- Use Amortized Costs with Effective Interest Method Ex. Bonds
oFV of consideration received + Transaction costs
oIf over a period of time PV of market interest rate reflective of risk& term
oIf don’t use FVTPL use this method
FVTPL- Use Fair value method , expense transaction costs
oFV changes into net income
oRequired to use for Derivatives
Derivatives ( can choose to elect hedge accounting)
Choose to use Straight Line Method for Amortization or Effective Interest
Choose to capitalize borrowing costs
Non-Financial Liabilities: anything but a financial liability
Ex. Asset retirement, unearned revenue, provision or warranty liability
No offset asset account created
Provisions- Liability of uncertain timing or amount
Non-Financial Liabilities: Provision
Changes in estimate – Prospectively (don’t care about past)
Re-estimated annually
Capitalize Transaction Costs
Use most likely outcome for amount, if given range used E(x) value
Long term provision- use NPV with current market interest rate reflective of risk
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Ex. Lawsuits, Executory Contracts
Types of Provisions:
oExecutory Contracts: Neither party has yet done anything (pay or send goods) -do not
record until performance happens, if significant disclose
oOnerous Contracts: Unavoidable costs meeting contract that exceed economic benefits
Ex. Lease contract
oRestructuring : Liability recorded if detailed formal plans and has started implement or
announced specifics
oWarranty Expense – must adjust each year, can be current if 1 year or less or can split
oRestoration /Environmental: Dr. capital asset Cr. Decommission liability, must discount
then add to liability, as well depreciate the added amt to capital asset
IFRS: Component depreciation- treats as a separate component
ASPE: No component depreciation, Accretion
(instead of Interest) Expense, adjust based on changing interest rate each year
oCoupons, Refunds, Gift Cards: record provision if coupon sold at loss or cash back
Breakage rate (unused) –apply to provision
Deposits- Unearned revenue when given, if customer doesn’t use then recognize
revenue after certain time
oLoyalty Programs: multiple revenues, unearned revenue or provision for rewards
oSelf-Insurance: Provision set up for amount not covered for unexpected future loss
Loan Guarantee: Guarantor pays interest and principle if default
Record at FV estimated payout X probability = Expense & Liability recorded
End of the payout guarantor doesn’t pay then reverse
Re-estimate estimated payout each year like a provision
Discount to PV if longer than 1 year
Contingent Liability
Probable and Measurable (50%): recognize and not considered contingent liability
Not Probable: disclose in notes
Remote (5% or under): Do nothing
If range, use midpoint of range or weighted average
Likely + can measure (50%): recognize and not considered contingent liability
Likely + cannot measure: Disclose in notes
Unlikely: Do nothing
If range, use lower point
Contingent Asset: (IFRS)
Accrue: if 95% certain
Note disclosure: if probable
Not probable: do nothing
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