13 - Nonfinancial and current liabilities.docx

17 Pages
Unlock Document

University of Waterloo
Accounting & Financial Management
AFM 391
Duane Kennedy

Recognition and Measurement 11/5/2013 6:28:00 PM Liability Definition and Characteristics  A liability is an obligation that arises from past transactions or events, which may result in a transfer of assets (IFRS)  3 characteristics  embody a duty of responsibilities  the entity has little or no discretion to avoid the duty  the transaction or event that obliges the entity has occurred  A liability of an entity is a present economic obligation for which the entity is the obligor (proposed definition) 1. exist at the present time (balance sheet date)  There may be uncertainty about…  whether an obligating even has occurred  if the event results in a present obligation  how a law or regulation applies to that event 2. represent economic burdens or obligations  an unconditional promise or other requirement to provide economic resources  unconditional obligations – paying interest – not contingent or conditional on a future event  stand-ready obligation – obligor is ready to do whatever is required under the terms of contract  uncertainty regarding the amount of future outflows of assets  no uncertainty about whether a present obligation exists  conditional obligation requires performance to be carried out only if an uncertain future event actually occurs 3. the obligations are enforceable on the obligor entity  enforced by legal or equivalent terms – a law, a contract enforceable by law or a constructive obligations must exist  constructive obligation arises from past/present company practice that signals that the entity acknowledges a potential economic burden Financial liabilities and non-financial liabilities  a financial liability is any liability that is a contractual obligation o to deliver cash or other financial assets to another entity; or 1 o to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the entity  financial liabilities are based on obligations created by a contract  liabilities created by legislation (income taxes payable) are not financial liabilities  unearned revenue and warranty obligations are non-financial liabilities Measurement Financial Liabilities  recognized initially at their fair value and accounted for at their amortized cost  transaction costs directly resulting because of the issue of the liability are netted against its original fair value  transaction costs associated with financial liabilities accounted for at fair value are recognized in net income  short-term liabilities (30-60 days) are usually accounted for on practice grounds at their maturity value Non-Financial Liabilities  usually not payable in cash  private entity and ASPE measure non-financial liabilities in different ways depending on the specific liabilities  example – unearned revenue is measured at the fair value of the goods/services to be delivered in the future, measured based on management‟s best estimate  IFRS, non-financial liabilities are measured initially and at each subsequent reporting date at the best estimate of the amount  usually the present value of the resources need to fulfill the obligation, measured at their „exit‟ value/value in sale – not at their cost 2 Common Current Liabilities 11/5/2013 6:28:00 PM What is a Current Liability?  timing of when liabilities are due are one of the most important features  classifying current assets/liabilities from long-term assets/liabilities provides information about the entity‟s working capital during the operating cycle  operating cycle is the period of time between acquiring goods/services for processing and receiving cash from sales of the processed goods/services  current liability – meets any one of the following conditions:  it is expected to be settled in the entity‟s normal op. cycle  it is held primarily for trading  it is due within 12 month from the end of the reporting period  the entity des not have unconditional right to defer its settlement for at least 12 months after the b/s date Bank Indebtedness and Credit Facilities  major element of a company‟s cash position is its bank indebtedness for current operating purposes and its line of credit and revolving debt arrangements  a company generally enters into an agreement with its bank to allow multiple borrowings up to a negotiated limit  banks usually charge an additional fee for this service, requires a collateral and often sets restrictions on the company‟s activities or financial statement ratios  amount of actual bank indebtedness is reported on the b/s, total funds that the arrangement allows and other details are disclosed in the notes Accounts Payable  balances owed to others for goods, supplies, or services related to the entity‟s ordinary business activities that are purchased on account  regular invoices is enough evidence, instead of a separate contract  occurs because of lag time between receiving the goods/services and the payment  common terms of sale: 2/10, n/30; 1/10, EOM, net 30  usually 30 to 60 days long  record liabilities for purchased goods when the goods are received  if title has passed to the purchaser before the goods are received, record the transaction when the title passes Notes Payable 3  written promises to pay a certain sum of money on a specified future date (arising from purchases, financing or other transactions)  in some industries, notes are required as a part of the sale/purchase transaction Interest-Bearing Note Issued Provincial Bank loans $100,000 to Landscape on Mar 1, 2011 and signs a $100,000, four- month, 12% note. Landscape has a Dec 31 year end and prepares financial statements semi-annually. Mar 1 – Cash 100,000 Notes Payable 100,000 Jun 30 – Interest Expense 4,000 Interest Payable 4,000 July 1 – Notes Payable 100,000 Interest Payable 4,000 Cash 104,000 Zero-Interest-Bearing Note issued  zero-interest-bearing-not does have an interest component  the interest is included in the face amount – it is the difference between the amount of cash received when the note is signed and the face amount Landscape issues a $100,000, four-month, zero-interest-earing note payable to Provincial Bank on March 1. The notes present value is $96,154 and the discount rate is 12%. Mar 1 – Cash 95,154 Notes Payable 96,154 Jun 30 – Interest Expense3,846 Notes Payable 3,846 July 1 – Notes Payable100,000 Cash 100,000 Current Maturities of Long-Term Debt 4  bonds, mortgage notes and other long-term indebtedness that mature within 12 months form the b/s sheet date are current liabilities  current maturities of long-term debt are also current liabilities  only the maturing portion of the principal of the long-term debt is reported as current liability  liability that is due on demand (callable by the creditor) or that will be due on demand within a year is also a current liability  liabilities often become callable if there is a violation of a debt agreement  IFRS – reclassify long-term debt as current if it becomes callable  ASPE – liability is reclassified to the current category unless:  the creditor waives the covenant (agreement) requirements, or  the violations has been cured within the grace period that is usually given in these agreements, and  it is likely that the company will not violate the covenant requirements within a year from the b/s date Short-term Debt Expected to be Refinanced  classification issues arises when such a liability is expected to be refinanced on a long-term basis  IFRS – if the debt is due within 12 months from the reporting date, it is classified as a current liability  exception for continuing long-term classification is if the entity expects to refinance it or roll it over under an existing agreement for at least 12 months and the decision is solely at its discretion  PE GAAP – the short-term liability expected to be refinanced is classified as a current liability unless either the liability has been refinanced on a long-term basis or there is a non-cancellable agreement  PE GAAP allows currently maturing debt to be classified as long-term on the b/s Dividends Payable  a cash dividend payable is an amount that a corporation owes to its shareholders because the BoD has authorized a dividend payment  the corporation incurs a liability at the dividend declaration date which makes shareholders creditors for the amount of dividends declared  considered current liabilities they are paid within a year  accumulated but undeclared dividends on cumulative preferred shares are not recognized as a liability – preferred dividends in arrears are not an obligation until formal action is taken  required to disclose the existence of cumulative dividends that are undeclared in a note to the financial statements  stock dividends are not recognized as a liability because they don‟t require future outlays of economic resources 5  they are not enforceable in that the BoD can revoke them at any time  journal entry: debit retained earnings and credit contributed capital Rents and Royalties Payable  created by a contractual agreement in which payments are conditional on the amount of revenue that is earned or the quantity of product that is produced/extracted  example – franchise fees is calculated as a percentage of sales  example – if a lease calls for a fixed rent payment of $500 per month and 1% of sales over $300,000 a year – the annual rent obligation amounts to … $6000 + 0.01 × sales over $300,000 Customer Advances and Deposits  returnable cash deposits or customer advances are considered current liabilities  deposits rec‟d from customers can be used to guarantee the performance of a contract/service or to guarantee the payment of expected future obligations  if the entity does not have the right to defer the settlement of the deposit for a period of at least 12 months from the b/s date then it is a current liability Taxes Payable Sales Tax  must collect provincial sales tax on transfers of tangible property and certain services and remit to the tax authorities  debit accounts receivables/cash and credit sales and sales taxes payable Goods and Services Tax  GST – a value-added tax of 5% is a tax on the value added to the goods and services provided by each taxable entity  deduct its input tax credit from the amount of GST collected  Harmonized Sales Tax (HST) is accounted for in the same way  set up a liability account (GST Payable, GST collected from customers) and an asset account (GST Recoverable, GST paid to suppliers)  remit to CRA: GST Payable less GST Recoverable  provincial sales tax is not recoverable, unlike the GST, and should be included in the cost of the good/service Purchasing: 6 Inventory 1,070 GST Recoverable 50 Accounts Payable 1,120 Selling: Accounts Receivable 1,120 Sales 1,000 Sales Tax Payable 70 GST Payable 50 Income Tax  federal and provincial income taxes are levied on a company‟ taxable income  considered an estimate because the amount must be reviewed and approved by the CRA Current Income Tax Exp.21,000 Income Taxes Payable 21,000 Income Taxes Payable 20,000 Cash 20,000 Current Income Tax Exp. 1,000 Cash 1,000  if CRA assesses additional tax on an earlier year‟s income, Income Tax Payable is credited and the expense is charged to current operations  if the additional tax is caused by arithmetic errors, then the error is corrected through retained earnings  taxable income and accounting income is usually different because of differences in tax laws and GAAP  proprietorships an partnerships are not taxable entities (only corporatons) Employee-Related Liabilities  salaries or wages payable are amounts owed to employees at the end of an accounting period  there are additional items related to employee compensation reported as current liabilities:  payroll deductions  short-term compensated absences  profit-sharing and bonuses 7 Payroll Deductions  employee income taxes  Canada (or Quebec) Pension Plan premiums  financed by the government through a tax on both the employer and the employee  the tax is deducted from the employee‟s gross pay  tax rate is 4.95% (for both the employer and employee) for 2010, up to a maximum of $43,700 × 4.95% = $2,163.15  Employment Insurance  also financed by the gov‟t by levying a tax on both employees and employers  tax rate is 1.73% for employees and 2.422% for employers (for 2010)  insurable earnings are gross wages above a preset minimum and below a max amount of $43,200  Income Tax Withholding  income tax laws require employees to withhold the estimated amount of income tax that will be due on wages  this amount is calculated using a government-prescribed formula Example Weekly payroll of $10,00
More Less

Related notes for AFM 391

Log In


Don't have an account?

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.