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Canada (158,054)
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BU397 (49)
Chapter 13

Chapter 13 Notes.docx

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Wilfrid Laurier University
Allan Foerster

Chapter 13 Liabilities - IFRS definition o A present obligation, arising from past events, for which the settlement of is expected to require an outflow of economic resources - ASPE1000 definition o Obligations of an entity arising from past transactions or events, for which the settlement of may result in the transfer or use of assets, provision of services, or other yielding of economic benefits in the future o Embody a duty to others that entails settlement by future transfer or use of assets at a specified or determinable date, on occurrence of a specified event, or on demand - Characteristics of liabilities o Liability must exist in the present  Economic obligation must exist and the entity must be the obligor at the balance sheet date o Must be an economic obligation  A promise to provide or forego economic resources  Obligations can be conditional or unconditional  Unconditional means it has to be paid out no matter what  Unconditional liabilities aren’t contingent on a future event o Stand-ready obligation: obligor “stands- ready” to do what ever is required under the terms of a contract  Type of unconditional liability  There may be uncertainty about the amount, there is no uncertainty about whether the actual obligation exists  Conditional/contingent means it depends on some future event o Requires performance to be carried out only if an uncertain future event actually occurs  Conditional liabilities can also be present obligations that aren’t recognized as unconditional because o It is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation o A reliable estimate can not be made of the amount of the obligation  Provisions are like contingent liabilities but the obligation is measurable, probable, and the result of a past obligating event o If any of those things aren’t met, it is a contingent liability and not recognized  Provisions o They are present obligations that are a result of a past obligation that probably requires an outflow of resources where the amount can be reliably measured o Based on uncertainty except these obligations are probable, and measurable, and based on the result of a past obligating event o Ex. Accruals  Unconditional liabilities and provisions are recognized when o An entity has a present obligation as a result of a past event o It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation o A reliable estimate can be made of the amount of the obligation  Conditional/contingent liabilities aren’t recorded/recognized on the FS but are disclosed in the notes o Entity must have a duty to perform in a particular way, it is required to bear the economic obligation, and this duty can be enforced by legal means  Means that a law, a contract enforceable by law, or a constructive obligation  Constructive obligation: an obligation that derives from an entity’s actions where o By an established pattern of past practice, published policies, or a sufficiently specific current statement, the entity has indicated to other parties that it will accept certain responsibilities o As a result, the entity has created a valid expectation on the part of those other parties that it will discharge those responsibilities - ASPE Contingencies o Accrual required when it is likely that a future event will confirm an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated o Measurement  If there is a range of values, accrue the minimum of the range  GAAP PE  IFRS uses expected values using probabilities - Contingent asset o A possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity  Disclose only when the outcome is probable Non-financial vs. financial liability - A financial liability is any liability that is a contractual obligation o To deliver cash or other financial assets to another entity o To exchange the financial assets or financial liabilities with another entity under conditions that are potentially unfavorable to the entity Liability Recognition - Probably outflow and resources embodying economic benefits o The potential outflow of resources must be probable  More likely than not o If it is not probable, than, note disclosure is required  Unless the probability is remote - Reliable estimates of an obligation o If a provision is not estimable, which is rare, than it becomes a conditional liability, than note disclosure is required Liability Measurement - Financial liabilities o Should be recognized initially at their fair value o After acquisition, most financial liabilities are accounted for at their amortized cost o Transaction costs that are a direct result of the issue of the liability are netted against its original fair value o Transaction costs associated with the issue of financial liabilities that are accounted for after acquisition at fair value are recognized in net income as they occur - Non-financial liabilities o An entity must accrue the best estimate of the amount to settle the present obligation  Best estimate: the amount that an entity would rationally pay to settle the present obligation at the date of the statement o Entities must gather evidence to support the assessment of best estimate o Future events  Entities may consider future events if there is sufficient evidence regarding the occurrence of the events when estimating provisions  No gains are taken into income for assets that are expected to be sold when considering future events o Because they are not yet realized o Reimbursements  In some cases, some of the cash outflows will be reimbursed  Like from insurance  This should be assessed separately and recognized separately when the receipt of cash inflows is virtually certain  No netting  For presentation purposes, the cost and the reimbursement may be offset in the statement of profit and loss o Changes in and use of provisions  Provisions should be reviewed at each reporting date  Provisions must only be used for the expenditures intended  Should be reversed if an outflow is no longer probable - Future operating losses o Not accrued for since they represent future events that an entity may be able to get out of  However, future losses may be indicative of impairment of assets - Onerous contracts o Contracts in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it o Present obligations under onerous contracts are recognized as provisions in the financial statements - Restructuring provisions o A program that is planned and controlled by management that may include  Sale or termination of a line of business  Closure of a business location  Changes in management structure o Obligation commences when the entity is committed to the sale of an operation o Restructuring costs include only the direct expenditures that are  Necessary to execute the restructuring plan  Not associated with the ongoing activities of the reporting entity Current Liabilities - A liability is listed as current if one of the following is met o It is expected to be settled in the entity’s normal operating cycle  Operating cycle is the period of time between acquiring goods and services for processing in operations and receiving cash from the eventual sale of the processed foods and services o Held primarily for trading o Due within 12 months of from the end of the reporting period - Bank Indebtedness o Generally an agreement entered with the bank that allows multiple borrowings up to a negotiated limit o Repayments are made whenever there are sufficient funds available o Amount borrowed is reported on the balance sheet  Availability of funds and restrictions imposed by the financial institution requires note disclosure - Accounts payable o Amounts owed for goods, supplies, or services purchased on open account o The liability is recorded when the title has passed o Recorded at amount payable - Notes payable o Promises to pay a sum of money on a specified future date o Arises from purchases, financing, or other transactions o Notes payable are either short-term or long-term o Can be interest bearing or zero-interest-bearing o In both cases, interest is determined whenever financial statement are prepared - Zero-interest-bearing notes o The difference between the PV of the note and the face value of the note represents the discount on the note payable  This discount is the related interest o The discount becomes the interest expenses recorded over the life of the note o On the issuance of the note  DR Cash: For cash received  DR Discount on note payable: for difference between cash received an face value of note  CR Notes payable: for face value of the note o On the reporting date or when ever interest is recognized, but since it’s a zero-interest-bearing note, it usually happens at a reporting date, because there isn’t monthly required payments of interest, but a company could have a system where they record the discounts as interest on a monthly basis  DR Interest expense: for portion of interest to be recognized  The total discount on the note payable is evenly distributed over length of the loan  So if at year end the loan hasn’t matured, than pro- rate the discount to how long you’ve had the loan for and apply interest  CR Discount on note payable: for portion of interest to be recognized o On maturity of note  DR Notes payable: for FV  CR Cash: For FV - Interest
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