Kieso_IFRS_Ch13 - IFRS (Current Liabilities).ppt

CHAPTER13 CURRENTLIABILITIES PROVISIONS ANDCONTINGENCIES IntermediateAccountingIFRSEditionKieso Weygandt andWarfield Describethenature type andvaluationofcurrentliabilities Explaintheclassificationissuesofshort termdebtexpectedtoberefinanced Identifytypesofemployee relatedliabilities Explaintheaccountingfordifferenttypesofprovisions Identifythecriteriausedtoaccountforanddisclosecontingentliabilitiesandassets Indicatehowtopresentandanalyzeliability relatedinformation LearningObjectives CurrentLiabilities Provisions PresentationandAnalysis Whatisaliability Whatisacurrentliability RecognitionMeasurementCommontypesDisclosures PresentationofcurrentliabilitiesAnalysisofcurrentliabilities CurrentLiabilitiesandContingencies Contingencies ContingentliabilitiesContingentassets WhatisaLiability Threeessentialcharacteristics Presentobligation Arisesfrompastevents Resultsinanoutflowofresources cash goods services WhatisaCurrentLiability Currentliabilityisreportedifoneoftwoconditionsexists Liabilityisexpectedtobesettledwithinitsnormaloperatingcycle orLiabilityisexpectedtobesettledwithin12monthsafterthereportingdate LO1Describethenature type andvaluationofcurrentliabilities Theoperatingcycleistheperiodoftimeelapsingbetweentheacquisitionofgoodsandservicesandthefinalcashrealizationresultingfromsalesandsubsequentcollections WhatisaCurrentLiability TypicalCurrentLiabilities Accountspayable Notespayable Currentmaturitiesoflong termdebt Short termobligationsexpectedtoberefinanced Dividendspayable Customeradvancesanddeposits Unearnedrevenues Salestaxespayable Incometaxespayable Employee relatedliabilities LO1Describethenature type andvaluationofcurrentliabilities Balancesowedtoothersforgoods supplies orservicespurchasedonopenaccount AccountsPayable tradeaccountspayable WhatisaCurrentLiability LO1Describethenature type andvaluationofcurrentliabilities Timelagbetweenthereceiptofservicesoracquisitionoftitletoassetsandthepaymentforthem Termsofthesale e g 2 10 n 30or1 10 E O M usuallystateperiodofextendedcredit commonly30to60days Writtenpromisestopayacertainsumofmoneyonaspecifiedfuturedate NotesPayable WhatisaCurrentLiability LO1Describethenature type andvaluationofcurrentliabilities Arisefrompurchases financing orothertransactions Notesclassifiedasshort termorlong term Notesmaybeinterest bearingorzero interest bearing Illustration CastleNationalBankagreestolend 100 000onMarch1 2011 toLandscapeCo ifLandscapesignsa 100 000 6percent four monthnote LandscaperecordsthecashreceivedonMarch1asfollows WhatisaCurrentLiability LO1Describethenature type andvaluationofcurrentliabilities Cash100 000NotesPayable100 000 Interest BearingNoteIssued IfLandscapepreparesfinancialstatementssemiannually itmakesthefollowingadjustingentrytorecognizeinterestexpenseandinterestpayableatJune30 WhatisaCurrentLiability LO1Describethenature type andvaluationofcurrentliabilities Interestexpense2 000Interestpayable2 000 100 000 x6 x4 12 2 000 Interestcalculation Atmaturity July1 Landscaperecordspaymentofthenoteandaccruedinterestasfollows WhatisaCurrentLiability LO1Describethenature type andvaluationofcurrentliabilities Notespayable100 000Interestpayable2 000Cash102 000 Illustration OnMarch1 Landscapeissuesa 102 000 four month zero interest bearingnotetoCastleNationalBank Thepresentvalueofthenoteis 100 000 Landscaperecordsthistransactionasfollows WhatisaCurrentLiability LO1Describethenature type andvaluationofcurrentliabilities Cash100 000Notespayable100 000 Zero BearingNoteIssued IfLandscapepreparesfinancialstatementssemiannually itmakesthefollowingadjustingentrytorecognizeinterestexpenseandtheincreaseinthenotepayableof 2 000atJune30 WhatisaCurrentLiability LO1Describethenature type andvaluationofcurrentliabilities Interestexpense2 000Notespayable2 000 Atmaturity July1 Landscapemustpaythenote asfollows Notespayable102 000Cash102 000 E13 2 AccountsandNotesPayable Thefollowingareselected2010transactionsofDarbyCorporation WhatisaCurrentLiability LO1Describethenature type andvaluationofcurrentliabilities Sept 1 PurchasedinventoryfromOrionCompanyonaccountfor 50 000 Darbyrecordspurchasesgrossandusesaperiodicinventorysystem Oct 1 Issueda 50 000 12 month 8 notetoOrioninpaymentofaccount Oct 1 Borrowed 75 000fromtheShoreBankbysigninga12 month zero interest bearing 81 000note Preparejournalentriesfortheselectedtransactions Sept 1 PurchasedinventoryfromOrionCompanyonaccountfor 50 000 Darbyrecordspurchasesgrossandusesaperiodicinventorysystem WhatisaCurrentLiability LO1Describethenature type andvaluationofcurrentliabilities Sept 1Purchases50 000Accountspayable50 000 WhatisaCurrentLiability LO1Describethenature type andvaluationofcurrentliabilities Oct 1Accountspayable50 000Notespayable50 000 Interestcalculation Oct 1 Issueda 50 000 12 month 8 notetoOrioninpaymentofaccount Dec 31Interestexpense1 000Interestpayable1 000 50 000 x8 x3 12 1 000 Dec 31Interestexpense1 500Notespayable1 500 WhatisaCurrentLiability LO1Describethenature type andvaluationofcurrentliabilities Oct 1Cash75 000Notespayable75 000 6 000 x3 12 1 500 Interestcalculation Oct 1 Borrowed 75 000fromtheShoreBankbysigninga12 month zero interest bearing 81 000note Portionofbonds mortgagenotes andotherlong termindebtednessthatmatureswithinthenextfiscalyear Excludelong termdebtsmaturingcurrentlyiftheyaretobe CurrentMaturitiesofLong TermDebt WhatisaCurrentLiability LO1Describethenature type andvaluationofcurrentliabilities Retiredbyassetsaccumulatedthathavenotbeenshownascurrentassets Refinanced orretiredfromtheproceedsofanewdebtissue orConvertedintoordinaryshares Excludefromcurrentliabilitiesifbothofthefollowingconditionsaremet Short TermObligationsExpectedtoBeRefinanced WhatisaCurrentLiability LO2Explaintheclassificationissuesofshort termdebtexpectedtoberefinanced Mustintendtorefinancetheobligationonalong termbasis Musthaveanunconditionalrighttodefersettlementoftheliabilityforatleast12monthsafterthereportingdate LO2 WhatisaCurrentLiability E13 4 RefinancingofShort TermDebt TheCFOforHendricksCorporationisdiscussingwiththecompany schiefexecutiveofficerissuesrelatedtothecompany sshort termobligations Presently boththecurrentratioandtheacid testratioforthecompanyarequitelow andthechiefexecutiveofficeriswonderingifanyoftheseshort termobligationscouldbereclassifiedaslong term ThefinancialreportingdateisDecember31 2010 Twoshort termobligationswerediscussed andthefollowingactionwastakenbytheCFO Instructions IndicatehowthesetransactionsshouldbereportedatDec 31 2010 onHendricks statementoffinancialposition LO2Explaintheclassificationissuesofshort termdebtexpectedtoberefinanced WhatisaCurrentLiability Short termobligationA Hendrickshasa 50 000short termobligationdueonMarch1 2011 TheCFOdiscussedwithitslenderwhetherthepaymentcouldbeextendedtoMarch1 2013 providedHendricksagreestoprovideadditionalcollateral AnagreementisreachedonFebruary1 2011 tochangetheloantermstoextendtheobligation smaturitytoMarch1 2013 ThefinancialstatementsareauthorizedforissuanceonApril1 2011 Liabilityof 50 000 Dec 31 2010 StatementIssuance Apr 1 2011 Liabilitydueforpayment Mar 1 2011 Refinancecompleted Feb 1 2011 LO2Explaintheclassificationissuesofshort termdebtexpectedtoberefinanced WhatisaCurrentLiability Short termobligationA Hendrickshasa 50 000short termobligationdueonMarch1 2011 TheCFOdiscussedwithitslenderwhetherthepaymentcouldbeextendedtoMarch1 2013 providedHendricksagreestoprovideadditionalcollateral AnagreementisreachedonFebruary1 2011 tochangetheloantermstoextendtheobligation smaturitytoMarch1 2013 ThefinancialstatementsareauthorizedforissuanceonApril1 2011 CurrentLiabilityof 50 000 Dec 31 2010 Sincetheagreementwasnotinplaceasofthereportingdate December31 2010 theobligationshouldbereportedasacurrentliability LO2Explaintheclassificationissuesofshort termdebtexpectedtoberefinanced WhatisaCurrentLiability Short termobligationB Hendricksalsohasanothershort termobligationof 120 000dueonFebruary15 2011 Initsdiscussionwiththelender thelenderagreestoextendthematuritydatetoFebruary1 2012 TheagreementissignedonDecember18 2010 ThefinancialstatementsareauthorizedforissuanceonMarch31 2011 Refinancecompleted Dec 18 2010 StatementIssuance Mar 31 2011 Liabilitydueforpayment Feb 15 2011 Liabilityof 120 000 Dec 31 2010 LO2Explaintheclassificationissuesofshort termdebtexpectedtoberefinanced WhatisaCurrentLiability Short termobligationB Hendricksalsohasanothershort termobligationof 120 000dueonFebruary15 2011 Initsdiscussionwiththelender thelenderagreestoextendthematuritydatetoFebruary1 2012 TheagreementissignedonDecember18 2010 ThefinancialstatementsareauthorizedforissuanceonMarch31 2011 Refinancecompleted Dec 18 2010 Non CurrentLiabilityof 120 000 Dec 31 2010 Sincetheagreementwasinplaceasofthereportingdate December31 2010 theobligationisreportedasanon currentliability Amountowedbyacorporationtoitsstockholdersasaresultofboardofdirectors authorization DividendsPayable WhatisaCurrentLiability Generallypaidwithinthreemonths Undeclareddividendsoncumulativepreferencesharesnotrecognizedasaliability Dividendspayableintheformofadditionalsharesarenotrecognizedasaliability Reportedinequity LO2Explaintheclassificationissuesofshort termdebtexpectedtoberefinanced Returnablecashdepositsreceivedfromcustomersandemployees CustomerAdvancesandDeposits WhatisaCurrentLiability Maybeclassifiedascurrentornon currentliabilities LO2Explaintheclassificationissuesofshort termdebtexpectedtoberefinanced Paymentreceivedbeforedeliveringgoodsorrenderingservices UnearnedRevenues WhatisaCurrentLiability LO2Explaintheclassificationissuesofshort termdebtexpectedtoberefinanced Illustration13 2UnearnedandEarnedRevenueAccounts BE13 6 SportsProMagazinesold12 000annualsubscriptionsonAugust1 2010 for 18each PrepareSportsPro sAugust1 2010 journalentryandtheDecember31 2010 annualadjustingentry WhatisaCurrentLiability LO2Explaintheclassificationissuesofshort termdebtexpectedtoberefinanced Aug 1Cash216 000Unearnedrevenue216 000 12 000 x 18 Dec 31Unearnedrevenue90 000Subscriptionrevenue90 000 216 000 x5 12 90 000 Retailersmustcollectsalestaxesorvalue addedtaxes VAT fromcustomersontransfersoftangiblepersonalpropertyandoncertainservicesandthenremittothepropergovernmentalauthority SalesTaxesPayable WhatisaCurrentLiability LO2Explaintheclassificationissuesofshort termdebtexpectedtoberefinanced BE13 7 DillonsCorporationmadecreditsalesof 30 000whicharesubjectto6 salestax Thecorporationalsomadecashsaleswhichtotaled 20 670includingthe6 salestax a preparetheentrytorecordDillons creditsales b PreparetheentrytorecordDillons cashsales LO2 Accountsreceivable31 800Sales30 000Salestaxpayable 30 000 x6 1 800 1 800Cash20 670Sales 20 670 1 06 19 500 19 500Salestaxpayable1 170 WhatisaCurrentLiability Businessesmustprepareanincometaxreturnandcomputetheincometaxpayable IncomeTaxPayable WhatisaCurrentLiability Taxespayableareacurrentliability Corporationsmustmakeperiodictaxpayments Differencesbetweentaxableincomeandaccountingincomesometimesoccur Chapter19 LO2Explaintheclassificationissuesofshort termdebtexpectedtoberefinanced Amountsowedtoemployeesforsalariesorwagesarereportedasacurrentliability Employee RelatedLiabilities WhatisaCurrentLiability Currentliabilitiesmayinclude Payrolldeductions Compensatedabsences Bonuses LO3Identifytypesofemployee relatedliabilities PayrollDeductions WhatisaCurrentLiability Taxes SocialSecurityTaxesIncomeTaxWithholding LO3Identifytypesofemployee relatedliabilities Illustration13 3SummaryofPayrollLiabilities Illustration Assumeaweeklypayrollof 10 000entirelysubjecttoSocialSecuritytaxes 8 withincometaxwithholdingof 1 320andunionduesof 88deducted Thecompanyrecordsthewagesandsalariespaidandtheemployeepayrolldeductionsasfollows WhatisaCurrentLiability Wagesandsalariesexpense10 000Withholdingtaxespayable1 320Socialsecuritytaxespayable800Unionduespayable88Cash7 792 LO3Identifytypesofemployee relatedliabilities Illustration Assumeaweeklypayrollof 10 000entirelysubjecttoSocialSecuritytaxes 8 withincometaxwithholdingof 1 320andunionduesof 88deducted Thecompanyrecordstheemployerpayrolltaxesasfollows WhatisaCurrentLiability Payrolltaxexpense800Socialsecuritytaxespayable800 LO3Identifytypesofemployee relatedliabilities TheemployermustremittothegovernmentitsshareofSocialSecuritytaxalongwiththeamountofSocialSecuritytaxdeductedfromeachemployee sgrosscompensation CompensatedAbsences WhatisaCurrentLiability LO3Identifytypesofemployee relatedliabilities Paidabsencesforvacation illnessandmaternity paternity andjuryleaves Vestedrights employerhasanobligationtomakepaymenttoanemployeeevenafterterminatinghisorheremployment Accumulatedrights employeescancarryforwardtofutureperiodsifnotusedintheperiodinwhichearned Non accumulatingrights donotcarryforward theylapseifnotused Illustration AmutronInc beganoperationsonJanuary1 2011 Thecompanyemploys10individualsandpayseach 480perweek Employeesearned20unusedvacationweeksin2011 In2012 theemployeesusedthevacationweeks butnowtheyeachearn 540perweek AmutronaccruestheaccumulatedvacationpayonDecember31 2011 asfollows WhatisaCurrentLiability Wagesexpense9 600Vacationwagespayable9 600 LO3 In2012 itrecordsthepaymentofvacationpayasfollows Vacationwagespayable9 600Wagesexpense1 200Cash10 800 WhatisaCurrentLiability LO3Identifytypesofemployee relatedliabilities Paymentstocertainorallemployeesinadditiontotheirregularsalariesorwages Bonusespaidareanoperatingexpense Unpaidbonusesshouldbereportedasacurrentliability Profit SharingandBonusPlans Provisionisaliabilityofuncertaintimingoramount Reportedeitherascurrentornon currentliability CommontypesareObligationsrelatedtolitigation Warranteesorproductguarantees Businessrestructurings Environmentaldamage Provisions LO4Explaintheaccountingfordifferenttypesofprovisions Uncertaintyaboutthetimingoramountofthefutureexpenditurerequiredtosettletheobligation Companiesaccrueanexpenseandrelatedliabilityforaprovisiononlyifthefollowingthreeconditionsaremet Warranteesorproductguarantees Probablethatanoutflowofresourceswillberequiredtosettletheobligation andAreliableestimatecanbemade RecognitionofaProvision LO4Explaintheaccountingfordifferenttypesofprovisions Areliableestimateoftheamountoftheobligationcanbedetermined RecognitionofaProvision LO4 RecognitionExamples Illustration13 4 Constructiveobligationisanobligationthatderivesfromacompany sactionswhere Byanestablishedpatternofpastpractice publishedpolicies orasufficientlyspecificcurrentstatement thecompanyhasindicatedtootherpartiesthatitwillacceptcertainresponsibilities andAsaresult thecompanyhascreatedavalidexpectationonthepartofthoseotherpartiesthatitwilldischargethoseresponsibilities RecognitionofaProvision RecognitionExamples LO4Explaintheaccountingfordifferenttypesofprovisions Areliableestimateoftheamountoftheobligationcanbedetermined RecognitionofaProvision LO4 RecognitionExamples Illustration13 5 Areliableestimateoftheamountoftheobligationcanbedetermined RecognitionofaProvision LO4 RecognitionExamples Illustration13 6 Howdoesacompanydeterminetheamounttoreportforaprovision IFRS Amountrecognizedshouldbethebestestimateoftheexpenditurerequiredtosettlethepresentobligation Bestestimaterepresentstheamountthatacompanywouldpaytosettletheobligationatthestatementoffinancialpositiondate MeasurementofProvisions LO4Explaintheaccountingfordifferenttypesofprovisions Managementmustusejudgment basedonpastorsimilartransactions discussionswithexperts andanyotherpertinentinformation MeasurementofProvisions MeasurementExamples LO4Explaintheaccountingfordifferenttypesofprovisions Toyotawarranties Toyotamightdeterminethat80percentofitscarswillnothaveanywarrantycost 12percentwillhavesubstantialcosts and8percentwillhaveamuchsmallercost Inthiscase byweightingallthepossibleoutcomesbytheirassociatedprobabilities Toyotaarrivesatanexpectedvalueforitswarrantyliability Managementmustusejudgment basedonpastorsimilartransactions discussionswithexperts andanyotherpertinentinformation MeasurementofProvisions MeasurementExamples LO4Explaintheaccountingfordifferenttypesofprovisions Carrefourrefunds Carrefoursellsmanyitemsatvaryingsellingprices Refundstocustomersforproductssoldmaybeviewedasacontinuousrangeofrefunds witheachpointintherangehavingthesameprobabilityofoccurrence Inthiscase themidpointintherangecanbeusedasthebasisformeasuringtheamountoftherefunds Measurementoftheliabilityshouldconsiderthetimevalueofmoney Futureeventsthatmayhaveanimpactonthemeasurementofthecostsshouldbeconsidered MeasurementofProvisions MeasurementExamples LO4Explaintheaccountingfordifferenttypesofprovisions Novartislawsuit LargecompanieslikeNovartisareinvolvedinnumerouslitigationissuesrelatedtotheirproducts Whereasingleobligationsuchasalawsuitisbeingmeasured themostlikelyoutcomeofthelawsuitmaybethebestestimateoftheliability CommonTypes CommonTypesofProvisions LO4Explaintheaccountingfordifferenttypesofprovisions LawsuitsWarrantiesPremiums EnvironmentalOnerouscontractsRestructuring IFRSrequiresextensivedisclosurerelatedtoprovisionsinthenotestothefinancialstatements howevercompaniesdonotrecordorreportinthenotesgeneralriskcontingenciesinherentinbusinessoperations e g thepossibilityofwar strike uninsurablecatastrophes orabusinessrecession LitigationProvisions CommonTypesofProvisions LO4Explaintheaccountingfordifferenttypesofprovisions Companiesmustconsiderthefollowingindeterminingwhethertorecordaliabilitywithrespecttopendingorthreatenedlitigationandactualorpossibleclaimsandassessments Timeperiodinwhichtheunderlyingcauseofactionoccurred Probabilityofanunfavorableoutcome Abilitytomakeareasonableestimateoftheamountofloss LitigationProvisions CommonTypesofProvisions LO4Explaintheaccountingfordifferenttypesofprovisions Withrespecttounfiledsuitsandunassertedclaimsandassessments acompanymustdeterminethedegreeofprobabilitythatasuitmaybefiledoraclaimorassessmentmaybeasserted andtheprobabilityofanunfavorableoutcome Ifbothareprobable ifthelossisreasonablyestimable andifthecauseforactionisdatedonorbeforethedateofthefinancialstatements thenthecompanyshouldaccruetheliability BE13 10 ScorceseInc isinvolvedinalawsuitatDecember31 2010 a Prepa