Chapter 13 - Non-Financial and Current Liabilities

Question 1

Criteria For a Liability (IFRS)

Answer 1

1. The entity has an obligation (that is, a present duty or responsibility to others that has no practical ability to avoid)
2. The obligation is to transfer an economic resource to another party or parties
3. The obligation exists as a result of past transactions or events

Question 2

Criteria For a Liability (ASPE)

Answer 2

1. They embody a duty or responsibility to others
2. The entity has little or no discretion to avoid the duty
3. The transaction or event that obigues the entity has already occurred

Question 3

A Constructive Obligation

Answer 3

Arises when a past or present company practice shows that the entity acknowledges a potential economic burden

Question 4

A Financial Liability

Answer 4

(Under IFRS and ASPE) is any liability that is contractual obligation to either:

1. Deliver cash or other financial assets to another party or
2. To exchange financial instruments with another party under conditions that are potentially unfavourable to the entity

This does not include liabilities created by legislation (ei. income tax)

Question 5

Non-Financial Liability

Answer 5

Liability not payable in cash

Question 6

Measurement of a Financial Liability

Answer 6

• Initially measured at fair value
• Subsequently measured generally at amortized cost (except those held for trading where fair value is used)
• Include transaction costs at acquisition
• Short-term liabilities are accounted at maturity value

Question 7

Measurement of a Non-Financial Liability

Answer 7

ASPE: no specific measurement standards (varies based on nature)

IFRS: measurement at best estimate of payment that would be required to settle the obligation at the date of the statement of financial position (updated every SFP)

• Usually at PV
• Expected value or probability-weighted average of possible outcomes

Question 8

Provision

Answer 8

• Liabilities of uncertain timing or amount

- Non-financial liability

Question 9

Current Liability

Answer 9

Under IFRS, liabilities are classified as current when any of the following are met:

1. Expected to be settled within normal operating cycle
2. Held primarily for trading
3. Due within 12 months from the end of the reporting period
4. No unconditional right to defer settlement for at least 12 months after the date of the statement of financial position

Question 10

Operating Cycle

Answer 10

Is the period of time between acquiring the goods and services for processing in operations and receiving cash form the eventual sale of the processed goods and services.

Question 11

Line of Credit or Revolving Loan

Answer 11

• An agreement entered with the bank that allows multiple borrowings up to a limit
• Repayments are made whenever
• Amount borrowed reported on the SFP, restrictions are disclosed in the notes

Question 12

Accounts Payable/Trade Accounts Payable

Answer 12

• Amounts owed for goods, supplies or services related to the entity’s ordinary business activities purchased on open account
• Usually recorded when the goods are received/title has passed

Question 13

Notes Payable

Answer 13

• Usually recorded when the goods are received/title has passed
• Can be current or non-current
• Can be interest-bearing or zero-interest-bearing (Interest expense must be accrued regardless of when cash is paid)

Question 14

Recording Interest Expense on Interest Bearing Note

Answer 14

Record expense when payments are made and record a payable when SFP are issued

Question 15

Recording Interest Expense on Interest Bearing Note

Answer 15

• The difference between the PV and face value represents the interest and should be recorded over the life
• For the SFP record a credit to adjust the PV of the note by debiting interest expense
• At maturity debit full face value

Question 16

Current Maturities of Long-Term Debt

Answer 16

• The portion of long-term debt maturing within 12 months from the date of the SFP is reported as current
• Portions of long-term debt should not be reported as current liabilities if, by contract, they are retired by assets not classified as current assets
• Any liability due on demand or due on demand within a year or operating cycle
• If any long-term debt is violated and becomes payable on demand, the debt is classified as current

Question 17

Short-Term Debt Expected to be Refinanced

Answer 17

• Are classified as current except if they are expected to be refinanced on a long-term basis, and no current assets will be required to settle it
• Under IFRS, debt due within 12 months is classified as current as current, unless it is expected to be refinanced under an existing agreement for at least 12 months
• Under ASPE, currently maturing debt can be classified as long-term if there is irrefutable evidence when the financial statements are completed that the debt has been or will be converted to long-term obligation

Question 18

Cash Dividend Payable

Answer 18

• Generally paid within three months

- Classified as current liability when declared

Question 19

Preferred Dividends in Arrears

Answer 19

• Undeclared dividends on cumulative preferred shares are not a liability
• Not an obligation until distribution is authorized
• Should be disclosed

Question 20

Share or Stock Dividends

Answer 20

• Dividends payable in the form of additional shares

- Do not meet the definition of a liability. (Do not require future outlays of economic resources)

Question 21

Rent and Royalties Payable

Answer 21

• This type of liability may be created by a “contractual agreement in which payments are conditional on the amount of revenue that is earned or quantity of product that is produced or extracted”
• Accrued as produced

Question 22

Customer Advances and Deposits

Answer 22

• Customers pay deposits that guarantee the payment of expected future obligations, the performance of a future service or to cover possible future damage to property
• Classified as current or non-current depending on the specific conditions attached to the deposit ( cannot be deferred for a period of more than 12 months)

Question 23

Taxes Payable: Sales Tax

Answer 23

• The liability represents sales taxes that have been collected from customers but have not been remitted to the appropriate government
• Credit is deducted from sales revenue

Question 24

Taxes Payable: Goods and Service Tax

Answer 24

• 5%
• GST is charged by each taxable entity so businesses pay GST and also charge it to their customer
• Therefore accounting for GST involves a GST payable charged on sales and a GST receivable paid to suppliers
• The net amount is stated on the SFP as a current asset or liability