International accounting standards 10

Question 1

Non-current Liabilities (znaczenie):

Answer 1

Zobowiązania długoterminowe

Question 2

Non-current liabilities:

Answer 2

• Non-current liabilities (long-term debt) consist of an expected outflow of resources arising from present obligations that are not payable within a year or the operating cycle of the company, whichever is longer.
• Long-term debt has various covenants or restrictions.

Question 3

Examples of non-current liabilities:

Answer 3

• Bonds payable (obligacje)
• Long-term notes payable (Obligacje długoterminowe płatne)
• Mortgages payable (kredyty hipoteczne do spłaty)
• Pension liabilities (zobowiązania emerytalne)
• ## Lease liabilities (Zobowiązania leasingowe)

Question 4

Overview of bonds:

Answer 4

• Bonds are a form of interest-bearing (oprocentowane) notes payable issued by corporations, universities, and governmental agencies.
• Sold in small denominations (usually $1,000 or multiples of $1,000).
• When a company issues bonds, it is borrowing money. The person who buys the bonds (the bondholder) is investing in bonds

Question 5

Types of Bonds:

Answer 5

Secured and Unsecured Bonds
* Secured bonds have specific assets of issuer (emiter) pledged (zobowiązał się) as collateral (zabezpieczenie) for bonds
* Unsecured bonds are issued against general credit of borrower (Jest więcej unsecured)
Convertible and Callable Bonds
* Convertible bonds can be converted into ordinary shares at bondholder’s option
* Callable bonds (płatne na żądanie) can be redeemed (bought back), by issuing company, at a stated dollar amount prior to maturity (terminem zapadalności)

Question 6

Bonds:

Answer 6

• Bond certificate
• Issued (wydane) to investor
• Provides name of the issuer, face value, contractual interest rate, and maturity date
• Face value - principal due at maturity (how much will be pay in maturity)
• Maturity date - date final payment is due (należny)
• Contractual interest rate – annual rate used to determine cash interest paid, also referred to as the stated rate

Question 7

Bearer bonds (znaczenie):

Answer 7

na okaziciela

Question 8

Bond Trading:

Answer 8

• Bondholders can sell their bonds at any time on national securities exchanges
• Bonds prices are quoted as a percentage of face value
• Corporation makes journal entries only when it issues or buys back bonds, or when bondholders convert bonds into common stock

Question 9

How do you calculate the amount of interest that is paid to the bondholder each period?

Answer 9

Stated rate x Face Value of the bond

Question 10

How do you calculate the amount of interest that is recorded as interest expense by the issuer of the bonds?

Answer 10

Market rate x Carrying Value of the bond

Question 11

If market rate is lower than the stated rate, bonds sold at

Answer 11

premium

Question 12

If market rate equals the stated rate bonds sold at

Answer 12

par

Question 13

If market rate is higher than the stated rate bonds sold at

Answer 13

discount

Question 14

Extinguishment of non-current liabilities (znaczenie):

Answer 14

wygaśnięcie zobowiązań długoterminowych

Question 15

Three common situations besides payment at maturity:

Answer 15

• Extinguishment with cash before maturity,
• Extinguishment by transferring assets or securities, and
• Extinguishment with modification of terms.

Question 16

Extinguishment with cash before maturity

Answer 16

Net carrying amount (wartość bilansowa) > Reacquisition price (cena odkupu)= Gain (zysk)
Reacquisition price > Net carrying amount
= Loss

Question 17

Non-Current Liabilities: Measurement

Answer 17

• Non-current liabilities are measured at their fair value. It is used not only for non-current liabilities, but for most most financial assets and liabilities.
• The IASB believes that fair value measurement for financial instruments, including financial liabilities, provides more relevant and understandable information than amortized cost (skorygowana cena nabycia).

Question 18

Off-Balance-Sheet Financing (finansowanie pozabilansowe)

Answer 18

• Non-Consolidated Subsidiary
• Special Purpose Entity (SPE) / Special Purpose Vehicle (SPV)

Question 19

Off-Balance-Sheet Financing: Rationale

Answer 19

• Removing debt enhances the quality of the balance sheet and permits credit to be obtained more readily and at less cost.
• Loan covenants often limit the amount of debt a company may have. These types of commitments might not be considered in computing the debt limitation.
• Some argue that the asset side of the balance sheet is severely understated.

Question 20

Leases:

Answer 20

• A lease is a contractual agreement between a lessor (owner of a property) and a lessee (renter of the property).
• Gives lessee the right to use specific property for a specified period of time
• Lessee makes rental payments over the lease term to the lessor
• Under IFRS 16 almost all leases are capital leases.
• A contract is, or contains, a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration. [IFRS 16:9]
• Control is conveyed where the customer has both the right to direct the identified asset’s use and to obtain substantially all the economic benefits from that use. [IFRS 16:B9]

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Question 21

A lessee may elect to account for lease payments as an expense on a straight-line basis over the lease term or another systematic basis for the following two types of leases:

Answer 21

i) leases with a lease term of 12 months or less and containing no purchase options – this election is made by class of underlying asset
ii) leases where the underlying asset has a low value when new (such as personal computers or small items of office furniture) – this election can be
made on a lease-by-lease basis

Question 22

Accounting for lease liabilities

Answer 22

• Right-of-use asset is reported on the statement of financial position under non-current assets
• Lease liability is reported on the statement of financial position as a liability
• Portion of lease liability expected to be paid in the next year is a current liability with the remainder classified as a non-current liability

Question 23

Two ratios that provide information about debt- paying ability and long-run solvency are:

Answer 23

• Debt to Total Assets Ratio
• Times Interest Earned Ratio

Question 24

Debt to Assets Ratio =

Answer 24

Total Liabilities ÷ Total Assets

Question 25

Times Interest Earned =

Answer 25

(Net Income + Interest Expense + Income Tax Expense) / Interest Expense

Question 26

Advantages of bond financing over equity financing:

Answer 26

• Shareholder control is not affected.
• Bondholders do not have voting rights, so current owners (shareholders) retain full control of
  the company.
• Tax savings result.
• Bond interest is deductible for tax purposes; dividends on stock are not.
• Return per share (EPS) may be higher.
• Although bond interest expense reduces net income, earnings per share is higher under bond financing because no additional shares are issued.