Liabilities Flashcards
(22 cards)
what are the considerations that need to be made with respect to the risk charactersistics of current and non-current liabilities? (1)
- current liabilities are more risky than non-current liabilities
what are the differences in time frame between current and non-current liabilities? (1)
- current
– expected setlement within 12 months of end of reporting period
what impact does interest play on risk with respects to debt? (1)
- interest-bearing debts more risky
what are the 4 types of risk characteristics for current and non-current liabilities? (4x2)
- definition
– expected settlement within 12 months
– expected settlement after 12 months - risk level
– riskier due to short-term repayment
– lower risk but still financial obligation - examples
– accounts payable, short-term loans, taxes payable
– long-term loans, bonds payable, kease obligations - interest
– both interest/non-interest-bearing
– usually interest-bearing
what are the 5 general principles for liabilities? (5)
- liability definition
- recognition criteria
- classification
- measurement
- de-recognition
define the liability definition (1)
- a present obligation of the entity to transfer an economic resource as a result of past events
what requirements need to be met in the liability definition? (1,2,2)
- present obligation (obl)
– duty responsible of the business it cannot practically avoid - transfer an economic resource (ter)
– obligations to potentially transfer economic resources include obligations to pay cash, deliver goods, provide services
– potential means the transfer of ERs does not have to be certain of even likely: the obligation must merely have the potential to require the entity to transfer ERs in atleast one circumstance - past events (pe)
– key event required to make obligation present must have happened
– known as obligating event
what are the recognitio criteria of liabilities, explain (1X2, 1x1)
- recognition provides relevant info about item
– little to no existence uncertainty about item (Rel,eu)
– probability of an outflow of economic benefits to settle is not low (Rel,prob) - recognition provides faithful representation
– level of measurement uncertainty is not high (FR,mu)
given an example of an existance uncertainty (1)
- lawsuit
– loss = pay, thus liability
– win = no liability
– thus uncertain
given an example of measurement uncertainty (1)
- pollution, requiring clean-up
– uncertain costs as can’t measure damage
– cost of hiring specialists could change
– regulation in future may change cost
– there is liability, but cost is uncertain
can the following be recognised as liabilities use the criteria previously mentioned (5x7):
- duty to repay a loan raised
- duty to pay for goods ordered
- duty to pay for goods received
- duty to pay landlord (before rental term)
- duty to pay damages (chance of payout is 10%)
- Obl
– y
– y
– y
– y
– y - TER
– y
– y
– y
– y
– y - PE
– y
– n
– y
– n
– y - REl,EU
– y
– n
– y
– n
– y - Rel,prob
– y
– n
– y
– n
– n - FR,MU
– y
– n
– y
– n
– y - recognised
– y
– n
– y
– n
– n
what are the aspects of classification for liabilities? (4)
- provision
- commitment
- contingent liability
- constructive obligation
for the classification aspects, give defintions and examples (4x2)
- provision
– liability of uncertain timing or amount that company must pay
– company estimantes pay of R1 million to fix faulty products under warranty - commitment
– future obligation that company has already agreed to, but no liability exists
– signs a contract to buy equipment for R500 000 - contingient liability
– potential liability that depends on a future event happening or not. Not recognised in financial statement unless it becomes probable
– being sued R2 million (lose=pay, win=safe) - constructive obligation
– liability/provision based on a company’s past actions or promises even if not legally required
– company always pays bonuses to employees, even though not in contract. Employees expect it, so company must recognised a liability
can the following be recognised as liabilities use the criteria previously mentioned (5x7):
- provision
- commitment
- contingent liability
- constructive obligation
- Obl
– y
– y
– y
– y - TER
– y
– y
– y
– y - PE
– y
– not yet occurred
– y
– y - REl,EU
– y
– n
– uncertainty existence
– y - Rel,prob
– y
– n
– uncertainty occurrence
– y - FR,MU
– y
– n
– uncertainty amount
– y - AFS
– recognised - uncertainty amount and or timing
– disclosed
– disclosed
– recognised if all criteria are met
what is an easy way to remember the classifications? (4)
- provision
– we know we have to pay, but not sure amount or when - commitment
– we promised to pay in future, but haven’t yet and there’s no past event - contingent liability
– we might have to pay, depending on what happens - constructive obligation
– we made people expect we’ll pay, so we have to
can the following be recognised as a liability or must they be disclosed:
- duty to repay a loan raised
- duty to pay for goods ordered
- duty to pay for goods received
- duty to pay landlord (before rental term)
- duty to pay damages (chance of payout is 10%)
- recognised, not disclosed
- not recognised, disclosed (commitment)
- recognised, not disclosed
- not recognised, disclosed (commitment)
- not recognised, disclosed (contingent liability)
outline the process of classification*
-
how are liabilities measured? (1,3,1)
- amount required to settle
- no interest charged, and long period between recognition and settlement
– time value of money is significant difference to intial measurement
– initial measurement determined by discounting future cash flows - liability carried at present value, both on initial and subsequent measurement
what is the formula for present value? (1)
- PV = FV / (1+r)^n
– PV: present value
– FV: future value
– r: discount rate (interest rate per period)
– n: number of periods
what are the general principles of de-recognition? (2)
- when liability settles, it is de-recognised from SOFP (debit with corresponding reduction in credit)
- settling liability not always involve paying entity or person owed
how can a liability be settles without paying the entity/person involved? (3)
- warranty obligation
– settled by transferring inventory, not cash, to customer - advance payment
– customer is settled by transfering goods or servies to custormer - government grant
– obliges business to comply with whatever conditions are specified in grant
