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Noncurrent liabilities
Liabilities not classified as current. These include the following: noncurrent
portion of long term debt, capital lease liability, noncurrent deferred tax liability,
long term obligations to company officers, long term deferred revenue
Refinancing activity
Current: between end of reporting period & date of authorization for issue of
financial statement
Noncurrent: on/before end of reporting period or the entity has discretion to
refinance
Breach of covenant
PAS 1, par. 74, states that such liability is classified as current even if the lender
has agreed after the reporting period and before the statements are authorized for
issue, not to demand payment as a consequence of the breach
Liability is classified as noncurrent if the lender has agreed on or before the end of
the reporting period to provide a grace period ending at least twelve months after
that date.
Sale of Warranty- sold separately from the product sold or may offer the product
sold but with an additional cost. Amount is recognized as deferred revenue.
Accrued Liabilities and Deferred Revenue
Payroll Tax Expense
Under our law, the entity as an employer is required to withhold from the salaries
of each employee the following:
income tax payable by the employee
employee contribution to the SSS
employee contribution to the Philhealth
employee contribution to the Pag-ibig fund
Such amounts withheld from the salaries shall be recognized as payroll taxes
payable until remitted by the entity to the appropriate government authority
Value Added Taxes Payable
Under the National Internal Revenue Code, the entity is required to collect value
added taxes from customers on sales of tangible personal property and certain
services
Such value added taxes collected shall be recognized as value added taxes
payable and remitted monthly to the BIR
Gift Certificates Payable
When the gifts certificates are sold, the amount received is initially recognized as
unearned revenue or gifts certificate payable. The subsequent redemption of gift
certificates is recognized by debiting gift certificates payable and crediting sales
revenue. The DTI ruled that gift certificates no longer have an expiration period.
GCs may be forfeited as other income when not presented for redemption.
Refundable Deposits
Refundable deposits consist of cash or property received from customers but which
are refundable after compliance with certain conditions.
Bonus Computation- large entities compensate key officers and employees by
way of bonus for superior income realized the year. The purpose is for motivation.
bonus is expressed as a percent of income before bonus and tax
bonus is expressed as a percent of income after bonus but before tax
bonus is expressed as a percent of income after and tax
bonus is expressed as a percent of income before bonus but after tax
use of provision
future operating loss
onerous contract
Examples of Provision
warranty
environmental contamination
decommissioning or abandonment cost
court case
guarantee
Decommissioning Liability
The outflows include the amount that the entity would rationally pay a contractor
if theres an active market- the amount is the price that the entity estimates a
contractor would charge
if theres no active market for the service- the amount if would charge
another party at the future date to undertake the service
Restructuring
PAS 37 par. 10 defines restructuring as a program that is planned and controlled
by management and materially changes either the scope of an enity or the manner
in which that business is conducted.
Provision for restructuring
when the entity has a detailed formal plan for the restructuring
the entity has raised valid expectation in the minds of those affected
Amount of restricting provision
A restructuring program shall include only direct expenditures arising from
restructuring. The expenditures are necessarily entailed by the restructuring and
not associated with the ongoing activities of the enity
Contingencies
Contingent liability- is a possible obligation that arises from past event and whose
existence will be confirmed only by the occurrence or nonoccurrence of one or
more uncertain future events not wholly within the control of the entity.
Contingent asset- is a possible asset that arises from past event and whose
existence will be confirmed only by the occurrence or nonoccurrence of one or
more uncertain future events not wholly within the control of the entity.
Degrees of probability Contingent Liability
Contingent Asset
according to PAS 37
NOTE PAYABLE
A promissory note is an unconditional promise in writing made by one person to
another, signed by the maker, engaging to pay on demand or at a fixed or
determinable future time a sum certain in money to order or to bearer.
Initial measurement of note payable
PFRS 9 par. 5.1.1 provides that a note payable shall be measured initially at fair
value minus transaction costs that are directly attributable to the issue costs of the
note.
If the note is irrevocably designated at fair value through profit or loss, the
transaction costs are expensed immediately.
Subsequent measurement of note payable
PFRS 9 par. 5.3.1 provides that after initial recognition, a note payable shall be
measured at amortized costs using the effective interest method or at fair value
through profit or loss.
Amortized cost of note payable
The difference between the face amount and present value of the note payable is
amortized through interest expense using the effective interest method.
Fair value option
Under the fair value option, the note payable shall be measured initially at fair
value and remeasured at every year end at fair value and any changes in fair valu
are recognized in profit or loss. Any changes in fair value attributable to credit risk
of note payable are recognized in other comprehensive income. No amortization of
transaction cost, discount or premium. The interest expense is recognized using the
nominal rate.
DEBT RESTRUCTURE
Debt restructuring is a situation in which the creditor for economic or legal reasons
related the debtors financial difficulties grants a concession to the debtor that it
would not otherwise consider. That the concession either from an agreement
between the creditor and the debtor or is imposed by the law or cout.
Types of restructuring
Asset swap- is the transfer of any asset such as real estate, inventory or investment
by the debtor to the creditor in full settlement of an obligation.
PFRS 9 par. 3.3.1 and 3.3.3, asset swap is treated as a derecognition of a financial
liability or extinguishment of an obligation.
The difference between the carrying amount of the financial liability over the
carrying amount of the asset given is recognized in profit or loss
USA GAAP, asset swap is recorded as if two transactions have taken place, the
sale of the asset and the extinguishment if the liability. Accordingly, two gains or
losses are recognized. The difference between the fair value and the carrying
amount of the asset is the gain or loss from exchange while the difference between
the carrying amount of the liability over the fair value of the asset is gain or loss
from restructuring.
Dacion en pago- arises when a mortgaged property is offered by the debtor in full
settlement of the debt. The transaction is accounted for as an asset swap.
Equity swap- the issuance of share capital by the debtor to the creditor in full or
partial payment of an obligation.
IFRIC 19 The equity instruments issued to extinguish a financial liability shall be
measured at the following amounts in the order of priority
1. Fair value of equity instruments issued
2. Fair value of the liability extinguished
3. Carrying amount of the liability extinguished
Such gain or loss on extinguishment shall be disclosed as a separate line item in the
income statement.
Modification of terms
Interest concession- may involve a reduction of the interest rate. Forgiveness of
unpaid interest or a moratorium on interest payment
Maturity value concession- may involve an extension of the maturity date or
reduction of the amount to be paid at maturity
Accounting for substantial modification
PFRS 9 par. 3.3.2 provides that a substantial modification of terms of an existing
financial liability shall be accounted for as an extinguishment of the old financial
liability
Under Application Guidance B3.3.6 of PFRS 9 there is substantial modification
of terms if the gain or loss is at least 10% of the carrying amount of the liability.
The difference between the present value of the new liability over the carrying
amount of the liability is treated as gain or loss on extinguishment. The present
value of the new liability shall be determined using the original effective interest
method.
Accounting for no substantial modification
Application guidance B3.3.6, if the gain or loss is less than 10% of the old
liability, theres no substantial modification of terms.
The gain or loss is not recognized because the modification is not an
extinguishment of the old liability. The old liability is simply continued but with
modified interest charges.
OPERATING LEASE
PAS 17 par. 4 defines a lease as an agreement whereby the lessor conveys to the
lessee for a payment or series of payments the right to use an asset for an agreed
period of time
Operating lease in the books of the lessee
PAS 17 par. 33 provides that lease payments under an operating lease shall be
recognized as an expense on a straight line basis over the lease term unless another
systematic basis is more representative of the time pattern of the users benefit.
1. The lessee will not recognize the leased asset.
2. Rentals under operating leases should be charged to the income statement on
a straight line basis over the term of the lease.
3. Any difference between the amounts charged and amounts paid should be
adjusted to repayment accruals.
4. Any incentives given by the lessor should be recognized over the life of the
lease on the straight line basis.
5. Any lease bonus is recognized as additional rent expense over the lease term.
6. Any leasehold improvement is depreciated over the lease term or life of
asset whichever is shorter.
Operating lease on the books of the lessor
PAS 17, par. 50, lease income from operating lease on the part of the lessor shall
be recognized on a straight line basis over the lease term, unless another systematic
is more representative of the time pattern in which use benefit derived from the
leased is diminished.
1. The periodic rental in an operating lease is recognized as rent income.
2. A lessor shall present in the statement of financial position.
3. The leased property remains as an asset of the lessor but he may pass on the
lessee the payment for taxes, insurance and maintenance.
4. The depreciation for the leased shall be depreciated in a normal way.
5. Any security deposit shall be accounted for as a liability.
lease payments. There is a bargain purchase option if the price is less than the fair
value of the asset upon the option exercise date, since the option price is is
estimated to be the same fair value on option exercise date, therefore, the lease
contract has no bargain purchase option.
Initial direct costs are often incurred by the lessors and include amounts such as
commissions, legal fees and internal costs that are incremental and directly
attributable to negotiating and arranging a lease. For finance leases other than those
involving manufacturer of dealer lessors, initial direct costs are included in the
initial measurement of the fianc lease receivable and reduce the amount of income
recognized over the lease term, the interest rate implicit in the lease is defined in
such a way that the initial direct cost are included automatically in the finance
receivable, there is no need to add them separately. Cost incurred by manufacturer
or dealer lessors in connection with negotiating and arranging a lease is excluded
from the definition of initial direct costs. As a result they are excluded from the net
investment in the lease and are recognized as an expense when the selling prfit is
recognized, which for a finance lease is normally at the inception of the term.
Depreciation on leased assets will depend on how the lease qualifies as a
finance lease
If the lease transaction met the criterion as either transferring ownership or
containing a bargain purchase option, the asset is depreciated over the the
estimated useful life
If the transaction qualifies as finance lease because it met either the major part of
useful life or because the present value of the minimum lease payments
represented substantially all of the fair value of the asset, it must be depreciated
over the lease term or life of the asset whichever is shorter.
If theres no reasonable certainty that the lease will obtain ownership by the end of
the lease term, the asset should be fully depreciated over the shorter of the lease
term or its useful life. Therefore, the leased asset should be fully depreciated voer
the lease term.
Cost of goods sold- equal to the cost of the asset plus any initial direct cost.
Gross profit- sales minus cost of goods sold
Initial direct cost- amount is expensed immediately as a component of cost
of goods sold.
Actual sale of the leased asset- the difference between the carrying amount of the
lease receivable is recognized in profit or loss. The carrying amount of the lease
receivable is equal to the balance of the lease receivable minus the unearned
interest income.
SALE AND LEASBACK
Sale and leaseback is an arrangement whereby one party sells a property to another
party and then immediately leases the property back from to its new owner. The
sell becomes the lesse and the purchaser becomes the lessor. The lease rent and the
sale price are usually interdependent as they are negotiated as a package. The
accounting treatment of a sale and leaseback transaction depends upon the typed of
the lease involved.
Sale and leaseback as a finance lease
PAS 17 par. 59 provides that if the sale and leaseback transaction results in a
finance lease, any excess of the sale proceeds over the carrying amount shall not be
immediately recognized as income but deferred and amortized over the lease term.
Any gain from sale and leaseback is deferred and amortized over the term
Any loss on sale and leaseback is recognized immediately
Sale and leaseback as an operating lease
PAS 17 par. 61 provides the following rules if the leaseback is an operating lease.
If the sale and leaseback is established at FV, any gain or loss on sale shall
be recognized immediately.
If the sale price is below fair value, any gain or loss shall also be recognized
immediately. If the loss is compensated by future lease rental at below
market value, the loss is deferred and amortized in proportion to the lease
term.
If the sale price is above fair value, the excess over the fair value is deferred
and amortized over the lease term.
PAS 63 further provides that the carrying amount of the asset is written down to
fair value and the writedown is accounted for as an impairment loss.