Nee ES ENS Bn C, Uberta’®, Espenitla LIABILI1 1. Mensure of tiabilten Upon incurrence - PV of future cash outlay to liquidate the ncountng labilitin * Amouut tiquidated thr 4 payment of cash 1 'b. payment of non-cash asset 1 ©. performance of service 1 (0) 4, amortization (passage of time) | ©. forfeiture‘expiration . PY/FV estimated value of additional liability incurred x Lipon Balance sheet presentation» Canying Value m PV of future cash outflows to settle the obligation ~ is the amount of cash required to liquidate the obligation if it were paid today: which is equal to any of the following 4 face value ofthe liability (for liabilities that are definite in amount) estimated value (provision or iabliies that are estimated) present value or discounted value (Kor lng term non-interest bearing Habilties) satisfies any ofthe following: Itis expected to be settled in the entity's normal operating cycle {is held primarily forthe purpose of being Icis due t be settled within twelve months after the balance sheet date: or ‘The entity does not huve an unconditional right co defer settlement ofthe liability for atleast twelve months after the balance sheet date: Non-current fiabilities ~ are liabilities not classified as current. These include the following: non-current portion of long term, capital lease liability, non-current deferred tax liability. long term obligations to company officers, long term deferred revenue. 3. Short term debt that is expected to be refinanced An entity classifies its financial liabilities us current when they are due to be settled within twelve months after the balance sheet date, even if &. The original term was for a period longer than twelve months, and fh The mention is supported by an agreement ta refinance. or reschedule payments, on u long-term basis is completed after the balance sheet date and completed before the financial statements are authorised Jor If an emity expects, and has the discretion, ta refinance or roll over an obligation Jor at least twelve months after the balance sheet date under an existing loun facility. it classifies the obligation as nor-curreni, evem if it would otherwise he due within a shorter perind. However, when refinancing or rolling over the obligation i¢ ‘not at the discretion of the entity, the potential to refinance is not considered and the obligation is classified as current. 4. Breach of an undertaking: When an entity breaches an undertaking under a longsterm loan agreement on or fefore the balance sheet date with the effect that the lables becomes payable on demand. the Tiailty is classified as curren, even ifthe lender had ugreed , after the balance sheet date and before the authorization of Jfinarcial statements for issue, not to demand payment as a consequence of the breach. The liability te classified 4 current because, at the halance sheet date, the entity does not have an unconditional right to defers selllement for atleast twelve months afler that date. 5. Brovision - An existing liability of uncertain timing or uncertain amount. The lability does exist on balance sheet date but the amount is indefinite or the date the obligation is due and in some cases the payee cannot be determined. I is the equivalent of estimated liability or a loss contingency that ts accrued because it is both probable and measurable, 4. Recognition of provision — the following conditions must be met: The enterprise has a present obligation, legal or constructive. asa result ofa past event D._Itis probable that an outflow of resources embodying economic benefits will be required to settle the obligation Q__The amount of the obligation can be measured reliably. b. Measurement of the provision The IFRS for SMF does not describe the best estimate. PULL IERS deseribes it as the amount that an entity would rationally pay © settle an obligation at the end of the Feporting period or to transfer it to a third pany at that dateBESAPRACIIC AL ACCOUNTING 1- Liabilities Lecture) Page? of 4 Ae standard provides two methods Io messare pros eon 1 ten pevvssion consis ofa single obligation, the best estimate is normally the most ikely outcome Homever, hes the mos likely cutcome fs ased, other possible outcomes mist be considered, I the ‘ther posible outcomes are mostly higher oF most Lower then the most likely outcome, the best eoterate may bea higher or lower amourt than the ls likely outcome 2. hen the provision involves a large population of items, the best estimate reflects the weighing of all Pomible autcomes by their respective probabilities 6. Keimbursements — where some of all of the expenditure required to settle a provision is expected to be reimiwrses by another party. the reimbursement shall be recognized when, and only when, it is virwally certain ua reimbursement will be received when the entity setles the obligation, ‘The reimbursement shail be treated @ a seperate act. The amount recognized for the reimbursement shall not exceed the amount of provision. The rcunburseruem receivable shall not be offset with the provision, However, in the statement of Comprchersive income. the expense relating to a provision may be presented net of the amount recognized. for 2 rermbursement, if they relate to the same event and are recognized in the same period. 6 Contingencies: 4 Contingent lability — is a ‘abligation that arises from past event and whose existence will be confirmed oniy by the occurrence oF nenoccurTence of one oF more uncertain future events not wholly within the control of the enterprise. It is a present obligation that arises from past event but is not recognized because Mis not probuhle that an outflow of resources embodying economic henefits will be required 10 seat the obligation or the amount of the obligation cannot be ineasured reliably. 1b. Contingent asset — is a possihle asset that arises from past event and whose existence will be confirmed only by the eccurrence &¢ nonoccurrence of one oF more uncertain fulure events not wholly within the contro of the enterprise Accounting for contingent liabilities and contingent assets Contingent Liabit ‘Contingent Assets ‘Virtually certain (therefore, not contingent) Provide Recognize Probable Provide Disclose by note Ponsibie Disclose by note No disclosure Remote No disclosure No disclosure Degrees of peobability — PAS 37 recognizes four degrees of probability: for contingencies but it gives no guidance a5 to the meaning of the terms. One possible interpretation could be: ‘Virwalls certain probability above O5% Probable Probability above 50% and up to 95% Possible probability of S% and up to 50% Remote probability below 5% Debt Instruments(Bonds Pavable) 1 mri measurement = the fair value of the instrument issued. The fair value ofthe instrument issued is equal to the proceeds from the issue of the debt instrument excluding any proceeds for accrued interest (if the instruments were issued between interest dates) less any transaction costs incurred. Bond issue cost is initially part of the carrying aniount of the lability and should therefore be added to the bond discount or deducted from. {any premium. The incurrence of issue cost would mean a recomputation of the yield or effective interest rate on the issuance of the debt instruments 2. Any premium or discount and any transaction cost incurred should be amortized using the effective interest method of amortization 3. When Bonds are issued w/share/stock warrants, The esuance of a bund with a detachable stock warrants is considered am issuance of compound financial imsarumens that requires splitting the proceeds from issue in accordance with the new standards. Thot om “imitua recngrition the equity component (warrants) represents the residual umount of the fair value prsceesty Of the instruments 1 a whole after deducing the amount separately determined for the liabiity (bends) component a 4. Issve of a convertible debt instruments (Classifs the insirument, oF us component parts, on initial recognition as a financial lability a fi ‘on equity tmirument in accordance with the substance of the contractual arrangement endintooia me ofe financial liability, a financial asset and equity instrument” fnstions of a The equity component represents the residual amount of the fair val ib Teen ol prs ton hentia a wed vy The sume of the carrying amouns usigned to the liability and equity components om ind rene es equal to the fair value that would be ascribed to the instrument as a whole. No gain an eae en ees sclal recognition of the compomtents of the instrument 10 gain or loss is recexnize from1 PRACTICAL ACCOUNTING I~ kdabllities (Lecture) rion of x debt insteuine Fhe carrving value. which is equ to the fee val of the st uinamortized tnd discount or pis anamvertized equity. The equity eomponent atthe may be transferred trom one of debt to equity Page 3 of 4 ment feye any uontnonizet bond iyue costs and nn iv aleteeunized as w lability wll be recognize as an time of gue (oF the compu usteumerts) Fetnains in equity (although ne item within equity to another), Ni pain or ls Is recounize on the conversion 6. Retirement of bonus prior to maturity a) Non-convertible bonds - the carrying value oF the bonds » retirement pice excluding any accrued interest should be recomnized in the protit ve loss aya ordinary Hem. ertible bonds = the redemption price anal any transaction costs are allocated to the liability and equity components atthe date of transaction, The metho uso in allocating the consideration paid and transaction costs 10 the separate components is consistent with that used in the original allocation to the separate ‘components ofthe proceeds received shen the convertible instrument was issued b 1. The periodic rental is to be recognized as an expense (lense) & asm revetue (Lessor) Ay Tease bonus sould be amortize ave he fs Kr ah eco nada rent expense (esse) or rent income (lesson, ‘When the periotic rental ts unequal anor has a provision for @ rent holiday (rent-free) the total cash rental throughout the tease contract term be detcemined & amotio on seh line basis over the tern of the lease, unless another systematic and rational hast is mre appropiate. Any diference between amount charged and amount puid should be adiusted to prepayments or aeruals (lessee), receivables of deferred revenue (lesson 4, Any additional remtal that is contingent on the revenue ofthe lessee oF ay other factors, should be recognized as expense (lessee) & income (lessor), 5. Any leasehold improvements should be depreciated over the remaining lease temnveemaining extended lease term or the tite of the improvement, whichever is short. 6. Any security deposit that is refundable of to be used upon oF prior to the expiration of the lease contract be recognized as an asset (lessee), sa linbility (lessor, 7. Expenses related to the lease asset are normally borne by the lessor 8. Any direct cast related to the lease contract ly be spreinl aver the life oF the lease or charged when incurred. 9. The lessor will continue to recognize the leased assets, They are normally classified as non-current assets held for hiring out under operating leases. hey will be depreciated inthe normal way. The lessee should recounize the leased asset andl the obligation to make lease payments as assets and liabilities in the balance sheet 2. Atthe inception of the fease the amounts will be equal the lower: ‘athe fair value of the leased property, and the present value of the minimum lease payments, which includes the following, 1, periodic rentals excluding executory costs 2, any payment required under a bargain option oF any guaranteed residual value made by the lessee oF & party related to the lewee. cc. the discount rate to be used is the imptict rat lessec’s borrowing rate. “The lease payments will be split between a finance charge and a repayment ofthe liability, 4. The leased asset should be depreciated; over the economic useful life ofthe asset if there is reasonable certainty that the lessee will obtain ownership at the end ot the lease term (1. when transfer of title or 2. when the bargain option criterion is met), over the lease term or useful life whichever is shorter ( 3. when the ease term is for the major part of the economic life of the asset oF 4, the present value of minimum payments amounts to substantially all of the fair value is met) the lease but when it is impracticable to determine use the nce Les (Recognitio 3 1. The lessor should recognize the fease as a receivable. The carrying value will be the lessor’s net investment in the lease which is equal tothe followine: the present value of the minimum lease payments receivable. b. the present value of any unguaranteed residual value ac leased asset when itis repossessed at the end of the lease. {In practice. the lessor's net investment in the lease willbe the same as the lessee's lib The lease receipts wil be split between finance income and repayment of the principal us 18 to the lessor (e.g, the residual value of the ‘A comet of lease may lead 10 finance ea it ny. of he fllowing enter 1 The lease ranfers cwncrshp of hcl 0 te esee Py Oe ae a 4 The lessee has the option to purchase the ast wt a priv, which is expected tbe sfcienly lower than the fair ‘ale a the date the option becomes exercisable such that atthe ception uf the louse, Ut tearonahle that the option will he exercised; ee Hee aoe ©The length i for the mayor part ofthe economic life ofthe asset even if ile i a transiered. The length o tease should include any secondary rental. A secondary rental xeves the lessee an aption for renewal. —ReS.c PRACTICAL ACCOUNTING | {ile meepuion of the Fease, th mea ee 1 he inception ofthe lease, the present valu of th: minimum lease payinenh ammointe To at Teast subwantiall Loh the fae val of the feascad set, and or : ©, & Teaveid assets are of a spectalized nature such that only the lessee can use them without major modifications ‘Anaisntors.oLsityattons shat lngividvaty or In combination could also lead to »teane being classified an» finance lense 4H the fesveu van cancel thy lease the lessor lasses associated with the cancellaion are borne by the lessee Gains ut losses fram the fluctnation in the fair value of the residual accrue to the lessee Gor example, inthe form vy a rend rxbate equaling most of the sales procevds ut the end of the lease), and © the texsee has the ability w continue the lease or a secondary pertod at a rent that is substantially lower than market rent facture or Dealer Lessons 1.“ inanve ives tn be aranged with a third party, suchas bank, oF they can be provided bythe supplier of the tne: the upp (nanaactrer or dealer) also provides the finance, then there are two transactions: 1 sale on normal terms, and the provisn vin rise to financial income. ‘This is recognized the normal way 2. the sak proceeds asured athe lower of: rsa I sales peice). and the present value of the minimum lease payments discounted at commercial rate of imerest. 3. The cost of sales is the cost (canying value) of the asset sold, less the present value of any unguaranteed residual value. All diteet selling cost will be charged when the sale 1 made Sale und Lensebuck Transactions —: Under a sale and lease back transaction an enterprise sells one of its own assets and immediately leases the asset back. The buyer and lessor is normally a hank. These arrangements are common ways of raising finance whilst retaining the use of the related assets. There are two hey questions to ask when assessing the substance of these transactions’ 1. Isthe new lease a finance lease or an operating lease? 2. Ifthe new lease is an operating lease. was the orjinal sale at fair value or not? ‘ifthe leaveback 15 «finance lease then the deal ts recognized as a secured loan rather than a sale Wf the teavebuack s an operating lease then there has been a xenuine sate which will he recognized in the income statement. However, problems can arise if the sale proceeds are above or below fair value ‘Sale und Leaseback - Finance lease: Belore the sale, the company will have recognized an item of property or ‘equipment as a non-current assel. Afler the Feaseback under a finance lease, the company will recognize the same asset. Therefore no sale can have taken place. Following on from this, the basic approach to a sale and finance— Hease-buck is as follows: 1. Continue to recognize the original asset at its original cost (less depreciation), 2. Credit the proceeds of the sale to a finance lease liability account. The treatment will not be affected by the proceeds being above or below the market value of the asset. The asset is only being used as security for the loan, and so its up to the lender as to whether they are prepared to fend mote or less than the value of the security. However, asa totally separate issue. the process of valuing the asset may reveal impairment of a potential revaluation, These adjustments will be dealt with in the normal way tnd they donot affect the substance of the sale und feaseback transaction itself. ‘The usual approach to u sale and leaseback is as follows: 1. Record the sale of the non-current asset in & normal manner, aty gain should be deferred and amortize over the lease term, any lovs should be recognized outright. 2, Recognized a leased asset and leased liability equal to the present value of minimum lease payments (sales price). Sale and Lenseback _ Operating Lease:: Before the sale, the c tl recognize n non-current asset. However, the company will not recognize an asset if'it is leased back under an operating lease. Therefore a disposal has taken place, and any related profit or loss must be recognized. The operating lease will be accounted for in the normal way. However, when the ses pricé is more than the far value for the asset, then the lessor will recoup their costs by charaing an above markeL-rate tent. Ifthe sales price 1 less than the fair value, then the lessee will be compensated thvouph a below market-rate ret. These gains or loses on disposals should be recognized over the life of the related lease I the sles price exceeds the fir markt value, the (selling price ~ cary value) gain should be accounted for as follows. Deferred gain ~ sales price fair value: Realized gain (gain om disposal) tate value earoieg Wale of asset disposed of arias dare Woe 4 Hthe sales price 1s below the fair mark! vue, the selling price > carrying value prized our Ifeates prices below fr marker vue, the (selling pric = carving vuluclio it eoeurcd ccioch When future rentals are at market rate of above since there are no future benefit to ffet the love vn dsposdl However 1 are rentals are below market rate then the lesson diponal will pvc rae tothe ture hens of heap rentals, in his case the lars can be deferred and amoriced over the le othe lease