Liabilities. Chapter 10. Learning Objectives. After studying this chapter, you should be able to:

Transcription

1 10-1

2 Chapter 10 Liabilities 10-2 Learning Objectives After studying this chapter, you should be able to: 1. Explain a current liability, and identify the major types of current liabilities. 2. Describe the accounting for notes payable. 3. Explain the accounting for other current liabilities. 4. Explain why bonds are issued, and identify the types of bonds. 5. Prepare the entries for the issuance of bonds and interest expense. 6. Describe the entries when bonds are redeemed. 7. Describe the accounting for long-term notes payable. 8. Identify the methods for the presentation and analysis of non-current liabilities.

3 Preview of Chapter Financial Accounting IFRS Second Edition Weygandt Kimmel Kieso

4 Current Liabilities Current liability A debt that the company expects to pay within one year or the operating cycle, whichever is longer. Most companies pay current liabilities by using current assets. Current liabilities include notes payable, accounts payable, unearned revenues, and accrued liabilities such as taxes, salaries and wages, and interest payable LO 1 Explain a current liability, and identify the major types of current liabilities.

5 Current Liabilities Notes Payable Recorded obligation in the form of written notes. Usually require the borrower to pay interest. Issued for varying periods of time. Those due for payment within one year of the statement of financial position date are usually classified as current liabilities LO 2 Describe the accounting for notes payable.

6 Current Liabilities Illustration: Hong Kong National Bank agrees to lend HK$100,000 on September 1, 2014, if C.W. Co. signs a HK$100,000, 12%, four-month note maturing on January 1. Instructions a) Prepare the journal entry on September 1. b) Prepare the adjusting journal entry on December 31, assuming monthly adjusting entries have not been made. c) Prepare the journal entry at maturity (January 1, 2015) LO 2 Describe the accounting for notes payable.

7 Current Liabilities Illustration: Hong Kong National Bank agrees to lend HK$100,000 on September 1, 2014, if C.W. Co. signs a HK$100,000, 12%, four-month note maturing on January 1. a) Prepare the journal entry on September 1. Cash 100,000 Notes payable 100,000 b) Prepare the adjusting journal entry on Dec. 31. Interest expense 4,000 Interest payable 4,000 HK$100,000 x 12% x 4/12 = HK$4, LO 2 Describe the accounting for notes payable.

8 Current Liabilities Illustration: Hong Kong National Bank agrees to lend HK$100,000 on September 1, 2014, if C.W. Co. signs a HK$100,000, 12%, four-month note maturing on January 1. c) Prepare the journal entry at maturity (January 1, 2015). Notes payable 100,000 Interest payable 4,000 Cash 104, LO 2 Describe the accounting for notes payable.

9 Current Liabilities Sales Tax Payable Sales taxes are expressed as a stated percentage of the sales price. Either rung up separately or included in total receipts. Retailer collects tax from the customer. Retailer remits the collections to the government s department of revenue LO 3 Explain the accounting for other current liabilities.

10 Current Liabilities Illustration: The March 25 cash register reading for Cooley Grocery shows sales of NT$10,000 and sales taxes of NT$600 (sales tax rate of 6%), the journal entry is: Cash 10,600 Sales revenue 10,000 Sales tax payable LO 3 Explain the accounting for other current liabilities.

11 Current Liabilities Unearned Revenue Revenues that are received before the company delivers goods or provides services. 1. Company debits Cash, and credits a current liability account (Unearned Revenue). 2. When the company earns the revenue, it debits the Unearned Revenue account, and credits a Revenue account LO 3 Explain the accounting for other current liabilities.

12 Current Liabilities Illustration: Busan IPark (KOR) sells 10,000 season football tickets at W 50,000 each for its five-game home schedule. The club makes the following entry for the sale of season tickets (in thousands of W): Aug. 6 Cash 500,000 Unearned ticket revenue 500,000 As each game is completed, Busan IPark records the revenue earned. Sept. 7 Unearned ticket revenue 100,000 Ticket revenue 100, LO 3 Explain the accounting for other current liabilities.

13 Current Liabilities Current Maturities of Long-Term Debt Portion of long-term debt that comes due in the current year. Considered a current liability. No adjusting journal entry required LO 3 Explain the accounting for other current liabilities.

14 Statement Presentation and Analysis Presentation Current liabilities are presented after non-current liabilities on the statement of financial position. A common method of presenting current liabilities is to list them by order of magnitude, with the largest ones first LO 3 Explain the accounting for other current liabilities.

15 Statement Presentation and Analysis Illustration LO 3 Explain the accounting for other current liabilities.

16 Statement Presentation and Analysis Analysis Illustration 10-4 Liquidity refers to the ability to pay maturing obligations and meet unexpected needs for cash. The current ratio permits us to compare the liquidity of differentsized companies and of a single company at different times. Illustration LO 3 Explain the accounting for other current liabilities.

17 Total take: $150,000 ANATOMY OF A FRAUD Art was a custodial supervisor for a large school district. The district was supposed to employ between 35 and 40 regular custodians, as well as 3 or 4 substitute custodians to fill in when regular custodians were missing. Instead, in addition to the regular custodians, Art hired 77 substitutes. In fact, almost none of these people worked for the district. Instead, Art submitted time cards for these people, collected their checks at the district office, and personally distributed the checks to the employees. If a substitute s check was for $1,200, that person would cash the check, keep $200, and pay Art $1, The Missing Control Human Resource Controls. Thorough background checks should be performed. No employees should begin work until they have been approved by the Board of Education and entered into the payroll system. No employees should be entered into the payroll system until they have been approved by a supervisor. All paychecks should be distributed directly to employees at the official school locations by designated employees. Independent internal verification. Budgets should be reviewed monthly to identify situations where actual costs significantly exceed budgeted amounts.

18 Non-Current Liabilities Obligations that are expected to be paid after one year. Bond Basics A form of interest-bearing notes payable. To obtain large amounts of long-term capital. Three advantages over ordinary shares: 1. Shareholder control is not affected. 2. Tax savings result. 3. Earnings per share may be higher LO 4 Explain why bonds are issued, and identify the types of bonds.

19 Bond Basics Effects on earnings per share equity vs. debt. Illustration LO 4 Explain why bonds are issued, and identify the types of bonds.

20 Bond Basics Types of Bonds LO 4

21 Bond Basics Issuing Procedures Government laws grant corporations power to issue bonds. Board of directors and shareholders must approve bond issues. Board of directors must stipulate number of bonds to be authorized, total face value, and contractual interest rate. Terms of the bond are set forth in a legal document called a bond indenture. Issuing company arranges for printing of bond certificates LO 4 Explain why bonds are issued, and identify the types of bonds.

22 Bond Basics Issuing Procedures Represents a promise to pay: face value at designated maturity date, plus periodic interest at a contractual (stated) interest rate on the maturity amount (face value). Interest payments usually made semiannually. Generally issued when the amount of capital needed is too large for one lender to supply LO 4 Explain why bonds are issued, and identify the types of bonds.

23 Bond Basics Issuer of Bonds Illustration Maturity Date DUE 2017 DUE 2017 Contractual Interest Rate Face or Par Value LO 4

24 Bond Basics Bond Trading Bondholders can sell their bonds, at any time, at the current market price on national securities exchanges. Bond prices are quoted as a percentage of the face value. Application (1) What is the price of a $1,000 bond trading at 95 1/4? (2) What is the price of a $1,000 bond trading at 101 7/8? $ $1, LO 4 Explain why bonds are issued, and identify the types of bonds.

25 Bond Basics Bond Trading Bondholders can sell their bonds, at any time, at the current market price on national securities exchanges. Bond prices are quoted as a percentage of the face value. Newspapers and the financial press publish bond prices and trading activity daily. Illustration LO 4 Explain why bonds are issued, and identify the types of bonds.

26 Bond Basics Bond Trading Bondholders can sell their bonds, at any time, at the current market price on national securities exchanges. Bond prices are quoted as a percentage of the face value. Newspapers and the financial press publish bond prices and trading activity daily. A corporation makes journal entries only when it issues or buys back bonds, or when bondholders exchange convertible bonds into ordinary shares LO 4 Explain why bonds are issued, and identify the types of bonds.

27 Bond Basics Determining the Market Value of Bonds Market value is a function of the three factors that determine present value: 1. amounts to be received, 2. length of time until the amounts are received, and 3. market rate of interest. The features of a bond (callable, convertible, and so on) affect the market rate of the bond LO 4 Explain why bonds are issued, and identify the types of bonds.

28 10-28

29 Accounting for Bond Issues Corporation records bond transactions when it issues (sells), retires (buys back) bonds and when bondholders convert bonds into ordinary shares. NOTE: If bondholders sell their bond investments to other investors, the issuing firm receives no further money on the transaction, nor does the issuing corporation journalize the transaction LO 5 Prepare the entries for the issuance of bonds and interest expense.

30 Accounting for Bond Issues Issue at Par, Discount, or Premium? Illustration Bond Contractual Interest Rate of 10% LO 5 Prepare the entries for the issuance of bonds and interest expense.

31 Accounting for Bond Issues Issuing Bonds at Face Value Illustration: On January 1, 2014, Candlestick Inc. issues 100,000, five-year, 10% bonds at 100 (100% of face value). The entry to record the sale is: Jan. 1 Cash 100,000 Bonds payable 100, LO 5 Prepare the entries for the issuance of bonds and interest expense.

32 Issuing Bonds at Face Value Illustration: On January 1, 2014, Candlestick Inc. issues 100,000, five-year, 10% bonds at 100 (100% of face value). Assume that interest is payable semiannually on January 1 and July 1. Prepare the entry to record the payment of interest on July 1, 2014, assume no previous accrual. July 1 Interest expense 5,000 Cash 5,000 ( 100,000 x 10% x 6/12) LO 5 Prepare the entries for the issuance of bonds and interest expense.

33 Issuing Bonds at Face Value Illustration: On January 1, 2014, Candlestick Corporation issues 100,000, five-year, 10% bonds at 100 (100% of face value). Assume that interest is payable semiannually on January 1 and July 1. Prepare the entry to record the accrual of interest on December 31, 2014, assume no previous accrual. Dec. 31 Interest expense 5,000 Interest payable 5, LO 5 Prepare the entries for the issuance of bonds and interest expense.

34 Accounting for Bond Issues Issuing Bonds at a Discount Illustration: On January 1, 2014, Candlestick, Inc. sells 100,000, five-year, 10% bonds for 92,639 (92.639% of face value). Interest is payable on July 1 and January 1. The entry to record the issuance is: Jan. 1 Cash 92,639 Bonds payable 92, LO 5 Prepare the entries for the issuance of bonds and interest expense.

35 Issuing Bonds at a Discount Statement Presentation Illustration Carrying value or book value The issuance of bonds below face value at a discount causes the total cost of borrowing to differ from the bond interest paid. The reason: Borrower is required to pay the difference between the issuance price and face value the discount at the maturity date. Thus, the discount is considered to be an additional cost of borrowing LO 5 Prepare the entries for the issuance of bonds and interest expense.

36 Issuing Bonds at a Discount Total Cost of Borrowing Illustration Illustration LO 5 Prepare the entries for the issuance of bonds and interest expense.

37 Accounting for Bond Issues Issuing Bonds at a Premium Illustration: On January 1, 2014, Candlestick, Inc. sells 100,000, five-year, 10% bonds for 108,111 ( % of face value). Interest is payable on July 1 and January 1. The entry to record the issuance is: Jan. 1 Cash 108,111 Bonds payable 108, LO 5 Prepare the entries for the issuance of bonds and interest expense.

38 Issuing Bonds at a Premium Statement Presentation Illustration The sale of bonds above face value causes the total cost of borrowing to be less than the bond interest paid. The reason: The borrower is not required to pay the bond premium at the maturity date of the bonds. Thus, the bond premium is considered to be a reduction in the cost of borrowing LO 5 Prepare the entries for the issuance of bonds and interest expense.

39 Issuing Bonds at a Premium Total Cost of Borrowing Illustration Illustration LO 5 Prepare the entries for the issuance of bonds and interest expense.

40 Accounting for Bond Retirements Redeeming Bonds at Maturity Assuming that the company pays and records separately the interest for the last interest period, Candlestick records the redemption of its bonds at maturity as follows: Bond payable 100,000 Cash 100, LO 6 Describe the entries when bonds are redeemed.

41 Accounting for Bond Retirements Redeeming Bonds before Maturity When bonds are retired before maturity, it is necessary to: 1. eliminate carrying value of bonds at redemption date; 2. record cash paid; and 3. recognize gain or loss on redemption. The carrying value of the bonds is the face value of the bonds adjusted for the bond discount or bond premium amortized up to the redemption date LO 6 Describe the entries when bonds are redeemed.

42 Accounting for Bond Retirements Illustration: Candlestick, Inc. has sold its bonds at a premium. At the end of the eighth period, Candlestick retires these bonds at 103 after paying the semiannual interest. The carrying value of the bonds at the redemption date is 101,623. Candlestick makes the following entry to record the redemption at the end of the eighth interest period (January 1, 2018): Bonds payable 101,623 Loss on bond redemption 1,377 Cash 103, LO 6 Describe the entries when bonds are redeemed.

43 Accounting for Long-Term Notes Payable May be secured by a mortgage that pledges title to specific assets as security for a loan. Typically, terms require borrower to make installment payments over the term of the loan. Each payment consists of interest on the unpaid balance of the loan and a reduction of loan principal. Companies initially record mortgage notes payable at face value LO 7 Describe the accounting for long-term notes payable.

44 Accounting for Other Long-Term Liabilities Illustration: Mongkok Technology Inc. issues a HK$500,000, 12%, 20-year mortgage note on December 31, The terms provide for semiannual installment payments of HK$33,231. The installment payment schedule for the first two years is as follows. Illustration LO 7 Describe the accounting for long-term notes payable.

45 Accounting for Other Long-Term Liabilities Illustration: Mongkok Technology Inc. issues a HK$500,000, 12%, 20-year mortgage note on December 31, The terms provide for semiannual installment payments of HK$33,231. The installment payment schedule for the first two years is as follows. Dec. 31 Cash 500,000 Mortgage payable 500,000 Jun. 30 Interest expense 30,000 Mortgage payable 3,231 Cash 33, LO 7 Describe the accounting for long-term notes payable.

46 10-46

47 Statement Presentation and Analysis Presentation Illustration LO 8 Identify the methods for the presentation and analysis of non-current liabilities.

48 Statement Presentation and Analysis Analysis Two ratios that provide information about debt-paying ability and long-run solvency are: Debt to Total Assets Ratio Times Interest Earned Ratio LO 8 Identify the methods for the presentation and analysis of non-current liabilities.

49 Statement Presentation and Analysis Analysis Illustration: LG s (KOR) had total liabilities of 39,048 billion, total assets of 64,782 billion, interest expense of 778 billion, income taxes of 1,092 billion, and net income of 2,967 billion. Illustration LG has a relatively high debt to total assets percentage of 60.3%. Its interest coverage of 6.22 times is considered safe LO 8

50 10-50

51 APPENDIX 10A PRESENT VALUE CONCEPTS RELATED TO BOND PRICING Present Value of Face Value Illustration: Assume that you are willing to invest a sum of money that will yield HK$1,000 at the end of one year, and you can earn 10% on your money. What is the HK$1,000 worth today? To compute the answer, 1. divide the future amount by 1 plus the interest rate (HK$1,000/1.10 = HK$ OR 2. use a Present Value of 1 table. (HK$1,000 X.90909) = HK$ (10% per period, one period from now) LO 9 Compute the market price of a bond.

52 Present Value of Face Value To compute the answer, 1. divide the future amount by 1 plus the interest rate (HK$1,000/1.10 = HK$ Illustration 10A LO 9 Compute the market price of a bond.

53 Present Value of Face Value To compute the answer, 2. use a Present Value of 1 table. (HK$1,000 X.90909) = HK$ (10% per period, one period from now) LO 9 Compute the market price of a bond.

54 Present Value of Face Value The future amount (HK$1,000), the interest rate (10%), and the number of periods (1) are known Illustration 10A LO 9 Compute the market price of a bond.

55 Present Value of Face Value If you are to receive the single future amount of HK$1,000 in two years, discounted at 10%, its present value is HK$ [($1, ) 1.10]. Illustration 10A LO 9 Compute the market price of a bond.

56 Present Value of Face Value To compute the answer using a Present Value of 1 table. (HK$1,000 X.82645) = HK$ (10% per period, two periods from now) LO 9 Compute the market price of a bond.

57 Present Value of Interest Payments (Annuities) In addition to receiving the face value of a bond at maturity, an investor also receives periodic interest payments (annuities) over the life of the bonds. To compute the present value of an annuity, we need to know: 1) interest rate, 2) number of interest periods, and 3) amount of the periodic receipts or payments LO 9 Compute the market price of a bond.

58 Present Value of Interest Payments (Annuities) Assume that you will receive HK$1,000 cash annually for three years and the interest rate is 10%. Illustration 10A LO 9 Compute the market price of a bond.

59 Present Value of Interest Payments (Annuities) Assume that you will receive HK$1,000 cash annually for three years and the interest rate is 10%. Illustration 10A LO 9 Compute the market price of a bond.

60 Present Value of Interest Payments (Annuities) Assume that you will receive HK$1,000 cash annually for three years and the interest rate is 10%. HK$1,000 annual payment x = HK$2, LO 9 Compute the market price of a bond.

61 Computing the Present Value of a Bond Selling price of a bond is equal to the sum of: Present value of the face value of the bond discounted at the investor s required rate of return PLUS Present value of the periodic interest payments discounted at the investor s required rate of return LO 9 Compute the market price of a bond.

62 Computing the Market Price of a Bond Assume a bond issue of 10%, five-year bonds with a face value of 100,000 with interest payable semiannually on January 1 and July 1. Illustration 10A LO 9 Compute the market price of a bond.

63 Computing the Market Price of a Bond Assume a bond issue of 10%, five-year bonds with a face value of 100,000 with interest payable semiannually on January 1 and July 1. Illustration 10A LO 9 Compute the market price of a bond.

64 Computing the Market Price of a Bond Assume a bond issue of 10%, five-year bonds with a face value of 100,000 with interest payable semiannually on January 1 and July 1. Illustration 10A LO 9 Compute the market price of a bond.

65 Computing the Market Price of a Bond Assume a bond issue of 10%, five-year bonds with a face value of 100,000 with interest payable semiannually on January 1 and July 1. Illustration 10A LO 9 Compute the market price of a bond.

66 APPENDIX 10B EFFECTIVE-INTEREST METHOD OF BOND AMORTIZATION Under the effective-interest method, the amortization of bond discount or bond premium results in period interest expense equal to a constant percentage of the carrying value of the bonds. Required steps under the effective-interest method: Illustration 10B LO 10 Apply the effective-interest method of amortizing bond discount and bond premium.

67 Effective-Interest Method of Bond Amortization Amortizing Bond Discount Illustration: Candlestick, Inc. issues 100,000 of 10%, five-year bonds on January 1, 2014, for 92,639, with interest payable each July 1 and January 1. This results in a discount of 7,361. Illustration 10B LO 10

68 Amortizing Bond Discount Illustration: Candlestick, Inc. issues 100,000 of 10%, five-year bonds on January 1, 2014, for 92,639, with interest payable each July 1 and January 1. This results in a discount of 7,361. Journal entry on July 1, 2014, to record the interest payment and amortization of discount is as follows: July 1 Interest Expense 5,558 Bonds Payable 558 Cash 5, LO 10 Apply the effective-interest method of amortizing bond discount and bond premium.

69 Amortizing Bond Premium Illustration: Candlestick, Inc. issues 100,000 of 10%, five-year bonds on January 1, 2014, for 108,111, with interest payable each July 1 and January 1. This results in a premium of 8,111. Illustration 10B LO 10 Apply the effective-interest method of amortizing bond discount and bond premium.

70 Amortizing Bond Premium Illustration: Candlestick, Inc. issues 100,000 of 10%, five-year bonds on January 1, 2014, for 108,111, with interest payable each July 1 and January 1. This results in a premium of 8,111. Journal entry on July 1, 2014, to record the interest payment and amortization of premium is as follows: July 1 Interest Expense 4,324 Bonds Payable 676 Cash 5, LO 10 Apply the effective-interest method of amortizing bond discount and bond premium.

71 APPENDIX 10C STRAIGHT-LINE AMORTIZATION Amortizing Bond Discount The effective-interest method is the method required by IFRS to determine amortized cost. Under U.S. GAAP, companies are allowed to use straight-line amortization when the results do not differ materially from the effective-interest method. Illustration 10C LO 11

72 APPENDIX 10C STRAIGHT-LINE AMORTIZATION Amortizing Bond Discount Illustration: Candlestick, Inc., sold 100,000, five-year, 10% bonds on January 1, 2014, for 92,639 (discount of 7,361). Interest is payable on July 1 and January 1. Illustration 10C LO 11

73 Amortizing Bond Discount Illustration: Candlestick, Inc., sold 100,000, five-year, 10% bonds on January 1, 2014, for 92,639 (discount of 7,361). Interest is payable on July 1 and January 1. The bond discount amortization for each interest period is 736 ( 7,361 10). Journal entry on July 1, 2014, to record the interest payment and amortization of discount is as follows: July 1 Interest Expense 5,736 Bonds Payable 736 Cash 5, LO 11 Apply the straight-line method of amortizing bond discount and bond premium.

74 Amortizing Bond Premium Illustration: Candlestick, Inc., sold 100,000, five-year, 10% bonds on January 1, 2014, for 108,111 (premium of 8,111). Interest is payable on July 1 and January 1. Illustration 10C LO 11 Apply the straight-line method of amortizing bond discount and bond premium.

75 Amortizing Bond Premium Illustration: Candlestick, Inc., sold 100,000, five-year, 10% bonds on January 1, 2014, for 108,111 (premium of 8,111). Interest is payable on July 1 and January 1. The bond premium amortization for each interest period is 811 ( 8,111 10). Journal entry on July 1, 2014, to record the interest payment and amortization of premium is as follows: July 1 Interest Expense 4,189 Bonds Payable 811 Cash 5, LO 11 Apply the straight-line method of amortizing bond discount and bond premium.

76 APPENDIX 10D PAYROLL-RELATED LIABILITIES Every employer incurs liabilities relating to employees salaries and wages. Salaries and Wages Payable amounts owed to employees. Withholding taxes (U.S. federal and state income taxes, and Social Security taxes) amounts owed to the governmental taxing authorities. Determining the payroll involves computing three amounts: (1) gross earnings, (2) payroll deductions, and (3) net pay LO 12 Prepare entries for payroll and payroll taxes under U.S. law.

77 Payroll-Related Liabilities Illustration: Assume a corporation records its payroll for the week of March 7 as follows: Mar. 7 Salaries and wages expense 100,000 FICA tax payable 7,650 Federal income tax payable 21,864 State income tax payable 2,922 Salaries and wages payable 67,564 Record the payment of this payroll on March 11. Mar. 11 Salaries and wages payable 67,564 Cash 67, LO 12

78 Payroll-Related Liabilities Payroll tax expense results from three taxes that governmental agencies levy on employers. These taxes are: FICA tax Federal unemployment tax State unemployment tax LO 12 Prepare entries for payroll and payroll taxes under U.S. law.

79 Payroll-Related Liabilities Illustration: Based on the corporation s $100,000 payroll, the company would record the employer s expense and liability for these payroll taxes as follows. Payroll tax expense 13,850 FICA tax payable 7,650 Federal unemployment tax payable 800 State unemployment tax payable 5, LO 12 Prepare entries for payroll and payroll taxes under U.S. law.

80 Another Perspective Key Points The basic definition of a liability under GAAP and IFRS is very similar. Liabilities may be legally enforceable via a contract or law but need not be; that is, they can arise due to normal business practice or customs. Both GAAP and IFRS classify liabilities as current or non-current on the face of the statement of financial position. IFRS specifically states, however, that industries where a presentation based on liquidity would be considered to provide more useful information (such as financial institutions) can use that format instead

81 Another Perspective Key Points Under IFRS, companies sometimes show liabilities before assets. Also, they will sometimes show non-current liabilities before current liabilities. Neither of these presentations is used under GAAP. Under IFRS, companies sometimes will net current liabilities against current assets to show working capital on the face of the statement of financial position. This practice is not used under GAAP. The basic calculation for bond valuation is the same under GAAP and IFRS. In addition, the accounting for bond liability transactions is essentially the same between GAAP and IFRS

82 Another Perspective Key Points IFRS requires use of the effective-interest method for amortization of bond discounts and premiums. GAAP allows use of the straight-line method where the difference is not material. GAAP often uses a separate discount or premium account to account for bonds payable. IFRS records discounts or premiums as direct increases or decreases to Bonds Payable. The accounting for convertible bonds differs between IFRS and GAAP. GAAP requires that the proceeds from the issuance of convertible debt be shown solely as debt. Unlike GAAP, IFRS splits the proceeds from the convertible bond between an equity component and a debt component. The equity conversion rights are reported in equity

83 Another Perspective Key Points IFRS reserves the use of the term contingent liability to refer only to possible obligations that are not recognized in the financial statements but may be disclosed if certain criteria are met. Under GAAP, contingent liabilities are recorded in the financial statements if they are both probable and can be reasonably estimated. If only one of these criteria is met, then the item is disclosed in the notes. IFRS uses the term provisions to refer to liabilities of uncertain timing or amount. Examples of provisions would be provisions for warranties, employee vacation pay, or anticipated losses. Under GAAP, these are considered recordable contingent liabilities

84 Another Perspective Looking to the Future The FASB and IASB are currently involved in two projects, each of which has implications for the accounting for liabilities. One project is investigating approaches to differentiate between debt and equity instruments. The other project, the elements phase of the conceptual framework project, will evaluate the definitions of the fundamental building blocks of accounting. The results of these projects could change the classification of many debt and equity securities

85 Copyright Copyright 2013 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein