Liabilities 2015

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Lecture notes for Liabilities

Transcript of Liabilities 2015

  • BA 219 Corporate Financial Reporting Valderrama

    10/13/2015

    1

    Liabilities

    Liability

    Present obligation

    As a result of past transactions or events

    Expected to result in an outflow of resources embodying economic benefits

  • BA 219 Corporate Financial Reporting Valderrama

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    Initial Recognition: Criteria

    (1) It is probable that an outflow of resources embodying economic benefits will result from the settlement of a present obligation; and

    (2) The amount at which the settlement will take place can be measured reliably.

    Types of Liabilities

    1. Liabilities of definite timing and amount

    2. Liabilities of uncertain timing and amount (a.k.a. provisions covered by PAS 37)

    3. Contingent liabilities

  • BA 219 Corporate Financial Reporting Valderrama

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    Liabilities of Definite Timing and

    Amount Accounts payable

    Accrued expenses

    Salaries payable

    Unearned revenues

    Loans

    Screen clipping taken: 8/2/2012, 11:54 PM

    Globe 2011 Annual Report

  • BA 219 Corporate Financial Reporting Valderrama

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    Customer Loyalty Programs

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    IFRIC 13 Accounting for Customer Loyalty Programmes

    http://www.pwc.com/en_GX/gx/retail-consumer/pdf/ifric13_final_low.pdf

    Applies to entities that grant awards credits as part of a sales transaction, including awards that can be redeemed for goods and services not supplied by the entity

    Requires that the consideration received from the sale be allocated to the award credit using relative fair values; the portion allocated to the award credit shall be considered deferred revenue

    IFRIC 13 Accounting for Customer Loyalty Programmes

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    Provisions and Contingencies

    A provision is a liability of uncertain timing or amount

    A contingent liability is either

    1. A possible obligation whose existence will be confirmed only by the occurrence or non-occurrence of one or more future events not wholly within the control of the entity; or

    2. A present obligation that is not recognized because at least one of the criteria for recognition is not satisfied

  • BA 219 Corporate Financial Reporting Valderrama

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    Provisions and Contingencies:

    Examples Provision Contingent Liability

    1. Provision for dismantling and restoration costs

    1. Loan guarantee

    2. Provision for future warranty claims

    2. Meralcos liability for real estate taxes on its electric poles, wires, etc. (see excerpt).

    3. Provision for damages arising from a lawsuit that management believes will be decided against the entity

    3. Possible liabilities arising from lawsuits & other 3rd party claims against the company whose outcomes are not determinable on balance sheet date

    4. Provision for employee pension benefits

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    Contingent Liability: Other Examples

    Source: Meralco 2007 Annual Report

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    Philex on Aug 1 decided to suspend operations after indications that water and sediment were being discharged from one of two underground tunnels that drain water from the penstock in the tailing pond

    Rehabilitation expected to cost P220M per month

    So far, core income dropped by 26% to P2.11B in the first half on the back of lower gold output

    Philex took out $30M in business interruption insurance and $50M in environment insurance following the incident

  • BA 219 Corporate Financial Reporting Valderrama

    10/13/2015

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    Classification of Liabilities

    Current liabilities Expected to be settled in the entitys normal operating

    cycle

    Held primarily for trading

    Due to be settled within 12 months after balance sheet date

    Entity does not have an unconditional right, as of balance sheet date, to defer settlement of he liability for at least 12 months after the balance sheet date

    Non-Current Liabilities: Bonds Payable

    Common types of bonds

    Term and serial

    Secured and unsecured

    Registered and bearer (coupon)

    Callable

    Convertible

    Zero-interest or deep-discount

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    Accounting for Bonds

    Issuance At par, discount or premium

    Bond issue costs

    Convertible bonds

    Accounting for interest and principal payments

    Measurement on balance sheet date

    Troubled debt restructuring

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    Review: Price of a Bond

    Q: What is the price of a 3-year, 10% bond with face value of P5M when the prevailing market interest rate is 12%?

    A: (500,000 x 0.893)+(500,000 x 0.797) + (5,500,000 x

    0.712) = P4,759,817 Note: The bond sold at a discount (i.e., less than par

    value) because its coupon rate is less than the market interest rate.

    Amortizing Bond Discount

    Date Interest paid Interest expense amortization

    Amortized cost

    1/1/2008

    4,759,816.87

    12/31/2008

    500,000.00 571,178.02

    71,178.02

    4,830,994.90

    12/31/2009

    500,000.00 579,719.39

    79,719.39

    4,910,714.29

    12/31/2010

    500,000.00 589,285.71

    89,285.71

    5,000,000.00

  • BA 219 Corporate Financial Reporting Valderrama

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    Bond Issued at a Premium

    Q: What is the price of a 5-year, 10% P5M bond paying annual interest every December 31 when the annual market interest rate is 8%?

    A: P5,399,271.00

    Amortizing a Bond Premium

    date interest

    paid interest expense

    Amortiza-tion

    cv

    1/1/2005 5,399,271.00

    12/31/2005

    500,000.00 431,941.68

    (68,058.32)

    5,331,212.68

    12/31/2006

    500,000.00 426,497.01

    (73,502.99)

    5,257,709.70

    12/31/2007

    500,000.00 420,616.78

    (79,383.22)

    5,178,326.47

    12/31/2008

    500,000.00 414,266.12

    (85,733.88)

    5,092,592.59

    12/31/2009

    500,000.00 407,407.41

    (92,592.59)

    5,000,000.00

  • BA 219 Corporate Financial Reporting Valderrama

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    Amortizing Both Principal and Interest:

    Mortgage Loan

    On January 1, 2008, Picard Inc. purchased a new piece of equipment from LaForge Engineering to expand its production facilities. The equipment was purchased at a cost of P800,000. Picard financed the purchase with an P800,000 mortgage to be repaid in annual payments of P211,038** over 5 years at the rate of 10%. The first payment is to be made on December 31, 2008.

    ----

    ** P800,000/3.7908 (PV factor of an ordinary annuity for 5 periods at 10%)

    Picard Inc.: Mortgage Amortization Schedule

    Payment Interest

    Payment

    Principal

    Payment

    Cumulative

    Principal

    Paid

    Cumulative

    Interest

    Paid

    Loan

    Balance

    10%

    800,000

    2008

    211,038

    80,000

    131,038

    131,038

    80,000

    668,962

    2009

    211,038

    66,896

    144,142

    275,180

    146,896

    524,820

    2010

    211,038

    52,482

    158,556

    433,736

    199,378

    366,264

    2011

    211,038

    36,626

    174,412

    608,147

    236,005

    191,853

    2012

    211,038

    19,185

    191,853

    800,000

    255,190

    (0)

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    Measurement on Balance Sheet Date

    Two alternatives: Fair value for liabilities designated as such at the

    time of borrowing

    Amortized cost most commonly used measurement basis for long-term debt; is the present value of the cash payments expected to be made for the liability based on the effective borrowing cost when the liability was incurred

    Troubled Debt Restructuring

    Asset swap Difference between the carrying amount of the liability

    and the consideration paid shall be recognized in profit or loss

    Equity swap Equity issued is measured at fair value or, if not

    reliably measurable, at the fair value of the liability extinguished.

    Gain/loss recognized in profit and loss is allowed for debt-equity swaps in a troubled debt restructuring (IFRIC 19 )

    Modification of debt terms Gain or loss is recognized if there is substantial

    modification of debt terms

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    Asset Swap