Substantive Test of Liabilities

Module 5

Instructor: Mr. Almario G. Parco, Jr., CPA, MBA

LEARNING OBJECTIVES:
• After studying this chapter, you should be able to:

1. Identify the audit objectives for liabilities and related accounts.

2. Explain the primary substantive audit procedures for liabilities and related accounts.

3. Identify assertions addressed by audit procedures for liabilities and related accounts.
Audit Objectives
• When auditing liabilities, the principal objective for the substantive tests is to determine
the following:
Assertion Category Account Balances Audit Objectives
Existence All recorded liabilities on the statement of financial
position are authentic debts due to
creditors of the entity.
Completeness All liabilities owed by the entity at the reporting date are
included on the statement of financial position.
Valuation and Allocation Liabilities are included on the statement of financial
position at the appropriate amounts.
Rights and Obligations Liabilities reported in the statement of financial position
represent obligations of the entity at the reporting date.
Presentation and Disclosure Liabilities and related accounts are properly classified,
described, and disclosed in the financial statements,
including notes, in accordance with the applicable
PFRSs.
Audit Procedures for Liabilities
The auditor's primary substantive procedures for liabilities typically include the following:

1. Reconciling general ledger and subsidiary ledger;

2. Performing purchase and accounts payable cut-off;

3. Confirming liabilities to debtors;

4. Inspecting supporting documents such as contracts, invoices,

receiving reports, etc.;

5. Search for unrecorded liabilities

6. Testing the accuracy of interest expense, interest payable, amortization of discount and premium;

7. Evaluating valuation of liabilities denominated in foreign currencies;

8. Reviewing compliance with terms of debt agreements;

9. Performing analytical review procedures to liabilities and related accounts; and

10. Evaluating proper financial statement presentation and adequacy of disclosure.

Reconciliation of Subsidiary Ledger with
General Ledger
First step in the audit of accounts payable is to obtain a copy of the entity's reconciliation
of subsidiary ledger and general ledger. After obtaining the entity's reconciliation
schedule, the auditor should test the clerical accuracy (e.g., footing, cross-footing) of the
schedule. The auditor then should review the reconciliation prepared by the entity
between the sub-ledger and the control account (i.e., general ledger), and investigate.
reconciling items, particularly any unusual non-standard journal entries.

One purpose of this procedure is to determine whether the liability figure appearing in the
statement of financial position agrees with the individual items comprising the detailed
records. Another purpose is to provide a starting point for other substantive procedures.
Purchase and Accounts Payable Cutoff
• The primary purpose of cutoff tests for goods and services received as well as for
supplier credit memos is to verify that transactions are completely recorded in the
correct accounting period. In performing cutoff test, accounts payable and purchase
cutoff is normally conducted jointly in verifying the purchases (inventory) and payables
recorded. The auditor tests the accounts payable cutoff by performing the following
procedures:

1. Obtain and examine invoices from suppliers and other entities and other
documentation supporting transactions recorded in the purchase journal and cash
disbursements journal immediately before and after the reporting date. Determine
whether the transactions were recorded in the proper period; and

2. Review cutoffs in related areas such as purchases and inventories, paying particular
attention to goods in transit.
Confirmation of Liabilities to Debtors
Confirmation of liabilities to debtors is considered to be less necessary as compared to confirmation of receivables to customers because the
auditors will normally find in the client's possession externally created evidence such as-vendor's invoices and statements that substantiate the
liabilities.

Accounts payable

In some cases, however, it may be appropriate to request vendors to confirm the balances owed to them when the following condition exists:

1. Control over the recording of vendors’ invoices and receiving reports and ineffective;

2. There are few transactions involving large amounts; or

3. There are numerous old balances.

Notes payable

As compared to accounts payable, notes payable is supported by promissory notes and may be given for a variety of reasons, for example:

1. Purchase of merchandise in the ordinary course of business;

2. In settlement of a long outstanding amount;

3. In return for loans from affiliates, shareholders, banks or other financial institution; or

4. To raise money in the short term money markets ("commercial paper").

In verifying notes payable and related obligation, the auditor may either confirm the notes payable or review supporting documentation as to
amounts owed, terms, collateral and restrictions and the debtor's compliance with the loan provisions and identify liens, security interests, and'
assets pledged as loan collateral.

Upon receipt of confirmation replies, the auditor should agree the information confirmed by the creditor to the accounting records, and follow
up and resolve any differences noted.
Inspection of Supporting Documentations
Accounts Payable

The auditors should vouch entries in the voucher register or in the purchase journal to supporting vouchers,
invoices, receiving reports and purchase orders. The purpose of this procedure is to ensure that recorded
amounts exist and to check the accuracy of the amounts recorded.

Lease liability

The auditors should examine the lease contract during the current year to determine whether leases are
appropriately classified as finance or operating leases. In addition, the auditor should determine whether finance
(capital) lease obligations are appropriately recorded and required disclosures are made.

Notes Payable and Other Obligations (Short-term and Long-term)

The auditors should inspect client's copies of loan agreements (e.g., promissory note) or other short-term
lending arrangements (e.g., factoring) to obtain an of the pertinent provisions, including the amount of loans
authorized, interest rates, due dates, assets pledged, and restrictions imposed, and to extract information relevant
to the disclosures of notes payable and other obligations in the financial statements. The auditor should also
contact the lender and/or legal counsel for the entity, as appropriate, with respect to interpretation of loan
agreement terms, restrictions, and any other information that may be sought regarding special provisions of
notes or loan agreements.
Search for Unrecorded Liabilities
As discussed, the major concern in the audit of liabilities is to ensure that all liabilities are included in
the financial statement. It is important to note that search for unrecorded liabilities may only be
conducted after the reporting date and the auditor ordinarily performs the following procedures:

1. Examine files of unpaid or unrecorded invoices, unmatched purchase orders, and unmatched
receiving reports and trace it to the related journal ( e.g., purchase journal) to determine it was
properly recorded;

2. Examine significant recorded purchases between the reporting date and the date of search for
unrecorded liabilities to determine if this purchase should be properly included in the current year
financial statement;

3. Obtain and review minutes of meetings and inspect contracts, to identify unrecorded liabilities such
as liabilities on pending litigations;

4. Review cash disbursements subsequent to the reporting date and check whether this may represent a
liability that should be reported on the current year; and

5. Request the client to make an appropriate adjusting entry for any unrecorded liability identified by
the auditor.
Test the Computation of Interest Expense, Interest
Payable, and Amortization of Discount and Premium
To test the accuracy of interest expense, interest payable and amortization of discount and
premium, the auditor ordinarily should obtain the interest rate (nominal or effective rate)
and compute the amount reported as interest expense and payable based on the number of
months the obligation is outstanding during the current year.

For long-term debts (e.g., bonds) initially issued at a discount or premium, the auditor
recomputes the amount by preparing an amortization table and comparing it with the
amounts recorded.

For recurring engagement, the auditor may use the amortization table from the prior
working paper.
Liabilities Denominated in Foreign
Currencies
Some of the liabilities of an entity may be denominated in foreign currency as a result of
purchase or loan transaction from a foreign country. As required by PAS 21 The Effects of
Changes in Foreign Exchange Rates, these payables (i.e., monetary liabilities) should be
translated using the closing rate at the reporting date. The auditor ordinarily obtains the
closing rate and re­performs the translation of the foreign currency denominated payable.
The auditor should also ensure that any foreign currency transaction gain or loss should
be reported as part of profit or loss.
Review Compliance with the Terms of
Debt Agreements
The auditor should review the entity's compliance with terms, restrictive covenants or
other provisions of debt agreements to determine whether a default or violation of any
debt covenant has occurred. If there has been a default or violation of any debt covenants,
the auditor should ensure that this is properly disclosed in the notes and the item should
be appropriately presented as current liability in the statement of financial position.
Evaluating proper financial statement
presentation and adequacy of disclosure
The auditor should review proper financial statement presentation of liabilities (e.g., current vs. non-current,
trade vs. non-nontrade). The auditor should ensure that any debit balance of accounts payable or other
liabilities (either due overpayment to suppliers, errors or irregularities) should be appropriately presented as
non-trade receivable through a reclassification entry in the audit working papers.

The auditor should satisfy himself/herself that the liabilities have been disclosed properly in the financial
statements. In some cases loans are guaranteed by third parties in whose, favor the assets of the entity are
charged. The auditor should examine whether the disclosures concerning such loans are appropriate, e.g.,
they .may be classified as secured with disclosure of the fact that the assets of the entity have been charged
in favor of third parties which, in turn, have given guarantees to parties from whom loans have been obtained

For contingent liability, the auditor should examine that the following have been disclosed:

1. Brief description of the nature of each contingent liability;

2. Estimate of the financial effect or a statement that such estimate cannot be made;

3. Uncertainties which may affect the future outcome; and

4. Possibility of any reimbursement.

Additional Audit Considerations
Accruals. Accruals occur where the expenditure. has been incurred in the current period
but not yet paid. normally, supporting documents (e.g., invoice) are not available at the
time of recording of the accrual in the books. Since the supporting documents are not yet
available the following audit procedures should be observed by the auditor:

1. Considering the client’s own system (if any) for capturing accruals;

2. Obtaining a schedule of accruals; ensuring that it is cast correctly, and comparing it

with prior year accruals and performing other analytical procedures;

3. Test checking a sample of accruals for correct calculation: referring to supporting

invoices in the next period; and

4. Agree accruals to payments after year end.

Litigation and claims.
Litigations and claims may have a major impact in the financial statements of a company;
thus, it should be properly accounted for and disclosed. PSA 501 (Redrafted) requires that
auditors should carry out procedures to become aware of material litigation or claims
involving the entity. Audit procedures directed to litigations and claims include:

1. Inquiry of management and others within the entity, including, where applicable, in-
house legal counsel;

2. Review of minutes of meetings of those charged with governance and correspondence

with the entity's external legal counsel;

3. Examine legal expense accounts and examining related source documents such as
invoices for legal expenses; and

4. Use any information obtained regarding the entity's business including information
obtained from discussions with any in-house legal department.
Contingencies. Contingencies may be assets in the case of gains, or liabilities in the case
of losses. PAS 37 requires that contingent liabilities be disclosed while contingent asset
need not be disclosed if the possibility of gain is possible. When auditing contingencies,
the auditor must review the client's records and financial statements for proper disclosure
of contingencies. The auditor is more concerned with the contingent liability (loss)
because management may not wish to disclose them. For contingent assets (gain), the
auditor should also check for premature recording of the gain. An .example of a
contingent gain that might be recorded prematurely would be recording the proceeds from
a lawsuit the client has anticipated winning before the lawsuit is resolved.

Early Retirement or Restructuring of Debt. The auditor should review an early

retirement of debt or a restructuring of debt to determine whether a gain or loss on the
transaction should be recognized, and if so, that it has been appropriately calculated,
accounted for, and disclosed in accordance with the applicable PFRSs.

Subsequent Events. The auditor should review refinancing agreements and liability
transactions subsequent to the reporting date to determine their effects on statement of
financial position classification or on disclosure.
Introduction to Liabilities
Financial Liabilities and Debt Restructuring
Module 5

Instructor: Mr. Almario G. Parco, Jr., CPA, MBA

Liabilities Defined
Present obligations of an enterprise arising from past transactions or events the settlement
of which is expected to result in an outflow from the enterprise of resources embodying
economic benefits.
Recognition of Liabilities
A liability is recorded and reported in the statement of financial position when the
following conditions are met:

• It is probable that an outflow of resources embodying economic benefits will result

from the settlement of a present obligation.

• The amount at which the settlement will take can be measured reliably.
Current Liabilities
• Obligations whose liquidation is reasonably expected to require the use of existing
resources properly classified as current assets or the creation of other current liabilities.
• It is expected to be settled in the normal course of the enterprise's operating cycle.
• It is due to be settled within twelve months from the end of the reporting period.
Examples of current liabilities
• Trade accounts and notes payable
• Short-term non-trade notes
• Accrued expenses
• Income tax payable
• VAT payable,
• payroll taxes and contributions (Employees income taxes withheld, SSS premiums payable, Pag-ibig contributions payable,
Medicare premiums payable)
• Provisions
• Dividends payable
• Credit balances in customers' accounts
• Deposits and advances from customers
• Current portion of long-term debts
• Unearned revenues
• Liability arising from loyalty rewards programmes
Provisions
• Liabilities of uncertain timing or amount
• Recognized in the statement of financial position when, and only when
 an enterprise has a present obligation (legal or constructive) as a result of past events;
 it is probable (i.e. more likely than not) that an outflow of resources embodying economic benefits will be required to
settle the obligations; and
 a reliable estimate can be made of the amount of the obligation .

• The amount recognized as a provision should be the best estimate of the expenditure required to settle the
present obligation at . the end of the reporting period.
• Where the provision being measured involves a large population of items, the obligation is estimated by
weighting all possible outcomes by their associated probabilities (statistical method called expected value
method). Where there is a continuous range of possible outcomes and each point in that range is as likely as
any other, the midpoint of the range is used.
• Where the effect of .the time value of money is material, the amount of provision should be the present value
of the expenditure expected to be required to settle the obligation.
• Provisions can be paralleled with estimated liabilities such as liabilities for product and service warranties
and liabilities arising from customer premium offers.
Contingent Liability
• A possible obligation that arises from past events and whose existence will be
confirmed only by the occurrence or non-occurrence of one or more uncertain future
events and wholly within the control of the enterprise.
• A present obligation that arises from past events but is not recognized because
 it is not probable that an outflow of resources embodying economic benefits will be required to
settle the obligation; or
 the amount of the obligation cannot be measured with sufficient reliability.

• An entity should not recognize a contingent liability. An entity should disclose a

contingent liability unless the possibility of an outflow of resources embodying
economic benefits is remote.
Summary Analysis of Provisions and
Contingent Liabilities
Contingent Asset
• A possible asset that arises from past events and whose existence will be confirmed
only by the occurrence or non-occurrence of one or more uncertain events not wholly
within the control of the enterprise.
• An enterprise should not recognize a contingent asset. A contingent asset should be
disclosed where an inflow of economic benefits is probable.
Summary Analysis of Contingent Assets
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Short-term Obligations Expected to be
Refinanced
• Long-term obligations maturing within twelve months from the end of the reporting
period are generally classified as current liabilities. However, these liabilities may be
expected to be refinanced or rolled over at the discretion of the enterprise.
• These obligations are excluded from current liabilities if
 the enterprise has the right to defer settlement of the obligation for a period of more than twelve
months from the end of the reporting period; or
 the agreement to refinance is completed on or before the end of the reporting period; or
 the enterprise expects and has the discretion to refinance or roll over an obligation for more than
twelve months after the end of the reporting period under an existing loan facility; or
 the lender agreed by the end of the reporting period to provide a grace period ending at least
twelve months after the end of the reporting period, within which the enterprise can rectify the
breach and during which the lender cannot demand immediate payment.
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Premiums liability
Premiums are articles offered free or at a reduced price to make a combined offer more
attractive to the customers. In some cases, cash payments are also given to customers as a
result of past sales promotional activities.
Rebates Liability
Warranty Liability
Warranty is a legally binding assurance that a product is, among
other things

1. Fit for use as represented

2. Free from defective material and workmanship

3. Meets statutory and/or other specifications.

A warranty describes the conditions under, and period during,

which the producer or vendor will repair, replace, or other
compensate for, the defective item without cost to the buyer or
user. Often it also delineates the rights and obligations of both
parties in case of a claim or dispute.

Warranty is recorded at the time of sale based on best estimate.

Estimate is reviewed at a certain date and difference between
estimate and actual cost is accounted as change in accounting
estimate to be treated as currently and prospectively.
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Non-current Liabilities Defined
• Liabilities that fail to meet any one of the criteria for classification of current liabilities.
• Represent future sacrifices of economic benefits expected to be settled beyond the
operating cycle of an enterprise or beyond twelve months after the end of reporting
period.
• Include those not held for trading purpose and those in which the entity, as of the end of
the reporting period, has discretion to refinance or roll over for a period of more than
twelve months from the end of the reporting period.
• Include bonds payable, notes payable, finance lease obligation, pension payable,
deferred compensation plan obligations, deferred tax liability and long-term unearned
revenue.
Financial Liabilities
any liability that is:
• a contractual obligation:
 to deliver cash or another financial asset to another entity; or
  to exchange financial assets or financial liabilities with another entity under conditions that are
potentially unfavorable to the entity; or

• a contract that will or may be settled in the entity's own equity instruments and is
 a non-derivative for which the entity is or may be obliged to deliver a variable number of the
entity's own equity instruments or
  a derivative that will or may be settled other than by the exchange of a fixed amount of cash or
another financial asset for a fixed number of the entity's own equity instruments. For this purpose
the entity's own equity instruments do not include: instruments that are themselves contracts for
the future receipt or delivery of the entity's own equity instruments; puttable instruments
classified as equity or certain liabilities arising on liquidation classified by PAS 32 as equity
instruments.
Other liabilities that did not meet the above requirements are non-financial liabilities.
MAJOR CLASSIFICATION OF
FINANCIAL LIABILITIES
1.) Financial liabilities at fair value through profit or loss (FL@FVTPL)
 a. Held for trading
 b. Designated at fair value through profit or loss

2.) Financial liabilities at amortized cost (FL@AC)

FINANCIAL LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS

An entity may, at initial recognition, irrevocably designate a financial liability as measured at fair
value through profit or loss when doing so

a.) Eliminates or significantly reduces a measurement or recognition inconsistency (sometimes

referred to as 'an accounting mismatch') that would otherwise arise from measuring assets or
liabilities or recognizing the gains and losses on them on different bases, or

b.) A group of financial liabilities or financial assets and financial liabilities is managed and its
performance ls evaluated on a fair value basis, in accordance with a documented risk management
or investment strategy, and information about the group is provided. internally on that basis to the
entity's key management personnel.
Measurement of FL@FVTPL
A. Initial Measurement-FL@FVTPL

Financial liabilities at fair value through profit or loss shall be initially measured at fair value.

Transaction Costs Incurred on FL@FVTPL

Such costs may include printing costs of certificates; legal, accounting and other professional fees; registration fees;· and commissions
to underwriters or arrangers. Transaction cost or bond issuance cost directly attributed to the issuance of financial -liabilities at fair
value through profit or loss is treated as an outright expense during the period incurred.

B. Subsequent Measurement

Subsequent to initial measurement, financial liabilities at fair value through profit or loss is measured at fair value.

Accounting for Changes in Fair Value

a. Changes in fair value of liabilities held for trading at fair value through profit or loss

b. Changes in fair value on liabilities designated as at fair value through profit or loss
a. Change in fair value not attributable to change in the credit risk­present the unrealized gain or loss in the profit or loss.
b. Change in fair value attributable to change in the credit risk
1. If it would create or enlarge an accounting mismatch in profit or loss, present all unrealized gains or losses on that liability (including the effects of changes in the
credit risk of that liability) in profit or loss.
2. if it would not create or enlarge an accounting mismatch in profit or loss, present the unrealized gain or Joss attributable to changes in the credit risk of that liability in
the other comprehensive income (OCI)
3. Remaining amount of change in the fair value, present the unrealized gain or loss in the profit or loss.
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Derecognition Of Financial Liability -
FL@FVTPL
A financial liability should be removed from the statement of financial position when, and
only when, it is extinguished, that is, when the obligation specified in the contract is
either discharged, cancelled, or expired.

Derecognition gain or loss on held for financial liabilities at fair value through profit or
loss is computed as the difference between the consideration paid and the carrying
amount (fair value at the previous reporting date).

But for financial liabilities designated as at fair value through profit or loss, the amounts
presented in other comprehensive income shall not be subsequently transferred to profit
or loss. However, the entity may transfer the cumulative gain or loss within equity.
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FINANCIAL LIABILITIES AT
AMORTIZED COST (FL@AC)
• Examples of a financial liability measured at amortized cost include the following:

a. Bonds Payable

b. Notes Payable

c. Loans Payable

Measurement - Bonds Payable

Bonds payable classified as FL@AC shall be initially measured at fair value minus transaction cost. Normally, it is equal to the net proceeds
from the issuance of the bonds(in the case of issuance at interest date).

Fair value is determined thru (in order of priority)

d. Quotation from an active market.

e. Present value of all principal and interest payments.

Transaction Costs Incurred on Financial Liabilities at Amortized Cost

Transaction cost or bond issuance cost directly attributed to the issuance of bonds payable is treated as an adjustment to premium (deducted
from) or discount (added to) on bonds payable and not treated as an outright expense.

Subsequent measurement

Bonds payable are subsequently measured at amortized cost using the effective interest method.
Derecognition – Bonds Payable
• A financial liability should be removed from the statement of financial position when,
and only when, it is extinguished, that is, when the obligation specified in the contract
is either discharged, cancelled, or expired.
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COMPOUND FINANCIAL
INSTRUMENTS
Compound financial instruments are financial instruments that have both a liability and an equity component from
the issuer's perspective. Examples include the following:

a. Convertible bonds

b. Debt instruments issued with detachable share purchase warrants

Accounting Treatment Split accounting

According to PAS 32, the component parts of compound financial instruments must be accounted for and presented
separately according to their substance based on the definitions of liability and equity.

Approach on how to split

According to par. 31 of PAS 32, "when the initial carrying amount of a compound financial instrument is required to
be allocated to its equity and liability components, the equity component is assigned the residual amount after
deducting from the fair value of the instrument as a whole, the amount separately determined for the liability
component" This is otherwise known as "with-and-without method" and "residual approach".

When to split?

The split is made at issuance and not revised for subsequent changes in market interest rates, share prices, or other
event that changes the likelihood that the conversion option will be exercised.
Bonds with Warrants
When bonds are issued with share
warrants, the bondholders are given
the right to acquire a specified number
of ordinary shares of the issuing
corporation at a given price within a
certain time period.

The issue price is allocated first to the

bonds based on its market value and
any remainder is related to the equity.
In most cases, the market price is the
sum of the market value of the bonds
without the share warrants and the
market value of the equity.
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Convertible Bonds
Convertible bonds give the holders thereof the right to convert their holdings into ordinary shares or other
securities of the issuing company within a specified period of time.

The proceeds from the issuance of convertible bonds is comprised of two components: a financial liability (bond)
and an equity instrument (bond conversion privilege.

The value assigned to the conversion privilege is determined using the intrinsic value method, computing first the
fair value of a similar liability without an attached equity component. The excess of the issue price over the fair
value of the financial liability represents the carrying amount of the equity instrument.

Upon conversion of bonds payable into ordinary shares, the carrying value of the debt converted .(including the
carrying amount of equity cancelled due to the conversion) is the value assigned to the ordinary shares issued in
exchange. Hence, no gain or loss is recognized upon conversion. Paid-in capital arising from bond conversion
privilege relating to the bonds converted is cancelled from the accounts.

Any accrued interest at time of conversion of bonds is paid in cash and recorded as interest expense.

When convertible bonds are retired prior to maturity, the retirement price is allocated to the debt or liability
retired and the equity portion for bond conversion privilege. After allocation of the consideration, the gain or loss
relating to the liability component is recognized in profit or loss. Any excess of the equity cancelled as a result of
the retirement over the consideration allocated to the equity component is taken to Equity.
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Debt Restructuring
In periods of downward economic conditions, the
creditor· may grant concession to the debtor that it
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This may take the form of (1) debt forgiveness (2) an

asset swap; (3) an equity swap; or (4) a modification of
debt terms.

In an asset swap, non-cash assets are used to settle the

obligation. A gain on restructuring is recognized by the
debtor equal to the excess of the carrying amount of
the debt over the fair value of the asset transferred.
Meanwhile, a gain or loss on disposal of the asset is
recognized equal to the difference between the asset's
fair value and carrying amount.
In an equity swap, the debtor issues its own shares to settle its obligation. Based on IFRIC
19 Extinguishing Financial Liabilities with Equity Instruments, equity instruments issued
in settlement of the debt obligation in a troubled debt restructuring shall be measured at
their fair market value. In cases where the fair value of the equity instruments cannot be
reliably measured, the fair value of the financial liability settled shall be used. Any
difference between the carrying amount of the liability extinguished and the fair value of
either the equity instruments or financial liability is taken to profit or loss.

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Modification of Terms
Modification of debt terms may In a modification of debt terms, the gain on restructuring
come in various forms or is recognized for the difference' between the carrying
combination of forms, such as: amount of the debt and the total discounted amount of
the payment under the new terms.
a. Reduction of interest rate
Modification of ·debt terms that are not substantially
b. Reduction or condonation of different. If the difference between the carrying amount
accrued interest of the original obligation at the date of restructuring and
the discounted value of the cash flow under the new
c. Reduction of principal amount
terms is · 1ess than 10%, the exchange is not accounted
d. Extension of maturity date for as an extinguishment.

e. Moratorium on the payment of The restructured obligation is recorded at the carrying

interest and/or principal amount of the original obligation and a new effective rate
is to be computed.
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• End of slides