Intermediate Financial

Accounting- II
BY
REDWAN KELIL
 CURRENT LIABILITIES
“What is a Liability?”

Liability is defined as present obligation of the company

arising from past events, the settlement of which is expected
to result in an outflow from the company of resources,
embodying economic benefits.

Three essential characteristics:

1. Present obligation.

2. Arises from past events.

3. Results in an outflow of resources

(cash, goods, services).
 CURRENT LIABILITIES
Recall: Current assets are cash or other assets that companies
reasonably expect to convert into cash, sell, or consume in operations
within a single operating cycle or within a year.
Current liabilities are “obligations whose liquidation is reasonably
expected to require use of existing resources properly classified as
current assets, or the creation of other current liabilities.”

A current liability is reported if one of two conditions exists:

1. Liability is expected to be settled within its normal operating cycle; or

2. Liability is expected to be settled within 12 months after the reporting

date.

The operating cycle is the period of time elapsing between the acquisition of
goods and services and the final cash realization resulting from sales and
subsequent collections.
CURRENT LIABILITIES

Typical Current Liabilities:

1. Accounts payable. 6. Customer advances and
deposits.
2. Notes payable.
7. Unearned revenues.
3. Current maturities of long-
term debt. 8. Sales and value-added
taxes payable.
4. Short-term obligations
expected to be refinanced. 9. Income taxes payable.

5. Dividends payable. 10. Employee-related liabilities.

 Q1
1. Which of the following is a current liability?
a. A long-term debt maturing currently, which is
to be paid with cash in a sinking fund
b. A long-term debt maturing currently, which is
to be retired with proceeds from a new debt
issue
c. A long-term debt maturing currently, which
is to be converted into common stock
d. None of these
 Q2
2. Among the short-term obligations of Lance Company
as of December 31, the balance sheet date, are notes
payable totalling $250,000 with the Madison
National Bank. These are 90-day notes, renewable
for another 90-day period. These notes should
be classified on the balance sheet of Lance Company as
a. current liabilities.
b. deferred charges.
c. long-term liabilities.
d. intermediate debt.
 Q3
3. A company has not declared a dividend on its
cumulative preferred stock for the past three
years. What is the required accounting
treatment or disclosure in this situation?
a. Record a liability for cumulative amount
of preferred stock dividends not declared.
b. Disclose the amount of the dividends in arrears.
c. Record a liability for the current
year's dividends only.
d. No disclosure or recognition is required.
 Q4
4. A sky company takes out a $400,000 loan from a bank.
The bank requires eight equal repayments of the loan
principal, paid annually. Assume no interest is paid or
accumulated on the loan until the final repayment.
How much of the loan principal is considered a current
portion of a noncurrent note payable in year 3?
A. $50,000
B. $150,000
C. $100,000
D. $250,000
 Q5
5. A client pays cash in advance for a magazine
subscription to Living Daily. Living Daily has yet to
provide the magazine to the client. What accounts
would Living Daily use to recognize this advance
payment?
A. unearned subscription revenue, cash
B. cash, subscription revenue
C. subscription revenue, unearned subscription revenue
D. unearned subscription revenue, subscription revenue,
cash
PROVISIONS

Provision is a liability of uncertain timing or amount.

Reported either as current or non-current liability.

Common types are

► Obligations related to litigation (lawsuit).
► Warrantees or product guarantees.
Uncertainty about the
► Business restructurings. timing or amount of the
future expenditure
► Environmental damage. required to settle the
obligation.
Recognition of a Provision

Companies accrue an expense and related liability for a

provision only if the following three conditions are met:
1. Company has a present obligation (legal or constructive) as
a result of a past event;

2. Probable that an outflow of resources will be required to

settle the obligation; and

3. A reliable estimate can be made.

Measurement of Provisions

How does a company determine the amount to report for a

provision?

IFRS:
Amount recognized should be the best estimate of the
expenditure required to settle the present obligation.

Best estimate represents the amount that a company would pay

to settle the obligation at the statement of financial position date.
Common Types of Provisions

Common Types:
1. Lawsuits 4. Environmental

2. Warranties 5. Onerous contracts

3. Consideration payable 6. Restructuring

IFRS requires extensive disclosure related to provisions in the notes to

the financial statements. Companies do not record or report in the notes
general risk contingencies inherent in business operations (e.g., the
possibility of war, strike, uninsurable catastrophes, or a business
recession).
 Contingent Liabilities

Illustration 13-16 presents the general guidelines for the accounting and
reporting of contingent liabilities.

ILLUSTRATION 13-16
Contingent Liability
Guidelines
 Contingent Assets

The general rules related to contingent assets are presented in Illustration

13-18.

ILLUSTRATION 13-18
Contingent Asset Guidelines

Contingent assets are disclosed when an inflow of economic benefits

is considered more likely than not to occur (greater than 50 percent).
 Q6
6. Which of the following is the proper
way to report a gain contingency?
a. As an accrued amount.
b. As deferred revenue.
c. As an account receivable with additional
disclosure explaining the nature of the
contingency.
d. As a disclosure only.
 Q7
7. Espinosa Co. has a loss contingency to accrue.
The loss amount can only be reasonably estimated
within a range of outcomes. No single amount
within the range is a better estimate than any other
amount. The amount of loss accrual should be
a. zero.
b. the minimum of the range.
c. the mean of the range.
d. the maximum of the range
 Q8
8. The essential characteristics of a liability
do not include:
A)The existence of a past causal transaction or
event.
B)Present obligation.
C)The existence of a legal obligation.
D)A future sacrifice of economic benefits
 Q9
9. In its 2006 financial statements, an enterprise
should accrue a liability for a loss contingency
involving a possible cash payment if certain
conditions exist. Each of the following is a
condition for accrual except:
A)The payment is probable.
B)The cause of the loss contingency occurred prior
to the end of 2006.
C)The amount of payment can be estimated before
the 2006 financial statements are issued.
D)The obligation is a legally enforceable claim.
 Q10
10. An entity sells appliances that include a three-
year warranty. Service calls under the warranty are
performed by an independent mechanic under a
contract with the entity. Based on experience,
warranty costs are expected to be incurred for each
machine sold. When should the entity recognize
these warranty costs?
a. Evenly over the life of the warranty
b. When the service calls are performed
c. When payments are made to the mechanic
d. When the machines are sold
 Q11
11. An onerous contract is a contract in which
__________ of meeting the obligations under
the contract __________ the economic
benefits expected to be received under it.
A. Sunk costs; exceed
B. Unavoidable costs; exceed
C. Opportunity costs; are less than
D. Avoidable costs; are less than
Non-Current Liabilities
And
Investments
ACCOUNTING FOR FINANCIAL ASSETS

Financial Asset
 Cash.
 Equity investment of another company (e.g., ordinary or
preference shares).
 Contractual right to receive cash from another party
(e.g., loans, receivables, and bonds).

IASB requires that companies classify financial assets into two

measurement categories—amortized cost and fair value—
depending on the circumstances.
ACCOUNTING FOR FINANCIAL ASSETS

Measurement Basis—A Closer Look

IFRS requires that companies measure their financial
assets based on two criteria:
 Company’s business model for managing its financial
assets; and
 Contractual cash flow characteristics of the financial
asset.

Only debt investments such as receivables, loans, and bond investments

that meet the two criteria above are recorded at amortized cost. All other
debt investments are recorded and reported at fair value.
 Classification financial assets
Business
Business
model = Other
model=
hold to business
hold to
collect model
collect
and sell
Cash flows
are solely
payments of Amortised FVOCI*
cost FVTPL
principal and
interest
(SPPI)

Other types of FVOCI FVTPL FVTPL

cash flows
 Q12
12. IFRS 9 uses a mixed model approach to
measurement. Which of the following
measurement methods are acceptable under
IFRS 9?
A. Amortised cost, fair value and depreciated
replacement cost
B. Amortised cost, fair value and net realisable
value
C. Amortised cost and fair value
D. Amortised cost, fair value and replacement cost
 Q13
13. How does IFRS 9 distinguish between the
measurement methods to be used in the standard?
A. By reviewing the business model of each entity
and the risks and rewards of the transaction
B. By reviewing the realisability of the instrument
and risks and rewards of ownership
C. By reviewing the realisability and the contractual
cash flow characteristics of the instrument
D. By reviewing the business model of each entity
and the contractual cash flow characteristics of the
instrument
 Q14
14. Under what circumstances can the profit or loss on
an equity instrument carried at fair value be dealt
with in Other Comprehensive Income?
A. When the equity investment is not held for trading
B. When the profit or loss is capable of recycling
C. When the equity investment is available for sale
D. When the equity investment is held for trading
 Q15
15. Under what circumstances under IFRS 9 can
an entity classify financial assets that meet the
amortised cost criteria as at FVTPL?
A. Where the business model approach is
adopted
B. Where the instrument is held to maturity
C. If doing so eliminates or reduces an
accounting mismatch
D. Where the financial asset passes the
contractual cash flow characteristics test
 Q16
16. Which of the following are not classified as
financial instruments ?
A. Share options
B. Intangible assets
C. Trade receivables
D. Redeemable preference shares
 Q17
17. Entity can classify equity security as
__________________________.
A. Fair value through Other Comprehensive
income only.
B. Fair value through other comprehensive
income and fair value through profit and loss.
C. Fair value through profit and loss only,
D. Amortized Cost