Accounting Chapter 13 Yes The Debt Should Included Current Liabilities

CE13.1

Master Glossary

(a) An asset retirement is an obligation associated with the retirement of a tangible long-lived asset.

(b) Current liabilities is used principally to designate obligations whose liquidation is reasonably

expected to require the use of existing resources properly classifiable as current assets, or the

CE13.2

According to FASB ASC 410-20-50 (Asset Retirement and Environmental Obligations):

50-1 An entity shall disclose all of the following information about its asset retirement obligations:

(a) A general description of the asset retirement obligations and the associated long-lived

assets

50-2 If the fair value of an asset retirement obligation cannot be reasonably estimated, that

fact and the reasons therefor shall be disclosed.

CODIFICATION EXERCISES

CE13.3

According to FASB ASC 450-10-55 (Contingencies —Implementation Guidance and Illustrations):

Depreciation

55-2 The fact that estimates are used to allocate the known cost of a depreciable asset over the pe–

Estimates Used in Accruals

55-3 Amounts owed for services received, such as advertising and utilities, are not contingencies

Changes in Tax Law

55-4 The possibility of a change in the tax law in some future year is not an uncertainty.

CE13.4

According to FASB ASC 710-10–25-1 (Compensation Recognition—Compensated Absences), an

employer must accrue a liability for employees’ compensation for future absences if all of the following

conditions are met:

(a) The employer’s obligation relating to employees’ rights to receive compensation for future

absences is attributable to employees’ services already rendered.

CODIFICATION RESEARCH CASE

(a) FASB ASC 606-20–25-1 addresses how revenue and costs from a

separately priced extended warranty or product maintenance contract

should be recognized.

(b) According to FASB ASC 605-20–25 – Some products include warranty

obligations that are incurred in connection with the sale of the product,

(c) According to FASB ASC 606-10–65–1, a loss shall be recognized on

extended warranty or product maintenance contracts if the sum of the

expected costs of providing services under the contracts and any

asset recognized for the incremental cost of obtaining a contract

IFRS CONCEPTS AND APPLICATION

IFRS13.1

A company should exclude a short-term obligation from current liabilities

IFRS13.2

The ability to defer settlement of short-term debt may be demonstrated by

IFRS13.3

A provision is defined as a liability of uncertain timing or amount and is

IFRS13.4

A provision should be recorded and a charge accrued to expense only if:

(a) the company has a present obligation (constructive or legal) as

IFRS13.5

A current liability such as accounts payable is susceptible to precise

measurement because the date of payment, the payee, and the amount of

cash needed to discharge the obligation are reasonably certain. There is

IFRS13.6

Onerous contracts are ones in which the unavoidable costs of meeting the

IFRS13.7

ALEXANDER COMPANY

Partial Statement of Financial Position

December 31, 2020

Current liabilities:

IFRS13.7 (Continued)

Note to Instructor: To classify as long-term, the company must have the

IFRS13.8

1. Mckee should classify $100,000 of the obligation as a current maturity

of long-term debt (current liability) and the $300,000 balance as a

noncurrent liability.

IFRS13.9

1.

Warranty Expense ……………………………………..

5,000,000*

Warranty Payable ………………………………

5,000,000

*Expected warranty costs:

%

Units

Costs per Unit

Total Costs

No defects

Minor defects

Major defects

2.

Income Tax Expense ………………………………….

400,000

Income Taxes Payable ……………………….

IFRS13.10

a. No. IFRS indicate that refinancing a short-term obligation on a long–

term basis also requires that a company have an unconditional right

to defer settlement of the liability for at least 12 months after the

reporting date.

b. No. The events described will not have an impact on the financial

c. Yes. The debt should be included in current liabilities. The issuance

of ordinary shares in January does not meet the criteria to have an

IFRS13.11

a. IAS 37, Provisions, Contingent Liabilities and Contingent Assets.

b. Recognizing a liability from restructuring (IAS 37, 72 – 79).

IFRS13-11 (Continued)

(b) has raised a valid expectation in those affected that it will carry

out the restructuring by starting to implement that plan or

announcing its main features to those affected by it.

Evidence that an entity has started to implement a restructuring plan

would be provided, for example, by dismantling plant or selling assets

For a plan to be sufficient to give rise to a constructive obligation

when communicated to those affected by it, its implementation needs

to be planned to begin as soon as possible and to be completed in a

A management or board decision to restructure taken before the end

of the reporting period does not give rise to a constructive obligation

at the end of the reporting period unless the entity has, before the end

of the reporting period: (a) started to implement the restructuring

plan; or (b) announced the main features of the restructuring plan to

IFRS13-11 (Continued)

Although a constructive obligation is not created solely by a manage–

ment decision, an obligation may result from other earlier events

together with such a decision. For example, negotiations with employee

No obligation arises for the sale of an operation until the entity is

committed to the sale, I.E. there is a binding sale agreement.

Even when an entity has taken a decision to sell an operation and

announced that decision publicly, it cannot be committed to the sale

until a purchaser has been identified and there is a binding sale

agreement. Until there is a binding sale agreement, the entity will be

Costs to include (IAS 37, 80)

A restructuring provision shall include only the direct expenditures

arising from the restructuring, which are those that are both:

(a) necessarily entailed by the restructuring; and (b) not associated

with the ongoing activities of the entity.

IFRS13-11 (Continued)

Identifiable future operating losses up to the date of a restructuring

are not included in a provision, unless they relate to an onerous

contract as defined in paragraph 10.

As required by paragraph 51, gains on the expected disposal of assets

are not taken into account in measuring a restructuring provision,

even if the sale of assets is envisaged as part of the restructuring.

c. The current warranty contract is considered an onerous contract. The

required accounting related to an onerous contract is in IAS 37, 81 – 82.

This Standard defines an onerous contract as a contract in which the

unavoidable costs of meeting the obligations under the contract

exceed the economic benefits expected to be received under it. The

unavoidable costs under a contract reflect the least net cost of exiting

from the contract, which is the lower of the cost of fulfilling it and any

compensation or penalties arising from failure to fulfil it.

IFRS13.12

(a) M&S’s short-term borrowings were £518 million at 30 April, 2017.

£m

Current

Bank loans and overdrafts

70.3

Finance lease liabilities

6.250% US$500m medium-term notes 2017

Interest accrued on medium-term notes

46.4

Revaluation of medium-term notes

The interest rate for medium-term notes is 6.25%.

(b) 1. Working capital = Current assets less current liabilities.

IFRS13.12 (Continued)

3.

Current ratio =

Current assets

Current liabilities

M&S’s acid-test ratio is at 0.40, its current ratio is less than 1. Working

capital may appear. The lower liquidity ratios may not be a problem.

Many large companies carry relatively high levels of accounts

(c) M&S provided the following discussion related to commitments and

contingencies:

25 CONTINGENCIES AND COMMITMENTS

A. Capital commitments

2017

£m

2016

£m

Commitments in respect of properties in the

B. Other material contracts

In the event of a material change in the trading arrangements with certain

warehouse operators, the Group has a commitment to purchase property,

C. Commitments under operating leases

The Group leases various stores, offices, warehouses and equipment

2017

£m

2016

£m

Total future minimum rentals payable under

non-cancellable operating leases are as follows:

Within one year

342.0

311.3

− Later than one year and not later than five years

1,115.9

1,108.4

− Later than five years and not later than ten years

964.1

1,099.4

− Later than ten years and not later than 15 years

421.9

542.8

− Later than 15 years and not later than 20 years

285.3

351.9

− Later than 20 years and not later than 25 years

166.8

225.8

Total

4,365.5

4,609.9

Of the total commitments under operating leases disclosed above, £70m

are already provided for on the balance sheet with regards to expected