IFAII - Liability definition and categories

Transcript

1. INTERMEDIATE FINANCIAL ACCOUNTING II Financial Liabilities and Provisions https://samanthataylor.co/course/IFAII 1
2. TOPIC 1: LIABILITY DEFINITION AND CATEGORIES Financial Liabilities and Provisions https://samanthataylor.co/course/IFAII 2
3. Definition of a Liability • Future sacrifice of assets/services • Present obligation • Results from past transaction/event (“obligating event”) Legal obligation – liability results from contract or law Constructive obligation – liability results from policy or historical practice https://samanthataylor.co/course/IFAII 3
4. Categories of Liabilities • Financial liability – Creates financial liability for one party (such as A/P) and financial asset for another (such as A/R). • Requires cash to settle. • Ex: Loan payable • Nonfinancial liability – Does not meet the definition of a financial liability • Does NOT meet the definition above • Ex: Provisions https://samanthataylor.co/course/IFAII 4
5. Categories of Financial Liabilities • Fair value through profit and loss (FVTPL) – if (a) will be sold in the short term (< 1 year), or (b) designated as FVTPL by management (ex. For hedging purposes). Valued at FV with changes in FV going through the income statement. Expense transaction costs. Exception: in the case of (b), changes in value caused by changes in credit risk flow through OCI • “Other” financial liabilities – Are not FVTPL. Initial valuation at FV, subsequently at amortized cost. Capitalize transaction costs. All liabilities should be discounted where TVM is material https://samanthataylor.co/course/IFAII 5
6. Classifying Liabilities • Current liability –Will be settled within either the next 12 months or the next operating cycle (generally, 12 months is used). • Long-term liability –Will be settled outside of the 12 month period. • Liabilities can be a mix of both current and long-term • The amount of a loan due in the next year is classified as current and the remainder is classified as long-term. https://samanthataylor.co/course/IFAII 6
7. Question Which of the following is not a part of the definition of a liability? a) Comprises a current obligation b) Results from a contractual agreement c) Requires a future payment of assets or services d) Was created by a past event https://samanthataylor.co/course/IFAII 7
8. Solution Which of the following is not a part of the definition of a liability? a) Comprises a current obligation b) Results from a contractual agreement c) Requires a future payment of assets or services d) Was created by a past event Answer: B. Liabilities such as many provisions are non-contractual. The 3 parts of the definition of a liability are (1) past event, (2) current obligation, (3) future payment https://samanthataylor.co/course/IFAII 8
9. Question True or False: When a financial liability is classified as FVTPL, transaction costs must be expensed. https://samanthataylor.co/course/IFAII 9
10. Solution True or False: When a financial liability is classified as FVTPL, transaction costs must be expensed. Answer: True. For FVTPL liabilities, transaction costs are expensed. For other financial liabilities, transaction costs are capitalized. https://samanthataylor.co/course/IFAII 10