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CURRENT LIABILITIES AND NON- CURRENT LIABILITIES

According to IASB Frmework liability is defined as follows:


A liability is a present obligation of the enterprise arising from past events, the
settlement of which is expected to result in an outflow from the enterprise of resources
embodying economic benefits (IASB Framework). The classification of Liabilities
divided into two, Current liabilities and Non- current liabilities. The distinction is made
on the basis of time period within which the liability is expected to be settled by the
entity. Current Liability is one which the entity expects to pay off within one year from
the reporting date. Non-Current Liability is one which the entity expects to settle after
one year from the reporting date. Also, non current liabilities terms according
Businessdictionary.com is Obligation that is not to required to be satisfied within 12
months of the balance sheet date. Also, Current liability The requirement to classify
currently maturing debt as a current liability includes debt that is callable, or due on
demand, by the creditor in the upcoming year even if the debt is not expected to be
called.
Following are examples the common types of liabilities along with their usual
classifications.
Liability Classification
Long Term Bank Loan Non-current
Bank Overdraft current
Short Term Bank Loan current
Trade Payables current
Debenture Non-current
Tax Payble Current
It may be appropriate to break up a single liability into their current and non current
portions. For instance, a bank loan spanning two years and carrying 2 equal
installments payable at the end of each year would be classified half as current and
half as non-current liability at the inception of loan.
In concept, liabilities should be reported at their present values; that is, the valuation
amount is the present value of all future cash payments resulting from the debt,
usually principal and/or interest payments.In this case, the amount would be
determined as the present value of $100,000, discounted for three months at an
appropriate rate of interest for a debt of this type.
This is proper because of the time value of money. In practice, liabilities ordinarily are
reported at their maturity amounts if payable within one year because the relatively
short time period makes the interest or time value component immaterial. Accounting
Principles Board Opinion No 21, "Interest on Receivables and Payables," specifically
exempts from present value valuation all liabilities arising in connection with suppliers
in the normal course of business and due within a year.
When interest is "discounted" from the face amount of a note at the time it is written, it
usually is referred to as a "noninterest-bearing" note. They do, of course entail
interest, but the interest is deducted (or discounted) from the face amount to
determine the cash proceeds made available to the borrower at the outset and
included in the amount paid at maturity. In fact, the effective interest rate is higher than
the stated discount rate because the discount rate is applied to the face value, but the
cash borrowed is less than the face value.
This is an example of an accrued expense an expense incurred during the current
period, but not yet paid. The expense and related liability should be recorded as
follows:
Salaries expense 5,000
Salaries payable 5,000
This achieves a proper matching of this expense with the revenues it helps generate.
3 Key Issues in Current liabilities:
1. Effective interest method
2. Types of non-current liabilities
3. Understanding the financials
Explanation:
2 implications:
1) the net book value (NBV) of the liability = present value of the future cash flows
discounted at the effective (market required rate) rate in effect at the liability
issuance [i.e., any subsequent changes in interest rates are ignored]
2) interest expense =
3) beginning of period
NBV
4) x 5) the effective market rate
4)

Effective Interest Method
effective market rate (r%) can be > = < coupon rate (C%)
par bond: effective rate ______ coupon rate
Discount bond: effective rate ______ coupon rate
Premium bond: effective rate ______ coupon rate

5) cash payment can be > = < interest expense
par bond: cash payment ______ interest expense
Discount bond: cash payment ______ interest expense
Premium bond: cash payment ______ interest expense

EXAMPLE
We will show the accounting for each of the 5 examples, by using an amortization
schedule (amortization table same as JE). In each case, the liability has a 5 year life, a
10% effective market rate, and a $1000 present value at inception. Only the pattern of
(and total) future cash outflows differs.
Key: effective interest method
ANSWER

amount (par) principal liability
coupons cash annual
rate coupon
ZERO COUPOUN BOUND
The inception j.e. is:
DR Cash 1,000
CR Liability 1,000
The periodic j.e.s are:
Period Beg. Liab. Interest Expense - DR Liability -
CR
Cash - CR EndLiab
1 1,000 100 100 0 1,100
2 1,100 110 110 0 1,210
3 1,210 121 121 0 1,331
4 1,331 133 133 0 1,464
5 1,464 146 146 0 1,610
End 1,610 0 1610 DR 1610 0
Total cash outflows = 1610 (note: 1610 = 1000 x 1.10
5
)


DISCOUNT BOND (5% COUPONS=$50)
The inception j.e. is:
DR Cash 1,000
CR Liability 1,000
Period Beg. Liab. Interest
Expense - DR
Liability - CR Cash - CR EndLiab
1 1,000 100 50 50 1,050
2 1,050 105 55 50 1,105
3 1,105 110 60 50 1,165
4 1,165 117 67 50 1,232
5 1,232 123 73 50 1,305
End 1,305 0 1305 1305 0
Total cash outflows = (5 x 50) + 1305 = 1555
PV of coupons = 50 x 3.791(5 yr,10% annuity factor)=190
PV of principal = 810(810x1.10
5
= 1305)

PAR BOND
The inception j.e. is:
DR Cash 1,000
CR Liability 1,000
Period Beg. Liab. Interest Expense
- DR
Liability -
CR
Cash - CR EndLiab
1 1,000 100 0 100 1,000
2 1,000 100 0 100 1,000
3 1,000 100 0 100 1,000
4 1,000 100 0 100 1,000
5 1,000 100 0 100 1,000
End 1,000 100 1000 DR 1000 CR 0
Total cash outflows = (5 x 100) + 1000 = 1500
PV of coupons=100 x 3.791 = 379; PV of principal = 621 (621 x 1.10
5
= 1000)

PREMIUM BOND (15% COUPONS = $150)

The inception j.e. is:
DR Cash 1,000
CR Liability 1,000
Period Beg. Liab. Interest
Expense - DR
Liability - DR Cash - DR EndLiab
1 1,000 100 50 150 950
2 950 95 55 150 895
3 895 90 60 150 835
4 835 84 66 150 769
5 769 77 73 150 696
End 696 0 696 696 0

Total cash outflows = (5 x 150) + 696 = 1446
PV of coupons = 150 x 3.791 = 569; PV of principal = 431 (4311 x 1.10
5
= 696)