CH 13 - LIABILITIES: IFRS Def: entity has a present loss can’t be estimated; higher exposure; not possible Issuance: DR Cash
Issuance: DR Cash (PV); CR Bonds Pay
obligation (duty or responsibility to act or perform in a
certain way – may be legally enforceable
Constructive Obligation: may arise from normal
business (& a desire to maintain good business
relations or act in an equitable manner
ASPE Def: (1) Embody a duty or responsibility to
others that entails settlement by future yielding of
economic benefits (2) the duty or responsibility
obligates the entity making it unavoidable (3)
transaction or event obligating the entity has already
occurred
Financial Liability: a) a contractual obligation to
deliver cash/financial asset to another entity or to
exchange financial assets/liabilities with another
entity that are potentially unfavourable to the entity
Current Liabilties: expected to settle in the normal
operating cycle, holds the liability to trade it, liability
will be settled within 12 months of the reporting
period, does not have an unconditional right to defer
settlement of the liability for at least 12 months after
the reporting period
EXAMPLE: Zero Interest Bearing Note – Princ: 100K
Issuance: DR Cash (PV); CR Notes Pay (PV)
Interest: PV*Int%*Time - DR Int Exp; CR Notes Pay
Repayment: DR Notes Pay (principal); CR Cash
Decommissioning & Restoration: must be recognized
in the period when the obligation is incurred, known
as an asset retirement obligation or site restoration
obligation, include activities like: decommissioning
nuclear facilities, restoring oil and gas properties,
closure of mining facilities, closure & remediation of
landfills. THIS DOES NOT INCLUDE OIL SPILLS OR ACCIDENTAL RUNOFF!
IFRS ASPE
Category of Recognizes costs: Recognizes:
Obligations legal & constructive Only legal
Category of Costs included as Costs included as revenue, deep-discount, callable, convertible
Activities capital assets are capital assets are market rate > stated rate = discount; opposite = premium
only related to the ARO-related costs Straight Line Method - Discount: ASPE
acquisition of asset, from acquisition & Issuance: DR Cash (800K*0.97); CR Bonds Pay
no subsequent producing
production inventory
The estimated ARO costs associated with acquisition Issuance: DR Cash (800K*1.03); CR Bonds Pay
are added to carrying amount of related asset & a
liability is recognized for the same amount
ARO JE: DR Asset; CR Asset Retirement Obligation (PV) Issuance + Int: DR Cash 800*1.02+(800*0.1*2/12)
Dep JE: DR Dep Exp; CR Acc Dep – Asset
Interest: IFRS – DR Int Ex, CR ARO ASPE – DR
Accretion Exp, CR ARO
Increases in ARO: IFRS – DR Inv, CR ARO ASPE – DR
Asset, CR ARO
Warranty Obligations: Assurance-Type Warranty
(Expense Approach): Outstanding liability measured
at estimated cost of economic resources needed to
meet obligation – matched with revenues (ASPE)
JE’s Sale: DR A/R; CR Sales Rev
Warranty: DR Warr Exp; CR Materials, Cash, Pay
Accrued outstanding warr: DR Warr Exp; CR Warr Lia
Service-Type Warranty: When sold as an additional
service beyond assurance-type, liability measured at
value of obligation – proceeds yet to be delievered
are unearned at POS – are there separately
identifiable contracts?
JEs Sale: DR Cash ($); CR Sales Rev ($-Ins); CR
Unearned Rev (Value of Ins)
Rev: DR U/R (Time*Value); CR Warranty Rev
Expense Incurred: DR Warr Exp; CR Materials Cash
Payable
Contingency Obligations: an existing
condition/situation involving uncertainty as to
possible gain or loss to an enterprise that will
ultimately be resolved when one or more future
events occur/fail to occur
ASPE: (1)Future event is likely (high) (2) Loss amount
can be reasonably estimated; Take the biggest % out
of the range or take the bottom if equal
Disclosure: Nature of contingency, estimated amount,
extent of losses in excess to recognized amt; required
to disclose when future events will confirm loss but
to determine likelihood of event Int Payment: DR Int Exp (3256); DR Bonds Pay (744);
IFRS: only used to obligations not recognized; lower CR Cash (4000)
threshold – is the event probable (>50%)? Use Accrual (Multiply BP, IE, IP all by time 2/6 in this case):
expected value approach in the estimation DR Bonds Pay (248); DR Int Exp (1085); CR Int Pay
Disclosure: Nature, estimate of financial effect, info (1333)
about uncertainties, reimbursements are possible Marketable Securities: Debt exchanged for non-cash
Premiums/Rebates: Legit marketing expenses (ASPE) assets: -fair value of consideration given
or separate contracts with customer (IFRS) Int Exp = FV of consideration * int rate
JE for both: DR Inventory of Premiums; CR Cash DR Int Exp; CR Notes Pay
ASPE – Prem: $2.30 IFRS Non-Marketable Securities: Cash =/= FV, measure FV
Sale: DR Cash ($), CR Rev ($) DR Cash ($); CR Rev of loan by discounting cash flows using market rate;
($*0.95); CR U/R (0.05*$) differences are booked to net income unless
Redemption: DR Cash ($); DR Prem Exp asset/liability – EX: 100K, 5 year, 10%, Building
DR Cash ($); DR Premium Exp (Plug); CR Inventory of Prem DR Cash 100K; CR Notes Pay (PV Loan $62K); CR
(Plug); CR Inventory of (Prem*#) Buildings ($37K)
Premiums (Prem*#) DR U/R (U/R*1/3); CR Rev Fair Value Option: Long-term debt is generally
Adjustment @ end of year N/A measured at amortized cost however it can also be
DR Prem Exp (Total estimated measured at fair value. IFRS requires the fair value
redemptions – Redeemed) * option only it is more relevant information; IFRS
Cost of estimated claims; CR requires that non-performance risk be included in the
Estimated Prem Lia fair value measurement; ASPE allows the fair value
CH 14 – LONG TERM DEBT: option for all financial instruments
Defeasance: set aside the sufficient funds in a trust or
other arrangement and allow the trust to repay the
original debt (principal and interest) as it becomes
due according to the original agreement
Bonds Issued at Par: 10y, $800K, Int: 10% Extinguishment: Recorded when: (1) debtor
Issuance: DR Cash 800K; CR Bonds Pay 800K discharges liability by paying creditor (2) debtor is
Interest: DR Int Exp; CR Cash (800K*0.1*6/12) legally released from primary responsibility for the
Accrued Int: DR Int Exp; CR Int Pay (800K*0.1*6/12) liability by law or by the creditor; If the instrument is
Bonds @ Discount: 10y, 100K, Int: 10%, 97% par held to maturity, no gain or loss is calculated
Repayment before Maturity: 800K, 0.97, 20y, 8ylater,
Calculate: PV of principal (PV of $1 – 0.#), PV of int
payments (PV of annuity - #.#); add together = PV called 101, straight line
(selling price of bonds) Reacquisition price = 808K – (Principal 800K –
*Notes do not normally trade on public Unamortized Discount ($24KA*12/20) 785,600 = Loss
markets, types of bonds: bearer, secured, serial, income & on redemption: $22,400 A = 800K*(1-0.97)
DR Bonds Pay (785K); DR Loss on Redemption of
Bonds (22K); CR Cash (808K)
Exchange of Debt Instruments: If the new debt is
Int: DR Int Exp [800K-800K*0.97]/10; CR Bonds Pay substantially the same as the old debt, the economic
Straight Line Method - Premium: substance is that it is a continuation of the old debt,
even though, legally, the old debt may have been
Int: DR Bonds Pay (800*1.03-800)/10; CR Int Exp settled
Accounting for Time: Troubled Debt Restructuring: Settlement: all old debt
& related costs are removed; usually results in a gain;
CR Bonds Pay (800*1.02); CR Int Exp (800*0.1*2/12) to settle, (1)transfer non-cash assets (2)issue shares
Effective Interest Method - Discount: required under (3)issue new debt to another creditor & use cash to
IFRS, allowed under ASPE repay existing debt
5 yr, $100K, r=8%, Eint=10%, SEMI ANNUAL EX – Asset: 20M loan, swaps building FV 16M,
PV = PV of 100K*PV#10y,5% + PV of Int = Carrying carrying value 21M – 5M dep
Amount  Discount = 100K-Carrying Amount Loaner - DR Buildings (16M); CR Loss on Loan
Settlement (4M); Notes Receivable (20M)
Loanee – DR Acc Dep (5M); DR Notes Payable (20M);
DR Loss on Disposal of Building (21-16=5M);
CR Buildings (26M); CR Gain on Restructuring of Debt
(20M-16M=4M)
EX – Share Transfer: 20M loan, swaps for 16M shares,
loss of 4M
Loaner: DR FV-NI Investments (16M); DR Loss on Loan
(4M); CR Notes Receivable (20M)
Issuance: DR Cash (PV); CR Bonds Pay Loanee: DR Notes Payable (20M); CR Common Shares
Int Payment: DR Int Exp (4616); CR Bonds Pay (614); (16M); CR Gain on Restructuring (4M)
CR Cash (4000) Modifications: If modifications are substantial,
Accrued Int: DR Int Exp (4645 NY); CR Bonds Pay (645); treated like a settlement (1)if discounted PV under
CR Int Pay (4000) new terms was 10% different than discounted PV of
Effective Interest Method - Premium: remaining cash flows under old debt (2)if there is a
5 yr, $100K, r=8%, Eint=6%, SEMI ANNUAL change in creditor & original debt is legally discharged
Substantial modifications: calculate old debt PV,
calculate new debt PV (principal + int)
DR Notes Pay (Old Debt PV); CR Notes Pay (New Debt
PV); CR Gain (Plug)
Non-Substantial: Under ASPE, the debt would remain
on the books at $10.5 million and no gain or loss
would be recognized. As a result, no entry would be
made by Resorts Development Corp. (debtor) at the
date of restructuring. Do not derecognize debt if non-
substantial
Note Disclosures: Nature of lias, maturity dates, int.
rates, call provisions, conversion privileges, restrictions,
collateral
CH 15 – EQUITIES
SE: Common/Preferred Shares + Contributed Surplus
= Contributed Capital, Retained Earnings + AOCI =
Earned Capital
Shares Rights: share proportionately in (1)
profits/losses (2) in mgmt. (3) in liquidation assets (4)
in any new issue of shares
Common Shares: basic ownership, residual ownership
interest, not guaranteed dividends, voting shares
Preferred Shares: certain rights are given up for other
rights, preference given on dividends & dissolution
assets – Features: cumulative (dividends must be paid
before profits are distributed to common shares),
convertible (can exchange for CS at a ratio),
participating (holders can participate with CS in any
profit distributions higher than prescribed rate),
callable/redeemable (can call at its option),
retractable (can put/sell shares to company)
Treasury Shares = Shares Issued – Shares
Outstanding
AOCI – only IFRS, none under ASPE
Bundling: When 2 or more classes of shares are sold
for a lump sum
Proportional Method (Relative FV Method): The first
method values each instrument according to its fair
value and then proportionally allocates the lump-sum
value to each instrument
Incremental Method: values one instrument (often
the one that is easier to measure) and then allocates
the rest of the amount to the other instrument
Reacquisition: increases EPS, ROE, provides shares for
employee share compensation, meets merger needs,
stops takeover attempts, reduced shareholders,
makes a market, return cash to shareholder instead of
dividends – should result in no gains or losses
IFRS: more freedom ASPE: if cost of shares >= par,
allocated (1) share capital = to par, stated or assigned
value (2) excess to contributed surplus (net proceeds
– resale) (3) excess in amount equal to pro rata share
of portion of contributed surplus (4) to retained
earnings; if cost of shares <=par, (1) share capital (2)
to contributed surplus **the assigned value is equal
to the average per share amount in the account for
that class of shares at the transaction date
Types of Contributed Surplus: (A)Created by issuance
of shares in excess of par (B) created by repurchase
and resale of previously issued shares (C) created by
any transactions other than A or B above (ex: issuance
of stock options)
Dividends: (1) return on capital (a share of the
earnings); (2) liquidating dividends
A declared dividend is a liability because once
declared, they cannot avoid paying it
Cash Dividend: JE: Date of declaration: DR Dividends;
CR Div Pay Date of record: No entry
Date of payment: DR Div Pay; CR Cash
Stock Dividend: At date of declaration and
distribution: DR Dividend; CR Common Shares
Liquidating Dividends: DR Retained
Earnings/Dividends (return on income); DR
Contributed surplus (return on capital); CR Div Pay
PS vs. CS: $50K dividend, CS = $400K and PS = 1000 $6
shares (1) Non-Cumulative & Non-Participating: P =
$6K, CS = $44K (2) Cumulative & Non-Participating –
2 year lag: P = ($6*1000 for 2 years + CY Dividend =
$12K + $6K) = $18K, CS = $32K (3) Non-Cumulative &
Participating: P = (CY Div $6K + Participating Dividend
$4K) $10K + CS ($24K + $16K) = 40K
Rate of return on common shareholders’ equity = (NI
– Preferred Dividends)/Average common
shareholders’ equity
Rate of Return on total Assets = (NI – Preferred
Dividends)/Avg total assets
Payout Ratio = cash div to CS / (NI – Preferred
Dividends)
Financial Reorganization: why: (1) company with
accumulated deficient has picked it up – new mgmt.,
markets, products (2) desire to pay dividends to
encourage shareholders
Comprehensive Revaluation: requirements (1) must
be approved by shareholders before implementation
(2) new asset and liability valuations should be fair (3)
balance in R/E must be 0, may have contributed
surplus ASPE: Not allowed if there is no change in
control; IFRS: no guidelines
Process: (1) deficit is brought to 0 (reclassified to
capital accounts, impairments recorded first)
DR CS; CR Deficit (2) changes in debt and equity are
recorded (exchange debt for equity, change in
control) (3) assets & lias are comprehensively
revalued (going concern values)
DR Asset, DR Lia; CR Common Shares
Disclosure: During reorg: (1) date of reorg (2)
description of reorg (3) amount of change in major
classes of assets, lias, & SE
During next period: (1) date of reorg (2)revaluation
adjustment amount and SE account where it was
recorded (3) amount of deficit reclassified and acct
where it was reclassified
CH 16 – DERIVATIVES
Financial Instruments: contracts that create both a
financial asset for one party and a financial
liability/equity for the other – can be primary or
derivative – primary: most basic financial assets/lias
such as receivable, payables, shares
Primary Acctg: Amortized cost for HTM debt (most
financial liabilities for non-financial companies); FV
through PnL and Held for trading liabilities; FV-OCI for Convertible Debt: Bonds that are convertible to other forms
available-for-sale liabilities
Derivatives: are financial instruments that create
rights & obligations, transfer financial risk from one
part to another party Characteristics: value changes in bond for shares at the bondholder’s option; once the bond is
response to underlying instrument; the require little converted, all interest and principal no longer payable; (1)
to no initial investment; settled at a future date – can corporation can raise equity capital without giving up
be non-financial (contract to buy steel at a specified
date for a specified price)
Common Derivatives: Options, warrants, forwards,
futures, swaps
Financial Risks: (1) Credit Risk: risk to one party that equity components using method consistent with how
the other party will fail to meet an obligation (2)
liquidity risk: risk of not being able to meet own
financial obligation (3) market risk: risk that fair value clear the bonds payable and any outstanding premiums,
or FCF of a financial instrument will fluctuate due to
changes in market price (currency risk, interest rate) equity component remains in Contributed Surplus)
Basic Principles: (1) Things that meet definition of
assets/liabilities should be reported in financial
statements when entity becomes party to the
contract (2) Derivatives should be reported at FV (3)
Gains & losses should be recorded through NI
Purchase Commitments: ASPE – generally not
accounted for, difficult to measure IFRS – considers
net settlement features
Options – gives the holder the contractual right to acquire or Stock Compensation Plans: (1) Compensatory stock option
sell an underlying instrument at a specific price within a
specific term
Acct’g: Held for trade/FV-PnL: measure at FV, value changes
through income statement – exceptions; hedging &
derivatives that relate to entity’s own equity (warrants) –
recorded at historical cost
Options have value: (1)Intrinsic value - in a call option - the
greater of zero and the difference between the market price
and the strike price (S – K). (2) Time value of an option -
portion of an option’s value that reflects the probability that
the future market price of the underlying instrument will
exceed the strike price
Warrants - right but not the obligation to buy a share at a
specified price over a specified period of time; Can be
considered a type of call option; Issued only by company
whose shares are the underlying instrument
Forwards - Under a forward contract, parties each commit
upfront to do something in the future (obligation); The price
and time period are locked in under the contract; Therefore,
forward contracts are specific to the transacting parties and
Forwards generally do not trade on exchanges; Banks are
usually involved in forward contracts; Forwards are measured
at the present value of any future cash flows, discounted at a
rate that reflects risk
Futures – Same as forwards except: they have standardized
amounts and dates; They are exchange traded and have ready
market values; They are settled through clearing houses;
There is a requirement to put up collateral
Swaps - A swap is a derivative contract in which two parties
agree to exchange cash flows; Dependent on one party
wanting the cash flow stream of the other party
Hybrid/compound created in order to profit from the best
attributes of debt and equity instruments
Contractual terms: Does the instrument specifically call for a
payout of cash or other assets? Can the holder force the
company to pay out cash? Are there settlement options?
Economic substance: Are there equity like features? E.g., a
conversion feature Definitions of financial statement
elements: Does the instrument meet the def of a liability?
Equity instrument: any contract that evidences a residual
interest in the assets of an entity after deducting all lias
Measurement: Economic value stems from both the debt
component and the equity component
Approaches: (1) Residual value method (or incremental
method) - IFRS (2) Relative FV method/proportional method)
ASPE - equity component to be valued at zero, or the use of
residual method (with component that is easier to measure
being valued first)
of securities (e.g., common shares) during a specified period
of time, combines the benefits of a bond (interest payments,
principal repayment) with the privilege of exchanging the
unnecessary ownership control; (2) achieve equity financing
at a lower cost
Induced Conversion: when corporation wants to entice
bondholders to convert bonds into shares through additional
consideration. Inducement is allocated between debt and
instrument was first recorded
Normal Retirement: treated the same as debt retirement (i.e.
discounts, bond issue costs, interest accrued to bondholders,
Early Retirement: clear bonds payable and any outstanding
premiums, discounts, bond issue costs, interest accrued to
bondholders, the conversion rights must be zeroed out - loss
on early retirement is allocated between the debt and equity
Compensatory: Option terms (non-standard), discount from
market price, eligibility (only certain ppl)
Purchase: DR Cash, CR Contributed Surplus – Stock Options
Exercise: DR Cash, DR Contributed Surplus, CR CommShar
plans (CSOP), (2) Direct awards of stock, (3) Stock
appreciation rights plans (SAR), (4) Performance-type plans
Compensatory Stock Option Plans: Compensation expense is
determined as of the measurement date and allocated over
service period (i.e. period benefited by employee’s service,
usually between grant date and vesting date). These aren’t
traded so there’s no market value  value must be
determined at grant date using an option pricing model
(Black-Scholes)
I/S: Income from Ops – 1.7M, Loss on Redemption of Bonds -
$190K = Income Before Tax; S/E on B/S: