ACCOUNTING Financial and Organisational Decision Making

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Transcript ACCOUNTING Financial and Organisational Decision Making

ACCOUNTING
Financial and Organisational
Decision Making
Chapter 17
Liabilities
Slides written by Sandra Porritt
designed by Tony Van Eekelen
PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co.
Aust.
17.1
Chapter 17: Liabilities
Learning Objectives
• In this chapter you will be introduced to:
– the nature of liabilities
– the criteria for the recognition of liabilities
– executory contracts and contingent liabilities
PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust.
17.2
Chapter 17: Liabilities
Learning Objectives
– liability measurement
techniques, particularly
for the measurement of
debentures and leases.
PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust.
17.3
Chapter 17: Liabilities
Introduction
• definition and recognition of liabilities
raises problems in the reporting
• liabilities are often recognised because of a
related asset and or expense and or revenue
• the release of accounting concepts
statements has provided guidance
PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust.
17.4
Chapter 17: Liabilities
The definition of liabilities
• Nature of liabilities
– legal debts or legal obligation
• The IASC framework defines a liability as:– 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…….para 49(b)
PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust.
17.5
Chapter 17: Liabilities
Existance of present obligation
•
result of past transaction or event
•
legally enforceable
•
ethical consideration - moral and social
obligation outside warranty
PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust.
17.6
Chapter 17: Liabilities
Other liabilities
• partly equitable partly legal
– certain minium requirements for environmental
restoration on mining companies
– matching principle, each period takes a part of
the restoration costs
PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust.
17.7
Chapter 17: Liabilities
Constructive obligation
• proposed final dividend = current liability
– dividend to be ratified by shareholders at AGM
before it is a legal obligation
PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust.
17.8
Chapter 17: Liabilities
Obligations settled in the future
by
•
•
•
•
•
payment in cash
transfer of other assets
provision of services
replacement of obligation with another or
conversion of obligation to equity
PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust.
17.9
Chapter 17: Liabilities
The recognition of liabilities
• IASC framework provides the following
tests:
– it is probable that any future economic benefit
associated with the item will flow to or from
the enterprise and
– the item has a cost or value that can be
measured with reliability…….para 83
PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust.
17.10
Chapter 17: Liabilities
Executory contracts
• (performance depends on some future
action by both parties)
– accepted practice is that no obligation exists on
the part of the purchaser of goods until the
creditor has performed the service
PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust.
17.11
Chapter 17: Liabilities
Contingent liabilities
•
•
•
•
probable future committment
not sufficiently defined at present
amounts potentially material
to remain faithful to the principles of the
historical cost system, contingent liabilities
must relate to a past event
PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust.
17.12
Chapter 17: Liabilities
The measurement of liabilities
– made difficult
• future
• uncertain
– timing of payment
• present resources used
• paid in one year (resources used by the company
and in that year can earn interest?)
PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust.
17.13
Chapter 17: Liabilities
Future interest commitment
– on debentures
– on loans
PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust.
17.14
Chapter 17: Liabilities
The irrelevance of possible future
actions
• the company might seek to repay the
debentures early and perhaps incur a
penalty...
• the company might repurchase the
debentures on the open market ……
• the company may enter liquidation
PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust.
17.15
Chapter 17: Liabilities
The discount rate
• fluctuation of interest rate
– due to market forces
• in historical cost
– changes ignored
– assumes that debt held to maturity
PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust.
17.16
Chapter 17: Liabilities
A specific application of
• the recognition and measurement
principles: leases
– finance leases
• used to buy assets - loan repaid in installments.
– Operating leases
• short period for jobs or equipment for a project
(technology changing rapidly)
PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust.
17.17
Chapter 17: Liabilities
Effect on financial statements
Profit and Loss statement extract for year 1
Rental approach
Purchase approach
Lease rental expense
$3880
Interest expense
$ 800
Amortised expense
2000
Balance sheet extract at end of year 1
Assets
Leased assets
less Accumulated amortisation
-
$10000
2000
8000
Liabilities
Leases liabilities
-
6920
PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust.
17.18
Chapter 17: Liabilities
Comparion of approaches
• Rental/operating - keeps liabilities off the
balance sheet
• Accounting standards require finance lease
liabilities shown
• The variety of lease arrangements in
practice make it difficult to distinguish
PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust.
17.19
Chapter 17: Liabilities
Ethical issues
• as the provision accounts are subject to
judgement
• overstating provisions can be used in future
years
PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust.
17.20
Chapter 17: Liabilities
Summary
• clearly specified definition of liabilities
would lead to full and consistant reporting
• in practice judgement is involved
PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust.
17.21