Intermediate Accounting, Volume 2, 10th Canadian Edition Lecture Notes

Name: Intermediate Accounting, Volume 2, 10th Canadian Edition Lecture Notes
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Intermediate Accounting, Volume 2, 10th Canadian Edition Lecture Notes simplifies complex topics with easy-to-understand notes.

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INTERMEDIATE ACCOUNTING – VOLUME II
CICA HANDBOOK
Introduction and Overview:
The CICA Accounting Handbook is comprised of the following:
PART I
ACCOUNTING, PART I
International Financial Reporting Standards (IFRS)
PART II
ACCOUNTING, PART II
Accounting Standards for Private Enterprises (ASPE)
PART III
ACCOUNTING, PART III
Accounting Standards for Not-for-profit organizations
PART IV
ACCOUNTING, PART IV
Accounting Standards for Pensions
PART V
ACCOUNTING, PART V
Pre-changeover accounting standards
Note that the focus of this text is on the first two parts. Part II is commonly referred
to as Accounting Standards for Private Enterprises (ASPE) and includes many
of the provisions in the pre-changeover accounting standards, though many
have been simplified.
Both ASPE and IFRS are required for year-ends beginning on or after 2011. A
private enterprise is one that has not issued, and is not in the process of

CHAPTER 13
NON-FINANCIAL AND CURRENT LIABILITIES
CHAPTER TOPICS CROSS-REFERENCED WITH THE
CICA HANDBOOK, PART I (IFRS) AND PART II (ASPE)
Cash and Cash Equivalents IAS 7 Section 1540
Current Assets and Current Liabilities IAS 1 Section 1510
Non-financial liabilities IAS 37 and
IFRIC 13
—
Asset Retirement Obligations IAS 37 Section 3110
Contractual Obligations IAS 37 Section 3280
Contingencies IAS 37 Section 3290
Financial Instruments—Recognition and
Measurement
IAS 39 Section 3856
Financial Instruments—Presentation IAS 32 Section 1521
Financial Instruments—Disclosure IFRS 7 Section 3856
Disclosure of guarantees IAS 37 AcG-14
Proposed amendments to IAS 37 IASB
Exposure Draft
ED/2010/1
—

LEARNING OBJECTIVES
1. Understand the importance of non-financial and current liabilities from a business
perspective.
2. Define liabilities, distinguish financial liabilities from other liabilities, and identify
how they are measured.
3. Define current liabilities and identify and account for common types of current
liabilities.
4. Identify and account for the major types of employee-related liabilities.
5. Explain the recognition, measurement, and disclosure requirements for
decommissioning and restoration obligations.
6. Explain the issues and account for unearned revenues.
7. Explain the issues and account for product guarantees and other customer
program obligations.
8. Explain and apply two approaches to the recognition of contingencies and
uncertain commitments, and identify the accounting and reporting requirements
for guarantees and commitments.
9. Indicate how non-financial and current liabilities are presented and analyzed.

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CHAPTER REVIEW
1. Chapter 13 explains the basic principles regarding accounting and reporting for
common current liabilities and a variety of non-financial liabilities. Contingencies,
commitments, and guarantees are also addressed. Explanations regarding non-
financial liabilities under international standards are based on current IAS 37
Provisions, Contingent Liabilities and Contingent Assets and materials underlying
expected revisions to this standard. In 2010 the IASB released an exposure draft
of amendments to IAS 37 and invited comments on the draft. As of April 2012, the
project has been paused pending other discussions.
Current Liabilities
2. Existing IFRS and ASPE state liabilities have three essential characteristics:
1. They embody a duty or responsibility.
2. The entity has little or no discretion to avoid the obligation.
3. The transaction or other event creating the obligation has already
occurred.
This is similar to the current proposed definition in Conceptual Framework—
Elements and Recognition Project that states liabilities have three essential
characteristics:
1. They exist at the present time
2. They represent economic burdens or obligations
3. The obligations are enforceable on the obligor entity.
However, the key difference between the two is in how they are applied – the new
definition will result in recognizing a liability whenever an unconditional obligation
exists at the reporting date. Any uncertainty about the amount to be given up in
the future is considered when measuring the liability.
3. A distinction is made between financial liabilities and those that are not financial in
nature. Financial liabilities are contractual obligations to deliver cash or other
financial assets to another entity, or to exchange financial assets or financial

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4. Financial liabilities are initially measured at fair value and subsequently at
amortized cost. Short-term financial liabilities, such as account payable, are
accounted for at their maturity value if the amount is immaterial. Non-financial
liabilities under ASPE are generally measured at the fair value of the goods or
services to be delivered in the future. Under IFRS, non-financial liabilities are
measured initially and at each subsequent reporting date at the best estimate of
the amount the entity would rationally pay at the statement of financial position
date to settle the present obligation.
5. Liabilities are classified on the statement of financial position as current
obligations or long-term obligations. Current liabilities are those obligations
whose liquidation is reasonably expected to require use of existing resources
classified as current assets, or the creation of other current liabilities.
6. The relationship between current assets and current liabilities is an important
factor in the analysis of a company's financial condition. A liability is classified as
current under IFRS when ONE of the following conditions are met:
1. It is expected to be settled in the entity’s normal operating
cycle
2. It is held primarily for trading
3. It is due within 12 months from the end of the reporting period
4. The entity does not have an unconditional right to defer its
settlement for at least 12 months after the statement of
financial position date.
COMMON CURRENT LIABILITIES
Bank Indebtedness and Credit Facilities

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Accounts Payable
1. Accounts payable represent obligations owed to others for goods, supplies, and
services purchased on open account. These obligations, commonly known as
trade accounts payable, should be recorded to coincide with the receipt of the
goods or at the time title passes to the purchaser. Attention must be paid to
transactions occurring near the end of one accounting period and at the beginning
of the next to ascertain that the goods received (inventory) are in agreement with
the liability (accounts payable) and that both are recorded in the proper period.
Notes Payable
1. Notes payable are written promises to pay a certain sum of money on a specified
future date and may arise from sales, financing, or other transactions. Notes may
be classified as short-term or long-term, depending on the payment due date.
2. Short-term notes payable resulting from borrowing funds from a lending institution
may be interest-bearing or non-interest-bearing (i.e., zero-interest-bearing).
Interest-bearing notes payable are reported as a liability at the face amount of the
note along with any accrued interest payable. A zero-interest-bearing note does
not explicitly state an interest rate on the face of the note. Interest is the
difference between the present value of the note and the face value of the note at
maturity. For example, assume that Landscape Corp. issues a $100,000, four-
month, zero-interest-bearing note payable to the Provincial Bank on March 1. The
note’s present value is $96,154, based on the bank’s discount rate of 12%. The
entry to record this transaction for Landscape Corp. would be as follows:
Cash 96,154
Notes Payable 96,154
3. The currently maturing portion of long-term debts may be classified as a current
liability. When a portion of long-term debt is so classified, it is assumed that the
amount will be paid within the next 12 months out of funds classified as current
assets.

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4. A liability due on demand (callable debt) is classified as current even if the debt
agreement has a payment schedule over several years. Liabilities that become
callable by the creditor because of a violation of a debt covenant will be classified
as current, even if previously classified as long-term debt. Under IFRS, this
classification will hold even if the lender agrees between the balance sheet date
and the date the financial statements are released that it will not demand
repayment because of the violation. This is because the lender, not the entity,
was the one holding the unconditional right to defer the payment beyond 12
months from the reporting date. Under ASPE, the liability is reclassified as current
unless:
a. the creditor waives the covenant (agreement) requirements, or
b. the violation has been cured within the grace period that is usually given
in these agreements, and
c. it is likely that the company will not violate the covenant requirements with
a year from the statement of financial position date.
Short-Term Debt Expected to be Refinanced on a Long-Term Basis
1. Under IFRS, if the debt is due within 12 months from the reporting date, it is
classified as a current liability even if a long-term financing has been completed
before the financial statements are released. The only exception is if, at the
statement of financial position date, the entity expects to refinance it or roll it over
under an existing agreement for at least 12 months and the decision is solely at
its discretion. Under ASPE, short-term obligations expected to be refinanced on a
long-term basis could be excluded from current liabilities if the liability has been
refinanced on a long-term basis or there is a non-cancellable agreement to do so
before the financial statements are completed and nothing stands in the way of
completing the refinancing.
Dividends Payable
1. Cash dividends payable are classified as current liabilities during the period
subsequent to declaration and prior to payment. Once declared, a cash dividend
is a binding obligation of a corporate entity, payable to its shareholders. Stock
dividends payable are reported in the shareholders' equity section when
declared, and dividends payable in the form of additional shares are not
recognized as a liability.

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Rents and royalties payable
1. Rents and royalties are contractual agreements covering rent or royalty payments
which are conditional on the amount of revenues earned or the quantity of product
produced or extracted. As each additional unit of product is produced or
extracted, an additional obligation, usually a current liability, is created.
Customer Advances and Deposits
1. When returnable deposits or customer advances are received from customers
or employees, a liability corresponding to the asset received is recorded. The
classification of these items as current or non-current liabilities is dependent on
the time involved between the date of the deposit and the termination of the
relationship that required the deposit.
Taxes Payable
1. Current tax laws require most business enterprises to collect sales taxes from
customers and income taxes from employees during the year and periodically
remit these collections to the appropriate governmental unit. In such instances,
the enterprise is acting as a collection agency for a third party. If tax amounts due
to governmental units are on hand at the financial statement date, they are
reported as current liabilities.
2. Sales Taxes Payable: To illustrate the collection and remittance of sales tax by a
company, assume that Bentham Company recorded sales for the period of
$230,000. Further assume that Bentham is subject to a 7% sales tax collection
that must be remitted to the provincial government. The entry to record the sales
tax liability is:
Accounts Receivable 246,100
Sales 230,000
Sales Tax Payable 16,100
When payment is made, the sales tax payable would be debited and cash could
be credited.

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3. Goods and Services Tax: Most businesses in Canada are subject to a goods and
services tax (GST). Because companies are permitted to offset the recoverable
and payable amounts, only the net balance of the two accounts is reported on the
statement of financial position. Until net credit balances are remitted to the
Canada Revenue Agency, they are reported as current liability. A net debit
balance is reported as a current asset. In the provinces with a Harmonized Sales
Tax (HST), the full HST amount is treated the same as shown for the GST.
4. Income Taxes Payable: A corporation should estimate and record the amount of
income tax liability as computed per its income tax return. Chapter 18 discusses in
detail the complexities involved in accounting for the difference between taxable
income under the tax laws and accounting income under generally accepted
accounting principles.
Employee-Related Liabilities
1. Amounts owed to employees for salaries or wages of an accounting period are
reported as a current liability. The following items are related to employee
compensation and are often reported as current liabilities:
a. Payroll deduction.
b. Short-term compensated absences.
c. Profit-sharing and bonuses.
2. The following illustrates the concept of accrued liabilities related to payroll
deductions. Assume a weekly payroll of $10,000 that is entirely subject to Canada
Pension (4.95%) and Employment Insurance (1.83%) deductions. Also, income
tax withholding amounts to $1,320, and union dues to $88. Two entries are
necessary to record the payroll, the first for the wages paid to employees and the
second for the employer’s payroll taxes. The two entries are as follows:
Wages and Salaries 10,000.00
Employee Income Taxes Payable 1,320.00
CPP Contributions Payable 495.00
EI Premiums Payable

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NON-FINANCIAL LIABILITIES
Decommissioning and Restoration Obligations
Asset Retirement Obligations
1. In industries such as mining or oil drilling, the construction and operation of long-
lived assets often involves obligations at the time of retirement of those assets. A
company must recognize an asset retirement obligation (ARO), an existing
legal obligation associated with the retirement of a tangible long-lived asset that
results from its acquisition, construction, development, or normal operation in the
period in which it is incurred, if its fair value can be reasonably estimated. If
a fair value cannot be reasonably estimated, the details must be reported in the
notes.
2. Obligating Event. Existing legal obligation that requires the recognition of a
liability and asset cost such as the cost of restoring or reclaiming oil and gas
properties.
3. Measurement. Under the CICA Handbook, Part II (ASPE), Section 3110.09, an
ARO is initially measured at the best estimate of the expenditure required to settle
the present obligation at the reporting date, which is similar to the proposed
revision.
4. Recognition and Allocation. The estimated costs of the ARO are included in the
carrying amount of the related long-lived asset in the same amount as the liability
recognized. An asset retirement cost is recorded as part of the related asset
because these costs are considered a cost of operating the asset. Therefore, the
specific asset, e.g., mine, drilling platform, nuclear power plant, should be
increased and should not be recorded as a separate account. The ARO is
amortized to expense over the related asset’s useful life. Because the liability is
measured on a discounted basis, interest on the liability is recognized each period
as an increase in the carrying amount of the liability and either an accretion
expense (ASPE, operating cost) or an interest expense (IFRS, interest or
borrowing cost). Subsequent changes in the ARO due to production are added to
the asset’s capital cost under ASPE and inventoried under IFRS.
5. Reporting and Disclosure Requirements. Most of the AROs are long-term in
nature and should be shown outside current liabilities, providing details of the
AROs and associated long-lived assets.

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Unearned Revenues
1. A company sometimes receives cash in advance of the performance of services
or issuance of merchandise. Such transactions result in a credit to a deferred or
unearned revenue account classified as a current liability on the statement of
financial position. As claims of this nature are redeemed, the liability is reduced
and a revenue account is credited.
Product Guarantees and Customer Programs
Warranties
1. A warranty (product guarantee) represents a promise by a seller to a buyer to
make good on any deficiency in quantity, quality, or performance specifications in
a product. Product warranty costs may be accounted for by using the cash basis
method or the accrual method. The cash basis method must be used for income
tax purposes and for financial accounting purposes when a reasonable estimate
of warranty costs cannot be made at the time of sale. The accrual method
includes two different accounting treatments: a) expense warranty approach,
and b) revenue warranty approach.
2. The expense warranty treatment should be used whenever the warranty is an
integral and inseparable part of the sale and is viewed as a loss contingency.
Under the expense warranty approach the liability is measured at the estimated
cost of meeting the obligation and recorded in the period of the sale. There is no
effect on future income if the estimated and actual costs are close. Warranty
expense is recorded in the year in which the item subject to the warranty is sold.
When the warranty is honoured in a subsequent period the liability is reduced by
the amount of the expenditure to repair the item. For example, if 200 units are
sold for $5,000 each and the estimated warranty cost is $300 per unit, the
following entry would be made for the sale and the warranty:
Cash ($5,000 x 200) 1,000,000
Sales 1,000,000
Warranty Expense

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