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Questions and Answers
What is the scope of the accounting policy choice being limited by the IASB?
What is the scope of the accounting policy choice being limited by the IASB?
What is the focus of the assessment of interest in a basic lending arrangement?
What is the focus of the assessment of interest in a basic lending arrangement?
What makes contractual cash flows inconsistent with a basic lending arrangement?
What makes contractual cash flows inconsistent with a basic lending arrangement?
How should an entity assess contractually specified changes in cash flows?
How should an entity assess contractually specified changes in cash flows?
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What is a characteristic of a change in contractual cash flows that is consistent with a basic lending arrangement?
What is a characteristic of a change in contractual cash flows that is consistent with a basic lending arrangement?
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Why does the IASB propose to elaborate requirements on contractual cash flow characteristics?
Why does the IASB propose to elaborate requirements on contractual cash flow characteristics?
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What is the purpose of assessing interest in a basic lending arrangement?
What is the purpose of assessing interest in a basic lending arrangement?
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What is a characteristic of contractual cash flows that are consistent with a basic lending arrangement?
What is a characteristic of contractual cash flows that are consistent with a basic lending arrangement?
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Why does the IASB propose to clarify the requirements on contractual terms that change the timing or amount of contractual cash flows?
Why does the IASB propose to clarify the requirements on contractual terms that change the timing or amount of contractual cash flows?
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What should the resulting contractual cash flows represent in a basic lending arrangement?
What should the resulting contractual cash flows represent in a basic lending arrangement?
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Study Notes
Classification of Liabilities
- Current liabilities: operating items that are due to be settled within 12 months after the reporting period, or held primarily for trading.
- Entities with no identifiable normal operating cycle are assumed to have a 12-month cycle.
- Examples of current liabilities: • Financial liabilities that meet the definition of held for trading • Bank overdrafts • Current portion of non-current financial liabilities • Dividends payable • Income taxes • Other non-trade payables
Non-Current Liabilities
- All liabilities not qualified for recognition as current liabilities are classified as non-current.
- Examples of non-current liabilities: • Non-current portion of long-term debt • Finance lease liability • Deferred tax liability • Long-term obligation to entity officers • Long-term deferred revenue
Classification of Liabilities with a Grace Period
- If the lender agrees to provide a grace period ending at least 12 months after the reporting period, the liability is classified as non-current.
- The entity must have an unconditional right to defer settlement of the liability for at least 12 months after the reporting period.
Accounting for Provisions
- A provision is an account maintained to cover an expected liability with uncertain amount and timing.
- Provisions are recognized when: • An entity has a present obligation (legal or constructive) as a result of a past event • An outflow of resources will probably be required to settle the obligation • A reliable estimate can be made of the amount of the obligation
- Expected value is a statistical method of estimating provisions, weighing all possible outcomes by their associated probabilities.
Disclosures for Provisions
- For each class of provision, an entity shall disclose: • The carrying amount at the beginning and end of the period • Additional provisions made in the period • Amounts used during the period • Unused amounts reversed during the period • The increase in the discounted amount arising from the passage of time and the effect of any change in the discount rate
- Comparative information is not required.
- An entity shall disclose: • A brief description of the nature of the obligation and the expected timing of any resulting outflows of economic benefits • An indication of the uncertainties about the amount or timing of those outflows • The amount of any expected reimbursement, stating the amount of any asset recognized for that expected reimbursement.
Proposed Amendments to the Classification & Measurement of Financial Instruments
- The International Accounting Standards Board (IASB) published the Exposure Draft Amendments to the Classification and Measurement of Financial Instruments in March 2023.
- The IASB tentatively decided to limit the scope of this accounting policy choice to electronic payment systems.
- Assessment of Contractual Cash Flow Characteristics in Classifying Financial Assets: • Elements of interest in a basic lending arrangement • Contractual terms that change the timing or amount of contractual cash flows
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Description
This quiz covers the classification of current liabilities in financial reporting, including the rules for determining normal operating cycle and settlement periods.
