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Questions and Answers
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 makes contractual cash flows inconsistent with a basic lending arrangement?
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?
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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?
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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?
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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.
