IFA CH 2 NEW Non-Current Liabilities PDF

Non-Current CHAPTER 2 Liabilities LEARNING OBJECTIVES After studying this chapter, you should be able to: 1. Describe the nature of bonds and 3. Explain the accounting for the indicate the accounting for bond extinguis...

Non-Current CHAPTER 2 Liabilities LEARNING OBJECTIVES After studying this chapter, you should be able to: 1. Describe the nature of bonds and 3. Explain the accounting for the indicate the accounting for bond extinguishment of non-current issuances. liabilities. 2. Explain the accounting for long- 4. Indicate how to present and term notes payable. analyze non-current liabilities. 14-1  LEARNING OBJECTIVE 1 Bonds Payable Describe the nature of bonds and indicate the accounting for bond issuances. Non-current liabilities (long-term debt) consist of an expected outflow of resources arising from present obligations that are not payable within a year or the operating cycle of the company, whichever is longer. Examples: ► Bonds payable ► Pension liabilities ► Long-term notes payable ► Lease liabilities ► Mortgages payable Long-term debt has various covenants/Agreement‘s or restrictions. 14-2 LO 1  Types of Bonds Common types found in practice:  Secured and Unsecured (debenture) bonds.  Term, Serial, and Callable bonds.  Convertible, Commodity-Backed, Deep-Discount bonds.  Registered and Bearer (Coupon) bonds.  Income and Revenue bonds. 14-3 LO 1 Types of Bonds 1. Secured and Unsecured Bonds;  Secured bonds are backed by a pledge of some sort of collateral. Mortgage bonds are secured by a claim on real estate.  Bonds not backed by collateral are unsecured. A debenture bond is unsecured. 2. Term , Serial Bonds , and Callable Bonds ;  Bond issues that mature on a single date are called term bonds.  Bond Issues that mature in installments are called serial bonds.  Callable bonds give the issuer the right to call and retire the bonds prior to maturity. 4  …Types of Bonds 3. Convertible, Commodity backed and Deep Discount Bonds;  If bonds are convertible into other securities of the corporation for a specified time after issuance, they are convertible bonds.  Commodity-backed bonds (also called asset-linked bonds) are redeemable in measures of a commodity, such as barrels of oil, tons of coal, or ounces of rare metal.  Deep-discount bonds, also referred to as zero- interest debenture bonds, are sold at a discount that provides the buyer’s total interest payoff at maturity. 5  …Types of Bonds 4. Registered and Bearer (Coupon) Bonds;  Bonds issued in the name of the owner are registered bonds and require surrender of the certificate and issuance of a new certificate to complete a sale.  A bearer or coupon bond, however, is not recorded in the name of the owner and may be transferred from one owner to another by mere delivery 5. Income & Revenue Bonds;  Income bonds pay no interest unless the issuing company is profitable.  Revenue bonds, so called because the interest on them is paid from specified revenue sources, are most frequently issued by airports, school districts, counties, toll-road authorities, and governmental bodies. 6  Issuing Bonds  Bond contract known as a bond indenture.  Represents a promise to pay: (1) sum of money at designated maturity date, plus (2) periodic interest at a specified rate on the maturity amount (face value).  Paper certificate, typically a €1,000 face value.  Interest payments usually made semiannually.  Used when the amount of capital needed is too large for one lender to supply. 14-7 LO 1  What Do the Numbers Mean? Corporate bond listing. Company Price as a % of par Name Interest rate based on price Interest rate paid as Creditworthiness a % of par value 14-8 LO 1  Valuation and Accounting for Bonds Issuance and marketing of bonds to the public:  Usually takes weeks or months.  Issuing company must ► Arrange for underwriters. ► Obtain regulatory approval of the bond issue, undergo audits, and issue a prospectus. ► Have bond certificates printed. 14-9 LO 1  Valuation and Accounting for Bonds Selling price of a bond issue is set by the  supply and demand of buyers and sellers,  relative risk,  market conditions, and  state of the economy. Investment community values a bond at the present value of its expected future cash flows, which consist of (1) interest and (2) principal. 14-10 LO 1  Valuation and Accounting for Bonds Interest Rate  Stated, coupon, or nominal rate = Rate written in the terms of the bond indenture. ► Bond issuer sets this rate. ► Stated as a percentage of bond face value (par).  Market rate or effective yield = Rate that provides an acceptable return commensurate with the issuer’s risk. ► Rate of interest actually earned by the bondholders. 14-11 LO 1  Valuation and Accounting for Bonds i. How do you calculate the amount of interest that is actually paid to the bondholder each period? (Stated rate x Face Value of the bond) ii. How do you calculate the amount of interest that is actually recorded as interest expense by the issuer of the bonds? (Market rate x Carrying Value of the bond) 14-12 LO 1  Bonds Issued at Par Illustration: Santos SA issues R$100,000 in bonds dated January 1, 2019, due in five years with 9 percent interest payable annually on January 1. At the time of issue, the market rate for such bonds is 9 percent. ILLUSTRATION 14.1 Time Diagram for Bonds Issued at Par 14-13 LO 1  Bonds Issued at Par ILLUSTRATION 14.1 Time Diagram for Bonds Issued at Par PVOA = PMT*(1-(1+r)^n))/r PVF = FV* 1/(1+r)^n ILLUSTRATION 14.2 Present Value Computation of Bond Selling at Par 14-14 LO 1  Bonds Issued at Par Journal entry on date of issue, Jan. 1, 2019. Cash 100,000 Bonds payable 100,000 Journal entry to record accrued interest at Dec. 31, 2019. Interest expense 9,000 Interest payable 9,000 Journal entry to record first payment on Jan. 1, 2020. Interest payable 9,000 Cash 9,000 14-15 LO 1  Bonds Issued at a Discount Illustration: Assuming now that Santos issues R$100,000 in bonds, due in five years with 9 percent interest payable annually at year-end. At the time of issue, the market rate for such bonds is 11 percent. ILLUSTRATION 14.3 Time Diagram for Bonds Issued at a Discount 14-16 LO 1  Bonds Issued at a Discount ILLUSTRATION 14.3 Time Diagram for Bonds Issued at a Discount ILLUSTRATION 14.4 Present Value Computation of Bond Selling at Discount 14-17 LO 1  Bonds Issued at a Discount Journal entry on date of issue, Jan. 1, 2019. Cash 92,608 Bonds payable 92,608 Journal entry to record accrued interest at Dec. 31, 2019. Interest expense ($92,608 x 11%) 10,187 Cash 9,000 Bonds payable 1,187 14-18 LO 1  Bonds Issued at a Discount When bonds sell at less than face value: ► Investors demand a rate of interest higher than stated rate. ► Usually occurs because investors can earn a higher rate on alternative investments of equal risk. ► Cannot change stated rate so investors refuse to pay face value for the bonds. ► Investors receive interest at the stated rate computed on the face value, but they actually earn at an effective rate because they paid less than face value for the bonds. 14-19 LO 1  Effective-Interest Method Bond issued at a discount - amount paid at maturity is more than the issue amount. Bonds issued at a premium - company pays less at maturity relative to the issue price. Adjustment to the cost is recorded as bond interest expense over the life of the bonds through a process called amortization. Required procedure for amortization is the effective- interest method (also called present value amortization). 14-20 LO 1  Effective-Interest Method Effective-interest method produces a periodic interest expense equal to a constant percentage of the carrying value of the bonds. ILLUSTRATION 14.5 Bond Discount and Premium Amortization Computation 14-21 LO 1  Effective-Interest Method Bonds Issued at a Discount Illustration: Evermaster AG issued €100,000 of 8% term bonds on January 1, 2019, due on January 1, 2024, with interest payable each July 1 and January 1. Investors require an effective-interest rate of 10%. Calculate the bond proceeds. ILLUSTRATION 14.6 Computation of Discount on Bonds Payable 14-22 LO 1  Effective-Interest Method TABLE 6.2 PRESENT VALUE OF 1 (PRESENT VALUE OF A SINGLE SUM) $100,000 x.61391 = $61,391 Face Value Factor Present Value 14-23 LO 1  Effective-Interest Method TABLE 6.4 PRESENT VALUE OF AN ORDINARY ANNUITY OF 1 $4,000 x 7.72173 = $30,887 Semiannual Factor Present Value Payment 14-24 LO 1 ILLUSTRATION 14.7 Bond Discount Amortization Schedule 14-25 ILLUSTRATION 14.7 Bond Discount Amortization Schedule Journal entry on date of issue, Jan. 1, 2019. Cash 92,278 Bonds Payable 92,278 14-26 LO 1 ILLUSTRATION 14.7 Bond Discount Amortization Schedule Journal entry to record first payment and amortization of the discount on July 1, 2019. Interest expense 4,614 Bonds payable 614 Cash 4,000 14-27 LO 1 ILLUSTRATION 14.7 Bond Discount Amortization Schedule Journal entry to record accrued interest and amortization of the discount on Dec. 31, 2019. Interest expense 4,645 Interest payable 4,000 Bonds payable 645 14-28 LO 1  Effective-Interest Method Bonds Issued at a Premium Illustration: Evermaster Corporation issued €100,000 of 8% term bonds on January 1, 2019, due on January 1, 2024, with interest payable each July 1 and January 1. Investors require an effective- interest rate of 6%. Calculate the bond proceeds. ILLUSTRATION 14.8 Computation of Premium on Bonds Payable 14-29 LO 1  Effective-Interest Method TABLE 6.2 PRESENT VALUE OF 1 (PRESENT VALUE OF A SINGLE SUM) $100,000 x.74409 = $74,409 Face Value Factor Present Value 14-30 LO 1  Effective-Interest Method TABLE 6.4 PRESENT VALUE OF AN ORDINARY ANNUITY OF 1 $4,000 x 8.53020 = $34,121 Semiannual Factor Present Value Payment 14-31 LO 1 ILLUSTRATION 14.9 Bond Premium Amortization Schedule 14-32 ILLUSTRATION 14.9 Bond Premium Amortization Schedule Journal entry on date of issue, Jan. 1, 2019. Cash 108,530 Bonds Payable 108,530 14-33 LO 1 ILLUSTRATION 14.9 Bond Premium Amortization Schedule Journal entry to record first payment and amortization of the discount on July 1, 2019. Interest expense 3,256 Bonds payable 744 Cash 4,000 14-34 LO 1  Effective-Interest Method Accrued Interest What happens if Evermaster prepares financial statements at the end of February 2019? In this case, the company prorates the premium by the appropriate number of months to arrive at the proper interest expense, as follows. ILLUSTRATION 14.10 Computation of Interest Expense 14-35 LO 1  Effective-Interest Method Accrued Interest ILLUSTRATION 14.10 Computation of Interest Expense Evermaster records this accrual as follows. Interest expense 1,085.33 Bonds payable 248.00 Interest payable 1,333.33 14-36 LO 1  Effective-Interest Method Bonds Issued Between Interest Dates Bond investors will pay the issuer the interest accrued from the last interest payment date to the date of issue. On the next semiannual interest payment date, bond investors will receive the full six months’ interest payment. 14-37 LO 1  Effective-Interest Method Bonds Issued at Par Illustration: Assume Evermaster issued its five-year bonds, dated January 1, 2019, on May 1, 2019, at par (€100,000). Evermaster records the issuance of the bonds between interest dates as follows. (€100,000 x.08 x 4/12) = €2,667 Cash 100,000 Bonds payable 100,000 Cash 2,667 Interest expense 2,667 14-38 LO 1  Effective-Interest Method Bonds Issued at Par On July 1, 2019, two months after the date of purchase, Evermaster pays the investors six months’ interest, by making the following entry. ($100,000 x.08 x 1/2) = $4,000 Interest expense 4,000 Cash 4,000 14-39 LO 1  Effective-Interest Method Bonds Issued at Discount or Premium Illustration: Assume that the Evermaster 8 percent bonds were issued on May 1, 2019, to yield 6 percent. Thus, the bonds are issued at a premium price of €108,039. Evermaster records the issuance of the bonds between interest dates as follows. Cash 108,039 Bonds payable 108,039 Cash 2,667 Interest expense 2,667 (€100,000 x.08 x 4/12) = €2,667 14-40 LO 1  Effective-Interest Method Bonds Issued at Discount or Premium Evermaster then determines interest expense from the date of sale (May 1, 2019), not from the date of the bonds (January 1, 2019). ILLUSTRATION 14.12 Partial Period Interest Amortization 14-41 LO 1  Effective-Interest Method Bonds Issued at Discount or Premium The premium amortization of the bonds is also for only two months. ILLUSTRATION 14.13 Partial Period Interest Amortization 14-42 LO 1  Effective-Interest Method Bonds Issued at Discount or Premium Evermaster therefore makes the following entries on July 1, 2019, to record the interest payment and the premium amortization. Interest expense 4,000 Cash 4,000 Bonds payable 253 Interest expense 253 The Interest Expense account now contains a debit balance of €1,080 (€4,000 − €2,667 − €253). 14-43 LO 1  LEARNING OBJECTIVE 2 Long-Term Notes Payable Explain the accounting for long-term notes payable. Accounting is Similar to Bonds  A note is valued at the present value of its future interest and principal cash flows.  Company amortizes any discount or premium over the life of the note. 14-44 LO 2  Notes Issued at Face Value Illustration: Scandinavian Imports issues a €10,000, three-year note, at face value to Bigelow ASA. The stated rate and the effective rate were both 10 percent. Scandinavian would record the issuance of the note as follows. Cash 10,000 Notes Payable 10,000 Scandinavian Imports would recognize the interest incurred each year as follows. Interest Expense 1,000 Cash 1,000 (€10,000 x.10 = €1,000) 14-45 LO 3  Notes Not Issued at Face Value Zero-Interest-Bearing Notes Issuing company records the difference between the face amount and the present value (cash received) as  a discount and  amortizes that amount to interest expense over the life of the note. 14-46 LO 2  Zero-Interest-Bearing Notes Illustration: Turtle Cove Company issued the three-year, $10,000, zero-interest-bearing note to Jeremiah Company. The implicit rate that equated the total cash to be paid ($10,000 at maturity) to the present value of the future cash flows ($7,721.80 cash proceeds at date of issuance) was 9 percent. ILLUSTRATION 14.14 Time Diagram for Zero-Interest Note 14-47 LO 2  Zero-Interest-Bearing Notes Illustration: Turtle Cove Company issued the three-year, $10,000, zero-interest-bearing note to Jeremiah Company. The implicit rate that equated the total cash to be paid ($10,000 at maturity) to the present value of the future cash flows ($7,721.80 cash proceeds at date of issuance) was 9 percent. Turtle Cove records issuance of the note as follows. Cash 7,721.80 Notes Payable 7,721.80 14-48 LO 2  ILLUSTRATION 14.15 Schedule of Note Turtle Cove records interest expense at Discount Amortization the end of the first year as follows. Interest Expense 694.96 Notes Payable 694.96 14-49 LO 3  Interest-Bearing Notes Illustration: Marie Co. issued for cash a €10,000, three-year note bearing interest at 10 percent to Morgan Corp. The market rate of interest for a note of similar risk is 12 percent. In this case, because the effective rate of interest (12%) is greater than the stated rate (10%), the present value of the note is less than the face value. That is, the note is exchanged at a discount. ILLUSTRATION 7-16 Computation of Present Value— Effective Rate Different from Stated Rate 14-50 LO 2  Interest-Bearing Notes Illustration: Marie Co. issued for cash a €10,000, three-year note bearing interest at 10 percent to Morgan Group. The market rate of interest for a note of similar risk is 12 percent. In this case, because the effective rate of interest (12%) is greater than the stated rate (10%), the present value of the note is less than the face value. That is, the note is exchanged at a discount. Marie Co. records the issuance of the note as follows. Cash 9,520 Notes Payable 9,520 14-51 LO 2 ILLUSTRATION 14.16 Schedule of Note Discount Amortization Marie Co. records the following entry at the end of year 1. Interest Expense 1,142 Notes Payable 142 Cash 1,000 14-52 LO 2  Special Notes Payable Situations Notes Issued for Property, Goods, or Services When exchanging the debt instrument for property, goods, or services in a bargained transaction, the stated interest rate is presumed to be fair unless: 1. No interest rate is stated, or 2. The stated interest rate is unreasonable, or 3. The stated face amount is materially different from the current cash price for the same or similar items or from the current fair value of the debt instrument. 14-53 LO 2  Special Notes Payable Situations Choice of Interest Rates If a company cannot determine the fair value of the property, goods, services, or other rights, and if the note has no ready market, the present value of the note must be determined by the company to approximate an applicable interest rate (imputation). Choice of rate is affected by: ► Prevailing rates for similar instruments. ► Factors such as restrictive covenants, collateral, payment schedule, and the existing prime interest rate. 14-54 LO 2  Special Notes Payable Situations Illustration: On December 31, 2019, Wunderlich plc issued a promissory note to Brown Interiors Company for architectural services. The note has a face value of £550,000, a due date of December 31, 2024, and bears a stated interest rate of 2 percent, payable at the end of each year. Wunderlich cannot readily determine the fair value of the architectural services, nor is the note readily marketable. On the basis of Wunderlich’s credit rating, the absence of collateral, the prime interest rate at that date, and the prevailing interest on Wunderlich’s other outstanding debt, the company imputes an 8 percent interest rate as appropriate in this circumstance. 14-55 LO 2  Special Notes Payable Situations ILLUSTRATION 14.18 Time Diagram for Interest-Bearing Note ILLUSTRATION 14.19 Computation of Imputed Fair Value and Note Discount 14-56 LO 2  Special Notes Payable Situations ILLUSTRATION 14.19 Computation of Imputed Fair Value and Note Discount On December 31, 2019, Wunderlich records issuance of the note in payment for the architectural services as follows. Building (or Construction in Process) 418,239 Notes Payable 418,239 14-57 LO 2 ILLUSTRATION 14.20 Schedule of Discount Amortization Using Imputed Interest Rate Payment of first year’s interest and amortization of the discount. Interest Expense 33,459 Notes Payable 22,459 Cash 11,000 14-58  Mortgage Notes Payable A promissory note secured by a document called a mortgage that pledges title to property as security for the loan.  Common form of long-term notes payable.  Payable in full at maturity or in installments.  Fixed-rate mortgage.  Variable-rate mortgage. 14-59 LO 2  Extinguishment of LEARNING OBJECTIVE 3 Non-Current Explain the accounting for extinguishment of non- Liabilities current liabilities. Three common situations besides payment at maturity: 1. Extinguishment with cash before maturity, 2. Extinguishment by transferring assets or securities, and 3. Extinguishment with modification of terms. 14-60 LO 3  Extinguishment of Non-Current Liabilities Extinguishment with Cash before Maturity  Net carrying amount > Reacquisition price = Gain  Reacquisition price > Net carrying amount = Loss  At time of reacquisition, unamortized premium or discount must be amortized up to the reacquisition date. 14-61 LO 3  Extinguishment with Cash before Maturity Illustration: Evermaster bonds issued at a discount on January 1, 2019. These bonds are due in five years. The bonds have a par value of €100,000, a coupon rate of 8 percent paid semiannually, and were sold to yield 10 percent. ILLUSTRATION 14.21 Bond Premium Amortization Schedule, Bond Extinguishment 14-62  Extinguishment with Cash before Maturity Two years after the issue date on January 1, 2021, Evermaster calls the entire issue at 101 and cancels it. ILLUSTRATION 14.22 Computation of Loss on Redemption of Bonds Evermaster records the reacquisition and cancellation of the bonds as follows. Bonds Payable 94,925 Loss on Extinguishment of Debt 6,075 Cash 101,000 14-63 LO 3  Extinguishment of Non-Current Liabilities Extinguishment by Exchanging Assets or Securities  Creditor should account for the non-cash assets or equity interest received at their fair value.  Debtor recognizes a gain equal to the excess of the carrying amount of the payable over the fair value of the assets or equity transferred (gain). 14-64 LO 3  Transfer of Assets Illustration: Hamburg Bank loaned €20,000,000 to Bonn Mortgage Company. Bonn, in turn, invested these monies in residential apartment buildings. However, because of low occupancy rates, it cannot meet its loan obligations. Hamburg Bank agrees to accept from Bonn Mortgage real estate with a fair value of €16,000,000 in full settlement of the €20,000,000 loan obligation. The real estate has a carrying value of €21,000,000 on the books of Bonn Mortgage. Bonn (debtor) records this transaction as follows. Note Payable (to Hamburg Bank) 20,000,000 Loss on Disposal of Real Estate 5,000,000 Real Estate 21,000,000 Gain on Extinguishment of Debt 4,000,000 14-65 LO 3  Granting of Equity Interest Illustration: Now assume that Hamburg Bank agrees to accept from Bonn Mortgage 320,000 ordinary shares (€10 par) that have a fair value of €16,000,000, in full settlement of the €20,000,000 loan obligation. Bonn Mortgage (debtor) records this transaction as follows. Notes Payable (to Hamburg Bank) 20,000,000 Share Capital—Ordinary 3,200,000 Share Premium—Ordinary 12,800,000 Gain on Extinguishment of Debt 4,000,000 14-66 LO 3  Extinguishment of Non-Current Liabilities Extinguishment with Modification of Terms Creditor may offer one or a combination of the following modifications: 1. Reduction of the stated interest rate. 2. Extension of the maturity date of the face amount of the debt. 3. Reduction of the face amount of the debt. 4. Reduction or deferral of any accrued interest. 14-67 LO 3  Modification of Terms Illustration: On December 31, 2019, Morgan National Bank enters into a debt modification agreement with Resorts Development Group. The bank restructures a ¥10,500,000 loan receivable issued at par (interest paid to date) by: ► Reducing the principal obligation from ¥10,500,000 to ¥9,000,000; ► Extending the maturity date from December 31, 2019, to December 31, 2023; and ► Reducing the interest rate from the historical effective rate of 12 percent to 8 percent. Given Resorts Development’s financial distress, its market-based borrowing rate is 15 percent. 14-68 LO 3  Modification of Terms IFRS requires the modification to be accounted for as an extinguishment of the old note and issuance of the new note, measured at fair value. ILLUSTRATION 14.23 Fair Value of Restructured Note 14-69 LO 3  Modification of Terms The gain on the modification is ¥3,298,664, which is the difference between the prior carrying value (¥10,500,000) and the fair value of the restructured note, as computed in Illustration 14.23 (¥7,201,336). Given this information, Resorts Development makes the following entry to record the modification. Note Payable (old) 10,500,000 Gain on Extinguishment of Debt 3,298,664 Note Payable (new) 7,201,336 14-70 LO 3  ILLUSTRATION 14.24 Schedule of Interest and Amortization after Debt Modification Resorts Development recognizes interest expense on this note using the effective rate of 15 percent. Thus, on December 31, 2020 (date of first interest payment after restructure), Resorts Development makes the following entry. Interest Expense 1,080,200 Notes Payable 360,200 Cash 720,000 14-71 LO 3  ILLUSTRATION 14.24 Schedule of Interest and Amortization after Debt Modification Resorts Development makes a similar entry (except for different amounts for credits to Notes Payable and debits to Interest Expense) each year until maturity. At maturity, Resorts Development makes the following entry. Notes Payable 9,000,000 Cash 9,000,000 14-72 LO 3  LEARNING OBJECTIVE 4 Presentation and Analysis Indicate how to present and analyze non-current liabilities. Fair Value Option Companies have the option to record fair value in their accounts for most financial assets and liabilities, including bonds and notes payable. The IASB believes that fair value measurement for financial instruments, including financial liabilities, provides more relevant and understandable information than amortized cost. 14-73 LO 4  Fair Value Option Fair Value Measurement Non-current liabilities are recorded at fair value, with unrealized holding gains or losses reported as part of net income. Illustrations: Edmonds SE has issued €500,000 of 6 percent bonds at face value on May 1, 2019. Edmonds chooses the fair value option for these bonds. At December 31, 2019, the value of the bonds is now €480,000 because interest rates in the market have increased to 8 percent. Bonds Payable (€500,000 - €480,000) 20,000 Unrealized Holding Gain or Loss—Income 20,000 14-74 LO 4  Off-Balance-Sheet Financing Off-balance-sheet financing is an attempt to borrow monies in such a way to prevent recording the obligations. Different Forms: ► Non-Consolidated Subsidiary ► Special Purpose Entity (SPE) 14-75 LO 4  Off-Balance-Sheet Financing Rationale ► Removing debt enhances the quality of the balance sheet and permits credit to be obtained more readily and at less cost. ► Loan covenants often limit the amount of debt a company may have. These types of commitments might not be considered in computing the debt limitation. ► Some argue that the asset side of the balance sheet is severely understated. 14-76 LO 4  Presentation and Analysis Presentation of Non-Current Liabilities Note disclosures generally indicate the nature of the liabilities, maturity dates, interest rates, call provisions, conversion privileges, restrictions imposed by the creditors, and assets designated or pledged as security. Fair value of the debt should be disclosed. Must disclose future payments for sinking fund requirements and maturity amounts of long-term debt during each of the next five years. 14-77 LO 4  Presentation and Analysis Analysis of Non-Current Liabilities One ratio that provides information about debt-paying ability and long-run solvency is: Total Liabilities Debt to Assets = Total Assets The higher the percentage of total liabilities to total assets, the greater the risk that the company may be unable to meet its maturing obligations. 14-78 LO 4  Presentation and Analysis Analysis of Non-Current Liabilities A second ratio that provides information about debt-paying ability and long-run solvency is: Income before Income Taxes and Times Interest Expense Interest = Earned Interest Expense Indicates the company’s ability to meet interest payments as they come due. 14-79 LO 4  Presentation and Analysis Illustration: Novartis has total liabilities of $54,434 million, total assets of $131,556 million, interest expense of $655 million, income taxes of $1,106 million, and net income of $17,794 million. We compute Novartis’s debt to assets and times interest earned ratios as shown. ILLUSTRATION 14.28 Computation of Long-Term Debt Ratios for Novartis 14-80 LO 4  Thank you Chapter Two 14-81 End