Long Term Liabilities Vocabulary

Flashcards covering the vocabulary and definitions discussed in the Long Term Liabilities lecture.

Liability

Obligation that brings about a PROBABLE loss or future sacrifice of assets (ex. cash) for a PAST act or CURRENT benefit (ex. salaries payable, lawsuit damages liability, A/P, LT loan payable, etc.)

Liabilities vs Obligations

Liabilities are as SUBSET of Obligations: All Liabilities are Obligations, NOT all Obligations are Liabilities

US GAAP Probable Loss

80% probability of occurring

IFRS Probable Loss

50% probability

Lease

ASSET “BORROWING” – contract for use of asset for specified period for specified payments

Lessor

Asset Owner (“lender”)

Lessee

Asset User (“borrower”)

Operating Lease

Asset Used for LESS THAN 75% of Useful Life / 90% of value used / no bargain purchase option, asset title reverts back to owner.

Capital Lease

Asset Used for MORE THAN 75%/90% threshold / Bargain Purchase Option Accounting is the Same as LTL accounting

Commitment

Exchange of promises for future performance (Executory Agreements) [ex. future services / delivery, (historically future lease payments – no longer) ]

Contingencies

Firm “Guarantees” payment If another entity’s Liabilities if the other entity does not pay [ ex. co-signing a loan; parent company guaranteeing a subsidiary payment]

Constructive Liabilities

Obligation to pay (future outflow of assets) by a firm’s commitment to pay without receipt of any MEASURABLE benefit: Recorded immediately as a Liability [ ex. severance / benefits pay to laid off employees, terminated real estate lease penalties ]

Long Term Monetary Items Recorded Value

PRESENT VALUE (PV) OF FUTURE CASH FLOWS related to the monetary item

Lump Sum

a one time payment at the end of a period (for example: repayment/receipt of the principal amount of a loan)

Annuity

a series of fixed payments for a fixed period of time (example: interest payments)

Self-Amortizing Loan

loan where the borrower makes payments that pay BOTH interest AND a portion of the principal amount (Face) each period.