Non-current Liabilities Notes (Ch. 15)

Non-current liabilities

An obligation expected to be paid more than one year in the future

Main types of non-current liabilities

- Bonds Payable (debt)

- Instalment Notes

- Lease Obligations

Why issue debt instead of equity?

- keep shareholder control unchanged

- provide tax savings since interest exp is deductible

-Return on Equity / Earnings per Share may be higher

A disadvantage of debt financing is

Interest obligations & increased financial risk

A bond is a promise to...

- Pay interest periodically

- Repay the face value at maturity

Types of Bonds

secured (backed by specific assets) unsecured (backed by trust/general credit),

convertible (can be converted to common shares),

callable (company can redeem before maturity)

Bond Pricing

Market value of bond = PV of all future cash payments

Market rate determines the present value

Present value of interest payments + Present face value

market rate & contract rate

Market rate > contractual rate -> sold at discount

Market rate < contractual rate -> sold at premium

Market rate = contractual rate -> face value

Bond Issued at Face Value

Dr. Cash

Cr. Bonds Payable

interest for bonds at face value

Dr. Interest Expense

Cr. Cash

( (Face value amt) * (x%) * (x/12) ) -> effective-interest method of amortization

Steps of effective interest method for bonds at discount

1. compute the bond interest expense

(Carrying amt * market rate * time)

2. compute the bond interest paid or accrued

(Face value * contractual rate * time)

3. compute the amortization amounted (interest expense - interest paid)

Needs approval from board of directors

- number of bonds to be sold

- the total face value (par value & maturity value)

- contractual interest rate (coupon interest rate, stated interest rate)

- maturity dates

- market interest rates

Lease Liabilities

long-term contractual arrangements between two parties

leesor vs leesee

Leesor: owner of the asset

Lessee: right to use the asset in return for a series of cash payments over an agreed period of time

Operating lease (ASPE)

- benefits and risks of ownership are not transferred to lessee

- rental payments recorded as expense by leesee and as revenue by lessor

Capital leases (ASPE)

Any of the following:

- leesee owned the assets at the end of lease

- lease contains a bargain purchase option

- lease term is >/= to 75% of economic life of leased property

- PV of lease payments >/= to 90% of FV of leased property

Accounting for lease arrangements (IFRS)

"Right-of-use assets" and related lease liabilities in balance sheet, unless:

- leases with term less than 12 months

- leases for certain low-value assets