F4 M1 FAR CPA

Liabilities

Probable future sacrifices of economic benefits arising from present obligations of an entity to transfer assets or provide services to other entities in the future as a result of past transactions or events

• Current Liability = Operating Liability

• Non-Current Liability = Interest bearing (financing liability)

Trade Accounts Payable

Amounts owed for goods, raw materials, and supplies that are not evidenced by a promissory note

• Operating/ current liability

• Can be recorded to inventory or purchases

Trade Notes Payable

Formal, written promise to pay on a certain date

• Interest bearing

  • Note, debt, bonds, debentures

Current Obligations Expected to Be Refinanced

Current obligations expected to be refinanced may be excluded from current liabilities and be included in non-current liabilities if (Both Intent and Ability):

1. Actual refinancing prior to the issuance of financial statements

2. Existence of a non-cancelable financing agreement from a lender having the financial resources to accomplish the refinancing

Payroll Deductions

Employee taxes (Social Security, Medicare, and income taxes) that are withheld from employees out of the gross pay of their paychecks

• NOT an expense to Employer

• Must remit withheld taxes = Payable

Accrued Vacation

Apart of salary and wages expense that’s accrued and recorded in the year the vacation was earned by the employee

• Accrue and record if all of the following conditions are met:

  • S- Services have already been rendered by employees

  • O- The Obligation relates to rights that vest or accumulate

  • C - Payment of compensation is probable

  • R- Amount can be reasonably estimated

If only the first criteria are met, disclosure in a note is required

Exit or Disposal Activities

Recognize a liability for the costs of an exit or disposal activity when a transaction or event occurs that creates a present obligation of an entity to transfer an economic benefit

• Costs include:

  • Severance Pay: Involuntary employee termination benefits

  • Breach of Contract: Costs to terminate a contract that is NOT a lease

  • Other costs: Consolidating facilities and relocating employees, moving PP&E

Liability should be measured at Fair Value or (if NOT given) measure at the Present Value of all associated costs

Asset Retirement Obligations (AROs)

A legal obligation associated with the retirement of a tangible long-lived asset that results from the acquisition, construction, or development, and normal operation of a long-loved asset, except for certain lease obligations

• Record as a liability for future payment required to clean up, close down, or restore the condition of the asset; recorded at the PV of future CF

  • Closure costs or removal costs

• Debit ARC___

• Credit ARO___

Asset Retirement Cost (ARC)

The amount capitalized (asset) that increases the carrying value of the long-lived asset when a liability for an ARO is recognized

• Must be depreciated and spread over the remaining years to be benefitted, which decreases the asset

Accretion Expense

The increase in the ARO liability due to the passage of time

• Begging CV of ARO * Accretion Rate

Contingency

An existing condition, situation, or set of circumstances involving uncertainty as to a possible gain or loss that will be determined when a future event occurs or fails to occur

• Do NOT book Gain contingencies (NO accrual)

Loss Contingency

A possible future loss whose existence is proven by subsequent events

• Recognition in financial statements depends on the likelihood of the future event

1. Probable & Reasonably Estimated —> Accrue and record journal entry

2. Reasonably Possible —> Disclose it in notes

3. Remote —> Do NOT record journal entry; do NOT disclose in notes (EXCEPTION = DOG Guarantee)

General risk (Fires, strikes, war) do NOT have to be disclosed/ booked

Gain Contingency

Claims or rights to receive assets whose existence is uncertain but may become valid upon the occurrence of future events (Ex: Insurance proceeds)

• Do NOT record Journal Entry, until realized —→ Rule of conservatism

• Disclose in the financial statements as long as the probability is NOT remote

Premiums

Offers to customers for the purpose of stimulating sales; costs are charged to sales as an Expense in periods that benefit from the offer

• Offered in return for coupons, box tops, labels

• Must book and expense the number of outstanding premium offers as a current liability

Warranty

A seller’s promise to correct any product defects

• Creates a liability account if the cost can be reasonably estimated which is accrued in the year of sale

• Debit Estimated Warranty Expense (In year of sale)

• Credit Warranty Liability (In year of sale)

Annuity

Multiple equal payments that company is either making (Company borrows money) or receiving (Bond holder)

• Multiple equal cash flows; every payment is the exact same amount

  • Making Payments = Liability

  • Receiving Payments = Asset

Ordinary Annuity (Annuity in arrears)

Payments are being made at the end of each period

• Present Value of coupon payments

Annuity Due

Payments are made at the beginning of each period

• “Starting today”

• “Beginning now”

• “First payment immediately”

Single Lump-Sum

A single cash flow that we will either pay (Liability) or receive (Asset) in the future; Present value of $1

Long-term Liabilities

Probable sacrifices of economic benefits associated with the present obligations that are ot payable within the current operating cycle or reporting year (whichever one is greater)

Notes Payable

Contractual rights to pay money at a fixed or determinable rate that is recorded at Present Value of the date of issuance; discount rate must be calculated

• Negotiated debt/ interest-bearing debt

• If note is non-interest bearing —> Value of note must be determined by imputing the market rate of the note by using the Effective Interest Method

Discount on N/P

Contra-liability account that’s calculated from taking the Gross Notes Payable and subtracting the Present Value of the Notes Payable; will be recorded over life of the note and will be amortized

• Reduces Notes Payable

• Deferred Interest expense (Unamortized): Represents interest over the passage of time

Effective Interest Method

A method under which each payment on a note is allocated to interest and principal as though the note had a constant effective stated rate or interest

Debt Covenants

Used in lending agreements to protect their interest by limiting or prohibiting the actions of debtors that might negatively effect the positions of the creditors

• 2 types:

• Affirmative Covenants: Things Debtor will do

• Negative Covenants: Things Debtor should NOT do

Technical Default

Occurs when debt covenants are violated by the debtor

Post-Employment Benefits

Requirements to record/ accrue post-employment benefits:

1. The employer's obligation relating to the employees' rights to receive compensation for future absences is attributable to services already rendered.

2. The obligation relates to rights that vest or accumulate.

3. Payment of the compensation is probable.

4. The amount can be reasonably estimated.

Employees' compensation for future absences

Employees' compensation for future absences should be accrued if:

1. Services are already rendered and

2. The amount can be reasonably estimated and

3. The obligation relates to vested or accumulated rights and

4. Payment of the compensation is probable.