Chapter 13: current and non-financial liabilities
Short-term Debt to be refinanced (GAAP VS. IFRS)
-IFRS: current debt can only be reclassified as long term if the entity expects to refinance it under an existing agreement at the balance sheet date decision is solely at its discretion
-GAAP: current debt can be reclassified as long term if there is evidence the firm will refinance at the date financial statements are issued

Asset retirement obligations (ARO)
-IFRS recognizes legal and constructive obligations
-GAAP recognizes only legal obligations
-ARO IS NOT reported as a separate asset because it does not provide economic benefit alone
-Under IFRS, accretion expense considered financing cost, recorded as interest expense 1. Find present value of expected retirement obligation 2. Add the ARO cost to the carrying amount of the asset, create ARO liability 3. Amortize and expense the discount on the ARO (accretion expense) 4. Upon settlement, Debit the ARO, Credit Cash and record a gain/loss on settlement

Expense Approach
-liability is measured at the estimated cost of meeting the obligation
-no effect on future net income, because the full revenue/expense is recorded immediately
Revenue Approach
-liability is measured at the value of the service to be provided, not its cost
-future income is expected because revenue will be recognized as the liability decreases
-warranty service is considered separate deliverable, unearned revenue

Warranties: promise made by a seller to a buyer to correct product issues
Expense approach illustrated
July -Dec. 31, 2011(Record sale in full)
Cash/AR 500,000 Sales 500,000 July-Dec. 31, 2011 (actual warranty costs incurred)
Warranty Expense 4000 Cash/Inventory/payroll 4000

Dec. 31, 2011 (accrue outstanding warranty obligations, 20,000 – 4000 already incurred)
Warranty Expense 16,000 Estimated Liability 16,000

2012 (actual costs incurred)
Warranty Expense 16,000 Cash/Inventory/payroll 16,000

Dec. 31, 2012 (adjusting entry to adjust liability account to $0)
Estimated Liability 16,000 Warranty Expense 16,000

Revenue approach illustrated Jan. 2, 2011 (record sale and allocate unearned warranty obligation)
Cash 20,000 Sales 18,800 Unearned warranty Revenue 1200 Dec, 31, 2011 (recognize revenue assuming it is earned evenly over 2 years)
Unearned Warranty Revenue 600 Warranty Revenue 600

Dec. 31, 2011 (record costs incurred as a result of servicing the warranty)
Warranty expense 423 Cash/Accounts payable 423

If costs are expected to be more than remaining unearned revenue (onerous contract) record loss and liability for the amount

Premiums: benefits offered to customers in return for box tops, coupons, wrappers, etc… 1. Record purchase of inventory of premiums
(purchase of 20,000 bowls at $2.25 each)
Inventory of premiums 45,000 Cash 45,000

2. Record sales of related product
Cash 630,000
Sales 630,000

3. Redemption of 60,000 box tops for premiums with a dollar for every 10 box tops and delivery of 6000 mixing bowls
Cash 6000
Premium expense 7500 Inventory of premiums 13,500

4. Adjusting entry to recognize remaining estimated liability/expense for outstanding premiums, equal to the difference between the cost per premium and the cash to be received

(estimated redemptions on 300,000 boxes is 60%, 60,000 already redeemed 10 box tops required)
Premium expense 15,000 Estimated premium Liability 15,000

Contingency liabilities (GAAP VS. IFRS)
GAAP: liability must be accrued if it is more likely than not that future events will confirm the liability
-disclosure in notes still required if it can’t be estimated and likelihood unknown

IFRS: liability must be accrued if it is somewhat probable that future events will confirm the liability
-disclosure