Test .Bank .for .Intermediate .Accounting, .Twelfth .Canadian .Edition
,1. Understand .the .importance .of .non-financial .and .current .liabilities .from .a .business .perspective.
.Cash .flow .management .is .a .key .control .factor .for .most .businesses. .Taking .advantage .of .supplier
.discounts .for .prompt .payment .is .one .step .companies .can .take. .Control .of .expenses .and .related
.accounts .payable .can .improve .the .efficiency .of .a .business, .and .can .be .particularly .important
.during .economic .downturns.
2. Define .liabilities, .distinguish .financial .liabilities .from .other .liabilities, .and .identify .how .they .are
.measured. .Liabilities .are .defined .as .an .obligation .of .an .entity .arising .from .past .transactions .or
.events .that .are .settled .through .a .transfer .of .economic .resources .in .the .future. .The .entity .should
.have .little .(or .no) .ability .to .avoid .the .duty .or .responsibility. .Financial .liabilities .are .a .subset .of
.liabilities. .They .are .contractual .obligations .to .deliver .cash .or .other .financial .assets .to .another
.party, .or .to .exchange .financial .assets .or .liabilities .with .another .party .under .conditions .that .are
.potentially .unfavourable. .Financial .liabilities .are .initially .recognized .at .fair .value, .and .subsequently
.either .at .amortized .cost .or .fair .value. .ASPE .does .not .specify .how .non-financial .liabilities .are
.measured. .However, .unearned .revenue .is .generally .measured .at .the .fair .value .of .the .goods .or
.services .to .be .delivered .in .the .future, .while .others .are .measured .at .the .best .estimate .of .the
.resources .needed .to .settle .the .obligation. .Under .IFRS, .non-financial .liabilities .other .than .unearned
.revenue .are .measured .at .the .best .estimate .of .the .amount .the .entity .would .rationally .pay .at .the
.date .of .the .SFP .to .settle .the .present .obligation.
3. Define .current .liabilities .and .identify .and .account .for .common .types .of .current .liabilities. .Current
. liabilities .are .obligations .that .are .payable .within .one .year .from .the .date .of .the .SFP .or .within .the
.operating .cycle .if .the .cycle .is .longer .than .a .year. .IFRS .also .includes .liabilities .held .for .trading .and
.any .obligation .where .the .entity .does .not .have .an .unconditional .right .to .defer .settlement .beyond
.12 .months .after .the .date .of .the .SFP. .There .are .several .types .of .current .liabilities. .The .most
.common .are .accounts .and .notes .payable, .and .payroll-related .obligations.
4. Identify .and .account .for .the .major .types .of .employee-related .liabilities. .Employee-related
.liabilities .include .(1) .payroll .deductions, .(2) .compensated .absences, .and .(3) .profit-sharing .and .bonus
.agreements. .Payroll .deductions .are .amounts .that .are .withheld .from .employees .and .result .in .an
.obligation .to .the .government .or .another .party. .The .employer’s .matching .contributions .are .also
.included .in .this .obligation. .Compensated .absences .earned .by .employees .are .company
.obligations .that .are .recognized .as .employees .earn .an .entitlement .to .them, .as .long .as .they .can .be
.reasonably .measured. .Bonuses .based .on .income .are .accrued .as .an .expense .and .liability .as .the
.income .is .earned.
13-1
,5. Explain .the .recognition, .measurement, .and .disclosure .requirements .for .decommissioning .and
.restoration .obligations. .A .decommissioning, .restoration, .or .asset .retirement .obligation .(ARO) .is .an
.estimate .of .the .costs .a .company .is .obliged .to .incur .when .it .retires .certain .assets. .It .is .recorded .as .a
.liability .and .is .usually .long-term .in .nature. .Under .ASPE, .only .legal .obligations .are .recognized. .They
.are .measured .at .the .best .estimate .of .the .cost .to .settle .them .at .the .date .of .the .SFP, .and .the
.associated .cost .is .included .as .part .of .the .cost .of .property, .plant, .and .equipment. .Under .IFRS, .both
.legal .and .constructive .obligations .are .recognized. .They .are .measured .at .the .amount .the .entity
.would .rationally .pay .to .be .relieved .of .the .obligation, .and .are .capitalized .as .part .of .property, .plant
.and .equipment .or .to .inventory, .if .due .to .production .activities. .Over .time, .the .liability .is .increased
.for .the .time .value .of .money .and .the .asset .costs .are .amortized .to .expense. .Entities .disclose
.information .about .the .nature .of .the .obligation .and .how .it .is .measured, .with .more .disclosures
.required .under .IFRS .than .ASPE.
6. Explain .the .issues .and .account .for .product .guarantees, .other .customer .program .obligations, .and
.unearned .revenue. .Historically, .an .expense .approach .has .been .used .to .account .for .the
.outstanding .liability, .and .this .type .of .approach .is .still .used .for .assurance-type .warranties .as .initially
.discussed .in .Chapter .6. .More .recently, .standards .such .as .IFRS .15 .have .moved .to .a .revenue .approach
.for .warranties .that .are .not .included .in .the .sales .price .of .the .product .(that .is, .for .service-type
.warranties). .Under .the .expense .approach, .the .outstanding .liability .is .measured .at .the .cost .of .the
.economic .resources .needed .to .meet .the .obligation. .The .assumption .is .that, .along .with .the .liability
.that .is .required .to .be .recognized .at .the .reporting .date, .the .associated .expense .needs .to .be
.measured .and .matched .with .the .revenues .of .the .period. .Under .the .revenue .approach, .the
.outstanding .liability .is .measured .at .the .value .of .the .obligation. .The .proceeds .received .for .any .goods
.or .services .yet .to .be .delivered .or .performed .are .considered .to .be .unearned .revenue .at .the .point .of
.sale. .Until .the .revenue .is .earned, .the .obligation— .the .liability—is .reported .at .its .sales .or .fair .value.
.The .liability .is .then .reduced .as .the .revenue .is .earned.
More .generally, .when .an .entity .receives .proceeds .in .advance .or .for .multiple .deliverables, .unearned
.revenue .is .recognized .to .the .extent .the .entity .has .not .yet .performed. .This .is .measured .at .the .fair
.value .of .the .remaining .goods .or .services .that .will .be .delivered. .When .costs .remain .to .be .incurred .in
.revenue .transactions .where .the .revenue .is .considered .earned .and .has .been .recognized,
.estimated .liabilities .and .expenses .are .recognized .at .the .best .estimate .of .the .expenditures .that .will
.be .incurred. .This .is .an .application .of .the .matching .concept.
7. Explain .and .account .for .contingencies .and .uncertain .commitments, .and .identify .the .accounting
. and .reporting .requirements .for .guarantees .and .commitments. .Under .existing .standards, .a .loss .is
.accrued .and .a .liability .recognized .if .(1) .information .that .is .available .before .the .issuance .of .the
.financial .statements .shows .that .it .is .likely .(or .more .likely .than .not .under .IFRS) .that .a .liability .has
.been .incurred .at .the .date .of .the .financial .statements, .and .(2) .the .loss .amount .can .be .reasonably
.estimated .(under .IFRS, .it .would .be .a .rare .situation .where .this .could .not .be .done). .An .alternative
.approach .that .may .be .required .in .new .standards .being .considered .by .the .IASB .is .described .in .the
.Looking .Ahead .section .of .the .chapter.
Guarantees .in .general .are .accounted .for .similarly .to .contingencies. .Commitments, .or .contractual
, obligations, .do .not .usually .result .in .a .liability .at .the .date .of .the .SFP. .Information .about .specific .types
.of .outstanding .commitments .is .reported .at .the .date .of .the .SFP.
8. Indicate .how .non-financial .and .current .liabilities .are .presented .and .analyzed. .Current .liability
.accounts .are .commonly .presented .as .the .first .classification .in .the .liability .section .of .the .SFP,
.although .under .IFRS, .an .alternative .presentation .is .to .present .current .assets .and .liabilities .at .the
.bottom .of .the .statement. .Within .the .current .liability .section, .the .accounts .may .be .listed .in .order .of
.their .maturity .or .in .order .of .their .liquidation .preference. .IFRS .requires .information .about .and
.reconciliations .of .any .provisions. .Additional .information .is .provided .so .that .there .is .enough .to
.meet .the .requirement .of .full .disclosure. .Information .about .unrecognized .loss .contingencies .is
.reported .in .notes .to .the .financial .statements, .including .their .nature .and .estimates .of .possible
.losses. .Commitments .at .year .end .that .are .significant .in .size, .risk, .or .time .are .disclosed .in .the .notes
.to .the .financial .statements, .with .significantly .more .information .required .under .IFRS. .Three
.common .ratios .used .to .analyze .liquidity .are .the .current, .acid-test, .and .days .payables .outstanding
.ratios.
9. Identify .differences .in .accounting .between .IFRS .and .ASPE .and .what .changes .are .expected .in
.the .near .future. .The .IASB .issued .a .new .Conceptual .Framework .for .Financial .Reporting .in .March
.2018 .that, .among .other .things, .provides .clearer .definitions .of .assets .and .liabilities, .including .more
.detailed .guidance .for .interpreting .the .definitions. .Accounting .for .a .variety .of .liabilities, .including
.contingencies, .continues .to .be .under .review .by .the .IASB. .An .Exposure .Draft .(ED) .was .issued .in
.2010 .proposing .amendments .to .the .measurement .requirements .of .IAS .37. .However, .due .to .the
.significant .opposition .expressed .to .the .ED, .the .project .was .suspended. .In .June .2015, .a .Staff .Paper
.entitled .research—provisions, .contingent .liabilities, .and .contingent .assets .(IAS .37)—was
.published. .Based .on .the .research .in .the .Staff .Paper, .the .IASB .is .expected .to .decide .whether .to .start
.an .active .project .to .amend .IAS .37 .now .that .revisions .to .the .conceptual .framework .have .been
.finalized.
,1. Understand .the .importance .of .non-financial .and .current .liabilities .from .a .business .perspective.
.Cash .flow .management .is .a .key .control .factor .for .most .businesses. .Taking .advantage .of .supplier
.discounts .for .prompt .payment .is .one .step .companies .can .take. .Control .of .expenses .and .related
.accounts .payable .can .improve .the .efficiency .of .a .business, .and .can .be .particularly .important
.during .economic .downturns.
2. Define .liabilities, .distinguish .financial .liabilities .from .other .liabilities, .and .identify .how .they .are
.measured. .Liabilities .are .defined .as .an .obligation .of .an .entity .arising .from .past .transactions .or
.events .that .are .settled .through .a .transfer .of .economic .resources .in .the .future. .The .entity .should
.have .little .(or .no) .ability .to .avoid .the .duty .or .responsibility. .Financial .liabilities .are .a .subset .of
.liabilities. .They .are .contractual .obligations .to .deliver .cash .or .other .financial .assets .to .another
.party, .or .to .exchange .financial .assets .or .liabilities .with .another .party .under .conditions .that .are
.potentially .unfavourable. .Financial .liabilities .are .initially .recognized .at .fair .value, .and .subsequently
.either .at .amortized .cost .or .fair .value. .ASPE .does .not .specify .how .non-financial .liabilities .are
.measured. .However, .unearned .revenue .is .generally .measured .at .the .fair .value .of .the .goods .or
.services .to .be .delivered .in .the .future, .while .others .are .measured .at .the .best .estimate .of .the
.resources .needed .to .settle .the .obligation. .Under .IFRS, .non-financial .liabilities .other .than .unearned
.revenue .are .measured .at .the .best .estimate .of .the .amount .the .entity .would .rationally .pay .at .the
.date .of .the .SFP .to .settle .the .present .obligation.
3. Define .current .liabilities .and .identify .and .account .for .common .types .of .current .liabilities. .Current
. liabilities .are .obligations .that .are .payable .within .one .year .from .the .date .of .the .SFP .or .within .the
.operating .cycle .if .the .cycle .is .longer .than .a .year. .IFRS .also .includes .liabilities .held .for .trading .and
.any .obligation .where .the .entity .does .not .have .an .unconditional .right .to .defer .settlement .beyond
.12 .months .after .the .date .of .the .SFP. .There .are .several .types .of .current .liabilities. .The .most
.common .are .accounts .and .notes .payable, .and .payroll-related .obligations.
4. Identify .and .account .for .the .major .types .of .employee-related .liabilities. .Employee-related
.liabilities .include .(1) .payroll .deductions, .(2) .compensated .absences, .and .(3) .profit-sharing .and .bonus
.agreements. .Payroll .deductions .are .amounts .that .are .withheld .from .employees .and .result .in .an
.obligation .to .the .government .or .another .party. .The .employer’s .matching .contributions .are .also
.included .in .this .obligation. .Compensated .absences .earned .by .employees .are .company
.obligations .that .are .recognized .as .employees .earn .an .entitlement .to .them, .as .long .as .they .can .be
.reasonably .measured. .Bonuses .based .on .income .are .accrued .as .an .expense .and .liability .as .the
.income .is .earned.
13-1
,5. Explain .the .recognition, .measurement, .and .disclosure .requirements .for .decommissioning .and
.restoration .obligations. .A .decommissioning, .restoration, .or .asset .retirement .obligation .(ARO) .is .an
.estimate .of .the .costs .a .company .is .obliged .to .incur .when .it .retires .certain .assets. .It .is .recorded .as .a
.liability .and .is .usually .long-term .in .nature. .Under .ASPE, .only .legal .obligations .are .recognized. .They
.are .measured .at .the .best .estimate .of .the .cost .to .settle .them .at .the .date .of .the .SFP, .and .the
.associated .cost .is .included .as .part .of .the .cost .of .property, .plant, .and .equipment. .Under .IFRS, .both
.legal .and .constructive .obligations .are .recognized. .They .are .measured .at .the .amount .the .entity
.would .rationally .pay .to .be .relieved .of .the .obligation, .and .are .capitalized .as .part .of .property, .plant
.and .equipment .or .to .inventory, .if .due .to .production .activities. .Over .time, .the .liability .is .increased
.for .the .time .value .of .money .and .the .asset .costs .are .amortized .to .expense. .Entities .disclose
.information .about .the .nature .of .the .obligation .and .how .it .is .measured, .with .more .disclosures
.required .under .IFRS .than .ASPE.
6. Explain .the .issues .and .account .for .product .guarantees, .other .customer .program .obligations, .and
.unearned .revenue. .Historically, .an .expense .approach .has .been .used .to .account .for .the
.outstanding .liability, .and .this .type .of .approach .is .still .used .for .assurance-type .warranties .as .initially
.discussed .in .Chapter .6. .More .recently, .standards .such .as .IFRS .15 .have .moved .to .a .revenue .approach
.for .warranties .that .are .not .included .in .the .sales .price .of .the .product .(that .is, .for .service-type
.warranties). .Under .the .expense .approach, .the .outstanding .liability .is .measured .at .the .cost .of .the
.economic .resources .needed .to .meet .the .obligation. .The .assumption .is .that, .along .with .the .liability
.that .is .required .to .be .recognized .at .the .reporting .date, .the .associated .expense .needs .to .be
.measured .and .matched .with .the .revenues .of .the .period. .Under .the .revenue .approach, .the
.outstanding .liability .is .measured .at .the .value .of .the .obligation. .The .proceeds .received .for .any .goods
.or .services .yet .to .be .delivered .or .performed .are .considered .to .be .unearned .revenue .at .the .point .of
.sale. .Until .the .revenue .is .earned, .the .obligation— .the .liability—is .reported .at .its .sales .or .fair .value.
.The .liability .is .then .reduced .as .the .revenue .is .earned.
More .generally, .when .an .entity .receives .proceeds .in .advance .or .for .multiple .deliverables, .unearned
.revenue .is .recognized .to .the .extent .the .entity .has .not .yet .performed. .This .is .measured .at .the .fair
.value .of .the .remaining .goods .or .services .that .will .be .delivered. .When .costs .remain .to .be .incurred .in
.revenue .transactions .where .the .revenue .is .considered .earned .and .has .been .recognized,
.estimated .liabilities .and .expenses .are .recognized .at .the .best .estimate .of .the .expenditures .that .will
.be .incurred. .This .is .an .application .of .the .matching .concept.
7. Explain .and .account .for .contingencies .and .uncertain .commitments, .and .identify .the .accounting
. and .reporting .requirements .for .guarantees .and .commitments. .Under .existing .standards, .a .loss .is
.accrued .and .a .liability .recognized .if .(1) .information .that .is .available .before .the .issuance .of .the
.financial .statements .shows .that .it .is .likely .(or .more .likely .than .not .under .IFRS) .that .a .liability .has
.been .incurred .at .the .date .of .the .financial .statements, .and .(2) .the .loss .amount .can .be .reasonably
.estimated .(under .IFRS, .it .would .be .a .rare .situation .where .this .could .not .be .done). .An .alternative
.approach .that .may .be .required .in .new .standards .being .considered .by .the .IASB .is .described .in .the
.Looking .Ahead .section .of .the .chapter.
Guarantees .in .general .are .accounted .for .similarly .to .contingencies. .Commitments, .or .contractual
, obligations, .do .not .usually .result .in .a .liability .at .the .date .of .the .SFP. .Information .about .specific .types
.of .outstanding .commitments .is .reported .at .the .date .of .the .SFP.
8. Indicate .how .non-financial .and .current .liabilities .are .presented .and .analyzed. .Current .liability
.accounts .are .commonly .presented .as .the .first .classification .in .the .liability .section .of .the .SFP,
.although .under .IFRS, .an .alternative .presentation .is .to .present .current .assets .and .liabilities .at .the
.bottom .of .the .statement. .Within .the .current .liability .section, .the .accounts .may .be .listed .in .order .of
.their .maturity .or .in .order .of .their .liquidation .preference. .IFRS .requires .information .about .and
.reconciliations .of .any .provisions. .Additional .information .is .provided .so .that .there .is .enough .to
.meet .the .requirement .of .full .disclosure. .Information .about .unrecognized .loss .contingencies .is
.reported .in .notes .to .the .financial .statements, .including .their .nature .and .estimates .of .possible
.losses. .Commitments .at .year .end .that .are .significant .in .size, .risk, .or .time .are .disclosed .in .the .notes
.to .the .financial .statements, .with .significantly .more .information .required .under .IFRS. .Three
.common .ratios .used .to .analyze .liquidity .are .the .current, .acid-test, .and .days .payables .outstanding
.ratios.
9. Identify .differences .in .accounting .between .IFRS .and .ASPE .and .what .changes .are .expected .in
.the .near .future. .The .IASB .issued .a .new .Conceptual .Framework .for .Financial .Reporting .in .March
.2018 .that, .among .other .things, .provides .clearer .definitions .of .assets .and .liabilities, .including .more
.detailed .guidance .for .interpreting .the .definitions. .Accounting .for .a .variety .of .liabilities, .including
.contingencies, .continues .to .be .under .review .by .the .IASB. .An .Exposure .Draft .(ED) .was .issued .in
.2010 .proposing .amendments .to .the .measurement .requirements .of .IAS .37. .However, .due .to .the
.significant .opposition .expressed .to .the .ED, .the .project .was .suspended. .In .June .2015, .a .Staff .Paper
.entitled .research—provisions, .contingent .liabilities, .and .contingent .assets .(IAS .37)—was
.published. .Based .on .the .research .in .the .Staff .Paper, .the .IASB .is .expected .to .decide .whether .to .start
.an .active .project .to .amend .IAS .37 .now .that .revisions .to .the .conceptual .framework .have .been
.finalized.
