15
Long-Term Liabilities
Learning Objectives
15-1
1
Describe the major characteristics of bonds.
2
Explain how to account for bond transactions.
3
Explain how to account for long-term notes payable.
4
Discuss how long-term liabilities are reported and analyzed.
LEARNING
OBJECTIVE
1
Describe the major characteristics of bonds.
Long-term liabilities are obligations that are expected to
be paid after one year.
Bonds are a form of interest-bearing notes payable.
15-2

Sold in small denominations (usually $1,000 or multiples
of $1,000).

Attract many investors.

Corporation issuing bonds is borrowing money.

Person who buys the bonds (the bondholder) is investing
in bonds.
LO 1
Types of Bonds
15-3
LO 1
Bonds
Issuing Procedures
15-4

State laws grant corporations the power to issue bonds.

Board of directors and stockholders must approve bond
issues.

Board of directors must stipulate number of bonds to be
authorized, total face value, and contractual interest rate.

Bond terms set forth in legal document known as a bond
indenture.

Bond certificate, typically a $1,000 face value.
LO 1
Bonds
Issuing Procedures

15-5
Represents a promise to pay:
►
sum of money at designated maturity date, plus
►
periodic interest at a contractual (stated) rate on the
maturity amount (face value).

Interest payments usually made semiannually.

Issued to obtain large amounts of long-term capital.

Investment company sells the bonds for the issuing
company.
LO 1
Illustration 15-1
Bond certificate
15-6
LO 1
Determining the Market Value of a Bond
Current market price (present value) is a function of the three
factors:
1. dollar amounts to be received,
2. length of time until the amounts are received, and
3. market rate of interest.
The market interest rate is the rate investors demand for
loaning funds.
15-7
LO 1
Determining the Market Value of a Bond
Illustration: Assume that Acropolis Company on January 1, 2017,
issues $100,000 of 9% bonds, due in five years, with interest
payable annually at year-end. The purchaser of the bonds would
receive the following two types of cash payments: (1) principal of
$100,000 to be paid at maturity, and (2) five $9,000 interest
payments ($100,000 x 9%) over the term of the bonds.
15-8
Illustration 15-2
Time diagram depicting cash flows
LO 1
Determining the Market Value of a Bond
Illustration 15-2
The current market price of a bond is equal to the present value of
all the future cash payments promised by the bond.
15-9
Illustration 15-3
Computing the market price of bonds
LO 1
DO IT! 1
Bond Terminology
State whether each of the following statements is true or false.
True 1. Mortgage bonds and sinking fund bonds are both
_______
examples of secured bonds.
True 2. Unsecured bonds are also known as debenture bonds.
_______
False 3. The stated rate is the rate investors demand for loaning
_______
funds.
True 4. The face value is the amount of principal the issuing
_______
company must pay at the maturity date.
False 5. The market price of a bond is equal to its maturity
_______
value.
15-10
LO 1
LEARNING
OBJECTIVE
2
Explain how to account for bond
transactions.
Corporation records bond transactions when it

issues (sells),

redeems (buys back) bonds, and

when bondholders convert bonds into common stock.
NOTE: If bondholders sell their bond investments to other investors,
the issuing company receives no further money on the transaction, nor
does the issuing company journalize the transaction.
15-11
LO 2
Accounting for Bond Transactions
Issue at Face Value, Discount, or Premium?
Illustration 15-4
Interest rates and bond prices
Bond
Contractual
Interest
Rate 10%
15-12
Run slide show to reveal “Bonds Sell at.”
LO 2
Accounting for Bond Transactions
Question
The rate of interest investors demand for loaning funds to a
corporation is the:
a. contractual interest rate.
b. face value rate.
c. market interest rate.
d. stated interest rate.
15-13
LO 2
Accounting for Bond Transactions
Question
Karson Inc. issues 10-year bonds with a maturity value of $200,000.
If the bonds are issued at a premium, this indicates that:
a. the contractual interest rate exceeds the market interest rate.
b. the market interest rate exceeds the contractual interest rate.
c. the contractual interest rate and the market interest rate are
the same.
d. no relationship exists between the two rates.
15-14
LO 2
Issuing Bonds at Face Value
Illustration: On January 1, 2017, Candlestick, Inc. issues
$100,000, five-year, 10% bonds at 100 (100% of face value).
The entry to record the sale is:
Jan. 1
Cash
100,000
Bonds Payable
15-15
100,000
LO 2
Issuing Bonds at Face Value
Illustration: On January 1, 2017, Candlestick, Inc. issues
$100,000, five-year, 10% bonds at 100 (100% of face value).
Assume that interest is payable annually on January 1. At
December 31, 2017, Candlestick recognizes interest expense
incurred with the following entry. Assume monthly accruals
have not been made.
Dec. 31 Interest Expense
Interest Payable
15-16
10,000
10,000
LO 2
Issuing Bonds at Face Value
Illustration: On January 1, 2017, Candlestick, Inc. issues
$100,000, five-year, 10% bonds at 100 (100% of face value).
Assume that interest is payable annually on January 1.
Candlestick records the payment on January 1, 2018, as
follows.
Jan. 1
Interest Payable
Cash
15-17
10,000
10,000
LO 2
Issuing Bonds at a Discount
Illustration: On January 1, 2017, Candlestick,
Inc. sells $100,000, five-year, 10% bonds for
$98,000 (98% of face value). Interest is
payable annually January 1. The entry to
record the issuance is:
Jan. 1
Cash
98,000
Discount on Bonds Payable
Bonds Payable
15-18
2,000
100,000
LO 2
Issuing Bonds at a Discount
Statement Presentation
Illustration 15-5
Statement presentation of
discount on bonds payable
Carrying value or
book value
Sale of bonds below face value (discount) =
total cost of borrowing > interest paid.
Reason: Borrower is required to pay the bond discount at the maturity
date. Therefore, the bond discount is considered to be a increase in
the cost of borrowing.
15-19
LO 2
Issuing Bonds at a Discount
Total Cost of Borrowing
Illustration 15-6
OR
15-20
Illustration 15-7
LO 2
Issuing Bonds at a Discount
Illustration 15-8
Amortization of bond discount
15-21
LO 2
Issuing Bonds at a Discount
Question
Discount on Bonds Payable:
a. has a credit balance.
b. is a contra account.
c. is added to bonds payable on the balance sheet.
d. increases over the term of the bonds.
15-22
LO 2
Issuing Bonds at a Premium
Illustration: On January 1, 2017,
Candlestick, Inc. sells $100,000, five-year,
10% bonds for $102,000 (102% of face
value). Interest is payable annually
January 1. The entry to record the issuance
is:
Jan. 1
Cash
102,000
Bonds Payable
Premium on Bonds Payable
15-23
100,000
2,000
LO 2
Issuing Bonds at a Premium
Statement Presentation
Illustration 15-9
Statement presentation of
discount on bonds payable
Sale of bonds above face value (premium) =
total cost of borrowing < interest paid.
Reason: Borrower is not required to pay the bond premium at the
maturity date of the bonds. Therefore, the bond premium is
considered to be a reduction in the cost of borrowing.
15-24
LO 2
Issuing Bonds at a Premium
Total Cost of Borrowing
Illustration 15-10
OR
15-25
Illustration 15-11
LO 2
Issuing Bonds at a Premium
Illustration 15-12
Amortization of bond premium
15-26
LO 2
DO IT!
2a
Bond Issuance
Giant Corporation issues $200,000 of bonds for $189,000. (a)
Prepare the journal entry to record the issuance of the bonds, and
(b) show how the bonds would be reported on the balance sheet at
the date of issuance.
Solution
(a)
Cash
Discount on Bonds Payable
189,000
11,000
Bonds Payable
(b)
Long-term liabilities
Bonds payable
Less: Discount on bonds payable
15-27
200,000
$200,000
11,000
$189,000
LO 2
REDEEMING BONDS AT MATURITY
Assuming that the company pays and records separately the
interest for the last interest period, Candlestick records the
redemption of its bonds at maturity as follows:
Jan. 1
Bonds Payable
Cash
15-28
100,000
100,000
LO 2
REDEEMING BONDS BEFORE MATURITY
When bonds are redeemed before maturity, it is necessary to:
1. eliminate carrying value of bonds at redemption date;
2. record cash paid; and
3. recognize gain or loss on redemption.
The carrying value of the bonds is the face value of the bonds less any
remaining bond discount or plus any remaining bond premium at the
redemption date.
15-29
LO 2
REDEEMING BONDS BEFORE MATURITY
Question
When bonds are redeemed before maturity, the gain or loss
on redemption is the difference between the cash paid and
the:
a. carrying value of the bonds.
b. face value of the bonds.
c. original selling price of the bonds.
d. maturity value of the bonds.
15-30
LO 2
REDEEMING BONDS BEFORE MATURITY
Illustration: Assume Candlestick, Inc. has sold its bonds at a
premium. At the end of the fourth period, Candlestick retires
these bonds at 103 after paying the annual interest. The
carrying value of the bonds at the redemption date is $100,400.
Candlestick makes the following entry to record the redemption
at the end of the fourth interest period (January 1, 2021):
Jan. 1
Bonds Payable
Premium on Bonds Payable
Loss on Bond Redemption
Cash
15-31
100,000
400
2,600
103,000
LO 2
CONVERTING BONDS INTO COMMON STOCK
Until conversion, the bondholder receives interest on the
bond.
For the issuer, the bonds sell at a higher price and pay a
lower rate of interest than comparable debt securities
without the conversion option.
Upon conversion, the company transfers the carrying value
of the bonds to paid-in capital accounts. No gain or loss is
recognized.
15-32
LO 2
CONVERTING BONDS INTO COMMON STOCK
Illustration: On July 1, Saunders Associates converts
$100,000 bonds sold at face value into 2,000 shares of $10
par value common stock. Both the bonds and the common
stock have a market value of $130,000. Saunders makes the
following entry to record the conversion:
July 1 Bonds Payable
15-33
100,000
Common Stock (2,000 x $10)
20,000
Paid-in Capital in Excess of Par—
Common Stock
80,000
LO 2
CONVERTING BONDS INTO COMMON STOCK
Question
When bonds are converted into common stock:
a. a gain or loss is recognized.
b. the carrying value of the bonds is transferred to paidin capital accounts.
c. the market price of the stock is considered in the
entry.
d. the market price of the bonds is transferred to paidin capital.
15-34
LO 2
People, Planet, and Profit Insight
Unilever
How About Some Green Bonds?
Unilever recently began producing popular frozen treats such as Magnums and
Cornettos, funded by green bonds. Green bonds are debt used to fund activities
such as renewable- energy projects. In Unilever’s case, the proceeds from the
sale of green bonds are used to clean up the company’s manufacturing
operations and cut waste (such as related to energy consumption).
The use of green bonds has taken off as companies now have guidelines as to
how to disclose and report on these green-bond proceeds. These standardized
disclosures provide transparency as to how these bonds are used and their effect
on overall profitability. Investors are taking a strong interest in these bonds.
Investing companies are installing socially responsible investing teams and have
started to integrate sustainability into their investment processes. The disclosures
of how companies are using the bond proceeds help investors to make better
financial decisions.
Source: Ben Edwards, “Green Bonds Catch On.” Wall Street Journal (April 3, 2014), p. C5.
15-35
LO 2
DO IT!
2b
Bond Redemption
R & B Inc. issued $500,000, 10-year bonds at a discount. Prior
to maturity, when the carrying value of the bonds is $496,000,
the company redeems the bonds at 98. Prepare the entry to
record the redemption of the bonds.
Solution
Bonds Payable
Discount on Bonds Payable
4,000
Gain on Bond Redemption
6,000
Cash ($500,000 x 98%)
15-36
500,000
490,000
LO 2
LEARNING
OBJECTIVE
3
Explain how to account for long-term notes
payable.
Long-Term Notes Payable

May be secured by a mortgage that pledges title to
specific assets as security for a loan.

Typically, the terms require the borrower to make
installment payments over the term of the loan. Each
payment consists of
1. interest on the unpaid balance of the loan and
2. a reduction of loan principal.

15-37
Companies initially record mortgage notes payable at
face value.
LO 3
Long-Term Notes Payable
Illustration: Porter Technology Inc. issues a $500,000, 8%, 20-
year mortgage note on December 31, 2017. The terms provide
for semiannual installment payments of $50,926 (not including
real estate taxes and insurance).
15-38
Illustration 15-13
Mortgage installment payment schedule
LO 3
Long-Term Notes Payable
Illustration: Porter Technology Inc. issues a $500,000, 8%,
20-year mortgage note on December 31, 2017. The terms
provide for semiannual installment payments of $50,926 (not
including real estate taxes and insurance). Prepare the entries
to record the mortgage and first payment.
Dec. 31
Cash
500,000
Mortgage Payable
Dec. 31
Interest Expense
40,000
Mortgage Payable
10,926
Cash
15-39
500,000
50,926
LO 3
Long-Term Notes Payable
Question
Each payment on a mortgage note payable consists of:
a. interest on the original balance of the loan.
b. reduction of loan principal only.
c. interest on the original balance of the loan and
reduction of loan principal.
d. interest on the unpaid balance of the loan and
reduction of loan principal.
15-40
LO 3
DO IT! 3
Long-Term Notes
Cole Research issues a $250,000, 6%, 20-year mortgage note to
obtain needed financing for a new lab. The terms call for annual
payments of $21,796 each. Prepare the entries to record the
mortgage loan and the first payment.
Solution
Cash
250,000
Mortgage Payable
Interest Expense ($250,000 x 6%)
Mortgage Payable
Cash
15-41
250,000
15,000*
6,796
21,796
LO 3
LEARNING
OBJECTIVE
4
Presentation
Discuss how long-term liabilities are
reported and analyzed.
Illustration 15-14
Balance sheet presentation
of long-term liabilities
Companies report the current maturities of long-term debt under
current liabilities if they are to be paid within one year or the
operating cycle, whichever is longer.
15-42
LO 4
Use of Ratios
Two ratios that provide information long-run solvency and
the ability to meet interest payments as they come due
are:
15-43

Debt to Assets Ratio

Times Interest Earned
LO 4
Use of Ratios
Illustration: Kellogg Company reported total liabilities of $8,925
million, total assets of $11,200 million, interest expense of $295
million, income taxes of $476 million, and net income of $1,208
million.
Illustration 15-15
Debt to assets ratio
The higher the percentage of debt to assets, the greater the
risk that the company may be unable to meet its maturing
obligations.
15-44
LO 4
Use of Ratios
Illustration: Kellogg Company reported total liabilities of $8,925
million, total assets of $11,200 million, interest expense of $295
million, income taxes of $476 million, and net income of $1,208
million.
Illustration 15-16
Times interest earned
Times interest earned indicates the company’s ability to meet
interest payments as they come due.
15-45
LO 4
Debt and Equity Financing
Illustration 15-17
Advantages of bond financing
over common stock
15-46
LO 4
Debt and Equity Financing
Illustration: Microsystems, Inc. is considering two plans for financing the
construction of a new $5 million plant. It is considering two alternatives for
raising an additional $5 million: Plan A involves issuing 200,000 shares of
common stock at the current market price of $25 per share. Plan B involves
issuing $5 million of 8% bonds at face value. Income before interest and
taxes will be $1.5 million; income taxes are expected to be 30%.
Illustration 15-18
15-47
Lease Liabilities and Off-Balance-Sheet
Financing
A lease is a contractual arrangement between a lessor (owner
of the property) and a lessee (renter of the property).
Illustration 15-19
15-48
LO 4
Lease Liabilities
The issue of how to report leases is the case of substance versus
form. Although technically legal title may not pass, the benefits
from the use of the property do.
Operating Lease
Capital Lease
Journal Entry:
Rent Expense
Cash
Journal Entry:
Leased Equipment
Lease Liability
xxx
xxx
xxx
xxx
A lease that transfers substantially all of the benefits and risks of
property ownership should be capitalized (only noncancellable
leases may be capitalized).
15-49
LO 4
CAPITAL LEASES
To capitalize a lease, one or more of four criteria must be met:
15-50

Transfers ownership to the lessee.

Contains a bargain purchase option.

Lease term is equal to or greater than 75 percent of the
estimated economic life of the leased property.

The present value of the minimum lease payments
(excluding executory costs) equals or exceeds 90 percent of
the fair value of the leased property.
LO 4
CAPITAL LEASES
Illustration: Gonzalez Company decides to lease new equipment.
The lease period is four years; the economic life of the leased
equipment is estimated to be five years. The present value of the
lease payments is $190,000, which is equal to the fair market value
of the equipment. There is no transfer of ownership during the
lease term, nor is there any bargain purchase option.
Instructions:
a. What type of lease is this? Explain.
b. Prepare the journal entry to record the lease.
15-51
LO 4
CAPITAL LEASES
Illustration: (a) What type of lease is this? Explain.
Capitalization Criteria:
1. Transfer of ownership
NO
2. Bargain purchase option
NO
3. Lease term => 75% of
economic life of leased
property
4. Present value of minimum
lease payments => 90% of
FMV of property
15-52
Capital Lease?
Lease term
Economic life
YES
4 yrs.
5 yrs.
80%
YES - PV and FMV
are the same.
LO 4
CAPITAL LEASES
Illustration: (b) Prepare the journal entry to record the lease.
Leased Asset - Equipment
Lease Liability
190,000
190,000
The portion of the lease liability expected to be paid in the next
year is a current liability.
The remainder is classified
as a long-term liability.
15-53
LO 4
CAPITAL LEASES
Question
The lessee must record a lease as an asset if the lease:
a. transfers ownership of the property to the lessor.
b. contains any purchase option.
c. term is 75% or more of the useful life of the leased
property.
d. payments equal or exceed 90% of the fair market
value of the leased property.
15-54
LO 4
Investor Insight
“Covenant-Lite” Debt
In many corporate loans and bond issuances, the lending agreement specifies debt
covenants. These covenants typically are specific financial measures, such as minimum
levels of retained earnings, cash flows, times interest earned, or other measures that a
company must maintain during the life of the loan. If the company violates a covenant, it is
considered to have violated the loan agreement. The creditors can then demand immediate
repayment, or they can renegotiate the loan’s terms. Covenants protect lenders because
they enable lenders to step in and try to get their money back before the borrower gets too
deeply into trouble. During the 1990s, most traditional loans specified between three to six
covenants or “triggers.” In more recent years, when lots of cash was available, lenders
began reducing or completely eliminating covenants from loan agreements in order to be
more competitive with other lenders. Lending to weaker companies on easy terms is now
common as investors’ appetite for higher-yielding debt grows stronger and the Federal
Reserve keeps money flowing at ultralow rates. Since the 2008 financial crisis, companies
have been able to borrow more without offering investors what were once considered
standard protections against possible losses.
Sources: Cynthia Koons, “Risky Business: Growth of ’Covenant-Lite’ Debt,” Wall Street Journal (June 18,
2007), p. C2; and Katy Burne, “More Loans Come with Few Strings Attached,” Wall Street Journal
June 12, 2014).
15-55
LO 4
DO IT! 4
Lease Liability
FX Corporation leases new equipment on December 31, 2017. The
lease transfers ownership to FX at the end of the lease. The present
value of the lease payments is $240,000. After recording this lease,
FX has assets of $2,000,000, liabilities of $1,200,000, and
stockholders’ equity of $800,000. (a) Prepare the entry to record the
lease, and (b) compute the debt to assets ratio at year-end.
(a)
Leased Asset—Equipment
Lease Liability
240,000
240,000
(b) The debt to assets ratio = $1,200,000 ÷ $2,000,000 = 60%.
15-56
LO 4
LEARNING
OBJECTIVE
5
APPENDIX 15A: Apply the straight-line method of
amortizing bond discount and bond premium.
Amortizing Bond Discount
Illustration: Candlestick, Inc., sold $100,000, five-year, 10%
bonds on January 1, 2017, for $98,000 (discount of $2,000).
Interest is payable on January 1.
Illustration 15C-2
15-57
Illustration 15A-2
Bond discount amortization schedule
LO 5
Amortizing Bond Discount
Illustration: Candlestick, Inc., sold $100,000, five-year, 10%
bonds on January 1, 2017, for $98,000 (discount of $2,000).
Interest is payable on January 1. The bond discount amortization
for each interest period is $400 ($2,000 ÷ 5).
Journal entry to record the first accrual of bond interest and the
amortization of bond discount on December 31 as follows.
Dec. 31
Interest Expense
Discount on Bonds Payable
Interest Payable
15-58
10,400
400
10,000
LO 5
Amortizing Bond Premium
Illustration: Candlestick, Inc., sold $100,000, five-year, 10%
bonds on January 1, 2017, for $102,000 (premium of $2,000).
Interest is payable on January 1.
Illustration 15A-4
Bond premium amortization
schedule
15-59
LO 5
Amortizing Bond Premium
Illustration: Candlestick, Inc., sold $100,000, five-year, 10%
bonds on January 1, 2017, for $102,000 (premium of $2,000.
Interest is payable on January 1. The bond premium amortization
for each interest period is $400 ($2,000 ÷ 5).
Candlestick records the first accrual of interest on December 31
as follows.
Dec. 31
Interest Expense
Premium on Bonds Payable
Interest Payable
15-60
9,600
400
10,000
LO 5
LEARNING
OBJECTIVE
6
APPENDIX 15B: Apply the effective-interest method of
amortizing bond discount and bond premium.
Under the effective-interest method, the amortization of bond
discount or bond premium results in period interest expense
equal to a constant percentage of the carrying value of the
bonds.
Required steps:
1. Compute the bond interest expense.
2. Compute the bond interest paid or accrued.
3. Compute the amortization amount.
15-61
LO 6
Effective-Interest Method
Required steps:
1. Compute the bond interest expense.
2. Compute the bond interest paid or accrued.
3. Compute the amortization amount.
Illustration 15B-1
Computation of amortization
using effective-interest method
15-62
LO 6
Effective-Interest Method
Amortizing Bond Discount
Illustration: Candlestick, Inc. issues $100,000 of 10%, five-year
bonds on January 1, 2017, for $98,000, with interest payable each
January 1. This results in a discount of $2,000.
Illustration 15B-2
Illustration 15B-2
Bond discount amortization schedule
15-63
LO 6
Amortizing Bond Discount
Illustration 15B-2
Bond discount
amortization schedule
Candlestick, Inc. records the accrual of interest and amortization
of bond discount on December 31 as follows.
Dec. 31
Interest Expense
Interest Payable
Discount on Bonds Payable
15-64
10,324
10,000
324
LO 6
Amortizing Bond Discount
Illustration 15B-2
Bond discount
amortization schedule
For the second interest period, at December 31, Candlestick
makes the following adjusting entry.
Dec. 31
Interest Expense
Interest Payable
Discount on Bonds Payable
15-65
10,358
10,000
358
LO 6
Amortizing Bond Premium
Illustration: Candlestick, Inc. issues $100,000 of 10%, five-year
bonds on January 1, 2017, for $102,000, with interest payable
January 1. This results in a premium of $2,000.
Illustration 15B-4
Bond premium amortization
schedule
15-66
LO 6
Amortizing Bond Premium
Illustration 15B-4
Bond premium amortization
schedule
The entry Candlestick makes on December 31 is:
Dec. 31
Interest Expense
Premium on Bonds Payable
Interest Payable
15-67
9,669
331
10,000
LO 6
A Look at IFRS
LEARNING
OBJECTIVE
7
Compare the accounting for long-term liabilities
under GAAP and IFRS.
Key Points
Similarities

15-68
IFRS requires that companies classify liabilities as current or
noncurrent on the face of the statement of financial position (balance
sheet), except in industries where a presentation based on liquidity
would be considered to provide more useful information (such as
financial institutions). When current liabilities (also called short-term
liabilities) are presented, they are generally presented in order of
liquidity.
LO 7
A Look at IFRS
Key Points
15-69

Under IFRS, liabilities are classified as current if they are expected
to be paid within 12 months.

Similar to GAAP, items are normally reported in order of liquidity.
Companies sometimes show liabilities before assets. Also, they will
sometimes show long-term liabilities before current liabilities.

The basic calculation for bond valuation is the same under GAAP
and IFRS. In addition, the accounting for bond liability transactions is
essentially the same between GAAP and IFRS.
LO 7
A Look at IFRS
Key Points

IFRS requires use of the effective-interest method for
amortization of bond discounts and premiums. GAAP allows use
of the straight-line method where the difference is not material.
Under IFRS, companies do not use a premium or discount
account but instead show the bond at its net amount. For
example, if a $100,000 bond was issued at 97, under IFRS a
company would record:
Cash
Bonds Payable
15-70
97,000
97,000
LO 7
A Look at IFRS
Key Points
Differences

15-71
The accounting for convertible bonds differs across IFRS and
GAAP, Unlike GAAP, IFRS splits the proceeds from the
convertible bond between an equity component and a debt
component. The equity conversion rights are reported in equity.
LO 7
A Look at IFRS
Key Points
Differences

15-72
The IFRS leasing standard is IAS 17. Both Boards share the
same objective of recording leases by lessees and lessors
according to their economic substance—that is, according to the
definitions of assets and liabilities. However, GAAP for leases is
much more “rules-based” with specific bright-line criteria (such as
the “90% of fair value” test) to determine if a lease arrangement
transfers the risks and rewards of ownership; IFRS is more
conceptual in its provisions. Rather than a 90% cut-off, it asks
whether the agreement transfers substantially all of the risks and
rewards associated with ownership.
LO 7
A Look at IFRS
Looking to the Future
The FASB and IASB are currently involved in two projects, each of which
has implications for the accounting for liabilities. One project is
investigating approaches to differentiate between debt and equity
instruments. The other project, the elements phase of the conceptual
framework project, will evaluate the definitions of the fundamental
building blocks of accounting. In addition to these projects, the FASB and
IASB have also identified leasing as one of the most problematic areas of
accounting. One of the first areas studied is, “What are the assets and
liabilities to be recognized related to a lease contract?” Should the focus
remain on the leased item or the right to use the leased item? This
question is tied to the Boards’ joint project on the conceptual
framework—defining an “asset” and a “liability.”
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LO 7
A Look at IFRS
IFRS Self-Test Questions
The accounting for bonds payable is:
a) essentially the same under IFRS and GAAP.
b) differs in that GAAP requires use of the straight-line method
for amortization of bond premium and discount.
c) the same except that market prices may be different
because the present value calculations are different
between IFRS and GAAP.
d) not covered by IFRS.
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LO 7
A Look at IFRS
IFRS Self-Test Questions
The leasing standards employed by IFRS:
a) rely more heavily on interpretation of the conceptual
meaning of assets and liabilities than GAAP.
b) are more “rules based” than those of GAAP.
c) employ the same “bright-line test” as GAAP.
d) are identical to those of GAAP.
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LO 7
A Look at IFRS
IFRS Self-Test Questions
The joint projects of the FASB and IASB could potentially:
a) change the definition of liabilities.
b) change the definition of equity.
c) change the definition of assets.
d) All of the above.
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LO 7
Copyright
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or from the use of the information contained herein.”
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