Member Advisory
May 2012
Presentation of Long-term Debt
Under Accounting Standards for
Private Enterprises (ASPE)
By: Patricia Dahm, CA
This article is one of a series of articles prepared by the ICAA’s Professional Services
department aimed at assisting members with the transition to Accounting Standards for Private
Enterprises (ASPE).
While the presentation of third party long-term debt adjusted for finance fees, discounts and
other transaction costs can take many forms, it is important to ensure that the information is
provided in a manner that is clear and understandable, (Accounting Standards for Private
Enterprises (ASPE) – Part II Handbook Section 1400.04(c)) for the users of the financial
statements.
The examples provided in this article are illustrative of the many presentation options available
for long-term debt adjusted for finance fees, discounts, and other transaction costs. Regardless
of the form of presentation, it is important that it conforms to the disclosure requirements of
Section 3856.43.
Member Advisory is produced by the Institute of Chartered Accountants of Alberta distributed as part of the
electronic monthly mailing package. Opinions expressed in this bulletin are those of the author and do not
reflect the official position of ICAA. Any queries regarding this material should be directed to Sean Johnson
CA, ICAA Director, Professional Services at s.johnson@icaa.ab.ca. This bulletin has been posted to the ICAA
website. For additional copies of this advisory, please access
http://www.albertacas.ca/Resources/TechnicalPublications/MemberAdvisory.aspx or contact Chris Pilger,
Director, Member Relations and Communications at c.pilger@icaa.ab.ca or 1-800-232-9406 or
(780) 420-2363
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2012
2011
Example 1
Mortgage bearing interest at bank prime rate plus 1.0%, payable
$7,717 monthly including interest, secured by land and building
with a carrying value of $xxx,xxx (2011 - $1,537,400), due July
2014
Finance contract with a stated interest rate of 2.6%,
payable $7,564 monthly, including interest, due July 2012,
secured by a specific vehicle with a net book value of
$xx,xxx (2011 - $211,551), net of unamortized fair value
discount of $x,xxx (2011 - $5,816) calculated using an
effective interest rate of xxx%
Finance contract with a stated interest rate of 0%,
payable $965 monthly, due September 2012, secured by a
specific vehicle with a net book value of $xx,xxx (2011 - $23,710) ,
net of unamortized fair value discount of $x,xxx (2011 - $1,485)
calculated using an effective interest rate of xxx%.
Current portion of long-term debt
154,320
$ xxx,xxx
$ 1,010,881
44,301
127,574
8,388
xxx,xxx
18,787
1,157,242
xxx,xxx
$ xxx,xxx
$ 1,002,922
On initial recognition of the loan, the Company adjusts non-market rate of interest finance
contracts or similar non-bank financing to fair value using the Company’s conventional longterm borrowing rate available under its credit facility. The Company recognizes the difference
(discount) between the stated value and the fair value of the loan over the term of the loan,
using the effective interest method. During the year, the Company incurred $xx,xxx (2011 $50,420) of interest on long-term debt, including amortization of the discounts of $x,xxx (2011 $11,453). Estimated principal payments due to maturity on the long-term debt are approximately
as follows:
2013
2014
2015
$ xxx,xxx
xxx,xxx
xxx,xxx
The following examples are two possible disclosure presentations relating to the same scenario.
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Example 2(a)
2012
Equipment loan, payable $10,000 monthly including interest,
using an effective interest rate of 7.22% determined on initial recognition,
due December 31, 2015, secured by equipment with a net book
value of $337,485 (2011 - $420,856 )
$322,834
Current principal portion
(99,964)
$ 222,870
2011
$ 415,856
(93,022)
$322,834
The equipment loan, with a stated interest rate of 0%, was acquired through the equipment
dealer and requires 48 monthly payments of $10,000. The fair value for the loan was
determined based on the Company’s commercial borrowing rate of 6.60% adjusted for
transaction costs. The estimated repayment schedule is as follows:
2013
2014
2015
$ 99,964
107,426
115,444
Example 2(b)
2012
Equipment loan with a stated interest rate of 0%, payable
$10,000 monthly, due December 31, 2015, secured by
equipment with a net book value of $337,485 (2011 -$420,856)
Unamortized discount for initial fair value recognition and fees
Current principal portion
$360,000
(37,166)
322,834
(99,964)
$ 222,870
2011
$480,000
(64,144)
415,856
(93,022)
$322,834
The equipment loan, with a stated interest rate of 0%, was acquired through the equipment
dealer and requires 48 monthly payments of $10,000 commencing January 31, 2012. The fair
value was calculated at 7.72%, which is the Company’s commercial borrowing rate of 6.60%
adjusted for transaction costs. The estimated repayment schedule is as follows:
2013
2014
2015
$ 99,964
107,426
115,444
Consideration should be given to the following when presenting financing fees, discounts and
other transaction costs related to long-term debt.
a) Terms of the restated loans
Users of the financial statements, including lenders, need to understand the terms of the
loan. Therefore, the long term debt note should disclose both the stated rate of interest
and the effective interest rate used to adjust any non-market rate of interest loan to fair
value on initial recognition.
b) Principal outstanding
Consideration should be given to disclosing both the principal outstanding on the loan
based on the terms in the loan agreement as well as the carrying amount of the loan
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calculated using the effective interest rate. This disclosure can easily be accommodated
when the only debt outstanding is a non-market rate of interest loan (see example 2(b)
above). However, as shown in example 1 above, this is not always the case. Here, the
amount actually owing to the lender is determined by adding the carrying amount of the
loan and the unamortized fair value discount.
c) Determination of the current portion of long term debt
Current Assets and Liabilities, Section 1510.12 states; “The current liability classification
shall include only that portion of long-term debt obligations, including sinking-fund
requirements, payable within one year from the date of the balance sheet”. Example 2(a)
and (b) above calculate the current portion based on the principal reduction of the loan
expected in the next year, using the calculated fair value of the loan.
d) Five year repayment schedule
Financial Instruments, Section 3856.45 states; “An entity shall disclose the aggregate
amount of payments estimated to be required in each of the next five years to meet
repayment, sinking fund or retirement provisions of financial liabilities”. The five year
repayment amount should reflect the calculated annual principal reduction using the
effective interest rate amortization schedule.
e) Accounting policy for amortization of the fair value discount and transaction costs
Section 3856, Financial Instruments, states that for financial liabilities measured at
amortized cost, the fair value discount and transaction costs are to be amortized over
the expected life of the financial liability. There is no prescribed method for amortizing
this amount; the straight line method or the effective interest rate method would be
acceptable. Since there is a choice, the method used should be disclosed. While this
disclosure is provided in the long-term debt note in example 1 above, it could also be
included in the Significant Accounting Policy note.
Any discussion on long term debt requires specific reference to callable debt. Callable debt is an
obligation where the negotiated term of repayment remaining at the balance sheet date is
greater than 12 months but the terms and conditions of the debt provide the lender with the right
to call for repayment of the loan at any time. Under these conditions, unless the lender has
given notice of their intention to call the loan, the outstanding debt would be allocated between a
current portion (the principal balance to be repaid over the next twelve months), and callable
debt, the principal portion of the loan expected to be repaid thereafter.
A callable loan cannot be included in long term debt due to the fact the lender has the right to
call the loan at any time. While it must be reported within current liabilities, it can be reported as
a separate category, as while the lender has the right to call for repayment that right has not
been exercised. An example of a possible financial statement presentation for an organization
with Callable debt is provided in the illustrative example included in Section 1510, Current
Assets and Liabilities.
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