Financial accounting 3e IFRS edtion willey appendix d

They are a provisions and contingent liabilities, b lease liabilities, and c additional liabilities for employee fringe benefits paid absences and postretirement benefits... Zhang expect

W ILEY

IFRS EDITION

Financial Accounting

IFRS 3rd Edition Weygandt ● Kimmel ● Kieso

In addition to the current and non-current liabilities discussed

in Chapter 10, several more types of liabilities may exist that could have a significant impact on a company’s financial

position and future cash flows These other significant

liabilities will be discussed in this appendix They are (a)

provisions and contingent liabilities, (b) lease liabilities, and (c) additional liabilities for employee fringe benefits (paid

absences and postretirement benefits)

LEARNING OBJECTIVES

After studying this chapter, you should be able to:

1 Describe the accounting and disclosure requirements for

provisions and contingent liabilities

2 Contrast the accounting for operating and finance leases

3 Identify additional fringe benefits associated with employee

compensation

APPENDIX

Other Significant Liabilities

Provision – if a loss is probable

(> 50% chance) and if a reasonable estimate can be made of the amount, then a liability should be recorded

Contingent Liability – if a loss is not probable a

liability should not be recorded and the details of situation should be disclosed in the notes to the financial statements

Remote Possibility (< 10%) – no disclosure

Product Warranties

Future costs that companies may incur in replacing defective

units or repairing malfunctioning units

Estimated cost of honoring product warranty contracts should

be recognized as an expense in the period in which the sale

occurs

Recording a Provision

Illustration: In 2017 Zhang Manufacturing Ltd sells 10,000

washers and dryers at an average price of NT$6,000 each The

selling price includes a one-year warranty on parts Zhang expects that 500 units (5%) will be defective and that warranty repair costs will average NT$800 per unit In 2017, the company honors

warranty contracts on 300 units, at a total cost of NT$240,000 At

December 31, compute the estimated warranty liability.

Illustration H-1

Computation of estimated product warranty liability

Recording a Provision

LO 1

Warranty Expense 400,000

Warranty Liability 400,000

Recording a Provision

Illustration: In 2017 Zhang Manufacturing Ltd sells 10,000

washers and dryers at an average price of NT$6,000 each The

selling price includes a one-year warranty on parts Zhang expects that 500 units (5%) will be defective and that warranty repair costs will average NT$800 per unit In 2017, the company honors

warranty contracts on 300 units, at a total cost of NT$240,000 At

December 31, the company makes the following adjusting entry.

Illustration: Prepare the entry to record the repair costs

incurred in 2017 to honor warranty contracts on 2017 sales

Repair Parts 240,000

Assume that the company replaces 20 defective units in

January 2018, at an average cost of NT$800 in parts and labor

Repair Parts 16,000

Recording a Provision

LO 1

Disclosure should identify the:

Nature of the item

Amount of the contingency, if known

Expected outcome of the future event

Disclosure of Contingent Liabilities

A lease is a contractual arrangement

between a lessor (owner of the property)

and a lessee (renter of the property)

IFRS does not prescribe criteria for determining

classification, however if any one of the following conditions

exists, the lessee should record a lease as a finance lease:

1.The lease transfers ownership of the property to the

lessee

2.The lease contains a bargain purchase option

3.The lease term is a major portion of the economic life of

the leased property

4.The present value of the lease payments represents

Finance Leases

Illustration: Gonzalez SA 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

Finance Leases

LO 2

Illustration: (a) What type of lease is this? Explain.

Capitalization Conditions:

1 Transfer of ownership

2 Bargain purchase option

3 Lease term major portion of

economic life of leased property

4 Present value is substantially

the FMV of the leased

NO NO

Finance Lease?

Finance Leases

Illustration: (b) Prepare the journal entry to record the lease.

Lease Liability

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 non-current

liability.

Finance Leases

LO 2

Paid absences for vacation, illness, and holidays.

Accrue a liability if:

Payment of the compensation is probable.

The amount can be reasonably estimated.

Vacation Benefits Liability

3,300

Illustration: Academy Company employees are entitled to one

day’s vacation for each month worked If 30 employees earn an average of $110 per day in a given month, the accrual for

vacation benefits in one month is $3,300

Cash1,100Academy pays vacation benefits for 10 employees

Paid Absences

LO 3

Post-retirement benefits are benefits that employers

provide to retired employees for

1.health care and life insurance2.pensions

Companies account for post-retirement benefits on the

accrual basis.

Postretirement Benefits

POSTRETIREMENT HEALTH-CARE AND LIFE

INSURANCE BENEFITS

Companies estimate and expense postretirement costs

during the working years of the employee

Companies rarely sets up funds to meet the cost of the

future benefits

► Pay-as-you-go basis for these costs

► Major reason is that the company does not receive a tax

deduction until it actually pays the medical bill.

Postretirement Benefits

LO 3

An arrangement whereby an employer provides benefits to employees after they retire for services they provided while they were working.

Pension Plan Administrator

 Employer contribution

determined by plan (fixed)

 Risk borne by employees

 Benefits based on plan value

 Benefit determined by plan

 Employer contribution varies (determined by Actuaries)

 Risk borne by employer

 Companies record pension costs as an expense.

 Actuaries estimate the employer contribution by considering

mortality rates, employee turnover, interest and earning rates, early retirement frequency, future salaries, etc.

Postretirement Benefits PENSION

PLANS

LO 3

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