Statement of Financial Accounting Standards No'47

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Statement of Financial Accounting Standards No.47

• Disclosure of Long-Term Obligations
• Effective March 1981
• By
• Shona L. Thomas

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What will be covered in FAS 47

• 1.) Overview and reasons for the new
  Interpretation
• 2.) Meaning of the term conditional asset
  retirement obligation
• 3.) Criteria for sufficient information to
  reasonably estimate the fair value of a
  conditional retirement obligation

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What will be covered in FAS 47

• 4.) Implications when there is not sufficient
  information at the same time the liability is
  incurred.
• 5.) Examples
• 6.) Effective date and transaction
• 7.) Implementation considerations

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Definition of FAS 47

• 1.)This statements requires that an enterprise
  disclose its commitments under unconditional
  purchase obligations that are associated with
  suppliers financing arrangements.
• 2.)Such obligations often are in the form of take
  or pay contracts and throughputs contracts.

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Definition of FAS 47

• 3.)This statement also requires disclosures of
  future payments on long-term borrowings and
  redeemable stock.
• 4.)The purchases in each year for which an income
  statement is presented.

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Long term Assets and Liabilities

• Long-term obligations Liabilities
• bonds payable
• pension and other post retirement benefits
• capital leases
• accrued vacation and sick leave
• legal claims

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Long term Assets and Liabilities

• Long-term obligation Assets, including fixed and
  intangible assets are
• buildings, vehicles, machines
• infrastructure, including roads, bridges, and
  sewage systems
• securities, including bonds and stocks
• investments in joint ventures

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Recognize or to not Recognize

• For long-term unconditional purchase obligations
  that are associated with suppliers financing and
  are not recognized on a purchasers balance
  sheet the disclosures include
• 1.) The nature of the obligations

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Recognize or to not Recognize

• 2.) The amount of the fixed and determinable
  obligation in the aggregate
• 3.) For each of the next five years a
  description
• 4.) A description of any portion of the
  obligation that is variable
• 5.) The purchases in each year for which an
  income statement is presented

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Recognize or to not Recognize

• For long-term unconditional purchase
  obligations that are associated with suppliers
  financing and are recognized on purchasers
  balance sheets
• 1.) Payments for each of the next five years
  shall be disclosed.

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Issue to address with FAS 47

• Whether or not it should be listed on the balance
  sheet?

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Unconditional Purchase Obligation

• It is an obligation to transfer funds in the
  future for fixed or minimum amounts or quantities
  of goods or services at fixed or minimum prices.
• Example would be
• Take or pay contracts
• Throughput contracts

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Example of a take or pay contract

• A subsidiary of the XYZ Company has entered into
  a take or pay contract with a Perfume
  manufacturing company. XYZ Company is obligated
  to purchase 50 of the planned capacity
  production of the plant each period while the
  debt used to finance the plant remains
  outstanding.

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Example of a take or pay contract

• The monthly payment equals the sum of 50 of raw
  material costs, operating expenses, depreciation,
  interest on the debt used to finance the Perfume
  Company and a return on the owners equity
  investment.

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Example of a take or pay contract

• To make sure that it is a long-term supply the
  company
• has contracted the Perfume plant through 2006 and
  make
• minimum annual payments as follows
• 2002 through 2006 (6,000 Per Year) 30,000
• Latest years 120,000
• Total 150,000
• Less ( Amount representing interest) (65,000)
• Total present value 85,000

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Unrecorded Obligations

• A purchaser shall disclose unconditional
  purchase obligations if it is an obligation to
  transfer funds in the future for fixed or minimum
  amounts or quantities if goods or services at
  fixed or minimum prices.
• Disclosures shall include
• -The nature and term of the obligations

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Unrecorded Obligations

• -The nature of any variable components of the
  obligations
• -Disclosures of similar or related unconditional
  purchase obligations may be combined.
• -These disclosures may be omitted only if the
  aggregate commitment for all such obligations not
  disclosed is immaterial

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Disclosures in regards to Interest

• The disclosure the amount of calculated interest
  necessary to reduce the unconditional purchase
  obligation to present value is available to use
  but not required.

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Recorded Obligations and Redeemable Stock

• Certain unconditional purchase obligations are
  presently recorded as liabilities on purchasers
  balance sheets with the related assets to be
  recognized.
• The statement does not alter or change
• A.) The treatment of current or future
  unconditional purchase obligations as those
  already recorded as liabilities with related
  assets

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Recorded Obligations and Redeemable Stock

• The statement does not alter or change
• B.) The disclosure is an appropriate substitute
  for accounting recognition if the substance of
  the arrangement is the sale of an asset and
  incurrence of a liability.

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Recorded Obligations and Redeemable Stock

• What information should be disclosed for the five
  years following the date of the latest balance
  sheet presented?
• 1.) The combined aggregate amount of maturities
  and sinking fund requirements for all long term
  borrowings
• 2.) The amount of redemption requirements for all
  issues of capital stock that are redeemable at
  fixed or determinable prices on fixed or
  determinable dates. Separately by issue or
  combined.

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Example of a Long-term Borrowing in regards to a
Sinking Fund

• How does it work?
• ABC Company has outstanding two long-term
  borrowings and one issues of preferred stock with
  mandatory redemption requirements. The first
  borrowing is a 100 million sinking fund
  debenture with annual sinking fund payments of
  10 million in 2002, 2003, and 2004 and 15
  million in 2005, 2006, and 20 million in 2005,
  2006.

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Example of a Long-term Borrowing in regards to a
Sinking Fund

• How does it work?
• The 30 million issue of preferred stock
• requires a 5 annual cumulative sinking
• fund payment of 1.5 million until retired.

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Effective Date and Transition

• This statement shall be effective for financial
  statements for fiscal years ending after June 15,
  1981.
• Primarily used for comparative purposes with
  financial statements for periods after the
  effective date.
• The provisions of this statement need not to be
  applied to immaterial items.

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Effective Date and Transition

• Cumulative growth and accumulated depreciation
  for the period should be measured from the date
  the liability and capitalized costs would be
  recognized if the interpretation were in effect
  when the company incurred the liability to the
  date the interpretation was adopted.
• The company should also present on the face of
  the income statement, income before extraordinary
  items and net income

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Effective Date and Transition

• with related per share amounts in advance for all
  periods presented.
• The amounts should be calculated using
  information, assumptions, and interest rates as
  of the date of adoption.

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Conditional Asset Retirement Obligations

• The obligation to perform the asset retirement
  activity is unconditional even though uncertainty
  exists about the timing or method of settlement.
• Method of settlement of a conditional asset
  retirement obligation should be factored into the
  measurement of the liability when sufficient
  information exists.

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Conditional Asset Retirement Obligations

• It also refers to a legal obligation to perform
  an asset retirement activity in which the timing
  or method of settlement are conditional on a
  future event that may or may not be within the
  control of the company.
• The obligation to perform the asset retirement
  activity is unconditional even though uncertainty
  exists about the timing method of settlement.

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Example of Asset Retirement Activities Scenario

• A company acquires a factory fireproofed with
  asbestos. The adopted regulations the were
  specific to how the company is to dispose of the
  asbestos if the factory is demolished or
  undergoes major renovation. The company can in
  the future retire the factory as it sees fit,
  including by demolishing, selling, or abandoning
  it. But the legal obligations to perform

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Example of Asset Retirement Activities Scenario

• asset-retirement activities is nevertheless
  incurred when the regulations are adopted, and
  should be recognized at that time, it fair value
  is reasonably estimable. However when the
  regulations are adopted, the company believes it
  has insufficient information to estimate the fair
  
• value of the legal obligation to perform
  asset-retirement activities, because the

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Example of Asset Retirement Activities Scenario

• settlement dates has not been specified
  by external parties and the company does not have
  the necessary information to estimate the
  settlement date. The company should therefore
  disclose in its financial statements a
  description of the legal obligations to perform
  asset-retirement activities, the fact that no
  liability was recognized because fair value could
  not be Four years later, the company that it will
  in time abandon and demolish the factory because
  of decreasing demand for its products. The
  company is then aware of at least one

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Example of Asset Retirement Activities Scenario

• method of settlement and can reasonably assign
  probabilities to potential settlement dates. It
  has the information needed to determine the fair
  value of the legal obligation using an
  expected-present-value-technique. The company
  should therefore recognize a liability for the
  obligation in the period in which

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Example of Asset Retirement Activities Scenario

• available information made it possible to
  reasonably estimated the fair value of the
  liability and should recognize a liability for
  the obligation in the period in which available
  information made it possible to reasonably
  estimate the fair value of the liability and
  should recognize a corresponding increase in the
  carrying amount of the factory for the
  asset-retirement cost.

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New Announcements with FAS 47

• Interpretation 47 is effective no later than the
  end of fiscal years ending after December 15,
  2005 or December 31, 2005, for calendar-year
  enterprises. Retrospective application of interim
  financial information is permitted but is not
  required.

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Review of what we learned

• FAS 47 will result in
• -More consistent recognition of liabilities
  relating to asset retirement obligations
• -More information about expected future cash
  outflows associated with those obligations
• -More information about investments in long lived
  assets because additional asset retirement costs
  will be recognized as part of the carrying assets.