ACCOUNTING FOR COMPANY

1

• ACCOUNTING FOR COMPANY
• STATEMENT OF FINANCIAL POSITION
• (LIABILITIES)

2
Learning outcomes

• Understand the accounting items assets,
  liabilities and owners equity
• Understand the recognitions, classifications and
  measurements of accounting items assets,
  liabilities and owners equity

3
Liabilities

• Defintion A liability is a present obligation of
  the entity arising from past events, the
  settlement of which is expected to result in an
  outflow from the entity of resources embodying
  economic benefits.

4
Recognition

• Recognition is the process of incorporating in
  the balance sheet or income statement an item
  that meets the definition of an element and
  satisfies the following criteria for recognition
• It is probable that any future economic benefit
  associated with the item will flow to or from the
  entity and
• The item's cost or value can be measured with
  reliability.
• A liability is recognised in the balance sheet
  when it is probable that an outflow of resources
  embodying economic benefits will result from the
  settlement of a present obligation and the amount
  at which the settlement will take place can be
  measured reliably.

5
Measurement

• Measurement involves assigning monetary amounts
  at which the elements of the financial statements
  are to be recognised and reported. F 4.54
• The IFRS Framework acknowledges that a variety of
  measurement bases are used today to different
  degrees and in varying combinations in financial
  statements, including F 4.55
• Historical cost
• Current cost
• Net realisable (settlement) value
• Present value (discounted)
• Historical cost is the measurement basis most
  commonly used today, but it is usually combined
  with other measurement bases. F. 4.56

6
Classification

• An entity must normally present a classified
  statement of financial position, separating
  current and noncurrent assets and liabilities,
  unless a presentation based on liquidity is more
  relevant.
• Current liabilities are those to be settled
  within the entity's normal operating cycle or due
  within 12 months, or those held for trading, or
  those for which the entity does not have an
  unconditional right to defer payment beyond 12
  months. Other liabilities are noncurrent.

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Minimum items on the face of the Statement of
Financial Position IAS 1.54

• Liabilities the amounts payable or redeemable
  within the next 12 months and those payable or
  redeemable later than 12 months must be
  distinguished. Liabilities must be shown
  separately under the following headings.
• Debentures, those secured and not secured
• Liabilities charged on the assets of the company
• Bank loans, overdrafts and other loans,
  distinguished between those which are secured and
  unsecured
• Other unsecured borrowings
• Provision for retirement benefits
• Deferred tax liability

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Cont.

1. Other liabilities and provisions
2. Trade creditors
3. Amounts owing to a director
4. Amounts owing to the holding/subsidiaries
5. Amounts owing to related corporations
6. Other amounts owing by company

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Items of liabilities

• Debentures
• Debentures are loan capital with a fixed rate of
  interest payable by the company to the debenture
  holders regardless of the performance of the
  company.
• It may be redeemable, i.e., repayable at or by a
  specified time.
• It may be convertible, i.e., to be converted into
  ordinary shares at or by a specified date.
• It can be traded in BM, thus, the rights are
  transferable.
• Debentures are often secured on certain assets of
  the company.
• Implication if the company unable to pay
  interest or fails to repay the loan on the due
  date- the trustee can take possession of the
  asset and sell it to repay the debenture
  holders.
• On the face of SFP - State (in bracket) whether
  it is charged over the assets of the company or
  not

10
Cont.

• Deferred tax liability
• It arises because the tax payable as calculated
  for the current year according to the tax rules
  is different form the tax payable according to
  accounting rules.
• The reason is that certain income and expenses
  recognised in the current year in the companys
  accounts may only be recognised for tax purposes
  at a different amount or at an earlier or later
  date.
• e.g. Accrued interest expense recognised in
  the current accounting period according to
  accrual concepts in accounting. However, IRD will
  allow interest expense as an allowable deduction
  only when it is paid (cash basis). Thus, taxable
  profit and accounting profit will be different.
• FRS112 Income Taxes- Deferred tax liability to be
  disclosed in the year-end SFP must be calculated.
  Then, the difference between the opening and
  closing balances of deferred tax liability will
  be disclosed in the SCI either as an addition or
  deduction to the tax payable.

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Cont.

• Other liabilities
• Tax payable
• Dividend payable to be discussed after topic on
  equity.