Current and Noncurrent Liabilities, Bonds, and Leases
What this domain tests
This domain covers current liability classification, contingencies, bond issuance and effective interest amortization, extinguishment, and lease accounting under ASC 470, ASC 450, ASC 842, IFRS 9, and IFRS 16.
Liabilities and bonds
Current liabilities are due within one year or the operating cycle. Refinancing on a long-term basis before the financial statements are issued can support noncurrent classification if the criteria are met. A contingency is accrued if probable and reasonably estimable; probable but not estimable is disclosed; reasonably possible is disclosed; remote generally requires no disclosure.
Bonds are issued at par, a discount, or a premium. Interest expense equals the beginning carrying amount times the market rate at issuance under the effective interest method. Cash interest equals face amount times the coupon rate. The difference amortizes the discount or premium. An extinguishment gain or loss is the carrying amount, including unamortized issue costs, minus the reacquisition price.
Leases
A lessee recognizes a right-of-use asset and a lease liability at the present value of lease payments, discounted at the implicit rate if readily determinable, otherwise the incremental borrowing rate. Short-term leases of 12 months or less and low-value assets may use expedients. Under US GAAP, a lessee finance lease arises if any criterion is met: ownership transfer, bargain purchase option, lease term of 75% or more of remaining economic life, present value of 90% or more of fair value, or a specialized asset. Finance leases produce amortization and interest; operating leases produce a single straight-line lease cost. IFRS 16 uses a single lessee model. Lessor accounting is sales-type, direct financing, or operating.
Worked example
A $100,000 face bond has a 5-year term, a 6% annual coupon, and an 8% market rate. The issue price is $92,015, the present value of $6,000 annual interest for five years plus $100,000 at maturity. Year 1 interest expense is $92,015 x 8% = $7,361. Cash interest is $6,000, so discount amortization is $1,361 and the ending carrying amount is $93,376.
Traps
Using the coupon rate for interest expense; ignoring unamortized discount in an extinguishment; excluding renewal options reasonably certain to be exercised from the lease term; using the implicit rate when it is not readily determinable; and treating all leases as operating under IFRS.