Chapter 14 Long Term Financial Liabilities Essay

Submitted By lightshield
Words: 2913
Pages: 12
Open Document
LONG-TERM FINANCIAL LIABILITIES

Preview
Understanding Debt Instruments
Measurement
Recognition and Derecognition
Presentation, Disclosure, and Analysis
IFRS/ASPE Comparison

UNDERSTANDING DEBT INSTRUMENTS
LT Debts are obligations not payable within a year, or the operating cycle of the business, whichever is longer
Usually subject to formal creation  BoD & SH approval, legal contracts, restrictive covenants

BONDS & NOTES PAYABLE
Purpose is to borrow for long term when amount of capital needed is too large for one lender to supply & indebtedness can be divided
Created by bond indenture contract AKA promise to repay (1) principal at maturity, and (2) periodic interest at specified rate on face value
Typically accompanied by paper certificate, have $1K face value, and have semi-annual interest payments (but expressed as APR)
Selling agents AKA underwriters may guarantee certain sum of bond sales to the corporation, thus taking the risk for the given price. May also perform best efforts underwriting, or private placement.
TYPES OF LT DEBT
Registered and Bearer (Coupon) Bonds
Registered means issued in owner`s name
To sell, current certificate must be surrendered, and new certificate issued
Bearer/coupon is not recorded in owner's name, and may be transferred simply by delivery
Secured and Unsecured Debt
Secured is backed by pledge of collateral e.g. mortgage
Unsecured is not backed by collateral, risky, and high interest e.g. Junk bonds, LBO offerings
Term, Serial, and Perpetual Bonds or Notes
Term Bonds/Notes mature on a single date
Serial Bonds/Notes mature in instalments
Perpetual Bonds/Notes have unusually long terms, or do not mature
Income, Revenue, and Deep Discount Bonds
Income Bonds pay no interest unless issuing entity is profitable
Revenue Bonds pay interest from a specified revenue source
Deep Discount Bonds/Notes are sold at large discount that provide "total interest payoff" (at market rates) at maturity AKA zero-interest bonds
Commodity-Backed Bonds
Redeemable in amounts of a commodity, AKA asset-linked debt
Callable, Convertible Bonds and Notes, and Debt with Various Settlement and Other Options
Callable means right to retire debt before maturity (similar to demand loans)
Convertible means right to convert to other securities
Miscellaneous bonds/instruments provide payments tied to esoteric items, e.g. weather, catastrophes

CREDIT RATINGS
Assigned by independent credit rating agencies
Reflects company's credit quality (ability to meet debt obligations)
Quality is constantly monitored, so rating can be changed during issue's outstanding life
Many insurance companies, pension funds, and institutional investors are required to invest in investment grade securities (pressure to attain and stay at this level)

DEFEASANCE
Early repayment penalties may stop companies from paying off debt early
Companies may instead set aside money in a trust and allow the trust to repay the original debt (P&I) as it becomes due
Defeasance is the act of setting aside sufficient funds (PV of amount due under loan agreement) to pay the creditor
Legal Defeasance is when the original creditor looks to the trust for repayment and gives up its claim on the company; trust becomes debtor & new legal agreement made

TYPES OF COMPANIES THAT HAVE SIGNIFICANT DEBT FINANCING
3 general sources of financing  debt, equity, internally generated funds
Debt/leverage increase liquidity and solvency risk, but increases profits if return on invested proceeds is higher than interest payments
Issuing shares dilutes ownership
Internally generated funds is only do-able when there are excess funds, and requires an alternatives assessment (e.g. dividends)
Capital intensive industries (i.e. high tangible assets e.g. transportation, hotel) have greater ability to borrow funds because debt can be secured
Too much LT Debt means company is overextended, has higher cost of capital, and may be unable to access additional debt; ratios are important

MEASUREMENT
Show More

Related Documents: Chapter 14 Long Term Financial Liabilities Essay

ACC220 Timetable 2013 Essay

their understanding of the role of financial statement users by studying financial statement analysis. Credit Status 1. Accounting II (ACC220) is one credit of the "ACC" professional requirement in the Accounting Diploma programs. 2. Accounting II (ACC220) is one credit towards the Canadian Institute of Bookkeeping designation. Minimum grade of "B" required. 3. Accounting II (ACC220), coupled with Accounting I (ACC120) is accredited as the equivalent of Financial Accounting I (FA1) by the CGA. A…

Words 1234 - Pages 5

The Dynamics Of Business And Economics

Business 101 – Spring 2015 Exam 1 Study Guide Chapters 1, 2, 14, 15 and 16 Chapter 1: The Dynamics of Business & Economics What is any business’s primary objective? Earn a profit Be able to articulate “the” primary success factor in a business’s ability to attain its primary objective. (3 words!) It is something you do better than your competitors and you continue doing it over time. Sustainable competitive advantage: doing something better than your competitors and continuing to do so time…

Words 1788 - Pages 8

Assignment: Technology Support Contacts

examine the accounting principles underlying the measurement, recognition and reporting of long-lived tangible and intangible assets and long-term liabilities including bonds, pensions, and leases. Learning Outcomes Upon successful completion of this course, a student will be able to Demonstrate an understanding of the accounting for long-lived tangible and intangible assets and long-term liabilities including bonds, pensions, and leases. Analyze transactions and develop an understandable explanation…

Words 1432 - Pages 6

Essay on Freeman10e SM Ch14v2

CHAPTER 14 Financial Reporting: Deriving Government-Wide Financial Statements and Required Reconciliations ANSWERS TO QUESTIONS Question 14-1 Most of the information required for fund financial statements is captured and recorded in the accounts of the various funds as transactions occur throughout a fiscal year. Adjustments for accruals, deferrals, and so on are required at year end even if a government keeps its books on the GAAP basis for the particular fund as assumed in the illustrations…

Words 4718 - Pages 19

BUSI2093 Unit1 Problems LM Essay

Introduction Managerial Finance Chapter 14, Problem 9 Financial Ratios - Liquidity Required Data Current Assets Current Liabilities Inventories Cash $ $ $ $ 2011 1,630,200 1,857,200 587,500 191,000 $ $ $ $ 2010 1,504,700 1,787,700 563,600 188,900 Current Ratio: Current Ratio = current assets / current liabilities Current Ratio = 0.8778 0.8417 $ $ $ $ Change 125,500 69,500 23,900 2,100 0.0361 Quick Ratio: Quick Ratio = (current assets - inventories) / current liabilities Quick Ratio = 0.5614 0.5264…

Words 1260 - Pages 6

ACC Additional Theory Questions Essay

Chapter 2 1. The primary objective of financial reporting is to communicate information to permit users of the information to make informed decisions. 2. Qualitative characteristics make accounting information useful. Understandability: the quality of accounting information that makes it comprehensible to those willing to spend the necessary time. Relevance: the capacity of information to make a different decision. Reliability: the quality that makes accounting information dependable in representing…

Words 990 - Pages 4

Some Paper that I have to upload

Accounting 372 – Financial Accounting II Course Syllabus for Spring Semester 2014 Instructor: Gregory L. Prescott, CPA, CGMA, CMA, CFM Office Location: Mitchell Learning Resource Center, #122 Office Phone: 251 460-6409 Home Phone: 251 661-8376 E-mail address: gprescot@southalabama.edu Class/Office Hours: Class Schedule ACC 372.101 Tu – Th 11:00 a.m. – 12:15 p.m. ACC 416.101 Tu – Th 12:30 – 1:45 p.m. ACC 511.501 Tu – Th 7:30 – 8:45 p.m.…

Words 1730 - Pages 7

Essay on Balance Sheet and Assets

2 201Lec02.PPTX More More on on Financial Financial statements statements Chapter Chapter A BALANCE SHEET: i - changes constantly (every time an activity occurs) ii - shows assets, liabilities and equities as of a specific date. Prepared at least once per year. iii - uses original cost (historical cost principle) for most items. Current Fair Market Value (FMV) used for some assets like marketable securities since daily price is readily available. iv - Only shows items that can be expressed…

Words 920 - Pages 4

Essay about Generally Accepted Accounting Principles and Non-major Governmental Funds

Chapter Two 1. The three main sections of the North Las Vegas CAFR are the Introductory Section, Financial Section and Statistical Section. 2. a. The city was awarded the certificate of achievements for excellence in financial reporting, for 31 years in a row. The GFOA established the Certificate of Achievement for Excellence in Financial Reporting Program (CAFR Program) to encourage and assist state and local governments to go beyond the minimum requirements of generally accepted…

Words 1566 - Pages 7

Financial Statement Analysis Study Guide Essays

Financial Statement Analysis Financial Reporting & Analysis Questions Professor Mahoney Spring 2013 Chapter 1: Introduction to Financial Reporting I. Questions 2. How does the concept of consistency aid in the analysis of financial statements? What type of accounting disclosure is required if this concept is not applied? Consistency allows for the same accounting principle from period to period. A change in principle requires statement disclosure. 3. The president of your firm…

Words 3553 - Pages 15