1. H-1 Prepared by Coby Harmon University of California, Santa Barbara Westmont College W ILEY IFRS EDITION

2. H-2 APPENDIX PREVIEW 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).

3. H-3 H 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

4. H-4 LO 1 Provisions and Contingent Liabilities Learning Objective 1 Describe the accounting and disclosure requirements for provisions and contingent liabilities. IFRS Guidelines:  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.

5. H-5 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 LO 1

6. H-6 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

7. H-7 Warranty Expense 400,000 Warranty Liability 400,000 Recording a Provision LO 1 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.

8. H-8 Illustration: Prepare the entry to record the repair costs incurred in 2017 to honor warranty contracts on 2017 sales. Warranty Liability240,000 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. Warranty Liability16,000 Repair Parts 16,000 Recording a Provision LO 1

9. H-9 Disclosure should identify the:  Nature of the item.  Amount of the contingency, if known.  Expected outcome of the future event. Disclosure of Contingent Liabilities LO 1

10. H-10 A lease is a contractual arrangement between a lessor (owner of the property) and a lessee (renter of the property). Illustration H-3 Types of leases LO 2 Lease Liabilities Learning Objective 2 Contrast the accounting for operating and finance leases.

11. H-11 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 substantially all of the fair value of the leased property. Finance Leases LO 2

12. H-12 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

13. H-13 Illustration: (a) What type of lease is this? Explain. Capitalization Conditions:   Transfer of ownership   Bargain purchase option   Lease term major portion of economic life of leased property   Present value is substantially the FMV of the leased property NO NO Lease term 4 yrs. Economic life5 yrs. YES 80% YES - PV and FMV are the same. Finance Lease? Finance Leases LO 2

14. H-14 Illustration: (b) Prepare the journal entry to record the lease. Leased Asset - Equipment 190,000 Lease Liability190,000 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

15. H-15 Paid absences for vacation, illness, and holidays. Accrue a liability if:  Payment of the compensation is probable.  The amount can be reasonably estimated. Paid Absences Liabilities for Employee Fringe Benefits Learning Objective 3 Identify additional fringe benefits associated with employee compensation. LO 3

16. H-16 Vacation Benefits Expense 3,300 Vacation Benefits Liability3,300 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. Vacation Benefits Liability1,100 Cash1,100 Academy pays vacation benefits for 10 employees. Paid Absences LO 3

17. H-17 Post-retirement benefits are benefits that employers provide to retired employees for 1.health care and life insurance 2.pensions. Companies account for post-retirement benefits on the accrual basis. Postretirement Benefits LO 3

18. H-18 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

19. H-19 An arrangement whereby an employer provides benefits to employees after they retire for services they provided while they were working. Pension Plan Administrator Pension Plan Administrator Contributions Employer Retired Employees Benefit Payments Assets & Liabilities Postretirement Benefits PENSION PLANS LO 3

20. H-20 Defined-Contribution PlanDefined-Benefit Plan  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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