Question 1

Explain,in the context of the latest AASB 137,why 'provisions' for items such as future repairs and maintenance are no longer permitted to be recognised.

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Question 2

Unless the probability of any outflow in a settlement is remote,an entity needs to disclose for each class of contingent liability:

Accepted Answer

Unless the probability of any outflow in a settlement is remote, an entity needs to disclose all of the given answers for each class of contingent liability to provide complete and accurate information to the users of financial statements. The possibility of any reimbursement, an indication of the timing and amount uncertainties, and an estimate of its financial effect are all important information for users to make informed decisions.

Question 3

An essential characteristic of a liability is the existence of a present obligation.What does this mean?
 Discuss the different types of obligations that may be considered 'present' obligations.

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Question 4

A compound instrument,such as a convertible note,comprises two components.They are:

Accepted Answer

A compound instrument such as a convertible note comprises of a financial liability which is a contractual arrangement to deliver cash or another financial asset and an equity instrument which is a call option granting the holder the right, for a specified period of time, to convert it into a fixed number of ordinary shares of the entity. Option B fits this definition. Option A is incorrect because it mentions a call option instead of a put option. Option C is incorrect because it mentions a variable number of ordinary shares instead of a fixed number. Option D is incorrect because it mentions a put option instead of a call option.

Question 5

The fact that a preference share is redeemable:

Accepted Answer

The fact that a preference share is redeemable does not automatically make it a financial liability. Depending on the conditions and rights attached to the share, it could be classified as either a financial liability or an equity instrument. Therefore, option D is the best choice.

Question 6

Discuss the criteria required to classify a liability as current.

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Question 7

In determining the amount to be assigned to the equity component of a compound financial instrument,you must:

Accepted Answer

In determining the amount to be assigned to the equity component of a compound financial instrument, the fair value of the financial liability should be deducted from the fair value of the compound financial instrument as a whole. This is because the equity component is the residual amount after deducting the fair value of the financial liability from the overall fair value. Choice D is the only option that reflects this approach.

Question 8

Adopting the effective-interest method means that the balance of the debenture liability represents:

Accepted Answer

Adopting the effective-interest method requires calculating the present value of the liability throughout the debenture term, taking into account the borrowing cost. Therefore, the balance of the debenture liability will represent the present value of the liability rather than the par value of the debenture (option A), an adjustment to the debenture par value (option C), or simply the borrowing cost (option D).

Question 9

From the following extract of an amortisation schedule pertaining to a compound financial instrument,what is the net liability (assuming the debenture has not yet been repaid),at the end of Period 10? $$\begin{array} { | c | r | r | r | r | r | r | } 
\hline \text { Period } & \begin{array} { c } 
\text { Opening } \
\text { liability }
\end{array} & \begin{array} { c } 
\text { Effective } \
\text { interest }
\end{array} & \text { Coupon rate } & \begin{array} { c } 
\text { Discount } \
\text { amortisation }
\end{array} & \begin{array} { c } 
\text { Balance of } \
\text { discount }
\end{array} & \text { Net liability } \
\hline 0 & & & & & 736055 & 9263945 \
\hline 1 & 9263945 & 555837 & 500000 & 55837 & 680218 & 9319782 \
\hline 2 & 9319782 & 559187 & 500000 & 59187 & 621031 & 9378969 \
\hline 3 & 9378969 & 562738 & 500000 & 62738 & 558293 & 9441707 \
\hline
\end{array}$$

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Question 10

In accordance with AASB 137 Provisions,Contingent Liabilities and Contingent Assets,differentiate provisions from accruals and provide one example for each type of liability.

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Question 11

Discuss the substance-over-firm approach in AASB 132 Financial Instruments.

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Question 12

Explain,in the context of Positive Accounting Theory,the implications of making professional judgments in respect to recognising and measuring liabilities.

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Question 13

From the following extract of an amortisation schedule pertaining to a compound financial instrument,what is the effective-interest rate embodied in the instrument? $$\begin{array} { | c | r | r | r | r | r | r | } 
\hline \text { Period } & \begin{array} { c } 
\text { Opening } \
\text { liability }
\end{array} & \begin{array} { c } 
\text { Effective } \
\text { interest }
\end{array} & \text { Coupon rate } & \begin{array} { c } 
\text { Discount } \
\text { amortisation }
\end{array} & \begin{array} { c } 
\text { Balance of } \
\text { discount }
\end{array} & \text { Net liability } \
\hline 0 & & & & & 736055 & 9263945 \
\hline 1 & 9263945 & 555837 & 500000 & 55837 & 680218 & 9319782 \
\hline 2 & 9319782 & 559187 & 500000 & 59187 & 621031 & 9378969 \
\hline 3 & 9378969 & 562738 & 500000 & 62738 & 558293 & 9441707 \
\hline
\end{array}$$

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Question 14

Explain in what situations,and why,some provisions should be measured at present values.

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Question 15

If liabilities are disclosed as current on the basis of the entity's operating cycle,and this cycle is greater than 12 months it should:

Accepted Answer

If an entity's operating cycle is greater than 12 months and liabilities are disclosed as current on this basis, it should disclose the length of the operating cycle in the notes to the financial statements. This is according to IAS 1 (Paragraph 69). Adjusting the statement of financial position for a 12-month period would not be appropriate as it does not reflect the true nature of the liabilities. Applying the 12-month test is also not applicable in this situation. Therefore, the best option is to disclose the length of the operating cycle in the notes. Thus, Option B is correct.

Question 16

AASB 13 defines fair value measurement as:

Accepted Answer

Fair value measurement, as defined by AASB 13, is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Question 17

Discuss the necessary conditions prescribed in AASB 137 Provisions,Contingent Liabilities and Contingent Assets to recognise provisions.Illustrate how these conditions are satisfied in a product warranty example.

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Question 18

Explain,providing an example,the 'effective-interest method' used to amortise debenture discount and debenture premium accounts.What is the implication of using this method for the balance of the net liability throughout the debenture term?

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Quiz 10: An Overview of Accounting for Liabilities