chapter 13 part 3

Question 1

what is derecognition also called

Answer 1

extinguishment

Question 2

what is derecognition

Answer 2

debt is removed from accounts

Question 3

what is derecognition

Answer 3

when a debt is recorded in the accounts it is recognized

• when it is removed, it is derecognized

Question 4

how is debt derecognized or extinquished

Answer 4

usually by paying the amoutn of the liability to the creditor

Question 5

sometimes can debt be repaid and derecognized before its maturity

Answer 5

yes

Question 6

How is debt derecognized at maturity

Answer 6

by the time debt reaches full maturity, all the discount or premium is fully amortized

• making the carrying value equal to the face value
• with no gains and losses being recorded

Question 7

why would you want to derecognize prior to maturity

Answer 7

1. to improve ratios
2. eliminate debt covenants
   bonds: may be pruchased on the open makret at any time

Question 8

some reasons bonds may be retired early

Answer 8

1. bonds may be redeemable (the borrower may pay back the loan using a Call option at a specific price and time
2. investors can force repaymetn of a bond if the bond is retractable

Question 9

a bond carries a call prvilege, the issuer may do what

Answer 9

may retire the debt by paying the call price or redemption price, during a speciied period

• typcially the call price exceeds fave value by a certain percent

Question 10

Retirement decision with regards to a bond result in recording what

Answer 10

a gain or loss that reflects the changed fair value of the bond that is caused when market yield rates change

• whether the retirmenet happens or not, the fiar value of the bond has still changed ?????

-

Question 11

accounting for early debt retirement involves what

Answer 11

1. updating interet expense, discount premium, and related issue costs to the retirement date
2. removing the liability accounts
3. recording the transfer of cash, other resources, or the issuance of new debt sercurities
4. reocrding a gain or loss

Question 12

gains or losses on bond retirmens are either what

Answer 12

1. ordrinary or
2. unsual items
   - depends on the circumstances

Question 13

how are gains and losses dealth with replacement debt

Answer 13

they are deferred and amortized over the term of any repalcement debt

• if and only if, the transaction is a substitution or modificaiton of debt

Question 14

what happens when bons are dercognized for an amount different than the amortized cost

Answer 14

gain or loss results

Question 15

How do you record derecognition of a bond prior to matuirty

Answer 15

1. update interest expense to retirement date, discount/premium amortization and related debt issue costs
2. remove disocunt/premium and loan payable accounts
3. record apyment of cash or other consideration
4. record gain or loss

Question 16

the classification of a gain or loss can be

Answer 16

1. . unusual or
2. ordinary
   - on SCI
   - may be deferred and amortized if new “replacemnet” debt is a substiution or modificaiton of old debt

Question 17

how does extinguisment of debt (derecognition) accomplished

Answer 17

by defeasance

Question 18

what is defeasance

Answer 18

requires a company to place assets in an irrecvocable trust sufficient to pay the debt and obtaining agreemnt from the creditor tha the liability is extinguished when the debtor makes the payments to the trust

• the liability will no longer appear on the SFP
• the defeasance gain/ loss is the difference between the book value of hte liability and the payment required by the defeasance agreement

Question 19

defeasance simple what it is

Answer 19

1. requires company to palce assets in an irrevocable trust sufficient to pay te debt interst and principal
2. credotr has approved this, and copany no longer has obligaton to the creditor
3. thefore can derecognize the liability (with an entry that removes the assets(funding), liaibity, and related accoutns, and records a gain or loss

Question 20

what is in-substance defeasance

Answer 20

similar to defeasance except that the trust is not irrevocable

1. creidtor has not approved and therofre the compay still has an obligation
2. liability is not removed form the balance sheet
   - and a seperate investment account is recorded for funds transferred to the trustee

Question 21

is in-substance defeasance allowed

Answer 21

this practice is no longer avialalbe as a means of removing debt from the SFP

• because there is no legal relase provided by the creditor

Question 22

what was the concern wth in-substance defeasance

Answer 22

standard-setters were concerned that compaies set up in-substance defeasnce if interest rates increased.

• the increased reduces the amoutn of investment needed to service the debt, and reduced the fair value of hte debt, resulting in gain
• this might allow management a way to manipulate earnings
• another concern was that the borrowing company would have debt legally outstanding but was not reported on SFP

Question 23

what is substiution or modificaiton of debt

Answer 23

repay and revorrow in the same transaction

• replacng an existing loan prior to its due date

Question 24

with regards to substitution or modification of debt, if present value of new loan is at least 10% different form the presnet value of old loan, then

Answer 24

• extinguish the old loan recognizing a gain or loss
• record the new loan

Question 25

with regards to substitution or modification of debt, if the present value of new loan difference is less than 10%

Answer 25

in substance, there is no difference - no gain or loss is recorded

Question 26

* on the SCF, financing section inludes with regards to bonds :

Answer 26

1, cash inflow form issuance of bonds 2. cash outflow to repay bonds

Question 27

on the SCF, with regards to bonds, the operation section inlcudes(assuming indirect method) :

Answer 27

1. loss (gain) on bond retiremnet is added back (deducted) 2. discount or premium amortization is added back 3. interest expenses is added back 4. interest paid may be shown as a financing or operating acitivity

Question 28

What do you disclose with regards to liabilities

Answer 28

1. accounting polciies, fair value and methods used to determine fair values 2. title, interest rate, interest expense, maturity date, amount outstanding, security, redepmtion or conversion privileges 3. aggregate amount of payments due in next 5 years 4. foreign currency 5. show secured liablities separately and the fact htey are secured 6. details of defaults 7. objectives, polices and processes to manage risk and captial

Question 29

what are the treatment fo long-term liabilities under IFRS and ASPE

Answer 29

the are similar ASPE - may use either the effective interest method or the stright line mtheod - may choose to capitalize borrwoing costs, but no guidleness are provided - disclose accounting policy - disclosure is less extensive under ASPE

Question 30

under IFRS and ASPE if a long-term loan is coming due but is being renegotitead

Answer 30

IFRS - requries that a legally enforceable agreement be in palce by the **end of the fiscal year (the reporting date)** if the laon is to be classified as long-term ASPE - classification as long-term is permitted if renegotated resulted in agreemnt by the **date the fincnial statements are released**

Question 31

IFRS vs ASPE cpatialization of borrowing costs

Answer 31

IFRS - required to capitalize borrowing costs ASPE - copanies may choose to capitalize or not - although imputed interst may not be capitalized

Question 32

IFRS vs ASPE disclsoure

Answer 32

disclsoure is less onerous in all reas under ASPE