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Accounting for Short Term Debt Obligations
Page 541
General
1. Liabilities that are short term in nature are not discounted.
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They are shown at face value.
. Examples
i) Accounts Payable
ii) Notes Payable
iii) Miscellaneous Taxes
iv) Property taxes
v) Payroll taxes
vi) Sales Taxes
Short Term Operating Liabilities
. Most goods are purchased on Credit
4. Accounts Payable is reserved for purchase of materials in a manufacturing company, and merchandise in a retailing company.
5. Other short term liabilities are stated separately.
6. If discounts are expected to be taken then the liability should be reported net of the expected discount.
Short Term Debt
7. Promissory Note formal written promise to pay a sum of money in the future. Usually reflected on the Debtors Books as Notes Payable
8. Two Types of Promissory Notes
i) Trade Notes Payable note issued to trade creditors for purchase of goods and services
ii) Non Trade Notes Payable loans for the purchase of non current operating assets.
Short Term Obligations Expected to be Refinanced.
. short term debt that is expected to be refinanced on a long term basis should not be reported as a current asset.
10. FASB Statement # 6 Provides Authoritative Guidelines.
i) Management must intend to refinance obligation on a long term basis
ii) Management must demonstrate an ability to refinance
a) actually refinancing between balance sheet date and the issue date of the statements
b) reaching a firm agreement that clearly provides for refinancing on a long term basis
11. other items
i) The terms of the refinancing arrangement should be non-cancelable
ii) The refinancing agreement should be clearly long term in nature.
iii) Company should not be in violation of the agreement as of the date of the financial statements or on the date of issuance.
iv) Both lender and company should have the financial capability.
v) The portion that is excluded from current liabilities cannot be greater than the proceeds from the refinancing.
1. Timing of the Refinancing A special problem occurs when the debt matures between the balance sheet date, and the date that the financial statements are issued.
Example
ABC Co. has $ 800,000 Note Payable as a current liability at December 15, 001. The note payable is due Jan 15, 00. Management intends to refinance the note with a bond issue. The requirements to have the note reclassified as long term are satisfied. The Financial Statements will be issued Feb 8, 00
Case I. Bonds are issued before December 1, 001
The company does not have a current liability at year end , and this discussion does not apply.
Case II. The Bonds are issued on January 15, 001
The Note Payable will be reclassified as long term.
Case III The Bonds are issued on January 8, 001.
The Note Payable cannot be classified as long term. It must be included in current liabilities.
V. Line of Credit -
1. Definition Line of Credit is a negotiated arrangement with a lender in which the terms are agreed to prior t the need for borrowing. Access to funds will be provided immediately when needed instead of having to go through the loan approval process.
. Disclosure of a Line of Credit arrangement is required in the Notes to the Financial Statements.
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