Question

1. How do IFRS and U.S. GAAP differ with respect to the classification of debt that is expected to be refinanced?

2. What is the difference between the use of the term contingent liability in U.S. GAAP and IFRS?

Thank you!

Answer 1

Debts expected to be refinanced

Per US GAAP

Debts to be refinanced
            are excluded from current liabilities
            only if both of the following conditions are met:

            a. Company intends to refinance the obligation on a long-term basis.
            b. Company has the ability to refinance.

Company has the ability to refinance
            can be supported by one of the following:

            a. Issuance of long-term debt (or equity securities)
                 after the balance sheet date
                 but before the balance sheet is issued.

            b. Financing agreement
                 (to refinance short-term debt on a long-term basis)
                 before the balance sheet is issued.

Financing agreement should satisfy all of the following:
            a. Within one year (or operating cycle)
                 from balance sheet date
                 --> agreement doe not expire
                 --> agreement is not cancelable by lender

            b. No violation of provisions
                 --> at the balance sheet date and
                 --> during the period between the balance sheet date and
                       the date balance sheet is issued.

            c. Lender is financially capable of honoring the agreement.

Per IFRS:

If an entity expects, and has the discretion, to refinance or roll over an obligation for at least twelve months after the reporting period under an existing loan facility with the same lender, on the same or similar terms, it classifies the obligation as non-current, even if it would otherwise be due within a shorter period. However, when refinancing or rolling over the obligation is not at the discretion of the entity (for example, there is no arrangement for refinancing), the entity does not consider the potential to refinance the obligation and classifies the obligation as current.

Contingent Liability

Per US GAAP

Companies operating in the United States rely on the guidelines established in the generally accepted accounting principles (GAAP). Under GAAP, a contingent liability is defined as any potential future loss that depends on a "triggering event" to turn into an actual expense.

It's important that shareholders and lenders be warned about possible losses—an otherwise sound investment might look foolish after an undisclosed contingent liability is realized.

There are three GAAP-specified categories of contingent liabilities: probable, possible, and remote. Probable contingencies are likely to occur and can be reasonably estimated. Possible contingencies do not have a more-likely-than-not chance of being realized but are not necessarily considered unlikely either. Remote contingencies aren't likely to occur and aren't reasonably possible.

Working through the vagaries of contingent accounting is sometimes challenging and inexact. Company management should consult experts or research prior accounting cases before making determinations. In the event of an audit, the company must be able to explain and defend its contingent accounting decisions.

Any probable contingency needs to be reflected in the financial statements—no exceptions. Remote contingencies should never be included. Contingencies that are neither probable nor remote should be disclosed in the footnotes of the financial statements.

Per IFRS

A contingent liability either a:

possible obligation arising from past events whose existence will be confirmed only by the occurrence or non-occurrence of some uncertain future event not wholly within the entity’s control, or • present obligation that arises from a past event but is not recognized because either: (i) it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation, or (ii) the amount of the obligation cannot be measured with sufficient reliability.

A contingent liability, being a possible obligation, is not recognised but is disclosed unless the possibility of an outflow of economic benefits is remote.

An entity shall present and disclose information that enables users of the financial statements to evaluate the financial effects of provisions and the disclosure of contingent liabilities.

Unless the possibility of any outflow in settlement is remote, an entity shall disclose for each class of contingent liability at the end of the financial reporting period a brief description of the nature of the contingent liability and, where practicable: (i) an estimate of its financial effect; (ii) an indication of the uncertainties relating to the amount or timing of any outflow; and (iii) the possibility of any reimbursement. In extremely rare cases, disclosure of some or all of the information can be expected to prejudice seriously the position of the entity in a dispute with other parties on the subject matter of the provision, contingent liability or contingent asset. In such cases, an entity need not disclose the information, but shall disclose the general nature of the dispute, together with the fact that, and reason why, the information has not been disclosed.