Question

Facts: Argent Corporation reports short-term obligations of $15,000,000 in the current liability section of its statement of financial position at December 31, 2020 (its year-end). This amount includes the current portion of 12% long-term debt in the amount of $10,000,000 (matures in March 2021). Management has stated its intention to refinance the 12% debt whereby no portion of it will mature during 2021. The financial statements are issued on March 25, 2021.

Question 1: Based solely on the above facts, would management be correct under US GAAP if they classified the $10,000,000 portion of the above debt as long-term as of 12/31/2020? Why or why not?

Question 2: Using the same fact pattern, now assume that Argent Corporation issues $13,000,000 of 10-year bonds to the public on January 18, 2021 and management uses the proceeds to liquidate the $10,000,000 short-term debt on February 8, 2021.

Question 3: Would the classification of the $10,000,000 debt at December 31, 2020 be the same under IFRS and US GAAP? Explain your answer.

Answer 1

Answer :

1.

No. IFRS indicate that refinancing a short-term obligation on a long-term basis also requires that a company have an unconditional right to defer settlement of the liability for at least 12 months after the reporting date.

2.

No. The events described will not have an impact on the financial statements. Since Argent Corporation’s refinancing of the longterm debt maturing in March 2021 does not meet the conditions set forth in IFRS that obligation should be included in current liabilities. The $10,000,000 should continue to be classified as current at December 31, 2020. A short-term obligation, other than one classified as a current liability, shall be excluded from current liabilities if the entity’s intent to refinance the short-term obligation on a long-term basis is supported by an unconditional right to defer the settlement of the liability for at least 12 months after the reporting date.

3.

Yes. The debt should be included in current liabilities. The issuance of ordinary shares in January does not meet the criteria to have an unconditional right to defer the settlement of the liability for at least 12 months after the reporting date.