At
December 31, 2011, Burr Corporation owes $500,000 on a note payable due
February 15, 2012. Assume that Burr follows IFRS and that the financial
statements are completed and released on February 20, 2012.
(a)
If Burr refinances the obligation by issuing a long-term note on February 14
and by using the proceeds to pay off the note due February 15, how much of the
$500,000 should be reported as a current liability at December 31, 2011?
(b)
If Burr pays off the note on February 15, 2012, and then borrows $1 million on
a long-term basis on March 1, how much of the $500,000 should be reported as a
current liability at December 31, 2011, the end of the fiscal year?
(c)
Now assume that Burr follows private enterprise GAAP. Would that affect your
answers to (a) and (b)?
(a) Under IFRS, since the debt is due within 12
months from the reporting date, it is classified as a current liability. This
classification holds even if a long-term refinancing has been completed before
the financial statements are released. The only exception accepted for
continuing long-term classification is if, at the balance sheet date, the
entity expects to refinance it or roll it over under an existing agreement for
at least 12 months and the decision is solely at its discretion.
(b) Under IFRS, the whole $500,000 of maturing
debt would still be classified as a current obligation. The international
standard has a stringent requirement that the agreement must be firm at the
balance sheet date. (This assumes Burr had not entered into a long-term
agreement prior to financial statement release date.)
(c) For part (a), under private enterprise GAAP,
the debt would be classified as a long-term liability. If there is irrefutable
evidence by the time the financial statements are completed and released that
the debt has been or will be converted into a long-term obligation, PE GAAP
allows currently maturing debt to be classified as long-term on the balance
sheet. In this case, the debt was refinanced before the financial statements
were completed and released.
For part (b), under private enterprise
GAAP, the debt would be classified as a current liability since there was not
irrefutable evidence by the time the financial statements were completed that
the debt has been or will be converted into a long-term obligation. (This
assumes Burr had not entered into a long-term agreement prior to the release of
the financial statements.) In addition, since its repayment occurred before
funds were obtained through long-term financing, the repayment used existing
current assets.
