1. © Prentice-Hall of India Private Limited, 2004. All rights reserved.1 Financial Accounting: A Managerial Perspective Second Edition Prepared by R. Narayanaswamy Indian Institute of Management Bangalore

2. © Prentice-Hall of India Private Limited, 2004. All rights reserved.2 Liabilities Chapter 9

3. © Prentice-Hall of India Private Limited, 2004. All rights reserved.3 Liabilities in Perspective  Defining liabilities  Classification of liabilities  Current and long-term liabilities  Secured and unsecured liabilities  The Companies Act, Schedule VI presentation Chapter 9

4. © Prentice-Hall of India Private Limited, 2004. All rights reserved.4 Current Liabilities  Classification  Definite liabilities  Estimated liabilities  Definite liabilities  Bills payable  Sales tax payable  Current portions of long-term debt  Interest accrued but not due on loans Chapter 9

5. © Prentice-Hall of India Private Limited, 2004. All rights reserved.5 Current Liabilities continued  Estimated liabilities  Income tax  Product warranties  Dividends payable  When is dividend payable? Chapter 9

6. © Prentice-Hall of India Private Limited, 2004. All rights reserved.6 Contingent Liabilities  Defining contingent liabilities  Examples  Bills discounted  Disputed tax demands  Product liability suits  Demands for increase in wages  Accounting treatment  Recognition  Disclosure Chapter 9

7. © Prentice-Hall of India Private Limited, 2004. All rights reserved.7 Long-term Liabilities  Why long-term liabilities?  Examples  Debentures  Lease liabilities  Pension liabilities  Deferred tax liabilities  Deferred tax assets  Long-term liabilities and current liabilities  Duration  Legal formalities Chapter 9

8. © Prentice-Hall of India Private Limited, 2004. All rights reserved.8 Debentures Payable  Debenture or bond  Underwriter  Debenture trust deed  Debenture trustee  Covenants  Characteristics of debentures  Secured and unsecured debentures  Registered and unregistered debentures  Term and serial debentures Chapter 9

9. © Prentice-Hall of India Private Limited, 2004. All rights reserved.9 Debentures Payable continued  Characteristics of debentures continued  Convertible debentures  Callable bonds  Zero-coupon bonds  Debenture ratings Chapter 9

10. © Prentice-Hall of India Private Limited, 2004. All rights reserved.10 Accounting for Debentures  Debentures issued at face value  Debenture prices and interest rates  Debentures issued at a discount  Debentures issued at a premium  Amortisation of debenture discount and premium  Straight-line amortisation  Effective interest amortisation Chapter 9

11. © Prentice-Hall of India Private Limited, 2004. All rights reserved.11 Other Problems in Accounting for Debentures Payable  Debentures issued between interest dates  Year-end accrual of debenture interest expense  Debenture issue expenses Chapter 9

12. © Prentice-Hall of India Private Limited, 2004. All rights reserved.12 Debentures: Retirement, Conversion and Redemption  Retirement  Conversion  Redemption  Debenture redemption fund Chapter 9

13. © Prentice-Hall of India Private Limited, 2004. All rights reserved.13 Other Long-term Liabilities  Mortgages payable  Leases  Finance leases  Operating leases  Pensions and other post-retirement benefits  Defined contribution plans  Defined benefit plans Chapter 9

14. © Prentice-Hall of India Private Limited, 2004. All rights reserved.14 Deferred Tax Liabilities  Taxable income and accounting profit  Why they differ?  Permanent differences and temporary differences (timing differences)  Examples of temporary differences  Depreciation  Effect of disallowance Section 43 B of the Income Tax  Warranty provisions Chapter 9

15. © Prentice-Hall of India Private Limited, 2004. All rights reserved.15 Deferred Tax Liabilities  Understanding the effect of tax deferral  Depreciation  Measuring and recognising deferred tax liability  Measuring and recognising deferred tax asset Chapter 9

16. © Prentice-Hall of India Private Limited, 2004. All rights reserved.16 Off-Balance Sheet Financing  What is off-balance sheet financing?  Why do managers like off-balance sheet financing?  Transfer of receivables with recourse  Product financing arrangement  Unconditional purchase obligation  In-substance defeasance  Financial instruments Chapter 9