TRUE OR FALSE? (Based on the book) A financial liability that is due within one year after the reporting period shall be classified as current when it is refinanced on a long-term basis after the end of the reporting period.
TRUE OR FALSE? (Based on the book) A financial liability that is due within one year after the reporting period shall be classified as current when it is refinanced on a long-term basis after the end of the reporting period.
Auditing: A Risk Based-Approach to Conducting a Quality Audit
10th Edition
ISBN:9781305080577
Author:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg
Publisher:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg
Chapter9: Auditing The Revenue Cycle
Section: Chapter Questions
Problem 19MCQ
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TRUE OR FALSE? (Based on the book)
A financial liability that is due within one year after the reporting period shall be classified as current when it is refinanced on a long-term basis after the end of the reporting period.
Transcribed Image Text:Discretion to refinance
PAS 1, paragraph 73, provides that if the entity has the
discretion to refinance or roll over an obligation for at least
twelve months after the reporting period under an existing
loan facility, the obligation is classifed as noncurrent even
if it would otherwise be due within a shorter period.
Note that the refinancing or rolling over must be at the
discretion of the entity.
Otherwise, if the refinancing or rolling over is not at the
discretion of the entity, the obligation is classified as a
current liability.
Covenants
Covenants are often attached to borrowing agreements which
represent undertakings by the borrower.
These covenants are actually restrictions on the borrower
as to undertaking further borrowings, paying dividends,
maintaining specified level of working capital and so forth.
Under these covenants, if certain conditions relating to the
borrower's financial situation are breached, the liability
becomes payable on demand.
PAS 1, paragraph 74, states that such a liability is classified
as current even if the lender thas agreed, after the end of
reporting period and before the statements are authorized
for issue, not to demand payment as a consequence of the
breach.
However, Paragraph 75 states that the liability is classified
as noncurrent if the lender has agreed on or before the end of
reporting period to provide a grace period ending at least
twelve months after the end of reporting period.
In this context, the grace period is a period within which
the borrower can rectify the breach and.during which the
lender cannot demand immediate payment.
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