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C H A P T E R 13 CURRENT LIABILITIES, PROVISIONS, AND CONTINGENCIES This IFRS Supplement provides expanded discussions of accounting guidance under In- ternational Financial Reporting Standards (IFRS) for the topics in Intermediate Account- ing. The discussions are organized according to the chapters in Intermediate Accounting (13 th or 14 th Editions) and therefore can be used to supplement the U.S. GAAP require- ments as presented in the textbook. Assignment material is provided for each supplement chapter, which can be used to assess and reinforce student understanding of IFRS. Chapter 13 Current Liabilities, Provisions, and Contingencies 131 CURRENT MATURITIES OF LONG-TERM DEBT Delhaize Group (BEL) reports as part of its current liabilities the portion of bonds, mort- gage notes, and other long-term indebtedness that matures within the next fiscal year. It categorizes this amount as current maturities of long-term debt . Companies, like Delhaize, exclude long-term debts maturing currently as current liabilities if they are to be: 1. Retired by assets accumulated for this purpose that properly have not been shown as current assets, 2. Refinanced, or retired from the proceeds of a new debt issue (discussed in the next section), or 3. Converted into ordinary shares. When only a part of a long-term debt is to be paid within the next 12 months, as in the case of serial bonds that it retires through a series of annual installments, the company reports the maturing portion of long-term debt as a current liability , and the remaining portion as a long-term debt. However, a company should classify as current any liability that is due on demand (callable by the creditor) or will be due on demand within a year (or operating cycle, if longer). Liabilities often become callable by the creditor when there is a violation of the debt agreement. For example, most debt agreements specify a given level of equity to debt be maintained, or specify that working capital be of a minimum amount. If the company violates an agreement, it must classify the debt as current because it is a rea- sonable expectation that existing working capital will be used to satisfy the debt. To illustrate a breach of a covenant, assume that Gyro Company on November 1, 2011, has a long-term note payable to Sanchez Inc., which is due on April 1, 2013. Un- fortunately, Gyro breaches a covenant in the note, and the obligation becomes payable on demand. Gyro is preparing its financial statements at December 31, 2011. Given the breach in the covenant, Gyro must classify its obligation as current. However, Gyro can classify the liability as non-current if Sanchez agrees before December 31, 2011, to pro- vide a period of grace for the breach of the agreement. The period of grace must end at least 12 months after December 31, 2011, to be reported as a non-current liability. If the agreement is not finalized by December 31, 2011, Gyro must classify the note payable as a current liability . .... View Full Document

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