Question

Kobayashi Corporation reports in the current liability section of its statement of financial position at December 31, 2017 (its year-end), short-term obligations of \(15,000,000, which includes the current portion of 12% long-term debt in the amount of \)10,000,000 (matures in March 2018). Management has stated its intention to refinance the 12% debt whereby no portion of it will mature during 2018. The date of issuance of the financial statements is March 25, 2018.Instructions

(a) Is management’s intent enough to support long-term classification of the obligation in this situation?

(b)Assume that Kobayashi Corporation issues \(13,000,000 of 10-year debentures to the public in January 2018 and that management intends to use the proceeds to liquidate the \)10,000,000 debt maturing in March 2018. Furthermore, assume that the debt maturing in March 2018 is paid from these proceeds prior to the authorization to issue the financial statements. Will this have any impact on the financial position classification at December 31, 2017? Explain your answer.

(c) Assume that Kobayashi Corporation issues ordinary shares to the public in January and that management intends to entirely liquidate the \(10,000,000 debt maturing in March 2018 with the proceeds of this equity securities issue. In light of these events, should the \)10,000,000 debt maturing in March 2018 be included in current liabilities at December 31, 2017?

Short answer

(a) No, the management’s intention is not enough to support the long-term classification of the obligation in this situation.

(b) No, the events specified will not affect the financial statements. As Kobayashi Corporation refinancing the long-term obligation matures in March 2018, it does not meet the criteria set out in IFRS that debt should include in the current liabilities.

(c) Yes, the obligation should include in current liabilities.

Step-by-step solution

Meaning of Financial Statements

Financial statements are annual statements of assets and liabilities and income and expenditure. Financial statements areprepared by all the forms of business organizations to ascertain the operating results of the business and to know the financial positionon a particular date.

Explanation for statement ‘a’

No, IFRS states that refinancing a short-term debt on a long-term basis also needs that a firm has an unrestricted right to delay settlement of the liability for a minimum period of twelve months after the listing date.

Explanation for statement ‘b’

No, the situations specified will not affect the financial statements. Because Kobayashi Corporation’s refinancing of the long-term liability is maturing in March 2018, it does not meet the criteria outlined in IFRS that debt should include in the current liabilities. The $10,000,000 should continue to categorize as the current liability of December 31, 2017. A short-term liability shall not have in current liabilities if the firm’s intention to refinance the short-term debt on a long-term basis is assisted by an unconditional right to delay the settlement of the debt for a minimum of twelve months after the listing date.

Explanation for statement ‘c’

Yes, the obligation should include in current liabilities. The issuance of ordinary shares in January does not meet the conditions required to have an unconditional right to delay the settlement of the debt for a minimum period of twelve months after the listing date.