Question

Question: In accounting for short-term debt expected to be refinanced to long-term debt:

1. GAAP uses the authorization date to determine classification of short-term debt to be refinanced.
2. IFRS uses the authorization date to determine classification of short-term debt to be refinanced.
3. IFRS uses the financial statement date to determine classification of short-term debt to be refinanced.
4. GAAP uses the date of issue, but only for secured debt, to determine classification of short-term debt to be refinanced.

Short answer

Answer

The correct statement is (c), IFRS uses the financial statement date to determine classification of short-term debt to be refinanced.

Step-by-step solution

Meaning of Short-term debt

Short-term debt refers to the debt liability that is ought to be paid within a year or the current financial year of the entity. Examples include accounts payable, income taxes payable and lease payments.

Explanation for the correct option 

International Financial Reporting Standard (IFRS) uses the financial statement date to determine classification of short-term debt to be refinanced is correct. It needs an entity to show a full set of financial statements every year.

Explanation for the incorrect options 

Generally Accepted Accounting Principles (GAAP) uses the authorization date to determine classification of short-term debt. Generally, GAAP uses the authorization date to determine classification of non-current assets as long-term debt.

IFRS uses the authorization date to determine the classification of short-term debt to be refinanced is incorrect. The date that the financial statements are authorized for issue is normally the date at which the financial statements are authorized and issued by the regulation.

GAAP uses the date of issue, but only for secured debt, to determine classification of short-term debt to be refinanced is incorrect. While GAAP uses the date of issue, for secured and unsecured debt for ascertaining the classification of short-term debt to be refinanced.

Therefore, statements (a), (b) and (d) are incorrect.