I think that since accounting is the language of business, we all can benefit from having a place we can ask questions about it.
I hope that most of you will use this thread to ask questions and answer them.
In order to keep it organized and searchable, if you ask a new question please start it by writing its number at the beginning, and if you answer, please write the question number at the beginning of your answer.
Let me start by asking my first question.
#1 When company XYZ balance sheet says it has 100m in long term debt, does that amount takes into consideration the amount that will be paid in interest or is it only the principal that should be paid ?
That's the principal only, you record the interest expense as it is incurred, not upfront. The interest liability is going to be recorded in a separate account as a current liab, eg.:
Yr1
Dr.Cash 10000
Cr.LT Debt 10000
Yr2
Dr.Int Exp 1000
Cr.Int Payable 1000
Dr. Int Payable 1000
Dr. LT Debt 1000
Cr.Cash 2000
Pretty harsh going straight for Debits & Credits!!! :o
For corporates, the total debt is the principal only. Don't forget to include short term portions of long term debt (current liabilities) in this number and potentially any significant operating lease liabilities and the net pension liability if the pension is material.
A simple rule of thumb for operating leases is to take the current year operating lease payment (rent) and multiply by 5. Finance leases are already included as debt so no need to worry about those.
For pensions, remember to use the actual economic deficit - which means taking the "projected benefit obligation (PBO)" from the notes to the account as the liability and taking the fair value of plan assets. This net liability should be added to the debt if it's a material number, particularly in UK / European companies where the pension can rank senior to bondholders. Would be interesting to know where pension deficits rank in US Chapter 11 bankruptcy.
I think banks, perversely, are allowed to record discounts on their debt as a gain (which means I assume they drop the principal amount to face value) but I don't really look at the big banks so someone with better expertise could clarify that.
I am a qualified IFRS accountant and did some US GAAP when doing the CFA. I can help on financial reporting questions but will be of no use on tax related stuff (I've never looked at US tax but mainly because tax laws pretty much change every other year, I qualified 10 years ago and have not kept up to date on it).
General Accounting questions
in General Discussion
Posted
Pretty harsh going straight for Debits & Credits!!! :o
For corporates, the total debt is the principal only. Don't forget to include short term portions of long term debt (current liabilities) in this number and potentially any significant operating lease liabilities and the net pension liability if the pension is material.
A simple rule of thumb for operating leases is to take the current year operating lease payment (rent) and multiply by 5. Finance leases are already included as debt so no need to worry about those.
For pensions, remember to use the actual economic deficit - which means taking the "projected benefit obligation (PBO)" from the notes to the account as the liability and taking the fair value of plan assets. This net liability should be added to the debt if it's a material number, particularly in UK / European companies where the pension can rank senior to bondholders. Would be interesting to know where pension deficits rank in US Chapter 11 bankruptcy.
I think banks, perversely, are allowed to record discounts on their debt as a gain (which means I assume they drop the principal amount to face value) but I don't really look at the big banks so someone with better expertise could clarify that.
I am a qualified IFRS accountant and did some US GAAP when doing the CFA. I can help on financial reporting questions but will be of no use on tax related stuff (I've never looked at US tax but mainly because tax laws pretty much change every other year, I qualified 10 years ago and have not kept up to date on it).