On The Measurement Of Liabilities

Accounting measurement is a very important content in accounting research.

There are many discussions about the assets, but there is little discussion on the corresponding liabilities measurement.

This article attempts to make the following discussion in this respect.

When measuring assets, according to the flow direction and flow time of assets, we can choose the measurement attributes such as historical cost, current cost, current market value or discount value of future cash flow.

Asset measurement emphasizes a right, and fair value is introduced for fair representation.

Similarly, debt as an obligation of enterprises should also be fair.

Since an enterprise's liability is an asset of another market entity, the measurement of the fair value of liabilities should be converted into an asset measurement.

For example, in order to estimate the fair value of an enterprise's notes payable or bonds payable, we can estimate a price. At this price level, other entities are willing to take the liabilities of the enterprise as their assets.

However, the measurement of liabilities also differs from asset measurement.

For example, the ability of any enterprise to exercise their rights is not very different, but the ability of enterprises to fulfill their obligations under different financial conditions or credit conditions is different.

In addition, it is also necessary to consider whether an enterprise's liabilities should be included in the book value of liabilities when the liabilities of an enterprise are pformed into assets of another market entity.

Two, the measurement and profit factor of liabilities. Whether the measurement of liabilities is based on cost or profit factors, people's opinions are different.

In accordance with the requirements of the seventh financial statement of the United States Financial Accounting Standards Committee (FASB), when a company intends to use its internal resources to process liabilities, the fair value of liabilities should include a certain profit, that is, if the liability is paid to the third party in the independent market, the profits demanded by it should be included.

Because the fair value of liabilities refers to the price of the hypothetical independent market participants when handling liabilities, while the independent market participants are bound to require certain profits to deal with liabilities.

In another view, we should not include the profit required by the third party to handle the paction, that is, the cost accumulation method should be adopted.

The cumulative cost method refers to the cost of measuring a certain period of time that a certain asset is expected to be paid or paid off in a certain period.

This measure excludes the factors of manufacturing costs, profits and risk premiums considered by independent market participants in assessing the liabilities, and inevitably has some disadvantages: (1) the information provided is incomparable.

For example, three enterprises have the same amount of product maintenance guarantee debt, one is to undertake the maintenance obligations by the internal departments, one is to be undertaken externally, and the other is partly borne by the internal and partly externally.

If the cost accumulation method is used, the three liabilities are actually priced at cost, priced at market price, and partly priced at cost and partly at market prices, so they are not comparable.

2. The amount shown in the statement will not be accepted by the third independent party in the market, because if the liability is pferred to the independent third party, the third party will certainly require certain risk reward and profit.

(3) the cost accumulation method does not attempt to reflect the market situation, so it is difficult to distinguish the purpose of measurement, nor can it accurately answer the question whether the cost is direct or other costs.

Three, the measurement of debt and the credit condition. (1) whether the measurement of liabilities should reflect the credit condition. Firstly, the amount of loans that different credit companies can borrow is different, and their borrowing rates are different when borrowing the same amount.

Although some views argue that two enterprises with the same repayment obligation but far from the credit condition should report the same amount of liabilities, such as the initial accounting method of this type of debt (cash loan) in the accounting treatment of employer's pension to FASB and the accounting treatment of other benefits other than the employer's retirement pension No. 106th of the code No. Seventy-eighth of the FASB, in general, most of the views still believe that the initial measurement of this type of cash loan should reflect the credit condition of the enterprise.

Secondly, the initial measurement methods of other liabilities, such as secured liabilities, are relatively controversial.

In fact, as some assets are measured by fair value and some assets are made unreasonable by historical cost measurement, the different measurement attributes of different liabilities are logically loopholes.

Finally, there is a problem of whether the initial measurement and the subsequent new starting point measurement need to reflect the credit condition of the enterprise.

Some views argue that if we reflect the credit situation of enterprises in the new starting point measurement, we will produce a violation of common sense. That is, the deterioration of credit condition will cause the value of debt to drop, and the decline of debt value will mean the rise of owners' rights and interests, and bad things will lead to a good result.

As a matter of fact, the fair value of creditors' claims will deteriorate when the credit condition of enterprises is deteriorating, but at the same time, the value of shareholders' residual claim value should be offset by the loss caused by the decline of credit status.

In addition, when the initial measurement reflects the credit condition of the enterprise, the viewpoint that the new starting point is not reflected in the measurement is theoretically impossible.

(two) how to reflect the credit condition in the measurement of liabilities. 1., the initial measurement reflects the credit status of an enterprise.

For example, a and B two companies issued a 10 thousand year 10 year zero interest note respectively at the beginning of first years. The company's credit rating is AA, the corresponding annual interest rate is 7%, the cash received is 5083 US dollars [10000 (1+7%) [10]]. credit rating is B level, the corresponding annual interest rate is 12%, and the receipt of cash 3220 US dollars [10000 (1+12%) [10]]. the same day, the comparable US Treasury bond annual interest rate is 5.8%.. According to the American accounting standards, the accounting treatments are as follows: (a): A: cash: 5083 US dollars; loan: notes payable 5083 us dollars.

B company: cash: 3220 US dollars; loan: notes payable 3220 US dollars.

The number of cash received by the company and B company reflects their respective credit status and the fair value of their liabilities.

However, some people believe that, although the source of funds is different, as long as the debts are contractual and measurable, the enterprises that continue to operate will make full and reasonable use of their debts. Therefore, the two companies should record their liabilities to 5690 US dollars [10000 1+5.8% ([10]].). The accounting treatment is: 1. A company: 5083 dollars in cash, 607 dollars in loans, 5690 in notes payable.

B company: cash: $3220, loan loss $2470; loan: notes payable $5690.

Through comparison, we find that after considering the influence of credit condition, the net assets of both companies have not changed. If we exclude the influence of credit condition, the net assets of both parties will be reduced. The result of accounting measurement, which is only caused by the loan behavior itself, can not be accepted.

Therefore, the initial measurement should reflect the impact of credit status on liabilities.

In addition, the $5083 and $3220 in the above example represent the fair value of the assets received by the enterprise because of the commitment. The lender did not expect the company to default, and the management of the company did not plan to default.

This is not as viewed by some as the initial measurement towel reflects the credit situation as the premise that enterprises no longer satisfy the assumption of continuous operation.

Because the paction price of the above assets and commitments represents only a market expected result, that is, in the market, a company such as a and B may have a breach of contract, and the market participants are required to pay a special amount corresponding to the corporate credit situation to compensate for the expected loss.

The 2. new starting point reflects the credit status of enterprises.

Assuming that the credit condition of B company increased to AA level at the beginning of sixth, and issued a 5 year zero interest note with a face value of 10000 US dollars, which is suitable for the new credit rating, the discount rate of the bill is 7%. [10000 receives cash 7130 [10000 [10000 (1+7%) [5]].. Now, there are two liabilities of the company's account after 5 years. If the credit condition is not considered, the book balance of the first issue should be 5675 dollars [10000 (1+12%) [5]], and the difference between the book value and 3220 dollars of the first year's liability has entered interest expense year after year. Meanwhile, the book value of the debt increases year by year, while the balance of the new issue is 7130 dollars.

If the effect of credit condition is excluded, the amount of two bills issued by company B with the same economic value is different from the amount shown on the balance sheet.

Such accounting information is very easy to mislead policy makers.

Therefore, we must consider the impact of credit conditions on liabilities.

It is assumed that in the third and sixth years, the credit rating of B companies rose to class A and AA respectively, with a corresponding discount rate of 9% and 7%. related accounting results, such as the right table.

Although the table shows that after the credit condition of B company has improved, the owner's equity has been reduced because of the confirmation of the loss, but this reflects the real economic brother of the company.

The credit condition of the enterprise has improved and the fair value of the creditor's claim right has been raised. Under the condition that the total rights and interests remain unchanged, the shareholder's value of the residual claim of the enterprise assets will naturally drop.

Four, the measurement of debt under the pfer of debt. The assumption is that if an enterprise pfers its liabilities to a third party with comparable credit status, then how to determine the fair value of liabilities?

In this regard, the FASB seventh series concept announcement indicates that when the present value method is used to estimate the fair value of liabilities, the objective is to estimate the value of the assets currently being liquidated or pferred to an entity with the same credit status.

Follow the example above.

Assuming that the credit condition of B company has not changed at the beginning of sixth, it is still B level, and the company is ready to pfer the zero interest note (book value of US $5675) to other companies.

If the company is willing to purchase a company with an equal credit condition, the purchase price is $5675 (excluding the pfer cost), so the amount shown on the balance sheet is $5675.

Now, if a company pfers its liabilities to a company, the price of a company's AA is the same as that of the company issuing new bills, that is, $7130.

Therefore, the amount that the company pfers to the company should amount to US $7130.

The sum actually includes two parts: the fair value of the liabilities of the company B is $5675, and the credit level of the note is raised from B to AA, which is 1455 dollars.

This is not the view that some $7130 is a price acceptable to a company and should be the fair value of a company's bill.

Five, the impact of credit enhancement measures on debt measurement. Sometimes, in order to raise the credit level of its bills, companies may take measures such as buying credit guarantees.

In this case, the debt will increase because of the credit enhancement, while the loss of the same amount should be confirmed. But should the expenditure be recognized as an asset?

The B company mentioned in the above example purchased a credit guarantee of $1455 at the beginning of sixth, raising the credit level of its notes from B to AA. The book value of bills payable increased by US $1455, and the income statement confirmed a loss of US $1455.

Because the beneficiary of this expenditure is the holder of the bill, rather than the issuing company itself, it can not bring the future economic benefits to the company, but the improvement of the credit status can really bring the advantage of re financing to the company. Therefore, the expenditure should be recognized as an asset and amortized during its remaining period.