Noncurrent Liabilities: Financial and Deferred Tax

Since bonds were issued at that price, that's what cash was received; this has to be matched with the liability, since the company basically owes what they get when issuing bonds. Then this premium is amortized over time between issue and maturity. What do you think that means for the liability balance?

If it isn't current, then it's non-current. Simple as that.

No, that would be the case if the bonds were issued at a discount, but not when issued at a premium.

Exactly. In the end, the company has to pay the USD 1 million face value; so that will eventually be the liability that is left. A premium is amortized down to face value, and a discount is amortized up to face value. That's really how long-term financial liabilities work. Sure, there are some cases where even the liabilities are listed as trading liabilities, and then it's a fair value thing. But that's less common.

Deferred tax liabilities are non-current liabilities under both IFRS and US GAAP. Recall that deferred tax liabilities arise when the books say "pay this much tax" and the tax authority says "no, you're going to pay this amount instead." Think about how a payment would be matched on a balance sheet. For a deferred tax liability, do you think the tax authority is saying "pay less" or "pay more"?

No, the authority is actually saying "pay less" in this situation. Think about this: a company keeps track of its books according to US GAAP or IFRS, and ends up owing 10,000 of whatever currency. The local tax authority has its own rules, and says you owe 9,000 for now. So the company is trying to match a tax expense of 10,000 with a payment of 9,000 today.

Absolutely!

Since the company is paying less than the books say to pay, the rest is owed; it will eventually be paid, and that's the deferred tax liability.

Relate this to depreciation. Think of how the choice of depreciation (straight-line vs. accelerated) affects income. Knowing that the tax authority has a certain way this is to be calculated, a different choice by a company on its books will create this temporary difference, resulting in a deferred tax asset or liability. Which depreciation choice is most likely to create a deferred tax liability?

No, consider that the company will just owe the face value at maturity, and not the premium price received at issue.

Yes!

It's the same idea of the tax authority saying "pay less," meaning that the company's financial statements saying "pay more." This happens with higher taxable income, which means fewer expenses. So straight-line depreciation on the books when the tax authority is using accelerated methods will create this difference. Of course, just the fact that the deferred tax liability is a "pay this tax in another period" sort of thing means that it's reasonable to call it a non-current liability.

To summarize: [[summary]]

No, straight-line depreciation could create the deferred tax liability.

As far as liabilities go, there can be parts that are both. Deferred revenue can be non-current, if a company isn't planning to earn its advance in the current year or operating cycle. If a company issues 10-year bonds with an annual coupon payment, then the next coupon is a current liability, and the face value is a non-current liability. If the bonds were issued at a USD 1 million face value, then there's the balance of the non-current liability. Think about what liabilities represent, and also the matching principle. If the bonds were instead issued at a premium price of USD 1.1 million, what do you think the non-current liability balance would be?

No, it's actually the USD 1.1 million idea.

Good choice!

It will fall over time

It will rise over time

It will stay the same

Pay less

Pay more

Accelerated

Straight-line

USD 1 million

USD 1.1 million

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