Presentation and Disclosures Relating to Debt

Depending on the maturity structure of a company’s debt obligations, its debt (or portions of it) can be reported either in the non-current liabilities section or the current liability section of the balance sheet.

Notes to the financial statements can also provide useful debt-related information that can assist in determining the financial health of a company and its ability to continue as a going concern.

Financial Statement Presentation and Disclosures of Debt

The non-current liabilities section of the balance sheet usually includes a single line item of the total amount of a company’s long-term debt whose due date falls  beyond one year. The portion of long-term debt that is due in the next twelve months is usually shown as a current liability.

More detailed information on the types and nature of a company’s debt is usually found in the notes to the financial statements. These note disclosures can be used to determine the amount and timing of future cash outflows. They typically include information such as the stated and effective interest rates, maturity dates, covenants, any collateral that is pledged, and the amount of scheduled debt repayments for the next five years.

It is important to note disclosures can also be made for more complex debt contracts such as those relating to convertible debt and debt with warrants. A convertible debt gives the debt holder the option of exchanging debt for equity. Bonds issued with warrants, on the other hand, give holders the right to purchase shares of the issuer’s common stock at a specific price.

The MD&A may also provide useful information about a company’s capital resources, including its debt financing and off-balance-sheet financing. In the MD&A, the company’s management usually provides a qualitative discussion on any material trends in capital resources and indicates any expected material changes in their mix and relative cost.

Question 1

Which of the following statements is the most accurate?

1. Disclosures in notes to the financial statements cannot be used to determine the amount and timing of future cash outflows.
2. Disclosures on debt typically include information such as the stated and effective interest rates, maturity dates, covenants, and any collateral that is pledged.
3. Disclosures on complex debt contracts such as those relating to convertible debt and debt with warrants are usually not made in the notes to the financial statements.

Solution

The correct answer is B.

Disclosures on debt typically include information such as the stated and effective interest rates, maturity dates, covenants, and any collateral that is pledged.

A is incorrect because disclosures can be used to determine the amount and timing of future cash outflows.

C is incorrect because disclosures on any complex debt contracts are usually made in the notes to the financial statements.

Question 2

How is ‘debt due after more than 12 months of the preparation date of the balance sheet’ disclosed?

1. It is only disclosed in the footnotes of the balance sheet.
2. It is disclosed alongside ‘debt due in less than 12 month’ as a single line item.
3. It is disclosed under a separate line item, with further disclosure in the footnotes.

Solution

The correct answer is C.

Long term debt (due in more than 12 months) is disclosed under a separate line item on the balance sheet, and further disclosure (maturity schedule, interest rate, etc.) is made in the footnotes.