- a line of credit with a bank or financial institution;
- a demand bank loan;
- the current portion of long term debt; and
- the current portion of capital leases.
The current portion is equal to the principal due within one year of the balance sheet date.
Examples of long term debt include a bond, debenture, an equipment loan or a mortgage against real property. Bank debt may also be classified as long term, when a maturity date beyond one year is set by a banking agreement.
The general disclosure requirements for debt include:
- the interest rate, whether it is fixed (7%, for example) or floating (prime + 3%, for example);
- the currency;
- the maturity date of the debt (due March 31, 2017, for example) or if it is payable on demand;
- the amount and timing of any scheduled principal repayments;
- if the loan is secured and type of security (for example, a personal guarantee by a shareholder,
- pledging of cash or accounts receivable, a mortgage against real property or a chattel against
- equipment); and
- any conditions which if breached would change the terms of the debt.
Where an asset is pledged as security against liabilities, the nature and carrying amount of the asset needs to be disclosed. This information will be of interest to the surety company. Interest on short term and long term debt also needs to be disclosed separately on the income statement.
In addition, principal repayments over the next five years, following the balance sheet date are disclosed in the notes to the financial statements.
Because loan agreements with a contractor’s bank can impact on bonding capacity, it is critical that the contractor ensure that both the bank and surety company are aware of a contractor’s bonding needs. Since the bank’s security interests will normally place above that of the surety company’s interests, in negotiations with the bank, the pledging of assets as collateral needs to be carefully considered.
Source: Construction Accounting Best Practices by Canadian Construction Association
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