- CFA Exams
- CFA Level I Exam
- Study Session 8. Financial Reporting and Analysis (3)
- Reading 28. Non-current (Long-term) Liabilities
- Subject 5. Presentation and Disclosure of Long-Term Debt
CFA Practice Question
Which of the following conditions would allow a firm to classify a short-term liability as a long-term debt?
II. The firm has entered into a binding agreement with a bank to refinance the short-term debt with a long-term liability.
III. The firm has announced that it will continue to refinance the debt with available credit for the next 2 years.
I. The firm has issued a long-term note with the stated purpose of extinguishing the short-term debt when it matures. The note is cancelable if there are violations of certain operating provisions.
II. The firm has entered into a binding agreement with a bank to refinance the short-term debt with a long-term liability.
III. The firm has announced that it will continue to refinance the debt with available credit for the next 2 years.
Correct Answer: II only
If these agreements have any provisions for cancellation which are either ambiguous or which have a good probability of being violated, then the short-term debt cannot be classified as long-term debt. That's why (I) is not a valid choice. (III) is not acceptable because there is no demonstration of credible intent or ability to be able to refinance the debt.
User Contributed Comments 3
User | Comment |
---|---|
bundy | Binding is the key word here choice III is not binding, therefore it is just a "fart in the wind" until they actually make the commitment |
johntan1979 | Watch out for the silent ones... they stink the most |
ashish100 | i'm convinced johntan is asian now. the silent fart joke is popular in the east |