discussions qusetion In the area of long-term liabilities, there are a variety o
ID: 2489994 • Letter: D
Question
discussions qusetion
In the area of long-term liabilities, there are a variety of topics that pose issues to accountants. Please select a topic, such as trouble debt restructuring, and outline the issues that accountants are faced with. After writing a brief analysis of the issues, what are your feelings about current practice? Do you agree or disagree with the current position of the IFRS and/or FASB in this area? Why or why not? Your initial posting should be in 300 words or more. Use at least two outside references for your initial posting, not including your textbook. Accounting articles are preferred. Two reply posts, of at least 100 words, are required. Reply posts should pertain to the topics that are being discussed and can include additional research.
Explanation / Answer
Public debt is an obligation on the part of a governmental unit to pay specific monetary sums to holders of legally designated claims at particular points in time. The sums owed to creditors may be defined in standard monetary units of the debtor government or in units of an external currency. The United States national debt represents, predominantly, an obligation of the federal government to pay specific sums of United States dollars to creditors. On the other hand, national debts may, and local debts must, be defined in units of external currency. The monetary obligation may be that of paying either interest or a return of principal, or both. Specific issues of debt may or may not be characterized by definite maturity schedules. Consols, which represent obligations to pay interest in perpetuity, involve no obligation for a return of principal.
Public debt must be distinguished from currency outstanding. The obligation on the part of a money-issuing governmental authority to the holder of currency is not public debt, since the claim can also be met in currency units.
Public debt is created by the act of public borrowing, or, in other words, the act of floating public loans, the act of selling government securities. This is a process through which governmental units, in exchange for money (currency or demand deposits) give promises to pa/, this exchange being normally voluntary on the part of the lender. For governments the purpose of the exchange is that of securing current purchasing power with which they may purchase resource services, or final products. The issue of public debt is one means of financing government expenditures, alternative to taxation and to direct currency creation.
Public debt is amortized, or retired, by a reverse transfer in which government gives up money for debt instruments, either through purchase on the open market or through scheduled maturity payments.
Measurement. Public debt is normally measured in nominal maturity values. This does not represent the “size” of the public debt in such a manner as to make comparisons over time and among separate governmental units fully accurate. Varying composition of debt can affect its degree of liquidity for holders, as well as other characteristics. To the extent that debt instruments are valued for these nondebt features, the effective size of public debt, as such, is reduced. A more accurate measure of debt is produced by capitalizing the annual interest charges at some appropriate rate of discount, normally that rate which approximates the return on risk-free investment in the economy. An example will clarify this point. In terms of nominal maturity value, national debt may be of equal size, say $300,000 million, at two points in time. In the one case, however, if the debt is composed primarily of shortterm issues possessing a high degree of “moneyness,” the annual interest charges may amount to, say, only $6,000 million. In the other case, if the debt is largely funded, the interest charges may be as high as, say, $12,000 million. Clearly, the “size” of the public debt is not identical in the two cases; other dimensions than nominal maturity values must be included in any appropriate measure. For purposes of making intertemporal and international comparisons, the most appropriate measure is perhaps the ratio of annual interest charges to gross national or gross domestic product.
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