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Financial Statement Fraud: Strategies for Detection and Investigation by Gerard M. Zack

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CHAPTER TEN

Omissions and Underreporting of Liabilities

DEBT

Debt obligations are liabilities associated with money that has been borrowed by an entity. Examples of debt obligations include:

  • Loans from financial institutions (mortgages, lines of credit, commercial loans, and other loans provided by banks and other financial institutions)
  • Unsecured promissory notes
  • Bonds issued by the company
  • Mortgage-backed securities
  • Asset-backed securities

In addition to a stated rate of interest (often referred to as the coupon rate) debt instruments can have several other important features that can impact their accounting treatment:

  • Call provisions. These provisions permit the issuer of the debt to repay the obligation prior to the stated maturity date, usually at some premium (to compensate the holder of the debt instrument for the reduction in interest income that the holder will receive).
  • Put provisions. These provisions enable the lender (the holder of the debt instrument) to require the borrower to repay the debt obligation prior to the scheduled maturity date, usually on specified dates and also often at par (face) value (thus enabling the lender to reinvest in other, more attractive investment options).

Under both U.S. GAAP and IFRS, debt is generally initially recognized at an amount equal to the proceeds received or, if proceeds are not provided in cash, the fair value of the consideration received. After the initial issuance of debt, the subsequent measurement of debt is to ...

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