Reorganizing the Accounting Statements: In Practice  219
Debt  Debt includes all short-term or long-term interest-bearing liabilities. 
Short-term debt includes commercial paper, notes payable, and the current 
portion of long-term debt. Long-term debt includes fixed debt, floating debt, 
and convertible debt with maturities of more than a year.
Debt Equivalents Such as Retirement Liabilities and Restructuring Re-
serves  If a company’s defined-benefit plan is underfunded, it must recog-
nize the underfunding as a liability. The amount of underfunding is not an 
operating liability. Rather, treat unfunded pension liabilities and unfunded 
postretirement medical liabilities as a debt equivalent (and treat the net in-
terest expense associated with these liabilities as nonoperating). It is as if 
the company must borrow money to fund the plan. As an example, UPS an-
nounced in 2012 that it would withdraw from a multiemployer pension fund. 
To be released from its obligations to the fund, UPS promised to pay $43 mil-
lion per year for 50 years. This fixed repayment promise, an obligation with 
seniority to equity claims, is no different from traditional debt.
We discuss other debt equivalents, such as reserves for plant decommis-
sioning and restructuring reserves, in Chapter 21.
Equity  Equity includes original investor funds, such as common stock and 
additional paid-in capital, as well as investor funds reinvested into the com-
pany, such as retained earnings and accumulated other comprehensive income 
(OCI). In the United States, accumulated OCI consists primarily of currency 
adjustments, aggregate unrealized gains and losses from liquid assets whose 
value has changed but that have not yet been sold, and pension plan fluctua-
tions within a certain band. IFRS also includes accumulated OCI within share-
holders’ equity but reports each reserve separately. Any stock repurchased 
and held in the treasury should be deducted from total equity. In Exhibit 11.5, 
we consolidate these accounts into a single account titled shareholders’ equity.
Equity Equivalents Such as Deferred Taxes  Equity equivalents are balance 
sheet accounts that arise because of noncash adjustments to retained earnings. 
Equity equivalents are like debt equivalents; they differ only in that they are 
not deducted from enterprise value to determine equity value.
The most common equity equivalent, deferred taxes, arises from differences 
in how businesses and the government account for taxes. For instance, the 
government typically uses accelerated depreciation to determine a company’s 
taxes, whereas the accounting statements are prepared using straight-line de-
preciation. This leads to cash taxes that are lower than reported taxes during the 
early years of an asset’s life. For growing companies, this difference will cause 
reported taxes consistently to overstate the company’s actual tax payments. 
To avoid this bias, use cash-based (versus accrual) taxes to determine NOPAT. 
Since reported taxes will now match cash taxes on the income statement, the