Liabilities
This presentation is the property of its rightful owner.
Sponsored Links
1 / 20

LIABILITIES PowerPoint PPT Presentation


  • 63 Views
  • Uploaded on
  • Presentation posted in: General

LIABILITIES. Probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events. (SFAC #6, 1980). ESSENTIAL CHARACTERISTICS.

Download Presentation

LIABILITIES

An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -

Presentation Transcript


Liabilities

LIABILITIES

  • Probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events. (SFAC #6, 1980)


Essential characteristics

ESSENTIAL CHARACTERISTICS

  • A present obligation that entails settlement by probable future transfer or use of cash, goods, or services.

  • Unavoidable.

  • Transaction or other event creating the obligation must have already occurred.


Current liabilities

CURRENT LIABILITIES

  • Maturity within one year or the operating cycle whichever is longer.

  • Obligations whose liquidation is reasonably expected to require use of existing resources properly classified as current assets, or the creation of other current liabilities. (Committee on Accounting Procedure, AICPA, 1961, p. 21)

  • Time value of money is ignored; CL are stated at full maturity value.


Current maturities of long term debt

CURRENT MATURITIES OF LONG-TERM DEBT

  • Report as a current liability unless it is:

    • to be retired by assets accumulated for this purpose that have not been shown as current assets

    • to be refinanced by a new debt issue

    • it is to be converted into stock


Short term obligations expected to be refinanced

SHORT-TERM OBLIGATIONS EXPECTED TO BE REFINANCED

  • FASB Statement No. 6, 1975

  • Can be excluded from Current Liabilities only if the firm:

    • Intends to refinance the obligation on a long-term basis, AND

    • Demonstrates the ability to refinance.


Short term obligations expected to be refinanced1

SHORT-TERM OBLIGATIONS EXPECTED TO BE REFINANCED

  • Ability to refinance can be evidenced by:

    • Actual refinancing (after balance sheet date but before financial statements are issued), or

    • Signing a refinancing agreement (with a capable lender) which is noncancellable and not violated.


Short term obligations expected to be refinanced2

SHORT-TERM OBLIGATIONS EXPECTED TO BE REFINANCED

  • Amount excluded from current liabilities:

    • Cannot exceed amount available under agreement.

    • Must be adjusted for any limitations or restrictions in the agreement that indicate that the full amount obtainable will not be available to retire the short-term obligation.

    • Cannot exceed a reasonable estimate of the minimum amount expected to be available, if the amount available for refinancing will fluctuate.


Short term obligations expected to be refinanced3

SHORT-TERM OBLIGATIONS EXPECTED TO BE REFINANCED

  • Repayment and Replacement

    • FASB Interpretation No. 8

    • Refinancing must occur before current debt is due.


Compensated absences

COMPENSATED ABSENCES

  • FASB Statement No. 43, 1980

  • Vacations, illnesses, and holidays for which employees are normally paid.

  • Accrue liability for future absences (except for sick pay) if:

    • The obligation arises from services already rendered by the employee; and

    • The rights vest or accumulate; and

    • Payment is probable; and

    • The amount can be reasonably estimated.


Compensated absences1

COMPENSATED ABSENCES

  • Sick pay:

    • It sick pay benefits vest, must recognize expense and accrue liability.

    • If sick pay benefits accumulate but not vest, recognition of expense and accrual of liability is optional.


Contingent liabilities

CONTINGENT LIABILITIES

  • FASB Statement No. 5, 1975

  • Obligations that are dependent upon the occurrence or non-occurrence of one or more future events to confirm either the amount payable, or the payee, or the date payable, or its existence. The condition had to exist at the balance sheet date. Information has to be available prior to issuing financial statements.


Contingent liabilities1

CONTINGENT LIABILITIES

  • The likelihood that the future event or events will confirm the incurrence of a liability can be classified as:

    • PROBABLE: The future event or events are likely to occur.

    • REASONABLY POSSIBLE: The chance of the future event or events occurring is more than remote but less than likely.

    • REMOTE: The chance of the future event or events occurring is slight.


Loss contingencies

LOSS CONTINGENCIES

  • A contingent liability should be accrued (i.e., record an expense and the related liability) if information available prior to the issuance of the financial statements indicates that:

  • it is probable that a liability has been incurred at the date of the financial statements AND

    • the amount of the loss can be reasonably estimated.


Loss contingencies1

LOSS CONTINGENCIES

  • If the loss is not both probable and reasonably estimable, but there is at least a reasonable possibility that a loss may have been incurred, then disclose the loss contingency in the notes to the financial statements.


Warranty obligations

WARRANTY OBLIGATIONS

  • Expense warranty accrual methodWarranty is not sold separately but is included in cost of product.

  • Sales warranty accrual methodWarranty is sold separately (i.e., a service contract)


Warranty obligations1

WARRANTY OBLIGATIONS

  • Cash basis method

    • Only method recognized for tax purposes.

    • Used for financial reporting purposes when a warranty liability is not accrued in the year of sale because:

      • It is not probable that a liability has been incurred; or

      • The amount of the liability cannot be reasonably estimated.


Expense warranty accrual method

EXPENSE WARRANTY ACCRUAL METHOD

  • Warranty expense should be recognized in the period during which the sale was made.

  • Estimate liability.


Expense warranty accrual method1

EXPENSE WARRANTY ACCRUAL METHOD

  • Period of sale:Warranty ExpenseDR Estimated Liability Under Warranties CR

  • Period when warranty costs are incurred:Estimated Liability Under WarrantiesDR Cash (or other assets) CR


Sales warranty accrual method

SALES WARRANTY ACCRUAL METHOD

  • Period of sale:CashDR Sales CR Unearned Warranty Revenue CR

  • Period when warranty revenue is earned:Unearned Warranty RevenueDR Warranty Revenue CR


Premiums and coupons

PREMIUMS AND COUPONS

  • Result in the probable existence of a liability at the date of the financial statements.


  • Login