Current Liabilities and Contingencies
Liability Defined
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 (page 702 of text)
Current Liability Defined
Current liabilities are obligations whose
liquidation is reasonably expected to require
use of existing resources properly classified as
current assets, or the creation of other current
liabilities (page 702 of text)
Examples of Current Liabilities
Accounts payable
Notes payable
Current maturities of long-term debt
Dividends payable
Customer advances and deposits
Unearned revenues
Sales taxes payable
Income taxes payable
Employee-related liabilities
Measurement of Current Liabilities
•
Theoretically, they should be measured at the
present value of the amounts owed, taking into
consideration the timing of the payment(s) and an
appropriate interest rate
•
For convenience, GAAP allows them to be
measured at their face amount (i.e., not
discounted)
Current Maturities of Long-Term Debt
•
General rule – should be included in current
liabilities
•
Exceptions

If the debt will be paid off with assets that
appropriately have not been classified as current
assets (e.g., a bond “sinking fund” that can be
used for no purpose other than to pay off the
bonds

If the debt is “refinanced on a long-term basis”
Short-Term Obligations Expected
to be Refinanced
Exclude from current liabilities (include in l.t. liab.) if

Management intends to refinance the obligation on
a long-term basis.

Management, by the date the financial statements
are issued, demonstrates the ability to refinance
on a long-term basis by either:

Actually refinancing on a long-term basis or

Enter into a qualifying financing agreement
Short-Term Obligations Expected
to be Refinanced
See E13-3 of text
Short-Term Obligations Expected
to be Refinanced
See E13-4 of text
Contingencies
An existing condition, situation, or set of
circumstances involving uncertainty as to possible
gain (gain contingency) or loss (loss contingency)
to an enterprise that will ultimately be resolved when
one or more future events occur or fail to occur
Gain Contingencies
Typical Gain Contingencies are:

Possible receipts of monies from gifts, donations, and
bonuses.

Possible refunds from the government in tax disputes.

Pending court cases with a probable favorable
outcome.
Gain contingencies are not recognized (recorded) until
realized
May be necessary to disclose, however
Loss Contingencies
Likelihood of confirming event
FASB uses three classifications of likelihood:

Probable – likely to occur

Reasonably possible – chance is more than remote
but less than probable

Remote – chance of occurring is slight
Loss Contingencies
Common loss contingencies:
•
•
•
•
Litigation, claims, and assessments.
Guarantee and warranty costs.
Premiums and coupons.
Environmental liabilities.
Determinable Liabilities
vs. Contingent Liabilities
Determinable liabilities – the transaction or other
event obligating the entity has already occurred
• Liability is known – amount may be known (e.g.,
salaries payable) or may have to be estimated (e.g.,
income taxes payable)
• “Confirming” critical event has already occurred
• Recognize liability at known or estimated amount
Contingent Liabilities
Contingent liabilities – “confirming” critical event has
not yet occurred
• Example – lawsuit resulting from employee having
accident in company’s delivery truck
• A first event has occurred (the accident) but the
confirming event has not occurred – the judge or jury
has not yet decided if the company is at fault
Recognize (Record) Contingent Liability
• Probable that liability has been incurred (or asset
impaired) at the date of the balance sheet
• Amount of the loss can be reasonably estimated
 May be necessary to disclose
Only Disclose Contingent Liability
• Reasonably possible that liability has been incurred
(or asset impaired) at the date of the balance sheet
• Amount of the loss can be reasonably estimated
Generally No Disclosure Necessary
• Likelihood that liability has been incurred (or asset
impaired) is remote
Examples of Loss Contingencies
See E13-13 of text
Compensated Absences
Nature of compensated absences:
Paid absences for vacations, illnesses, and holidays.
Accounting for Compensated Absences
Accrue (record) a liability if all the following conditions
are met

The employer’s obligation is attributable to
employees’ services already rendered

The obligation relates to rights that vest or
accumulate

Payment of the compensation is probable

The amount can be reasonably estimated
Litigation, Claims and Assessments
Companies must consider the following factors, in
determining whether to record a liability with respect
to pending or threatened litigation and actual or
possible claims and assessments.

Time period in which the action occurred

Probability of an unfavorable outcome

Ability to make a reasonable estimate of the loss.
Asserted Litigations, Claims & Assessments
Recognize (record) in current year if
•
Related critical event occurred by balance sheet date
•
Probable that contingent loss will be incurred
•
Can reasonable estimate loss amount
Unasserted Litigations, Claims & Assessments
Recognize (record) in current year only if
•
Related critical event occurred by balance sheet date
•
Probable that unasserted LCA will be asserted (filed)
•
Probable that the “asserted” claim will result in a loss
•
Amount of the loss can be reasonably estimated
Unasserted Litigations, Claims & Assessments
Disclose in current year (but do not record) if
•
Related critical event occurred by balance sheet date
•
Only reasonably possible that unasserted LCA will be
asserted (filed)
•
Probable that the “asserted” claim will result in a loss
•
Amount of the loss can be reasonably estimated
Asset Retirement Obligations
A company must recognize an asset retirement
obligation (ARO) when it has an existing legal obligation
associated with the retirement of a long-lived asset and
when it can reasonably estimate the amount of the
liability.
Asset Retirement Obligations
• See illustration on page 724 of text
• See E13-14
Presentation
Presentation of Current Liabilities

Usually reported at their full maturity value.

Difference between present value and the maturity
value is considered immaterial.
Presentation of Contingencies
Disclosure should include:

Nature of the contingency.

An estimate of the possible loss or range of loss.
Other

See E13-16 of text