FASB CON 6 Current Liabilities

• Are probable future sacrifices of
economic benefits
• Arise from present obligations (to
transfer goods or provide services) to
other entities
• Result from past transactions or events
---------------------------------------------------FASB CON 6
Current Liabilities
… are “obligations whose
liquidation is reasonably expected
to require the use of existing
resources properly classified as
current assets, or the creation of
other current liabilities.”
11 Types of Current Liabilities
• Accounts Payable
• Notes Payable
• Current maturities of
LT Debt
• Short-term
obligations expected
to be refinanced
• Dividends payable
Returnable deposits
Unearned revenues
Sales taxes payable
Property taxes
• Income taxes
• Employee related
Current Maturities of Long-Term Debt
are classified as Current Liabilities
...unless …
(1) retired by assets accumulated for this
purpose that have not been shown as current
(2) refinanced, or retired from the proceeds of a
new long-term debt issue, or
(3) converted into capital stock
Short-Term Obligations Expected to
be Refinanced on a Long-term basis
may be classified as noncurrent if ...
Refinancing Criteria (both must be met):
(1) it intends to refinance on a long-term
basis, &
(2) it demonstrates an ability to consummate
the refinancing
Dividends Payable
• Cash dividends payable are always current
liabilities (are always paid within 12 mos.)
• Preferred dividends in arrears are NOT
liabilities ( while they do represent “probable future
economic sacrifice” they do not result from a past
transaction until after authorized by the board of
• Stock dividends are NOT liabilities (do not
require future outlays of assets or services)
Returnable Deposits
Returnable Cash Deposits
may be current liabilities
(if they will probably be returned within 12 mos.)
Unearned Revenues
Accounting for unearned revenues:
(a) when advance is received:
Dr Cash
Cr Current Liability
(b) when revenue is earned:
Dr Current Liability
Cr Revenue
Sales Tax Payable
When collected at point-of-sale:
...if tax is segregated:
Dr Cash or Accounts Receivable
Cr Sales
Cr Sales Tax Payable
… if tax is not segregated, prepare a reclassifying JE:
Dr Sales
Cr Sales Tax Payable
When paid:
Dr Sales Tax Payable
Cr Cash
Property Taxes Payable
based on assessed value of real & personal property
When should property owners record the liability?
To which accounting period should the cost be charged?
• …accrue monthly on the taxpayer’s books during the
taxing authority’s fiscal period when the taxes are paid
• …alternative: consistent application from year to year
May 1
Gov’t fiscal year 0
Gov’t fiscal year 1
Corp. fiscal year 1
Jan 1
May 1 7/1,9/1
Rec’d Paid
Apr 31
Corp. fiscal year 2
Dec 31
Income Taxes Payable
• Varies with taxable income
• Is estimated throughout the fiscal year for
corporations (owners of sole proprietorships &
partnerships pay the tax, rather than the business
• Is covered in detail in Chapter 20
Employee-Related Liabilities
• Payroll Deductions
Income Tax (Federal, State & Local)
Social Security (FICA & Medicare)
Unemployment (FUTA & State)
Health & Life Insurance Premiums
Employee Savings
Union Dues, etc.
[employee only]
[employer only]
[possibly both]
• Compensated Absences
– Vacation Pay -- accrue at current or expected earnings
– Sick Leave (accrue generally if vested)
• Post-retirement Benefits (Chapter 21)
• Bonuses (appendix … skipping)
Contingency … “an existing condition, situation, or set of
circumstances involving uncertainty as to possible gain or
loss to an enterprise that will ultimately be resolved when
one or more future events occur or fail to occur.” (FAS 5)
Typical Gain Contingencies:
Typical Loss Contingencies:
• Possible receipts of monies
• Litigation, claims &
from gifts, donations, bonuses,
• Guarantees and warranty
• Possible refunds from the
government in tax disputes
• Premiums and coupons
• Pending court cases where the • Environmental liabilities
probable outcome is favorable • Self-insurance risks
• Tax loss carryforwards (Ch 20)
Contingent liabilities are obligations that are
dependent upon future event(s) to confirm:
Who is to be paid (the payee),
How much will be paid,
When it is to be paid, &/or
If the debt really exists
How likely are the future events?
• Probable -- the future event(s) are likely to occur
• Reasonably possible -- the chance of the future event(s) is
more than remote but less than likely
• Remote -- the chance of the future event(s) occurring is slight
Record a Contingent Loss if both of
the following conditions are met:
Dr Loss / Cr Liability
(1) the 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, (probable future economic sacrifice … arising
from present obligations …resulting from past transactions or
(2) the amount of the loss can be reasonably
estimated (based on past experience, industry experience,
an expert opinion, or educated guess)
Accounting for Litigation, Claims &
Book the Liability (and Loss) if:
(1) The underlying cause for action
occurred prior to the end of the reporting
(2) An unfavorable outcome is probable, &
(3) a reasonable estimate on the loss can be
Required Disclosures for
Loss Contingencies
• If the contingent loss is either probable or estimable
(but not both), disclose:
– The nature of the contingency
– An estimate of the possible loss or range of loss or a
statement that an estimate cannot be made
• The following other contingent losses are disclosed
… even if remote:
– Guarantees of indebtedness of others
– Obligations of commercial banks under “stand-by letters
of credit”
– Guarantees to repurchase receivables (or any related
property) that have been sold or assigned
Accounting for Guarantee & Warrantee Costs
– expense in the period incurred
– justifiable under some (probably rare) circumstances:
• it is not probable that a liability has been incurred, or
• the amount of the liability cannot be reasonably estimated
• expense the total expected costs in the period of sales
• used when the warrantee is sold separately
• may defer revenue over the life of the contract using the straight line
method over time, or
• may defer revenue proportionately based on expected costs
Accounting for Compensated Absences
• Record the Payroll Expense & the related
Liability in the year the benefits are earned
– may accrue at current earnings level, or
– may accrue at expected future earnings level
– accrual for sick pay is optional if it does not vest
(that is, if it is not used, it is not paid)
– consistency of application from year to year is