Intermediate Accounting Chapter 12

Liability according to FASB

a probable future sacrifice of economic benefits arising from a present obligation to transfer assets or provide services due to past transactions or events

Current liabilities

obligations expected to be settled by use of current assets or creation of other current liabilities within one year or the operating cycle, whichever is longer

Operating cycle

time between acquisition of goods/services and collection of cash from sales

Typical current liabilities

• accounts payable

• notes payable

• dividends

• customer advances and deposits

• unearned revenues

• sales taxes payable

• income taxes payable

• employee-related liabilities

• current maturities of long-term debt

Accounts Payable

trade payables for goods/services on open account; common credit terms 2/10, n/30, 1/10 EOM

Notes payable distinction

interest-bearing - interest stated separately

zero-interest-bearing - interest embedded via discount

Interest Formula

principal * rate * time

Zero-interest-bearing note

recorded at present value, difference recorded as discount on notes payable, discount amortized to interest expense

Dividends payable

recorded only after declaration; cumulative preferred dividends not declared are not a liability and stock dividends are equity

Unearned revenue

cash received before goods/services provided; liability until performance occurs

Sales taxes payable

collected from customers; held on behalf of government

Income taxes payable

based on taxable income, not GAAP income; differences create deferred taxes

Compensated absences - accrual criteria

a liability is accrued only if:

1. services already rendered

2. rights vest or accumulate

3. payment is probable

4. amount is reasonably estimable

Bonus agreements

bonuses = operating expenses

unpaid bonuses = current liability

What qualifies as a current maturity of long-term debt?

portion of long-term debt due within one year; NOT current when it is refinanced, converted to equity, paid using non-current assets

Two conditions to classify as non-current

due > 1 year after balance sheet date

contractual right to defer payment exists at balance sheet date

Contingency

an existing uncertainty resolved by future events that may result in a gain or loss

Gain contingencies

never recorded, disclosed only if high probability

Loss contingency probability levels

probable → accrue and disclose

reasonably possible → disclose only

remote → ignore

Accrual rule

accrue a loss contingency when it is probable and reasonably estimable

Assurance-type warranty

product meets specs at sale, expense in period of sale, record warranty liability

Service-type warranty

separate performance obligation, recorded as unearned revenue, recognized over time

Accounting treatment

expense in period of sale, estimate redemptions, credit premium liability

Asset retirement obligation (ARO)

recognize when legal obligation exists and the amount is reasonably estimable; recorded at fair value

ARO over time

capitalized into asset, depreciated, liability increased via interest accretion

Current liabilities presentation

reported at maturity value; ordered by maturity, size, liquidation preference

Contingency disclosures include:

nature of contingency, estimated loss or range, statement if estimate cannot be made

Key differences between GAAP and IFRS

IFRS uses midpoint of range while GAAP uses minimum of range