0128 - Ch13 Current liabilities and contingencies II (1)

This chapter of ACCT 312 focuses on current liabilities and their classifications as well as contingencies that may impact financial statements.

Definition: Obligations that are payable within one year or within the firm’s operating cycle, whichever is longer.
Settlement: Current liabilities can be satisfied using current assets or through the creation of other current liabilities.

Accounts and Notes:
- Accounts payable
- Trade notes payable
- Bank loans
- Commercial paper
Accrued Liabilities:
- Interest payable
- Salaries payable
Liabilities from Advance Collections:
- Refundable deposits
- Advances from customers
- Gift cards
- Collections for third parties
Classification:
- Current and noncurrent classification is essential.
- Current maturities of long-term debt should be noted.
- Obligations callable by the creditor are considered current.
- Short-term obligations expected to be refinanced.

An in-depth discussion of:
- Appropriately classifying current liabilities.
- Situations where uncertainty exists regarding the existence of obligations.

Definition: A loss contingency defines an existing uncertain situation that involves potential loss based on a future event.
Recognition Criteria:
- Loss contingency is acknowledged only if the event that results in it occurred before the financial statement date.
- Accrual depends on the likelihood of the confirming event and the estimate of the loss amount.

Likelihood of Confirmation:
- Probable: The confirming event is likely to occur.
- Reasonably Possible: The chance is more than remote but less than likely.
- Remote: The chance is slight.

Recognition of a loss contingency involves:
- Reporting a range of possible loss amounts.
- If one amount within the range appears better, that amount is accrued.
- Minimum amount recorded if no amount is more likely than another.

Journal representation:
- Loss (or expense) x,xxx
- Liability x,xxx
- In some cases, the contingency may impair a noncash asset, reducing it instead of recording a liability.

Most consumer products come with guarantees, creating an obligation for companies.
Recognition of a liability for warranties occurs at the point of sale since it reflects a future obligation.
Historical data allows estimates of total liabilities to be reasonably accurate for the period.

A new therapeutic chair carries:
- Two-year warranty
- Estimated costs of 3% in the first year and 4% in the second year.
Sales Journal Entry:
- Cash (and accounts receivable) 2,000,000
- Sales Revenue 2,000,000
- Warranty Expense and Liability: 140,000 at year-end
Adjusting entry for claims made reduces the warranty liability.

Provides additional warranty protection beyond the manufacturer’s original warranty.
Recognized as a separate performance obligation, with revenue recognized over the coverage period after the sale.
Costs to satisfy warranties are expensed as incurred.

Cash Rebates: Estimated cash rebate liability recognized at sale.
Premiums: Treated as separate performance obligations; recognized as deferred revenue until delivered.
Coupons: Potential liability recognized either at issuance or upon redemption.

Pending litigation involves uncertainty and accruals for loss are rare until settled.
Firms are required to provide extensive disclosures regarding contingent liabilities such as litigation, especially in light of the SEC’s pressure for transparency.

Time frame between fiscal year-end and financial statement issuance is crucial.
Clarifying events can influence how contingencies are reported in financial statements.

Potential claims that have not yet been made may necessitate disclosure or accrual of liabilities.
Evaluation involves likelihood of claims and their associated outcomes.

U.S. GAAP: Refers to obligations as contingent liabilities.
IFRS: Calls them provisions, with differentiations in thresholds for recognition and estimation techniques.
Gain contingencies under GAAP are never accrued, while IFRS allows accrual if virtually certain.