...ACCT 2015 INTERMEDIATE FNANCIAL ACCOUNTING 11 Current Liabilities, Contingencies & Provisions Required Reading: Alfredson – Chap 5, Keiso – Chaps 13, IAS 37 Learning Objectives 1. CURRENT LIABILITIES: – Define and explain types of current liabilities. – Account for the major types 2. IAS 37 PROVISIONS & CONTINGENCIES – Define Provisions and answer the following questions: • • • Why do them When to provide How much to provide – Calculate and account for Restructuring Provisions – Define Contingent Assets & Liabilities and apply relevant measurement and recognition rules – Apply IAS 37 Disclosure Requirements CURRENT LIABILITIES LIABILITY – Claims against the business arising out of a past transaction that will cause an outflow of resources e.g. loans, notes payable • Long-Term Liability - Obligations that a company does not reasonably expect to liquidate within the normal operating cycle Current Liability - Obligations that a company reasonably expects to liquidate either through the use of current assets or the creation of other current liabilities. • 1 CURRENT LIABILITIES E13-2 (Accounts and Notes Payable) The following are selected 2007 transactions of Sean Astin Corporation. Sept. 1 - Purchased inventory from Encino Company on account for $50,000. Astin records purchases gross and uses a periodic inventory system. Oct. 1 - Issued a $50,000, 12-month, 8% note to Encino in payment of account. Oct. 1 - Borrowed $50,000 from the Shore Bank by signing...
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...Current Liabilities and Contingencies The International Accounting Standards board (IASB) issues the International Financial reporting standards (IFRS) to over one hundred ten countries. The United States is excluded from this group but primarily follows the standards of Financial Accounting Standards Board (FASB) and General Accepted Accounting Principles (GAAP). While both accounting standards have some differences, 2016 will be the year the U.S. will make the switch and unite with the IFRS. Current liabilities and contingencies are one of the many areas that standard setters continue to work on financial reporting and the major changes in how to recognize and measure contingent liabilities. The Statement of Financial Accounting Standards Board defines current liabilities as, “obligations whose liquidation is reasonably expected to require use of existing resources properly classified as current assets, or the creation of other current liabilities.” In addition, Statement of Financial Statement Standards indicates, “Current liabilities should include obligations that are due on demand or that will become due on demand within one year from the balance sheet date” (SFAS No.78). Operating Cycle is the time between the purchase of an asset and its sale, and the sale of product/good from the asset. Some examples of conventional current liabilities are Accounts payable, Notes Payable, unearned revenues, and employee related liabilities. One of the most popular current liabilities...
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...creditors use in making credit decisions. Camp Industries is the defendant in a class action suit filed in the amount of $44 million. After an informal conversation with in house legal counsel, I learn that it is remote that the company will win this lawsuit and our counsel feels that we will probably lose $30 million. Upon sharing this information with a co-worker, it is pointed out that accrual of loss contingencies for unsettled litigation is rare, in practice. My co-worker also points out that if we disclose that management believes that it is probable that Camp Industries will lose a specific dollar amount, that this could serve as ammunition for the opposing legal counsel. His opinion is that a loss should not be accrued and recorded until a final settlement has been reached in the lawsuit. This ethical dilemma deals with loss contingencies. According to our textbook, “a loss contingency is an existing, uncertain situation involving potential loss depending on whether some future event occurs”. (Spiceland, Sepe, & Nelson, 2012) In dealing with loss contingencies, two criteria must be determined, the likelihood that the event will occur and the estimation of the dollar amount of the potential loss. To determine the likelihood that the event will occur, we use three categories: “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; and remote – The...
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...to understand the proper and logical accounting literature to address the matter previously presented. The case it self provides a series of matters to be attends, these matters have to be address in accordance to the General Accepted Accounting Principles. Matters to be discussed: * The liability to be recorded by M financial statements, for the year-end December 31, 2007 * What adjustments should be done if any, for the year-ended December 31, 2009, financial statements; should the amount be recognized as a 2009 event or as a prior period adjustment. * When should M record a deduction of the previously recorded loss contingency Solution To understand the topic to be discussed is necessary to understand its basic components. FASB recognizes that companies are often involved in situations where uncertainty exists about whether an obligation will arise and an amount will be disbursed to fulfill or settle the obligation. This is known as a Contingency in the Accounting world. What is a contingency? ASC 450-10-20 defines it as “An existing condition, situation, or set of circumstances involving uncertainty as to possible gain (gain contingency) or loss (loss contingency) to an entity that will ultimately be resolved when one or more future events occur or fail to occur.” Meaning that sometimes companies either through experience, educated guest or peers conditions may understand that a probable disbursement may occur in relation to a...
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...CHAPTER 13 Current Liabilities and Contingencies ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC) Topics 1. Concept of liabilities; definition and classification of current liabilities. Accounts and notes payable; dividends payable. Short-term obligations expected to be refinanced. Deposits and advance payments. Compensated absences. Collections for third parties. Contingent liabilities (General). Guaranties and warranties. Premiums and awards offered to customers. Self-insurance, litigation, claims, and assessments, asset retirement obligations. Presentation and analysis. Questions 1, 2, 3, 4, 6, 8 7, 11 9, 10 12, 5 13, 14, 15 16 17, 18, 19, 20, 22 21, 23 24, 25 26, 27, 28 1, 2, 3 4 5 8, 9 6, 7 10, 11 13, 14 15 12 5, 6, 16 7, 8, 9, 16 13, 16 10, 11, 16 12, 15, 16 14 3, 4 10, 11, 13 5, 6, 7, 12, 14 8, 9, 12, 14 2, 10, 11, 13 9 6, 7 5, 6, 7 7, 8 Brief Exercises Exercises 1, 16 Problems 1, 2 Concepts for Analysis 1 2. 3. 4. 5. 6. 7. 8. 9. 10. 2, 16 3, 4 1, 2 1, 2 3, 4 2 11. 29, 30, 31 17, 18, 19 3 Copyright © 2010 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only) 13-1 ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE) Learning Objectives 1. 2. 3. 4. 5. Describe the nature, type, and valuation of current liabilities. Explain the classification issues of short-term debt expected to be refinanced. Identify types of employee-related liabilities. Identify the criteria used to account for...
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...CHAPTER 13 Current Liabilities and Contingencies ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC) Topics 1. Concept of liabilities; definition and classification of current liabilities. Accounts and notes payable; dividends payable. Short-term obligations expected to be refinanced. Deposits and advance payments. Compensated absences. Collections for third parties. Contingent liabilities (General). Guaranties and warranties. Premiums and awards offered to customers. Self-insurance, litigation, claims, and assessments, asset retirement obligations. Presentation and analysis. Questions 1, 2, 3, 4, 5, 6, 8 7, 11, 29 9, 10 12 13, 14, 15 16 17, 18, 19, 20, 22 21, 23 24, 25 26, 27, 28 1, 2, 3 4 5 8 6, 7 10, 11 13, 14 15 12 5, 6, 16 7, 8, 9, 16 13, 16 10, 11, 16 12, 15, 16 14 3, 4 10, 11, 13 5, 6, 7, 12, 15 8, 9, 12, 15 2, 10, 11, 13 9 14, 15 6, 7 5, 6, 7 7, 8 Brief Exercises Exercises 1, 16 Problems 1, 2 Concepts for Analysis 1 2. 3. 4. 5. 6. 7. 8. 9. 10. 2, 16 3, 4 1, 2 1, 2 3, 4 2 11. 29, 30, 31 9, 16 17, 18, 19 20, 21, 22 3 *12. Bonus payments. *This material is covered in an Appendix to the chapter. 13-1 ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE) Learning Objectives 1. 2. 3. 4. 5. Describe the nature, type, and valuation of current liabilities. Explain the classification issues of short-term debt expected to be refinanced. Identify types of employee-related liabilities. Identify the criteria used to account for and disclose gain and...
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...1. A liability has three essential characteristics, which of the following is not one of them? a. It is a present obligation that entails settlement by probable future transfer or use of cash, goods or services b. The obligation must be liquidated using cash, goods, or services that were earned by the entity in the performance of their normal business operation c. The liability must be an unavoidable obligation d. The transaction or other event creating the obligation must have already occurred 2. Current liabilities are: a. Liabilities that are due and payable on the balance sheet date b. Liabilities that may be paid out of any asset pool accumulated by the enterprise as long as payment is due within one year c. Due within one year or one operating cycle, whichever is longer d. Void of notes payable, as notes are always long-term 3. On October 1, 2003, a company borrowed cash and signed a one-year, interest-bearing note on which both the principal and interest are payable n October 1, 2004. How will the note payable and the related interest be classified in the December 31, 2003, balance sheet? Note Payable Accrued Interest a. Current liability Noncurrent liability b. Noncurrent liability Current liability c. Current liability Current liability d. Noncurrent liability Noncurrent liability 4. The Diana Co. issues...
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...are used by users not only to look at the current situation, but also to predict the company’s ability to continue as a going concern or functioning as a business entity in the future. The balance sheet and the valuations for assets and liabilities are a reflection of the company’s financial position for the next 12 months. If there are uncertainties or contingencies that occur they must be disclosed in the footnotes section of the statement and in some circumstances reflected in the actual reporting (Schroeder, Clark, & Cathey, 2005). Pending Lawsuit A contingency is a possible event that will have some effect on the company. Pending lawsuits are considered a contingency because of possible outcomes that will impact the company’s financials. Litigation is a costly and length process that can work against a company’s good reputation regardless of the outcome. The future financial position may be affected by the information presented regarding the potential litigation outcome and therefore disclosure is required. Because of the high probability of losing the lawsuit it should be reported on the balance sheet as a liability instead of notification in the footnotes (Schroeder, Clark, & Cathey, 2005). This disclosure provides users with relevant information, but may be used against the company by the plaintiff to assist in proving their case. The Financial Accounting Standards Board (FASB) reviews the nature of contingencies in the Statement of Financial Accounting Standards...
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...ACTG 493, Accounting Cases, Research and Analysis Group Case 1 Memorandum To: Professor Siyi Li From: Group 4 Date: July 5, 2016 Subject: eVade Pays Up (Deloitte Trueblood Case 14-07) I. Case Description and Key Facts eVade is an online retailer that fulfills its orders by shipping its products directly to customers across all 50 states in the U.S. eVade does not have a brick-and-mortar store presence in any state, but does operate distribution centers in various states, including State X. eVade does not collect or remit sales tax to State X. This practice is consistent with eVade’s practice in all 50 States. In recent court rulings, State X has taken the position that operating a distribution center within the state constitutes nexus and thus would subject any company operating a distribution center to collect and remit sales tax on all sales made within the state. As of December 31, 2011, eVade has operated a distribution center within State X for the past five years. Although the company considers the risk of detection to not be probable, eVade estimates total sales tax payable to State X to be $50 million. In addition, eVade estimates that $6 million in interest and $4 million in penalties are also payable to the state. On March 15, 2012, a tax amnesty program was established by the Governor of State X. The program provides that an unregistered taxpayer who voluntarily registers to collect sales tax prospectively will be forgiven...
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...contingent liabilities, the proposal suggests that current obligations are the only ones to consider when accounting for liabilities, which in themselves should be stated separately from the events which may dictate their occurrence. The uncertainty of the events themselves should also be disclosed, when presenting the measurements for the liability. Additionally, defining contingency with regard to the amount required to settle a liability rather than the probability of its occurrence will aid the goal of better recognition rather than simple disclosure. Similarly, with respect to contingent assets, the proposed changes require elimination of the term “contingent asset,” and clarify that purely the rights associated with a past transaction or event give the ability to recognize an asset as such, to be controlled by an entity. The amendment proposal also inquires into the need for further guidance on how the creation of a constructive obligation is incurred, and proposes to omit the criterion of probability recognition, due to the contingent liabilities proposed change of recognizing the liability and applying contingency as a term solely for the amount and not the possibility of the liability. With regard to measurements, the proposal adds non-financial liability measurement to be determined in terms of the amount an entity would rationally pay to settle the present obligation, states the cash flow method as viable for measuring the above named liabilities, and mentions...
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...Campbell v. Martin lawsuit, we have come to the following conclusion: We recommend Martin adjust the $18 million loss contingency recorded in 2011 to $19 million in the current period. This recommendation is in line with FASB guidance on accounting for contingencies as detailed in the Accounting Standards Codification. FACTS These are the facts as we understand them. In 2011 Martin’s management accrued a loss of $18 million based on an estimated range of $16 million to $20 million. A judgment was ordered in September 2013 requiring Martin to pay Campbell $19 million for patent infringement. Martin immediately filed a Notice of Appeal with the Court of Appeals. ISSUE What amount should be adjusted for the liability recorded in 2011and should the adjustment be considered a 2013 event or prior period adjustment? CONCLUSION We recommend Martin adjust the $18 million loss contingency recorded in 2011 to $19 million in the current period. An example of the journal entry would be: Loss on Contingent Lawsuit $1 million Estimated Liability for Contingent Loss $1 million DISCUSSION This event meets both conditions of ASC 450-20-25-2, which require recognition of a loss contingency. First, ASC 450-20-25-2(a) requires that information available before the date of the financial statements indicates the probably impairment of an asset or that a liability has been incurred at the date of the financial statements. ASC 450-20-25-2(b) then demands that the amount of the...
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...February 23, 2015 Subject: Treatment of Loss Contingency Overturned on Appeal I would like to give some guidance on a relevant accounting issue that has arisen at your company, M corporation. There has recently been a litigation against the company and I believe that the best way to account for it would be to record the loss in a contingent liability account. This account will ensure that the company’s statements properly illustrate the current situation by matching the cost with the events that created them. The first issue we need to address is the initial valuation and recognition of the possible liability. At December 31, 2007 it was determined that the loss was probable and was estimated to incur a cost of $15 million to $20 million with $17 million being the most probable amount. I strongly suggest that the company recognize this potential loss because given the facts, FASB would require it. According to FASB Codification 450-20-25-2, “An estimated loss from a loss contingency shall be accrued by a charge to income if…Information available before the financial statements are issued or are available to be issued and the amount of loss can be reasonably estimated.” In this case, both requirements are met so it would be difficult to make a case against the recognition of the potential loss on December 31, 2007. The next issue to consider is the amount of loss contingency that should be recorded. A $17 million contingent liability should be accrued because according to FASB...
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...Client Response II ACC/541 January 31, 2011 Client Response II To: ABC Warehouse CC: Date: [ 1/31/2011 ] Re: Loss Contingencies Reporting Requirement for Lawsuit Contingencies The implication to the company depends upon outcome of the lawsuit. If the outcome results in a loss to the company, the loss should be accrued as estimated into the company’s financials, provided that the loss can be reasonably estimated and noted, in detail per FASB Codification section 450-20-25-2. If the loss cannot reasonably estimated, FASB Codification section 450-20-50-5, states that in the company’s financial statement there should be a disclosure of the contingency outlining conditions which could possibly result in an additional loss. If the litigation is unlikely to result in a loss, the Codification of FASB section 450-20-50-6, requires no disclosure in the financial statement. Reporting requirement for Debt Reorganization If there is an unfavorable outcome in the pending litigation, the cash flow of the company may become distressed to the point where the company may sue for relief under chapter 11 bankruptcy code for debt reorganization. There is a detailed method for creditors, provided by the bankruptcy plan of the organization suing for relief, to recoup funds allocated to the company through the restructuring of the company’s debt . In the restructuring of the company’s debt, it may result in modified repayment schedules, debt forgiveness, modification...
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...accrued for (as required by ASC 450-20-25-2), yet Danle’s legal counsel concluded that the litigation could “potentially but not probably” cause a future loss. The use of the word “potentially” can be reasonable assumed to mean reasonably possible, which is defined as more than remote but less than probable. ASC 450-20-50-3 states, “Disclosure of a contingency shall be made if there is at least a reasonable possibility that a loss or an additional loss may have been incurred,” and “an accrual is not made for a loss contingency because any of the conditions in paragraph 450-20-25-2 are not met.” As previously stated no accrual was made because the litigations were not considered probable, however the language used by Danle’s legal counsel to describe the litigation was interpreted to mean reasonably possible. Therefore ASC 450-20-50-3 applies and proper disclosure is needed for the financial statements of fiscal year December 31, 2009. As additional proof ASC 450-20-50-5 clearly states, “Disclosure is preferable to accrual when a reasonable estimate of loss cannot be made. For example, disclosure shall be made of any loss contingency that meets the condition in paragraph 450-20-25-2(a) but that is not accrued because the amount of loss cannot be reasonably estimated (the condition in paragraph 450-20-25-2[b]).” Additionally, this information would affect the amount, timing and uncertainty of net future cash flows, which FASB’s Statement of Financial Reporting Concept #8 declares...
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...range of $1 million and $3 million, with no amount in the range more likely than the next. Issues 1. Is the lawsuit considered a loss contingency? 2. Will the loss be accrued, and if so for what amount? 3. What disclosures should be made in the company’s financial Statement? Analysis – Issue 1: Is the lawsuit considered a loss contingency? FASB Accounting Standards (ASC) 450-20 provides information on contingencies, covering the definition of a loss contingency as well as providing examples of loss contingencies. Contingencies are described in (ASC) 450-20-20 as follows: Contingency: An existing condition, situation, or set of circumstances involving uncertainty as to possible gain (gain contingency) or loss (loss contingency) to an entity that will ultimately be resolved when one or more future events occur or fail to occur. As can be seen the company has an existing situation (lawsuit) involving uncertainty (estimated range of $1-3 million in damages) which could make it considered a contingency. FASB goes on to describe loss contingency as a “set of circumstances involving uncertainty as to possible loss”, making this a loss contingency. FASB Accounting Standards Codification (ASC) 450-20 provides examples of different types of loss contingencies in par. 05-10 05-10 The following are examples of loss contingencies that are discussed in this subtopic. a. Injury or damage caused by products sold b. Risk of loss or damage of property by fire, explosion...
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