Current Liabilities

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Chapter 13

• Current Liabilities Contingencies

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Liabilities

• Defined in SFAC No. 6.
• 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.

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Current Liabilities

• Obligations whose liquidation is reasonably
  expected to require the use of existing resources
  classified as current assets, or the creation of
  other current liabilities.
• Can be either determinable or contingent

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Determinable Current Liabilities

• Can be measured with a fair degree of precision
  and the amount and timing of the cash outflows
  are reasonably certain

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Determinable Current Liabilities

• Accounts Payable
• Notes Payable
• Trade notes
• Short-term loan notes
• Current maturities of long-term debt

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Determinable Current Liabilities

• Short-term obligations expected to be refinanced
• Can be excluded from current liabilities if
• Intends to refinance and
• Demonstrates an ability to refinance
• Ability evidenced by
• Actual refinancing
• Signing a refinancing agreement which is
  noncancellable and not violated
• Amount excluded cannot exceed amount available
  under agreement
• Refinancing must occur before current debt is due

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Determinable Current Liabilities

• Dividends payable
• At date of declaration
• Not preferred dividends in arrears
• Not stock dividends
• Returnable deposits
• Unearned revenues
• Sales taxes payable

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Determinable Current Liabilities

• Property taxes payable
• When to record?
• Which period charged with cost?
• Income taxes payable
• Not sole proprietorships and partnerships
• Interim tax payments based on estimates

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Determinable Current Liabilities

• Employee-related liabilities
• Payroll deductions
• Unemployment taxes
• Income tax withholding
• Compensated absences

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Contingencies

• 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
• Loss contingencies result in recognition of a
  contingent liability

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Contingent Liabilities

• Liabilities which are dependent upon the
  occurrence or nonoccurrence of one or more future
  events to confirm either the amount payable, or
  the payee, or the date payable, or its existence.
  Condition had to exist at balance sheet date.
  Information has to be available prior to issuing
  financial statements.

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Likelihood

• Probable. Likely. Liability is recorded if it
  is probable that a liability had been incurred at
  the balance sheet date and the amount of loss can
  be reasonably estimated.
• Reasonably possible. Chance of future event is
  more than remote but less than likely

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Likelihood

• Remote. Chance is slight.

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Common Loss Contingencies

• Litigation, claims, and assessments
• Guarantee and warranty costs
• Premiums and coupons offered to customers
• Environmental liabilities
• Self-insurance

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Presentation

• Current liabilities are reported at their full
  maturity value, not their present value.
• Current liabilities are generally the first
  classification in the liability section
• Current liabilities are frequently listed in
  order of maturity, according to amount, or order
  of liquidation preference.

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Presentation

• Disclosures for short-term obligations expected
  to be refinanced should include
• General description of financing agreement
• Terms of any new obligations incurred or to be
  incurred
• Terms or any equity security issued or to be
  issued

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Presentation

• Currently maturing debt to be paid with
  noncurrent assets should be classified as
  long-term liabilities
• Secured liabilities should be identified and
  related assets clearly indicated

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Presentation

• If a loss contingency is either probable or
  estimable but not both and if there is at least a
  reasonable possibility that a liability may have
  been incurred then the following disclosure is
  required
• The nature of the contingency
• An estimate of the possible loss or range of loss
  or statement that estimate cannot be made

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Presentation

• Other contingent liabilities that should be
  disclosed even if the possibility of a loss is
  remote are
• Guarantees of indebtedness to others
• Obligation to banks under stand-by letters of
  credit
• Guarantees to repurchase receivables that have
  been sold or assigned

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Analysis of Current Liabilities

• Current ratio
• Current assets/current liabilities
• Acid-test ratio
• (Cash marketable securities net receivables)
  / current liabilities