LIABILITIES 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. (SFAC #6, 1980)

ESSENTIAL CHARACTERISTICS A present obligation that entails settlement by probable future transfer or use of cash, goods, or services. Unavoidable. Transaction or other event creating the obligation must have already occurred.

CURRENT LIABILITIES Maturity within one year or the operating cycle whichever is longer. Obligations whose liquidation is reasonably expected to require use of existing resources properly classified as current assets, or the creation of other current liabilities. (Committee on Accounting Procedure, AICPA, 1961, p. 21) Time value of money is ignored; CL are stated at full maturity value.

CURRENT MATURITIES OF LONG-TERM DEBT Report as a current liability unless it is: to be retired by assets accumulated for this purpose that have not been shown as current assets to be refinanced by a new debt issue it is to be converted into stock

SHORT-TERM OBLIGATIONS EXPECTED TO BE REFINANCED FASB Statement No. 6, 1975 Can be excluded from Current Liabilities only if the firm: Intends to refinance the obligation on a long-term basis, AND Demonstrates the ability to refinance.

SHORT-TERM OBLIGATIONS EXPECTED TO BE REFINANCED Ability to refinance can be evidenced by: Actual refinancing (after balance sheet date but before financial statements are issued), or Signing a refinancing agreement (with a capable lender) which is noncancellable and not violated.

SHORT-TERM OBLIGATIONS EXPECTED TO BE REFINANCED Amount excluded from current liabilities: Cannot exceed amount available under agreement. Must be adjusted for any limitations or restrictions in the agreement that indicate that the full amount obtainable will not be available to retire the short-term obligation. Cannot exceed a reasonable estimate of the minimum amount expected to be available, if the amount available for refinancing will fluctuate.

SHORT-TERM OBLIGATIONS EXPECTED TO BE REFINANCED Repayment and Replacement FASB Interpretation No. 8 Refinancing must occur before current debt is due.

COMPENSATED ABSENCES FASB Statement No. 43, 1980 Vacations, illnesses, and holidays for which employees are normally paid. Accrue liability for future absences (except for sick pay) if: The obligation arises from services already rendered by the employee; and The rights vest or accumulate; and Payment is probable; and The amount can be reasonably estimated.

COMPENSATED ABSENCES Sick pay: It sick pay benefits vest, must recognize expense and accrue liability. If sick pay benefits accumulate but not vest, recognition of expense and accrual of liability is optional.

CONTINGENT LIABILITIES FASB Statement No. 5, 1975 Obligations that are dependent upon the occurrence or non-occurrence of one or more future events to confirm either the amount payable, or the payee, or the date payable, or its existence. The condition had to exist at the balance sheet date. Information has to be available prior to issuing financial statements.

CONTINGENT LIABILITIES The likelihood that the future event or events will confirm the incurrence of a liability can be classified as: 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. REMOTE: The chance of the future event or events occurring is slight.

LOSS CONTINGENCIES A contingent liability should be accrued (i.e., record an expense and the related liability) if 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 AND the amount of the loss can be reasonably estimated.

LOSS CONTINGENCIES If the loss is not both probable and reasonably estimable, but there is at least a reasonable possibility that a loss may have been incurred, then disclose the loss contingency in the notes to the financial statements.

WARRANTY OBLIGATIONS Expense warranty accrual method Warranty is not sold separately but is included in cost of product. Sales warranty accrual method Warranty is sold separately (i.e., a service contract)

WARRANTY OBLIGATIONS Cash basis method Only method recognized for tax purposes. Used for financial reporting purposes when a warranty liability is not accrued in the year of sale because: It is not probable that a liability has been incurred; or The amount of the liability cannot be reasonably estimated.

EXPENSE WARRANTY ACCRUAL METHOD Warranty expense should be recognized in the period during which the sale was made. Estimate liability.

EXPENSE WARRANTY ACCRUAL METHOD Period of sale: Warranty Expense DR Estimated Liability Under Warranties CR Period when warranty costs are incurred: Estimated Liability Under Warranties DR Cash (or other assets) CR

SALES WARRANTY ACCRUAL METHOD Period of sale: Cash DR Sales CR Unearned Warranty Revenue CR Period when warranty revenue is earned: Unearned Warranty Revenue DR Warranty Revenue CR

PREMIUMS AND COUPONS Result in the probable existence of a liability at the date of the financial statements.