13-1 CHAPTER 13 CURRENT LIABILITIES, PROVISIONS, AND CONTINGENCIES Intermediate Accounting IFRS Edition Kieso, Weygandt, and Warfield 13-2 Learning Learning Objectives Objectives 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 Explain the accounting for different types of provisions Identify the criteria used to account for and disclose contingent liabilities and assets Indicate how to present and analyze liability-related information 13-3 Current Current Liabilities Liabilities and and Contingencies Contingencies Current Liabilities What is a liability? What is a current liability? 13-4 Provisions Recognition Measurement Common types Disclosures Contingencies Contingent liabilities Contingent assets Presentation and Analysis Presentation of current liabilities Analysis of current liabilities What What is is aa Liability? Liability? Three essential characteristics: Present obligation Arises from past events Results in an outflow of resources (cash, goods, services) 13-5 What What is is aa Current Current Liability? Liability? Current liability is reported if one of two conditions exists: Liability is expected to be settled within its normal operating cycle; or Liability is expected to be settled within 12 months after the reporting date The operating cycle is the period of time elapsing between the acquisition of goods and services and the final cash realization resulting from sales and subsequent collections 13-6 LO Describe the nature, type, and valuation of current liabilities What What is is aa Current Current Liability? Liability? Typical Current Liabilities: Accounts payable Notes payable 13-7 Current maturities of longterm debt Short-term obligations expected to be refinanced Customer advances and deposits Unearned revenues Sales taxes payable Income taxes payable Employee-related liabilities Dividends payable LO Describe the nature, type, and valuation of current liabilities What What is is aa Current Current Liability? Liability? Accounts Payable (trade accounts payable) Balances owed to others for goods, supplies, or services purchased on open account Time lag between the receipt of services or acquisition of title to assets and the payment for them Terms of the sale (e.g., 2/10, n/30 or 1/10, E.O.M.) usually state period of extended credit, commonly 30 to 60 days 13-8 LO Describe the nature, type, and valuation of current liabilities What What is is aa Current Current Liability? Liability? Notes Payable Written promises to pay a certain sum of money on a specified future date 13-9 Arise from purchases, financing, or other transactions Notes classified as short-term or long-term Notes may be interest-bearing or zero-interest-bearing LO Describe the nature, type, and valuation of current liabilities What What is is aa Current Current Liability? Liability? Interest-Bearing Note Issued Illustration: Castle National Bank agrees to lend $100,000 on March 1, 2011, to Landscape Co if Landscape signs a $100,000, percent, four-month note Landscape records the cash received on March as follows: Cash 100,000 Notes Payable 13-10 100,000 LO Describe the nature, type, and valuation of current liabilities Common Common Types Types of of Provisions Provisions Onerous Contract Provisions Illustration: Sumart Sports operates profitably in a factory that it has leased and on which it pays monthly rentals Sumart decides to relocate its operations to another facility However, the lease on the old facility continues for the next three years Unfortunately, Sumart cannot cancel the lease nor will it be able to sublet the factory to another party The expected costs to satisfy this onerous contract are €200,000 In this case, Sumart makes the following entry Loss on lease contract 200,000 Lease contract liability 200,000 13-70 LO Explain the accounting for different types of provisions Common Common Types Types of of Provisions Provisions Onerous Contract Provisions Assume the same facts as above for the Sumart example and the expected costs to fulfill the contract are €200,000 However, Sumart can cancel the lease by paying a penalty of €175,000 In this case, Sumart should record the liability as follows Loss on lease contract 175,000 Lease contract liability 175,000 13-71 LO Explain the accounting for different types of provisions Common Common Types Types of of Provisions Provisions Restructuring Provisions Restructurings are defined as a “program that is planned and controlled by management and materially changes either the scope of a business undertaken by the company; or the manner in which that business is conducted.” Companies are required to have a detailed formal plan for the restructuring and to have raised a valid expectation to those affected by implementation or announcement of the plan 13-72 LO Explain the accounting for different types of provisions Common Common Types Types of of Provisions Provisions Restructuring Provisions IFRS provides specific guidance related to certain costs and losses that should be excluded from the restructuring provision Illustration 13-9 13-73 LO Explain the accounting for different types of provisions Common Common Types Types of of Provisions Provisions Restructuring Provisions Illustration 13-10 13-74 LO Common Common Types Types of of Provisions Provisions Self-Insurance Self-insurance is not insurance, but risk assumption There is little theoretical justification for the establishment of a liability based on a hypothetical charge to insurance expense Conditions for accrual stated in IFRS are not satisfied prior to the occurrence of the event 13-75 LO Explain the accounting for different types of provisions Disclosures Disclosures Related Related To To Provisions Provisions A company must provide a reconciliation of its beginning to ending balance for each major class of provisions, identifying what caused the change during the period In addition, ► Provision must be described and the expected timing of any outflows disclosed ► Disclosure about uncertainties related to expected outflows as well as expected reimbursements should be provided 13-76 LO Explain the accounting for different types of provisions Contingent Contingent Liabilities Liabilities Contingent liabilities are not recognized in the financial statements because they are A possible obligation (not yet confirmed), A present obligation for which it is not probable that payment will be made, or A present obligation for which a reliable estimate of the obligation cannot be made 13-77 LO Identify the criteria used to account for and disclose contingent liabilities and assets Contingent Contingent Liabilities Liabilities Contingent Liabilities Guidelines 13-78 Illustration 13-12 LO Identify the criteria used to account for and disclose contingent liabilities and assets Contingent Contingent Assets Assets A contingent asset is a possible asset that arises from past events and whose existence will be confirmed by the occurrence or non-occurrence of uncertain future events not wholly within the control of the company Typical contingent assets are: Possible receipts of monies from gifts, donations, bonuses Possible refunds from the government in tax disputes Pending court cases with a probable favorable outcome Contingent assets are not recognized on the statement of financial position 13-79 LO Identify the criteria used to account for and disclose contingent liabilities and assets Contingent Contingent Assets Assets Contingent Asset Guidelines Illustration 13-14 Contingent assets are disclosed when an inflow of economic benefits is considered more likely than not to occur (greater than 50 percent) 13-80 LO Identify the criteria used to account for and disclose contingent liabilities and assets Presentation Presentation of of Current Current Liabilities Liabilities Presentation of Current Liabilities Usually reported at their full maturity value Difference between present value and the maturity value is considered immaterial 13-81 LO Indicate how to present and analyze liability-related information Presentation Presentation of of Current Current Liabilities Liabilities Illustration 13-15 13-82 LO Indicate how to present and analyze liability-related information Analysis Analysis of of Current Current Liabilities Liabilities Liquidity regarding a liability is the expected time to elapse before its payment Two ratios to help assess liquidity are: 13-83 LO Indicate how to present and analyze liability-related information Copyright Copyright Copyright © 2011 John Wiley & Sons, Inc All rights reserved Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc The purchaser may make back-up copies for his/her own use only and not for distribution or resale The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein 13-84 ... authorized for issuance on April 1, 2 011 Liability of $50,000 Refinance completed Liability due for payment Statement Issuance Dec 31, 2 010 Feb 1, 2 011 Mar 1, 2 011 Apr 1, 2 011 13 -22 LO Explain the classification... for issuance on March 31, 2 011 Refinance completed Liability of $12 0,000 Liability due for payment Statement Issuance Dec 18 , 2 010 Dec 31, 2 010 Feb 15 , 2 011 Mar 31, 2 011 13 -24 LO Explain the classification... issuance on March 31, 2 011 Refinance completed Non-Current Liability of $12 0,000 Dec 18 , 2 010 Dec 31, 2 010 13 -25 Since the agreement was in place as of the reporting date (December 31, 2 010 ), the obligation