Intermediate Accounting Seventeenth Edition Kieso ● Weygandt ● Warfield Chapter 13 Current Liabilities and Contingencies This slide deck contains animations Please disable animations if they cause issues with your device Learning Objectives After studying this chapter, you should be able to: Describe the nature, valuation, and reporting of current liabilities Explain the classification issues of short-term debt expected to be refinanced Explain the accounting for gain and loss contingencies Indicate how to present and analyze liabilities and contingencies Copyright ©2019 John Wiley & Sons, Inc Preview of Chapter 13 Current Liabilities and Contingencies Current Liabilities • • • • • • • • • Accounts payable Notes payable Dividends payable Customer advances and deposits Unearned revenues Taxes payable Employee-related liabilities Current maturities of long-term debt Short-term obligations Copyright ©2019 John Wiley & Sons, Inc Preview of Chapter 13 Current Liabilities and Contingencies Short-Term Obligations • Refinancing illustration Contingencies • Gain contingencies • Loss contingencies Copyright ©2019 John Wiley & Sons, Inc Preview of Chapter 13 Current Liabilities and Contingencies Presentation and Analysis • Presentation of current liabilities • Presentation of contingencies • Analysis of current liabilities Copyright ©2019 John Wiley & Sons, Inc Learning Objective Describe the Nature, Valuation, and Reporting of Current Liabilities LO Copyright ©2019 John Wiley & Sons, Inc Current Liabilities “What is a Liability?” The FASB, defined liabilities as: “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.” LO Copyright ©2019 John Wiley & Sons, Inc Current Liabilities Recall: Current assets are cash or other assets that companies reasonably expect to convert into cash, sell, or consume in operations within a single operating cycle or within a year Current liabilities are “obligations whose liquidation is reasonably expected to require use of existing resources properly classified as current assets, or the creation of other current liabilities.” Operating cycle: Period of time elapsing between the acquisition of goods and services and the final cash realization resulting from sales and subsequent collections LO Copyright ©2019 John Wiley & Sons, Inc Current Liabilities Typical Current Liabilities LO 1 Accounts payable Sales taxes payable Notes payable Income taxes payable Dividends payable Employee-related liabilities Customer advances and deposits Current maturities of long-term debt Unearned revenues Copyright ©2019 John Wiley & Sons, Inc Current Liabilities 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 LO Copyright ©2019 John Wiley & Sons, Inc 10 Self-Insurance Disclosure Molson Coors Brewing Company Notes to Financial Statements (in part) Note 21: Insurance We are self-insured for certain insurable risks consisting primarily of employee health insurance programs, as well as workers' compensation, general liability, automobile liability, and property insurance deductibles or retentions we fully insured future risks for long-term disability, and, in most states, workers' compensation, but maintained a self-insured position for workers' compensation for certain self-insured states and for claims incurred prior to the inception of the insurance coverage in Colorado in 1997 LO Copyright ©2019 John Wiley & Sons, Inc 83 Learning Objective Indicate How to Present and Analyze Liabilities and Contingencies LO Copyright ©2019 John Wiley & Sons, Inc 84 Presentation and Analysis Presentation of Current Liabilities LO • Usually reported at their full maturity value • Difference between present value and the maturity value is considered immaterial • Companies may list the accounts in  Order of maturity,  Descending order of amount, or  Order of liquidation preference Copyright ©2019 John Wiley & Sons, Inc 85 Current Liabilities Presentation LO Copyright ©2019 John Wiley & Sons, Inc 86 Presentation of Current Liabilities If a company excludes a short-term obligation from current liabilities because of refinancing, it should include the following in the note to the financial statements: LO A general description of the financing agreement The terms of any new obligation incurred or to be incurred The terms of any equity security issued or to be issued Copyright ©2019 John Wiley & Sons, Inc 87 Actual Refinancing of Short-Term Debt LO Copyright ©2019 John Wiley & Sons, Inc 88 Presentation of Contingencies Disclosure should include: • Nature of the contingency • An estimate of the possible loss or range of loss or a statement that an estimate cannot be made Companies should disclose certain other contingent liabilities LO Guarantees of indebtedness of others Obligations of commercial banks under “stand-by letters of credit.” Guarantees to repurchase receivables (or any related property) that have been sold or assigned Copyright ©2019 John Wiley & Sons, Inc 89 Disclosure of Loss Contingency through Litigation LO Copyright ©2019 John Wiley & Sons, Inc 90 Analysis of Current Liabilities Two ratios to help assess liquidity based on the information for Best Buy Co previously provided LO Copyright ©2019 John Wiley & Sons, Inc 91 Learning Objective Compare the Accounting Procedures for Current Liabilities and Contingencies Under GAAP and IFRS LO Copyright ©2019 John Wiley & Sons, Inc 92 IFRS Insights Relevant Facts – Similarities • Similar to U.S practice, IFRS requires that companies present current and non-current liabilities on the face of the statement of financial position (balance sheet), with current liabilities generally presented in order of liquidity However, many companies using IFRS present non-current liabilities before current liabilities on the statement of financial position • The basic definition of a liability under GAAP and IFRS is very similar In a more technical way, liabilities are defined by the IASB as a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits Liabilities may be legally enforceable via a contract or law but need not be That is, they can arise due to normal business practices or customs LO Copyright ©2019 John Wiley & Sons, Inc 93 IFRS Insights Relevant Facts – Similarities • IFRS requires that companies classify liabilities as current or non-current on the face of the statement of financial position (balance sheet), except in industries where a presentation based on liquidity would be considered to provide more useful information (such as financial institutions) • Under IFRS, short-term obligations expected to be refinanced can be classified as non-current if the refinancing is completed by the financial statement date GAAP now also uses the balance sheet date LO Copyright ©2019 John Wiley & Sons, Inc 94 IFRS Insights Relevant Facts – Differences • Under IFRS, the measurement of a provision related to a contingency is based on the best estimate of the expenditure required to settle the obligation If a range of estimates is predicted and no amount in the range is more likely than any other amount in the range, the “midpoint” of the range is used to measure the liability In GAAP, the minimum amount in a range is used • Both IFRS and GAAP prohibit the recognition of liabilities for future losses However, IFRS permits recognition of a restructuring liability, once a company has committed to a restructuring plan GAAP has additional criteria (i.e., related to communicating the plan to employees) before a restructuring liability can be established LO Copyright ©2019 John Wiley & Sons, Inc 95 IFRS Insights Relevant Facts – Differences • IFRS and GAAP are similar in the treatment of asset retirement obligations (AROs) However, the recognition criteria for an ARO are more stringent under GAAP: The ARO is not recognized unless there is a present legal obligation and the fair value of the obligation can be reasonably estimated • IFRS uses the term provisions to refer to estimated liabilities Under IFRS, contingencies are not recorded but are often disclosed The accounting for provisions under IFRS and estimated liabilities under GAAP are very similar • GAAP uses the term contingency in a different way than IFRS Contingent liabilities are not recognized in the financials under IFRS, whereas under GAAP, a contingent liability is sometimes recognized LO Copyright ©2019 John Wiley & Sons, Inc 96 Copyright Copyright © 2019 John Wiley & Sons, Inc All rights reserved Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States 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 Copyright ©2019 John Wiley & Sons, Inc 97 ... liabilities Explain the classification issues of short-term debt expected to be refinanced Explain the accounting for gain and loss contingencies Indicate how to present and analyze liabilities and contingencies... $50,000, 12-month, 8% note to Encino in payment of account Oct - Borrowed $50,000 from the Shore Bank by signing a 12-month, zero-interest-bearing $54,000 note LO Copyright ©2019 John Wiley & Sons,... Copyright ©2019 John Wiley & Sons, Inc $51,000 20 Current Liabilities Dividends Payable Amount owed by a corporation to its stockholders as a result of board of directors’ authorization • Generally