Liabilities: Godfrey Hodgson Holmes Tarca
Liabilities: Godfrey Hodgson Holmes Tarca
Liabilities: Godfrey Hodgson Holmes Tarca
GODFREY
HODGSON
HOLMES
TARCA
CHAPTER 8
LIABILITIES
INTRODUCTION
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LIABILITIES DEFINED
LIABILITIES DEFINED
• FASB:
– 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
• Characteristics of LIABILITY:
– Present Obligation
– Outflow of resources
– Past Transaction/Events
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C1:Present obligation
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LIABILITY RECOGNITION
Recognition criteria:
• Reliance on the law
– legal enforceability
• Determination of the economic substance of
the event (‘real’ obligation):
– Definition of liability
– Measurable
LIABILITY RECOGNITION
Recognition criteria:
• Ability to measure the value of the liability
– normally the nominal amount
– if period longer than 12-months, based on the present
value of expected future cash flows
• Use of the conservatism principle
– Recognise liability as soon as possible as long as it is
probable and measurable
– Does not wait its realisation
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IASB Framework
it is probable that
any future the item has a cost
economic benefit or value that can be
associated with the measured with
items will flow to or reliability
from the entity;
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PROVISION AND
CONTINGENCY
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PROVISION
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PROVISION
Legal Constructive
obligation obligation
Liability vs Provision
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Provisions - Recognition
PRESENT PROBABLE
OUTFLOW OF RELIABLE ESTIMATE
OBLIGATION (MEASUREMENT)
RESOURCES
• Present obligation must • There should be
have been arise from the • The outflow
outflow of resources
past event should have
• The outflow of
• Determine present reliable estimate
resources & other
obligation at the end of • This would be
events must
reporting period using: extreme rare case
be probable (i.e.
• Expert opinion where no reliable
more than 50%
• Evidence provided by estimate can be
probable)
IAS 10: Event after made
the reporting period
PROVISION
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PROVISION
When to recognize a provision?
Do not Recognize a
recognize a provision provision
Examples:
Training of personnel Warranty Repairs
PROVISION-Measurement
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methods of measuring a
provision
• Expected value method:
– use this method when we have a range of possible
outcomes or we measure the provision for large amount of
items.
– In this case, we need to weight each outcome by its
probability (for example, warranty repair costs for 10 000
products).
• The most likely outcome:
– suitable in the case of a single obligation or just 1 item (for
example, provision for loss in the court case).
insurance
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Provisions in specific
circumstances
1. Future operating losses
No provision
Provisions in specific
circumstances
a contract in which
2. Onerous contracts unavoidable costs of
fulfilling exceed the
benefits from the contract
Loss of contract
Unavoidable
costs of fulfilling
the contract
PROVISION
Lower of
Penalty for not
meeting
obligations from
the contract
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Provisions in specific
circumstances
A program planned &
3. Restructuring controlled by management
that change the scope of
business or a manner of
A PROVISION conducting a business
Disclosures - Provisions
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CONTINGENT LIABILITIES
• Contingent liabilities =
– Possible obligations that arise from past events and whose
existence will be confirmed only by the occurrence or non-
occurrence of one or more uncertain future events not
wholly within the control of the entity
– because:
• It is not probable that an outflow of resources embodying
economic benefits or service potential will be required to settle
the obligation; or
• The amount of the obligation cannot be measured with
sufficient reliability
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Contingent liabilities
• For example, We might face a lawsuit, but our
lawyers estimate the probability of losing the case at
30% – in this case, it’s not probable that we will have
to incur any expenditures to settle the claim and we
should not book a provision. It’s typical contingent
liability.
• If we identify we have a contingent liability, we do
NOT recognize it – no journal entry.
– only make appropriate disclosures in the notes to
the financial statements.
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Contingent assets
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Off-Balance sheet
Summary
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