Kế toán, kiểm toán - Chapter 13: Current liabilities, provisions, and contingencies

C H A P T E R 13CURRENT LIABILITIES, PROVISIONS, AND CONTINGENCIESIntermediate AccountingIFRS EditionKieso, Weygandt, and Warfield 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.Learning ObjectivesCurrent LiabilitiesProvisionsPresentation and AnalysisWhat is a liability?What is a current liability?RecognitionMeasurementCommon typesDisclosuresPresentation of current liabilitiesAnalysis of current liabilitiesCurrent Liabilities and ContingenciesContingenciesContingent liabilitiesContingent assetsWhat is a Liability?Three essential characteristics:Present obligation.Arises from past events.Results in an outflow of resources (cash, goods, services).What is a Current 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.LO 1 Describe the nature, type, and valuation of current liabilities.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.What is a Current Liability?Typical Current Liabilities:Accounts payable.Notes payable.Current maturities of long-term debt.Short-term obligations expected to be refinanced.Dividends payable.Customer advances and deposits.Unearned revenues.Sales taxes payable.Income taxes payable.Employee-related liabilities.LO 1 Describe the nature, type, and valuation of current liabilities.Balances owed to others for goods, supplies, or services purchased on open account.Accounts Payable (trade accounts payable)What is a Current Liability?LO 1 Describe the nature, type, and valuation of current liabilities.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.Written promises to pay a certain sum of money on a specified future date.Notes PayableWhat is a Current Liability?LO 1 Describe the nature, type, and valuation of current liabilities.Arise from purchases, financing, or other transactions.Notes classified as short-term or long-term.Notes may be interest-bearing or zero-interest-bearing.Illustration: Castle National Bank agrees to lend $100,000 on March 1, 2011, to Landscape Co. if Landscape signs a $100,000, 6 percent, four-month note. Landscape records the cash received on March 1 as follows:What is a Current Liability?LO 1 Describe the nature, type, and valuation of current liabilities.Cash 100,000 Notes Payable 100,000Interest-Bearing Note IssuedIf Landscape prepares financial statements semiannually, it makes the following adjusting entry to recognize interest expense and interest payable at June 30:What is a Current Liability?LO 1 Describe the nature, type, and valuation of current liabilities.Interest expense 2,000 Interest payable 2,000($100,000 x 6% x 4/12) = $2,000Interest calculation =At maturity (July 1), Landscape records payment of the note and accrued interest as follows.What is a Current Liability?LO 1 Describe the nature, type, and valuation of current liabilities.Notes payable 100,000Interest payable 2,000 Cash 102,000Illustration: On March 1, Landscape issues a $102,000, four-month, zero-interest-bearing note to Castle National Bank. The present value of the note is $100,000. Landscape records this transaction as follows.What is a Current Liability?LO 1 Describe the nature, type, and valuation of current liabilities.Cash 100,000 Notes payable 100,000Zero-Bearing Note IssuedIf Landscape prepares financial statements semiannually, it makes the following adjusting entry to recognize interest expense and the increase in the note payable of $2,000 at June 30.What is a Current Liability?LO 1 Describe the nature, type, and valuation of current liabilities.Interest expense 2,000 Notes payable 2,000At maturity (July 1), Landscape must pay the note, as follows.Notes payable 102,000 Cash 102,000E13-2: (Accounts and Notes Payable) The following are selected 2010 transactions of Darby Corporation.What is a Current Liability?LO 1 Describe the nature, type, and valuation of current liabilities.Sept. 1 - Purchased inventory from Orion Company on account for $50,000. Darby records purchases gross and uses a periodic inventory system.Oct. 1 - Issued a $50,000, 12-month, 8% note to Orion in payment of account.Oct. 1 - Borrowed $75,000 from the Shore Bank by signing a 12-month, zero-interest-bearing $81,000 note.Prepare journal entries for the selected transactions.Sept. 1 - Purchased inventory from Orion Company on account for $50,000. Darby records purchases gross and uses a periodic inventory system.What is a Current Liability?LO 1 Describe the nature, type, and valuation of current liabilities.Sept. 1 Purchases 50,000 Accounts payable 50,000What is a Current Liability?LO 1 Describe the nature, type, and valuation of current liabilities.Oct. 1 Accounts payable 50,000 Notes payable 50,000Interest calculation =Oct. 1 - Issued a $50,000, 12-month, 8% note to Orion in payment of account.Dec. 31 Interest expense 1,000 Interest payable 1,000($50,000 x 8% x 3/12) = $1,000Dec. 31 Interest expense 1,500 Notes payable 1,500What is a Current Liability?LO 1 Describe the nature, type, and valuation of current liabilities.Oct. 1 Cash 75,000 Notes payable 75,000($6,000 x 3/12) = $1,500Interest calculation =Oct. 1 - Borrowed $75,000 from the Shore Bank by signing a 12-month, zero-interest-bearing $81,000 note.Portion of bonds, mortgage notes, and other long-term indebtedness that matures within the next fiscal year.Exclude long-term debts maturing currently if they are to be:Current Maturities of Long-Term DebtWhat is a Current Liability?LO 1 Describe the nature, type, and valuation of current liabilities.Retired by assets accumulated that have not been shown as current assets,Refinanced, or retired from the proceeds of a new debt issue, orConverted into ordinary shares.Exclude from current liabilities if both of the following conditions are met:Short-Term Obligations Expected to Be RefinancedWhat is a Current Liability?LO 2 Explain the classification issues of short-term debt expected to be refinanced.Must intend to refinance the obligation on a long-term basis.Must have an unconditional right to defer settlement of the liability for at least 12 months after the reporting date.LO 2What is a Current Liability?E13-4 (Refinancing of Short-Term Debt): The CFO for Hendricks Corporation is discussing with the company’s chief executive officer issues related to the company’s short-term obligations. Presently, both the current ratio and the acid-test ratio for the company are quite low, and the chief executive officer is wondering if any of these short-term obligations could be reclassified as long-term. The financial reporting date is December 31, 2010. Two short-term obligations were discussed, and the following action was taken by the CFO.Instructions: Indicate how these transactions should be reported at Dec. 31, 2010, on Hendricks’ statement of financial position.LO 2 Explain the classification issues of short-term debt expected to be refinanced.What is a Current Liability?Short-term obligation A: Hendricks has a $50,000 short-term obligation due on March 1, 2011. The CFO discussed with its lender whether the payment could be extended to March 1, 2013, provided Hendricks agrees to provide additional collateral. An agreement is reached on February 1, 2011, to change the loan terms to extend the obligation’s maturity to March 1, 2013. The financial statements are authorized for issuance on April 1, 2011.Liability of $50,000Dec. 31, 2010Statement IssuanceApr. 1, 2011Liability due for paymentMar. 1, 2011Refinance completedFeb. 1, 2011LO 2 Explain the classification issues of short-term debt expected to be refinanced.What is a Current Liability?Short-term obligation A: Hendricks has a $50,000 short-term obligation due on March 1, 2011. The CFO discussed with its lender whether the payment could be extended to March 1, 2013, provided Hendricks agrees to provide additional collateral. An agreement is reached on February 1, 2011, to change the loan terms to extend the obligation’s maturity to March 1, 2013. The financial statements are authorized for issuance on April 1, 2011.Current Liability of $50,000Dec. 31, 2010Since the agreement was not in place as of the reporting date (December 31, 2010), the obligation should be reported as a current liability.LO 2 Explain the classification issues of short-term debt expected to be refinanced.What is a Current Liability?Short-term obligation B: Hendricks also has another short-term obligation of $120,000 due on February 15, 2011. In its discussion with the lender, the lender agrees to extend the maturity date to February 1, 2012. The agreement is signed on December 18, 2010. The financial statements are authorized for issuance on March 31, 2011.Refinance completedDec. 18, 2010Statement IssuanceMar. 31, 2011Liability due for paymentFeb. 15, 2011Liability of $120,000Dec. 31, 2010LO 2 Explain the classification issues of short-term debt expected to be refinanced.What is a Current Liability?Short-term obligation B: Hendricks also has another short-term obligation of $120,000 due on February 15, 2011. In its discussion with the lender, the lender agrees to extend the maturity date to February 1, 2012. The agreement is signed on December 18, 2010. The financial statements are authorized for issuance on March 31, 2011.Refinance completedDec. 18, 2010Non-Current Liability of $120,000Dec. 31, 2010Since the agreement was in place as of the reporting date (December 31, 2010), the obligation is reported as a non-current liability.Amount owed by a corporation to its stockholders as a result of board of directors’ authorization.Dividends PayableWhat is a Current Liability?Generally paid within three months.Undeclared dividends on cumulative preference shares not recognized as a liability.Dividends payable in the form of additional shares are not recognized as a liability. Reported in equity.LO 2 Explain the classification issues of short-term debt expected to be refinanced.Returnable cash deposits received from customers and employees.Customer Advances and DepositsWhat is a Current Liability?May be classified as current or non-current liabilities.LO 2 Explain the classification issues of short-term debt expected to be refinanced.Payment received before delivering goods or rendering services?Unearned RevenuesWhat is a Current Liability?LO 2 Explain the classification issues of short-term debt expected to be refinanced.Illustration 13-2Unearned and Earned Revenue AccountsBE13-6: Sports Pro Magazine sold 12,000 annual subscriptions on August 1, 2010, for $18 each. Prepare Sports Pro’s August 1, 2010, journal entry and the December 31, 2010, annual adjusting entry.What is a Current Liability?LO 2 Explain the classification issues of short-term debt expected to be refinanced.Aug. 1 Cash 216,000 Unearned revenue 216,000 (12,000 x $18) Dec. 31 Unearned revenue 90,000 Subscription revenue 90,000 ($216,000 x 5/12 = $90,000) Retailers must collect sales taxes or value-added taxes (VAT) from customers on transfers of tangible personal property and on certain services and then remit to the proper governmental authority.Sales Taxes PayableWhat is a Current Liability?LO 2 Explain the classification issues of short-term debt expected to be refinanced.BE13-7: Dillons Corporation made credit sales of $30,000 which are subject to 6% sales tax. The corporation also made cash sales which totaled $20,670 including the 6% sales tax. (a) prepare the entry to record Dillons’ credit sales. (b) Prepare the entry to record Dillons’ cash sales.LO 2 Accounts receivable 31,800 Sales 30,000 Sales tax payable ($30,000 x 6% = $1,800) 1,800 Cash 20,670 Sales ($20,670  1.06 = $19,500) 19,500 Sales tax payable 1,170What is a Current Liability?Businesses must prepare an income tax return and compute the income tax payable.Income Tax PayableWhat is a Current Liability?Taxes payable are a current liability.Corporations must make periodic tax payments.Differences between taxable income and accounting income sometimes occur (Chapter 19).LO 2 Explain the classification issues of short-term debt expected to be refinanced.Amounts owed to employees for salaries or wages are reported as a current liability.Employee-Related LiabilitiesWhat is a Current Liability?Current liabilities may include:Payroll deductions.Compensated absences.Bonuses.LO 3 Identify types of employee-related liabilities.Payroll DeductionsWhat is a Current Liability?Taxes:Social Security TaxesIncome Tax WithholdingLO 3 Identify types of employee-related liabilities.Illustration 13-3Summary of Payroll LiabilitiesIllustration: Assume a weekly payroll of $10,000 entirely subject to Social Security taxes (8%), with income tax withholding of $1,320 and union dues of $88 deducted. The company records the wages and salaries paid and the employee payroll deductions as follows.What is a Current Liability? Wages and salaries expense 10,000 Withholding taxes payable 1,320 Social security taxes payable 800 Union dues payable 88 Cash 7,792LO 3 Identify types of employee-related liabilities.Illustration: Assume a weekly payroll of $10,000 entirely subject to Social Security taxes (8%), with income tax withholding of $1,320 and union dues of $88 deducted. The company records the employer payroll taxes as follows.What is a Current Liability? Payroll tax expense 800 Social security taxes payable 800LO 3 Identify types of employee-related liabilities.The employer must remit to the government its share of Social Security tax along with the amount of Social Security tax deducted from each employee’s gross compensation.Compensated AbsencesWhat is a Current Liability?LO 3 Identify types of employee-related liabilities.Paid absences for vacation, illness and maternity, paternity, and jury leaves.Vested rights - employer has an obligation to make payment to an employee even after terminating his or her employment. Accumulated rights - employees can carry forward to future periods if not used in the period in which earned.Non-accumulating rights - do not carry forward; they lapse if not used.Illustration: Amutron Inc. began operations on January 1, 2011. The company employs 10 individuals and pays each €480 per week. Employees earned 20 unused vacation weeks in 2011. In 2012, the employees used the vacation weeks, but now they each earn €540 per week. Amutron accrues the accumulated vacation pay on December 31, 2011, as follows.What is a Current Liability? Wages expense 9,600 Vacation wages payable 9,600LO 3In 2012, it records the payment of vacation pay as follows. Vacation wages payable 9,600 Wages expense 1,200 Cash 10,800What is a Current Liability?LO 3 Identify types of employee-related liabilities.Payments to certain or all employees in addition to their regular salaries or wages.Bonuses paid are an operating expense.Unpaid bonuses should be reported as a current liability. Profit-Sharing and Bonus PlansProvision is a liability of uncertain timing or amount. Reported either as current or non-current liability. Common types are Obligations related to litigation. Warrantees or product guarantees. Business restructurings.Environmental damage.ProvisionsLO 4 Explain the accounting for different types of provisions.Uncertainty about the timing or amount of the future expenditure required to settle the obligation.Companies accrue an expense and related liability for a provision only if the following three conditions are met: Warrantees or product guarantees. Probable that an outflow of resources will be required to settle the obligation; and A reliable estimate can be made.Recognition of a ProvisionLO 4 Explain the accounting for different types of provisions.A reliable estimate of the amount of the obligation can be determined.Recognition of a ProvisionLO 4Recognition ExamplesIllustration 13-4Constructive obligation is an obligation that derives from a company’s actions where:By an established pattern of past practice, published policies, or a sufficiently specific current statement, the company has indicated to other parties that it will accept certain responsibilities; and As a result, the company has created a valid expectation on the part of those other parties that it will discharge those responsibilities.Recognition of a ProvisionRecognition ExamplesLO 4 Explain the accounting for different types of provisions.A reliable estimate of the amount of the obligation can be determined.Recognition of a ProvisionLO 4Recognition ExamplesIllustration 13-5A reliable estimate of the amount of the obligation can be determined.Recognition of a ProvisionLO 4Recognition ExamplesIllustration 13-6How does a company determine the amount to report for a provision?IFRS: Amount recognized should be the best estimate of the expenditure required to settle the present obligation. Best estimate represents the amount that a company would pay to settle the obligation at the statement of financial position date.Measurement of ProvisionsLO 4 Explain the accounting for different types of provisions.Management must use judgment, based on past or similar transactions, discussions with experts, and any other pertinent information.Measurement of ProvisionsMeasurement ExamplesLO 4 Explain the accounting for different types of provisions. Toyota warranties. Toyota might determine that 80 percent of its cars will not have any warranty cost, 12 percent will have substantial costs, and 8 percent will have a much smaller cost. In this case, by weighting all the possible outcomes by their associated probabilities, Toyota arrives at an expected value for its warranty liability.Management must use judgment, based on past or similar transactions, discussions with experts, and any other pertinent information.Measurement of ProvisionsMeasurement ExamplesLO 4 Explain the accounting for different types of provisions. Carrefour refunds. Carrefour sells many items at varying selling prices. Refunds to customers for products sold may be viewed as a continuous range of refunds, with each point in the range having the same probability of occurrence. In this case, the midpoint in the range can be used as the basis for measuring the amount of the refunds.Measurement of the liability should consider the time value of money. Future events that may have an impact on the measurement of the costs should be considered.Measurement of ProvisionsMeasurement ExamplesLO 4 Explain the accounting for different types of provisions. Novartis lawsuit. Large companies like Novartis are involved in numerous litigation issues related to their products. Where a single obligation such as a lawsuit is being measured, the most likely outcome of the lawsuit may be the best estimate of the liability.Common Types:Common Types of ProvisionsLO 4 Explain the accounting for different types of provisions.LawsuitsWarrantiesPremiums EnvironmentalOnerous contractsRestructuringIFRS requires extensive disclosure related to provisions in the notes to the financial statements, however companies do not record or report in the notes general risk contingencies inherent in business operations (e.g., the possibility of war, strike, uninsurable catastrophes, or a business recession).Litigation ProvisionsCommon Types of ProvisionsLO 4 Explain the accounting for different types of provisions.Companies must consider the following in determining whether to record a liability with respect to pending or threatened litigation and actual or possible claims and assessments.Time period in which the underlying cause of action occurred.Probability of an unfavorable outcome.Ability to make a reasonable estimate of the amount of loss.Litigation ProvisionsCommon Types of ProvisionsLO 4 Explain the accounting for different types of provisions.With respect to unfiled suits and unasserted claims and assessments, a company must determine the degree of probability that a suit may be filed or a claim or assessment may be asserted, and the probability of an unfavorable outcome.If both are probable, if the loss is reasonably estimable, and if the cause for action is dated on or before the date of the financial statements, then the company should accrue the liability.BE13-10: Scorcese Inc. is involved in a lawsuit at December 31, 2010. (a) Prepare the December 31 entry assuming it is probable that Scorcese will be liable for $900,000 as a result of this suit. (b) Prepare the December 31 entry, if any, assuming it is not probable that Scorcese will be liable for any payment as a result of this suit.(a) Lawsuit loss 900,000 Lawsuit liability 900,000(b) No entry is necessary. The loss is not accrued because it is not probable that a liability has been incurred at 12/31/10.Common Types of ProvisionsLO 4 Explain the accounting for different types of provisions.Warranty ProvisionsCommon Types of ProvisionsLO 4 Explain the accounting for different types of provisions.Promise made by a seller to a buyer to make good on a deficiency of quantity, quality, or performance in a product.If it is probable that customers will make warranty claims and a company can reasonably estimate the costs involved, the company must record an expense.Two basic methods of accounting for warranty costs:Cash-Basis methodExpense warranty costs as incurred, becauseit is not probable that a liability has been incurred, orit cannot reasonably estimate the amount of the liability.Warranty ProvisionsLO 4 Explain the accounting for different types of provisions.Common Types of ProvisionsTwo basic methods of accounting for warranty costs:Accrual-Basis methodCharge warranty costs to operating expense in the year of sale. Method is the generally accepted method.Referred to as the expense warranty approach.LO 4 Explain the accounting for different types of provisions.Common Types of ProvisionsWarranty ProvisionsCommon Types of ProvisionsBE13-13: Streep Factory provides a 2-year warranty with one of its products which was first sold in 2010. In that year, Streep spent $70,000 servicing warranty claims. At year-end, Streep estimates that an additional $400,000 will be spent in the future to service warranty claims related to 2010 sales. Prepare Streep’s journal entry to record the $70,000 expenditure, and the December 31 adjusting entry.2010 Warranty expense 70,000 Cash 70,00012/31/10 Warranty expense 400,000 Warranty liability 400,000LO 4 Explain the accounting for different types of provisions.Common Types of ProvisionsCompanies should charge the costs of premiums and coupons to expense in the period of the sale that benefits from the plan.Accounting:Estimate the number of outstanding premium offers that customers will present for redemption. Charge cost of premium offers to Premium Expense and credits Premium Liability.LO 4 Explain the accounting for different types of provisions.Premiums and CouponsCommon Types of ProvisionsIllustration: Fluffy Cakemix Company offered its customers a large non-breakable mixing bowl in exchange for 25 cents and 10 boxtops. The mixing bowl costs Fluffy Cakemix Company 75 cents, and the company estimates that customers will redeem 60 percent of the boxtops. The premium offer began in June 2011 and resulted in the transactions journalized below. Fluffy Cakemix Company records purchase of 20,000 mixing bowls as follows.Inventory of Premium Mixing Bowls 15,000 Cash 15,000$20,000 x .75 = $15,000LO 4 Explain the accounting for different types of provisions.Common Types of ProvisionsLO 4Illustration: The entry to record sales of 300,000 boxes of cake mix would be:Cash 240,000 Sales 240,000300,000 x .80 = $240,000Fluffy records the actual redemption of 60,000 boxtops, the receipt of 25 cents per 10 boxtops, and the delivery of the mixing bowls as follows.Cash [(60,000 / 10) x $0.25] 1,500Premium Expense 3,000 Inventory of Premium Mixing Bowls 4,500Computation: (60,000 / 10) x $0.75 = $4,500Common Types of ProvisionsIllustration: Finally, Fluffy makes an end-of-period adjusting entry for estimated liability for outstanding premium offers (boxtops) as follows.Premium Expense 6,000 Premium Liability 6,000LO 4Common Types of ProvisionsA company must recognize an environmental liability when it has an existing legal obligation associated with the retirement of a long-lived asset and when it can reasonably estimate the amount of the liability.Environmental ProvisionsLO 4 Explain the accounting for different types of provisions.Common Types of ProvisionsObligating Events. Examples of existing legal obligations, which require recognition of a liability include, but are not limited to:Decommissioning nuclear facilities,Dismantling, restoring, and reclamation of oil and gas properties,Certain closure, reclamation, and removal costs of mining facilities,Closure and post-closure costs of landfills.LO 4 Explain the accounting for different types of provisions.Environmental ProvisionsCommon Types of ProvisionsMeasurement. A company initially measures an environmental liability at the best estimate of its future costs.LO 4 Explain the accounting for different types of provisions.Environmental ProvisionsRecognition and Allocation. To record an environmental liability a company includes the cost associated with the environmental liability in the carrying amount of the related long-lived asset, and records a liability for the same amount. Common Types of ProvisionsIllustration: On January 1, 2010, Wildcat Oil Company erected an oil platform in the Gulf of Mexico. Wildcat is legally required to dismantle and remove the platform at the end of its useful life, estimated to be five years. Wildcat estimates that dismantling and removal will cost $1,000,000. Based on a 10 percent discount rate, the fair value of the environmental liability is estimated to be $620,920 ($1,000,000 x .62092). Wildcat records this liability on Jan. 1, 2011 as follows.Drilling platform 620,920 Environmental liability 620,920LO 4 Explain the accounting for different types of provisions.Common Types of ProvisionsIllustration: During the life of the asset, Wildcat allocates the asset retirement cost to expense. Using the straight-line method, Wildcat makes the following entries to record this expense.Depreciation expense ($620,920 / 5) 124,184 Accumulated depreciation 124,184December 31, 2011, 2012, 2013, 2014, 2015LO 4 Explain the accounting for different types of provisions.Common Types of ProvisionsIllustration: In addition, Wildcat must accrue interest expense each period. Wildcat records interest expense and the related increase in the environmental liability on December 31, 2011, as follows.Interest expense ($620,092 x 10%) 62,092 Environmental liability 62,092LO 4 Explain the accounting for different types of provisions.December 31, 2011Common Types of ProvisionsIllustration: On January 10, 2016, Wildcat contracts with Rig Reclaimers, Inc. to dismantle the platform at a contract price of $995,000. Wildcat makes the following journal entry torecord settlement of the liability.Environmental liability 1,000,000 Gain on settlement of liability 5,000 Cash 995,000January 10, 2016LO 4 Explain the accounting for different types of provisions.Common Types of Provisions“The unavoidable costs of meeting the obligations exceed the economic benefits expected to be received.”The expected costs should reflect the least net cost of exiting from the contract, which is the lower of the cost of fulfilling the contract, or the compensation or penalties arising from failure to fulfill the contract.LO 4 Explain the accounting for different types of provisions.Onerous Contract ProvisionsCommon Types of ProvisionsLO 4 Explain the accounting for different types of provisions.Onerous Contract ProvisionsIllustration: 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 200,000Common Types of ProvisionsLO 4 Explain the accounting for different types of provisions.Onerous Contract ProvisionsAssume 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 175,000Common Types of ProvisionsLO 4 Explain the accounting for different types of provisions.Restructuring ProvisionsRestructurings 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; orthe 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.Common Types of ProvisionsLO 4 Explain the accounting for different types of provisions.Restructuring ProvisionsIFRS provides specific guidance related to certain costs and losses that should be excluded from the restructuring provision.Illustration 13-9Common Types of ProvisionsLO 4Illustration 13-10Restructuring ProvisionsCommon Types of ProvisionsSelf-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.Self-InsuranceLO 4 Explain the accounting for different types of provisions.Disclosures Related To ProvisionsA 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.LO 4 Explain the accounting for different types of provisions.Contingent LiabilitiesLO 5 Identify the criteria used to account for and disclose contingent liabilities and assets.Contingent liabilities are not recognized in the financial statements because they areA 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. Contingent LiabilitiesIllustration 13-12LO 5 Identify the criteria used to account for and disclose contingent liabilities and assets.Contingent Liabilities GuidelinesContingent AssetsLO 5 Identify the criteria used to account for and disclose contingent liabilities and 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.Contingent AssetsIllustration 13-14LO 5 Identify the criteria used to account for and disclose contingent liabilities and assets.Contingent Asset GuidelinesContingent assets are disclosed when an inflow of economic benefits is considered more likely than not to occur (greater than 50 percent).Presentation of Current LiabilitiesPresentation of Current LiabilitiesUsually reported at their full maturity value.Difference between present value and the maturity value is considered immaterial.LO 6 Indicate how to present and analyze liability-related information.Presentation of Current LiabilitiesLO 6 Indicate how to present and analyze liability-related information.Illustration 13-15Analysis of Current LiabilitiesLiquidity regarding a liability is the expected time to elapse before its payment. Two ratios to help assess liquidity are:LO 6 Indicate how to present and analyze liability-related information.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.Copyright