Topic 5 & 6 Current Liabilities, Provisions, and Contingencies
Topic 5 & 6 Current Liabilities, Provisions, and Contingencies
Intermediate Accounting
IFRS Edition
Kieso, Weygandt, and
Warfield
13-1
Learning
LLeeararnnObjectivesinni gg
ObjectOebcjtivvi eses
1. Describe the nature, type, and valuation of current liabilities.
13-2
Current
CuCurrrren Liabilities
enttLLiaiaband Contingencies
biliilitiesties anandd
CoC
onn
itg tence
nin issein
ce
Presentation and
Current Liabilities Provisions Contingencies
Analysis
13-3
What
WhWhis ataa t isLiability?
is aa
LLiaai bbillty
i yt ??
Three essential characteristics:
1. Present obligation.
3. Results in an outflow of
resources (cash, goods,
services).
13-4
What
WhWhaisatatisCurrent
is aaCuCurLiability?
rrerenntt
LLa
itbity
ilabiy??
Current liability is reported if one of two conditions exists:
Cash 100,000
Notes Payable 100,000
Cash 100,000
Notes payable 100,000
13-19
LO 2 Explain the classification issues of short-term
debt expected to be refinanced.
What
WhWhaisatatisCurrent
is aaCuCurLiability?
rrerenntt
LLa
itbity
ilabiy??
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.
13-20 LO 2
What
WhWhaisatatisCurrent
is aaCuCurLiability?
rrerenntt
LLa
itbity
ilabiy??
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.
13-21
LO 2 Explain the classification issues of short-term
debt expected to be refinanced.
What
WhWhaisatatisCurrent
is aaCuCurLiability?
rrerenntt
LLa
itbity
ilabiy??
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.
Since the agreement was not in place as of the reporting
Current Liability
date (December 31, 2010), the obligation should be
of $50,000
reported as a current liability.
Dec. 31, 2010
13-22
LO 2 Explain the classification issues of short-term
debt expected to be refinanced.
What
WhWhaisatatisCurrent
is aaCuCurLiability?
rrerenntt
LLa
itbity
ilabiy??
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.
Dec. 18, 2010 Dec. 31, 2010 Feb. 15, 2011 Mar. 31, 2011
13-23
LO 2 Explain the classification issues of short-term
debt expected to be refinanced.
What
WhWhaisatatisCurrent
is aaCuCurLiability?
rrerenntt
LLa
itbity
ilabiy??
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.
Non-Current
Refinance Liability of Since the agreement was in place as of
$120,000
completed
the reporting date (December 31, 2010),
the obligation is reported as a non-
Dec. 18, 2010 Dec. 31, 2010
current liability.
13-24
LO 2 Explain the classification issues of short-term
debt expected to be refinanced.
What
WhWhaisatatisCurrent
is aaCuCurLiability?
rrerenntt
LLa
itbity
ilabiy??
Dividends Payable
Amount owed by a corporation to its stockholders as a result
of board of directors’ authorization.
13-25
LO 2 Explain the classification issues of short-term
debt expected to be refinanced.
What
WhWhaisatatisCurrent
is aaCuCurLiability?
rrerenntt
LLa
itbity
ilabiy??
Customer Advances and Deposits
Returnable cash deposits received from customers and
employees.
May be classified as current or non-current liabilities.
13-26
What
WhWhaisatatisCurrent
is aaCuCurLiability?
rrerenntt
LLa
itbity
ilabiy??
Unearned Revenues
Payment received before delivering goods or rendering
services? Illustration 13-2
Unearned and Earned
Revenue Accounts
13-27
LO 2 Explain the classification issues of short-term
debt expected to be refinanced.
What
WhWhaisatatisCurrent
is aaCuCurLiability?
rrerenntt
LLa
itbity
ilabiy??
BE13-6: 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.
13-29
LO 2 Explain the classification issues of short-term
debt expected to be refinanced.
What
WhWhaisatatisCurrent
is aaCuCurLiability?
rrerenntt
LLa
itbity
ilabiy??
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.
Cash 20,670
Sales ($20,670 1.06 = $19,500) 19,500
Sales tax payable 1,170
13-30 LO 2
What
WhWhaisatatisCurrent
is aaCuCurLiability?
rrerenntt
LLa
itbity
ilabiy??
Income Tax Payable
Businesses must prepare an income tax return and compute
the income tax payable.
13-31
LO 2 Explain the classification issues of short-term
debt expected to be refinanced.
What
WhWhaisatatisCurrent
is aaCuCurLiability?
rrerenntt
LLa
itbity
ilabiy??
Employee-Related Liabilities
Amounts owed to employees for salaries or wages are
reported as a current liability.
Other than salary, there are two types of employee-related
payments:
1. Contribution made out of the company’s pocket to a fund,
e.g. Employees Provident Fund (EPF) under a defined
contribution plan.
13-32
Theoretically, at the end of each month, an employer should record these
What
WhWhaisatatisCurrent
is aaCuCurLiability?
rrerenntt
LLa
itbity
ilabiy??
13-34
What
WhWhaisatatisCurrent
is aaCuCurLiability?
rrerenntt
LLa
itbity
ilabiy??
Profit-Sharing and Bonus Plans
Payments to certain or all employees in addition to their
regular salaries or wages.
13-36
LO 4 Explain the accounting for different
types of provisions.
Recognition
RRececooggnitofintioaon
Provision
nooffaa
Provo
rs
P
v io
iosiinn
Companies accrue an expense and related liability for a provision
only if the following three conditions are met:
13-37
LO 4 Explain the accounting for different
types of provisions.
Recognition
RRececooggnitofintioaon
Provision
nooffaa
Provo
rs
P
v io
iosiinn
Recognition Examples
A reliable estimate of the amount of the obligation can be determined.
Illustration 13-4
13-38
LO 4
Recognition
RRececooggnitofintioaon
Provision
nooffaa
Provo
rs
P
v io
iosiinn
Recognition Examples
Constructive obligation is an obligation that derives from a
company’s actions where:
13-39
LO 4 Explain the accounting for different
types of provisions.
Recognition
RRececooggnitofintioaon
Provision
nooffaa
Provo
rs
P
v io
iosiinn
Recognition Examples
A reliable estimate of the amount of the obligation can be determined.
Illustration 13-5
13-40
LO 4
Recognition
RRececooggnitofintioaon
Provision
nooffaa
Provo
rs
P
v io
iosiinn
Recognition Examples
A reliable estimate of the amount of the obligation can be determined.
Illustration 13-6
13-41
LO 4
Measurement of Provisions
MMeasureasurement ofof
PPrroovv
niss
o io
inss
How does a company determine the amount to report
for a provision?
IFRS:
13-42
LO 4 Explain the accounting for different
types of provisions.
Measurement of Provisions
MMeasureasurement ofof
PPrroovv
niss
o io
inss
Management must use judgment, based on
past or similar transactions, discussions with
experts, and any other pertinent
information.
3. Premiums 6. Restructuring
13-44
LO 4 Explain the accounting for different
types of provisions.
Common
CCommommTypes
oonnTyof TypProvisions
pesesooff
PPrroovvs
isio
i oi nsns
Litigation 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.
13-45
LO 4 Explain the accounting for different
types of provisions.
Common
CCommommTypes
oonnTyof TypProvisions
pesesooff
PPrroovvs
isio
i oi nsns
Litigation Provisions
With respect to unfiled suits and unasserted claims and
assessments, a company must determine
13-46
LO 4 Explain the accounting for different
types of provisions.
Common
CCommommTypes
oonnTyof TypProvisions
pesesooff
PPrroovvs
isio
i oi nsns
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.
13-48
LO 4 Explain the accounting for different
types of provisions.
Common
CCommommTypes
oonnTyof TypProvisions
pesesooff
PPrroovvs
isio
i oi nsns
Warranty Provisions
Two basic methods of accounting for warranty costs:
Cash-Basis method
► Expense warranty costs as incurred, because
13-49
LO 4 Explain the accounting for different
types of provisions.
Common
CCommommTypes
oonnTyof TypProvisions
pesesooff
PPrroovvs
isio
i oi nsns
Warranty Provisions
Two basic methods of accounting for warranty costs:
Accrual-Basis method
► Charge warranty costs to operating expense in the
year of sale.
► Method is the generally accepted method.
► Referred to as the expense warranty approach.
13-50
LO 4 Explain the accounting for different
types of provisions.
Common
CCommommTypes
oonnTyof TypProvisions
pesesooff
PPrroovvs
isio
i oi nsns
BE13-13: 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.
12/31/10 liability
400,000
13-51
LO 4 Explain the accounting for different
types of provisions.
Common
CCommommTypes
oonnTyof TypProvisions
pesesooff
PPrroovvs
isio
i oi nsns
Premiums and Coupons
Companies 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.
13-52
LO 4 Explain the accounting for different
types of provisions.
Common
CCommommTypes
oonnTyof TypProvisions
pesesooff
PPrroovvs
isio
i oi nsns
Illustration: 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.
13-53
LO 4 Explain the accounting for different
types of provisions.
Common
CCommommTypes
oonnTyof TypProvisions
pesesooff
PPrroovvs
isio
i oi nsns
Illustration: The entry to record sales of 300,000 boxes of cake mix
would be: 300,000 x .80 = $240,000
Cash 240,000
Sales
240,000
13-55 LO 4
Common
CCommommTypes
oonnTyof TypProvisions
pesesooff
PPrroovvs
isio
i oi nsns
Environmental Provisions
A 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.
13-56
LO 4 Explain the accounting for different
types of provisions.
Common
CCommommTypes
oonnTyof TypProvisions
pesesooff
PPrroovvs
isio
i oi nsns
Environmental Provisions
Obligating 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.
13-57
LO 4 Explain the accounting for different
types of provisions.
Common
CCommommTypes
oonnTyof TypProvisions
pesesooff
PPrroovvs
isio
i oi nsns
Environmental Provisions
Measurement. A company initially measures an
environmental liability at the best estimate of its future costs.
13-58
LO 4 Explain the accounting for different
types of provisions.
Common
CCommommTypes
oonnTyof TypProvisions
pesesooff
PPrroovvs
isio
i oi nsns
Illustration: 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.
13-60
LO 4 Explain the accounting for different
types of provisions.
Common
CCommommTypes
oonnTyof TypProvisions
pesesooff
PPrroovvs
isio
i oi nsns
Illustration: 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.
13-61
LO 4 Explain the accounting for different
types of provisions.
Common
CCommommTypes
oonnTyof TypProvisions
pesesooff
PPrroovvs
isio
i oi nsns
Illustration: 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
to record settlement of the liability.
13-62
LO 4 Explain the accounting for different
types of provisions.
Common
CCommommTypes
oonnTyof TypProvisions
pesesooff
PPrroovvs
isio
i oi nsns
Onerous Contract 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
13-63
LO 4 Explain the accounting for different
types of provisions.
Common
CCommommTypes
oonnTyof TypProvisions
pesesooff
PPrroovvs
isio
i oi nsns
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.
13-65
LO 4 Explain the accounting for different
types of provisions.
Common
CCommommTypes
oonnTyof TypProvisions
pesesooff
PPrroovvs
isio
i oi nsns
Restructuring Provisions
Restructurings are defined as a “program that is planned and
controlled by management and materially changes either
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.
13-66
LO 4 Explain the accounting for different
types of provisions.
Common
CCommommTypes
oonnTyof TypProvisions
pesesooff
PPrroovvs
isio
i oi nsns
Restructuring Provisions
IFRS provides specific guidance related to certain costs and losses
that should be excluded from the restructuring provision.
Illustration 13-9
13-67
LO 4 Explain the accounting for different
types of provisions.
Common
CCommommTypes
oonnTyof TypProvisions
pesesooff
PPrroovvs
isio
i oi nsns
Restructuring Provisions
Illustration 13-10
13-68
LO 4
Disclosures
DisclDiscloosuresRelated
sures RTo
ReProvisions
elata
lteded
TToo PrrPoovvns
o
inisis
o
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.
13-69
LO 4 Explain the accounting for different
types of provisions.
Contingent
CoConnttiningen Liabilities
gentt
LLiiababilliiteeitiss
Contingent liabilities (MFRS 137) are not recognized in the
financial statements because they are
13-70
LO 5 Identify the criteria used to account for and
disclose contingent liabilities and assets.
Contingent
CoConnttiningen Liabilities
gentt
LLiiababilliiteeitiss
Contingent Liabilities Guidelines
Illustration 13-12
13-71
LO 5 Identify the criteria used to account for and
disclose contingent liabilities and assets.
Contingent Assets
CoConnttinging enentt
AAssses
tstes
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:
13-72
LO 5 Identify the criteria used to account for and
disclose contingent liabilities and assets.
Contingent Assets
CoConnttinging enentt
AAssses
tstes
Contingent Asset Guidelines
Illustration 13-14
13-73
LO 5 Identify the criteria used to account for and
disclose contingent liabilities and assets.
Presentation ofioCurrent
PPrresentatesentat ionn ooff Liabilities
CuCurrrerennttLLteia
islb
tsb
ialii
e
Presentation of Current Liabilities
Usually reported at their full maturity value.
Difference between present value and the maturity
value is considered immaterial.