Intermediate_Accounting_Chapter13 - 1460T_c13.qxd...

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CHAPTER THIRTEEN Learning Objectives After studying this chapter, you should be able to: 1 Describe the nature, type, and valuation of current liabilities. 2 Explain the classification issues of short-term debt expected to be refinanced. 3 Identify types of employee-related liabilities. 4 Identify the criteria used to account for and disclose gain and loss contingencies. 5 Explain the accounting for different types of loss contingencies. 6 Indicate how to present and analyze liabilities and contingencies. A look at the liabilities side of the balance sheet of the German company Beru AG Corporation , dated March 31, 2003, shows how international standards are changing the reporting of financial information. Here is how one liability was shown on this date: Anticipated losses arising from pending transactions 3,285,000 euros Do you believe a liability should be reported for such transactions? Anticipated losses means the losses have not yet occurred; pending transactions mean that the condition that might cause the loss has also not occurred. So where is the liability? To whom does the company owe something? Where is the obligation? U.S. GAAP provides guidance on this subject. A company can accrue a liability for a contingency only if an obligation has arisen from a past event, if payment is probable, and if the company can reasonably estimate the obligation. In short, under U.S. GAAP, compa- nies cannot accrue anticipated future losses today. German accounting rules are more permissive. They permit companies to report liabil- ities for possible future events. In essence, the establishment of this general-purpose “liability” provides a buffer for Beru if losses do materialize. If you take a more skeptical view, you might say the accounting rules let Beru smooth its income by charging expenses in good years and reducing expenses in bad years. The story has a happy ending, from a U.S. accounting point of view. As we indicated earlier in the text, European companies switched to International Financial Reporting Stan- dards (IFRS) in 2005. Because IFRS are similar to U.S. GAAP, liabilities like “Anticipated losses from pending transactions” disappear. So when we look at Beru’s 2005 financial state- ments, we find a note stating that the company has reported as liabilities only obligations arising from past transactions that can be reasonably estimated. Now You See It, Now You Don’t 617 CURRENT LIABILITIES AND CONTINGENCIES
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WHAT IS A LIABILITY? The question, “What is a liability?” is not easy to answer. For example, is preferred stock a liability or an ownership claim? The first reaction is to say that preferred stock is in fact an ownership claim, and companies should report it as part of stockholders’ equity. In fact, preferred stock has many elements of debt as well.
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Intermediate_Accounting_Chapter13 - 1460T_c13.qxd...

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