Non-current liability for asbestos payments:2002 report: $A94.4 million2003 report: $A0!2007 report: $A1,614.2 million2008 report: $A1,718.7 million2008: ASIC commenced civil action against former directors (failure to discharge duties with duecare and diligence)2009: 10 Directors found guilty and given disqualifications of 5 – 15 years and fines of $30,000 -$350,0002009 report: $A1,755.4 million2010 report: $A1,651.5 million2011 report: $US1,587.0 million……..but wait, there’s more..
James Hardie (JHX)An old case but a good case…it is still ongoing! (2)•2012 report: $US1,662.6 million•2013 report: $US1,558.7 million•2014 report: $US1,571.7 million•Mesothelioma claims are still at peak levels of 400 per year and willremain there until 2016-2017 when they will start to decline•Claims are rising, but payouts are falling – Why?–Claims relate to exposure during the period from 1986 onwards–Claimants are ageing – 60% are older than 70 years oldContingent liabilities will continue to appear on James Hardie’s BalanceSheet for many more years to come.
Why are Liabilities Important?•The way that a company measures and discloses itsliabilities is important to its continuing survival•Legal contracts and agreements can put conditions onthe company’s debt–E.g. specify maximum levels of debt, minimum levels of performance•Influence on financial ratios and debt covenants
A liability is defined as (Conceptual Framework, para 49):“apresent obligationof the entity arising frompast events, the settlement of whichis expected to result inan outflowfrom the entityof resources embodyingeconomic benefits”Three essential characteristics:1.Apresent obligation•Duty or responsibility to act in a certain way•More than just a commitment/intention2.Arising from a past event•E.g. purchase of supplies/services3.Expected to result in an outflow of economic resources•Little discretion in avoiding this outflowLiabilities Defined
Recognition of LiabilitiesA liability should be recognised in the Statement ofFinancial Position when (Conceptual Framework, para 91):•It isprobablethat an outflow of resources embodyingeconomic benefits will result from settling the presentobligation,and•The amount at which the settlement will take place can bemeasured reliablyAn item MUST satisfy BOTH the definition and recognitioncriteria!
Test Yourself…Liability definition criteria: Pick the correct 3!Future disposition of economic benefitsFuture disposition of economic benefits to other entitiesLots of money is owedPast transaction or event created the obligationThe amount of money owed can be determinedPast obligationPast or anticipated transaction or event created the obligationMoney is owedPresent obligation
Test Yourself…Liability recognition criteria: Pick the correct 2!The amount of the liability can be measured reliablyThe amount of the liability can be known exactlyThe liability can be expressed in monetary termsIt’s highly likely that future economic benefits will flow from the entityIt’s certain that future economic benefits will flow from the entityThe liability can be expressed as a percentage of assetsIt’s probable that future economic benefits will flow from the entity
Woolworths LimitedLiabilities on the Balance SheetStatement of Financial Position as at 30 June 2014
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