Liabilities

10 Key excerpts on "Liabilities"

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  eBook - ePub

  Fraud in Financial Statements

  • Julie E. Margret, Geoffrey Peck(Authors)
  • 2014(Publication Date)
  • Routledge

    (Publisher)

  Financial Obligations Liabilities

  The Liabilities of a business include all debt owed by it, and such other obligations as it is [or may be] legally liable for. (Bentley, 1911, p. 22)

  Liabilities in Context

  Liabilities are considered herein with regard to the fundamentals of debt. This provides the foundation to explore opportunities where Liabilities, debt, or other obligations might be drivers of fraud in financial statements. Hence we include case studies, both anecdotal and evidence based, to illustrate possible links. Basically the concept of a liability, as an obligation, is straightforward. On the other hand, a liability may be conditional and so take many forms. It is sometimes when the apparently uncomplicated becomes somewhat complicated that irregularities likely occur.

  Essentially in a commercial situation a liability is a debt owed by one party to another. It incorporates a duty to meet an agreed responsibility. Thus a liability may be in the form of a legal debt or, a casual agreement or, it might be provisional on a change in circumstance. The financial amount of the debt may be absolute, in accord with a contract between agreed parties. Alternatively the amount owed may be contingent upon a future and currently unknown happening. Martin (1984) explained Liabilities, debt, and obligations as a factor of legal standing; that ‘[s]ince Liabilities are not necessarily legal debts, they are [also] defined as obligations’ (p. 358).

  An obligation may be multifaceted. Clearly, it may be a duty to pay money to another party for goods and/or services rendered. More broadly however, an obligation is a commitment to do, or to provide, ‘something’ for another. It involves a sense of duty to act. Part of the responsibilities of a business entity is to inform its stakeholders about the outcomes, financial and non-financial, of its business activities. In that context the entity is obliged, morally and/or legally, to disclose certain facts about its business deals. The latter could be directly of a monetary nature or more indirectly of an environmental nature.

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  Accounting, 11th Edition

  • John Hoggett, John Medlin, Keryn Chalmers, Claire Beattie, Andreas Hellmann, Jodie Maxfield(Authors)
  • 2020(Publication Date)
  • Wiley

    (Publisher)

  16.1 Liabilities defined LEARNING OBJECTIVE 16.1 Define Liabilities. As previously noted, Liabilities are defined in accounting standards and in the AASB Conceptual Framework for Financial Reporting (para. 4.26) as ‘A liability is a present obligation of the entity to transfer an economic resource as a result of past events’. Further, for a liability to exist the following three criteria must be satisfied: (a) the entity has an obligation; (b) the obligation is to transfer an economic resource; (c) the obligation is a present obligation that exists as a result of past events (Conceptual Framework, para. 4.27). Obligation An entity has an obligation when it has a duty or responsibility, which it cannot avoid. Liabilities generally arise from contractual arrangements voluntarily entered into by the entity. Obligations to supply goods paid for in advance, for borrowings, for services provided by employees and other award benefits owing to them, and for plant and equipment purchased are all examples of transactions arising from contractual property arrangements. Most obligations are evidenced by formal documentation such as contracts or other documents which establish a present obligation. An entity can also have obligations imposed on it by external factors such as when it becomes liable for damages under a lawsuit or for employee or customer compensation claims, or when government taxes and charges are assessed or imposed. As well as a legal obligation that arises from contracts, legislation or other operations of the law, such as those just discussed, a constructive obligation may give rise to a liability. A constructive obligation is when the past practices of an entity, its published policies or a specific current statement indicate that it will accept responsibility for certain actions, and so it becomes reasonable for others to assume the entity will fulfil those responsibilities.

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  Financial Accounting, P-eBK

  • John Hoggett, John Medlin, Keryn Chalmers, Claire Beattie, Andreas Hellmann, Jodie Maxfield(Authors)
  • 2020(Publication Date)
  • Wiley

    (Publisher)

  16.1 Liabilities defned LEARNING OBJECTIVE 16.1 Defne Liabilities. As previously noted, Liabilities are defined in accounting standards and in the AASB Conceptual Framework for Financial Reporting (para. 4.26) as ‘A liability is a present obligation of the entity to transfer an economic resource as a result of past events’. Further, for a liability to exist the following three criteria must be satisfied: (a) the entity has an obligation; (b) the obligation is to transfer an economic resource; (c) the obligation is a present obligation that exists as a result of past events (Conceptual Framework, para. 4.27). Obligation An entity has an obligation when it has a duty or responsibility, which it cannot avoid. Liabilities generally arise from contractual arrangements voluntarily entered into by the entity. Obligations to supply goods paid for in advance, for borrowings, for services provided by employees and other award benefits owing to them, and for plant and equipment purchased are all examples of transactions arising from contractual property arrangements. Most obligations are evidenced by formal documentation such as contracts or other documents which establish a present obligation. An entity can also have obligations imposed on it by external factors such as when it becomes liable for damages under a lawsuit or for employee or customer compensation claims, or when government taxes and charges are assessed or imposed. As well as a legal obligation that arises from contracts, legislation or other operations of the law, such as those just discussed, a constructive obligation may give rise to a liability. A constructive obligation is when the past practices of an entity, its published policies or a specific current statement indicate that it will accept responsibility for certain actions, and so it becomes reasonable for others to assume the entity will fulfil those responsibilities.

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  Financial Accounting in an Economic Context

  • Jamie Pratt, Michael F. Peters(Authors)
  • 2016(Publication Date)
  • Wiley

    (Publisher)

  Current Liabilities include primarily short-term payables to suppliers, employees, banks, and others. Long-term Liabilities relate to long-term notes, bonds, leases, retirement costs, and deferred income taxes. This chapter introduces Liabilities in general and covers the methods used to account for current Liabilities and contingent Liabilities, which can be either current or long term. Accounting for retirement costs and deferred income taxes is briefly reviewed in Appendi- ces 10A and 10B, respectively. Chapter 11 is devoted to long-term notes, bonds, and leases. These three Liabilities are covered in a single chapter because the same basic method, called the effective interest method, is used to account for them. What Is a Liability? The FASB has defined Liabilities as “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.” The board commented further that all liabili- ties appearing on the balance sheet should have three characteristics in common: (1) They should be present obligations that entail settlements by probable future transfers or uses of cash, goods, or services; (2) they should be unavoidable obligations; and (3) the transaction or event obligat- ing the enterprise must have already happened. 1 While the FASB’s definition makes the measurement of most Liabilities relatively straight- forward, the Liabilities listed on the balance sheet do encompass a wide variety of items, includ- ing credit balances with suppliers, debts from borrowings, services yet to be performed, with- holdings from employees’ wages and salaries, dividend declarations, product warranties, deferred income taxes, and a number of complex financing arrangements.

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  Balance of Payments Manual, Sixth Edition

  • International Monetary Fund(Author)
  • 2010(Publication Date)
  • INTERNATIONAL MONETARY FUND

    (Publisher)

  CHAPTER 5 Classifications of Financial Assets and Liabilities 5.1 This chapter discusses the classifications of financial assets and Liabilities used in the international accounts. These classifications are applied to positions, the associated income and financial account transactions, and other changes involving financial assets and Liabilities. Classifications are used to group similar components and to separate components with different characteristics. The international accounts functional categories and their relationship to the instruments classification are discussed in Chapter 6. A. Definitions of Economic Assets and Liabilities 1. Economic assets in general 5.2 Economic assets are resources over which ownership rights are enforced and from which future economic benefits may flow to the owner. They include fixed assets, such as equipment and research and development, that are used repeatedly or continuously in production over more than one year. They also include inventories, valuables, nonproduced assets, and financial assets. 5.3 Every economic asset has an owner. The economic owner of the asset is the party who has the risks and rewards of ownership. Rewards of ownership usually include the right to use, rent out, or otherwise generate income, or to sell the asset. The risks include the potential losses caused by damage, theft, and holding losses; that management, transfer, or maintenance costs are greater than anticipated; and, in the case of financial assets, default of the counterparty. Ownership may be subject to costs such as maintenance and taxes. Usually, the economic owner is the same as the legal owner, but they may differ in cases such as financial leases. Under some legal arrangements, elements of the risks and rewards are split between different parties, so it is necessary to identify which party has the bulk of risks and rewards to identify the economic ownership

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  Financial Reporting Standards

  • David T. Doran(Author)
  • 2012(Publication Date)
  • Business Expert Press

    (Publisher)

  CHAPTER 5 Liabilities: Current, Contingent, and Long-Term Debt Introduction

  In this chapter we initially discuss Liabilities and related issues in general . The topic of leases is covered in the next chapter. Debt instruments are discussed from the borrower’s perspective here, but the same concepts apply from the lender’s perspective, which will be discussed in chapter 7 —Investments. Recall from chapter 1 that in financial analysis Liabilities are compared with assets in order to assess a firm’s liquidity, solvency, and financial flexibility. As we discussed in chapter 1 , Liabilities are the opposite of assets and represent “probable future economic sacrifices as a result of past transactions and events.“ Although the “future sacrifice” typically requires cash payment (e.g., accounts payable, taxes payable, salaries and wages payable, etc.), it may require providing goods or services (i.e., unearned revenue). An understanding of the accrual accounting principles (revenue and expense recognition) is necessary to comprehend liability recognition. Under the accrual basis of accounting, revenue is included in the income statement of the period earned (regardless of when the cash is received) and costs associated with revenue of the income statement period are expensed (regardless of when the cash is paid).

  Executory contracts (also called unexecuted contracts) are those where parties each agree to provide consideration (something of worth) in the future, but neither party has provided anything yet. Executory contracts are generally not considered to constitute “past transactions or events,” and therefore are not typically recognized in the financial statements. For example, if a corporation enters into a contract with its CEO to provide $12 million in exchange for her services during the next fiscal year, nothing

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  eBook - ePub

  Financial Accounting

  An IFRS Perspective in Romania

  • Adriana Duțescu(Author)
  • 2019(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  measurement ), with some differentiation to be highlighted further.

  A liability consists of an obligation to an outside party arising from past transactions or events for the settlement of which cash or other assets are needed (IFRS Conceptual framework, par. 4.46).

  There are different ways to classify Liabilities , based on different criteria:

  • by nature criteria, that splits Liabilities into financial and operating ;
  • by settlement date criteria, that generates current & non -current Liabilities ;
  • by source of funds : that depicts debt capital & equity capital.

  7.2 Classification of Liabilities and Receivables

  The Balance Sheet disclosure of Liabilities is based upon the classification of “current” vs “non-current Liabilities ” (that applies also to assets ), originated in the IAS/IFRS framework but also used by the US GAAP and the Romanian accounting framework. A current liability is an obligation due in 12 months’ time that (IAS 1, proposed amendments):

  • is expected to be settled in the normal operation cycle;
  • is primarily for trading purposes;
  • does not have an unconditional right at the end of the reporting period to defer the settlement of the liability for at least twelve months after the reporting period.

  All the other Liabilities are classified as long-term or non-current Liabilities .

  A receivable is a claim to an outside party, as a result of past events, from which future economic benefits are expected to flow in the form of cash or other assets . Receivables are meeting the assets’ definition (see Chapter 3 ) and the current assets’ characteristics: the expectation to be realized in the normal operating cycle of the entity, within 12 months (IAS 1, par. 1.66).

  Entities and individuals in connection with Liabilities are named creditors

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  The Simplified Guide to Not-for-Profit Accounting, Formation, and Reporting

  • Laurence Scot(Author)
  • 2010(Publication Date)
  • Wiley

    (Publisher)

  CHAPTER 7

  Liabilities and Net Assets—Concepts and Data Flow

  Liabilities, as previously defined, are organizational obligations—something the organization owes to another entity. Liabilities are listed on the statement of financial position according to their nearness to maturity or need to be satisfied with cash. For example, amounts owed to vendors (i.e., accounts payable) would be listed first because they are usually paid within a number of months. The most common NFP liability categories include the following:

  • Accounts payable • Accrued Liabilities • Loans and notes payable • Deferred revenue • Refundable advances • Other Liabilities (e.g., scholarship payable, due to employees)

  Accounts Payable and Accrued Expenses

  Accounting Concepts—Accounts Payable

  Accounts payable is defined as “obligations to pay for goods and services that have been acquired on open account.” Processing accounts payable is one of the most basic tasks performed by the accounting department of every NFP organization. This is also one of the most understood and least complicated areas of accounting, because most people, even non-accountants, understand the concept of paying for goods and services on a timely basis. GAAP requires NFPs to maintain their accounting records on the accrual basis of accounting, which calls for recognizing all Liabilities when incurred rather than when paid. At what point is a vendor invoice a liability?

  When the organization is legally liable for the obligation. However, this is not always clear. Should it be?

  • The date the invoice is prepared (i.e., invoice date). • The date the invoice is received. • The due date stated on the invoice.

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  eBook - PDF

  Using Financial Accounting

  • Carl Warren, Jeff Jones, Amanda Farmer, , Carl Warren, Carl Warren, Jeff Jones, Amanda Farmer(Authors)
  • 2021(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Chapter 9 Liabilities However, lowering the income will have the opposite effect. For example, if income is lowered to $440,000 Alternatives One and Two become more attractive to common stock- holders. This is shown in Exhibit 3. In Exhibit 3, earnings per share is lowest for Alternative Three because the income must first be used to pay bond interest and preferred stock dividends. What’s left then becomes available to common stockholders. In addition to earnings per share, a corporation should consider other factors in decid- ing among the financing plans. For example, if bonds are issued, periodic interest and the face value of the bonds at maturity must be paid. If these payments are not made, the bondholders could seek court action and force the company into bankruptcy. In contrast, a corporation is not legally obligated to pay dividends on preferred or common stock. Current Liabilities Liabilities are debts owed to others called creditors. Liabilities that are to be paid out of current assets and are due within a short time are reported as current Liabilities on the balance sheet. Liabilities due beyond one year are classified as long-term Liabilities. When a long-term liability becomes due within one year, it is reclassified as a current liability. Accounts Payable and Accruals Accounts payable transactions have been described and illustrated in earlier chapters. These transactions involve a variety of purchases on account, including the purchase of merchandise and supplies.

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  Financial Accounting Theory and Analysis

  Text and Cases

  • Richard G. Schroeder, Myrtle W. Clark, Jack M. Cathey(Authors)
  • 2020(Publication Date)
  • Wiley

    (Publisher)

  Assets have future economic benefit. Liabilities and equity provide resources (capital) for the acquisition of assets. The amount of Liabilities a firm has relative to equity is termed the firm’s capital structure. In current accounting practice, Liabilities and equity are treated as separate and distinct ele- ments of the firm’s capital structure. This distinction is apparent in the fundamental accounting equation Assets Liabilities Equity = + Accordingly, Liabilities and equity are both claimants to enterprise assets, but equity rep- resents an ownership interest, whereas Liabilities are creditor claims. These interests are differ- ent, and their separate disclosure is relevant to decision makers who rely on published financial information. 2 Theories of equity postulate how the balance sheet elements are related, and they have implications for the definitions of both Liabilities and equity. The two prominent theories of equity—entity theory and proprietary theory—imply unique relationships among assets, liabil- ities, and equity. The entity theory depicts the accounting equation as Assets Equities = According to the entity theory, there is no fundamental difference between Liabilities and owners’ equity. 3 Both provide capital to the business entity and receive income in return in the THE DEFINITION OF Liabilities Long-Term Liabilities CHAPTER 11 1 See Robert S. Hamada, “The Effect of the Firm’s Capital Structure on the Systematic Risk of Common Stocks,” Journal of Finance (March 1969): 13–31; and Mark E. Rubinstein, “A Mean‐Variance Synthesis of Corporate Financial Theory,” Journal of Finance (May 1973): 167–181. 2 See Myrtle W. Clark, “Entity Theory, Modern Capital Structure Theory, and the Distinction between Debt and Equity,” Accounting Horizons (September 1993): 14–31. 3 William A. Paton, Accounting Theory (New York: Ronald Press, 1922), 73. 338 CHAPTER 11 Long-Term Liabilities form of interest and dividends.

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