INTERMEDIATE

ACCOUNTING
Sixth Canadian Edition
KIESO, WEYGANDT, WARFIELD, IRVINE, SILVESTER, YOUNG, WIECEK

Prepared by
Gabriela H. Schneider, CMA; Grant MacEwan College
 CHAPTER

14
Current Financial and
Other Liabilities
 Learning Objectives
1. Define liabilities and differentiate between financial
and other liabilities.
2. Define current liabilities, describe how they are
valued, and identify common types of current
liabilities.
3. Explain the classification issues of short-term debt
expected to be refinanced.
4. Identify and account for the major types of
employee-related liabilities.
 Learning Objectives
5. Explain the accounting for common estimated
liabilities.
6. Explain the accounting and reporting standards
for loss contingencies.
7. Indicate how financial and other current liabilities
and contingencies are presented and analysed.
 Current Financial and
Other Liabilities
Liabilities Current Liabilities Estimated Contingencies Presentation
Accounts payable Liabilities and Analysis
Liabilities
Notes payable Guarantee and Types of Current
Financial
Current maturities of warranty contingencies liabilities
liabilities
long-term debt obligations Litigation, claims Contingencies
Short-term refinancing Premiums and assessments
coupons Analysis of
Dividends payable Guarantee & current
Returnable deposits warranty costs liabilities
Unearned revenues Premiums and
coupons
Sales taxes
Goods & services tax Environmental
liabilities
Property taxes
Self-insurance
Income taxes
risks
Employee-related
liabilities
Rents and royalties
 Liabilities in General

• Liabilities are:
• Probable future sacrifices of economic
benefits
• Arising from past transactions or events
• To transfer assets or to provide services in
the future
• Defined in Section 1000 of CICA
Handbook
 Liabilities in General
• Three essential characteristics of a liability
1. Obligation to be settled on a determinable date
or on the occurrence of an event, requiring the
transfer or use of an asset or provision of a good
or service
2. There is little or no opportunity to avoid the
obligation
3. Obligation arises from a transaction or event
which has already occurred
 Financial Liabilities

• Obligation to deliver cash or other

financial asset
• Key distinction is the measurement at
historic cost (financial liability) and fair
value (non-financial liability)
 Current Liabilities
• Important for a business to manage
liabilities for:
• their effect on liquidity
• investor & creditor perceptions
• future funding opportunities

• A current liability is defined as:

“Amounts payable within one year from the
date of the balance sheet or within the
normal operating cycle where this is longer
than a year.”
 Current Liabilities
Common current liabilities encountered include:

• Accounts Payable • Sales taxes payable

• Notes payable • Goods and Services
• Current maturities of Tax
long-term debt • Property taxes payable
• Short-term obligations • Income taxes payable
expected to be • Employee-related
refinanced liabilities
• Dividends payable • Rents and royalties
• Returnable deposits payable
• Unearned revenues
 Notes Payable
• Notes payable may be interest-bearing or
zero-interest-bearing (non-interest-bearing)
• In both cases interest expense is accrued
whenever financial statements are prepared
• For zero-interest-bearing notes, the difference
between the present value of the note and
the face value of the note represents the
discount on the note payable
• The discount is the interest expense
chargeable to future periods
 Interest-Bearing
Notes Payable
Given: Journal Entries:
Landscape Corp. March 1:
borrows $100,000 Cash 100,000
Notes Payable 100,000
Signs a 4-month, July 1:
12 percent note on
Notes Payable 100,000
March 1
Interest Expense 4,000
Cash 104,000
(100,000 * 4% * 4/12)
 Zero-Interest-Bearing
Notes Payable
Journal Entries:
Given:
March 1:
Landscape Corp. borrows
Cash 96,293
$100,000 Discount on
Signs a 4-month, zero- Note Payable 3,707
interest-bearing note on Notes Payable 100,000
March 1 PV of $100,000 where
The current market rate n=4/12, i=12% = $96,293
on similar notes is 12 July 1:
percent Notes Payable 100,000
Interest Expense 3,707
Discount on N/P 3,707
Cash 100,000
 Current Maturities of
Long-Term Debt
• The portion of long-term debt maturing
within the next fiscal year is reported as a
current liability
• Long-term debts should not be reported as
current liabilities if:
1. they are retired by assets not classified as
current assets
2. they are refinanced or retired by new issues of
debt, or converted into share capital
• Any liability due on demand is reported as a
current liability
 Short-Term Obligations
Expected to be Refinanced
• Short-term debt must be excluded from
current liabilities if:
• there is intent to refinance on a long-term basis,
and
• the entity demonstrates the ability to complete the
refinancing
• The entity has the ability to refinance if:
• the debt is actually refinanced before issue of the
financial statements, or
• the entity enters into a refinancing agreement
 Employee-Related Liabilities
• Employee-related liabilities are the
following:
• salaries or wages owed to employees at
end of the accounting period
• payroll deductions
• compensated absences
• Bonuses
• Reported as current liabilities
 Employee Payroll Deductions
• Payroll deductions include statutory and
discretionary deductions
• Statutory (mandatory) deductions include:
• Canada (Quebec) Pension Plan [CPP/QPP]
• Employment Insurance (EI)
• Income Tax Withholding (Federal and Provincial)
• Discretionary deductions might include:
• Medical insurance
• Union dues
 Employee Compensated
Absences
• Compensated absences are absences from
employment for which employees are paid
• A liability for such absences must be accrued if:
• employer’s liability relates to services already
rendered by employees
• the liability relates to employee’s vested or
accumulated rights
• payment of the compensation is probable, and
• the amount can be reasonably estimated.
• The liability is recognized in the year it is
earned by employees
 Guarantee and
Warranty Obligations
• Warranty - promise made by a seller to a buyer
to make good on a deficiency (quantity, quality
or performance)
• Warranties entail future “post-sale costs”
• Two methods of accounting for warranty costs
– Cash Basis
– Accrual Basis
• Extended warranty revenues are deferred and
recognized over the life of the warranty contract
 Guarantee and
Warranty Obligations
Cash Basis Accrual Basis
• Warranty costs charged • Used when the warranty
to the period in which the is integral and
costs are paid inseparable part of the
• Acceptable for accounting sale
purposes when: • Warranty expense
– Not likely a liability exists, recognized in the year of
or sale (based on estimate)
– Liability amount cannot be • Warranty liability reported
estimated
for the estimated amount
• Acceptable for income tax of outstanding claims
purposes
 Guarantee and Warranty Costs:
Example
Given:
• Units sold in 2000: 10,000 units at $300
• Expected return rate for repair: 3%
• Expected repair cost per unit:
parts, $5; labor, $10
• Units returned in 2001: 170 units
• Actual repair costs: same as estimated
• The entity has the calendar year as its fiscal
year
Record the warranty expense for 2000
 Guarantee and Warranty Costs:
Example
Estimated warranty costs:
3% of 10,000 units at $15 each = $4,500

Adjusting journal entry (Dec 31, 2000):

Warranty Expense 4,500
Estimated Warranty Liability 4,500

Entry in 2001 (170 units at $15 each):

Estimated Warranty Liability 2,550
Parts Inventory 850
Accrued Payroll 1,700
 Extended Warranties: Example

Refer to the previous example.

• Assume that the seller sold extended
warranties on the 4,000 units as follows:
• $30 per unit for years 2002 and 2003
• Record the sale in 2000 and show
recognition of warranty revenue in 2002
 Extended Warranties: Example

Journal entry in 2000:

Cash 3,120,000
Sales Revenue 3,000,000
Unearned Warranty Revenue 120,000

Journal entry in 2002: (relating to year 2000 sales)

Unearned Warranty Revenue 60,000
Warranty Revenue 60,000
(1/2 of deferred revenue now recognized)
 Contingency: Definition

A contingency is (CICA Handbook, Section

3290):
An existing condition or situation involving
uncertainty as to possible gain (gain
contingency) or loss (loss contingency)…
that will ultimately be resolved when one or
more future events occur or fail to occur
 Loss Contingencies: General

• Loss contingencies involve situations of

possible loss
• A liability incurred as a result of a loss
contingency is a contingent liability
• The likelihood of occurrence of the event may
be:
• Likely (high chance of occurrence)
• Unlikely (remote chance of occurrence)
• Not determinable (a chance or likelihood of the
event occurrence cannot be determined)
 Loss Contingencies: Accrual

• Estimated losses from loss contingencies are

accrued as liabilities if both of the following
conditions are met:
• it is likely that a liability has been incurred, and
• the amount of loss can be reasonably estimated
• It is not necessary that the exact payee or
the exact date of payment be known
 Gain Contingencies
• Gain contingencies are claims or rights to
receive assets; these claims or rights may
eventually become valid
• Examples are:
• Pending litigation whose probable outcome is
favourable
• Possible tax refunds in tax disputes
• Gain contingencies are not accrued
(conservatism)
 Accounting and Reporting
Standard for Loss Contingencies
Probability Loss can be reasonably estimated?
Yes No
Likely Accrue Notes

Not Likely No Disclosure No Disclosure

Not Notes* Notes*

Determinable
* Disclose the nature of the contingency and either an estimate of the
amount or an explanation that an estimate cannot be made
 Litigation, Claims, and
Assessments
• To determine whether a liability should be
recorded, evaluate:
• the time period in which the underlying cause of
action occurred
• the probability of an unfavourable outcome
• the ability to make a reasonable estimate of loss
• To determine the probability of a possible
outcome, evaluate:
• nature of litigation and progress of case
• opinion of legal counsel
• response by management
 Environmental Liabilities
• Environmental liabilities represent
estimated costs to clean-up waste and
toxic sites
• CICA Handbook, Section 3061 requires
that companies must accrue the minimum
expected cost (if reasonably
determinable)
• If not, then a contingent liability may be
required
Analysis of Current Liabilities

Current Ratio: Current Assets_

Current Liabilities

Acid-Test Ratio:
Cash+Marketable securities + Net Receivables
Current Liabilities
 COPYRIGHT
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