Kim Park (B): Liabilities

9-110-018

REV: JUNE 4, 2010

DAVID HAWKINS

GREGORY MILLER

V.G. NARAYANAN

Kim Park (B): Liabilities

As part of her plan to explore interesting accounting questions with her study group, Kim Park

prepared a set of short case studies dealing with the recognition and measurement of liabilities.1 Kim

knew from her earlier study group discussions that her fellow students expected her to prepare

tentative answers to the questions she would raise in the meeting. In addition, the study group had

encouraged her to illustrate her tentative answers with numerical illustrations using case data.

Prior Knowledge

Kim understood from the background readings assigned for her accounting course that Generally

Accepted Accounting Principles (GAAP) defined liabilities as

“[P]robable 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.”2

Kim also knew under International Financial Reporting Standards (IFRS) that liabilities were

recognized on the balance sheet when

“[I]t is probable that an outflow of resources embodying economic benefits will result from

the settlement of a present obligation and the amount at which the settlement will take place

can be measured reliably.”3

Further, Kim understood from her readings that there was a special set of accounting rules

covering contingent liability recognition and disclosure. Under GAAP, a contingency is an existing

condition involving uncertainty as to possible gain or loss. When a contingency loss exists, it should

be accrued as a liability when both of the following conditions are met: a) at the date of the financial

statements it is probable that an asset has been impaired or a liability has been incurred, and b) the

amount of the loss can be reasonably estimated. If both of these conditions cannot be met, the

1 See “Kim Park (A): Long-lived...