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Ebook Intermediate accounting (13th edition): Part 2

(BQ) Part 2 book "Intermediate accounting" has contents: Current liabilities and contingencies; dilutive securities and earnings per share, revenue recognition, accounting for pensions and postretirement benefits, accounting for leases, full disclosure in financial reporting,.and other contents. | 2760T_c13_636-687.qxd 11/11/08 12:48 AM C H A P T E R Page 636 13 CU R R ENT LIAB I LITI ES AN D CO NTI N G ENC I ES 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: Now You See It, Now You Don’t 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, companies cannot accrue anticipated future losses today. German accounting rules are more permissive. They permit companies to report liabilities 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 .