12.0 Current Liabilities

Learning Objectives

After completing this chapter, you should be able to:

1. Define current liabilities and account for various types of current liabilities.
2. Differentiate between financial and non-financial current liabilities.
3. Explain the accounting treatment of different types of current, financial liabilities.
4. Explain the accounting treatment of different types of current, non-financial liabilities.
5. Discuss the nature of provisions and contingencies and identify the appropriate accounting treatment for these.
6. Discuss the nature of commitments and guarantees and identify the appropriate accounting disclosure for these items.
7. Describe the presentation and disclosure requirements for various types of current liabilities.
8. Use ratio analysis of current liabilities to supplement the overall evaluation of a company’s liquidity.
9. Identify differences in the accounting treatment of current liabilities between IFRS and ASPE.

Introduction

If you recall our discussion about financial statement elements from the review chapter, one of the key components of financial statements identified by the conceptual framework is the liability. The proper management of liabilities is an essential feature of business success. Liabilities can impose legal and operational constraints on a business, and managers need to be prudent and strategic in the management of these obligations. Shareholders and potential investors are also interested in the composition of a company’s liabilities, as the restrictions created by these obligations will have a significant effect on the timing and amount of future cash flows. Creditors, of course, have a direct interest in the company’s liabilities, as they are the ultimate beneficiaries of these obligations. Because of the broad interest in these types of accounts, it is important that the accountant have a thorough understanding of the issues in recognition, measurement, and disclosure of liabilities.

Liabilities can take many forms. The most obvious example would be when a company borrows money from a bank and agrees to repay it later. Another common situation occurs when companies purchase goods on credit, agreeing to pay the supplier within a specified time period. These types of examples are easy to understand, but there are situations where the existence of the liability may not be so clear. When a retail store offers loyalty points to its customers, does this create a liability for the store? Or, when you purchase a new car and the manufacturer offers a five-year warranty against repairs, does this create a liability and, if so, how much should be recorded?

In this chapter we will examine current liabilities, provisions, and contingent liabilities. We will look at the recognition, measurement, and disclosure requirements for these types of accounts. Long-term financial liabilities will be discussed in Chapter 13.

Chapter Organization