PRODUCT WARRANTIES AND GUARANTEES
The contingent liability for product warranties almost always
is accrued.
Caldor Health, a supplier of in-home health care products,
introduced a new therapeutic chair carrying a 2-year warranty
T13-13
16-20 Intermediate Accounting, 8/e
SUBSEQUENT EVENTS
If information becomes available that sheds light on a
contingency that existed when the fiscal year ended, that
UNASSERTED CLAIMS AND ASSESSMENTS
It must be probable that an unasserted claim or assessment or
an unfiled lawsuit will occur before considering whether and
how to report the possible loss.
Example: The EPA is in the process of investigation possible
violations of clean air laws at a company’s factory, but has
T13-15
16-22 Intermediate Accounting, 8/e
GAIN CONTINGENCIES
Uncertain situations that might result in a gain.
T13-16
INTERNATIONAL FINANCIAL REPORTING STANDARDS
Contingencies. Loss Contingencies. Accounting for contingencies is part of a
broader international standard, IAS No. 37, “Provisions, Contingent Liabilities and
Contingent Assets.” Overall, accounting for contingent losses under IFRS is quite
similar to accounting under U.S. GAAP. A contingent loss is accrued if it’s both
probable and can be reasonably estimated, and disclosed if it’s of at least a remote
probability. However, there are some important differences:
• IFRS refers to accrued liabilities as “provisions,” and refers to possible obligations
that are not accrued as “contingent liabilities.”
• IFRS requires disclosure (but not accrual) of two types of contingent liabilities:
(1) possible obligations whose existence will be confirmed by some uncertain
future events that the company does not control, and (2) a present obligation for
which either it is not probable that a future outflow will occur or the amount of the
future outflow cannot be measured with sufficient reliability.
• IFRS defines “probable” as “more likely than not” (greater than 50%), which is a
T13-17
16-24 Intermediate Accounting, 8/e
DECISION-MAKERS’ PERSPECTIVE
Current liabilities impact a company’s liquidity. Liquidity
refers to a company’s cash position and overall ability to
obtain cash in the normal course of business.
DECISION-MAKERS’ PERSPECTIVE (continued)
It’s important to remember that each ratio is but one piece of
the puzzle.
T13-18 (continued)
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1. Business Scenario
Outpost Healthcare, Inc. provides long-term healthcare services primarily through the operation
of nursing centers and hospitals. It operates 380 nursing centers, with 45,627 licensed beds in 35
states, and a rehabilitation therapy business. The following news release appeared in March 2016.
OUTPOST HEALTHCARE ANNOUNCES FISCAL 2015 RESULTS
Company Provides Operating Guidance for Fiscal 2016
Hall, Indiana. (March 5, 2016) – Outpost Healthcare, Inc. (the “Company”) (NASDAQ: OUTP)
today announced its operating results for the fourth quarter and fiscal year ended December 31,
2015.
Revenues for the fourth quarter of 2015 grew 7% to $689 million compared to $644 million in the
fourth quarter last year, and net income from operations for the current quarter totaled $15.1 million
or $0.74 per diluted share. Operating results for the fourth quarter of 2015 included an unusual
pretax gain of $3.1 million ($2.3 million net of tax or $0.06 per diluted share) recorded in connection
with the resolution of a loss contingency related to a partnership interest.
Suggestions:
Have the class consider how Outpost might have recorded a gain “in connection with the
resolution of a loss contingency the loss contingency.” What might have led to the loss contingency
being recorded? How did they record it? How would the gain be recorded?
2. Real World Scenario
The following represents a portion of an actual press release:
Mon Aug 10, 2009 6:12 pm EDT
WARRENVILLE, Ill. -(Business Wire)-
Fuel Tech, Inc. (NASDAQ: FTEK), a world leader in advanced engineering solutions for optimization of
combustion systems and emissions control in utility and industrial applications, today reported results for the
three- and six-month periods ended June 30, 2009.
Second-Quarter 2009
…The Air Pollution Control technology segment (APC segment) generated revenues of $9.2 million, a
decrease of 12% versus the second quarter of 2008. This segment continues to feel the effects of deferred
capital investment by electric utilities and other industrial customers as the combination of an economic
slowdown, reduced electricity demand, shortfalls in cash generation by power providers and ongoing
uncertainty over the ultimate outcome of the Clean Air Interstate Rule (CAIR) served to depress outlays for
NOx control systems. Segment gross margins were 49% versus the 46% reported in the second quarter of
2008. Contributing to the increase was a partial reversal of the first-quarter 2009 contingent loss provision on
an APC contract, which has now been resolved.
Suggestions:
Have the class consider the effect of the loss contingency. What motivated Fuel Tech to reverse
the loss contingency? (Resolution of the contingency at a reduced amount.) How did they record it?
FUEL TECH REPORTS SECOND-QUARTER 2009 RESULTS
16-28 Intermediate Accounting, 8/e
3. PetSmart Analysis
Have students, individually or in groups, go to the most recent PetSmart annual report at PetSmart’s
web site at: www.PetSmart.com/. Ask them to:
1. Compare accounts payable, accrued expenses, and other current liabilities with those in the
annual report that came with the textbook. Are there any discernible trends? How might they
be interpreted?
2. Determine what contingencies are reported in the disclosure notes. Are any accrued?
4. Professional Skills Development Activities
The following are suggested assignments from the end-of-chapter material that will help your
students develop their communication, research, analysis, and judgment skills.
Communication Skills. In addition to Communication Cases 13-7, 13-8, 13-10, and 13-12,
Judgment Case 13-9 can be adapted to ask students to write a memo to the “veteran Board
Research Skills. In their professional lives, our graduates will be required to locate and extract
relevant information from available resource material to determine the correct accounting
Analysis Skills. The “Broaden Your Perspective” section includes Analysis Cases that direct
students to gather, assemble, organize, process, or interpret date to provide options for making
Judgment Skills. The “Broaden Your Perspective” section includes Judgment Cases that require
students to critically analyze issues to apply concepts learned to business situations in order to
5. Ethical Dilemma
Consider the following ethical dilemma:
ETHICAL DILEMMA
You are Chief Financial Officer of Camp Industries. Camp is the defendant in a $44 million
class action suit. The company’s legal counsel informally advises you that chances are remote that
the company will emerge victorious in the lawsuit. Counsel feels the company will probably lose
$30 million. You recall that a loss contingency should be accrued if a loss is probable and the
amount can reasonably be estimated. A colleague points out that, in practice, accrual of a loss
contingency for unsettled litigation is rare. After all, disclosure that management feels it is
probable that the company will lose a specified dollar amount would be welcome ammunition for
the opposing legal counsel. He suggests that a loss not be recorded until after the ultimate
settlement has been reached. What do you think?
You may wish to discuss this in class. If so, discussion should include these elements.
Step 1 ⎯The Facts:
Camp Industries is the defendant in a $44 million class action suit. Legal Counsel believes that
the company will not win the lawsuit and will probably lose $30 million. GAAP mandates that a
Step 2 ⎯The Ethical Issue and the Stakeholders:
The ethical issue or dilemma is whether your obligation to protect company interests in the
lawsuit is greater than your obligation to provide full disclosure of relevant information to users of
Step 3 ⎯Values:
16-30 Intermediate Accounting, 8/e
Step 4 ⎯Alternatives:
1. Omit the recognition of the probable loss as a contingent liability on the balance sheet.
Step 5 ⎯Evaluation of Alternatives in Terms of Values:
1. Alternative 1 illustrates loyalty to protecting company interests during the trial.
Step 6 ⎯Consequences:
Alternative 1
Positive Consequences: Opposing legal counsel will not learn about the company’s estimation
of the loss. Positive litigation outcome, though unlikely, will not be hurt.
Negative Consequences: Users of the financial statements would not receive full disclosure.
Alternative 2
Positive Consequences: Users of financial statements would become fully informed of the
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Learning Est. time
Questions Objective(s) Topic (min.)
13-1
13-01
Essential characteristics of liabilities
5
13-2
13-01
Distinguish current from long-term liabilities
5
13-3
13-01
Measurement of current liabilities
5
13-4
13-02
Line of credit
5
13-5
13-02
Noninterest-bearing notes
5
13-6
13-02
Commercial paper
5
13-7
13-03
Accrued salaries
5
13-8
13-03
Compensated absenses
5
13-9
13-03
Refundable deposits and customer advances
5
13-03
Gift cards
5
13-03
Collections for third parties
5
13-04
Classification as a noncurrent obligation
5
13-04
Classification as a noncurrent obligation
5
IFRS; Classification as a noncurrent obligation
5
13-05
Define a loss contingency
5
13-05
Three categories of likelihood
5
13-05
Conditions for a loss contingency to be accrued
5
IFRS; Contingent liability definition
5
13-06
Accounting for a loss contingency not accrued
5
13-06
Two loss contingencies almost always accrued
5
warranty
13-06
Subsequent events
5
13-06
Subsequent events
5
IFRS; Range of equally likely losses
5
IFRS; present values
5
13-06
Unasserted assessment
5
13-06
Gain contingency
5
IFRS; gain contingency
5
16-32 Intermediate Accounting, 8/e
Brief Learning Est. time
Exercises Objective(s) Topic (min.)
13-1
Bank loan; accrued interest
5
13-2
Non-interest-bearing note; accrued interest
5
13-3
Determining accrued interest
5
13-4
Commercial paper
5
13-5
Non-interest-bearing note; effective interest rate
5
13-6
Advance collection
5
13-7
Advance collection
5
13-8
Sales tax
5
13-9
Classifying debt
5
13–10
Refinancing debt
5
13–11
Refinancing debt
5
13–12
Warranties
5
13–13
Product recall
5
13–14
Contingency
5
13–15
Contingency
5
13–16
Contingency
5
13–17
Contingencies
5
13–18
Unasserted assessment
5
Learning Est. time
Exercises Objective(s) Topic (min.)
13-1
13–02
Bank loan; accrued interest
10
13-2
13–02
Determining accrued interest in various situations
15
13-3
13–02
Short-term notes
20
13-4
13–03
Paid future absences
10
13-5
13–03
Paid future absences
10
13-6
13–03
Customer advances; sales taxes
20
13-7
13–03
Customer deposits
15
13-8
13–03
Various transactions involving advance collections
20
13-9
13–03
Gift Cards
20
13–10
13-03, 13-04,
13–05
FASB codification research
15
13–11
13-01, 13-04
Current-noncurrent classification of debt; Sprint
Corporation
10
13–12
13-01, 13-04,
13–07
Current-noncurrent classification of debt; Sprint
Corporation
15
13–13
13-01, 13-04
Current-noncurrent classification of debt
15
13–14
13–05
FASB codification research
15
13–15
13-05, 13-06
Warranties
15
13–16
13-05, 13-06
Extended warranties
15
13–17
13-05, 13-06
Contingency; product recall
15
13–18
13-05, 13-06
Impairment of accounts receivable
15
13–19
13–06
Unasserted assessment
15
13–20
13-05, 13-06
Various transactions involving contingencies
30
13–21
13-05, 13-06
Various transactions involving contingencies
30
13–22
13-05, 13-06,
13–07
Various transactions involving contingencies; IFRS
30
13–23
13-01, 13-02,
13-03, 13-04,
13-05, 13-06
Disclosures of liabilities
25
13–24
13-05, 13-06
Warranty expense; change in estimate
15
13–25
13–03
Change in accounting estimate
10
13–26
13-05, 13-06
Contingency; Dow Chemical Company disclosure
15
13–27
App 13A
Payroll-related liabilities
10
16-34 Intermediate Accounting, 8/e
CPA/CMA Learning Est. time
Exam Questions Objective(s) Topic (min.)
CPA-1
Coupons
3
CPA-2
Employee absences
3
CPA-3
Note payable
3
CPA-4
Lawsuit
3
CPA-5
Warranty
3
CPA-6
Warranty
3
CPA-7
IFRS; loss contingency
3
CPA-8
IFRS; gain contingency
3
CPA-9
IFRS; loss contingency with range of outcomes
3
CMA-1
Refinance debt
3
CMA-2
Employee absences
3
CMA-3
Loss contingency
3
CMA-4
Loss contingency
3
Learning Est. time
Problems Objective(s) Topic (min.)
13-1
13-02, 13-03
Bank loan; accrued interest
20
13-2
13-01, 13-02, 13-03,
13-04
Various transactions involving liabilities
20
13-3
13-01, 13-04
Current – noncurrent classification of debt
30
13-4
13-01, 13-02, 13-03,
13-04
Various liabilities
20
13-5
13-03
Bonus compensation
25
13-6
13-05, 13-06
Various contingencies
35
13-7
13-04, 13-05, 13-06,
13-07
IFRS; Various liabilities
30
13-8
13-06
Expected cash flow approach; product recall
25
13-9
13-06
Subsequent events
25
13–10
13-04, 13-05
Subsequent events; classification of debt; loss
contingency; financial statement effects
35
13–11
13-01 – 13-06
Concepts; terminology; matching
15
13-12
13-04, 13-05
Various liabilities; frequent flyer program; balance
sheet classification; prepare liability section of
balance sheet; write footnotes
45
13-13
13-03
Payroll-related liabilities [based on appendix]
15
Star Problems
Learning Est. time
Cases Objective(s) Topic (min.)
Research Case 13-1
13-01, 13–02
Bank loan: accrued interest; codification
30
Real World Case 13-2
13-01, 13–03
Returnable containers; Memphis Zoo
15
Research Case 13-3
13-01
Relationship of liabilities to assets and owners’ equity;
SFAC
20
Ethics Case 13-4
13-01
Outdoors R Us
20
Judgment Case 13-5
13-03
Paid future absences
20
Trueblood Accounting Case 13-6
13-05
Contingencies; research
60
Communication Case 13-7
13-04
Exceptions to the general classification guideline; group
interaction
40
Communication Case 13-8
13-05, 13–06
Various contingencies
20
Judgment Case 13-9
13-05, 13–06
Loss contingency and full disclosure
15
Communication Case 13-10
13-05, 13-06
Change in loss contingency; write a memo
45
Research Case 13-11
13-05, 13–06
Researching the way contingencies are reported;
retrieving information from the Internet
60
Communication Case 13-12
13-05, 13–06
Accounting changes
45
Real World Case 13–13
13-05, 13–06
Lawsuit settlement; Morgan Stanley
20
Ethics Case 13-14
13-05
Profits guaranteed
20
IFRS Case 13-15
13-01-13-07
IFRS; Accounting for current liabilities and
contingencies in other countries
45
Analysis Case 13–16
13-01
Analyzing financial statements; liquidity ratios
25
Analysis Case 13–17
13-01
Reporting current liabilities; liquidity; PetSmart
20
Real World Case 13–18
13-05
Contingencies; Microsoft
20
Real World Case 13–19
13-06
Contingencies; AU Optronics, B Communications,
20
Real World Case 13–20
13-06
Contingencies; J. Crew
20
Trueblood Case 13-21
13–05
Subsequent Events
20
Air France-KLM Case
13-07
IFRS; deferred income, contingencies; Air France-KLM
30