What’s a Liability? A liability is a present obligation of an entity to transfer an economic benefit, per SFAC No. 8, Chapter 4, paragraph E37. A present obligation must exist at the financial statement date (paragraph E45). An obligation is any condition that binds an entity to some performance or action (paragraph E41). While most obligations are legally enforceable, including those arising from contracts, agreements (written or oral; paragraph E40), rules, and statutes, some liabilities rest on constructive obligations, such as through customary business practice (paragraphs E49 & E50). For example, constructive obligations may arise from an entity’s historical policies and practices for sales returns as well as the absence of written warranties in business entities. On the other hand, donor-imposed restrictions on an NFP’s use of contributed assets do not create obligations that qualify as liabilities (paragraph E53). Please note that the GASB defines a liability as a present obligation to sacrifice resources that the government has little or no discretion to avoid. Revenues, Expenses, Gains & Losses Revenues and expenses result from delivering or producing goods, rendering services, or carrying out other activities.* Other activities include, for example, interest, rent, royalties, fees, and charitable contributions received and made (paragraph E84). Gains/losses are increases/decreases in equity except those that result from revenues/expenses (paragraphs E82 & E83). *The FASB ASC Glossary at 610-20-20 adds the words “ongoing, major, or central operations.” A term that still appears in some NFP financial statements is “support.” This term was defined long ago (June 1993) in FASB Statements 116 on Contributions and 117 on NFP Financial Statements as referring to contributions. However, neither the FASB ASC nor SFAC No. 8, Chapter 4 appears to define the term “support.” Thus, this term is apparently previous GAAP, and should probably not be used, especially when no contributions are received during the reporting period. Events, Transactions & Circumstances An event is a happening of consequence to an entity (internal or external). A transaction is a particular kind of external event; namely, it involves a transfer of something of value between two or more entities, either in an exchange or a nonreciprocal transfer. Circumstances are a condition or set of conditions that develop from an event or series of events. (SFAC No. 8, Chapter 4) Based on these GAAP definitions the term “transaction” is clearly a conceptual subset of the term “event.” Therefore, the phrase “transactions and events” would be inappropriate in a subsequent events footnote (it would be like referring to “cars and vehicles”). Reporting entity management could simply refer to “transactions and other events,” or better yet just “events.” Accruals & Deferrals Accrual accounting records the financial effects of events, transactions, and circumstances in the periods in which those items occur (SFAC No. 8, Chapter 4). This is not new! Nonetheless, numerous GAAP financial statements still contain footnotes stating: “The entity follows accrual accounting. Under accrual accounting, revenues are recognized when earned, and expenses when a liability has been incurred.” Proper use of GAAP terminology would require replacing “earned” with “occurred,” and “liability” with “cost.” Accrual is the accounting process of recognizing assets or liabilities and the related changes in revenues, expenses, gains, losses, or equity for amounts expected to be received or paid, usually in cash, in the future. In other words, transaction occurrence precedes the related cash flow. For example, if a lawn service mows my lawn with the understanding I will pay them later, I have an accrued liability. Deferral, on the other hand, is concerned with past cash receipts and payments. Deferral is the accounting process of recognizing a liability resulting from a current receipt of cash or other asset, with deferred recognition of related revenues, expenses, gains, or losses. In other words, cash flow precedes related transaction occurrence (SFAC No. 8, Chapter 4). So, if I were to pay the lawn service to mow my lawn before they do it, then I would have a deferred charge on my balance sheet, probably reported as a prepaid expense. However, please be aware that GASB Concepts Statement (SGAC) No. 4 and GASB Statements 63 & 65 prohibit state and local governments from presenting deferrals as liabilities or assets; they are to be presented separately as “deferred inflows of resources” or “deferred outflows of resources,” respectively. Accrual/Deferral GAAP Departures to Avoid When a reporting entity enters into a contract to sell goods or services to a customer, but the contract is wholly unperformed as of the financial statement date, neither party has an accounting entry to make generally. The seller has no CONTINUED FROM PAGE 27 28 Nebraska CPA
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