ADMS 3595 Chapter Notes - Chapter 13: Oil Platform, Contingent Liability, Accounts Payable
Document Summary
A liability is an obligation that arises from past transactions or events, which may result in a transfer of assets or services. Liabilities have 3 essential characteristics: they carry a duty or a responsibility, the entity has little or no discretion to avoid the duty, the transaction or event that obliged the entity has already occurred. Constructive obligation occurs when past or present company practices show that the entity agrees to incur potential economic liabilities, such as regularly paying 6% sick pay instead of the required minimum 4%. Non-financial liabilities are recognized only if it is probable (more likely than not) that the obligation would result in an outflow of cash or other economic assets. A financial liability must be valid by contract. Any liability that is created by legislation, such as income tax payable, is not a financial liability. Recognized initially at fair value at time of acquisition, and at their amortized cost thereafter.