Framework Problem #2

Following is the definition of a liability from three sources:

1. IASB Framework, paragraph 49(b) A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.

2. FASBs Concept Statement No. 6, paragraph 35 Liabilities are probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.

3. The Working Groups working definition as of October 2008 A liability of an entity is a present economic obligation for which the entity is the obligor. Accompanying text will amplify the liability definition by describing present, economic obligation, and obligor. Present means that on the date of the financial statements both the economic obligation exists and the entity is the obligor. An economic obligation is an unconditional promise or other requirement to provide or forgo economic resources, including risk protection, that is enforceable by legal or equivalent means. An entity is the obligor if the entity is required to bear the economic obligation and its requirement to bear the economic obligation is enforceable by legal or equivalent means.

Required: Read each definition and compare and contrast the FASB and IASB versions and then compare to the Working Groups definition. Review the following items and evaluate if each meets the Working Groups definition of liability. Focus on present economic obligation and entity is obligor in your analysis:

Accounts payable Bank loan payable Future inventory purchases Discretionary employee bonuses Existing property lease Product warranty obligation Possible lawsuit alleging patent infringement Preferred stock redeemable at option of stockholder Futures contract to purchase raw materials in two years at todays price