The proposed definition of a liability is a "present economic obligation for which the entity is the obligor."
These terms can be further expanded as follows (as taken from l>\SB Board meeting minutes): "Present'' means at the report date that an economic obligation exists.
"Economic obligation" is an unconditional promise to incur an economic burden and is enforceable by legal or equivalent means.
Instructions
Using the definition of a liability, discuss whether or not the following scenarios would result in the recognition of a liability.
(The following situations are adapted from examples provided in FASB board meetings on the Conceptual
Framework- Elements Phase of June 25, 2008, and May 7, 2008.) Also explain how you might use probabilities in each Scenario.
(a) Silverstrike Mines has purchased the right to mine for silver in two countries. In Country X, the environmental regulations require the company to completely fill in mining shafts greater than 15 metres when the mining operations cease or pay a fine of 250,000 euros per shaft. In Country Y, there are no environmental laws, but Silverstrike has signed a contract to fill in any mine shafts greater than 15 metres, in return for which the local government would grant it exploration rights within a 200-kilometre radius of the existing mine. It is December 31, 2014, and the company now has four operating mining shafts in Country X that are 17 metres deep. In Country Y, the company has six shafts that are only I 0 metres deep. However, the company will have to dig down to 17 metres in Country Y to hit silver, and this should be completed by December 2015 with 95% certainty.
(b) Zion Limited has an employee benefit plan that will pay for medical and dental coverage after an employee leaves the company, provided the employee has worked for 15 years for the company. If the employee is terminated or leaves voluntarily before the 15 years is completed, then the company will not pay for any benefits. Historically, the company has found that only 15% of employees Leave before the 15 years has passed. At the reporting date of December 31, 2014, there is one employee who is still currendy employed and has been with the company for 11 years. How would the liability for this employee's benefits be determined?
(c) Beatonville’s soccer team has just finished building a new soccer stadium and is now trying to raise corporate funds to help pay for the centre. The team has recently signed a contract with Masonry Limited, a large employer in the area, for sponsorship. The agreement states that in return for $2 million to be paid today, the team will allow Masonry to have its corporate name and logo on the building for eight years. At the end of eight years, the contract can be renewed, or the team will seek another sponsor.