I don’t know how to handle this Accounting question and need guidance.
You are considering purchasing a company — assets, liabilities, warts, and all. You are aware that sometimes liabilities do not always show up on the balance sheet. Discuss five examples of liabilities that may not be explicitly recognized on the balance sheet, making sure to explain why they are liabilities.
Just do response each posted # 1 to 3
Good morning class,
When investing in a company, it’s important to thoroughly review their financial statements, but sometimes important information is omitted from financial statements. For instance, there are several liabilities that aren’t included on the balance sheet. The following are five examples of OBS items:
Operating leases: Omitting an operating lease from the balance sheet will cause the company’s debt to be understated.
Contingent liabilities: Although some contingencies are reported, some may be omitted or understated.
Litigation: Pending lawsuits may result in settlement costs to the company, which is a liability.
Guarantees: This is when a company acts as collateral for another company. If that company fails to pay, claims on the first company’s resources are used.
Throughput Agreements: This agreement is considered a risk because a company has committed itself to use a service or a commodity for a specified period of time.
Off-balance-sheet liabilities are financial obligations of a company that are not required by accounting standards to be recorded on the balance sheet. A few examples of liabilities that may not be explicitly recognized on the balance sheet include:
- Operating leases – With operating leases, the business rents an asset from a lender without transfer of ownership. The lease payment is recorded as a rental expense. It is considered a liability because many benefits and risks of ownership are transferred to the business.
- Purchase agreements – In a purchase agreement, the business agrees to purchase output from a processing facility. The purchase agreement is a binding and legal contract between two parties that obligates a transaction between the buyer and the seller. It is considered a liability because the business is required to buy the output.
- Through-put agreements – With through-put agreements, the business agrees to run a specified amount of goods through a processing facility. A through-put contract is an agreement between two parties that secures a service or commodity by one of the parties for a specified amount of time. It is considered a liability because the business has taken a risk by agreeing to supply production time for another party.
- Take-or-pay agreements – In a take-or-pay agreement, the business guarantees to pay for a specified quantity of goods whether needed or not. The business must take the product from the supplier or pay a penalty to the supplier. It is considered a liability because the business is required to make a future payment to the supplier.
- Joint ventures – A joint venture is a business agreement in which two or more parties agree to pool their resources in order to accomplish a specific task or project. None of the parties hold a controlling interest. It is considered a liability because there are anticipated costs and risks to engaging in a joint venture.
Hello professor and everyone,
If the liability is not recognized as an accounting transaction, it would not be disclosed/reported on balance sheet according to GAAP standards.
First example is operating lease. It is the liability to pay for the rent to use the facilities, but it is not showing on the book as no asset recorded.
Second example is taking on a contract that company can carry products without having to record the product or service as an asset. Situation happens like retails carry some merchandise and have to pay the vendors to supply the products along paying them in order to put their products on the shelves for sales.
Third example is throughput arrangement. Gas station owner has to pay the monthly service for the fuel/energy received. This is a bill/liability that company paid but there is no tangible asset to record and will not show on the balance sheet.
Fourth example is commodity link bond. Instead of paying with the cash/asset of the company like the gas station, they will do it as repayment to the bonds that financing the purchase inventory from energy company.
Last example I have is selling some of its accounts receivables. This happens with past due accounts that sold to collection companies at a loss in order to improve their position. Since this is the sale of money that has not been collected, it does not fall under GAAP standards for an assets or liabilities.