Accountants' Handbook Volume One: Financial Accounting and General Topics, Eleventh Edition

Chapter 25. LIABILITIES

Frederick Gill, CPA

American Institute of Certified Public Accountants

Accounting Standards Team

Senior Technical Manager

The views of Mr. Gill, as expressed in this publication, do not necessarily reflect the views of the AICPA. Official positions are determined through certain specific committee procedures, due process, and deliberation.

NATURE OF LIABILITIES

(a) DEFINITION OF LIABILITIES.

FASB Statement of Financial Accounting Concepts No. 6, "Elements of Financial Statements," defines liabilities as:

[P]robable 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.

Probable is used with its usual general meaning and refers to that which can reasonably be expected on the basis of available evidence but is not certain. Obligation is broader than "legal obligation," referring to duties imposed legally or socially and to that which one is bound to do by contract, promise, or moral responsibility. Concepts Statement No. 6 (par. 36) elaborates that a liability has three essential characteristics:

1. [I]t embodies a present duty or responsibility to one or more other entities that entails settlement by probable future transfer or use of assets at a specified or determinable date, on occurrence of a specified event, or on demand,

2. the duty or responsibility obligates a particular entity, leaving it little or no discretion ...