USCPA (FAR) – (17) Payables and Accrued Liabilities

I would like to record about the key points of the US CPA exam content.

The liability amount that should be reflected on the year-end balance sheet will represent all amounts that are owed as of the year-end that have not been paid out yet.

Interest must be accrued on that amount, but only for the months where interest has not been paid in cash (For example, March to December).

If the terms of a deferred compensation arrangement attribute all or a portion of expected future benefits to a period of service greater than one year, the cost of benefits should be recognized over that required period of service.

The definition of short-term liabilities typically refers to debts that are due within one year.
Impact of Refinancing Plans: Short-term debt can be reclassified as long-term debt if there is a confirmed refinancing plan. The intent and means to refinance must be established by the date the financial statements are issued.
Recording Short-term Liabilities (example)
- The $250,000 prepaid on January 12, Year 2, must be recorded as a short-term liability because it was paid before the refinancing was completed.
- The remaining $500,000 can be reclassified as long-term debt due to the completed refinancing.

Under ASC 420 ‘Exit or Disposal Cost Obligations,’ costs associated with exit and disposal activities include those directly related to activities such as business downsizing, exit of a business line, or closure of facilities.
Costs to relocate employees are costs associated with exit and disposal activities.

An asset retirement obligation (ARO) exists when an asset is constructed and there are legal requirements to incur removal-type costs related to the constructed asset. In this example, the company has an obligation to dismantle the platform at the end of its useful life. As such, an asset retirement obligation exists and will be recorded as a liability when the asset is put into service. The reported liability is the present value of the future obligation, which is the estimated fair value of the liability.
Accretion Expense represents the increase in the liability related to an Asset Retirement Obligation (ARO). This expense accrues over time as the ARO liability’s present value increases as it approaches the time of settlement.
It is recognized as an interest expense and recorded as an increase in the ARO liability.
Calculation Method: Accretion Expense is calculated by multiplying the beginning balance of the ARO liability by the applicable discount rate (in a case, the credit-adjusted rate).
Asset account is the asset retirement cost (ARC). When an Asset Retirement Obligation (ARO) is recognized, its present value is calculated and simultaneously added to the cost of the related fixed asset. This additional cost, referred to as the Asset Retirement Cost (ARC), is then depreciated over the depreciation period of the asset.

A company recognizes a decommissioning liability as a liability and includes this amount as part of the cost of the related property.
The property is depreciated over its useful life, but the decommissioning liability remains as a liability even after the property is fully depreciated.
If the decommissioning liability is adjusted after the property is fully depreciated, the adjustment needs to be reflected in the financial statements.
If the estimated amount of the decommissioning liability increases or decreases after the related property is fully depreciated, the change is recognized immediately in profit or loss. (DR) Decommissioning Expense (CR) Decommissioning Liability or (DR) Decommissioning Liability (CR) Decommissioning Income

Costs related to exit or disposal activities (e.g., employee relocation costs) should not be recognized as a liability until the costs are actually incurred.
Even if these costs are incremental to other operating costs and arise directly as a result of the plan, they should not be recognized until they are incurred.
the example of the liability amount is 1000 + (annual salary / 52 weeks per year X number of years’ service), which is separation exit liability.
If the terminations are not met as of the year-end and no obligating event has occurred as of the year-end, no liability should be recorded at the balance sheet date.
Current Obligations: Costs that have already been incurred as of the balance sheet date are recognized as current obligations. Example: If an employee has already paid a moving company and the company is obligated to reimburse the employee, this cost is recognized as a liability on the balance sheet.
Future Operating Costs: Costs that have not yet been incurred as of the balance sheet date are recognized as future operating costs. Example: If an employee is scheduled to move next month, the relocation costs to be incurred at that time are not recognized as a liability until the move actually occurs.

When there is no early termination provision: The entity recognizes a liability for the remaining term of the contract on the cease-use date, which is the date the entity stops using the rights conveyed by the contract. This ensures that costs incurred without any economic benefit to the entity are recorded.
When there is an early termination provision: A liability for costs to terminate the contract in accordance with the contract terms is recognized on the communication date, which is when the entity notifies the counterparty of the termination. Costs are recorded based on the contract’s cancellation provisions.