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CORPORATE FINANCIAL REPORTING

11 – Liabilities Revisited

Corporate Financial Reporting - Liabilities 2

LIABILITIES DISCUSSED IN CHAPTER 11

Off balance sheet financingPensions

Income taxesRetirement Obligations

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LIABILITIES IN CHAPTER 11Pensions

There are thousands of different kinds of pension plans, but in general they can be classified

into two types:defined contribution plans anddefined benefit plans

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REPORTING OF PENSIONSDEFINED CONTRIBUTION PLANS

Pretty simple and risk free for the company, but would

you prefer one?

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REPORTING OF PENSIONSDEFINED BENEFIT PLANS

How they work and their terminology are what are of

interest to us.

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REPORTING OF PENSIONSDEFINED BENEFIT PLANS TERMINOLOGY

Service cost (SC)Projected benefit obligation (PBO)Plan assets (PA)Settlement rate or discount rateRate of return on plan assetsPrior service costUnamortized gains or lossesAccumulated benefit obligation (ABO) Chapter 11 - 6Corporate Financial Reporting -

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REPORTING OF PENSIONSEXAMPLE FOR DEFINED BENEFIT PLAN

1/1/01: we hire an employee & promise her, after retirement she will receive, for the rest of her life, pension payments equal to: her highest salary times the number of years she worked for us times 2%.And to make Congress happy, we will deposit her pension money in an independent company.

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LIABILITIES IN CHAPTER 11 REPORTING OF INCOME TAXES

Two relevant aspects of income taxes:

Tax loss carryback/carryforward (Net Operating Loss or NOL) and

Deferred income taxes.

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REPORTING OF INCOME TAXESNET OPERATING LOSS

Our company reports the following:

TAX TAX YEAR IBT RATE PAID 2007 $10,000 25% $2,500 2008 21,000 20 4,200 2009 12,000 30 3,600 2010 (40,000) 30 ?

2011 13,000 30 ? Chapter 11 - 9Corporate Financial Reporting - Liabilities 2

REPORTING OF INCOME TAXESDEFERRED INCOME TAXES

PUBLIC INCOME TAX STATEMENT RETURNestimate bad debt expense ?estimate warranty expense ?straight line depreciation ?first-in first-out inventory flow ?rent revenue when earned ?rent expense when incurred ?etc, etc.

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LIABILITIES

DEFERRED INCOME TAXES:

  future year(s)

Year: 2011 (35%) [say 2012] (30%)*

Public Tax Public Tax

Inc. before 10,000 10,000 ? ?

Land sale 7,000 - 0 - - 0 - 7,000

Warr. exp. (4,000) - 0 - - 0 - (4,000)

Prem. L.I. (2,000) - 0 - - 0 - - 0 -

I.B.T. 11,000 Taxable Inc. 10,000

Tax Due ?

Inc. tax exp. ( )

Net income .

  * Assuming that the congress has legislated the tax rate for 2011.

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ASSET RETIREMENT OBLIGATION

FAS 143 covers legal obligations associated with the retirement of a tangible long-lived asset that result from the acquisition, construction, or development and (or) normal operation of that asset.

Obligations are created by law, statute, ordinance, and written or oral contracts.

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ASSET RETIREMENT OBLIGATION

On 1/1/11, our company (not BP) spends $2,000,000 acquiring an oil platform in the Gulf of Mexico.

We will depreciate the platform using SL depreciation over 10 years.

Our “risk adjusted risk-free” interest is 10%.

We must remove the platform at the end of its useful life; we estimate those costs to be:

Option Amount Probability A $300,000 25% B 500,000 40 C 600,000 35

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LIABILITIES

QUESTIONS?

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