An organization is not inclined to report more liabilities than necessary because of potential damage to the image being portrayed. The inclusion of debts tends to make a company look riskier to creditors and investors. Thus, the danger that officials will report an excessive amount of liabilities seems slight. Balance sheets look better to decision makers if fewer obligations are present to drain off resources. Consequently, where possible, is there not a tendency for officials to limit the debts that are reported? At what point does an entity have to recognize a liability? How does U.S. ensure that all liabilities are appropriately included on a balance sheet? Answer: FASR No. 6defines many of the elements found in a set of financial statements. According to this guideline, liabilities should be recognized when several specific characteristics all exist: 1. there is a probable future sacrifice 2. of the reporting entity’s assets or services 3. arising from a present obligation that is the result of a past transaction or event. To understand the reporting of liabilities, several aspects of these characteristics are especially important to note. First, the obligation does not have to be absolute before recognition is required. A future sacrifice only has to be “probable.” This standard leaves open a degree of uncertainty
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As might be expected, determination as to whether a potential payment is probable can be the point of close scrutiny when independent CPAs audit a set of financial statements. The line between “probable” and “not quite probable” is hardly an easily defined benchmark. Second, for reporting to be required, a debt must result from a past transaction or event.  An employee works for a company and is owed a salary. The work is the past event that creates the obligation.  A vendor delivers merchandise to a business. Acquisition and receipt of these goods is the past event that creates the obligation. Third, the past transaction or event must create a present obligation. In other words, an actual debt must exist and not just a potential debt. Ordering a piece of equipment is a past event but, in most cases, no immediate obligation is created. In contrast, delivery of this equipment probably does obligate the buyer and, thus, necessitates the reporting of a liability. Often, in deciding whether a liability should be recognized, the key questions for the accountant are (a) what event actually obligates the company and (b) when did that event occur?
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