Kim Park Liabilities

9-110-018
REV: JUNE 4, 2010

DAVID HAWKINS
GREGORY MILLER
V.G. NARAYANAN

Kim Park (B): Liabilities
As part of her plan to explore interesting accounting questions with her study group, Kim Park
prepared a set of short case studies dealing with the recognition and measurement of liabilities.1 Kim
knew from her earlier study group discussions that her fellow students expected her toprepare
tentative answers to the questions she would raise in the meeting. In addition, the study group had
encouraged her to illustrate her tentative answers with numerical illustrations using case data.

Prior Knowledge
Kim understood from the background readings assigned for her accounting course that Generally
Accepted Accounting Principles (GAAP) defined liabilities as
“[P]robable futuresacrifices 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.”2
Kim also knew under International Financial Reporting Standards (IFRS) that liabilities were
recognized on the balance sheet when
“[I]t is probable that an outflow of resources embodyingeconomic benefits will result from
the settlement of a present obligation and the amount at which the settlement will take place
can be measured reliably.”3
Further, Kim understood from her readings that there was a special set of accounting rules
covering contingent liability recognition and disclosure. Under GAAP, a contingency is an existing
condition involving uncertainty as to possible gainor loss. When a contingency loss exists, it should
be accrued as a liability when both of the following conditions are met: a) at the date of the financial
statements it is probable that an asset has been impaired or a liability has been incurred, and b) the
amount of the loss can be reasonably estimated. If both of these conditions cannot be met, the

1 See “Kim Park (A): Long-livedNonmonetary Assets,” Harvard Business School No. 110-017.
2 Financial Accounting Standards Board, Statements of Financial Accounting Concepts No. 6, “Elements of Financial
Statements.”
3 International Accounting Standards Board, “Framework for the Preparation and Presentation of Financial Statements.”________________________________________________________________________________________________________________
Professors David Hawkins (HBS), Gregory Miller (University of Michigan), and V.G. Narayanan (HBS) prepared this case. The character
mentioned in the case is fictional. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as
endorsements, sources of primary data, or illustrations of effective or ineffective management.
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110-018Kim Park (B): Liabilities

contingent liability should be disclosed unless the probability of occurrence is remote.4 Under IFRS,
Kim had noted that capitalized contingent liabilities were referred to as “provisions.” The term
“contingent liability” was reserved for those contingent liabilities that were not capitalized.
Otherwise, in Kim’s view, the GAAP and IFRS contingent liabilityaccounting rules were similar.

Austral Electronics Company
Before Kim went to business school, she had a friend who worked for Austral Electronics
Company (“Austral”). As Kim recalled, during her friend’s time with the company, it had issued a
US$1 million equivalent local currency eight-year zero-coupon bond priced to yield 10% at maturity.5
Kim had three questions for her study group: (1) How...