Subtopics

ASC 405, Liabilities, consists of four subtopics:

• ASC 405-10, Overall, which merely points to other areas of the Codification which contain guidance on liabilities
• ASC 405-20, Extinguishments of Liabilities, which provides guidance on when an entity should consider a liability settled
• ASC 405-30, Insurance-Related Assessments, which provides guidance on items such as assessments for state guaranty funds and workers' compensation second-injury funds
• ASC 405-40, Obligations Resulting from Joint and Several Liabilities, which provides guidance on arrangements where the total amount of the obligation is fixed at the reporting date.

ASC 405 provides accounting and reporting guidance related to short-term liabilities and certain guidance that may apply broadly to any liability. The Codification has several topics on liabilities, including ASC 470, Debt, and ASC 480, Distinguishing Liabilities from Equity.

Scope and Scope Exceptions

ASC 405 guidance applies to all entities with the covered transactions.

ASC 405-30 does not apply to the following:

1. Amounts payable or paid as a result of reinsurance contracts or arrangements that are in substance reinsurance, including assumed reinsurance activities and certain involuntary pools that are covered by Topic 944.
2. Assessments of depository institutions related to bank insurance and similar funds.
3. The annual fee imposed on health insurers by the Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act (the Acts). The accounting for the Acts' fee is addressed in Subtopic 720-50.

ASC 405-40 applies to all entities and obligations such as debt arrangements, other contractual obligations, and settled litigation and judicial rulings. The guidance does not apply to obligations accounted for under the following topics:

• ASC 410, Asset Retirement and Environmental Obligations
• ASC 450, Contingencies
• ASC 460, Guarantees
• ASC 715, Compensation – Retirement Benefits
• ASC 740, Income Taxes.

Overview

The FASB has declared, as a long-term goal, that all financial liabilities should be recognized in the statement of financial position at fair value, rather than at amounts based on their historical cost. The proper calculation of fair value is described in detail in the chapter on ASC 820, Fair Value Measurements and Disclosures. Under ASC 825, Financial Instruments, an entity has the option to record certain of its current liabilities that meet the definition of “financial liabilities” at their respective fair values, with changes in fair value recognized each period in net income. Liabilities that require the entity to provide goods or services to settle the obligation, instead of cash settlement, are not financial liabilities and thus are not eligible for the fair value measurement election permitted by ASC 825. This option is addressed in detail in the chapter on ASC 825.

Although measurement of liabilities is generally straightforward, some liabilities are difficult to measure because of uncertainties. Uncertainties regarding subsequent events, whether an obligation exists, how much of an entity's assets will be needed to settle the obligation, and when the settlement will take place can impact whether, when, and for how much an obligation will be recognized in the financial statements.

Most entities continue to measure their current liabilities at their settlement value, which is the amount of cash (or its equivalent amount of other assets) that will be paid to the creditor to liquidate the obligation during the current operating cycle. Accounts payable, dividends payable, salaries payable, and other current obligations are measured at settlement value because they require the entity to pay a determinable amount of cash within a relatively short period of time. If a current liability is near its payment date, there will be only an insignificant risk of changes in fair value because of changes in market conditions or the entity's credit standing, and settlement value and fair value will be essentially the same.

Other current liabilities are measured at the proceeds received when the obligation arose. Liabilities that are measured in this manner generally require the entity to discharge the obligation by providing goods or services rather than by paying cash. Deposits payable, or rents paid in advance on the statement of financial position of a lessor are examples of current liabilities measured by reference to proceeds received.

ASC 405-10, Overall

ASC 405-10 contains no guidance. Its purpose is to point to guidance in other areas of the Codification. ASC 410-10-02 points to the following Codification Topics which contain guidance on accounting and reporting on liabilities:

• Asset Retirement and Environmental Obligations – ASC 410
• Exit or Disposal Cost Obligations and Contract Liabilities (added by ASU 2014-09) – ASC 420
• Deferred Revenue – ASC 430
• Commitments – ASC 440
• Contingencies – ASC 450
• Guarantees – ASC 460
• Debt – ASC 470
• Distinguishing Liabilities from Equity – Topic 480.

ASC 405-20, Extinguishments of Liabilities

A liability is extinguished when

• The debtor pays the creditor
• The debtor is legally given relief from the liability.

If the entity becomes a guarantor on the debt, the entity applies the guidance in ASC 460.

ASC 405-30, Insurance—Related Assessments

Entities that self-insure, as well as insurance entities, are subject to assessment related to insurance activities. However, note that the annual fee imposed on health insurers by the Patient Protection and Affordable Care Act is not considered an insurance-related assessment. The accounting for that fee falls under the guidance in ASC 720-50.

ASC 405-40, Obligations Resulting from Joint and Several Liabilities

ASC 405-40 requires an entity to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of the guidance is fixed at the reporting date as the sum of:

1. The amount the reporting entity agreed to pay on the basis of its arrangement among its obligors, and
2. Any additional amount the entity expects to pay on behalf of its co-obligors.

The corresponding entry depends on the particular facts and circumstances.