Commitments

Although a company doesn't have to disclose all of its contractual obligations, obligations that involve a higher degree of risk than ordinary for the business, that make expenditures that are abnormally large, or that dictate the level of a particular type of expenditure for a considerable time in the future should be disclosed.   These include commitments such as those for plant acquisition or an obligation to reduce debts, maintain working capital, or restrict dividends.¹ Commitments to issue shares must also be disclosed. If it is probable that a commitment will result in a loss, that liability should be recorded as a contingent liability.

Unconditional purchase obligations must be disclosed in the notes, and recognized if it is probable that they will result in a loss. An unconditional purcase obligation is the obligation to transfer funds in the future for fixed or minimum amounts of quantities of goods or services at fixed or minimum prices. Unconditional purchase obligations include take-or-pay contracts or throughput contracts.²

Take-or-pay: An agreement between a purchaser and a seller that provides for the purchaser to pay specified amounts periodically in return for products or services. The purchaser must make these specified minimum payments even if it does not take delivery of the contracted products or services.²

Throughput contract: An agreement between a shipper (processor) and the owner of a transportation facility (such as an oil or natural gas pipeline or a ship) or a manufacturing facility that provides for the shipper (processor) to pay specified amounts periodically in return for the transportation (processing) of a product. The shipper (processor) is obligated to provide specified minimum quanitites to be transported (processed) in each period and is required to make cash payments even if it does not provide the contracted quantities.²

References:

1. FASB ASC 440-10-05
2. FASB ASC 440-10-20

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