Estimated Liabilities

If an event occurs today that makes a future obligation unavoidable, it should be recognized today. Most liabilities are measured based on the amount of cash or the fair value of the assets that must be exchanged in order to discharge the obligation. However, because liabilities represent an obligation to be settled in the future, it is sometime difficult to measure with certainty the value of the future obligation that should be recognized on the balance sheet today. When the future obligation is probable, can be estimated, and the revenue which it helped earned was recognized in the current period, the amount of the future obligation should be estimated and recognized today. For example, when a product is sold with a warranty, the estimated future warranty should be recognized today. Similarly, coupons that come with the purchase of an item (for example, a coupon on a box top) should be recognized as a cost when the original item is sold, not when the coupon is redeemed.