Definition of Liability
Liability
A financial obligation, or the cash outlay that must be made at a specific time to satisfy the
contractual terms of such an obligation.
Liability
A dollar amount of obligation payable to another entity.
Liability
A probable future sacrifice 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.
Related Terms:
Also called surplus management, the task of managing funds of a financial
institution to accomplish the two goals of a financial institution:
1) to earn an adequate return on funds invested, and
2) to maintain a comfortable surplus of assets beyond liabilities.
Under ERISA, the firm is liable to the plan participants for up to 39% of the net
worth of the firm.
Investment strategies that select assets so that cash flows will equal or exceed
the client's obligations.
An interest rate swap used to alter the cash flow characteristics of an institution's liabilities so
as to provide a better match with its assets.
Limitation of possible loss to what has already been invested.
A security, such as a call option, in which the owner can only lose his initial
investment.
A security, such as a call option, in which the owner can only lose his initial investment.
Full liability for the debt and other obligations of a legal entity. The general partners of a
partnership have unlimited liability.
an organizational form that is a hybrid of the corporate and partnership organizational
forms and used to limit the personal liability of the owners;
it is typically used by small professional (such as accounting) firms
an organizational form that is a hybrid of the corporate and partnership organizational
forms and used to limit the personal liability of the owners;
it is typically used by large professional (such as accounting) firms
This is typically the accounts payable, short-term notes payable, and
accrued expense accounts on the balance sheet, or any other liabilities that are
expected to be liquidated within a short time interval.
The owners of the corporation are not personally responsible for its obligations.
An obligation that is dependent on the occurrence or nonoccurrence of
one or more future events to confirm the existence of an obligation, the amount owed, the payee,
or the date payable.
Future tax obligation that results from the origination of a temporary
difference that causes pretax book income to exceed taxable income.
An approximate measure of the liability of a plan in the event of a
termination at the date the calculation is performed. Related: projected benefit obligation.
Automatic stay
The restricting of liability holders from collection efforts of collateral seizure, which is
automatically imposed when a firm files for bankruptcy under Chapter 11.
Bill of lading
A contract between the exporter and a transportation company in which the latter agrees to
transport the goods under specified conditions which limit its liability. It is the exporter's receipt for the goods
as well as proof that goods have been or will be received.
Cash flow matching
Also called dedicating a portfolio, this is an alternative to multiperiod immunization in
which the manager matches the maturity of each element in the liability stream, working backward from the
last liability to assure all required cash flows.
Current maturity
Current time to maturity on an outstanding debt instrument.
Current / noncurrent method
Under this currency translation method, all of a foreign subsidiary's current
assets and liabilities are translated into home currency at the current exchange rate while noncurrent assets
and liabilities are translated at the historical exchange rate, that is, the rate in effect at the time the asset was
acquired or the liability incurred.
Deterministic models
liability-matching models that assume that the liability payments and the asset cash
flows are known with certainty. Related: Compare stochastic models
General partner
A partner who has unlimited liability for the obligations of the partnership.
Historical exchange rate
An accounting term that refers to the exchange rate in effect when an asset or
liability was acquired.
Immunization
The construction of an asset and a liability that are subject to offsetting changes in value.
Limited partner
A partner who has limited legal liability for the obligations of the partnership.
Limited partnership
A partnership that includes one or more partners who have limited liability.
Limited partnership
A partnership that includes one or more partners who have limited liability.
Multiperiod immunization
A portfolio strategy in which a portfolio is created that will be capable of
satisfying more than one predetermined future liability regardless if interest rates change.
Net book value
The current book value of an asset or liability; that is, its original book value net of any
accounting adjustments such as depreciation.
Off-balance-sheet financing
Financing that is not shown as a liability in a company's balance sheet.
Partnership
Shared ownership among two or more individuals, some of whom may, but do not necessarily,
have limited liability. See: general partnership, limited partnership, and master limited partnership.
Project notes (PNs)
Project notes are issued by municipalities to finance federally sponsored programs in
urban renewal and housing and are guaranteed by the U.S. Department of Housing and Urban Development.
Project financing A form of asset-based financing in which a firm finances a discrete set of assets on a standalone
basis.
Projected benefit obligation (PBO) A measure of a pension plan's liability at the calculation date assuming
that the plan is ongoing and will not terminate in the foreseeable future. Related:accumulated benefit obligation.
Sole proprietorship
A business owned by a single individual. The sole proprietorship pays no corporate
income tax but has unlimited liability for business debts and obligations.
Stochastic models
liability-matching models that assume that the liability payments and the asset cash flows
are uncertain. Related: Deterministic models.
Switching
Liquidating an existing position and simultaneously reinstating a position in another futures
contract of the same type. Symmetric cash matching An extension of cash flow matching that allows for the
short-term borrowing of funds to satisfy a liability prior to the liability due date, resulting in a reduction in the
cost of funding liabilities.
Symmetric cash matching
An extension of cash flow matching that allows for the short-term borrowing of
funds to satisfy a liability prior to the liability due date, resulting in a reduction in the cost of funding liabilities.
BALANCE SHEET
A “snapshot” statement that freezes a company on a particular day, like the last day of the year, and shows the balances in its asset, liability, and stockholders’ equity accounts. It’s governed by the formula:
Assets = Liabilities + Stockholders’ Equity.
Liquidity
A term that means nearness to cash; the closer an asset is to becoming cash or a liability is to using cash, the more liquid that asset or liability is.
accounts payable
Short-term, non-interest-bearing liabilities of a business
that arise in the course of its activities and operations from purchases on
credit. A business buys many things on credit, whereby the purchase
cost of goods and services are not paid for immediately. This liability
account records the amounts owed for credit purchases that will be paid
in the short run, which generally means about one month.
accrued expenses payable
The account that records the short-term, noninterest-
bearing liabilities of a business that accumulate over time, such
as vacation pay owed to employees. This liability is different than
accounts payable, which is the liability account for bills that have been
received by a business from purchases on credit.
big bath
A street-smart term that refers to the practice by many businesses
of recording very large lump-sum write-offs of certain assets or
recording large amounts for pending liabilities triggered by business
restructurings, massive employee layoffs, disposals of major segments of
the business, and other major traumas in the life of a business. Businesses
have been known to use these occasions to record every conceivable
asset write-off and/or liability write-up that they can think of in
order to clear the decks for the future. In this way a business avoids
recording expenses in the future, and its profits in the coming years will
be higher. The term is derisive, but investors generally seem very forgiving
regarding the abuses of this accounting device. But you never
know—investors may cast a more wary eye on this practice in the future.
book value and book value per share
Generally speaking, these terms
refer to the balance sheet value of an asset (or less often of a liability) or
the balance sheet value of owners’ equity per share. Either term emphasizes
that the amount recorded in the accounts or on the books of a business
is the value being used. The total of the amounts reported for
owners’ equity in its balance sheet is divided by the number of stock
shares of a corporation to determine the book value per share of its capital
stock.
income statement
Financial statement that summarizes sales revenue
and expenses for a period and reports one or more profit lines for the
period. It’s one of the three primary financial statements of a business.
The bottom-line profit figure is labeled net income or net earnings by
most businesses. Externally reported income statements disclose less
information than do internal management profit reports—but both are
based on the same profit accounting principles and methods. Keep in
mind that profit is not known until accountants complete the recording
of sales revenue and expenses for the period (as well as determining any
extraordinary gains and losses that should be recorded in the period).
Profit measurement depends on the reliability of a business’s accounting
system and the choices of accounting methods by the business. Caution:
A business may engage in certain manipulations of its accounting methods,
and managers may intervene in the normal course of operations for
the purpose of improving the amount of profit recorded in the period,
which is called earnings management, income smoothing, cooking the
books, and other pejorative terms.
management information system (MIS)
a structure of interrelated elements that collects, organizes, and communicates
data to managers so they may plan, control, evaluate
performance, and make decisions; the emphasis of the
MIS is on internal demands for information rather than external
demands; some or all of the MIS may be computerized
for ease of access to information, reliability of input
and processing, and ability to simulate outcomes of
alternative situations
Accounts payable
Acurrent liability on the balance sheet, representing short-term obligations
to pay suppliers.
Corporation
A legal entity, organized under state laws, whose investors purchase
shares of stock as evidence of ownership in it. A corporation is a legal entity, which
eliminates much of the liability for the corporation’s actions from its investors.
Expenditure
A payment or the incurrence of a liability by an entity.
Partnership
A form of business organization in which owners have unlimited personal
liability for the actions of the business, though this problem has been mitigated
through the use of the limited liability partnership.
Illegal Immigration Reform and Immigrant Responsibility Act of 1996 (IIRIRA)
A federal Act shielding employers from liability if they have made
a good-faith effort to verify a new employee’s identity and employment eligibility.
Cash Flow Provided or Used from Financing Activities
Cash receipts and payments involving
liability and stockholders' equity items, including obtaining cash from creditors and repaying
the amounts borrowed and obtaining capital from owners and providing them with a return on,
and a return of, their investments.
Cookie Jar Reserves
An overly aggressive accrual of operating expenses and the creation of
liability accounts done in an effort to reduce future-year operating expenses.
Fair Value
The amount at which an asset could be purchased or sold or a liability incurred or
settled in a current transaction between willing and informed parties. When a quoted market price
is available, fair value is the product of the number of units in question times that market price.
That product also is referred to as the item's market value. For traded securities, the terms fair
value and market value are synonymous. When no quoted market price is available for the item
in question, fair value must be estimated.
Present Value
The amount due on an obligation less any interest on that obligation that would
be expected to accrue under market interest-rate conditions over the period prior to settlement. On
an interest-bearing liability, the amount owed on the liability, the principal, is its present value.
Interest is paid in addition to that present value amount. On a noninterest-bearing liability, the
amount owed is considered to include interest. To calculate present value, the liability must be discounted to remove that interest. The liability amount, excluding interest, would be the noninterest-
bearing liability's present value.
Realized Gains and Losses
Increases or decreases in the fair value of an asset or a liability that
are realized through sale or settlement.
Capital Lease
One where substantially all of the benefits and risks of ownership are transferred to the lessee. It must be reflected on the company's balance sheet as an asset and corresponding liability.
Long Term Debt
liability due in a year or more.
Segregated Fund
A pool of assets held by the insurer, to back a specific liability to a policyholder. Segregated Funds flucuate in value depending on the market value of a specific group of assets the company must maintain separately.
Waiver
Removing liability or responsibility regarding a tangible event.
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