CFA Practice Question

CFA Practice Question

Which of the following is an essential characteristic of a liability?
A. Liabilities must be legally enforceable.
B. The identity of the recipient entity must be known to the obligated entity before the time of settlement.
C. Liabilities represent an obligation that has arisen as the result of a previous transaction.
Explanation: A liability has 3 essential characteristics:

1. It represents an obligation that requires settlement by probable future transfer or use of assets.
2. The firm has little or no discretion in avoiding the obligation.
3. The transaction or other event that has given rise to the obligation has already occurred.

User Contributed Comments 8

User Comment
jayjunk I would think A is true too... can't think of a liability that is not legally enforceable!
smillis "legally" enforceable...there are other ways to be enforceable, ie supplier won't ship raw materials unless current debt is paid.
surob I can go to another supplier assuming there are lot of suppliers out there... :)
jackwez liability could be for non cash items as well.... bonds, loans, leases, etc.....
JCopeland A. Implies 1. but it isn't specifically stated. However, a liability can result from a lawsuit (which is not a transaction). Note #3 The transaction OR OTHER EVENT, giving rise to the obligation has already occured.
arendb I went A as well.

Liability represents an obligation that has arisen as the result of a past event...not necessarily a past transaction.
Friso Why would you pay if the other party can't (legally) enforce it? "Sure, there's no contract, but as a token of our good will, here is the money anyway"?
I also agree with the others: intended (future) actions can also cause liabilities now. I say A.
tzanchan You can have a deferred tax liability which is not legally enforcable and may not end up being paid if the company is not profitable.
You need to log in first to add your comment.