Financial Accounting and Reporting-CPA Practice Exam

What must occur for a commitment to an exit/disposal plan to be recognized as a liability?

1. The plan must be approved by shareholders

2. An event resulting in a present obligation must occur

3. The company must have financial resources allocated

4. The exit/disposal plan must be published

The correct answer is: An event resulting in a present obligation must occur

For a commitment to an exit or disposal plan to be recognized as a liability, it is essential that an event resulting in a present obligation has occurred. This typically means that the company has officially communicated its intent to exit a particular line of business or has taken actions that unequivocally commit it to carrying out the exit. The recognition of a liability hinges on the presence of a current obligation that the company must settle. This often involves actions such as initiating a formal plan, informing affected parties, including employees or stakeholders, and identifying the costs associated with executing the plan. The timing and nature of these commitments create a present obligation that meets the recognition criteria for a liability under the applicable accounting standards. While having a plan approved by shareholders or allocating financial resources may be relevant to the management's decision-making process, these alone do not establish the necessary present obligation required for liability recognition. Similarly, the publication of the plan, although it may inform the public or investors, does not inherently create a liability unless it is tied to a firm commitment through specific actions taken by the company. Hence, the focus is on the concrete obligations that arise from those actions rather than the ancillary processes involved in developing the exit plan.