REV: JUNE 4, 2010
Kim Park (B): Liabilities
As part of her plan to explore interesting accounting questions with her study group, Kim Park
prepared a set of short case studies dealing with the recognition and measurement of liabilities.1 Kim
knew from her earlier study group discussions that her fellow students expected her to prepare
tentative answers to the questions she would raise in the meeting. In addition, the study group had
encouraged her to illustrate her tentative answers with numerical illustrations using case data.
Kim understood from the background readings assigned for her accounting course ...view middle of the document...
If both of these conditions cannot be met, the
1 See “Kim Park (A): Long-lived Nonmonetary Assets,” Harvard Business School No. 110-017.
2 Financial Accounting Standards Board, Statements of Financial Accounting Concepts No. 6, “Elements of Financial
3 International Accounting Standards Board, “Framework for the Preparation and Presentation of Financial Statements.”
Professors David Hawkins (HBS), Gregory Miller (University of Michigan), and V.G. Narayanan (HBS) prepared this case. The character
mentioned in the case is fictional. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as
endorsements, sources of primary data, or illustrations of effective or ineffective management.
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Kim Park (B): Liabilities
contingent liability should be disclosed unless the probability of occurrence is remote.4 Under IFRS,
Kim had noted that capitalized contingent liabilities were referred to as “provisions.” The term
“contingent liability” was reserved for those contingent liabilities that were not capitalized.
Otherwise, in Kim’s view, the GAAP and IFRS contingent liability accounting rules were similar.
Austral Electronics Company
Before Kim went to business school, she had a friend who worked for Austral Electronics
Company (“Austral”). As Kim recalled, during her friend’s time with the company, it had issued a
US$1 million equivalent local currency eight-year zero-coupon bond priced to yield 10% at maturity.5
Kim had three questions for her study group: (1) How should Austral have accounted for its zerocoupon bond at the issue date? (2) How should the company have accounted for the zero-coupon
bond at the end of the first year following it issuance? (3) At the end of the third year?
United Airlines, Inc.6
Prompted by her observation that different airlines seemed to account for their unredeemed
frequent flier mileage obligations differently, Kim decided to ask her study group the question: How
should an airline account for its unredeemed frequent flier mileage obligations?
To focus the study group discussion, Kim prepared a short description of United Airlines Inc.’s
Mileage Plus program. United Airlines (“United”), through its frequent flier rewards program
(Mileage Plus), rewarded frequent fliers with mileage credits that could be redeemed for free,
discounted, or upgraded travel, and non-travel awards. United also sold frequent flier mileage