Analysis of Liabilities

Dr. Rachappa Shette

Indian Institute of Management
Kozhikode.
 Analysis of Liabilities: Synopsis
• Indicators of liabilities analysis to understand
the short-term and long-term solvency.
• Analysis of off-balance sheet liabilities
• A brief case discussion on contingent liability
• Intel Case analysis on contingent liability
• Summit Distributors case discussion on debt-
covenants
 Indicators Solvency Analysis
• Ratio analysis:
– Current Ratio
– Quick Ratio
– Super-quick ratio
– Debt-to-Equity Ratio
– Debt-to-Assets Ratio
– Debt-to-Tangible Equity Ratio
– Debt-to-Tangible Assets Ratio
– Interest coverage Ratio
 Analysis of measurement of liabilities:
• Analysis of liabilities reported based on judgement of the
management
– Provision for retirement benefits
– Provision for warranties
• Analysis of off Balance Sheet liabilities and their notes
– Operating lease versus Financial lease
– Factoring (sold out accounts receivables – with recourse)
– Guarantees
– Contingent liabilities
– Debt covenants
• Analysis of Contingent Liabilities (A brief case analysis and Intel
Case)
• Debt Covenants (Summit Distributor Case analysis)
 Analysis of Contingent Liabilities
• On March 20, 2023 XYZ corp. had a chemical spill in a
field adjacent to their factory. They completed and paid cash
for the immediate clean up prior to their March 31 year-end.
However, they have consulted with an environmental
engineering firm that indicated that there is a 90% chance
that XYZ will have to perform a further clean up in six
months. The cost of such a cleanup would most likely be
INR 50,00,000. If the weather is perfect during the clean up,
it could cost as little as INR 47,50,000. On the other hand,
there is a small chance that soil contamination could spread,
increasing the costs to INR 75,00,000.
• Question 1: Should XYX recognize a liability in their 2022-23
financial statements?
 Analysis of Contingent Liabilities
• On March 20, 2023 XYZ corp. had a chemical spill in a
field adjacent to their factory. They completed and paid cash
for the immediate clean up prior to their March 31 year-end.
However, they have consulted with an environmental
engineering firm that indicated that there is a 90% chance
that XYZ will have to perform a further clean up in six
months. The cost of such a cleanup would most likely be
INR 50,00,000. If the weather is perfect during the clean up,
it could cost as little as INR 47,50,000. On the other hand,
there is a small chance that soil contamination could spread,
increasing the costs to INR 75,00,000.
• Question 2: Assuming they do, what amount should be
recognized?
 Analysis of Contingent Liabilities
• On March 20, 2023 XYZ corp. had a chemical spill in a
field adjacent to their factory. They completed and paid cash
for the immediate clean up prior to their March 31 year-end.
However, they have consulted with an environmental
engineering firm that indicated that there is a 90% chance
that XYZ will have to perform a further clean up in six
months. The cost of such a cleanup would most likely be
INR 50,00,000. If the weather is perfect during the clean up,
it could cost as little as INR 47,50,000. On the other hand,
there is a small chance that soil contamination could spread,
increasing the costs to INR 75,00,000.
• Question 3: How would XYZ record such a liability on their
books?