Liability

Youssry Saleh & Partners 24 Mar 2016 1738 Views

“Liability” means: (mass noun)  The state of being legally responsible for something. (count noun) (usually liabilities) A thing for which someone is responsible, especially an amount of money owed. (usually in singular)A person or thing whosepresence or behavior is likely to put one at a disadvantage:

A liability can mean something that is a hindrance or puts an individual or group at a disadvantage, or something that someone is responsible for, or something that increases the chance of something occurring (i.e. it is a cause).

Types of Liability…

Legal Liability: the legal bound obligation to pay debt, whereby; a person is legally liable when they are financially and legally responsible for something.

Legal liability concerns both civil law and criminal law. Legal liability can arise from various areas of law, such as contracts, tort judgments or settlements, taxes, or fines given by government agencies. Liabilities may be covered by insurance, although typically insurance covers liability arising from negligent torts rather than intentional wrongs or breach of contract. Liability may also be imposed joint and severally in certain cases. Liabilities arising from a contract to borrow money are debt.

In commercial law, limited liability is a form of business ownership in which business owners are legally responsible for no more than the amount that they have contributed to a venture. If for example, a business goes bankrupt an owner with limited liability will not lose unrelated assets such as a personal residence (assuming they do not give personal guarantees). This is the standard model for larger businesses, in which a shareholder will only lose the amount invested (in the form of stock value decreasing). For an explanation, see business entity.

Manufacturer’s liability is a legal concept in most countries that reflects the fact that producers have a responsibility not to sell a defective product.

Public Liability: part of the law of tort which focuses on civil wrongs. An applicant (the injured party) usually sues the respondent (the owner or occupier) under common law based on negligence and/or damages. Claims are usually successful when it can be shown that the owner/occupier was responsible for an injury, therefore they breached their duty of care.

The duty of care is very complex, but in basic terms it is the standard by which one would expect to be treated whilst one is in the care of another.

Once a breach of duty of care has been established, an action brought in a common law court would most likely be successful. Based on the injuries and the losses of the applicant the court would award a financial compensation package.

Contingent Liability: it is potential obligation that may be incurred by an entity depending on the outcome of a future event; such as a court case. A contingent liability is one where the outcome of an existing situation is uncertain, and this uncertainty will be resolved by a future event.

A contingent liability is recorded in the books of accounts only if the contingency is probable and the amount of the liability can be estimated. These liabilities are not recorded in a company’s accounts and shown in the balance sheet when both probable and reasonably estimable as “contingency” or “worst case” financial outcome. A footnote to the balance sheet may describe the nature and extent of the contingent liabilities. The likelihood of loss is described as probable, reasonably possible, or remote. The ability to estimate a loss is described as known, reasonably estimable, or not reasonably estimable. Outstanding lawsuits and product warranties are common examples of contingent liabilities.

Tax Liability: The total amount of tax that an entity is legally obligated to pay to an authority as the result of the occurrence of a taxable event. Tax liability can be calculated by applying the appropriate tax rate to the taxable event’s tax base. Taxable events include, but are not limited to, annual income, the sale of an asset, a fiscal year-end or an inheritance.

A tax liability is a legal claim on assets. Should an entity default on paying its taxes, the governing authority may foreclose on the delinquent account, or take out a lien or encumbrance on an asset.

Current Liabilities: A company’s debts or obligations that are due within one year. Current liabilities appear on the company’s balance sheet and include short term debt, accounts payable, accrued liabilities and other debts. Essentially, these are bills that are due to creditors and suppliers within a short period of time. Normally, companies withdraw or cash current assets in order to pay their current liabilities.
Analysts and creditors will often use the current ratio, (which divides current assets by liabilities), or the quick ratio, (which divides current assets minus inventories by current liabilities), to determine whether a company has the ability to pay off its current liabilities.

Total Liabilities: The aggregate of all debts an individual or company is liable for. Total liabilities can be easily calculated by summing all of one’s short-term and long-term liabilities, along with any off balance sheet liabilities which corporations may incur. On the balance sheet, total liabilities plus equity must equal total assets. The company’s total liabilities can be split up into two basic parts, short and long term liabilities. Short-term liabilities are typically liabilities which are due within one year or less. Long-term liabilities are those with a time horizon of maturity is past the one year point. Liabilities such as loans, leases and taxes due can fall into either category.

Liability Swap: An exchange of debt related interest rates between two parties – usually large corporations. In a liability swap, two currently identical (in nominal value) cash flows are exchanged. Usually a variable (floating) rate is exchanged for a fixed rate of income. Swaps are undertaken because each company receives a better rate of interest by trading with the other than they would if they chose a more traditional financing route.

A swap will have an initial value of zero because the initial cash flows are the same. Over time, however, this will change as interest rates change and the swap will have either a positive or negative value for each contract holder. In certain cases, the swap can be marked-to-market periodically to clear out the unrealized gains and losses by making any payments due.