Question

Scenario 4: Definition of a Liability

CON 6 includes the following guidance defining liabilities.

Liabilities

35. Liabilities are probable future sacrifices of economic benefits arising from present

obligations of a particular entity to transfer assets or provide services to other entities

in the future as a result of past transactions or events.

Characteristics of Liabilities

36. A liability has three essential characteristics: (a) it embodies a present duty or

responsibility to one or more other entities that entails settlement by probable

future transfer or use of assets at a specified or determinable date, on occurrence

of a specified event, or on demand, (b) the duty or responsibility obligates a particular

entity, leaving it little or no discretion to avoid the future sacrifice, and (c)

the transaction or other event obligating the entity has already happened. Liabilities

commonly have other features that help identify them—for example, most liabilities

require the obligated entity to pay cash to one or more identified other entities and

are legally enforceable. However, those features are not essential characteristics of

liabilities. Their absence, by itself, is not sufficient to preclude an item’s qualifying

as a liability. That is, liabilities may not require an entity to pay cash but to convey

other assets, to provide or stand ready to provide services, or to use assets. And the

identity of the recipient need not be known to the obligated entity before the time

of settlement. Similarly, although most liabilities rest generally on a foundation of

legal rights and duties, existence of a legally enforceable claim is not a prerequisite

for an obligation to qualify as a liability if for other reasons the entity has the

duty or responsibility to pay cash, to transfer other assets, or to provide services to

another entity. [Footnotes omitted]

Scenario 4: Consider the following case excerpt from the FASB’s discussion materials related to

the existing CON 6 liability definition:

Suppose a hospital has carried out a routine operation during which the patient died. If the

patient’s death was the result of hospital negligence, it is highly probable the hospital will

have to pay compensation to the patient’s dependents. The cause of death has not been

established.

. . . Is a present obligation created when:

a. the hospital determines it has been negligent?

b. the executors of the patient’s estate assert negligence occurred?

c. a court concludes that negligence has occurred?

4. Analyze this issue

Answer 1

Answer -

Basic Note - Death due to negligence is serious issue and not just a matter of economic and financial transaction fact.

a. Yes

Reason -

The obligation will definitely get created when the hospital determines it has been negligent. Hospital is accepting it's fault and thereby a future obligation to pay patients dependents gets created.

b. No

Reason -

Although Present obligation does not get created but a footnote in Notes to Accounts is required to be disclosed as it is a Contingent Liability

c. Yes

Reason -

The court by passing the judgement is creating the liability for the hospital to pay the patients dependents.

4. The Issue as stated in question is Analyzed through the following points -

• In the current issue a life was lost due to negligence.
• "Doctors are considered next to God" Due to the reason they save patients. A moneytary consideration is however involved in the same for provision of his services.
• The negligence lead to patients death which in any circumstances cannot be brought back again.
• People spend their hard earned money by paying hospitals and medical experts to revive and restore their health.
• Keeping in mind the importance of life and hard earned money of patients it becomes essential to let the rules make hospital pay penalties and compensation for each small mistakes commited by them.
• Liability must be created and recovered from the hospital and also warning must be given to the hospital to follow the procedure and conduct its operations with utmost care.