[LILY2609]

LLC formed Dec 2008 by Members A & B.
Member A made its required initial capital contribution in Dec 2008.
Member B is required to make first installment of its initial capital contribution in Oct 2009, as long as it is still a Member of the LLC on the date the first installment is due, or if agreement has not been terminated.

Question is: Does Member B show a liability for this on its 12/31/08 financial statements?

My gut tells me this should be disclosed in a footnote to the financial statements, but not booked as a liability at 12/31/08.

Thanks.

[codyman144]

As this is homework please see the big red notice on the top of this board about where to post these questions.

That being said I think you are on the right track.

[LILY2609]

Cody,
I only WISH this was a homework question! :o

I stated only the bare facts of the issue, to keep it very simple.
I'm a 58 year old accountant, who has primarily operational accounting experience, and not much financial reporting, so I've been trying to research on the internet.
I've lightly perused SFAS 5, and need to look closer at it, but if you could cite another source for me, I'd appreciate it.

Lily

[codyman144]

Cody,
I only WISH this was a homework question! :o

I stated only the bare facts of the issue, to keep it very simple.
I'm a 58 year old accountant, who has primarily operational accounting experience, and not much financial reporting, so I've been trying to research on the internet.
I've lightly perused SFAS 5, and need to look closer at it, but if you could cite another source for me, I'd appreciate it.

Lily

Well to me real world questions are 10 times more important than homework questions. Sometime tonight I will try to do some research on this. Sounds like a contingent liability to me. And this would require a footnote to the financial statements.

I will try to find the FASB or SFAS that applies and cite it.

[codyman144]

Okay first question are we talking about two companies here i.e. company A and company B? Otherwise how could “member b” show a liability on its balance sheet? Well this could be possible if both members are owners of a sole proprietorship entering into an LLC.

If you are talking about company b than FAS 5 does apply. If you are talking about the LLC they both are forming then it does not.

FAS 5 States paragraph 1 states “…a contingency is defined as an existing condition, situation, or set of circumstances involving uncertainty as to possible gain… or loss…to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur. Resolution of the uncertainty may confirm the acquisition of an asset or the reduction of a liability or the loss or impairment of an asset or incurrence of a liability. “

So if we are discussing a company b (enterprise b) then this is a contingent liability subject to FAS 5. Now I struggle with this point is there a potential loss or are we merely talking about an exchange of assets? If only an exchange of assets no entry is needed but should be noted on the financial statements. If there is a potential loss then we must apply the tests in FAS 5.

FAS 5 paragraph 8 states “An estimated loss from a loss contingency … shall be accrued as a charge to income if BOTH the following conditions are met: a. information is available prior to issuance of the financial statements indicates it is probable… or a liability had been incurred at the date of the financial statements. It is implicit that this condition be probable… b. the amount of loss can be reasonably estimated.

The definitions of probable, reasonably probable, and remote can be found in paragraph 3.

I really need more details here to give this the full attention it is due. If you are uncomfortable posting them publicly you can private message me.

http://www.fasb.org/pdf/aop_FAS5.pdf

[LILY2609]

Okay first question are we talking about two companies here i.e. company A and company B? Otherwise how could “member b” show a liability on its balance sheet? Well this could be possible if both members are owners of a sole proprietorship entering into an LLC.

If you are talking about company b than FAS 5 does apply. If you are talking about the LLC they both are forming then it does not.

FAS 5 States paragraph 1 states “…a contingency is defined as an existing condition, situation, or set of circumstances involving uncertainty as to possible gain… or loss…to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur. Resolution of the uncertainty may confirm the acquisition of an asset or the reduction of a liability or the loss or impairment of an asset or incurrence of a liability. “

So if we are discussing a company b (enterprise b) then this is a contingent liability subject to FAS 5. Now I struggle with this point is there a potential loss or are we merely talking about an exchange of assets? If only an exchange of assets no entry is needed but should be noted on the financial statements. If there is a potential loss then we must apply the tests in FAS 5.

FAS 5 paragraph 8 states “An estimated loss from a loss contingency … shall be accrued as a charge to income if BOTH the following conditions are met: a. information is available prior to issuance of the financial statements indicates it is probable… or a liability had been incurred at the date of the financial statements. It is implicit that this condition be probable… b. the amount of loss can be reasonably estimated.

The definitions of probable, reasonably probable, and remote can be found in paragraph 3.

I really need more details here to give this the full attention it is due. If you are uncomfortable posting them publicly you can private message me.

http://www.fasb.org/pdf/aop_FAS5.pdf

Company A and Company B are forming Company C, which is the LLC.
Company A has made an initial contribution of $2mm to Company C in Dec 2008.
Company B is required to make the 1st installment of it's $500k total initial contribution to Company C in Oct 2009.
I am the Accountant for Company B, and was anticipating recording the following je on Company B's books when we made the contribution in Oct 2009: DR Investment in Company C, CR Cash. However, the question has arisen: Do we need to record a liability for this as of 12/31/08?
Based on your discussion, it appears that this is an exchange of assets, and therefore no je would be necessary - just a footnote disclosure, which is what my gut was feeling. I do not anticipate a loss from this transaction.
Did I give you enough additional information to substantiate this conclusion?

I was also going to look at Paragraph 6 of ARB 50, as mentioned in Parragraphs 18 and 19of FAS 5.

Cody, you have been a great deal of help, and I thank you VERY much!

[codyman144]

Company A and Company B are forming Company C, which is the LLC.
Company A has made an initial contribution of $2mm to Company C in Dec 2008.
Company B is required to make the 1st installment of it's $500k total initial contribution to Company C in Oct 2009.
I am the Accountant for Company B, and was anticipating recording the following je on Company B's books when we made the contribution in Oct 2009: DR Investment in Company C, CR Cash. However, the question has arisen: Do we need to record a liability for this as of 12/31/08?
Based on your discussion, it appears that this is an exchange of assets, and therefore no je would be necessary - just a footnote disclosure, which is what my gut was feeling. I do not anticipate a loss from this transaction.
Did I give you enough additional information to substantiate this conclusion?

I was also going to look at Paragraph 6 of ARB 50, as mentioned in Parragraphs 18 and 19of FAS 5.

Cody, you have been a great deal of help, and I thank you VERY much!

Feel free to call me John,

Because we are not talking about a loss contingency no accrual of liability and recognition of expense is necessary. This is backed up by SAFS 5

We are simply talking about an agreement the company has entered into in which no exchange of assets will occur in the current period (2008). Thus a simple discloser on the financial statements is necessary, something like this: Company B has agreed to invest ($___) with company A in a joint venture to be named company c LLC. Blah blah blah reasons you think this will benefit the future earnings potential of company b.” Have an attorney or someone write that part up and look at notes to financial statements of other companies in which they disclose agreements like this.

The simple J/E you have above to record this transaction looks good to me.

Keep in mind that depending on the level of control and ownership you hold in company c you may have to include some or all of their financial results in yours. Use SFAS 141 (as amended) as guidance.

http://www.fasb.org/pdf/aop_FAS141.pdf

A full listing of FASB statements and interpretations can be found here.

FASB: FASB Statements and Concepts Statements

If you have more questions later feel free to come back. And I am glad I could help.

[LILY2609]

Thanks SO much, John - GREAT information!

[codyman144]

Thanks SO much, John - GREAT information!

Your welcome now get some sleep. :)