PART 1 –
United Health Group, Last Name E-K
1. What are contingent liabilities? Under what circumstances should contingent liabilities be recorded in the financial statements? Remember to address specific sections of the financial statements in your response.
Contingent liabilities are “potential, rather than actual, liabilities because they depend on a future event” (Miller-Nobles, 2018, p. 594). Contingent liabilities are only recorded on financial statements when they are probable (likely to happen), and can be estimated. In this situation, a contingent liability is recorded on the balance sheet as an expense and a liability as its estimated value. When a contingent liability is reasonably possible or probable but unable to be estimated, it is recorded in a note on the financial statements, describing the situation but not providing any monetary value. This way, investors and other interested parties are made aware of the possibility of the liability affecting the company’s financial situation. Remote contingent liabilities are not disclosed in anyway on financial statements because they are highly unlikely to occur.
2. Review Note 13 (Commitments and Contingencies), specifically the section labeled Legal Matters. Does UnitedHealth Group Incorporated report any contingencies? If so, provide a summary.
United Health Group Incorporated reports two types of contingent liabilities; probable and able to be estimated, and probably unable to be estimated. In summary of note 13, United Health Group estimates liabilities for medical malpractice, employment, intellectual property, antitrust, privacy and contract claims and claims related to health care benefits coverage and other business practices (United Health Group, 2016, Form 10-K). United Health Group likely uses historical data to estimate a value for these liabilities. Additionally, they include a statement in the note regarding legal and regulatory matters that are difficult to predict and estimate. These liabilities cannot be listed on financial statements since they cannot be tied to a reasonable and reliable monetary value.
3. How should a company handle contingent liabilities that are reasonably possible or probable but cannot be estimated?
When a contingent liability is reasonably possible or probable but unable to be estimated, it is recorded in a note on the financial statements. The note should include a description of the situation but not provide any monetary value. This way, investors and other interested parties are aware of the possibility of the liability affecting the company’s financial situation. It would be wrong to attempt to estimate the value of these liabilities based on a gut feeling to report them on a balance sheet. If a confident estimate cannot be determined, a liability cannot be recorded on a balance sheet.
4. Review Note 13 (Commitments and Contingencies), specifically the section labeled California Claims Processing Matter. How did UnitedHealth Group Incorporated handle the recording of this contingent liability?
United Health Group Incorporated recorded its on-going legal battle with the California Department of Insurance (CDI) as a note because it is a probably liability but cannot be reasonably estimated at this point in the lawsuit. The note details the history of the dispute, including the changing fine amounts. This information allows investors and other interested parties to make their own decision on how the suit may end up without tying United Health Group Incorporated to any wrongly reported information. Any major, developing contingencies should be reported similar to this one in other companies. (United Health Group, 2016, Form 10-K).
References
Miller-Nobles, T., Mattison, B., & Matsumura, E. M. (2018). Horngren’s Financial & Managerial Accounting (6th ed.). Pearson.
United States Securities and Exchange Commission. (2016, February 9). UnitedHealth Group Form 10-K. United Health Group. https://www.unitedhealthgroup.com/viewer.html?file=%2Fcontent%2Fdam%2FUHG%2FPDF%2Finvestors%2F2015%2FUNH-Q4-2015-Form-10-K.pdf
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PART 2 –
The Walt Disney Company is a diversified entertainment company that is comprised of five different business segments. Walt Disney began as a cartoon studio in 1920 and today is known as a leading worldwide entertainment provider.
Requirements
1. On The Walt Disney Company’s balance sheet dated October 3, 2015, the company reports borrowings of $12,773 million. Review Note 8 (Borrowings) of the company’s annual report. What are the different types of borrowings the company holds?
The company holds 5 different types of borrowings. The company has U.S. medium-term notes (13,873), commercial paper (2,430), capital cities/ABC debt (108), foreign currency-denominated debt (447), and international theme parks borrowings (319). Of note, the company lists an “other” section with 159 in this column and a “less current portion” that is 4,563.
2. Perform a web search for the terms commercial paper and U.S. medium-term notes. What do each of these terms mean?
Commercial paper is a short-term debt that is commonly used and unsecured (Chen, 2021). Commercial paper is frequently used for financing a company’s payroll, accounts payable, and inventories (Chen, 2021). The maturity of commercial paper typically lasts from several days to rarely any longer than 270 days (Chen, 2021). Usually, commercial paper is issued at a discount from the face value and reflects market interest rates (Chen, 2021). A major benefit to commercial paper is it does not have to be registered with the SEC (Chen, 2021). They are short-term debt instruments to raise capital for a short period (Chen, 2021).
A medium-term note (MTN) is a note that typically matures in 5-10 years. A company can continuously offer a corporate MTN to its investors through a dealer. The investors can choose from different maturities from 9 months to 30 years, but most range between 1-10 years. A positive thing about MTN is that the company only has to register with the SEC once instead of every time for differing maturities.
3. Review the information included in Note 8. What are the maturity dates for The Walt Disney Company’s U.S. medium-term notes?
The US medium-term notes in 2015 totaled 13.9 billion with maturity spanning from 1-78 years. This includes the fixed notes of $13.7 billion with interest rates spanning 0.45% to 7.5%. It also has $260 mission worth of floating rates that have LIBOR interest rates plus/minus the spread. The effective rate as of October 30 was 0.69%. Of note, Disney has European Medium-term notes that the company can issue a security that amounts to $4 billion based on market conditions at the time.
References
Chen, J. (2021, March 31). Commercial Paper. Retrieved from https://www.investopedia.com/terms/c/commercialpaper.asp.
Chen, J. (2021, March 19). Medium Term Note (MTN). Retrieved from https://www.investopedia.com/terms/m/mtn.asp.
Miller-Nobles, T., Mattison, B., & Matsumura, E. M. (2018). Horngren’s Financial & Managerial Accounting (6th ed.). Pearson.
