Question

In the liabilities section of its 2013 balance sheet, Bank of America reported "noninterest-bearing deposits" in U.S. offices of over $373 million. Bank of America is a very large banking company.

In the liabilities section of its 2013 balance sheet, Newmont Mining Corporation reported "reclamation and remediation liabilities" of more than $1.5 billion. Newmont Mining Corporation is involved in gold mining and refinancing activities.

In its 2013 balance sheet, Delta Air Lines' largest current liability reported was $4.1 billion for "air traffic liability".

Discuss what you believe the nature of these liabilities are and how each company might pay them off. In thinking about your response, think about the industry that each company operates in.

Further discuss which one of these liabilities you think poses the most risk for the company, explain why you feel this way. In other words, for which liability are actual costs most likely to exceed the liability reported on the balance sheet? Keep in mind that uncertianty creates risk.

Answer 1

1. Liabilities section of Balance sheet of the Bank of America reported on liabilities side, Non Interest Bearing deposits Non interest bearing deposits are basically a liability which the company owes without the need of any interest being paid on such deposit. It may be current or a non current liability depending on case to case basis. Also, Banks get funding in the form of non interest bearing deposits which are payable to respective persons. If deposits dont provide interests, this will lead to more spending more cash, more loans financing to others etc. In long term these non interest bearing deposits dont work out to be good. They however do balance position for banks 2. Recdamation & Remediation of Liabilities (Newmont Mining corporation) Generally mining companies carry out work on lands. The companies hence, need to incur a cost to bring the land to the functionally equivalent state to what it was before such work took place those cost incurred or to be incurred is known as reclamation cost. While remediation is the cost incurred to manage the contamination caused to land, while complying with all legal and regulatory requirements. There are many laws made for companies engaged in such business. The laws are subject to changes which directly changes the cost estimations. The company makes an expected estimate of future expenditure in order to comply with these laws as the full amounts cannot be predicted. So, they make a liability that these costs might be incurred in future subject to additions, deletions, laws, going concern etc 3. Air traffic liability (Delta Airlines) Basically, all airlines follow this principle, Revenues are recognised in accounting only when service is actually provided. Airline tickets are booked well in advance. But these are shown as unearned They prefer a practice of defering their revenue and taking it as a liability in the balance sheet primarily shown as air traffic liability. When the service is actually provided that particular part or amount is recognised in profit & loss account. And simultaneous reduction is made in this liability Taxes are also a part of this account, firstly, taxes are collected on booked tickets and later on when service is provided paid to the respective authority and the liability is further adjusted In the air traffic liability account, the estimated amount of refunds are also adjusted. This account shows the estimated net revenue that the company can generate.while the actual is shown in P & L A/c. This account is maintained based on the past experiences and even based the seasons involved 4. As per the given data,the most uncertain thing is the teclamation and remediation costs, as in future, if laws change and companies are under a position to incur a lot than the actual provision made