Perspective and Issues

The balance sheet bifurcation of assets and liabilities into current and noncurrent segments allows net working capital (defined as current assets minus current liabilities) to be readily perceived. Working capital, which is the relatively liquid portion of total entity capital, can be used to determine the ability of an entity to repay obligations as they become due in the ordinary course of business. Working capital assumes a going‐concern concept. If the entity is to be liquidated in the near future, this mode of balance sheet classification of assets and liabilities is generally inappropriate.

ARB 43, Chapter 3, defines current liabilities as those obligations whose liquidation is reasonably expected to require the use of existing resources properly classifiable as current assets or the creation of other current liabilities. This definition excludes from the current liability classification any currently maturing obligations that will be satisfied by using long‐term assets and currently maturing obligations expected to be refinanced.

The offsetting of assets and liabilities is almost entirely prohibited under GAAP. However, under certain narrowly defined circumstances, where a right of setoff actually exists, netting for financial reporting purposes is acceptable, as described in this chapter.

FASB has declared, as a long‐term goal, that all financial liabilities are to be recognized in the balance sheet at fair values, rather than at amounts based on ...

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