Hello all, A quick question with regards to take or pay: It states the following: The purchaser must make specified minimum payments even if it does not take delivery of the goods. However if the transaction was a off-balance sheet transaction, where would these minimum payments be reflected? Cheers
The point of the Take or Pay contract is that it is a liability but is not reflected on the balance sheet. For example, if the company goes bankrupt the guy with the take or pay contract is going to show up and have a fine bankruptcy claim. The importance for FSA is that you should recognize that a corporation may have undisclosed liabilities like a take or pay. Once payments happen under a take or pay, they are just expenses or purchases or whatever without regard to the take or pay.
Alirght, that clears things up…thanks Joey, although it all seems rather dodgey… Why does GAAP allow such operations to be allowed, if they are so meticulous with all other recording?
I guess I would disagree with “so meticulous in all other recording”. GAAP is a bizarre hodge podge of weird rules that got that way by lobbying from lots of special interest groups. Why isn’t there something in GAAP that says “You must disclose all material claims against the company” or “You must disclose the terms of all derivative contracts that may have a material effect on the company?” or “You must disclose all contractual arrangements with related entities, including all SPV’s affiliated with your company” or… Like somehow GAAP is involved in saving paper so those 10-K’s don’t kill many trees.