Centro Case



Centro Case

Question 1.

Classification of Liabilities

Liabilities are the set of accounting items that reflect the financing obtained by the Company by outside entities. There are two types of liabilities: current and long term. Current liabilities refer to the obligations that the organization has to pay creditors in a short period of time, usually within one year. It's a funding is obtained through foreign entities having a maturity less than or equal to one period. It consists of; loans, bonds, bank loans, advance payments received, liabilities for goods and services, bills, liability for taxes, duties, social security, salaries and wages payable to employees, intercompany obligations and others. Long term liabilities are all obligations of the company with a maturity longer than 12 months. These include mainly long-term loans, bonds and other debt securities. These include; loans, liabilities arising from debt securities, other financial liabilities, other long-term liabilities (due to finance leases for fixed assets alienated, but still used by the body).

Thus, long and short term liabilities are mainly classified based on the time duration while preparing the balance sheet. Current liabilities are for short period of time i.e. within a year and long term liabilities are obligations that are for a period of more than a year.

Directors' Justification for Misclassification of Current Liabilities

With respect to the misclassification of liabilities of Centro, the directors of the company raised their point that directors are not expected to know the liability durations. They said that the documentation with respect to the borrowing by the company was complicated and it just have been a change in the accounting standards that resulted in some griminess in their interpretation.

Question 2.

Courts Dismissal of Arguments

The points raised by the directors were not able to influence the court and they dismissed their discretions by raising several points. They said ...