Page 67 - Bankruptcy and Reorganization Services

litigation the precise amount of indebtedness. fn 33 In the context of bankruptcy, the U.S. federal courts’
glossary of legal terms defines a liquidated claim as "a creditor’s claim for a fixed amount of money." fn
34 Accordingly, the amount and timing of payments required to satisfy the indebtedness must be known
for the debt to be considered liquidated. Notes or accounts payable would be an example of liquidated
debt. In contrast, unliquidated debt represents an obligation that is recognized by both the creditor and
debtor, yet either the amount or timing of payments, or both, is unknown. Obligations associated with
environmental remediation, the perpetual care of cemeteries, and defined benefit pension plans would be
examples of unliquidated debt.

Contingent and disputed debt arises when the existence of an obligation is not fully recognized or
acknowledged. The term contingent is defined as being dependent on, associated with, or conditioned by
something else. fn 35 For GAAP purposes, FASB (Accounting Standards Codification) ASC 450, Con-
tingencies, defines a contingency "as an existing condition, situation, or set of circumstances involving
uncertainty as to possible gain .. or loss ... to an entity that will ultimately be resolved when one or more
future events occur or fail to occur." fn 36 Accordingly, in the context of contingent debt, the existence of
an obligation is conditioned upon the occurrence of some future event. The potential creditor and debtor
both recognize the possibility that a liability may arise, but the triggering event has not yet occurred. Fi-
nancial guaranties, warranty obligations, and certain earn-out payments (for example, those that are con-
ditioned upon performance as opposed to the passage of time) are examples of contingent debt. The term
disputed debt denotes an obligation that is not acknowledged by the alleged debtor. Causes of action are
an example of disputed debt. In the context of bankruptcy or financial distress, all debt, whether liqui-
dated, unliquidated, contingent, or disputed, must be considered and evaluated.

Most liquidated debt obligations are financial liabilities. Although the valuation of financial liabilities
can be complex, the methods employed to value such liabilities are known and generally accepted in the
valuation community. Liquidated debt is categorized as either current or long term. Examples of current
liabilities include accounts payable, taxes payable, and accrued expenses. For most purposes, these lia-
bilities are valued at their face value. Long-term liabilities include bonds and notes. As discussed later,
these liabilities may be stated at face value or at market value using a premise of value framework, de-
pending on the purpose of the valuation. Liquidated debt is typically reflected on the balance sheet of the
debtor. fn 37 Chapter 10 of this practice aid contains a summary-level discussion of the basic methodology
of valuing liquidated debt and some of the issues involved when valuing distressed, liquidated debt.
Unliquidated, contingent, and disputed liabilities tend to be off-balance-sheet liabilities. Such liabilities
can occur for a variety of reasons. fn 38

fn 33 As defined by Merriam-Webster Online.

fn 34 The U.S. federal courts’ glossary of legal terms can be found at www.uscourts.gov/glossary.

fn 35 As defined by Merriam-Webster Online.

fn 36 FASB ASC 450-10-20.

fn 37 One obvious exception to this is operating, or true, leases. Information regarding operating leases is contained in the footnotes of
GAAP financial statements. When assessing the value of a business, many analysts adjust the financial statements to reflect operating
leases as debt. For a good discussion on the capitalization of operating leases, see Tim Koller, Marc Goedhart and David Wessels,
Valuation: Measuring and Managing the Value of Companies, 5th ed. (Hoboken, NJ: John Wiley & Sons, Inc., 2010).

fn 38 Fishman, Pratt, Griffith, and Wilson, Guide to Business Valuations, 702.12.

© 2020 Association of International Certified Professional Accountants 65