Louisiana-Pacific Corporation and Weyerhaeuser Company (forest products companies) need additional pulp-processing capacity. Each firm could borrow the needed funds and build its own manufacturing plant. Instead, they form a joint venture to build a pulp-processing plant. Each firm agrees to use half of the new plant’s capacity each year for 20 years and to pay half of all operating and debt service costs. The joint venture uses the purchase commitments of Louisiana-Pacific Corporation and Weyerhaeuser Company to obtain a loan to build the facility. Accounting views the purchase commitments as executor contracts—all benefits occur in the future—and therefore neither firm will recognize a liability for its portion of the loan. The loan will appear as a liability on the balance sheet of the joint venture. Thus, each firm obtains financing for the services of the plant without showing a liability on its balance sheet.3

Contingent Obligations As an alternative to borrowing and using a particular asset as collateral, a firm might obtain cash by selling (transferring) an asset to a purchaser (transferee). In some cases, the arrangement includes a requirement that the seller will pay cash to the purchaser under certain conditions, for example, if the asset sold generates less cash for the purchaser than anticipated at the time of sale. In this arrangement, the seller has relinquished its claim to the cash flows that the transferred asset will generate and has assumed an obligation to stand ready to make a cash payment if the stated condition is met. These are the accounting issues:

1. Should the transferor account for the transfer of the asset as a sale or as a secured borrowing?

2. If the transferor accounts for the transfer as a sale, how should it account for the obligation (referred to as a contingent obligation by U.S. GAAP and as a provision by IFRS) to stand ready to make a future cash payment?

We present two examples to illustrate these arrangements now, and return to these questions later in the chapter.

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