scania signs an agreement with its employees labor union promising to increase wages 566873

Scania signs an agreement with its employees” labor union, promising to increase wages by 6% and to increase medical benefits. Although this agreement creates an obligation, it does not immediately create an accounting liability because the obligating event has not yet occurred. That event occurs when employees provide labor services that require Scania to pay wages and provide medical benefits. As employees work, Scania recognizes a liability on its balance sheet. The agreement in Example 14 is, at the time of signing, a mutually unexecuted contract (also called an executory contract) because neither Scania nor its employees have performed under the contract. Other examples include most purchase orders and some leases. Firms usually do not recognize the obligations created by mutually unexecuted contracts as accounting liabilities, nor do they recognize the benefits of such contracts as assets, as illustrated previously in Example 7. Chapter 11 discusses the accounting treatment of some of these arrangements.