LIABILITIES

- Present obligations of an entity

- It arises from past transactions or events
- Settlement results from an outflow of resources embodying economic benefits
(pay cash, transfer noncash asset, provide service at some future time)

PRESENT OBLIGATION

- Can be legal or constructive
- Legally enforceable as a consequence of binding contract or statutory requirement (accounts
payable)
- Constructive obligations by reason of normal practice, custom and a desire to maintain good
business relations or an act in an equitable matter

PAST EVENT

- Past event that leads to legal and constructive obligation is obligating event, it creates present
obligation because the entity has no realistic alternative but to settle the obligation created by
the event

OUTFLOW OF FUTURE ECONOMIC BENEFITS

- Without payment of money, without transfer of noncash asset, without performance of service,
there is no accounting liability
- E.g. cash dividend declaration, cash advances or deposit from customer, advance rent
- Stock dividend is not an accounting liability, stock dividend payable is part of equity

EXAMPLES OF LIABILITIES

a. AP to suppliers for purchases of goods or services
b. Withheld from employees or taxes or contributions to SSS or pension funds
c. Accruals for wages, interest, royalties, taxes, product warranties and profit sharing plans
d. Dividends declared not paid
e. Deposits and advances from customers and officers
f. Debt obligations for borrowed funds notes, mortgages and bonds payable
g. Income tax payable
h. Unearned revenue




INITIAL MEASUREMENT OF LIABILITIES

- PFRS 9, PARAGRAPH 5.1.1. initial measurement at fair value minus, in the case of financial
liability not designated at fair value through profit or loss, transaction costs that are directly
attributable to the issue of the financial liability
- Transactions costs are included in the initial measurement of a financial liability at amortized
cost
- If designated initially, transaction costs are expensed outright
- Transaction costs are incremental costs that are directly attributable to the issue of a financial
liability
- Incremental costs, those that would not have been incurred if the entity did not issue a financial
liability
- Transaction costs include:
a. Fees and commissions paid to agents, advisers, brokers and dealers
b. Levies by regulatory agencies and securities exchanges
c. Transfer taxes and duties
- Transaction costs does not include:
a. Debt premiums and discounts
b. Financing costs
c. Internal administrative or holding costs

FAIR VALUE OF FINANCIAL LIABILITY

- Fair value, the amount for which a liability is settled between knowledgeable and willing parties
in an arms length transaction
- it is equal to Present Value of the future cash payment to settle the obligation
- Present Value the discounted amount of the future cash outflow in settling an obligation using
the market rate of interest

SUBSEQUENT MEASUREMENT OF LIABILITIES

- PFRS 9, PARAGRAPH 5.3.1, financial liability shall be measured at:
a. Amortized cost, using effective interest method
b. Fair value through profit or loss

AMORTIZED COST OF FINANCIAL LIABILITY

- It is the amount at which the financial liability is measured at initial recognition minus principal
repayment, plus or minus the cumulative amortization using the effective interest method of
any difference between the initial amount and the maturity amount OR
FACE AMOUNT PRESENT VALUE (can either be discount or premium)

MEASUREMENT OF NONCURRENT LIANBILITIES

- Initially measured at present value and subsequently measured at amortized cost (for bonds
payable and noninterest-bearing note payable)
- If interest-bearing note payable, initially measured at face amount (it is equal to the present
value of the note payable

MEASUREMENT OF CURRENT LIABILITIES

- In concept, initially measured at present value and subsequently measured at amortized cost
- In practice, recorded at face amount because the difference between the face amount and
present value are usually immaterial therefore ignored

FAIR VALUE OPTION OF MEASURING FINANCIAL LIABILITY

- PFRS 9. PARAGRAPH 4.2.2, provides that at initial recognition an entity may irrevocably
designate financial liability at fair value through profit or loss when doing so results in more
relevant information
- Every year end, the entity shall recognize changes in fair value as profit or loss
- Interest shall be measured using the stated or nominal rate

CLASSIFICATION OF LIABILITIES

- PAS 1, classified as:
a. Current liabilities
b. Noncurrent liabilities

CURRENT LIABILITIES

- PAS 1, PARAGRAPH 69, an entity can classify liability as current when:
a. expects to settle the liability within 1 year
b. holds the primarily the liability for the purpose of trading (incurred with an intention to be
repurchase in the near term)
c. is due to be settled within 12 months after the reporting period
d. does not have unconditional right to defer settlement of the liability for at least 12 months
after the reporting period
- e.g. trade payables and accruals for employees and other operating costs (considered current
even if settled for more than 12 months)
- e.g. of current liabilities held for trading: bank overdraft, dividends payable, income taxes, other
nontrade payables, and current portion of noncurrent liabilities

NONCURRENT LIABILITIES

- Includes all liabilities not classified as current as:
a. Noncurrent portion of long-term debt
b. Finance lease liability
c. Deferred tax liability
d. Long-term obligations to entity officers
e. Long-term deferred revenue

LONG-TERM DEBT FALLING DUE WITHIN ONE YEAR

- Liability which is due to be settled within 12 months is classified as current when:
a. The original term was for a period longer than 12 months
b. An agreement to refinance or to reschedule payment on a long-term basis is completed
after the reporting period and before the financial statements are authorized for issue
- However, if the refinancing is completed on or before the end of the reporting period, classified
as noncurrent
- If the entity has the discretion to refinance or roll over an obligation for at least 12 months after
the reporting period under an existing loan facility, still noncurrent because such obligation is
considered to form part of the entitys long-term refinancing because of the unconditional right
under the existing loan facility to defer settlement of the liability for at least 12 months
- NOTE: refinancing must be on the discretion of the entity otherwise considered as current
liability

COVENANTS

- Attached to borrowing agreements which represents undertakings by the borrower
- Actually restrictions on the borrower as to undertaking further borrowing, paying dividends,
maintaining specified level of working capital and so forth

BREACH OF COVENANTS

- In case of breach, the liability becomes payable on demand
- PAS 1, PARAGRAPH 74, such liability is classified as current even if the lender has agreed, after
the reporting period and before the financial statements are authorized for issue, not to
demand payment as a consequence of the breach
- However, the liability is classified as noncurrent if the lender has agreed on or before the end of
the reporting period to provide a grace period ending at least 12 months after that date
- Grace period is a period within which the entity can rectify the breach and during which the
lender cannot demand immediate repayment

NONADJUSTING EVENTS

- Events occurring between the end of the reporting period and the date the financial
statements are authorized for issue shall qualify for disclosure, meaning, the loans remain as
current liabilities:
a. Refinancing on a long-term basis
b. Rectification of a breach of a long-term loan agreement
c. The granting by the lender of a grace period to rectify a breach of a long-term loan
arrangement ending at least 12 months after the reporting period

PRESENTATION OF CURRENT LIABILITIES

- PAS 1, PARAGRAPH 54, shall include the following line items:
a. Trade and other payables (AP, NP, accrued interest on NP, dividends payable, accrued
expenses)
b. Current provisions
c. Short-term borrowing
d. Current portion of long-term debt
e. Current tax liability

ESTIMATED LIABILITIES

- Obligations which exist at the end of reporting period although their amount is not definite
- Either current or noncurrent
- provision both probable and measurable