Financial Accounting & Reporting Liability
FINANCIAL LIABILITIES
Example:
a. Payables (accounts, notes, loans & bonds payable)
- Discount on bonds payable is deducted to bonds
payable
b. Lease liabilities
c. Held for trading liabilities & Derivative Liabilities
d. Redeemable preference shares issued
e. Security Deposits & other returnable deposits
f. Utilities Payable
g. Accrued interest Expense
h. Obligation to deliver a variable number of own
shares worth a fixed amount of cash
i. Cash dividends payables
NOT FINANCIAL LIABILITIES:
a. Unearned revenue & warranty obligations that are
to be settled by future delivery of goods or
provisions of services.
b. Taxes, SSS, Philhealth, and Pag-IBIG payables
c. Constructive obligations
d. Advances from customers
e. Preference shares issued
f. Property & share dividends payable
Financial Liabilities are INITIALLY measured at fair value
minus transactions costs, except financial liability at FVPL
whose transaction costs are EXPENSED immediately.
Financial Liabilities classified as AMORTIZED COSTS are
subsequently measured at amortized cost.
Financial Liabilities classified as HELD FOR TRADING are
subsequently measured at FAIR VALUE with changes in fair
values recognized in PROFIT or LOSS.
Financial liabilities DESIGNATED AT FVPL are subsequently
measured at FAIR VALUE with changes in fair values
recognized as:
a. The amount of change in fair value that is
attributable to changes in the credit risk of that
liability is presented in other comprehensive income,
and
b. The remaining amount of change in the fair value of
the liability is presented in profit or loss.
CURRENT LIABILITIES
EXAMPLES:
a. Financial Assets measured at FVPL (e.g. designated
or held for trading)
b. Current portion of long-term notes, bonds, loans and
lease liabilities
c. Trade accounts and notes payables
d. Other non-trade payables due within 12 months
after end of reporting period
e. Unearned income expected to be earned within 12
months after end of reporting period
f. Bank overdrafts
g. Income tax payables, Accrued Expenses
NOT CURRENT LIABILITIES
a. Deferred tax liability – presented always as non-
current
b. Contingent liability is disclosed in the notes
c. Reserve for Contingencies is an appropriation of
retained earnings and thus, presented in equity.
d. Deferred Revenue is same with unearned revenue
except it is long-term
e. Share Dividends Payables is an adjunct equity
account, presented as additional to share capital.
f. Guarantee on the loan that is possible and not
probable is not recognized as liability
REFINANCING AGREEMENT
A long-term obligation that is maturing within 12 months
after the reporting period is classified as CURRENT, even if
refinancing agreement to reschedule payments on a long-
term basis is completed after the reporting period but
before the financial statements are authorized for issue.
- However, the obligation is classified as
NONCURRENT if the entity expects, and has the
DISCRETION to refinance it on a long-term basis
under an existing loan facility.
- If the refinancing is NOT at the discretion of the
entity, the financial liability is current.
ILLUSTRATION:
ABC Co. has a 10%, P1M loan payable as of December
31,20x1 that is maturing on July 1, 20x2. Interest on the
loan is due every July 1 and December 31.
Case 1: NO DISCRETION
On February 1, 20x2, ABC Co. entered into a refinancing
agreement with a bank to refinance the loan on a long-
term basis. Both parties are financially capable of honoring
the agreement’s provisions. ABC’s financial statements
were authorized for issued on March 15, 20x2.
Answer: The current liability is P1,000,000 because the
refinancing agreement is not at the discretion of ABC. The
refinancing agreement is disclosed in the notes as a non-
adjusting event after reporting period.
Case 2: WITH DISCRETION
On February 1, 20x2, ABC Co. entered into a refinancing
agreement with a bank to refinance the loan on a long-
term basis. Both parties are financially capable of honoring
the agreement’s provisions. ABC has the discretion to
refinance or roll over the loan for at least 12 months from
December 31,20x1 under an existing loan facility. ABC’s
financial statements were authorized for issued on March
15, 20x2.
Answer: The current liability is NONE because the
refinancing agreement is at the discretion of ABC. The loan
payable is presented as noncurrent.
Case 3: REFINANCING COMPLETED AS OF END OF
REPORTING PERIOD
On December 1, 20x1, ABC Co. entered into a refinancing
agreement with a bank to refinance the loan on a long-
term basis. The refinancing and roll over transaction was
completed on December 31,20x1.
Answer: The current liability is NONE because the
refinancing is completed as of the end of reporting period.
The loan payable is presented as noncurrent.
Case 4: WITH DISCRETION – INTEREST PAYABLE
Answer: The current liability is P50,000 representing the
accrued interest of the loan (1M x 10% x 6/12). The loan
payable is presented as noncurrent.

LIABILITIES PAYABLE ON DEMAND
A long-term obligation may become payable on demand as a
result of a breach of a loan provision.
The obligation is classified as CURRENT even if the lender
agreed, after the reporting period and before the
authorization of the financial statements for issue, not to
demand payment.
- Because the entity does not have an
unconditional right to defer settlement of the
liability for at least 12 months after the
reporting period.
However, the liability is NONCURRENT is the lender provides
the entity by the end of the reporting period a grace period
ending at least 12 months after the reporting period, within
which the entity can rectify the breach and during which the
lender cannot demand immediate repayment.
ILLUSTRATION:
On January 1, 20x1, ABC Co. took a 3-year, P1M loan from a
bank. The loan agreement requires ABC to maintain a
current ratio of 2:1. If the current ration falls below 2:1,
the loan becomes payable on demand. As of December 31,
20x1, ABC’s current ratio is 1:8:1
Case 1: Obligation Payable on Demand
Despite the breach of loan agreement on December 31,
20x1, there is no indication that the bank will demand
payment over the next 12 months.
Answer: the current liability presented in its year-end
financial statements is P1M. Only if an enforceable promise
is received on or before the end of reporting period from
the bank not to demand payment for at least 12 months
from end of reporting period that the loan is classified as
NONCURRENT.
Case 2: Grace period received after year-end
On January 5,20x2, the bank agreed not to collect the loan
in 20x2 and gave ABC 12months to rectify the breach of
loan agreement.
Answer: the current liability presented in its year-end
financial statements is P1M, because the grace period was
received after the end of the reporting period.
Case 3: Grace period received by year-end
On December 31, 20x1, the bank agreed not to collect the
loan in 20x2 and gave ABC 12months to rectify the breach
of loan agreement.
Answer: the current liability presented in its year-end
financial statements is NONE, because the grace period
was received by the end of reporting period. The loan is
presented as NONCURRENT.
TRADE ACCOUNTS PAYABLE
Accounts payable from purchases of inventory are recognized
when ownership over the goods are transferred to the
buyer.
Trade discounts are EXCLUDED from the amount recognized
for an account payable.
Cash Discounts may or may not be excluded from the initial
amount of account payable recognized depending on
whether the entity uses the gross or net method of recording
purchases.
Financial Accounting & Reporting Liability
ITEMS RECORDED AS ACCOUNTS PAYABLE
a. Goods in Transit purchased FOB shipping point.
- If the freight is freight prepaid, add the freight
prepaid to the payables.
b. Goods shipped FOB shipping point lost in transit.
c. Check draws but not yet release is addback to
accounts payable.
d. Check drawn released to payees but were postdated
are also addback to accounts payable.
ITEMS DEDUCTED OR NOT RECORDED AS ACCOUNTS
PAYABLE
a. Goods in transit purchased FOB Destination. (NR)
b. Return of credit goods shipped before the end of
accounting period. (D)
c. Goods shipped FOB destination, if freight collect,
deduct the freight from accounts payable.
ILLUSTRATION:
On December 31, 20x1 ABC Co. has accounts payable of
P1M before possible adjustment for the following:
a. Checks drawn but not yet released to payees
amounted to P12,000 while checks drawn and
released to payees but were postdated amounted
to P5,000.
b. On December 28,20x1, a vendor authorized ABC
to return for full credit goods shipped and billed at
P25,000 on December 14, 20x1. ABC shipped the
returned goods on December 31, 20x1 but the
credit memo was received and recorded only on
January 3, 20x2.
c. Goods shipped FOB shipping point, freight prepaid
from a vendor on December 28,20x1 was
recorded at invoice cost at shipment date. The
invoice cost is P14,000 while the freight cost is
P3,000.
d. Goods shipped FOB destination, freight collect
were received on December 29,20x1. The invoice
cost of P40,000 was credited to accounts payable
on date of receipt and the related freight of P5,000
was debited to an expense account.
How much is the adjusted accounts payable?
Unadjusted A/P P1,000,000
Unreleased & Post-dated checks 17,000
Purchased Return (25,000)
Unrecorded Freight on FOB SP, FP 3,000
Freight shouldered on behalf of the seller (5,000)
Adjusted Accounts Payable P 990,000
UNEARNED INCOME
EXAMPLES:
a. Advances received for future delivery of goods
b. Advances received for future provision of services
c. Gift certificates either for goods or services.
ILLUSTRATION:
ABC Co. requires advance payments for custom-built
guitar effects, gadgets, and racks. The records of ABC Co.
show the following:
Unearned revenue, Jan. 1, 20x1 P 1M
Advances received during 20x1 10M
Advances applied to orders shipped in 20x1 8M
Advances pertaining to orders cancelled in 20x1 300K
How much is Non-Refundable Advance payments received?
Unearned Revenue
P1,000,000
8,000,000 10,000,000
300,000
P2,700,000
 Financial Accounting & Reporting Liability

How much is the Refundable Advance payments received?

Unearned income – December 31, 20x1 P 2.7M
Orders Cancelled – liability for refundable deposits 300K
Total current liability for advances received P 3M

Note:
Since the advances received are refundable, those
pertaining to orders cancelled remain a liability of ABC.
However, they should be reclassified out of unearned
income and recognized as liability for refundable deposits.

ILLUSTRATION: Deferred Revenue – Sales of Service

ABC Co. sells service contracts that cover a 2-year period.
The sales price of each contract is P1,000. ABC sold 1,000
contracts evenly throughout 20x1. ABC’s past experience
shows that of the total pesos spent for repairs on service
contracts, 40% is incurred evenly during the first contract
year and 60% evenly during the second contract year.

20x1 20x2 20x3 Total

% earned – 1st year 40% 60%
% earned – 2nd year 40% 60%
1st Half (1M / 2) 500,000 200K 300K
2nd Half (1M / 2) 500,000 200K 300K
Earned Portions 200K 500K 300K 1M

How much is current and noncurrent portion of deferred

revenue to be presented in the statement of financial
position?

Current portion (earned portion in 20x2) 500,000

Noncurrent portion (earned portion in 20x3) 300,000
Total 800,000

How much is the service revenue recognized in 20x2?

Service revenue in 20x2 is its earned portion 500,000