STANDARDS

PAS 1, PAS 32, PFRS 7, PFRS 9

Under the Conceptual Framework for Financial Reporting, Noncurrent liabilities are defined as a
residual definition where all liabilities not classified as current are classified as noncurrent liabilities.

Noncurrent liabilities include:

- Noncurrent portion of long-term debt

- Finance lease liability
- Deferred tax liability
- Long-term obligation to officers
- Long-term deferred revenue

According to the PAS 1, paragraph 69, an entity shall classify a liability as a noncurrent one
when,

1. The entity expects to settle the liability not within the entity’s operating cycle.

2. The entity holds the liability primarily for the purpose of trading.

3. The liability is due to be settled not within twelve months after the reporting period.

4. The entity does not have an unconditional right to defer the settlement of the liability for at
least twelve months after the reporting period.

IAS 32 This standard prescribes the guidelines for the presentation of financial instrument either as
financial asset, financial liability or equity instrument from the issuer’s perspective. It also provides the
guidelines for the accounting treatment of the interest, dividend and gains or losses related to financial
instruments and the circumstances, when a financial asset can be off set with a financial liability.
However, the recognition and measurement rules for financial instrument are covered under IFRS 9 and
related disclosure requirements are covered under IFRS 7

IFRS 9 classifies financial liabilities as follows:

1. Financial liabilities at fair value through profit or loss: these financial liabilities are
subsequently measured at fair value and here, all derivatives belong.
2. Other financial liabilities measured at amortized cost using the effective interest method.
INITIAL MEASUREMENT

According to PFRS 9, a noncurrent liability of an entity shall be initially measured 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. On the other hand, financial
liability designated initially at fair value through profit or loss have transaction costs that are expensed
immediately that is why the recognition for such instruments are different — based from fair value
alone.

In the case of, for example, bonds payable and noninterest-bearing note payable, are initially
measured at present value. If the long term note payable is interest-bearing, it is initially measured at
face amount. In addition to this, noncurrent liabilities or long-term obligations are commonly recorded
and reported at its face amount.

“Fair value is the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date” (PFRS 13)

Compound Financial instrument contains both a liability and an equity component. These
components are classified and accounted for separately. To separate the debt and equity components,
the entity simply deducts from the fair value of the whole instrument the fair value of the debt
component without the equity feature; the remaining amount represents the equity component. The
sum of the carrying amounts allocated to the liability and equity components is always equal to the fair
value of the whole instrument. No gain or loss is recognized on the initial recognition.

SUBSEQUENT MEASUREMENT

PFRS 9, paragraph 5.3.1, states that an entity shall subsequently measure a financial liability,
either as:

1. Initially measured at Face amount are subsequently measured at Face amount or expected
settlement amount.

2. Initially measured at Present value are subsequently measured at Amortized cost.

3. At amortized cost using the effective interest method. The amortized cost of a financial
liability is defined to be 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. In other words, the
difference between the financial liability’s face amount and the present value, of which can be either
discount or premium on the issue of such instrument, is amortized through interest expense using the
effective interest method. If cash price equivalent is determinable, it is initially measured at this amount
and is subsequently amortized.

DERECOGNITION

PFRS 9 prohibits the reclassification of financial liabilities.

 A financial liability should be removed from the balance sheet when, and only when, it is
extinguished, that is, when the obligation specified in the contract is either discharged or cancelled or
expires. A liability is extinguished in, for example through:

a. Repayment in cash

b. Transfer of non-cash assets or rendering of services

c. Issuance of equity securities

d. Replacement of the existing obligation with a new obligation

e. Waiver or cancellation by the creditor

f. Expiration, e.g., a warranty obligation expires after the warranty period

When a debtor settles an obligation by transferring noncash assets to the creditor, the
difference between the carrying amount of the liability extinguished and the carrying amount of the
noncash asset transferred is recognized as gain or loss in profit or loss. If payment is less than the
liability being extinguish, the difference is a gain. If payment is more than the liability being extinguish,
the difference is a loss. (Asset Swap)

When the terms of financial liability are renegotiated such that the debtor settles it by issuing
equity securities to the creditor, the difference between the carrying amount of the liability
extinguished and the fair value of the securities issued or fair value of the financial liability extinguished,
whichever is more clearly determinable, is recognized as gain or loss in profit or loss. (IFRC 19, Equity
Swap)

A borrower and lender may also modify the terms of an existing financial liability, such as by
changing the stated interest rate, the maturity date or the face amount, or by reducing, deferring or
cancelling any accrued interest.

If the modification is substantially different terms (at least 10% different from the carrying
amount of the original) the existing financial liability is considered extinguished and replaced by a new
one. The difference between the present value of the new liability and the carrying amount of original
liability is recognized as gain or loss. A modification can be substantial regardless of the debtor’s
financial difficulty.

If modification is not substantial, existing financial liability is not considered extinguished.

Hence, it is continued to be recognized but with modified cash flows depending on the modified terms.
An adjustment to the effective interest rate may be necessary. No gain or loss is recognized.

Direct cost of modification is included in the gain or loss if substantial and deducted from the
carrying amount of the existing financial liability and subsequently amortized using effective interest
method if not substantial. (Modification of terms)