LIABILITIES

DEFINITION Liabilities are present obligation of an entity to

transfer an economic resource as a result of past
events.
CLASSIFICATION A liability is classified as current in the statement
of financial position under the following criteria:
1. It is expected to be settled as part of the
normal operating cycle (e.g. Trade
payables, Accrued operating expenses)
2. It is issued/held for trading purposes
(e.g. Financial liabilities at fair market
value)
3. It is expected to be settled within 12
months after the reporting period or the
balance sheet date (e.g. Non-trade
payables)
4. The company has no unconditional right,
option or prerogative as of the balance
sheet date to defer settlement of the
obligation for at least 12 months after the
balance sheet date (see refinancing and
breach of contracts discussion below)

If the liability does not qualify as current under

any of the above criteria, the liability must be
non-current.

LONG-TERM REFINANCING
Generally, a currently maturing obligation has to be presented as current liability. A currently maturing
obligation may be presented as a long term liability under refinancing agreement, only if:
 The company has the prerogative/option/unconditional right as of the balance sheet
date to refinance the liability on a long-term basis (that is to extend the maturity of the loan for
at least another 12 months after the reporting period or balance sheet date) OR
 If there is no prerogative but the long-term refinancing agreement was completed before or
at the balance sheet date.

BREACH OF CONTRACT
Generally, if the company breaches a covenant or contract (e.g. maintenance of a certain working
capital ratio, payment of interest as they fall due) connected to a long-term obligation, the long-term
obligation becomes due and demandable by the creditor, thus is generally presented as short-term
liability. The obligation may still be presented as long term only under the following conditions:
 If the creditor agreed to give the debtor a grace period for at least 12 months after the
balance sheet date (grace period is a period within which the debtor is allowed to rectify or
make correct the breached agreement or covenant) AND
 The said grace period should have been provided on or before the balance sheet date.

PROVISIONS (PAS 37)

Estimated liabilities in which either the amount or timing is uncertain. ACCRUED in the statement
of financial position, under the following conditions:
 Present obligation (legal or constructive) resulting from a past event or transaction (obligation
event should have happened on or before the balance sheet date for it to be considered a
present obligation);
 It is probable that an outflow of economic benefits will be required to settle the obligation.
 The amount of obligation should be capable of being reliable measured.
LIABILITIES

In measuring the provision, if it entails a single obligation:

 The best estimate shall be the most rational amount the company shall pay to
exit the obligation.
 Given a range of amount, where one range is as likely, as the other, the
provision shall be measured at the mid-range.

If the provision constitutes a large population of obligation, the “expected value” approach
shall be used, that is, by weighting all possible outcomes by their associated probabilities.

COMMON EXAMPLES:
1. Provision from Legal Obligating Events:
a. Liability from litigations or court cases
b. Liability form unasserted claims
c. Guarantee of liability of others
d. Provisions from onerous contracts
e. Unlawful environmental damages

2. Provision from Constructive Obligating Events (those which are being incurred by
virtue of the company’s business practices or policies)
a. Provision from premiums
b. Provision from product warranties
c. Liability for unredeemed coupons (e.g. discount coupons)

REIMBURSEMENTS
These are amounts expected to be received as reimbursements if entity settles the
provision. Reimbursements shall be accounted for as follows:
1. Recognized only if its virtually certain.
2. If the entity has no obligation for the part of the expenditure to be reimbursed, the entity
has no liability for the amount to be reimbursed, the reimbursable amount shall be
deducted against the losses recognized in the income statement and from the amount of
liability (provision) in the statement of financial position.
3. If the entity is still principally liable over the portion to be reimbursed by the third party, the
reimbursements shall be accrued as an asset (receivable) in the statement of financial
position and is still presented as an offset against the losses recognized in the income
statement.
4. The amount recognized for the expected reimbursement should not exceed the liability.
5. If the obligation for the amount expected to be reimbursed remains with the entity and the
reimbursement is not virtually certain, the expected reimbursement is not recognized
as an asset. The expected reimbursement may be disclosed if the reimbursement is
probable.

CONTINGENT LIABILITIES
1. Possible obligation whose existence is to be determined in the future contingent upon
the happening of a future event; or
2. Present obligation, but is not accrued because it is either not probable that economic
benefits will be required to settle the obligation and/or the amount of the obligation is not
capable of being reliably measured.

A contingent liability is disclosed in the notes to financial statements if the likelihood of the expected
future cash flows is reasonably possible.
LIABILITIES

BONDS PAYABLE

Bonds issued at a Discount Discount is a transaction loss; amount

received/proceed is lower than the amount to be
paid/face value) to be amortized over the
remaining term of the bonds using the
EFFECTIVE INTEREST METHOD
1. Proceeds < Face Value
2. Effective Interest Rate > Nominal
Interest
3. Interest Expense > Interest Paid
Bonds issued at a Premium Discount is a transaction gain; amount
received/proceed is higher than the amount to
be paid/face value) to be amortized over the
remaining term of the bonds using the
EFFECTIVE INTEREST METHOD
1. Proceeds > Face Value
2. Effective Interest Rate < Nominal
Interest
3. Interest Expense < Interest Paid

COMPOUND INSTRUMENTS
Financial instruments that are partly debt security and party equity security. Common examples
include convertible bonds and bonds issued with warrants.

Issuance Exercise Expiration/Early Retirement

Bonds Payable Cash Cash (Ex. P) EXPIRATION:
with Warrants Discount (or) OSWO** OSWO
Premium OS Share premium from
Bonds Payable Share Premium expired warrants
OSWO **debit OSWO at the carrying
*Use residual approach. value of the warrants
exercised.
Convertible Proceeds from the If Convertible bonds are EARLY RETIREMENT
Bonds issuance of Convertible converted into ordinary If Convertible bonds are retired prior
Bonds should be allocated shares, the carrying value of to maturity date, the retirement price
between the debt the bonds (updated shall be allocated between the
component (bonds amortized bonds payable) Bonds and the equity component,
payable) and the equity shall be cancelled out. The consistent with how the original
component (Share difference between the issue price was allocated (Residual
Premium form Bond carrying value of the bonds Approach). The difference between
Conversion Privilege) and the aggregate par value the retirement price of the allocated
using the RESIDUAL of the converted shares shall to the debt component and the
APPROACH, that is, the be credited to share premium carrying value of the bonds payable
fair market value of the account. An allowed shall be recognized in the income
bonds being assigned to alternative is the cancel out statement, while the difference
the bonds with the excess the equity component between the retirement price
being allocated to the originally credited to share allocated to the equity component
conversion privilege. The premium account upon and the original share premium from
pro-forma entry to record issuance of the bonds. The bond conversion privilege shall be
issuance: same shall be added to the credited to share premium account.
amount credited to the share
Cash premium account upon
Discount (or) conversion. To wit, the pro-
Premium
LIABILITIES

Bonds Payable forma entry to record the

SP-CP conversion is:
*Use residual approach.
SP-CP
BP
Premium (or)
Discount
OSC
OSP - issuance

NOTES PAYABLE
Irrevocably designated at
Not designated at FVPL
FVPL
Initial measurement Fair value minus Transaction costs are
transaction costs; meaning, expensed immediately
transaction costs are included
in the measurement of notes
payable
Subsequent measurement At amortized cost* using the At fair value through profit or
effective interest method loss

Difference between the face

amount and present value is
either the discount or
premium on the issue of note
payable.

SPECIAL CONSIDERATIONS IN INITIAL MEASUREMENT OF NOTES PAYABLE

1. If issued solely for cash – present value is equal to the cash proceeds
2. Interest bearing note issued for property – property or asset recorded at purchase price,
which is assumed to be the present value of the note, and therefore the fair value of the
property because the note issued is interest bearing

No discount or premium on notes payable shall be recorded if this is the case.

3. Noninterest bearing note issued for property – property or asset recorded at cash price,
which is assumed to be the present value of the note.

Difference between the cash price and the face of the note issued represents the imputed
interest (either discount or premium)

4. No cash price – same with item 3; the only difference is that you need to compute for the
present value of the cost of property or asset to be recorded.

Note: In computing for the present value, always exclude the down payment, which is usually paid
simultaneous with the issuance of the note.