LIABILITY concluded in 12 months or less) or long

term (12 months or greater).

Nature
 Liability is “a present obligation of the entity
to transfer an economic resource as a result
of past events.
 A liability is something a person or company
owes, usually a sum of money. Liabilities are
settled over time through the transfer of
economic benefits including money, goods,
or services. Recorded on the right side of
the balance sheet, liabilities include
loans, accounts payable, mortgages,
deferred revenues, bonds, warranties, and
accrued expenses.
Obligation
 An obligation is a “duty or responsibility
that an entity has no practical ability to
avoid.
An obligation is either:
a. Legal Obligation- an obligation that results
from a contract, legislation, or other
operation of law
b. Constructive Obligation-p an obligation
that results from an entity’s actions that
create a valid expectation on others that
the entity will accept and discharge certain
responsibilities
Transfer of Economic Resource
An obligation to transfer an economic resource
may be an obligation to:
a. Pay cash , deliver, or render services;
b. Exchange assets with another party on
unfavorable terms;
c. Transfer assets if a specified uncertain
future event occurs; or
d. Issue a financial instrument that obliges the
entity to transfer an economic resource.
Present obligation as a result of past
events
The obligation must be a present obligation that
exists as a result of past events. A present
obligation exists as a result of past events if:
a. The entity has already obtained economic
benefits or taken an action; and
b. As a consequence, the entity will or may
have to transfer an economic resource that
it would not otherwise have had to transfer.
 The past event (for example purchase and
receipt of certain inventory goods) has
created valid expectations in other parties
that the entity will discharge the obligation.
 Obligations that will arise from the entity’s
future actions (i.e. the future conduct of its
business) do not satisfy the condition
above, no matter how likely they are to
occur and even if they are contractual.

 The liability is the obligation that has the

Executory contracts
potential to require the transfer of an
 An executory contract “is a contract that is
economic resource to another party and
equally unperformed-neither party has
not the future economic benefits that the
fulfilled any of its obligations, or both
obligation may cause to be transferred.
parties have partially fulfilled their
Thus, the obligation’s potential to cause a
obligations to an equal extent.”
transfer of economic benefits need not to
 An executory contract is a contract that has
be certain, or even likely, for example, the
been signed but not yet executed. Such a
transfer may be required only if a specified
contract, for example an agreement to buy
uncertain future event occurs.
a car that will be delivered in three months’
 In general, a liability is an obligation
time, will appear in the income statement
between one party and another not yet
when the transaction is performed and the
completed or paid for. In the world of
goods or services are passed to the client. A
accounting, a financial liability is also an
forward contract to buy currency is another
obligation but is more defined by previous
form of executory contract.
business transactions, events, sales,
exchange of assets or services, or anything
that would provide economic benefit at a
later date. Liabilities are usually
considered short term (expected to be
Recognition Criteria
financial liability.
An item is recognized if:
a. It meets the definition of a liability; and
b. Recognizing it would provide useful
information, i.e., relevant and faithfully
represented information
NOTE:
Both the criteria above must be met before
an item is recognized. Accordingly, items that meet
the definition of liability but do not provide useful
information are not recognized, and vice versa.
However, even if a liability is not recognized,
information about it may still need to be disclosed
in the notes. In such cases, the item is referred to
as unrecognized liability.
Non-financial liability- is a liability other than
Presentation of Financial
Instruments
 The issuer classifies a financial instrument,
or its component parts, as a financial asset,
a financial liability or an equity instrument
in accordance with substance of the
contract( rather than its legal form) and the
definitions of a financial asset, a financial
liability and an equity instrument.
 Equity instrument- is “any contract that
evidences a residual interest in the assets of
an entity after deducting all of its liabilities.”

 This definition reflects the basic accounting

Relevance equation “Assets – Liabilities = Equity.”
Recognition may not provide relevant information
if, for example:
 NOTE:
a. it is uncertain whether a liability exists; Financial asset/ Equity Instrument
or Financial Liability
b. a liability exists, but the probability of
an outflow of economic benefits is low.  Variable  Fixed
number for a number for a
Faithful Representation fixed fixed
amount. amount.
A liability must be measured for it to be
 Fixed
recognized. Often, measurement requires
number for a
estimation and thus subject to measurement variable
uncertainty. The use of reasonable estimates is an amount.
essential part of financial reporting and does not
necessarily undermine the usefulness of
information.
Recognition of Financial
Financial and Non-financial Liabilities Liabilities
 A financial liability is recognized only when
Financial Liability -is any liability that is:
the entity becomes a party to the
a. A contractual obligation to deliver cash or contractual provisions of the instrument.
another financial asset to another entity;
b. A contractual obligation to exchange financial Classification of Financial Liabilities
assets or financial liabilities with another entity
under conditions that are potentially unfavorable All financial liabilities are classified as subsequently
to the entity; or measured at amortized cost, except for the
following:
c. A contract that will or may be settled in the
entity’s own equity instruments and is not a. Financial liabilities at fair value through
classified as the entity’s own equity instrument. profit or loss (FVPL) and derivative liabilities
b. Financial liabilities that arise when a
transfer of a financial asset does not qualify
for derecognition
 c. Financial guarantee contracts and
commitments to provide a loan at a below-
market interest rate-subsequently
measured at the higher of:
d. Contingent consideration recognized by an
acquirer in a business combination
Measurement of Financial Liabilities
 Initial Measurement
Financial liabilities are initially measured at
fair value minus transaction costs, except
financial liabilities at FVPL whose
transaction cost are expensed immediately.
 Subsequent Measurement
 Financial liabilities classified as amortized
cost are subsequently measured at
amortized cost.
 Financial liabilities classified as held for
trading are subsequently measured at fair
value with charges 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 follows:
a. The amount of change in the fair value
of the financial liability 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.
Measurement of Non-financial
liabilities
 Non-financial liabilities are initially
measured at the best estimate of the
amounts needed to settle those obligations
or the measurement basis required by
other applicable standard, e.g., deferred tax
liabilities are measured under PAS 12
Income Taxes.
Examples of non-financial liabilities:
a. Obligations arising from statutory
requirements ( e.g., income tax payable)
b. Warranty obligations
c. Unearned or deferred revenues
d. Commodity contracts that either cannot be
settled in cash or which are expected to be
settled by commodity exchange
Financial Statement
Presentation
 Liabilities are presented as either (a)
current or (b) noncurrent on the face of a
classified statement of financial position. A
classified statement of financial position. A
classified statement of financial position is
one that shows current and noncurrent
distinctions.
Current Liabilities are liabilities
that are:
a. Expected to be settled in the entity’s
normal operating cycle;
b. Held primarily for trading;
c. Due to be settled within 12 months after
the reporting period; or
d. The entity does not have unconditional
right to defer settlement of the liability
for at least twelve months after the
reporting period.
All other liabilities are classified as
noncurrent.
“The operating cycle of an entity is the time
between the acquisition of assets for
processing and their realization in cash or
cash equivalents. When the entity’s normal
operating cycle is not clearly identifiable, it
is assumed to be 12 months.”
Examples of current liabilities:
a. Financial assets measured at FVPL
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 the end
of the reporting period
f. Bank overdrafts
Trade and non-trade payables
 Trade payables are obligations arising from
purchases of inventory that are to be sold in
the ordinary course of business. Other
payables are classified as non-trade.
  Trade payables are classified as current
liabilities when they are expected to be
settled within the normal operating cycle or
one year, whichever is longer.
Examples of payables
 Accounts payable
 Notes payable
 Loans payable
 Bonds payable
 Liabilities under trust receipts
 Other payables arising from sources other
than purchases and borrowings
Refinancing agreement
 A long-term obligation that is maturing
within 12 months after the reporting period
is classified as current, even if a 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.
 Refinancing refers to the replacement of an
existing debt with a new one but with
different terms, e.g., an extended maturity
date or a revised payment schedule.
Refinancing normally entails a fee or
penalty. A refinancing where the debtor is
under financial distress is called “troubled
debt restricting.”
 Loan facility refers to a credit line.
Liabilities payable on demand
 Liabilities that are payable upon the
demand of the lender are classified as
current.
 A liability is noncurrent if the lender
provides the entity by the end of the
reporting period (e.g., on before December
31) a grace period ending at least twelve
months after the reporting period within
which the entity can rectify the breach and
during which the lender cannot demand
immediate repayment.
Trade accounts payable
 Accounts payable from purchases of
inventory are recognized when ownership
over the goods is transferred to the buyer.
The amount recognized excludes trade
discounts. Cash discounts are included if
the entity uses the gross method of
recording purchases; they are excluded if
the entity uses the net method.
Unearned Income
 Unearned income represents advanced
collection of income that is not yet earned.
Prior to earning, unearned income is
classified as liability.
Liability for deposits received
 Liability for deposits received represents
cash receipts that are held in trust for
other parties.
Deposit for future subscription of
shares of stocks
 Deposits received for future subscription of the
entity’s shares of stocks are classified as either
liability or equity as follows:
 If repayable in cash at any time prior to
issuance of the subscribed shares, the
deposits are classified as liability.
 If not repayable in cash, the deposits
are classified as equity, preferably
presented under contributed capital.
Accrued expenses are liabilities for expenses already
incurred but not yet paid (e.g., salaries payable, utilities
payable, and the like).
Dividends payable
 The liability to pay dividend is recognized
when the dividend is appropriately
authorized and is no longer at the
discretion of the entity
 Dividends declared by banks are subject to
the approval of the BSP.
 Only cash and property dividends are
recognized as liabilities. Stock dividends are
not liabilities; ‘share dividends distributable
‘(‘stock dividends payable’) is presented in
equity as an addition to share capital.
Liability for remittable collections
Liabilities may also arise from amounts collected
on behalf of third parties. Examples:
a. Taxes withheld
b. SSS premiums, Philhealth, Pag-Ibig and
similar contributions
c. Output value added taxes(VAT)
d. Collections made by an agent or broker on
behalf of a principal.