ACC 309 INTERMEDIATE ACCOUNTING 2

Module 1

CURRENT LIABILITIES

Week 1-2

Introduction

This module discusses liabilities, its characteristics, types and classification, initial
recognition, initial measurement, subsequent measurement, and reclassification,
derecognition, and financial statement presentation.

Learning Objectives

After studying this module, students should be able to:

1. Describe the elements in the definition of liabilities

2. Identify the different categories and classifications of liabilities

3. Describe the initial recognition, initial measurement, subsequent measurement,

and reclassification, derecognition, and financial statement presentation of current
liabilities

4. Classify liability as current and non- current

5. Compute the correct amount of liability and its related accounts.

Discussion

LIABILITIES ELEMENTS

1. Liability is a present obligation of an entity.

2. Liability arises from past transaction or events.

3. The settlement of which is expected to result in an outflow from the entity of

resources embodying economic benefits.

INITIAL RECOGNITION OF LIABILITES

A liability is recognized is recognized in the statement of financial position when

a. it is probable that an outflow of resources embodying economic benefits will result

from the settlement of a present obligation; and

b. the amount at which settlement will take place can be measured reliably.
Under PFRS 9, financial liabilities are recognized on the Statement of Financial
Position when the entity becomes party to the contractual provision of the
instrument.

Financial vs. Non- Financial liabilities

To appropriately assign peso amount to an item classified as liability, liabilities shall

be categorized as to either financial or non financial liability.

Financial Liability- any liability that is a contractual obligation; or a contract that

will or may be settled in the entity’s own equity instruments. (E.g: Accounts Payable,
Loans Payable, etc.)

Non Financial Liability- any liability that is to be settled thru provision of service or
delivery of non cash assets or did not arise from contract.(E.g: Advances from
Customers, Unearned revenue and etc.)

Classification of Financial Liabilities

Financial liabilities are classified as

1. Financial liabilities at amortized cost

2. Financial liabilities at fair value through profit or loss

a. Designated financial liabilities at FVPL

b. Held for trading

3. Financial liabilities that arise when a transfer of a financial asset does not qualify
for derecognition or when the continuing involvement approach applies

4. Financial guarantee contracts and commitments

Measurement of financial and non- financial liabilities with available fair value

Initial measurement Subsequent

measurement
Financial Liabilities Either Either
-Fair Value -Fair Value
-Fair value minus -Amortized cost
transaction costs
Non financial liabilities Either Either
-Best estimate or amounts -Best estimate or amounts
needed to settle the needed to settle the
obligations, or obligations, or
-Measurement basis -Measurement basis
required by PFRS required by PFRS
RECLASSIFICATION OF FINANCIAL LIABILITIES

PFRS 9, paragraph 4.4.2, states that an entity shall not reclassify liability.

DERECOGNITION OF LIABILITIES

Financial liability is derecognized only when extinguished

a. the obligation specified in the contract is discharged, cancelled or it expires

b. an exchange between existing borrower and lender of debt instruments with

substantially different terms or substantial modification of the terms of an existing
financial liability of part thereof.

Gain or loss on derecognition. The difference between the carrying amount of a

financial liability extinguished or transferred to a third party and the consideration
paid is recognized in profit or loss.

FINANCIAL STATEMENT PRESENTATION

Presence of breach of Required to be settled within 12 Current

covenants months
Classification of Long-Term Debt Falling Due Within One Year

The following rules shall be applied for long-term liabilities which are due to be
settled within twelve months from the reporting date.

Settlement and Refinancing

 Presence of breach of
Breach of provision of loan arrangement
Required to be settled within 12 Current
covenants months

Presence of breach of
TRADE ACCOUNTS PAYABLE
Required to be settled within 12 Current
covenants
Description
months
Characteristics
Present obligations that are not supported by formal promises to
pay by the debtor. These obligations normally arise from
acquisitions of inventories to be used in the normal operating
cycle of the entity
Recognition When ownership of goods are transferred to the buyer
Measurement Fair value, which is normally the invoice price of goods acquired
and may or may not be affected by related freight and cash
discounts
Presentation Normally included in the current liabilities section under the
heading ‘’ Trade and other payables”
ESTIMATED LIABILITIES

Estimated liabilities are items that involve a present obligation and satisfy the rest of
the definition but can only be measured only by using a substantial degree of
estimation

BONUS PAYABLE

Gratuity given by entities to their employees as a gift or compensation earned as

reward upon achieving goal.

UNEARNED OR DEFERRED REVENUE

This represents income already collected but not yet earned. This item shall be
presented as part of entity’s liabilities and normally classified as current liabilities.

Pro-forma journal entries

1. To record receipt of cash from advance orders:
Cash xx
Unearned revenue xx

2. To record application of advances to service provided or orders shipped:

Unearned revenue xx
 Revenue xx
PROVISION AND CONTINGENT LIABILITY

Provision Contingent Liability

-A present obligation -A possible obligation
-Both probable and reliably measurable -Either probable or reliably measurable
but not both
-Recognized as regular liability in the -Disclosed in the notes to financial
financial statement statements and not recognized in the
financial statements

Likelihood of occurrence Meaning

Probable The future event is more likely than not
to occur.
Reasonably possible The future event is less likely to occur
Remote The future event is least likely to occur

Summary of Accounting Treatments for Contingencies

Accounting Treatment Remarks

Level of
uncertainty Reliably Accru Ignor
measurable e Disclose e
   
Loss
Contingencies  
   
Probable Yes X     Treated as Provision
Probable No   X  
Possible Yes/No   X   Categorized as
Remote Yes/No     X contingent liabilities
Gain
Contingencies  
Virtually Certain Yes X     Treated as an asset
Virtually Certain No   X  

Probable/Possibl Categorized as
e /Remote Yes/No     X contingent liabilities

Measurement of provision
It shall be the best estimate of the expenditure required to settle the present
obligation at the end of the reporting date. Best estimate is determined as follows:

a. Determined by the judgment of the management of the entity, supplemented by

experience of similar transactions and, in some cases, reports from independent
experts.

b. Where the provision being measured involves a large population of items, the
obligation is estimated by weighting all possible outcomes by their associated
probabilities or the expected vale.

c. Where there is a continuous range of possible outcomes, and each point in

that range is as likely as any other, the midpoint of the range is used.

ESTIMATED LIABILITIES- AFTER SALE TRANSACTIONS

Liabilities may also arise after recognition of revenue from sale transactions. These
liabilities may include, but not limited to the following:

a. Premiums Liability c. Warranties Liability

b. Rebates Liability

Premiums Liability

Premiums are articles offered free or at a reduced price to make a combined offer
more attractive to the customers.

Pro-forma journal entries

1. To recognize provision for premiums to entitled customers

Premiums Expense xx
Premiums Liability xx
2. To record acquisition of premiums inventory to be distributed:
Premiums Inventory xx
Cash/ AP xx
3. To record distribution of premiums to customers:

Premiums liability xx

Cash(for any remittance received) xx

Premiums inventory xx

Rebates liability
Pro-forma journal entries

1.To recognize provision for rebates to entitled customers:

Rebates expense xx

Rebates Liability xx

2. To record distribution of rebates to customers:

Rebates liability xx

Cash xx

Warranty Liability

-is a legally binding assurance that a product is, among other things fit for use as
presented, free from defective material and workmanship and meets statutory and
/or other specifications.

Pro-forma journal entries

1. When products with warranties are sold

Warranties Expense xx
Estimated warranties liability xx
2. Disbursement for warranties
Estimated warranties liability xx
Cash xx
3. Actual cost exceeds estimate
Warranties Expense xx
Cash xx
4. Actual cost is less than the estimate
Estimated warranties liability xx
Warranties Expense xx
References:Valix, Peralta & Valix, Financial Accounting/ Asuncion, Ngina &Escala
Applied Auditing