LIABILITIES

LEARNING OBJECTIVES
1. Understand the concept of liabilities.
2. Describe the nature and type of current and noncurrent liabilities.
3. Know the measurement of current and noncurrent liabilities.
4. Explain the issue of breach of covenants attached to a long-term debt.
5. Describe formulas in computing bonus to officers and employees.

WHAT IS A LIABILITY?

Liability is a present obligation of the entity to transfer an economic resource as a result

of past events.

ESSENTIAL CHARACTERISTICS
1. Present obligation
a. Legal obligation
b. Constructive obligation
2. Transfer of economic resource
a. Payment of money (by cash)
b. Payment in kind ( noncash) or
c. Payment in a form of service
3. Past event – obligating event

MEASUREMENT
Current Liabilities – FACE AMOUNT
Noncurrent Liabilities
Interest-bearing – FACE AMOUNT (initial and subsequent)
Noninterest-bearing
Initial – PRESENT VALUE
Subsequent – AMORTIZED COST

CURRENT LIABILITIES
PAS 1 provides that an entity shall classify a liability as current when:
a. The entity expects to settle the liability within the entity’s operating cycle.
b. The entity holds the liability primarily for the purpose of trading.
c. The liability is due to be settled within twelve months after the reporting period.
d. The entity does not have an unconditional right to defer settlement of the liability for at
least twelve months after the reporting period.

NONCURRENT LIABILITIES
The term noncurrent liabilities is a residual definition. All liabilities not classified as current are
classified as noncurrent.

Long term debt falling due within one year

A liability which is due to be settled within twelve months after the reporting period is classified
as current, even if:
 a. The original term was for a period longer than twelve months.
b. An agreement to refinance or reschedule payment on a long-term basis is completed
after the reporting period and before the financial statements are authorized for issue.

Breach of covenants
What is a covenant? Covenants are often attached to borrowing agreements which represent
undertakings by the borrower.

Under these covenants, if certain conditions relating to the borrower’s financial situation are
breached, the liability becomes payable on demand.

Estimated Liabilities
Estimated liabilities are obligations which exist at the end of reporting period although their
amount is not definite.
In many cases, the date when the obligation is due is not also definite and in some instances,
the exact payee cannot be identified or determined.

Deferred Revenue
Deferred revenue or unearned revenue is income already received but not yet earned. Can be
classified as a current or a noncurrent liability.

Bonus
Large entities often compensate key officers and employees by way of bonus for superior
income realized during the year.
The main purpose of this scheme is to motivate officers and employees by directly relating their
well-being to the success of the entity.
This compensation plan results in liability that must be measured and reported in the financial
statements.
Computation
1. Bonus is expressed as a certain percent of income before bonus and before tax.
2. Bonus is expressed as a certain percent of income after bonus but before tax.
3. Bonus is expressed as a certain percent of income after bonus and after tax.
4. Bonus is expressed as a certain percent of income after tax but before bonus.

END