NON-CURRENT

LIABILITIES
Initial Recognition-Subsequent Recognition –
Extinguishment and Presentation Analysis
(under PFRS 9/ PAS 1)
Non-current Liabilities
• Non-current liabilities (sometimes referred to as long-term
debt) consist of an expected outflow of resources arising
from present obligations that are not payable within a year
or the operating cycle of the company, whichever is
longer.
• Bonds payable, long-term notes payable, mortgages
payable, pension liabilities, and lease liabilities are
examples of non-current liabilities.
Bonds Payable
• A bond is a certificate of indebtedness whereby borrower
agrees to pay a sum of money at a specified future date plus
periodic interest payments at the stated rate.
• Commonly issued in denomination of, say, P1,000, P5,000, or
P10,000 referred to as a face value or par value.
• The contract between the issuing corporation and the
bondholder is known as bond indenture.
• A bond represents a promise to pay (1) a sum of money at a
designated maturity date, plus (2) periodic interest at a
specified rate on the maturity amount (face value). Individual
bonds are evidenced by a paper certificate.
• A company usually requires approval by the board of directors
and the shareholders before bonds or notes can be issued.
Types of Bonds
• Secured and Unsecured Bonds.
• Secured bonds are backed by a pledge of some sort of collateral.
• Unsecured bonds, frequently termed as debentures, are not protected by the pledged of any specific
asset of the issuing corporation.
• Term, Serial Bonds, and Callable Bonds.
• Bonds that mature on a single date are called term bonds.
• Bonds that mature in installment are called serial bonds.
• Callable bonds give the issuer the right to call and retire the bonds prior to maturity.
• Convertible and Commodity-Backed Bonds
• Convertible bonds are those that give the bondholders the right to exchange their bond holdings into a
specified or predetermined number of the issuing corporation’s shares of stock.
• Commodity-backed bonds (also called asset-linked bonds) are redeemable in measures of a
commodity, such as barrels of oil, tons of coal, or ounces of rare metal.
• Registered and Bearer (Coupon) Bonds
• Bonds issued in the name of the owner are registered bonds and require surrender of the certificate
and issuance of a new certificate to complete a sale
• A bearer or coupon bond, however, is not recorded in the name of the owner and may be transferred
from one owner to another by mere delivery.
• Income and Revenue Bonds.
• Income bonds pay no interest unless the issuing company is profitable.
• Revenue bonds, so called because the interest on them is paid from specified revenue sources, are
most frequently issued by airports, school districts, counties, toll-road authorities, and governmental
bodies.
• Zero-interest bonds
• Deep-discount bonds, also referred to as zero-interest debenture bonds, are sold at a discount that
provides the buyer's total interest payoff at maturity.
Issuance of Bonds
• An entity shall recognize financial liability in its statement of financial position
when, and only when, the entity becomes a party to the contractual provisions of
the instrument (PFRS 9). Thus, bonds payable are initially recognized at the date
of the actual issue of the bonds.
• Bond liabilities are initially recognized at their discounted value, which equals the
net proceeds from their issuance or called the issue price of the bonds.
• The rate of interest stated on the face of the bond certificate is termed as the
contract rate, stated rate or nominal rate of interest.
• The interest rate which investors are willing to accept on a bond at the time of its
issue depends upon some factors such as the market evaluation of the quality of
the bond issue referred to as market rate of interest, yield, or effective interest
rate.
• The sale of the bonds at face value implies the agreement between the bond
stated rate of interest and the prevailing market rate of interest.
• If the effective interest rate exceeds the stated rate, the issue price of the bonds
will fall below the face amount of the bonds referred to as issued at a discount.
• If the bond rate exceeds the market interest rate for comparable instruments at
the time of issue, the price of the bonds will exceed the face amount; that is, the
bonds will be sold or issued at a premium.
Valuation and Accounting for Bonds
Payable
• Bonds Issued at Par
• If the rate employed by the investment community (buyers) is the
same as the stated rate, the bond sells at par. That is, the par value
equals the present value of the bonds computed by the buyers (and
the current purchase price).
• Bonds Issued at Discount or Premium
• If the rate employed by the investment community (buyers) differs
from the stated rate, the present value of the bonds computed by
the buyers (and the current purchase price) will differ from the face
value of the bonds. The difference between the face value and the
present value of the bonds determines the actual price that buyers
pay for the bonds. This difference is either a discount or premium.1
• If the bonds sell for less than face value, they sell at a discount.
• • If the bonds sell for more than face value, they sell at a premium.
Cont.. ..Valuation and Accounting for
Bonds Payable
• The rate of interest actually earned by the
bondholders/interest expense by the issuer of bond is
called the effective rate, yield rate or market rate.
• Discount on bonds is reported as a direct deduction from
the face value of bonds payable, whereas premium on
bonds is an adjunct account and reported as an addition
to the face value of bonds payable.
• To compute the issue price of the bonds or the proceeds
from the issuance of the bonds:
Present value of maturity value of the face of the bond P xxx
Present value of the interest payments xxx
Bond price or proceeds from bond issuance P xxx
• To illustrate, assume now that Santos issues R$100,000
in bonds, due in five years with 9 percent interest payable
annually at year-end. At the time of issue, the market rate
for such bonds is 11 percent.
• Present Value Computation of Bond Selling at a Discount
• Entry made
Cash 92,608.10
Discount on Bonds payable 7,391.90
Bonds Payable 100,000
Effective-Interest Method
• The required procedure for amortization of a discount or
premium is the effective interest method (also called
present value amortization).
• Under the effective- interest method, companies:
Bond Discount and Premium Amortization
Computation
• To illustrate amortization of a discount under the effective-
interest method, assume Evermaster AG issued €100,000
of 8 percent term bonds on January 1, 2015, due on
January 1, 2020, with interest payable each July 1 and
January 1. Because the investors required an effective-
interest rate of 10 percent, they paid €92,278 for the
€100,000 of bonds, creating a €7,722 discount.
Evermaster computes the €7,722 discount
Bond Discount Amortization Schedule
Evermaster records the issuance of its bonds at a discount on January 1, 2019,
as follows:
Bonds Issued at a Premium
• Now assume that for the bond issue described above, investors are
willing to accept an effective-interest rate of 6 percent. In that case,
they would pay €108,530 or a premium of €8,530, computed as
shown below:
Bond Premium Amortization Schedule
Accrued Interest on Bonds Issued
• Bonds are often issued at any time between the interest
payment dates.
• Since the issuing corporation will pay the full periodic
interest on all bonds outstanding at an interest date, the
bondholder is usually required to purchase the interest
that has accrued from the most previous interest date to
the date of issue.
• This accrued interest is added to the issue price of the
bond to determine the total cash proceeds from the bond
issuance.
• Assume that 1,000 bonds of P1,000 face value, dated
January 1, 2018 were sold on March 1, 2018 at 112 plus
accrued interest. The bonds pay interest at 15% semi-
annually on June 30 and December 31.
• Entry:
Cash 1,145,000
Bonds Payable 1,000,000
Premium on Bonds Payable 120,000
Interest payable 25,000
(1.000,000 x .15 x 2/12)
• Entry on June 30 (the first periodic interest payment
Interest expense 50,000
Interest payable 25,000
Cash 75,000
Transaction costs on issue of bonds
• Bond issue costs are expenditures incurred by the issuing
company for legal fees, printing and engraving of bond
certificates, taxes, commissions and similar charges.
• The initial bond issue cost form part of the initial carrying
amount of the bond liability.
• In effect, the net proceeds are reduced by incurrence of
bond issue cost.
• The incurrence of bond issue cost would mean a
recomputation of the yield or effective interest rate on the
bond issue.
• XYZ sells its P1,000,000 face value, five year, 12% bonds on
the bond date, January 1, 2015. The bonds were sold at 110.
Bond issue costs of P15,000, consisting of promotions,
engraving, printing and underwriter’s commission, were
incurred and paid by the company. The entries for the
issuance of the bonds and the payment of bond issue costs are
as follows:
Cash 1,100.000
Bonds Payable 1,000,000
Premium on Bonds Payable 100,000
Premium on Bonds Payable 15,000
Cash 15,000
After recording the payment of bond issue costs, the premium on
bonds payable is reduced to P85,000. The carrying amount of
the liability on issue date is, therefor, P1,085,000, which is the
basis for the computation of bond yield. Then it is the
recomputed yield interest rate will be used in the interest
expense for the period.
When the Bond Year does not Coincide with the
reporting period

• If the bond year does not coincide with the reporting

period, other than the entries every interest payment date,
an adjusting entry is made at year-end to accrue interest
and update the amortization of premium or discount.
• Assume a 12% bonds with a face of P1,000,000 were
sold for P897,039 on March 1, 2018 and pay interest,
adjusted yield rate of 15%, semi-annually every Feb. 28
and Aug 31. Bond issue cost of P20,000, consisting of
promotions, engraving, printing and underwriter’s
commission, were incurred and paid by the company.
The issuer uses calendar year as its reporting period.
2018 Journal Entries
2019 Journal Entries
Retirement of Bonds
• Bonds Payable xxx
• Premium on Bonds Payable xxx
Cash xxx
Gain on Retirement of Bonds xxx

Retirement computation
Retirement Price xxx
Carrying amount on bonds payable xxx
Gain or loss on retirement xxx
Bond Refunding
• It is the replacement of an outstanding bond issue with a
new bond issue bearing a lower interest rate is called
bond refunding. It is also a kind of retirement of
outstanding bond issue recognizing a gain or loss
immediately in the profit or loss.
Bond with Equity Characteristics
• Bond with Non-Detachable Share Warrants Issued
• When bonds are issued with share warrants attached, the
bondholders are given the right to acquire a specified number of
ordinary shares of the issuing corporation at a given price within a
certain time period.
• When warrants are included in the issue of bonds, the issue price
shall be allocated between the debt (the bond) and the equity (the
warrants).
• Based on the concept that equity represents residual interest in the
assets of the corporation, the equity component is assigned the residual
amount after deducting from the fair value of the compound instrument
(bond with warrant) as a whole the amount separately determined for
the liability component. This method of bifurcation is called the
residual approach.
To illustrate
• On December 31, 2018, ABC Corporation issued 1,000 of
its 10%, 10-year, P1,000 face value bond with non-
detachable share warrants at 103. Each bond carried two
detachable warrants, each warrant entitling the holder for
one share of ABC’s P20 par value ordinary share at an
specified option price of P25 per share. Immediately after
issuance, the bond warrant sells at P97 and each ordinary
share sells at P75.
Total issue price (P1,000,000 x 103%) P1,030,000
Market price of bonds without warrants
(P97 x P1,000,000) 970.000
Price assigned to warrants P 60,000
The entry for the issuance of the bonds with non-detachable
share warrants

Cash 1,030,000
Discount on Bonds Payable 30,000
Bonds Payable 1,000,000
Share Warrants Outstanding 60,000
• The account Share Warrants Outstanding is reported as
part of the Additional paid in capital in the equity section of
the Statement of Financial Position.
• When the market price of the bonds without the warrant is
not readily determinable, it shall be computed by
discounting the maturity value and periodic interest at the
market rate of interest for similar debt instruments without
the equity component.
Convertible Bonds
• Convertible bonds is another example of a compound financial
instrument.
• Convertible bonds give the holders thereof the right to
exchange their bondholding into ordinary shares or other
securities of the issuing company within the specified period of
time.
• To illustrate: XYZ Corporation issued P5,000,000, 14% bonds
at 105 on bond issue date. Each P1,000 bond is convertible
into 5 shares of P100 par value ordinary shares. Without the
conversion feature, the bonds would have sold at 102. The
total issue price of the bonds is then allocated to bond liability
and to equity as follows:
Total proceeds (P5,000,000 x 105) P5,250,000
Market value of bonds without the
conversion privilege 5,000,000 x102 5.100,000
Paid in capital arising from bond
conversion privilege P 150,000
 The entry to record the issuance of the convertible bond:
Cash 5,250,000
Bonds Payable 5,000,000
Premium on bonds payable 100,000
Share Premium – Bond
• Conversion Privilege 150,000
• Assume that before maturity date of the bonds, holders of P2,000,000 face value bonds exercised their conversion privilege
when each ordinary share sells for P130. Further assume that on this date, the balance of premium on bonds payable is
P30,000
• The conversion of the bonds is recorder as follows:
Bonds Payable 2,000,000
Premium on bonds payable 12,000
Share Premium-bond conversion 60,000
Ordinary Share capital 1,000,000
Share Premium – Ordinary 1,072,000
P30,000 x 2/5 = P12,000
P150,000 x 2/5 = 60,000
2,000 sh x 5 x P100 = P1,000,000
• Note that no gain or loss is recognized upon conversion of bonds into ordinary shares. This is
because the conversion is in accordance with the original terms of the bonds.
• When conversion takes place between interest payment dates, any accrued interest should be paid
in cash.
• Expenditures incurred related to conversion are recorded by reducing the additional paid-in capital
(share premium) pertaining to share issued upon conversion.
• Any excess of the expenditures over the related share premium shall be recorded as expense
during the period of conversion.
• On the allocation of the consideration is made, any resulting gain or loss is treated in accordance
with the accounting principles applicable to the related component as follows
• The amount of the gain or loss relating to the liability component is recognized in profit or loss;
and
• The amount of gain or loss relating to the equity component is recognized in equity.
Assume that P1,000,000 of the bonds issued above were retired when the total
unamortized premium was P40,000. Further assume that the interest payment and
premium amortization have been recorded properly. The 1,000,000 bonds were retired at
105. Without the conversion privilege , these bonds would have sold at this date at 103.

Total retirement price P1,050,000

Retirement price on account of the
liability (1,000,000 x 103) 1,030,000
Retirement price on account of equity
portion P 20,000

Face value of bonds retired P1,000,000

Related unamortized premium
(P40,000 x 1M/5M) 8,000
Carrying value of bonds retired P1,008,000
Retirement price on account of bond 1,030,000
Loss on retirement of bonds P 22,000
Cont.
• The additional credit to equity (additional paid in capital) from the unexercised
bond conversion privilege
Carrying value of equity cancelled
(150,000 X 1m/5m) P 30,000
Retirement price on account of
equity portion 20,000
Gain on cancellation – taken to
equity (APIC) P 10,000
Journal entry on the retirement of the convertible bonds:
Bonds Payable 1,000,000
Premium on Bonds Payable 8,000
Loss on Retirement of bonds 22,000
Share premium-bond conversion
Privilege 30,000
Cash 1,050,000
Share premium-unexercised
Bond Conversion Privilege 10,000
Serial Bonds
• Serial bonds are bonds that mature in series of
installments.
• The amortization of premium or discount on serial bonds
based on effective interest method is computed by
comparing the nominal interest and effective interest.
• Unlike the term bonds where the full amount of the
principal is paid on maturity date, the principal of serial
bonds decreases after each installment payment. Thus,
both the nominal interest and effective interest decrease.
• Illustration: P5,000,000, 12% bonds were issued on bond
issue date, January 1, 2018. The principal of the bonds is
paid in series of P1,000,000 annually, together with any
accrued interest on the outstanding bonds, each
December 31, starting December 31, 2018. The bonds
were issued for P5,241,834, a price that yields 10%.
Cont…
• Periodic interest due:
12/31/2018 = 12% x P5,000,000 = P 600,000
12/31/2019 = 12% x P4,000,000 = P 480,000
12/31/2020 = 12% x P3,000,000 = P 360,000
12/31/2021 = 12% x P2,000,000 = P 240,000
12/31/2022 = 12% x P1,000,000 = P 120,000
The issue price is computed as follows:
Cont……
Journal Entries for years 2018 and 2019
• 2018
1/1 Cash 5,241,834
Bonds Payable 5,000,000
Premium on Bonds Payable 242,834

12/31 Interest Expense 524,183

Premium on Bonds Payable 75,817
Cash 600,000

Bonds Payable 1,000,000

Cash 1,000,000
• 2019
12/31 Interest Expense 416,602
Premium on Bonds Payable 63,398
Cash 480,000

Bonds Payable 1,000,000

Cash 1,000,000
Long-term Notes
• Interest-Bearing Note
• An interest-bearing note is initially recorded at its face value since
this represents the present value of the note.
• After initial recognition, an interest-bearing note is measured at
face plus accrued interest.
1. Principal Matures in Lump sum, Interest is Payable
Periodically.
2. Principal and Interest are Payable Periodically
Long-Term Notes
• Non-Interest Bearing Notes Payable
• A non-interest bearing note payable is written in a form where the
face value includes an imputed interest.
• The most appropriate basis for the measurement of the non-
interest bearing note at date of initial recognition is the market
value of the goods or services received in exchange for the note.
• If this is not determinable, the present value of the note is
determined based on prevailing interest rate on similar notes or
based on incremental borrowing rate of the issuer.
• At the date of issuance, the note payable is initially recorded at its
amortized cost, which is its present value.
• After the initial recognition, the carrying amount of the note, which
is its present value at the end of the reporting period, is the face
value less the adjusted amount of discount.
Maturity Value is payable in lump-sum
• Assume that on March 31, 2018, the MNO Corporation
issued a three-year, P4,000,000, non-interest bearing
promissory note for a machinery purchased. The
equivalent cash price of the machinery acquired is
P3,005,200.
• To determine the effective interest on this note, the
present value factor is computed by dividing the present
value (P3,005,200) by the maturity value (P4,000,000).
Thus, the present value factor for three periods is 0.7513.
Finding the appropriate interest rate corresponding to the
number of periods, the factor under the column 10%, thus
the effective interest rate is 10%.
The amortization table on the note
Journal entries 2018 and 2019
• 2018
3/31 Machinery 3,005,200
Discount on Notes Payable 994,800
Notes Payable 4,000,000

12/31 Interest expense 225,390

Discount on Notes Payable 225,390
(300,520 x 9/12)
2019
12/31 Interest expense 323,059
Discount on Notes Payable 323,059
(300,520 x 3/12 + 330,572 x 9/12)
Maturity value is payable in installment
• Assume that on March 31, 2018, the MNO Corporation
issued a three-year, P3,000,000, non-interest bearing
promissory note for a machinery purchased. The note is
payable on installments of P1,000,000 every March 31,
starting March 31, 2019. The equivalent cash price of the
machinery acquired is P2,401,800. Assume that the
company uses the calendar year as its accounting period.
Yield rate is 12%. The amortization schedule follows:
Journal entries 2018 and 2019
• 2018
3/31 Machinery 2,401,800
Discount on Notes Payable 598,200
Notes Payable 3,000,000
12/31 Interest Expense 216,162
Discount on Notes Payable 216,162
(288,216 x 9/12)
2019
3/31 Interest Expense 72,054
Discount on Notes Payable 72,054
(288,216-216,162)
Notes Payable 1,000,000
Cash 1,000,000
12/31 Interest Expense 152,102
Discount on Notes Payable 152,102
(202,802 x 9/12)
Presentation of Notes Payable - 2018
Extinguishment of Non-Current Liabilities
• 1. Extinguishment with cash before maturity,
• 2. Extinguishment by transferring assets or securities, and
• 3. Extinguishment with modification of terms
Presentation of Non-Current Liabilities
• Non-current liabilities such as bonds and notes payable are generally
measured at amortized cost (face value of the payable, adjusted for any
payments and amortization of any premium or discount).
• Companies that have large amounts and numerous issues of non-current
liabilities frequently report only one amount in the statement of financial
position, supported with comments and schedules in the accompanying
notes.
• Long-term debt that matures within one year should be reported as a
current liability, unless using non-current assets to accomplish retirement.
• If the company plans to refinance debt, convert it into shares, or retire it from a bond
retirement fund, it should continue to report the debt as non-current if the refinancing
agreement is completed by the end of the period. [10]
• Note disclosures generally indicate the nature of the liabilities, maturity dates,
interest rates, call provisions, conversion privileges, restrictions imposed by the
creditors, and assets designated or pledged as security.
• Companies should show any assets pledged as security for the debt in the assets
section of the statement of financial position. The fair value of the long-term debt
should also be disclosed.
• Finally, companies must disclose future payments for sinking fund requirements and
maturity amounts of long-term debt during each of the next five years.
• However, companies have the option to record fair value in their accounts for most
financial assets and liabilities, including bonds and notes payable.
Analysis of Non-Current Liabilities
• Long-term creditors and shareholders are interested in a
company's long-run solvency, particularly its ability to pay
interest as it comes due and to repay the face value of the debt
at maturity. Debt to assets and times interest earned are two
ratios that provide information about debt-paying ability and
long-run solvency.
• Debt to Assets Ratio
• The debt to assets ratio measures the percentage of the total assets
provided by creditors
• Debt to Assets=Total Liabilities/Total Assets
• Times Interest Earned
• The times interest earned ratio indicates the company's ability to meet
interest payments as they come due
• Times Interest Earned=Net Income + Interest Expense + Income Tax
Expense/ Interest Expense
TROUBLED-DEBT RESTRUCTURING
• During periods of depressed economic conditions, some
debtors experience difficulty in meeting their maturing
obligations.
• For this reason, the creditor may grant concession to the
debtor that it would not otherwise grant under normal
condition. This is referred to as troubled debt
restructuring.
• Forms of troubled debt restructuring:
• Asset swap
• Equity swap
• Modification of debt terms
ASSET SWAP
• Settlement of Debt by Transfer of Asset
• It is a transfer of non-cash assets (real estate, receivables or other
asset) that can be used to settle the debt obligation in a troubled debt
restructuring.
• The difference between the carrying amount of a financial liability (or
part of a financial liability) extinguished or transferred to another party
and the consideration paid, including any non-cash assets transferred
or liabilities assumed, shall be recognized in profit or loss.
• Assume Manila Bank loaned P10,000,000 to ABC Realty which was
invested in real estate development. Due to economic downtrend in
the real estate business, the company had low sales and therefore,
cannot meet its loan obligation. On December 31, 2019, the loan’s
due date, Manila Bank agrees to accept from ABC Realty land with fair
value of P9,000,000 in full settlement of the P10,000,000 principal and
one-year accrued interest at 12% or P1,200,000. The land has a
carrying value, based on the cost model, in ABC Realty’s books of
P10,500,000.
Cont….
• ABC Realty records the transaction as follows:
Notes Payable – Manila Bank 10,000,000
Interest Payable 1,200,000
Loss on Disposal of Land 1,500,000
Land 10,500,000
Gain on Debt Restructuring 2,200,000

Carrying value of debt settled P11,200,000

Fair market value of asset transferred 9,000,000
Gain on debt restructuring P 2,200,000

• Fair market value of land transferred P 9,000,000

• Carrying value of the land transferred 10,500,000
• Loss on disposal of land P 1,500,000
EQUITY SWAP
• Settlement of debt by Granting equity interest
• It is the issuance of the debtors’ share capital that can be used to
settle a debt obligation in a troubled debt restructuring. IFRIC 19-
Extinguishing Financial Liabilities with Equity Instruments provides
guidance on how to account for settlement of financial liability when
the creditor accepts the debtor company’s shares or other equity
instruments.
• The equity instruments issued shall be measured at (in the order of
priority)
a. The fair value of the equity instruments granted (shares of stock
issued;
b. The fair value of the financial liability settled.
Journal entry:
Notes Payable xxx
Interest Payable xxx
Gain on Debt Restructuring xxx
Ordinary share capital xxx
Share premium – ordinary xxx
MODIFICATION OF TERMS
• A troubled debt restructuring involving modification of
terms may take the form of one or any combination of the
following:
 Reduction of stated interest
 Reduction of the face amount of the debt
 Reduction or condonation of accrued interest
 Extension of the maturity date
 Moratorium on the payment of interest and/or principal