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Definition
Liabilities are present obligations of
an entity to transfer an economic
resource as a result of past
events.
There are three essential
characteristics of an accounting for
liability, namely:
1. The entity has a present obligation
The present obligation may be legal
or constructive.
Obligations may be legally
enforceable as a consequence of
binding contract or statutory
requirement. This is normally the
case, for example, with accounts
payable for goods and
services received.
A constructive obligation results
from
–a established pattern of past
practice or published policies or
–a sufficiently specific current
statement in which the entity has
indicated that it will accept
certain responsibilities.
As a result, the entity has created a
valid expectation from other parties
that it will discharge
those responsibilities. Learn more
about constructive obligations in
Provisions.
2. The obligation is to transfer an
economic resource.
The obligation must be to pay cash,
transfer non-cash asset or provide
service at some future
time.
Question: Is there a liability when an
entity declares cash dividend?
Answer: Yes, because there is an
obligation to pay cash.
Question: Is there an accounting
liability when an entity declares
share dividend?
Answer: No, because issuance of
entity’s own shares is not a transfer
of asset. Share capital is an
equity item. Therefore, share
dividend payable is classified as part
of equity rather than an
accounting liability.
3. The liability arises from a past
event.
This means that the liability is not
recognized until it is incurred. It
must arise from a past
transaction that leads to a legal or
constructive obligation known as
obligating event.
An obligating event is an event that
creates a legal or constructive
obligation and, therefore,
results in an entity having no
realistic alternative but to settle the
obligation.
For example, the acquisition of
goods gives rise to accounts payable.
The receipt of a bank loan
(obligating event) results in
obligation to repay the loan at some
future date.
Common Examples of Liabilities:
What are Liabilities?
Definition
Liabilities are present obligations of
an entity to transfer an economic
resource as a result of past
events.
There are three essential
characteristics of an accounting for
liability, namely:
1. The entity has a present obligation
The present obligation may be legal
or constructive.
Obligations may be legally
enforceable as a consequence of
binding contract or statutory
requirement. This is normally the
case, for example, with accounts
payable for goods and
services received.
A constructive obligation results
from
–a established pattern of past
practice or published policies or
–a sufficiently specific current
statement in which the entity has
indicated that it will accept
certain responsibilities.
As a result, the entity has created a
valid expectation from other parties
that it will discharge
those responsibilities. Learn more
about constructive obligations in
Provisions.
2. The obligation is to transfer an
economic resource.
The obligation must be to pay cash,
transfer non-cash asset or provide
service at some future
time.
Question: Is there a liability when an
entity declares cash dividend?
Answer: Yes, because there is an
obligation to pay cash.
Question: Is there an accounting
liability when an entity declares
share dividend?
Answer: No, because issuance of
entity’s own shares is not a transfer
of asset. Share capital is an
equity item. Therefore, share
dividend payable is classified as part
of equity rather than an
accounting liability.
3. The liability arises from a past
event.
This means that the liability is not
recognized until it is incurred. It
must arise from a past
transaction that leads to a legal or
constructive obligation known as
obligating event.
An obligating event is an event that
creates a legal or constructive
obligation and, therefore,
results in an entity having no
realistic alternative but to settle the
obligation.
For example, the acquisition of
goods gives rise to accounts payable.
The receipt of a bank loan
(obligating event) results in
obligation to repay the loan at some
future date.
Common Examples of Liabilities:
strategic management
By
"The system connects the dots between big picture strategy elements such as
mission (our purpose), vision (what we aspire for), core values (what we
believe in), strategic focus areas (themes, results and/or goals) and the more
operational elements such as objectives (continuous improvement activities),
measures (or key performance indicators, or KPIs, which track strategic
performance), targets (our desired level of performance), and initiatives
(projects that help you reach your targets)."
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