Polytechnic University of the Philippines

Freeport Area of Bataan Branch

Mariveles, Bataan

MODULE 1 - NON-FINANCIAL LIABILITIES

OVERVIEW

This module covers Non-financial Liabilities. It aims to guide the student in gaining full understanding and application of accounting principles and standards relating
to its nature and composition of accounts, recognition, initial and subsequent measurement and valuation and the disclosure requirements in reporting.

LEARNING OUTCOMES (LO)

By the end of this module, the students will be able

to:
1 - Understand the essential characteristics of liabilities
2 - Distinguish provisions from contingent liabilities
3 - Understand the concepts of various non-financial liabilities such as warranties, premiums, unearned revenues, customer loyalty awards, gift
certificates, refundable deposits, advances, accrued liabilities and bonuses.
4 - Learn the accounting for different non-financial liabilities after initial recognition.
5 - Learn the measurement of non-financial liabilities in the statement of financial position.
6 - Identify the required disclosures for current liabilities and contingencies
READING STRATEGY

All students will be encouraged to read the chapter topic of the required reading material. Further readings are also recommended for additional information
opportunities
regarding the within
topic. the curriculum to develop their information retrieval and
evaluation skills in order to identify such resources effectively
Required reading:
Robles, N. & Empleo, P. (2019) The Intermediate Accounting Series, Volume 3, Millenium Books, Inc.
Chapter 1 - Non-financial Liabilities

Further reading:
IAS 37: Provisions, Contingent Liabilities and https://www.ifrs.org/issued-standards/list-of-standards/ias-37-provisions-contingent-liabilities-and-contingent-assets/
Contingent Assets

WEEK 1
TASK
Task 1: ASSIGNED READING
1 - Recognition criteria for liabilities (LO1)
2- Provision vs Contingent Liabilities (LO2)
3- Measurement of Provision (LO2)
4- Changes of Provision (LO2)
5- Non-Financial Liabilities (LO3)
6-Accounting for different non-financial
liabilities (LO4)
LEARNING PLAN
ACTIVITIES / STRATEGIES TIME TO COMPLETE
Read through Chapter 1 of the course textbook and use the activities below
as learning guide.
Chapter 4 of the mandatory reference
Read the definition and be able to explain the recognition criteria of liabilities.
Relate this definition with provisions and contingent liabilities.
Distinguished Provisions from Contingent Liabilities by citing their distinction as
to (1) definition, (2) recognition, (3) presentation and (4) likelihood of occurrence
Explain the concept of "best estimate" in measuring provisions with respect to the
following considerations:
(1) single obligation, (2) midpoint range, (3) expected value, (4) present value of
obligations, and (5) reimbursements 2 - 3 hours
Discuss the principles and procedures involved in the changes and adjustments of
provision amounts to reflect the current best estimate.
Understand and be able to explain the concepts of the following non-financial liabilities:
(1) Accrued liabilities in general; bonuses, VAT, and payroll taxes in particular.
(2) Warranty, (3) Premiums, (4) Customer Loyalty Awards, (5) Unearned Revenues,
(6) Dividends Payable, and (7) Deposits and Advances
Learn how to account and journalize different non-financial liabilities
Illustrate the recognition of each non-financial liabilities discussed.
 Go over the course content below and answer the review questions after the topic
Task 2: Course Content 1 -2 hours
introduction.
WHAT IS A PROVISION?
A provision is a present obligation of uncertain timing and uncertain amount

ELABORATION AND INTERPRETATION OF THE DEFINITION

Characteristics of Provisions
* Uncertainty in the amount of liability as well as the timing of its settlement differentiates provisions from other liabilities. Please be reminded that the word
uncertainty does not include uncertainty of the existence of obligations.
* The past event that leads to a present obligation is called an obligating event.
* The present obligation may be legal or constructive.
Legal vs Constructive Obligation
A legal obligation is an obligation arising from a contract, legislation or other operation of law.
A constructive obligation is an obligation that is derived from an entity's actions where:
(a) The entity has indicated to other parties that it will accept certain responsibilities by reason of an established pattern of past practice, published policy, or a
sufficiently specific current statement.
(b) And as a result the entity has created a valid expectation on the part of other parties that it will discharge those responsibilities.

*A provision may be the equivalent of an estimated liability or a loss contingency that is accrued because it is both probable and measurable
* In some instances, the exact payee of estimated liabilities cannot be identified or determined.

Review Theory Questions Series 1

1- Which of the following is the correct definition of a provision?
a. A possible obligation arising from a past event
b. A liability of uncertain timing or amount
c. A liability which cannot be easily measured
d. An obligation to transfer funds to an entity

2- A provision shall be recognized as a liability when

a. An entity has a present obligation as a result of a past event
b. It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation
c. The amount of the obligation can be measured reliably
d. All of these are required for the recognition of a provision as liability
3- A constructive obligation is an obligation
I - that is derived from an entity's action that the entity will accept certain responsibilities because of past practice, published policy or current statement.
II - the entity has created a valid expectation on other parties that will discharge those responsibilities.
a. I only b. II only c. both I and II d. either I or II

4- It is an event that creates a legal or constructive obligation because the entity has no other realistic alternative but to settle the obligation.
a. Obligating event b. Past event c. Subsequent event d. Current event

5-Which of the following should not be considered a provision?

a. Warranty liability b. Bad debt c. Tax payable d, Note payable

WHEN ARE PROVISIONS RECOGNIZED?

PAS 37, paragraph 14, states that a provision shall be recognized as liability under the following conditions:
(1) The entity has a present obligation as a result of a past event.
(2) It is probable that an outflow of economic benefits shall be required to settle the obligation
(3) The amount of the obligation can be measured reliably.

WHAT IS A CONTINGENT LIABILITY?

It is a possible obligation that arises from past events and whose existence will only be confirmed only by the occurrence or non-occurrence of one or more uncertain
future events not wholly within the control of the entity. (para. 10, IAS 37)

WHAT IS A CONTINGENT ASSET?

It is a possible asset that arises from past events and where existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain
future events not wholly in the control of the enterprise (para. 10, IAS 37)

WHAT ARE THE DISTINCTION OF PROVISIONS, CONTINGENT LIABILITIES & CONTINGENT ASSET WITH RESPECT TO RECOGNITION?
Refer to the table below.
Likeliness to Happen Ranges of Outcome Treatment if LIABILITY Treatment if ASSET
More than 95% Virtually Certain Accrue as Asset
Provisions (Accrue) Contingent Asset
51% - 95% Probable (Disclosed in Notes to FS)
Contingent Liability
5% - 50% Possible (Disclosed in Notes to FS Do Nothing
Less than 5% Remote Do Nothing
HOW ARE PROVISIONS MEASURED?
The amount recognized as a provision should be the best estimate of the expenditure required to settle the present obligation at the end of reporting period.
The best estimate is the amount that an entity would rationally pay to settle the obligation at the reporting date or to transfer it to a third party at that time

Scenario Best Estimate

Large Population (Distributed Probability) Expected value
Continuous range of possible outcomes and each
Midpoint
point in that range is as likely as any other

OTHER MEASUREMENT CONSIDERATIONS

(1) RISK & UNCERTAINTIES - The risks and uncertainties that inevitably surround many events and circumstances shall be taken into account in reaching the best estimate
of a provision. It shall be taken into account by multiplying the amount of provision to RISK ADJUSTMENT FACTOR.

(2) PRESENT VALUE - Where the effect of the time value of money is MATERIAL, the amount of provision shall be the present value of the expenditures expected to be
required to settle the obligation.

(3) FUTURE EVENTS - Future events that affect the amount required to settle an obligation shall be reflected in the amount of a provision where there is SUFFICIENT
OBJECTIVE EVIDENCE that they will occur.

(4) EXPECTED DISPOSAL OF ASSETS - Gains from expected disposal of assets shall NOT BE TAKEN INTO ACCOUNT in measuring a provision.

(5) REIMBURSEMENT - Where some or all of the expenditure required to settle a provision is expected to be reimbursed by another party, the reimbursement shall be
recognized when it is virtually certain that reimbursement will be received if the entity settles the obligation.
The reimbursement shall be treated as a separate asset and not "netted" against the estimated liability for the provision. However, the related income can be offset to the
expense generated by the estimated liability

(6) CHANGES IN PROVISION - Provisions shall be REVIEWED AT EACH REPORTING DATE and adjusted to reflect the current best estimate.

(7) FUTURE OPERATING LOSSES - Provision shall NOT BE RECOGNIZED for future operating losses.

(8) ONEROUS CONTRACT - An onerous contract is a contract in which the unavoidable costs of meeting the obligation under the contract exceed the economic benefits
expected to be received under the contract. If an entity has an onerous contract, the present obligation under the onerous contract shall be recognized and measured as a provision.
The amount to be recognized as provision is the lower amount between the cost of fulfilling the contract and the compensation or penalty arising from failure to fulfil the contract.
Review Theory Questions Series 2
1- What amount is recognized as a provision?
a. Best estimate of the expenditure b. Minimum of the range c. Maximum of the range d. Midpoint of the range
2- Which of the following statements are correct
I. An enterprise should not recognize a contingent liability
II. The amount recognized as a provision should be the best estimate of the expenditure required to settle the present obligation at the end of the reporting period.
III. A provision is a liability of certain timing and amount
IV. Accruals are liabilities to pay the goods or services that have been received or supplied but have not been paid.

a. I, II, III and IV b. I and IV only c. II and IV only d. I, II and IV

3- Which of the following statements is true in relation to recognition of provision?

I. No provision is recognized for costs that need to be incurred to operate in the future
II. A provision for the decommissioning of an oil installation or a nuclear plant shall be recognized to the extent that an entity is obliged to rectify damaged already caused.

a. I only b. II only c. Both I and II d. Neither I nor II

4- Which of the following statements is incorrect concerning a contingent liability?

a. A contingent liability is not recognized in the financial statements

b. A contingent liability is disclosed only
c. If the contingent liability is remote, no disclosure is required.
d. A contingent liability is both probable and measurable

5- Which of the following statements is true in relation to the measurement of a provision?

I. The risk and uncertainties that inevitably surround many events and circumstances shall be taken into account in reaching the best estimate of a provision
II. Where the effect of the time value of money is material, the amount of provision shall be the present value of the expenditure expected to settle the obligation.

a. I only b. II only c. Both I and II d. Neither I nor II

6- Provision shall be recognized for the following except

a. Cleaning up costs of contaminated land when an oil company has a published policy that it will undertake the clean up all contamination that it causes
b. Restructuring costs after a binding sale agreement has been signed
c. Rectifications costs relating to defective products already sold
d. Future refurbishment costs due to introduction of a new computer system
7- Contingent assets are usually recognized when

a. Realized
b. Occurence is reasonably possible and the amount can reliably measured
c. Occurrence is probable and the amount can be reliably measured
d. The amount can be reliably measured

8- How should a contingent liability be reported in the financial statements when it is reasonably possible that the entity will have to pay the liability at a future date?

a. As a deferred liability b. As an accrued liability c. As a disclosure only d. As an account payable with an additional disclosure
explaining the nature of the transaction
HOW ARE PROVISIONS RECORDED?
Generally, provisions are recorded by debiting the expense account and crediting the estimated liability account

Expense or Loss xx
Estimated Liability xx

EXCEPTION: If the provision is directly attributable to a certain asset, it is debited as cost of the asset. (i.e. estimated dismantling cost for PPEs and estimated restoration cost
for wasting assets)

WHAT ARE THE COMMON TYPES OF PROVISIONS?

Types of Provisions Present Obligation Arises When?

Lawsuit or Court Cases
Decommissioning Cost (c)
Warranties (b)
Premiums (a)
Guarantee
Restructuring (d)
Upon causing damage or harm
Upon imposition of provision of a law or contract
Upon Sale
Upon default of party guaranteed by the entity
(1) The entity has a detailed formal plan
(2)The
(2) Theentity
entityhas
hasraised
raisedvalid
validexpectation
expectationin
inthe
the minds of those affected that the entity will carry out the restructuring by starting to implement the plan and announ
features to those affected by it.
minds of those affected that the entity will carry
out the restructuring by starting to implement the
plan and announcing its main features to those
affected by it.

PREMIUMS LIABILITY (a)

Premiums are articles of value such as toys, dishes, silverware, and other goods and in some cases cash payments, given to customers as result of past sales or sales
promotion activities. Accordingly, an accounting liability for the distribution of the premiums arises and should be given accounting recognition.
WHAT ARE THE FREQUENTLY ASKED QUESTIONS IN EXAMS REGARDING PREMIUMS?

(1) Premiums expense for the year

(2) Estimated premiums liability at the end of the year

Illustration: Premiums expense for the year

An entity manufactures a certain product and sells it at PhP 300.00/unit. A toy (the premium) is offered to customers on the return of 5 box tops plus a remittance of PhP10.00.
The toy costs PhP 50.00 and the entity estimates that only 60% of the box tops will be redeemed.

The data for the year related to the premium plan is below:

Sales, 10,000 units @ PhP 300.00 ea PhP 3,000,000.00

Toys purchased, 2,000 units @ PhP 50.00 ea 100,000.00
Box tops redeemed 4,000

Journal entries: To record the sales

Cash ( or Accounts Receivable) 3,000,000.00 (10,000 units x PhP 300)
Sales 3,000,000.00

To record the purchase of the premium toys

Premium Inventory (or Prepaid Expense) 8,000.00 (2,000 units x PhP 50)
Cash ( or Accounts Receivable) 8,000.00

To record the redemption of the premium toys

Cash 8,000.00 (4,000/5*10)
Premium Expense 32,000.00 (4,000/5*40) (toy cost less remittance = PhP 50-PhP 10)
Premium Inventory 40,000.00

To record year-end adjustment for outstanding premium

Premium Expense 16,000.00 Expected box tops to be redeemed 6,000 (10,000x 60%)
Estimated Premium Liability 16,000.00 Less: Box tops already redeemed 4,000
Balance 2,000
Premiums still to be distributed 400 (2,000 /5)
Estimated liability 16,000 (400 x 40)
 Estimated Premiums Liability
Actual Expense xx Beginning Balance xx
(Redemption) Accrual of Expense (upon sale) xx
Ending Balance xx
WARRANTIES LIABILITY (b)
Home appliances like television sets, stereo sets, ratio sets, refrigerators and the like are often sold under guarantee or warranty to provide free repair service or replacement
during a specified period if the products are defective. Such entity policy may involve significant costs on the part of the entity if the products sold prove to be defective in the
future within the specified period of time. Accordingly, at the point of sale, a constructive obligation arises and a liability is incurred.

WHAT ARE THE FREQUENTLY ASKED QUESTIONS IN EXAMS REGARDING WARRANTIES?

(1) Warranty expense for the year (based on accrual of expense)

(2) Estimated warranty liability at the end of the year

Illustration: Warranty expense for the year

An entity sells units of television sets at PhP 9,000.00 ea for cash. Each television is under warranty for one year. the entity has estimated from past experience that
warranty cost will probably average PhP 500/unit and that only 60% of the units sold will be returned for repair. The entity incurs PhP 180,000.00 for repairs during the year.

Journal entries:
To record the sales
Cash 9,000,000.00
Sales 9,000,000.00

To set-up the estimated liability

Warranty expense 300,000.00 Expected television to be returned 600 (1,000 x 60%)
Estimated warranty liability 300,000.00 x warranty cost/unit 500
Estimated warranty cost 300,000
To record payment of actual cost
Estimated warranty liability 180,000.00
Cash 180,000.00

Estimated Warranty Liability

Actual Expense xx Beginning Balance xx
Accrual of Expense (upon sale) xx
Ending Balance xx
 Task 3: Problem Solving Refer to your course textbook for the practice problems
Straight Problems

Problem 1-2 Read and solve Problem 1-2 on page 37-39 of your course textbook.
Video solutions will be posted separately.

Problem 1-6 Read and solve Problem 1-6 on page 40 of your course textbook.
Video solutions will be posted separately.

Problem 1-10 Read and solve Problem 1-10 on page 42 of your course textbook.
Video solutions will be posted separately.
MC Problems
MC 10
MC 12 1- 2 hours
MC 14
MC 15
MC 16
MC 19 Choose the correct answer for the listed MCQ's
MC 30 Video solutions will be posted separately.
MC 31
MC 33
MC 34
MC 35
MC 41

Task 3: Homework

A 10 item MC problems Answer all questions and solve all problems based on the Week 1 Module
will be presented to you synthesizing The link to access the quizzes will be posted in google classroom 1 hour
the topics learned in Week 1 module.

Task 3: Virtual Classroom

Lecture plus homework discussion via Google Meet

Lecture discussion Instructor summarizes the main points of the Week 1 module 3 hours

This exercise will validate the achievement of learning outcomes.

END OF WEEK 1 MODULE