Current Liabilities Current liability
• Held for trading.
Liabilities
• Present obligation arising from
past events.
• Outflow of economic benefits.
Financial liabilities
• Contractual obligation to
deliver cash.
• Contractual obligation to
exchange financial assets or
financial liabilities that are
potentially unfavorable.
Examples:
o Payables
o Lease liability
o Held for trading liabilities
o Redeemable preference
shares
o Security deposits
Recognition principles
• Meets the definition of a
liability.
• Probable that an outflow of
resources will result
settlement.
• Measured reliably.
Initial measurement
• Fair value minus transaction
cost.
• Except FVPL whose
transaction costs are
expensed.
Subsequent measurement
• If the liability is classified at
amortized cost, it shall be
measured subsequently at
amortized cost.
• If the liability is classified as
held for trading, it shall be
subsequently measured at fair
value.
• Expected to be settled within
operating cycle.
• Due within 12 months after
reporting period.
• The entity does not hold an
unconditional right to defer
settlement.
Examples:
o FVPL
o Trade accounts and notes
payable.
o Current portion of long-
term debt.
o Unearned income.
o Non-trade payables.
Refinancing agreement
• Refinancing means
replacement of an existing
debt.
• If the entity has the discretion
to refinance, the debt is
classified as non-current.
• If the refinancing happened on
or before the reporting date,
the debt is classified as non-
current.
• If the refinancing happened
after the reporting date, the
debt is classified as current.
Breach of Covenants
• A violation of the agreement
on the terms of a loan.
• Upon violation, the liability
becomes payable in demand,
classified as current.
• If a grace period of 12
months was provided at
reporting date, the debt is
classified as non-current.
Trade Accounts Payables
• Liability from the operations of
business.
Unearned Income
• Advanced payments from
customers for future services
or delivery of goods.
• Issuance of gift certificates.
Deposits liabilities
Liability for deposits made by
customers for:
• Returnable containers.
• Security deposits.
• Escrow agreements.
• Deposit for future
subscription.
Accrued Expenses
• “Expenses that had incurred
but not yet paid.”
PAS 37
Provisions, Contingent Liabilities
and Contingent Assets
Provision
- A liability that is uncertain of
timing or amount.
Examples:
• Warranty
• Provision for loss on litigation
• Environmental damages
• Restructuring provision
• Decommissioning liability
• Obligations from guarantees
Recognition Principle
1. Present obligation.
➢ The present obligation may be
legal or constructive. It is fairly
clear what a legal obligation
is.
➢ 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:
➢ 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.
➢ And as a result, the entity has
created a valid expectation on
the part of other parties that it
will discharge those
responsibilities.
2. Obligating Event
➢ The past event that leads
to a present obligation is
called an obligating event.
An obligating event is an event
that creates a legal or
constructive obligation because
the entity has no realistic
alternative but to settle the
obligation created by the event.
This is the case where:
a. The settlement of the
obligation can be enforced by
law.
b. The event creates valid
expectation on the part of other
parties that the entity will
discharge the obligation, as in the
case of constructive obligation.
 3. Probable of outflow of
resources.
➢ For a provision to qualify
for recognition, there must
be not only a present
obligation but also a
probable outflow of
resources embodying
economic benefits to settle
the obligation. An outflow
of resources is regarded
as "probable" if the event
is more likely than not to
occur, meaning, the
probability that the event
will occur is greater than
the probability that it will
not occur. As a rule of
thumb, "probable" means
more than 50% likely.
4. Can be measured reliably.
Range of outcomes
1. Virtually certain – sure to
happen.
2. Probable – most likely to
happen.
3. Possible – 50/50
4. Remote – will not happen.
Contingent Liability
1. A liability that does not meet
all the recognition criteria.
2. They are either probable or
measurable, but not both.
3. They are disclosed except
when remote.
Accounting Treatment
- A contingent liability shall not
be recognized in the financial
statements but shall be
disclosed only.
Required disclosures in relation
to contingent liability
a. Brief description of the nature
of the contingent liability
b. An estimate of its financial
effects
c. An indication of the
uncertainties that exist
d. Possibility of any
reimbursement
If the contingent liability is
remote, no disclosure is
necessary.
Contingent Assets
1. Assets that are not
recognized.
2. Disclosed only when
probable.
3. If the outcome is virtually
certain, it is no longer a
contingent asset.
Initial measurement
- A provision shall be measured
at the best estimate. The best
estimate may be determined
based on the situation as
follows:
1. Best estimate – when there is
only one event.
2. Mid-point – when there is a
range of possible events.
3. Expected value – when there
is a large population.
Present Values
- Where appropriate, all
estimates of provision shall be
incorporated with time value
of money.
Reimbursement
- An amount collectible from a
third party for the loss on a
provision.
 - Recognized separately from
the provision.
Deductible clause
- An amount that is not covered
by an insurance company.
- Usually termed as the
participation fee on the
insurance proceeds.
Change in estimate
- Change in the estimate of
provision shall be accounted
for prospectively.
Customer loyalty program
- Promotional activities
intended to increase sales.
- The entity usually offers
premium items such as bags,
t-shirt, umbrella, etc.
Restructuring provision
- A program that is planned and
controlled by management
and materially changes either
the scope or manner of
business conducted.
Examples of events that may
qualify as restructuring include:
a. Sale or termination of a the
of business.
b. Closure of business location
in a region or relocation of
business activities from one
location to another.
c. Change in management
structure, such as elimination of a
layer of management.
d. Fundamental reorganization
of an entity that has a material
and significant impact on the
operations.
Recognition principle:
1. The entity has a detailed plan.
2. The plan has been
communicated and
implemented
Measurement
A restructuring provision shall
include only direct expenditures
arising from the restructuring,
meaning, those expenditures that are
necessarily entailed by the
restructuring and not associated with
the ongoing activities of the entity.
For example, salaries and benefits of
employees to be incurred after
operations cease and that are
associated with the closure of the
operations shall be included in the
amount of the restructuring provision.
PAS 37, paragraph 81, specifically
excludes the following expenditures
from the restructuring provision:
a. Cost of retraining or relocating
continuing staff.
b. Marketing or advertising
program to promote the new entity
image.
c. Investment in new system and
distribution network.
Loans Payable
Initial Measurement
• Fair value minus transaction
cost.
• Present value of future cash
flows discounted at the
effective rate.
Nominal Rate
• Also known as the coupon
rate or stated rate.
• The interest rate as per the
contract.
• Used to compute for the
interest payable/receivable
every interest date.
Effective Rate
• Also known as the discount
rate or yield rate.
 • Used to compute the present
value of the cash flow.
Effective Rate vs. Nominal Rate
• If the effective rate is equal to
nominal rate, the loan is
issued at face amount.
• If the effective rate is greater
than to nominal rate, the loan
is issued at a discount.
• If the effective rate is less than
to nominal rate, the loan is
issued at a premium.
Origination Cost
• Amount incurred to issue the
liability.
• These are direct attributable
cost in acquiring a liability.
Origination Fee
• Amount collected from the
borrower.
• Treated as an advance
payment from the borrower.
Debt Restructuring
Modes of settlement of liability
• Asset swap
- The asset is used to pay
the liability.
- The difference between
the carrying amount of the
liability and the carrying
amount of the asset is
recognized in profit or loss.
• Equity swap
- The liability is extinguished
through issuing of shares.
- The shares shall be valued
in the order of priority.
1. Fair value of the
shares.
2. Fair value of the
liability.
3. Par value of the
shares.
• Modification of terms
May have the following
modifications:
- May decrease the interest
rate.
- May forgive the accrued
interest.
- May extend the payment
terms.
- May decrease the principal
payments.
- The new liability shall be
measured at present value
discounted using the
original effective rate.
- The difference between
the old liability and the
modified liability shall be
recognized in profit or loss
only if substantial.
- To be substantial, the
difference should be at
least 10% of the old
liability.
Bonds Payable and Compound
Financial Instruments
Bonds Payable
• Debt instruments similar to
notes and loans.
• A contract that represents a
right of the holder to receive
cash from the issuer.
• Debtor-creditor relationship.
• Bond indenture is the contract
between the issuer and the
holder.
Bond Indenture
The bond indenture may specify
the following:
• Rights and duties
 1. Call Provision – the issuer
had the right to call.
2. Redemption Right
• Restrictions and
Requirements
1. Sinking fund and financial
ratios.
2. Authorized amount and
interest.
Types of Bonds
As to Maturity
• Term bonds
• Serial bonds
• Extendable or retractable
bonds
As to recording point of view and
payment of interest
• Registered bonds
• Coupon bonds
• Zero-coupon bonds
• Income bonds
• Participating bonds
• Indexed and inflation-linked
bonds
As to maturity and risk
• Mortgage bonds
• Collateral trust bonds
• Asset-backed security
• Subordinate bonds
• Debentures
• Junk bonds
As to right of redemption
• Callable bonds
• Convertible bonds
As to issuer
• Corporate bonds
• Government bonds
As to currency
• International bonds
• Foreign currency bonds
Initial measurement
• Bonds are measured at
transaction price less the
transaction cost, which is the
bond issue cost.
• It shall constitute its fair value,
which approximates its
present value.
Subsequent measurement
• The bonds shall be carried at
amortized cost using effective
interest method.
• If the issuer opted to measure
the bonds at fair value option,
the same shall be carried at
fair value at reporting date.
Effective interest method
• The effective interest method
or simply “interest method” or
scientific method recognizes
two kinds of interest rate –
nominal rate and effective
rate.
• The nominal rate is the rate
appearing on the face of the
bonds while the effective rate
is the actual interest incurred
on the bond issue.
• The effective rate is the rate
that exactly discounts
estimates cash future
payments through the
expected life of the bonds
payable or when appropriate,
a shorter period to the net
carrying amount of the bonds
payable.
• The nominal rate is also
known as coupon or stated
rate. The effective rate is also
known as yield or market rate.
Effective interest method
Nominal rate Equal Effective rate Bond is
issued at
face amount
Nominal rate > Effective rate Bond is
issued at
premium
Nominal rate < Effective rate
issued at a
discount
Bond issued at a discount
• The issue price (present
value) is less than the face
amount.
• Interest expense is higher
than interest paid.
• The amortization shall be
added to the carrying amount
until it reaches the face
amount at maturity.
Bond issued at a premium
• The issue price (present
value) is greater than the face
amount.
• Interest expense is lower than
interest paid.
• The amortization shall be
deducted from the carrying
amount until it reaches the
face amount at maturity.
Bond issued in between interest
dates
• When bonds are sold in
between interest dates, the
pre-issuance interest should
be separated from the issue
price.
• It shall be recognized as an
interest expense or interest
payable at the date of issue.
Serial bonds
• A type of bond where the
principal is paid in a series of
payments (installments).
• The issue price is computed
using the bond outstanding
method.
Bond is
Retirement of bonds
• Retirement of bonds prior to
maturity.
• May be through refunding or
non-refunding.
• The carrying amount of bonds
is updated up to the date of
retirement.
• The difference between the
updated carrying amount and
the retirement price is
recognized in P/L.
Compound financial instruments
• A financial instrument that
contains both liability and
equity components.
• These components are
accounted for separately.
• The liability shall be measured
at fair value and the residual
amount shall be the equity.
Examples:
• Convertible bonds – bonds
that can be converted into
shares of stock.
• Bonds with share warrants –
bonds that carries share
warrants or right to purchase
shares of stock.