Liabilities, Provisions and Contingent Liabilities

Liabilities

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

past events. Obligation means a responsibility that has no practical way to avoid. Liability
requires a transfer of economic resource to another even if the other party is not specifically
identified as of the moment or even if the amount is not yet certainly measured. 

Financial liabilities are contractual obligations to deliver cash or other financial assets,
exchange a financial asset to which the entity is on the unfavorable side, or a contract that
will be settled in the entity's own equity instruments.

Financial liabilities are measured at fair value minus transaction costs, except for FVPL.

Non financial liabilities are liabilities that are not financial liabilities. These are liabilities that
not from contractual agreements, nor requires the delivery of financial instruments. Non
financial liabilities are measured at best estimate of the amount needed to settle the
obligation or other measurement basis set by the accounting standards.

Examples of financial liabilities are accounts payable, loans payable, bonds payable and
other similar transactions. Non financial liabilities are unearned income, warranty
obligations, income tax etc.

Liabilities are classified as current when:

 expected to be settled in the entity's normal operating cycle

 held primarily for trading
 due to be settled within 12 moths after the end of the reporting date, or
 the entity does not have the right, at the end of the reporting date, to defer settlement
of the liability.

Provisions

Provisions are liabilities of uncertain timing or amount. The main characteristic of a

provision is uncertainty in the timing or amount of liability. The obligation to transfer an
economic resource is already clear but the timing or the amount of such economic resource
to be transferred is uncertain. Examples are warranties, liability for environmental damages,
decommissioning costs, guarantees etc.

Provisions are measured at the best estimate of the amount needed to settle as at the end
of the reporting period. The best estimate can be derived from the computation of the
expected value or the mid-point of the series of possible amount of liability. If the liability is
expected to be paid in the future, then the present value concept will apply.

Provisions are estimates and are subject to changes. Change in the amount of provisions
are accounted prospectively. 
Provisions are classified as liability when the liability is attached to the product or services
sold to the customer. When the obligation is optional on the part of the customer, then such
obligation is accounted under PFRS 15.

Contingent Liabilities

Contingent liabilities are possible obligations which are depended on another event
happening or not happening not wholly under control of the entity. Contingent liabilities are
disclosed and are not recognized in the financial position. For example, the obligation of
your friend to give 1,000 when you pass the subject AEC 32 is a contingent liability, since
the event happening (e.g. passing) is yet to happen in the future.

Contingent assets are possible asset that arise from past events and ere dependent on
another event happening or not happening not wholly under control of the entity. Examples
are seeking refunds, insurance claims etc. Contingent assets are disclosed in the notes
when the likelihood is probable.

Notes and Bonds Payable

Financial liabilities are obligations from contractual agreements that requires the entity to
deliver cash or other financial instruments. Measuring financial liabilities are at fair value
less transaction costs. 

Accounts payable are financial liabilities arising from trading, these are usually short term
obligations that do not require the application for time value of money. Accounts payable
are measured at face value and are settle in cash.

Notes payable can also arise in trading but the settlement can usually take longer than one
year. Long term notes payables can be interest bearing or non-interest bearing. Interest
bearing payables are measured at face value if the interest is a reasonable interest rate.
Non-interest bearing notes are measured at present value using the effective interest rate of
similar note.

For example, On January 1, 2020, an entity issued a 3-year non-interest bearing note of
1,000,000 on its purchase of equipment. The note has a 12% similar interest rate.
Bonds payable are long term liabilities that normally pays interest every period and pays
the principal at the end of the term. These bonds are interest bearing and are issued either
at premium or discount. When bonds are issued at lower than the face value, then bonds
were issued at a discount. When bonds are issued at price above its face value, then the
bonds are issued at premium. Premiums and discounts are amortized using the effective
interest rate of the bond. Transaction costs of issuing bonds are also deducted from the
carrying amount of the bonds.

For example, On January 1, 2020, the entity issued 10% 1,000,000 bond at face value.
Principal is due on December 31, 2022 but interest is due every December 31 of each year.
The entity paid 48,037 as commission.