MS. SHARON A.

BACTAT
sabactat@mmsu.edu.ph
PROF. SUERTE R. DY
srdy@mmsu.edu.ph

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 To understand the concept of liabilities
 To describe the nature and type of current and noncurrent liabilities
 To know the measurement of current and noncurrent liabilities
 To explain the issue of long-term debt falling due within one year
 To explain the issue of breach of covenants attached to long-term debt
 To describe formulas in computing bonus to officers and employees.

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Instructional Mode of Delivery

Full online scheme

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present obligation of an entity to transfer an
economic resource as a result of past event.
(Revised Conceptual Framework for Financial
Reporting)

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 present obligation
 transfer an economic resource/ probable outflow of resources
embodying economic benefits
 past event

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 An obligation is a duty or responsibility that an entity has no practical ability to
avoid.
 Obligating event – one that results in an enterprise having no realistic alternative to
settling that obligation. May be classified as legal or contractive.
 LEGAL OBLIGATION – one that derives from contract (through implicit and explicit terms), legislation or
other operation of law. (e.g. accounts payable (arising from a CONTRACT with a supplier); taxes payable
(arising from LEGISLATION AND OTHER OPERATION OF LAW)
 CONSTRUCTIVE OBLIGATION – one that derives from an enterprise’s actions whereby an established
pattern of past practice, published policies or a sufficiently specific current statement, the enterprise
has indicated to other parties that it will accept certain responsibilities and as a result, the enterprise
has created a valid expectation on the part of those other parties that it will discharge those
responsilities.

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 Without payment of money, transfer of noncash assets performance of
service, there is NO ACCOUNTING LIABILITY.
 Declaration of cash dividends
 Declaration of share dividends, no accounting liability (not a transfer of
noncash asset since share capital is an equity item.
Share dividends payable is classified as EQUITY rather than an accounting liability.

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Past event Obligating event (see p. 7)

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• Accounts Payable to suppliers for the purchase of goods;
• Amounts withheld from employees for taxes and for contributions to the Social
Security System;
• Accruals for salaries, interest, rent taxes, product warranties and profit sharing
bonus;
• Cash dividends declared but not paid;
• Deposits and advances from customers;
• Debt obligations for borrowed funds – notes, mortgages and bonds payable;
• Income Tax Payable;
• Unearned Revenue

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 All liabilities are initially measured at PRESENT VALUE
and subsequently measured at AMORTIZED COST.
 In practice, current liabilities or short-term obligations are not
discounted anymore but measured, recorded and reported at
FACE AMOUNT (REASON: the discount or the
difference between the face amount and present value is
usually NOT MATERIAL and therefore IGNORED.

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 Liabilities (e.g. Bonds Payable and Non-interest Bearing Note) are
initially measured at PRESENT VALUE and subsequently measured
at AMORTIZED COST.
 INTEREST BEARING LONG-TERM NOTES PAYABLE–
initially and subsequently measured at FACE AMOUNT

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PAS 1, par. 69, provides that an entity shall classify a liability as current
when:
 The entity expects to settle the liability within the entity’s operating cycle.
 The entity holds the liability primarily for the purpose of TRADING
 The liability is due to be settled within 12 months after the reporting
period
 The entity DOES NOT HAVE an UNCONDITIONAL RIGHT to
defer settlement of the liability for at least 12 months after the reporting
period

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 Trade payable and accruals for employees – part of the working capital
(current assets and current liabilities) used in the entity’s operating cycle.
Classified as CURRENT although it is due to be settled more than 12
months after the reporting period.
OPERATING CYCLE not clearly identifiable, its duration is assumed to be 12 months.
 Other current liabilities are not settled as part of the normal operating cycle
but are due for settlement within 12 months after the reporting period or
held primarily for the purpose of trading. (e.g. financial liabilities held for
trading, bank overdraft, dividends payable, income taxes, other nontrade
payables and current portion of long-term debt.)

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 All liabilities not classified as current (residual definition)
 Noncurrent portion of long-term debt
 Finance Lease Liability
 Deferred Tax Liability
 Long-term obligation to Officers
 Long-term deferred Revenue

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 CLASSIFIED AS CURRENT EVEN IF:
a. The original term was for a period longer than 12 months.
b. An agreement to refinance or to reschedule payment on a long-term basis is
complete after the reporting period and before the financial statements are
authorized for issue.
HOWEVER, see next slide

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 REFINANCING on a long-term basis is completed on or before the end
of the reporting period, the refinancing is an ADJUSTING EVENT and
therefore classified as NONCURRENT.
 THE ENTITY HAS A DISCRETION TO REFINANCE or roll over
an obligation for at least 12 months after the reporting period under an
existing loan facility, the obligation is classified as NONCURRENT even if
it would otherwise be due within a shorter period
*refinancing or rolling over must be at the discretion of the entity

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 Often attached to borrowing agreements which represent
undertakings by the borrower
 These are RESTRICTIONS on the borrower as to
undertaking further borrowings, paying dividends,
maintaining specified level of working capital and so forth.

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 BREACHED PAYABLE ON DEMAND
 CURRENT LIABILITY – even if the lender has AGREED, after the
reporting period and before the statements are authorized for issue not to demand
payment as a consequence of breach (REASON: since at the END of the
REPORTING PERIOD, the entity DOES NOT HAVE AN
UNCONDITIONAL RIGHT TO DEFER SETTLEMENT for at least
twelve months after the date.
 NONCURRENT LIABILITY – if the lender agreed ON OR BEFORE
THE END OF THE REPORTING PERIOD TO PROVIDE GRACE
PERIOD ending at least twelve months after that date.

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 Par. 54 of PAS 1, as a minimum, the face of the Statement of
Financial Position (Balance Sheet) shall include the following line
items:
 Trade and other payables (line item for accounts payable, notes
payable, accrued interest on notes payable, dividends payable and
accrued expenses)
 Current Provisions
 Short-term Borrowing
 Current Portion of Long-term Debt
 Current Tax Liability

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 Obligations which exist at the end of the reporting period although their AMOUNT is
NOT DEFINITE.
 The DATE when the obligation is due is NOT ALSO DEFINITE and in some
instances the EXACT PAYEE CANNO BE IDENTIFIED OR DETERMINED
 Its presence is valid and unquestioned.
 Can either be classified as current or noncurrent
 Examples
 Estimated liability for premium
 Award points
 Warranties
 Gift certificates
 Bonus

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 Income already received but not yet earned.
 May be realizable within one year (CURRENT LIABILITY- i.e. unearned interest income,
unearned rental income and unearned subscription revenue) or more than one year after the
reporting period (NONCURRENT LIABILITY – i.e. long-term service contracts and long-
term leasehold advances).
ACCOUNTING PROCEDURE:
 Cash Receipt from Service Contract Sold
 Cash xx
 Unearned Service Revenue xx
 Contract costs paid
 Unearned Service Revenue xx
 Cash xx
 Revenue recognized
 Unearned Service Contract xx
 Service Contract Revenue xx

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 A number of malls, department stores and supermarkets sell gift certificates
which are REDEEMABLE in merchandise.
ACCOUNTING PROCEDURE:
 Sold Gift Certificates
 Cash xx
 Gift Certificates Payable xx
 Redeemed Gift Certificates
 Gift Certificates Payable xx
 Sales xx
 Expired/Unredeemed/Forfeited Gift Certificates
 Gift Certificates Payable xx
 Forfeited Gift Certificates xx

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 Granted to compensate key officers and employees for
superior income realized during the year
 Its main purpose is to MOTIVATE officers and employees
by directly relating their well-being to the success of the
entity.
 Has four variations:
 Expressed as a certain percent of income before bonus and tax
 Expressed as a certain percent of income after bonus but before tax
 Expressed as a certain percent of income after bonus and tax
 Expressed as a certain percent of income after tax before bonus

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 Valix, C. et al (2020). Intermediate Accounting II. GIC
Enterprises. Recto, Manila.
Millan, Z. (2019). Intermediate Accounting II. Bandolin
Enterprises. Baguio City.
Robles, N. et al (2019). The Intermediate Accounting Volume II.
Millennium Books Inc. Mandaluyong City, Metro Manila.

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