LIABILITIES

Introduction
Liability is a present obligation arising from past even, the settlement of which is expected to result in an outflow of
resources embodying economic benefits or service potential.

Present obligation means that as of the reporting date, an obligating event must have already occurred. An obligating
event is an event that creates either of the following:
a. Legal obligation – an obligation that results from a contract, legislation, or other operation of law.
b. Constructive obligation – an obligation that results from an entity’s actions that create a valid expectation from
others that the entity will accept and discharge certain responsibilities.

Scope
The scope of this section includes the following:
1. Financial liabilities; and
2. Provisions, contingent liabilities, and contingent assets

Financial Liabilities
The definition of financial liabilities has already been discussed under “Financial Assets”.

Initial Measurement
Financial liabilities are initially measured at fair value minus transaction costs, except for financial liabilities at fair value
through surplus or deficit whose transaction costs are expensed.

Subsequent Measurement
Financial liabilities are subsequently measured at amortized cost, except for financial liabilities at fair value through
surplus or deficit which are subsequently measured at fair value.

Example:
On January 1, 20x1, the BTr issues a 5-year, 5%, P1,000,000 bonds for P970,000. Transaction costs on the issuance (bond
issue costs) amount to P12,124. The effective interest rate adjusted for both the bond discount and the bond issue cost
is 6%.

The initial measurement of the bonds payable is determined as follows:

Face amount 1,000,000
Bond discount (P1,000,000 - P970,000) (30,000)
Bond issue cost (12,124)
Carrying amount, Jan. 1, 20x1 957,876

Amortization Table:
Interest Interest Amortized
Date Payments Expense Amortization Cost
Jan. 1, 20x1       957,876
Dec. 31, 20x1 50,000 57,473 7,473 965,349
Dec. 31, 20x2 50,000 57,921 7,921 973,269
Dec. 31, 20x3 50,000 58,396 8,396 981,666
Dec. 31, 20x4 50,000 58,900 8,900 990,566
Dec. 31, 20x5 50,000 59,434 9,434 1,000,000
Journal Entries:
Jan. 1, 20x1 Cash in Bank-Local Currency, Bangko Sentral ng Pilipinas 970,000
Discount on Bonds Payable-Domestic 30,000
Bond Payable-Domestic 1,000,000

Bond Issue Cost-Domestic 12,124

Cash in Bank-Local Currency, Bangko Sentral ng Pilipinas 12,124

Dec. 31,
20x1 Interest Expense 57,473
Discount on Bonds Payable-Domestic* 5,322
Bond Issue Cost-Domestic* 2,151
Cash in Bank-Local Currency, Bangko Sentral ng Pilipinas 50,000

*Allocation:
Carrying amounts Allocation of amortization Allocations
Bond discount 30,000 7,473 * (30,000/44,124) 5,322
Bond issue cost 12,124 7,473 * (12,124/44,124) 2,151
Totals 42,124 7,473

Provisions, Contingent Liabilities, and Contingent Assets

Provision – is a liability of uncertain timing or amount.

Contingent liability is:

1. A possible obligation that arises from past events, and whose existence will be confirmed only by the occurrence
or non-occurrence of one or more uncertain future events not wholly within the control of the entity; or
2. A present obligation that arises from past events, but is not recognized because:
a. It is not probable that an outflow of resources embodying economic benefits or service potential will be
required to settle the obligation; or
b. The amount of the obligation cannot be measured with sufficient reliability.

Contingent asset is a possible asset that arises from past events and whose existence will be confirmed only by the
occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity.

Summary:
Contingent Probable Possible Remote
Liability Recognize and Disclose Disclose only Ignore
Asset Disclose only Ignore Ignore

Measurement
A provision is measured at the entity’s best estimate of the amount needed to settle the liability at the reporting date.
Gains from the expected disposal of assets shall not be taken into account in measuring a provision. Provisions shall be
reviewed at each reporting date to reflect the current best estimate.

LEASES

Introduction
Lease is an agreement whereby the lessor conveys to the lessee, in return for a payment or series of payments, the right
to use an asset for an agreed period of time.

Leases include hire purchase contracts (i.e. contracts for hire of an asset which contain a provision giving the hirer an
option to acquire title to the asset upon the fulfillment of agreed conditions).
Classifications
1. Finance Lease – a lease that transfers substantially all the risks and rewards incidental to ownership of an asset.
2. Operating Lease – a lease that does not transfer substantially all the risks and rewards incidental to ownership of
an asset.

Any of the following would lead to a finance lease classification:

1. The lease transfers ownership of the asset to the lessee by the end of the lease term.
2. The lessee has the option to purchase the asset at a price that is expected to be sufficiently lower than the fair
value at the date the option becomes exercisable for it to be reasonably certain, at the inception of the lease,
that the option will be exercised (“bargain purchase option”).
3. The lease term is for the major part of the economic life of the asset even if title is not transferred. A lease
qualifies to be accounted for as finance lease if the contract is a non-cancellable contract.
4. At the inception of the lease, the present value of the minimum lease payments amounts to at least
substantially all of the fair value of the leased asset.
5. The leased assets are of such a specialized nature that only the lessee can use them without major
modifications.
6. The leased assets cannot easily be replaced by another asset.
7. If the lessee can cancel the lease, the lessor’s losses associated with the cancellation are borne by the lessee.
8. Gains or losses from the fluctuation in the fair value of the residual (leased asset) accrue to the lessee (for
example in the for of a rent rebate equaling most of the sales proceeds at the end of the lease).
9. The lessee has the ability to continue the lease for a secondary period at a rent that is substantially lower than
market rent.

Accounting for Finance Lease by Lessees

At the commencement date, a lessee recognizes the asset acquired under a finance lease and the related lease liability
measured at the lower of the:
a. Fair value of the leased property at inception date; and
b. Present value of the minimum lease payments at inception date.

Contingent rent is lease payment that is not fixed in amount but rather based on the future amount of a factor that
changes other than with the passage of time (e.g. percentage of future sales). Contingent rent is recognized as expense
in the period incurred.

The minimum lease payments are discounted using the interest rate implicit in the lease, if this is determinable;
otherwise, the lessee’s incremental borrowing rate is used.

Initial direct costs, such as costs incurred in negotiating and securing leasing agreements, are capitalized as part of the
asset recognized.

The lease liability is subsequently measured similar to an amortized cost financial liability. The leased asset, on the other
hand is accounted for similar to PPE.

Accounting for Finance Lease by Lessors

A lessor recognizes the lease payments receivable under a finance lease at an amount equal to the net investment in the
lease.

Initial direct costs are included in the initial measurement of the finance lease receivable and reduce the amount of
revenue recognized over the lease term. The interest rate implicit in the lease is defined in such a way that the initial
direct costs are included automatically in the finance lease receivable. Therefore, there is no need to add the initial
direct costs separately.
The lease receivable (net investment in the lease) is subsequently measured similar to an amortized cost financial asset.
Accordingly, the lease payments are applied against the gross investment in the lease to reduce both the principal and
the unearned finance revenue.

Illustration:
On January 1, 20x1, Lessee enters into a 4-year lease of machinery with Lessor. Ownership of the machinery will be
transferred to Lessee at the end of the lease term. Annual rental payable at the end of each year is P100,000. The
implicit interest rate, known to Lessee, is 10%.

Lessee estimates that the remaining useful life of the machinery is 5 years.

The machinery has a historical cost of P1,000,000 and accumulated depreciation of P683,013 in the books of Lessor.

Initial Measurement
The present value of the lease payments is computed as follows:
Annual rental 100,000
Multiply by PV of ordinary annuity of 1 @ 10%, n=4 3.16987
PV of lease payments, Jan. 1, 20x1 316,987

Books of Lessee Books of Lessor

Jan. 1, 20x1     Jan. 1, 20x1    
316,98 400,00
Leased Asset, Machinery and Equipment 7   Finance Lease Receivable 0  
316,98 683,01
Finance Lease Payable 7 Accumulated Depreciation 3  
    Deferred Finance Lease Revenue 83,013
      Machinery   1,000,000

Amortization Table
Amortizatio Carrying
Date Payments Interest n Value
1/1/x1       316,987
12/31/x1 100,000 31,699 68,301 248,686
12/31/x2 100,000 24,869 75,131 173,554
12/31/x3 100,000 17,355 82,645 90,909
12/31/x4 100,000 9,091 90,909 (0)

Books of Lessee Books of Lessor

Dec. 31, 20x1     Dec. 31, 20x1    
Interst Expense 31,699   Cash-Collecting Officers 100,000  
Finance Lease Payable 68,301   Deferred Finance Lease Revenue 31,699  
Cash-Modified Disbursement System   Interest Income 31,699
100,00
(MDS), Regular 0 Finance Lease Receivable 100,000
       
Depreciation Expense-Leased Assets,      
Machinery and Equipment 63,397      
Accumulated Depreciation-Leased      
Assets, Machinery and Equipment   63,397      

Operating Lease
A lessee (or lessor) under an operating lease recognizes the lease payments as payments (or lease collections as income)
on a straight-line basis over the lease term, unless another systematic basis is more representative of the time pattern of
the user’s benefit.
Initial direct costs incurred by lessors are added to the carrying amount of the leased asset and recognized as expense
over the lease term on the same basis as the lease income. Initial direct costs incurred by lessees are treated as prepaid
rent and recognized as expense on the same basis as the lease expense.

FINANCIAL STATEMENTS

Introduction
General Purpose Financial Statements are those intended to meet the needs of users who are not in a position to
demand reports tailored to meet their particular information needs.

Objectives
The objectives of general-purpose financial statements of a public sector entity are:
a. To provide information about the entity’s financial position, financial performance, and cash flows that is useful
to a wide range of users in making economic decisions; and
b. To demonstrate the accountability of the entity for the resources entrusted to it.

Responsibility for Financial Statements

The responsibility over financial statements rests with the entity’s management, particularly the Head of the Entity
jointly with the Head of Finance/Accounting.

A Statement of Management Responsibility for Financial Statements shall be attached to the financial statements as a
cover letter.

Components
A complete set of financial statements consists of:
a. Statement of Financial Position
b. Statement of Financial Performance
c. Statement of Changes in Net Assets/Equity
d. Statement of Cash Flows
e. Statement of Comparison of Budget and Actual Amounts
f. Notes to the Financial Statements, comprising a summary of significant accounting policies and other
explanatory notes.

General Principles

Fair Presentation
Fair presentation means the faithful representation of the effects of transactions and other events in accordance with
the definitions and recognition criteria for assets, liabilities, revenue, and expenses in the PPSAS. The application of
PPSAS, with appropriate disclosures, if necessary, would result in the fair presentation of the financial statements.

Compliance with PPSASs

An entity whose financial statements comply with the PPSASs shall make an explicit and unreserved statement of such
compliance in the notes.

In the event that Management strongly believes that compliance with the requirements of PPSAS would result in
misleading presentation, the entity may depart from that requirement if the relevant regulatory framework allows, or
otherwise does not prohibit, such departure.

Going Concern
The financial statements shall be prepared on a going concern basis unless there is an intention to discontinue the entity
operation or there is no realistic alternative but to do so.

Consistency of Presentation
The presentation and classification of items in the financial statements shall be retained from one period to the next
unless laws, rules and regulations, and PPSAS require a change in presentation.

Materiality and Aggregation

Each material class of similar items shall be presented separately in the financial statements. Items of dissimilar nature
or function shall be presented separately unless they are immaterial. If a line item is not material, it is aggregated with
other items either on the face of the financial statements on in the Notes.

Offsetting
Assets and liabilities, and revenue and expenses, shall not be offset unless (a) required or permitted by PPSAS, or (b)
when offsetting reflects the substance of the transaction of other events.

Comparative Information
Comparative information shall be disclosed with respect to the previous period for all amounts reported in the financial
statements.

Identification of the Financial Statements

The financial statements shall be identified clearly, and distinguished from other information in the same published
document.

The following information shall be displayed prominently and repeatedly:

a. Name of the reporting entity;
b. Whether the financial statements cover the individual entity or a group entity;
c. The reporting date or the period covered by the financial statements, whichever is appropriate to that
component of the financial statements;
d. Name of fund cluster;
e. The reporting currency; and
f. The level of rounding-off of amounts.

Statement of Financial Position

The statement of financial position shows the entity’s financial condition as at a certain date. It is presented in
comparative, condensed and detailed formats.

Condensed statement of financial position presents only the line items, as follows (with their breakdowns shown in the
Notes):
a. Cash and cash equivalents
b. Receivables from exchange transactions
c. Recoverable from non-exchange transactions (taxes and transfers)
d. Financial assets (excluding amounts shown under (a), (b), and (c))
e. Inventories
f. Investment Property
g. Property, Plant and Equipment
h. Intangible assets
i. Taxes and Transfers Payable
j. Payables under exchange transactions
k. Provisions
l. Financial liabilities (excluding those shown under (h), (i), and (j))
m. Net assets/equity

Detailed statement of financial position presents all the asset, liability, and equity accounts in the Revised Chart of
Accounts.
Statement of Financial Performance
The statement of financial performance shows the revenue, expenses, and surplus or deficit for the period. It is
presented in comparative, condensed and detailed formats.

The following are the minimum line items to be presented on the face of the statement of financial performance:
a. Revenue
b. Finance costs
c. Share in the surplus or deficit of associates and joint ventures
d. Gain or loss attributable to discontinuing operations
e. Surplus or deficit

Expenses may be presented according to their function or nature, whichever form is more relevant. If expenses are
classified by function, additional disclosures shall be made on the nature of expenses, including depreciation,
amortization and employee benefits expenses.

Statement of Changes in Net Assets/Equity

The statement of changes in net assets/equity shows the increase or decrease in the entity’s net assets during the
period resulting from the following:
a. Surplus or deficit for the period
b. Items of revenue and expense that are recognized directly in equity
c. Effects of changes in accounting policies and corrections of errors
d. The balance of accumulated surpluses or deficits at the beginning of the period and at the reporting date, and
the changes during the period.

Statement of Cash Flows

The statement of cash flows shows the sources and utilizations of cash and cash equivalents during the period according
to the following activities:
a. Operating activities – derived from the principal cash-generating activities of the entity. Some examples include:
 Receipt of NCA and reversion of unused NCA
 Receipt or provision of assistance and subsidy to other entities
b. Investing activities – involve acquisition and disposal of noncurrent assets and other investments. Some
examples include:
 Acquisition and disposal of PPE
 Acquisition and disposal of investment property
c. Financing activities – activities that affect the entity’s equity capital and borrowings. Some examples include:
 Issuing of notes, loans, and bonds payable, and their repayments
 Finance lease payments pertaining to the reduction of the outstanding finance lease liability

Presentation of Cash Flows

Cash flows from (used in) operating activities are presented using the Direct Method. The indirect method, which is
available to business entities, is not allowed for government entities.

Statement of Comparison of Budget and Actual Amounts

The statement of comparison of budget and actual amounts shows the differences (variances) between the budgeted
amounts and actual results for a given reporting period. This enhances the transparency of financial reporting of the
government.

The statement shows the following:

1. Budget information – consists of, among others, data on appropriations, allotments, obligations, revenues and
other receipts, and disbursements. This is based on the budget registries and includes the following:
a. Original budget – the initially approved budget for the period, usually the GAA.
b. Final budget – the original budget adjusted for all reserves, carry-over amounts, realignments, transfers,
allocations and other authorized legislative or similar authority changes applicable to the period.
 Explanations regarding changes from original to final budget are disclosed in the notes.
2. Actual amounts on a comparable basis – these represent the actual disbursements made during the period.
Since the “actual amounts on a comparable basis” to the budgeted amounts are on a cash basis, they may not
always be equal to the amounts presented in the other financial statements, which are on accrual basis. These,
therefore, are reconciled in the notes. The differences are classified as follows:
a. Basis differences – occur when the approved budget is prepared on a basis other than the accounting
basis
b. Timing differences – occur when the budget period differs form the reporting period reflected in the
financial statements
c. Entity differences – occur when the budget omits program or entities that are part of the entity for
which the financial statements are prepared
3. Differences between (1) and (2) above – explanations of material differences shall be made in the notes.

Notes to Financial Statements

The notes to financial statements provides information in addition to those presented in the other financial statements.
Accordingly, information in the other financial statements shall be cross-referenced to the notes.

The notes shall be structured in a systematic and logical manner to show the following:
1. General information on the reporting entity.
2. Statement of compliance with the PPSAS and Basis of preparation of financial statements.
3. Summary of significant accounting policies.
4. Disaggregation (breakdowns) and other supporting information for the line items in the other financial
statements.
5. Other disclosures required by PPSAS.
6. Other disclosures not required by PPSAS but the management deems relevant to the understanding of the
financial statements.