(Intermediate Accounting 2)

LECTURE AID

ZEUS VERNON B. MILLAN

Chapter 1 Current Liabilities
Related standards:
PAS 1: Presentation of Financial Statements
PAS 32: Financial Instruments: Presentation
PFRS 9: Financial Instruments

Learning Competencies
• Know the recognition criteria for liabilities and their essential
characteristics.
• Identify the characteristics of a financial liability.
• Know the initial and subsequent measurements of financial
and non-financial liabilities.
• Know how to classify liabilities as current and noncurrent.

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Liabilities

PAS 1 prescribes the basis for presentation of

general purpose financial statements to
improve comparability both with the entity's
financial statements of previous periods and with
the financial statements of other entities.

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Essential characteristics of a liability

1. Present obligation (Legal or Constructive)

2. Arising from past events
3. Outflow of economic benefits

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Financial liabilities

• A financial liability is any liability that is a contractual

obligation :
a. to deliver cash or another financial asset to another entity; or
b. to exchange financial assets or financial liabilities with another
entity under conditions that are potentially unfavorable to the
entity; or

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Examples of financial liabilities

1. Payables such as accounts, notes, loans, bonds payable and accrued

expenses that are payable in cash.
2. Finance lease obligations.
3. Liabilities held for trading such as obligations to deliver financial
assets borrowed by a “short seller” (i.e. an entity that sells financial
assets it has borrowed and does not yet own).
4. Preference shares issued with mandatory redemption.
5. Security deposits received that are to be returned to tenants at the end
of lease term.
6. Obligations to deliver a variable number of own shares worth a fixed
amount of cash.

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• The following are not financial liabilities
1. Unearned revenues and warranty obligations that are to be settled by
future delivery of goods or services, rather than cash.
2. Taxes, SSS premiums, Philhealth and other payables arising from
statutory requirements and not from contracts.
3. Commodity contracts that either cannot be settled in cash or which
are expected to be settled by commodity exchange (e.g., coffee beans,
gold bullion, oil, and the like). If a commodity contract is expected to
be cash settled, it will be included as financial liability on the part of
the cash payor.
4. Constructive obligations. These obligations do not arise from
contracts.

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Recognition of liabilities

• An item is recognized as a liability when:

1. It meets the definition of a liability;
2. It is probable that an outflow of resources embodying economic
benefits will result from its settlement; and
3. The settlement amount can be measured reliably.

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Measurement of financial liabilities

• Initial measurement – fair value minus transaction costs,

except financial liabilities at FVPL whose transaction costs are
expensed immediately.
• Subsequent measurement – amortized cost (except financial
liabilities that are classified as held for trading and those that are
designated; these are subsequently measured at fair value)

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Measurement of Non-financial liabilities

• Non-financial liabilities are initially measured at the best estimate of

the amounts needed to settle those obligations or the measurement
basis required by other applicable standard.
• Examples:
1. Obligations arising from statutory requirements (e.g., income tax
payable)
2. Unearned or deferred revenues
3. Warranty obligations
4. Commodity contracts that either cannot be settled in cash or which
are expected to be settled by commodity exchange

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Current liabilities

• An entity shall classify a liability as current when:

1. It expects to settle the liability in its normal operating cycle;
2. It holds the liability primarily for the purpose of trading;
3. The liability is due to be settled within 12 months after the
reporting period; or
4. The entity does not have an unconditional right to defer settlement
of the liability for at least 12 months after the reporting period.
(PAS 1)
All other liabilities are classified as noncurrent.

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Trade and non-trade payables

• Trade payables are obligations arising from purchases of inventory

that are to be sold in the ordinary course of business. Other payables
are classified as non-trade.
• Trade payables are classified as current liabilities when they are
expected to be settled within the normal operating cycle or
one year, whichever is longer.
• On the other hand, non-trade payables are classified as current
liabilities only when they are expected to be settled within one
year.

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Dividends payable

• Under IFRIC 17, the liability to pay a dividend is recognized when the
dividend is appropriately authorized and is no longer at the discretion of
the entity, which is:
1. the date when the declaration of the dividend (e.g., by management or
the board of directors) is approved by the relevant authority
(e.g., the shareholders) if the jurisdiction requires such approval, or
2. the date when the dividend is declared (e.g., by management or
the board of directors) if the jurisdiction does not require further
approval.

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