Liabilities

By: Luvy Sale-Asis. CPA

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Learning Objectives
• Understand the concepts of liabilities.
• Identify the characteristics of a financial liability (PFRS 9).
• Differentiate current liabilities from noncurrent liabilities.
• Identify the different liabilities account
• Know the initial and subsequent measurements of financial and non-
financial liabilities.

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Liabilities – Definition

• Liabilities are present obligation of an entity to transfer an

economic resource as a result of past events. (Revised
Conceptual Framework for Financial Reporting)

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Classification of liabilities

• As to its nature of obligation

• Financial and nonfinancial liabilities

• As to its presentation
• Current and noncurrent liabilities

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Financial liabilities – PFRS 9

• 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 instruments with another entity under conditions that are
potentially unfavorable to the entity

Note: Financial asset is any asset that is:

a. Cash
b. A contractual right to receive cash or another financial asset from another entity
c. A contractual right to exchange financial instrument with another entity under condition that are
potentially favorable
d. An equity instrument of another entity

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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 (arises because of normal business
practice, custom & desire to maintain good business
relations). These obligations do not arise from contracts.

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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 twelve months after
the reporting period; or
4.the entity does not have an unconditional right to defer
settlement of the liability for at least twelve months after
the reporting period.
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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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Noncurrent liabilities

• The term noncurrent liabilities is a residual definition. Examples:

• Noncurrent portion of long-term debt such as Notes payable, Mortgage
payable, Bonds payable
• Finance lease liability
• Deferred tax liability
• Long-term obligation to officers
• Long-term unearned revenue
• Due to or advances from affiliate & subsidiary

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• On Jan 1, 2022, BSA Corporation obtained a loan from BPI amounting to
P2,000,000 to be settled on December 31, 2024. Deposit should be
maintained with BPI for P50,000
• A= L+E
• BSA Corporation
• Cash P2,000,000
• Loan Payable P2,000,000

• December 31, 2022 – Statement of Financial Position

• Liabilities
• Loan Payable P2,000,000

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Currently maturing long-term liabilities
• General rule: Currently maturing long term liabilities
are presented as current liabilities.

• Exceptions:
1. Refinancing agreement fully completed on or before the
balance sheet date – non-current liability
2. Refinancing agreement after the balance sheet date but
before the financial statements are authorized for issue –
non-current liability if the refinancing is at the discretion of
the entity.

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Breach of loan agreement

• General rule: A liability that is payable on demand is a current liability.

• Exception: It is presented as non-current liability if the lender provides

the entity, on or before the balance sheet date, a grace period ending at
least 12 months after the balance sheet date to rectify a breach of loan
covenant.

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Presentation of Current Liabilities

• Minimum presentation per PAS 1:

• Trade and other payables
• Current provisions
• Short-term borrowing
• Current portion of long-term debt
• Current tax liability

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Specific accounts under Liabilities

• Trade accounts payable – are recognized when ownership over the goods
are transferred to the buyer.
• Accrued expenses - expenses that were incurred during the period but
were not yet paid.
• Liabilities may also arise from amounts collected on behalf of third
parties such as
• Taxes withheld (Withholding taxes payable)
• SSS premiums, Pag-ibig, Philhealth and similar contributions (SSS/Pag-
ibig/Philhealth Contributions Payable)
• Value Added Taxes (VAT Payable)

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• Gross pay P30,000
• Withholding tax 3,000 to BIR
• SSS 500 to SSS
• Philhealth 300
• Pag-ibig 200
• Net 26,000
• Salaries expense P30,000
• Withholding tax payable P3,000
• SSS Contributions payable 500
• Philhealth contribution payable 300
• Pag-ibig contributions payable 200
• Cash 26,000
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• Purchased tshirts 10pcs at P448/piece, inclusive of 12% VAT, on account
• Purchases P 4,000 (100%)
• Input tax 480 (12%)
• Accounts payable 4,480 (divided by 112%)

• Sold 10 tshirts at P616/piece, inclusive of 12% VAT on account

• Accounts receivable P6,160

• Sales 5,500
• Output tax 660
• Output tax P660
• Input tax P480
• VAT payable 180

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Specific accounts under Liabilities

• Unearned revenue – income already received but not yet earned

• Bonus payable – compensation plans given to key officers and employees
based on superior income realized during the year
• Refundable deposits – cash received from customers but which are
refundable after compliance with certain conditions
• Estimated premiums liability – an obligation for the future distribution of
premium as a result of past sales or sales promotion activities
• Unearned revenue – discounts/ Rebate liability - an obligation for the
future claim of incentives by customers as a result of past sales or sales
promotion activities

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Specific accounts under Liabilities

• Unearned revenue – gift certificates – the sell of gift certificates of gift

cards in exchange for future delivery of goods
• Unearned revenue – points – loyalty points to be redeemed by goods in
the future
• Estimated warranty liability – estimated liability of seller for certain period
as a guarantee to repair or to replace products if defective
• Provisions – an existing liability of uncertain timing or uncertain amount

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 QUESTIONS????
 REACTIONS!!!!!

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