Module 1 Introduction to Liability

Liability
- Present obligations of an entity arising from past transactions or events,
the settlement of which is expected to result in an outflow from the entity
of resources embodying economic benefits.

Elements of a liability
1. Present obligation
- can be legal or constructive
2. Arises from past events
- there is an obligating event
3. Outflow of future economic benefits
- payment in money
- transfer of non-cash assets
- performance of service

Classifications of Liabilities
1. Current Liability
- Entity expects to settle the obligation within the normal operating cycle.
- Liability is due within 12 months after the reporting period.
General rule: current
Exceptions:
a. the entity has the discretion to refinance or roll over an
obligation for at least 12 months after the reporting date.
b. refinancing on a long-term basis is completed on or before the
end of the reporting period.

- Held for trading

- Does not have an unconditional right to defer settlement for at least 12
months after the reporting period

2. Non-current Liability
- Residual definition
- Liability is due after 12 months after the reporting period.
General rule: non-current
Exception:
breach of contract (payable on demand)
Exception to the exception to the rule:
a. the lender agreed to provide grace period of 12 months after the
reporting date, on or before the end of the reporting date.
b. the lender agreed to waived the breach of covenant on or before
the end of the reporting date.
Measurement:

Conceptually, all liabilities are initially measured at present value and

subsequently measured at amortized cost.

Initial Subsequent
Short-term interest-bearing Face Value Face Value
Short-term non-interest-bearing Face Value Face Value
Long-term interest-bearing Face Value Face Value
Long-term non-interest-bearing Present Value Amortized Cost

Sample Scenarios:

On May 1, 2021, A Company issued P1M, 12-month promissory note to B

Company in exchange for equipment. Reporting date is on December 31, 2021
while the date the financial statements are authorized for issue is on March 31,
2022.

Required: What is the proper classification (current or non-current) under the

following scenarios:

1. A Company has the discretion to refinance or roll over for another year.
(Non-current)
2. On March 1, 2022 before the financial statements were issued, the note
payable was replaced by an 18-month note for the same amount.
(Current)
3. A Company intends to pay the obligation on April 20, 2022 and borrows
again on the same date for the same amount. The new note will be due in
2 years from May 1, 2021.
(Current)
4. On February 1, 2022, the entire note was refinanced through an
issuance of long-term obligation.
(Current)
5. On November 30, 2021, A Company entered into an agreement with Rain
to refinance the obligation for 8 months from May 1, 2022. The new
maturity date will be on December 31, 2022.
(Current)
6. On December 31, 2021, A Company entered into an agreement with B
Company to refinance the obligation for another 12 months from May 1,
2022.
(Non-current)

.
On May 1, 2021, A Company issued a P1M, 2-year promissory note to B
Company in exchange for an equipment. Reporting date is on December 31,
2021 while the date the financial statements are authorized for issue is on
March 31, 2022.

1. A Company intends to settle the note on the maturity date.

(Non-current)

2. On April 30, 2022, A Company entered into an agreement with B

Company to refinance the obligation for another 2 years from the date of
maturity.
(Non-current)

3. On March 1, 2022, A Company breaches a covenant related to the

obligation and the loan becomes payable on demand. On the same date,
B Company agreed to give A Company a grace period of 1 year from the
date of breach.
(Non-current)

4. On November 1, 2021, A Company breaches a covenant related to the

obligation and loan becomes payable on demand. On the same date, B
Company agreed to give A Company a grace period of 1 year from the
date of breach.
(Current)

5. On October 1, 2021, A Company breaches a covenant related to the

obligation and the loan becomes payable on demand. On the same date,
B Company agreed to give A Company a grace period of 1 year after the
reporting date.
(Non-current)

6. On September 1, 2021, A Company breaches a covenant related to the

obligation and the loan becomes payable on demand. On the same date,
B Company agreed to waive the breach and give A Company a second
chance.
(Non-current)