LIABILITIES

Liability, as defined in the Revised Conceptual Framework is a present obligation of the entity to transfer
economic resource/s as a result of past events.
Characteristics of A Liability
l. The entity has a present obligation.
This means that the entity has a duty or responsibility to act or perform as a consequence of a binding
contract or statutory requirements. For example, when goods or services are received from another party, the
entity is obliged to settle the corresponding consideration (liability) to the said party.
2. The liability results from past transactions or other past events.
For example, the purchase of goods and the use of services give rise to trade payables.
3. Settlement of a present obligation may occur in a number of ways such as payment of cash, transfer of
other assets or provision of services.

RECOGNITION OF LIABILITIES
A liability is recognized in the statement of financial position when it is probable that a transfer of economic
resource resulting from past event(s) will result from the settlement of a present obligation and the amount at
which the settlement will take place can be measured reliably. (probable & measurable)
CLASSIFICATION OF LIABILITIES
Liabilities can be classified as either (a)financial or (b) non-financial.
(a) Financial Liability as defined in PAS 32, is any liability that is a contractual obligation: (i) to deliver cash
or another financial asset to another entity; or (ii) to exchange financial assets or financial liabilities
with another entity under conditions that are potentially unfavorable to the entity; or (b) a contract
that will or may be settled in the entity's own equity instruments.

The following are examples of financial liabilities:

• Accounts payable • Obligations to deliver own shares worth a
• Notes payable (secured or unsecured) fixed amount of cash
• Loans payable • Some derivatives on own equity
• Bonds payable instruments
• Other debt instruments issued by the entity • Mandatorily redeemable share (i.e., a share
(commercial paper) that will be redeemed by the entity at a
• Accrued expenses payable future date)
• Derivative financial liabilities

(b) Non- Financial Liabilities - all liabilities that did not qualify as financial liabilities are considered non-
financial liabilities. Such liabilities are associated with the future delivery of goods or services. They do
not give rise to a contractual obligation to pay cash or another financial asset.
The following are examples of nonfinancial liabilities:

• Deferred revenue.
• Warranty liability.
• Premium liability.
Principal Categories of Financial Liabilities B. Financial Liabilities Measured at Amortized Cost
(FL@AC) - these are financial liabilities that do not
A. Financial Liabilities at Fair Value through Profit
meet the definition of financial liabilities at fair
or Loss (FL@FVTPL) - these include financial
value through profit or loss (FL@FVTPL). For most
liabilities that the entity has either:
entities, most financial liabilities will fall in this
(a) incurred for trading purposes (e.g., short-term category.
note payable, commercial paper) that the entity
Examples of financial liabilities measured at
intends to repurchase in the near term to make a
amortized cost (FL@AC) are
gain from short-term movements in interest rates.
1. Accounts payable
(b) elected to classify or designate into this
category. (e.g., bonds payable) 2. Notes payable
3. Bonds payable
4. Deposits from customers
Measurement of Financial Liabilities
Initial Measurement
At initial recognition, an entity shall measure a financial liability at its fair value minus, in the case of a financial
liability not at fair value through profit or loss, transaction costs that are directly attributable to the issue of
the financial liability (PFRS 9, par. 5. 1.1 ).
Fair value is the price that would be paid to transfer a liability in an orderly transaction between market
participants at the measurement date.
Transaction costs may arise in the acquisition, issuance or disposal of a financial liability. They are incremental
costs such as fees and commissions paid to agents, advisers, brokers or dealers, levies by regulatory agencies
and securities exchanges; and transfer taxes and duties. Are expensed immediately for financial liabilities
measured at FVTPL because the payment of transaction costs do not result in any increase in future economic
benefits of the entity.
Subsequent Measurement of Financial Liabilities
Subsequent to initial recognition, PFRS 9, requires that an entity shall measure a financial liability in
accordance with par.4.2.1 -4.2.2 which provide that an entity shall classify all financial liabilities as
subsequently measured at amortized cost (AC) unless it is held for trading or designated for trading (FVTPL)
Presentation in Statement of Financial Position - CURRENT / NON-CURRENT DISTINCTION
✓ PAS I Presentation of Financial Statements, par. 69 provides that an entity shall classify a liability as
current when:
(a) it expects to settle the liability within its normal operating cycle; e.g trade AP, trade NP
(b) it holds the liability primarily for the purpose of trading; e.g. FL@ FVTPL Liabilities are held for trading if
they are incurred principally for the purpose of selling or repurchasing in the near term, or a portfolio of
identified financial instruments that are managed together and for which there is evidence of a recent pattern
of actual profit-taking. These types of liabilities include deposits received by banks which are held under trust
funds and are invested by banks, in behalf of the depositors, in some short-term financial instruments.
Liabilities held for trading also include derivatives.
(c) the liability is due to be settled within twelve months after the reporting period;e.g. short-term, non-trade
notes payable, deposits and advances and portion of long term debt due within 12 months from the reporting
date (current portion of LT debt)
(d) it does not have an unconditional right to defer settlement of the liability for at least twelve months after
the reporting period. Terms of a liability that could at the option of the counterparty, result in its settlement by
the issue of equity instruments do not affect its classification.
✓ An entity shall classify all other liabilities as non-current.
Operating cycle is the elapsing between the acquisition of goods and services involved in the manufacturing
process and the final cash realization resulting from sales and subsequent collections
Current portion of LT debt classified as non-current
✓ The currently maturing obligation shall be reported as non-current only if the agreement to refinance
is completed on or before the reporting date.
✓ Likewise, if an entity (DEBTOR) expects, and has the discretion, to refinance or roll over an obligation
for more than twelve months after the reporting date under an existing loan facility, it classifies the
obligation as non-current, even if it would be due within a short period.
✓ The liability is classified as non-current if the lender agreed at or before the reporting date to provide a
grace period ending at least twelve months from that date, within which the entity rectify the breach
and during which the lender cannot demand immediate payment.
Current portion of LT debt classified as current
✓ If the agreement to refinance is completed after the reporting period, even before the issuance of the
financial statements, the maturing obligation shall be classified as current, because as of the end of the
reporting date, the enterprise does not have the right to defer the settlement of the liability.
✓ When an entity breaches an undertaking under a long-term loan agreement on or before the reporting
date with the effect that the liability becomes payable on demand, the liability is classified as current,
even if the lender has agreed, after the reporting period and before the authorization of the financial
statements for issue, not to demand payment as a consequence of the breach. The liability is classified
as current because, at the reporting date, the entity does-not have an unconditional right to defer its
settlement for at least twelve months after that date.
ILLUSTRATIVE CASES:
To illustrate the foregoing, assume the following independent cases and the classification of liability . The
statement is dated December 3l ,2014.
CASE 1. John, Inc. has P4 million of notes payable due June 15,2015. At December 31, 2014, John signed an
agreement to borrow up to P4 million to refinance the notes payable on a two year basis. The financing
agreement called for borrowings not to exceed 75% of the value of the collateral John was providing. At the
date of issue of the December 31, 2014 financial statements, the value of the collateral was P4.8 million and
was not expected to fall below this amount.
NON-CURRENT LIABILITY 3.6M & 400k CURRENT LIABILITY. Because as of December 3I, 2014, the reporting
date, John has the discretion to defer the settlement of a portion of the maturing obligation for a period of
more than twelve months by signing on December 31, 2014 a refinancing agreement. Of the P4 million notes
payable, P3,600,000 (which is 75% of P4.8 million) shall be classified as non-current while the remaining
P40O,OO0 shall be classified as current liabilities.
CASE 2. John, Inc. has P4 million of notes payable due June 15,2015. At February 15, 2015, John signed an
agreement to borrow up to P4 million to refinance the notes payable on a long-term basis. The financing
agreement called for borrowings not to exceed 75% of the value of the collateral John was providing. At the
date of issue of the December 31, 2014 financial statements, the value of the collateral was P4.B million and
was not expected to fall below this amount. The financial statements are authorized for issuance on March 5,
201 5.
CURRENT LIABILITY 4M. On the December 31, 20l4 statement of financial position, the full amount of P4
million shall be classified as current liabilities even if the enterprise signed an agreement to refinance the
maturing notes payable on a long-term basis before the issuance of the 2014 financial statements. The full
amount is classified as a current liability because as of December 31, 2014, John has no unconditional right yet
to defer the settlement of the P4 million (the refinancing agreement was signed on February 15, 2015). The
refinancing of the P4 million is considered as an event after the reporting period not requiring adjustment in
the financial statements. This refinancing after the reporting period, if considered significant, qualifies for
disclosure in the notes to the financial statements.
CASE 3. In October 2012, Eman Corp. acquired a special equipment from Carlo, Inc. by paying P1,000,000
down and signing a note with a face value of P4,000,000 due October 2015. Under the terms of the financing
agreement, Eman has the discretion to roll over the obligation for at least fifteen months. In October 2014,
management decides to exercise its discretion to roll over the liability up to October 31, 2016.
NON-CURRENT LIABILITY. The P4,000,000 note is classified as non-current on December 31 , 2014 statement
of financial position. The enterprise (debtor) already exercised its discretion as of the reporting date
(December 31, 2014) to roll over the obligation. The maturity date of the obligation has been reset to October
31, 2016, which is 22 months away from December 31, 2014, the reporting date.
Case 4. In October 2012, Eman Corp. acquired equipment from Carlo, Inc. by paying P1,O00,0O0 down and
signing a note with a face value of P4,000,000 due October 2014. The existing loan agreement does not carry a
provision to refinance. In October 2014, Eman was experiencing financial difficulty and was unable to pay the
maturing obligation. On February 1, 2O15, Carlo has agreed not to demand payment for at least 12 months as
a consequence of the breach of payment on the principal of the loan. The financial statements were
authorized for issue on March 31, 2015.
CURRENT LIABILITY. The P4,000,000 note payable shall be classified on Eman's December 31, 2O14 statement
of financial position as current liabilities. It is classified as current because as of December 31, 2014, the entity
has no discretion yet to roll over the obligation for at least twelve months after that date.
Case 5. In October 2012, Eman Corp. acquired equipment from Carlo, Inc. by paying P750,000 down and
signing a note with a face value of P4,000,000 due October 2O14. The existing loan agreement does not carry
a provision to refinance. In October 2014, Eman was experiencing financial difficulty and was unable to pay
the maturing obligation. On December 31, 2014, Carlo signed an agreement to provide Eman a grace period of
15 months from that date, during which period, Carlo will not demand immediate payment in order to give
Eman the chance to rectify the breach. The financial statements were authorized for issue on March 31, 2015.
NON-CURRENT LIABILITY. In the December 31, 2014 statement of financial position of Eman, the P4,000,000
note payable shall be classified as non-current, because Carlo has agreed not to demand payment for 15
months from December 31,2014. Thus, under the new terms offered by the creditor, Eman is given a grace
period of 15 months, within which the creditor could not demand immediate payment.
Case 6.
On October 1, 2012, Vilma Corporation acquired land from Fortune Corporation by paying P1,OOO,O00 down
and signing a note with a face value of P6,O0O,0AO due in installments of P1,0O0,000 plus annual interest on
the balance of the principal at the rate of 10%, the first installment being due on September 3O, 2013. The
existing loan agreement does not carry a provision to refinance and further states that any failure to pay the
required installment and interest will make the full amount of the loan due and demandable. Further, the full
amount of the principal and accrued interest shall be subject to interest of 10%. As of December 31, 2014,
Vilma Corporation is already three months behind in the payment of the 2014 annual installment and interest.
CURRENT LIABILITY. The violation of the debt agreement makes the obligation due and demandable. The
remaining balance of the loan principal amounting to P5,000,000 plus accrued interest of P500,000 shall be
subject to further interest of 10 %. Thus, the total amount of obligation related to this note of P5,637,500
which is P5,500,000 + (P5,500,000 x 10% x 3/12) shall be classified as current liabilities.
EXAMPLES OF CURRENT LIABILITIES

• Accounts Payable • Commercial Paper

• Short-term Notes Payable • Deposits and Advances
 • Current Portion of Long-term Debt • Dividends Payable
• Accrued Liabilities • Credit Balances in Customers' Accounts
• Income Tax Payable • Deferred Revenue

• Provisions expected to be settled within 12 months

EXAMPLES OF NON-CURRENT LIABILITIES

• Bonds Payable • Liability Under Finance Leases not due

• Mortgage Loans Payable within 12 months
• Long-term Notes Payable • Long-term Deferred Revenue
ACCOUNTING FOR DIFFERENT CURRENT LIABILITIES
Accounts Payable - trade accounts payable are liabilities arising from the purchase of goods, materials,
supplies, or services on an open charge-account basis. Recording liabilities for purchases of goods is when the
goods are received, or practically, when the invoices are received from the supplier. In most cases, this
coincides with the transfer of the legal title or the acquisition of ownership. The transfer of title depends on
the terms of purchase (which could either be FOB shipping point or FOB destination).
Methods of Accounting for Cash Discounts - the purchase transaction may be recorded using either the gross
method or the net method.
To illustrate, assume that ABC Corporation purchased merchandise from DEF Company with an invoice price of
P200,000; terms: FOB shipping point, 3/10; n/30. The purchase took place on November 2,2014. DEF Company
prepaid the freight charge of P2,000. ABC paid the full amount on Nov.10, 2014. Assume further that ABC
uses periodic inventorv system. Entries to record the purchase and payment under the gross and net methods
are:
Gross Method Net Method
November 2,2014 Purchases 194,000
Purchases 200,000 Freight-in 2,000
Freight-in 2,000 AP 196,000
AP 202,000

November 10,20l4 Accountspayable 196,000

Accounts payable 202,000 Cash 196,000
Purchase Discount 6,000
Cash 196,000

if the account paid beyond

Accounts payable 202,000 Accounts payable 196,000
Cash 202,000 Purchase Discounts lost6,000
Cash 202,000

if the account unpaid as of year end

NO AJE PD Lost 6,000
AP 6,000

Notes Payable - a promissory note is a written promise to pay a certain sum of money to the bearer at a
designated future time. The promissory notes may arise out of either a trade situation (purchase of goods or
services on credit) or the borrowing of money from a bank, or other transactions.
Short Term = Face value/Transaction price

Long Term:

Interest bearing:
Realistic/Market rate = Face value
 Unrealistic/Below market rate:
1) Cash price (Fair value of goods/services)
2) PV of cash flows discounted using prevailing IR

Non-Interest bearing:
1) Cash price (Fair value of goods/services)
2) PV of cash flows discounted using prevailing IR

The issuance a realistic interest bearing note is recorded as follows (assume an issuance of note in settlement
of an overdue trade account):
Accounts Payable xxx
Notes Payable xxx

At maturity date, payment is made for the principal amount plus interest for the entire term of the note, as
follows:
Notes Payable xxx
Interest Expense xxx
Cash xxx

If the note is still outstanding at the end of the reporting period, an accrued interest should be
recorded for the period from the date of issuance of the note to the end of the reporting period. Accrual of
interest is recorded as
Interest Expense xxx
Interest Payable xxx

This adjusting entry may be reversed at the beginning of the new accounting period so that the
subsequent payment of the note and interest may be recorded in the usual manner, debiting Notes Payable
for the principal and Interest Expense for the total interest paid.

Note Bearing an Unrealistic Interest Rate

A note bears an unrealistic interest rate when any one or both of these two situations exist:
(a) the interest rate appearing on the face of the note (NR) is significantly different from the market rate (ER)
of similar notes; and
(b)the consideration received on account of the note issued has a fair value which is significantly different
from the face value of the note.
Accrued Liabilities – or expenses incurred on or before the end of the reporting period but payable at a later
date. Common examples of liabilities of this nature are accrued salaries, accrued interests, accrued rentals,
and accrued taxes. An accrued liability is taken up as an adjustment at year-end by charging an expense
account and crediting an accrued liability account.
Provision for Product and Service Warranties - Warranty agreements require the seller to correct any
deficiency in quality, quantity or performance of the merchandise sold, to replace the item, or to refund the
selling price over a specified period of time after the sale. Warranty expense is recognized based on
associating cause and effect. To properly measure an enterprise's profit for the period, the expected costs
related to revenues of the period shall be recognized as expenses in the same period in which sales are
recorded, even if the expenditure is to be incurred at a subsequent period.
 To illustrate accounting for warranties, consider the following data:
JVC Electronics sells DVD and VCD systems with a two-year warranty. JVC estimates warranty costs as a
percentage of peso sales as follows: First year of warranty – 3%; Second year of warranty – 8%. Sales and
actual repairs for 2013 and 2O14 are Sales: 2Ol3 - P2,500,000; 2O14 - P4,750,000 ;Actual warranty repairs:
2013 - P53,000; 2O14 - P184,500.
2013 2014
Warranty Expense 275000 522500
Liability for Warranty 275000 522500

Liability for Warranty 53000 184500

Cash, etc. 53000 184500

Warranty Expense for year 2013: 11% x P2,500,000 = P275,000

Warranty Expense for year 2Ol4: 11% x P4,750,000 = P522,500

Liability for Warranty, December 31, 2013 P222,000

P275,000 - P53,000
Liability for Warranty, December 31, 2Ol4:
P222,OOO + P522,500 - Pl84,500 P560,000*

The warranty liability account should be reviewed periodically to determine if the actual repairs
approximate the estimate. Assuming that sales and repairs occur evenly throughout the year, an analysis is
made as follows. at December 31, 2Ol4:
2013 sales still under warranty:
2,500,000 x 1/2 x 8% P100,000

2014 sales still under warranty:

4,750,000 x 1/2x 3% 71,250
4,750,000 x 8% 380,000 451,250
Total 551,250

***Warranty liability = ½ of warranty in first year and 1 whole of second year)

The warranty liability account shows a balance of P560,000 whereas the analysis shows predicted
warranty liability of P551,250, the difference of which may be considered insignificant. In situations where
estimate differs significantly from actual experience, an adjustment is made to the warranty expense account
of the current accounting period. The adjustment is treated as a change in accounting estimate.
Liability for Warranty 8,750
Warranty Expense 8,750

Provision for Premiums and Coupons - to increase sales, premiums are offered to customers in exchange for
coupons, box tops, wrappers or any other evidence of purchase. The cost of these premiums should be
matched as expenses against the revenues in the period of the sale.
To illustrate a typical situation, assume that for a particular year, a company launched a new sales promotional
program. For every 1O product box tops returned to the company, customers receive an attractive prize. The
company estimates that only 6O% of the product box tops reaching the consumer market will be redeemed.
Additional information is as follows:
Units Amount
Sales of products (in boxes) 2,000,000 P90,000,000
Purchase of premiums (prizes) 100,000 800,000
Premiums distributed to customers 82,000
 The following journal entries are made in the current year to record the foregoing data.
Cash (or Accounts Receivable) 90,000,000
Sales 90,000,000
Sales of products

Premium Inventory @r Prepaid Expense)800,000

Cash (or Accounts Payable) 800,000
Purchase of premiums

Premium Expense 304,000

Premium Inventory 304,000
Redemption s of premiums

Customer Loyalty Awards - Certain companies grant their customers rewards for patronage of their products
and services, Examples of this scheme are awarding of points to SM Advantage cardholders, Mercury Suki
Card, and other cards which entitle holders to exchange points accumulated from purchases for goods and
services of the entity. Such points are used by customers as part or full payment for goods and services
offered by the company.
Awards Supplied by the Entity
Under IFRIC 13, the consideration received or receivable by an entity for goods sold is apportioned between
the product or service sold and the customer loyalty awards redeemable in the future based on relative fair
values. The redeemable loyalty awards are recognized initially as a liability and recognized as revenue upon
redemption.
Awards Supplied by a Third Party
If an award is supplied by a third party, the amount received as consideration for goods or services sold is
recognized as revenue in full, and an expense is recognized for the points granted to customers.
Liability for Bonuses - The amount of bonus may be based on the amount of revenue or profit of the
enterprise. If unpaid at year-end, should be accrued by debiting Compensation Expense (or Bonus Expense)
and crediting Bonus Payable. The amount of bonus, if based on profit, is computed using different possible
formulas.
Dividends Payable - Cash dividends are usually payable within a relatively short period of time from the date
of declaration and are, therefore, classified as current liabilities.
Undeclared cash dividends on cumulative preference shares (dividends in arrears) are not recognized as
liabilities and is simply disclosed in the notes to financial statements.
A property dividend and a scrip dividend will likewise result in the creation of a current liability, because they
are generally distributable within a relatively short period of time after declaration and would require the
outflow of resources for their settlement.
A share dividend distributable, is not classified as a liability in the statement of financial position, because it
will not require outflow from the enterprise of 'resources embodying economic benefits. The distribution of
such a dividend merely involves issuance of additional shares of the entity's capital without consideration.
Share Dividend Distributable is presented as part of contributed capital in the equity section of the statement
of financial position
Deposits and Advances - consist of cash or property received but which are returnable to the depositor or
which have been collected or otherwise accumulated to be remitted to third parties (such as funds held for
others).
If the deposit or advance results from the company's operating activities (e.g., deposits on returnable
containers received by a company whose products, such as San Miguel Beer, Coca-cola are sold on returnable
containers), the liability is normally reported as current.
If the deposit is nontrade and is expected to be refunded or paid after more than one year (as in the case of
deposits to utility companies and security deposit on long-term leases), the liability is reported as non-current.
Unearned Revenues - are amounts collected in advance that have not yet been earned and recorded as
revenues pending completion of the earning process. Examples are collections in advance for interest, rent,
magazine subscriptions, royalties, tickets, tokens, gift certificates, and service contracts. For these items,
journal entries to record collection in advance and subsequent recognition of revenue are made either based
on liability method or income method.
Under the nominal approach or income method, the entry for the advance collection of revenue is
Cash xxx
Revenue xxx
Under the liability method, the entry for the advance collection of revenue is
Cash xxx
Unearned Revenue xxx
At the end of the accounting period, an adjusting entry is made to reflect the amount earned and still
unearned, thus:
Nominal Approach
Revenue xxx
Unearned Revenue xxx
To record the unearned portion
Liability Approach
Unearned Revenue xxx
Revenue xxx
To record the earned portion
Gift Certificates Outstanding - The sale of gift certificates creates a liability in the books of the retail store. The
liability is settled either through redemption of certificates in exchange for merchandise sold or through
expiration of gift certificates.
The journal entries for transactions regarding gift certificates outstanding are as follows:
Upon sale of gift certificates,
Cash xxx
Unearned Revenue for Gift Certificates Outstanding xxx

Upon redemption of the gift certificates, the entry is

Unearned Revenue for Gift. Certificates Outstanding xxx
Sales xxx

When the gift certificates expire, the entry is

Unearned Revenue for Gift Certificates Outstanding xxx
Gain from Forfeited Gift Certificates xxx

Current Portion of Long-term Debt (already discussed in the previous pages)

Employee-Related Liabilities – Compensated absences and payroll taxes.
Compensated Absences - Paid absences for vacation, illness and maternity, paternity, and other paid leaves.
Vested rights - employer has an obligation to make payment to an employee even after terminating his or her
employment. Accumulated rights - employees can carry forward to future periods if not used in the period in
which earned. Non-accumulating rights - do not carry forward; they lapse if not used.
Payroll Taxes - Employers are required by law to withhold from the salaries of each employee an amount
representing income taxes payable by employees, as well as employee’s share for SSS premiums, PhilHealth
contribution, Pag-ibig contribution, group insurance, union dues, and various other amounts payable by the
employees to third parties. These amounts withheld from employees' salaries are reported as current
liabilities of the withholding company until they are remitted to the appropriate third parties.
The payment of salaries by the employer is recorded as
Salary Expense xxx
Cash xxx
Withholding Taxes Payable xxx
SSS Premiums Payable xxx
Pag-ibig Premiums Payable xxx
Philhealth Premiums payable xxx

Provision
Provision is a liability of uncertain timing or amount.

Recognition of a Provision
An enterprise must recognize a provision if, and only if:
• a present obligation (legal or constructive) has arisen as a result of a past event (the obligating event),
• payment is probable (‘more likely than not’) , and
• the amount can be estimated reliably.

Common types of provision

• Lawsuits • Premiums
• Warranties

An obligating event is an event that creates a legal or constructive obligation and, therefore, results in an
enterprise having no realistic alternative but to settle the obligation.
A legal obligation is an obligation that derives from:
(a) a contract (through its explicit or implicit terms);
(b) legislation; or
(c) other operation of law.

A constructive obligation is an obligation that derives from an entity’s actions where:

(a) by an established pattern of past practice, published policies or a sufficiently specific current statement,
the entity has indicated to other parties that it will accept certain responsibilities; and
(b) as a result, the entity has created a valid expectation on the part of those other parties that it will
discharge those responsibilities.

A possible obligation (a contingent liability) is disclosed but not accrued. However, disclosure is not required if
payment is remote.

Measurement of Provisions
The amount recognized as a provision should be the best estimate of the expenditure required to settle the
present obligation at the end of the reporting period, that is, the amount that an enterprise would rationally
pay to settle the obligation at the end of the reporting period or to transfer it to a third party. This means:
 • Provisions for one-off events (restructuring, environmental clean-up, settlement of a lawsuit) are
measured at the most likely amount.
• Provisions for large populations of events (warranties, customer refunds) are measured at a probability-
weighted expected value.
• Where there is a continuous range of possible outcomes, and each point in that range is as likely as any
other, the mid-point of the range is used.
• The provision is measured before tax, as the tax consequences of the provision, and changes in it, are dealt
with under PAS 12 Income Taxes.

Contingent Liabilities
• a possible (not probable) obligation depending on whether some uncertain future event occurs, or
• a present obligation but payment is not probable or the amount cannot be measured reliably

Contingent Assets
• 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 enterprise.

Contingent assets should not be recognized - but should be disclosed where an inflow of economic benefits is
probable. When the realization of income is virtually certain, then the related asset is not a contingent asset
and its recognition is appropriate.

Difference between Provisions and Other Liabilities

Provisions can be distinguished from other liabilities such as trade payables and accruals because there is
uncertainty about the timing or amount of the future expenditure required in settlement. By contrast:

(a) trade payables are liabilities to pay for goods or services that have been received or supplied and have
been invoiced or formally agreed with the supplier; and

(b) accruals are liabilities to pay for goods or services that have been received or supplied but have not been
paid, invoiced or formally agreed with the supplier, including amounts due to employees (for example,
amounts relating to accrued vacation pay). Although it is sometimes necessary to estimate the amount
or timing of accruals, the uncertainty is generally much less than for provisions.

Accruals are often reported as part of trade and other payables, whereas provisions are reported separately.

Relationship between Provisions and Contingent Liabilities

In a general sense, all provisions are contingent because they are uncertain in timing or amount. However,
within PAS 37 the term ‘contingent’ is used for liabilities and assets that are not recognized because their
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. In addition, the term ‘contingent liability’ is used for liabilities that
do not meet the recognition criteria.

PAS 37 distinguishes between:

(a) provisions - which are recognized as liabilities (assuming that a reliable estimate can be made) because they
are present obligations and it is probable that an outflow of resources embodying economic benefits will be
required to settle the obligations; and
(b) contingent liabilities - which are not recognized as liabilities because they are either:
(i) possible obligations, as it has yet to be confirmed whether the entity has a present obligation that could
lead to an outflow of resources embodying economic benefits; or
(ii) present obligations that do not meet the recognition criteria in this Standard (because either it is not
probable that an outflow of resources embodying economic benefits will be required to settle the
obligation, or a sufficiently reliable estimate of the amount of the obligation cannot be made).