Liability – a present obligation of an enterprise arising from past event, CONTINGENT
PROVISION the settlement of which is expected to result in an outflow from the LIABILITIES enterprise of resources embodying economic benefits, (IASB’s DEFINITION Conceptual Framework for Financial Reporting). Liabilities which are uncertain as Either: to timing or amounts a) a possible obligation that NOTE!!! Liabilities arise only from past events or transactions. arises from past events and whose existence will be Essential Characteristics: confirmed only by the occurence or non-occurence of one or more 1. Present Obligation future events not wholly within the control of the enterprise 2. Past Event b) a present obligation that 3. Probable outflow of resources embodying economic benefits arises from past events but is not recognized because: Obligation – is a duty or responsibility to act or perform in a certain way Probable only, not which may be legally enforceable as a consequence of a binding measurable contract or statutory requirement; Measurable only not probable Obligating event – is one that results in an enterprise because having no realistic alternative to settling that obligation. RECOGNITION Recognized as a liability on the Not recognized as a liability on Classification of Obligating Event: face of the statement of financial the face of the statement of position. financial position. 1. Legal Obligation – is one derives from a contract. FINANCIAL STATEMENT PRESENTATION (Ex: Accounts payable, withholding taxes payable and VAT Presented separately in the Unless remote, disclosed in the payable) statement of financial position notes to financial statements 2. Constructive Obligation – is one derives from an enterprise’s under liabilities actions whereby an established pattern of past practice, published policies of a sufficiently specific current statement, Obligations involving uncertainties: the enterprise has indicated to other parties that it will accept certain resposibilities, and as a result, the enterprise has STATUS RECORDED AS: Probable (more than 50%) created a valid expectation on the part of those parties that it Reliably measurable Expense/Loss xx will discharge those responsibilities. Liability xx (Ex: Provision for clean up costs) Not reliably measurable Disclosure Settlement of a Present Obligation: Reasonably Possible (50%) Disclosure a) Payment of cash Remote (less than 50%) Ignore b) Transfer of other assets c) Provision of services d) Replacement of an obligation with another obligation Liabilities are initially measured: e) Conversion of the obligation to equity 1. At amount established in exchanges (amount tobe paid or f) Condonation by creditor (in some exceptional cases amount discounted). Recognition of Liabilities: 2. By estimates of a definitive character when the amount of the liability cannot be measured more precisely (provisions). 1. It is probable that an outflow of resources embodying o General Liability economic benefits will result from the settlement of a present Probable (there is probability of outflow) obligation Measurable – realiably measurable (sure amount) 2. The amount at which settlement will take place can be – reasonably estimated (estimation) measured reliably. o Specific Liability o General Liability o Specific Liability
Chapter 1 – Current Liabilities, Provision and Contingencies
INTERMEDIATE ACCOUNTING 2 – LIABILITIES
SPECIFIC LIABILITY DATE OF RECOGNITION CURRENT LIABILITIES DEFINITION
Trade Payables Payable within the entity’s Loans Upon approval normal operating cycle; even Dividends if they are not due for Cash Upon declaration settlement within 12 mos. Property Upon declaration Non-trade Payables Due for settlement within 12 Scrip Upon declaration mos. From the end of Share (Not a liability) accounting period. Liquidating Upon declaration Accounts Payable Liabilities arising from the Accrued Liability End of reporting period purchase of goods, (Rent, utilities, interest, wages) (recognize expenses only materials, supplies, services when incurred on an open charge-account Agency Obligation (SSS, Pag-Ibig, basis (credit term, generally Philhealth) 30-120 days, no interest) Share of employer End of reporting period Short-term Notes Payable Share of employee Upon withholding Acceptances Payable Income tax payable End of reporting period Liabilities under Trust Receipts Purchase of Merchandise Upon passing of title by the Deposits and Advances Advances are normally seller contract to render Estimated liability goods/services. Premiums End of reporting period Current Portion of Long-term Debt Warranties Upon sale of merchandise Accrued Liabilities Obligations for expenses Gift certificates incurred on or before the end Income Method End of reporting period of the reporting period but Liability Method Upon issuance payable at a later date. Tickets Similar to Gift Certificate Income Tax Payable Bonus(Compensation) End of reporting period Dividends Payable Deposits on returnable Credit Balances in Customers containers End of reporting period Accounts Advances from Deferred Revenue Are amounts collected in Income Method End of reporting period advance that have not yet Liability Method Upon receipt of cash been earned and recorded Asset restoration as revenues pending satisfaction of performance Classification of Liabilities: obligations Provisions expected to be settled 1. Current Liabilities within 12 mos. 2. Noncurrent Liabilities ACCOUNTS PAYABLE Recognition of Current liabilities: Two methods of recording purchase a) It expects to settle the liability in its normal operating cycle; transaction: b) It holds the liability primarily for the purpose of trading; Gross method Net method c) The liability is due to be settled within 12 months after the To record purchases reporting period; Purchases Puchases d) It does not have an unconditional right to defer settlement of Freight-in Freight-in the liability for atleast 12 months after the reporting period; Accounts Payable Accounts Payable To record payment within discount period Recognition of Noncurrent liabilities: Accounts Payable Accounts Payable Purchase Discount Cash a) Agreement to refinance is completed on or before the Cash reporting date To record payment beyond discount period b) The entity has the discretion to refinance or roll over an Accounts Payable Accounts Payable obligation for more than 12 months after the reporting date Cash Purchase Discounts Lost under an existing loan facility Cash Chapter 1 – Current Liabilities, Provision and Contingencies INTERMEDIATE ACCOUNTING 2 – LIABILITIES
FORMULAS: PROFORMA ENTRIES:
Cash paid x Cash collected x GIFT CERTIFICATES
Prepaid expense, beg x Unearned income, beg x Income method Liability Method Accrued expense, end x Accrued income, end x To record issuance Prepaid expense, end (x) Unearned income, end (x) Cash Cash Accrued expense, beg (x) Accrued income, beg (x) Gift Certficate Payable Sales EXPENSE x INCOME x To record redemption Gift Certificate Payable NO ENTRY Sales Advances from Gift Certificate Payable, beg x To record year-end adjustments customers, beg x Gift Cert. Payable Sales Cash receipts GC Issued during the period x Gift Cert. Forfeited Gift Cert. Payable during the period x Gift Cert. Forfeited Advances earned (x) GC Redeemed (x) Cancelled (x) GC Forfeited (x) BONUS ADVANCES FROM GIFT CERTIFICATE If paid: If unpaid: CUSTOMERS, END x PAYABLE, END x Bonus Bonus Cash Bonus Payable
BONUS (EXAMPLE ONLY) PREMIUMS
Given: NIBBBT = $ 5,000,000 Asset method Expense Method Bonus = 5% of Net Income Income tax rate = 30% To record purchase of premiums NIBBBT ( Net Income Before NIBBAT (Net Income Before Premiums Inventory Premium Expense Bonus Before Tax) Bonus After Tax) Cash/AP Cash B = 5% x 5,000,000 B = 5% (5,000,000 – T) To record redemption of proof of purchase = 250,0000 B = 5% [5,000,000 – 30% Premiums Expense Premiums Expense (5,000,000 – B)] Cash Cash T = 30% (5,000,000 – 250,000) T = 30% (5,000,000 – B) distribution cost distribution cost NIABBT (Net Income after Bonus NIABAT (Net Income after Bonus Cash Cash before Tax) after Tax) Premium Expense Premium Expense B = 5% (5,000,000 – B) B = 5%[5,000,000 – B – 30% Premium inventory cash remittance (5,000,000 – B)] To record year-end adjustments T = 30% (5,000,000 –B) T = 30% (5,000,000 –B) Premium Expense Sales Premium Payable Gift Cert. Payable FOR CHECKING: Gift Cert. Forfeited NIBBAT NIABBT NIABAT NIBBBT NIBBBT NIBBBT WARRANTIES Less: Tax Less: Bonus Less: Bonus Warranties expense Warranties payable NIBBAT NIABBT Tax Warranties payable Cash Multiply by Multiply by Multiply by To record adjustment of estimate Bonus rate Bonus rate Bonus rate Actual > Estimate Actual < Estimate BONUS BONUS BONUS Warranties expense Warranties payable Warranties payable Warranties expense Warranties Payable, beg Warranties during the period Actual expenditure WARRANTIES PAYABLE, END
Chapter 1 – Current Liabilities, Provision and Contingencies