FAR 4 – LIABILITIES

Essenntial Characteristics of Liability

1.) Present Obligation – no practical ability to avoid.

1.1) Legal Obligation – legally enforcable as consequence of binding contract.

Ex. Accounts Payable

1.2) Constructive Obligation – normal business practice to maintain good business relations.

Ex. Loyalty Card, Premiums

2.) Transfer an economic resource – to pay cash, transfer non-cash asset or provide services.

*economic resource – asset that represents right with a potential to produce economic benefit.

*share dividend payable – NOT an accounting liability. Share capital is an equity item.

3.) Arise from Past Event – not recognized until it is incurred.

*obligating event – Leads to obligation. Entity has no alternative but to settle the obigation.

Measurement of Liabilities

Current Liabilty – measured at face amount.

*difference between the face amount and present value is not material.

Non-current Liability
Probable outlfow of resources
Interest bearing note
Virtually Certain – 100% To be considered
Initially and subsquently measure at Face amount
Probable – 51% to 99% liability.
Non-Interest Bearing Note
Possible – 11% to 50%
Initial Measurement: Present Value
Remote – 0% to 10%
Subsq. Measurement: At amortized cost

CLASSIFICATION

A. Current Liability

- settle within normal operating cycle if not = to reporting period *whichever is longer.

- purpose of trading *even if exceed 12 mos.

- unconditional right to defer for at least 12 mos.

- due is to be settled within 12 mos after the reporting period.

B. Non-Current Liability

- residual definition of current liability.

Long-Term debt falling due within one year

Classified as current, even if:

- original term was period longer than 12 mos

- refinance or to reschedule payment on long-term basis is completed AFTER the reporting period
and BEFORE the financial statements.

*however, if the refinancing on a long-term basis is completed on or before the end of the reporting
period it is classified as non-current.

NCL

Reporting Period CL Financial Statements

Cases that would alter classification of Liability

A.) Covenants – restrictions on the borrower

Ex. Undertaking futher borrowings, paying dividends, maintaining specified level of working capital
etc.

- Breached – become payable on demand, classified as current.

- Grace period – time to rectify the breach of covenants

*on or before reporting period = NCL

* After reporting period but before FS = CL

* lender cannot demand immediate repayment

B.) Refinancing - Increases in interesnt, increase in period

* usually because the liability can’t be settled immediately

*on or before reporting period = NCL

* After reporting period but before FS = CL

Presentation of Current Liabilities

a.) Trade and other payables – line item

b.) Current Provisions – warranty, premiums

c.) Short-term borrowing – bank loans

d.) Current portion of long-term debt

e.) current tax liability

Estimated Liabilities

- exiset at the end of reporting period

- Amount and due date is not definite and in some instances, exact payee cannot be identified.

* existence of estimated liabilities is valid and unquestioned

Deferred Revenue – income already received but not yet earned

- Current Liability - within 12 mos

Ex. Unearned interest income/rental income/subscription revenue

- Non-Current Liability – takes years

Ex. Long-term service contract/leasehold advances

Bonus Computation
* After, minus (-)
Income before bonus and before tax = 4,400,000
*Before, ignore
Bonus = 10%

Income Tax Rate = 30%

Case 1 - Before Bonus and Before Tax

B= 4.4M x 10%

B= 440,000

Case 2 – After Bonus but Before Tax

B= 10% (4.4M-B)

B= 440k – 10%B

1.10B/1.10 = 440K/1.10

B= 400,000
Case 3 – After Bonus and After Tax

B= 10% (4.4M – B – T ) T = 30% (4.4M – B)

B= 10% (4.4M – B – 1.32M + 30%B) T= 1.32M – 30%B

B= 440k – 10%B – 132k + 3%B

1.07B/1.07 = 308K/1.07

B= 287,850

Case 4 – After Tax but Before Bonus

B= 10% (4.4M – T)

B= 10% (4.4M – 1.32M + 30%B)

B= 440k – 132k = 3%B

.97B/.97= 308k/.97

B= 317,526

Refundable Deposits

Cash or property received from the customers which are refundable after compliance with certain
conditions. Classified as current liability.