Intermediate Accounting 2  A financial liability is recognized only when the entity becomes a

party to the contractual provisions of the instrument.

Financial and Non-Financial Liabilities

Current Liabilities
1. Financial Liability
 Liability – a present obligation of the entity to transfer an a. A contractual obligation to deliver cash or another financial
economic resource as a result of past events. asset to another entity.
Aspects of Liability b. A contractual obligation to exchange financial assets or
financial liabilities with another entity under conditions that
1. Obligation – a duty or responsibility that an entity has no are potentially unfavorable to the entity
practical ability to avoid. c. A contract that will or may be settled in the entity’s own
a. Legal obligation – results from a contract, legislation, or equity instruments and is not classified as the entity’s own
other operation of law. equity instrument
b. Constructive obligation – results from an entity’s actions 2. Non-financial Liability – liability other than a financial liability.
that create a valid expectation on others that the entity will a. Unearned revenues and warranty obligations that are to be
accept and discharge certain responsibilities. settled through future delivery of goods or provision of
2. Transfer of an economic resource services
a. Pay cash, deliver goods, or render services b. Taxes and mandatory deductions
b. Exchange assets with another party on unfavorable terms c. Construction obligations
c. Transfer assets if a specified uncertain future event occurs d. Commodity contracts that are settled only by commodity
d. Issue a financial instrument that obliges the entity to transfer exchange
an economic resource
3. Present obligation as a result of past events Financial Liability/Asset Equity Instrument
a. The entity has already obtained economic benefits or taken  The entity has a contractual  The entity has no
an action obligation obligation
b. As a consequence, the entity will or may have to transfer an  The contract requires the delivery  The contract requires
economic resource that it would not otherwise have had to of a variable number of the the delivery (receipt)
entity’s own equity instruments in of a fixed number of
transfer.
exchange for a fixed amount of the entity’s own equity
 Executory contracts – a contract that is equally unperformed – cash or another financial asset; or instruments in
neither party has fulfilled any of its obligations, or both parties a fixed number of the entity’s own exchange for a fixed
have partially fulfilled their obligations to an equal extent. equity instruments in exchange amount of cash or
for a variable amount of cash or another financial
Recognition criteria
another financial asset. asset.
 An item is recognized if (1) it meets the definition of a liability
and (2) recognizing it would provide useful information that is Redeemable
relevant and faithfully represented information. Callable preference shares
preference shares
- Refers to preferred stocks
which the holder has the
right to redeem at a set date.
- Classified as financial liability -
because when the holder
exercises its right to redeem,
the issuer is mandatorily
obligated to pay for the
redemption price.
- Refers to preferred stocks
which the issuer has the
right to call at a set date.
Classified as equity
instrument because the
right to call is at the
discretion of the issuer and
therefore has no obligation
to pay unless it chooses to
call on the shares.