Chapter 1: Current Liabilities
met before an item is recognized)
Liability – a present obligation of the entity to
transfer an economic resource as a result of past
events.
Three aspects:
1. Obligation – a duty or responsibility that an
entity has no practical ability to avoid. The
payor must be identified (the payee, amount
and timing are not necessary).
a. Legal – obligation that results from a
contract, legislation, or other operation of
law.
b. Constructive – obligation that results from
an entity’s actions that create a valid
expectation on others that the entity will
accept and discharge certain responsibilities.
2. Transfer of an economic resource:
a. Cash, deliver goods, or render services
b. Exchange assets with another party on
unfavorable terms
c. transfer assets if a specified uncertain
future event occurs
d. issue a financial instrument that obliges the
entity to transfer an economic resource
3. Present obligation as a result of past events:
a. The entity has already obtained economic
benefits or taken an action
b. As a consequence, the entity will or may
have to transfer an economic resource that it
would not otherwise have had to transfer.
o A non-cancellable future commitment
(irrevocable commitment) gives rise to a present
obligation when it becomes onerous
(burdensome).
o Executory contract – is a contract that is
equally unperformed – neither party has fulfilled
any of its obligations, or both parties have
partially fulfilled their obligations to an equal
extent.
 A contract is favorable if the entity has an
asset.
 A contact is unfavorable if the entity has a
liability,
Recognition criteria (both of these criteria must be
a. it meets the definition of a liability
b. recognizing it would provide useful
information (relevant and faithfully
represented)
 Unrecognized liability – even if the liability is
not recognized, information may be disclosed in
the notes.
 Relevance – recognition of this may not
provide relevant information IF:
o it is uncertain whether a liability exists.
o a liability exists, but the probability of an
outflow of economic benefit is low.
 HOWEVER, it doesn’t automatically
lead to non-recognition of a liability if
the existence uncertainty or low
probability of an outflow of economic
benefits result in – other factors should
be considered.
 Faithful representation
Financial and Non-financial liabilities
1. Financial liability:
a. A contractual obligation to deliver cash or
another financial asset to another entity
b. A contractual obligation to exchange
financial assets or financial liabilities with
another entity under conditions that are
potentially unfavorable to the entity
c. A contract that will or may be settled in the
entity’s own equity instruments and is not
classified as the entity’s own equity
instrument
d. Examples:
 Payables (A, N, L, B and Accrued)
 Lease liabilities
 Held for trading and derivative
 Redeemable preference shares issued
 Security deposits and returnable deposits
2. Non-financial liability – liability other than
financial liability.
a. Examples:
 Unearned revenues and warranty
obligations (to be settled through future
 delivery of goods or provision of
services)
 Taxes, SSS, PhilHealth and Pag-IBIG
payables – do not arise from contracts
 Constructive obligations – do not arise
from contracts
 Obligations arising from statutory
requirements (e.g. income tax payable)
 Commodity contracts – can either be a
financial instrument or not. If it can be settled
net in cash or other financial instrument – then it
is a financial instrument (vice versa).
Presentation of financial instruments
- substance over form
2. When a financial asset does not qualify for
derecognition – subsequently measured on a
basis that reflects the rights and obligations
the entity has retained.
3. Financial guarantee contracts and
commitments to provide a loan at a below-
market interest rate – subsequently measured at
the higher of:
a. amount of loss allowance (12-month
expected losses)
b. amount initially recognized less, when
appropriate, the cumulative amount of
income recognized
4. Contingent consideration recognized by an
acquirer in a business combination –
subsequently measured at FVPL

Financial liability Equity instrument  Reclassification of financial liabilities after

 The entity has a  The entity has no initial recognition is prohibited
contractual obligation obligation to pay cash
to pay cash or another or another financial Measurement of Financial Liabilities
financial asset asset (instruments)
(instruments) under under potentially Initial measurement
potentially unfavorable condition.  Initially measured at fair value minus
unfavorable condition.  Fixed to fixed transaction costs, except FVPL
 Variable to fixed  The entity has an  FVPL are measured at fair value – transactions
 Fixed to variable unconditional right to
refuse redemption of costs are expensed immediately.
members’ shares.
 Redemption is Subsequently measurement
unconditionally  FL classified as amortized cost – amortized
prohibited by law or
relevant regulation. cost
 FL classified as held for trading – FVPL
Redeemable preference shares Callable preference shares  FL designated at FVPL:
 preferred stocks which  preferred stocks which o amount of change in FV of financial
the holder has the right the issuer has the right
to redeem at a set date. to call at a set date.
liability that is attributable to changes in
 financial liability – as  equity instrument – the credit risk of that liability – presented
the holder exercises the the right to call is at the in OCI
right to redeem, the discretion of the issuer o the remaining amount of change in the
issuer is mandatorily
obligated to pay the FV – presented in Profit or Loss
price.
Measurement of Non-financial Liabilities
Recognition of financial liabilities – only when the Initial measurement
entity becomes a party to the contractual  Initially measured at the best estimate of the
provisions of the instrument amounts needed to settle those obligation or
measurement basis required by other
Classification of Financial Liabilities – all are applicable standard.
subsequently measured at amortized cost EXCEPT:
1. FVPL and derivative liabilities – subsequently Subsequently measurement
measured at fair value.
 Subsequently measured at the best estimate of
the amounts needed to settle the obligations
adjusted (adjustments are accounted
prospectively) for any changes on the
expected settlement amount.

Financial statement presentation

o Classified SFP– shows the current and
noncurrent distinctions.
o Unclassified SFP – based on liquidity,
disclosures of liabilities due within and beyond
one year must be made in notes.

Current liabilities:
o Expected to be settled in the entity’s normal
operating cycle
o Held primarily for trading
o Due to be settled within 12 months after the
end of the reporting period
o Does not have the unconditional right to defer
settlement for at least 12 months after the
reporting period