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Classification of Liabilities
Classification of Liabilities
Classification of
liabilities
Joint World Bank and IFRS Foundation
train the trainers workshop hosted by the
ECCB, 30 April to 4 May 2012
Concepts
classification of liabilities
Classification concepts
IAS 1
application of IFRSs with additional disclosures when
necessary results in a fair presentation (faithful
representation of transactions, events and conditions)
dont offset assets and liabilities or income and
expenses
IFRS
| 30 Cannon
Street Street
| London
EC4MEC4M
6XH |6XH
UK. |www.ifrs.org
2010Foundation
IFRS Foundation.
30 Cannon
| London
UK. www.ifrs.org
Classification conceptsassets
and claims
Classification conceptsclaims
Information about priorities and payment
requirements of existing claims helps users to
predict how future cash flows will be distributed
among those with a claim against the reporting
entity (CF.OB13)
IFRS
| 30 Cannon
Street Street
| London
EC4MEC4M
6XH |6XH
UK. |www.ifrs.org
2010Foundation
IFRS Foundation.
30 Cannon
| London
UK. www.ifrs.org
Conceptliability definition
A liability is defined as a:
present obligation
arising from a past event
the settlement of which is expected to lead to
an outflow of future economic benefits from the
entity
Conceptliability recognition
IAS 32
Financial Instruments: Presentation
IAS 32
Financial Instruments: Presentation
The following are equity:
Puttable instrument that entitles holder to pro
rata share of net assets on liquidation
Instrument that is automatically redeemed if
an uncertain future event occurs or death or
retirement of holder
Subordinated instrument payable only on
liquidation
IAS 32
Financial Instruments: Presentation
The following are liabilities:
Instrument is payable on liquidation, but the
amount is subject to a maximum ceiling
Entity is obliged to make payments before
liquidation such as mandatory dividend
Mandatorily redeemable preference shares
IAS 32
Financial Instruments: Presentation
12
Examplecompound financial
instrument
Issuance of convertible debt - Example
1/1/X1 issue at par a 4% convertible bond, par
and maturity amount = 50,000, maturity in 5
years
If no conversion feature, would have paid 6%
Calculate present value of cash flows at 6%:
PV 50,000 due in 5 years @ 6% = 37,363
PV annuity 2,000/year 5 years @ 6% = 8,425
Total PV = 45,788
Debit cash
50,000
Credit financial liability
45,788
Credit equity (conversion right) 4,212
IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
IAS 32
Financial Instruments: Presentation
14
IAS 32
Financial Instruments: Presentation
15
IAS 32
Financial Instruments: Presentation
16
IFRS 2
Share-based Payment
17
Recognition
The transaction is recognised when the entity
obtains the goods or services.
Goods or services received are recognised as
assets or expenses as appropriate.
The transaction is recognised as equity (if equitysettled) or as a liability (if cash-settled).
If a payment is required, the payment amount is
based on the price of the entitys shares (eg
share appreciation rights).
IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Classifying liabilities
Liability
19
FL
or ~ F
PV if les V
ML s
P
etc
Contingent
Provisions
Leases
Liabilities
L
O
~
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OL (nil
Financial
Defined
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la
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o
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and
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Deferred
Tax
te s &
Tax ra nted
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undisc
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Tax ra nted
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undisc
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ir
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ue
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he M
r
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20
Provisions
A provision is a liability of uncertain timing or
amount (ie recognition is uncertain).
A liability may be a legal obligation or a
constructive obligation.
21
Examplesprovisions
Ex 1: Waste from As factory contaminated the
groundwater. Lawsuit: local community seek
compensation for damages to health from
contamination. A acknowledges wrongdoing.
Court is deciding extent of the compensation.
Lawyers expect ruling in +2 yrs &
compensation in the range of CU1,000,000 to
CU30,000,000.
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23
Examplesnot provisions
Ex 1: provision for self-insurance
Ex 2: Ski-resort operator operates in a very
cyclical business, with good years and bad
years depending primarily on the weather. To
reduce earnings volatility, it recognises
provisions in good years to reverse in bad
years.
Ex 3: provision for depreciation
Ex 4: provision for doubtful debts
IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
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Exampleconstructive obligation
25
Contingent liabilities
Contingent liabilities are:
possible obligations whose existence will be confirmed
by uncertain future events that are not wholly within the
control of the entity.
obligations that are not recognised because their
amount cannot be measured reliably or settlement is
not probable (eg litigation against the entity when the
occurrence of any wrongdoing by the entity is uncertain
and it is more likely than not that the entity will
successfully defend the case).
Contingent liabilities are not recogniseddefinition and
recognition criteria are not met.
IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
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Examplecontingent liability
A community is seeking compensation from A
for damages to their health as a result of
contamination believed to be caused by As
plant.
It is doubtful whether A is the source of the
contamination because
many entities operate in the same area
producing similar waste & it is unclear which
entity is the source of the leak
A has taken precautions to avoid leaks and
is vigorously defending the case.
IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
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28
29
IFRS 9
Financial Instruments
30
Amortised
cost
Except:
Fair value
through
P&L
IFRS
October
Foundation
| Sao|Paulo
30 Cannon
IFRS Conference
Street | London EC4M 6XH | UK. www.ifrs.org
FVO for
mismatch,
managed on
FV basis and
hybrids
Own
credit in
OCI
IFRS 9
Financial Instruments
31
IAS 17
Leases
32
Classification of leases
A finance lease transfers to the lessee substantially
all the risks and rewards incidental to ownership of
the leased asset.
All other leases are operating leases.
When a lease includes both land and buildings
elements, the classification of the land and building
elements are considered separately.
in determining whether the land element is an
operating or finance lease, an important consideration
is that land normally has an indefinite economic life.
IAS 17
Leases
33
IAS 17
Leases
34
Exampleslease classification
Ex 1: On 1/1/20X1 enter into 5-yr
noncancellable lease over a machine.
Machines cash cost = 100,000, economic
life = 10 yrs and residual value = 0.
Annual lease payments on 31/12: 4
23,000 & 23,539 at end of yr 5 when
ownership transfers to the lessee.
The interest rate implicit in the lease is
5% p.a. which approximates lessees
incremental borrowing rate.
35
Exampleslease classification
36
Exampleslease classification
37
IAS 17
Leases
38
Operating leases
The leased asset remains in the statement of
financial position of the lessor.
Operating lease payments are usually
recognised in profit or loss on a straight-line
basis.
From the perspective of the lessee, if payments
are subject to escalation, straight-line
recognition is profit or loss may give rise to a
liability on the statement of financial position
IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
IAS 17
Leases
39
Finance leases
Finance leases are accounted for by lessees as
an asset purchased (other IFRSs then apply to
the asset) on credit (a liability).
Initially, the liability is recognised at:
the fair value of the leased property, or if lower
The present value of the minimum lease
paymentsthe implicit interest rate is used as
the discount rate
IAS 19
Employee Benefits
40
Employee benefits
Employee benefits are all forms of consideration
paid for services of employees or for termination
of employment.
IAS 19 separates employee benefits into 4
categories:
short-term benefits
post-employment benefits
other long-term benefits
termination benefits
IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
IAS 19
Employee Benefits
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IAS 19
Employee Benefits
42
IAS 19
Employee Benefits
43
Post-employment benefits
Post-employment benefits are payable after the
completion of employment.
Two types:
defined contribution plan, entity pays fixed
contributions to a separate entity (a fund) and
has no legal or constructive obligation to pay
further contributions if the fund cannot pay the
employee.
all other post-employment plans are defined
benefit plans.
IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
IAS 19
Employee Benefits
44
Post-employment benefitsdefined
contribution
Employees (not the employer) are exposed to risks.
Employer:
recognises contributions payable as an expense as
the employee provides services in exchange for the
contributions.
measures obligations for unpaid contributions at
undiscounted amounts (application of the cost
constraint).
disclose amount recognised as an expense.
IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
IAS 19
Employee Benefits
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IAS 19
Employee Benefits
46
IAS 19
Employee Benefits
47
Termination benefits
Termination benefits arise only on termination, rather
than during employment.
Principlethe event that gives rise to an obligation is the
termination of employment rather than employee service
Questions or comments?
Expressions of individual
views
by members of the IASB and
its staff are encouraged. The
views expressed in this
presentation
are those of the presenter.
Official positions of the IASB
on accounting matters are
determined only after
extensive due process and
deliberation.
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