INTERMEDIATE

ACCOUNTING 2
Liabilities
 Liabilities

Liabilities are present obligations of an entity arising from past transactions

or events, the settlement of which is expected to result in an outflow of
economic benefits
 Examples of Liabilities
 Accounts payable to suppliers
 Amounts withheld from employees or other parties for taxes and for contributions to the SSS or to
other pensions
 Accruals for wages, interest, royalties, taxes, product warranties and profit sharing plans
 Dividends declared but not yet paid (except stock dividends since stocks are equity items rather
than noncash assets)
 Deposits and advances from customers, officers and shareholders
 Debt obligations for borrowed funds – notes, mortgages and bonds payable  Income tax payable
 Unearned revenue
 Measurement of Liabilities (PFRS 9)
Current Liabilities
Current liabilities are recorded and reported at
face amount. The effect of discounting of current
liabilities compared to its face amount is
immaterial.
Noncurrent Liabilities
Noncurrent liabilities are measured at face
amount or present value depending on whether
they are interest bearing or not.
Noncurrent interest-bearing liabilities are
measured at face amount since the face amount is
already indicative of its present value.
Noncurrent noninterest-bearing liabilities are
measured at present value. This requires
amortization of the discount or premium on the
liability. Amortization of discount or premium
leads to amortized cost at subsequent
measurement.
 Current Liabilities
PAS 1, paragraph 69, provides that an entity shall classify a liability as current
when:
 The entity expects to settle the liability within the entity’s operating cycle.
 The entity holds the liability primarily for the purpose of trading.
 The liability is due to be settled within twelve months after the reporting period.
 The entity doesn’t have an unconditional right to defer settlement of the liability
for at least twelve months after the reporting period.
 Non-Current Liabilities
The term noncurrent liability is a residual definition. All other liabilities not qualified to be classified as current liability shall be
classified as noncurrent liability.
Long-Term Debt Falling Due Within One Year A liability which is due to be settled within twelve months after the reporting period
shall be classified as current even if:
 The original term was a period longer than twelve months.
 An agreement to refinance or to reschedule payment on a long-term basis is completed after the reporting date and before the
financial statements are authorized for issue.
Note:
 However, if the refinancing on a long-term basis is completed on or before the end of the reporting period, the refinancing shall be
an adjusting event and therefore the obligation is classified as noncurrent.
 Moreover, if the entity has the discretion to refinance or roll over an obligation for at least twelve months after the reporting period
under an existing loan facility, the obligation is classified as noncurrent even if it would otherwise be due within a shorter period.
 Covenants
Covenants are often attached to borrowing agreements which represent
undertakings by the borrower. These covenants are actually restrictions on
the borrower as to undertaking further borrowings, paying dividends,
maintaining specified level of working capital and so forth.
 Breach of Covenants
 Breach of covenants will result to reclassification of a noncurrent liability as
current. This is due to the fact that upon breach of covenant, the liability becomes
due and demandable on demand.
 PAS 1 provides that such a liability is classified as current even if the lender has
agreed, after the reporting period and before the statements are authorized for issue,
not to demand payment as a consequence of the breach.
 However, the liability is classified as noncurrent if the lender has agreed on or
before the end of the reporting period to provide a grace period ending at least twelve
months after that date
 Non-Adjusting Events
With respect to loans classified as current liabilities, the following events
occurring between the end of the reporting period and the date the financial
statements are authorized for issue shall qualify for disclosure as nonadjusting
events, meaning, the loans remain current liabilities:
 Refinancing on long-term basis
 Rectification of a breach of a long-term loan agreement
 The granting of the lender of a grace period to rectify a breach of a long-term
loan arrangement ending at least twelve months after the reporting period.
 Presentation of Current Liabilities
Under PAS 1, as a minimum, the face of the statement of financial position
shall include the following line items for current liabilities:
 Trade and other payables
 Current provisions
 Short-term borrowing
 Current portion of long-term debt
 Current tax liability
 Estimated Liabilities
Estimated liabilities are obligations which exist at the end of the reporting
period although their amount is not definite. They are either current or
noncurrent.
 Under PAS 37, an estimated liability is considered as a provision which is
both probable and measurable
 Estimated Premium Liability
 Premiums are articles of value such as toys, dishes, silverware, and other
goods and in some cases cash payments given to customers as a result of
past sales or sales promotion activities.
 Since premiums are attached each time a sale transaction occurs,
accounting liability for the future distribution of the premium and therefore
should be given accounting recognition.
 Estimated Warranty Liability
 Warranties are accounted for using two approaches, namely, accrual
approach and expense as incurred approach. Under accrual approach,
recognition of liability for estimated warranties arises each time a sale
transaction occurs.
 While under expense as incurred approach, warranty expenses shall only
be given accounting recognition when such warranties occur. Hence under
this method, no liability for estimated warranties shall appear on the
statement of financial position.
 Gift Certificates Payable
Many megamalls, department stores and supermarkets sell gift certificates
which are redeemable in merchandise.
 Refundable Deposits
Refundable Deposits consist of cash or property received from customers
but which are refundable after compliance with certain conditions.
 Bonus Computation
 Bonus is usually given for compensation of key officers and employees by
way of bonus for superior income realized during the year.
 Bonus computation usually has four variations:
 Bonus as percent of income before bonus and before tax.
 Bonus as percent of income after bonus but before tax.
 Bonus as percent of income before bonus but after tax.
 Bonus as percent of income after bonus and after tax.
 Deferred Revenue
 Deferred revenue is income already received but not yet earned. It may
either be classified as current or noncurrent depending on whether realizable
within one year or more period