Liabilities

Prepared by: Jay Mark Andoy

 Liabilities
Liabilities
A liability is defined as "a present obligation or an entity arising from past event, the
settlement of which is expected to result in an outflow from the entity of resources embodying
economic benefits
.
The essential characteristics of a liability are:

a. The liability is the present obligation of a particular entity.

The entity liable must be identified. It is not necessary that the payee or the entity to whom
the obligation is owed be identified.

b. The liability arises from past event.

c. The settlement of the liability requires an outflow of resources embodying economic

benefits.
 Present obligation

An essential characteristic of a liability is that the entity has a present obligation. The present
obligation may be legal obligation or constructive obligation.

An obligation is a duty or responsibility to act or perform in a certain way.

Obligations may be legally enforceable as a consequence of binding contract or statutory

requirement.

This is normally for the accounts payable.

Constructive obligation also gives rise to liabilities by reason of normal business practice,
custom and a desire to maintain good business relations. Example is warranty
Past Event

The past event that leads to a legal or constructive event is known as the obligating
event.
It creates a present obligation because the entity has no realistic alternative but to
settle the obligation created by the event.
For example, the acquisition of goods gives rise to accounts payable. The obligating
event is the acquisition of goods.
Outflow of future economic resources

Without payment of money, without the transfer of non cash asset, without
performance of service, there is no accounting liability.
Initial measurement of liabilities

The entity shall measure a liability at its fair value minus transaction costs that are
directly attributable to the issue of financial liability.

Transaction costs include

a. Fees and commissions paid to agents, advisers, brokers or dealers.
b. Transfer taxes and duties
c. Levies by regulatory agencies and securities exchanges.
 Liabilities
Current Liabilities

PAS 1, paragraph 69, provides that an entity shall classify a liability as current
when:

a. The entity expects to settle the liability within the entity's normal operating
cycle.

b. The entity holds the liability primarily for the purpose of trading.

c. The liability is due to be settled within twelve months after the reporting
period.
 Liabilities
Presentation of current liabilities

PAS 1, paragraph 54, provides that as a minimum, the face of the statement of
financial position shall include the following line items for current liabilities:
a. Trade and other payables
b. Current provisions
c. Short-term borrowing
d. Current portion of long-term debt
e. Current tax liability
The term "trade and other payables" is a line item for accounts payable, notes
payable, accrued interest on note payable, dividends payable and accrued
expenses.
 Liabilities
Noncurrent liabilities

The term " noncurrent liabilities" is also a residual definition.

PAS 1, paragraph 69, simply states that "all liabilities not classified as current
liabilities are classified as noncurrent liabilities".

Examples of noncurrent liabilities

a. Noncurrent portion of long-term debt
b. Finance lease liability
c. Deferred tax liability
d. Long-term obligations to entity officers
e. Long-term deferred revenue