Chapter 12

Liabilities

Learning Objectives
1. State the recognition criteria for liabilities.
2. State the initial and subsequent
measurements of financial liabilities.
3. State the measurement of provisions,
contingent liabilities and contingent
assets.

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 Liability
• Liability – is a present obligation arising from past event,
the settlement of which is expected to result in an outflow
of resources embodying economic benefits or service
potential.
• Present obligation means that as of the reporting date, an
obligating event must have already occurred.
• An obligating event is an event that creates either:
a. Legal Obligation – is an obligation that results from a
contract, legislation, or other operation of law; or
b. Constructive Obligation – is an obligation that results
from an entity’s actions (e.g., past practice, published
policies) that create a valid expectation from others
that the entity will accept and discharge certain
responsibilities.
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Liability Recognition Criteria
• A liability is recognized only when all of the
following are met:
a. The item meets the definition of a liability
(i.e., present obligation);
b. It is probable that an outflow of resources
embodying economic benefits will be
required to settle the obligation; and
c. The obligation has a cost or value (e.g., fair
value) that can be measured reliably.

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 Financial Liabilities
• A financial liability is any liability that is:
a. A contractual obligation to deliver cash or
another financial asset to another entity;
b. A contractual obligation to exchange
financial instruments with another entity
under conditions that are potentially
unfavorable to the entity; or
c. A contract that will or may be settled in
the entity’s own equity instruments.

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Examples of financial liabilities
• Accounts Payable
• Notes Payable
• Interest Payable
• Loans Payable
• Bonds Payable
• Accrued Payables

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 Initial Recognition
• A financial liability is recognized
when an entity becomes a party
to the contractual provisions of
the instrument. (PPSAS 29.16)

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 Initial Measurement
• Financial liabilities are initially measured at
fair value minus transaction costs, except
for financial liabilities at fair value through
surplus or deficit (e.g., designated financial
liabilities and derivative liabilities) whose
transaction costs are expensed. (PPSAS
29.45)
• Transaction costs are incremental costs that
are directly attributable to the acquisition,
issue, or disposal of a financial instrument.
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Subsequent Measurement
• Financial liabilities are subsequently
measured at amortized cost, except for
financial liabilities at fair value through
surplus or deficit which are subsequently
measured at fair value.

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Derecognition of Financial Liability
• A financial liability is
derecognized when it is
extinguished, such as when it is
discharged, waived, cancelled, or
it expires.

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 Provisions
• Provision – is a liability of uncertain timing
or amount.
• A provision is recognized if all the
recognition criteria for a liability are met
(i.e., present obligation, probable outflow,
and reliable measurement). If one or more
of the criteria are not met, the item is a
contingent liability, not a provision, and
therefore not recognized as liability.

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 Contingent Liability
• Contingent Liability is:
• A possible obligation that arises from past events, and
whose existence will be confirmed only by the occurrence
or non-occurrence of one or more uncertain future events
not wholly within the control of the entity; or
• A present obligation that arises from past events, but is not
recognized because:
a. It is not probable that an outflow of resources
embodying economic benefits or service potential will
be required to settle the obligation; or
b.The amount of the obligation cannot be measured with
sufficient reliability.
(PPSAS 19.18)

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 Contingent Asset
• Contingent Asset – is a possible asset that arises
from past events, and whose existence will be
confirmed only by the occurrence or non-
occurrence of one or more uncertain future events
not wholly within the control of the entity. (PPSAS
19.18)

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 Summary:

Contingent  Probable Possible Remote

Recognize and Disclose
 Liability Disclose only Ignore

 Asset Disclose only Ignore Ignore

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 Measurement
• A provision is measured at the entity’s best
estimate of the amount needed to settle the
liability at the reporting date.
• If the effect of time value of money is material, the
provision is measured at present value.

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 Reimbursements
• If another party is expected to reimburse the
settlement amount of a provision, a
reimbursement asset is recognized and presented
in the statement of financial position separately
from the provision.
• However, in the statement of financial
performance, the expense related to the provision
may be presented net of the reimbursement.
• The amount recognized for the reimbursement
shall not exceed the amount of the provision.

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 END

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