Government

Accounting&
Accounting for non-profit organizations

by: ZEUS VERNON B.

MILLAN
 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
GOVT measurement
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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
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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
acquisiti o n Z.B.Millan
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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

 Liability Recognize and Disclose Ignore

Disclose only
 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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 APPLICATION OF
CONCEPTS

PROBLEM 12-3: FOR CLASSROOM

DISCUSSION

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OPEN FORUM

QUESTIONS??
??
 REACTIONS!!!!

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 END

GOVT ACCTG & ACCTG FOR NPOs by:

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