26. Liabilities PDF

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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 atleast twelve months after the reporting period. 

Noncurrent 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. Practical Accounting 1 Theory of Accounts

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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

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USL Blue Notes

Chapter 26 – Liabilities

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.

Practical Accounting 1 Theory of Accounts...