LIABILITIES

- Present obligations of an entity to transfer an economic resource as a result of past

events.
- The entity has a PRESENT obligation
- The entity liable must be identified; it is NOT necessary that the payee to whom the
obligation is owed is identified
- The obligation is to TRANSFER an ECONOMIC RESOURCE
- Economic resource : the asset that represents a right with a potential to produce
economic benefits ; obligation must be to PAY CASH, TRANSFER NONCASH ASSET
or PROVIDE SERVICE at some future time
- The liability arises from a PAST EVENT
- The liability is NOT recognized UNTIL it is INCURRED.
Present obligation
- May be a legal obligation or a constructive obligation
- Legally enforceable obligation: a consequence of binding contract or statutory
requirement
- Constructive obligation: by reason of normal business practice, custom, and a desire to
maintain good business relations or act in an equitable manner.
Measurement of CURRENT liabilities
■ All liabilities are INITIALLY measured at PRESENT VALUE, and SUBSEQUENTLY
measured at AMORTIZED COST (conceptually)
■ Current liabilities or short-term obligations are NOT discounted anymore but measured,
recorded and reported at their FACE AMOUNT (in practice).
■ The discount or the difference between the face amount and the present value is NOT
material (thus, ignored).
Measurement of NONCURRENT liabilities
■ Bonds payable and NONINTEREST-BEARING note payable are INITIALLY measured
at present value and SUBSEQUENTLY measured at AMORTIZED COST.
■ Long-term INTEREST-BEARING note payable: INITIALLY and SUBSEQUENTLY
measured at FACE AMOUNT = PV of NP
Current liabilities
■ The liability is expected to be settled within the entity’s operating cycle.
■ The liability is held primarily for the purpose of trading
■ The liability is due to be settled within 12 months after the reporting period
■ The entity DOES NOT have an unconditional right to defer settlement of the liability for
at least 12 months after the reporting period.
Noncurrent liabilities
Residual definition; all liabilities NOT classified as current are classified as noncurrent
liabilities
 ■ Noncurrent portion of long-term debt
■ Finance lease liability
■ Deferred tax liability
■ Long-term obligation to officers
■ Long-term deferred revenue
Long-term debt falling due within one year : Current or Noncurrent?
A liability which is due to be settled within 12 months after the reporting period is classified
as CURRENT, even if :
a. The original term was period longer than 12 months
b. An agreement to REFINANCE (or to reschedule payment on a long-term basis) is
completed AFTER the reporting period and BEFORE the financial statements are
authorized for issue.
c. If the REFINANCING on a long-term basis is completed ON OR BEFORE THE END OF
THE REPORTING PERIOD, the refinancing is an adjusting event; the obligation is
classified as NONCURRENT.
Refinancing or rolling over at the discretion of the entity
■ If the entity (the borrower) has the DISCRETION to refinance or roll over an obligation
for at least 12 months AFTER the reporting period under an existing loan facility, the
obligation is NONCURRENT even it would otherwise be due within a shorter period.
Covenants
■ attached to borrowing agreements which represent undertakings by the borrower
■ Restrictions on the borrower as to undertaking further borrowings, paying dividends,
maintaining specified level of working capital
Breach of covenants
■ If certain conditions relating to the borrower’s situation are BREACHED, the liability
becomes PAYABLE ON DEMAND.
■ Such a liability is classified as CURRENT even if the lender has agreed AFTER the
reporting period and BEFORE the FS are authorized for issue, NOT TO DEMAND
payment as a consequence of the breach.
■ Reason : at the end of the reporting period, the entity DOES NOT HAVE an
unconditional right to defer settlement for at least 12 months after that date.
■ 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 12 months after that
date.
Grace period
■ A period within which the entity can RECTIFY the breach and DURING which the
LENDER CANNOT DEMAND IMMEDIATE PAYMENT
 Estimated liabilities
■ Obligations which exist at the end of reporting period although THEIR AMOUNT IS NOT
DEFINITE.
■ The date WHEN the obligation is due is NOT ALSO DEFINITE (in many cases)
■ The exact payee CANNOT BE identified or determined (in some instances)
■ The existence of the estimated liabilities is VALID ; either current or noncurrent
■ Ex : Estimated liability for premium, award points, warranties, gift certificates, and bonus
Deferred revenue
■ a.k.a. Unearned revenue; income already received but not yet earned
■ May be realizable within one year or in more than one year after the end of the reporting
period.
■ If realizable within 1 year: current liability
■ If realizable in more than 1 year: noncurrent liability
Pro-forma entries

To record cash receipts from services Cash

contracts sold
Unearned service revenue

To record service contract costs paid Service contract expense

Cash

To record the service contract Unearned service revenue

revenue recognized
Service contract revenue

Gift certificates payable : Pro-forma

When GCs are sold Cash

Gift certificate payable

When GCs are redeemed Gift certificate payable

Sales

When GCs expire ; or when GCs are Gift certificate payable

NOT redeemed
 Forfeited gift certificates

The Philippine DTI ruled that GCs no longer have an expiration period.

Bonus computation
Bonus is expressed as a certain percent of income
BBBT Before Bonus Before Tax
ABBT After Bonus Before Tax
ABAT After Bonus After Tax
BBAT Before Bonus After Tax

Refundable deposits
■ Consist of cash or property received from customers but which are refundable after
compliance with certain conditions
■ Ex : customer deposit required for returnable containers like bottles, drums, tanks and
barrels
Pro-forma entries

Receipt of deposit from customers Cash

Containers’ deposit
*classified as current LIABILITY

Customer returns the containers Containers’ deposit

Cash

Customer fails to return the containers Containers’ deposit

Containers (at cost)
Gain on sale of containers