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 Noncurrent Liabilities

Current liabilities are recorded and reported at face Noncurrent liabilities are measured at face amount
amount. The effect of discounting of current or present value depending on whether they are
liabilities compared to its face amount is interest bearing or not.
immaterial.
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.
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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 non-adjusting 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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98 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, Blue Notes. SLU