Intermediate Accounting

13th Canadian Edition, Volume 2

Kieso ● Weygandt ● Warfield ● Wiecek ● McConomy

Chapter 13

Non-Financial and Current Liabilities

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Chapter 13: Non-Financial and Current
Liabilities (LO 1 to LO 5)
After studying this chapter, you should be able to:
1. Understand the importance of non-financial and current
liabilities from a business perspective.
2. Define liabilities, distinguish financial liabilities from other
liabilities, and identify how they are measured.
3. Define current liabilities and identify and account for
common types of current liabilities.
4. Identify and account for the major types of employee-related
liabilities.
5. Explain the recognition, measurement, and disclosure
requirements for decommissioning and restoration
obligations.
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Chapter 13: Non-Financial and Current
Liabilities (LO 6 to LO 9)
6. Explain the issues and account for product guarantees, other
customer program obligations, and unearned revenues.
7. Explain and account for contingencies and uncertain
commitments, and identify the accounting and reporting
requirements for guarantees and commitments.
8. Indicate how non-financial and current liabilities are
presented and analyzed.
9. Identify differences in accounting between IFRS and ASPE,
and what changes are expected in the near future.

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Understanding Non-Financial and
Current Liabilities
• It is important for businesses to properly account for
liabilities because it is useful for cash flow management
• Cash flow management is a key control factor for most
companies
• Control of expenses and accounts payable can improve
the efficiency of a business and can be particularly
important during economic downturns

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Definition of Liabilities, IFRS vs. ASPE
Part A: Definition in IFRS Conceptual Framework (summary)
A liability is a present obligation of the entity to transfer an economic resource as a result
of past events.
For a liability to exist, the following criteria must all be satisfied:
1. The entity has an obligation (that is, a present duty or responsibility to others that it
has no practical ability to avoid).
2. The obligation is to transfer an economic resource to another party or parties.
3. The obligation exists as a result of past events.
Part B: ASPE Definition in CPA Canada Handbook, Part II (summary)
A liability is an obligation that arises from past transactions or events, which may result in
a transfer of assets or provision of services.
Liabilities have three essential characteristics:
1. They embody a duty or responsibility to others.
2. They entity has little or no discretion to avoid the duty.
3. The transaction or event that obliges the entity has already occurred.

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Liability Definition and Characteristics
• A liability requires a duty or responsibility to perform in a
specific way, therefore
o It suggests there might be an economic burden
o The requirement can be enforced by legal means
• A constructive obligation arises
o From past or present practice
o Indicates acknowledgement of a potential economic
burden
• Entities must comply with statutes, laws, and regulations
o A liability arises only if the provisions are violated
• Under ASPE recognition requirements, uncertainty of the
amount is a factor in determining if the obligation is a liability

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Financial Liabilities
• A financial liability (under ASPE and IFRS) is any liability
that is a contractual obligation to either:
o deliver cash or other financial assets to another party, or
o exchange financial assets or financial liabilities with
another party under conditions that are potentially
unfavourable to the entity
• Liabilities that are created by legislation do not qualify
as financial liabilities, they must be created by a contract

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Classification
• Classification of liabilities into financial and non-financial
liabilities
o Defines the accounting standard that is applied
o Conceptual framework provides a basis for settling
classification issues

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Measurement of Financial Liabilities
• Financial liabilities
o Initially measured at fair value
o Subsequent measurement generally at amortized cost
(except those held for trading where fair value is used)
o Include transaction costs at acquisition
o Transaction costs after acquisition are expensed
o Short-term liabilities are accounted for at maturity
value—little difference between fair value and maturity
value

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Measurement of Non-Financial
Liabilities
• Non-financial liabilities—not payable in cash
• ASPE: no specific measurement standards
(measurement varies based on nature of liability)
• IFRS: measured at best estimate of payment that would
be required to settle the obligation at the date of the
statement of financial position
o Timing and amount are usually not fixed
o Expected value or probability-weighted average of
possible outcomes

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What is a Current Liability?
• An important feature of liabilities is the timing of when
they are due
o Short-term maturity places a demand on current assets
o Distant due dates do not result in a claim on current assets
o Difference in timing and the effect on current assets
distinguish current from non-current liabilities
• Separate current assets from non-current assets to show
how working capital is used in the normal operating cycle

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Current Liability
• Under IFRS, liabilities are classified as current when they
meet any one of the following conditions:
o Expected to be settled within normal operating cycle
o Held primarily for trading
o Due within 12 months from the end of the reporting
period
o No unconditional right to defer settlement for at least 12
months after the date of the statement of financial
position
• ASPE has a less specific definition, similar intent
although there may be minor differences in application

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Bank Indebtedness
• Line-of-credit or revolving debt
• Revolving debt arrangements: an agreement entered
with the bank that allows multiple borrowings up to a
negotiated limit
• Repayments made whenever there are sufficient funds
available
• Usually collateral required; some restrictions set
• Amount borrowed reported on the SFP; availability of
funds and restrictions imposed by the financial
institution are typically disclosed in the notes

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Accounts Payable
• Also called trade accounts payable
• Amounts owed for goods, supplies or services related to
the entity’s ordinary business activities purchased on
open account
• Arise because of the time lag between receipt of goods
and services and the payment for them
• Usually record liabilities when the goods are received
• Generally recorded when title has passed

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Notes Payable
• Notes payable are written promises to pay a sum of
money on a specified future date
• Arises from purchases, financing or other transactions
• Notes payable may be classified as either current or
long-term depending on the payment due date
• Notes payable may be interest-bearing or zero-interest-
bearing (non-interest-bearing)
o In both cases, interest expense must be accrued
regardless of when cash payment is made

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Notes Payable: Zero-Interest-Bearing
• For zero-interest-bearing notes, the difference between
the amount of cash received at issuance and the higher
face value at maturity represents the interest
o The borrower receives the note’s present value and pays
back the face value
• The interest expense is recorded over the life of the note

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Current Maturities of Long-Term Debt
• The portion of long-term debt maturing within 12 months
from the date of the statement of financial position is
reported as a current liability
• Portions of long-term debts should not be reported as
current liabilities if, by contract, they are retired by assets not
classified as current assets
• Any liability due on demand, or due on demand within a year
or operating cycle, even if it has payments due over a
number of years, is reported as a current liability
• If a long-term debt is violated and becomes payable on
demand, the debt is reclassified as current
o Under ASPE, it is not reclassified if the requirements are
waived in writing, or the violation has been rectified
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Short-Term Debt Expected to be
Refinanced
• Short-term debt obligations are classified as current except if
they are expected to be refinanced on a long-term basis, and
no current assets will be required to settle
• Under IFRS, debt due within 12 months is classified as
current, unless it is expected to be refinanced under an
existing agreement for at least 12 months
• Under ASPE, currently maturing debt can be classified as
long-term if there is irrefutable evidence when the financial
statements are completed that the debt has been or will be
converted to a long-term obligation
o The short-term debt reclassified cannot be more than the
proceeds used to retire it
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Refinancing of Short-Term Debt
PiP 13.3 Assume a company has $3 million of short-term debt at
the reporting date. Company then issues $2 million of long-term
debt after the balance sheet date but before the financial
statements are issued.

Under ASPE, only $2 Under IFRS, $3 million of maturing

million can be debt would still be classified as
reclassified as long- current; IFRS requirements are more
term stringent: the agreement must be in
place at the date of the SFP

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Repayment of Short-Term Debt
PiP 13.4 A company pays off short-term debt of $40,000 on Jan
17 and issues long-term debt of $100,000 on Feb 3. The
company’s financial statements are date Dec 31 (prior year) and
are issued on Mar 1.
• Refinancing does not appear to be linked to the short-term
debt—both ASPE and IFRS require the debt to be classified as
current
• Because repayment occurred before funds were obtained
through long-term financing, the repayment used existing
current assets

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Cash Dividends Payable
• An amount a corporation owes to its shareholders
because the board authorized a dividend
• Liability recognized at the dividend declaration date
• Generally paid within three months
• Classified as current liability

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Preferred Dividends in Arrears
• Undeclared dividends on cumulative preferred shares
are not a liability
• Not an obligation until distribution is authorized
• Disclose undeclared cumulative dividends in arrears in
the notes

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Share or Stock Dividends Payable
• Dividends payable in the form of additional shares
• Not recognized as a liability
• Do not meet the definition of a liability—do not require
future outlays of economic resources
• Represents a transfer of equity from retained earnings to
contributed capital

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Rents and Royalties Payable
This type of liability may be created by a “contractual
agreement in which payments are conditional on the
amount of revenue that is earned or the quantity of product
that is produced or extracted.”
• Examples
o Franchisees often pay the franchisor franchise fees
calculated as a percentage of sales
o Tenants in shopping centres may be required to pay
additional rents based on sales
o Manufacturers pay the holder of a patent a royalty for
each unit produced

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Customer Advances and Deposits
• Customers may pay deposits that guarantee the payment
of expected future obligations, the performance of a
future service or to cover possible future damage to
property
• They are classified as either current or non-current
liabilities depending on the specific conditions attached
to the deposit
• If settlement of the deposit cannot be deferred for a
period of more than 12 months from the SFP date, it is
reported as a current liability

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Taxes Payable: Sales Tax
• In some provinces, sales tax is applied to transfers of
tangible property and to certain services
• The liability represents sales taxes that have been
collected from customers but have not been remitted to
the appropriate government
• Usually applied to the sale amount

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Taxes Payable: Goods and Services Tax
• The GST is a value-added tax of 5% based on the value
added to goods and services by each taxable entity
• The net amount is payable to Canada Revenue Agency
(CRA)—deduct the GST paid on goods and services
purchased from the GST collected by customers
• Some provinces charge Harmonized Sales Tax (provincial
retail sales tax plus GST) which is accounted for in the
same way as GST
• GST collected is not included in revenue; GST paid is not
included in the cost of the item

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Accounting for Goods and Services Tax
• Accounting for GST involves two accounts:
o GST Payable: liability; credited with GST charged to
customers on sales
o GST Receivable: asset; debited with GST paid to suppliers
• The net amount of the GST Payable and GST Receivable
accounts is remitted to (due from) Canada Revenue
Agency (CRA)
• This net amount is reported on the statement of financial
position as a current liability (credit balance) or a current
asset (debit balance)
• HST is treated similarly to GST

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Taxes Payable: Income Tax
• Corporations are charged federal and provincial income
tax based on taxable income
• Since income tax returns are generally finalized after the
financial statements have been issued, companies
generally estimate the total amount of income tax
payable
• Income taxes payable are reported as a current liability
• CRA reassessment amounts are charged to current
operations; obvious arithmetic errors from prior periods
are corrected through R/E

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Employee-Related Liabilities
• Employee-related liabilities include the following:
o Salaries or wages owed to employees at end of the
accounting period
o Payroll deductions owed to CRA and others
o Short-term compensated absences
o Profit-sharing and bonuses
• Usually reported as current liabilities

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Payroll Deductions
• Payroll deductions include statutory and discretionary
deductions
• Statutory (mandatory) deductions include:
o Canada (Quebec) Pension Plan [CPP/QPP]
o Employment Insurance (EI)
o Income Tax Withholding (Federal and Provincial)
• Discretionary deductions might include:
o Insurance premiums, union dues, employee savings
• Until these deductions, along with matching amounts
from the employer, are remitted to the government or
other entity, they are reported as current liabilities
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Short-Term Compensated Absences
• Compensated absences are periods of time taken off
from active employment for which employees are paid—
statutory holidays; vacations
• The entitlement to such benefits is one of two types:
o Accumulated rights are rights that accrue with employee
service
o Non-accumulating compensated absences are benefits
employees are entitled to by virtue of their employment
and the occurrence of an obligating event: paternity leave

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Accumulating Rights to Benefits
• Rights that accrue with employee service (vacation pay, sick
leave)
• For some benefits, such as vacation, employers have an
unconditional obligation to pay for benefits that accrue as the
employee works
• Some rights are vested—the rights do not depend on an
employee’s continued service (e.g., minimum level of vacation
pay as prescribed by law)
• Costs are accrued as expense and liability in the period in which
the benefit is earned
o Future obligation (liability) must be estimated
o Use current rate of pay or future amounts that are likely to be
paid
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Non-Accumulating Rights to Benefits
• Benefits earned through employment and a specific
situation: additional compensation and time off for
parental leave beyond government benefits, or short-
term disability
• Rights to the benefits are not vested
• No basis for accrual of the costs and the associated
liability, not recorded until the event occurs
• When benefit is used, the total estimated expense and
liability must be recognized at the time

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Profit-Sharing and Bonus Agreements
• Payments are in addition to regular salary or wage, and
are considered compensation
• Can be based on regular rates of pay, productivity, or
company profits
• Obligations arising are reported as current liabilities at
the reporting date
o Usually relate to the period just ended
o Usually based on results of the period just ended
o Usually payable in the near term
• May involve complex calculations determining the tax
consequences

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Decommissioning and Restoration
Obligations
• Construction and operation of long-lived assets:
obligations associated with retirement
o Decommissioning nuclear facilities
o Dismantling, restoring, reclaiming oil and gas properties
o Closure, reclamation, removal of mining facilities
o Closure and post-closure remediation of landfills
• Liability is known as an asset retirement obligation (ARO)
or site restoration obligation
• Obligation must be recognized in the period when the
obligation is incurred
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Asset Retirement Costs: IFRS versus
ASPE
• Category of obligations—IFRS recognizes a broader
group of non-financial obligations as liabilities: both
legal and constructive obligations; ASPE recognizes legal
obligation only
• Category of activities—costs related to production of the
goods and services: ASPE capitalizes; IFRS recognizes as
product costs

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Decommissioning and Restoration
Obligations: Measurement
• Initially measured at “best estimate of the expenditure
required to settle the present obligation”
• Because obligation will be met in the future; future costs
must be discounted
• ARO cost is recorded as part of the cost of the related
asset because it is necessary to acquire the asset
• Because no future economic benefit is associated with
the ARO as a stand-alone asset, it is included in the asset
account

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Decommissioning and Restoration
Obligations: Recognition
• Expected ARO and cost increases arising from production
activities
• Recognized differently by IFRS and ASPE
IFRS ASPE
Added to the obligation Added to the obligation
amount; incremental costs amount (liability) and to the
caused by production are capital asset account,
added to inventory as increasing future depreciation
product cost amount

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Decommissioning and Restoration
Obligations: Allocation
• ARO cost is amortized to expense over the related asset’s
useful life--depreciation
• Because ARO is measured on a discounted basis, interest
must be accrued each period
o Interest Expense under IFRS
o Accretion Expense under ASPE

Costs arising from catastrophic events do not result in an

asset retirement obligation, and are not added to the cost
base of the underlying asset

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Accounting for Asset Retirement
Obligations
PiP 13-13 Facts
• Oil platform erected January 1, 2023
• Platform must be dismantled at the end of the useful life of 5
years
• Estimated cost of dismantling: $1,000,000
• Discount rate: 10%
• PV of the asset retirement obligation: $620,920 ($1,000,000 ×
0.62092)

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Accounting for ARO: Initial Recognition
PiP 13.13 (a) Prepare the journal entry to initially recognize the ARO.
Date Account Debit Credit Same entry under
Jan 1 Drilling Platform 620,920 IFRS & ASFE
Asset Retirement Obligation 620,920

PiP 13.13 (b) Prepare the journal entry to initially recognize the ARO
assuming 80% of the $1,000,000 ARO is related to the acquisition; 20%
caused by production.
Date Account Debit Credit Same entry under
Jan 1 Drilling Platform 496,736 IFRS & ASFE
Asset Retirement Obligation 496,736

80% x PV of $1,000,000
discounted at 10%

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Accounting for ARO: Allocation
PiP 13.13 (c) Prepare the journal entry to be recorded at year-end
assuming straight-line depreciation.
Straight-line
Date Account Debit Credit
depreciation:
31-Dec Depreciation Expense 99,347 $496,736 ÷ 5 for this
Accumulated Depreciation-- year—same journal
Drilling Platform 99,347 entry for all 5 years
(unless the amount of
the ARO changes)

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Accounting for ARO: Accrued Interest
PiP 13.13 (d) Prepare the journal entries to recorded interest relating to
the ARO liability under IFRS and ASPE.

Under IFRS, the interest Under ASPE, the interest is

adjustment due to the recognized as an operating
passage of time is a expense on the income
borrowing cost statement

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Accounting for ARO: Increases Related
to Production
PiP 13.14 (a) & (b) Prepare the journal entries to be recorded assuming
the increase in the ARO due to production in 2023 was $136,602.

Under ASPE, the increase in cost

Under IFRS, the increase in cost would be added to the cost of the
would be charged to asset: drilling platform
production (through inventory
and then COGS)
Under ASPE, the depreciation
Under IFRS, the cost of goods sold expense would increase in the
would increase as the inventory is sold following years

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Accounting for ARO: Settlement of the
Liability
PiP 13.14 (c) Prepare the journal entry to be recorded when the
platform is dismantled at a cost of $995,000.

Date Account Debit Credit

10-Jan Asset Retirement Obligation 1,000,000
Gain on Settlement of ARO 5,000
Cash 995,000

With the annual accrued interest,

the ARO liability will increase to
$1,000,000 by Dec 31, 2027

The interest component would be

adjusted annually with any
increases in the liability estimate

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Product Guarantees, Customer
Programs, and Unearned Revenue
• A continuing obligation results when an entity provides
customer programs requiring that goods or services be
provided after the initial product or service is delivered
• There are two approaches to accounting for the
outstanding liability:
o Expense approach—used to account for liabilities relating
to services provided after good delivery; assurance-type
warranties; consistent with matching principle
o Revenue approach—used to account for service-type
warranties not included in product sale

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Product Guarantees and Warranty
Obligations
• A warranty (product guarantee) is a promise made by a
seller to a buyer to correct problems experienced with a
product’s quantity, quality, or performance
• Warranties and product guarantees are stand-ready
obligations at the reporting date that result in future
costs that are often significant

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Comparison: Assurance-Type and
Service-Type Warranties
Assurance-type Warranty Service-type Warranty
Expense-based approach Revenue-based approach
Associated expense is measured and Proceeds are unearned revenue at the
matched to actual revenue point of sale
Liability is measured at the estimated cost Liability is measured at the value of the
of meeting the obligation obligation, that is, the service to be
provided
As actual costs are incurred, the liability is The revenue is earned as the warranty
reduced service is provided; and the liability is
reduced
No effect on future income Some unearned revenue is recognized as a
liability, recognized as revenue when the
obligation is satisfied

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Assurance-Type Warranty Illustrated
PiP 13.15 Facts
• Sales of 100 units at $5,000 each during 2023
• Provides one-year assurance-type warranty
• Estimate of $200 per unit warranty cost
• Incurs $4,000 in actual warranty costs in 2023 on machines
sold before year-end
• Estimates further costs of $16,000 in 2024
• Actual costs in 2024: $16,800

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Assurance-Type Warranty: Initial Sale
and Warranty Expense
PiP 13.15 (a) Prepare the journal entries to account for the sale of the
machines using the expense approach.
July to December 2023
Account Debit Credit Cost estimate could also be
Accounts Receivable 500,000 accrued at time of sale
Sales Revenue 500,000

PiP 13.15 (a) Prepare the journal entry to record the related warranty
costs using the expense approach.
July to December 2023
Account Debit Credit Warranty costs incurred
Warranty Expense 4,000 are charged to expense
Materials, Cash, Payables 4,000

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Assurance-Type Warranty: Year End
2023 & 2024
PiP 13.15 (a) Prepare the year-end adjusting entry at the end of 2023 to
accrue outstanding warranty obligations.
Account Debit Credit Remaining expense associated
Warranty Expense 16,000 with the sale is recognized and
Warranty Liability 16,000 the liability account is adjusted
for the same amount
Recognizes warranty expense in the same
period as the sales

PiP 13.15 (b) Prepare the journal entry to record the actual warranty
costs at the end of 2024 and to adjust the liability to zero.
Account Debit Credit Warranty Liability is adjusted to
Warranty Expense 16,800 zero because the warranty period
Materials, Cash, Payables 16,800 has expired for machines sold in
2023.
Warranty Liability 16,000
Warranty Expense 16,000
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Product Guarantee and Warranty
Obligations-Use of Cash Basis
• Cash basis of accounting for warranties is sometimes
used
o When warranty costs are immaterial
o When the warranty period is short
• Warranty costs are charged to expense as incurred in the
period when the warranty is honoured
• No liability is recognized for future costs
• Expense may not be recognized in the period of the sale
• Used for income tax; not for financial reporting

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Service-Type Warranty Illustrated
PiP 13.16 Facts
• Date of sale of equipment: January 2, 2023
• Total sale price of equipment including two-year warranty:
$20,000
• Estimated stand-alone value of the two-year warranty (if
purchased separately): $1,200
• Assume costs of $423 were incurred in 2023 to service the
warranty
Under the revenue approach for service-type warranties, the warranty
service is considered sold as a separate service or as part of a bundle of
associated goods. The proceeds from the sale of the warranty are
unearned at the point of sale.

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Service-Type Warranty and Warranty
Liability: The Sale
PiP 13.16 (a) Prepare the journal
entry to record the sale. Estimated warranty
revenue is separated
from the proceeds of
Account Debit Credit the “bundled” sale
Cash 20,000
Sales Revenue 18,800 Recorded
Unearned Revenue 1,200 at fair
value

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Service-Type Warranty and Warranty
Liability: Recording Revenue/Expense
PiP 13.16 Prepare the journal entry to remeasure the warranty at the
end of 2023.
Account Debit Credit Recognize the revenue from one
Unearned Revenue 600 year of the two-year warranty
Warranty Revenue 600

PiP 13.16 Prepare the journal entry to record actual costs incurred in
2023.

Account Debit Credit If costs are expected to exceed the

Warranty Expense 423 remaining unearned revenue
(onerous contract), a loss and
Materials, Cash, Payables 423
related liability should be
recognized immediately

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Customer Loyalty Programs
• Promise future benefits in exchange for current sales

IFRS ASPE
Recognizes the promise to Does not specifically address
provide goods as a performance loyalty programs
obligation General principle that
Fair value of the ”rewards” is revenue recognition criteria is
recognized as a liability applicable
Recognized as revenue when May record rewards as
rewards are redeemed unearned revenue

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Premiums and Rebates
• Offers to customers with evidence of having purchased a
particular product
• Printed and online coupons; cash rebates; contests
• To increase current sales—costs incurred in the future
• Total estimated cost is expensed in current period
• Obligations at period end are recognized as a liability

IFRS ASPE
Liability is for a separate Liability: Estimated Liability
performance obligation: for Premiums
Unearned Revenue

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Unearned Revenue
• Cash received in advance for specific goods or services to
be delivered or performed in the future
• Recognized as a liability: unearned revenue
• Liability is measured at the fair value of the outstanding
obligation
• Revenue is recognized as the goods are delivered or the
services are provided

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Contingencies and Uncertain
Commitments
• Issue: Does an obligation exist at the SFP date and what is
the amount required to settle the obligation?
Under ASPE a contingency is:
“An existing condition or situation involving
uncertainty as to possible gain or loss to an
enterprise that will ultimately be resolved when one
or more future events occur or fail to occur”
(CPA Handbook-Accounting, Part II, Section 3290.05)

• Gain contingencies and contingent assets are not

recorded in the accounts
LO 7 Copyright ©2022 John Wiley & Sons, Canada, Ltd. 60
Recognition of Contingent Liabilities
IFRS ASPE
Contingent liability: used only Contingent liability: whole
for those existing or possible population of existing or possible
obligations that are not obligations that depend on the
recognized occurrence of a future event

The approach taken by current standards is–

determine the probability of a future event occurring
(or not occurring) that would establish whether the
outcome is a loss.

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Recognizing Contingent Losses (ASPE)
• Under ASPE, a contingent loss is recognized in income
and as a liability if two conditions are met:
o It is probable a future event will confirm the impairment
or the liability
• and it relates to events occurring on or before the SFP date
o The loss can be reasonably estimated—that is, it is
possible to make a reasonable and reliable estimate
• Based on experience or expert guesses
• Often consists of a range of possible outcomes

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Disclosing Contingent Losses (ASPE)
• Contingencies with a higher degree of uncertainty
require disclosure in addition to the accrual if
o Occurrence is likely but a reasonable estimate cannot be
determined
o The likelihood of a confirming future event cannot be
determined
o The entity is exposed to loss above the amount accrued
• Information to be disclosed
o Nature of the contingency
o Estimated amount of the loss or a statement that an
estimate cannot be made
o The extent of loss exposure in excess of the amount that
has been recognized
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Recognizing Provisions under IFRS
• Under IFRS, provisions are required for situations where it is
more likely than not that a present obligation exists
• A provision is recognized based on whether it is “probable”
there will be an outflow of resources
o Probable involves considerable judgement and subjectivity
o So, recognition of losses and liabilities varies considerably
o War, strikes, uninsurable catastrophes, economic recession are
not accounting contingencies
• Provisions are liabilities; not contingent liabilities
• If recognized, the best estimate and an expected value
method should be used to measure the liability
o Assign associated probabilities if a range of possible amounts is
available
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Contingent Liabilities under IFRS
• Under IFRS, contingent liabilities refer only to those
existing or possible obligations that are not recognized
• Contingent liabilities are not recognized because their
existence and amount are very uncertain
• Disclosure is required about their nature and, if
practicable
o An estimate of the financial effect
o Information about the uncertainties related to the
amount and timing of outflows
o Whether any reimbursement is possible

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Contingencies and Uncertain
Commitments: Summary
IFRS ASPE
Recognize if occurrence of a future Recognize if occurrence of a future
confirming event is “probable,” confirming event is “likely,” meaning
meaning more likely than not and a high probability and measurable.
measurable—a lower threshold than Measure the amount of the liability
under ASPE. at the best estimate in the range of
Measure the amount at the possible outcomes; if none, use
probability-weighted expected value of lowest point in the range and
the loss. disclose the remaining exposure to
IAS 37 identifies specific disclosures for loss.
“provisions” including descriptions and Disclosures are less extensive
a reconciliation of balances between than required under international
beginning and ending balances. standards.

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Litigation, Claims by Others,
Assessments
• To recognize a loss and liability, the litigation cause must
have occurred on or before the statement date—even if
the company was not aware
• To evaluate the likelihood of an unfavourable outcome,
consider: nature of the litigation, progress of the case,
opinion of legal counsel, experience of the company,
other similar cases, and the company’s response
• Estimating the amount of loss can rarely be done with
certainty, and generally is not disclosed (could produce a
negative outcome)

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Financial Guarantees
• One party (the guarantor) contracts to reimburse a
second party for a loss incurred if a third party (the
debtor) does not make required payments when due
• Qualifies as a financial liability because the guarantor has
unconditional obligation to transfer cash
• Disclosure objective is to give readers information about
the company’s obligations and the risks associated with
the guarantees

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Financial Guarantees (ASPE)
• Falls under the loss contingency standards and disclosure
provisions for guarantees
o Specific disclosures even if the probability of making
payments is slight
o Information presented—
• What types of guarantees have been made
• Maximum exposure
• How much has been recognized as a liability
• Prospects for recovery
• Details of guarantees issued to benefit related parties

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Financial Guarantees (IFRS)
• Guarantee initially recognized at fair value (usually equal
to the premium charged by the guarantor)
• After this, the higher of the loss allowance required and
the amount recognized initially
• The best estimate would be the most likely amount
• Time value of money considered is effects are significant
• Disclosure requirements similar to ASPE except
o Must provide a reconciliation of the opening to the
closing balance for this type of obligation

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Commitments
• Executory contracts—contracts where neither party has yet
performed
• Not recognized as liabilities
• These types of contracts should be disclosed if
o The company is committed to expenditures that are unusual for
their typical operations
o They involve significant risk
o Costs to complete the contract exceed the benefits to be
received (an onerous contract)
o A penalty is charged for failing to fulfill a contract
• Examples: commitments for major PP&E purchases,
intangible asset expenditure commitments, lease payments

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Presentation and Disclosure of Current
Liabilities
• First classification in the liability section of the SFP
• IFRS allows presentation of the current liabilities at the
bottom of the statement
• Within the section, accounts may be listed in order of
maturity, or liquidation preference
• IFRS requires provisions to be reported separately along with
a reconciliation of the opening to closing balances
• Amounts owing to associated persons and companies are
reported separately
• Secured liabilities and any assets used as collateral should be
identified
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Presentation and Disclosure—
Contingencies, Guarantees, and
Commitments (ASPE)
• Any contractual obligations that are significant relative to
their financial position or future
• Disclose contingent liabilities if one of the following is true
o If the future event is likely to confirm a loss but the amount
cannot be estimated
o The expected loss is more than the amount recognized
o The likelihood of the confirming event happening cannot be
determined
• Guarantees—nature, maximum potential payments, potential
recoveries, existence of any collateral

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Presentation and Disclosure—
Contingencies, Guarantees, and
Commitments (IFRS)
• Similar to ASPE requirements except for contingent
liabilities
• Companies are required to disclose
o A brief description for each class of contingent liability
unless the probability of outflow is remote
o An estimate of the financial effect of the contingency

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 rent, insurance, and taxes payable—are the most common. In addition, advances from custom-
ers are a source of operating credit, and it is important to distinguish them from other operating
sources. Why? This liability requires the company to provide a service or product in the future

Analytics—Liquidity Ratios
rather than make cash payments, and will therefore result in the recognition of revenue in the
future. An increase in this category of liability predicts future revenues, not cash outflows.
Short-term notes payable and the current portion of long-term debt result from financ-
ing activities. The company must either generate operating cash flows to repay these liabili-
• Identifying current liabilities separately from long-term
ties or arrange for their refinancing. Refinancing, however, may not always be possible or may
come at a higher cost to the borrower than the original note or debt.
obligations is important because it provides information
Identifying current liabilities separately from long-term obligations is important because it
provides information about the company’s liquidity. Liquidity is a company’s ability to convert
about the company’s liquidity
assets into cash to pay off its current liabilities in the ordinary course of business. The higher the
• Liquidity is a company’s ability to convert assets into cash
proportion of assets expected to be converted to cash over liabilities currently due, the more liq-
uid the company. A company with higher liquidity is better able to survive financial downturns
to pay off its current liabilities in the ordinary course of
and has a better chance of taking advantage of investment opportunities that arise.
As indicated in earlier chapters of the text, basic ratios such as net cash flow provided by
business
operating activities to current liabilities and the turnover ratios for receivables and inventory
• Current ratio: shows how many dollars of current assets
are useful in assessing liquidity. Three other key ratios are the current ratio, the acid-test
ratio, and the days payables outstanding.
are available for each dollar of current liabilities
The current ratio is the ratio of total current assets to total current liabilities. The for-
mula is shown in Illustration 13.10.

13.10
Formula Current assets
Current ratio =
Current liabilities

LO 8 Copyright ©2022 John Wiley & Sons, Canada, Ltd. 75

Analytics—More Liquidity Ratios
• Acid-test or quick ratio: relates quick assets (cash,
investments for trading, receivables--which are all readily
convertible to cash) to total current liabilities

• Days payables outstanding: how long it takes a company

to pay its trade payables

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Comparison of IFRS and ASPE
• There are many differences between ASPE and IFRS with
respect to non-financial and current liabilities. The
majority of these have been addressed in the body of
this presentation.
• For more specific information refer to Illustration 13.14
in the text.

LO 9 Copyright ©2022 John Wiley & Sons, Canada, Ltd. 77

Looking Ahead
• Accounting for a variety of liabilities, including
contingencies, continues to be under review by the IASB
• Review of IAS 37 continues anchored by the updates to
the new Conceptual Framework (2020) including
o aligning the liability definition and requirement for
identifying liabilities with the updates in the Conceptual
Framework
o Clarifying the costs to include in the measure of a provision
o Specifying whether rates used by entities to discount
provisions should reflect their own credit risk
o Removal of the term “contingent liabilities” was rejected as
it was perceived as potentially disruptive
LO 9 Copyright ©2022 John Wiley & Sons, Canada, Ltd. 78
Copyright
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from the use of the information contained herein.

Copyright ©2022 John Wiley & Sons, Canada, Ltd. 79