CURRENT
LIABILITIES
• LIABILITY
obligation
transfer of economic resource
present obligation as a result of past events
• Obligation
duty or responsibility that an entity has practical
ability to avoid
legal obligation – results from a contract, legislation, or
other operation of law
constructive obligation – results from an entity’s
actions (past practices or published policies ) that
create a valid expectation on others that the entity will
accept and discharge responsibilities
• Transfer of an economic resource
pay cash, deliver goods, or render services
exchange assets with another party on unfavorable
terms
transfer assets if a specified uncertain future event
occurs
issue a financial instrument that obligates the entity to
transfer an economic resource
• Present obligation as a result of past events
economic benefits has already been obtained
transfer an economic resource as a consequence.
FINANCIAL LIABILITY EQUITY INSTRUMENT
Contractual obligation to pay cash or another financial No obligation to pay cash or other financial asset or to
asset or to exchange financial instruments under exchange financial instruments under potentially
potentially unfavorable condition unfavorable condition
MEASUREMENT OF
LIABILITIES
CURRENT LIABILITIES
• Measured at their face amount
difference between present value and face
amount is immaterial, thus, ignored
NON CURRENT LIABILITIES
bonds payable and non interest bearing note
payable
initially measured at present value and subsequently
measured at amortized cost
interest bearing note payable
initially and subsequently measured at face amount
CURRENT LIABILITIES
• Expected to be settled within the entity’s operating cycle
• The entity holds the liability for the purpose of trading
• The entity does not have an unconditional right to defer
settlement of the liability for at least twelve months after
the reporting period
• Example of current liabilities:
accounts payable to suppliers
employee taxes and SSS contributions withheld
accruals for salaries, interest, rent, taxes, product
warranties and profit sharing bonus
cash dividends declared but not paid
deposits and advances from customers
income tax payable
Unearned revenue
NON-CURRENT
LIABILITIES
• Non current 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
• A liability due to be settled within 12 months after the
reporting period is classified as current even if:
the original term was longer that 12 months
an agreement to refinance or to reschedule payment on
long-term basis is completed after the reporting period and
before the financial statements are authorized for issue
• Refinancing/rescheduling completed on or before the
end of the reporting period
considered as an adjusting event - thus, classified as non
current
LONG TERM DEBT
FALLING DUE WITHIN
ONE YEAR
• Entity has the discretion to refinance
classified as non current even if is due within a
shorter period.
BREACH OF CONVENANTS
• Covenants – restrictions to the borrowers
attached to borrowing agreements:
further borrowings
paying dividends
maintaining specified level of working capital
• Breach of covenants
Lender agreed not to demand payment
current - if the lender’s agreement was made after the
reporting period and before the FS is authorized for issue
non current – if the lenders agreement was made on or
before the reporting period.
ESTIMATED LIABILITIES
• obligations which exists at the end of reporting
period though their amount is not definite
• estimated liabilities are either current or non
current in nature
• Examples of estimated liabilities:
estimated liability for premiums
award points
warranties
gift certificates
bonus
DEFERRED REVENUE
• unearned revenue, income already received but
not yet earned
• deferred revenue:
current - realizable within one year
unearned interest income
unearned rental income
unearned subscription income
non-current – realizable more than one year
unearned revenue from long term service contracts
long term leasehold advances
DEFERRED REVENUE -
Example 1:
An entity sells equipment service contracts agreeing to service equipment for a 2-yer
period
Cash receipts from contracts are credited to unearned service revenue and service
contract costs are charged to service contract expense .
Revenue from service contracts is recognized as earned over the service period of the
contracts
The following transactions occur in the first year:
• Cash receipts from service contracts sold 1,000,000
• Service contracts paid 500,000
• Service contract revenue recognized 800,000
Journal entries:
Cash 1,000,000
Deferred revenue 1,000,000
Service contract expense 500,00
Cash 500,000
Deferred revenue 800,000
Service contract revenue 800,000
DEFERRED REVENUE
Example 2: ABC Co sells contracts that cover 2-year
period. The sale price of each contract is P1,000. ABC
sold 1,000 contracts evenly throughout 20x1. ABC’s
past experience shows that, of the total pesos spent for
repairs on service contracts, 40% is incurred evenly in
the first year of the contract and 60% in the second
year.
Requirements: Compute for approximation of the
following:
a) Current and non-current portions of the
deferred revenue as of Dec 31, 20x1
b) Revenue 20x2
DEFERRED REVENUE
• SOLUTION: 20X1 20X2 20X3 TOTAL
% earned 40% 60%
40% 60%
First half (1M /2) 200,000 300,000
Second half (1M /2) 200,000 300,000
Earned portions 200,000 500,000 1,000,000
CURRENT AND NON CURRENT – As of Dec 31, 20x1
Current portion ( earned portion in 20x2) 500,000
Non current portion (earned portion in 20x3) 300,000
TOTAL 800,000
SERVICE REVENUE – 20X2 500,000
UNEARNED
SUBSCRIPTIONS
An entity sells monthly issues for a magazine.
Subscriptions received after the Nov 1 cut-off date are
held for publication in the following year. Information
on subscriptions is as follows:
Unearned revenue – Jan 1 3,000,000
Receipts from subscriptions during
20x1 (made evenly) 24,000,000
Requirements:
1) How much is the unearned revenue balance on
Dec 31, 20x1?
2) How much is the revenue from subscriptions
during 20x1?
SOLUTIONS
a) Unearned revenue – December 31
24M x 2/12 = P4,000,000
b) Subscription revenue – 20x1
3M(beg) + (24M x 10/12) = P23,0000
ACCOUNTING FOR GIFT
CERTIFICATES
• A contract liability is derecognized and revenue is recognized when
the gift certificates are redeemed (used)
• As to gift certificates sold that are not exercised (referred to as
“breakage”), PFRS 15 provides the ff:
1. Proportionate method : If the entity expects that a portion of the gift
certificates sold will not be redeemed, the entity recognizes the expected
breakage amount as revenue in proportion to the pattern of rights
exercised by the customer
2. Remote method: If the entity does not expect that a portion of the gift
certificates sold will not be redeemed, the entity recognizes the expected
breakage amount as revenue when the likelihood of redemption becomes
remote
GIFT CERTIFICATES
An entity sells gift certificates as part of its sales promotion. During the year,
the entity sells gift certificates worth P100,000 of which P72,000 were
redeemed
Case 1: Proportionate method: Based on the entity’s past experience, 10% of the gift certificates sold are
never redeemed
Cash 100,000
Gift card liability 100,000
Gift card liability 72,000
Revenue 72,000
Gift certificates sold 100,000 Gift certificates redeemed 72,000
Multiply by 10% Divided by 90,000
Total expected breakage 10,000 % of actual redemptions 80%
Gift certificates sold 100,000 Total expected breakage 10,000
Less: expected breakage (10,000) % of actual redemption 80%
Gift certificates sold net of expected breakage 90,000 Amount of expected
breakage recognized as rev 8,000
Cont……
Gift card liability 8,000
Revenue 8,000
Case 2: Remote method: The entity expects that all the gift certificates sold will be redeemed
The entity makes the first two entries and the entity recognizes revenue only the likelihood of
redemption becomes remote
LIABILITY FOR DEPOSITS
RECEIVED
• Deposit liabilities of banks
• Deposit received for returnable
containers
• Security deposit s received from lessees
• Deposit received from escrow
agreements
• Deposits for future subscription of the
entity’s own equity instrument
ILLUSTRATION : Deposits
for returnable containers
ABC Co. requires deposits from customers for the containers of goods sold.
The customers are refunded for the deposits received when the containers are
returned within two years from the date of sale of the related goods. Deposits
for containers not returned within the time limit are regarded as proceeds
from retirement of containers. Information for 20x3 is as follows:
Deposits for containers on Dec 31, 20x2 from deliveries in:
20x1 20,000
20x2 45,000
65,000
Deposit for containers delivered in 20x3: 90,000
Deposits for containers returned in 20x3 from deliveries in:
20x1 9,000
20x2 25,000
20x3 46,000
80,000
Required: Compute for the liability for deposits on returnable containers as of
December 31, 20x3?
SOLUTION
LIABILITY FOR DEPOSITS
Ignored Deposits from 20x1
Returns from 20x1 ignored 45,000 Deposits from 20x2
Returns from 20x2 25,000 90,000 Deposits from 20x3
Returns in 20x3 46,000
Ending bal. 64,000
