INTRODUCTION

After the discussions,

students will be able to:
define “liabilities” as a term
identify its essential
characteristics
give examples of liabilities
classify and measure
liabilities
 Liabilities are present
obligations of an entity arising
from past transactions or events,
the settlement of which is
expected to result in an outflow
from the entity of resources
embodying economic benefits.

Conceptual Framework for Financial Reporting

Definition
PRESENT OBLIGATION of a particular entity

That arises from a PAST EVENT

Settlement requires an OUTFLOW OF resources

embodying ECONOMIC BENEFITS
PRESENT OBLIGATION
of a particular entity
•Entity liable must be identified
•Obligation is a duty or
responsibility
 An OBLIGATION
is a juridical necessity
to give, to do or not
do.
Art. 1156
 The court may be asked to order the
performance of an obligation if the debtor
does not fulfill it.

 If an obligation cannot be enforced through

the courts, it may be disregarded with
impunity (freedom from punishment).
PRESENT OBLIGATION of a particular entity
• May be legally enforceable---binding contract or
statutory requirement (i.e. payable for goods or services
received)
• Constructive obligations by reason of normal business
practice, custom and a desire to maintain good business
relation (ex. an entity decides as a matter of policy to
rectify faults in its products even when these become
apparent after the warranty period has expired)
PRESENT OBLIGATION

PAST EVENT
•Obligating event --- entity has no
alternative but to settle the
obligation (ex. acquisition of goods)
PRESENT OBLIGATION

PAST EVENT

OUTFLOW OF FUTURE ECONOMIC BENEFITS

• Payment of money
• Transfer of noncash assets
• Performance of service
 Accounts Payable • To suppliers for purchases

Amounts Withheld • From employees

Accrued Exp • For wages, interest, rentals, etc.

Dividends • Declared but not paid (Xstock dividends)

Deposits and Advances • From customers and officers

Debt obligations • For borrowed funds

Others • income tax payable & unearned revenue

 Any asset that is
◦ cash
◦ an equity instrument of another enterprise
◦ a contractual right
 to receive cash or another financial asset to another
enterprise, or

 to exchange financial instrument with another

enterprise under conditions that are potentially
favorable to the entity.
 Any liability that is a

CONTRACTUAL OBLIGATION

 to deliver cash or another financial asset to another

enterprise, or

 to exchange financial instrument with another

enterprise under conditions that are potentially
unfavorable to the entity.
◦ Cash
◦ Derivatives
◦ Equity instrument
◦ Debt instrument
 Bank deposits and bank borrowings
 Bonds, loan, notes and promissory notes
 Trade receivables and trade payables
 Financial Instruments Non-Financial
Cash
Unearned revenue
T-bill, T-note, T-bond
Prepaid expense
Income tax payable
Accounts receivable
Notes payable
Property and
equipment

Investment in equity
securities

Loans payable
 Financial Instruments Non-Financial
Cash √
Unearned revenue √
T-bill, T-note, T-bond √
Prepaid expense √
Income tax payable √
Accounts receivable √
Notes payable √
Property and √
equipment

Investment in equity √
securities

Loans payable √
 Financial liabilities at fair value through profit
or loss (FL@FVPL) Issued debt instrument that the entity
intends to repurchase in the near term
◦ Held for Trading to make a gain from short-term
movements in interest rates

◦ Designated

 Other financial liabilities measured at

amortized cost using the effective interest
method (FL@AC)
 Expected to be settled  Residual: if NOT
w/n entity’s operating classified as current,
cycle then, it is noncurrent
 Noncurrent portion of
 Held primarily for
long-term debt
trading  Finance lease liability
 Due to be settled w/n  Deferred tax liability
12 months  Long-term obligation
 Entity has NO to officers
unconditional right to  Long-term deferred
revenue
defer settlement

CURRENT NONCURRENT
When, and only when, the entity
becomes a party to the
contractual provisions of the
instrument
  Financial Liability
◦ designated at Fair Value through Profit or Loss
FAIR VALUE
(Transaction cost – expensed immediately)
◦ measured at amortized cost
FAIR VALUE -
transaction cost
Includes: Does not include:
a. Fees and commissions paid to agents, a. Debt premiums or
advisers, brokers and dealers discounts
b. Levies by regulatory agencies and b. Financing costs
securities exchanges c. Internal administrative or
c. Transfer taxes and duties holding costs
 At amortized cost, using the effective
interest method (AC)

 At fair value through profit or loss

(FVPL)
 CHANGES
CATEGORY INITIAL SUBSEQUENT IN FV

FL@FV FV FV P/L
(Trading)

Credit Risk-
FL@FV FV FV OCI
(Designated)
Others-P/L

FL@AC FV-TC AC Ignore

 The amount for which a liability is settled between
knowledgeable and willing parties in an arm’s length
transaction.
◦ Quoted price in an active market
◦ Most recent market transaction price
◦ Market price for similar liability with adjustment to reflect
any difference
◦ Sector benchmark
◦ Present value of expected net cash flows

 Equal to the present value of future cash payment to

settle the obligation

◦ PV is the discounted amount of the future cash outflow in

settling an obligation using the market interest rate
 Amount at which the financial liability is
measured at initial recognition minus principal
repayment, plus or minus the cumulative
amortization using the effective interest method
of any difference between the initial amount and
the maturity amount

 (Face Amount – PV) is amortized through interest

expense using the effective interest method.

 Face amount – PV = discount (PV<FA)

premium (PV>FA)
 Current Liabilities (short-term obligations)

◦ Conceptually initially PV
subsequently amortized cost

◦ In practice, not discounted anymore but measured,

recorded and reported at FACE AMOUNT
 Noncurrent Liabilities (long-term obligations)

◦ Noninterest initially PV
bearing NP subsequently amortized cost

◦ Interest initially face amount

bearing NP subsequently face amount
a) The entity expects to settle the liability
within the entity’s operating cycle.
b) The entity holds the liability primarily for
the purpose of trading.
c) The liability is due to be settled within 12
months after the reporting period.
d) The entity does not have an unconditional
right to defer settlement of the liability for
at least 12 months after the reporting
period.
 Financial liabilities held for trading
 Bank overdrafts
 Dividends payable
 Income taxes
 Other nontrade payables
 Current portion of noncurrent
liabilities
 • To suppliers for purchases
Accounts Payable

• From employees
Amounts Withheld

• For wages, interest, rentals, etc.

Accrued Exp

• Declared but not paid (Xstock dividends)

Dividends

• From customers and officers

Deposits and Advances

• For borrowed funds

Debt obligations

• income tax payable & unearned revenue

Others
• estimated liabilities
Obligation which exist at the end of reporting period
◦ although their amount is not definite
◦ in many cases, the due date is also not definite
◦ In some instances, exact payee cannot be identified

Either Current or Noncurrent

Considered as a PROVISION (both probable and

measurable)

Examples:
estimated liability for premiums, award points,
warranties, gift certificates and bonus
On December 31, 2016, the following information are provided in the
books of Duterte Company:

 Accounts Payable Including deposits and 2,500,000

advances from customers of P500,000
Notes Payable including note payable to bank 3,000,000
due on December 31, 2018 of P1,000,000
Stock Dividends Payable 800,000
Credit balance in customers’ accounts 400,000
Serial Bonds, payable in semiannual 10,000,000
installment of P1,000,000
Accrued Interest on bonds payable 300,000
Contested BIR tax assessment – possible obligation 600,000
Unearned Rent Income 100,000

How much is the current liabilities? ____________________________

The following amounts were taken from the unadjusted trial balance of
Defensor Company on December 31, 2016:

Accounts Payable 450,000

Accounts Receivable w/ customers’ deposit of P100k 800,000
Accrued Interest Payable 25,000
Cash 200,000
Dividends Payable 125,000
Income Tax Payable 50,000
Trading Securities 1,000,000
Notes Receivable 1,500,000
Bonds Payable, P250,000 due Sept. 30 annually 1,000,000
Contingent Liabilities 400,000
Accrued Expenses 175,000
Merchandise Inventory 750,000

How much is the current liabilities? ____________________________

 A liability which is due to be settled w/n 12
months after the reporting period is classified as
current, even if:
a. The original term was for a period longer than 12 mos.
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.

noncurrent if:
a. refinancing on a long-term basis is completed on or before
the end of the reporting period (ADJUSTING EVENT)
b. entity has the discretion to refinance
 CAE Company had a note payable due on March 1, 2017.
On January 31, 2017 before the issuance of the 2016
financial statements, the entity issued long-term bonds
payable. Proceeds from the bonds were used to repay the
note when it came due. How should the entity classify the
note payable in the December 31, 2016 financial
statements?

a. Current liability with separate disclosure of note

refinancing
b. Current liability with no disclosure required
c. Noncurrent liability with separate disclosure of note
refinancing
d. Noncurrent liability with no separate disclosure required.
Shadow Company had the following liabilities on December 31, 2015:

AP after deducting debit balances in 200,000

suppliers’ accounts of P10,000
Accrued liabilities 20,000
NP – due 3/31/16 2,000,000
NP – due 5/31/16 1,200,000
NP – due 12/31/17 4,000,000

On March 1, 2016 before the 2015 FS were issued, the NP of

P2,000,000 was replaced by an 18-month note for the same
amount. Shadow is considering similar action on P1,200,000 note
due on May 31, 2016. The FS were issued on Marach 31, 2016.

How much is the current liabilities? ________________________________

How much is the noncurrent liabilities? ____________________________
Bank notes payable include two separate notes payable to
Metrobank.

A P3million, 10% note issued March 1, 2014, payable on

demand. Interest is payable every six months.

A one-year P5million, 11% note issued January 2, 2015. On

December 31, 2015, the company negotiated a written
agreement with Metrobank to replace the note with a 2-year
P5million, 10% note to be issued January 2, 2016.

On December 31, 2015:

How much is the current liabilities? _________________________
How much is the noncurrent liabilities? _____________________
The 10% mortgage note of P3million was issued October 2,
2012 with a term of 10 years.

Terms of the note give the holder the right to demand

immediate payment if the entity fails to make a monthly
interest payment within 10 days of the date the payment is
due.

On December 31, 2015, the company is three months behind in

paying its required interest payment.

On December 31, 2015:

How much is the current liabilities? _________________________
How much is the noncurrent liabilities? _____________________
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:

a. Refinancing on a long-term basis

b. Rectification of a breach of a long-term loan agreement

c. The granting by the lender of a grace period to rectify a

breach of a long-term loan arrangement ending at least
12 months after the reporting period.

Loans remain as CURRENT liabilities.

 As a minimum, the face of the Statement of
Financial Position shall include the following
line items: For accounts payable, notes
a. Trade and other payables payable, accrued interest on
NP, dividend payable and
b. Current provisions
accrued expenses
c. Short-term borrowings
d. Current portion of long-term debt
e. Current tax liability
------------
NO objection if trade accounts and notes payable are separately
presented.
Entity may present additional line items when such presentation
is relevant to an understanding of the entity’s financial
position