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LIABILITIES

A liability is a

a. present obligation of the entity


b. arising from past events
c. the settlement of which is expected to result in an outflow from the entity of resources embodying
economic benefits.

Definition explained:

A. Obligation
a duty or responsibility to act or perform in a certain way
obligations may be legally enforceable or constructive
a. legally enforceable- binding contract, statutory requirement
b. constructive- normal business practice, custom and a desire to maintain good business
relations or act in an equitable manner

An obligation always involves another party to whom the obligation is owed. It is not necessary, however, to
know the identity of the party to whom the obligation is owedindeed the obligation maybe to the public at
large.

B. Past event
The past event the leads to a legal or constructive obligation is known as obligating event
C. Outflow of Economic Benefits
The settlement of an obligation usually involves the entity giving up resources embodying
economic benefits in order to satisfy the claim of the other party
payment of cash;
transfer of other assets;
provision of services;
replacement of that obligation with another obligation;
conversion of the obligation to equity; or
waiver (creditor waiving or forfeiting its rights)
declaration of stock dividend shall not give rise to a liability

Recognition: A liability is recognized in the financial statements when

a. the outflow of economic resources is probable AND


b. the amount at which the settlement will take place can be measured reliably

Measurement Bases:

Historical Cost: Liabilities are recorded at the amount of proceeds received in exchange for the obligation,
or in some circumstances (for example, income taxes), at the amounts of cash or cash equivalents expected to
be paid to satisfy the liability in the normal course of business.

REFERENCE: CONCEPTUAL FRAMEWORK, IAS 1, IAS 37, IFRS 7,9


Current cost: Liabilities are carried at the undiscounted amount of cash or cash equivalents that would be
required to settle the obligation currently.

Realizable (settlement) value: Liabilities are carried at their settlement values; that is, the undiscounted
amounts of cash or cash equivalents expected to be paid to satisfy the liabilities in the normal course of
business.

Present value: Liabilities are carried at the present discounted value of the future net cash outflows that are
expected to be required to settle the liabilities in the normal course of business.

Classification and Presentation:

An entity shall present current and non-current liabilities, as separate classifications except when a
presentation based on liquidity provides information that is reliable and more relevant.

Whichever method of presentation is adopted, an entity shall disclose the amount of liability to be
settled

(a) no more than twelve months after the reporting period, and

(b) more than twelve months after the reporting period.

Current Liabilities:

(a) entity expects to settle the liability in its normal operating cycle;

in classifying liabilities arising from the operations of the entity (trade payables and some
accruals for employee and other operating costs), disregard the 12-month rule
if the operating cycle is not clearly distinguishable, it is assumed to be twelve months

(b) entity holds the liability primarily for the purpose of trading;

(c) the liability is due to be settled within twelve months after the reporting period; or

(d) entity does not have an unconditional right to defer settlement of the liability for at least twelve months after the
reporting period

In relation to (c) and (d):

liabilities with original term longer than 12 months but due in twelve months after the balance
sheet date are current liabilities
refinanced or rescheduled payments
if liabilities become due in the next twelve months according to its term or because of a
breach on the loan covenant, the classification is
CURRENT
if the refinancing (rescheduling) agreement is completed after the reporting period
but before the authorization for issuance of the FS

REFERENCE: CONCEPTUAL FRAMEWORK, IAS 1, IAS 37, IFRS 7,9


NON-CURRENT
if an entity expects, and has the discretion, to refinance or roll over an
obligation for at least twelve months after the re porting period
if the agreement to refinance (reschedule the payment of) the liability is completed
on or before the end of the reporting period

Hence, in respect of loans classified as current liabilities the following events if completed after the reporting
period but before the issuance of the FS, shall be referred to as NON-ADJUSTING EVENTS:

a) refinancing on a long-term basis;


b) rectification of a breach of a long-term loan arrangement; and
c) the granting by the lender of a period of grace to rectify a breach of a long-term loan arrangement
ending at least twelve months after the reporting period.

FINANCIAL LIABILITY

A financial liability is any liability that is a contractual obligation :

to deliver cash or another financial asset to another entity; or


to exchange financial assets or financial liabilities with another entity under conditions that are
potentially unfavorable to the entity

Examples of Financial Liabilities:

1. trade accounts payable


2. notes payable
3. loans payable
4. bonds payable

Examples of Financial Liabilities:

1. deferred revenue
2. warranty obligations
3. income tax payable
4. constructive obligations

I. Accounts Payable and Other Trade Payables


Measurement:

At initial recognition, an entity shall measure a financial liability at its fair value minus, in the case of
a financial liability not at fair value through profit or loss, transaction costs that are directly
attributable to the acquisition or issue of the financial asset or financial liability.

After initial recognition, an entity shall measure a financial liability


a. AT AMORTIZED COST, using effective interest method
b. AT FAIR VALUE through P/L

REFERENCE: CONCEPTUAL FRAMEWORK, IAS 1, IAS 37, IFRS 7,9


II. Long term Debts and Debt restructuring
Bond is a formal unconditional promise, made under seal, to pay a specified sum of money at a
determinable future date and to make specific interest payments at a stated rate until the principal is
paid.

Bond is evidenced by bond indenture.

Fair value is the issue price of the proceeds from the issue of the bonds.

Promissory Notes is an unconditional promise in writing made by one person to another, signed by
the maker, engaging to pay on demand or at a fixed or determinable future time a sum certain in
money to order or bearer.

Fair value of the note is equal to the present value of the future cash payments to settle the note. The
present value is determined using the market rate of interest.

Measurement: At initial recognition, an entity shall measure a financial liability at its fair value
minus, in the case of a financial liability not at fair value through profit or loss, transaction costs
that are directly attributable to the acquisition or issue of the financial asset or financial liability.

After initial recognition, an entity shall measure a financial liability


a. AT AMORTIZED COST, using effective interest method
The amount at which the bond is measured initially minun any principal payment plus or
minus the amortization of discount or premium.
b. AT FAIR VALUE through P/L

Bonds
A. According to maturity
i. Term bond
ii. Serial bond
B. According to security
i. Secured- collateral trust bonds
ii. Unsecured- debenture bonds
C. As to form
i. Registered bonds
ii. Coupon or bearer bonds
D. Other types
i. Convertible bonds
ii. Callable bonds
iii. Guaranteed bonds
iv. Junk bonds

REFERENCE: CONCEPTUAL FRAMEWORK, IAS 1, IAS 37, IFRS 7,9


DEBT RESTRUCTURING is a situation where the creditor , for economic or legal reasons
related to the debtors financial difficulties, grants to the debtor, concession that would not otherwise
be granted in a normal business relationship.
Nature and Forms
1. Asset swap- the transfer of asset to settle an obligation
Gain or loss shall be determined by comparing the carrying value of the liability and
the carrying value of the asset
2. Equity swap- extinguishing the liability through issuance of equity instrument
The equity instrument issued shall be measured in the following order of priority
1. Fair value of equity instruments issued
2. Fair value of liability extinguished
3. Carrying value of liability extinguished
3. Modification of term- the terms of the existing liability shall be modified
a. Substantial modification- if the gain or loss on extinguishment is at least 10% of
the old liability
b. No substantial modification- if the gain or loss on extinguishment is less than
10% of the old liability

Derecognition:

An entity shall remove a financial liability (or a part of a financial liability) from its statement of
financial position when, and only when, it is extinguished ie when the obligation specified in the
contract is discharged or cancelled or expires.

REFERENCE: CONCEPTUAL FRAMEWORK, IAS 1, IAS 37, IFRS 7,9


1. For a liability to exist
a. There must be a past transaction or event
b. The exact amount must be known
c. The identity of the party to whom the liability is owed must be known
d. There must be an obligation to pay cash in the future
2. Which is not an essential characteristic of an accounting liability?
a. The liability is the present obligation of a particular entity.
b. The payee to whom the obligation is owed must be identified.
c. The liability arises from past event or transaction.
d. The settlement of the liability requires an outflow of resources embodying economic benefits
3. Which is not true about obligation?
a. a duty or responsibility to act or perform in a certain way
b. obligations may be legally enforceable or constructive
c. it is not necessary to know the identity of the party to whom the obligation is owed
d. an obligation cannot be extinguished by forfeiture or waiver or rights by the creditor
4. liabilities are present obligations, which represent
a. legal and or constructive obligation
b. neither legal nor constructive obligation
c. legal obligations only
d. constructive obligations only
5. A legal obligation is an obligation that derives from:
I. a contract
II. legislation
III. other operation of law
a. I only
b. II and III only are the possible sources of a legal obligation
c. I and II only are the possible sources of a legal obligation
d. I, II and III are possible sources of a legal obligation
6. A constructive obligation is an obligation that derives from an entitys actions where:
I. by an established pattern of past practice, published policies or a sufficiently specific current
statement, the entity has indicated to other parties that it will accept certain responsibilities
II. as a result, the entity has created a valid expectation on the part of those other parties that it will
discharge those responsibilities.
a. I and II are important characteristics of a constructive obligation
b. Only the first statement describes a constructive obligation
c. Only the second statement describes a constructive obligation
d. Neither I nor II describes a constructive obligation
7. Which of the following do not meet the definition of a liability?
a. The signing of a three-year employment contract
b. An obligation to provide goods or services in the future.
c. A note payable with no specified maturity date
d. An obligation that is not an estimated amount.
8. An event that creates a legal or constructive obligation that results in an entity having no realistic
alternative to settling that obligation.
a. legal obligation

REFERENCE: CONCEPTUAL FRAMEWORK, IAS 1, IAS 37, IFRS 7,9


b. contingent liability
c. obligating event
d. provisions
9. These are contracts under which neither party has performed any of its obligations or both parties have
partially performed their obligations to an equal extent
a. Executory contracts
b. Provision
c. Contingent liability
d. Legal obligation
10. IAS 10 Events after the Balance Sheet Date, states that if a dividend is declared after the balance sheet
date but before the financial statements are authorized for issue, the dividend is:
a. recognized as a liability at the balance sheet date;
b. not recognized as a liability at the balance sheet date
c. recorded as a direct reduction of equity at the balance sheet date;
d. recorded as a reduction against the asset cash at balance sheet date
11. Events that occur after the balance sheet date but prior to its issuance are called:
a. Prior events
b. Post-closing events
c. Subsequent events
d. Unaudited events
12. Which is not recognized as a liability?
I. Trade payables with a debit balance
II. Tax withheld by the employers due to the government
III. Stock dividend
IV. Contingent liability
V. Accounts receivables with a credit balance
a. I and III only
b. III and IV only
c. I, III, and IV only
d. I, III, IV and V
13. Stock dividends distributable should be classified on the
a. balance sheet as a liability.
b. balance sheet as an asset.
c. balance sheet as an item of stockholders' equity.
d. income statement as an expense.
14. The settlement of a liability could be through
I. payment of cash;
II. transfer of other assets;
III. provision of services;
IV. replacement of that obligation with another obligation;
V. conversion of the obligation to equity; or
VI. waiver (creditor waiving or forfeiting its rights)
a. I, II and III only
b. I, II IV,and VI only
c. I, II III, IV and V only

REFERENCE: CONCEPTUAL FRAMEWORK, IAS 1, IAS 37, IFRS 7,9


d. I, II,III, IV, V and VI
15. An entity may classify its liabilities as
a. Current and non-current at all times
b. Order of liquidity at all times
c. Current and Non-current except if the order of liquidity is more appropriate
d. The standard do not prescribe the classification of liabilities
16. According to IAS 1, Presentation of Financial Statements, which of the following is not among the
criteria in classifying a liability as current?
a. It is expected to be settled in the entitys normal operating cycle.
b. It is due to be settled within twelve months after the balance sheet date.
c. The entity has an unconditional right to defer settlement of the liability for at least twelve
months after the balance sheet date.
d. It is held primarily for the purpose of being traded
17. A firm wants to exclude short-term debt from its current liabilities to improve its current ratio. Which of
the following would help the firm accomplish its goal?
a. Enter into a financing agreement before the balance sheet date which permits the refinancing of the
debt with other debt due 8 months after the balance sheet date.
b. Pay the debt after the balance sheet date, and replenish the cash used to pay the debt with the
proceeds from long-term debt issued before issuance of the balance sheet.
c. Plan not to pay the debt until after the end of the next fiscal period.
d. Refinance the debt by issuing share capital before the balance sheet date.
18. Which of the following is true about current liabilities?
a. A short-term obligation can be excluded from current liabilities if the company intends to refinance it
on a long-term basis.
b. The expected profit from a sales type warranty that covers several years should all be recognized in
the period the warranty is sold.
c. Current liabilities are usually recorded and reported in financial statements at their full
maturity value.
d. Companies report the amount of social security taxes withheld from employees as well as the
companies matching portion as current liabilities even after they are remitted.
19. An account which would be classified as a current liability is
a. dividends payable in the company's stock.
b. accounts payabledebit balances.
c. losses expected to be incurred within the next twelve months in excess of the company's insurance
coverage.
d. none of these.
20. Which of the following should not be included in the current liabilities?
a. Trade notes payable
b. Deferred tax liability
c. Short-term zero-interest bearing note payable
d. Unearned revenue
21. Which is a non-current liability?
a. Income tax payable
b. One-year magazine subscription received in advance
c. Estimated warranty liability

REFERENCE: CONCEPTUAL FRAMEWORK, IAS 1, IAS 37, IFRS 7,9


d. Unearned interest income related to non-interest bearing long-term note receivable
22. An entity shall measure initially a financial liability not designated at fair value through profit or loss at
a. Fair value
b. Face amount
c. Fair value plus directly attributable transaction costs
d. Fair value minus directly attributable transaction costs
23. Transaction costs directly attributable to the issue of a financial liability include all the following, except
a. Fees and commission paid to agents
b. Financing costs
c. Levies by regulatory agencies
d. Transfer taxes and duties
24. After initial recognition, an entity shall measure a financial liability at
a. Either at amortized cost using effective interest method or fair value through profit or loss
b. Either at amortized cost using straight line or fair value through profit or loss
c. Amortized cost using effective interest method
d. Fair value through profit or loss
25. Bonds payable not designated at fair value through profit or loss at shall be measured at
a. Fair value
b. Fair value plus bond issue costs
c. Face amount
d. Fair value minus bond issue costs
26. Amortized cost of bonds means
a. Face amount plus premium on bonds payable
b. Face amount minus discount on bonds payable
c. Face amount minus bond issue cost
d. Face amount plus premium on bonds payable, minus bond discount on bonds payable and
menus bond issue cost.
27. Under the fair value option, bonds payable shall be measured initially at
a. Fair value
b. Fair value plus bond issue costs
c. Face amount
d. Fair value minus bond issue costs
28. Bonds that mature on a single date are called
a. Serial bonds
b. Debenture bond
c. Callable bond
d. Term bond
29. Bond with schedule maturities
a. Debenture bond
b. Callable bond
c. Serial bonds
d. Term bond
30. Unamortized bond discount should be reported as
a. Direct deduction from the present value of the debt
b. Direct deduction from the face amount of the debt

REFERENCE: CONCEPTUAL FRAMEWORK, IAS 1, IAS 37, IFRS 7,9


c. Deferred charge
d. Part of the issue costs
31. A bond issued on July 1 has interest payment dates if May 1 and November 1. Bond interest expense for
the current year ended December 31 is for a period of
a. Two months
b. Six months
c. Four months
d. Seven months
32. How would the amortization of bond premium on bonds payable affect the carrying amount of the
bond?
a. Increase
b. Decrease
c. No effect
d. Increase or decrease
33. How would the amortization of bond premium on bonds payable affect the net income?
a. Increase
b. Decrease
c. No effect
d. Increase or decrease
34. Debenture bonds are
a. Serial bonds
b. Ordinary bonds
c. Secured bonds
d. Unsecured bonds
35. When bonds are sold between interest dates, any accrued interest is credited to?
a. Interest revenue
b. Interest receivable
c. Bonds payable
d. Interest payable
36. The proceeds from the sale of the bonds payable
a. Will always be equal to the face amount.
b. Will always be less than the face amount.
c. Will always be more than the face amount.
d. May be equal, more or less than the face amount depending on the market interest rate.
37. The extinguishment of bonds payable originally issued at a premium is made by purchase of the bonds
between interest dates. Which of the following statements is true at the time of the extinguishment?
a. Any cost of issuing the bonds must be amortized up to the purchase date.
b. The premium must be amortized up to the purchase date.
c. Interest must be accrued from the last interest date to the purchase date.
d. All of these are true
38. When bonds retired are retired prior to maturity with proceeds from a new bond issue, any gain or loss
from the early extinguishment shall be
a. Amortized over the remaining original life of the retired bond issue
b. Recognized in the profit or loss statement
c. Amortized over the life of the new bond issue

REFERENCE: CONCEPTUAL FRAMEWORK, IAS 1, IAS 37, IFRS 7,9


d. Recognized in the retained earnings
39. What is the effect of failing to amortize bond discount in the interest expense account and the carrying
value of the bond?
a. Overstated, understated
b. Understated, overstated
c. Understated, understated
d. Overstated, overstated
40. The contract between the issuer of bonds and the bondholders is called
a. Bond debenture
b. Registered bond
c. Bond coupon
d. Bond indenture

REFERENCE: CONCEPTUAL FRAMEWORK, IAS 1, IAS 37, IFRS 7,9


LIABILITIES II

EFFECTIVE INTEREST METHOD and DEBT RESTRUCTURING

1. Which of the following is a non-monetary liability?


a. Notes Payable
b. Deferred Tax Liability
c. Bonds Payable
d. Accounts Payable
2. Bonds for which the owners' names are not registered with the issuing corporation are called
a. term bonds.
b. bearer bonds.
c. secured bonds.
d. debenture bonds.
3. If bonds are issued initially at a premium and the effective-interest method of amortization is used,
interest expense in the earlier years will be
a. greater than the amount of the interest payments.
b. the same as if the straight-line method were used.
c. less than if the straight-line method were used.
d. greater than if the straight-line method were used.
4. The interest rate written in the terms of the bond indenture is known as the
a. coupon rate.
b. nominal rate.
c. stated rate.
d. coupon rate, nominal rate, or stated rate.
5. The rate of interest actually earned by bondholders is called the
a. stated rate.
b. yield rate.
c. effective rate.
d. effective, yield, or market rate.
6. Stone, Inc. issued bonds with a maturity amount of $200,000 and a maturity ten years from date of issue.
If the bonds were issued at a premium, this indicates that
a. the nominal rate of interest exceeded the market rate.
b. the effective yield or market rate of interest exceeded the stated (nominal) rate.
c. the market and nominal rates coincided.
d. no necessary relationship exists between the two rates.
7. Under the effective-interest method of bond discount or premium amortization, the periodic interest
expense is equal to
a. the market rate multiplied by the beginning-of-period carrying amount of the bonds.
b. the stated (nominal) rate of interest multiplied by the face value of the bonds.
c. the market rate of interest multiplied by the face value of the bonds.
d. the stated rate multiplied by the beginning-of-period carrying amount of the bonds.
8. When a note payable is issued for property, goods, or services, the present value of the note is measured
by
a. the fair value of the property, goods, or services.
b. the market value of the note.

REFERENCE: CONCEPTUAL FRAMEWORK, IAS 1, IAS 37, IFRS 7,9


c. using an imputed interest rate to discount all future payments on the note.
d. any of these.
9. Discount on Notes Payable is charged to interest expense
a. equally over the life of the note.
b. using the effective-interest method.
c. only in the year the note is issued.
d. only in the year the note matures.
10. Which is not a method of debt restructuring?
a. Asset swap
b. Equity swap
c. Liability swap
d. Modification of terms
11. A situation where the creditor , for economic or legal reasons related to the debtors financial difficulties,
grants to the debtor, concession that would not otherwise be granted in a normal business relationship.
a. Derecognition of liability
b. Reformation of liability
c. Debt restructuring
d. Waiver of debt
12. A transfer of any asset such as real estate, inventory or investment by the debtor to the creditor in full
settlement of an obligation.
a. Equity swap
b. Asset swap
c. Modification of terms
d. Liability swap
13. In asset swap, the difference between the carrying mount of the financial liability and the consideration
shall be recognized
a. Profit or loss
b. OCI
c. Retained earnings
d. Not recognized
14. A transaction whereby the debtor and creditor may renegotiate the terms of a financial liability with the
result that the liability is fully or partially extinguished by the debtor issuing equity instruments to the
creditor.
a. Equity swap
b. Asset swap
c. Modification of terms
d. Liability swap
15. The equity instrument issued in a debt restructuring shall be measured using an order of priority
I. Fair value of liability extinguished
II. Carrying amount of the liability extinguished
III. Fair value of equity instruments issued
a. I, II and III
b. III,II and I
c. III, I and II
d. II ,III and I

REFERENCE: CONCEPTUAL FRAMEWORK, IAS 1, IAS 37, IFRS 7,9


16. In equity swap, the difference between the carrying mount of the financial liability and equity instruments
issued shall be
a. Profit or loss
b. OCI
c. Retained earnings
d. Not recognized
17. Modification of terms may involve
a. Interest concession
b. Maturity value concession
c. Either or both A and B
d. Neither A nor B
18. Modification of terms is considered substantial if the gain or loss from extinguishment is
a. At least 10% of the carrying value of liability
b. At least 20% of the carrying value of liability
c. Between 5% to 10% of the carrying value of liability
d. Between 10% to 20% of the carrying value of liability
19. Modification of terms is not considered substantial if the gain or loss from extinguishment is
a. At least 10% of the carrying value of liability
b. At least 20% of the carrying value of liability
c. less than 10% of the carrying value of liability
d. more than 5% but less than 10% of the carrying value of liability
20. If the modification of terms is not substantial, the gain or loss
a. is recognized in profit or loss
b. is recognized in OCI
c. is recognized in Retained Earnings
d. is not recognized
21. In a troubled debt restructuring in which the debt is continued substantial modification, the present value
shall be determined using
a. a new effective interest rate
b. the original effective interest rate
c. the new nominal rate
d. the old nominal rate
22. In a troubled debt restructuring in which the debt is continued without substantial modification, the
present value of the cash flow from the modified liability shall be computed to equate with the carrying
value of the old liability using
a. The old effective rate
b. The new effective interest rate
c. The old nominal interest rate
d. None of the above
23. A troubled debt restructuring will generally result in a
a. gain by both the debtor and the creditor.
b. gain by the debtor and a loss by the creditor.
c. loss by both the debtor and the creditor.
d. loss by the debtor and a gain by the creditor.

REFERENCE: CONCEPTUAL FRAMEWORK, IAS 1, IAS 37, IFRS 7,9


24. In a troubled debt restructuring in which the debt is settled by a transfer of assets with a fair market value
less than the carrying amount of the debt, the debtor would recognize
a. a loss on the settlement.
b. no gain or loss on the settlement.
c. a gain on the settlement.
d. none of these.
25. Dacion en pago shall be accounted for as an
a. Asset swap
b. Equity swap
c. Modification of terms
d. Liability swap

REFERENCE: CONCEPTUAL FRAMEWORK, IAS 1, IAS 37, IFRS 7,9


Specific Liabilities and their Treatment:

Some liabilities can only be measured through estimation as in the case of A-C.

A. PREMIUMS are articles of value given to customers as a result of past sales or sales promotion
activity.
Premiums distributed to customers shall be treated as expense (net of any cash remittance).
Premiums purchased but undistributed by the end of the year shall be recognized as asset.
Premiums earned by the customers but not yet redeemed shall give rise to a liability
(estimated).
To determine the outstanding liability, an entity shall make estimate the number of
premiums to be redeemed.

B. WARRANTY are normally attached to sale of appliances (and other products) and gives rise to free
repair or replacement of parts during a specified period of time if the products.
An estimate shall be made on the expected repairs or replacement on the items/products
sold.
A corresponding liability is incurred at the point of sale.
Changes on the estimate of difference in the estimated warranty and the actual amount is
treated as a change in estimate and therefore treated prospectively.
If the warranty is for more than a year, the liability shall be treated as current and non-
current as may be appropriate.
Warranty may be sold separately from a product ( i.e. extended warranty). Revenue from
such shall be treated as deferred revenue and subsequently amortized over the life of the
contract (on a straight line basis or in proportion to the cost to be incurred in relation to the
warranty).

C. CUSTOMER LOYALTY PROGRAM designed to reward customers for past purchases and to
further encourage them to make further purchases
On every sale transaction recognized, the points accumulated by the customer from his
purchase shall be accounted for separately.
The points or credits earned is expected to result in the future delivery of goods or services
The consideration on the sale transaction shall therefore be allocated to the reward and the
sale itself.
The amount allocated to the reward is equal to its fair value.

SUBSEQUENT RECOGNITION OF REVENUE depends on who provides the rewards:

C.1 by the ENTIITY

The part (amount) allocated to the reward/credit points is recognized as deferred


revenue.
Upon redemption of points, the revenue is realized.
An entity typically makes an estimate of the rewards expected to be redeemed and
shall make the same assessment at the end of each period. Changes on the estimate
shall be accounted for prospectively.

REFERENCE: CONCEPTUAL FRAMEWORK, IAS 1, IAS 37, IFRS 7,9


C.2 by a THIRD ENTITY

Revenue from the award is recognized at the point of sale.


Collected acting as principal: Revenue=gross consideration; subsequently recognize
Collected acting as agent: Revenue= net amount retained; amount collected on
behalf of the third party is a liability

D. GIFT CERTIFICATES
shall not have an expiration date
shall be recognized as a current liability when sold
revenue shall be recognized when redeemed

E. SUBSCRIPTION (DEFERRED REVENUE)


If the deferred revenue is to be eared within one year, it is a current liability. Otherwise, the deferred
revenue is a non-current liability.
F. REFUNDABLE DEPOSITS consists of cash and other properties received from customers but
are refundable after compliance with certain conditions
Container deposits shall be considered as current liability unless otherwise stated
when customers fail to comply with the condition (return the containers), liability is
extinguished, the related container shall be derecognized and gain or loss shall be recognized

G. STATUTORY DEDUCTIONS (LIABILITY) withheld by the employer for remittance to the


appropriate government and other agencies
Income tax payable by employee
SSS Contribution
Philhealth Contribution
Pag-Ibig Fund

REFERENCE: CONCEPTUAL FRAMEWORK, IAS 1, IAS 37, IFRS 7,9


Provisions, Contingent Liabilities and Contingent Assets (IAS 37)

Definitions:

A provision is a liability of uncertain timing or amount.

A provision shall be used only for expenditures for which the provision was originally recognized.

A contingent liability is:

a) a possible obligation that arises from past events and whose existence will be confirmed only by the
occurrence or non-occurrence of one or more uncertain future events not wholly within the control
of the entity; or
b) a present obligation that arises from past events but is not recognized because:
i. it is not probable that an outflow of resources embodying economic benefits will be
required to settle the obligation; or
ii. the amount of the obligation cannot be measured with sufficient reliability.

Provisions vs. Contingent Liabilities

PROVISIONS CONTINGENT LIABILITIES


Present obligation Possible obligation or
Meets the recognition criteria of Present obligation that is not recognized because it
probability and does not meet both of the recognition criteria
measured reliably
Recognized as liability Not recognized as liability

A legal obligation is an obligation that derives from:

a) a contract (through its explicit or implicit terms);


b) legislation; or
c) other operation of law.

A constructive obligation is an obligation that derives from an entitys actions where:

a) by an established pattern of past practice, published policies or a sufficiently specific current


statement, the entity has indicated to other parties that it will accept certain responsibilities; and
b) as a result, the entity has created a valid expectation on the part of those other parties that it will
discharge those responsibilities.

An onerous contract is a contract in which the unavoidable costs of meeting the obligations under the
contract exceed the economic benefits expected to be received under it.

Present obligation shall be recognized as a provisions.

Measurement of Provisions (and other factors to be considered in measuring provisions)

REFERENCE: CONCEPTUAL FRAMEWORK, IAS 1, IAS 37, IFRS 7,9


1. Single Obligation
Where a single obligation is being measured, the individual most likely outcome
may be the best estimate of the liability.

2. Large Population of Items

Where the provision being measured involves a large population of items, the obligation is
estimated by weighting all possible outcomes by their associated probabilities. The name for this
statistical method of estimation is expected value.

Where there is a continuous range of possible outcomes, and each point in that range is as likely
as any other, the mid-point of the range is used.

3. The risks and uncertainties that inevitably surround many events and circumstances shall be
taken into account in reaching the best estimate of a provision.

4. Where the effect of the time value of money is material, the amount of a provision shall be
the present value of the expenditures expected to be required to settle the obligation.

The discount rate shall be a pre- tax rate that reflects current market assessments of the time
value of money and the risks specific to the liability.

5. Future events that may affect the amount required to settle an obligation shall be reflected in
the amount of a provision where there is sufficient objective evidence that they will occur.

The effect of possible new legislation is taken into consideration in measuring an existing
obligation when sufficient objective evidence exists that the legislation is virtually certain to be
enacted.

6. The following factors shall not be considered in measuring provisions


Gains from the expected disposal of assets
Future operating losses (no provisions for future operating LOSSES)

Reimbursements

Reimbursement from third party shall be recognized when, and only when, it is virtually
certain that reimbursement will be received if the entity settles the obligation.
The reimbursement shall be treated as a separate asset.
The amount recognized for the reimbursement shall not exceed the amount of the
provision.
In the statement of comprehensive income, the expense relating to a provision may be
presented net of the amount recognized for a reimbursement.

REFERENCE: CONCEPTUAL FRAMEWORK, IAS 1, IAS 37, IFRS 7,9


Changes in provisions

Provisions shall be reviewed at the end of each reporting period and adjusted to reflect the
current best estimate.
If it is no longer probable that an outflow of resources embodying economic benefits will be
required to settle the obligation, the provision shall be reversed.
Where discounting is used, the carrying amount of a provision increases in each period to reflect
the passage of time. This increase is recognized as borrowing cost.

Restructuring

The following are examples of events that may fall under the definition of restructuring:

sale or termination of a line of business;


the closure of business locations in a country or region
the relocation of business activities from one country or region to another
changes in management structure
fundamental reorganizations that have a material effect on the nature and focus of the entitys
operations.

A constructive obligation to restructure arises only when an entity:


(a) has a detailed formal plan for the restructuring identifying at least:
the business or part of a business concerned;
the principal locations affected;
the location, function, and approximate number of employees who will be compensated for
terminating their services;
the expenditures that will be undertaken; and
when the plan will be implemented; and
(b) has raised a valid expectation in those affected that it will carry out the restructuring by starting to
implement that plan or announcing its main features to those affected by it.

Measurement:
A restructuring provision shall include only the direct expenditures arising from the restructuring, which
are those that are both:
1. necessarily entailed by the restructuring; and
2. not associated with the ongoing activities of the entity.
A restructuring provision does not include such costs as:
1. retraining or relocating continuing staff;
2. marketing; or
3. investment in new systems and distribution networks.

REFERENCE: CONCEPTUAL FRAMEWORK, IAS 1, IAS 37, IFRS 7,9


Contingent Liability no liability recognized

A. DISCLOSED- if probable but cannot be reliably measured


B. DISCLOSED- if possible
C. IGNORE if remote

Contingent Asset

A contingent asset is a possible asset that arises from past events and whose existence will be
confirmed only by the occurrence or non-occurrence of one or more uncertain future events not
wholly within the control of the entity.
An entity shall not recognize a contingent asset.
A contingent asset is disclosed where an inflow of economic benefits is probable.
Contingent assets are not recognized in financial statements since this may result in the recognition
of income that may never be realized. However, when the realization of income is virtually certain,
then the related asset is not a contingent asset and its recognition is appropriate.

REFERENCE: CONCEPTUAL FRAMEWORK, IAS 1, IAS 37, IFRS 7,9


1. It is a marketing scheme whereby an entity grants award credits to customers and the entity can redeem
the award credits in exchange for free or discounted goods or services.
a. Premium plan
b. Marketing program
c. Customer loyalty program
d. Loyalty award
2. The consideration allocated to the award credits is measured at
a. The proportion of the fair value of the award credits relative to the total consideration received from
the initial sale of the goods or pro rata.
b. Carrying amount of goods to be received in exchange
c. Fair value of the goods to be receive in exchange
d. Fair value of the award credits
3. Which of the following best describes the accrual approach of accounting for warranty?
a. Expensed based on estimate in the year of sale
b. Expense when paid
c. Expensed when warranty claims are certain
d. Expense when incurred
4. When the entity has a continuing policy of guaranteeing new products against defects for three years, the
liability arising from the warranty
a. Should be reported as noncurrent
b. Should be reported as current
c. Should be reported as part current and part non-current
d. Need not be disclosed
5. When a retail store issues a gift certificate for redeemable merchandise in exchange for cash, what is the
treatment of the gift certificate issued?
a. Revenue account should be decreased.
b. Revenue account should be increased.
c. Deferred revenue account should be decreased.
d. Deferred revenue account should be increased.
6. Magazine subscription collected in advance should be treated as
a. A contra account to magazine subscriptions receivable
b. Deferred revenue in the equity section
c. Deferred revenue
d. Reduction to the earned subscription for the year
7. How would the proceeds from the advance sale of nonrefundable tickets for a theatrical performance
entitled Cinder-ella be reported in the sellers financial statements before the performance?
a. Unearned revenue for the entire proceeds
b. Revenue for the entire proceeds
c. Revenue to the extent of related costs expended
d. Unearned revenue to the extent of related costs expended
8. A liability of uncertain timing or amount.
a. Executory contracts
b. Provision

REFERENCE: CONCEPTUAL FRAMEWORK, IAS 1, IAS 37, IFRS 7,9


c. Contingent liability
d. Legal obligation
9. Which is not a provision?
a. Warranties
b. Premiums and coupons
c. Liability estimated for litigation losses
d. Tax withheld from employees
10. Provisions are recognized using the best estimate of the expenditure required to settle the present
obligation at the end of the reporting period. Which is incorrect about the use of estimates in provisions?
a. The best estimate of the expenditure required to settle the present obligation is the amount that an
entity would rationally pay to settle the obligation at the end of the reporting period or to transfer it
to a third party at that time.
b. The estimates of outcome and financial effect are determined by the judgment of the management of
the entity, supplemented by experience of similar transactions and, in some cases, reports from
independent experts.
c. Where there is a continuous range of possible outcomes, and each point in that range is as likely as
any other, the mid-point of the range is used.
d. When no reliable estimate can be made, a liability shall continue to recognized.
11. The variability of outcome is also known as
a. Provisions
b. Contingent liability
c. Estimates
d. Risk
12. What amount is accrued as a provision involving as single obligation?
a. Maximum estimated amount
b. Minimum estimated amount
c. Median between the minimum and maximum amounts
d. Best estimate
13. What amount is accrued as a provision involving a large population of items and where there is a
continuous range of possible outcomes, and each point in that range is as likely as any other, the range to
be used is?
a. Minimum amount
b. Maximum amount
c. Midpoint
d. Summation of the minimum and maximum amounts
14. It is a statistical tool or method of estimating a provision which means that the obligation is estimated by
weighting all possible outcomes by their associated probabilities.
a. Extrapolation
b. Weighted average
c. Simple average
d. Expected value
15. In calculating present value in a situation with a range of possible outcomes all discounted using the same
interest rate, the expected present value would be
a. The most-likely outcome
b. The sum of probability weighted present values

REFERENCE: CONCEPTUAL FRAMEWORK, IAS 1, IAS 37, IFRS 7,9


c. The maximum outcome
d. The minimum outcome
16. How are provisions presented in the financial statements?
a. In the notes to financial statements
b. By showing the estimated amount among the liabilities but not extending it to liability total
c. As an appropriation of retained earnings.
d. By appropriately classifying them as a regular liabilities in the statement of financial position
17. The following is statement made in IAS 37 Provisions, Contingent Liabilities and Contingent Assets:
a contract in which the unavoidable costs of meeting the obligations under the contract exceed the
economic benefits expected to be received under it.
This statement provides a definition of:
a. an onerous contract;
b. a deferred liability;
c. a future operating loss;
d. a present obligation.
18. Which is not correct about provisions?
a. If an entity has an onerous contract, the obligation under the contract shall be measured as a
provision.
b. A provision shall only be used for expenditures for which the provision was originally recognized.
c. Provisions shall be reviewed at each balance sheet date and adjusted to reflect the current best
estimate.
d. Provisions shall be recognized for future operating losses.
19. Which statement is incorrect about a provision to be reimbursed by another party?
a. Reimbursement from third party shall be recognized when, and only when, it is virtually certain that
reimbursement will be received if the entity settles the obligation.
b. The reimbursement shall be treated as a separate asset.
c. The amount recognized for the reimbursement may exceed the amount of the provision.
d. In the statement of comprehensive income, the expense relating to a provision may be presented net
of the amount recognized for a reimbursement.
20. Which of the following is true?
a. Accruals are often reported as part of trade and other payables, whereas provisions are
reported separately.
b. Accruals are often reported as part of trade and other payables, whereas provisions are not reported.
c. Accruals are often reported as part of trade and other payables or together with provisions separately.
d. Accruals and provisions shall be presented separately.
21. A possible obligation that arises from past events and whose existence will be confirmed only by the
occurrence or non-occurrence of one or more uncertain future events not wholly within the control of
the entity
a. Executory contracts
b. Provision
c. Contingent liability
d. Legal obligation
22. A contingent liability
a. is the result of a loss contingency.
b. is accrued even though not reasonably estimated.

REFERENCE: CONCEPTUAL FRAMEWORK, IAS 1, IAS 37, IFRS 7,9


c. definitely exists as a liability but its amount and due date are indeterminable.
d. is not disclosed in the financial statements.
23. Which is not true about a contingent liability?
a. An entity shall not recognize a contingent liability.
b. A contingent liability is disclosed unless the possibility of an outflow of resources embodying
economic benefits is remote.
c. Where an entity is jointly and severally liable for an obligation, the part of the obligation that is
expected to be met by other parties is treated as a contingent liability.
d. A present obligation that arises from past events but is not recognized because the amount is
probable or can be estimated reliably.
24. The following statements pertain to contingent liability. Which statement (s) is (are) correct?
I. An entity shall not recognize a contingent liability.
II. A contingent liability is disclosed unless the possibility of an outflow of resources embodying
economic benefits is remote.
III. Where an entity is jointly and severally liable for an obligation, the part of the obligation that is
expected to be met by other parties is treated as a contingent liability.
a. I and II only
b. I, II and III
c. I only
d. I and III only
25. A restructuring is a programmed that is planned and controlled by management, and materially changes
a. the scope of a business undertaken by an entity
b. the manner in which that business is conducted
c. A or B
d. None of the above
26. A constructive obligation to restructure arises only when
I. The entity has a detailed formal plan for the restructuring
II. The entity has raised a valid expectation in those affected that it will carry out the restructuring by
starting to implement that plan or announcing its main features to those affected by it.
a. Both I and II
b. Neither I nor II
c. I only
d. II only
27. Under IAS 37 Provisions, Contingent Liabilities and Contingent Assets, the appropriate accounting
treatment for future operating losses is to:
a. determine a reasonable estimate of the cost and provide for the future liability;
b. determine the cost and charge it directly against retained earnings;
c. not recognise such items in the financial statements;
d. measure on the basis of estimated future cash flows.
28. A possible asset that arises from past events and whose existence will be confirmed only by the
occurrence or non-occurrence of one or more uncertain future events not wholly within the control of
the entity.
a. Executory contracts
b. Possible asset
c. Contingent liability

REFERENCE: CONCEPTUAL FRAMEWORK, IAS 1, IAS 37, IFRS 7,9


d. Contingent asset
29. According to IAS 37 Provisions, Contingent Liabilities and Contingent Assets, the appropriate treatment
for a contingent asset in the financial statements of en entity is:
a. do not recognise in the financial statements, and do not disclose in the notes
b. recognition in the financial statements, but no further disclosure in the notes;
c. recognition in the financial statements, and note disclosure
d. disclosure of information in the notes, but do not recognise in the financial statements;
30. For each class of provision, an entity is required under IAS 37 Provisions, Contingent Liabilities and
Contingent Assets, to disclose the following information:

I. The carrying amount at the beginning and end of the period.


II. Amounts incurred and charged against the provision during the period.
III. Comparative information.
IV. Unused amounts reversed during the period.
V. Additional provisions made during the period.
a. I, II, IV and V only;
b. I, II, and III only;
c. II, III and IV only;
d. I, III, IV and V only.

REFERENCE: CONCEPTUAL FRAMEWORK, IAS 1, IAS 37, IFRS 7,9

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