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A liability is a
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
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.
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.
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
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
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
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:
FINANCIAL LIABILITY
1. deferred revenue
2. warranty obligations
3. income tax payable
4. constructive obligations
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.
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.
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
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.
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.
D. GIFT CERTIFICATES
shall not have an expiration date
shall be recognized as a current liability when sold
revenue shall be recognized when redeemed
Definitions:
A provision shall be used only for expenditures for which the provision was originally recognized.
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.
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.
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.
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.
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:
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.
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.