Professional Documents
Culture Documents
Chapter 26
Chapter 26
Liabilities – are present obligation of an entity arising from past events or transactions, the settlement of w/c is
expected to result in an outflow from the entity of resources embodying economic benefits.
Under PFRS 9, financial liabilities are recognized on the Statement of Financial Position when the entity becomes party
to the contractual provisions of the instrument.
Financial v. Non-financial liabilities
To appropriately assign peso amount to an item classified as liability, liabilities shall be categorized as to either financial
or non-financial liability.
b. a contract that will or may be settled in the entity’s own equity instruments and is:
i. a non-derivative for w/c the entity is or may be obliged to deliver a variable number of the entity’s own equity
instruments; or
ii. a derivative that will or may be settled other than by the exchange of a fixed amount of cash or another financial asset
for a fixed number of the entity’s own equity instruments.
**other liabilities that did not meet the above requirements are non-financial liabilities.
Transaction costs – are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial
liability. An incremental cost is one that would not have been incurred if the entity had not acquired, issued or disposed
of the financial liability.
Includes:
- Fees and commissions paid to agents, advisers, brokers and dealers
- levies by regulatory agencies and securities exchange
- transfer taxes and duties
Important notes:
For financial liabilities classified at fair value through profit or loss, the following are made:
1. measured at fair value
2. transaction costs are recognized as expense; and
3. changes in fair values are recognized in profit or loss
DERECOGNOTION OF LIABILITIES
Financial liability is derecognized when extinguished
a. the obligation specified in the contract is discharged, cancelled or it expires
b. an exchange between an existing borrower and lender of debt instruments w/ substantially different terms or
substantial modification of the terms of an existing financial liability of part thereof.
Gain or loss on derecognition – the difference between the carrying amount of a financial liability extinguished or
transferred to a 3rd party and the consideration paid is recognized in profit or loss.
ESTIMATED LIABILITIES – are items that involve a present obligation and satisfy the rest of the definition but can only be
measured only by using substantial degree of estimation.
BONUS PAYABLE – is a gratuity by entities to their employees as a gift or compensation earned as reward upon achieving
a goal such as exceeding budgeted income during the year, meeting quotas, and having a superior performance in a
project or activity. The primary purpose of this is to encourage performance from officers and employees by directly
associating their success to company’s success.
Bonus calculation
1. NI before bonus and tax B = NY x BR
2. NI after bonus but before tax B = BR x (NY-B) OR B = BR X NY/100% + BR
3. NI after bonus and tax B = BR X (NY-B-T) T = TR X (NY-B)
4. NI after tax but before bonus B = BR x (NY-T) T = TR x (NY-B)
Where:
NY = Net income before bonus and tax
B = Bonus
BR = Bonus Rate
T = Tax
TR = Tax Rate
UNEARNED OR DEFFERED REVENUE – this represents income already collected but not yet earned. This item shall be
presented as part of entity’s liabilities and normally classified as current liabilities. Example include advances received
from customers for goods yet to be delivered, services yet to be provided, gift certificates sold and subscriptions.
DEPOSITS RECEIVED – represent cash received and held in behalf of other entities such as clients and customers. These
items are recognized as liabilities and classified as to either current or non-current depending their settlement dates.
Examples include deposit in escrow accounts and refundable deposits on returnable containers.
The “contingent liability” is used for liabilities that do not meet the recognition criteria.
Measurement of provision
The amount recognized as a provision shall be the best estimate of the expenditure required to settle the present
obligation at the end of the reporting period. Best estimate is determined as follows:
a. the estimates of outcome and financial effect are determined by the judgement of the management of the entity,
supplemented by experience of similar transactions and, in some cases, reports from independent experts.
b. 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”.
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.
Consideration in determining best estimate
In reaching its best estimate, the entity should take into account the following:
1. Risks and uncertainties that surround the underlying events
2. Future events
a. forecast reasonable changes in applying existing technology
b. ignore possible gains on sale of assets
c. consider changes in legislation only if virtually certain to be enacted
3. discounted present value using pre-tax discount rate that reflects the current market assessments of the time value of
money and the risks specific to the liability
4. reimbursement by another party
If some or all of the expenditure required to settle a provision is expected to be reimbursed by another party, the
reimbursement should be recognized as a separate asset provided it is virtually certain that reimbursement will be
received if the entity settles the obligation.
The amount recognized as an asset should not exceed the amount of the provision and it should not be treated as a
reduction of the required provision.
5. Gains on expected disposal of assets – an entity recognizes gains on expected disposals of assets at the time of
disposition of assets
6. Presence of onerous contracts – if an entity has an onerous contract, the present obligation under the contract shall be
recognized and measured as a provision.
7. Remeasurement of provisions – the following shall be performed when measuring provisions subsequent to initial
recognition.
a. review and adjust provisions at each reporting date
b. if an outflow no longer probable, provision is reversed.
8. Use of provisions – if it is no longer probable that an outflow of resources will be required to settle the obligation, the
provision should be reversed.
Examples of Provision
Circumstance Recognize a provision?
Restructuring by sale of an Only when the entity is committed to a sale, i.e. there is a binding sale
operation agreement
Restructuring by closure or Only when a detailed form plan is in place and the entity has started to
reorganization implement the plan or announced its main features to those affected. A Board
decision is insufficient.
Warranty When an obligating event occurs (sale of product w/ warranty and probable
warranty claims will be made)
Land contamination A provision is recognized as contamination occurs for any legal obligations of
clean up, or for constructive obligations of the company’s published policy is to
clean up even if there is no legal requirement to do so (past event is the
contamination and public expectation created by the company’s policy)
Customer refunds Recognized a provision if the entity’s established policy is to give refunds (past
event is the sale of the product together w/ the customer’s expectation, at the
time of purchase, that a refund would be available)
Offshore oil rig must be Recognize a provision for removal costs arising from the construction of the oil
removed and sea bed rig as it is constructed, and add to the cost of the asset. Obligations arising
restored from the production of oil are recognized as the production occurs
Abandoned leasehold, four A provision is recognized for the unavoidable lease payments
years to run, no re-letting
possible
Onerous (loss-making) Recognize a provision
contract
Self-insured restaurant, Accrue a provision (the past event is the injury to customer)
people were poisoned,
lawsuits are expected but
none has been filed yet.
A chain of retail stores is self- No provision until an actual fire (no past event)
insured for fire loss
CPA firm must staff training No provision is recognized (there is no obligation to provide the training,
for recent changes in tax law recognized a liability if and when the retraining occurs)
Major overhaul for repairs No provision is recognized (no obligation)
Future oprating losses No provision is recognized (no obligation)
Premiums liability – premiums are articles offered free or at a reduced price to make a combined offer more attractive to
the customers. In some cases, cash payments are also given to customers as a result of past sales promotional activities.
Rebates liability
Pro-forma journal entries:
1. To recognized provision for rebates to entitled customers:
Rebates Expense XX
Rebates Liability XX
2. To record distribution of rebates to customers
Rebates liability XX
Cash XX
WARRANTY LIABILITY
Warranty is a legally binding assurance that a product is, among other things
Fit for use as presented
Free from defective material and workmanship
Meets statutory and/or other specifications
A warranty that describes the conditions under, and period during, w/c the producer or vendor will repair, replace, or
other compensate for, the defective item w/o cost to the buyer or user. Often it also delineates the rights and obligations
of both parties in case of a claim or dispute.
Warranty is recorded at the time of sale based on best estimate. Estimate is reviewed at a certain date and difference
between estimate and actual cost is accounted as change in accounting estimate to be treated as currently and
prospectively.