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    Liabilities PDF

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    Mika

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    © All Rights Reserved
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    LIABILITIES LIABILITIES ARE PRESENT OBLIGATIONS OF AN ENTITY TO TRANSFER AN ECONOMIC RESOURCE AS A RESULT OF PAST EVENTS. » ESSENTIAL CHARACTERISTIC « a. The entity has a present obligation. Pea ACM eC cl! EL NAC mete] (3 > Constructive Obligation - by reason of normal Poe eee CC RM CnC mmm ETL} COTM Sm eMC ale am Ly manner. b. The obligation is to transfer an economic resource. *share dividend = no accounting liability c. The liability arises from a past event BOI Ee An et Eel UE Ta em Core LEI Clam iem emer L Cg) MEASUREMENT OF CURRENT LIABILITIES PARAGRAPH 5-1: STATES THAT AL FINANGAL ee ee 4 ae GuRep AT FAIR VAWE PLS oR MINUS TRANSA en net ee NoT MEASURED AT FAIR VALE THROUGH e ee Wea NTLY, MEASURED AT ‘AMORTIZED (OST: HOWEV' Ce er ues oR SHORT-TERM OBLIGATIONS ARE MEAS (URRENT LIAB sae MEASUREMENT OF NON CURRENT LIABILITIES NoNCURRENT LIABILITIES, FOR EXAMPLE, BONDS PAYABLE AND NoN INTEREST-BEARING NOTE PAYABLE, ARE INITIALLY MEASURED AT FAIR VALVE PLUS OR MINUS TRANSACTION (OSTS AND SUBSEQUENTLY MEASURED AT AMORTIZED (OST. IF THE LONG-TERM NoTE PAYABLE If INTEREST-BEARING, IT IS INITIALLY AND SUBSEQUENTLY MEASURED AT FACE AMOUNT. IN THIS (ASE, THE FACE AMOUNT IS EQUAL To THE PRESENT VALVE OF THE NoTE PAYABLE. THE “AMORTIZED (OST MEASUREMENT” IS TAKEN UP IN A LATER (HAPTER IN RELATION To BONDS PAYABLE. JUNIOR PHILIPPINE INSTITUTE OF ACCOUNTANTS= co @uPIAHAU ‘SOURCE: INTERMEDIATE ACCOUNTING 2 HOLY ANGEL UNIVERSITY BY VALIX, 2019 EDITION AND IFRS,ORG CURRENT LIABILITIES PAS 1, PARAGRAPH 69, PROVIDES THAT AN ENTITY SHALL CLASSIFY A LIABILITY AS CURRENT WHEN: 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. *OPERATING ITEMS ARE CLASSIFIED AS CURRENT LIABILITIES EVEN IF SETTLED MORE THAN 12 MONTHS AFTER THE REPORTING PERIOD. *FINANCIAL LIABILITIES HELD FOR TRADING = INCURRED WITH AN INTENTION TO REPURCHASE IN THE NEAR FUTURE. QO Nin PuLIPIE RETIUTE OF ACCOUNTANTS a eveummay SOURCE: INTERMEDIATE AccoUNTING 2 : BY VALI 201 EDTON AND IFRS.ORS_ CURRENT LIABILITIES ALL LIABILITIES NOT CLASSIFIED AS CURRENT ARE NONCURRENT LIABILITIES. THESE INCLUDE: A. NONCURRENT PORTION OF LONG-TERM DEBT B. FINANCE LEASE LIABILITY C. DEFERRED TAX LIABILITY D. LONG-TERM OBLIGATION TO OFFICERS E. LONG-TERM DEFERRED REVENUE USSU tsi VMN CM EU AULD ONT eae Oar Classified as current even if: (a) original term was for a period longer than 12 months; (b) an agreement to refinance or to reschedule payment on a long- term basis is completed after the reporting period and before the PES CLC SE UL G art Rl te POET RSC Cer CC a Cen WELT DMCC re En UT) period = adjusting event; therefore, noncurrent. a ESRC nee ON eee ne Uru ncree Tt least 12 months after the reporting period under an existing loan Lela ESS eS icile An entity has an unconditional right under the existing loan facility Lou Claes Chi LU cele cee reporting period, it is considered as part of the entity's long-term CUCU *Refinancing or rolling over must be at the discretion of the entity. i Tau gna SMa a er Ls 7 rene eS ease Goo Ue Crema Rec ECU a ea ty sae ML Paty REVENUE (Mirela Weel (eer (oN AaclecTN Alen ele Tals) eY(=1@ccrel aac « Realizable within one year = current liability + Realizable in more than one year = Tarte nel LY GIFT CERTIFICATES PAYABLE NC) SM OMA CUR ele ieetecia dite cc COM CYaTeC Vane CM=LAM=D 4 Leech Cola la (oLe REFUNDABLE DEPOSITS consist of cash or property received from customers but which are refundable after compliance with certain conditions. were em) ie-leoe lt aemee ae tal mE eTICLONg *Excess of the deposit over the cost of the COLON Ue eH TN) JUNIOR PHILIPPINE INSTITUTE OF ACCOUNTANTS 7 errimay SOURCE: WTERNEOIATE AccoUNTNG HOLY ANGEL UNIVERSITY BY VALIK, 2017 EDITION AND IFRS.ORG 8 is any liability that is a contractual obligation: FINANCIAL LIABILITY (a) to deliver cash or other financial asset to another entity; (b) to exchange financial instruments with another entity under condition that are potentially unfavorable. Examples: (a) trade accounts payable; (b) notes payable; (c) loans payable; (d) bonds payable NCIAL (a) deferred revenue and warranty obligations; (b) income tax payable; (¢) constructive obligations JUNIOR PHILIPPINE INSTITUTE OF ACCOUNTANTS © @uPianau ‘SOURCE: INTERMEDIATE ACCOUNTING 2 HOLY ANGEL UNIVERSITY BY VALLX, 2019 EDITION AND IFRS.ORG UU ELM ala PAS 32, paragraph 28, defines a compound financial as a financial instrument that contains both a liability and an equity element from the perspective of the issuer. PAS 32, paragraph 29, mandates that such components shall be accounted for separately in accordance with the substance of the contractual arrangement and the definition of a financial liability and an equity. Fair value of liability component is first determined then deducted from the total consideration received from issuing the compound financial instrument to get equity component. Bonds payable issued with share warrants - Issue price of bonds payable with warrants minus market value of bonds payable without warrants equals share premium or increase in equity. Issuance of convertible bonds payable - Total issue price of convertible bonds payable minus market value of bonds payable without conversion privilege equals share premium. SLAC | eh Sea Us Oat Ue Poke M as RUE kd PREMIUM LIABILITY PREMIUMS are articles of value such as toys, dishes, silverware and other goods given to customers as result of past sales or sales promotion activities. CUSTOMER LOYALTY PROGRAM -— IFRS 15 Customer loyalty program is generally designed to reward customers for past purchases and to provide them with incentives to make further purchases. If a customer buys goods or services, the entity grants the customer award credits often described as “points”. The entity can redeem the points by distributing to the customer free or discounted goods or services. i SMALLS PR SN ea Ms Gio Ue Coe CeM isi CO Ue U aon. An entity shall account for the award credits as eae mM Cer mor ee Cadre IFRS 15, paragraph 74, provides that an entity shall allocate the transaction price to each performance obligation identified in a contract on a relative stand-alone selling price basis. Fair value of the consideration received with respect to the initial sale shall be allocated between the award credits and the sale based in relative stand-alone selling price. RECOGNITION @ The consideration allocated to the award credits is initially recognized as deferred revenue and subsequently as revenue when the award credits are redeemed. *amount of revenue recognized shall be rer in the number of award credits that have been redeemed relative to the total number expected to be redeemed.* oe lat eUaroimo a uC MCAT MIU Aeon =M LU tel* MEME te BCoN T oleae \ oa oC s i Ae " rere Breese ee ed Preemie Rec aa cd WARRANTY LIABILITY Home appliances are often sold under UL MN CON COLUM oe ltr service or replacement during specified period Tum elele Volccee- le Mel 1g -let he RECOGNITION OF WARRANTY PROVISION PAS 37, paragraph 14, provides that a provision shall be recognize as a liability in the financial statements under the following conditions: . The entity has a present obligation, legal or constructive, as a result of a past event. . It is probable that an outflow of resources embodying economic benefits would be required to settle the obligation. . The amount of the obligation can be measured reliably. SALE OF WARRANTY - warranty is sold separately from the product. The seller may offer an “extended warranty” on the product sold but with additional cost. Amount received then is recognized initially as deferred revenue and subsequently amortized. However, if costs are expected to be incurred in performing services under the extended warranty contract, revenue is recognized as proportion to the costs to be incurred annually. i SULA La er eed sau ane Cena eM sae Cece Gen wy PRU VISION Essence of provision is that there is an uncertainty about the timing or amount of the future expenditure. y . Constructive obligation — from entity's actions; creates a valid expectation. b. probable outflow of benefit ' n 1 1 I ' | present obligation- legal or constructive ; 1 | ! c. amount of obligation can be measure reliably RELIABLE ESTIMATE PAS 37, Paragraph 25, provides that the use of estimates is an essential part of the preparation of financial statements and does not undermine their reliability. MEASUREMENT OF PROVISION Amount recognized shall be the best estimate of the expenditure required to settle the present obligation. *Midpoint of the range is used. f JUNIOR PHILIPPINE (NSTITUTE OF ACCOUNTANTS 7 ‘qupianau ‘SOURCE: INTERMEDIATE ACCOUNTING 2 HOLY UNIVERSITY ‘BY VALIX, 2019 EDITION AND IFRS.ORG a. Risks and uncertainties—describe the variability of outcome. May increase or decrease the amount of liability. Prudence is required b. present value c. Future events—there must be sufficient evidence that they will occur (new legislation, changes in technology) d. Cash inflows from disposal are treated separately from provision e. Reimbursement shall be treated as a separate asset and not netted against estimated liability f. Change in provision—should be reversed if it is no longer probable g. Expectation of future operating losses is an indication that certain assets may be impaired. An impairment test is necessary. RESTRUCTURING PAS 37, paragraph 10, defines it as a program that is planned and controlled by management and materially changes either the scope of a business of an entity or the manner in which that business is conducted. Events that may qualify as restructuring include: a. Sale or termination of a line of business b. closure of business location or relocation c. Change in management structure d. fundamental reorganization of an entity In provision for restructuring, there must be a detailed plan and valid expectation. AMOUNT OF RESTRUCTURING PROVISION: Restructuring provision shall include only direct expenditures that are necessarily incurred for the restructuring and not associated with the ongoing activities of the entity, Example: salaries and benefits of employees to be incurred after operations cease and that are associated with the closure of operation. @ HOLY ANGEL UNIVERSITY ef oe BY VALI, 209 ETION ANO IFRS ORG PAS EV SCTE Le) elec | Eee Ce Te a rll ii' yl continuing staff iy EU ctuy' and administration c. Investment in new system and distribution network. MMM RCM Mee me CHM CMU CT) conduct of business. OTT TCT Te UCTS SSMS Tec LM ULES eu -La Sec Lie LU) fn Teme Urea Rielle cost between to pay for the penalty of not fulfilling it or for the lease payments. ee Se TM PAS 37, paragraph 10, define contingent liability as: (a) a poss/ble obligationthat arises from past event and whose existence will be UMUC NM Ue Cc TMLee Cn A Oa et La PTR MLA ULM VAT ULeNTL Mn eCo Ce Cela AT-R-UCL at-UT (ew etre obligationthat arises from past event but it not eect) Pete aang ie CRUSE Ce ee eel ce aut economic benefits will be required to settle the obligation or the amount of the obligation cannot be measured reliably. ‘It shall not be recognized in the financial statements but shall be Ciera er Te Fe AI a Prerenty SOURCE: INTERMEDIATE ACCOUNTING 2 Coes ash aaron en nos tc DECOMMISSIONING LIABILITY An obligation to dismantle, remove and restore an item of property, plant and equipment as required by law or contract. It is also called asset retirement obligation. It is initially recognized at present value and included in the cost of the related asset. CHANGE IN DECOMMISSIONING LIABILITY Under IFRIC 1, changes in the measurement of an existing decommissioning liability shall be accounted as follows: (1) a decrease in the liability is deducted from the cost of the asset; (2) an increase in liability is added to the cost of the asset. SALUT cea Usa soe Cone em sas s CO cue Ut DV (Ne) hg A bond is a formal unconditional promise, made under seal, to pay a specified sum of money at a determinable future date, and to make periodic interest payment at a stated rate until the principal sum is paid. Bond indenture or deed of trustis the document which shows in detail the terms of the loan and the rights and duties of the borrower and other parties to the contract. If property is pledged as security for the loan, a trustee is named to hold title to the property serving as security. Trustee acts as the representative of the bondholders and is usually a bank or trust entity. INITIAL MEASUREMENT OF BONDS PAYABLE PFRS 9, paragraph 5.1.1, provides that bonds payable not designated at fair value through profit or loss shall be measured initially at fair value minus transaction costs that are directly attributable to the issue of the bonds payable. The fair value of the bonds payable is equal to the present value of the future cash payments to settle the bond liability. PFRS 9, bond issue costs shall be deducted from the fair value or issue price of bonds payable in measuring initially the bonds payable. However, if the bonds are measured at fa/r value through profit or loss, the bond issue costs are expensed immediately. Actually, fair value of bonds payable is same as the issue price or net proceeds from bond issuance excluding accrued : 1 interest. ! ee a Sega AEM a eT Uo » aT) ‘SOURCE: INTERMEDIATE ACCOUNTING 2 Lae mS PATO AS EE aca toy SUBSEQUENT MEAS Pte BONDS iD fff PFRS 9, paragraph 5.3.1, — the after initial recognition, bonds payable shall be measured either: (a) at amortized cost, using effective interest method; (lb) at fair value through profit or loss. Under effective interest method of amortization, the bond issue cost must be lumped with the discount on bonds payable and netfed against the premium on bonds payable. If bonds are sold between interest dates, an accrued interest is involved and it is paid by the buyer. The unexpired life is computed from the date of sale to the maturity date. Monthly amortization would be the best approach. In premature retirement, the discount and bond issue cost are updated up to the date of retirement. Total cash payment is equal to retirement price + accrued interest from the last payment date up to the retirement date. JUNIOR PHILIPPINE INSTITUTE OF ACCOUNTANTS~ qurianau ‘SOURCE: INTERMEDIATE ACCOUNTING 2 HOLY ANGEL UNIVERSITY ‘BY VALIX, 2017 EDITION AND IFRS.ORG aaa mae METHOD Two kinds of interest rate: (1) nominal rate - the coupon or stated rate; (2) effective rate - yield or market rate. Effective rate is the rate that exactly discounts estimated cash Lee ESR CRU eRe tat CRO MUD payable or when appropriate, a shorter period to the net carrying amount of the bonds payable. Letter] at FACE ener Bonds sold aS tae ae Uae 3 Bonds sold at DISCOUNT EFFECTIVE RATE > NOMINAL RATE i JUNIOR PHILIPPINE INSTITUTE OF ACCOUNTANTS ao Perey ST aN ere un POM Meg CeO Eu tty Interest received = face amount x nominal rate Interest income = carrying amount at the beginning x effective rate Amortization = difference between interest received and interest income MARKET PRICE OR ISSUE PRICE OF BONDS PAYABLE is equal to the sum of: (a) present value of bonds payable and (b) present value of the total interest payments. Premium (Discount) = market price or issue price - face amount EFFECTIVE INTEREST METHOD — BOND ISSUE COST PFRS 9 provides that “transaction costs’ that are directly attributable to the issue of a financial liability shall be included in the initial measurement of the financial liability. Transaction costs include bond issue costs. Calculation of effective interest rate shall include all transaction costs, premiums and discounts. i Fae ee LLULSS . OT Sea eae ee Le See ee OE a st a Ue IMPAIRMENT OF ASSET - the frequency of revaluation depends upon the movement in the fair value of the items of PPE being revalued. When a fair value of a revalued asset differs materially from its carrying amount a further revaluation is necessary. Some items of PPE may experience significant and volatile movements in fair value thus necessitating annual revaluation - Items within a class of PPE are revalued simultaneously in order to avoid selective revaluation and the reporting of amounts which are a mixture of costs and values at different dates Approaches in Recording the Revaluation Proportional Approach - the accumulated depreciation at the date of revaluation is restated proportionately with the change in the gross carrying amount of the asset; preferable method because it preserves the gross and net amounts after revaluation Elimination Approach - = the accumulated depreciation is eliminated against the gross carrying amount of the asset and the net amount related to the revalued amount of the asset Impairment - is the fall in the market value of an asset so that its recoverable amount is now less than its carrying amount Impairment loss - the excess of carrying amount over recoverable amount FALSE Sera OT Ne eee ae ed Cram su Rec E Uk cy LUV AN hg RED MARC Re Ml CNEL] CML 7g PETES C ea EUR UO ae ea Oe ESCM CAC CUCM SR UE Lr umes Om ULE are directly attributable to the issue of the note payable. In other words, transaction costs are included in the ST eam) meh 1) om Nee UR CM ENE CN CM gee bee eal value through profit or loss, the transaction costs are COTS MU 1 SUBSEQUENT MEASUREMENT OF NOTE PAYABLE aR ELEM ed Ul erm Cle recognition, a note payable shall be measured: (a) at amortized cost using the effective interest method; (b) at fair value through profit or loss if the note payable is designated irrevocably as measured at fair value through profit or loss. i SLAC | er ea Us oe Ue Cae eM su Crue Ut *When the note is issued solely for cash, the cash proceed is the present value using a discount rate. Straight line method of depreciation is used. *If a promissory note is interest-bearing, the purchase price is the present value. *When a noninterest-bearing note is issued for a property with cash price, the cash price is assumed to be the present value of the note issued. * lf there is no cash price ina noninterest bearing note, present value/cash price is determined by multiplying the annual installment by the present value factor. Fete UA Pi » Prererty SOURCE: INTERMEDIATE ACCOUNTING 2 DoS PATO ASU UE ak DEBT RESTRUCTURE ROIS SOY OA Debt restructuring is a situation where the creditor, for economic or legal reasons related to the debtor's financial difficulties, grants to the debtor concession that would not otherwise be granted in a normal business relationship. The concession either stems from an agreement between the creditor and debtor, or is imposed by law or a court. The objective of the creditor in a debt restructuring is to make the best of a bad situation or maximize recovery of investment. Thus, the creditor usually sustains an accounting loss on debt restructuring and the debtor realizes an accounting gain. NANA ASANO SSS i SGA | er Seas oe Crna eM eS Ceo ek cy THE COMMON FORMS OF DEBT RESTRUCTURING ARE: (1) ASSET SWAP is the transfer of any asset such as real estate, inventory or investment by the debtor to the creditor in full settlement of an obligation. Under PFRS 9, paragraphs 3.3.1 and 3.3.3, asset swap is treated as a derecognition of a financial liability or extinguishment of an obligation. The difference between the carrying amount of the financial liability and the consideration given shall be recognized in profit or loss. In Dacion en pago accounting, mortgage properties are being given to extinguish a liability. Book value is used. _ DSSS. LOO O.O9.O.0.0 OO 0.000.000.0000 00 08 SS f Ta aaa MMe ce a Pernt ST US ays esl Un Cone eM I Ssg Cee DEON en (2) EQUITY SWAP is c transaction whereby a debtor and creditor may renegotiate the narod fo] financial liability with the result that the | liability i iu) Na ‘or partially extinguished by the debtor issuing equity instruments to the creditor. Simply stated, equity swap is the issuance of share capital by the debtor to the creditor in full or partial payment of an obligation. This accounting issue of “extinguishment of a financial liability by i Issuing equity instruments” is now Nail settled under IFRIC- 1) The equity instruments issued to extinguish a financial i Ue LeMiLN shall be measured at the following amounts in the order, ea Tuiie (a) fair value: oii equity instruments ssU-Tely (6) fair value of liability extinguished; (c) carrying amount of liability extinguished. The difference between carrying amount of the financial liability extinguished and the “initial measurement” of the equity instruments issued shall be recognized in profit or loss. Such gain or loss on extinguishment shall be disclosed as a separate line item in the income statement. ra a apna uu ool ce a Peart SOURCE: INTERMEDIATE ACCOUNTING 2 LR e Sm aS AUC AS UL EY aac CGM Cee Cer WUC Me) sa galt Tsy EM acid aera (esses nea ce Cel Otel Cel forgiveness of unpaid interest b. Maturity value-extension of maturity date or ace Me MUM] naa LU aaa ELC Lee Smee RUC mE LeecIeSl | ETE CLA modification of terms of an existing financial liability shall be accounted for as an extinguishment of the old HUET LOU MUM RTT ee MMT In Lt LETH Under Pea STEEL Me es Cm eM UTS Perot eeSHiTeL Cement Cele ES-L} extinguishment of the old liability and the recognition of a new liability. Any costs or fees incurred are Cole Plt Le oe Witte , old liability minus the absolute EN aimee cle MEL Nay ene Meri m CT M rT ES gain or loss on debt restructuring. rd Seana eS. SRT reas aun ne Crag emai Rec EN ac) NO|SUBSTANTIAL MODIFICATION If the gain or loss on extinguishment of the Cole TE]

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