NON-FINANCIAL LIABILITIES Noel A.

Bergonia, CPA, MBA

 PROVISIONS (IAS 37)
- Liabilities of uncertain timing or amount.
Recognized in the statement of financial position when, and only
when
➢ an enterprise has a present obligation (legal or constructive) as a
result of past events;
➢ it is probable (i.e. more likely than not) that an outflow of
resources embodying economic benefits will be required to settle the
obligations; and
➢ a reliable estimate can be made of the amount of the obligation.
NOEL A. BERGONIA, CPA, MBA
CONTINGENT LIABILITIES (IAS 37)

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 and wholly within the control
of the enterprise.
NOEL A. BERGONIA, CPA, MBA
 PROVISIONS VS. CONTINGENT LIABILITIES
Provisions and Contingencies
There is a present obligation that probably
requires an outflow of resources that can be
measured reliably.
There is a present obligation that probably
requires an outflow of resources but the
amount cannot be measured reliably.
There is a possible obligation or a present
obligation that may, but probably will not,
require an outflow of resources.
There is a possible obligation or a present
obligation where the likelihood of an outflow
of resources is remote.
Disposition
A provision is recognized.
Disclosures are required for the provision.
No provision is recognized.
Disclosures are required for the contingent
liability.
No provision is recognized.
Disclosures are required for the contingent
liability.
No provision is recognized.
No disclosure is required.
NOEL A. BERGONIA, CPA, MBA
MEASUREMENT OF PROVISIONS

1. best estimate
2. most likely outcome
3. midpoint of the range
4. present value of the expenditures
5. actual settlement
NOEL A. BERGONIA, CPA, MBA
 EXAMPLE
Adobo Company operates in a city where there is no
environmental legislation. However, the company has a widely
published policy in which it undertakes to clean up all
contamination it causes. As of the date of issuance of 2019
financial statements, a reasonable estimate of this clean up
related to 2019 operations is P3,000,000. Provide the entry to
record the recognition of provision.
Loss on environmental clean-up 3,000,000
Provision for environmental clean-up 3,000,000

NOEL A. BERGONIA, CPA, MBA

 EXAMPLE
Tine, Inc. is being sued for illness caused to local residents as a
result of negligence on the company’s part in permitting the local
residents to be exposed to highly toxic chemicals from its plant.
Tine, Inc.’s lawyer states that it is probable that Tine, Inc. will lose
the suit and be found liable for a judgment costing Tine, Inc.
anywhere from P400,000 to P2,000,000. However, the lawyer
states that the most probable cost is P1,200,000. As a result of the
given facts, Tine, Inc. should be a provision of P1,200,000 and
contingent liability of P800,000 (P2M-P1.2M)

NOEL A. BERGONIA, CPA, MBA

 EXAMPLE
Tine, Inc. is being sued for illness caused to local residents as a
result of negligence on the company’s part in permitting the local
residents to be exposed to highly toxic chemicals from its plant.
Tine, Inc.’s lawyer states that it is probable that Tine, Inc. will lose
the suit and be found liable for a judgment costing Tine, Inc.
anywhere from P400,000 to P2,000,000. As a result of the given
facts, Tine, Inc. should be a provision of P1,200,000 [(P400K +
P2M)/2] and P800,000 contingent liability.

NOEL A. BERGONIA, CPA, MBA

EXAMPLE
Tine, Inc. is being sued for violating the law. On December 31, 2020,
Tine, Inc.’s lawyer states that it is probable that Tine, Inc. will lose the suit
and be found liable for a judgment costing Tine, Inc. for P500,000. On
February 2021, the court have already decided on the case and Tine
settled P600,000. The financial statement for 2020 was issued on March
31, 2021. As a result of the given facts, Tine, Inc. should be a provision on
December 31, 2020 amounting to P600,000 (based on actual settlement
that happened before the date of issuance of the 2020 Financial
statements).

NOEL A. BERGONIA, CPA, MBA

 UNEARNED REVENUES
Under IFRS 15, Revenues from contracts with customers is recognized by following the 5- step
model:
STEP 1 : Identifying the contract with a customer.
STEP 2 : Identifying the performance obligations.
STEP 3 : Determining the transaction price
STEP 4 : Allocating the transaction price to the performance obligations.
STEP 5 : Recognizing revenue when the entity satisfies the performance obligations.

UNEARNED REVENUES are amounts collected in advance that not yet earned and recorded as
revenues only when the performance obligations are already satisfied. Examples are collections in
advance for magazine subscriptions, tickets, gift certificates, etc.
NOEL A. BERGONIA, CPA, MBA
GIFT CERTIFICATES
❖Gift certificates area vouchers given as a present that is exchangeable for a specified cash
value of goods or services from a particular place of business.
❖They are considered as unearned revenue for the issuing companies.
❖RA 10962: Gift Check Act of 2017 section 5 stated that issuing a gift check that bears
expiration is considered as unlawful act.

Gift Certificate Outstanding, beginning XX

Sold gift certificates during the period XX
Redeemed gift certificates (XX)
Expired gift certificates (XX)
Gift Certificate Outstanding, ending XX
NOEL A. BERGONIA, CPA, MBA
 EXAMPLE: GIFT CERTIFICATES
ABC Company sells gift certificates in denomination of P 100 only. For the year 2019, 5,000 of P 100 gift certificates
were issued to its customers. Out of the 5,000 gift certificates issued 1,000 was related to entity’s promotional activities
and the remaining were sold to customers. Total cash received related to sales with promotional activities was P 500,000
including the gift certificates which are valued at P 90,000. During the year, gift certificates valued at P 250,000 were
redeemed and P 40,000 gift certificates have expired.
Entries in the books of ABC would be as follows:
Cash 500,000
Sales 410,000
Unearned Revenue for Gift Certificates outstanding 90,000
Cash 400,000
Unearned Revenue for Gift Certificates outstanding 400,000
4,000 gift certificates x P 100 = 400,000
Unearned Revenue for Gift Certificates outstanding 250,000
Sales 250,000
Unearned Revenue for Gift Certificates outstanding 40,000
Gain from Forfeited Gift certificates 40,000
NOEL A. BERGONIA, CPA, MBA
 DEPOSITS AND ADVANCES
❖Consist of cash or property received which are returnable to the depositor or accumulated
for the purpose of being remitted to third parties (funds held for others).
❖If the deposit or advance originates from the company’s operating activities, the liability is
reported as current.
❖If the deposit or advance comes from non-trade activities and is expected to be refunded
or paid after more than one year, the liability is reported as non-current.
Deposits and Advances, beginning XX
Additional deposits/advances during the period XX
Returned deposits/advances (XX)
Expired deposits (XX)
Deposits and Advances, ending XX
NOEL A. BERGONIA, CPA, MBA
 EXAMPLE: DEPOSITS & ADVANCES
Citea Company sells 1 liter Citea milktea for P 250 each wherein additional P 15 is charged for
deposits on bottles to be returned within 15 days from the date of sale. At the start of the year,
the balance of Deposits for Returnable Bottles is P 125,000. During the year, 5,000 bottles were
sold and deposits received was P 75,000. Deposits of P 50,000 was refunded and Deposits of P
25,000 was forfeited for the bottles not returned within 15 days. The related cost and
accumulated depreciation of the bottles not returned within 15 days were P50,000 and P30,000,
respectively.
Cash 75,000
Deposits for Returnable Bottles 75,000

Deposits for Returnable Bottles 50,000

Cash 50,000
Deposits for Returnable Bottles 25,000
Accumulated Depreciation- Returnable bottles 30,000
Returnable Bottles 50,000
Gain on Sale of Returnable Bottles 5,000
NOEL A. BERGONIA, CPA, MBA
ACCRUED LIABILITIES
❖Consists of obligations for expenses incurred on or before the end of the
reporting period but payable at a later date.
❖Accrued liabilities are recognized by debiting an expense and crediting an
accrued liability account.
❖Examples : Accrued salaries, accrued interests, accrued rentals , accrued taxes,
etc.

NOEL A. BERGONIA, CPA, MBA

BONUS OBLIGATIONS
❖ Bonus is an additional compensation and incentive given to officers and employees for
superior earnings realized during a given year. This is reported as an operating expense
and a liability, until it is actually paid.
Bonus is computed under different variations and is usually expressed as percentage of:
1.) Profit before both bonus and income tax
2.) Profit after bonus but before income tax
3.) Profit after income tax but before bonus
4.) Profit after both bonus and income tax

NOEL A. BERGONIA, CPA, MBA

 EXAMPLE: BONUS OBLIGATION
ABC Corporation has a profit before bonus and income tax of P 1,000,000 for the year 2019.
Bonus rate is 20% and income tax rate is 30%. Compute the bonus and income tax under each
different scenarios:
1. Bonus is based on profit before bonus and income tax.

Bonus = 20% (Profit before bonus and income tax) Income Tax = 30% (Profit after bonus)
= 20% (1,000,000) = 30% (1,000,000 -200,000)
= P 200,000 = P 240,000
2. Bonus is based on profit after bonus but before income tax.

Bonus = 20% (Profit after bonus) Income Tax = 30% (Profit after bonus)
= 20% (1,000,000 - B) = 30% (1,000,000 -166,666.67)
= 200,000 – 0.20B = P 250,000
= 200,000/1.20
= P 166,666.67
NOEL A. BERGONIA, CPA, MBA
 EXAMPLE: BONUS OBLIGATION
3. Bonus is based on profit before bonus but after income tax.

Bonus (B) = 20% (Profit before bonus but after income tax) Income Tax (T) = 30% (Profit after bonus)
B = 20% (1,000,000- T) T = 30% (1,000,000 – 148,936.17)
B = 20% (1,000,000- (300,000– 0.30B)) T = P 255,319.15
B = 200,000 – 60,000 + 0.06B
B = 140,000/0.94
B = P 148,936.17
4. Bonus is based on profit after bonus and income tax.
Bonus = 20% (Profit after bonus and income tax) Income Tax (T) = 30% (Profit after bonus)
B = 20% (1,000,000 – B - T) T = 30% (1,000,000 –122,807.02)
B = 20% (1,000,000 – B – 300,000 + 0.30B) = P 263,157.90
B = 20%(700,000 – 0.70B)
B = 140,000 – 0.14B
B = 140,000/1.14
B = P 122,807.02 NOEL A. BERGONIA, CPA, MBA
TAXES & OTHER EMPLOYEE RELATED LIABILITIES
VAT ( Value added tax)
❖Levied on the sale of goods and services,
❖VAT is chargeable to customers which is collected by the seller and to be remitted, on a
monthly basis to Bureau Internal Revenue ( BIR).
❖This VAT payable is reported as part of the current liabilities until it is remitted to BIR.

PAYROLL TAXES
❖Employers are required by law to withhold from its employee’s salary an amount to SSS,
PAG-IBIG and PHILHEALTH equivalent to employee’s contribution and also their income taxes.
These amounts withheld are reported under the current liabilities until remitted to the
appropriate organizations.

NOEL A. BERGONIA, CPA, MBA

 DIVIDENDS PAYABLE
❖Dividends can be distributed in different forms.
❖A cash dividends payable are dividends recognized at the date of declaration of
Board of Directors which are to be distributed in the form of cash at the date of
distribution. Normally, cash dividends payable same with property dividends payable
and scrip dividends payable are presented under the current liabilities portion because
they are usually payable within a short period of time.
❖Undeclared cash dividends on cumulative preference shares are not recognized as
liabilities but rather they are just disclosed in the notes to financial statements.
❖Share dividends distributable is not classified as a liability but rather recognized as
part of equity.

NOEL A. BERGONIA, CPA, MBA

NOEL A. BERGONIA, CPA, MBA