This event creates a legal or
LIABILITIES
PAS 1 prescribes the basis for presentation of
general-purpose financial statements to
improve comparability both with the entity’s
financial statements of previous periods and
with the financial statements of other
entities.
LIABILITIES – These are present obligation of
an entity arising from past transactions or
events, the settlement of which expected to
result in an outflow from the entity of
resources embodying economic benefits.
ESSENTIAL CHARACTERISTICS OF A
LIABILITY
1. Present obligation (Legal or
Constructive)
 The entity liable should
acknowledge its existing
obligation to a particular
payee, whether the latter is
identified or not.
 An obligation is a duty or
responsibility to act or
perform in a certain way.
This may be legally
enforceable as a another obligation
consequence of a binding
contract or stator
requirement.
2. Arising from past transactions or
events
 A transaction or event that
will give rise to a liability
should occur first prior to the
recognition of an item as
liability.
 The past event that gave rise
to the present obligation is
called OBLIGATING EVENT.
constructive obligation
because the entity has no
realistic alternative but to
settle the obligation.
LEGAL VS. CONSTRUCTIVE OBLIGATION
3. The settlement of liability requires
an outflow of resources embodying
economic benefits
 Settlements may occur in a
number of ways such as:
i. Payment of cash
ii. Transfer of other
assets
iii. Provision of services
iv. Replacement of the
obligation with
(Promissory notes)
v. Conversion of the
obligation to equity
FINANCIAL LIABILITIES
Financial liability is any liability that is a
contractual obligation:
a. To deliver cash or another financial
asset to another entity; or;
b. To exchange financial assets or
financial liabilities with another
entity under conditions that are
potentially unfavorable to the entity.
EXAMPLES OF FINANCIAL LIABILITIES

1. Payables such as accounts, notes, FINANCIAL NONFINANCIAL

loans, bonds payable and accrued  Accounts To be settled thru
expenses that are payable in cash. payable provision of service or
2. Finance lease obligations.  Notes payable delivery of noncash
3. Liabilities held for trading such as  Loans payable assets:
obligations to deliver financial assets  Bonds payable  Advances
borrowed by a “short seller” (i.e., an  Mortgage from
payable customers
entity that sells financial assets it has
 Lease liability  Unearned
borrowed and does not yet own).
 Salaries revenues/Defe
4. Preference shares issued with
payable rred revenues
mandatory redemption.  Unearned rent
 Accrued
5. Security deposits received that are to  Warranties
interest
be returned to tenants at the end of expense/inter payable
lease term. est payable  Premiums
6. Obligations to deliver a variable  Utilities payable
number of own shares worth a fixed payable  Property
amount of cash.  Cash dividends
dividends payable
THE FOLLOWING ARE NOT FINANCIAL payable
LIABILITIES Did not arise from a
contract:
1. Unearned revenues and warranty
 SSS
obligations that are to be settled by
Contribution
future delivery of goods or services,
payable
rather than cash. (noncash assets)  PAG-IBIG
2. Taxes, SSS premiums, Philhealth and contributions
other payables arising from statutory payable
requirements and not from  Withholding
contracts. taxes payable
3. Commodity contracts that either  Income taxes
cannot be settled in cash or which payable
are expected to be settled by  Constructive
commodity exchange (e.g., coffee obligation
beans, gold bullion, oil, and the like).
If a commodity contract is expected
to be cash settled, it will be included
RECOGNITION OF LIABILITIES
as a financial liability on the part of An item is recognized as a liability when:
the cash payor.
4. Constructive obligations. These 1. It meets the definition of a liability;
obligations do not arise from 2. It is probable (more than 50%) that
contracts. an outflow of resources embodying
economic benefits will result from its
CLASSIFICATION OF FINANCIAL AND settlement; and
NONFINANCIAL LIABILITIES
 3. The settlement amount can be
measured reliably.
FINANCIAL LIABILITIES
CLASSIFICATION OF FINANCIAL
LIABILITIES
1. Financial liabilities at Fair Value
through Profit or Loss (FVTPL)
a. Designated financial liabilities at
FVTPL
b. Held for trading
2. Financial liabilities at Amortized Cost
3. Financial liabilities that arise when a
transfer of a financial asset does not
qualify for derecognition or when the
continuing involvement approach
applies.
4. Financial guarantee contracts and
commitments.
MEASUREMENT OF NON-
 Non-financial liabilities are initially
measured at the best estimate of the
amounts needed to settle those
obligations or the measurement
basis required by other applicable
standard.
 Examples:
o Obligations arising from
statutory requirements (e.g.,
income tax payable)
o Unearned or deferred
revenues
o Warranty obligations
o Commodity contracts that
either cannot be settled in
cash or which are expected
to be settled by commodity
exchange

SUMMARY
MEASUREMENT OF FINANCIAL
LIABILITIES
 Initial measurement – fair value
minus transaction costs, except
financial liabilities at FVPL whose
transactions costs are expensed
immediately.
 Subsequent measurement –
amortized cost (except financial
liabilities that are classified as held
for trading and those that are
designated; these are subsequently
measured at fair value)

Transaction costs include:

1. Fees and commissions paid to

agents, advisers, brokers and dealers.
2. Levies by regulatory agencies and
securities exchange.
3. Transfer taxes and duties.

CURRENT LIABILTIES
An entity shall classify a liability as current
when:
1. It expects to settle the liability in its
normal operating cycle;
2. It holds the liability primarily for the
purpose of trading;
3. The liability is due to be settled
within 12 months after the reporting
period; or
4. The entity does not have and
unconditional right to defer the
settlement of the liability for at least
12 months after the reporting period.
(PAS 1)
All other liabilities are classified
noncurrent.
 The operating cycle of an entity is
the time between the acquisition of
assets for processing and their
realization in cash or cash
equivalents. (PAS 68)
 When the entity’s normal operating
cycle is not clearly identifiable, it is
assumed to be 12 months. (PAS 68)
 Liabilities that do not form part of
the entity’s normal operating cycle
(e.g., non-operating liabilities) are
presented as current only when they
are expected to be settled within 12
months after the end of reporting
period.
EXAMPLES OF CURRENT
LIABILITIES
a. Financial assets measured at FVPL
(i.e., designated or held for trading)
b. Current portion of long-term notes,
bonds, loans, and lease liabilities.
c. Trade accounts and notes payables.
d. Non-trade payables due within 12
months after the end of the reporting
period.
e. Unearned income expected to be
earned withing 12 months after the
end of the reporting period.
f. Bank overdrafts.
TRADE AND NON-TRADE
PAYABLES
 Trade payables are obligations
arising from purchases of inventory
that are to be sold in the ordinary
course of business. Other payables
are classified as non-trade.
 Trade payable are classified as
current liabilities when they are
expected to be settled within the
as
normal operating cycle or one year,
whichever is longer.
 On the other hand, non-trade
payables are classified as current
liabilities only when they are
expected to be settled within one
year.
DIVIDENDS PAYABLE
Under IFRIC 17, the liability to pay a dividend
is recognized when he dividend is
appropriately authorized and is no longer at
the discretion of the entity, which is:
1. The date when the declaration of the
dividend (e.g., by management or
the board of directors) is approved
 by the relevant authority (e.g., the
shareholders) if the jurisdiction
requires such approval, or
2. The date when the dividend is
declared (e.g., the shareholders) if
the jurisdiction does not require
further approval.
PROVISIONS,
CONTINGENT
LIABILITIES &
CONTINGENT ASSETS
APPLICABLE ACCOUNTING STANDARDS
PAS 37. PROVISIONS, CONTINGENT
LIABILITIES & CONTINGENT ASSETS
RECOGNITION OF PROVISIONS
A provision is recognized when all of the
following conditions are met:
1. The entity has a present obligation
(legal or constructive) as a result of a
past event;
2. It is probable that an outflow of
resources embodying economic
benefits will be required to settle the
obligation; and
3. A reliable estimate can be made of
the amount of the obligation.
Note: If these conditions did not meet, then
it is not recognized as a provision and will
become a contingent liability.

DEFINITION OF TERMS

 A provision is a liability of uncertain

timing or amount.
 Provisions differ from other liabilities
because of the uncertainty about the
timing or amount of expenditure
required in settlement. Unlike for
other liabilities, provisions must be
estimated. Although, some other
liabilities are also estimated, their MEASUREMENT OF PROVISIONS
uncertainty is generally much less
than for provisions.
 Other liabilities, such as accruals, are
reported as part of “Trade and other
payables” whereas provisions are
reported separately.

PROVISIONS VS. CONTINGENT LIABILITIES

SAMPLE PROBLEM 1
During 2018, Madara Company guaranteed a
supplier’s ₱500,000 loan from a bank. On
October 1, 2018, the entity was notified that
the supplier had defaulted on the loan and
filed for bankruptcy protection. Counsel
believed that the entity would probably have
to pay ₱250,000 under the guarantee.
As a result of the supplier’s bankruptcy, the
entity entered into a contract in December
2018 to retool its machines so that the entity
could accept parts from other suppliers.
Retooling costs are estimated to be
₱300,000.
What should be reported as liability on
December 31, 2018?
ANSWER – ₱250,000
The guarantee should be accrued as a
provision because the loss is probable
and the amount can be reasonably
estimated.
SAMPLE PROBLEM 2
During 2018, Hinata Company became
involved in a tax dispute with the BIR. On
December 31, 2018, the tax advisor believed
that an unfavorable outcome was probable
and reasonable estimate of additional taxes
was ₱500,000.
After 2018 financial statements were issued,
the entity received and accepted a BIR
settlement offer of ₱550,000.
What amount of accrued liability should have
been reported on December 31, 2018?
ANSWER – The reasonable estimate of
₱500,000 is recorded.
The accepted BIR offer is not recorded
because it was made after the statement
are issued.
In 2019, when the BIR settlement offer of
₱550,000 is accepted, an additional
liability of ₱50,000 will be recognized.
SAMPLE PROBLEM 3
Hashirama Company is involved in the
litigation regarding a faulty product sold in a
prior year. The entity has consulted with an
attorney and determined that it is possible
that the entity may lose the case.
The attorney estimated that there is a 40%
chance of losing. If this is the case, the
attorney estimated that the amount of any
payment would be ₱5,500,000.
How much is the litigation liability that the
company must recognize?
IMPORTANT NOTES
PRESENT VALUE
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.
EXPECTED DISPOSAL OF ASSETS
Gains from the expected disposal of assets
shall not be taken into account in measuring
a provision. Gains shall be recognized only
when the assets are actually disposed of.
REIMBURSEMENTS
Where some or all of the expenditure
required in settling a provision is expected to
be reimbursed by another party, the
reimbursement is recognized 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.
In the statement of profit or loss and other
comprehensive income, the expense relating
to a provision may be presented net of the
amount recognized for a reimbursement.
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.
GUARANTEE FOR INDEBTEDNESS OF
OTHERS
A provision for the guarantee for
indebtedness of others is recognized when it
becomes probable that the entity will be
held liable for the guarantee, such as when
the original debtor defaults the loan.
CONTINGENT ASSETS
SAMPLE PROBLEM 1
On November 1, 2018, Kakashi company was
awarded a judgement of ₱1,500,000 in
connection with a lawsuit. The decision is
being appealed by the defendant and it is
expected that the appeal process will be
completed by the end of 2019.
The attorney believed that it is highly
probable that an award will be upheld on
appeal but that the judgement may be
reduced by 40%.
What amount should be reported as a
receivable on December 31, 2018?
ANSWER – The contingent asset is only
DISCLOSED when probable and
measurable.
The asset and related gain are recognized
only when realized.
SAMPLE PROBLEM 2
On May 2018, Obito Company filed suit
against Deidara company seeking ₱1,900,000
damages for patent infringement. A court
verdict in November 2018 awarded Obito
₱1,500,000 in damages, but, Deidara’s
appeal is not expected to be decided before
2019.
Obito’s counsel believed it is probable that
Obito will be successful against Deidara for
an estimated amount in the range between
₱800,000 and ₱1,100,000, with ₱1,000,000
considered the most likely manner.
What amount should Obito record as income
from the lawsuit for the year ended
December 31, 2018?
ANSWER – Zero or None
A contingent asset and the related
contingent gain are disclosed only where
the inflow of economic benefits is
probable. (Disclosed to notes to FS)

WARRANTY LIABILITIES
WHAT IS WARRANTY?
 Home appliances are often sold
under guarantee or warranty to
provide free repair service or
replacement during a specified
period if the products are defective.
 Such policy may involve significant
costs on the part of the entity if the
products sold prove to be defective
in the future within the specified
period.
 This is a form of constructive
obligation because it arises from the
sale of home appliances.
RECOGNITION OF WARRANTY
When it is:
1. Present obligation
2. Probable (outflow)
3. Measurable(reliably)/Reliable
Estimate (Best Estimate)
Where no reliable estimate can be made, no
warranty liability is recognized.
WARRANTY – ACCOUNTING
2 APPROACHES IN ACCOUNTING FOR
WARRANTY
1. Accrual approach
- Recognized from the moment a sale
of an appliance or gadget.
- Soundest theoretical approach
- Matching of cost with revenue
At a certain date, the estimate is reviewed to
determine its reasonableness and accuracy.
The actual warranty cost is analyzed to
validate the original estimate.
Any difference between estimate and actual
cost is a change in accounting estimate
(treated as currently and prospectively), if
necessary.
SAMPLE PROBLEM (ACCRUAL
APPROACH)
An entity sells 1,000 units of television sets at
₱9,000 each for cash. Each television set is
under warranty for one year.
The entity has estimated from past
experience that warranty cost will probably
average ₱500 per unit and that only 60% of
units sold will be returned for repair.
The entity incurs ₱180,000 for repairs during
the year.
 warranty repairs are made evenly
throughout the year.

Based on the past experience, the entity

projects an estimated projects an estimated
warranty cost as a percentage of sales as
follows:

First year of warranty – 4%

Second year of warranty – 10%

ANSWER:

2. Expense as incurred approach

(Expense outright)
- Recognized when there is an actual
claim.
- Expensing the warranty cost only
when actually incurred.
- This approach is justified on the basis
of expediency when warranty cost is
TESTING THE ACCURACY OF WARRANTY
not very substantial or when the
LIABILITY
warranty period is relatively short.
On December 31, 2020, the estimated
warranty liability account may be analyzed
SAMPLE PROBLEM (EXPENSE AS based on the 4% and 10% estimate to
INCURRED APPROACH) determine whether the actual warranty costs
approximate the estimate.
An entity sells refrigerators that carry a 2-
year warranty against defects. The sales and
 ANSWER:

SALE OF WARRANTY
A warranty is sometimes sold separately
from the product sold.

When the products are sold, the customers

are entitled to the usual manufacturer’s
warranty during a certain period.

However, the seller may offer an “extended

warranty” on the product sold but with
additional cost.

In such case, the sale of the product with the

usual warranty is recorded separately form
the sale of the extended warranty.

The amount received from the sale of the

extended warranty is recognized initially as
₱deferred revenue and subsequently
amortized using straight line over the life of
the warranty contract.

However, if costs are expected to be incurred

in performing services under the extended
warranty contract, revenue is recognized is
proportion to the costs to be incurred
annually.

SAMPLE PROBLEM (SALE OF

WARRANTY)
An entity sold a product for 3,000,000. The
regular warranty period for the product is
two years. The entity sold an additional
warranty of two years at a cost of ₱60,000.
 ADDITIONAL NOTES
MEASUREMENT OF LIABILITIES
MEASUREMENT INITIALLY SUBSEQUE
NTLY
Short term- Face Value Face Value
Interest Bearing
Short term-Non- Face Value Face Value
Interest Bearing
Long term- Face Value Face Value
Interest Bearing
Long term-Non- Present Amortized
Interest Bearing Value Cost

REFUNDABLE DEPOSITS
DEFERRED REVENUE OR Consists of cash or property received from
customers but which are refundable after
UNEARNED INCOME compliance with certain conditions:
Income already received but not yet earned. ACCOUNTING ENTRIES
CURRENT LIABILITIES (EXAMPLES) Cash xxx
Container's deposit (CL) xxx
 Unearned Interest Income #
Container's deposit xxx
 Unearned Rental Income
Cash xxx
 Unearned Subscription Revenue #
Container's deposit xxx
NON-CURRENT LIABILITIES (EXAMPLES) Container (asset) xxx

 Long-term service contracts

Notes:
 Long-term leasehold advances
 If the value of the deposit is
higher than the container,
there will be a gain (credit).
ACCOUNTING ENTRIES  If the value of deposit is lower
than the container, there will
be a loss (debit).
Liability for deposits received represents cash
receipts that are held in trust for other
parties. Examples include:

g. Deposit liabilities of banks and other

entities performing similar function.
h. Deposit received for returnable
containers, such as bottles, cases,
crates, trays, boxes, and similar items
that contain the goods sold but must
be returned to the seller upon
SAMPLE PROBLEM 2 (SECURITY DEPOSIT
consumption of the goods.
i. Security deposits received from FROM A LEASE)
lessees. On January 1, 20x1, ABC Co. received a
j. Deposits received from escrow ₱100,000 security deposit from a tenant in
agreements. conjunction with a 10-year lease. ABC will
k. Deposits for future subscription of the return the security deposit to the tenant at
entity’s own equity instrument to the the end of the lease term, net of costs of any
extent that the deposits are damages to the leased property. The
repayable in cash. discount rate is 10%.
SAMPLE PROBLEM 1 (DEPOSITS FOR Provide the entries in 20x1.
RETURNABLE CONTAINERS)
ABC Co. requires deposits from customers for
the containers of goods sold. The customers
are refunded for the deposits received when
the containers are returned within two years
from the date of sale of the related goods.
Deposits for containers not returned within
the time limit are regarded as proceeds from
retirement of the containers. Information for
20x3 is as follows:
SAMPLE PROBLEM 3 (DEPOSITS HELD
UNDER ESCROW AGREEMENT)
ABC Co. maintains escrow accounts and pays
insurance premiums for its customers.
Escrow funds are kept in interest-bearing
accounts. Interest, less a 10% service fee, is
credited to the customer’s account and used
to reduce future escrow payments.
Information on escrow accounts is shown
below:
Escrow accounts liability, Jan. 1, 20x1 200,000.00
Escrow payments received during 20x1 1,500,000.00
Insurance premiums paid during 20x1 500,000.00
Interest on escrow funds during 20x1 100,000.00
Compute for the current liability for escrow
accounts on Dec. 31, 20x1.
DEPOSIT FOR FUTURE
SUBSCRIPTION OF SHARES OF
STOCKS
Deposits received for future subscription of
the entity’s shares of stocks are classified as
either liability or equity as follows:
a. If repayable in cash at any time prior
to the issuance of the subscribed
shares, the deposits are classified as
liability.
b. If not repayable in cash, the deposits
are classified as equity, preferably
presented under contributed capital.
ACCRUED EXPENSES
Accrued expenses are liabilities for expenses
already incurred but not yet paid (e.g.,
salaries payable, utilities payable, etc.)
SAMPLE PROBLEM (ACCRUED EXPENSES)
An entity is preparing it December 31, 20x1
year-end financial statements and has
gathered the following information:
 The bill for December’s utility costs
of 30,000 was received and paid on
January 10, 20x2.
 A ₱20,000 advertising bill was
received on January 2, 20x2. Of the
total billing, ₱15,000 pertain to
advertisements in December 20x1
and ₱5,000 pertain to
advertisements in January 20x2.
 A lease, effective December 16, 20x0,
requires monthly rental of ₱100,000,
payable one month after the
commencement of the lease and
every month thereafter. In addition,
rent equal to 5% of net sales over
₱1,000,000 per year is payable on
January 31 of the following year.
 Total cash sales and collection on
accounts amounted to ₱1,000,000.
Accounts receivable has a net
increase of ₱200,000. Commissions
of 15% of sales are paid on the same
day cash is received from customers.
Compute for the accrued liabilities on Dec.
31, 20x1.
 PREMIUMS
Are articles of value such as toys, dishes,
silverware, and other goods given to
customers as a result of past sales or sale
promotion activities. Return of product
labels, box tops, wrappers, and coupons.

ACCOUNTING ENTRIES:

1. When the premiums are purchased:

Premiums(asset) xxx
Cash xxx

2. When the premiums are distributed to

customers:
Premium Expense xxx
Premiums xxx

3. At the end of the year, if premiums are

still outstanding:
Premium Expense xxx
Estimated Premium Liability xxx

ESTIMATED LIABILITY

Are obligations which exist at the end of

reporting period although their amount is
not definite.

SAMPLE PROBLEM 1: PREMIUM

LIABILITY
Hirai Momo Company manufactures a special
laundry soap. A towel is offered as a
premium to customers who send in two-
proof-of-purchase seals from the soap boxes
and a remittance of ₱20. The distribution
cost is ₱5 per towel. Data for the premium
offer are as follows:
20x2 20x3
Soap sales 2,500,000.00 3,125,000.00
Towel purchases (P100 per towel) 175,000.00 200,000.00
No. of towels distributed as a premium 1,000 towels 1,800 towels
No.of towels expected to be
distributed in subsequent period 600 towels 800 towels
Prepare the journal entries for 20x2 and
20x3.
Cost 100.00
Distribution Cost 5.00
Cash remittance (20.00)
Premium Expense/unit 85.00
Premium Expense(1K x 85) 85,000.00

20X2
Cash 2,500,000.00
Sales 2,500,000.00
#
Premiums 175,000.00
Cash 175,000.00
#
Cash (15*1K) 15,000.00
Premium Expense 85,000.00
Premium (100*1K) 100,000.00
#
Premium Expense (85*600) 51,000.00
Estimated Premium Liability 51,000.00

20x3
Cash 3,125,000.00
Sales 3,125,000.00
#
Premiums 200,000.00
Cash 200,000.00
#
Cash (15*1.8K) 27,000.00
Premium Expense (85*1.8K) 153,000.00
Premium (100*1.8K)
#
180,000.00
FREE PRODUCT,
DISCOUNT AND REBATE
Premium Expense (85*800) 68,000.00
Estimated Premium Liability 68,000.00

SAMPLE PROBLEM 2: PREMIUM In a contract of sale of goods, an entity may

LIABILITY
An entity manufactures a certain product and
sells it at P300 per unit.
A soup bowl is offered to customers on the
return of 5 wrappers plus a remittance of
P10. The bowl costs P50 and it is estimated
that 60% of the wrappers will be redeemed.
The data for the first year concerning the
premium plan are summarized below.
offer customer incentives such as free
product coupons, discount coupons and
rebate coupons with the end in view of
stimulating sales.
IFRS 15, paragraph 22, provides that at
contract inception, an entity shall assess the
goods promised in a contract with customer
and shall identify as a performance
obligation each promise to transfer to the
customer either:
 a. A distinct good
b. A series of distinct goods that are
substantially the same and that have
the same pattern of transfer to the
customer.
Under paragraph B40, such options to
purchase additional goods provide the
customer a material right and therefore gives
rise to a performance obligation that the
seller must satisfy.
If the options provide a material right to the
customer, the customer in effect pays the
seller in advance for future delivery of
additional goods.
The selling price of the products sold is 1,800
multiplied by P1,500 or P2,700,000.
It is expected that 75% of the coupons will be
redeemed. During 2023, the entity delivered
150 free additional pieces to the customer.
The stand-alone selling price of the coupons
is equal to the selling price of the free
product adjusted by the expected
redemption.
No. of free add product (1800/3) 600.00
Selling price 1,500.00
Total 900,000.00
Expected redemption 75%
Stand-alone selling price 675,000.00

Accordingly, the entity has two performance

ALLOCATION:
obligations in these customer options, Stand-alone Fraction Allocated
namely: Product sold 2,700,000.00 2.7/3.375 2,160,000.00
Coupons 675,000.00 .675/3.375 540,000.00
1. To deliver or transfer the goods or 3,375,000.00 2,700,000.00
products sold.
JOURNAL ENTRIES:
2. To satisfy the customer options for
coupons for free product, discount 2022
Cash 2,700,000.00
and rebate. Sales 2,160,000.00
Deferred revenue 540,000.00
Under IFRS 15, paragraph 74, an entity is
required to allocate the transaction price of 2023
goods sold between the products sold and Deferred revenue 135,000.00
Sales 135,000.00
the customer options based on relative (150/600 x 540,00)
stand-alone selling price.

The allocated transaction price of the (540,000/600 = 900)

(540,000/600 = 900)
redeemed =135,000
customer options shall be deferred and redeemed 150 x 900 =135,000
recognized as income when options are
exercised or when the options expire. Note: computed coupon – coupon =
allocated coupons
SAMPLE PROBLEM: FREE PRODUCT
COUPONS SAMPLE PROBLEM: DISCOUNT
COUPONS
An entity sells shelf organizers for P1,500
each. There is a promotion wherein if a An entity is a retailer that sells clothing, The
customer buys 3 pieces in a single entity has launched a promotional campaign
transaction, a customer receives a coupon wherein customers who buy clothing with
for one additional piece for free. single purchase of at least P10,000 shall be
granted “40% discount coupons” on future
During 2022, the entity sold 1,800 pieces or
an equivalent of 600 free additional pieces.
purchases. The coupons may be used for 3
months following immediately the campaign.

During the campaign, the entity sold clothing

worth P7,600,000 and issued simultaneously
CASH REBATE
100 “40% discount coupons” to the PROGRAM
customers.
REBATE – Retrospective payment which
It is expected that 80% of the coupons will be
ultimately reduces the overall cost of a
redeemed and the customer using the
product/service at a later date.
discount coupons will spend an average price
of P12,500. REBATE COUPONS

The stand-alone selling price of the discount The manufacturer would recognize a refund
coupon is equal to the amount of discount liability or rebate liability to the retailers.
on future purchases adjusted by the Such liability is reduced when the
expected redemption. manufacturer reimburses the retailers.
Average price of future purchase 12,500.00 Under IFRS 15, paragraph 70, the transaction
no. coupons with discount x 100.00
Total 1,250,000.00
price shall be allocated between the products
Percent of discount x 40% sold and the rebate liability based on relative
Total discount on future purchases 500,000.00 stand-alone selling price.
Expected redemption x 80%
Stand-alone selling price of coupons 400,000.00 The stand-alone selling price of the rebate
coupon is equal to the discount on the
ALLOCATION: products sold during the year adjusted by the
Stand-alone Fraction Allocated expected redemption.
Product sold 7,600,000.00 76/80 7,220,000.00
Coupons 400,000.00 4/80 380,000.00 No. of product sold 30,000.00
8,000,000.00 7,600,000.00 Discount per coupon 50.00
Total Discount 1,500,000.00
Expected redemption 75%
JOURNAL ENTRY: Stand-alone selling price of rebate coupons 1,125,000.00
Cash 7,600,000.00
Sales 7,220,000.00
Deferred revenue-coupons 380,000.00 ALLOCATION:
Stand-alone Fraction Allocated
Product sold 4,500,000.00 4,500/5,625 3,600,000.00
Cash 600,000.00 (30,000x150)
Deferred revenue -coupons 380,000.00 Rebate coupons 1,125,000.00 1,125/5,625 900,000.00
Sales 980,000.00 5,625,000.00 4,500,000.00

Total amount of future purchases 1,250,000.00

Discount (40%) (500,000.00) JOURNAL ENTRIES:
Net Price 750,000.00
Expected redemption 80%
Cash received from customers 600,000.00
 Cash 4,500,000.00
Sales
Rebate liability
# pattern of rights exercised by the
Rebate liability 200,000.00
Cash
GIFT CERTIFICATE
A voucher given as a present that is
exchangeable for a specified cash value of
goods or service from a particular place of
business.
ACCOUNTING ENTRIES
Cash
Gift Certificate Payable
Gift certificate sold
#
Gift Certificate Payable
Sales
Gift certificate redeemed
#
Gift Certificate Payable
Forfieted Gift Certificate (income)
Gift certificate not redeemed
Gift certificate is a current liability
The accounting for gift certificates is
addressed under PFRS 15 Revenue from
Contracts with Customers (par. B44 to B47). The
accounting procedures are summarized
below:
A. a contract liability is recognized when
gift certificates are sold.
B. The contract liability is derecognized
and revenue is recognized when the gift
certificates are redeemed (used).
C. As to the gift certificates sold that are
not exercised (referred to as
‘breakage’), PFRS 15 provides the
following:
a. Proportionate method – If the entity
expects that a portion of the gift
certificates sold will not be redeemed, the
3,600,000.00 entity recognizes the expected breakage
900,000.00 amount as revenue in proportion to the
customer.
200,000.00 b. Remote method – If the entity does not
expect that a portion of the gift
certificates sold will not be redeemed, the
entity recognizes the expected breakage
amount as revenue when the likelihood of
redemption becomes remote.
SAMPLE PROBLEM 1 (GIFT
CERTIFICATES)
An entity sells gift certificates as part of its
sales promotion. During the year, the entity
xxx sells gift certificates worth ₱100,000, of
xxx which ₱72,000 were redeemed.
xxx
xxx
xxx
xxx
Requirement: Provide journal entries
Cash 100,000.00
Gift card liability(a) 100,000.00
to record the sale of gift certificates
#
Gift card liability 72,000.00
Revenue(b) 72,000.00
to record the redemption of gift certificates
(a) Alternatively, “Unearned revenue” or
“Contract liability” account may be used
in lieu of the “Gift card liability” account.
(b) Alternatively, the “Gift Card Revenue” or
similar account may be used.
PROPORTIONATE RECOGNITION OF
BREAKAGE REVENUE
Breakage revenue is recognized on a pro-rata
basis in proportion to the value of actual
redemptions.
Gift card liability 8,000.00
Revenue 8,000.00
to record the revenue from expected breakage

Accounting:

The entity makes the first two entries above.

As to breakage, the entity recognizes
revenue only when the likelihood of
redemption becomes remote, for example,
when the certificates are not redeemed after
a long period of time.

SAMPLE PROBLEM 2 (PFRS 15 vs.

TRADITIONAL ACCOUNTING)
An entity sells gift certificates that expire one
year after issuance. Information on gift ADDITIONAL SAMPLE PROBLEM (GIFT
certificates is shown below: CERTIFICATES
Gift card liability/Unearned revenue, Jan. 1, 20x1 600,000.00 During the current year, an entity sold gift
Gift certificates sold during 20x1 1,000,000.00
certificates worth P5,000,000 to customers in
Prior year gift certificates redeemed in 20x1
(the ₱200K bal. from Jan. 1, 20x1 has expired) 400,000.00 exchange for future delivery of its product.
Gift certificates sold and redeemed in 20x1 675,000.00
The gift certificates are nonrefundable and
Historically, 10% of gift certificates sold are never redeemed. the entity expects that 10% of the certificates
will not be redeemed.

The entity redeemed gift certificates worth

P1,800,000 during the current year.
Expected value of breakage (5,000,000 x10%)
Expected value of certificates to be redeemed
(5,000,000 x 90%)
Value of certificates redeemed
Breakage revenue (1,800,000/4,500,000 x 500,000)
JOURNAL ENTRIES:
Cash 5,000,000.00
Deferred revenue
#
Deferred revenue 1,800,000.00
Sales
# RECOGNITION
Deferred revenue 200,000.00
Breakage revenue
CUSTOMER LOYALTY
PROGRAM
The 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
MEASUREMENT
 An entity shall account for the award
credits as a separately component of the
initial sale transaction.
 In other words, the granting of award
credits is effectively accounted for as a
future delivery of goods or services.
 IFRS 15, paragraph 74, provides that an
entity shall allocate the transaction price
to each performance obligation
500,000.00 identified in a contract on a relative
4,500,000.00 stand-alone selling price basis.
1,800,000.00  In other words, the fair value of the
consideration received with respect to
200,000.00 the initial sale shall be allocated between
the award credits and the sale based on
relative stand-alone selling price.
 The stand-alone selling price is the price
5,000,000.00 at which an entity would sell a promised
good or service separately to a customer.
1,800,000.00
The consideration allocated to the award
200,000.00 credits is initially recognized as deferred
revenue and subsequently recognized as
revenue when the award credits are
redeemed.
The amount of revenue recognized shall be
based on the number of award credits that
have been redeemed relative to the total
number expected to be redeemed.
SAMPLE PROBLEM (CUSTOMER LOYALTY
PROGRAM)
An entity, a grocery retailer, operates a
customer loyalty program. The entity grants
program members loyalty points when they
spend a specified amount on groceries.
Program members can redeem the points for
further groceries. The points have no expiry
date.
The sales during 2022 amounted to
P9,000,000 based on stand-alone selling
price.
During 2022, the customers earned 10,000
points.
But management expects that 80% or 8,000
of these points will be redeemed.
The stand-alone selling price of each loyalty
point is estimated at P100.
 2022
On December 31, 2022, 4,000 points have
Cash 9,000,000.00
been redeemed in exchange for groceries. Sales 8,100,000.00
Unearned revenue-points 900,000.00
In 2023, the management revised #
Unearned revenue-points 450,000.00
expectations and now expects that 90% or
Sales 450,000.00
9,000 points will be redeemed altogether. (4,000/8,000 x 900,000)

During 2023, the entity redeemed 4,100 2023

Unearned revenue-points 360,000.00
points. In 2024, a further 900 points are
Sales 360,000.00
redeemed.
Points redeemed -2022 4,000.00
Management continues to expect that only Points redeemed-2023 4,100.00
Total 8,100.00
9,000 points will ever be redeemed,
meaning, no more points will be redeemed Cumulative revenue-Dec 31, 2023
after 2024. (8,100/9,000 x 900,000) 810,000.00
Revenue recognized-2022 (450,000.00)
Stand-alone Fraction Allocated Revenue to be recognized-2023 360,000.00
Product sales 9,000,000.00 9/10 8,100,000.00
2024
Points 1,000,000.00 1/10 900,000.00
Unearned revenue-points 90,000.00
(100 x 10,000) Sales 90,000.00
10,000,000.00 9,000,000.00
Points 2022 4,000.00
2023 4,100.00
2024 900.00
JOURNAL ENTRIES:
Total 9,000.00

Cumulative revenue Dec 31, 2024

(9,000/9,000 x 900,000) 900,000.00
Revenue recognized-Dec. 31, 2023 (810,000.00)
Revenue to be recognized-2024 90,000.00

SAMPLE PROBLEM: THIRD PARTY

OPERATES LOYALTY PROGRAM
An entity, a retailer of electrical goods,
participates in a customer loyalty program
operated by an airline.
The entity grants program members one air
travel point for every P1,000 spent on
electrical goods.
Programs members can redeem the points
for travel with the airline subject to
availability. The entity pays the airline P60 for
each point.
During the current year, the entity sold
electrical goods for consideration totaling P
4,500,000 based on stand-alone selling price
and granted 5,000 points with stand-alone
selling price of P100 per point.
The entity has fulfilled its obligation by
granting the points.

Therefore, revenue from points is recognized

when the electrical goods are sold.

REFINANCING AGREEMENT
 However, the obligation is classified as
 Refers to the replacement of an existing
debt with a new one but with different
terms, e.g., an extended maturity date or
a revised payment schedule. A
refinancing wherein the debtor is under
financial distress is called “troubled debt
restructuring.”
RULES ON REFINANCING
 A long-term obligation that is maturing
within 12 months after the reporting
period is classified as current, even if a
refinancing agreement to reschedule
payments on a long-term basis is
completed:
o after the reporting period; and
o before the financial statements
are authorized for issue.
noncurrent if the entity has the right, at
the end of the reporting period, to roll
over the obligation for at least 12
months after the reporting period under
an existing loan facility. Without such
right, the entity does not consider the
potential to refinance the obligation and
classifies the obligation as current.
SAMPLE PROBLEM: REFINANCING
On December 31, 20x1, ABC co. has a
₱1,000,000 loan payable that is maturing
on July 1, 20x2. ABC’s 20x1 financial
statements were authorized for issue on
March 15, 20x2.
 ₱50,000 (1M x 10% x 6/12) interest
payable on the loan is presented as
current.

LIABILITIES PAYABLE ON
DEMAND
ANALYSIS: The loan is presented as a
current liability in ABC Co.’s Dec. 31, COVENANT
20x1 statement of financial position
Restrictions on the borrower as to undertake
despite the refinancing on Feb. 1, 20x2
further borrowings paying dividends,
because, as of Dec. 31, 20x1, ABC Co
maintaining specified level of working capital,
does not have a right to defer/postpone
etc.
the settlement. The refinancing
agreement is disclosed in the 20x1 notes
as a non-adjusting event after the  PAS 1, par. 74, provides that such a
reporting period. liability is classified as current even if
the lender has agreed, after the
reporting period and before the
statements are authorized for issue,
not to demand payment as a
consequence of the breach.

 This is because the entity does not

ANALYSIS: The loan is presented as a
noncurrent liability in ABC Co.’s Dec. 31,
 However, a liability that is payable on
20x1 statement of financial position
because ABC Co. has the right, as of Dec.
31, 20x1, to roll over the obligation for at
least 12 months after the reporting
period under existing loan agreement.
have the right at the end of the
reporting to defer settlement of the
liability.
demand is classified as noncurrent if
the lender provides the entity by the
end of the reporting period (e.g., on
of before December 31) a grace
ending at least twelve months after
the reporting period within which
the entity can rectify a breach of loan
covenant and during which the
lender cannot demand immediate
repayment.

ANALYSIS: The ₱1,000,000 principal on GRACE PERIOD

the loan is presented as noncurrent (see
discussion in case 2 above). However, the
Is the period within which the entity can Q: How much is presented as current liability
rectify the breach and during which the in ABC’s 20x1 year-end financial statements?
lender cannot demand immediate
A: ₱1,000,000. The loan is presented as
repayment.
current because the grace period was
received after the end of reporting period.

SAMPLE ILLUSTRATION (COVENANT)

On January 1, 20x1, ABC Co. took a 3-year,
₱1,000,000 loan from a bank. The loan
agreement requires ABC to maintain a
current ratio of 2:1. If the current ratio falls
below 2:1, the loan becomes payable on
demand. As of December 31, 20x1, ABC’s
current ratio is 1:8:1.
Q: How much is presented as current liability
in ABC’s 20x1 year-end financial statements?
A: None, the loan is presented as noncurrent
because grace period was received by the
end of the reporting period.

Q: How much is presented as current liability

in ABC’s 20x1 year-end financial statements?

A: ₱1,000,000. The loan is payable on

demand. Only if an enforceable promise is
received from the bank on or before the end
of the reporting period not to demand
payment for at least 12 months form the end
of reporting period that the loan is classified
as noncurrent.
LIABILITIES SUMMARY: