CHAPTER 1 LIABILITIES

Examples of financial liabilities

LIABILITIES 1. Payables (accounts, notes, loans, bonds, and accrued liabilities)
-is a present obligation of the entity to transfer an economic resource as a result of past events. 2. Lease liabilities
3. Held for trading liabilities and derivative liabilities
The definition of liability has the following three aspects: 4. Redeemable preference shares issued
1. Obligation 5. Security deposits
2. Transfer of an economic resource
3. Present obligation as a result of past events The following are NOT financial liabilities
1. Unearned revenues and warranty obligations → Contractual obli -

service ang Peperform

Obligation 2. Taxes, SSS, Philhealth and Pag-IBIG payables →
(Law)
An obligation is a duty or responsibility that an entity has no practical ability to avoid. 3. Constructive obligations
An obligation is either
1. Legal obligation
2. Constructive obligation Nonfinancial liability - is a liability other than a financial liability

Obligations may be legally enforceable because of a binding contract or statutory requirement.

This is normally the case for goods and services received. Financial statement presentation
Liabilities are presented as either (a) current or (b) noncurrent on the face of a classified statement of
Constructive obligations also give rise to liabilities because of normal business practices, customs, and a desire to financial position
maintain good business relations or act equitably.
no contract Current liabilities
Current liabilities are liabilities that are: water no net )
1. Expected to be settled in the entity's normal operating cycle; AP A curved liab (
.
,

Transfer of an economic resource 2. Held primarily for trading; Walang balak Patagalin ang liab .

- obligation to transfer an economic resource may be an obligation to: 3. Due to be settled within 12 months after the reporting period; or Postponed
1. Pay cash, deliver goods, or render services 4. The entity does not have an unconditional right to defer settlement of the liability for at least 12 months
Walang right ang entity to postpone
2. Exchange assets with another party on unfavorable terms after the reporting period
3. Transfer assets if a specified uncertain future event occurs, or All other liabilities are classified as noncurrent.
The Hab
4. Issue a financial instrument that obliges the entity to transfer an economic resource
• A financial instrument is "any contract that gives rise to a financial asset of one entity and a financial liability or
equity instrument of another entity." (PAS 32)
• A financial asset is any asset that is:
1.Cash; Long-term debt falling due within one year
2.Equity instrument of another entity; or Refinancing refers to the replacement of existing debt with a new one but with different terms, e.g., an
3.Contractual right to receive cash or another financial asset or to exchange financial instruments extended maturity or a revised payment schedule.
with another entity under conditions that are potentially favorable
A long-term obligation that is maturing 12 months after the reporting period is classified as current, even if
•Equity instrument - evidences a residual interest in the net assets of the entity. E.g., shares of stocks a refinancing agreement to reschedule payments on a long-term basis is completed after the reporting period
but before the financial statements are authorized for issue.
Present obligation as a result of past events
A present obligation exists as a result of past events if: However, the obligation is classified as noncurrent if the entity expects and has the discretion, to refinance it
1. The entity has already obtained economic benefits or taken an action; and on a long-term basis but under an existing loan facility. Loan facility refers to a credit line.
2. As a consequence, the entity will or may have to transfer an economic resource that it would not otherwise
have had to transfer. need If the refinancing is not at the discretion of the entity, the financial liability is current.
niyang bayaran para ma fulfill yung present obligation
Recognition criteria
An item is recognized if:
1. It meets the definition of a liability;
2. It is probable that an outflow of resources embodying economic benefits will result from its settlement; and
3. The settlement amount can be measured reliably. need
may
Financial and Nonfinancial liabilities bayaran
Financial liability is any liability that is
1. A Contractual obligation, to deliver cash or another financial asset to another entity.
2. A contractual obligation to exchange financial assets or financial liabilities with another entity under the
conditions that are potentially unfavorable to the entity.

Illustration:1 Solution 1
Kim Jennie Company's liabilities on December 31, 20x2 were:
Accounts payable. 1,000,0000
12% note payable issued November 1, 20x0
maturing July 1, 20x3. 2,000,000
10% debentures payable, next annual principal
installment of P500, 000 due February 1, 20x3. 7,000,000
On December 31, 20x2, Kim Jennie Company consummated a noncancelable agreement with the lender to
refinance the 12% note payable on a long-term basis. On December 31, 20x2, what total amount should be
reported as current liabilities?

Illustration:2
Pranpriya Manoban Company had the following liabilities on December 31, 20x2. Solution 2

Accounts payable, after deducting debit balances in

suppliers' accounts of P100, 000 500,000
Accrued liabilities. 50,000
Notes payable - due March 31, 20×3. 1,000,000
Notes payable - due May 31, 20×3. 800,000
Bonds payable - due December 31, 20x4. 2,000,000
On March 1, 20x3 before the 20x2 financial statements were issued, the note payable of P1, 000,000 was
replaced by an 18-month note of the same amount. The entity is considering similar action on the
P800,000 due on May 1, 20x3. The financial statements were issued on March 31, 20x3.
Compute the following:
1. Total current liabilities
2. Total noncurrent liabilities

Illustration. 3
The following information about Roseanne Park Company is available on December 31, 20×2: Solution 3
Income taxes withheld from employees 900,000
Cash balance at First State Bank. 2,500,000
Cash overdraft at Harbor Bank. 1,300,000
Accounts receivable with credit balance 750,000
Estimated expenses of meeting warranties on
merchandise previously sold. 500,000
Estimated damages because of unsatisfactory
performance on a contract. 1,500,000
Accounts payable. 3,000,000
Deferred serial bonds, issued at par and bearing interest
at 12% payable in semiannual installment of P500,000
due April 1 and October 1 of each year, the last bond to be paid
on October 1, 20x7.Interest is also paid semiannually. 5,000,000
Stock dividend payable. 2,000, 000
Compute the total current liabilities on December 31, 20×2.