Liabilities

- Present obligations of an entity to transfer an economic resource as a result of past events.

Essential Characteristics
a. The entity has a present obligation
The payor must be identified. The rest is not that necessary.
Source of obligation: Legal - can be made because of law and contract (e.g. Tax, Sales of Goods),
Constructive - inobliga ng entity sarili niya na may utang siya and yung payee is nagexpect na sa
obligations na ginawa mo (e.g. public offer)
b. The obligation is to transfer an economic resource.
May kailangan kang ibigay o gawin para mawala yung obligation.
Economic resource - asset or service. Matatanggap na may makukuhang something na beneficial sa
kanya. Maybe cash or noncash.
Stock dividends payable (constructive obligation) - not a liability. Substance over form. Form siya na
liability kasi payable pero hindi talaga siya liability kasi walang naging transfer of economic resource.
Kasi ang binibigay mo is share which is part of equity and not an economic resource which is an asset
or a service.
c. The liability arises from a past event.
Past event = obligating event
Walang liability na mangyayari because of a future event

Measurement Initially Subsequently

Short term - Interest Bearing Face Value Face Value
Short term - Non Interest Bearing Face Value Face Value
Long Term - Interest Bearing Face Value Face Value
Long Term - Non Interest Bearing Present Value Amortized Cost
Note: If silent ang problem at sinabing liabilities lang, conceptually, all liabilities are initially measured at present
value and subsequently measured at amortized cost.
Short Term - 12 months
Long Term - more than 12 months
Interest Bearing - face value lang both kasi inihiwalay na kasi yung utang sa interest kaya pwede ng face value
ang measurement.
Note: never assume na walang interest ang utang. Wrong Assumption in Accounting. Rather, assume that the
face value of the debt, nakalagay na dun both principal and interest
Non Interest Bearing (Short Term) - both face value lang din kasi immaterial ang value nung interest and
therefore ignored na siya.
Non Interest Bearing (Long Term) - initially at present value (process of discounting or yung paghiwalay nung
interest sa principal sa face value na nakalagay sa contract of debt). Subsequent measured at amortized cost
(value niya sa amortization habang papunta si present value sa face value nung contract of debt).

Current Liabilities
a. The entity expects to settle the liability within the entity’s operating cycle.
Operating cycle
- the length of the operating cycle depends on the nature of the business
- Bananacue business (can be a week), wine (can be longer than a year)
- Cycle of your operation from purchasing of inventories to receiving cash.
- Irrespective of the term basta part of the trade, current siya
- Silent ang problem: 12 months
b. The entity holds the liability primarily for the purpose of trading
 - Financial instruments
- E.g. bonds payable quoted (may active market = may bumibili at nagbebenta)
- Business model niya is to hold for fair value changes.
- Trading securities
c. The liability is due to be settled within 12 months after the reporting period.
- Usually december 31 ang end ng reporting period (calendar period)
- Pero hindi naman porket 3 years or 4 years ang term, noncurrent na kasi pwede siyang
pumasok sa a or b.
- Wag paghahaluin ang for trading or related sa trading sa other matters. (3yrs ang A/P mo for
trading tapos 2yrs ang L/P mo, noncurrent si L/P mo. pero kung ang L/P mo naman is 8 months,
kahit hindi siya for trading, pasok naman siya sa letter c which is within 12 months, kaya current
siya.)
d. The entity does not have an unconditional right to defer settlement of the liability for atleast 12 months
after the reporting period.
- Walang unconditional right ang company na iextend yung liability. Kasi kapag meron, noncurrent
ka na siya kasi kaya mo naman patagalin
- Kahit walang intention si entity pero may unconditional right siya, noncurrent parin siya.
- Kung intention naman sa side ni payee, marereclassify siya kasi intention siya ni payee. Wala
pa namang execution of right si payor.

Noncurrent Liabilities - residual definition

- Kung hindi siya current, edi noncurrent siya.
Note: pwede mareclassify ang noncurrent to current kung lumalapit ang maturity date. (from 2yrs na maturity
tapos noncurrent siya then lumipas ang panahon naging within 1yr current na siya basta wala paring
unconditional right ang entity na ipaextend yung liability)

Refinancing or Extension Agreement (may utang ka tapos umutang ka sa bangko para ibayad sa lumang
utang)
- Pwede maging noncurrent at current depende sa time nung maturity ng liability
- Kapag nagkaagreement si payor at payee before the end of reporting period na ieextend ang bayaran
ng liability for more than one year
- December 31 is Date when the FS are authorized for issue
- December 31 to the date ng pagauthorized for issue - events after the reporting period / subsequent
events (adjusting / nonadjusting events)
- Kapag ang extension is sa subsequent events, nonadjusting event yung execution kaya hindi
mababago si current to noncurrent.

Covenant - restrictions on the borrower as to undertake further borrowing, paying dividends, maintaining
specified level of working capital, etc.
- Marereclassify ang liabilities kapag binreach ang covenant. Same treatment siya sa refinancing.

Grace Period - is the period within which the entity can rectify the breach and during which the lender cannot
demand immediate repayment.
- Same treatment ng covenant. Kung saan nagtake place yung event, dun siya marereclassify.

Deferred Revenue or Unearned Income - income already received but not yet earned.
- Income is earned when the service is rendered regardless of when the cash is collected. (Accrual
principle)
Current Liabilities (Examples): Unearned Interest Income, Unearned Rental Income, Unearned Subscription
Revenue
Non-Current Liabilities (Examples): Long-term service contracts, Long-term leasehold advances
Accounting Entries
-Liability method-
Cash xx
Unearned Income xx
#
Unearned Income xx
Income xx
-Income Method-
Cash xx
Income xx
#
Income xx
Unearned Income xx
#

Bonus - motivate officers and employees by directly relating their well-being to the success of the entity.
For variations of bonus computation:
a. Income before bonus and before tax
- Times mo lang si income sa rate ng bonus
b. Income after bonus but before tax
- B = rate of bonus(income - B)
c. Income after bonus and after tax
- B = rate of bonus(income - B - T)
- T = tax rate(income - B)
- B = rate of bonus(income - B - tax rate(income - B))
d. Income after tax but before bonus
- B = rate of bonus(income - B - T)
- T = tax rate(income - B)
- Tax in proof = (Income - B) * tax rate

Returnable Deposits - consist of cash or property received from customers but which are refundable after
compliance with certain conditions
Accounting Entries
Cash xx
Containers’ Deposit xx
#
Containers’ Deposit xx
Cash xx
#
Containers’ Deposit xx
Container xx
#