LIABILITIES  Pension Liability

 In the absence of additional information, bonds payable,

 Liabilities are PRESENT OBLIGATONS of an entity to mortgage payable, and pension liabilities are normally
transfer an economic resource as a result of past classified as non-current liabilities
events.
 For these to be considered as current, they must be
Two Types of Obligation settled within 12 months after the reporting period,
regardless of the original term of the liability.
1) Legal Obligation- arise from contracts, laws, and
regulations Scenarios Classification
2) Constructive Reporting date to Maturity ≤ 12 months Current
Reporting date to Maturity ≥ 12 months Non-Current
 Obligations that will be incurred in the future shall not be
recognized as there is no present obligation to account d) It does not have an unconditional right to defer
for. settlement of the liability for at least twelve months
Examples of Liabilities: after the reporting period.

 Accounts payable to suppliers for the purchase of Non-Current Liabilities

goods  An entity shall classify all other liabilities as NON-
 Amounts withheld from employees for taxes and for CURRENT.
contributions to the Social Security System
 Deferred tax liability is always considered as non-
 Accruals for salaries, interest, rent, taxes, product
current.
warranties and profit-sharing bonus
 Dividends payable in cash or noncash asset ILLUSTRATION #1
 Deposits and advances from customer
 Debt obligations for borrowed funds – notes, ROSARIO Company had the following non-trade payables
mortgages, and bonds payable as of December 31, 2023:
 Income tax payable 7-year bonds payable with maturity of July 1, 4,000,000
 Deferred or unearned revenue 2024
FINANCIAL REPORTING OF LIABILITIES 3-year bonds payable with maturity of 2,000,000
December 31, 2025
Current Liabilities 5-year loan payable borrowed last October 5,000,000
1, 2019
a) It expects to settle the liability within its normal 4-year loan payable borrowed last April 1, 1,000,000
operating cycle 2022
Examples: 10-year loan payable borrowed last June 30, 10,000,000
 Accounts Payable 2023: principal is payable in 10 equal annual
 Notes payable for operating purposes instalments starting on June 30,2024
 Accrued operating expenses 6-year loan payable with P400,000 semi- 8,000,000
 Unearned Income; and annual principal payments every January 1
 Warranty liabilities and July of each year
Accrued interest payable 625,000
There are normally classified as current even if they
will be settled beyond 12 months after the
reporting date as long as it will be paid within the Required: From these given liabilities, determine the amounts
normal operating cycle. to be classified as current and noncurrent.

b) It holds the liability primarily for the purpose of Current Non-current

trading 1. 7 year bonds payable P4,000,000
c) The liability is due to be settled within twelve months
after the reporting period 2. 3 year bonds payable P2,000,000
Examples: 3. 5 year loan payable 5,000,000
 Bank overdraft
 Dividends payable 4. 4 year loan payable 1,000,000
 Current income tax payable and indirect taxes
payable 5. 10 year loan payable 1,000,000 9,000,000
 Accrued interest payable
 Notes payable (issued other than for operating 6. 6 year loan payable 800,000 7,200,000
purposes), loans and bonds payable maturing
7. Accrued Interest 625,000
within 12 months after the reporting date,
payable
regardless of the length of their original term
 Portion of notes payable, loans payable, bonds Total P P19,200,000
11,425,00.00 .00
payable, and lease liability that are due to be
settled within 12 months after the reporting
date
 PROVISIONS RESTRUCTURING

 An existing liability of uncertain timing or uncertain  A program that is planned and controlled by
amount. management and materially changes either the
scope of a business of an entity or the manner in
RECOGNITION OF PROVISION which that business is conducted.
 Provision shall be recognized as a liability in the Restructuring Events may include:
financial statements under the following conditions:
 The entity has a present obligation, legal or a. Sale or termination of a line of business
constructive as a result of past event. b. Closure of business location in a region or relocation
 It is probable that an outflow of resources of business activities from one location to another or
embodying economic benefits would be relocation of headquarters from one country to
required to settle the obligation. another.
 The amount of the obligation can be c. Change in management structure, such as elimination
measured reliably of a layer on management or making all functional
units autonomous.
MEASURMENT OF PROVISION d. Fundamental reorganization of an entity that has
material and significant impact on its operations.
 The amount recognized as a provision should be the
best estimate of the expenditure required to settle Provision for Restructuring
the present obligation at the end of reporting period.
A constructive obligation for restructuring arises when two
ILLUSTRATION: Expected Value Method conditions are present:
 An entity sells goods with a warranty under which 1. The entity has a detailed formal plan for the
customers are for the cost of repairs of any restructuring which includes the following:
manufacturing defects that become apparent within six a) The business being restructured
months after purchase. b) The principal location affected
 If minor defects are detected in all products sold, c) The location, function and approximate number of
repair costs would be about P1,000,000. employees who will be compensated for
 If major defects are detected in all products sold, terminating their employment
repair costs of P5,000,000 would result. d) Date when the plan will be implemented
 The entity’s past experience and future expectations e) The expenditures that will be undertaken
indicate that 75% of the goods sold will have no 2. The entity has raised valid expectation in the minds of
defects, 20% will have minor defects and 5% will have those affected that the entity will carry out the
major defects. restructuring by starting to implement the plan and
announcing the main features to those RING affected
The expected value or cost of repairs is measured as follows: by it.
75% sales None Amount of Restructuring Provision
20% sales (20% x 1,000,000) 200,000.00
5% sales (5% x 5,000,000) 250,000.00  A restructuring provision shall include only direct
Total expected value or cost of repairs 450,000.00 expenditures arising from restructuring.
INCLUSIONS
OTHER MEASUREMENT CONSIDERATIONS
 salaries and benefits of employees to be incurred
1. Risks and Uncertainties after operations cease and that are associated with
2. Present Value of Obligation the closure of the operations.
3. Future Events
4. Expected Disposal of Assets EXCLUSIONS
5. Reimbursements
 cost of retraining or relocating continuing staff;
6. Changes in provision
marketing or advertising program to promote the
7. Use of provision
new company image; investment in new system and
8. Future operating losses
distribution network.
9. Onerous Contract

CONTINGENT LIABILITY
EXAMPLES OF PROVISIONS
 Possible obligation that arises from past event and
Warranties
whose existence will be confirmed only by the
Environmental Contamination
occurrence or non-occurrence of one or more
Decommissioning or abandonment costs
uncertain feature events not wholly within the control
Court case
of the entity.
Guarantee
 Present obligation that arises from past event but is
not recognized because is it not probable that an
outflow of resources embodying economic benefits
 will be required to settle the obligation or the amount Environmental Clean Up Expense 2,000,000
of the obligation cannot be measured reliably. Provision for Environmental Clean UP 2,000,000

Contingent Liability and Provision CASE #3

 The second definition states that a contingent liability is
a present obligation.
 However, it is either probable or measurable but not
both to be considered a contingent liability.
 If the present obligation is probable and can be
measured reliably, the obligation is not a contingent
liability but shall be recognized as a provision
TREATEMENT OF CONTIGENT LIABILITY
 only a disclosure in the financial statement but shall not
be recognized
REQUIRED DISCLOSURES
a. Brief description of the mature of the contingent
liability
b. An estimate of its financial assets
c. An indication of the uncertainties that exist
d. Possibility of any reimbursement.
NOTE: If a contingent liability is remote, no disclosure is
necessary.
As a result of an uninsured accident during the year 2022,
personal injury suit for P3,000,000 has been filed against
BSAC Company. It is the judgement of the company’s legal
counsel that an unfavourable verdict will result in a loss
ranging from P1,800,000 to P2,800,000.
The Lawyer believes that the most reasonable estimate is
P2,200,000.
A. A provision is recognized for the best estimate of the
obligation. The best estimate is the most likely
outcome which is P2,200,000.
Loss from Accident 2,200,000
Provision for Damages 2,200,000
Additional possible obligation of P600,000 (the difference
between the recorded amount of P2,200,000 and the highest
in the range of estimated amounts of P2,800,000) is to be
disclosed in the notes to the financial statements

ILLUSTRATIVE CASES
CASE #1
In September 2022, Howell filed a suit against Blue Company,
alleging violation of patent rights and it is seeking payment
for damages of 7,000,000.
Blue disclaims the charges and the legal counsel advises that
as of the date of the issuance of Blue Company’s financial
statements, it is probable that the enterprise will not be found
liable.
A. No provision is recognized, because based on the
evidence available as of the financial statement
date, there is no obligation as a result of past events.
The matter is disclosed as a contingent liability, unless
the probability of any outflow is regarded as
remote.

CASE #2
ABC 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 the issuance of its 2022 financial statements,
a reasonable estimate of the cost of this clean-up related to
2022 operations is P2,000,000.
A. A provision is recognized for the estimated amount
of the costs of the clean-up, which is 2,000,000. The
obligating event is one of a constructive obligation.
The entry for the recognition of the provision is: