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Classification of Liabilities
Classification of Liabilities
Classification of Liabilities
Classification of
liabilities
Joint World Bank and IFRS Foundation
train the trainers workshop hosted by the
ECCB, 30 April to 4 May 2012
Concepts
classification of liabilities
IFRS
2010Foundation | 30 Cannon
IFRS Foundation. Street Street
30 Cannon | London EC4MEC4M
| London 6XH |6XH
UK. |www.ifrs.org
UK. www.ifrs.org
Classification conceptsassets
and claims 4
IFRS
2010Foundation | 30 Cannon
IFRS Foundation. Street Street
30 Cannon | London EC4MEC4M
| London 6XH |6XH
UK. |www.ifrs.org
UK. www.ifrs.org
Conceptliability definition 6
A liability is defined as a:
present obligation
arising from a past event
the settlement of which is expected to lead to
an outflow of future economic benefits from the
entity
Recognition
The transaction is recognised when the entity
obtains the goods or services.
Goods or services received are recognised as
assets or expenses as appropriate.
The transaction is recognised as equity (if equity-
settled) or as a liability (if cash-settled).
If a payment is required, the payment amount is
based on the price of the entitys shares (eg
share appreciation rights).
IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
International Financial Reporting Standards
Classifying liabilities
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IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
IAS 37: Provisions, Contingent Liabilities
and Contingent Assets 20
Provisions
A provision is a liability of uncertain timing or
amount (ie recognition is uncertain).
A liability may be a legal obligation or a
constructive obligation.
A constructive obligation arises from the entitys
actions, through which it has indicated to others
that it will accept certain responsibilities, and as
a result has created an expectation that it will
discharge those responsibilities.
IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
IAS 37: Provisions, Contingent Liabilities
and Contingent Assets 21
Examplesprovisions
Ex 1: Waste from As factory contaminated the
groundwater. Lawsuit: local community seek
compensation for damages to health from
contamination. A acknowledges wrongdoing.
Court is deciding extent of the compensation.
Lawyers expect ruling in +2 yrs &
compensation in the range of CU1,000,000 to
CU30,000,000.
Examplesnot provisions
Ex 1: provision for self-insurance
Ex 2: Ski-resort operator operates in a very
cyclical business, with good years and bad
years depending primarily on the weather. To
reduce earnings volatility, it recognises
provisions in good years to reverse in bad
years.
Ex 3: provision for depreciation
Ex 4: provision for doubtful debts
Exampleconstructive obligation
Waste from As factory contaminated the
groundwater. A is not required by law to
restore the contaminated environment & there
is no court case. However, in the reporting
period the entity publicly announced that it
would restore the contaminated environment
within the next 12 months.
Contingent liabilities
Contingent liabilities are:
possible obligations whose existence will be confirmed
by uncertain future events that are not wholly within the
control of the entity.
obligations that are not recognised because their
amount cannot be measured reliably or settlement is
not probable (eg litigation against the entity when the
occurrence of any wrongdoing by the entity is uncertain
and it is more likely than not that the entity will
successfully defend the case).
Contingent liabilities are not recogniseddefinition and
recognition criteria are not met.
Examplecontingent liability
A community is seeking compensation from A
for damages to their health as a result of
contamination believed to be caused by As
plant.
It is doubtful whether A is the source of the
contamination because
many entities operate in the same area
producing similar waste & it is unclear which
entity is the source of the leak
A has taken precautions to avoid leaks and
is vigorously defending the case.
IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
IAS 37: Provisions, Contingent Liabilities
and Contingent Assets 27
Fair value
Held for trading through
P&L
No reclassification permitted
2011
IFRS
October
Foundation
| Sao|Paulo
30 Cannon
IFRS Conference
Street | London EC4M 6XH | UK. www.ifrs.org
IFRS 9
Financial Instruments 31
Classification of leases
A finance lease transfers to the lessee substantially
all the risks and rewards incidental to ownership of
the leased asset.
All other leases are operating leases.
When a lease includes both land and buildings
elements, the classification of the land and building
elements are considered separately.
in determining whether the land element is an
operating or finance lease, an important consideration
is that land normally has an indefinite economic life.
Operating leases
The leased asset remains in the statement of
financial position of the lessor.
Operating lease payments are usually
recognised in profit or loss on a straight-line
basis.
From the perspective of the lessee, if payments
are subject to escalation, straight-line
recognition is profit or loss may give rise to a
liability on the statement of financial position
IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
IAS 17
Leases 39
Finance leases
Finance leases are accounted for by lessees as
an asset purchased (other IFRSs then apply to
the asset) on credit (a liability).
Initially, the liability is recognised at:
the fair value of the leased property, or if lower
The present value of the minimum lease
paymentsthe implicit interest rate is used as
the discount rate
Employee benefits
Employee benefits are all forms of consideration
paid for services of employees or for termination
of employment.
IAS 19 separates employee benefits into 4
categories:
short-term benefits
post-employment benefits
other long-term benefits
termination benefits
IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
IAS 19
Employee Benefits 41
Post-employment benefits
Post-employment benefits are payable after the
completion of employment.
Two types:
defined contribution plan, entity pays fixed
contributions to a separate entity (a fund) and
has no legal or constructive obligation to pay
further contributions if the fund cannot pay the
employee.
all other post-employment plans are defined
benefit plans.
IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
IAS 19
Employee Benefits 44
Post-employment benefitsdefined
contribution
Employees (not the employer) are exposed to risks.
Employer:
recognises contributions payable as an expense as
the employee provides services in exchange for the
contributions.
measures obligations for unpaid contributions at
undiscounted amounts (application of the cost
constraint).
disclose amount recognised as an expense.
IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
IAS 19
Employee Benefits 45
Termination benefits
Termination benefits arise only on termination, rather
than during employment.
Principlethe event that gives rise to an obligation is the
termination of employment rather than employee service
Recognise expense and a liability at the earlier of:
when the entity can no longer withdraw the offer of those
benefits
when the entity recognises the related restructuring
provision in accordance with IAS 37.
No disclosures specified in IAS 19.
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