Chapter 1: Liabilities Accounting for Nonfinancial Liabilities

Liabilities - depending on relevant accounting standard

a. Provisions, Contingent liabilities, and
- present obligations to transfer an economic Contingent assets (PAS 37)
resource as a result of past events. b. Lease liabilities (PFRS 16)
a. Present Obligation c. Liabilities for employee benefits (PAS 19)
- duty/responsibility that an entity has Other Nonfinancial liabilities
no practical ability to avoid.
- entity liable must be identified, but not a. Estimated amount: Warranties, income taxes
payable or value-added tax payable
necessary who is owed.
b. Equal to amount received from customers not
(1) Legal Obligation
yet earned: Unearned income, liability from gift
- consequence of binding contract certificate.
or statutory requirement.
(2) Constructive Obligation
- custom and a desire to maintain Measurement of liabilities
good business relations.
b. Obligation to transfer an economic Current Noncurrent
resource Initial Face amount Present Value
Subsequent Amortized Cost
- must be to pay cash, transfer noncash
asset or provide service at future.
c. Liability arises from a past event. Classification (financial reporting purposes)
- liability not recognized until incurred.
Current Liabilities
- obligating event (past event that leads
to legal or constructive obligations) a. within entity’s operating cycle.
b. trading liability
General Classification of Liabilities (accounting)
c. due to be settled w/in 12 months (for
Financial Liabilities Nonfinancial Liabilities nontrade)
- any liability that gives (a) Unearned Income d. entity does not have unconditional right to
rise to contractual defer settlement of liability for at least 12
obligation.
a. to deliver cash or (b) Estimated warranty months after reporting period.
other financial asset liability
Noncurrent Liabilities
to another
b. to exchange financial (c) Income tax payable a. Noncurrent portion of long-term debt
assets/liabilities to (d) Constructive
another that are
b. Finance lease liability
obligations
potentially c. Deferred tax liability
unfavorable. d. Long-term obligation to officers
Note: certain liabilities such as lease and employee e. Long-term deferred revenue
benefits appear to financial liabilities but accounted
differently. Long-term debt falling due w/in one year

Accounting for Financial Liabilities General rule: Current

Financial Liabilities Exceptions:
Initial FV less transaction cost
Subsequent Amortized cost Refinancing on long term basis is completed on or
Exception FVPL before the end of reporting period – Noncurrent
If entity has discretion to refinance or roll over an Advances to suppliers
obligation for at least 12 months after reporting Accounts payable
period – Noncurrent b. Accounts receivable in credit balance
Accounts receivable
If entity has unconditional right to defer settlement
Advances from customers
of liability for at least 12 months after reporting
c. Bank overdraft that cannot be offset
period. – Noncurrent
Cash in bank
Convertible bonds payable Bank overdraft

- bonds that can be converted into equity Chapter 2: Accounts and Notes Payable
securities.
- convertibility feature shall not be Accounts Payable
considered in classifying bonds payable as - arises from credit purchases, considered as a
current or noncurrent, shall assess period short-term financing.
of reporting date to maturity.
Note: Cash purchases or refunds does not affect A/P.
Covenants
Adjustments to accounts payable balance
- often attached to borrowing agreements
a. Unreleased, stale and postdated checks
which represents undertakings by the
- add back to accounts payable
borrower.
- restrictions on borrower. Cash in bank
Breach of covenants Accounts Payable
- liability becomes payable on demand. b. Premature or late recording of supplier’s
- liability = current, borrower does not have invoice.
unconditional right to defer settlement for Purchases/Other expense account
at least 12 months. Accounts Payable
- exc: noncurrent if lender agreed before end
Notes Payable
of reporting period to provide grace period
at least 12 months after that date. - maker (creates and signs promissory note)
- payee (whom the amount stated)
Grace period – a period w/in which the entity can
rectify the breach during which the lender cannot Initial recognition and measurement
demand immediate payment.
- Fair value less transaction costs incurred
Estimated liabilities
Interest bearing Noninterest bearing
- obligations exist at the end of reporting Fair Value = Face value Fair value = Present
period although amount is not definite. value using market rate
- either current or noncurrent.
Deferred revenue Stated rate – amount of interest maker shall pay in
addition to face amount of promissory note.
- income received but not earned
- current if realizable w/in one year. Market rate – general prevailing rate regardless
whether note is interest bearing or not.
Other items to be considered (AJE)
PV of single PV of Ordinary PV of Annuity
a. Accounts payable in debit balance payment Annuity Due
 For term notes For serial For serial c. Transaction costs on issuance of
payable, installment = to installment = to liability shall be expensed outright.
installment installment installment
d. Designation on FVPL does not
payments are amounts in equal amounts in
unequal/ interval at the equal interval at automatically make financial liability
intervals are end of each the beginning as held for trading.
unequal. period. of each period.
Cash flow Cash flow Cash flow Exceptions to recognition in Profit or Loss
amount = face amount = amount =
amount periodic periodic - not all changes in FV are recognized in
installment installment profit or loss.
amount amount - changes in the entity’s own credit risk is
deducted from OCI.
Subsequent Accounting for Promissory Notes Determining the changes in FV from entity's own
Interest-bearing Interest-bearing Noninterest credit risk
= market rate ≠ market rate bearing
Interest Stated rate Market rate on initial Procedures
expense to face recognition
amount 1. Determine FV of financial liability at end of
CA each Remaining Present value on
reporting face amortization table period by discounting the remaining cash
period amount flows using market rate as of that date.
Accrued Not 2. Determine the portion of interest rate of
interest Based on stated rate applicable
payable return used
Note: Note’s fair values at end of each period is not
Instrument-specific portion of the rate of
considered, exc: note measured at FVPL
return = Total rate of return – benchmark rate
Financial Liabilities – FVPL as of date of issuance
- entity has an option, on initial recognition, to 3. Determine PV of remaining cash flow
irrevocably designate a note payable at using discount rate = Instrument-specific
FVPL meeting either ff scenarios: portion of the rate of return + benchmark
a. designation eliminates or significantly 4. Difference between PV and FV = amount of
reduce a measurement or recognition change in FV from changes in entity’s own
inconsistency (accounting mismatch) credit risk.
b. a group of financial liabilities or
CA of liability @ beg. Difference recognized
financial assets is managed and its
of period in profit or loss.
performance is evaluated on fair value
PV using interest Difference recognized
basis. specific rate + in profit or loss (1,2) /
benchmark rate OCI (2,3).
consequences:
FV @ end of period Difference recognized
a. liability’s carrying amount = fair value in OCI.
as of each reporting date.

Scenario Consequence Chapter 3: Introduction to Provisions

FV > CA Unrealized loss
FV < CA Unrealized gain Provisions and Contingent Liabilities
- reported in profit or loss - inclusions, but are not limited to:
b. Interest expense = liability’s face a. Liabilities from environmental damage by
amount x stated rate, if any. entity’s operation
 b. Defective products (sales return) a. current market assessments of time value of
c. Warranty claims money; and
d. Premium liability b. the risks specific to the liability.
e. Asset retirement obligation (restoration,
Specific measurement guidelines
rehabilitation cost)
1. Expected value
Provision Contingent L.
How likely to Probable Below
- involves large population, weight all
happen? probable possible outcome amounts
Can amount be Yes No associated w/probabilities
measured reliably?
- measurement of provision depends
Financial reporting Liability + Notes only
Notes on likelihood of loss happening.
2. Mid-point of range
- there is continuous range of possible
Probable – more than 50% chance outcomes and each point in that
Recognition of Provisions range is likely as any other.

- liability of uncertain timing or amount Mid-point = lower limit + upper limit / 2

a. entity has present obligation by past event. 3. Events after the reporting period
b. probable outflow of resources - “adjusting events”
c. reliable estimate of amount. - contingent liability settled after
Recognition of Contingent Liability reporting date, effects:
a. amount of actual settlement shall be
a. possible obligation from past event, whose the measurement.
existence will be confirmed only by b. confirms that entity has existing and
occurrence/non-occurrence of uncertain probable obligation as of reporting
event. date.
b. possible obligation from past event but 4. Plaintiff’s offer of out of court settlements
not recognized because - shall not solely be considered as
i. no probable outflow of resources measurement of provision.
ii. no reliable estimate. 5. Future events
Measuring Obligation - includes but not limited to:
a. technological advances that may
- best estimate at end of reporting period. affect costs of settling obligation in
a. to settle obligation at the end of reporting the future.
period. b. New legislation when sufficient
b. to transfer it to third party at that time. evidence exists that the legislation is
virtually certain to be enacted to.
Judgement of entity’s management – primary 6. Expected gain from disposal of asset
basis of obligation’s outcome and financial effects. - shall not be considered in measuring
amount of provision.
Provision
Within 12 months Face value Journal Entries:
More than 12 months Present value
a. Recognition of provision
Discount rate shall be pre-tax rate that reflects:
Loss on provision xx
Provision xx
Exceptions: wasting assets, right-of use (lease) b. corresponding gain on reversal shall be
recognized during the current period.
Subsequent Measurement
Specific Applications of Provisions
General rule: shall not be changed.
a. future operating losses
Exceptions:
- provisions shall not be recognized for
a. Present value increased due to future operating losses.
accretion of interest to be b. onerous contracts
recognized as expense. - unavoidable costs of meeting
contract obligations exceed
Interest expense xx economic benefits expected.
Provision xx
Provision from onerous contracts shall
b. Partial settlement that reduces CA
be lower the ff:
of provision
a. cost to fulfill onerous contracts
Provision xx b. any compensation and penalties
Cash xx arising from failure to fulfil,
includes both incremental and
Provision shall be used only for expenditures for
allocated costs.
which provision was originally recognized.
c. restructuring
Changes in estimated amount of provisions - program that is planned and
controlled by management and
- provisions shall be revised every end of
materially changes either:
period to adjust the current best estimate.
a. scope of business
- changes recorded as gain or loss at period.
b. manner in which that business is
(change in accounting estimate)
conducted
Scenario Gain or Loss d. warranties and premiums
Increase in provision Loss
Decrease in provision Gain
Chapter 2: Premium Liability
Changes in probability of outflow of economic
Premiums
benefits
- articles of value of goods given to customers
-changes in accounting estimate
result of past sales or sales promotion
i. possible -> probable scenarios.
activities.
a. provision shall be recognized during the
- to stimulate sales
current period.
b. loss shall be recognized during the current Journal Entries:
period though obligation arise from prior
a. Premiums are purchased
periods.
Premiums xx
ii probable -> possible scenarios Cash xx
b. Premiums are distributed
a. provision shall be reversed during the
Premiums expense xx
current period.
Premiums xx
c. If premiums are still outstanding
 Premium expense xx - award credits as a separate component
Estimated premium liability of initial sale transaction.
- granting of award credits is effectively
accounted for as future delivery of
Cash Rebate Program
goods or services.
- common variation of a premium offer
Stand alone selling price – price which an entity
- estimated amount of cash rebate is
would sell a promised good or service separately to
recognized both expense and estimated
a customer.
liability in period of sale.
Journal Entries:
Journal Entries:
a. Recognize
a. Recognize cash rebate program
Cash
Rebate expense
Sales
Estimated rebate liability
Unearned revenue – points
b. Record payments to customers
b. Redemption
Estimated rebate liability
Unearned revenue – points
Cash
Sales
Cash discount coupon
Third party operates loyalty program
- popular marketing tool
Journal Entries:
- estimated amount of cash rebate is
recognized both expense and estimated a. Recognize
liability in period of sale.
Cash
Journal Entries:
Sales
a. Recognize cash discount coupon
Revenue from points
Cash discount coupon expense
Estimated coupon liability b. Record payments to airline
b. Record payments to retailers Loyalty program expense
Estimated coupon liability Cash
Cash
Chapter 3: Warranty Liability
Customer loyalty program – IFRS 15
Warranty (PAS 37)
- to reward customers for past purchases and
to provide incentives for further purchases. - for appliances, to provide free repair service
- awarding of credits/points which is or replacement during a specified period if
redeemable. products are defective.

Measurement Recognition of warranty provision

- Fair value of consideration received a. Entity has present obligation, legal or

w/respect to initial sale shall be constructive by past event.
allocated between the award credits and b. Probable outflow of resources embodying
sale based on relative stand-alone economic benefits would be required to
selling price. settle obligation.
 c. Amount of obligation can be measured Unearned warranty revenue
reliably. Warrant revenue
Accounting for warranty
I. Accrual approach
a. Estimated warranty cost is
recorded
Warranty expense
Estimated warranty liability
b. Accrual warranty cost is incurred
and paid
Estimated warranty liability
Cash
 Actual cost > Estimate
Warranty expense
Estimated warranty liability
 Actual cost < Estimate
Estimated warranty liability
Warranty expense
II. Expense as incurred approach
- basis of expediency when
warranty cost is not very
substantial or warranty period is
relatively short.
Accrual warranty cost is incurred and
paid
Warranty expense
Cash
Sale of warranty
- warranty is sometimes sold separately from
the product sold.
- “extended warranty” but w/additional cost.
Journal Entries: (Deferred method)
a. Sale is recorded
Cash
Sales
Unearned warranty revenue
Note: extended warranty contract starts only after the
expiration of the included warranty period.

b. If costs incurred evenly