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Introduction To Liabilities

Liabilities are present obligations that arise from past transactions and require an outflow of resources. They have three essential characteristics: 1) they are obligations of an entity, 2) they arise from past events, and 3) their settlement requires an outflow of economic benefits. Current liabilities are expected to be settled within one year, while noncurrent liabilities are obligations due after one year. Examples of noncurrent liabilities include long-term debt, finance leases, and deferred tax liabilities. The classification of certain liabilities can change based on factors like loan covenants and grace periods.

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84 views

Introduction To Liabilities

Liabilities are present obligations that arise from past transactions and require an outflow of resources. They have three essential characteristics: 1) they are obligations of an entity, 2) they arise from past events, and 3) their settlement requires an outflow of economic benefits. Current liabilities are expected to be settled within one year, while noncurrent liabilities are obligations due after one year. Examples of noncurrent liabilities include long-term debt, finance leases, and deferred tax liabilities. The classification of certain liabilities can change based on factors like loan covenants and grace periods.

Uploaded by

AJ Gaspar
Copyright
© © All Rights Reserved
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Download as DOCX, PDF, TXT or read online on Scribd
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Liabilities are present obligations of an entity arising from past transactions or events, the settlement of which is expected to

result in an outflow from the entity of resources embodying economic benefits.

ESSENTIAL CHARACTERISTICS:
a. Liability is present obligation of a particular entity.
b. Liability arises from past event.
c. The settlement of the liability requires an outflow of resources embodying economic benefits.

1. Present Obligations:
 Legal obligations – consequence of a binding contract or statutory requirement
 Constructive obligations – give rise to liabilities by reason of normal business practice, custom and desire to maintain
good business relations or act in an equitable manner.
2. Past Event
 The past event that leads to a legal or constructive obligation is known as an obligating event.
3. Outflow of future economic benefits

Measurement of current liability (short-term obligations) – FACE AMOUNT


Measurement of noncurrent liability – initially at present value and subsequently measured at amortized cost.

CURRENT LIABILITIES (PAS 1)


- The entity expects to settle the liability within the entity’s operating cycle.
- The entity holds the liability primarily for the purpose of trading.
- The liability is due to be settled within twelve months after the reporting period.
- The entity does not have an unconditional right to defer settlement of the liability for at least 12months after the
reporting period.
NONCURRENT LIABILITIES
- Noncurrent portion of long-term debt
- Finance lease liability
- Deferred tax liability
- Long-term obligation to officers
- Long-term deferred revenue

A liability which is due to be settled within twelve months after the reporting period is classified as current, even if:

a. The original term was for a period longer than 12months


b. An agreement to refinance or to reschedule payment on a long-term basis is completed after the reporting period and
before the financial statements are authorized for issue.

Covenants – often attached to borrowing agreements which represent undertakings by the borrower.

Breach of covenants:
-if certain conditions relating to the borrower’s financial situation are breached, the liability becomes payable on demand.
-PAS 1, par 74, provides that such liability is classified as current even if the lender has agreed, AFTER the reporting period and
before the statements are authorized for issue, not to demand payment as a consequence of the breach.
- the liability is classified as noncurrent if the lender has agreed ON OR BEFORE the end of the reporting period to provide a
grace period ending at least 12months after that date.

Grace period – a period within which the entity can rectify the breach and during which the lender cannot demand immediate
repayment.

PRESENTATION OF CURRENT LIABILITIES


Minimum requirements for current liabilities
a. Trade and other payables
b. Current provisions
c. Short-term borrowing
d. Current portion of long-term debt
e. Current tax liability

Estimated liabilities
- Are obligations which exist at the end of the reporting period although their amount is not definite.

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