INTERMEDIATE

ACCOUNTING

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 TABLE OF CONTENTS
Liabilities 3-5
Provisions 5-7
Notes Payable 7
Loans Payable 7
Debt Restructuring 8

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 1. Held for trading
INTERMEDIATE ACC. 2 2. Expected to be settled within
cycle
Topic: Liabilities
3. Due within 12 months after
Liabilities reporting period
4. Entity does not hold an
 Present obligation arising from unconditional right to defer
past events settlement
 Outflow of economic benefits
Refinancing Agreement
Financial Liabilities
 Refinancing
 Contractual obligation to deliver o Replacement of existing
cash debt
 Contractual obligation to  Discretion to refinance
exchange financial assets or o Debt is non-current.
liabilities that are potentially
unfavorable Breach of Covenants

Recognition Principles  Violation of agreement

 Upon violation, liability is current.
1. Meets the definition of liability  If grace period of 12 months was
2. Probable that an outflow of provided, liability is non-current.
resource will result
3. Measured reliably CURRENT NON-CURRENT
No discretion to With discretion to
Initial Measurement
refinance refinance
Upon violation With grace period
1. Fair value minus transaction cost
After reporting On/Before
2. Except FVPC (transaction cost is
date reporting date
expensed)
Trade Accounts Payable
Subsequent Measurement
 Liability from the operations of
1. Liability classified at amortized
business.
cost (effective interest)
2. Liability classified held for trading Unearned Income
at fair value (through profit/loss)

Current Liability

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  Advanced payments from  The price that would be paid to
customers for future services of transfer a liability in an orderly
delivery of goods transaction between market
 Issuance of gift certificates participants at the measurement
date.
Deposits Liabilities  Conceptually, the fair value of the
liability is equal to the present
 Liability for deposits made by
value of the future cash payment
customers for:
to settle the obligation.
o Returnable containers
o Security deposits Present Value
o Escrow agreement
o Deposit for future  Discounted amount of the future
subscription cash outflow in settling an
obligation using the market value
Accrued Expenses of the interest.

 Expenses that had been incurred, Amortized Cost

but not yet paid.
 Amount at which the financial
Terms & Other Information liability is measured at initial
recognition minus principal
Transaction Cost repayment, plus or minus the
cumulative amortization using the
 Incremental costs which are effective interest method of any
directly attributable to the issue of difference between the initial
a financial liability. An amount & the maturity amount.
incremental cost is one that
 Simply, the face amount minus
would not have been incurred if
present value is amortized using
the entity had not issued the
effective interest method. This is
financial liability.
either discount or premium on the
INCLUDE DOES NOT issue of the financial liability.
INCLUDE *NOTE: current liabilities are not
Fees & Debt premiums or discounted anymore, but measure and
commission paid discounts reported at their face amount
Levies by Financing cost Rationale: the discount is usually
regulatory agency not material and therefore
Transfer taxes & Internal admin. ignored.
duties cost
Non-current Liabilities
Fair Value

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  Are initially measured at present  Current (ex. rent, subscription)
value.  Non-current (ex. long-term
 Subsequently measured at service contract, leasehold
amortized cost. advances)
 If liability is interest-bearing, it is
initially and subsequently
measured at face amount. (In
Gift Certificates
this case, face amount = present
value)  When sold, it is recognized as
“Gift Certificates Payable”
Taxes Payable
Refundable Deposits
 Employers are required to
withhold the ff.:  Consists of cash or property
o Income tax payable by received from customers but
employees which are refundable after
o Employee’s contribution to compliance with certain
SSS conditions
o Employee’s contribution to
PhilHealth Customer Loyalty Program
o Employee’s contribution to
 To build brand loyalty, retain
Pag-Ibig Fund
valuable customers, increase
 These are considered as
sales volume.
“Payroll Taxes Payable” until
 Designed to reward customers
remitted.
for past purchases and to
*NOTE: entity is required by law to
provide them with incentives to
make contribution to SSS,. PhilHealth,
make further purchases.
and Pag-Ibig Fund representing its
share in the benefits of the employees.  Award credits are called points.

Value Added Tax Payable Topic: Provisions

 Under National Internal Revenue Provision

code, entities must collect VAT &
record it as “Value Added Taxes  A liability that is uncertain of
Payable” until remitted to BIR. timing or amount
 Example:
Deferred Revenue o Warranty
o Provisions for Loss on
 Income already received but not
Litigation
yet earned.
o Environmental Damages

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 o Restructuring Provisions  If the outcome is virtually
o Decommissioning Liability, certain, it is no longer a
Obligations from contingent asset.
Guarantees

Recognition Principle
Initial Measurement
1. Principle obligation
2. Probable of outflow of resources  Shall be measured at the best
3. Can be measured reliably estimate
 Best estimate may be determined
Ranges of Outcomes based on:
o Best estimate
1. Virtually certain: sure to happen  When there’s only
2. Probable: most likely to happen one event
than not o Mid-point
3. Possible: 50/50
 When there is a
4. Remote: will not happen
range of possible
Contingent Liability events.
o Expected value
 A liability that does not meet all  When there is a
the recognition criteria. large population
CONTINGEN PROBABLE POSSIBLE REMOTE
 They are either probable or T
measurable, but not both. Disclose
Recognize &
only
 They are disclosed except when Liability Disclose Ignore
CONT.
remote. PROVISION
LIABILITY
 Possible obligation which will only Disclose
only
be confirmed by occurrence/non- Asset
CONT.
Ignore Ignore
occurrence of uncertain future ASSET
event.
*NOTE: contingent liabilities are Present Values
disclosed only; except when possibility
 Where appropriate, all estimates
of an outflow of resources embodying
of provision shall be incorporated
economic benefit is remote.
with time value of money.
Contingent Asset
Reimbursement
 Assets that are not recognized
 Amount of collectible from a third
 Disclosed only when probable
party for the loss of a provision

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  Recognized separately from the  If issued as a consideration for a
provision property purchased, the fair value is
the cash price equivalent
Deductible Clause  If the note was interest bearing, the
fair value is the face value
 An amount that is not covered by  If the note was non-interest bearing,
an insurance company the fair value is the present value
 Usually termed as “Participation
Fee” on the insurance proceeds Topic: Loans Payable

Change in Estimate Initial Measurement

 Fair value minus transaction cost

 Shall be accounted for
 Present value of future cash flows
prospectively
discounted at the effective rate
Customer Loyalty Program
Nominal Rate
 Promotional activities intended to  Also known as the coupon rate or
increase sale stated rate
 Entity usually offers premiums  The interest rate as per the contract
such as bags, t-shirts, umbrellas,  Used to compute for the interest
etc. payable/receivable every interest
date.
Restructuring Provision
Effective Rate
 A program that is planned &
controlled by management &  Also known as the discount rate or
materially changes either the yield rate
scope or manner of business  Used to compute the present value
of the cash flow
conducted.
 Recognition Principle: Effective Rate vs Nominal Rate
o The entity has detailed
plan  Effective = Nominal; then loan is
o The plan has been issued at face amount
communicated and  Effective > Nominal; then loan is
issued at discount
implemented.
 Effective < Nominal; then loan is
issued at premium
Topic: Notes Payable
Origination Cost
Initial Measurement
 Amount incurred to issue the liability
 Fair value less transaction cost.

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  These are direct attributable cost in  The difference between the old
acquiring a liability. liability and the modified liability shall
be recognized in profit or loss only if
Origination Fee substantial
 To be substantial, the difference
 Amount collected from the borrower should be at least 10% of the old
 Treated as an advance payment liability
from the borrower

Topic: Debt Restructuring

Topic: Bonds Payable
Asset Swap

 The asset is used to pay the liability  Debt instruments similar to notes
 The difference between the carrying and loans.
amount of the liability and the  A contract that represents a right of
carrying amount of the asset is the holder to receive cash from the
issuer.
recognized in profit or loss.
 Debtor-creditor relationship.
 Bond indenture is the contract
Equity Swap
between the issuer and the holder.
 The liability is extinguish through Bond Indenture
issuing of shares
 The shares shall be valued in the The bond indenture may specify the
order of priority: following:
o Fair value of the shares
 Rights and duties
o Fair value of the liability 1. Call Provision – the issuer had the
o Par value of the shares right to call.
2. Redemption Right
Modification of Terms
 Restrictions and Requirements
 May have the ff. modifications: 1. Sinking fund and financial ratios.
o May decrease the interest 2. Authorized amount and interest.
rate Types of Bonds
o May forgive the accrued
interest  As to Maturity
o May extend the payment 1. Term bonds
terms 2. Serial bonds
3. Extendable or retractable bonds
o May decrease the principal
payments  As to recording point of view and
 The new liability shall be measured payment of interest
at present value discounted using 1. Registered bonds
the original effective rate 2. Coupon bonds
3. Zero-coupon bonds
4. Income bonds

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 5. Participating bonds while the effective rate is the actual
6. Indexed and inflation-linked bonds interest incurred on the bond issue.
 The effective rate is the rate that
 As to maturity and risk exactly discounts estimates cash
1. Mortgage bonds future payments through the
2. Collateral trust bonds expected life of the bonds payable or
3. Asset-backed security when appropriate, a shorter period
4. Subordinate bonds to the net carrying amount of the
5. Debentures bonds payable.
6. Junk bonds  The nominal rate is also known as
coupon or stated rate. The
 As to right of redemption effective rate is also known as yield
1. Callable bonds or market rate.
2. Convertible bonds  The issue price (present value) is
less than the face amount.
 As to issuer  Interest expense is higher than
1. Corporate bonds interest paid.
2. Government bonds  The amortization shall be added to
the carrying amount until it reaches
 As to currency the face amount at maturity.
1. International bonds
2. Foreign currency bonds Bond issued at a premium
Initial measurement  The issue price (present value) is
greater than the face amount.
 Bonds are measured at transaction  Interest expense is lower than
price less the transaction cost, interest paid.
which is the bond issue cost.  The amortization shall be deducted
 It shall constitute its fair value, which from the carrying amount until it
approximates its present value. reaches the face amount at maturity.
Subsequent measurement Bond issued in between interest dates
 The bonds shall be carried at  When bonds are sold in between
amortized cost using effective interest dates, the pre-issuance
interest method. interest should be separated from
 If the issuer opted to measure the the issue price.
bonds at fair value option, the same  It shall be recognized as an interest
shall be carried at fair value at expense or interest payable at the
reporting date. date of issue.
Effective interest method Serial bonds
 The effective interest method or  A type of bond where the principal is
simply “interest method” or scientific paid in a series of payments
method recognizes two kinds of (installments).
interest rate – nominal rate and  The issue price is computed using
effective rate. the bond outstanding method.
 The nominal rate is the rate
appearing on the face of the bonds Retirement of bonds

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  Retirement of bonds prior to
maturity.
 May be through refunding or non-
refunding.
 The carrying amount of bonds is
updated up to the date of retirement.
 The difference between the updated
carrying amount and the retirement
price is recognized in P/L.

Compound financial instruments

 A financial instrument that contains

both liability and equity components.
 These components are accounted
for separately.
 The liability shall be measured at fair
value and the residual amount shall
be the equity.

Examples:

1. Convertible bonds – bonds that can

be converted into shares of stock.
2. Bonds with share warrants – bonds
that carries share warrants or right to
purchase shares of stock.

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