Chapter – 4

Accounting for Current and Non-Current Liabilities

Sr. No Chapter outline - Topics

80 Accounting for current liabilities classification

81 Accounting for current liabilities Nature

82 Accounting for current liabilities offsetting

83 Accounting for current liabilities types

84 Accounting for current liabilities Payee known and amount known

85 Accounting for current liabilities Payee known and amount not known

86 Accounting for current liabilities Payee not known and amount not known

87 Accounting for current liabilities due to loss contingency

88 Accounting For Non-Current Liabilities

89 Financial Vs. Non-financial Liabilities

90 Measurement of Non-Current Liabilities

91 Amortized Cost Method

92 Amortized Cost Method Practice

93 Effective Interest Rate

94 Effective Interest Rate Practice

95 Accounting for non-current liabilities – Derecognition

Topic Videos 080-095 are mandatory part of this module

Topic 80 – Accounting for Current Liabilities – Classification

Classification of liabilities
IAS 1 requires that the reporting entity must present current and non-current liabilities, as separate
classifications on the face of its statement of financial position.
Current liability
A liability of the entity which:
1. The entity expects to settle in its normal operating cycle; or
2. The entity holds primarily for the purpose of trading; or

1
 3. Is due to be settled within 12 months after the reporting period; or
4. The entity does not have an unconditional right to defer settlement for at least 12 months after
the reporting period.
Obligating Event
An event that creates a legal or constructive obligation that results in an entity having no realistic
alternative but to settle that obligation
Legal obligation
An obligation that derives from the:
1. Terms of a contract, or
2. Legislation, or
3. Operation of law.
Constructive obligation
An obligation resulting from entity’s established:
1. Published policy, or
2. Past practice, or
3. Current Statement – to accept certain responsibilities
As a result, the entity has created a valid expectation on the part of other parties to accept such
responsibilities.
Presentation
Except in the case of liquidation all assets and liabilities are to be presented broadly in order of liquidity.
Because in this case a liquidity presentation provides more relevant and reliable information.

2
Topic 81 – Accounting for Current Liabilities – Nature
Nature of current liabilities
Generally speaking, current liability is payable within 12 months of the reporting date, means one year
after the reporting period as the threshold, subject to the operating cycle issue for liabilities linked to
operations
Examples
• Current portions of long-term debt,
• Bank overdrafts,
• Dividends declared and payable,
• Various non-trade payables
Also include
• Trade credit
• Accrued expenses
• Deferred revenues
• Advances from customers for which services/products are to be provided within one year.
Liability type depends upon
• When to pay
• Whom to pay
• What (how much) to pay

3
Topic 82 – Accounting for Current Liabilities – Offsetting

Offsetting
Means to net-off an asset against a liability while presenting in the Statement of Financial Position.

Reporting Requirement
Reporting framework doesn’t support this idea unless required or permitted by IFRS.

Simultaneous Settlement
Sample Co. purchases raw material from Zee Distributors.
Sample Co. also sells its final product to Zee Distributors.
Purchase = Rs. 9 million
Sales = Rs. 7 million
Net Exposure = Rs. 2 million

Unconditional Right of set-off

During the year current tax paid in advance is Rs. 200,000.
Current tax payable on profits for the year is Rs. 300,000.
Net tax payable will be Rs. 100,000 based on legally enforceable right to set-off

4
Topic 83 – Accounting for Current Liabilities – Types

Liability
Liability means a present obligation that arose from a past event for which there is a probability of out
flow of economic resources in future.

Liability type depends upon

• When to pay
• Whom to pay
• What (how much) to pay

5
Topic 84 – Accounting for Current Liabilities – Payee & Amount Known

Liability
Office rent of a certain amount payable each month to the property owner.

Liability type depends upon

• When to pay
• Whom to pay
• What (how much) to pay

Examples include
• Notes payable
• Dividend payable
• Advance from customer
• Agency liabilities (WHT, VAT)
• Current portion of long-term debts

6
Topic 85 – Accounting for Current Liabilities – Payee Known and Amount Not Known
Best Estimate
Estimated liabilities come under the definition of provisions. Amount to measure such liabilities should
be the best estimate, at the end of the reporting period, to settle the obligation.
This is often referred to as the “expected value” of the obligation.
Best Estimate - Scenario
Sample Co. provides warranty for the machine sold to EFF Co., where the EFF Co. is entitled to
replacement of parts if the defective machine is returned with valid proof of defect.
Sample Co. estimates that if the machine sold is still in warranty had major defects, total replacement
cost would equal Rs. 1,000,000; if the machine suffered from minor defects, the total replacement cost
would be Rs. 500,000.
Sample Co.’s past experience, however, suggests that only 10% of the machines sold will have major
defects, and that another 30% will have minor defects.

Expected value of the cost of refunds

Rs.
Resulting from major defects Rs. 1,000,000 × 0.10 = 100,000
Resulting from minor defects Rs. 500,000 × 0.30 = 150,000
No defects Rs. 0 × 0.60 = 0
Total amount of Liability = 250,000
Accounting Entry
Dr. Loss against warranty claim 250,000
Cr. Provision for warranty claim 250,000
Examples include
• Provision for dismantling asset
• Provision for onerous contract
• Provision for unlawful environmental damage

7
Topic 86 – Accounting for Current Liabilities – Payee Not Known and Amount Not Known
These are also estimated liabilities that come under the definition of provisions.
Best estimate is required to measure its amount.
Examples include
• Provision for premium offers
• Provision for product warranty
Provision for Product Warranty - Scenario
• Sample Co. manufactures washing machines. It sold washing machines to the value of Rs.
900,000 during the reporting period.
• Based on its historical warranty claims experience, it provides for an estimated warranty
expense of 2% of revenues.
Accounting Entries
For creating provision in the current year
Warranty expense Dr. 18,000
Provision for warranty Cr. 18,000
For meeting warranty expense in the following year
Provision for warranty Dr. 14,000
Cash / payroll cost / material cost Cr. 14,000
For reversal of excess provision in the following year
Provision for warranty Dr. 4,000
Warranty expense Cr. 4,000

Provision
Provision is a liability of uncertain timing or amount

8
Topic 87 – Accounting for Current Liabilities – Due to loss contingency

Contingent Liability
IAS 37 defines a contingent liability as an obligation that is either:
A possible obligation arising from past events, the outcome of which will be confirmed only on the
occurrence or non-occurrence of one or more uncertain future events which are not wholly within the
control of the reporting entity; or
A present obligation arising from past events, which is not recognised either because it is not probable
that an outflow of resources will be required to settle an obligation, or the amount of the obligation
cannot be measured with sufficient reliability.

Reporting entity does not recognise a contingent liability in its Statement of Financial Position.

Disclosure requirement
Following disclosures are required in the notes to the financial statements:
1. An estimate of its financial effect;
2. An indication of the uncertainties relating to the amount or timing of any outflow; and
3. The possibility of any reimbursement.

Disclosure not required

Disclosure is not required if the possibility of any outflow in settlement is remote, or if it is impracticable
to do so.

9
Topic 88 – Accounting for Non-Current Liabilities
Non-Current Liability
Generally, it is the obligation that is payable subsequent to the upcoming 12 months from the reporting
date. Which is not a current liability.
Examples
 Debentures / Debt Certificates
 Bonds / Loan Notes
 Long term borrowings
 Provision for dismantling
 Provision for gratuity
 Deferred tax liability

Categories
• Financial liability
• Non-financial liability

10
Topic 89 – Accounting for Non-Current Liabilities – Financial Vs. Non-Financial Liabilities
Categories of Liabilities
Liabilities are broadly be categorized into:
1. Financial liabilities; and
2. Non-Financial liabilities
Financial Liabilities
• These are incurred as a result of normal process of the business.
• These give rise to financial asset of other entity.
• These are mainly payable in cash or are settled by transfer of economic resources.
Examples
Financial Liabilities
• Issue of loan notes
• Borrowings
• Security deposits received
Non-Financial Liabilities
• These do not give rise to financial asset of other entity
• These are not payable in cash.
• These are mainly settled by delivering goods or services.
• These are regarded as contingent liabilities which may or may not occur.
Examples
None Financial Liabilities
• Provision for dismantling
• Provision for product warranty
• Deferred tax liability

11
Topic 90 – Accounting for Non-Current Liabilities – Measurement
Measurement at recognition
Financial liabilities are initially measured at:
• Fair value of consideration received
• Less transaction cost (if the liability is not classified at FVTPL)
Subsequent Measurement
Subsequent measurement of financial liability depends on its classification. Financial liabilities may be
measured at:
1. Amortised cost; or
2. Fair value through profit or loss
Amortised Cost Method
It is used to measure most of the financial liabilities at an amount that is adjusted with the difference of
coupon and effective interest rates, minus repayment of the principal amount.
FVTPL Method
It is used to measure very few financial liabilities, under which the difference between carrying amount
and fair value is reported in the SOPL either gain or loss.

12
Topic 91 – Accounting for Non-Current Liabilities – Amortised Cost Method
Amortised Cost Method
It is used to measure most of the financial liabilities at an amount that is adjusted with the difference of
coupon and effective interest rates, minus repayment of the principal amount.
Coupon interest rate
Also known as stated rate or nominal rate, is used to calculate the amount of interest payable to the
lender or bond holder.
Example:
• 10% Bonds
• 10% Loan notes
• 10% Debentures
It is calculated on the face value outstanding during the reporting period.
Effective interest rate
• It reflects the true amount of interest on the amount of loan due.
• It caters the compounding periods during a payment plan.
• It depicts the true picture of financial payments.
• It is the rate at which future value equates the present value (discounted cashflow)

13
Topic 92 – Accounting for Non-Current Liabilities – Amortised Cost Method - Practice
Sample Co. took a loan from Bank Rs. 1,000 for 3 years @ 10% per annum. The loan is repayable at
maturity equal to Rs. 1,200.
Measure the amount to be presented at the end of each reporting period i.e., year 1, year 2 and year 3
using effective interest rate.

Most of the financial liabilities are measured at amortised cost method.

14
Topic 93 – Accounting for Non-Current Liabilities – Effective Interest Rate
Effective interest rate
• It reflects the true amount of interest on the amount of loan due.
• It caters the compounding periods during a payment plan.
• It depicts the true picture of financial payments.
• It is the rate at which future value equates the present value (discounted cashflow)

Discounting at coupon / nominal interest rate does not equate the future value to the present value.
Therefore, the effective interest rate is different from the nominal rate.

15
Topic 94 – Accounting for Non-Current Liabilities – Effective Interest Rate – Practice
Sample Co. took a loan from Bank Rs. 1,000 for 3 years @ 10% per annum. The loan is repayable at
maturity equal to Rs. 1,200.
Measure the amount to be presented at the end of each reporting period i.e., year 1, year 2 and year 3
using effective interest rate.

Effective interest rate

15.71% is the effective interest rate in this scenario that equates the future value to the present value.

16
Topic 95 – Accounting for Non-Current Liabilities – Derecognition
Financial liabilities (or part thereof) are derecognised from an entity’s statement of financial position
only when the liability is extinguished i.e., when the obligation specified in the contract is discharged or
cancelled or expires.

The difference between the carrying value of a financial liability (or part thereof) extinguished and the
consideration paid (including value of non-cash consideration) or liabilities assumed is recognised in
profit or loss.

Accounting Entry

Liability Dr. 1,000

Cash Cr. 950
Discount Cr. 50

17