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1. Introduction to Liabilities (1)

Liabilities are present obligations of an entity to transfer economic resources due to past events, characterized by the entity's obligation, the transfer of resources, and the origin from past events. They can be classified into financial and non-financial liabilities, with financial liabilities involving cash or financial asset obligations, while non-financial liabilities arise from legal or contractual obligations. Liabilities are further categorized into current and non-current based on their settlement timelines, with specific measurement and classification rules outlined under International Financial Reporting Standards (IFRS).

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Lance Christian Laylo Ubeda
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7 views

1. Introduction to Liabilities (1)

Liabilities are present obligations of an entity to transfer economic resources due to past events, characterized by the entity's obligation, the transfer of resources, and the origin from past events. They can be classified into financial and non-financial liabilities, with financial liabilities involving cash or financial asset obligations, while non-financial liabilities arise from legal or contractual obligations. Liabilities are further categorized into current and non-current based on their settlement timelines, with specific measurement and classification rules outlined under International Financial Reporting Standards (IFRS).

Uploaded by

Lance Christian Laylo Ubeda
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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LIABILITIES

DEFINITION OF LIABILITIES

- ARE PRESENT OBLIGATIOONS OF AN ENTITY TO TRANSFER


AN ECONOMIC RESOURCE AS A RESULT OF PAST EVENTS.

ESSENTIAL CHARACTERISTICS
1. THE ENTITY HAS A PRESENT OBLIGATION
2. THE OBLIGATION IS TO TRANSFER AN ECONOMIC
RESOURCE
3. THE LIABILITY ARISES FROM PAST EVENT.
EXAMPLES OF LIABILITIES
The more common types of liabilities d. Dividends (not stock dividends)
include the following: declared but not paid
a. Accounts payable to suppliers for the
purchase of goods or services e. Deposits and advances from
customers and officers
b. Amounts withheld from employees
or other parties for taxes and for f. Debt obligations for borrowed funds-
contributions to the Social Security notes, mortgages and bonds payable
System or to pension funds

g. Income tax payable


c. Accruals for wages, interest,
royalties, taxes, product warranties
and profit sharing plans h. Unearned revenue
FINANCIAL AND NON-FINANCIAL
LIABILITIES
• Financial liability - is an obligation to deliver cash or another financial asset to
another entity, usually as a result of borrowing money or issuing securities. It is
recognized on the balance sheet as a liability, and its value can change due to
market conditions.
• Non-financial liability - is an obligation that doesn't involve a financial transaction.
It typically arises from legal or contractual obligations, like warranties, employee
benefits, or environmental cleanup. Non-financial liabilities are not traded in
financial markets and are not affected by changes in interest rates.
• Both types of liabilities are governed by International Financial Reporting
Standards (IFRS), specifically IAS 37 for non-financial liabilities and IFRS 9 for
financial liabilities.
INITIAL and SUBSEQUENT
MEASUREMENT
Conceptually, all liabilities(BOTH FINANCIAL AND NON-FINANCIAL
LIABILITIES) are initially measured at present value and subsequently
measured at amortized cost.
MEASUREMENT INITIALLY SUBSEQUENTLY
SHORT TERM-INTEREST BEARING FACE VALUE FACE VALUE
SHORT TERM-NON INTEREST BEARING FACE VALUE FACE VALUE
LONG TERM-INTEREST BEARING FACE VALUE FACE VALUE
LONG TERM-NON INTEREST BEARING PRESENT VALUE AMORTIZED COST
MEASUREMENT of FINANCIAL LIABILITY
INITIALLY, a financial liability is measured at fair value minus, in the case
of financial liability not designated at fair value through profit or loss,
transaction costs that are directly attributable to the issue of the financial
liability.

SUBSEQUENTLY, a financial liability is measured at:


a. At amortized cost, using the effective interest method.
b. At fair value through profit or loss.

Conceptually, the "fair value" of the liability is equal to the present value
of the future cash payment to settle the obligation.
MEASUREMENT of FINANCIAL LIABILITY
Transaction costs include, but not limited to the following:
a. Fees and commissions paid to agents, advisers, brokers and dealers
b. Levies by regulatory agencies and securities exchanges
c. Transfer taxes and duties

Transaction costs do not include:


a. Debt premiums or discounts
b. Financing costs
c. Internal administrative or holding costs
CLASSIFICATION OF LIABILITIES
LIABILITIES ARE CLASSIFIED INTO TWO, NAMELY:
A. CURRENT LIABILITIES
B. NON CURRENT LIABILITIES
CURRENT LIABILITIES
a. The entity expects to settle the liability within the entity’s operating
cycle.

b. The entity holds the liability primarily for the purpose of trading.

c. The liability is due to be settled within twelve months after the reporting
period.

d. The entity does not have an unconditional right to defer settlement of


the liability for at least twelve months after the reporting period.
NON CURRENT LIABILITIES
- Is a residual definition.
LONG-TERM DEBT FALLING DUE WITHIN ONE
YEAR
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 twelve months.

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.
ROLLING OVER OR REFINANCING OF LIABILITY

- If the entity has an unconditional right OR DISCRETION under the


existing loan facility to defer settlement of the liability OR
REFINANCE for at least twelve months after the reporting period, the
obligation is considered part of the entity's long-term refinancing OR
NON CURRENT LIABILITIES.
- If the refinancing on a long-term basis is completed on or before the
end of the reporting period, the refinancing is an adjusting event and
therefore the obligation is classified as NON CURRENT LIABILITIES.
- 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, the obligation is classified as
CURRENT LIABILITY.
COVENANTS

Covenants are often attached to borrowing agreements which represent


undertakings by the borrower.

These covenants are actually restrictions on the borrower as to


undertaking further borrowings, paying dividends, maintaining specified
level of working capital and so forth.

Under these covenants, if certain conditions relating to the borrower's


financial situation are breached, the liability becomes payable on demand
OR CURRENT.
GRACE PERIOD

A grace period is a period within which the entity can rectify the
breach and during which the lender cannot demand immediate
repayment.
Palugit/Biyaya/Pagkakataon
NON-ADJUSTING EVENTS

With respect to loans classified as current liabilities, the following events


occurring between the end of the reporting period and the date the financial
statements are authorized for issue shall qualify for disclosure as non-
adjusting events, meaning, the loans remain as current liabilities:

a. Refinancing on a long-term basis

b. Rectification of a breach of a long-term loan agreement

c. The granting by the lender of a grace period to rectify a breach of a long-


term loan arrangement ending at least twelve months after the reporting
period

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