Liabilities

Liability is a present obligation

arising from a past event, the
settlement of which is expected to
result in an outflow of resources
embodying economic benefits or
service potential.

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Present obligation means that as of
the reporting date, an obligating event
must have already occurred. An
obligating event is an event that
creates either (a) a legal obligation or
(b) constructive obligation.
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✣ Legal Obligation – an obligation that
results from a contract, legislation, or
other operation of law.
✣ Constructive Obligation – an obligation
that results from an entity’s actions (eg.
past practice, published policies).

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 Liability Recognition Criteria

A liability is recognized only when all of

the following are met:
✣ The item meets the definition of a
liability (ie. present obligation)
✣ It is probable that an outflow of
resources embodying economic
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 Liability Recognition Criteria

benefits will be required to settle the

obligation; and
✣ The obligation has a cost or value (eg.
fair value) that can be measured
reliably.

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 Financial Liabilities
A financial liability is any liability that is:
✣ A contractual obligation to deliver cash
or another financial asset or another
entity;
✣ A contractual obligation to exchange
financial assets or financial liabilities
with another

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 entity under conditions that are
potentially unfavorable to the entity; or
✣ A contract that will or may be settled in
the entity’s own equity instruments.

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Examples of financial liabilities:
Accounts Payable, Notes Payable,
Interest Payable, Loans Payable,
Bonds Payable, and Bail Bonds
Payable.

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 Initial Recognition
A financial liability is recognized when an
entity becomes a party to the contractual
provisions of the instrument.
Initial Measurement
FV – TC
FV = designated through P/L
 Transaction costs are
incremental costs that are
directly attributable to the
acquisition, issue, or disposal
of a financial instrument.

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Subsequent
Measurement
AC
FV through P/L
Illustration
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On January 1, 20x1, the BTr issues a 5-
year, 5%, ₱1,000,000 bonds for
₱970,000. Transaction costs on the
issuance (bond issue costs) amount to
₱12,124. The effective interest rate
adjusted for both the bond discount and
bond issue costs is 6%.

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 T he initialm easurem ent of the bonds payable is
determ ined as follow s:

Face am ount 1,0 0 0 ,0 0 0

B ond discount (1M - 970 K ) (30 ,0 0 0 )
B ond issue costs (12,124)
C arrying am ount - 1/1/x1 957,876

Or

N et issuance proceeds 970 ,0 0 0

B ond issue costs (12,124)
C arrying am ount - 1/1/x1 957,876

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 Bond issue costs are not
expensed outright, but rather
deduction when determining
the carrying amount of the
bonds (similar to bond
discount).

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1/1/x1 C ash in B ank - L ocalC urrency,B angko
Sentralng Pilipinas 970 ,0 0 0
D iscount on B onds Payable - D om estic 30 ,0 0 0
B ond Payable - D om estic 1,0 0 0 ,0 0 0
T o recognize the issuance of bonds
payable by the B T r

1/1/x1 B ond Issue C ost - D om estic 12,124

C ash in B ank - L ocalC urrency,B angko
Sentralng Pilipinas 12,124
T o recognize the incurrence of bond
issue cost by the B T r

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 Amortization Table
Interest Interest
D ate paym ents expense A m ortization Present value
1/1/x1 957,876
12/31/x1 50 ,0 0 0 57,473 7,473 965,349
12/31/x2 50 ,0 0 0 57,921 7,921 973,270
12/31/x3 50 ,0 0 0 58,396 8,396 981,666
12/31/x4 50 ,0 0 0 58,90 0 8,90 0 990 ,566
12/31/x5 50 ,0 0 0 59,434 9,434 1,0 0 0 ,0 0 0

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12/31/x1 Interest E xpense 57,473
D iscount on B onds Payable -
D om estic (a) 5,322
B ond Issue C ost - D om estic (b) 2,151
C ash in B ank - L ocalC urrency,
B angko Sentralng Pilipinas 50 ,0 0 0
T o recognize interest expense
on the bonds payable

C arryin g A llocation of
am oun ts am ortization A llocation s
(a)B ond discount 30 ,0 0 0 (7,473 x 30 ,0 0 0 /4,124) 5,322
(b)B ond issue costs 12,124 (12,124 x 30 ,0 0 0 /4,124) 2,151
T otals 42,124 7,473

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Derecognition of Financial Liability
A financial liability is derecognized when it
is extinguished, such as when it is
discharged, waived, cancelled, or it
expires.
 Provisions, Contingent
liabilities and Contingent
assets
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 Provision is a liability of
uncertain timing or amount.

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A provision is recognized if all the recognition
criteria for a liability are met (ie. Present
obligation, probable outflow, and reliable
measurement). If one or more of the criteria
are not met, the item is a contingent liability,
not a provision, and therefore not recognized
as liability.
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 Contingent liability is:

✣ A possible obligation that arises from

past events, and whose existence will be
confirmed only by the occurrence or non-
occurrence of one or more uncertain
future events not wholly within the control
of the entity; or

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 Contingent liability is:

✣ A present obligation that arises from past

events, but is not recognized because:
✣ It is not probable that an outflow of
resources embodying economic
benefits or service potential will be
required to settle the obligation; or

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 Contingent liability is:

✣ The amount of the obligation cannot be

measured with sufficient reliability,

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Contingent asset is a possible asset
that arises from past events, and
whose existence will be confirmed
only by the occurrence or non-
occurrence of one or more uncertain
future events not wholly within the
control of the entity.

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 Summary

C on tin gen t P robable P ossible R em ote

L iability R ecognize and D isclose D isclose only Ignore
A sset D isclose only Ignore Ignore

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Measurement

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A provision is measured at the entity’s best
estimate of the amount needed to settle the
liability at the reporting date.
If the effect of time value of money is material,
the provision is measured at the present
value of the settlement amount discounted at
a pre-tax rate.
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 Application of the Recognition and
Measurement Rules

✣ Future Operating Net Deficits – No

provision shall be recognized for
expected net deficits from future
operating activities.

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 Application of the Recognition and
Measurement Rules

✣ Onerous Contracts– A contract is

deemed onerous (ie. Burdensome) if
the unavoidable costs of settling the
obligations under the contract exceed
the economic benefits expected to be
received from it.
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The obligation under an
onerous contract is
recognized as provision.

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 Application of the Recognition and
Measurement Rules

✣ Restructuring – A program that is

planned and controlled by management,
and materially changes either:
✣ The scope of an entity’s activities; or
✣ The manner in which those activities are
carried out

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 A legal obligation to
restructure exists if, at the
reporting date, the entity has
entered into a binding
agreement to sell or transfer
an operation.

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 Application of the Recognition and
Measurement Rules
A constructive obligation to restructure
exists if, at the reporting date, both the
following are present:
✣ Detailed formal plan for the restructuring;
and
✣ The plan is announced to those affected
by it.
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 A restructuring provision
includes only the direct costs
resulting form the
restructuring.

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