‭26‬

‭ RESENTATION‬ ‭OF‬ ‭LIABILITIES‬ ‭AND‬ ‭ACCOUNTING‬ ‭FOR‬

P ‭Obligations to transfer an economic resource include, for example:‬

‭PROVISIONS AND CONTINGENCIES‬ ‭‬ o

● ‭ bligations to pay cash.‬
‭●‬ ‭obligations to deliver goods or provide services.‬
‭ ‬ ‭liability‬ ‭is‬ ‭a‬ ‭present‬ ‭obligation‬ ‭of‬ ‭the‬ ‭entity‬ ‭to‬ ‭transfer‬ ‭an‬ ‭economic‬
A
‭●‬ ‭obligations‬ t‭ o‬ ‭exchange‬ ‭economic‬ ‭resources‬ ‭with‬ ‭another‬ ‭party‬
‭resource as a result of past events.‬
‭on unfavorable terms.‬
‭For a liability to exist, three criteria must‬‭all‬‭be satisfied:‬ ‭●‬ ‭obligations‬ ‭to‬ ‭transfer‬ ‭an‬ ‭economic‬ ‭resource‬ ‭if‬ ‭a‬ ‭specified‬
‭uncertain future event occurs.‬
(‭ a)‬ ‭the entity has an‬‭obligation‬ ‭●‬ ‭obligations‬ ‭to‬ ‭issue‬ ‭a‬ ‭financial‬ ‭instrument‬ ‭if‬ ‭that‬ ‭financial‬
‭(b)‬ ‭the obligation is to‬‭transfer an economic resource‬ ‭instrument‬ ‭will‬ ‭oblige‬ ‭the‬ ‭entity‬ ‭to‬ ‭transfer‬ ‭an‬ ‭economic‬
‭(c)‬ ‭the‬ ‭obligation‬ ‭is‬ ‭a‬ ‭present‬ ‭obligation‬ ‭that‬ ‭exists‬ ‭as‬ ‭a‬ ‭result‬ ‭of‬ ‭resource.‬
‭past events‬
S‭ uch‬ ‭potential‬ ‭need‬ ‭not‬ ‭be‬ ‭certain‬‭or‬‭even‬‭likely‬‭—‬‭what‬‭is‬‭important‬‭is‬
‭ n‬ ‭obligation‬ ‭is‬ ‭a‬ ‭duty‬ ‭or‬ ‭responsibility‬ ‭that‬ ‭an‬ ‭entity‬ ‭has‬ ‭no‬ ‭practical‬
A ‭that‬‭the‬‭obligation‬‭already‬‭exists‬‭and‬‭that,‬‭in‬‭at‬‭least‬‭one‬‭circumstance,‬‭it‬
‭ability to avoid. An obligation is either:‬ ‭would‬‭require the transfer of an economic resource‬‭.‬

‭(a)‬ ‭Legal‬ ‭obligation‬ ‭-‬ ‭results‬ ‭from‬ ‭a‬ ‭contract,‬ ‭legislation,‬ ‭or‬ ‭other‬ ‭A‬‭present obligation exists as a result of past events‬‭only if:‬
‭operation of law‬
‭(b)‬ ‭Constructive‬ ‭obligation‬ ‭-‬ ‭results‬ ‭from‬ ‭an‬ ‭entity's‬ ‭actions‬ ‭(past‬ ‭(a)‬ t‭ he‬ ‭entity‬ ‭has‬ ‭already‬ ‭obtained‬ ‭economic‬ ‭benefits‬ ‭or‬ ‭taken‬ ‭an‬
‭practice‬ ‭or‬ ‭published‬ ‭policies)‬ ‭that‬‭create‬‭a‬‭valid‬‭expectation‬‭on‬ ‭action; and‬
‭others‬ ‭that‬ ‭the‬ ‭entity‬ ‭will‬ ‭accept‬ ‭and‬ ‭discharge‬ ‭certain‬ ‭(b)‬ ‭as‬ ‭a‬ ‭consequence,‬ ‭the‬ ‭entity‬ ‭will‬ ‭or‬ ‭may‬ ‭have‬ ‭to‬ ‭transfer‬ ‭an‬
‭responsibilities.‬ ‭economic‬ ‭resource‬ ‭that‬ ‭it‬ ‭would‬ ‭not‬ ‭otherwise‬ ‭have‬ ‭had‬ ‭to‬
‭transfer‬
-‭ ‬ ‭An‬ ‭obligation‬ ‭is‬ ‭always‬ ‭owed‬ ‭to‬ ‭another‬ ‭party.‬ ‭However,‬ ‭it‬ ‭is‬ ‭not‬
‭necessary that the identity of that party is known.‬ ‭CLASSIFICATION OF LIABILITIES‬

‭- One party's obligation normally corresponds to another party's right.‬ (‭ 1)‬ ‭CURRENT‬ ‭LIABILITIES:‬ ‭An‬ ‭entity‬ ‭shall‬ ‭classify‬ ‭a‬ ‭liability‬ ‭as‬ ‭current‬
‭when:‬
-‭ ‬‭There‬‭can‬‭be‬‭instances‬‭where‬‭the‬‭existence‬‭of‬‭an‬‭obligation‬‭is‬‭uncertain.‬
‭Until that uncertainty is resolved, it is uncertain whether a liability exists.‬ ‭a.‬ T‭ he‬ ‭entity‬ ‭expects‬ ‭to‬ ‭settle‬ ‭the‬ ‭liability‬ ‭within‬ ‭the‬ ‭entity's‬
‭operating cycle.‬

‭INTERMEDIATE ACCOUNTING 2 (ACG010)‬

 ‭27‬

‭ .‬ T‭ he entity holds the liability primarily for the purpose of trading.‬

b ‭2.‬ I‭f‬‭the‬‭entity‬‭has‬‭the‬‭discretion‬‭to‬‭refinance‬‭or‬‭roll‬‭over‬‭an‬
‭c.‬ ‭The‬ ‭liability‬ ‭is‬ ‭due‬ ‭to‬ ‭be‬ ‭settled‬ ‭within‬ ‭twelve‬ ‭months‬‭after‬‭the‬ ‭obligation‬ ‭for‬ ‭at‬ ‭least‬ ‭twelve‬ ‭months‬‭after‬‭the‬‭reporting‬
‭reporting period.‬ ‭period‬‭under‬‭an‬‭existing‬‭loan‬‭facility.‬‭(unconditional‬‭right‬
‭d.‬ ‭The‬ ‭entity‬ ‭does‬ ‭not‬ ‭have‬ ‭an‬ ‭unconditional‬ ‭right‬ ‭to‬ ‭defer‬ ‭to defer settlement of the liability)‬
‭settlement‬ ‭of‬ ‭the‬ ‭liability‬ ‭for‬ ‭at‬ ‭least‬ ‭twelve‬ ‭months‬ ‭after‬ ‭the‬
‭reporting period.‬ ‭(4) COVENANTS‬

‭(2) NONCURRENT LIABILITIES‬ ‭●‬ T‭ hese‬ ‭are‬ ‭often‬ ‭attached‬ ‭to‬ ‭borrowing‬ ‭agreements‬ ‭which‬
‭represent undertakings by the borrower.‬
‭ ll‬ ‭liabilities‬ ‭not‬ ‭classified‬ ‭as‬ ‭current‬ ‭are‬ ‭classified‬ ‭as‬ ‭noncurrent‬
A ‭●‬ ‭Breach of covenants make the liability payable on demand.‬
‭liabilities.‬ ‭○‬ ‭Generally classified as‬‭current‬
‭○‬ ‭Classified‬‭as‬‭noncurrent‬‭—‬‭if‬‭the‬‭lender‬‭has‬‭agreed‬‭on‬‭or‬
‭(3) LONG-TERM DEBT FALLING DUE WITHIN ONE YEAR‬ ‭before‬‭the‬‭end‬‭of‬‭the‬‭reporting‬‭period‬‭to‬‭provide‬‭a‬‭grace‬
‭ ‬ ‭liability‬ ‭which‬ ‭is‬ ‭due‬ ‭to‬ ‭be‬ ‭settled‬ ‭within‬ ‭twelve‬ ‭months‬ ‭after‬ ‭the‬
A ‭period ending at least twelve months after that date.‬
‭reporting period is classified as:‬
‭CURRENT‬ ‭NONCURRENT‬
‭CURRENT LIABILITY‬‭, even if:‬
‭ ESCHEDULE / ROLLOVER /‬ A
R ‭ FTER THE END OF‬ O‭ N OR BEFORE THE‬
‭1.‬ T‭ he‬ ‭original‬ ‭term‬ ‭was‬ ‭for‬ ‭a‬ ‭period‬ ‭longer‬ ‭than‬ ‭twelve‬ ‭REFINANCE‬ ‭REPORTING PERIOD‬ ‭END OF REPORTING‬
‭months.‬ ‭PERIOD‬
‭2.‬ ‭An‬‭agreement‬‭to‬‭refinance‬‭or‬‭to‬‭reschedule‬‭payment‬‭on‬‭a‬
E‭ NTITY HAS DISCRETION‬
‭long-term‬ ‭basis‬ ‭is‬ ‭completed‬ ‭after‬ ‭the‬ ‭reporting‬ ‭period‬
‭and before‬
‭(UNCONDITIONAL RIGHT‬
‭TO DEFER)‬
‭✔‬

‭✔‬
‭ ‬ ‭liability‬ ‭which‬ ‭is‬ ‭due‬ ‭to‬ ‭be‬ ‭settled‬ ‭within‬ ‭twelve‬ ‭months‬ ‭after‬ ‭the‬
A ‭ REACH OF COVENANT‬
B
‭reporting period is classified as:‬ ‭(PAYABLE ON DEMAND)‬

‭NONCURRENT LIABILITY‬ L‭ ENDER PROVIDED GRACE‬ ‭ FTER THE END OF‬ O

A ‭ N OR BEFORE THE‬
‭PERIOD TO RECTIFY‬ ‭REPORTING PERIOD‬ ‭END OF REPORTING‬
‭1.‬ I‭f‬‭the‬‭refinancing‬‭on‬‭a‬‭long-term‬‭basis‬‭is‬‭completed‬‭on‬‭or‬ ‭BREACH‬ ‭PERIOD‬
‭before‬‭the end of the reporting period‬

‭INTERMEDIATE ACCOUNTING 2 (ACG010)‬

 ‭28‬

‭ s‬‭a‬‭minimum,‬‭the‬‭face‬‭of‬‭statement‬‭of‬‭financial‬‭position‬‭shall‬‭include‬‭the‬
A ‭(1)‬ ‭Where‬‭a‬‭single‬‭obligation‬‭is‬‭being‬‭measured,‬‭the‬‭individual‬‭most‬
‭following line items for current liabilities:‬ ‭likely‬‭outcome‬‭adjusted‬‭for‬‭the‬‭effect‬‭of‬‭other‬‭possible‬‭outcomes‬
‭may be the best estimate.‬
a‭ .‬ T‭ rade and other payables‬
‭b.‬ ‭Current provisions‬ ‭(2)‬ ‭Where‬‭there‬‭is‬‭a‬‭continuous‬‭range‬‭of‬‭possible‬‭outcomes‬‭and‬‭each‬
‭c.‬ ‭Short-term borrowing‬ ‭point‬ ‭in‬ ‭that‬ ‭range‬ ‭is‬ ‭as‬ ‭likely‬ ‭as‬‭any‬‭other,‬‭the‬‭midpoint‬‭of‬‭the‬
‭d.‬ ‭Current portion of long-term debt‬ ‭range is used.‬
‭e.‬ ‭Current tax liability‬
‭(3)‬ ‭Where‬ ‭the‬‭provision‬‭being‬‭measured‬‭involves‬‭a‬‭large‬‭population‬
‭PROVISIONS‬ ‭of‬ ‭items‬‭,‬ ‭the‬ ‭obligation‬ ‭is‬ ‭estimated‬ ‭by‬ ‭"weighing"‬ ‭all‬ ‭possible‬
‭outcomes‬ ‭by‬ ‭their‬ ‭associated‬ ‭possibilities.‬ ‭This‬ ‭is‬ ‭called‬ ‭the‬
‭ ‬ ‭provision‬ ‭is‬ ‭an‬ ‭existing‬ ‭liability‬ ‭of‬ ‭uncertain‬ ‭timing‬ ‭or‬ ‭uncertain‬
A ‭expected value‬‭.‬
‭amount‬‭.‬

T‭ he‬ ‭liability‬ ‭definitely‬ ‭exists‬ ‭at‬ ‭the‬ ‭end‬ ‭of‬ ‭the‬ ‭reporting‬ ‭period,‬‭but‬‭the‬
‭OTHER MEASUREMENT CONSIDERATIONS FOR PROVISION‬
‭amount‬ ‭is‬ ‭indefinite‬ ‭or‬ ‭the‬ ‭date‬ ‭when‬ ‭the‬ ‭obligation‬ ‭is‬ ‭due‬ ‭is‬ ‭also‬ ‭RISKS AND UNCERTAINTIES‬
‭indefinite,‬ ‭and‬ ‭in‬ ‭some‬ ‭cases,‬ ‭the‬ ‭payee‬ ‭cannot‬ ‭be‬ ‭identified‬ ‭or‬
‭determined.‬ ‭‬ R
● ‭ isk describes the variability of outcome.‬
‭●‬ ‭A‬ ‭risk‬‭adjustment‬‭may‬‭increase‬‭the‬‭amount‬‭at‬‭which‬‭the‬‭liability‬
‭An entity must recognize a provision if, and only if: [IAS 37.14]‬ ‭is measured.‬
‭●‬ a‭ ‬ ‭present‬ ‭obligation‬‭(legal‬‭or‬‭constructive)‬‭has‬‭arisen‬‭as‬‭a‬‭result‬ ‭PRESENT VALUE OF OBLIGATION‬
‭of a‬‭past event‬‭(the obligating event),‬
‭●‬ ‭payment is‬‭probable‬‭('more likely than not'), and‬ ‭●‬ I‭f‬ ‭the‬ ‭effect‬ ‭of‬ ‭time‬ ‭value‬ ‭of‬ ‭money‬ ‭is‬‭material‬‭,‬‭the‬‭amount‬‭of‬
‭●‬ ‭the amount can be estimated reliably.‬ ‭provision‬‭shall‬‭be‬‭the‬‭present‬‭value‬‭of‬‭the‬‭expenditure‬‭expected‬
‭to settle the obligation.‬
T‭ he‬‭amount‬‭recognized‬‭as‬‭a‬‭provision‬‭should‬‭be‬‭the‬‭best‬‭estimate‬‭of‬‭the‬ ‭●‬ ‭The‬‭discount‬‭rate‬‭should‬‭be‬‭a‬‭pretax‬‭rate‬‭that‬‭reflects‬‭the‬‭current‬
‭expenditure‬ ‭required‬ ‭to‬ ‭settle‬ ‭the‬ ‭present‬ ‭obligation‬ ‭at‬ ‭the‬ ‭end‬ ‭of‬ ‭the‬ ‭market‬ ‭assessment‬ ‭of‬ ‭the‬ ‭time‬ ‭value‬ ‭of‬ ‭money‬ ‭and‬ ‭the‬ ‭risk‬
‭reporting period.‬ ‭specific to the liability.‬
‭●‬ ‭The‬ ‭discount‬ ‭rate‬ ‭should‬ ‭not‬‭reflect‬‭the‬‭risk‬‭for‬‭which‬‭cash‬‭flow‬
‭estimates have already been adjusted.‬

‭INTERMEDIATE ACCOUNTING 2 (ACG010)‬

 ‭29‬

‭CHANGES IN PROVISION‬ ‭WARRANTY LIABILITY‬

‭●‬ P‭ rovisions‬‭shall‬‭be‬‭reviewed‬‭at‬‭every‬‭end‬‭of‬‭the‬‭reporting‬‭period‬ ‭ arranty‬ ‭is‬‭the‬‭obligation‬‭of‬‭an‬‭entity‬‭to‬‭provide‬‭repairs‬‭or‬‭replacement‬
W
‭and adjusted to reflect the current best estimate.‬ ‭for items sold to a customer if they are defective.‬

‭●‬ P‭ rovisions‬ ‭shall‬‭be‬‭reversed‬‭if‬‭it‬‭is‬‭no‬‭longer‬‭probable‬‭of‬‭outflow‬ ‭ACCRUAL APPROACH‬

‭of economic benefits.‬
‭To record estimated warranty cost:‬
‭●‬ W‭ here‬ ‭discounting‬ ‭is‬‭used,‬‭the‬‭carrying‬‭amount‬‭of‬‭the‬‭provision‬ ‭Warranty Expense‬ ‭xxx‬
‭increases each period.‬ ‭Estimated Warranty Liability‬ ‭xxx‬

‭PREMIUM LIABILITY‬ ‭To record payment of actual warranty cost:‬

‭ remiums‬ ‭are‬ ‭given‬ ‭to‬ ‭customers‬ ‭as‬ ‭a‬ ‭result‬ ‭of‬ ‭past‬ ‭sales‬ ‭or‬ ‭sales‬
P ‭Estimated Warranty Liability‬ ‭xxx‬
‭promotion‬‭activities.‬‭These‬‭are‬‭usually‬‭part‬‭of‬‭the‬‭marketing‬‭efforts‬‭of‬‭an‬ ‭Cash‬ ‭xxx‬
‭entity in order to boost sales of the company's products.‬
‭CUSTOMER LOYALTY PROGRAM‬
‭To record purchase of premiums:‬
‭Premium Inventory‬ ‭xxx‬ T‭ he‬ ‭fair‬ ‭value‬ ‭of‬ ‭the‬ ‭consideration‬ ‭received‬ ‭for‬ ‭initial‬ ‭sale‬ ‭shall‬ ‭be‬
‭Cash‬ ‭xxx‬ ‭allocated between: (based on their relative stand-alone selling price)‬

‭To record estimated premiums liability:‬ -‭ ‬ t‭ he award credits (loyalty points)‬

‭-‬ ‭and the Sale‬
‭Premium Expense‬ ‭xxx‬
‭Premium Liability‬ ‭xxx‬ ‭The consideration allocated to the award credits is‬

‭To record distribution of premiums to customer:‬ -‭ ‬ i‭nitially‬‭recognized as‬‭deferred revenue‬‭and‬

‭Premium Liability‬ ‭xxx‬ ‭-‬ ‭subsequently‬ ‭recognized‬ ‭as‬ ‭revenue‬ ‭when‬ ‭the‬‭award‬‭credits‬‭are‬
‭redeemed‬
‭Premium Inventory‬ ‭xxx‬

‭INTERMEDIATE ACCOUNTING 2 (ACG010)‬

 ‭30‬

‭To record the initial sale transaction‬ ‭ ‬ ‭contingent‬ ‭liability‬ ‭shall‬ ‭be‬ ‭disclosed‬ ‭only‬ ‭in‬ ‭the‬ ‭notes‬ ‭to‬ ‭financial‬
A
‭Cash‬ ‭xxx‬ ‭statements. The required disclosures are:‬

‭Sales‬ ✔
‭ ‬ ‭ rief description of the nature of the contingent liability‬
B
‭Unearned Revenue - points‬ ‭xxx‬ ‭✔‬ ‭An estimate of the financial effects‬
‭✔‬ ‭An indication of the uncertainties that exist‬
‭To record the redemption of points by customer:‬ ‭✔‬ ‭Possibility of any reimbursement‬
‭Unearned Revenue - points‬ ‭xxx‬
‭If a contingent liability is‬‭remote‬‭, no disclosure‬‭is necessary.‬
‭Sales‬ ‭xxx‬
‭CONTINGENT ASSET‬
‭CONTINGENT LIABILITY‬
‭ ‬ ‭contingent‬ ‭asset‬ ‭is‬ ‭a‬ ‭possible‬ ‭asset‬ ‭that‬ ‭arises‬ ‭from‬ ‭past‬ ‭events‬ ‭and‬
A
‭A contingent liability is:‬ ‭whose‬ ‭existence‬ ‭will‬ ‭be‬ ‭confirmed‬ ‭only‬ ‭by‬ ‭the‬ ‭occurrence‬ ‭or‬
‭non-occurrence‬‭of‬‭one‬‭or‬‭more‬‭uncertain‬‭future‬‭events‬‭not‬‭wholly‬‭within‬
‭(a)‬ a‭ ‬ ‭possible‬ ‭obligation‬ ‭that‬ ‭arises‬ ‭from‬ ‭past‬ ‭events‬ ‭and‬ ‭whose‬ ‭the control of the entity.‬
‭existence‬ ‭will‬ ‭be‬ ‭confirmed‬ ‭only‬ ‭by‬ ‭the‬ ‭occurrence‬ ‭or‬
‭non-occurrence‬‭of‬‭one‬‭or‬‭more‬‭uncertain‬‭future‬‭events‬‭not‬‭wholly‬ ‭●‬ A
‭ ‬ ‭contingent‬ ‭asset‬ ‭shall‬ ‭not‬ ‭be‬ ‭recognized‬‭.‬ ‭It‬ ‭is‬ ‭only‬ ‭disclosed‬
‭within the control of the entity;‬ ‭when it is probable‬‭.‬

‭or‬ ‭●‬ W
‭ hen‬ ‭the‬ ‭realization‬ ‭is‬ ‭virtually‬ ‭certain‬‭,‬ ‭the‬ ‭related‬ ‭asset‬ ‭is‬‭no‬
‭longer a contingent asset, and its‬‭recognition is‬‭appropriate‬‭.‬
‭(b)‬ ‭a‬ ‭present‬ ‭obligation‬ ‭that‬ ‭arises‬ ‭from‬ ‭past‬ ‭events‬ ‭but‬ ‭is‬ ‭not‬
‭recognized‬‭because:‬ ‭●‬ I‭f‬ ‭a‬ ‭contingent‬ ‭asset‬ ‭is‬ ‭only‬‭possible‬‭or‬‭remote‬‭,‬‭no‬‭disclosure‬‭is‬
‭necessary.‬
‭(i)‬ i‭t‬‭is‬‭not‬‭probable‬‭that‬‭an‬‭outflow‬‭of‬‭resources‬‭embodying‬
‭economic‬ ‭benefits‬ ‭will‬ ‭be‬ ‭required‬ ‭to‬ ‭settle‬ ‭the‬
‭obligation; or‬

‭(ii)‬ t‭ he‬ ‭amount‬ ‭of‬ ‭the‬ ‭obligation‬ ‭cannot‬ ‭be‬ ‭measured‬‭with‬

‭sufficient reliability.‬

‭INTERMEDIATE ACCOUNTING 2 (ACG010)‬

 ‭31‬

‭LIABILITY‬

‭Probable‬ ‭>50%‬ ‭PROVISION‬ ‭ ecognize as Liability &‬

R
‭Disclose in Notes‬

‭Possible‬ ‭=<50%‬ ‭ ONTINGENT‬

C ‭Disclosure in Notes ONLY‬
‭LIABILITY‬

‭Remote‬ ‭=<10%‬ ‭IGNORED‬ ‭IGNORED‬

‭ASSET‬

‭ irtually‬
V ‭90% - 95%‬ ‭ASSET‬ ‭RECOGNIZE AS ASSET‬
‭Certain‬

‭Probable‬ ‭>50%‬ ‭ ONTINGENT‬

C ‭Disclosure in Notes ONLY‬
‭ASSET‬

‭Possible‬ ‭=<50%‬ ‭IGNORED‬ ‭IGNORED‬

‭Remote‬ ‭=<10%‬ ‭IGNORED‬ ‭IGNORED‬

‭INTERMEDIATE ACCOUNTING 2 (ACG010)‬