Liabilities

Learning objectives
1. State the recognition criteria for liabilities.
2. Identify the characteristics of a financial liability
3. Classify liabilities as current and noncurrent.
4. State the initial and subsequent measurements of financial
and non-financial liabilities.
 What is a Liability?
Liability is "a present obligation of the entity to transfer an economic resource
as a result of past events." (Conceptual Framework 4.26)

Three essential characteristics:

1. Present obligation.
2. Transfer of an economic resource.
3. Result of past events.
Liabilities
• The entity has a present obligation. The entity liable must
be identified. It is not necessary that the payee or the entity
to whom the obligation is owed be identified.
• The obligation is to transfer an economic resource. This is
the very heart of the definition of a liability. Specifically, the
obligation must be to pay cash, transfer noncash asset or
provide service at some future time.
• The liability arises from past event. This means that the
liability is not recognized until it is incurred
Liabilities
Illustrations:
1. Entity A intends to acquire goods in the future.
2. Entity B operates a nuclear power plant. In the current year, a
new law was enacted penalizing the improper disposal of toxic
waste. No similar law existed in prior years.
3. Entity C enters into an irrevocable commitment with another
party to acquire goods in the future, on credit.
4. Although not stated in the sales contract, Entity D has a
publicly-known policy of providing free repair services for the
goods it sells. Entity D has consistently honored this implied
policy in the past.
Liabilities
Illustrations:
5. Entity E obtained a loan from a bank. Repayment of the loan is
due in 10-years' time.
6. Entity F has caused environmental damages. Although, no law
exists penalizing such act, Entity F believes it has an obligation
to rectify the damages. However, the identity of the party to
whom the obligation is owed cannot be specifically identified.
7. Entity G employed Mr. Juan.
Liabilities
Executory contracts
• An executory contract "is a contract that is equally
unperformed neither party has fulfilled any of its obligations,
or both parties have partially fulfilled their obligations to an
equal extent.“ (Conceptual Framework 4.56)
• Establishes a combined right and obligation to exchange
economic resources, which are interdependent and
inseparable.
• The entity has an asset if the terms of the contract are
favorable; a liability if the terms are unfavorable.
• The contract ceases to be executory when one party
performs its obligation.
Liabilities
Executory contracts
Continuing the previous illustration:
• Entity G neither recognizes an asset nor a liability upon
entering the employment contract with Mr. Juan because,
at that point, the contract is executory.
Recognition criteria
An item is recognized if:
a) it meets the definition of a liability; and
b) recognizing it would provide useful information, i.e., relevant and faithfully
represented information.
Relevance
Recognition may not provide relevant information if, for example:
• it is uncertain whether a liability exists; or
• a liability exists, but the probability of an outflow of economic benefits is low.
(Conceptual Framework 5.12)
Faithful representation
• A liability must be measured for it to be recognized.
• An exceptionally high measurement uncertainty can affect the faithful
representation of a liability.
Financial and Non-financial liabilities

Financial liability - is any liability that is:

a) A contractual obligation to deliver cash or another
financial asset to another entity;
b) A contractual obligation to exchange financial assets or
financial liabilities with another entity under conditions
that are potentially unfavorable to the entity; or
c) A contract that will or may be settled in the entity's own
equity instruments and is not classified as the entity's own
equity instrument.
Non-financial liability - is a liability other than a financial
liability.
 Examples
Financial liability Non-financial liability
Payables, such as accounts, notes, Unearned revenues and warranty
loans, bonds and accrued payables obligations that are to be settled
through future delivery of goods or
provision of services.
Lease liabilities Taxes, SSS, Philhealth, and Pag-IBIG
payables
Held for trading liabilities and Constructive obligations
derivative liabilities
Redeemable preference shares issued
Security deposits and other returnable
deposits
Presentation of financial
instruments
a) a financial asset
b) a financial liability - The entity has a contractual obligation to
pay cash or another financial asset or to exchange financial
instruments under potentially unfavorable condition.
c) an equity instrument - The entity has no obligation to pay cash
or another financial asset or to exchange financial instruments
under potentially unfavorable condition.

Equity instrument - is "any contract that evidences a residual interest in

the assets of an entity after deducting all of its liabilities." (PAS32.11)
This definition reflects the basic accounting equation "Assets - Liabilities
= Equity."
Financial liabilities - Illustration

The records of an entity show the following:

Accounts payable 2,000 SSS contributions payable 6,000
Utilities payable 7,000 Cash dividends payable 4,000
Accrued interest expense 6,000 Property dividends payable 7,000
Advances from customers 1,000 Share dividends payable 3,000
Unearned rent 9,000 Lease liability 35,000
Warranty obligations 5,000 Bonds payable 120,000
Income taxes payable 2,000 Discount on bonds payable -15,000
Preference shares issued 10,000 Security deposit 2,000
Redeemable preferences
Constructive obligation 11,000 shares issued 14,000
Obligation to deliver a variable
number of own shares worth a Unearned interest on
fixed amount of cash 10,000 receivables 3,000

Requirement: Determine the financial liabilities to be disclosed

in the notes.
Financial liabilities - Illustration

Accounts payable 2,000

Utilities payable 7,000
Accrued interest expense 6,000
Obligation to deliver a variable number of
own shares worth a fixed amount of cash 10,000
Cash dividends payable 4,000
Lease liability 35,000
Bonds payable 120,000
Discount on bonds payable -15,000
Security deposit 2,000
Redeemable preferences shares issued 14,000
185,000
Recognition of financial liabilities

A financial liability is recognized only when the entity becomes a

party to the contractual provisions of the instrument.
Classification of Financial Liabilities
All financial liabilities are classified as subsequently measured at amortized cost,
except for the following:
a) Financial liabilities at fair value through profit or loss (FVPL) and derivative
liabilities - subsequently measured at fair value (e.g., designated or held for
trading).
b) Financial liabilities that arise when a transfer of a financial asset does not qualify
for derecognition - subsequently measured on a basis that reflects the rights and
obligations that the entity has retained.
c) Financial guarantee contracts and Commitments to provide a loan at a below-
market interest rate - subsequently measured at the higher of:
i. the amount of the loss allowance (12-month expected credit losses); and
ii. the amount initially recognized less, when appropriate, the cumulative
amount of income recognized in accordance with the principles of PFRS 15.
d) Contingent consideration recognized by an acquirer in a business combination -
subsequently measured at fair value through profit or loss.

Reclassification of financial liabilities after initial recognition is prohibited.

Measurement of Financial Liabilities

Initial measurement
Financial liabilities are initially measured at fair value minus transaction costs, except
FVPL. Financial liabilities classified as FVPL are initially measured at fair value. The
transaction costs are expensed immediately.
Subsequent measurement
➢ Financial liabilities classified as amortized cost are subsequently measured at
amortized cost.
➢ Financial liabilities classified as held for trading are subsequently measured at fair
value with changes in fair values recognized in profit or loss.
➢ Financial liabilities designated at FVPL are subsequently measured at fair value
with changes in fair values recognized as follows:
a. The amount of change in the fair value of the financial liability that is attributable
to changes in the credit risk of that liability is presented in other comprehensive
income, and
b. The remaining amount of change in the fair value of the liability is presented in
profit or loss.
Measurement of Non-financial liabilities

Non-financial liabilities are initially measured at the best estimate of the amounts needed to
settle those obligations or the measurement basis required by other applicable standard, e.g.,
deferred tax liabilities are measured under PAS 12 Income Taxes.
Examples of non-financial liabilities:
a. Obligations arising from statutory requirements (e.g., income tax payable)
b. Warranty obligations
c. Unearned or deferred revenues
d. Commodity contracts that either cannot be settled in cash or which are expected to be
settled by commodity exchange
Financial statement presentation

Liabilities are presented as either (a) current or (b) noncurrent on the face of a classified
statement of financial position. A classified statement of financial position is one that shows
current and noncurrent distinctions.
When an entity presents an unclassified statement of financial position (based on liquidity),
disclosures of liabilities due within one year and due beyond one year should nevertheless be
made in the notes.
 Current liabilities
PAS 1, paragraph 69 as amended, provides that an entity shall classify a liability as current when:

The entity expects The entity holds the The liability is due The entity does not
to settle the liability liability primarily for to be settled within have the right at
within the entity's the purpose of twelve months after the end of
normal operating trading. the reporting reporting period to
cycle. period. defer settlement of
the liability for at
least twelve months
after the reporting
period.

The operating cycle of an entity is the time between the acquisition of assets for
processing and their realization in cash or cash equivalents. When the entity's
normal operating cycle is not clearly identifiable, it is assumed to be 12 months.'
(PAS 1.68)
Examples of current liabilities:

• Financial assets measured at FVPL (i.e., designated or held for

trading)
• Current portion of long-term notes, bonds, loans, and lease
liabilities
• Trade accounts and notes payables
• Non-trade payables due within 12 months after the end of the
reporting period
• Unearned income expected to be earned within 12 months after
the end of the reporting period.
• Bank overdrafts
 Trade payables
• Trade payables are obligations arising from purchases of inventory that are
sold in the ordinary course of business.
• Trade payables are classified as current liabilities when they are expected
to be settled within the normal operating cycle or one year, whichever is
longer.
 Non-trade payables
• Other payables are classified as non-trade.
• Non-trade payables are classified as current liabilities only when they are
expected to be settled within one year.
Examples of payables
• Accounts payable - obligations not supported by formal
promises to pay by the debtor.
• Notes payable - obligations supported by promissory notes by
the debtor.
• Loans payable - usually used to connote bank loans.
• Bonds payable - obligations issued by the debtor supported by
promises to pay made under seal.
• Liabilities under trust receipts, e.g., before the corresponding
liability to the bank is paid, the goods are released to the buyer
in trust for the bank which advanced the money for the
importation of the goods.
• Other payables arising from sources other than purchases and
borrowings, such as dividends payable, taxes payable,
remittances payable, and accrued expenses.
Accounts payable (trade accounts payable)
Balances owed to others for goods, supplies, or services purchased on open
account.
• Time lag between the receipt of services or acquisition of title to assets
and the payment for them.
• Terms of the sale (e.g., 2/10, n/30 or 1/10, E.O.M.) usually state period of
extended credit, commonly 30 to 60 days.
 Notes payable
Written promises to pay a certain sum of money on a specified future date.
• Arise from purchases, financing, or other transactions.
• Notes classified as short-term or long-term.
• Notes may be interest-bearing or zero-interest-bearing.
 Interest-bearing note issued
Illustration: Banco De Oro agrees to lend P100,000 on March 1, 2021 to Win
Co. if Win signs a P100,000, 6 percent, four-month note. Win records the cash
received on March 1 as follows:

Cash 100,000
Notes payable 100,000
 Interest-bearing note issued
If Win prepares financial statements semiannually, it makes the following
adjusting entry to recognize interest expenses and interest payable at June
30:
Interest calculation = (P100,000 x 6% x 4/12) = P2,000

Interest expense 2,000

Interest payable 2,000
 Interest-bearing note issued
At maturity (July 1), Win records payment of the note and accrued interest as
follows.
Notes payable 100,000
Interest payable 2,000
Cash 102,000
 Zero-bearing note issued
Illustration: On March 1, Win issues a P102,000, four-month, zero-interest bearing note to
Banco De Oro. The present value of the note is P100,000. Win records this transaction as
follows.

Cash 100,000
Notes payable 100,000
 Zero-bearing note issued
If Win prepares financial statements semiannually, it makes the following adjusting entry to
recognize interest expense and increase in the note payable of P2,000 at June 30:

Interest expense 2,000

Notes payable 2,000

At maturity (July 1), Win must pay the note, as follows.

Notes payable 102,000

Cash 102,000
Accounts payable and notes payable illustration
The following are selected 2021 transactions of Mini Corporation.

Sept. 1 Oct. 1 Oct. 1

Purchased inventory Issued a P50,000, 12- Borrowed P75,000 from

from Orion Company on month, 8% note to Orion the Union Bank by
account for P50,000. in payment of account. signing a 12-month,
Mini records purchases zero-interest-bearing
gross and uses a P81,000 note.
periodic inventory
system.

Prepare journal entries for the selected transactions.

Accounts payable and notes payable illustration
Sept. 1 Purchases 50,000
Accounts payable 50,000

Oct. 1 Accounts payables 50,000

Notes payable 50,000

Interest calculation = (P50,000 x 8% x 3/12) = P1,000

Dec. 31 Interest expense 1,000
Interest payable 1,000

Oct. 1 Cash 75,000

Notes payable 75,000

Interest calculation = (P6,000 x 3/12) = P1,500

Dec. 31 Interest expense 1,500
Notes payable 1,500
Illustration 1: Current liabilities
Entity A has the following account balances on December 31, 20x1:

a. Trade accounts payable, net of P5,000 debit balance in

supplier's account, P4,000 unreleased checks drawn,
and P2,000 postdated checks drawn. 300,000
b. Credit balance in customers' accounts 2,000
c. Financial liability designated at FVPL 50,000
d. Bonds payable (maturing in 10 equal annual
installments of P100,000) 1,000,000
e. 12%, 5-year note payable issued on October 1, 20x1 100,000
f. Deferred tax liability 5,000
g. Unearned rent 4,000
h. Contingent liability 10,000
i. Reserve for contingencies 25,000

Requirement: How much is the total current liabilities?

Illustration 1: Current liabilities

a. Trade accounts payable gross of debit balance,

unreleased check, and postdated check (300K + 5K +
4K + 2K). 311,000
b. Advances from customers (Cr. bal. in customers'
accounts) 2,000
c. Financial liability designated at FVPL 50,000
d. Current portion of bonds payable 100,000
Interest payable on the note in 'e' (P100,000 x 12% ×
3/12) 3,000
g. Unearned rent 4,000
470,000
Illustration 2: Current liabilities

ABC Co. has the following liabilities as of December 31, 20x1.

a. Trade accounts payable, including cost of unsold

goods received on consignment of P10,000 300,000
b. Held for trading financial liabilities 50,000
c. Deferred revenue 20,000
d. Bank overdraft 10,000
e. Income tax payable 50,000
f. Accrued expenses 5,000
g. Share dividend payable 12,000
h. Advances from affiliates payable in 15 months after
year-end 23,000
i. Loan of XYZ, Inc. guaranteed by ABC - it is possible that
ABC will be held liable for the guarantee 45,000

Requirement: How much is the total current liabilities?

Illustration 2: Current liabilities

a. Trade accounts payable, net of cost of unsold goods

received on consignment (300,000 - 10,000) 290,000
b. Held for trading financial liabilities 50,000
c. Bank overdraft 10,000
d. Income tax payable 50,000
e. Accrued expenses 5,000
405,000
Long-term debt currently maturing

PAS 1, paragraph 72, provides that a liability which is due to be

settled within twelve months after the end of 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 end of reporting period
and before the financial statements are authorized for issue.
However, 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
noncurrent.
Long-term debt currently maturing

Portion of bonds, mortgage notes, and other long-term

indebtedness that matures within the next fiscal year.

Exclude long-term debts maturing currently if they are to be:

1. Retired by assets accumulated that have not been shown
as current assets,
2. Refinanced, or retired from the proceeds of a new debt
issue, or
3. Converted into ordinary shares.
Short-term obligations expected to be
refinanced
Exclude from current liabilities if both of the following conditions
are met:
1. Must intend to refinance the obligation on a long-term basis
2. Must have an unconditional right to defer settlement of the
liability for at least 12 months after the reporting date.
Illustration: Refinancing
On December 31, 20x1, ABC Co. has a P1,000,000 loan payable that is
maturing on July 1, 20x2. ABC's 20x1 financial statements were
authorized for issue on March 15, 20x2.
➢ Case 1: No right to defer settlement
On February 1, 20x2, ABC Co. enters into a refinancing agreement with
a bank to refinance the loan on a long-term basis. Both parties are
financially capable of honoring the agreement's provisions. The original
loan contract does not state any refinancing option.
➢ Case 2: With right to defer settlement
On February 1, 20x2, ABC Co. enters into a refinancing agreement with
the bank to roll over the loan for another four years. ABC Co. has the
option to roll over the loan under the existing loan contract and, as of
December 31, 20x1, ABC Co. has complied with all the conditions for
the rollover.
➢ Case 3: With right to defer settlement - interest payable
The facts are the same as in Case 2. In addition, 10% interest on the
loan is due annually every July 1.
➢ Case 4: Refinancing completed as of end of reporting period
On December 1, 20x1, ABC Co. enters into a refinancing agreement
with the bank to roll over the loan for another tour years. The rollover
is completed in December 20x1.
Liabilities payable on demand
A liability that is payable upon the demand of the lender is classified as current even if the lender agreed
after the end of the reporting period but before the financial statements are authorized for issue not to
demand repayment.

A liability that is payable on demand is classified as noncurrent if the lender provides the entity by the
end of the reporting period (e.g., on or before December 31) a grace period ending at least twelve months
after the reporting period within which the entity can rectify a breach of loan covenant and during which
the lender cannot demand immediate repayment.
Illustration: Liabilities payable on demand
On January 1, 20x1, ABC Co. took a 3-year, P1,000,000 loan from a bank. The loan agreement requires ABC
to maintain a current ratio of 2:1. If the current ratio falls below 2:1, the loan becomes payable on
demand. As of December 31, 20x1, ABC's current ratio is 1.8:1.

How much is presented as current liability in ABC's 20x1 year-end financial statements?

➢ Case 1: Obligation payable on demand

Despite the breach of the loan covenant (i.e., fall of current ratio below 2:1), there is no indication on
December 31, 20x1 that the bank will demand repayment over the next 12 months.

➢ Case 2: Grace period received after year-end

On January 5, 20x2, the bank agreed not to collect the loan in 20x2 and gave ABC 12 months to rectify the
breach of loan covenant.

➢ Case 3: Grace period received by year-end

On December 31, 20x1, the bank agreed not to collect the loan in 20x2 and gave ABC 12 months to rectify
the breach of loan covenant.
Non-adjusting events
The occurrence of the following after the reporting period, but before the
financial statements are authorized for issue, are disclosed only as non-
adjusting events (meaning, the classification of the liability as at the
reporting date is not affected):

a) Refinancing on a long-term basis of a liability classified as current.

b) Rectification of a breach of a long-term loan arrangement classified as
current.
c) The granting by the lender of a period of grace to rectify a breach of a
long-term loan arrangement classified as current.
d) Settlement of a liability classified as non-current.
(PAS 1.76)
 Trade accounts payable Illustration 1: Accounts payable
On December 31, 20x1, ABC Co. has accounts payable of
P1,000,000 before possible adjustment for the following:
Accounts payable arising from the purchase of
inventory is recognized when ownership over the a. Goods in transit from a vendor to ABC on December 31, 20x1
with an invoice cost of P50,000 purchased FOB shipping point
goods is transferred to the buyer. were not yet recorded.
The amount recognized excludes trade discounts.
b. Goods shipped FOB shipping point from a vendor to ABC were
Cash discounts are included if the entity uses the lost in transit. The invoice cost of P20,000 was not yet recorded.
gross method of recording purchases; they are c. Goods shipped FOB shipping point from a vendor to ABC on
excluded if the entity uses the net method. December 31, 20x1 amounting to P8,000 were recorded and
included in the year-end inventory count as "goods in transit.“

d. Goods in transit from a vendor to ABC on December 31, 20x1

Solution: with an invoice cost of P10,000 purchased FOB destination were
not yet recorded. The goods were received in January 20x2.
Unadjusted accounts payable 1,000,000
a. FOB shipping point not yet recorded 50,000 e. Goods with invoice cost of P15,000 were recorded and included
b. FOB shipping point lost in transit, not yet recorded 20,000 in the year-end inventory, count as "goods in transit." It was
e. FOB destination inappropriately recorded (15,000) found out that the goods were shipped from a vendor under FOB
Adjusted accounts payable 1,055,000 destination.

Requirement: Compute for the adjusted accounts payable on

December 31, 20x1.
Trade accounts payable

Illustration 2: Accounts payable

On December 31, 20x1, ABC Co. has accounts payable of P1,000,000 before
possible adjustment for the following:
a. Checks drawn for P12,000 were not yet released to payees; checks drawn for
P5,000 were released to payees but were postdated.
b. On December 28, 20x1, a vendor authorized ABC Co. to return for full credit
goods costing P25,000. ABC Co. returned the goods on December 31, 20x1
but recorded the related credit memo only on January 3, 20x2.
c. Goods shipped FOB shipping point, freight prepaid from a vendor on
December 28, 20x1 was recorded at the invoice cost of P14,000 on the
shipment date. The related freight of P3,000 was not recorded.
d. Goods shipped FOB destination, freight collect from a vendor were received
and recorded on December 29, 20x1 at the invoice cost of P40,000. The
related freight of P5,000 was recorded as an expense.

Requirement: Compute for the adjusted accounts payable on December 31,

20x1.
Trade accounts payable

Illustration 2: Accounts payable

Solution:
Unadjusted accounts payable 1,000,000
a. Unreleased checks and postdated checks (12K + 5K) 17,000
b. Purchase return (25,000)
c. Freight shouldered by the seller on behalf of ABC Co. 3,000
d. Freight shouldered by ABC Co. on behalf of the seller (5,000)
Adjusted accounts payable 990 000
 Unearned income
Unearned income represents advanced collection of income that is not yet
earned. Prior to earning, unearned income is classified as liability.
Example: advances received from customers for the future delivery of goods
or rendering of services.
Unearned income
Illustration 1: Unearned revenue
The records of an entity show the following:

Unearned revenue, January 1, 20x1 1,000,000

Advances received during 20x1 10,000,000
Advances applied to orders shipped in 20x1 8,000,000
Advances pertaining to orders cancelled in 20x1 300,000

Requirements: Compute for the current liability assuming:

a. the advance payments received are non-refundable and

b. the advance payments received are refundable.
Unearned income
Advances are non-refundable Advances are refundable

Unearned income
Unearned income - Dec. 31, 20x1 (previous solution) 2,700,000
1,000,000 Jan. 1 20x1
Liability for refundable deposits (Orders cancelled) 300,000
Advances
Advances earned 8,000,000 10,000,000 Total current liability for advances received 3,000,000
received
Orders cancelled 300,000
Dec. 31, 20x1 2,700,000
Gift certificates
A gift certificate (also known as gift card) is a prepaid card usually
issued by a retailer or a restaurant which the cardholder can use to
purchase goods or services.
Examples: SM Gift Card/Gift Pass, Lazada Gift Certificate, Amazon Gift
Card, and Vikings Luxury Buffet Gift Voucher.
a. A contract liability is recognized when gift certificates are sold.
b. The contract liability is derecognized and revenue is recognized
when the gift certificates are redeemed (used).
c. As to the gift certificates sold that are not exercised (referred to as
breakage), PFRS 15 provides the following:
i. Proportionate method: If the entity expects that a portion of the
gift certificates sold will not be redeemed, the entity recognizes
the expected breakage amount as revenue in proportion to the
pattern of rights exercised by the customer.
ii. Remote method: If the entity does not expect that a portion of the
gift certificates sold will not be redeemed, the entity recognizes
the expected breakage amount as revenue when the likelihood of
redemption becomes remote.
Gift Certificates
Illustration 1: Gift certificates
An entity sells gift certificates as part of its sales promotion.
During the year, the entity sells gift certificates worth
P100,000, of which P72,000 were redeemed.

Case 1: Proportionate method

Based on the entity's past experience, 10% of gift certificates
sold are never redeemed.

Requirement: Provide the journal entries.

Gift Certificates
Date Cash 100,000 Proportionate recognition of breakage revenue
Breakage revenue is recognized on a pro-rata basis in
Gift card liability (a) 100,000 proportion to the value of actual redemptions.
to record the sale of gift certificates
Gift certificates sold 100,000
Date Gift card liability 72,000 Multiply by: 10%
Revenue (b) 72,000 Total expected breakage 10,000
to record the redemption of gift certificates
Gift certificates sold 100,000
Date Gift card liability 8,000 Less: Total expected breakage - 10,000
Revenue (c) 8,000 Gift certificates sold net of expected breakage 90,000
to record the revenue from expected breakage
Gift certificates redeemed 72,000
Divide by: Gift certificates sold net of breakage 90,000
Percentage of actual redemptions 80%

Total expected breakage 10,000

Multiply by: Percentage of actual redemption 80%
Amount of expected breakage recognized as revenue 8,000
Gift Certificates
Illustration 1: Gift certificates
An entity sells gift certificates as part of its sales promotion.
During the year, the entity sells gift certificates worth P100,000, of
which P72,000 were redeemed.
Case 2: Remote method
The entity expects that all the gift certificates sold will be
redeemed.
Requirement: Provide the journal entries.

Accounting:
The entity makes the first two entries above. As to the breakage,
the entity recognizes revenue only when the likelihood of
redemption becomes remote, for example, when the certificates
are not redeemed after a long period of time.
Liability for deposits received

Liability for deposits received represents cash receipts that are held in
trust for other parties. Examples include:
a. Deposit liabilities of banks and other entities performing similar
function.
b. Deposits received for returnable containers, such as bottles, cases,
crates, trays, boxes, and similar items that contain the goods sold
but must be returned to the seller upon consumption of the goods.
c. Security deposits received from lessees
d. Deposits received from escrow agreements
e. Deposits for future subscription of the entity's own equity
instrument to the extent that the deposits are repayable in cash.
Liability for deposits received
Illustration 1: Deposits for returnable containers
ABC Co. requires deposits from customers for the containers of goods sold. The
customers are refunded for the deposits received when the containers are
returned within two years from the date of sale of the related goods. Deposits
for containers not returned within the time limit are regarded as proceeds from
retirement of the containers. Information for 20x3 is as follows:
Deposits for containers on December 31, 20x2 from deliveries in:
20x1 20,000
20x2 45,000 65,000
Deposits for containers delivered in 20x3: 90,000
Deposits for containers returned in 20x3 from deliveries in:
20x1 9,000
20x2 25,000
20x3 46,000 80,000

Requirement: Compute for the liability for deposits on returnable containers as

of December 31, 20x3.
Liability for deposits received

Liability for deposits

ignored Deposits from 20x1
Returns from 20x1 ignored 45,000 Deposits from 20x2
Returns from 20x2 25,000 90,000 Deposits in 20x3
Returns in 20x3 46,000
end. 64,000
Deposit for future subscription of shares of stocks

Deposits received for future subscription of the entity's shares of stocks are classified as either liability or
equity as follows:

a. If repayable in cash at any time prior to the issuance of the subscribed shares, the deposits are
classified as liability.
b. If not repayable in cash, the deposits are classified as equity, preferably presented under contributed
capital.
Accrued expenses
Accrued expenses are liabilities for expenses already incurred
buy not yet paid (e.g., salaries payable, utilities payable, and
the like).
Dividends payable
The liability to pay dividend is recognized when the dividend is
appropriately authorized and is no longer at the discretion of the
entity, which is:
a. the date when the declaration of the dividend (e.g., by the board
of directors) is approved by a relevant authority (e.g., by the
shareholders) if such approval is required; or
b. the date when the dividend is declared (e.g., by the board of
directors) if further approval is not required.
(IFRIC 17)

• Dividends declared by banks are subject to the approval of the Bangko Sentral
ng Pilipinas (BSP).
• Only cash and property dividends are recognized as liabilities. Stock dividends
are not liabilities; 'share dividends distributable' ('stock dividends payable') is
presented in equity as an addition to share capital.
Liability for remittable
collections
Liabilities may also arise from amounts collected on behalf of
third parties. Examples:
a. Taxes withheld
b. SSS premiums, Philhealth, Pag-IBIG and similar
contributions
c. Output value added taxes (VAT)
d. Collections made by an agent or broker on behalf of a
principal
Questions & answers