Liabilities
actually restrictions on the borrower as to undertaking further
Definition
borrowings, paying dividends, maintaining specified level of
Liabilities are present obligations of an entity to transfer
working capital and so forth.
an economic resource as a result of a past event.
Accordingly, the essential characteristics of an accounting
liability are:
a.
Breach of Covenants
The entity has a present obligation. The payee to whom
Under these covenants, if certain conditions relating to the
the obligation is owed is not necessarily identified.
borrower’s financial situation are breached, the liabilities become
b.
The obligation to transfer an economic resource.
payable on demand and classified as current liability.
c.
The liability arises from a past event.
However, the liability is classified as noncurrent if the
lender has agreed on or before the end of the reporting period to
provide grace period ending at least twelve months after that date.
Measurement of Current Liabilities
Conceptually, all liabilities are initially measured at
Estimated Liabilities
present value and subsequently measured at amortized cost.
However, in practice, current liabilities are not discounted
Estimated liabilities are obligation which exist at the end
anymore because the amount is not material so they are recorded
of reporting period although their amount is not definite. They are
and reported at their face amount.
either current or noncurrent in nature. Examples include estimated
liability for premium, award points, warranties, gift certificates and
bonus.
Measurement of Noncurrent Liabilities
Noncurrent liabilities, for example, bonds payable and
Deferred Revenue
noninterest-bearing note payable, are initially measured at present
Deferred revenue or unearned revenue is income already
value and subsequently measured at amortized cost.
received but not yet earned. Typical examples of current deferred
If the long-term note payable is interest-bearing, it is
revenue are unearned interest income, unearned rental income and
initially and subsequently measured at face amount.
unearned subscription revenue. Typical examples of noncurrent
deferred revenue are unearned revenue from long-term service
contracts and long-term leasehold advances.
Current liabilities
Financial liabilities held for trading are financial
Gift Certificates Payable
liabilities that are incurred with an intension to repurchase them in
the near term. An example is quoted debt instrument that the issuer
The Philippine Department of Trade and Industry ruled
may buy back in the near term depending on changes in fair value.
that gift certificates no longer have an expiration period.
Noncurrent Liabilities
Bonus Computation
Noncurrent liabilities include:
Large entities often compensate key officers and
1.
Noncurrent portion of long-term debt
employee by way of bonus for superior income realized during the
2.
Finance lease liability
year.
3.
Deferred tax liability
4.
Long-term obligation to officers
5.
Long-term deferred revenue
This compensation plan results in liability that must be
measured and reported in the financial statements. The bonus
computation usually has four variations:
1.
Covenants
Bonus is expressed as a certain percent of income before
bonus and before tax.
2.
Covenants are often attached to borrowing agreements
Bonus is expressed as a certain percent of income after
bonus but before tax
which represent undertakings by the borrower. The covenants are
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3.
4.
Bonus is expressed as a certain percent of income after
certain conditions. The best example of a refundable deposit is the
bonus and after tax.
customer required for returnable containers like bottles, drums,
Bonus is expressed as a certain percent of income after
tanks, and barrels.
tax but before bonus.
If the customer fails to return the containers, the deposit
is considered as the sale price of the containers. The excess of
Refundable Deposits
deposit over the cost of the containers is considered as gain
Refundable deposits consist of cash or property received
from customer but which are refundable after compliance with
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