CURRENT LIABILITIES
TOPIC OUTLINE
Definition
Liabilities
Essential
Characteristics
CURRENT
LIABILITES
Measurement
Current Liabilities
Classification
Non-current
Liabilities
LECTURE NOTES
LIABILITIES
Liabilities are present obligations of an entity arising from past transactions or events, the settlement of which is
expected to result in an outflow from the entity of resources embodying economic benefits.
Essential Characteristics of Liabilities:
1. Liabilities are PRESENT OBLIGATION.
It is NOT NECESSARY that the payee to whom the obligation is owed be identified. What is important is that the
entity identifies itself as liable to another entity.
2. Liabilities arise from PAST TRANSACTIONS OR EVENTS.
This means that the liability is no recognized until it is incurred. The past event that leads to a present obligation is
called an obligating event.
An obligating event is an event that creates a legal (the settlement of the obligation can be enforced by law) or
constructive obligation (The event creates valid expectation on the part of other parties that the entity will
discharge the obligation, as in the case of constructive obligation) because the entity has no realistic alternative
but to settle the obligation created by the event.
3. The settlement of the liability REQUIRES AN OUTFLOW of resources embodying economic benefits.
Settlement may be in the form of:
(a) payment of cash
(b) transfer of non-cash assets;
(c) provision of future services. This characteristic is the main reason why STOCK DIVIDENDS PAYABLE is NOT a
LIABILITY but rather presented within EQUITY.
MEASUREMENT
CLASSIFICATION
FINANCIAL
LIABILITIES
Financial
Liabilities at
Fair Value
through
Profit or Loss
Financial
Liabilities at
Amortized
Cost
NON-FINANCIAL LIABILITIES
INITIAL MEASUREMENT
SUBSEQUENT
MEASUREMENT
AMORTIZED?
FAIR VALUE
CHANGES
INTEREST EXPENSE
IS BASED ON
Nominal Rate
Fair Value
Fair Value
No
Yes
(Presented
in Profit or
Loss)
Fair Value minus
Transaction Cost
Amortized Cost
Yes
No
Effective Rate
Best Estimate of
Cash Outflow
Yes, if
measured
at present
value
No
Usually,
Effective Rate
if the liability is
measured at
present value
Best Estimate of
Cash Outflow
NOTES:
a. Transaction costs are expensed immediately if the financial liability is designated initially as at fair value through
profit or loss. Transaction costs are incremental costs that are directly attributable to the issue of a financial
liability.
b. Transaction costs include:
 Fees and commissions paid to agents, advisers, brokers and dealers
 Levies by regulatory agencies and securities exchanges
 Transfer taxes and duties
Transaction costs do not include:
 Debt premiums or discounts
 Financing costs
 Internal administrative or holding cots
c. Financial liabilities are classified as FVPL (1) through irrevocable designation or (2) if the liability is held for
trading (liabilities with an intention to repurchase them in the near term)
d. The “amortized cost” of a financial liability is the amount at which the financial liability is measured at initial
recognition minus principal repayment, plus or minus the cumulative amortization using the effective interest
method of any difference between the initial amount and the maturity amount.
FINANCIAL STATEMENTS CLASSIFICATION
An item of liability is classified as current liability if it met any of the following criteria set by PAS 1:
1.
2.
3.
4.
The entity expects to settle the liability within the entity’s normal operating cycle.
The entity holds the liability primarily for the purpose of trading.
The liability is due to be settled within twelve months after the reporting period.
The entity does not have an unconditional right to defer settlement of the liability for at least twelve
months after the reporting period.
NOTE: If an item did not meet any of the criteria above, it is classified as a non-current liability.
Examples of CURRENT LIABILITIES:
 Trade and other payables (a)
 Financial liabilities held for trading
 Current portion of long-term debt
 Short-term borrowing
 Current provisions
 Current tax liability
 Financial liabilities held for trading
 Bank overdraft
 Credit balances in accounts receivable
 Unearned income realizable within 12 months (b)
 Accrued expenses
 Long-term debt currently maturing
 Refundable deposits (c)
 Payroll taxes payable (d)
 Value-added Taxes (VAT) payable (Output VAT less Input VAT)
 Escrow liability (e)
Note: Non-trade payables are classified as current liabilities if are due for settlement within twelve months after
the reporting period or held primarily for the purpose of being traded.
REFINANCING OF CURRENTLY MATURING OBLIGATION
GENERAL RULE: A currently maturing obligation is presented as CURRENT LIABILITY.
EXCEPTIONS: (The liability is presented as NON-CURRENT LIABILITY if it met any of the following conditions)
(1) The company has the prerogative/option/unconditional right to refinance the liability.
(2) If there is no right but refinancing was completed on or before the balance sheet date.
Refinancing may be done thru extension of maturity date or through issuance of bonds the proceeds of which is
used to settle the currently maturing obligation.
To provide a clear guidance on the above concept, please see the following concept map:
With unconditional
right to refinance the
liability (NONCURRENT LIABILITY)
RULES ON
REFINANCING
Without unconditional
right to refinance the
liability
But refinancing was
made ON OR BEFORE
year-end (NONCURRENT LIABILITY)
But refinancing was
made AFTER year-end
(CURRENT LIABILITY)
GENERAL RULE: If the company breached a covenant or contract, the long-term obligation BECOMES
IMMEDIATELY DEMANDABLE, thus presented as a CURRENT LIABILITY.
EXCEPTIONS: (The liability is still presented a NON-CURRENT LIABILITY under the following conditions)
(1) If the creditor agreed to give the debtor a grace period for at least 12 months after the balance sheet date
AND
(2) The said grace period was provided on or before the balance sheet date.
To provide a clear guidance on the above concept, please see the following concept map:
BREACH OF CONTRACTS
BREACH OF
COVENANT
No grace period
was agreed upon
(CURRENT
LIABILITY)
After balance
sheet date
(CURRENT
LIABILITY)
Grace period given
was less than 12
months (CURRENT
LIABILITY)
Grace Period was
agreed upon
On or before
balance sheet
date
Grace period given
was equal or more
than 12 months
(NON-CURRENT
LIABILITY)
TRADE AND OTHER PAYABLES (a)
The frequently asked question regarding trade accounts payable is its adjusted balance. As a guide in computing
such, please see the below template:
Solution Guide
Unadjusted balance
Add: Post-date checks and unreleased checks
Debit balances in AP (If the unadjusted balance is a net amount
Less: Unrecorded purchase returns and allowances
Discounts forfeited (under net method)
Effect of Freight terms
Adjusted balance
xx
xx
xx
(xx)
(xx)
xx(xx)
xx
In relation to freight terms, please see the following guide:
 If the good were in transit to the entity and the freight term is
o FOB Shipping Point- Accounts Payable and purchases should be increased.
o FOB Destination- Ignore, purchases and accounts payable should be increased upon arrival of the
goods.





In relation to freight cost, its effect on accounts payable depends on the freight terms as well and are
summarized below:
Effect on Accounts Payable?
FOB Shipping Point, Freight Collect
No effect
FOB Shipping Point, Freight Prepaid
Increase
FOB Destination, Freight Prepaid
No effect
FOB Destination, Freight Collect
Decrease
UNEARNED INCOME(b)
Deferred revenue or unearned revenue is income already received but not yet earned. Unearned income may
come from:
 Goods (Advances from customers)
 Services (Unearned income from service contracts, unearned subscription revenue)
 Use of entity’s resources (Unearned interest income, unearned rental income)
Deferred revenue may be realizable within one year or in more than one year from the end of reporting period.
If the deferred revenue is realizable within one year, it is classified as current liability. Typical examples of current
deferred revenue are unearned interest income, unearned rental income and unearned subscription revenue. If
the deferred revenue is realizable in more than one year, it is classified as noncurrent liability. Typical examples of
noncurrent deferred revenue are unearned revenue from long-term service contacts and long-term leasehold
advances.
In relation to unearned income, the frequently asked questions are (1) Earned portion (income); (2) Ending
balance of unearned income. To answer such question, use the T-account in relation to unearned income:
Unearned Income
Earned Portion
xx Beginning Balance
Cash Receipts
End. Balance
For unearned income from gift certificates, please use the modified T-account:
Gift Certificates Payable
Redemption (whether
Beginning Balance
from prior year or current
Cash Receipts from
year sales)
xx sales
Expired Portion
xx
End. Balance
xx
xx
xx
xx
xx
xx
REFUNDABLE DEPOSITS (c)
Refundable deposits consist of cash or property received from customers but which are refundable after
compliance with certain conditions.
The Frequently asked question regarding refundable deposits would be its ending balance at balance sheet data.
Use the Following T-account as guide in answering such questions:
Liability for Deposits
Deposits returned
Beginning Balance
Applied
xx Cash Receipts
Deposits cancelled xx
Deposits Expired
xx
End. Balance
xx
xx
xx
PAYROLL TAXES PAYABLE (d)
Under our law, the entity as an employer is required to withhold from the salaries of each employee the
following:
(a) Income tax payable by the employee
(b) Employee’s contribution to the Social Security System or SSS
(c) Employee’s contribution for Philhealth
(d) Employee’s contribution to the Pag-ibig Fund
Such amounts withheld from the salaries of the employees shall be recognized as “payroll taxes payable” until
remitted by the entity to the appropriate government authority. In addition to the amounts withheld from the
salaries of the employees, the entity is required by law to make a contribution for SSS.
ESCROW LIABILITY (e)
Escrow is the use of a third party, which holds an asset or funds before they are transferred from one party to
another. The third party holds the funds until both parties have fulfilled their contractual requirements. The
frequently asked question regarding escrow liability is its ending balance. To help in solving such, please use the
following T-Account:
ESCROW LIABILITY
Cash transfer or payments
xx Beginning Balance
Interest and other charges paid
xx Cash Receipts
Interest income
End. Balance
xx
xx
xx
xx