CHAPTER 1
Related standards:
PAS 1: Presentation of Financial
Statements
PAS 32: Financial Instruments:
Presentation
PFRS 9: Financial Instruments
Learning Competencies
 Know the recognition
criteria for liabilities
and their essential
characteristics.
 Identify the
characteristics of a
financial liability.
 Know the initial and
subsequent measurements of
financial and non-financial
liabilities.
 Know how to classify
liabilities as current and
noncurrent.
Liabilities
PAS 1 prescribes the basis
for
presentation
of
general
purpose financial statements to
improve comparability both with
the
entity's
financial
statements of previous periods
and
with
the
financial
statements of other entities.
Essential characteristics of a
liability
1. Present obligation (Legal
or Constructive)
2. Arising from past events
3. Outflow
of
economic
benefits
Financial liabilities
 A financial liability is
any liability that is a
contractual obligation:
a. to deliver cash or
another financial asset
to another entity; or
b. to exchange financial
assets
or
financial
liabilities
with
another entity under
conditions
that
are
potentially unfavorable
to the entity; or
Examples of financial
liabilities
1. Payables such as accounts,
notes, loans, bonds payable
and accrued expenses that
are payable in cash.
2. Finance lease obligations.
3. Liabilities held for
trading such as obligations
to deliver financial assets
borrowed by a “short
seller” (i.e. an entity
that sells financial assets
it has borrowed and does
not yet own).
4. Preference shares issued
with mandatory redemption.
5. Security deposits received
that are to be returned to
tenants at the end of lease
term.
6. Obligations to deliver a
variable number of own
shares worth a fixed amount
of cash.
CHAPTER 1
The following are not financial
liabilities;
1. Unearned revenues and
warranty obligations that
are to be settled by future
delivery of goods or
services, rather than cash.
2. Taxes, SSS premiums,
Philhealth and other
payables arising from
statutory requirements and
not from contracts.
3. Commodity contracts that
either cannot be settled in
cash or which are expected
to be settled by commodity
exchange (e.g., coffee
beans, gold bullion, oil,
and the like). If a
commodity contract is
expected to be cash
settled, it will be
included as financial
liability on the part of
the cash payor.
4. Constructive obligations.
These obligations do not
arise from contracts.
Recognition of liabilities
 An item is recognized as a
liability when:
1. It meets the definition of
a liability;
2. It is probable that an
outflow of resources
embodying economic benefits
will result from its
settlement; and
3. The settlement amount can
be measured reliably.
Measurement of financial
liabilities
o Initial measurement – fair
value minus transaction
costs, except financial
liabilities at FVPL whose
transaction costs are
expensed immediately.
o Subsequent measurement –
amortized cost (except
financial liabilities that
are classified as held for
trading and those that are
designated; these are
subsequently measured at
fair value)
Measurement of Non-financial
liabilities
o 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.
Examples:
1. Obligations arising from
statutory requirements
(e.g., income tax payable)
2. Unearned or deferred
revenues
3. Warranty obligations
4. Commodity contracts that
either cannot be settled in
cash or which are expected
to be settled by commodity
exchange
CHAPTER 1
Current liabilities are
liabilities that are:
1. Expected to be settled in
the entity’s normal
operating cycle;
2. Held primarily for trading;
3. Due to be settled within 12
months after the end of the
reporting period; or
4. The entity does not have
the right at the end of the
reporting period to defer
settlement of the liability
for at least twelve months
after the reporting period.
o
All other liabilities are
classified as noncurrent.
Trade and non-trade payables

Trade payables are obligations
arising from purchases of
inventory that are to be sold
in the ordinary course of
business. Other payables are
classified as non-trade.

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.

On the other hand, non-trade
payables are classified as
current liabilities only when
they are expected to be
settled within one year.
Dividends payable
 Under IFRIC 17, the liability
to pay a dividend is
recognized when the dividend
is appropriately authorized
and is no longer at the
discretion of the entity,
which is:
1. the date when the
declaration of the dividend
(e.g., by management or the
board of directors) is
approved by the relevant
authority (e.g., the
shareholders) if the
jurisdiction requires such
approval, or
2. the date when the dividend
is declared (e.g., by
management or the board of
directors) if the
jurisdiction does not
require further approval.