Current

Liabilities

In-depth Topic
Christian James
Alegre

Introduction
Liabilities represent amounts an entity owes for its
debts or obligation. The IASBs Conceptual Framework
for Financial Reporting defines liability as present
obligation of an enterprise arising from past event, the
settlement of which is expected to result in an outflow
from the enterprise of resources embodying economic
benefits.
From the definition given, a liability possesses the
following characteristics:
1. Present Obligation;
2. Arising from Past Events;
3. Probable Outflow of Resources embodying economic
benefit

Introduction
An obligation is a duty or responsibility to act or
perform in a certain way which may be legally
enforceable as a consequence of a binding contract or
statutory requirements; or it may be an obligation
acknowledged by an enterprise because other parties
are made to believe that it will carry out an undertaking
or certain action.
An obligating event is one that results in an enterprise
having no realistic alternative to settling that obligation.
An obligating event may be classified in either of the
following:
1. Legal Obligation; or
2. Constructive Obligation

Introduction
A legal obligation is one that derives from a contract,
legislation, or other operation of law.
A constructive obligation is one that derives from an
enterprises actions whereby an established pattern of
past practice, published policies or a sufficiently specific
current statement, the enterprise has indicated to other
parties that it will accept certain responsibilities, and as
a result, the enterprise has created a valid expectation
on the part of those other parties that it will discharge
those responsibilities.

Introduction
Liabilities arise only from past events or transactions.
For example, the mere signing of a purchase agreement
with a supplier does not give rise to a liability. The
liability will only arise if the entity acquires legally or
constructively the title to the goods from the supplier.
The past event in that case is the acceptance by the
entity of the goods delivered by the supplier. In a
similar manner, the mere signing of an employment
contract with an employee does not give rise to a
liability. The liability for salaries shall be recognized
when an employee renders services to the entity.

Introduction
The settlement of a present obligation involves the
enterprise giving up resources embodying economic
benefits in order to satisfy the claim of the other party.
Settlement of a present obligation may occur in a
number of ways:
1. Payment of cash;
2. Transfer of assets;
3. Provision of services;
4. Replacement of an obligation with another
obligation; and
5. Conversion of the obligation to equity.

Introduction
A liability is recorded and reported in the statement of
financial position when the following condition are met:
1. It is probable that an outflow of resources embodying
economic benefits will result from the settlement of
a present obligation; and
2. The amount at which the settlement will take place
can be measured reliably.

Provisions and
Contingency
Obligations involving uncertainties are either provisions
or contingent liabilities. A provision is an obligation
whose existence is certain as of the end of the
reporting period, and only the timing of settlement or
the amount to be settled is uncertain. The amount of
the obligation, however, is reliably estimable.

Provisions and
Contingency
Definition

Provision

Contingency

A liability of
uncertain timing or
amount.

Either a possible obligation that arises

from past event and whose existence will
be confirmed only by the occurrence or
non occurrence of one or more future
events not wholly within the control of
the enterprise or a present obligation
that arises from past event but is not
recognized because it is not probable
that an outflow of resources embodying
economic benefits will be required to
settle the obligation or the amount
cannot be measured reliably.

Recognitio Recognized as a
n
liability on the face
of the statement of
financial position.

Not recognized as a liability on the face

of the statement of financial position.

Presentati

Unless remote, disclosed in the notes to

Presented separately

Provisions and
Contingency
Thus, based on the given table, obligation involving

uncertainties are accounted for as presented below

Record by debiting
Reliably Measurable An expense or loss an
Crediting a liability

Probable

Not Reliably Measurable

Possible
Remote

Disclosed in the note

To the financial
statements
Ignore

Provisions and
Contingency
Measurement of Provisions
The amount recognized as a provision should be the
best estimate of the expenditure required to settle the
obligation at the end of the reporting period,
considering:
a. Judgment of the management of the enterprise;
b. Experience of similar transaction; or
c. Reports from independent experts.
If a single obligation is being measured, the amount to
be recognized as a liability is the most likely
outcome.

Provisions and
Contingency
Measurement of Provisions
Where the amount of the obligation is still uncertain as
of the end of the reporting period, but the obligation is
settled subsequently before the issuance of the
financial statements, the amount shown in the
statement of financial position is the amount actually
settled subsequently.
Where the provision being measured involves a large
population of items, the obligation is estimated by
weighing all possible outcomes by their associated
possibilities (statistical method called expected
value). Where there is a continuous range of possible

Provisions and
Contingency
Illustration
In September 2012, Howell filed a suit against Blue
Company, alleging violation of patent rights and it is
seeking damages of P7,000,000. Blue disclaims the
charges and the legal counsel advises that as of the
date of issuance of Blue Companys financial
statements, it is probable that the enterprise will not be
found liable.

Provisions and
Contingency
Illustration
ABC Company operates in a city where there is no
environmental legislation. However, the company has
a widely published policy in which it undertakes to
clean up all contamination it causes. As of the date of
the issuance of its 2013 financial statements, a
reasonable estimate of the cost of this clean up related
to 2013 operations is P2,000,000.

Provisions and
Contingency
Illustration
As a result of an uninsured accident during the year
2013, personal injury suit for P3,000,000 has been filed
against XYZ Company. It is the judgment of the
companys legal counsel that an unfavorable verdict
will result in a loss ranging from P1,800,000 to
P2,800,000. The lawyer believes the most reasonable
estimate is P2,200,000.

Provisions and
Contingency
Illustration
GHI Company sells goods with warranty under which
customers are covered for the cost of any
manufacturing defects that become apparent within the
first year after purchase. If minor defects were detected
in all products sold, repair cost of P2,000,000 would
result. If major defects were detected in all products
sold, repair cost of P5,000,000 would result. The
enterprises past experience and future expectation
indicates that 60% of the goods sold have no defect,
30% of the goods sold have minor defects and 10% of
the goods sold have major defects.

Provisions and
Contingency
Illustration
JKL is charged with multiple lawsuits because of an
incident that happened in February 2015, causing death
of about 80 persons due to stampede in a sales
promotion program it was airing through Channel 6 on
February 10, 2015. Based on similar incidents suffered
by other entities, JKLs legal counsels are of the opinion
that it is probable that JKL would be found liable for the
incident. As of the date of the issuance of the 2015
financial statements, a reasonable estimate of the
obligation is between P16,000,000 to P24,000,000.
Each point within the range is as likely as any other.

Classification of
Liabilities
An enterprise shall classify a liability as current when:

a. It expects to settle the liability in its normal

operating cycle;
b. It holds the liability primarily for the purpose of
trading;
c. The liability is due to be settled within twelve
months after the reporting date; and
d. It does not have an unconditional right to defer
settlement of the liability for at least twelve months
after the reporting period.

Classification of
Liabilities
Illustration
Dorina Inc. has P4 million of notes payable due June 15,
2016. at December 31, 2015, Dorina signed an
agreement to borrow up to P4 million to refinance the
note payable on a two-year basis. The financing
agreement called for the borrowing not to exceed 75%
of the value of the collateral Dorina was providing. At
the date of the issue of the December 31, 2015
financial statements, the value of the collateral was
P4.8 million and was not expected to fall below this
amount.

Classification of
Liabilities
Illustration
Dorina Inc. has P4 million of notes payable due June 15,
2016. At February 14, 2016, Dorina signed an
agreement to borrow up to P4 million to refinance the
notes payable on a long term basis. The financing
agreement called for the borrowing not to exceed 75%
of the value of the collateral Dorina was providing. The
value of the collateral was P4.8 million and was not
expected to fall below this amount. The financial
statements are authorized for issuance on March 4,
2016.

Classification of
Liabilities
Illustration
In October 2011, Vivian Corp. acquired a special
equipment from Carlo, Inc. by paying P1,000,000 down
and signing a note with a face value of P4,000,000 due
October 2014. Under the terms of the financing
agreement, Vivian has the discretion to roll over the
obligation for at least fifteen months. In October 2013,
management decides to exercise its discretion to roll
over the liability up to October 31, 2015.

Classification of
Liabilities
Illustration
In October 2011, Vivian Corp. acquired a special
equipment from Carlo, Inc. by paying P1,000,000 down
and signing a note with a face value of P4,000,000 due
October 2013. The existing loan agreement does not
carry a provision to refinance. In October 2013, Vivian
was experiencing financial difficulty and was unable to
pay the maturing obligation. On February 1, 2014, Carlo
has agreed not to demand payment for at least 12
months as a consequence of the breach of the payment
on the principal of the loan. The financial statements at
and for the period ended December 31, 2013 were
authorized for issue on March 31, 2014.

Classification of
Liabilities
Illustration
In October 2011, Vivian Corp. acquired a special
equipment from Carlo, Inc. by paying P1,000,000 down
and signing a note with a face value of P4,000,000 due
October 2013. The existing loan agreement does not
carry a provision to refinance. In October 2013, Vivian
was experiencing financial difficulty and was unable to
pay the maturing obligation. On December 31, 2013,
Carlo signed an agreement to provide Vivian a grace
period of 15 months from that date, during which
period, Carlo will not demand immediate payment in
order to give Vivian the chance to rectify the breach.
The financial statements were authorized for issue on

Classification of
Liabilities
Illustration
In October 2011, Vivian Corp. acquired a special
equipment from Carlo, Inc. by paying P1,000,000 down
and signing a note with a face value of P6,000,000 due
in installments of P1,000,000 plus annual interest o the
balance of the principal at the rate of 10%, the first
installment being due on September 30, 2012. The
existing loan agreement does not carry a provision to
refinance and further states that any failure to pay the
required installment and interest will make the full
amount of the loan due and demandable. Further, the
full amount of the principal and accrued interest shall
be subject to interest if 10%. As of December 31, 2013,

Classification of
Liabilities
If the following events occur between the end of the

reporting period and the date of the financial

statements are authorized for issue, these events are
disclosed as non-adjusting events in the notes to the
financial statements:
1. Refinancing on a long-term basis;
2. Rectification of a breach of long-term loan
agreement;
3. The granting by the lender of a period of grace to
rectify a breach of a long-term loan arrangement
ending at least twelve months after the reporting
period.
Also, any liability that has been excluded from current

Current Liabilities
The major item usually found under the current
liabilities section of the statement of financial position
includes:
1. Accounts Payable;
2. Short-term notes payable;
3. Deposits and Advances;
4. Liabilities under trust receipt;
5. Current portion of long-term debt;
6. Accrued Liabilities;
7. Income taxes payable;
8. Dividends payable;
9. Deferred Revenue;
10.Provisions expected to be settled within 12 months;
and

Non-current Liabilities
The major item usually found under the non-current
liabilities section of the statement of financial position
includes:
1. Bonds payable;
2. Mortgage Loans Payable;
3. Long-term Notes Payable;
4. Liability under Finance Leases not due within 12
months;
5. Long-term Deferred Revenue.

Warranties
Warranty arrangement require the seller to correct any
deficiency in quality, quantity or performance of the
merchandise sold, to replace the item, or to refund the
selling price over a specified period of time after the
sale. Warranty expense is recognized based on
associating cause and effect. To properly measure an
enterprises profit for the period, the expected costs
related to revenues of the period shall be recognized as
expenses in the same period in which sales are
recorded, even if the expenditure is to be incurred at a
subsequent period.

Warranties
Illustration
JVC Electronics sells DVD and VCD systems with a twoyear warranty. JVC estimates warranty costs as a
percentage of peso sales as follows: first year of
warranty, 3%; second year of warranty, 8%. Sales and
actual repairs for 2013 and 2014 are:
Sales for 2013
P2,500,000
Sales for 2014
P4,750,000
Actual warranty repair 2013
P53,000
Actual warranty repair 2014
P184,500

Warranties
The warranty liability account should be reviewed
periodically to determine if the actual repairs
approximate the estimate. This assumption is called
occurred evenly throughout the year.

Premiums and Coupon

As part of a companys marketing strategy to increase
sales, premiums are offered to customers in exchange
for labels, coupons, box, tops, wrappers or any other
evidence of purchase. The cost of these premiums
should be matched as expenses against the revenues in
the period of sale. At the end of the reporting period
during which the sale is made, an estimate must be
made of the end-of-year outstanding premium offers
that will be presented for future redemption.

Premiums and Coupon

Illustration
A company launched a new sales promotional program.
For every P10 product box tops returned to the
Company, customers receive an attractive prize. The
company estimates that only 60% of the product box
tops reaching the consumer market will be redeemed.
Additional information is as follows:
Units
Amount
Sales of products in boxes
2,000,000 P90,000,000
Purchase of premiums
100,000 P800,000
Premiums distributed to customers
82,000

Customer Loyalty
Awards
Certain companies grant their customers rewards for

patronage of their products and services. Examples of

this scheme are awarding of points to SM advantage
cardholders, accumulation of mileage for Philippine
Airlines Mabuhay Miles frequent flyers, and other
privilege cards which entitle holders to exchange points
accumulated from purchases for goods and services of
the entity. Such points, therefore, are used by the
customers as part or full payment for goods and
services offered by the company.
Under IFRIC 13, Customer Loyalty Programme, the
consideration received by an entity for goods sold is
apportioned between the product or service and the

Customer Loyalty
Awards
Illustration
Assume that SM Corporation grants its customers 2
rewards points for each P100 sales. Each point is
redeemable in the form of merchandise and is
equivalent to P1. The points accumulate and may be
used by the customer as part of payment to the
merchandise purchases in the future. During the month
of April 2014, total sales of the company amounted to
P24,000,000. Fair values of merchandise and the
reward points are P23,520,000 and P480,000
respectively. By the end of the first year, 40% has been
redeemed and it is expected that 90% if the points
granted will be redeemed. During the second year, the

Liability for Bonus

As incentive to officers and managers, many companies
establish a bonus agreement, with the bonus usually
payable shortly after the end of the year. The amount of
bonus may be based on the amount of revenue or profit
of the enterprise. This bonus is, in effect, part of
salaries and compensation expense and is reported as
an operating expense of the company. The bonus, if
unpaid at year end, should be accrued by debiting
Compensation expense and crediting bonus payable.
The amount of bonus, if based on profit, is computed
using different possible formulas.

Liability for Bonus

Illustration
Assume the following data for ABC Corporation:
Profit before deducting bonus and tax is P2,000,000.
Bonus rate is 10% and income tax rate is 30%.
Compute the bonus and tax based on the following
scenarios:
1. Bonus is based on profit before deducting bonus and
tax;
2. Bonus is based on profit after bonus but before tax;
3. Bonus is based on profit before bonus but after tax;
4. Bonus is based on profit after bonus and tax

Deposits and advances

Deposits and advances consist of cash or property
received but which are returnable to the depositor or
which have been collected or otherwise accumulated to
be remitted to third parties.
If deposits or advance results from the companys
operating activities, the liability is normally reported as
current. If the deposit is nontrade and is expected to be
refunded or paid after more than one year, the liability
is reported as non-current.

Deposits and advances

Illustration
Assume the following data for ABC Corporation:
Description

Amou
nt

Balance of Deposits for returnable containers, 01/01/14

P250,0
00

Deposits received for containers of products sold during 2014

800,00
0

Deposits refunded during 2014 upon return of containers

720,00
0

Deposits forfeited for containers not returned within the

prescribed period

60,000

Cost of containers not returned within the prescribed period

55,000

Accumulated depreciation on containers not returned within the

prescribed period.

15,000

Unearned Service
Contract
The recognition of revenue from service contract is

measured by the passage of time or the lapsing of the

service contract period. To illustrate, assume the
following information.
ABC Service Company sells service contracts for
computer units that cover a two-year period. The sales
price of each contract is P750. ABCs past experiences
shows that of the total pesos spent for repairs in service
contract, 40% is incurred evenly during the first
contract year and 60% evenly during the second
contract year. During 2013, ABC sold 1,000 contracts .
Cost of servicing the units during 2013 amounted to
P80,000. For 2014, additional service contracts of 1,200

Gift Certificates
Outstanding
Some retail store sell gift certificates to customers that

are redeemable in merchandise. The sale of gift

certificates creates a liability in the books of the retail
store. The liability is settled either by redemption of the
certificates in exchange for merchandise sold or by
expiration of gift certificates

Gift Certificates
Outstanding
Illustration
Assume the following data for SM Corporation for the
year 2013.
Description
Unearned Revenue from Gift Certificate Outstanding, January 1,
2013

Amount
P500,00
0

Gift certificates issued during the year

2,000,00
0

Gift certificates redeemed during the year

1,800,00
0

Gift certificates relating to the entitys promo that expired

during the year

25,000

Additional outstanding gift certificate expected to expire during

2014

12,000

Value Added Tax

VAT are levied on the sale of goods and certain
services. VAT must be collected from the customer by
the seller and remitted on a monthly basis to the proper
government authority. The VAT payable is reported as
current liability until the VAT are remitted to the BIR in
the following period. In cases when the input VAT
exceeds the output VAT, the excess is set u as an asset.
Such excess reduces the amount of VAT that will be
remitted to the BIR in the succeeding periods.

Payroll Taxes
Employers are required by law to withhold from the
salaries of each employee an amount representing
income taxes payable by employee as well as the
employees share for SSS premium, Philhealth
contribution, Pag-ibig contribution, union dues and
various other amounts payable by the employees to
third parties. These amount withheld from employees
salaries are reported as current liabilities of the
withholding company until they are remitted to the
appropriate third parties.

THANK
YOU!