current liabilities, provisions and contingencies updated

7/27/2019 Current Liabilities, Provisions and Contingencies UPDATED

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Current Liabilities, Provisions and

Contingencies

Paolo Perandos

Ezra Luces


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Objectives

Define

Explain characteristics

Identify

Recognition criteria for liabilities

Required disclosures for current liabilities andcontingencies

Distinguish Current liabilities from noncurrent liabilities

Provisions from contingent liabilities


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Objectives

Account

Different current liabilities after recognition

Measure

Current liabilities on the balance sheet


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Definition

IASB 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.


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Essential Characteristics

1. Present obligation

2. Past event

3. Probable outflow of resources embodyingeconomic benefits


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What is an Obligation?

Article 1156

An obligation is a juridical necessity to give, todo or not to do.


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What is an Obligation?

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 requirement.


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What is an Obligating Event?

An obligating event is an event that creates a

legal or constructive obligation and, therefore,

results in an entity having no realistic

alternative but to settle the obligation.


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Legal and Constructive Obligation

A legal obligation is one that derives from a

contract, legislation or other operation of law.


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Legal and Constructive Obligation

A constructive obligation is one that derives froman enterprises actions whereby:

An established pattern of past practice,

published policies, or a sufficiently specific current statement,

the enterprise has indicated to other parties thatit will accept certain responsibilities, the

enterprise has created a valid expectation on thepart of those other parties that it will dischargethose responsibilities.


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Settlement of Obligation

Settlement of a present obligation may occur in

a number of ways, such as by

1. Payment of cash;

2. Transfer of assets;

3. Provision of services;

4. Replacement of obligation with another

obligation;

5. Conversion of the obligation to equity.


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Recognition of Liabilities

A liability is recorded and reported in the

statement of financial position when the

following conditions 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 takeplace can be measured reliably.


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Contingent Liability

PAS 37, paragraph 10 defines contingent liability

in two ways:

1. A contingent liability is a possible obligation

that arises from past event and whose

existence will be confirmed only by the

occurrence or non-occurrence of one ore

more uncertain future events not whollywithin the entity's control


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Contingent Liability

2. A contingent liability is a present obligation

that arises from past event but is not

recognizedbecause it is not probable that a

transfer of economic benefits will be requiredto settle the obligation or the amount of the

obligation cannot be measured reliably.


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Provision

Definition:

A liability of uncertain timing or amount


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Provision and Contingent Liability

Provision Contingent Liability

Recognition Recognized as a liability on

the face of the statement

of financial position

Not recognized as a liability

on the face of the

statement of financial

position

Financial statement

presentation

Presented separately in the

statement of financial

position under liabilities

Unless remote, disclosed in

the notes to the financial

statements


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Obligations involving uncertainties are

accounted as presented below:

Status

Probable

Reasonably

possible

Remote

Reliably measurable

Not reliably measurable

Record by debiting an

expense or a loss and

crediting a liability

Disclose in the notes to

financial statements

Ignore (Neither recognize

nor disclose)


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Measurement of Liabilities

Liabilities are measured:

1. At amounts established in exchanges

(amount to be paid or amount discounted);

or

2. By estimates of a definitive character when

the amount of the liability cannot be

measured more precisely (provisions).


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The amount recognized as a provision should

be the best estimate of the expenditure at the

end of the period, considering

Judgment of the management of the enterprise

Experience of similar transactions

Reports from independent experts


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Where the provision being measured involves

a large population of items, the obligation is

estimated by weighting all possible outcomes

by their associated possibilities (statisticalmethod called expected value).

Where there is a continuous range of possible

outcomes, and each point is as likely as anyother, the midpointof the range is used.


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Accounting for Different Current

Liabilities

Accounts Payable

Discounts

1. Trade Discounts

Example: 10%

2. Cash Discounts

Example: 3/10; n/30

Gross Method

Net Method

3. Progressive Discounts

Example: 5:10:15

Accounts Payable 90

Cash 90

Accounts Payable 100

Cash 100

Accounts Payable 72.68

Cash 72.68


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Liabilities

Net Method

Purchases and accounts payable are initially

recorded at invoice price less the cash discounts

available. A cash discount not taken is recorded as Purchase

Discounts Lost, which is reported in profit or loss

as part of finance cost


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Liabilities

Note Bearing a Realistic Interest Rate

At the end of the reporting period (if the note is still outstanding)

Interest Expense xxxInterest Payable xxx


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Liabilities

Note Bearing an Unrealistic Interest Rate

When do we say that the note bears an

unrealistic interest rate?

When the rate on face of the note is significantly

different from the market rate of similar notes; or

When the consideration received on account of

the note issued has a fair value which issignificantly different from the face of the note.


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Liabilities


If stated rate > market rate = premium

If market > stated rate = discount


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Liabilities


Example

Stated Rate of Note is more than the market

rate:

May 1, 2013, Ezer Chickser Corporation

purchased from Chickser Ezer Corporation by

issuing a 14%, one-year note for 320,000.

Market rate of interest on similar notes is 8%.


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Liabilities


The following are the entries in 2013 related to

the note:2013

May 1 Equipment 337,768

Notes Payable 320,000

Premium on Notes Payable 17,768

Dec 31 Interest Expense 18,014

Premium on Notes Payable 11,853

Interest Payable 29,867


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Liabilities


Assume no reversing entries were made at

Jan 1, 2014, the following entries are made:

2014

May 1 Premium on Notes Payable 5,915

Interest Expense 5,915

May 1 Notes Payable 320,000

Interest Payable 29,867


Cash 364,800


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i f iff


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Liabilities

Non-Interest Bearing Note

This is done by charging interest expense and

crediting discount on notes payable

Interest Expense xxx

Discount on Notes Payable xxx


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A ti f Diff t C t


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Liabilities


On December 31, 2013, an adjusting entry is

made as follows:

A ti f Diff t C t


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Liabilities


Upon payment of the note on October 1, 2014:


Discount on Notes Payable 16,072

Notes Payable 200,000

Cash 200,000


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Accrued Liabilities

Accrued liabilities consists of obligations for expensesincurred on or before the end of the reporting period butpayable at a later date.

Accrued liabilities include those payables to specific personsand determinable with reasonable accuracy.

They also include provisions. Common examples of liabilitiesof this nature are accrued salaries, accrued interests, accruedrentals and accrued taxes. An accrued liability is taken up asan adjustment at year-end by charging an expense accountand crediting an accrued liability account.

Utilities Expense xxx

Utilities Payable xxx


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h( )


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Cash(or AR) 90,000,000Sales 90,000,000

(sales of products)

Premium Inventory 800,000Cash(or AP) 800,000

(purchase of premiums)

Premium Expense 656,000Premium Inventory 656,000(82,000 x 8)

-(Redemption of pemiums)

Premium Expense 304,000Estimated Premium ClaimsOutstanding 304,000

(Year-end adjustment for outstanding premiums)

{(2,000,000 x 60%)/10} 82,000 = 38,000 x P8 = 304,000


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2012

Warranty Expense 522,500Liability for Warranty 522,500

Liability for Warranty 53,000Cash, etc. 53,000

Warranty Expense for 2012: 11%xP4,750,000 =522,500


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If a customer buys goods or services, the

entity grants the customer award credits oftendescribed as points

The entity can redeem the points by

distributing to the customer free ordiscounted goods or services.

A customer loyalty program operates in a

variety of ways. Customers may be required to

accumulate a specified minimum number of

award credits or points before they can be

redeemed.


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By the end of the first year 40% of the points


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By the end of the first year, 40% of the points

have been redeemed, and it is expected that

only a total of 90% of the points granted will be

redeemed by the customers. Perandos Piglet

Inc. recognizes revenue for points redeemed at

P213,333 (wchis is 40%/90% x 480,000) The

entry for the redemption is:

Liability for Customers

Loyalty Awards 213,333Sales 213,333


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B k f P d B k f E


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Books of Perandos Books of Ezer

Piglet Inc. Steroids Co.

Upon sale of baconCash xxx No entry

sales xxx

Upon redemption of pointsPremium Expense xxx AR-Perandos

Payable to Ezer xxx Cash(if any)

Sales


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The liability is normally reported as current.

But if the deposit is nontrade and expected to

be refunded or paid after one year, the liability

is reported as non-current.


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Customer Deposits on

Returnable Containers 60,000

Accum. Depreciation 15,000

Returnab Containers 55,000Gain on Sale of Returnable

Containers 20,000


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Treatment for unearned revenues are either

based on liability method or income method.

Under the income method, the entry for

advance collection of revenue is

Cash xxx

Revenue xxx

current liabilities, provisions and contingencies updated

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