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.
• The company/entity liable must be?

  Identified
• Liability is not recognized until it is

  incurred.
• -It is not necessary that the payee to

  whom the obligation is owed be

  identified.
• The settlement of the liability requires

  an outflow of resources embodying

  economic benefits
• Legally enforceable

  as consequences of binding contract or

  statutory requirement.

  legal obligation
• Give rise to

  liabilities by reason of normal business

  practice, custom and a desire to maintain

  good business relations or act an

  equitable manner.

  Constructive Obligation
• Past event that leads

  to a legal or constructive obligation.

  Obligating event
• Without payment of Money, without

  transfer of noncash asset, without

  performance of service, there is no __.

  accounting liability
• Transaction Costs are included in the initial

  measurement of a Financial Liability

  measured at AMORTIZED COST.
• Transaction Costs are expensed

  immediately if the financial liability is

  designated initially as at FAIR VALUE

  THROUGH PROFIT & LOSS.
• incremental costs that are

  directly attributable to the issue of a financial

  liability.

  transaction cost
• is one that would not

  have been incurred if the entity had not issued

  the financial liability.

  incremental cost
• the amount that

  would be paid to transfer a liability in an orderly

  transaction between market participants at the

  measurement date.

  Fair value of a liability
• Present Value of

  the future cash payment to settle the obligation.

  fair value of the liability
• Discounted amount of the

  future cash outflow in settling an obligation

  using the market rate of interest

  Present value
• Subsequent Measurement: At amortized cost, =

  effective interest method
• The “amortized cost”

  of a financial liability is

  the amount at which the financial liability is

  measured at initial recognition:
• Amortized Cost of Financial Liability: Face amount less Present Value of Financial

  Liability = amortized through interest expense

  using the effective interest method.

  =Discount or Premium on the issue

  of Financial Liability
• Non current liabilities = initially measured at

  Present Value and subsequently measured at

  Amortized Costs
• If the Long-Term Note Payable is

  Interest-bearing = Initially & subsequently

  measured at FACE AMOUNT.
• all liabilities are measured at

  Present Value and subsequently measured at

  Amortized Costs
• Current Liabilities or short-term obligations are

  not discounted anymore = recorded and

  measured at FACE AMOUNT.
• classify a liability as CURRENT when:

  The entity expects the liability within the

  entity’s 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.
• Noncurrent liabilities include:

  1. Noncurrent portion of the long-term

  debt.

  b. Finance lease liability

  c. Deferred tax liability

  d. Long-term obligation to entity officers

  e. Long-term deferred revenue
• A liability which is due to be settled within

  twelve months after the reporting reported is

  classified as CURRENT, even if

  The original term was for a period longer than

  twelve months.
• Often attached to borrowing

  agreements which represent

  undertakings by the borrower.

  covenants
• (blank ) on the borrower as to

  undertaking further borrowings, paying

  dividends, maintaining specified level of

  working capital and so forth.

  restrictions
• Breach of Covenants:

  • Under these covenants, if certain

  conditions relating to the borrower’s

  financial situation are BREACHED, the

  liability becomes PAYABLE ON

  DEMAND
• the liability is classified as

  NONCURRENT if the lender has

  agreed on or before the end of the

  reporting period to provide a grace

  period ending at least twelve months

  after the date.
• Contingent Liability: is not recognized because it is NOT

  PROBABLE that an outflow of resources

  embodying economic benefits.
• Virtually Certain - Provide

  Probable - Provide

  Possible - Disclose by Note

  Remote - No disclosure
• Virtually Certain - Probability above 95%

  Probable - Probability above 50%

  and up to 95%

  Possible - Probability of 5% and up to 50%

  Remote - Probability below 5%
• Transaction costs directly attributable to the

  issue of financial liability include Fees and commissions paid to agents, Transfer taxes and duties and levies by regulatory agencies. Except,

  Financing cost
• An entity shall measure initially a financial liability

  designated at fair value through profit and loss at

  fair value
• What term defines this? The amount that would be paid when transferring a liability in an orderly

  transaction between market participants.

  Fair value of a liability
• After initial recognition, an entity shall measure a

  financial liability at:

  a. Amortized cost using effective interest method

  B. Fair value through profit and loss

  C. Either amortized cost using the effective interest method or fair value through profit and loss.

  D. Either amortized cost using the straight line

  interest method or fair value through profit & loss.

  c
• The conceptually appropriate method of

  measuring a liability is to: a. Discount the amount of expected cash outflows that are

  necessary to liquidate the liability using the market rate of interest at the date the liability was initially incurred.

  B. Discount the amount of expected cash outflows that are necessary to liquidate the liability using the market rate of interest at the date of the Financial Statements.

  A
• For liability to exist: a. past transaction or event must have

  been occurred.

  B. The exact amount must be known

  C. The identity of the party owed must be

  known

  D. An obligation to pay cash in the future

  must exist.

  A
• Which of the following represents a liability: a. The obligation to pay for goods that an entity expects to order from suppliers next year.

  B. The obligation to provide goods that customers have ordered and paid for during

  the current year.

  C. The obligation to pay interest on a 5 year note

  payable that was issued the last day of the current year.

  B