Financial Liabilities

• Bonds represent legal obligations to repay debts with interest over a specified period of time.
• Financial Liabilities


  • It is a present obligation of an enterprise arising from past events, the settlement of which is expected to result in an outflow of resources embodying economic benefits
• Settlement of Liability

  1. Payment of cash

  2. Transfer of other assets

  3. Provision of services

  4. Replacement of an obligation with another obligation

  5. Conversion to Equity
• Recognition Criteria for Liabilities

  A liability is recorded and reported in the statement of financial position when it is probable that there will be an outflow of resources and the amount can be measured reliably
• Current Liabilities


  • Liabilities expected to be settled within the entity’s operating cycle or within twelve months from the end of the reporting period
• Non-Current Liabilities


  • Liabilities that do not meet the criteria for classification as current liabilities
• Financial Liabilities


  • Contractual obligations to deliver cash or other financial assets, exchange financial assets or liabilities, settle in the entity’s own equity instruments, or settle in the entity’s own equity instruments as a derivative
• Initial Recognition of Financial Liabilities


  Recognized when the entity becomes a party to the contractual provisions of the instrument, recognized at fair value which is the transaction price
• Accounts Payable


  • Liabilities arising from the purchase of goods, materials, supplies, or services on an open-charge-account basis with credit time periods generally varying from 30 to 120 days without interest
• Financial Liabilities

  • Accounts Payable
  • Notes Payable
  • Bonds Payable
• Accounts Payable


  • Liabilities arising from the purchase of goods, materials, supplies, or services on an open-charge-account basis
  • Credit time period generally varies from 30 to 120 days without interest being charged on deferred payment
• Accounts Payable

  1. Recognition of a liability depends on the terms of the purchase: FOB Shipping Point, FOB Destination

  2. Accounts Payable is affected by cash/purchase discount provided by the seller depending on the method used: Gross Method, Net Method
• Notes Payable


  A promissory note is a written promise to pay a certain sum of money to the bearer at a designated future time, usually carrying interest
• Notes Payable

  • May arise from: trade transaction, borrowing money from a bank, other transactions
  • Can be: Interest-Bearing, Non-Interest Bearing
• Bonds Payable


  When a corporation desires to raise additional funds for long-term purposes, it may borrow by issuing bonds and notes (debt financing) or issue additional share capital (equity financing)
• Advantages of debt financing over equity financing


  • Present owners remain in control of the corporation
  • Interest incurred is a deductible expense for tax purposes
  • Charge of interest on the debt may be less than the amount of dividends
• Bonds Payable


  A certificate of indebtedness whereby the borrower agrees to pay a sum of money at a specified future date plus periodic interest payments at the stated rate
• Bonds Payable


  Bond Indenture is the contract between the issuing corporation and the bondholder specifying terms of the bonds, rights and duties of both parties, restrictions on the issuing corporation, and other important details
• Types of Bonds


  • Term Bonds, Serial Bonds, Secured Bonds, Unsecured Bonds (also known as debenture), Registered Bonds, Bearer Bonds, Convertible Bonds, Callable Bonds, Zero-Interest Bonds (also known as Deep-Discount Bonds)
• Issuance of Bonds

  Bonds are recognized at their discounted value equal to the net proceeds from their issuance, expressed as a percentage of face value, issued in denominations like P1,000, P5,000, or P10,000
• Types on Interest Rates

  • Stated rate or nominal rate, Effective interest rate or market rate or yield rate
• Types on Interest Rates

  When computing present value, interest rates are considered: Stated rate = Effective rate → Bonds sell at face value, Stated rate > Effective rate → Bonds sell at a premium, Stated rate < Effective rate → Bonds sell at a discount
• Proforma Entry


  Cash xxx Bonds Payable xxx if the proceed is equal to the face value, Cash xxx Bonds Payable xxx Premium on Bonds Payable xxx if the stated rate exceeds market rate, Cash xxx Discount on Bonds Payable xxx Bonds Payable xxx
• Bonds sell at face value

  Stated rate > Effective rate
• Bonds sell at a premium

  Stated rate < Effective rate
• Bonds sell at a discount

  Stated rate > Effective rate
• Bond Issuance Costs are expenditures incurred by the issuing company for legal fees, printing and engraving of bond certificates, taxes, commissions, and other charges
• Bond Issuance Costs form part of the initial carrying amount of the bond liability
• The net proceeds from bond issue are reduced by the incurrence of bond issue costs
• Bond issue cost is being offset to the bond premium/discount
• Retirement of Bonds


  The issuing corporation may retire the bonds at or before the maturity date either by redeeming the bonds or repurchasing in the open market
• If bonds are retired at maturity date, any premium or discount is completely amortized so the retirement is recorded as a normal payment of debt
• If bonds are retired prior to maturity date, there is a gain or loss to be recognized: retirement price < carrying amount = gain on retirement, retirement price > carrying amount = loss on retirement
• If bonds are retired before maturity date, the amortization of premium or discount must be updated and any accrued interest must be paid
• Bonds with Equity Characteristics


  Corporations may issue bonds that allow creditors to become shareholders by attaching share warrants or including a conversion feature
• Bonds with Share Warrants

  When the warrants are non-detachable, the bonds and the warrants are considered as a compound financial instrument. In a compound financial instrument, the amount will be allocated first to the debt component and any remaining/residual amount will be allocated to the equity component
• Bonds with Share Warrants

  When the warrants are detachable, these will be sold separately from the bonds. The purchase price is considered to be a price for the issuance of two securities (the bonds and warrants)
• Convertible Bonds

  The issue price is comprised of two components: the debt and equity. In a compound financial instrument, the amount will be allocated first to the debt component and any remaining/residual amount will be allocated to the equity component
• Convertible Bonds

  When convertible bonds are retired prior to maturity date, the proceeds shall be allocated first to the liability to be settled and then the remaining amount to the equity portion for bond conversion privileges. Any resulting gain or loss is treated in accordance with the related component: the amount of gain or loss related to the liability component is recognized in profit or loss, and the amount of gain or loss related to the equity component is
• Gain or loss related to the liability component

  Recognized in profit or loss