Chap 1

• Liabilities


  Present obligations of an entity to transfer an economic resource as a result of past events
• Essential characteristics of an accounting liability

  • The entity has a present obligation
  • The obligation is to transfer an economic resource
  • The liability arises from a past event
• Present obligation


  An essential characteristic of a liability is that the entity has a present obligation, which may be a legal obligation or a constructive obligation
• Transfer of an economic resource


  The obligation must be to pay cash, transfer noncash asset or provide service at some future time
• Past event


  The liability must arise from a past transaction or event, known as the obligating event
• Common types of liabilities

  • Accounts payable
  • Amounts withheld from employees
  • Accruals
  • Dividends payable
  • Deposits and advances
  • Debt obligations
  • Income tax payable
  • Deferred or unearned revenue
• Measurement of current liabilities

  Measured and reported at face amount, as the discount or difference between face amount and present value is usually not material
• Measurement of noncurrent liabilities

  Initially measured at present value and subsequently measured at amortized cost, except for interest-bearing notes payable which are measured at face amount
• Current liabilities


  Liabilities that the entity expects to settle within its operating cycle, are due within 12 months, or the entity does not have the right to defer settlement for at least 12 months
• Noncurrent liabilities


  All liabilities not classified as current, including noncurrent portion of long-term debt, finance lease liability, deferred tax liability, and long-term obligations
• Long-term debt falling due within one year


  Classified as current, even if the original term was longer, unless refinancing on a long-term basis is completed by the end of the reporting period
• Covenants


  Undertakings by the borrower in borrowing agreements, such as restrictions on further borrowings, paying dividends, or maintaining specified levels
• Breach of covenants


  If certain conditions are breached, the liability becomes payable on demand and is classified as current, even if the lender agrees not to demand payment after the reporting period
• Minimum line items for current liabilities on the statement of financial position

  • Trade and other payables
  • Current provisions
  • Short-term borrowing
  • Current portion of long-term debt
  • Current tax liability
• Estimated liabilities


  Obligations that exist at the end of the reporting period, although the amount or exact payee may not be definite
• Deferred revenue


  Income already received but not yet earned, classified as current or noncurrent depending on when it is realizable
• Bonus computation


  1. Bonus expressed as a percent of income before bonus and before tax

  2. Bonus expressed as a percent of income after bonus but before tax

  3. Bonus expressed as a percent of income after bonus and after tax

  4. Bonus expressed as a percent of income after tax but before bonus
• The accounting equation states that Assets = Liabilities + Equity.
• Liabilities represent present obligations of an entity arising from past events, the settlement of which is expected to result in an outflow from the entity's assets or services performed.
• Equity represents residual interest in the assets of an entity after deducting all its liabilities.
• Assets refer to resources controlled by an entity as a result of past events and from which future economic benefits are expected to flow to the entity.