Chapter 12 Liabilities

CHAPTER 12 LIABILITIES
Learning Objectives
State the recognition criteria for liabilities.
State the initial and subsequent measurements

of financial liabilities.
State the measurement of provisions,

contingent liabilities and contingent assets.
Liability
 Liability – is a present obligation arising from past event, the settlement of which
is expected to result in an outflow of resources embodying economic benefits or
service potential.
 Present obligation means that as of the reporting date, an obligating event must
have already occurred.
 An obligating event is an event that creates either:
a. Legal Obligation – is an obligation that results from a contract,

legislation, or other operation of law; or
b. Constructive Obligation – is an obligation that results from an entity’s

actions (e.g., past practice, published policies) that create a valid
expectation from others that the entity will accept and discharge certain
responsibilities.
Liability Recognition Criteria
 A liability is recognized only when all of the following are met:
a. The item meets the definition of a liability (i.e., present obligation);
b. It is probable that an outflow of resources embodying economic benefits

will be required to settle the obligation; and
c. The obligation has a cost or value (e.g., fair value) that can be measured
reliably.
Financial Liabilities
 A financial liability is any liability that is:
a. A contractual obligation to deliver cash or another financial asset to another

entity;
b. A contractual obligation to exchange financial instruments with another entity

under conditions that are potentially unfavorable to the entity; or
c. A contract that will or may be settled in the entity’s own equity instruments.
Examples of financial liabilities
 Accounts Payable  Loans Payable
 Notes Payable  Bonds Payable
 Interest Payable  Accrued Payables
Initial Recognition
 A financial liability is recognized when an entity becomes a party to the

contractual provisions of the instrument. (PPSAS 29.16)
Initial Measurement
 Financial liabilities are initially measured at fair value minus transaction costs,
except for financial liabilities at fair value through surplus or deficit (e.g.,
designated financial liabilities and derivative liabilities) whose transaction costs
are expensed. (PPSAS 29.45)
MODULE ACCOUNTING FOR GOVERNMENT AND NON-PROFIT ORGANIZATIONS
 Transaction costs are incremental costs that are directly attributable to the
acquisition, issue, or disposal of a financial instrument.
Subsequent Measurement
 Financial liabilities are subsequently measured at amortized cost, except for

financial liabilities at fair value through surplus or deficit which are subsequently
measured at fair value.
Derecognition of Financial Liability
 A financial liability is derecognized when it is extinguished, such as when it is

discharged, waived, cancelled, or it expires.
Provisions
 Provision – is a liability of uncertain timing or amount.
 A provision is recognized if all the recognition criteria for a liability are met (i.e.,
present obligation, probable outflow, and reliable measurement). If one or more
of the criteria are not met, the item is a contingent liability, not a provision, and
therefore not recognized as liability.
Contingent Liability
 A possible obligation that arises from past events, and whose existence will be
confirmed only by the occurrence or non-occurrence of one or more uncertain
future events not wholly within the control of the entity; or
 A present obligation that arises from past events, but is not recognized because:
a. It is not probable that an outflow of resources embodying economic

benefits or service potential will be required to settle the obligation; or
b. The amount of the obligation cannot be measured with sufficient reliability.

(PPSAS 19.18)
Page 3
Contingent Asset
 Contingent Asset – is a possible asset that arises from past events, and whose
existence will be confirmed only by the occurrence or non-occurrence of one or
more uncertain future events not wholly within the control of the entity. (PPSAS
19.18)
Summary:
Contingent Probable Possible Remote
 Liability Recognize and Disclose only Ignore

Disclose
 Asset Disclose only Ignore Ignore
Measurement
 A provision is measured at the entity’s best estimate of the amount needed to

settle the liability at the reporting date.
 If the effect of time value of money is material, the provision is measured at

present value.
Reimbursements
 If another party is expected to reimburse the settlement amount of a provision, a

reimbursement asset is recognized and presented in the statement of financial
position separately from the provision.
 However, in the statement of financial performance, the expense related to the

provision may be presented net of the reimbursement.
 The amount recognized for the reimbursement shall not exceed the amount of
the provision.
Page 4
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Reference:
Accounting for Government and Non-profit Organization by Zeus Vernon B.

Millan
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CHAPTER 12 LIABILITIES

State the recognition criteria for liabilities.

State the initial and subsequent measurements

State the measurement of provisions,

 An obligating event is an event that creates either:

a. Legal Obligation – is an obligation that results from a contract,

b. Constructive Obligation – is an obligation that results from an entity’s

 A liability is recognized only when all of the following are met:

a. The item meets the definition of a liability (i.e., present obligation);

b. It is probable that an outflow of resources embodying economic benefits

 A financial liability is any liability that is:

a. A contractual obligation to deliver cash or another financial asset to another

b. A contractual obligation to exchange financial instruments with another entity

Examples of financial liabilities

 Accounts Payable  Loans Payable

 Notes Payable  Bonds Payable

 Interest Payable  Accrued Payables

 A financial liability is recognized when an entity becomes a party to the

 Financial liabilities are subsequently measured at amortized cost, except for

Derecognition of Financial Liability

 A financial liability is derecognized when it is extinguished, such as when it is

 Provision – is a liability of uncertain timing or amount.

a. It is not probable that an outflow of resources embodying economic

b. The amount of the obligation cannot be measured with sufficient reliability.

Contingent Probable Possible Remote

 Liability Recognize and Disclose only Ignore

 Asset Disclose only Ignore Ignore

 A provision is measured at the entity’s best estimate of the amount needed to

 If the effect of time value of money is material, the provision is measured at

 If another party is expected to reimburse the settlement amount of a provision, a

 However, in the statement of financial performance, the expense related to the

To know more information about CHAPTER 12- CURRENT LIABILITIES- PLEASE

Accounting for Government and Non-profit Organization by Zeus Vernon B.

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