Intermediate Accounting 2

(Intermediate Accounting 2) 3.
Liabilities held for trading such as obligations to

deliver financial assets borrowed by a “short
LECTURE AID
seller” (i.e. an entity that sells financial assets it
ZEUS VERNON B. MILLAN has borrowed and does not yet own).
Chapter 1 Current Liabilities 4. Preference shares issued with mandatory

Related standards: redemption.
PAS 1: Presentation of Financial Statements 5. Security deposits received that are to be
PAS 32: Financial Instruments: Presentation returned to tenants at the end of lease term.
PFRS 9: Financial Instruments
6. Obligations to deliver a variable number of own
Learning Competencies shares worth a fixed amount of cash.
 Know the recognition criteria for liabilities and • The following are not financial liabilities
their essential characteristics.
 Identify the characteristics of a financial liability. 1. Unearned revenues and warranty obligations
 Know the initial and subsequent measurements that are to be settled by future delivery of
of financial and non-financial liabilities. goods or services, rather than cash.
 Know how to classify liabilities as current and 2. Taxes, SSS premiums, Philhealth and other
noncurrent. payables arising from statutory requirements
Liabilities and not from contracts.
PAS 1 prescribes the basis for presentation of general 3. Commodity contracts that either cannot be
purpose financial statements to improve comparability settled in cash or which are expected to be
both with the entity's financial statements of previous settled by commodity exchange (e.g., coffee
periods and with the financial statements of other beans, gold bullion, oil, and the like). If a
entities. commodity contract is expected to be cash
settled, it will be included as financial liability on
Essential characteristics of a liability the part of the cash payor.
1. Present obligation (Legal or Constructive) 4. Constructive obligations. These obligations do
2. Arising from past events not arise from contracts.
3. Outflow of economic benefits
Recognition of liabilities
Financial liabilities
• An item is recognized as a liability when:
• A financial liability is any liability that is a
contractual obligation : 1. It meets the definition of a liability;
a. to deliver cash or another financial 2. It is probable that an outflow of resources

asset to another entity; or embodying economic benefits will result from
its settlement; and
b. to exchange financial assets or financial
liabilities with another entity under 3. The settlement amount can be measured
conditions that are potentially reliably.
unfavorable to the entity; or Measurement of financial liabilities
Examples of financial liabilities • Initial measurement – fair value minus
1. Payables such as accounts, notes, loans, bonds transaction costs, except financial liabilities at
payable and accrued expenses that are payable FVPL whose transaction costs are expensed
in cash. immediately.
2. Finance lease obligations.

• Subsequent measurement – amortized cost • On the other hand, non-trade payables are
(except financial liabilities that are classified as classified as current liabilities only when they
held for trading and those that are designated; are expected to be settled within one year.
these are subsequently measured at fair value)
Measurement of Non-financial liabilities
• Non-financial liabilities are initially measured at

the best estimate of the amounts needed to
settle those obligations or the measurement
basis required by other applicable standard.
• Examples:
1. Obligations arising from statutory requirements

(e.g., income tax payable)
2. Unearned or deferred revenues
3. Warranty obligations Dividends payable
4. Commodity contracts that either cannot be • Under IFRIC 17, the liability to pay a dividend is
settled in cash or which are expected to be recognized when the dividend is appropriately
settled by commodity exchange authorized and is no longer at the discretion of
the entity, which is:
Current liabilities
1. the date when the declaration of the dividend
Current liabilities are liabilities that are:
(e.g., by management or the board of directors)
1. Expected to be settled in the entity’s normal is approved by the relevant authority (e.g., the
operating cycle; shareholders) if the jurisdiction requires such
approval, or
2. Held primarily for trading;
2. the date when the dividend is declared (e.g., by
3. Due to be settled within 12 months after the management or the board of directors) if the
end of the reporting period; or jurisdiction does not require further approval.
4. The entity does not have the right at the end of
the reporting period to defer settlement of the
liability for at least twelve months after the
reporting period.
• All other liabilities are classified as noncurrent.
Trade and non-trade payables
• Trade payables are obligations arising from

purchases of inventory that are to be sold in the
ordinary course of business. Other payables are
classified as non-trade.
• Trade payables are classified as current

liabilities when they are expected to be settled
within the normal operating cycle or one year,
whichever is longer.

Intermediate Accounting 2

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(Intermediate Accounting 2) 3.

Liabilities held for trading such as obligations to

Chapter 1 Current Liabilities 4. Preference shares issued with mandatory

a. to deliver cash or another financial 2. It is probable that an outflow of resources

2. Finance lease obligations.

Measurement of Non-financial liabilities

• Non-financial liabilities are initially measured at

1. Obligations arising from statutory requirements

2. Unearned or deferred revenues

3. Warranty obligations Dividends payable

• All other liabilities are classified as noncurrent.

Trade and non-trade payables

• Trade payables are obligations arising from

• Trade payables are classified as current

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