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7/27/2019 Current Liabilities, Provisions and Contingencies UPDATED
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Current Liabilities, Provisions and
Contingencies
Paolo Perandos
Ezra Luces
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Objectives
Define
Explain characteristics
Identify
Recognition criteria for liabilities
Required disclosures for current liabilities andcontingencies
Distinguish Current liabilities from noncurrent liabilities
Provisions from contingent liabilities
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Objectives
Account
Different current liabilities after recognition
Measure
Current liabilities on the balance sheet
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Definition
IASB Conceptual Framework for Financial
Reporting defines liability as :
Present obligation of an enterprise arising from
past event, the settlement of which is expected
to result in an outflow from the enterprise of
resources embodying economic benefits.
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Essential Characteristics
1. Present obligation
2. Past event
3. Probable outflow of resources embodyingeconomic benefits
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What is an Obligation?
Article 1156
An obligation is a juridical necessity to give, todo or not to do.
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What is an Obligation?
An obligation is a duty or responsibility to act
or perform in a certain way which may be
legally enforceable as a consequence of a
binding contract or statutory requirement.
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What is an Obligating Event?
An obligating event is an event that creates a
legal or constructive obligation and, therefore,
results in an entity having no realistic
alternative but to settle the obligation.
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Legal and Constructive Obligation
A legal obligation is one that derives from a
contract, legislation or other operation of law.
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Legal and Constructive Obligation
A constructive obligation is one that derives froman enterprises actions whereby:
An established pattern of past practice,
published policies, or a sufficiently specific current statement,
the enterprise has indicated to other parties thatit will accept certain responsibilities, the
enterprise has created a valid expectation on thepart of those other parties that it will dischargethose responsibilities.
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Settlement of Obligation
Settlement of a present obligation may occur in
a number of ways, such as by
1. Payment of cash;
2. Transfer of assets;
3. Provision of services;
4. Replacement of obligation with another
obligation;
5. Conversion of the obligation to equity.
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Recognition of Liabilities
A liability is recorded and reported in the
statement of financial position when the
following conditions are met:
1. It is probable that an outflow of resources
embodying economic benefits will result from
the settlement of a present obligation; and
2. The amount at which the settlement will takeplace can be measured reliably.
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Contingent Liability
PAS 37, paragraph 10 defines contingent liability
in two ways:
1. A contingent liability is a possible obligation
that arises from past event and whose
existence will be confirmed only by the
occurrence or non-occurrence of one ore
more uncertain future events not whollywithin the entity's control
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Contingent Liability
2. A contingent liability is a present obligation
that arises from past event but is not
recognizedbecause it is not probable that a
transfer of economic benefits will be requiredto settle the obligation or the amount of the
obligation cannot be measured reliably.
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Provision
Definition:
A liability of uncertain timing or amount
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Provision and Contingent Liability
Provision Contingent Liability
Recognition Recognized as a liability on
the face of the statement
of financial position
Not recognized as a liability
on the face of the
statement of financial
position
Financial statement
presentation
Presented separately in the
statement of financial
position under liabilities
Unless remote, disclosed in
the notes to the financial
statements
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Obligations involving uncertainties are
accounted as presented below:
Status
Probable
Reasonably
possible
Remote
Reliably measurable
Not reliably measurable
Record by debiting an
expense or a loss and
crediting a liability
Disclose in the notes to
financial statements
Ignore (Neither recognize
nor disclose)
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Measurement of Liabilities
Liabilities are measured:
1. At amounts established in exchanges
(amount to be paid or amount discounted);
or
2. By estimates of a definitive character when
the amount of the liability cannot be
measured more precisely (provisions).
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Measurement of Liabilities
The amount recognized as a provision should
be the best estimate of the expenditure at the
end of the period, considering
Judgment of the management of the enterprise
Experience of similar transactions
Reports from independent experts
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Measurement of Liabilities
Where the provision being measured involves
a large population of items, the obligation is
estimated by weighting all possible outcomes
by their associated possibilities (statisticalmethod called expected value).
Where there is a continuous range of possible
outcomes, and each point is as likely as anyother, the midpointof the range is used.
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Accounting for Different Current
Liabilities
Accounts Payable
Discounts
1. Trade Discounts
Example: 10%
2. Cash Discounts
Example: 3/10; n/30
Gross Method
Net Method
3. Progressive Discounts
Example: 5:10:15
Accounts Payable 90
Cash 90
Accounts Payable 100
Cash 100
Accounts Payable 72.68
Cash 72.68
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Accounting for Different Current
Liabilities
Net Method
Purchases and accounts payable are initially
recorded at invoice price less the cash discounts
available. A cash discount not taken is recorded as Purchase
Discounts Lost, which is reported in profit or loss
as part of finance cost
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Accounting for Different Current
Liabilities
Note Bearing a Realistic Interest Rate
At the end of the reporting period (if the note is still outstanding)
Interest Expense xxxInterest Payable xxx
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Accounting for Different Current
Liabilities
Note Bearing an Unrealistic Interest Rate
When do we say that the note bears an
unrealistic interest rate?
When the rate on face of the note is significantly
different from the market rate of similar notes; or
When the consideration received on account of
the note issued has a fair value which issignificantly different from the face of the note.
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Accounting for Different Current
Liabilities
Note Bearing an Unrealistic Interest Rate
If stated rate > market rate = premium
If market > stated rate = discount
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Accounting for Different Current
Liabilities
Note Bearing an Unrealistic Interest Rate
Example
Stated Rate of Note is more than the market
rate:
May 1, 2013, Ezer Chickser Corporation
purchased from Chickser Ezer Corporation by
issuing a 14%, one-year note for 320,000.
Market rate of interest on similar notes is 8%.
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Accounting for Different Current
Liabilities
Note Bearing an Unrealistic Interest Rate
The following are the entries in 2013 related to
the note:2013
May 1 Equipment 337,768
Notes Payable 320,000
Premium on Notes Payable 17,768
Dec 31 Interest Expense 18,014
Premium on Notes Payable 11,853
Interest Payable 29,867
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Accounting for Different Current
Liabilities
Note Bearing an Unrealistic Interest Rate
Assume no reversing entries were made at
Jan 1, 2014, the following entries are made:
2014
May 1 Premium on Notes Payable 5,915
Interest Expense 5,915
May 1 Notes Payable 320,000
Interest Payable 29,867
Interest Expense 14,933
Cash 364,800
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i f iff
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Accounting for Different Current
Liabilities
Non-Interest Bearing Note
This is done by charging interest expense and
crediting discount on notes payable
Interest Expense xxx
Discount on Notes Payable xxx
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A ti f Diff t C t
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Accounting for Different Current
Liabilities
Non-Interest Bearing Note
On December 31, 2013, an adjusting entry is
made as follows:
A ti f Diff t C t
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Accounting for Different Current
Liabilities
Non-Interest Bearing Note
Upon payment of the note on October 1, 2014:
Interest Expense 16,072
Discount on Notes Payable 16,072
Notes Payable 200,000
Cash 200,000
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Accrued Liabilities
Accrued liabilities consists of obligations for expensesincurred on or before the end of the reporting period butpayable at a later date.
Accrued liabilities include those payables to specific personsand determinable with reasonable accuracy.
They also include provisions. Common examples of liabilitiesof this nature are accrued salaries, accrued interests, accruedrentals and accrued taxes. An accrued liability is taken up asan adjustment at year-end by charging an expense accountand crediting an accrued liability account.
Utilities Expense xxx
Utilities Payable xxx
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h( )
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Cash(or AR) 90,000,000Sales 90,000,000
(sales of products)
Premium Inventory 800,000Cash(or AP) 800,000
(purchase of premiums)
Premium Expense 656,000Premium Inventory 656,000(82,000 x 8)
-(Redemption of pemiums)
Premium Expense 304,000Estimated Premium ClaimsOutstanding 304,000
(Year-end adjustment for outstanding premiums)
{(2,000,000 x 60%)/10} 82,000 = 38,000 x P8 = 304,000
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2012
Warranty Expense 522,500Liability for Warranty 522,500
Liability for Warranty 53,000Cash, etc. 53,000
Warranty Expense for 2012: 11%xP4,750,000 =522,500
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If a customer buys goods or services, the
entity grants the customer award credits oftendescribed as points
The entity can redeem the points by
distributing to the customer free ordiscounted goods or services.
A customer loyalty program operates in a
variety of ways. Customers may be required to
accumulate a specified minimum number of
award credits or points before they can be
redeemed.
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By the end of the first year 40% of the points
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By the end of the first year, 40% of the points
have been redeemed, and it is expected that
only a total of 90% of the points granted will be
redeemed by the customers. Perandos Piglet
Inc. recognizes revenue for points redeemed at
P213,333 (wchis is 40%/90% x 480,000) The
entry for the redemption is:
Liability for Customers
Loyalty Awards 213,333Sales 213,333
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B k f P d B k f E
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Books of Perandos Books of Ezer
Piglet Inc. Steroids Co.
Upon sale of baconCash xxx No entry
sales xxx
Upon redemption of pointsPremium Expense xxx AR-Perandos
Payable to Ezer xxx Cash(if any)
Sales
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The liability is normally reported as current.
But if the deposit is nontrade and expected to
be refunded or paid after one year, the liability
is reported as non-current.
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Customer Deposits on
Returnable Containers 60,000
Accum. Depreciation 15,000
Returnab Containers 55,000Gain on Sale of Returnable
Containers 20,000
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Treatment for unearned revenues are either
based on liability method or income method.
Under the income method, the entry for
advance collection of revenue is
Cash xxx
Revenue xxx