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Lecture 1

ACTG 3120 Lecture Notes - Lecture 1: Contingent Liability, Executory Contract, Current Liability


Department
Accounting
Course Code
ACTG 3120
Professor
Elizabeth Farrell
Lecture
1

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Week #1: Chapter 12 – Financial Liabilities and Provisions
Liability Definition and Categories
-Liability = a present obligation of the entity arising from past events, settlement is
expected to result in an outflow of economic benefits
- Settlement can be in the future – transfer of assets, provision of services
- Liability criteria is:
o(a) Expected future sacrifice of of assets/services,
o(b) Is a present obligation,
o(c) Result of a past transaction
- The past transaction must be an obligating event
-Constructive Obligation
oSome legal obligations arise from contract or legislation, most are legal (trade
payables and borrowings)
oSome are constructive obligations = where a liability exists because theres is a
pattern of past practice or established policy (i.e. if it’s a public statement)
-Categories of Liabilities
o1. Financial Liability = a contract that gives rise to a financial liability of one party
and financial asset of other party (ex: loan payable)
o2. Non Financial Liability = has no offsetting financial asset on the books of
another party (provisions, unearned rev., decommissioning obligations)
-Financial Liabilities: classified in two ways
o1. Other Financial Liabilities: most fall here, valued at FV of transaction date, add
any transactions costs, amortized cost valuation
o2. FVTPL: its classified as FVTPL if liability will be sold in the short term or its
placed by management. FV gains and losses will hit earnings
- Liabilities valued at PV (Present Value) because time value of money is material
- When liabilities are discounted, interest expense Is recorded as time passes
Common Financial Liabilities
- Classified as “other financial liabilities” and measured at FV (Fair Value) less any
transaction costs
-Accounts Payable – aka trade payables are obligations (ex to suppliers), income tax
payable, and current portion of long term debt
-Notes Payable – borrowing money from a lender (can be a supplier), it’s a written
promise to pay a certain amount by a certain date. Notes can be interest bearing or non
interest bearing
-Loan Guarantees – When you guarantee a loan on behalf of someone else. It means
that the guarantor must pay the loan principal and the interest of the borrower defaults.
This is the financial liability of the guarantor and must be recorded at FV. You must
disclose the max potential payout, identify the party and any collateral involved
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