Chapter 13: Non-Financial and Current Liabilities
RECOGNITION AND MEASUREMENT:
Current definition: a liability is an obligation that arises from past transactions or
events, which may result in a transfer of assets.
Liabilites have three essential charteristics:
1) They embody a duty or responsibility.
2) The entity has little or no discretion to avoid the duty.
3) The transaction or event that obliges the entity has occured.
Proposed definition: a liability of an entity of a present economic obligation for which
the entity is the obligor.
Liabilites have three essential characteristics:
1) They exist at the present time (i.e. at balance sheet date)
2) They represent economic burdens or obligations or other requirement to provide or
forego economic resources: (either unconditional obligations i.e. is the requirement to
pay interest on borrowed money, or conditional obligations which requires performance
to be carried out only if an uncertain future event acutally occurs meaning these may not
always be recognized as liabilities)
3) The obligations are enforceable on the obligor entity which includes constructive
obligations that are based on enitity's present/past practices. (i.e. a company may be
required by provincial legislation to provide 4% vacation pay to its employees but it
many have paid 6% over the number of years therefore it might not be required but it is to
be expected to pay the extra 2%)
Financial Laibilities: are recongized initially at their fair value but after acquistion most
financial liabilites are measured at acqusition cost (except those that are held for trading,
suchas derivatives where fair value is used) Financial liabilites is any liability that is a contractual obligation (contact) to either:
1) Deliever cash or other financial asset to another party, or
2) To exchange financial instruments with another party under conditions that are
Non Financial Liabilites: are not payable in cash and the are measured in a different
Private enity or ASPE do not separately address the use of non-finanical liabilites so these
are measured in a varitey of ways depending on the specific liability.
• i.e. unearned revenue is measured at fair value of goods and services delivered in
future using managment's best estimate of cost of goods and services.
Under international standards, non financial liabilites are measured initially and at each
subsequent reporting date at the best estimate of the amount the entity would rationally
pay at the balance sheet date to settle the present obligation. This is ususally the present
value of the resources needed to fulfill the obligation, measured at the expected value or
problility weighted average of the range of possible outcomes.
COMMON CURRENT LIABILITIES:
Opertating Cycle : is the period of time between aquiring the goods and services for
processing in operations and recieving cash from the sale of processed goods and
Current Liabilites: Under IFRS, liabilites are classified as current when they meet any
one of the following conditions:
1) Expected to be settled within normal operating cycle or cash-cash cycle whichever is
2) Held primarily for trading.
3) Due within 12 months from balance sheet date.
4) No unconditional right to defer settlement for at least 12 months after balance sheet
date. > PE GAAP has no specific definition, but has some intent.
• Amajor element is its bank indebtedness for current opertaing purposes and its
line of credit or revolving debt arrangements related to this debt.
• Instead of having to negotiated a new loan with its bank every time it needs new
funds a company generally enteres into an agreement that allows it to make
mulitiple borrowings up to a negegaited limit.
• Repayments are made whenever there are sufficent funds available .
• Amount borrowed reposred on the blance sheet; availiablity of dunds and
restrictions imposed by the financial institutions requires note disclosure
Accounts Payable: or trade accounts payable are balances owed to others for goods,
supplies or servies realted to the entity's ordinary business activies that are purchased on
open account. It is generally recorded when the title has passed.
Notes Payable: are written promieses to pay a certain sum of money on a specified
future date and may arise from purchases, financing, or other transactions. Notes payable
may be classified as either short-term or long-term and they can be either interest bearing
or non-interest bearing. Interest expense is determined whenever financial statements are
Interest Bearing Note Payable:
- Landscape Corp borows $100,000
- Signs a 4-month, 12% note on March 1
Journal Entries to record:
- Signing of the note
- Interest accured at June 30 year end
- Note Repayment
Note Payable 100,000
June 30: Interest Expense 4,000
Interest Payable 4,000
Note Payable 100,000
Interest Payable 4,000
Zero-Interest-Bearing Notes Payable:
• For zero-interest bearing notes, the difference between the present value of the
note and the face value of the note represents the discount on the note payable and
the related interest.
• The discount is the interest expense recorded over the life of the note.
- Journal entries to record the signing and the repayment of the note
Discount on Note Payable 4,000
Note Payable 104,000
*in effect: $100,000 borrowed for four months and $4,000 interest = $104,000 maturity
Interest Expense 4,000
Interest Payable 4,000
Note Payable 104,000
Current Maturities of Long-Term Debt
• Current maturities of long-term debt maturing within 12 months from the balance
sheet date is reporteted a current liability.
• Portions of long-term debts should not be reported as current liabilites if, by
contract, they are retired by assets not clasffied as current assets. IFRS: Long term debt = retired bt long term asset
Current liability = retired by current asset
• Any liability due on demand, or due on deamnd within a year or operating cycle,
is reported as a current liability.
PE GAAP: Liability is classified as current unless
1) The creditor waves the agreement, or
2) Violation has been cured within grace period, and
3) It is likely the company won't violate agreement within a year from balance sheet.
Short-Term Debt Expected to be Refinanced
• IRFS has more stringent rules than PE GAAP.
• Under IFRS, debts due within 12 months is classified as current, unless at
balance sheet date the company has the intent and a right (under existing
contract, and solely in its discretion) to refinance with long-term debt.
• Under PE GAAP, currently maturing debt can be classified as long-term if there is
irrefutable evidence at time of issuing financial statements that debt has been or
will be converted to long-term debt.
Liability Liability of Issues long-term Liability of
$40,000 of $40,000 paid off debt of $100,000 $40,000 classifed as
How to classify? current
Dec 31, 2011 Jan 17, 2012 Feb 3, 2012 March 1, 2012
Balance Sheet date Balance
*Because the refiancing deos not appear to be linked to the short-term debt, private evterprise
standards require the debt to be classified as current.
• If actual refinancing occurs, the amount of the short-term obligations that is
excluded from current liabilities, cannot be higher than the proceeds from the new obligation or equity secruties that are used to retire it.
Example:Assume Montavon Winery has $3 million of short-term debt at the
reporting date. The company then issues $2 million of long-term debt after the
balance sheet date but before the financial statements are issued and uses the
proceeds from the issue to liquidate the short-term liability. Under PE GAAP only $2
million of the short-term debt can be excluded from the current liabilities. Under
IFRS the whole $3 million of maturing debt would be classifed as a current obligation
since it was issued "after the balance sheet date" it needed to be at the balance sheet
Cash Dividend: is the amount that a corportaion owes to its shareholders because the
board of directors has authorized a dividend payment.At declaration date it becomes
a current liability (legal obligation) as cash dividends are normally paid within one
Preferred Dividends in Arrears: are cumulative preferred dividends that have not been
declared which require note disclosure as they are not reconized as a liability.
Share/Stock Dividends: are not recognized as a liability as they do not require no
future outlays of assests/services. They are recorded only through equity from
retained earnings to contributed capital.
Rents and Royalities Payable
"This type of liability may be created by a contractual agreement in which payments
are conditional on the amount of revenue that is earned or the quanity of product that
is produced or extracted."
Examples include the following:
• Franchisees often pay the franchisor franchise fees calculated as a % of sales.
• Tenants in shopping centers may be required to pay additonal rents based on
CustomerAdvances and Deposits
• Customers may pay deposits that guarantee the payment of expected future
obligations or the performance of a future service.
• They are classified as either current or non-current liabililites depending on
specific conditions. Taxes Payable
• Most businesses in Canada pay Goods and Services (GST) which is 5% as of
July 1, 2008
• GST Payable: Represents amount collected on eligible sales.
• GST Recoverable: GST paid on eligible purchases.
• Net amount
• of "GST Payable" and "GST Recoverable" remitted to (due from) Canada
In addition to salaries payable at the end of the accounting period, the following
additional items related to employee compensation are also reported as current
1) Payroll deductions
• Includes statutory deductions such as:
- Canada (Quebec) Pension Plan [CPP/QPP]
- Employment Insurance
- Income Tax Witholding (Federal and Provincial)
• and discrectionary deductions such as:
- Insurance Premiums
- Union Dues
*untill these deductions are remitted to the government they are reported as current
2) Short-Term compensated absences: are absences from employment for which
employees are paid. There are two main types:
- Employee rights accuring with employee service (e.g. vacation and statutory hoilidays)
- Expense and liability recognized as earned by employees.
- Employee rights based on occurrence of obligating event (e.g. disability,
maturity leave, etc...)
- Expense and liability recognized at time of obligating event.
*use best estimate of future pay-rates to estimate future liability (often, current rates
of pay are used)
• Employees have vested rights which means the employer is legally required to
pay the benefits even if the employee no longer works for the organizations.
3) Profit-sharing and bonuses
• Many companies have a bonus or a profit-sharing plan for their employees
which may be open to all employees or those in managerial positions.
• Obligations for amounts outstanding are usually reported as current liabilities
at the reporting date because they relate to and are based on the reports of the
period just ended, and are usually payable in ther near term.
Decommisioning and Resotoration Obligations
• Obligation associated with retirement of a long-lived asset that results from
acquring, contructing, developing, or operating it must be recognized when
• Existing legal obligations include