ACCT 352 - CHAPT 13 - NON-FINANCIAL AND CURRENT LIABILITIES
Recognition and Measurement
IFRS/CICA liability definition:
A liability is an obligation that arises from past transactions or events, which may result in a transfer
of assets. Liabilities have three essential characteristics:
they embody a duty or responsibility
the entity has little or no discretion to avoid the duty
the transaction or event that obliges the entity has occurred
the settlement of which may result in the transfer or use of assets, provision of services, or
other yielding of economic benefits in the future
Current proposed definition:
A liability of an entity is a present economic obligation for which the entity is the obligor.
Liabilities have three essential characteristics:
they exist at the present time
o the economic obligation must exist and the entity must be the obligor at the balance
they represent economic burdens or obligations
o an unconditional promise (example: pay interest on borrowed money) or other
requirement to provide or forego economic resources. Obligation is not contingent
or conditional on a future event. Stand ready obligation, meaning that the obligor
stands ready to do whatever is required by the terms of the contract
the obligations are enforceable on the obligor entity
o a constructive obligation exists (obligations based on entity's present/past actions -
one that arises from past or present company practice that signals that the entity
acknowledges a potential economic burden).
o can't pass it to anyone
o Financial liabilities and non-financial liabilities
Under IFRS and PE GAAP, a financial liability is any liability that is a contractual obligation to either:
deliver cash or other financial asset to another party, or
to exchange financial instruments with another party under conditions that are potentially
Note that this definition require the liability to be based on an obligation that is created by a contract.
Income taxes payable and other liabilities from lefisltation are not considered as financial liabilities.
o Financial liabilities.
Financial liabilities are recognized originally at their fair value. After acquisition they can be
measured at amortized cost (except those held for trading, such as derivatives, where fair value is
Consistent with cost based measurement, transaction costs that are a direct result of the issue of the
liability are netted against its original fair value. Alternatively, transaction costs associated with the
issue of financial liabilities that are accounted for after acquisition at fair value are recognized in net
income as they are incurred.
o Non Financial liabilities
Non Financial liabilities on the other hand are usually not usually payable in cash. Therefore, they are
measured in other way. PE and ASPE do not separately address the issue of non-financial liabilities, ACCT 352 - CHAPT 13 - NON-FINANCIAL AND CURRENT LIABILITIES
so these are measured in a variety of ways depending on the specific liability. Example: unearned
revenue is usually measured at the fair value of the goods and services to be delivered in the future,
and, where matching is an issue, the obligations are measured based on management's best
estimate of the cost of the goods or services to be provided in the future.
Under international standards, non financial liabilities are measured initially and at each
subsequent reporting date at the best estimate of the amount the entity would rationally pay at
the BS date to settle the present obligation. This is usually the present value of the resources
needed to fulfill the obligation, measured at the expected value, or probability - weighted average of
the range of possible outcomes. Proposals to revise the existing standards indicate that any asset
outflows used in these calculations are measured at the amount the company would pay to be
relieved of the obligation; that is, at their "exit" value or value in sale, not at their cost of the entity.
Common Current Liabilities
o What is a current liability?
The definition of a current liability and of the length of the operating cycle (cash to cash cycle) is
directly related to that of a current asset. A liability is classified as current under IFRS when one of
the following condition is met:
it is expected to be settled in the entity's normal operating cycle
it is held primarily for trading
it is due within 12 months from the end of the reporting period
the entity doesn't have an unconditional right to defer its settlement for at least 12 months
after the BS datre.
PE / GAAP don't have a proper definition but similar in the intent to IFRS.
o Bank indebtedness and credit facilities
Line of credit (revolving debt). Generally, an agreement entered with the bank that allows multiple
borrowings up to a negotiated limit. Repayments are made whenever there are sufficient funds
The amount of actual bank indebtedness is reported on the BS, while total funds that the credit
arrangements allows the company to borrow or any restrictions that are imposed by the financial
institution are disclosed in the notes
o Accounts Payable
Accounts payable or trade accounts payable are amounts owned for goods, supplies or services
purchased on open account related to the entity's ordinary business activity. Accounts payable arise
because of the time lag between the receipt of the goods and services and the payment for them -
period generally stated in the terms of sale and purchase.
If title has passed to the purchaser before the goods are received, the transaction should be recorded
when the title passes. Attention must be paid to transactions that occur near the end of one
accounting period and the beginning of the next so that the goods and services received (inventory
or expense) are recorded in the same accounting period as the liability (accounts payable) and both
are recorded in the proper period.
o Notes Payables
Notes payable are written promises to pay a sum of money on a specified future date and may arise
from purchases, financing or other transactions. Notes may be classified as current or long term (non
current), depending on the payment due date. Notes may also be interest bearing or non-interest-
bearing (i.e. 0 interest bearing) and accounting for them is the mirror image of accounting for notes
receivable illustrated in chapt7.ACCT 352 - CHAPT 13 - NON-FINANCIAL AND CURRENT LIABILITIES
Interest bearing note issued
Landscape Corp. borrows $100,000
Signs a 4-month, 12% note on March 1
Entry to record when cash is received on march 1:
Notes Payable 100000
If Landscape has a 31/12 YE but prepared FS semi annually, an adjusting entry is required
to recognize the 4 months of interest expense and interest payable of $4,000
(100,000*0.12*(4/12)). The adjusting entry is:
Interest exp 4,000
Interest payable 4,000
At maturity on July 1, Landscape pays the note's face value of $100,000 plus the $4,000 of
interest. The entry to record payment of the note and accrued interest is as follows:
Interest payable 100,000
0 interest bearing note issued
Despite its name, a 0 interest bearing note DOES have an interest component. The interest
is just not added on top of the note's face or maturity value; instead, it is included in the face
amount. The interest is the difference between the amount of cash received when the note is
signed and the higher face amount that is payable at maturity. The borrower receives the
note's PV in cash and pays back the larger maturity value.
To illustrate, assume that Landscape issues a $100,000, 4months, 0 interest bearing note
payable to the provincial bank on march 1. The