Financial Accounting Chapter on Liabilities

A contingent liability is a present obligation that is probable and can be reliably measured.

Provisions are recognized when payment is probable and the amount can be estimated reliably.

When measuring provisions, the amount is always estimated at the historical cost of the liability.

Contingent assets are certain obligations that the company can confirm.

Provisions require review and adjustment at each balance sheet date.

Dividends in arrears on cumulative preference shares are disclosed as a liability.

Customer loyalty awards are always reported as selling expenses.

All unearned revenues are considered as current liabilities.

Premiums as components of transaction price can be split between current and non-current liabilities.

VAT payable is always recognized as a long-term liability.

Deposits and advances are treated solely as current liabilities.

The reconciliation for each class of provision does not require a prior year reconciliation.

Gift certificates outstanding are considered a form of current asset.

Current Liabilities

Short-term financial obligations due within one year or a normal operating cycle.
Three characteristics: present obligation from past events, resulting in resource outflow.

Provisions

Liabilities of uncertain timing or amount.
Present obligation from a past event, probable payment, and reliably estimable amount.
Measured as the best estimate of expenditure needed to settle the obligation at the balance sheet date.
Consider one-off events and large populations of events.
Uses discounted present value with a pre-tax discount rate reflecting time value of money and specific liability risks.

Remeasurement of Provisions

Reviewed and adjusted at each balance sheet date.
Reversed if outflow is no longer probable.

Contingent Liabilities

Possible obligations dependent on uncertain future events outside the entity's control.

Examples of Provisions

Environmental clean-up.
Damages.
Warranties.
Bonuses.
VAT payable.
Payroll taxes (SSS, Pag-IBIG, PhilHealth, WTax).
Discount vouchers, coupons, and customer loyalty awards.
Premiums (as component of transaction price or selling expense).
Unearned revenues (collection in advance vs. performance obligation satisfaction).
Gift certificates outstanding.
Dividends payable (cash, undeclared, arrears, property/scrip, share).
Deposits and advances.

Financial Statement Presentation

Assets and liabilities classified as current and non-current (excluding liquidity).
Current liabilities defined by normal operating cycle, traded nature, within 12 months, or lack of unconditional deferral right for at least 12 months.
Warranties, dividends, and deposits/advances may be split between current and non-current.

Disclosure Requirements

Reconciliation for each provision class: opening balance, additions, usage, reversals, discount unwinding/rate changes, and closing balance.
Prior-year reconciliation not required.

Explore the nuances of current liabilities, provisions, and contingent liabilities within financial accounting. This quiz will test your understanding of key concepts, including how obligations are measured and assessed. Use real-world examples to solidify your knowledge of financial obligations.