Reviewer in INTACC 2:
Liabilities on demand
a liability that is payable
upon the demand of the
lender is classified as
current even if the
lender agreed
after the end of the
reporting period but
before the financial
statements are
authorized for issue not
to
demand the repayment
However, a liability that is
payable on demand is
classified as noncurrent if
the lender provides the
entity by the end of the
reporting period a
GRACE PERIOD ending
at least twelve months
after the
reporting period w/in
which the entity can
rectify breach of loan
covenant and during w/c
the lender
cannot demand
immediate repayment.
a liability that is payable
upon the demand of the
lender is classified as
current even if the
lender agreed
after the end of the
reporting period but
before the financial
statements are
authorized for issue not
to
demand the repayment
However, a liability that is
payable on demand is
classified as noncurrent if
the lender provides the
entity by the end of the
reporting period a
GRACE PERIOD ending
at least twelve months
after the
reporting period w/in
which the entity can
rectify breach of loan
covenant and during w/c
the lender
cannot demand
immediate repayment.
a liability that is payable
upon the demand of the
lender is classified as
current even if the
lender agreed
after the end of the
reporting period but
before the financial
statements are
authorized for issue not
to
demand the repaymen
a liability that is payable
upon the demand of the
lender is classified as
current even if the
lender agreed
after the end of the
reporting period but
before the financial
statements are
authorized for issue not
to
demand the repaymen
A liability that is payable upon the demand of the lender is classified as current even if the lender
agreed after the end of the reporting period but before the financial statements are authorized for
issue not to demand the repayment
Explanation:
If a company owes a debt that is due on demand (meaning the lender could ask for repayment at any
time), the debt is classified as a current liability (short-term debt).
Even if the lender agrees, after the reporting period ends but before the financial statements are
finalized, not to demand repayment, the debt is still treated as a current liability for that reporting
period. This is because, at the end of the reporting period, the debt was still due immediately, and the
agreement to delay repayment happens too late to change its classification for that period.
In simpler terms: If the debt was due on demand at the end of the reporting period, it's considered
short-term (current) in the financial statements, even if the lender later agrees to wait for repayment.
However, a liability that is payable on demand is classified as noncurrent if the lender provides the
entity by the end of the reporting period a GRACE PERIOD ending at least twelve months after the
reporting period within which the entity can rectify breach of loan covenant and during w/c the
lender cannot demand immediate repayment.
Explanation:
means that a debt that is payable on demand (meaning the lender could ask for repayment at any
time) can be classified as a noncurrent liability (long-term debt) if certain conditions are met:
1. Grace Period: If the lender gives the company a grace period by the end of the reporting
period, this period must last at least 12 months after the reporting period.
2. Rectify Breach: During this grace period, the company has time to fix any issues or breaches
(such as not meeting a loan covenant) without the lender demanding repayment.
3. No Immediate Repayment: The lender agrees not to demand immediate repayment during
the grace period.
So, even though the debt is payable on demand, if the lender gives the company a 12-month period to
resolve the issues and doesn't demand repayment during that time, the liability is considered long-term
(noncurrent) in the financial statements.
In simpler terms: If the lender gives the company extra time (12 months or more) to fix any problems
with the loan and agrees not to ask for repayment during that time, the debt can be considered long-
term.
Different Scenarios
Case 1: Obligation payable on demand Presented as current liability
Case 2: Grace period received after year-end Presented as current liability
Case 3: Grace period received by year-end Presented as noncurrent liability
Note:
General rule: A currently maturing obligation is presented as current even if the obligation is refinanced
on a long-term basis after the balance sheet date.
Exceptions: The obligation is noncurrent if:
The entity has the right, as of the balance sheet date, to roll over the obligation on a long-term
basis under an existing loan facility; or
The rollover on a long-term basis is completed on or before the balance sheet date.
General rule: An obligation that is payable on demand is presented as current:
Exception: The obligation is noncurrent if the lender agreed on or before the balance sheet date not to
collect within the next 12 months.
Measurement of Financial Liabilities
Initial Measurement
- financial liabilities are initially measured at fair value minus transaction costs, except FVPL.
- Financial liabilities classified as FVPL are initially measured at fair value. The transaction costs are
expensed immediately.
Subsequent Measurement
Classification of Financial Liabilities Subsequent Measurement
Financial liabilities classified as amortized cost Amortized cost
Financial liabilities classified as held for trading Fair value with changes in fair value recognized in
profit of loss
Financial liabilities designated at FVPL Fair value with changes in fair values recognized
as follows:
a. the amount of change in fair value of the
financial liability that is attributable to changes in
the credit risk of that liability is presented in other
comprehensive income, and
b. the remaining amount of change in the fair value
of the liability is presented in profit or loss.
Measurement of Non-financial liabilities
Initially measured at – Best Estimate
Subsequently measured at – Best Estimate
In accounting, "measurement at best estimate" means determining the value of something (like a liability
or asset) based on the best available information and judgment. It's an attempt to estimate the most likely
amount, especially when the exact value is uncertain or can't be determined precisely.
Example of non-financial liabilities:
Obligations arising from statutory requirements (e.g., income tax payable)
Warrant obligations
Unearned or deferred revenues
Commodity contracts that either cannot be settled in cash or which are expected to be settled by
commodity exchange.
Commodity contracts - are agreements to buy or sell raw materials or natural resources,
like oil, gold, or wheat, at a future date. These contracts set the price and terms for the sale
of these goods.
Taxes, SSS, Philhealth, and Pag-IBIG payables
Constructive obligations
Share dividends payable
Current Liabilities
Current liabilities are liabilities that are:
a. Expected to be settled in the entity’s normal operating cycle;
b. Held primarily for trading;
c. Due to be settled within 12 months after the end of the reporting period; or
d. The entity does not have the right at the end of the reporting period to defer settlement of the liability for
at least 12 months after the reporting period.
Example of current liabilities:
Financial assets measured at FVPL (designated or held for trading)
Current portion of long-term notes, bonds, loans, and lease liabilities
Trade accounts payable
Notes payable
Non-trade payable due within 12 months after the end of the reporting period
Unearned income / revenue expected to be earned within 12 months after the end of the reporting
period
NOTE: Deferred revenue is different from unearned revenue; deferred revenue can be
used to refer to the long-term portion of the unearned income.
Bank overdrafts
Advances from customers (within 12 months) / credit balance in customers’ accounts
Interest Payable
Unearned Rent
Accrued expenses
Noncurrent liabilities
The operating cycle of an entity is the time between the acquisition of assets for processing and
their realization in cash or cash equivalents. When the entity’s normal operating cycle is not clearly
identifiable, it is assumed to be 12 months.
Non-current liabilities are debts or obligations that a company doesn’t need to pay within the next
12 months. These are long-term debts, like long-term loans or bonds, that are due in the future,
beyond one year from the reporting date.
Examples of non-current liabilities include:
Long-term loans – Loans that are due for repayment in more than one year.
Bonds payable – Debt securities issued by the company that are due in the long term.
Pension liabilities – Amounts owed to employees for retirement benefits, payable in the future.
Lease obligations – Lease payments due beyond the next 12 months.
Deferred tax liabilities – Taxes owed in the future, usually due to timing differences in accounting
and tax rules.
Trade and non-trade payables
Trade Payables Non-Trade Payables
Definition: obligations arising from purchases of Definition: Non-trade payables are the amounts a
inventory that are sold in the ordinary course of company owes for goods and services that are not
business. Other payables are classified as non- directly related to the company's core business
trade activities, like producing and selling goods or
services.
Classification: Classification:
Trade payables are classified as current Non-trade payables are classified as
liabilities when they are expected to be current liabilities only when they are
settled within the normal operating expected to be settled within one year.
cycle or one year, whichever is longer
Examples: Examples:
Amounts owed to suppliers for goods or Taxes payable – Amounts owed to tax
services purchased on credit as part of authorities, such as income tax or VAT.
normal business operations. Wages payable – Salaries or wages owed
Accounts payable for raw materials to employees but not yet paid.
purchased by a manufacturer. Interest payable – Interest due on loans
Payables to vendors for inventory or or other borrowings.
office supplies acquired on credit. Dividends payable – Amounts owed to
Payables to contractors for services shareholders as dividends.
rendered related to business operations, Social security or pension
like construction or maintenance. contributions payable – Amounts owed
to government or pension funds.
Loans payable – Amounts owed to banks
or other financial institutions (if due in the
short term).
Refinancing Agreement
A long-term obligation in refinancing agreement that is maturing within 12 months after the
reporting period is classified as current, even if a refinancing agreement to reschedule payments
on a long-term basis is completed after the reporting period and before the financial statements are
authorized for issue
Explanation:
If a company has a long-term debt that is due within 12 months after the reporting period, it is classified
as a current liability (short-term debt) on the financial statements.
Even if the company arranges a new agreement to extend the debt's repayment period beyond 12
months after the reporting period ends but before the financial statements are finalized, the debt will still
be considered a current liability for that reporting period.
In simple terms: If the debt is due within 12 months, it counts as short-term, even if the company later
changes the payment terms.
However, the obligation is classified as noncurrent if the entity has the right, at the end of the
reporting period, to roll over the obligation for at least 12 months after the reporting period under an
existing loan facility. Without such right, the entity does not consider the potential to refinance the
obligation and classifies the obligation as current. An entity’s right to defer settlement must
have substance and must exist at the end of the reporting period
Explanation:
If a company has the right to extend (or "roll over") a debt for at least 12 months beyond the reporting
period, the debt can be classified as non-current (long-term).
However, if the company doesn't have the right to extend the debt and relies on the possibility of
refinancing it later, the debt is classified as current (short-term), because it’s due in the near future.
In simpler terms: If the company has a clear option to delay paying the debt for more than 12 months,
the debt is long-term. If not, the debt is short-term, even if it might be refinanced later.
Note:
Classification of a liability is unaffected by the likelihood that the entity will exercise its right to defer
settlement of the liability for at least 12 mos.
If a liability meets the criteria for classification as non-current, it is classified as noncurrent even if:
a. Management intends or expects the entity to settle the liability within 12 mos. after the
reporting period;
b. The entity settles the liability between the end of the reporting period and the date the financial
statements are authorize for issue.
In this cases, the entity may need to disclose information about the timing of settlement to enable users
of its financial statements to understand the impact of the liability on the entity’s financial position (PAS
1.72 A)
Different Scenarios
Case 1: No right to defer settlement Presented as current liability
Disclosed in the notes as a non-adjusting
event after the reporting period
Case 2: With right to defer settlement Presented as noncurrent
Case 3: With right to defer settlement - interest Principal Loan presented as noncurrent
payable Interest Payable presented as current
Case 4: Refinancing completed as of the end of The loan is presented as noncurrent
the reporting period because the rollover on a long-term basis
is completed as of the end of the reporting
period.
Non-adjusting Events
are events that happen after the reporting period but before the financial statements are
finalized, and they do not affect the financial results for that period. These events may be
important, but they don't change the numbers in the financial statements. Instead, they may need
to be disclosed if they are significant.
In simpler terms: Non-adjusting events are things that happen after the reporting period that don’t
change the company’s financial numbers but may need to be mentioned in the financial report.
Non-adjusting events are disclosed only
a. Refinancing on a long-term basis of a liability classified as current
b. Rectification of a breach of a long-term loan arrangement classified as current
c. The granting by the lender of a period of grace to rectify a breach of a long-term loan arrangement
classified as current
d. Settlement of a liability classified as non-current.
Unearned Income
Represents an advanced collection of income that is not yet earned. Prior to earning, unearned
income is classified as liability.
The advances pertaining to the cancelled orders remain as liability, not as unearned income, but
as liability for refundable deposits.
Gift Certificates
A prepaid card is usually issued by a retailer or a restaurant that the cardholder can use to
purchase goods or services.
a. A contract liability is recognized when gift certificates are sold
b. A contract liability is derecognized and revenue is recognized when the gift certificates
are redeemed (used)
c. As to the gift certificates sold that are not exercised (referred to as ‘breakage’), PFRS 15
provides the following:
I. Proportionate method: if the entity expects that a portion of the gift certificates sold
will not be redeemed, the entity recognizes the expected breakage amount as revenue in
proportion to the pattern of rights exercised by the customer.
II. Remote method: if the entity does not expect that a portion of the gift certificates
sold will not be redeemed, the entity recognizes the expected breakage amount as revenue
when the likelihood of redemption becomes remote.
Proportionate Method Example:
Problem: An entity sells gift certificates as part of its sales promotion. During the year, the entity sells gift
certificates worth 100,000, of which 72,000 were redeemed. Based on the entity’s past experience, 10% of
gift certificates sold are never redeemed.
Gift certificates sold 100,000
Multiply by: 10%
Total expected breakage 10,000
Gift certificates sold 100,000
Less: Total expected breakage (10,000)
Gift certificates sold net of expected breakage 90,000
Gift certificates redeemed 72,000
Divided by: Gift certificates sold net of breakage 90,000
Percentage of actual redemptions 80%
Total expected breakage 10,000
Multiply by: Percentage of actual redemption 80%
Amount of expected breakage recognized as revenue 8,000
CASE STUDY #1
Deadline: March 31, 2025
Executive Summary – Cath
Introduction – Regine
Recommendation and Implementation plan – Frank
Conclusion – Frank
Analysis – Carlos
Alternatives – Railey
Case Problems:
1. Processing of goods outside of the accounting system.
2. Direct usage of sales to fund the Christmas Party.
Principles for Safeguarding:
1. Transparency and Full Disclosure
2. Corporate Control
3. Accountability
Key Considerations: (Analysis part)
1. The production department is conducting out-of-system operations.
2. The proceeds from sales are being directly used to fund the Christmas Party.
3. The aforementioned activities will result in significant discrepancies in the overall records of the
company, which may affect tax compliance and law regulations.
4. The management seems to be taking advantage of the company's size to evade statutory audits.
5. There will be a conflict of interest between us and the management once the issue will be raised upon
them.
Course of Action: (Recommendation part)
1. Conduct further investigations to gather concrete evidence regarding the alleged misconduct of the
company.
2. Conduct a meeting with the directors to discuss the evidence found that proves the misconduct of the
company.
3. As a last resort, opt for withdrawal if the company still refuses to adhere to the proper conduct of
operations and recording of transactions.
