CURRENT LIABILITIES, PROVISIONS &

CONTINGENT LIABILITIES

MSU-GSC 1st Semester, AY 2020-2021

• Conceptual Framework
• PAS 1 Presentation of Financial Statements
• PAS 8 Accounting Policies, Changes in Accounting
Estimates and Errors
• PAS 10 Events after the Reporting Period
• PAS 37 Provisions, Contingent Liabilities, and
Contingent Assets
• IFRIC 1 Changes in Existing Decommissioning,
Restoration and Similar Liabilities

References
• A liability is a present obligation of the entity arising
from past events, the settlement of which is expected to
result in an outflow from the entity of resources
embodying economic benefits.

• Present obligation of a particular entity

• Arises from past transaction/ event
• Settlement requires outflow of resources

Liability, defined
• An entity shall classify a liability as current when:

1. It expects to settle the liability in its normal operating

cycle;
• trade payables
• accruals for employee – short-term benefits
• Deferred revenue

2. It holds the liability primarily for the purpose of trading;

• an issued debt instrument that that the entity intends to
repurchase in the near term to make a gain in short-term
movement in interest rates.

Current Liability
 3. The liability is due to be settled within 12 months after the
reporting period
• dividends payable, income taxes, other non-trade payables,
currently scheduled payments on longer-term obligations
(current portion of non-current financial liabilities) and
currently maturing debt whose original term was for a period
longer than twelve months

4. The entity does not have an unconditional right to defer

settlement of the liability for at least 12 months after the
reporting period.

Current Liability
1. Both the amount and the payee are known
• accounts payable, notes payable; dividends payable
2. The payee is known but the amount may have to be
estimated;
• provision for staff bonus, provision for restructuring costs,
provision for decommissioning costs
3. The payee is unknown and the amount may have to be
estimated
• premiums, product warranties, other customer incentives
4. The liability has been incurred due to a loss
contingency.

Types of current liabilities

Obligations that are not expected to be liquidated within the
current operating cycle, include

• Obligations arising as part of the long-term capital structure of the

entity, such as the issuance of bonds, long-term notes, and finance
lease obligations;

• Obligations arising out of the normal course of operations, such as

pension obligations, decommissioning provisions, and deferred
taxes; and

• Contingent obligations involving uncertainty as to possible

expenses or losses.

Non-current Liabilities
Other issues in Current/Non-
Current Classification
• General Rule: An entity classifies its
financial liabilities as current when they
are due to be settled within twelve months
after the reporting period
• An entity classifies the obligation as non-current if the
original term was for a period longer than twelve
months and the entity intended to refinance the
obligation on a long-term basis prior to the date of the
statement of financial position, and that intention is
supported by an agreement to refinance, or to reschedule
payments, which is completed before the reporting
period.

Refinancing/rescheduling of
payments
• An entity classifies the obligation as non-current if an
entity expects, and has the discretion, to refinance or
roll over an obligation for at least twelve months after
the reporting period under an existing loan facility, even
if it would otherwise be due within a shorter period.

Refinancing/rescheduling of
payments
• An entity classifies its financial liabilities as current
when they are due to be settled within twelve months
after the reporting period, even if:
• (a) the original term was for a period longer than twelve
months, and
• (b) an agreement to refinance, or to reschedule payments,
on a long-term basis is completed after the reporting period
and before the financial statements are authorized for issue.
• it is disclosed as non-adjusting event in accordance with PAS
10 Events after the Reporting Period

Refinancing/rescheduling of
payments
• General rule: An entity classifies its long-term loan as
current when an entity breaches a provision on its long-
term loan arrangement on or before the end of the
reporting period with the effect that the liability becomes
payable on demand/callable.

Breach of undertaking or loan

covenant
• An entity classifies the liability as current even if the
lender agreed, after the reporting period and before the
authorization of the financial statements for issue, not to
demand payment as a consequence of the breach
because, at the end of the reporting period, it does not
have an unconditional right to defer its settlement for at
least twelve months after that date.
• it is disclosed as non-adjusting event in accordance with
PAS 10 Events after the Reporting Period

Breach of undertaking or loan

covenant
• However, an entity classifies the liability as non-current
if the lender agreed by the end of the reporting period
to provide a period of grace ending at least twelve
months after the reporting period, within which the entity
can rectify the breach and during which the lender cannot
demand immediate repayment.

Breach of undertaking or loan

covenant
• Provision is a liability of uncertain timing or amount.

Provision - definition
• An enterprise has a present obligation (legal or
constructive) as a result of a past event (that should an
obligating event)
• It is probable that an outflow of resources embodying
economic benefits will be required to settle the
obligation.
• A reliable estimate can be made of the amount of the
obligation.

Recognition of Provision
• The amount recognized as a provision should be the best
estimate of the expenditure required to settle the present
obligation at the reporting date; that is, the amount that an
enterprise would rationally pay to settle the obligation at
the reporting date or to transfer it to a third party.

Measurement of Provisions
1. Provisions for one-off events are measured at the most likely
amount.
2. Provisions for large populations of events are measured at a
probability-weighted expected value.
• Where there is a continuous range of possible outcomes, and each
point in that range is as likely as any other, the mid-point of the
range is used.
3. Both measurements are at discounted present value using a
pretax discount rate that reflects the current market assessments
of the time value of money and the risks specific to the liability.
• When the provision is measured at present value, the carrying
amount is increased each period to reflect the passage of time. The
increase is finance cost.

Measurement of Provisions
• Provision for product and service warranties
• Provision for premiums and coupons
• Provision for litigation losses
• Provision for decommissioning costs of property, plant
and equipment
• penalties or clean-up costs for unlawful environmental
damage
• Provision for restructuring
• Provision for onerous contracts

Examples of Provisions
Warranty Accrue a provision (past event
was the sale of defective goods)

Customer refunds Accrue if the established policy is

to give refunds
Decommissioning costs Accrue a provision when
(e.g., Offshore oil rig installed, and add to the cost of
must be removed and sea the asset
bed restored):

Examples of Provisions
• Is an obligation to dismantle, remove, and restore an item
of PPE as required by law or contract.
Change in decommissioning liability
• Under IFRIC 1, changes in the measurement of an
existing decommissioning liability shall be accounted for
as follows:
• A decrease in liability is deducted from cost of asset. If the
decrease in liability exceeds the carrying amount, the excess
is recognized in P/L
• An increase in liability is added to the cost of the asset.
However the entity shall consider whether this is an
indication that the carrying amount of the asset may not be
fully recoverable . If there is such an indication, the asset
should be tested for impairment.

Decommissioning liability
Reduce the required provision if some or all of the
expenditure required to settle a provision is expected to be
reimbursed by another party, when, and only when,
• It is virtually certain that reimbursement will be received
if the enterprise settles the obligation.
• The amount recognized should not exceed the amount of
the provision.
• The reimbursement shall not be offset against the
provision and shall be recognized as a separate asset.
• In the income statement, the expense is net of the amount
recognized for a reimbursement.

Reimbursements
  

Illustration: Reimbursements and Provisions

Assume that a probable loss measured at the best estimate of P100 is to be
partially reimbursed by another entity at P60, the entry is:
 

Loss 40
Receivable 60
Provision 100
 

Reimbursements
• Provisions shall be reviewed at each balance sheet date
and adjusted to reflect the current best estimate.

• If it is no longer probable that an outflow of resources

will be required to settle the obligation, the provision
shall be reversed.

Review of the Amount of Provision

Onerous Contracts
• is one in which the unavoidable costs of meeting the
obligations under the contract exceed the economic
benefits expected to be received under it.
• The unavoidable costs under a contract reflect the least
net cost of exiting from the contract, which is the lower
of the cost of fulfilling it and any compensation or
penalties arising from failure to fulfill it.

Application of the recognition and

measurement rules for provisions in
two specific case
 
Onerous contract illustrated
A company is moving to another location, a free-trade zone. The local government
in this new location also offers preferential licensing. The remaining non-
cancelable lease term in its present location is two years and annual rental
obligation is P100,000.
 
What amount of provision should be recognized as a result of the above?
 
Solution
The lease agreement is an executory onerous contract because after moving to the
new location, the company would derive no economic benefits from the existing
factory building but would still need to pay rent under the agreement since the
lease is noncancelable. Thus the unavoidable costs exceed the benefits expected
under the lease contract.
 
Based on the annual lease obligation under the lease agreement, the total amount
needed to be provided at year-end is the present value of the total commitment
under the lease
= PV of [P100,000 × 2 (years)].
 
Restructuring
• A restructuring is a program that is planned and controlled by management, and
materially changes either
• The scope of a business undertaken by an entity
• The manner in which that business is conducted 
Examples of restructuring
• Sale or termination of a line of business
• Closure of business locations in a country or region
• Relocation of business activities
• Changes in management structure,
• Fundamental reorganizations that have a material effect on the nature and focus
of the entity’s operations

Application of the recognition and

measurement rules for provisions in two
specific case
• Restructuring by closure or reorganization: Accrue a
provision only after a detailed formal plan is adopted and
announced publicly. A Board decision is not enough.
• A management or board decision to restructure does not
give rise to a constructive obligation at the end of the
reporting period unless the entity has, before the end of the
reporting period:
1. started to implement the restructuring plan; or
2. communicated the restructuring plan to those affected by it in
a sufficiently specific manner to raise a valid expectation in
them that the entity will carry out the restructuring.

Recognition of Provision for

Restructuring
• A provision for restructuring costs is recognised only when the general
recognition criteria for provisions are met. In this context, a constructive
obligation to restructure arises only when an entity:
1. Has a detailed formal plan for the restructuring identifying at least the
• The business or part of a business concerned
• The principal locations affected
• Location, function, and approximate number of employees who will be
compensated
• The expenditures that will be undertaken
• When the plan will be implemented; and
 
2. Has raised a valid expectation in those affected that it will carry out the
restructuring.

Recognition of Provision for

Restructuring
• No obligation arises for the sale until the entity is
committed to the sale, ie accrue a provision only after a
binding sale agreement

Restructuring by sale of an
operation
• A restructuring provision should include only the direct
expenditures arising from the restructuring, which are
those that are both:
• Necessarily entailed by the restructuring
• Not associated with the ongoing activities of the enterprise

Measurement of Provision for

Restructuring Costs
The provision does not include such costs as:
1. Retraining or relocating continuing staff
2. Marketing
3. Investment in new systems and distribution networks
4. Identifiable future operating losses up to the date of a
restructuring are not included in a provision, unless they
relate to an onerous contract.

Measurement of Provision for

Restructuring Costs
• If an entity starts to implement a restructuring plan, or
announces its main features to those affected, only after
the reporting period, disclosure is required under IAS
10 Events after the Reporting Period,
• possible obligations to be confirmed by future events not
wholly within the control of the enterprise, or
• present obligations
• of which the outflow of economic benefits is not
probable
• or which cannot be measured reliably

Contingent Liabilities
Provisions Contingent Liabilities
 Present obligation  Possible obligations, yet to be
confirmed or
 Meets the recognition criteria of  Present obligations that do not
PAS 37: meet the recognition criteria of
– Probable outflow of resources PAS 37
– Can be measured reliably – outflow of resources not probable
, or
– a sufficiently reliable estimate of
the amount of the obligation
cannot be made

 Recognized as liabilities  Not recognized as liabilities

Contingent Liabilities
• Probable loss. A contingent loss based on the occurrence
of a future event or events that are likely to occur (“more
likely than not”)
• Possible loss. A contingent loss based on the occurrence
of a future event or events whose likelihood of occurring
is more than remote but less than likely.
• Remote loss. A contingent loss based on the occurrence
of a future event or events whose likelihood of occurring
is slight.

Contingent Liabilities
Possible interpretations of the terms on degrees of
probabilities:

• Virtually certain probability above 95%

• Probable probability above 50% and up to 95%
• Possible probability of 5% and up to 50%
• Remote probability below 5%

Contingent Liabilities
An entity shall not recognize a contingent liability

• Probable but not reliably estimable → Disclose

• Reasonably possible → Disclose
• Remote → Ignore

Recognition of contingent liabilities

• Contingent liabilities are assessed continually whether an
outflow of resources has become probable. If it becomes
probable that an outflow of benefits will be required for
an item previously dealt with as a contingent liability and
its amount can be reasonable estimated, recognition is
appropriate.

Recognition of contingent liabilities

• A contingent asset is a possible asset from past events and
whose existence will be confirmed only by the occurrence or
non-occurrence of one or more future events not wholly
within the control of the entity.
• An entity shall not recognize a contingent asset.
• A contingent asset is disclosed, where an inflow of economic
benefits is probable.
• Contingent assets are assessed continually.
• When the realization of income becomes virtually certain,
the related asset is not a contingent asset and its recognition is
appropriate.

Contingent Assets
For each class of provision, an enterprise should disclose:
• The carrying amount at the beginning and end of the
period;
• Additional provisions made in the period
• Amount used during the period
• Unused amounts reversed during the period
• Increase during the period in the discounted amount arising
from the passage of time (Unwinding of the discount) and
the effect of any change in the discount rate
• Comparative information is not required.

DISCLOSURE REQUIREMENTS-PROVISIONS,
CONTINGENT LIABILITIES & CONTINGENT ASSETS
• An enterprise should disclose the following for each class of provision:
• Brief description of the nature of the obligation and the expected timing of any
resulting outflows
• Indication of the uncertainties amount the amount or timing of outflows. Where
necessary, major assumptions in relation to these uncertainties should also be
disclosed.
• Amount of any expected reimbursement, stating the amount of any asset recognized
for that expected reimbursement.
 
Unless the possibility of any outflow in settlement is remote, an enterprise should
disclose for each class of contingent liability at the balance sheet date a brief
description of the nature of the contingent liability and, where practicable,
• An estimate of its financial effect
• An indication of the uncertainties relating to the amount or timing of any outflow
• The possibility of any reimbursement.

DISCLOSURE REQUIREMENTS-PROVISIONS,
CONTINGENT LIABILITIES & CONTINGENT ASSETS
• Where an inflow of economic benefits is probable, an
enterprise should disclose
• a brief description of the nature of the contingent assets at
the balance sheet date, and
• An estimate of their financial effect

DISCLOSURE REQUIREMENTS-PROVISIONS,
CONTINGENT LIABILITIES & CONTINGENT ASSETS
End of Lecture