ACCOUNTING FOR COMPANY STATEMENT OF FINANCIAL POSITION (LIABILITIES)

Learning outcomes  Understand the accounting items – assets, liabilities and owners’ equity  Understand the recognitions, classifications and measurements of accounting items – assets, liabilities and owners’ equity

Liabilities  Defintion: 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.

Recognition  Recognition is the process of incorporating in the balance sheet or income statement an item that meets the definition of an element and satisfies the following criteria for recognition:  It is probable that any future economic benefit associated with the item will flow to or from the entity; and  The item's cost or value can be measured with reliability.  A liability is recognised in the balance sheet when it is probable that an outflow of resources embodying economic benefits will result from the settlement of a present obligation and the amount at which the settlement will take place can be measured reliably.

Measurement  Measurement involves assigning monetary amounts at which the elements of the financial statements are to be recognised and reported. [F 4.54]  The IFRS Framework acknowledges that a variety of measurement bases are used today to different degrees and in varying combinations in financial statements, including: [F 4.55]  Historical cost  Current cost  Net realisable (settlement) value  Present value (discounted)  Historical cost is the measurement basis most commonly used today, but it is usually combined with other measurement bases. [F. 4.56]

Classification  An entity must normally present a classified statement of financial position, separating current and noncurrent assets and liabilities, unless a presentation based on liquidity is more relevant.  Current liabilities are those to be settled within the entity's normal operating cycle or due within 12 months, or those held for trading, or those for which the entity does not have an unconditional right to defer payment beyond 12 months. Other liabilities are noncurrent.

Minimum items on the face of the Statement of Financial Position [IAS 1.54] Liabilities – the amounts payable or redeemable within the next 12 months and those payable or redeemable later than 12 months must be distinguished. Liabilities must be shown separately under the following headings. i. Debentures, those secured and not secured ii. Liabilities charged on the assets of the company iii. Bank loans, overdrafts and other loans, distinguished between those which are secured and unsecured iv. Other unsecured borrowings v. Provision for retirement benefits vi. Deferred tax liability

Cont. vi. Other liabilities and provisions vii. Trade creditors viii. Amounts owing to a director ix. Amounts owing to the holding/subsidiaries x. Amounts owing to related corporations xi. Other amounts owing by company

Items of liabilities Debentures  Debentures are loan capital with a fixed rate of interest payable by the company to the debenture holders regardless of the performance of the company.  It may be redeemable, i.e., repayable at or by a specified time.  It may be convertible, i.e., to be converted into ordinary shares at or by a specified date.  It can be traded in BM, thus, the rights are transferable.  Debentures are often secured on certain assets of the company.  Implication – if the company unable to pay interest or fails to repay the loan on the due date- the trustee can take possession of the asset and sell it to repay the debenture holders.  On the face of SFP - State (in bracket) whether it is charged over the assets of the company or not

Cont. Deferred tax liability  It arises because the tax payable as calculated for the current year according to the tax rules is different form the tax payable according to accounting rules.  The reason is that certain income and expenses recognised in the current year in the company’s accounts may only be recognised for tax purposes at a different amount or at an earlier or later date.  e.g.: Accrued interest expense – recognised in the current accounting period according to accrual concepts in accounting. However, IRD will allow interest expense as an allowable deduction only when it is paid (cash basis). Thus, taxable profit and accounting profit will be different.  FRS112 Income Taxes- Deferred tax liability to be disclosed in the year-end SFP must be calculated. Then, the difference between the opening and closing balances of deferred tax liability will be disclosed in the SCI either as an addition or deduction to the tax payable.

Cont. Other liabilities  Tax payable  Dividend payable – to be discussed after topic on equity.