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CHAPTER 13
NON-FINANCIAL AND CURRENT LIABILITIES
CHAPTER STUDY OBJECTIVES
1. Understand the importance of non-financial and current liabilities from a business perspective.
Cash flow management is a key control factor for most businesses. Taking advantage of supplier
discounts for prompt payment is one step companies can take. Control of expenses and related
accounts payable can improve the efficiency of a business, and can be particularly important during
economic downturns.
2. Define liabilities, distinguish financial liabilities from other liabilities, and identify how they are
measured. Liabilities are defined as an obligation of an entity arising from past transactions or events
that are settled through a transfer of economic resources in the future. The entity should have little (or
no) ability to avoid the duty or responsibility. Financial liabilities are a subset of liabilities. They are
contractual obligations to deliver cash or other financial assets to another party, or to exchange
financial assets or liabilities with another party under conditions that are potentially unfavourable.
Financial liabilities are initially recognized at fair value, and subsequently either at amortized cost or
fair value. ASPE does not specify how non-financial liabilities are measured. However, unearned
revenue is generally measured at the fair value of the goods or services to be delivered in the future,
while others are measured at the best estimate of the resources needed to settle the obligation. Under
IFRS, non-financial liabilities other than unearned revenue are measured at the best estimate of the
amount the entity would rationally pay at the date of the SFP to settle the present obligation.
3. Define current liabilities and identify and account for common types of current liabilities. Current
liabilities are obligations that are payable within one year from the date of the SFP or within the
operating cycle if the cycle is longer than a year. IFRS also includes liabilities held for trading and any
obligation where the entity does not have an unconditional right to defer settlement beyond 12
months after the date of the SFP. There are several types of current liabilities. The most common are
accounts and notes payable, and payroll-related obligations.
4. Identify and account for the major types of employee-related liabilities. Employee-related
liabilities include (1) payroll deductions, (2) compensated absences, and (3) profit-sharing and bonus
agreements. Payroll deductions are amounts that are withheld from employees and result in an
obligation to the government or another party. The employer’s matching contributions are also
included in this obligation. Compensated absences earned by employees are company obligations
that are recognized as employees earn an entitlement to them, as long as they can be reasonably
measured. Bonuses based on income are accrued as an expense and liability as the income is earned.
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5. Explain the recognition, measurement, and disclosure requirements for decommissioning and
restoration obligations. A decommissioning, restoration, or asset retirement obligation (ARO) is an
estimate of the costs a company is obliged to incur when it retires certain assets. It is recorded as a
liability and is usually long term in nature. Under ASPE, only legal obligations are recognized. They are
measured at the best estimate of the cost to settle them at the date of the SFP, and the associated
cost is included as part of the cost of property, plant, and equipment. Under IFRS, both legal and
constructive obligations are recognized. They are measured at the amount the entity would rationally
pay to be relieved of the obligation, and are capitalized as part of property, plant, and equipment or to
inventory, if due to production activities. Over time, the liability is increased for the time value of
money and the asset costs are amortized to expense. Entities disclose information about the nature of
the obligation and how it is measured, with more disclosures required under IFRS than ASPE.
6. Explain the issues and account for product guarantees, other customer program obligations, and
unearned revenue. Historically, an expense approach has been used to account for the outstanding
liability, and this type of approach is still used for assurance-type warranties, as initially discussed in
Chapter 6. More recently, standards such as IFRS 15 have moved to a revenue approach for warranties
that are not included in the sales price of the product (that is, for service-type warranties). Under the
expense approach, the outstanding liability is measured at the cost of the economic resources needed
to meet the obligation. The assumption is that, along with the liability that is required to be
recognized at the reporting date, the associated expense needs to be measured and matched with the
revenues of the period. Under the revenue approach, the outstanding liability is measured at the value
of the obligation. The proceeds received for any goods or services yet to be delivered or performed are
considered to be unearned revenue at the point of sale. Until the revenue is earned, the obligation—
the liability—is reported at its sales or fair value. The liability is then reduced as the revenue is earned.
More generally, when an entity receives proceeds in advance or for multiple deliverables, unearned
revenue is recognized to the extent the entity has not yet performed. This is measured at the fair value
of the remaining goods or services that will be delivered. When costs remain to be incurred in revenue
transactions where the revenue is considered earned and has been recognized, estimated liabilities
and expenses are recognized at the best estimate of the expenditures that will be incurred. This is an
application of the matching concept.
7. Explain and account for contingencies and uncertain commitments, and identify the accounting
and reporting requirements for guarantees and commitments. Under existing standards, a loss is
accrued and a liability recognized if (1) information that is available before the issuance of the
financial statements shows that it is likely (or more likely than not under IFRS) that a liability has been
incurred at the date of the financial statements, and (2) the loss amount can be reasonably estimated
(under IFRS, it would be a rare situation where this could not be done). Some minor changes are
under consideration by the IASB as described in the Looking Ahead section of the chapter.
Guarantees in general are accounted for similarly to contingencies. Commitments, or contractual
obligations, do not usually result in a liability at the date of the SFP. Information about specific types
of outstanding commitments is reported at the date of the SFP.
8. Indicate how non-financial and current liabilities are presented and analyzed. Current liability
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accounts are commonly presented as the first classification in the liability section of the SFP, although
under IFRS, an alternative presentation is to present current assets and liabilities at the bottom of the
statement. Within the current liability section, the accounts may be listed in order of their maturity or
in order of their liquidation preference. IFRS requires information about and reconciliations of any
provisions. Additional information is provided so that there is enough to meet the requirement of full
disclosure. Information about unrecognized loss contingencies is reported in notes to the financial
statements, including their nature and estimates of possible losses. Commitments at year end that are
significant in size, risk, or time are disclosed in the notes to the financial statements, with significantly
more information required under IFRS. Three common ratios used to analyze liquidity are the current,
acid-test, and days payables outstanding ratios.
9. Identify differences in accounting between IFRS and ASPE, and what changes are expected in the
near future. In June 2015, a Staff Paper on the Research—Provisions, Contingent Liabilities and
Contingent Assets (IAS 37) project was published. In 2020, as a follow-up, the IASB limited its study to
matters such as aligning the definition of a liability and requirements for identifying liabilities in IAS 37
with updates in the Conceptual Framework for Financial Reporting, which became effective in 2020.
Other goals are to clarify the costs to include in the measure of a provision and to specify whether the
rates used by entities to discount provisions should reflect their own credit risk.
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MULTIPLE CHOICE QUESTIONS
Answer No. Description
c 1. Essential characteristics of liabilities
c 2. Constructive obligation
b 3. Recognition and accounting for financial liabilities
b 4. Non-financial liabilities
a 5. Classification of notes payable
d 6. Zero-interest-bearing notes
c 7. Refinancing of long-term debts
b 8. Identify item that is not a current liability
c 9. Identify the current liability.
d 10. Classification of stock dividends distributable
a 11. Goods and Services Tax
b 12. Identify current liability
c 13. Accounting for GST
a 14. Provincial sales tax
b 15. Corporation income tax
a 16. Knowledge of accounts payable
b 17. Adjusting entry for zero-interest-bearing note
d 18. Journal entry for payment of interest-bearing note
b 19. Determine amount of short-term debt to be reported
d 20. Determine amount of short-term debt to be reported
b 21. Calculate accounts receivable including sales taxes
c 22. Calculate cost of purchase for own use
d 23. Payment of GST
c 24. Adjusting entry for corporate income tax
d 25. Determine amount of short-term debt to be reported
c 26. Calculate accrued interest payable
c 27. Calculate HST collected
d 28. Calculate a zero-interest-bearing note
a 29. Calculate interest on a zero-interest-bearing note
d 30. Current liabilities in general – determine false statement
c 31. Determine employer’s payroll costs
b 32. Recording payroll expenses – ASPE
b 33. Accumulating rights to benefits
c 34. Accrual of liability for compensated absences
b 35. Non-accumulating rights to benefits
d 36. Methods of calculating employee bonuses
b 37. Calculate payroll tax expense
b 38. Calculate vacation pay expense to be reported
c 39. Calculate accrued vacation pay liability
b 40. Calculate net pay
a 41. Calculate accrued salaries payable
b 42. Accrual of payroll taxes
d 43. Total source deductions owing
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CHAPTER 13
NON-FINANCIAL AND CURRENT LIABILITIES
CHAPTER STUDY OBJECTIVES
1. Understand the importance of non-financial and current liabilities from a business perspective.
Cash flow management is a key control factor for most businesses. Taking advantage of supplier
discounts for prompt payment is one step companies can take. Control of expenses and related
accounts payable can improve the efficiency of a business, and can be particularly important during
economic downturns.
2. Define liabilities, distinguish financial liabilities from other liabilities, and identify how they are
measured. Liabilities are defined as an obligation of an entity arising from past transactions or events
that are settled through a transfer of economic resources in the future. The entity should have little (or
no) ability to avoid the duty or responsibility. Financial liabilities are a subset of liabilities. They are
contractual obligations to deliver cash or other financial assets to another party, or to exchange
financial assets or liabilities with another party under conditions that are potentially unfavourable.
Financial liabilities are initially recognized at fair value, and subsequently either at amortized cost or
fair value. ASPE does not specify how non-financial liabilities are measured. However, unearned
revenue is generally measured at the fair value of the goods or services to be delivered in the future,
while others are measured at the best estimate of the resources needed to settle the obligation. Under
IFRS, non-financial liabilities other than unearned revenue are measured at the best estimate of the
amount the entity would rationally pay at the date of the SFP to settle the present obligation.
3. Define current liabilities and identify and account for common types of current liabilities. Current
liabilities are obligations that are payable within one year from the date of the SFP or within the
operating cycle if the cycle is longer than a year. IFRS also includes liabilities held for trading and any
obligation where the entity does not have an unconditional right to defer settlement beyond 12
months after the date of the SFP. There are several types of current liabilities. The most common are
accounts and notes payable, and payroll-related obligations.
4. Identify and account for the major types of employee-related liabilities. Employee-related
liabilities include (1) payroll deductions, (2) compensated absences, and (3) profit-sharing and bonus
agreements. Payroll deductions are amounts that are withheld from employees and result in an
obligation to the government or another party. The employer’s matching contributions are also
included in this obligation. Compensated absences earned by employees are company obligations
that are recognized as employees earn an entitlement to them, as long as they can be reasonably
measured. Bonuses based on income are accrued as an expense and liability as the income is earned.
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5. Explain the recognition, measurement, and disclosure requirements for decommissioning and
restoration obligations. A decommissioning, restoration, or asset retirement obligation (ARO) is an
estimate of the costs a company is obliged to incur when it retires certain assets. It is recorded as a
liability and is usually long term in nature. Under ASPE, only legal obligations are recognized. They are
measured at the best estimate of the cost to settle them at the date of the SFP, and the associated
cost is included as part of the cost of property, plant, and equipment. Under IFRS, both legal and
constructive obligations are recognized. They are measured at the amount the entity would rationally
pay to be relieved of the obligation, and are capitalized as part of property, plant, and equipment or to
inventory, if due to production activities. Over time, the liability is increased for the time value of
money and the asset costs are amortized to expense. Entities disclose information about the nature of
the obligation and how it is measured, with more disclosures required under IFRS than ASPE.
6. Explain the issues and account for product guarantees, other customer program obligations, and
unearned revenue. Historically, an expense approach has been used to account for the outstanding
liability, and this type of approach is still used for assurance-type warranties, as initially discussed in
Chapter 6. More recently, standards such as IFRS 15 have moved to a revenue approach for warranties
that are not included in the sales price of the product (that is, for service-type warranties). Under the
expense approach, the outstanding liability is measured at the cost of the economic resources needed
to meet the obligation. The assumption is that, along with the liability that is required to be
recognized at the reporting date, the associated expense needs to be measured and matched with the
revenues of the period. Under the revenue approach, the outstanding liability is measured at the value
of the obligation. The proceeds received for any goods or services yet to be delivered or performed are
considered to be unearned revenue at the point of sale. Until the revenue is earned, the obligation—
the liability—is reported at its sales or fair value. The liability is then reduced as the revenue is earned.
More generally, when an entity receives proceeds in advance or for multiple deliverables, unearned
revenue is recognized to the extent the entity has not yet performed. This is measured at the fair value
of the remaining goods or services that will be delivered. When costs remain to be incurred in revenue
transactions where the revenue is considered earned and has been recognized, estimated liabilities
and expenses are recognized at the best estimate of the expenditures that will be incurred. This is an
application of the matching concept.
7. Explain and account for contingencies and uncertain commitments, and identify the accounting
and reporting requirements for guarantees and commitments. Under existing standards, a loss is
accrued and a liability recognized if (1) information that is available before the issuance of the
financial statements shows that it is likely (or more likely than not under IFRS) that a liability has been
incurred at the date of the financial statements, and (2) the loss amount can be reasonably estimated
(under IFRS, it would be a rare situation where this could not be done). Some minor changes are
under consideration by the IASB as described in the Looking Ahead section of the chapter.
Guarantees in general are accounted for similarly to contingencies. Commitments, or contractual
obligations, do not usually result in a liability at the date of the SFP. Information about specific types
of outstanding commitments is reported at the date of the SFP.
8. Indicate how non-financial and current liabilities are presented and analyzed. Current liability
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accounts are commonly presented as the first classification in the liability section of the SFP, although
under IFRS, an alternative presentation is to present current assets and liabilities at the bottom of the
statement. Within the current liability section, the accounts may be listed in order of their maturity or
in order of their liquidation preference. IFRS requires information about and reconciliations of any
provisions. Additional information is provided so that there is enough to meet the requirement of full
disclosure. Information about unrecognized loss contingencies is reported in notes to the financial
statements, including their nature and estimates of possible losses. Commitments at year end that are
significant in size, risk, or time are disclosed in the notes to the financial statements, with significantly
more information required under IFRS. Three common ratios used to analyze liquidity are the current,
acid-test, and days payables outstanding ratios.
9. Identify differences in accounting between IFRS and ASPE, and what changes are expected in the
near future. In June 2015, a Staff Paper on the Research—Provisions, Contingent Liabilities and
Contingent Assets (IAS 37) project was published. In 2020, as a follow-up, the IASB limited its study to
matters such as aligning the definition of a liability and requirements for identifying liabilities in IAS 37
with updates in the Conceptual Framework for Financial Reporting, which became effective in 2020.
Other goals are to clarify the costs to include in the measure of a provision and to specify whether the
rates used by entities to discount provisions should reflect their own credit risk.
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MULTIPLE CHOICE QUESTIONS
Answer No. Description
c 1. Essential characteristics of liabilities
c 2. Constructive obligation
b 3. Recognition and accounting for financial liabilities
b 4. Non-financial liabilities
a 5. Classification of notes payable
d 6. Zero-interest-bearing notes
c 7. Refinancing of long-term debts
b 8. Identify item that is not a current liability
c 9. Identify the current liability.
d 10. Classification of stock dividends distributable
a 11. Goods and Services Tax
b 12. Identify current liability
c 13. Accounting for GST
a 14. Provincial sales tax
b 15. Corporation income tax
a 16. Knowledge of accounts payable
b 17. Adjusting entry for zero-interest-bearing note
d 18. Journal entry for payment of interest-bearing note
b 19. Determine amount of short-term debt to be reported
d 20. Determine amount of short-term debt to be reported
b 21. Calculate accounts receivable including sales taxes
c 22. Calculate cost of purchase for own use
d 23. Payment of GST
c 24. Adjusting entry for corporate income tax
d 25. Determine amount of short-term debt to be reported
c 26. Calculate accrued interest payable
c 27. Calculate HST collected
d 28. Calculate a zero-interest-bearing note
a 29. Calculate interest on a zero-interest-bearing note
d 30. Current liabilities in general – determine false statement
c 31. Determine employer’s payroll costs
b 32. Recording payroll expenses – ASPE
b 33. Accumulating rights to benefits
c 34. Accrual of liability for compensated absences
b 35. Non-accumulating rights to benefits
d 36. Methods of calculating employee bonuses
b 37. Calculate payroll tax expense
b 38. Calculate vacation pay expense to be reported
c 39. Calculate accrued vacation pay liability
b 40. Calculate net pay
a 41. Calculate accrued salaries payable
b 42. Accrual of payroll taxes
d 43. Total source deductions owing
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