Intermediate Accounting 2 Executory contract

Zeus Vernon Millan  A contact that is equally

unperformed neither party has
Chapter 1. Current Liabilities fulfilled any of it’s obligations, or
both parties have partially fulfilled
Liability- present obligation of the entity to their obligations to an equal extent
transfer an economic resource as a result of  Establishes a combined right and
past events obligation to exchange economic
resources, which are
Obligation- a duty or a responsibility that an interdependent and inseparable
entity has no practical ability to avoid.
*the contact ceases to be executory when
 Legal Obligation- an obligation that one party performs its obligation
results from a contact, legislation, or *if the entity performs first, the entity’s
other operation of law obligation changes to asset
 Constructive obligation- an *if the other party performs first, the
obligation that results from an entity’s obligation changes to liability
entity’s action that create a valid
expectation on other that the entity
will accept and discharge certain Recognition Criteria
responsibilities. An item is recognized if:
a. It meets the definition of liability
An obligation to transfer economic resource b. Recognizing it would provide useful
may be an obligation to: information, relevant and faithfully
a. Pay cash, deliver goods, or render represented information
services
b. Exchange asset with another party
on unfavorable terms Relevance
c. Transfer asset if a specified Recognition may not provide relevant
uncertain future event occurs information if, for example:
d. Issue a financial instrument that a. It is uncertain whether a liability
obliges the entity to transfer an exists
economic resource b. Aa liability exists but the probability
of an outflow of economic benefits
A present obligation exists as a result of is low
past events if:
a. The entity has already obtained Faithful representation
economic benefits or taken an  A liability must be measured for it to
action be recognized
b. As a consequence, the entity will or  The use of reasonable estimates is
may have to transfer an economic an essential part of financial
resource that it would not otherwise reporting and does not necessarily
have had to transfer undermine the usefulness of
information
 FINANCIAL LIABILITY Commodity Contract
- Any liability that is:  Cannot be settled net in cash or
a. A contractual obligation to other financial instruments but only
deliver cash or another through commodity exchange and
financial asset to another are not financial instruments
entity
b. A contractual obligation to Presentation of financial instruments
exchange financial asset or  The issuer classifies a financial
financial liabilities with instrument or its component parts,
another entity under a as a financial asset, a financial
conditions that are liability or an equity instrument in
potentially unfavorable to accordance with the substance of
the entity the contract
c. A contract that will or may
be settled in the entity’s own Equity Instruments- any contact that
equity instrument and is not evidences a residual interest in the asset of
classified as the entity’s own an entity after deducting all its liabilities
equity instrument.
Financial Liability Equity Instrument
Examples: The entity has a The entity has no
a. Payables such as accounts, notes, contractual obligation to pay
loans, bonds, and accrued payables obligation to pay cash or another
b. Lease liabilities cash or another financial asset or to
c. Held for trading liabilities and financial asset or to exchange financial
derivative liabilities exchange financial instruments under
d. Redeemable preference share instruments under the potentially
issued potentially unfavorable
e. Security deposits and other unfavorable condition
returnable deposits condition

The following guidance applies when a

NON-FINANCIAL LIABILITIES contract requires settlement in the entity’s
- A liability other than financial own equity instruments:
liabilities
Financial liability Equity instruments
Examples: The contract The contract
a. Unearned revenues and warranty requires the requires the
obligations that are to be settled delivery of: delivery (receipt) of
through future delivery of goods or a. A variable a fixed number of
provision of services number of the entity’s own
b. Taxes, SSS, Philhealth, and Pag-IBIG the entity’s equity instruments
payables own equity in exchanged for a
c. Constructive Obligations instruments fixed amount of
in exchange cash or another
 for a fixed financial asset price chooses to
amount of call on the
cash or shares.
another
financial Recognition of Financial Liabilities
asset  a financial liability is recognized only
b. A fixed when the entity becomes a party to
number of the contractual provisions of the
the entity’s instrument.
own equity
instruments Classification of Financial Liabilities
in exchange All financial liabilities are classified as
for a subsequently measured at amortized cost,
variable except for the following:
amount of a. Financial Liabilities at FVPL and
cash or derivative liabilities- subsequently
another measured at fair value
financial b. FL that arise when a transfer of a
asset financial asset does not qualify for
derecognition- subsequently
Redeemable PS Callable PS measured on a basis that reflects
- Are - Are the rights and obligations that the
preferred preferred entity has retained.
stocks stocks c.
which the which the
holder has issuer has
the right to the right to
redeem at a call at a set
set date date
- are - are
classified as classified as
financial equity
liability instrument
because because the
when the right to call
holder is at the
exercise its discretion
right to of the issuer
redeem, the and
issuer is therefore
mandatorily has no
obligated to obligation
pay for the to pay
redemption unless it