Non-financial

Liabilities, Provisions
and Contingencies
Definition:
Liability – “a present obligation of the entity to transfer an economic resource as a
result of past event.”(conceptual framework 4.26)
Financial liability and Non-financial liability
Financial liability Nonfinancial liability
Financial liability is any liability that is Contractual • Is a liability other than a financial liability (arises
obligation from statutory requirements or settled thru
• to deliver cash or another financial assets to delivery of non-cash assets or provision of
another entity; or service)
• to exchange financial assets or financial liabilities
with another entity under conditions that are
potentially unfavorable to the entity; or

• A contract that will or may be settled in the entity’s

own equity instrument and is not classified as the
entity’s own equity instrument.
 Measurement
  Initial measurement Subsequent measurement
Fair Value less transaction cost Amortized cost

Fair Value FL classified as held for trading – at FV

with changes in FV recognized in P/L
Financial liabilities
FL designated at FVTPL – at FV with
changes in FV recognized in OCI(credit
risk*) and P/L (remaining)

Best estimate needed to settle the Best estimate needed to settle the
obligations obligations
Non-financial liabilities    
Measurement basis required by Measurement basis required by other
other applicable standard applicable standard

*credit risk – the risk that one party to a financial instrument will cause a financial loss for the other
party by failing to discharge an obligation (PFRS 7)
 Examples of Financial laibilities:
 Accounts payable, Notes payable, accrued interest expense, mortgage payable, salaries
payable, loans payable, bonds payable, utilities payable, cash dividends payable
 Lease liabilities
 Redeemable preference shares issued
 Security deposit
 Held for trading liabilities and derivative liabilities
 Examples of Non-financial laibilities:
 Advances from customers
 Unearned revenues
 Unearned rent
 Premiums payable
 Warranties payable
 Property dividends payable
 SSS, PAG-IBIG, PhilHealth Contributions payable
 Income taxes payable
 Constructive obligations
TRUE OR FALSE

1. Financial liabilities are initially measured at fair value plus transaction cost, except for financial liabilities
that are classified as financial liabilities measured at fair value through profit or loss, whose transaction costs
are expensed immediately.

2. Non-financial liabilities are initially measured at the best estimate of the amounts needed to settle those
obligations or the measurement basis required by other applicable standard.

3. Unearned revenue is considered a financial liability.

4. Accounts payable is considered a financial liability.

5. A Financial liability is recognized only when the entity becomes a party to the contractual provisions of the instrument
The following are taken from the records of ABC Co. as of year-end
Unearned revenue 3,704
Utilities payable 8,642
Premiums payable 12,345
Advances from customers 1,235
Salaries payable 12,345
Warranties payable 6,173
Income taxes payable 2,469
Constructive obligation 13,580
Accrued interest expense 7,407
Accounts payable 2,469
Cash dividends payable 4,938
Lease liability 43,208
SSS contributions payable 7,407
Bonds payable 148,140
Discount on bonds payable (18,518)
Security deposit 2,469
Redeemable preferences shares issued 17,283
Property
How much dividends payable
is the total financial liabilities to be disclosed in the8,642
notes?
(adapted)
 UNEARNED INCOME
• Income collected but not yet earned.

To record advances received

Cash xx
Unearned revenue xx

To record advances earned

Unearned revenue xx
Revenue/Sales or any appropriate account xx
 T-Account of Unearned Revenue

Unearned revenue Unearned revenue(GC)

Beginning
Beginning GC redeemed GC sold
Advances earned Advances received Expired
Amt est not to be
Orders cancelled* redeemed
Ending Ending

*if non-refundable GC =Gift Certificate

NOTE: if refundable, part of liability for refundable
deposits
ABC Company requires advance payments with special orders for machinery constructed to customer
specification. Information for the current year is as follows:
Unearned revenue, January 1, 20x1 885,000
Advances applied to orders shipped in 20x1 1,230,000
Advances pertaining to orders cancelled in 20x1 375,000
Advances received during 20x1 1,380,000

Requirements: Compute the current liability for advances from customers at year-end assuming the advances are
non-refundable.

Unearned revenue
Beginning
Advances earned Advances received
Orders cancelled*
Ending
(adapted)
ABC Department Store sells gift certificates, redeemable for store merchandise and with no expiration date. The
entity has the following information pertaining to its gift certificates sales and redemptions:
 
Unearned revenue on January 1, 20x2 P 1,350,000
20x2 sales 4,500,000
20x2 redemptions of prior-year sales 450,000
20x2 redemptions of current-year sales 3,150,000
 
 
On December 31, 20x2, what amount should be reported as unearned revenue?
Unearned revenue(GC)
Beginning
GC redeemed GC sold
Expired
Amt est not to be
redeemed
Ending

(adapted)
ABC Department Store sells gift certificates that expire one year after their issuance. The entity has the following
information pertaining to its gift certificates sales and redemptions: 
Unearned revenue on January 1, 20x2 P 900,000
Gift certificates sold during 20x2 3,000,000
Gift certificate sold and redeemed in 20x2 2,100,000
Prior year gift certificate redeemed in 20x2 300,000
 
ABC’s past experience indicates that 10% of gift certificates sold will not be redeemed.
 
In its December 31, 20x2 balance sheet, what amount should be reported as unearned revenue?

(adapted)
ABC Department Store sells gift certificates redeemable only when merchandise is purchased.
These gift certificates have no expiration date. Upon redemption or expiration, the entity
recognizes the unearned revenue as realized. Information for the current year is as follows:
Unearned revenue, January 1, 20x1 3,250,000
Cost of Goods Sold 60%
Gift certificates sold 11,250,000
Gift certificates redeemed 9,750,000
Gift certificates expected not to be redeemed 500,000

In its December 31, 20x1 balance sheet, what amount should be reported as unearned revenue?
 
Unearned revenue(GC)
Beginning
GC redeemed GC sold
Expired
Amt est not to be
redeemed
Ending

(adapted)
ABC Company sells equipment service contracts that cover a two-year period. The sale price of each contract is P1,200.
The past experience is that, of the total pesos spent for repairs on service contracts, 40% is incurred evenly during the first
contract year and 60% evenly during the second contract year. ABC sold 1,000 contracts evenly throughout 20x1.

How much is the contract revenue for 20x1?

What amount should be reported as deferred contract revenue on December 31, 20x1?
What is the contract revenue for 20x2?
What is the contract revenue for 20x3?

      20x1 20x2 20x3 Total

Percentage earned
- 1st yr.    
Percentage earned
- 2nd yr.  
First half
Second half
Earned portions    

(adapted)
ABC Company sells magazine subscription for one-year, two-year, or three-year period. Cash
receipts from subscribers are credited to subscription collected in advance and this account had a
balance of P5,400,000 on December 31, 20x1 before year-end adjustments. Outstanding subscriptions
on December 31, 20x1 expire as follows:
During 20x2 1,350,000
During 20x3 2,025,000
During 20x4 900,000
 
On December 31, 20x1, what amount should be reported as subscriptions collected in advance?

What is the subscription revenue for 20x1?

(adapted)
ABC Company sells subscriptions to a specialized directory that is published semi-annually and shipped to
subscribers on April 15 and October 15. Subscriptions received after the March 31 and September 30 cut-off
dates are held for the next publication. Cash from subscribers is received evenly during the year and is
credited to deferred revenue from subscriptions. Data relating to the current are as follows:
Cash receipts from subscribers 8,640,000
Deferred revenue from subscriptions – January 1, 20x1 1,800,000
 
What amount should be reported as deferred revenue from subscriptions on December 31, 20x1?

What is the subscriptions revenue for 20x1?

(adapted)
 Liability for deposits received
- Represents cash receipts that are held in trust for other parties.

Examples:
1. Deposit received for returnable containers
2. Deposit received from escrow agreements
ABC Company operates a retail grocery store that is required by law to collect refundable
deposits of P5 on soda cans. Information for the current year follows:
Cans of soda sold 120,000
Soda cans returned 132,000
Liability for refundable deposit – January 1 P180,000
 
During the current year, the entity subleased space and received a P30,000 deposit to be applied
against rent at the expiration of lease in 5 years.

What amount should be reported as current liability for deposit on December 31?

(adapted)
ABC Company sells its products in reusable, expensive containers. The customer charged a deposit for each
container delivered and receives a refund for each container returned within two years after the year of
delivery. ABC accounts for the containers not returned within the time limit as being retired by sale at the
deposit amount. Information for 20x6 is as follows:
 
Deposits for containers at December 31, 20x5 from deliveries in:
20x4 P 300,000
20x5 860,000 P 1,160,000
Deposits for containers delivered in 20x6 1,560,000
Deposits for containers returned in 20x6 form deliveries in:
20x4 P 180,000
20x5 500,000
20x6 572,000 1,252,000
 
What amount should ABC Company report as a liability for deposits on returnable containers at December
31, 20x6?

(adapted)
ABC Company, a division of Philippine Realty Corporation maintains escrow accounts and pays
real estate taxes for Philippine’s mortgage customers. Escrow funds are kept in interest-bearing
accounts. Interest, less a 10% service fee, is credited to the mortgagee’s account and used to reduce
future escrow payments. Additional information follows:
 
Escrow accounts liability, January 1, 20x1 P1,350,000
Real estate taxes paid during 20x1 2,850,000
Interest on escrow funds during 20x1 135,000
Escrow payments received during 20x1 2,250,000

 
What amount should ABC report as escrow accounts liability in its December 31, 20x1 balance
sheet?

(adapted)
 Provision

Provision
• Liability of uncertain timing or amount.(PAS 37.10)
• Presented separately from other liabilities

A provision is recognized when ALL the following conditions are met :

1. PRESENT OBLIGATION(legal or constructive obligation)
2. PROBABLE outflow of resources embodying economic benefits (“more likely than not”)
3. MEASURED RELIABLY
 Liability
PROVISION PROBABLE
(recognize and disclose)
Contingent liability POSSIBLE
(disclose only)
Ignore REMOTE

Asset*
Contingent asset PROBABLE
(disclose only)
Ignore POSSIBLE
Ignore REMOTE
*Recognized only if virtually certain (100% )
 Measurement
1. Best Estimate- General rule
2. Expected Value – large population of items (probability weighted average)
3. Mid-point- (H+L)/2 (range of possible outcome)

Journal Entry to recognize provision:

EXPENSE(LOSS) xx
ESTIMATED LIABILITY ACCOUNT xx
 Provision
• If the effect of time value of money is material, provision should be discounted
to their present values using a current pre-tax discount rate.
• Gains from the expected disposal of assets shall not be taken into account in
measuring a provision.
• Reimbursements are considered only when their receipt is virtually certain.
Reimbursement asset is presented separated in the Statement of Financial
position separately.
• Changes in provision are accounted for prospectively.
 Guarantee for indebtedness of others
A provision for the guarantee for indebtedness of others is recognized when it
becomes probable that the entity will be held liable for the guarantee, such as when
the original debtor defaults on the loan.

Illustration: On January 1, 20x1. CBA Co. guaranteed a P1,500,00 loan obtained by ABC Co. from a
bank. On December 31, 20x1, ABC defaulted on its loan and it becomes probable that CBA will be held
liable to the bank for the P1,500,000 loan taken by ABC. What amount of estimated liability for
guarantee should be reported on December 31, 20x1?
In 20x1, ABC Co. received a court order requiring the cleanup of environmental damages caused by one
of ABC’s factory. ABC has no other realistic alternative but to comply with the court order. Other entities
have incurred around P70M for similar cleanup; however, ABC’s best estimate of the cost of cleanup is
P80M. How much is the provision to be recognized?

(adapted)
In 20x1, ABC Co. recalled a product due to a possible defect caused by a malfunctioning factory equipment. The
products recalled will be repaired free of charge. ABC is uncertain whether all products recalled will have the
possible defect. However, the following estimate was made by ABC’s engineers and managerial accountants and
approved by the board of directors.

Repair cost Probability

120,000,000 5%
90,000,000 20%
60,000,000 35%
30,000,000 40%
100%

(adapted)
In 20x1, a lawsuit was filed against ABC Co. for patent infringement. The plaintiff is claiming P480M in
damages. ABC’s legal counsel believes that it is probable that ABC will lose the lawsuit and pay damages of
not less than P48M but not more than P480M. The probability of any amount within the range is as likely as
any other amount also within the range. The plaintiff has offered to settle the lawsuit out of court for P430M
but ABC did not agree to the settlement. How much is provision to be reported in ABC’s year-end financial
statements?

(adapted)
During 20x1, ABC Company is the defendant in a breach of patent lawsuit. The lawyers believe there is an
80% chance that the court will not dismiss the case and the entity will incur outflow of benefits. If the court
rules in favour of the claimant, the lawyers believe that there is a 60% chance that the entity will be required
to pay damages of P4,500,000 and a 40% chance that the entity will be required to pay damages of
P2,250,000. Other amounts of damagers are unlikely. The court is expected to rule in late December 20x2.
There is no indication that the claimant will settle out of court. A 7% risk adjustment factor to the cash flows
is considered appropriate to reflect the uncertainties in the cash flow estimates. An appropriate discount rate
is 10% per year. The present value of 1 at 10% for one period is 0.91.
 
What is the measurement of the provision on December 31, 20x1?

(adapted)
On November 2, 20x1, ABC company was awarded a judgment of P2,000,000 in connection with a
lawsuit. The decision is being appealed by the defendant and it is expected that the appeal process will be
completed by the end of 20x2. The attorney believed that it is highly probable that an award will be
upheld on appeal but that the judgment may reduced by 40%. What amount should be reported as a
receivable on December 31, 20x1?

(adapted)
 In 20x1, CBA Co. recognized provision for a probable loss on pending lawsuit of P600,000. The lawsuit
remains unsettled in 20x2 necessitating a reassessment of the provision. CBA determined that the
probable loss on the pending lawsuit should be P840,000.
Case 1: The lawsuit was settled for P1,020,000 in 20x3.
Case 2: The lawsuit was settled for P720,000 in 20x3.
Case 3: CBA won the lawsuit in 20x3. None was paid on the settlement.
Provide the journal entries that should be made in 20x1,20x2, and 20x3.

(adapted)
 Warranty Liability
• Present obligation arises at the point of sale.
• Warranty expense = estimated costs ( Unit sold x Estimated cost per unit)

To record estimated warranty liability:

Estimated Warranty Liability Warranty Expense xx
Beginning Estimated warranty liability xx

Actual warranty cost Warranty Expense(estimated) To record actual warranty cost:

Estimated warranty liability xx
Ending Cash xx
On January 1, 20x1, the warranty liability of ABC Company was P90, 000. ABC Company
estimated the annual warranty expense at 3% of annual net sales. During the year, warranty
payments totalled P75,000. The net sales for 20x1 amounted to P6,000,000.
Requirements:
1. Compute the warranty expense for the year.
2. Compute the warranty liability on December 31, 20x1.  

Estimated Warranty Liability

Beginning
Actual warranty cost Warranty Expense(estimated)

Ending

(adapted)
ABC Appliance Center sells washing machines that carry a three-year warranty against manufacturer's
defects. Based on company experience, warranty costs are estimated at P75 per machine. During the
year, ABC sold 72,000 washing machines and paid warranty costs of P340,000.
What amount should ABC should report as warranty expense in its income statement for the year
ended December 31?

ABC Company sells washing machines that carry a three-year warranty against manufacturer’s defects.
Based on the entity’s experience, warranty costs are estimated at P450 per machine. During the current year,
the entity sold 3,600 washing machines and paid warranty costs of P382,500.
What amount should be reported as warranty expense for the year?
What amount should be reported as warrant liability at year-end?

(adapted)
During 20x1, ABC Company introduced a new product carrying a two-year warranty against defects.
The estimated warranty costs related to peso sales are 4% within 12 months following sale and 6% in
the second 12 months following sale. The entity reported sales of P7,200,000 for 20x1 and P8,640,000
for 20x2. The actual expenditures incurred amounted to P216,000 for 20x1 and P792,000 for 20x2.
 
What is the warranty expense for 20x1?
What is the estimated warranty liability on December 31, 20x1?
What is the warranty expense for 20x2?
What is the estimated warranty liability on December 31, 20x2?

Estimated Warranty Liability

Beginning
Actual warranty cost Warranty Expense(estimated)
Ending

(adapted)
ABC Company sold electrical goods covered by a one-year warranty for any defects. Of the sales of
P105,000,000 for the year, the entity estimated that 3% will have major defect and 5% will have
minor defect and 92% will have no defect. The cost of repairs would be P7.5M if all the products sold
had a major defect and P4.5M if all had minor defect. What amount should be recognized as warranty
provision?

(adapted)
ABC Company gives warranties at the time of sale to purchasers of its product. The entity undertakes
to make good, by repair or replacement, manufacturing defects that become apparent within one year
from the date of sale. The expenditure for warranty repairs and replacements for the products sold in
20x1 are expected to be made 50% in 20x1 and 50% in 20x2. The 20x2 outflow of economic benefits
related to the warranty will take place on June 30, 20x2. Sales of P15,000,000 were made evenly
throughout 20x1.
The entity estimated that 95% of products sold require no warranty repairs, 3% of products sold
require minor repairs costing 10% of sale price, and 2% of product sold require major repairs of
replacement costing 90% of sale price. The appropriate discount factor for cash flows expected to
occur on June 30, 20x2 is 0.95. An appropriate risk adjustment factor to reflect the uncertainties in the
cash flow estimates is an increment of 6% to the probability-weighted expected cash flows.
What is the warranty provision on December 31, 20x1?
 Liability for Premiums
Unit sales x % to redeemed Net cost of premium (cost of PREMIUM
x premium less cash from customers) =
Required no. for redemption EXPENSE
To record premium expense
Premium Expense xx
Premium Liability(net cost)
Estimated Premium Liability xx
To record acquisition of premium inventory to be distributed
Beginning Premium Inventory(cost) xx
Actual distribution Premium Expense Cash or AP
To record distribution of premiums to customers xx
Ending
Premium liability(net cost) xx
Cash(remittance received) xx
Premium Inventory(cost)
xx
During the current year, ABC company sold 750,000 boxes of cake mix under a new sale promotional
program. Each box contained one coupon, which entitled the customer to a baking pan upon remittance of
P60. The entity paid P75 per pan and P7.50 for handling and shipping. The entity estimated that 80% of the
coupons would be redeemed, even though only 450,000 coupons had been processed during the year.
Requirements:
1. Compute the premium expense for the year.
2. Compute the liability for outstanding premiums at year-end.

Unit sales x % to redeemed Net cost of premium (cost of PREMIUM

x premium less cash from customers) =
Required no. for redemption EXPENSE

Estimated Premium Liability

Beginning
Actual distribution Premium Expense
Ending

(adapted)
On January 1, 20x1, ABC company offers the customers a pottery cereal bowl if they send in three boxtops from the
products and P12. During the year, the entity, sold 810,000 boxes and customers redeemed 396,000 boxtops. The cost of
each bowl is P30. The entity estimated that 60% of the boxtops would be redeemed.
Requirements:
1. Compute the premium expense for the year.
2. Compute the liability for outstanding premiums at year-end.

Unit sales x % to redeemed Net cost of premium (cost of PREMIUM

x premium less cash from customers) =
Required no. for redemption EXPENSE

Estimated Premium Liability

Beginning
Actual distribution Premium Expense
Ending

(adapted)
In an effort to increase sales, ABC Company inaugurated a sales promotional campaign on June 30, 20x1.
The entity placed a coupon redeemable for a premium in each package of cereal sold. Each premium cost
P20 and five coupons must be presented by a customer to receive a premium. The entity estimated that only
60% of the coupons issued would be redeemed. For the six months ended December 31, 20x1, the following
information is available:
Packages of cereal sold 192,000
Coupons redeemed 48,000
Premium purchased 14,400

What is the premium expense for 20x1?

What is the estimated liability for premiums on December 31, 20x1?

(adapted)
In December 20x1, ABC Company began including one coupon in each package of candy that it sells and
offering a toy in exchange for P90 and five coupons. The toys cost P144 each.
Eventually, 60% of the coupons will be redeemed. During December, the entity sold 110,000 packages of
candy and no coupons were redeemed.
On December 31, 20x1, what amount should be reported as estimated liability for coupons?

(adapted)
ABC Company includes one coupon in each box of laundry soap it sells. A towel is offered as a
premium to customers who send in 10 coupons and a remittance of P15.
Distribution cost of premium is P7.50. Experience indicates that only 30% of the coupons will be
redeemed.
20x1 20x2
Boxes of soap sold 3,000,000 3,750,000
Number of towels purchased at P75 each 75,000 120,000
Coupons redeemed 600,000 1,050,000
 
What is the premium expense for 20x1?
What is the estimated premium liability on December 31, 20x1?
What is the premium expense for 20x2?
What is the estimated premium liability on December 31, 20x2?

(adapted)
THANK YOU!