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Liabilities Flashcards

1
Q

Why are liabilities significant in financial reporting?

A

They show future economic outflows, helping assess a company’s financial health and risk exposure.

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2
Q

Why are interest-bearing debts considered riskier?

A

Because they include additional costs (interest) compared to non-interest-bearing debts.

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2
Q

Where are liabilities reported?

A

On the statement of financial position (balance sheet).

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2
Q

What are the two types of liabilities based on time frame?

A

Current (settled within 12 months) and Non-current (settled after 12 months).

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2
Q

What happens when a liability is settled?

A

It is derecognised from the financial statements.

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3
Q

What are provisions?

A

Liabilities with uncertain amounts or timing (e.g., warranties), measured using best estimates.

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4
Q

How are financial liabilities measured?

A

Typically at amortised cost or fair value, depending on their classification.

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5
Q

What are contingent liabilities?

A

Possible obligations dependent on uncertain future events—disclosed in notes, not recognised.

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6
Q

What is the IASB’s definition of a liability?

A

A present obligation to transfer an economic resource due to past events.

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7
Q

What are the 3 key parts of the IASB liability definition?

A

1) Present obligation
(2) Transfer of resources,
(3) Past obligating event.

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8
Q

What qualifies as the ‘obligating event’?

A

The past event that makes the obligation present and unavoidable.

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9
Q

What is a commitment in financial reporting?

A

A planned future expenditure without a past obligating event—disclosed but not recognised.

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10
Q

What is a constructive obligation?

A

An obligation from a company’s actions or announcements that create expectations.

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11
Q

Are constructive obligations recognised as liabilities?

A

Only if they meet recognition criteria (probability & measurement certainty).

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12
Q

How are commitments and constructive obligations reported?

A

Commitments: Disclosed in notes.
Constructive obligations: Recognised if recognition criteria are met.

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13
Q

What are the recognition criteria for a liability?

A

Relevant information
faithful representation
,and reliable measurement.

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14
Q

When is a liability not recognised despite meeting the definition?

A

-Existence is uncertain
-Low probability of outflow
-High measurement uncertainty

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15
Q

What happens to obligations that meet the definition but not recognition criteria?

A

They are treated as contingent liabilities and disclosed in notes.

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16
Q

What ensures a liability is fairly presented on financial statements?

A

Meeting both the definition and the recognition criteria.

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17
Q

What is a contingent liability?

A

A possible obligation that does not meet the recognition criteria for a liability.

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17
Q

Where are contingent liabilities reported?

A

In the notes to the financial statements (if the probability of settlement is more than remote).

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18
Q

Why is disclosure of contingent liabilities important?

A

It informs users about potential future outflows and risks, providing a complete picture of the business’s financial position.

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19
Q

What is the difference between a liability and a commitment?

A

A liability involves a past obligating event; a commitment involves a planned future expenditure without such an event.

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20
Q

How do contingent liabilities fit into the broader context of liabilities?

A

They complement recognised liabilities and commitments, offering insight into potential obligations not shown on the statement of financial position.

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21
Why is the distinction between current and non-current liabilities important?
It helps users understand the timing and liquidity risks of a company’s obligations.
22
Why are current liabilities considered riskier?
They require short-term outflows that can strain liquidity.
23
Why is interest-bearing debt riskier than non-interest-bearing debt?
Because it adds ongoing interest expenses regardless of profitability, increasing the risk of financial distress.
24
Give examples of interest-bearing and non-interest-bearing debts.
-Interest-bearing: Bank loans -Non-interest-bearing: Accounts payable
25
How do these risk characteristics enhance financial reporting?
They allow users to evaluate timing, cost, and potential strain of obligations, contributing to informed decision-making.
26
What does measurement of a liability aim to capture?
The economic resource the business is obligated to transfer, as defined by the liability's settlement value.
26
How is a long-term non-interest-bearing liability initially measured?
By discounting future cash flows to present value.
26
How are most liabilities measured?
At the amount required to settle them.
27
When must the time value of money be considered in measurement?
When the liability is non-interest-bearing and settlement is far in the future.
28
What happens to the difference between initial measurement and future payment?
It is recognised as interest expense over time as the discount is unwound.
29
Give examples of provisions.
Warranty obligations, environmental rehab, employee leave pay, pensions, and onerous contracts.
30
How are provisions measured?
At the best estimate required to settle or transfer the obligation, discounted if time value is material.
31
How are financial liabilities measured?
At amortised cost or fair value.
32
What is fair value for a financial liability?
The amount a business would pay to transfer it to another party.
33
When are liabilities measured at fair value through profit or loss?
If they are actively traded or the business elects this option for some liabilities.
34
Where are changes in own credit risk reported?
In Other Comprehensive Income (OCI).
35
What role does recognition play in liability measurement?
Only recognised liabilities are measured; uncertain or unmeasurable ones are disclosed as contingent liabilities.
36
What does derecognition of a liability mean?
Removing the liability from the statement of financial position after it's settled.
37
What is the journal entry for liability settlement with cash?
Debit the liability, credit the cash/bank account.
38
Does settlement always involve cash?
No. It can involve inventory transfer, service provision, or meeting grant conditions.
39
Give examples of non-cash liability settlement.
-Warranty: Transfer of inventory -Customer advance: Transfer of goods/services -Government grant: Meeting specified conditions
40
What does settlement signify in the liability lifecycle?
The fulfillment of the obligation to transfer an economic resource.
41
Why is the current vs. non-current distinction important for settlement?
It indicates the expected timing of settlement and associated liquidity risk.
42
How does measurement affect derecognition?
The liability is carried at its measured amount until it is settled.
43
What happens to a discounted liability over time before settlement?
It increases as interest expense is recognised, unwinding the discount.
44
How are provisions measured?
Provisions are measured at the best estimate of the amount required to settle the obligation or transfer it to a third party.
44
What is a provision in the context of financial reporting?
A provision is a liability of uncertain timing or amount, recognised when there is a present obligation from a past event, a probable outflow of economic benefits, and a reliable estimate of the obligation can be made.
45
What role does management judgment play in measuring provisions?
Management uses judgment to determine the most likely outcome, based on all available evidence at the reporting date.
46
When should provisions be discounted to present value?
When the time value of money is material—i.e., if the settlement will occur over a long period.
47
Why is discounting to present value important?
It ensures liabilities reflect the true economic obligation when settlements are expected in the future and time value is material.
48
What principle applies to non-interest-bearing liabilities?
They should be initially and subsequently measured at present value if the time value of money is material.
49
Why are warranty obligations recognised as provisions?
Due to uncertainty in the number and cost of claims. They fit the criteria of a provision with uncertain amount and/or timing.
50
How is the provision for warranties measured?
Using historical data, expected product performance, and a best estimate approach—discounted if the time value is material.
51
What is the uncertainty in environmental rehabilitation provisions?
The extent of environmental damage, future regulatory requirements, and cost of rehabilitation are uncertain.
52
How is a provision for environmental rehabilitation measured?
By estimating future costs based on regulations, technologies, and discounting to present value if appropriate.
53
When is employee leave pay treated as a provision?
If there is significant uncertainty about the amount or timing of future leave payments.
54
When might employee leave pay be included under 'trade and other payables' instead?
When the amount and timing are predictable and less uncertain.
55
What is an onerous contract?
A non-cancellable contract where the unavoidable costs of fulfilling it exceed the expected benefits.
56
How is a provision for an onerous contract calculated?
As the best estimate of the expected loss (costs minus benefits).
57
Why is an onerous contract provision recognised immediately?
Because a present obligation exists due to a binding contract that is expected to result in a loss.
58
Why are future operating losses not recognised as provisions?
They do not arise from a past obligating event and are speculative. There’s no present obligation or reliable estimate.
59
How does an onerous contract differ from a future operating loss?
An onerous contract involves a binding past event and an unavoidable loss, while expected poor performance alone does not.

Part 1 (6 decks)

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