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 fact
...
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.
Test Bank for Intermediate Accounting, Thirteenth Canadian Edition
13-2
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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 discl
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