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IFRS for Liabilities
David Cairns
Liabilities and the IASB Framework
• Application to:
– provisions
– employer accounting for employee benefits
– lessee accounting for leases
© 2006 David Cairns
www.cairns.co.uk
IASB Framework
• IFRS balance sheet
– includes only assets and liabilities
– includes all assets and liabilities that qualify for
recognition under IFRS
– assets and liabilities are measured in accordance with IFRS
– equity is the residual
• Income and expenses
– result from the proper recognition and measurement of
assets and liabilities on the balance sheet
© 2006 David Cairns
www.cairns.co.uk
Liabilities and the IASB Framework
• IFRS balance sheet
– includes only ………. liabilities
– includes all ………. liabilities that qualify for recognition
under IFRS
– ………. liabilities are measured in accordance with IFRS
– equity is the residual
• Income and expenses
– result from the proper recognition and measurement of
……….. liabilities on the balance sheet
© 2006 David Cairns
www.cairns.co.uk
Recognition of Liabilities
• An item qualifies for recognition as a liability on an
IFRS balance sheet only when:
– it is a present obligation of the entity
– the obligation arises from a past event
– it is probable that the settlement of the obligation will
result in an outflow of economic benefits from the entity
– the cost or value of the item can be measured reliably
© 2006 David Cairns
www.cairns.co.uk
Measurement of Liabilities
• Amount of cash and cash equivalents received or
fair value of other consideration received
– payables
– own debt
• (Present value of) expected future payments
required to settle obligation
– provisions
– pensions
– leases
© 2006 David Cairns
www.cairns.co.uk
Provisions: Environmental Damage
• Present obligation
• Legal or constructive
obligation to repair damage
• Past event
• Damage to environment
• Outflow of economic
benefits
• Expenditure which will be
incurred to repair damage
• Measurement
• (Present value of) expected
future payments required to
repair damage
© 2006 David Cairns
www.cairns.co.uk
Provisions: Decommissioning Costs
• Present obligation
• Legal or contractual
obligation to
decommission plant at end
of useful life
• Past event
• Installation of plant
• Outflow of economic
benefits
• Expenditure which will be
incurred to decommission
plant
• Measurement
• Present value of expected
future payments required
to decommission plant and
restore site
© 2006 David Cairns
www.cairns.co.uk
Provisions: Sale with Warranty
• Present obligation
• Contractual obligation to
repair or replace faulty
goods
• Past event
• Sale of [faulty] goods
• Outflow of economic
benefits
• Cost of repair or
replacement goods
• Measurement
• Expected future payments
required to repair or
replace goods
© 2006 David Cairns
www.cairns.co.uk
Provisions: Onerous Contract
• Present obligation
• Contractual obligation to …..
• Past event
• Change in circumstances that
makes contract onerous
• Outflow of economic
benefits
• Unavoidable net costs of
meeting contractual obligation
• Measurement
• Lower of:
– costs of fulfilling the contract
and
– compensation/penalties of not
fulfilling the contract
© 2006 David Cairns
www.cairns.co.uk
Provisions: Restructuring
• Present obligation
• Constructive obligation to
carry out restructuring
• Past event
• Announcement of detailed
formal plan to restructure
• Outflow of economic
benefits
• Expenditure which will be
incurred in restructuring
• Measurement
• Direct expenditure
necessarily entailed in the
restructuring
© 2006 David Cairns
www.cairns.co.uk
Provisions: Income and Expenses
• Adjustments to carrying • Income and expenses
amount of related assets
– initial estimate of provisions
for decommissioning costs
– change in estimate of
provisions for
decommissioning costs
– change in discount rate used
to measure provisions for
decommissioning costs
© 2006 David Cairns
– initial estimates of all other
provisions
– change in estimate of all other
provisions
– application of discount rate for
all provisions measured at
present value (including
provisions for decommissioning
costs)
www.cairns.co.uk
Post-employment Benefits: Liability
• Present obligation
• Legal or constructive
obligation to pay benefits
• Past event
• Employee service giving
entitlement to benefits
• Outflow of economic
benefits
• Payment of benefits (or
contribution to fund that
takes over obligation)
© 2006 David Cairns
www.cairns.co.uk
Post-employment Benefits: Measurement
• Defined contribution
post-employment
benefit plans
• Unpaid contributions for
service rendered to
balance sheet date
• Defined benefit postemployment benefit
plans
• Present value of defined
benefit obligation less fair
value of any plan assets
© 2006 David Cairns
www.cairns.co.uk
Post-Employment Benefits: Exceptions
• Exceptions from Framework principles on
recognition of liabilities
– past service cost
• recognition spread over vesting period for increased benefits
– actuarial gains and losses
• may be ignored if cumulative amount lies with 10% corridor;
• if use corridor approach, amounts outside corridor may be
spread over expected remaining service lives of employees
• if do not use corridor approach, all amounts may be spread over
expected remaining service lives of employees
© 2006 David Cairns
www.cairns.co.uk
Post-Employment Benefits: Expenses
• Not recognised
– deferred past service costs
– actuarial gains and losses
within 10% corridor (if used)
– other deferred actuarial gains
and losses
© 2006 David Cairns
• Income and expenses
– contributions to defined
contribution plans
– current service cost
– interest (application of interest to
defined benefit obligation)
– expected return on plan assets
– amortisation of past service costs
– recognised actuarial gains and
losses
www.cairns.co.uk
Post-Employment Benefits: Exceptions
• Exception from Framework principle that all
income and expenses are included in income
statement
– actuarial gains and losses may be included in equity,
instead of income statement, if recognised in full in
period in which they arise
© 2006 David Cairns
www.cairns.co.uk
Lease (lessee)
• Present obligation
• Legal obligation to make
payments for use of asset
• Past event
• Commencement of the
lease term
• Outflow of economic
benefits
• Payments over lease term
for use of asset
© 2006 David Cairns
www.cairns.co.uk
Leases (lessee)
• Application of Framework definition and recognition
of liability
– finance leases
• Exception from Framework definition and
recognition of liability
– most operating leases
© 2006 David Cairns
www.cairns.co.uk
Finance Lease (lessee)
• Present obligation
• Legal obligation to make
payments for use of asset
• Past event
• Commencement of the lease
term
• Outflow of economic
benefits
• Payments over lease term for
use of asset
• Measurement
• Present value of minimum
lease payments
© 2006 David Cairns
www.cairns.co.uk
Finance Lease: Lessee Expenses
• Expenses
– interest (application of interest rate on lease obligation)
– depreciation of leased asset
– any impairment loss on leased asset
© 2006 David Cairns
www.cairns.co.uk
IFRS for Liabilities
David Cairns