WILEY

IFRS EDITION
Prepared by
Coby Harmon
University of California, Santa Barbara
H-1 Westmont College
 APPENDIX PREVIEW
In addition to the current and non-current liabilities discussed
in Chapter 10, several more types of liabilities may exist that
could have a significant impact on a company’s financial
position and future cash flows. These other significant
liabilities will be discussed in this appendix. They are (a)
provisions and contingent liabilities, (b) lease liabilities, and
(c) additional liabilities for employee fringe benefits (paid
absences and postretirement benefits).

Financial Accounting
IFRS 3rd Edition
Weygandt ● Kimmel ● Kieso
H-2
 APPENDIX
Other Significant
H Liabilities
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Describe the accounting and disclosure requirements for
provisions and contingent liabilities.
2. Contrast the accounting for operating and finance leases.
3. Identify additional fringe benefits associated with employee
compensation.

H-3
 Provisions and Contingent Liabilities
IFRS Guidelines:
 Provision – if a loss is probable
Learning Objective 1
Describe the accounting and
disclosure requirements for
provisions and contingent
liabilities.

(> 50% chance) and if a reasonable

estimate can be made of the amount, then a liability
should be recorded.
 Contingent Liability – if a loss is not probable a liability
should not be recorded and the details of situation
should be disclosed in the notes to the financial
statements.
 Remote Possibility (< 10%) – no disclosure.

H-4 LO 1
 Recording a Provision

Product Warranties
Future costs that companies may incur in replacing defective
units or repairing malfunctioning units.
Estimated cost of honoring product warranty contracts should
be recognized as an expense in the period in which the sale
occurs.

H-5 LO 1
 Recording a Provision

Illustration: In 2017 Zhang Manufacturing Ltd. sells 10,000

washers and dryers at an average price of NT$6,000 each. The
selling price includes a one-year warranty on parts. Zhang expects
that 500 units (5%) will be defective and that warranty repair costs
will average NT$800 per unit. In 2017, the company honors
warranty contracts on 300 units, at a total cost of NT$240,000. At
December 31, compute the estimated warranty liability.

Illustration H-1
Computation of estimated product warranty liability
H-6 LO 1
 Recording a Provision

Illustration: In 2017 Zhang Manufacturing Ltd. sells 10,000

washers and dryers at an average price of NT$6,000 each. The
selling price includes a one-year warranty on parts. Zhang expects
that 500 units (5%) will be defective and that warranty repair costs
will average NT$800 per unit. In 2017, the company honors
warranty contracts on 300 units, at a total cost of NT$240,000. At
December 31, the company makes the following adjusting entry.

Warranty Expense 400,000

Warranty Liability 400,000

H-7 LO 1
 Recording a Provision

Illustration: Prepare the entry to record the repair costs

incurred in 2017 to honor warranty contracts on 2017 sales.

Warranty Liability 240,000

Repair Parts 240,000

Assume that the company replaces 20 defective units in

January 2018, at an average cost of NT$800 in parts and labor.

Warranty Liability 16,000

Repair Parts 16,000

H-8 LO 1
 Disclosure of Contingent Liabilities

Disclosure should identify the:

 Nature of the item.

 Amount of the contingency, if known.

 Expected outcome of the future event.

H-9 LO 1
 Lease Liabilities
Learning Objective 2
A lease is a contractual arrangement Contrast the accounting for
operating and finance leases.
between a lessor (owner of the property)
and a lessee (renter of the property).
Illustration H-3
Types of leases

H-10 LO 2
 Finance Leases

IFRS does not prescribe criteria for determining

classification, however if any one of the following conditions
exists, the lessee should record a lease as a finance lease:
1. The lease transfers ownership of the property to the
lessee.

2. The lease contains a bargain purchase option.

3. The lease term is a major portion of the economic life of

the leased property.

4. The present value of the lease payments represents

substantially all of the fair value of the leased property.

H-11 LO 2
 Finance Leases

Illustration: Gonzalez SA decides to lease new equipment. The

lease period is four years; the economic life of the leased
equipment is estimated to be five years. The present value of
the lease payments is €190,000, which is equal to the fair
market value of the equipment. There is no transfer of
ownership during the lease term, nor is there any bargain
purchase option.

Instructions
(a) What type of lease is this? Explain.
(b) Prepare the journal entry to record the lease.

H-12 LO 2
 Finance Leases

Illustration: (a) What type of lease is this? Explain.

Capitalization Conditions: Finance Lease?

1. Transfer of ownership NO
2. Bargain purchase option NO
3. Lease term major portion of Lease term 4 yrs.
economic life of leased Economic life 5 yrs.
property YES 80%
4. Present value is substantially
the FMV of the leased YES - PV and FMV
are the same.
property

H-13 LO 2
 Finance Leases

Illustration: (b) Prepare the journal entry to record the lease.

Leased Asset - Equipment 190,000

Lease Liability 190,000

The portion of the lease liability expected to be paid in the next year is
a current liability. The remainder is classified as a non-current liability.

H-14 LO 2
 Liabilities for Employee Fringe Benefits
Learning Objective 3
Paid Absences Identify additional fringe benefits
associated with employee compensation.

Paid absences for vacation, illness, and holidays.

Accrue a liability if:

 Payment of the compensation is probable.

 The amount can be reasonably estimated.

H-15 LO 3
 Paid Absences

Illustration: Academy Company employees are entitled to one

day’s vacation for each month worked. If 30 employees earn an
average of $110 per day in a given month, the accrual for
vacation benefits in one month is $3,300.

Vacation Benefits Expense 3,300

Vacation Benefits Liability 3,300

Academy pays vacation benefits for 10 employees.

Vacation Benefits Liability 1,100

Cash 1,100

H-16 LO 3
 Postretirement Benefits

Post-retirement benefits are benefits that employers provide

to retired employees for

1. health care and life insurance

2. pensions.

Companies account for post-retirement benefits on the

accrual basis.

H-17 LO 3
 Postretirement Benefits

POSTRETIREMENT HEALTH-CARE AND LIFE

INSURANCE BENEFITS
 Companies estimate and expense postretirement costs
during the working years of the employee.

 Companies rarely sets up funds to meet the cost of the

future benefits.
► Pay-as-you-go basis for these costs.

► Major reason is that the company does not receive a

tax deduction until it actually pays the medical bill.

H-18 LO 3
 Postretirement Benefits PENSION
PLANS
An arrangement whereby an employer provides benefits to employees
after they retire for services they provided while they were working.

Pension Plan
Administrator

Employer

Retired
Employees Benefit Payments Assets &
Liabilities

H-19 LO 3
 Postretirement Benefits
Defined-Contribution Plan
 Employer contribution
determined by plan (fixed)
 Risk borne by employees
 Benefits based on plan value
PENSION
PLANS
Defined-Benefit Plan
 Benefit determined by plan
 Employer contribution varies
(determined by Actuaries)
 Risk borne by employer

 Companies record pension costs as an expense.

 Actuaries estimate the employer contribution by considering

mortality rates, employee turnover, interest and earning rates, early
retirement frequency, future salaries, etc.

H-20 LO 3
 Copyright

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H-21