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Intermediate Accounting – Liabilities and Equity: Current Liabilities · Definition and Classification

How to tell what counts as a liability and when IFRS classifies it as current, from accruals and unearned revenue to covenant breaches and refinancing.

Intermediate Accounting – Liabilities and Equity · 28 questions

Try 3 questions

1. Under the IFRS Conceptual Framework, what makes something a liability?

  1. A present obligation arising from past events
  2. A cost the company has budgeted for next year
  3. Any amount the company expects to pay someday
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Answer: A present obligation arising from past events

A liability is a present obligation to transfer an economic resource as a result of past events. Planned or merely expected future spending creates no obligation yet.

2. A company expects large operating losses next year. How are those future losses treated at year end?

  1. A current liability for the expected losses
  2. A noncurrent liability for the expected losses
  3. No liability is recognized for them
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Answer: No liability is recognized for them

Future operating losses are not an obligation to anyone arising from a past event, so they are not a liability; they will simply be reported as they occur.

3. Which of these is NOT one of the IAS 1 tests for classifying a liability as current?

  1. Management plans to pay it early
  2. It is held primarily for trading
  3. It is due within twelve months
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Answer: Management plans to pay it early

IAS 1 looks at the normal operating cycle, trading purpose, due date within twelve months and the right to defer settlement. Management's intention to repay early does not change the classification.

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