Question

Pursuant to the conceptual framework, for an item to be characterised as a liability the definition of liabilities must be applicable to the transaction or event, and the recognition criteria should also be satisfied.

Applying the definition of liabilities, there are three key components in the definition of ‘liability’, these being:

1. There must be an expected future disposition of economic benefits to other entities.

2. There must be a present obligation.

3. A past transaction or other event must have created the obligation.

Take any two examples of liabilities and test if they meet all three requirements. Each example carries 4 marks.

Answer 1

A liability is a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits.

So the 3 compoents of liabilities are -

1. There must be an expected future disposition of economic benefits to other entities.

2. There must be a present obligation.

3. A past transaction or other event must have created the obligation.

Examples of liabilities

1)Trade Payables- We have to settle the Trade payable by payment in cash or kind , so there is an expected future disposition of economic benefits. Also it is a legal obligation , the entity have to settle the payables. And It arises from the past transaction like purchase of goods or services. So it satisfies all the 3 requirements of liabilities.

2)Salary payable - The entity have to make payment of salary in future , So it involves future disposition of economic benefits to other entities.The entity have to settle the obligation, so it is a persent obligation. And it arisies from the past transaction like salary agreement between entity and employee. So it satisfies all the 3 requirements of liabilities.