Refinancing Agreement, Liability

on Demand, and other Financial

Liabilities
Semester | A.Y. 2024-2025
FINANCIAL INSTRUMENTS
NOTE: This file only contains the “lecture part” of
the class. Any reminders or announcements are ➔ Both assets and liabilities arise from a
excluded. contract. This contract is the “financial
instrument”.
➔ Examples are certificate of indebtedness,
certificate of shares, and promissory notes.
MAIN TOPIC ➔ Holder vs Issuer:
★ Issuer - The one who issues the
SUBTOPIC instrument; the borrower who records a
UNDER SUBTOPIC financial liability arising from the
transaction; pays/delivers cash, exchanges
1.0 BONUS financial liability/financial asset, or gives
shares to settle the obligation.

★ Holder - The one holds/keeps the

MT LESSONS instrument; the lender/creditor who
records a financial asset; may receive
cash or other allowed form of settlement
➔ Financial Liabilities: (e.g. financial asset).
○ Accounts Payable,
○ Notes Payable,
○ Bonds Payable,
○ Troubled Debt Restructuring (TDR),
and
○ Compound Financial Instruments ASSETS
(CFI)
Current Assets: Requisites
➔ Non-Financial Liabilities:
○ Contingent Liabilities
○ Bonus ➔ Realized within 12 months or within the
○ Accrued Liabilities entity's normal course of business.
○ Premium and Coupons (!) ➔ Held for trading
➔ Cash and cash equivalents (CCE)

Non-Current Assets

DEFINITION OF ASSETS AND LIABILITIES ➔ Assets that are not qualified to be “current
assets”.
Assets ➔ Examples are PPE, Intangibles, and
Investment Properties.
➔ Resource controlled (meaning the entity
can dictate and limit other's use of the
asset)
➔ Arising from past events
➔ From which future economic benefits are
expected to flow from it LIABILITIES

*If an item meets the criteria, an asset is recognized.

Current Assets: Requisites

➔ Realized within 12 months or within the

entity's normal course of business.
Liabilities ➔ Held for trading
➔ No unconditional right to defer payment
➔ Present obligation (otherwise, non-current).
➔ Arising from past events
➔ Outflow of economic resource *A non-current liability that is nearing its due date (12
months and below) or becomes “on demand” during the
fiscal year becomes “current”.
*If an item meets the criteria, a liability is recognized.

Non-Current Liabilities

➔ Liabilities that are not qualified to be

“current liabilities”.
LECTURE #1 | INTERMEDIATE ACCOUNTING 3 — FINANCIAL LIABILITIES

NOTES PAYABLE
REFINANCING AGREEMENT
➔ Short-Term Notes:
➔ Extending a liability's deadline by getting a ● Realistic: At Face Value (silent rule)
“refinancing agreement”; a non-current ● Unrealistic: At Present Value
liability is paid using another loan from a
➔ Long-Term Notes (at Present Value):
bank or other financial institutions. ● Interest Bearing: Include interest
➔ By having a refinancing agreement, the ● Non-Interest Bearing: Face - PV
entity can still use the amount of money
they borrowed for a longer period of time.
➔ If the agreement is made on or before the ➔ Interests:
reporting date, the liability becomes non- ● Stated Interest Rate (SIR): Payable
● Effective Interest Rate (EIR):
current. Expense

*’Di ba ang sabi, “kapag ang non-current liability ay 12

months or below near its due date, magiging current ito”.
BONDS PAYABLE
For cases with refinancing agreement, may isang NCL
(usually may malaking amount) ang malapit na ang ➔ Also at present value.
maturity. Hence, nagiging CL ang liability na ‘yon ➔ EIR>SIR: Discount (Face>PV)
hangga't wala pang agreement. Kapag meron nang
agreement and before siya ng reporting date, NCL ulit ang ➔ EIR<SIR: Premium (Face<PV)
liability. Kapag lagpas naman ng date, up until sa perfection ➔ EIR=SIR: Face
ng agreement eh CL ang classification ng liability (and
should be reported as such sa FS).

KINDS OF BONDS
➔ See page 336 onwards of the book for
more examples. ➔ Serial Bonds — Installment
➔ Term Bonds — Lump Sum

LIABILITY-ON-DEMAND ➔ Debenture Bonds — Unsecured so has

higher interests
➔ A liability becomes on demand/needs to be ➔ Callable Bonds — Can be retired early by
settled right away regardless of its original issuer
deadline.
➔ Usually arises from a breach of contract ➔ Convertible Bonds — Can be converted
into shares.
(ex. An entity’s current ratio reaches lower
than agreed hence, the bank decides to ➔ Others: In the book.
collect the debt right away).
➔ A non-current liability becomes current
unless there's a grant of grace period.
COLOR PALETTE
➔ During the grace period (palugid), the bank
cannot demand payment.
➔ If the grace period was granted on or
before the reporting date, the liability
becomes non-current. If after the date but
BEFORE authorization of statements, a
disclosure should be made in the notes.

*In this case, since nagkaroon ng breach of contract,

sisingilin na agad ng bank ang entity. The NCL becomes CL
again before the grant of grace period. Same concept din
sa refinancing, if on or before nag-grant eh magiging NCL mantra
‘yong liability. If after naman ng date pero before pa ng
authorization (meaning hindi pa nailalabas sa public ‘yong
FS), CL pa rin ‘yong liability pero magkakaroon ng ☆ ‘Wag magpapatinag ♡
disclosure sa notes about sa grace period na binigay..

notes

ACCOUNTS PAYABLE ♡Template from @adrenaliane (twitter)

➔ Should be aligned with the flow of
inventories.
➔ Review gross method and net method (it
has the same concept as in A/R).
➔ Remember: In the perpetual system,
there's no purchase/discount accounts;
only inventory and cost of goods sold
(cogs).