Liabilities can be defined as the amount that a company owes in exchange for goods and services that the company has utilized or plans on utilizing over the course of time. This is the amount that needs to be paid by the company, and therefore, it should include a number of different things.
Liabilities can broadly be categorized into Financial and Non-Financial Liabilities. Whereas Financial Liabilities can be regarded as liabilities that are incurred as a result of normal discourse of the business, where liabilities are mainly subdued in cash, non-financial liabilities are the opposite.
On the other hand, non-financial liabilities are mainly contingencies or types of liabilities that are not of financial transaction origin. Examples of these liabilities include deferred revenue, advances received, and provisions that might have to be made as a result of these changes.
Non-Financial Liabilities mainly require non-cash obligations that need to be provided to settle the balance, including goods, services, warranties, environmental liabilities, or any customer liability accounts that might otherwise exist.
In other words, non-financial liability can best be described as an obligation that is associated with the retirement or maintenance of a long-lived asset in the future. Therefore, it might be contingent on certain outcomes, based on which the company would then have to complete the required payout.
Measurement and Accounting Treatment
According to IAS 37, Non-Financial Liabilities should be measured at amounts that would rationally be paid to settle any present obligation or amount to transfer it to a third party on the balance sheet date.
An entity is supposed to recognize a non-financial liability when the definition of a liability has been satisfied, and the non-financial liability can be measured reliably.
The basis of estimating non-financial liabilities relied on the expected cash approach. In this regard, multiple cash flow scenarios are used, which reflect the range of all the possible outcomes, coupled with their respective probabilities.
This is primarily because of the reason that the expected cash flow approach is an approach that makes an appropriate basis for measuring liabilities and classes of similar obligations for single corresponding obligations.
Additionally, it can also be seen that Non-Financial Liabilities can be measured before tax. In the same manner, an entity is also supposed to include all the relevant risks and uncertainties. Similarly, the non-financial liability should be canceled when the obligation is settled, or canceled.
In the case where the Non-Financial Liability cannot be measured properly, it shall make complete disclosure about certain disclosures so that relevant information can be communicated to other people.
To conclude, it can be seen that Non-Financial Liabilities can be regarded as contingent liabilities which may or may not occur. The overall assessment of this particular task is based on the risk and return rationale, relating to the possible outcomes that might occur due to the fulfillment of this obligation.
Calculation and recording this particular liability is an important aspect, and because of the importance of this possibility, it should be duly communicated to the shareholder in the year-end financial statements.