Definition:

Liabilities are the present obligation of the entity in the form of legally enforceable and result from past events. Liabilities will have future economic outflow from an entity.

Those liabilities including account payable, salary payable, noted payable, accrual liabilities, short term loan, and long term loan.

If the entity financial statements are prepared according to IFRS, then those liabilities should meet the recognition criteria of liabilities in the conceptual framework.

Explanation:

Liabilities are one of the elements of financial statements as per conceptual framework and they are recording in balance sheet showing balance at the reporting date.

Liabilities are classified into two main classifications: current liabilities and non-current liabilities. As per the definition above, the entity could record the liabilities in balance only if:

  • The liabilities result from past event or transaction
  • The entity has a legal obligation on those transactions or event
  • There will be economic outflow from an entity when they are settled.

That means the entity could not recognize the liabilities in the balance sheet just because they have the future obligation and economic outflow when they are settled. Those liabilities need to be resulted from past transactions.

Summary of Recognition criteria:

The following are the recognition criteria of liabilities from the conceptual framework:

A liability is recognized in the balance sheet when it is probable that an outflow of resources embodying economic benefits will result from the settlement of a present obligation and the amount at which the settlement will take place can be measured reliably. In practice, obligations under contracts that are equally proportionately unperformed (for example, liabilities for inventory ordered but not yet received) are generally not recognized as liabilities in the financial statements. However, such obligations may meet the definition of liabilities and, provided the recognition criteria are met in the particular circumstances, may qualify for recognition. In such circumstances, recognition of liabilities entails recognition of related assets or expenses.

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