Liabilities and Their Measurement
Liabilities are disclosed in the statement of financial position of business organisation and are measured on various bases. There are various disguised basis that are used for measurement of liabilities of business organisation. In this report, analysis of technique of measurement of liabilities has been analysed. Westfield Corporation is the selected business organisation on which measurement technique has been analysed. In this report, liability of business organisation has been discussed and defined. How liabilities are measured and what are different types of issues that organisation faces in measuring liabilities has been conducted in this assignment. In this report, prescribed Australian Accounting Standards has been analysed and referred for the analysis of measurement technique of liabilities. Liabilities has been categorised into two types i.e. current liabilities and non-current liabilities and same has been discussed in this report. In this report, treatment of liabilities on the basis of categories has been analysed. Relationship between measurement of liabilities and decision useful information has been discussed in this report. Decision making information in terms of measurement of liabilities used by decision maker has been analysed and discussed in this report.
1. Liabilities in normal business term can be defined as the obligation of business organization in normal course of business. Obligation can be defined as the process of arising liabilities of the business organization in normal course of business. Obligation can be of two types i.e. legally enforceable obligations and constructive obligation or equitable obligation Liabilities of the business organization can be of two major types’ i.e. financial debts and operational liabilities i.e. liabilities which are arise in the course of business operations. Financial debt liabilities can be defined as the liabilities that arise in the course of procuring funds or financial assistance for the business operations or to invest in operational function of business organisation (Barker & Mcgeachin, 2013). On the other hand, operational liabilities can be defined as the liabilities arise from the business activities or business operations undertaken by business entity.
Liabilities (both current and long term liabilities) are measured using cost principles and amount of liabilities are sated in the financial statements or in statement of financial position on such basis. Liability amount is measurement at the rate of its market value or current market value at the time of creation of obligation. Liabilities are measured or reported in financial statement at actual amount which is required to discharge liability. In other words, amount of liability is measured or recorded at the amount which is required to be settled from the outflow of assets or economic benefits of the business organisation. Another measurement principle states that; liabilities shall be valued at fair market value of goods or services because of which liability is created (Cebotari, 2008). This principle is used when actual liability value does not work. Liabilities of business organisation are mainly based on or measured on the basis of fair value of the transaction. Fair value of transaction is market based and requires market information or observation of market information to be available. Cost principle, fair value method or current price method and other cash flow method are three major method used for measuring liability amount.
2. According to accounting standards or conceptual framework of accounting liabilities can be defined as the present obligation of business organization that has been arise because of any past events. Present obligation of business entity shall lead to outflow of resources or operational assets of the business organization present at the time of making payment. These resources shall have future economic benefit for the business entity or income generating attributes. Measurement of amount of liability plays important role in determining the amount to be presented in the financial statements (Zyla, 2012). In this case, management or managers of Westfield Corporation faces some issue in measuring the amount of liabilities.
Problems of Measuring Liabilities
In order to measure value of liabilities, business organisation or in this case Westfield Corporation has to consider many aspects of transaction that took place. There are mainly two broader measurements
According to Australian Accounting Standards Board, fair value of liability at the time of making transaction, liability would be created at the fair value or liability will be recorded at fair value i.e. the amount at which transaction took place between participants of transaction. In this case, it because very difficult for business organisation to identify and analyse the amount of transaction. As this amount is based on market conditions or market price of transaction under consideration, it becomes difficult for management of business organisation to measure such amount. On the other hand, liabilities are to be recorded or measured on initial or subsequent basis. In this case, two time adjustment or two times measurement of cost or liabilities are requited therefore this becomes time consuming process for management. Methods that are used in measuring liabilities are not fully developed and framework provided by Australian Accounting Standard Board are does not provide base for selecting method of measuring liabilities (Colauto & Beuren, 2013). Guidance in term of measuring liabilities is not clear which method to follow and how to implement that method in measuring liabilities of Westfield Corporation. Measurement attributes of liabilities are gross realisable value, net realisable value, current cost, historic cost, current market price and net present value of future cash flows. Therefore these are some limitations or issue that Westfield Corporation and other business entity faces while measuring amount to be recorded for liability in financial statement. Major issue in measuring liabilities lies between whether to use historic cost measurement method or to use current market cost method in measuring liabilities of the Westfield Corporation. Therefore lack of guidelines in terms of selection of method of liability measurement and how to follow such method effectively is not provided in the accounting frameworks or in Australian accounting standards (Horton, Macve & Serafeim, 2011).
On the basis of time and demand, liabilities of business organisation can be defined as long term liabilities and short term liabilities. Conceptual framework of accounting or accounting standards has also bifurcated liabilities on time and demand feature. Long term liabilities can be defined as the liabilities which exist in the statement of financial position of the business entity for longer period of time i.e. for more than one year. In present case of Westfield Corporation, long term liabilities are as follows:
- Payables and other creditors
- Interest bearing liabilities
- Other financial liabilities
- Deferred tax liabilities
- Derivative liabilities
Above mentions liabilities of Westfield Corporation is classified as long term liabilities as they are related to multiple financial year or obligation is for more than 1 year.
On the other hand, current liabilities or short term liabilities can be defined as the liabilities that are due within one year from the time of current or short term liabilities are recognized in financial statements. Current liabilities are expected to be settled in normal operating cycle of the Westfield Corporation and liability will be created for the purpose of trading activities or for working capital management activities (Huang & Gao, 2014).
Categorization of Liabilities
Following are examples of current liabilities of Westfield Corporation:
- Trade creditors
- Payables and other creditors
- Interest bearing liabilities
- Other financial liabilities
- Tax payable
- Derivative liabilities
(Westfield Corporation Annual Report, 2016)
Treatment of liabilities differs according to the nature and classification of liabilities. As there are two types of liabilities i.e. current liabilities and non-current liabilities of the business organisation, therefore there is different treatment for both. Current liabilities are treated as time liability i.e. bases of treatment of current liability depends on its maturity (Nevius, 2014). Liabilities are classified in financial statement or statement of financial position as current liabilities and non-current liabilities and are treated on the same basis. Current liabilities are treated as time liabilities and are therefore recorded at current market price or current value of current value. In case of Westfield Corporation, their current liabilities are recorded at current market value after deduction of all related expenses for discharging liability. On the other hand, non-current liabilities are treated as time and demand liability in the normal course of business (Nobes, 2011).
4. Measurement of liabilities requires many considerations and adjustments in order to come up at correct liability classification and amount of liability. Since stakeholders or users of financial statements of business organisation and in case of Westfield Corporation, decision maker’s uses information related to debt or liabilities. Users of financial statements of the business organisation undertake analysis of liabilities (current and non-current) for making correct decisions (Peasnell, 2013). Therefore there is direct relationship between measurement of liabilities and decision useful information for stakeholders or decision makers. Following are some attributes of same:
- It is the basic object of measurement concept of liability to provide decision useful information to the decision makers of the business organisation.
- Information related to measurement of liabilities provides ability to decision maker to make deeper analysis of the current and non-current liabilities of the Westfield Corporation. Decision maker or stakeholders are able to analyse
- Non-current liabilities of Westfield Corporation are recorded at historic cost and adjusted with current transactions or repayments of liabilities or debt provides more transparent information to the decision makers of the Westfield Corporation (Sinnock, 2013).
- On the other hand, single measurement basis used for measuring liabilities amount will not provide relevant information to the decision maker of the business organization. In case of Westfield Corporation, management has bifurcated current and non-current liabilities. Employee benefits, creditors and loans have been classified under different heads of liability section of financial statements. This measurement method has been used by decision maker or stakeholders of the Westfield Corporation.
- Measurement technique of liability of the Westfield Corporation has reflected or disclosed full amount and how Westfield Corporation will settle or repay liability amount. This information or measurement technique of Westfield Corporation will detailed information related to liability settlement.
- Measurement of liabilities also reflects information related to actual cost or amount of liabilities of Westfield Corporation has during reporting period. Measurement of liability alsoreflects details of how Westfield Corporation has recorded liabilities and any point are left out or not (Steffen, 2016).
- Measurement of liabilities also justifies usability or utilization of financial resources or funds that has created liability of the business organisation. In case of Westfield Corporation, liabilities measurement technique used supports decision of stakeholders by providing information related to liabilities and its settlement method. This information will support decision in terms of full and complete disclosure of liabilities.
Conclusion
From the above report it can be concluded that there liabilities are important element of business organisation that reflect debt undertaken by the business organisation. From the above mentioned definition of liability it can be concluded that liabilities is the current obligation which has taken place from the past events undertaken by business organisation. Lack of guidance in Australian accounting standard in terms of measurement of liabilities. Major issue in measurement of liability of business organisation is related to recognition i.e. initial recognition and subsequent recognition. It can be concluded that liabilities are categorised as current liabilities and non-current liabilities in the statement of financial statement of the business organisation. Treatment of liabilities is based on the category of liabilities i.e. treatment or disclosure of current liabilities is different from non-current liabilities. It can be concluded that, measurement of liability provided decision useful information to the stakeholders. Detailed disclosure of liabilities has been supported by measurement of liabilities.
References
Barker, R., & Mcgeachin, A. (2013). Why is there inconsistency in accounting for liabilities in IFRS? An analysis of recognition, measurement, estimation and conservatism. Accounting and Business Research, 1-26.
Cebotari, A. (2008). Contingent Liabilities (IMF Working Papers). Washington: International Monetary Fund.
Colauto, R., & Beuren, I. (2013). Basis of measurement of assets and liabilities: Correlation analysis of years 2006 and 2010. Enfoque, 32(1), 93-108.
Horton, J., Macve, R., & Serafeim, G. (2011). ‘Deprival value’ vs. ‘fair value’ measurement for contract liabilities: How to resolve the ‘revenue recognition’ conundrum? Accounting and Business Research, 41(5), 491-514.
Huang, Z., & Gao, S. (2014). The usefulness of derivative disclosures for investment decision-making. Journal of Chinese Economic and Foreign Trade Studies, 7(3), 173-192.
Nevius, A. (2014). New Treatment of Disguised Sales and Partnership Liabilities. Journal of Accountancy, 218(2), 68.
Nobes, C. (2011). On relief value (deprival value) versus fair value measurement for contract liabilities: A comment and a response. Accounting and Business Research, 41(5), 515-524.
Peasnell, K. (2013). Discussion of “Financial reporting for employee stock options: Liabilities or equity”. Review of Accounting Studies, 18(3), 683-691.
Sinnock, B. (2013). VA Liabilities Still A Hurdle, But Data Show Hope. National Mortgage News, 37(37), 1.
Steffen, B. (2016). The Recognition, Measurement and Valuation of Environmental Liabilities. American Bankruptcy Institute Journal, 35(12), 30-31,86-87.
Westfield Corporation Annual Report, 2. (2016). Westfield Corporation Annual Report, 2016. Westfield Corporation, 10-60.
Zyla, M. (2012). Fair Value Measurement Practical Guidance and Implementation (2nd ed., Wiley Corporate F&A). New York: Wiley.
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