Measuring and Recording Liabilities

Written by True Tamplin, BSc, CEPF®

Updated on March 29, 2022

Liabilities are generally recorded and disclosed at the present value of the future payments, computed using a realistic interest rate. The existence of a nominal interest rate that is unrealistic makes the measurement task more difficult.

The effect of complying with this rule is a description of the proper relationship between the amount actually borrowed and the amount of interest incurred during the life of the liability.

Example

As an example of the use of present value calculations, consider the following facts about the acquisition of an asset: Details About Asset The amount of debt is as follows: Amount of Debt The following entry would be made at the time of purchase: Entry At Time of Purchase The journal entry below would be recorded on 31 December 20x1, when the first payment is made. Journal Entry For First Payment The balance sheet would report the note balance of $44,580 on 31 December 20x1. The following example shows the calculation of the annual interest expense and the amount that would be disclosed for the note Change in Balance. Amortization of notes payable An alternate approach to recordkeeping would have recognized the difference between the present value of the note ($57,661) and the sum of the future payments ($75,000) as a discount of $17,339.

Then, subsequent entries would have credited the discount instead of the note payable.

While GAAP calls for disclosure of the amount of the discount, it need not be recorded formally in the accounts. However, as a practical matter, recording the discount would virtually assure its disclosure in the balance sheet.

As exceptions to this general treatment, GAAP does not require that present value measurements be applied to trade receivables or payables due within “approximately one year” or to deposits that are to be applied to the purchase or sale of goods.

The apparent reason for the exceptions is the probable immateriality of the amounts.

Measuring and Recording Liabilities FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.