Liabilities

The exam loves to make you classify a liability as current versus non-current, because that single call moves the current ratio and working capital. The “tell” is a refinancing or covenant clue: under IFRS (IAS 1, amended 2020 and 2022, effective 2024) the test is the right to defer settlement at least 12 months past the reporting date — not management’s intention, and that right must have substance and exist at the reporting date (the amendments deleted the old word “unconditional,” which some question banks still use). US GAAP instead reclassifies short-term debt as non-current when the borrower shows both the intent and ability to refinance long-term, evidenced before the statements are issued. Watch too for deferred revenue and deferred tax liabilities, which candidates wrongly treat as income or net out entirely.

The classic trap is conflating the three related concepts: liabilities are the stock of obligations, leverage is how much debt finances the firm, and solvency is the ability to service it long-term (versus liquidity’s short-term cash test). Remember that non-interest-bearing items like accounts payable and deferred revenue are liabilities but get stripped out of net-debt and interest-coverage math — a firm can be liability-heavy yet comfortably solvent.