Accounting for payables under GRAP 104 (2019)

At year-end, most entities’ financial statements reflect a payable that represents an amount owed to a creditor or supplier for the delivery of goods or services. A payable will meet the definition of a financial instrument in GRAP 104 on Financial Instruments when an entity becomes a party to a contractual obligation of the instrument. This will be, for example, when an entity has a contractual obligation to pay cash for materials or consumables already received that remain unpaid at year-end. A payable can arise from an exchange or non-exchange transaction.

Contractual obligations that require the transfer of goods or services instead of cash, or a payable that arises from legislation or similar means are not financial liabilities. These are accounted for using GRAP 19 on Provisions, Contingent Liabilities and Contingent Assets, or the Conceptual Framework for General Purpose Financial Reporting.  

Classification of payables

The classification of a payable determines how the payable will subsequently be measured. A payable is classified at amortised cost unless:

• the payable qualifies to be measured at fair value through surplus or deficit, for example a derivative; or
• the payable relates to a financial liability that arises because the entity has retained substantially all the risks and rewards of ownership of a transferred asset for which consideration was received. In subsequent periods, the revenue on the transferred asset, and any expenses incurred on the financial liability are separately recognised.

Measurement of payables

A payable that is subsequently measured at amortised cost is initially measured at the fair value of the consideration received minus any transaction costs that are directly attributable to the financial liability.

The fair value on initial recognition is the transaction price, unless the terms of the arrangement are not market related. This will be, for example, where no, or a below-market rate of interest is charged for the initial credit period granted (i.e. the period between the transaction date and the due date for payment). If the fair value of a payable is affected by off-market elements, the contractual interest rate is compared to an interest rate for a similar instrument with similar risk characteristics and similar maturity.

If the initial credit period is not in line with a period granted consistent with terms used in the public sector, either through established practice or specific legislation, the effect of discounting is considered, if material. This means that the initial transaction should be separated between expenses and interest.

For subsequent measurement, amortised cost is the amount at which the payable is initially recognised adjusted for principal repayments and cumulative amortisation. Cumulative amortisation is calculated as the difference between the initial amount and the maturity amount, using the effective interest rate.

When will a payable be derecognised?

A payable will be removed from an entity’s statement of financial position when the financial liability is extinguished. This will be when the liability is:

• settled, i.e. the creditor or supplier is paid (in full or in part);
• expires through law, or because it is cancelled; or
• waived, as the debt is assumed by another entity through a non-exchange transaction. These transactions are accounted for using GRAP 23 on Revenue from Non-exchange Transactions (Taxes and Transfers).

When the terms of an existing payable, or part thereof, are substantially modified or re-negotiated, the original liability is derecognised and a new payable is recognised. This will be when the revised terms are such that the discounted present value of the cash flows under the new terms, discounted using the original effective interest rate, is at least 10% different from the discounted present value of the remaining cash flows of the original payable. An example will be where short-term debt is converted into long-term debt.

A GRAP 104 Fact-sheet on Payables is available to further explain the GRAP 104 requirements to payables.

Disclaimer

The article has been prepared by the Secretariat of the ASB for information purposes only. It has not been reviewed, approved, or otherwise acted on by the Board.