Valuing liabilities in the balance sheet is one of the key elements of preparing financial statements under Polish accounting law. The Accounting Act (ustawa o rachunkowości) sets out precise rules under which entities must value their liabilities at the balance sheet date. Applying these rules correctly is fundamental to the reliability and fairness of the financial data presented.
Liabilities in the balance sheet are subject to detailed classification and appropriate presentation in the equity and liabilities side of the financial statements. The law requires entities to follow specific valuation procedures closely, which ensures that financial information is comparable and reliable. Valuing liabilities involves not only determining the basic amount due but also taking into account all additional elements that affect the final carrying amount. The place of liabilities on the equity and liabilities side follows from the general balance sheet preparation rules and structure.
Under Article 3 section 1 point 20 of the Accounting Act, liabilities are an obligation, resulting from past events, to provide performance of a reliably determined value. This performance will result in the use of the entity's existing or future assets
Modern entities that operate in several currencies and use various forms of financing must be particularly careful when valuing liabilities. The complexity of today's business transactions requires in-depth knowledge of the law and the ability to apply it in everyday accounting practice.
Basic rules for valuing liabilities under the Accounting Act
Article 28 section 1 point 8 of the Accounting Act states clearly that liabilities are valued at the amount due for payment. This is the basic rule underlying all liability valuation procedures in the Polish accounting system. The amount due represents the actual value of the liability at the balance sheet date, taking into account all relevant factors affecting its final amount.
An exception to this basic rule applies to financial liabilities, which under point 8a may be valued at adjusted acquisition price (amortised cost). In addition, if the entity intends to sell these liabilities within three months, it may value them at market value or otherwise determined fair value. This exception is particularly important for entities that are very active on financial markets.
The position of the Accounting Standards Committee (Komitet Standardów Rachunkowości, KSR) of 9 July 2019 on settlements with counterparties precisely defines the amount due as the value of a liability determined at its settlement date or at the balance sheet date. The definition covers all components affecting the final value of the liability
Determining the amount due starts with the nominal value of the liability on the date it is initially recognised in the accounting books. This initial value is the starting point for all subsequent adjustments and updates of the liability's value. Accountants must systematically track all changes affecting the value of liabilities and document them properly. Our accounting office records such changes, for example interest or exchange differences, in clients' books as they arise.
A detailed analysis of the components of the amount due covers not only the principal value of the liability but also all additional elements that arose during the life of the liability. A comprehensive approach to valuing liabilities requires both decreases and increases of the original value to be taken into account.
Components of the amount due – a detailed analysis
The amount due consists of several key elements that entities must systematically monitor and update. The basic component is the nominal value of the liability on the date of initial recognition in the accounting books, which is the basis for all subsequent calculations and adjustments.
All repayments received up to the settlement date or the balance sheet date must be deducted from the nominal value of the liability. These repayments include instalments towards the liability, prepayments made by counterparties and price reductions granted to counterparties in the form of various types of discounts and accepted complaints. Tracking all repayments precisely is crucial for accurate valuation of liabilities.
- Determine the nominal value of the liability on initial recognition
- Deduct all repayments and instalments received
- Deduct prepayments made by counterparties
- Deduct discounts and credit notes granted
- Add accrued contractual and statutory interest
- Add interest for late payment
- Add contractual penalties and court costs awarded
All additional charges accrued at the settlement date or the balance sheet date must be added to the value of the liability. These include contractual and statutory interest and interest for late payment, which can significantly affect the final value of the liability. Contractual penalties and court costs awarded in connection with the liability are also included.
The amount due does not take into account external factors such as the time value of money or discounting. This rule ensures that the valuation of liabilities is objective and comparable between different entities
| Component of the amount due | Effect on value | Legal basis | Time of accrual |
|---|---|---|---|
| Nominal value | Increases | Article 28 UoR | Recognition date |
| Repayments received | Decreases | KSR position 2019 | On an ongoing basis |
| Contractual interest | Increases | Agreement | As accrued |
| Contractual penalties | Increases | Agreement/statute | When incurred |
Applying these rules in practice requires accountants to systematically monitor all changes affecting the value of liabilities. Every transaction related to a liability must be properly documented and reflected in the accounting books in line with the accrual principle.
Foreign currency liabilities and exchange differences
Liabilities denominated in foreign currencies are a particular challenge in balance sheet valuation because changes in exchange rates have to be taken into account. The position of the Accounting Standards Committee of 9 July 2019 sets out precise procedures for such liabilities, requiring the same approach as for settlements in Polish currency.
At the balance sheet date the entity must determine the amount due on settlements with counterparties in a foreign currency in the same way as for settlements in Polish currency. It then translates the amount due in the foreign currency into Polish currency using, in accordance with Article 30 section 1 point 1 of the Act, the average exchange rate announced for the currency by the National Bank of Poland (NBP) applicable on the balance sheet date.
Exchange differences arise when the foreign currency rate used to translate settlements at the time of recognition in the books differs from the rate used for valuation at the balance sheet date. These differences have a direct impact on the entity's financial result
How exchange differences arise is closely linked to the nature of the liability and the direction of exchange rate changes. For liabilities, positive exchange differences arise when the foreign currency rate at the balance sheet date is lower than the rate on the date the liability was recognised in the accounting books. This means that the liability is worth less in Polish zloty, which is a gain for the entity.
Negative exchange differences on liabilities arise in the opposite situation – when the foreign currency rate at the balance sheet date is higher than the rate on the date the liability was recognised in the accounting books. In that case the liability is worth more in Polish zloty, which means an additional cost for the entity.
- Positive exchange differences on liabilities arise when the currency rate falls
- Negative exchange differences arise when the foreign currency rate rises
- Exchange differences directly affect the entity's financial result
- Translation is made at the NBP average rate on the balance sheet date
The entity recognises exchange differences in the accounting books as finance income or finance costs, which directly affects the financial result for the period. In justified cases (Article 30 section 4 of the Act) exchange differences may be included in the production cost of products, the purchase price of goods, the purchase price or production cost of fixed assets, fixed assets under construction, and intangible assets.
Practical example: An importing company incurred a liability of EUR 10,000 at a rate of PLN 4.50/EUR. On the balance sheet date the rate was PLN 4.70/EUR. The liability increased from PLN 45,000 to PLN 47,000, generating a negative exchange difference of PLN 2,000, which must be recognised as a finance cost.
An important rule is that positive and negative exchange differences are not offset in the accounting records. Each exchange difference must be recognised separately, which ensures transparent and reliable presentation of financial results. At the same time the entity adjusts the value of settlements with counterparties accordingly, reflecting the actual value of liabilities at the balance sheet date.
Presentation of liabilities in the balance sheet under different annexes
How liabilities are presented in the balance sheet depends on which annex to the Accounting Act the entity uses as the basis for its financial statements. The annexes provide for different levels of detail and different ways of grouping liabilities, which matters for the readability and comparability of financial statements.
Entities preparing financial statements under Annex 1 must show liabilities to counterparties in specifically defined items of the equity and liabilities side of the balance sheet. Undisputed liabilities for the purchase of materials, goods, finished products and services are presented as trade payables within short-term liabilities, regardless of their due date.
When presenting trade payables, the entity must separately present the amount of liabilities falling due within 12 months of the balance sheet date and the amount with a repayment term of more than 12 months. This split is key for analysing liquidity
Liabilities for the purchase of intangible assets and property, plant and equipment are shown in different items depending on their due date. They are presented as long-term liabilities when their due date is more than 12 months away, and the entity takes into account the original due date, not the period of delay in payment.
Special rules apply to liabilities for accrued contractual penalties, interest for late payment and liabilities that are disputed but not pursued in court. These liabilities are presented in the same items of the equity and liabilities side of the balance sheet as the principal liability they increase, which ensures logical grouping of related items.
- Identify the type of liability and its legal nature
- Determine the due date of the liability
- Check whether the liability is being pursued in court
- Choose the appropriate balance sheet item according to the annex
- Apply the correct short-term/long-term grouping
| Type of liability | Balance sheet item (Annex 1) | Classification criterion | Special notes |
|---|---|---|---|
| Trade payables | B.III.1a, B.III.2a, B.III.3d | Regardless of term | Amounts due within and after 12 months shown separately |
| Fixed assets | B.II.1-3e or B.III.1b-3i | Due date | Original term, not delay |
| Penalties and interest | As principal liability | Nature of principal | Increase the principal item |
| Disputed in court | B.III.3i | Status of proceedings | Regardless of nature |
Entities preparing financial statements under Annex 5 use a simplified presentation of liabilities. Undisputed liabilities for the purchase of materials, goods, finished products and services are presented as trade payables within short-term liabilities, while keeping the requirement to present amounts separately by due date.
Liabilities for the purchase of intangible assets and property, plant and equipment are presented together with other types of liabilities, using a simplified classification into long-term and short-term liabilities. This simplification is intended to reduce the reporting burden for smaller entities.
Classification of liabilities as short-term and long-term
Splitting liabilities into short-term and long-term is a fundamental balance sheet classification and is key to assessing the entity's financial position. Long-term liabilities include liabilities arising from titles other than trade, whose payment term falls, in whole or in part, later than in the year following the balance sheet date.
Short-term liabilities include all trade payables, regardless of their due date, and all or part of other liabilities that fall due within 12 months of the balance sheet date. This asymmetric classification of trade payables results from their operational nature and typically short settlement cycle.
The 12-month criterion from the balance sheet date is decisive for classifying liabilities as long-term or short-term. The entity must precisely analyse the due dates of all liabilities at each balance sheet date
Applying this classification in practice requires a systematic analysis of all the entity's liabilities at the balance sheet date. Accountants must carefully track due dates and classify liabilities accordingly, bearing in mind that a liability may change its classification in subsequent reporting periods as its due date approaches.
Particular attention should be paid to liabilities with long repayment terms, which may be classified partly as short-term and partly as long-term. For loan and credit instalments, the part falling due within 12 months should be shown as short-term liabilities and the rest as long-term.
- Trade payables always as short-term
- Other liabilities according to the 12-month criterion
- Long-term liabilities can be split in part
- Reclassification required in subsequent reporting periods
A manufacturing entity took out a 5-year investment loan with monthly instalments. At each balance sheet date it must classify the instalments falling due within the next 12 months as short-term liabilities and the remaining part as long-term liabilities. In subsequent years these proportions will change.
Correct classification of liabilities is fundamental to the financial analysis of the entity, especially when assessing liquidity and the ability to meet current obligations. Investors and lenders analyse the structure of liabilities by due date particularly carefully.
Special cases in valuing liabilities
In business practice there are many special cases of liability valuation that require an individual approach and in-depth knowledge of the law. Disputed liabilities are one of the most common situations requiring particular attention from accountants and statutory auditors (biegli rewidenci).
Liabilities pursued in court or in arbitration are shown as "other" within short-term liabilities, regardless of their original nature. This rule is intended to separate liabilities with an uncertain outcome and highlight their special legal status.
Liabilities for accrued contractual penalties, interest for late payment and liabilities that are disputed but not pursued in court are presented in the same items of the equity and liabilities side of the balance sheet as the principal liability. This approach logically links all the elements making up the full value of the liability to a given counterparty.
Contingent liabilities require a particular analysis of how likely they are to materialise. As contingent liabilities (Article 3 section 1 point 28 of the Act) they are not recognised in the balance sheet – they are disclosed in the notes (informacja dodatkowa). If the future liability is certain or highly probable and its amount can be reliably estimated, the entity creates a provision (Article 35d section 1 of the Act)
Restructured liabilities are another area requiring particular attention. When a liability is restructured, the entity must assess whether the terms of the original liability have been substantially modified, which may require it to be derecognised and a new liability to be recognised on the new terms.
Finance lease liabilities require special treatment under the Accounting Act. The lessee recognises the leased asset as a fixed asset and, at the same time, a lease liability, which is repaid systematically according to the payment schedule.
- Identify the specific nature of the liability
- Analyse the relevant laws and standards
- Assess the impact on presentation in the financial statements
- Apply the appropriate valuation and disclosure rules
- Document the accounting solution adopted
Impact of valuing liabilities on the financial statements
Correct valuation of liabilities has a fundamental impact on the reliability and fairness of the entity's entire financial statements. Errors in valuing liabilities directly affect the balance sheet, the profit and loss account and cash flows, which may significantly distort the picture of the entity's financial position. We explain the basics in our guide to what a balance sheet is and how to prepare one.
Understating liabilities in the balance sheet makes the entity's financial position look better by reducing total liabilities and improving debt ratios. At the same time it may lead to understated finance costs in the profit and loss account, which results in an overstated financial result for the period.
Overstating liabilities has the opposite effect – it makes the financial position look worse and may lead to an understated financial result. Although overstating liabilities is generally a more prudent approach than understating them, excessive prudence also breaches the principle of reliable financial statements.
Exchange differences from valuing foreign currency liabilities directly affect the financial result for the period as finance income or finance costs. Large exchange rate fluctuations can significantly affect the entity's profitability
| Valuation error | Effect on balance sheet | Effect on result | Effect on ratios | Consequences |
|---|---|---|---|---|
| Understated liabilities | Lower liabilities | Overstated profit | Better liquidity | Misleading signals |
| Overstated liabilities | Higher liabilities | Understated profit | Worse ratios | Excessive prudence |
| Incorrect exchange differences | Incorrect balance | Distorted result | Wrong risk assessment | Wrong decisions |
The impact of valuing liabilities on the financial ratios used by investors, lenders and other stakeholders is particularly important. Liquidity, debt and profitability ratios depend directly on liabilities being valued correctly, which is key to business decision-making.
- Liquidity ratios depend on accurate classification of liabilities
- Debt ratios are directly linked to the valuation of liabilities
- Profitability may be distorted by errors in exchange differences
- Cash flow analysis requires correct valuation of liabilities
