Liabilities

What are liabilities?

A liability is defined as an obligation a company has to provide services to third parties. Liabilities arise when a service has already been received, but the company has not yet provided the agreed-upon—usually financial—consideration.

Liabilities are classified based on their maturity. If obligations must be paid within one year, they are classified as current liabilities. For noncurrent liabilities, the payment period extends beyond one year.

Types of Liabilities

Pursuant to Section 247 of the German Commercial Code (HGB), liabilities must be classified by type on the balance sheet. The various types differ not only in how they arise, but also in terms of the creditors to whom they are owed.

In accordance with Section 266(2) C of the German Commercial Code (HGB), the breakdown is as follows:

Liabilities to Banks: Liabilities to banks arise from transactions in which a company obtains funds from banks. For example, when a loan is taken out to finance the purchase of machinery.

Advance payments received on orders: If customers make advance payments before the service is rendered, the company incurs a liability. This is often the case with custom-made products. Take, for example, a company that manufactures custom-made furniture and receives a down payment from a customer before the furniture is completed and delivered. In this case, the liability is a tangible liability, not a financial one.

Accounts Payable: This item includes all liabilities a company owes to service providers or suppliers. These liabilities arise, among other things, from the purchase of goods or the use of services. The goods or services must have been purchased on credit, that is, with a specified payment term. Such a liability arises, for example, when a company uses external consulting services and receives an invoice that must be paid within 30 days.

Liabilities arising from the acceptance of drawn bills of exchange and the issuance of promissory notes: These arise when a company accepts bills of exchange from creditors or issues its own promissory notes that must be honored at a later date. A promissory note is a written promise of payment between two parties that obligates the debtor to pay a specified amount of money to the creditor on a specific future date. A common scenario for issuing a promissory note, for example, is when a company receives goods from a supplier but cannot pay immediately due to liquidity constraints. In such cases, the supplier may accept a promissory note stating that the company will pay the outstanding amount at a later date. The liability must then be settled on the date specified in the promissory note.

Liabilities to Affiliated Companies: According to Section 271(2) of the German Commercial Code (HGB), affiliated companies are companies that are parent or subsidiary companies in relation to one another. Liabilities arise from business transactions between them. An example of this scenario occurs when Parent Company A receives goods worth 10,000 euros from Subsidiary B. If A has not yet paid the invoice, the amount is reported as a liability to affiliated companies.

Liabilities to companies in which the company holds an equity interest: This type of liability includes financial obligations that arise because a company holds either direct or indirect equity interests in another company. Potential liabilities may include dividend payments that the company makes to its shareholders.

Other Liabilities: Other liabilities refer to a company’s financial obligations that do not fall into the specific categories listed above. These include, among other things, liabilities arising from lease agreements, tax liabilities, or legal disputes that will not be paid until the next period.

What is the difference between receivables and liabilities?

Receivables are the opposite of liabilities. They represent the amounts a company is still due from customers or other parties for goods or services already provided—that is, future cash inflows. These are reported as assets on the balance sheet because they represent value that will flow to the company in the future.

Liabilities, on the other hand, represent the financial obligations the company has to suppliers or other parties because the company has already received goods or services but has not yet paid for them. Thus, liabilities are debts that must be settled at a later date.

Where are liabilities listed on the balance sheet?

Liabilities existing as of the balance sheet date are listed as a collective item on the liabilities side of the balance sheet.

They are reported under the following line item:

Valuation of Liabilities

Valuation involves determining the financial value of a company’s obligations. Pursuant to Section 211(1) of the Austrian Commercial Code (UGB), liabilities must be recognized at their settlement amount —that is, the amount required to fully settle the obligation. In principle, this corresponds to the amount at which the liability was incurred.

If, as of the balance sheet date, there are multiple valuation amounts due to an increase in the settlement amount—for example, as a result of exchange rate fluctuations for liabilities denominated in other currencies—the highest-value principle must be applied. This principle stipulates that liabilities must always be reported at their highest value. This provides a realistic overview of the company’s actual financial situation.

Pursuant to Section 253(2), first sentence, of the German Commercial Code (HGB), amounts determined in this manner are not discounted in the commercial balance sheet in the case of non-interest-bearing liabilities. Since 2022, there has also been no requirement to discount liabilities in the tax balance sheet.

Write-off of Liabilities

A financial liability must be derecognized as soon as it is settled. This occurs when the obligation has been fulfilled through payment or an effective setoff to the creditor, or when the debtor has been released from the liability by the creditor, for example, through a waiver of the claim. The obligation to perform may also be extinguished by law, for example, due to the statute of limitations.

To write off a liability, it must first have been recorded. For example, when goods are purchased on credit, this is done by posting an entry that records a credit to the liability account “Accounts Payable” and a credit to the relevant asset account—in this case, “Inventory”—for the amount of the transaction. Once the goods have been paid for, the liability is written off. To do this, a journal entry is created that reduces the “Accounts Payable” account and the company’s “Bank” account by the amount paid.

What is the difference between liabilities and provisions?

Liabilities are specific financial obligations that are due at a specific point in time and for which the amount is already known. For example, if a company has purchased goods from suppliers on account for a fixed amount with a payment term and has not yet paid for them, this constitutes a liability.

Provisions, on the other hand, are contingent liabilities for which the exact timing or amount is still uncertain, but there is a reasonable probability that they will occur. These include, among other things, warranty provisions. For example, a company sells electronic devices and offers a one-year warranty on its products. Since the company would have to cover the costs of future repairs or replacement parts in the event of damage, it recognizes a provision for expected warranty claims, as the exact amount and timing of the costs are still uncertain.

What is a statement of liabilities?

The statement of liabilities is part of the notes to the financial statements and includes a detailed list of all liabilities—including their type and amounts—that a company owes to external parties. These are categorized by their remaining term into the time periods “less than one year,” “between one and five years,” and “more than five years.” The statement of liabilities is particularly important for investors, as it helps them better assess the company’s financial situation.