What is a Financial Liability?

A financial liability is an obligation incurred that has to be settled by the liable party. The concept is most commonly used under international financial reporting standards (IFRS). Several variations on the concept are noted below.

Contractual Obligation

A financial liability can be a contractual obligation to deliver cash or similar to another entity or a potentially unfavorable exchange of financial assets or liabilities with another entity.

Equity Settlement

A financial liability can be a contract probably to be settled in the entity's own equity and that is a non-derivative under which the entity may deliver a variable amount of its own equity instruments.

Derivative Settlement

A financial liability can be a derivative that probably will be settled other than through the exchange of cash or similar for a fixed amount of the entity's equity.

Examples of Financial Liabilities

Examples of financial liabilities are accounts payable, loans issued by an entity, and derivative financial liabilities.

Presentation of Financial Liabilities

Financial liabilities are classified as short-term liabilities on the reporting entity’s balance sheet if they are due for payment within the next twelve months. If they are due as of a later date, then they are classified as long-term liabilities.