CONCEPTUAL FRAMEWORK

AND
ACCOUNTING STANDARDS

A conceptual framework can be defined as a system of ideas and objectives that lead

to the creation of a consistent set of rules and standards. Specifically, in accounting, the

rule and standards set the nature, function and limits of financial accounting and financial

statements.

The main reasons for developing an agreed conceptual framework are that it provides:

- a framework for setting accounting standards;

- a basis for resolving accounting disputes;
- fundamental principles which then do not have to be repeated in accounting

standards.

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CHAPTER 1: Overview of accounting ……………………………………………….. 8
 Definition of accounting…………………………………………………………… 8
 Measurement………………………………………………………………………. 9
 Common branches of accounting………………………………………………... 12
 Conceptual framework and accounting standards……………………………… 14
 Qualitative characteristics…………………………………………………………. 15
 Elements of financial statements…………………………………………………. 16
 PAS 1 – Presentation of financial statements…………………………………… 18
 Statement of financial position……………………………………………………. 19
 Presentation of deferred taxes……………………………………………………. 20
 Total comprehensive income……………………………………………………… 20
 PAS 2 – Inventories………………………………………………………………… 20
 Financial statement presentation…………………………………………………. 21
 Cost formulas………………………………………………………………………… 21

CHAPTER 2: PAS 7 - Statement of cash flows………………………………………. 28

 Operating activities…………………………………………………………………. 28
 Investing activities…………………………………………………………………... 29
 Financing activities…………………………………………………………………. 30
 PAS 8 – Accounting policies, Changes in accounting estimates……………… 31
 PAS 10 – Events after the reporting period……………………………………… 34
 Examples of adjusting events……………………………………………………… 35

CHAPTER 3: PAS 12 - Income taxes…………………………………………………… 42

 Accounting profit vs. taxable profit………………………………………………… 43
 Deferred taxes………………………………………………………………………. 44
 PAS 16 – Property, plant and equipment………………………………………… 45
 Characteristics of PPE……………………………………………………………… 45
 Recognition………………………………………………………………………….. 46
 Depreciation…………………………………………………………………………. 46
 Revaluation model………………………………………………………………….. 47
 PAS 19 – Employee benefits………………………………………………………. 48
 Categories of employee benefits………………………………………………….. 48

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CHAPTER 4: PAS 20 – Accounting for government grants………………………. 56
 PAS 21 – The effect of changes in foreign exchange rates……………………. 58
 Functional currency…………………………………………………………………. 59
 Foreign exchange transactions…………………………………………………… 59
 PAS 23 – Borrowing costs………………………………………………………… 60
 Capitalization of borrowing costs…………………………………………………. 60
 Specific borrowing…………………………………………………………………… 60
 General borrowing…………………………………………………………………… 61

CHAPTER 5: PAS 24 – Related party disclosures…………………………………… 65

 Related parties………………………………………………………………………. 65
 PAS 27 – Separate financial statements…………………………………………. 68
 Preparation of separate financial statements……………………………………. 68
 PAS 28 – Investments in associates and joint ventures………………………… 69
 Reclassification of comulative OCI………………………………………………… 70

CHAPTER 6: PAS 29 – Financial reporting in hyperinflationary economics……. 76

 The stable monetary assumption………………………………………………….. 76
 Indicators of hyperinflation………………………………………………………….. 77
 PAS 32 – Financial instruments……………………………………………………. 79
 Presentation of PAS 32……………………………………………………………… 81
 PAS 33 – Earning per share………………………………………………………… 82
 Types of earning per share………………………………………………………….. 83
 Financial statement presentation……………………………………………………. 84
 PAS 34 – Interim financial reporting………………………………………………… 84
 Recognition and measurement……………………………………………………… 86

CHAPTER 7: PAS 36 – Impairment of assets ………………………………………….. 92

 Core principle………………………………………………………………………….. 92
 Recognizing and measuring an impairment loss………………………………….. 93
 Cash generating unit………………………………………………………………….. 94
 PAS 37 – Provisions, contingent liabilities and contingent assets ………………. 95
 Recognition of provision………………………………………………………………. 96
 Present value………………………………………………………………………….. 96
 PAS 38 – Intangible assets…………………………………………………………… 98
 Recognition and measurement………………………………………………………. 99
 PAS 40 – Investment property………………………………………………………. 101
 Property, plant and equipment………………………………………………………. 101
 Fair value model……………………………………………………………………….. 102
 Cost model……………………………………………………………………………… 103

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CHAPTER 8: Agriculture……………………………………………………………………. 109
 Biological assets………………………………………………………………………. 109
 Common features of agricultural activity……………………………………………. 110
 Recognition and measurement……………………………………………………… 111
 Encouraged disclosures……………………………………………………………… 111
 PFRS 1 – First time adoption of PFRS……………………………………………… 112
 Recognition and measurement………………………………………………………. 113
 Accounting policies……………………………………………………………………. 113
 PFRS 2 – Share based payments…………………………………………………… 114
 Measurement of compensation………………………………………………………. 116
 PFRS 3 – Business combinations……………………………………………………. 118
 Accounting for business combinations………………………………………………. 119
 Non-controlling interest………………………………………………………………… 120

CHAPTER 9: PFRS 5 – Non-current assets held for sale and discontinued operations
 Core principle of PFRS 5……………………………………………………………… 125
 Classification of non-current assets…………………………………………………. 125
 Discontinued operations………………………………………………………………. 126
 PFRS 6 – Exploration for and evaluation or mineral resources…………………… 127
 Measurement and recognition………………………………………………………… 128
 PFRS 7 – Financial instruments disclosure…………………………………………. 128
 PFRS 8 – Operating segments………………………………………………………. 130
 PFRS 9 – Financial instruments……………………………………………………… 131
 PFRS 10 – Consolidated financial statements……………………………………… 133
 PFRS 11 – Joints arrangements……………………………………………………… 134
 Types of joints arrangements…………………………………………………………. 135

CHAPTER 10: PFRS 12 – Disclosure of interest in other entities……………………. 142

 Minimum disclosure under PFRS 12…………………………………………………. 142
 PFRS 13 – Fair value measurement…………………………………………………. 143
 PFRS 14 – Regulatory deferral accounts……………………………………………. 144
 PFRS 15 – Revenue from contracts with customers………………………………... 146
 PFRS 16 – Leases……………………………………………………………………… 148
 Accounting for operating lease………………………………………………………… 150
 PFRS 17 – Insurance contracts……………………………………………………….. 150
 Insurance contracts……………………………………………………………………… 151
 Types of insurance contracts…………………………………………………………… 152

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 Introduction to the Course

Course Description:

This course is designed provide students with knowledge on the current financial reporting

framework of businesses. This course deals with the financial reporting principles embodied

in the Conceptual Framework for Financial Reporting and the Philippine Financial

Reporting Standards (PFRS’s), which are issued by the Financial Standard Council

(FRSC.)

Learning Outcomes:

 Gain application of the financial reporting standards, particularly their development, application
and impact to the business environment.
 Demonstrate knowledge, skills and positive attitudes to the concepts and principles of financial
reporting for businesses as applied to real life situations.
 Demonstrate knowledge in identify the appropriate financial reporting standards to apply to
specific business transactions and other events.
 Demonstrate skills in applying the principles of the financial reporting standards through
problem solving.

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CHAPTER 1 – PRETEST

Read and understand each question carefully. This test consists of 10 items of Multiple Choice. Good
Luck.

1. It refers to the process of incorporating the effects of an accountable event in the statement of
financial position or the statement of profit or loss and other comprehensive income through a
journal entry.
a. realization
b. derecognition
c. posting
d. recognition

2. All of the following are events considered as exchange or reciprocal transfer, except
a. purchase of investment in equity securities
b. sale of equipment for non-interest bearing note
c. subscription of the entity’s own equity instrument (i.e., contributions by owners)
d. exchange of a note payable for an account payable
e. borrowing of money from a bank

3. All of the following are events considered nonreciprocal transfers, except

a. declaration of cash dividends
b. declaration of stock dividends
c. payment of accounts payable
d. imposition of fines
e. theft
4. These are events involving an entity and another external party.
a. Life events
b. internal events
c. transactions
d. external events

5. It is the accounting process of assigning numbers, commonly in monetary terms, to the economic
transactions and events.
a. analyzing c. classifying
b. measuring d. interpreting

6. What is the basic purpose of accounting?

a. To provide quantitative financial information about economic activities.
b. To provide all information that users need in making economic decisions.
c. To provide qualitative financial information about economic activities intended to be useful in
making economic decisions.
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 d. To provide quantitative financial information about economic activities intended to be useful in
making economic decisions.

7. Accounting provides which type of information?

a. quantitative
b. financial information
c. qualitative
d. all of these

8. General purpose financial statements are

a. those statements that cater to the common and specific needs of a wide range of external
users.
b. those statements that cater to the common needs of a wide range of external users and
internal users.
c. those statements that cater to the common needs of a limited range of external users.
d. those statements that cater to the common needs of a wide range of external users.

9. External users are those

a. who do have the authority to demand financial reports tailored to their specific needs.
b. who do not have the authority to demand financial reports tailored to their common needs
c. who do not have the authority to demand financial reports tailored to their specific needs.
d. who belong to countries other than the domicile country of the reporting entity

10. The primary objective of financial reporting is to provide

a. information about economic resources, claims to these resources, and changes in them.
b. information useful for investment and credit decisions.
c. information useful in predicting future cash flows.
d. All of these

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 CHAPTER 1

OVERVIEW OF ACCOUNTING

Objectives:
Define the meaning of accounting
Identify and learn the PAS 1 to PAS 23

Definition of Accounting

Accounting is “the process of identifying, measuring, and

communicating economic information to permit informed judgment and
decisions by users of information.”

Three important activities

1. Identifying - the process of analyzing events and transactions to

determine whether or not they will be recognized. Only accountable
events are recognized.

2. Measuring - involves assigning numbers, normally in monetary terms,

to the economic transactions and events.

3. Communicating - the process of transforming economic data into

useful accounting information, such as financial statements and other
accounting reports, for dissemination to users.

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Types of Events

1. External events – events that involve an external party.

a. Exchange (reciprocal transfer) – reciprocal giving and receiving

b. Non-reciprocal transfer – “one way” transaction

c. External event other than transfer – an event that involves changes

in the economic resources or obligations of an entity caused by an
external party or external source but does not involve transfers of
resources or obligations.

2. Internal events – events that do not involve an external party.

a. Production – the process by which resources are transformed into

finished goods.

b. Casualty – an unanticipated loss from disasters or other similar events.

Measurement

The several measurement bases used in accounting include, but not

limited to, the following:

- historical cost,

- fair value,

- present value,
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 - present value,

- current cost, and

- sometimes inflation-adjusted costs.

The most commonly used is historical cost. This is usually combined with
the other measurement bases.

Types of accounting information classified as to users’ needs

1. General purpose accounting information - designed to meet the common

needs of most statement users. This information is governed by the Philippine
10
 Financial Reporting Standards (PFRSs).

2. Special purpose accounting information - designed to meet the specific

needs of particular statement users. This information is provided by other
types of accounting, e.g., managerial accounting, tax basis accounting, etc.

- Double-entry system – each accountable event is recorded in two parts

– debit and credit

- Going concern - the entity is assumed to carry on its operations for an

indefinite period of time.

- Separate entity – the entity is treated separately from its owners,

- Stable monetary unit - amount in the financial statements are stated in

terms of a common unit of measure; changes in purchasing power are
ignored.

- Time Period – the life of the business is divided into series of reporting
periods.

- Materiality concept – information is material if its omission or

misstatement could influence economic decisions.

- Cost-benefit – the cost of processing and communicating information

should not exceed the benefits to be derived from it

- Accrual Basis of accounting – effects of transactions are recognized

when they occur (and not as cash is received or paid) and they are
recognized in the accounting periods to which they relate

- Historical cost concept – the value of an asset is determined on the

basis of acquisition cost.

- Concept of Articulation – all of the components of a complete set of

financial statements are interrelated.

- Full disclosure principle – financial statements provide sufficient detail to

disclose matters that make a difference to users, yet sufficient
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 condensation to make the information understandable, keeping in mind
the costs of preparing and using it.

- Consistency concept – financial statements are prepared on the basis

of accounting policies which are applied consistently from one period to
the next.

- Matching – costs are recognized as expenses when the related revenue

is recognized.

- Residual equity theory – this theory is applicable where there are two
classes of shares issued, ordinary and preferred. The equation is
“Assets – Liabilities – Preferred Shareholders’ Equity = Ordinary
Shareholders’ Equity.”

- Fund theory – the accounting objective is the custody and

administration of funds

- Realization – the process of converting non-cash assets into cash or

claims for cash

- Prudence (Conservatism) – the inclusion of a degree of caution in the

exercise of the judgments needed in making the estimates required
under conditions of uncertainty , such that assets or income are not
overstated and liabilities or expenses are not understated

Common branches of accounting

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1. Financial accounting - focuses on general purpose financial statements

2. Management accounting – focuses on special purpose financial reports for

use by an entity’s management.

3. Cost accounting - the systematic recording and analysis of the costs of

materials, labor, and overhead incident to production.

4. Auditing - the process of evaluating the correspondence of certain assertions

with established criteria and expressing an opinion thereon

5. Tax accounting - the preparation of tax returns and rendering of tax advice,
such as the determination of tax consequences of certain proposed business
endeavors

6. Government accounting - refers to the accounting for the government and its
instrumentalities, placing emphasis on the custody of public funds, the
purposes for which those funds are committed, and the responsibility and
accountability of the individuals entrusted with those funds.

Four sectors in the practice of accountancy

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1. Practice of Public Accountancy - involves the rendering of audit or accounting
related services to more than one client on a fee basis.

2. Practice in Commerce and Industry - refers to employment in the private

sector in a position which involves decision making requiring professional
knowledge in the science of accounting and such position requires that the
holder thereof must be a CPA.

3. Practice in Education/Academe – employment in an educational institution

which involves teaching of accounting, auditing, management advisory
services, finance, business law, taxation, and other technically related
subjects.

4. Practice in the Government – employment or appointment to a position in an

accounting professional group in the government or in a government–owned
and/or controlled corporation where decision making requires professional
knowledge in the science of accounting, or where civil service eligibility as a
CPA is a prerequisite

Conceptual Framework for Financial Reporting

The Conceptual Framework sets out the concepts that underlie the
preparation and presentation of financial statements for external users

Objective of general-purpose financial reporting

- The objective of general-purpose financial reporting is to provide

financial information about the reporting entity that is useful to existing
and potential investors, lenders and other creditors in making decisions
about providing resources to the entity. A secondary objective of
financial statements is to show the results of the stewardship of
management

- The objective of general-purpose financial reporting forms the

foundation of the Conceptual Framework. Other aspects of the
Conceptual Framework flow logically from the objective.

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Users and their Needs

Primary users – those to whom general purpose financial reports are directed:
(a) Existing and potential investors
(b) Lenders and other creditors

Only the common needs of primary users are met by the financial statements

Qualitative Characteristics

1. Qualitative Characteristics

(1) Relevance
(a) Predictive value
(b) Feedback value
 Materiality – entity-specific aspect of relevance
(2) Faithful representation
(a) Completeness
(b) Neutrality
(c) Free from error
2. Enhancing qualitative characteristics

(3) Comparability

(4) Verifiability
(5) Timeliness
(6) Understandability
Elements of Financial Statements
Financial Position
1. Asset - resource controlled by the entity as a result of past events and from
which future economic benefits are expected to flow to the entity.

2. Liability - present obligation of the entity arising from past events, the
settlement of which is expected to result in an outflow from the entity of
resources embodying economic benefits.

3. Equity – assets less liabilities

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Performance

1. Income - encompasses both (a) revenues and (b) gains

2. Expense - encompasses both (b) expenses and (losses)

PAS 1 Presentation of Financial Statements

PAS 1 prescribes the basis for presentation of a general purpose

financial statements to improve comparability both with the entity's financial
statements of previous periods (intra-comparability) and with the financial
statements of other entities (inter-comparability).

Complete set of financial statements

1. Complete set of financial statements

2. Statement of profit or loss and other comprehensive income

3. Statement of changes in equity

4. Statement of cash flows

5. Notes (5a) comparative information in respect of the preceding period; and

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6. Additional statement of financial position (required only when certain
instances occur)

General features

1. Fair Presentation and Compliance with PFRSs - The application of PFRSs,

with additional disclosure when necessary, is presumed to result in financial
statements that achieve a fair presentation

2. Going concern - An entity is not a going concern if, as of the financial

reporting date or prior to the date of authorization of the financial
statements for issue, management either:

a. Intends to liquidate the entity or to cease trading, or

b. Has no realistic alternative but to do so.

3. Accrual Basis of Accounting - An entity shall prepare its financial

statements, except for cash flow information, using the accrual basis of
accounting

4. Materiality & Aggregation - Each material class of similar items must be

presented separately in the financial statements.

5. Offsetting - Assets and liabilities, and income and expenses, shall not be
offset unless required or permitted by a PFRS

6. Frequency of reporting – An entity shall present a complete set of financial

statements (including comparative information) at least annually

7. Comparative Information - An entity shall present comparative information

in respect of the preceding period for all amounts reported in the current
period’s financial statements, unless other standards permit or require
otherwise

8. Consistency of presentation - An entity shall retain the presentation and

classification of items in the financial statements from one period to the next
unless:

17
 a. it is apparent that another presentation or classification would be
more appropriate following a significant change in the nature of the
entity’s operations or a review of its financial statements; or

b. a PFRS requires a change in presentation

Statement of financial position

A statement of financial position may be presented as either

a. Classified - showing distinctions between current and

noncurrent assets and liabilities, or

b. Unclassified (based on liquidity) - showing no distinction

between current and noncurrent items

Current Assets

An entity shall classify an asset as current when:

1. it expects to realize the asset or intends to sell or consume it, in its
normal operating cycle

2. it holds the asset primarily for the purpose of trading

3. it expects to realize the asset within twelve months after the reporting
period

4. the asset is cash or a cash equivalent unless the asset is restricted

from being exchanged or used to settle a liability for at least twelve
months after the reporting period

Current Liabilities

An entity shall classify a liability as current when:

1. it expects to settle the liability in its normal operating cycle

2. it holds the liability primarily for the purpose of trading

3. the liability is due to be settled within twelve months after the

reporting period
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 4. the entity does not have an unconditional right to defer settlement of
the liability for at least twelve months after the reporting period

Presentation of Deferred taxes

Deferred tax liabilities (assets) are presented as noncurrent items in a

classified statement of financial position, irrespective of their expected dates of
reversal

Statement of profit or loss and other comprehensive income

An entity shall present all items of income and expense recognized in a period

1. in a single statement of profit or loss and other comprehensive

income

2. in two statements: (1) a statement displaying the profit or loss section

only (separate ‘statement of profit or loss’ or ‘income statement’) and
(2) a second statement beginning with profit or loss and displaying
components of other comprehensive income

Total comprehensive income

Total comprehensive income comprises all components of Profit or loss;

and Other comprehensive income

Presentation of Expenses

1. Nature of expense method

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 2. Function of expense method

PAS 2 Inventories

Inventories are assets

1. Held for sale in the ordinary course of business (Finished Goods)

2. In the process of production for such sale (Work In Process)

3. In the form of materials or supplies to be consumed in the production

process or in the rendering of services (Raw materials and
manufacturing supplies)

Financial statement presentation

All items that meet the definition of inventory are presented on the
statement of financial position as one line item under the caption “Inventories.”
The breakdown of this line item (as finished goods, WIP and Raw materials) is
disclosed in the notes

Inventories are normally presented in a classified statement of financial

position as current assets

Measurement

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 a. Inventories are measured at the lower of cost and net realizable value
(NRV)

b. The cost of inventories comprise all costs of purchase, costs of

conversion and other costs incurred in bringing the inventories to their
present location and condition

c. Net realizable value (NRV) is the estimated selling price in the

ordinary course of business less the estimated costs of completion
and the estimated costs necessary to make the sale

Cost Formulas

1. Specific identification - - shall be used for inventories that are not ordinarily
interchangeable (i.e., used for inventories that are unique). Cost of sales is
the cost of the specific inventory that was sold

2. FIFO - cost of sales is based on the cost of inventories that were purchased
first. Consequently, ending inventory represents the cost of the latest
purchases

3. Weighted Average Cost - cost of sales is based on the average cost of all
inventories purchased during the period.

Wtd. Ave. Cost = (TGAS in pesos ÷ TGAS in units)

Recognition as an expense

The carrying amount of an inventory that is sold is charged as expense

(i.e., cost of sales) in the period in which the related revenue is recognized.
Likewise, the write-down of inventories to NRV and all losses of inventories are
recognized as expense in the period the write-down or loss occurs

For further discussion please refer to the link provided: Overview of Accounting
https://www.youtube.com/watch?v=RlhHMzzMKwA
For further discussion please refer to the link provided: Conceptual Framework
https://www.youtube.com/watch?v=CaGife7RCnE
Reference
For further discussion please refer to the link providedBook:
: PAS 1 – Presentation of FS
https://www.youtube.com/watch?v=c54-lIDFqbk
Conceptual Framework
21and Accounting Standards
By: Zeus Vernon B. Millan, 2019 Edition
CHAPTER 1 - ACTIVITY / ASSIGNMENT

Answer the following questions/statements in not less than 5 sentences.

1. What is the relevance of the Conceptual Framework and the PFRSs to your future career as a business
manager or an accountant?

CHAPTER 1 - POST TEST

Read and understand each question carefully. This test consists of 20 items Multiple Choice.

1. A soundly developed conceptual framework of concepts and objectives should

a. increase financial statement users' understanding of and confidence in financial reporting.
b. enhance comparability among companies' financial statements.
c. allow new and emerging practical problems to be more quickly soluble.
d. all of these.

2. The overall objective of financial reporting is to provide information

a. about an entity's assets, liabilities, and owners' equity.
b. about an entity's financial performance during a period.
c. that is useful in making economic decisions.
d. that allows owners to assess management's performance.

3. The two primary qualities that make accounting information useful for decision making are
a. comparability and consistency.
b. materiality and timeliness.
c. relevance and reliability.
d. faithful representation and relevance.

4. Late information lacks this qualitative characteristic.

a. Tardiness c. Timeliness
b. Verifiability d. Comparability

5. Which of the following is considered a qualitative factor in making materiality judgments?

a. the context of an item in relation to the current economic state of the environment where the
entity operates.
b. 10% of profit or loss, in absolute terms
c. 5% of total revenues
d. 1% of total assets
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6. PAS 1 requires an assessment of the entity’s ability to continue as a going concern each time
financial statements are prepared. Who is responsible in making this assessment?
a. Accountant c. Management
b. Auditor d. Government regulatory body

7. These are the end product of the financial reporting process and the means by which information
gathered and processed is periodically communicated to users.
a. Financial reporting c. Financial products
b. Financial statements d. Accounting statements

8. Which of the following is not one of the general features of financial statements under PAS 1?
a. Fair presentation and compliance with PFRSs
b. Going Concern
c. Cash Basis
d. Materiality and aggregation

9. Who is responsible for the preparation and the fair presentation of an entity’s financial statements
in accordance with the PFRSs?
a. Any accountant c. Auditor
b. Certified Public Accountant d. Management

10. This type of presentation of statement of financial position does not show distinctions between
current and noncurrent items.
a. Classified presentation c. Non-discriminating presentation
b. Unclassified presentation d. Awesome presentation

11. In making an economic decision, an investor needs information on the amounts of an entity’s
economic resources and claims to those resources. That investor would most likely refer to which
of the following financial statements?
a. Statement of financial position c. Statement of cash flows
b. Statement of comprehensive income d. Statement of changes in equity

12. Which of the following financial statements would be dated as at a certain date?
a. Statement of financial position
b. Statement of profit or loss and other comprehensive income
c. Statement of cash flows
d. All of these

13. This comprises all “non-owner changes in equity.” It excludes owner changes in equity, such as
subscription, issuance, and reacquisition of share capital and declaration of dividends.
a. Other comprehensive income
b. Changes in equity
c. Total comprehensive income
d. Profit or loss

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14. Which of the following is added to the cost of inventories?
a. Storage costs of part-finished goods
b. Trade discounts
c. Refundable purchase taxes
d. Administrative costs

15. Which of the following costs are included in the cost of inventories?
a. Transport costs for raw materials
b. Abnormal material usage
c. Storage costs relating to finished goods
d. Administrative and general overhead

16. How should trade discounts be dealt with when valuing inventories at the lower of cost and net
realizable value (NRV) according to PAS 2?
a. Added to cost c. Deducted in arriving at NRV
b. Ignored d. Deducted from cost

17. The cost of inventory should not include

I. Purchase price.
II. Import duties and other taxes.
III. Abnormal amounts of wasted materials.
IV. Administrative overhead.
V. Fixed and variable production overhead.
VI. Selling costs.

a. II, III, IV, V c. I, II

b. III, IV, VI d. II, III, IV, V, VI
18. The Coronet Company has a cost card in relation to an item of goods manufactured as follows:
Materials 70
Storage costs of finished goods 18
Delivery to customers (Freight out) 4
Non-recoverable purchase taxes 6

According to PAS 2, at what figure should the item be valued in inventory?

a. 88 b. 76 c. 98 d. 94

19. Inventories are measured at

a. Lower of cost and fair value.
b. Lower of cost and net realizable value.
c. Lower of cost and nominal value.
d. Lower of cost and net selling price.
e. Choices b and d.

20. Which of the following costs of conversion cannot be included in cost of inventory?
a. Cost of direct labor.
24
 b. Factory rent and utilities.
c. Salaries of sales staff (sales department shares the building with factory supervisor).
d. Factory overheads based on normal capacity.

CHAPTER 2 - PRETEST

Read and understand each question carefully. This test consists of 10 Multiple Choice. Good Luck.

1. Entity A had the following balances at December 31, 20x1:

Cash in checking account 35,000
Cash in 90-day money market account 75,000
Treasury bill, purchased 12/1/x0, maturing 5/31/x2 150,000
Treasury bill, purchased 12/1/x1, maturing 2/28/x2 200,000

How much cash and cash equivalents is reported in Entity A’s December 31, 20x1 statement of
financial position?
a. 110,000 c. 310,000
b. 235,000 d. 460,000

2. Entity A acquires equipment by issuing shares of stocks. How should Entity A report the
transaction in the statement of cash flows?
a. Operating activities
b. Investing activities
c. Financing activities
d. Not reported

3. Entity A, a financial institution, received cash dividends from its investments in marketable
securities during the year. How will the dividends be presented in Entity A’s statement of cash
flows?
a. as investing activity c. as financing activity
b. as operating activity d. a or b

4. Which of the following statements best describes a statement of cash flows?

a. The statement of cash flows is also called the statement of activities.
b. The statement of cash flows shows information on an entity’s assets, liabilities and equity.
c. The statement of cash flows shows information on an entity’s income and expenses during the
period.
d. The statement of cash flows shows historical changes of cash and cash equivalents during the
period.

5. Which of the following is presented under the investing activities section of a statement of cash
flows?
a. Collection of accounts receivable
b. Cash purchases of inventories
c. Purchase of equipment through cash
25
 d. Issuance of share capital through cash

6. According to PAS 8, these are the specific principles, bases, conventions, rules and practices
applied by an entity in preparing and presenting financial statements.
a. Accounting policies c. Accounting standards
b. Accounting estimates d. Accounting assumptions

7. A change in the pattern of consumption of economic benefits from an asset is most likely a
a. change in accounting policy. c. error.
b. change in accounting estimate. d. any of these

8. PAS 8 permits a change in accounting policy only if the change

a. is required by a PFRS
b. results in reliable and more relevant information
c. a or b
d. PAS 8 does not permit a change in accounting policy

9. These arise from misapplication of accounting policies, mathematical mistakes, oversights or

misinterpretations of facts, or fraud.
a. Error
b. Change in accounting estimate
c. Change in accounting policy
d. Impracticable application

10. How should the following changes be treated, according to PAS 8?

I. A change is to be made in the method of calculating the provision for uncollectible receivables.
II. Investment properties are now measured at fair value, having previously been measured at
cost.
Change (1) Change (2)
a. Change of accounting policy Change of accounting policy
b. Change of accounting policy Change of accounting estimate
c. Change of accounting estimate Change of accounting policy
d. Change of accounting estimate Change of accounting estimate

26
 CHAPTER 2 STATEMENT OF CASH FLOWS

Objectives:
1. Define the statement of cash flows
2. Differentiate the accounting policies, changes in accounting
estimates and errors

PAS 7 Statement of Cash Flows

The statement of cash flows provides information about the sources and
utilization (i.e., historical changes) of cash and cash equivalents during the
period. The statement of cash flows presents cash flows according to the
following classifications:

a. Operating activities include transactions that enter into the determination

of profit or loss. These transactions normally affect income statement
accounts

b. Investing activities include transactions that affect long-term assets and

other non-operating assets

c. Financing activities include transactions that affect equity and non-

operating liabilities

Examples of cash flows from Operating Activities

- cash receipts from the sale of goods, rendering of services, or other

forms of income

- cash payments for purchases of goods and services

27
 - cash payments for operating expenses, such as employee benefits,
insurance, and the like, and payments or refunds of income taxes

- cash receipts and payments from contracts held for dealing or trading
purpose

The statement of cash flows provides information about the sources

and utilization (i.e., historical changes) of cash and cash equivalents
during the period. The statement of cash flows presents cash flows
according to the following classifications

Operating activities include transactions that enter into the determination

of profit or loss.

Examples of cash flows from Investing Activities

- cash receipts and cash payments in the acquisition and disposal of

property, plant and equipment, investment property, intangible assets
and other noncurrent assets

- cash receipts and cash payments in the acquisition and sale of equity
or debt instruments of other entities (other than those that are
classified as cash equivalents or held for trading)

- cash receipts and cash payments on derivative assets and liabilities

(other than those that are held for trading or classified as financing
activities)

- loans to other parties and collections thereof (other than loans made
by a financial institution)

Examples of cash flows from Financing Activities

- cash receipts from issuing shares or other equity instruments and

cash payments to redeem them

- cash receipts from issuing notes, loans, bonds and mortgage payable
and other short-term or long-term borrowings, and their repayments

28
 - cash payments by a lessee for the reduction of the outstanding
liability relating to a lease

Interests and Dividends

Reporting cash flows from operating activities

Direct method - shows each major class of gross cash receipts and gross cash
payments

Indirect method - adjusts accrual basis profit or loss for the effects of changes
in operating assets and liabilities and effects of non-cash items

PAS 8 Accounting Policies, Changes in Accounting Estimates and Errors

PAS 8 prescribes the criteria for selecting, applying, and changing

29
accounting policies and the accounting and disclosure of changes in
accounting policies, changes in accounting estimates and correction of prior
period errors

Accounting policies are “the specific principles, bases, conventions, rules and
practices applied by an entity in preparing and presenting financial
statements.” (PAS 8.5)

Accounting policies are the relevant PFRSs adopted by an entity in preparing

and presenting its financial statements

Philippine Financial Reporting Standards (PFRSs) are Standards and

Interpretations adopted by the Financial Reporting Standards Council (FRSC).
They comprise the following:

a. Philippine Financial Reporting Standards (PFRSs)

b. Philippine Accounting Standards (PASs)

c. Interpretations

30
 When it is difficult to distinguish a change in accounting policy from a
change in accounting estimate, the change is treated as a change in an
accounting estimate

An entity shall change an accounting policy only if the change:

- is required by a PFRS

- results to a more relevant and reliable information about an entity’s

financial position, performance, and cash flows

Examples of changes in accounting policy

- Change from FIFO cost formula for inventories to the Average cost
formula

- Change in the method of recognizing revenue from long-term

construction contracts

- Change to a new policy resulting from the requirement of a new

PFRS

31
 - Change in financial reporting framework, such as from PFRS for
SMEs to full PFRSs

- Initial adoption of the revaluation model for property, plant, and

equipment and intangible assets

- Change from the cost model to the fair value model of measuring
investment property

- Change in business model for classifying financial assets resulting to

reclassification between financial asset categories

Examples of changes in accounting estimate

- Change in depreciation or amortization methods

- Change in estimated useful lives of depreciable assets

- Change in estimated residual values of depreciable assets

- Change in required allowances for impairment losses and

uncollectible accounts

- Changes in fair values less cost to sell of non-current assets held for
sale and biological assets

Errors

Errors include the effects of

- Mathematical mistakes

- Mistakes in applying accounting policies

- Oversights or misinterpretations of facts

- Fraud

32
Events after the Reporting Period

Events after the reporting period are “those events, favorable or

unfavorable, that occur between the end of the reporting period and the date
that the financial statements are authorized for issue.” (PAS 10)

Two types of events after the reporting period

- Adjusting events after the reporting period – are those that provide
evidence of conditions that existed at the end of the reporting period

- Non-adjusting events after the reporting period – those that are

indicative of conditions that arose after the reporting period

Date of authorization of the financial statements

This date is the date when management authorizes the financial

statements for issue regardless of whether such authorization for issue is for
further approval or for final issuance to users

Examples of adjusting events:

- The settlement after the reporting period of a court case that confirms
that the entity has a present obligation at the end of reporting period

- The receipt of information after the reporting period indicating that an

asset was impaired at the end of reporting period. For example:

d. The bankruptcy of a customer that occurs after the

reporting period may indicate that the carrying
amount of a trade receivable at the end of reporting
period is impaired.

33
 e. The sale of inventories after the reporting period may
give evidence to their net realizable value at the end
of reporting period

- The determination after the reporting period of the cost of asset

purchased, or the proceeds from asset sold, before the end of
reporting period

- The discovery of fraud or errors that indicate that the financial

statements are incorrect

Examples of non-adjusting events normally requiring disclosures

- Changes in fair values, foreign exchange rates, interest rates or

market prices after the reporting period

- Casualty losses (e.g., fire, storm, or earthquake) occurring after the

reporting period but before the financial statements were authorized
for issue

- Litigation arising solely from events occurring after the reporting

period

- Major ordinary share transactions and potential ordinary share

transactions after the reporting period

- Major business combination after the reporting period

- Announcing a plan to discontinue an operation after the reporting

period

For further discussion please refer to the link provided: PAS 7 – Statement of Cash Flows
https://www.youtube.com/watch?v=lxeFyzC2u5I
For further discussion please refer to the link provided : PAS 8 – Accounting Policies
https://www.youtube.com/watch?v=BP49bwQcBvk
For further discussion please refer to the link provided: PAS 10 –Events After Reporting
Period
https://www.youtube.com/watch?v=f989U5Ju_iA

34
Reference Book:
Conceptual Framework and Accounting Standards
By: Zeus Vernon B. Millan, 2019 Edition
CHAPTER 2 ACTIVITY / ASSIGNMENT

Answer the following questions/statements in not less than 5 sentences.

1. The statement of cash flows present cash flows according to the following classifications.
Explain each classification.

d. Operating activities
e. Investing activities
f. Financing activities

CHAPTER 2 - POST TEST

Read and understand each question carefully. This test consists of 10 items Multiple Choice.

1. According to PAS 10, these are those events, favorable and unfavorable, that occur between the
end of the reporting period and the date when the financial statements are authorized for issue.
a. Events after the reporting period c. Adjusting events
b. Non-adjusting events d. all of these

2. The Sarin Company's financial statements for the year ended 30 April 20X8 were approved by its
finance director on 7 July 20X8 and a public announcement of its profit for the year was made on
10 July 20X8. The board of directors authorized the financial statements for issue on 15 July 20X8
and they were approved by the shareholders on 20 July 20X8. Under PAS 10, after what date
should consideration no longer be given as to whether the financial statements to 30 April 20X8
need to reflect adjusting and non-adjusting events?
a. 7 July 20X8
b. 10 July 20X8
c. 15 July 20X8
d. 20 July 20X8

3. Which of the following is an example of a non-adjusting event?

a. Sale of inventory for less than its carrying value shortly after the reporting period
b. Amounts received in respect of an insurance claim being negotiated at the period end
c. Destruction of a machine by fire after the reporting period
d. Bankruptcy of a major customer with a balance owing at the period end

35
4. One of Entity A’s delivery trucks had an accident on February 14, 20x2. The truck is totally
wrecked and is uninsured. Entity A’s December 31, 20x1 current-period financial statements were
authorized for issue on March 31, 20x2. Entity A asked you if it can write-off the carrying amount
of the destroyed truck from its December 31, 20x1 statement of financial position. What will you
tell Entity A?
a. Yes, go ahead. Write-off the truck because the event is an adjusting event.
b. No. Don’t write-off the truck because the event is a non-adjusting event.
c. No. Don’t write-off the truck because the event is a non-adjusting event. You should, however,
disclose the event if you deem it to be material.
d. Yes, go ahead. I will support you.

5. Which of the following is most likely to be a non-adjusting event?

a. A major customer liquidates its business after the end of the reporting period.
b. The entity announces a major restructuring after the end of the reporting period.
c. The settlement after the reporting period of a court case that confirms that the entity has a
present obligation at the end of reporting period.
d. The determination after the reporting period of the cost of asset purchased, or the proceeds
from asset sold, before the end of reporting period.

6. Entity A had the following balances at December 31, 20x1:

Cash in checking account 35,000
Cash in 90-day money market account 75,000
Treasury bill, purchased 12/1/x0, maturing 5/31/x2 150,000
Treasury bill, purchased 12/1/x1, maturing 2/28/x2 200,000

How much cash and cash equivalents is reported in Entity A’s December 31, 20x1 statement of
financial position?
a. 110,000 b. 235,000 c. 310,000 d. 460,000

7. Entity A acquires equipment by issuing shares of stocks. How should Entity A report the
transaction in the statement of cash flows?
g. Operating activities b. Investing activities
h. Financing activities d. Not reported

8. Entity A, a financial institution, received cash dividends from its investments in marketable
securities during the year. How will the dividends be presented in Entity A’s statement of cash
flows?
a. as investing activity c. as operating activity
b. as financing activity d. a or b

9. Which of the following statements best describes a statement of cash flows?

a. The statement of cash flows is also called the statement of activities.
b. The statement of cash flows shows information on an entity’s assets, liabilities and equity.
c. The statement of cash flows shows information on an entity’s income and expenses during
the period.

36
 d. The statement of cash flows shows historical changes of cash and cash equivalents during
the period.

10. Which of the following is presented under the investing activities section of a statement of cash
flows?
a. Collection of accounts receivable
b. Cash purchases of inventories
c. Purchase of equipment through cash
d. Issuance of share capital through cash

11. According to PAS 8, these are the specific principles, bases, conventions, rules and practices
applied by an entity in preparing and presenting financial statements.
a. Accounting policies c. Accounting standards
b. Accounting estimates d. Accounting assumptions

12. A change in the pattern of consumption of economic benefits from an asset is most likely a
a. change in accounting policy. c. error.
b. change in accounting estimate. d. any of these

13. PAS 8 permits a change in accounting policy only if the change

a. is required by a PFRS
b. results in reliable and more relevant information
c. a or b
d. PAS 8 does not permit a change in accounting policy

14. These arise from misapplication of accounting policies, mathematical mistakes, oversights or
misinterpretations of facts, or fraud.
a. Error
b. Change in accounting estimate
c. Change in accounting policy
d. Impracticable application

15. How should the following changes be treated, according to PAS 8?

III. A change is to be made in the method of calculating the provision for uncollectible receivables.
IV. Investment properties are now measured at fair value, having previously been measured at
cost.
Change (1) Change (2)
a. Change of accounting policy Change of accounting policy
b. Change of accounting policy Change of accounting estimate
c. Change of accounting estimate Change of accounting policy
d. Change of accounting estimate Change of accounting estimate

CHAPTER 3 - PRETEST

Read and understand each question carefully. This test consists of 10 items of Multiple Choice.

37
1. These are differences that have future tax consequences.
a. Permanent differences c. Taxable differences
b. Temporary differences d. Deductible differences

2. This type of difference will give rise to deferred tax liability.

a. Taxable temporary difference
b. Permanent difference
c. Deductible temporary difference
d. Deferred difference

3. Deferred tax assets and deferred tax liabilities do not alter the tax to be paid in the current period.
However, they cause tax payments to either increase or decrease when they reverse in a future
period. The reversal of which of the following will cause an increase in tax payment?
a. Deferred tax liability c. Deferred tax expense
b. Deferred tax asset d. Deferred tax benefit

4. During the period, deferred tax assets increase by ₱400 while deferred tax liabilities increase by
₱500. The net change of ₱100 is a
a. deferred tax expense c. deferred tax liability
b. deferred tax income d. deferred tax asset

5. At the end of the period, Entity A has taxable temporary difference of ₱100,000. Entity A’s income
tax rate is 30%. Entity A’s statement of financial position would report which of the following?
a. 30,000 deferred tax asset
b. 30,000 deferred tax liability
c. 30,000 deferred tax expense
d. 30,000 income tax expense

6. According to PAS 16, the selection of an appropriate depreciation method rests upon the entity’s
a. management.
b. accountant.
c. regulator.
d. all of these

7. Which of the following is not one of the essential characteristics of a PPE?

a. tangible asset
b. used in business
c. primarily held for sale
d. long-term in nature

8. PAS 16 requires an entity to review the depreciation method and the estimates of useful life and
residual value at the end of each year-end. A change in any of these is accounted for using
a. a specific transitional provision of a PFRS.
b. retrospective application.
c. prospective application.
d. any of these
38
9. If plotted on a graph (X-axis: time; Y-axis: ₱), the depreciation charges under the straight-line
method would show
a. a straight-line.
b. an upward line sloping to the right.
c. a downward line sloping to the left.
d. a curvilinear line sloping here and there.

10. Which of the following instances does not preclude an entity from recognizing depreciation during
a certain period?
a. The asset is fully depreciated.
b. The asset is being depreciated using the units of production method and there is no production
during the period.
c. The asset is classified as held for sale under PFRS 5.
d. The asset becomes idle or is taken out of active use.

CHAPTER 3 INCOME TAXES

Objectives:
Identify the recognition of property, plant and equipment

Define the deferred taxes and current taxes

PAS 12 Income Taxes

39
Accounting profit vs. Taxable profit

40
 The varying treatments of economic activities between the PFRSs and tax
laws result to permanent and temporary differences:

Permanent differences

Permanent differences are those that do not have future tax consequences

Examples:

- Interest income on government bonds and treasury bills

- Interest income on bank deposits

- Dividend income

- Fines, surcharges, and penalties arising from violation of law

- Life insurance premium on employees where the entity is the

irrevocable beneficiary

Temporary differences

Temporary differences are those that have future tax consequences. Temporary
differences are either:

- Taxable temporary differences – arise, for example, when financial

income is greater than taxable income or the carrying amount of an
41
 asset is greater than its tax base

- Deductible temporary differences arise in case of the opposites of the

foregoing

Taxable temporary differences result to deferred tax liabilities while

deductible temporary differences result to deferred tax assets.

Deferred taxes

- If the increase in deferred tax liability exceeds the increase in deferred

tax asset, the difference is deferred tax expense. If it is the opposite, the
difference is deferred tax income or benefit

- A deferred tax asset is recognized only to the extent that it is realizable

- Deferred taxes are measured using enacted or substantially enacted

tax rates that are applicable to the periods of their expected reversals

- Deferred tax assets and liabilities are not discounted

- Deferred tax asset and liabilities are presented as non-current

PAS 16 Property, Plant and Equipment

42
Characteristics of PPE

- Tangible assets – items of PPE have physical substance

- Used in normal operations – items of PPE are used in the production or

supply of goods or services, for rental, or for administrative purposes

- Long-term in nature – items of PPE are expected to be used from more

than a year

Examples of items of PPE

1. Land used in business

2. Land held for future plant site

3. Building used in business
4. Equipment used in the production of goods
5. Equipment held for environmental and safety reasons
6. Equipment held for rentals
7. Major spare parts and long-lived stand-by equipment
8. Furniture and fixture
Recognition
The cost of an item of property, plant and equipment shall be recognized
as an asset only if:
43
 - it is probable that future economic benefits associated with the item will
flow to the entity
- the cost of the item can be measured reliably
Measurement of Cost
The cost of an item of PPE is the cash price equivalent at the recognition
date. If payment is deferred beyond normal credit terms, the difference between
the cash price equivalent and the total payment is recognized as interest over the
period of credit unless such interest is capitalized in accordance with PAS 23
Borrowing Costs

Cost Model

After recognition, an item of PPE is measured at its cost less any

accumulated depreciation and any accumulated impairment losses

Depreciation

Depreciation is the systematic allocation of the depreciable amount of an

asset over its estimated useful life. When computing for depreciation, each part of
an item of PPE with a cost that is significant in relation to the total cost of the item
shall be depreciated separately.

Depreciation begins when the asset is available for use, i.e., when it is in
the location and condition necessary for it to be capable of operating in the
manner intended by management.

Depreciation ceases when the asset is derecognized or when it is

classified as “held for sale” under PFRS 5, whichever comes earlier

The Straight-line method of Depreciation

Straight line method – depreciation is recognized evenly over the life of the
asset by dividing the depreciable amount by the estimated useful life

Depreciation = (Historical cost – Residual value) ÷

44
 Estimated useful life

Revaluation Model

After recognition as an asset, an item of PPE whose fair value can be

measured reliably shall be carried at a revalued amount, being its fair value at the
date of the revaluation less any subsequent accumulated depreciation and
subsequent accumulated impairment losses

Revaluation surplus

Fair value* xx
Less: Carrying amount (xx)
Revaluation surplus – gross of tax xx

The fair value is determined using an appropriate valuation technique, taking into
account the principles set forth under PFRS 13

Derecognition:

The carrying amount of an item or PPE shall be derecognized:

- on disposal

- when no future economic benefits are expected from its use or disposal

PAS 19 Employee Benefits

45
Employee benefits are “all forms of consideration given by an entity in exchange
for service rendered by employees.

Four categories of employee benefits under PAS 19

- Short-term employee benefits - Short-term employee benefits are

employee benefits (other than termination benefits) that are due to be
settled within 12 months after the end of the period in which the
employees render the related service

- Post-employment benefits - are employee benefits (other than

termination benefits) that are payable after the completion of
employment

- Other long-term employee benefits - are employee benefits (other than

post-employment benefits and termination benefits) that are due to be
settled beyond 12 months after the end of the period in which the
employees render the related service

- Termination benefits - are employee benefits provided in exchange for

the termination of an employee’s employment as a result of either:

1. an entity’s decision to terminate an employee’s employment before

the normal retirement date

2. an employee’s decision to accept an entity’s offer of benefits in

46
 exchange for the termination of employment

For further discussion please refer to the link provided: PAS 12 – Income Taxes

https://www.youtube.com/watch?v=puCzQ3duUhI
For further discussion please refer to the link provided : PAS 16 - PPE
https://www.youtube.com/watch?v=Z7SfSVmychY
For further discussion please refer to the link provided: PAS 19 – Employee Benefits
https://www.youtube.com/watch?v=2xTUfFcE6wE

Reference Book:
Conceptual Framework and Accounting Standards
By: Zeus Vernon B. Millan, 2019 Edition

CHAPTER 3 ACTIVITY / ASSIGNMENT

Answer the following questions/statements in not less than 5 sentences.

1. Explain the following:

a. Accounting profit
b. Taxable profit
c. Deferred taxes
d. Employee benefits
e. Property, plant and equipment

CHAPTER 3 - POST TEST

Read and understand each question carefully. This test consists of 10 items Multiple Choice.

1. Imagine you are an employer (an awesome one). When should you recognize short-term
employee benefits?
a. Every 1st day of the month

47
 b. Every 15th and 30th of the month.
c. When the employees have rendered service in exchange for the employee benefits.
d. Never!

2. You are the business owner of Entity A. You have 10 employees, each earning ₱20,000 per
month. You pay salaries on a bi-monthly basis. During the month of April 20x1, none of your
employees were absent, late or have rendered overtime service. When will you recognize the
salaries expense (and at what amount) for the first payday in the month of April 20x1?
Timing of recognition Amount recognized
a. April 1 20,000
b. April 15 20,000
c. April 1 100,000
d. April 15 100,000

3. Entity A has 20 employees who are each entitled to one day paid vacation leave for each month of
service rendered. Unused vacation leaves cannot be carried forward and are forfeited when
employees leave the entity. All the employees have rendered service throughout the current year
and have taken a total of 150 days of vacation leaves. The average daily rate of the employees in
the current period is ₱1,000. However, a 5% increase in the rate is expected to take into effect in
the following year. Based on Entity A’s past experience, the average annual employee turnover
rate is 20%. How much will Entity A accrue at the end of the current year for unused entitlements?
a. 0 c. 90,000
b. 150,000 d. 94,500

4. Under a profit-sharing plan, Entity A agrees to pay its employees 5% of its annual profit. The
bonus shall be divided among the employees currently employed as at year-end. Relevant
information follows:

Profit for the year ₱8,000,000

Employees at the beginning of the year 8
Average employees during the year 7
Employees at the end of the year 6

If the employee benefits remain unpaid, how much liability shall Entity A accrue at the end of the
year?
a. 400,000 c. 200,000
b. 300,000 d. 0

5. You are employed as an accountant. Your company’s retirement plan states that, upon retirement,
an employee (not less than 60 years but not more than 65 years of age) is entitled to a lump sum
payment equal to the employee’s final monthly salary level multiplied by the number of years in
service (not less than 10 years). At the end of month following the month of retirement and every
month thereafter, the retired employee is entitled to a monthly pension equal to one-eighth (1/8) of
the final monthly salary level. The monthly pensions cease upon death of the retired employee.
However, if the employee has immediate dependent(s) with age of less than 18 years, the
48
 dependent(s) will be entitled to the monthly pensions, which will cease when the dependent(s)
reaches 18 years of age. What type of post-employment benefit plan does your company have?
a. Defined contribution plan
b. Defined benefits plan
c. Defined pension plan
d. Cannot be determined; insufficient information!

Use the following information for the next six questions:

Information on Entity A’s defined benefit plan is as follows:
PV of DBO – Jan. 1, 20x1 1,800,000
FVPA – Jan.1, 20x1 1,440,000
PV of DBO – Dec. 31, 20x1 2,160,000
FVPA, end. – Dec. 31, 20x1 1,572,000
Current service cost 390,000
Actuarial loss 120,000
Return on plan assets 132,000
Discount rate 5%

6. How much is the net defined benefit liability (asset) in Entity A’s December 31, 20x0 statement of
financial position?
a. 588,000 liability
b. 588,000 asset
c. 360,000 liability
d. 360,000 asset

7. How much is the net defined benefit liability (asset) in Entity A’s December 31, 20x1 statement of
financial position?
a. 588,000 liability
b. 588,000 asset
c. 360,000 liability
d. 360,000 asset

8. How much is the total defined benefit cost for 20x1?

a. 588,000
b. 468,000
c. 348,000
d. 228,000

9. How much is the component of the total defined benefit cost to be recognized in profit or loss?
a. 390,000
b. 408,000
c. 348,000
d. 18,000

10. How much is the component of the total defined benefit cost to be recognized in other
comprehensive income?
49
 a. 180,000
b. (60,000)
c. 60,000
d. (180,000)

Use the following information for the next six questions:

Information on Entity A’s defined benefit plan is as follows:
PV of DBO – Jan. 1, 20x1 1,800,000
FVPA – Jan.1, 20x1 1,440,000
PV of DBO – Dec. 31, 20x1 2,160,000
FVPA, end. – Dec. 31, 20x1 1,572,000
Current service cost 390,000
Actuarial loss 120,000
Return on plan assets 132,000
Discount rate 5%

11. How much is the net defined benefit liability (asset) in Entity A’s December 31, 20x0 statement of
financial position?
f. 588,000 liability
g. 588,000 asset
h. 360,000 liability
i. 360,000 asset

12. How much is the net defined benefit liability (asset) in Entity A’s December 31, 20x1 statement of
financial position?
a. 588,000 liability
b. 588,000 asset
c. 360,000 liability
d. 360,000 asset

13. How much is the total defined benefit cost for 20x1?
a. 588,000
b. 468,000
c. 348,000
d. 228,000

14. How much is the component of the total defined benefit cost to be recognized in profit or loss?
a. 390,000
b. 408,000
c. 348,000
d. 18,000

15. How much is the component of the total defined benefit cost to be recognized in other
comprehensive income?
a. 180,000
b. (60,000)
50
 c. 60,000
d. (180,000)

CHAPTER 4 - PRETEST

Read and understand each question carefully. This test consists of 10 items of Multiple Choice.

1. Which of the following is considered a government grant under PAS 20?

a. Award of major government contracts
b. Cancellation of an existing loan from the government
c. Free technical advice
d. Public improvements

2. Which of the following is not considered a government grant under PAS 20?
a. Financial aid
b. Benefit of subsidized loans
c. Tax breaks
d. Forgivable loans

3. The main concept used in recognizing income from government grants is

a. capital approach
b. historical cost
c. matching
d. materiality

4. In 20x1, Entity A proposes an environmental clean-up project for a river. The government supports
this project and gives Entity A a ₱1M monetary grant conditioned that the money will only be spent
on the proposed project. The proposed project is expected to take about 2 years to complete.
Entity A starts the clean-up project in 20x2. How should Entity A recognize income from the
government grant?
a. in full when Entity A receives the grant
b. over 2 years starting in 20x1
c. over the period of the project as expenses are incurred
d. the grant is not recognized as income

5. According to PAS 20, a government grant that becomes repayable is accounted for
a. retrospectively.
b. prospectively.
c. a or b
d. not accounted for

6. ABC Philippines Co. is required to file audited financial statements with the Philippine Securities
and Exchange Commission (SEC) and the Bureau of Internal Revenue (BIR). What is the
presentation currency for the financial statements to be filed with the said government agencies?
51
 a. Philippine peso
b. U.S. dollar
c. a or b
d. none of these

7. These are those which do not give rise to a right to receive (or an obligation to deliver) a fixed or
determinable amount of money.
a. Monetary items
b. Non-monetary items
c. Financial items
d. Non-financial items

8. On December 1, 20x1, you imported a machine from a foreign supplier for $100,000, due for
settlement on January 6, 20x2. Your functional currency is the Philippine peso. When preparing
the December 31, 20x1 statement of financial position, which of the following will you translate to
the closing rate?
a. machine
b. accounts payable
c. a and b
d. none of these

9. Use the information in Problem #4 above. The relevant exchange rates are as follows:
Dec. 1, 20x1 Dec. 31, 20x1 Jan. 6, 20x2
₱50:$1 ₱52:$1 ₱47:$1

How much foreign exchange gain (loss) will you recognize on December 31, 20x1?
a. 200,000 c. 100,000
b. (200,000) d. (100,000)

10. Which of the following costs may not be eligible for capitalization as borrowing costs under PAS
23?
a. Interest on bonds issued to finance the construction of a qualifying asset.
b. Amortization of discounts or premiums relating to borrowings that qualify for capitalization.
c. Imputed cost of equity.
d.Exchange differences arising from foreign currency borrowings to the extent they are regarded
as an adjustment to interest costs pertaining to a qualifying asset

52
 CHAPTER 4
PAS 24 – ACCOUNTING FOR GOVERNMENT GRANTS

Objectives:
Explain the recognition of government grants
Identify the presentation of government grants in the financial
statements and the borrowing costs

Government grants are assistance received from the government in

the form of transfers of resources in exchange for compliance with certain
conditions. Government grants exclude government assistance whose
value cannot be reasonably measured or cannot be distinguished from the
entity’s normal trading transactions.

53
Examples of Government Grants
1. Receipt of cash, land, or other non-cash assets from the
government subject to compliance with certain conditions
2. Receipt of financial aid in case of loss from a calamity
3. Forgiveness of an existing loan from the government
4. Benefit of a government loan with below-market rate of interest
The following are not government grants:
- Tax benefits
- Free technical or marketing advice
- Provision of guarantees
- Government procurement policy that is responsible for a portion of
the entity’s sales
- Public improvements that benefit the entire community
Recognition
Government grants are recognized if there is reasonable assurance
that:
the attached conditions will be complied with; and the grants will be
received
Classifications of government grants according to attached condition
1. Grants related to assets - grants whose primary condition
is that an entity qualifying for them should purchase,
54
 construct or otherwise acquire long-term assets
2. Grants related to income – grants other than those related
to assets
Accounting for Gov’t. Grants
The main concept in accounting for gov’t. grants is the MATCHING
CONCEPT. This means that the gov’t. grant is recognized as income as the
entity recognizes as expense the related cost for which the grant is intended
to compensate.
Presentation of Government grants related to assets
Government grants related to assets are presented in the statement of
financial position either by:
- Gross presentation –the grant is presented as deferred income
(liability)
- Net presentation – the grant is deducted when computing for the
carrying amount of the asset
Presentation of Government grants related to income
Grants related to income are sometimes presented in the income
statement either by:
- Gross presentation – the grant is presented separately or under a
general heading such as “Other income”, or
- Net presentation – the grant is deducted in reporting the related
expense
Repayment of Government Grants
A government grant that becomes repayable is accounted for as a
change in accounting estimate that is treated prospectively under PAS 8.

PAS 21 The Effects of Changes in Foreign Exchange Rates

55
Two ways of conducting foreign activities
1. Foreign currency transactions – individual entities often
enter into transactions in a foreign currency
2. Foreign operations – groups often include overseas entities
Functional currency
- When preparing financial statements, a reporting entity must identify
its functional currency
- Functional currency is the currency of the primary economic
environment in which the entity operates
- The primary economic environment in which an entity operates is
normally the one in which it primarily generates and expends cash
Foreign currency transactions
Initial recognition:
- The foreign currency amount is translated at the spot exchange rate
at the date of the transaction
Subsequent recognition: At the end of each reporting period:
- Foreign currency monetary items are re-translated using the closing
rate
- Non-monetary items that are measured at historical cost in a foreign
currency shall be translated using the exchange rate at the date of
the transaction

56
 - Non-monetary items that are measured at fair value in a foreign
currency shall be translated using the exchange rates at the date
when the fair value was determined
Monetary items – are units of currency held and assets and liabilities to be
received or paid in a fixed or determinable number of units of currency.
A foreign operation is an entity that is a subsidiary, associate, joint venture or
branch of a reporting entity, the activities of which are based or conducted in
a country or currency other than those of the reporting entity

PAS 23 BORROWING COSTS

Borrowing costs that are directly attributable to the acquisition,

construction or production of a qualifying asset form part of the cost of that
asset. Other borrowing costs are recognized as an expense.” (PAS 23.1)
Borrowing costs are interest and other costs incurred by an entity in
connection with the borrowing of funds. Borrowing costs may include:
- interest expense on financial liabilities or lease liabilities computed
using the effective interest method
- Exchange differences arising from foreign currency borrowings to
the extent that they are regarded as an adjustment to interest costs
Qualifying asset is an asset that necessarily takes a substantial period of time
to get ready for its intended use or sale.
Commencement of capitalization
The capitalization of borrowing costs as part of the cost of a qualifying
asset commences on the date when all of the following conditions are met:
a. The entity incurs expenditures for the asset
b. The entity incurs borrowing costs
57
 c. It undertakes activities that are necessary to prepare the asset for its
intended use or sale
Suspension of capitalization
Capitalization of borrowing costs shall be suspended during extended
periods of suspension of active development of a qualifying asset.
Cessation of capitalization
An entity shall cease capitalizing borrowing costs when substantially all
the activities necessary to prepare the qualifying asset for its intended use or
sale are complete
Financial statement presentation
Qualifying assets are not segregated from other assets in the financial
statements. They are presented as regular assets under their normal
classification as provided under other standards.

For further discussion please refer to the link provided: PAS 20 - Government Grants
https://www.youtube.com/watch?v=TKZNC8KIBrk
For further discussion please refer to the link provided: PAS 21
https://www.youtube.com/watch?v=ingRv6iy4Us
For further discussion please refer to the link provided : PAS 23 – Borrowing Cost
https://www.youtube.com/watch?v=4j3d0QnZY4g

Reference Book:
Conceptual Framework and Accounting Standards
By: Zeus Vernon B. Millan, 2019 Edition

CHAPTER 4 - ACTIVITY / ASSIGNMENT

Answer the following questions/statements in not less than 5 sentences.

58
 1. Differentiate between specific borrowings and general borrowings. Give examples.

CHAPTER 4 - POST TEST

Read and understand each question carefully. This test consists of 10 items of Multiple Choice

1. On January 1, 20x1, Entity A obtained a 10%, ₱5,000,000 loan, specifically to finance the
construction of a building. The proceeds of the loan were temporarily invested and earned interest
income of ₱180,000. The construction was completed on December 31, 20x1 for total construction
costs of ₱7,000,000. How much is the cost of the building on initial recognition?
a. 7,320,000 c. 7,500,000
b. 7,000,000 d. 6,680,000

2. Which of the following may not be considered a “qualifying asset” under PAS 23?
a. A power generation plant that normally takes two years to construct.
b. An expensive private jet that can be purchased from a local vendor.
c. A toll bridge that usually takes more than a year to build.
d. A ship that normally takes one to two years to complete.

3. An asset is being constructed for an enterprise's own use. The asset has been financed with a
specific new borrowing. The interest cost incurred during the construction period as a result of
expenditures for the asset is
a. a part of the historical cost of acquiring the asset to be written off over the estimated useful life
of the asset.
b. interest expense in the construction period.
c. recorded as a deferred charge and amortized over the term of the borrowing.
d. a part of the historical cost of acquiring the asset to be written off over the term of the
borrowing used to finance the construction of the asset.

4. Which of the following costs may not be eligible for capitalization as borrowing costs under PAS
23?
a. Interest on bonds issued to finance the construction of a qualifying asset.
b. Amortization of discounts or premiums relating to borrowings that qualify for
capitalization.
c. Imputed cost of equity.
d. Exchange differences arising from foreign currency borrowings to the extent they are
regarded as an adjustment to interest costs pertaining to a qualifying asset.

5. Capitalization of borrowing costs

a. Shall be suspended during temporary periods of delay.
b. May be suspended only during extended periods of delays in which active development is
delayed.
c. Should never be suspended once capitalization commences.
d. Shall be suspended only during extended periods of delays in which active development is
59
 delayed..

6. These are those which do not give rise to a right to receive (or an obligation to deliver) a fixed or
determinable amount of money.
a. Monetary items
b. on-monetary items
c. Financial items
d. Non-financial items

7. On December 1, 20x1, you imported a machine from a foreign supplier for $100,000, due for
settlement on January 6, 20x2. Your functional currency is the Philippine peso. When preparing
the December 31, 20x1 statement of financial position, which of the following will you translate to
the closing rate?
a. machine
b. accounts payable
c. a and b
d. none of these

8. Which of the following is considered a government grant under PAS 20?

a. Award of major government contracts
b. Cancellation of an existing loan from the government
c. Free technical advice
d. Public improvements

9. Which of the following is not considered a government grant under PAS 20?
a. Financial aid
b. Benefit of subsidized loans
c. Tax breaks
d. Forgivable loans

10. The main concept used in recognizing income from government grants is
a. capital approach c. matching
b. historical cost d. materiality

CHAPTER 5 – PRETEST
Read and understand each question carefully. This test consists of 10 items of Multiple Choice. 2
points each.

1. PAS 24 requires the disclosure of key management personnel compensation. Which of the
following is not included in this disclosure?
a. short-term employee benefits
b. termination benefits
c. share-based payment
d. reimbursements of officers’ out-of-pocket expenses
60
2. Which of the following is not required to be disclosed under PAS 24?
a. A parent-subsidiary relationship when there were transactions between them during the period.
b. A parent-subsidiary relationship when there were no transactions between them during the
period.
c. Loans to officers
d. The name of the parent of the entity’s associate

3. The amount of benefits to be received by employees enrolled in a defined benefit plan is

a. dependent on the level of contributions to a fund.
b. dependent on the level of investment performance of a fund.
c. a and b
d. neither a nor b

4. Which of the following statements is correct?

a. PAS 19 encourages, but does not require, involving a qualified actuary in measuring defined
benefit obligations.
b. PAS 26 applies only to defined benefit plans but not to defined contribution plans.
c. Information on ‘excess’ or ‘deficit’ is required to be disclosed in the financial statements of a
defined contribution plan.
d. In practice, actuarial valuations are frequently prepared every year.

5. These are those presented in addition to consolidated financial statements or the financial
statements of an entity with an investment in associate or joint venture that is accounted for using
equity method in accordance with PAS 28.
a. Individual financial statements
b. Separate financial statements
c. Consolidate financial statements
d. Equity financial statements

CHAPTER 5

Objectives:
Enumerate examples of related parties
Describe the disclosure requirements for related parties

PAS 24 – RELATED PARTY DISCLOSURES

PAS 24 prescribes the necessary disclosures regarding related party

relationships and transactions, outstanding balances and commitments
between an entity and its related parties.
61
Related parties
A related party is “a person or entity that is related to the reporting
entity that is preparing its financial statements.” (PAS 24)
Examples of related parties:
1. Investor and investee relationship where control, joint control or
significant influence exists
2. Key management personnel
3. Close family member
4. Post-employment benefit plan
Control – an investor controls an investee when the investor is exposed, or
has rights, to variable returns from its involvement with the investee and has
the ability to affect those returns through its power over the investee.
Significant influence is the power to participate in the financial and operating
policy decisions of an entity, but is not control over those policies. Significant
influence may be gained by share ownership, statute or agreement.
Joint control is the contractually agreed sharing of control over an economic
activity.
Key management personnel are those persons having authority and
responsibility for planning, directing and controlling the activities of the entity,
directly or indirectly, including any director (whether executive or otherwise) of
that entity
A related party transaction is a transfer of resources, services or obligations

62
between a reporting entity and a related party, regardless of whether a price
is charged
Disclosure:
- Parent-subsidiary relationship regardless of whether there have
been transactions between them
- Key management personnel compensation broken down into the
following categories SPOTS and loans to key management
personnel.
- Related party transactions - nature of transaction and outstanding
balances
Disclosures that related party transactions were made on terms equivalent to
those that prevail in arm’s length transactions are made only if such terms
can be substantiated.

PAS 26 Accounting and Reporting by Retirement Benefit Plans

PAS 19 - Applied by an employer in (among others) determining the cost of

providing retirement benefits
PAS 26 - Applied by, for example, a trustee, when preparing the financial
statements of a retirement benefit plan.

Financial Statements of a Defined Contribution Plan

- a statement of net assets available for benefits
- a statement of changes in net assets available for benefits
- accompanying notes to the financial statements

Financial Statements of a Defined Benefit Plan

a statement that shows:
63
1. the net assets available for benefits
2. the actuarial present value of promised retirement benefits, distinguishing
between vested benefits and non-vested benefits
3. the resulting excess or deficit
a statement of net assets available for benefits including either:
1. a note disclosing the actuarial present value of promised retirement benefits,
distinguishing between vested benefits and non-vested benefits
2. a reference to this information in an accompanying actuarial report

PAS 27 Separate Financial Statements

- PAS 27 does not mandate which entities should produce separate

financial statements
- An entity shall apply PAS 27 in accounting for investments in
subsidiaries, joint ventures and associates when it elects, or is
required by local regulations, to present separate financial statements
Separate financial statements are those presented in addition to consolidated
financial statements or in addition to financial statements in which investments

64
in associates or joint ventures are accounted for using the equity method.
Separate financial statements need not be appended to, or accompany, those
statements.
Preparation of separate financial statements
Separate financial statements shall be prepared in accordance with all
applicable PFRSs, except as follows:
1. Investments in subsidiaries, associates and joint ventures are accounted for
in the separate financial statements either:
a. at cost
b. in accordance with PFRS 9 Financial Instruments
c. using the equity method
2. The entity shall apply the same accounting for each category of investments

PAS 28 Investments in Associates and Joint Ventures

Associate - an entity, including an unincorporated entity such as a

partnership, over which the investor has significant influence
Significant influence - the power to participate in the financial and operating
policy decisions of the investee but is not control or joint control over those
policies.
Significant influence is presumed to exist if the investor holds, directly or
indirectly (e.g. through subsidiaries), 20% or more of the voting power of the
investee, unless it can be clearly demonstrated that this is not the case.

65
Equity method
- Investments in associates or joint ventures are accounted for using
the equity method. Under this method, the investment is initially
recognized at cost and subsequently adjusted for the investor’s share
in the changes in the EQUITY of the investee.
Discontinuance of the use of equity method
- An investor starts to apply the equity method on the date it obtains
significant influence and ceases to apply the equity method on the
date it loses significant influence
- On the loss of significant influence, the investor shall measure at fair
value any investment the investor retains in the former associate. The
investor shall recognize in profit or loss any difference between:
1. The fair value of any retained investment and any proceeds
from disposing of the part interest in the associate
2. The carrying amount of the investment at the date when
significant influence is lost
Reclassification of cumulative OCI
If an investor loses significant influence over an associate, all amounts
recognized in other comprehensive income in relation to the associate shall be
accounted on the same basis as would be required if the associate had directly
disposed of the related assets or liabilities.
Share in losses of associate
If an investor’s share of losses of an associate equals or exceeds its
interest in the associate, the investor discontinues recognizing its share of
further losses.
Interest in the associate includes the following:
a. Investment in associate measured under equity method
b. Investment in preference shares of the associate
c. Unsecured long-term receivables or loans
Interest in the associate does not include the following:
a. Trade receivables and payables
66
 b. Secured long-term receivables or loans

For further discussion please refer to the link provided: PAS 24 – Related Party Disclosure
https://www.youtube.com/watch?v=19mZWo-KFks
For further discussion please refer to the link provided : PAS 28 – Investment in
associates
https://www.youtube.com/watch?v=gGrPuR1MpJc
For further discussion please refer to the link provided: Joint Ventures
https://www.youtube.com/watch?v=tGQveH0148s

Reference Book:
Conceptual Framework and Accounting Standards
By: Zeus Vernon B. Millan, 2019 Edition

CHAPTER 5 - ACTIVITY / ASSIGNMENT

Solve the following. Show your solutions: 5 points each.

A. On January 1, 20x1, Entity A acquires 25% interest in Entity B for ₱800,000. Entity
B reports profit of ₱1,000,000 and declares dividends of ₱100,000 in 20x1. How
much is the carrying amount of the investment in associate on December 31,
20x1?

B. The Hanwell Company acquired a 30% equity interest in The Northfield Company
for CU400,000 on 1 January 20X6. In the year to 31 December 20X6 Northfield
earned profits of CU80,000 and paid no dividend. In the year to 31 December
20X7 Northfield incurred losses of CU32,000 and paid a dividend of CU10,000. In
Hanwell's consolidated statement of financial position at 31 December 20X7, what
should be the carrying amount of its interest in Northfield, according to IAS 28
Investments in associates?

CHAPTER 5 – POST TEST

Read and understand each question carefully. This test consists of 10 items of Multiple Choice.

1. Which of the following best describes the term ‘significant influence’ as used under PAS 28?
a. The holding of 20% interest in an investee.

67
 b. The ability to control an investee’s relevant activities through holding of significant portion of
the investee’s voting rights.
c. The power to participate in the financial and operating policy decisions of an entity.
d. The contractually agreed sharing of profits and losses in an investee.

2. Entity A owns 25% of the voting rights in Entity B. However, Entity A has no representation on the
board of directors of Entity B. Which of the following statements is correct?
a. Entity A cannot be presumed to have significant influence over Entity B because Entity A does
not have board representation.
b. Entity A is presumed to have signification influence over Entity B because it holds 25% or more
of the voting rights in Entity B.
c. Entity A is presumed to have signification influence over Entity B because it holds 20% or more
of the voting rights in Entity B.
d. Representation on an investee’s board of directors is never considered when determining the
existence of significant influence.

3. On January 1, 20x1, Entity A acquires 25% interest in Entity B for ₱800,000. Entity B reports profit
of ₱1,000,000 and declares dividends of ₱100,000 in 20x1. How much is the carrying amount of
the investment in associate on December 31, 20x1?
a. 800,000
b. 1,250,000
c. 1,000,000
d. 1,025,000

4. The Hanwell Company acquired a 30% equity interest in The Northfield Company for CU400,000
on 1 January 20X6. In the year to 31 December 20X6 Northfield earned profits of CU80,000 and
paid no dividend. In the year to 31 December 20X7 Northfield incurred losses of CU32,000 and
paid a dividend of CU10,000. In Hanwell's consolidated statement of financial position at 31
December 20X7, what should be the carrying amount of its interest in Northfield, according to IAS
28 Investments in associates?
a. CU438,000
b. CU411,400
c. CU414,400
d. CU400,000

5. These are those presented in addition to consolidated financial statements or the financial
statements of an entity with an investment in associate or joint venture that is accounted for using
equity method in accordance with PAS 28.
a. Individual financial statements
b. Separate financial statements
c. Consolidate financial statements
d. Equity financial statements

6. Entity A acquired an investment in associate for ₱1M many years ago. At the end of the current
reporting period, the investment has a fair value of ₱2.9M. If the equity method is used, the

68
 investment would have a current carrying amount of ₱2.6M. In Entity A’s separate financial
statements, the investment should be valued at
a. 1,000,000.
b. 2,600,000.
c. 2,900,000.
d. any of these, as a matter of an accounting policy choice

7. The amount of benefits to be received by employees enrolled in a defined benefit plan is

a. dependent on the level of contributions to a fund.
b. dependent on the level of investment performance of a fund.
c. a and b
d. neither a nor b

8. Which of the following statements is correct?

a. PAS 19 encourages, but does not require, involving a qualified actuary in measuring defined
benefit obligations.
b. PAS 26 applies only to defined benefit plans but not to defined contribution plans.
c. Information on ‘excess’ or ‘deficit’ is required to be disclosed in the financial statements of a
defined contribution plan.
d. In practice, actuarial valuations are frequently prepared every year.

9. PAS 24 requires the disclosure of key management personnel compensation. Which of the
following is not included in this disclosure?
a. short-term employee benefits
b. termination benefits
c. share-based payment
d. reimbursements of officers’ out-of-pocket expenses

10. Which of the following is not required to be disclosed under PAS 24?
a. A parent-subsidiary relationship when there were transactions between them during the period.
b. A parent-subsidiary relationship when there were no transactions between them during the
period.
c. Loans to officers
d. The name of the parent of the entity’s associate

CHAPTER 6 - PRETEST
Read and understand each question carefully. This test consists of 10 items of Multiple Choice.

1. PAS 29 is generally not applied by entities unless their functional currency is that of a
hyperinflationary economy. This is because of which of the following basic accounting concepts?
a. Going concern
b. Price level concept
c. Stable monetary assumption
d. Materiality
69
2. Which of the following is within the scope of PAS 32?
a. Assets held for sale in the ordinary course of business
b. Contracts relating to employee benefits
c. Financial instruments that are within the scope of PFRS 9
d. Investments in associates and joint ventures

3. Which of the following is not a financial asset?

a. Cash
b. Receivable
c. Inventory
d. Investment in associate

4. These are bonds that can be exchanged for shares of stocks of the issuer.
a. Exchangeable bonds
b. Callable bonds
c. Convertible bonds
d. Rock bonds

5. Which of the following is not a financial instrument?

a. Accounts receivable
b. Investment in shares of stocks
c. Accounts payable
d. All of these are financial instruments

6. Which of the following is correct regarding the provisions of PAS 34?

a. PAS 34 requires publicly listed entities to prepare at least a semi-annual financial report to be
issued not later than 60 days after the end of the interim period.
b. PAS 34 requires both publicly and non-publicly listed entities to prepare at least a semi-annual
financial report to be issued not later than 60 days after the end of the interim period.
c. PAS 34 encourages publicly listed entities to prepare at least a semi-annual financial report to
be issued not later than 60 days after the end of the interim period.
d. PAS 34 encourages publicly listed entities to prepare at least three quarterly financial reports
to be issued not later than 45 days after the end of each interim period.

7. According to PAS 34, measurements in the interim period are made on

a. a discrete basis.
b. a year-to-date basis.
c. an item-by-item basis.
d. a or b, as matter of accounting policy choice

8. ________________ is “any contract that gives rise to a financial asset of one entity and a financial
liability or equity instrument of another entity.
9. ________________ is a computation made for ordinary shares. It is a form of profitability ratio which
represents how much was earned by each ordinary share during the period.

70
10. ________________is the amount of profit for the period per share, reflecting the maximum dilutions
that would have resulted from conversions, exercises, and other contingent issuances that individually
would have decreased earnings per share and in the aggregate would have had a dilutive effect.

CHAPTER 6
PAS 29 - Financial Reporting in Hyperinflationary Economies

Objectives:
Describe the restatement procedures under PAS 29
Explain the Hyperinflationary Economies

The Stable Monetary Assumption

Under the stable monetary assumption, the purchasing power of money is
assumed to be stable. Therefore, inflation is ignored. The exception to this

71
concept is hyperinflation.

Price level changes

General price level changes and the purchasing power of money have an
inverse relationship:
- If the general price level increases, this means that the purchasing
power of money has decreased – a condition known as inflation
- If the general price level decreases, this means that the purchasing
power of money has increased – a condition known as deflation
Indicators of hyperinflation

1. The general population prefers to keep its wealth in non-monetary

72
 assets or in a relatively stable foreign currency. Amounts of local
currency held are immediately invested to maintain purchasing
power
2. The general population regards monetary amounts not in terms of
the local currency but in terms of a relatively stable foreign
currency. Prices may be quoted in that currency
3. Sales and purchases on credit take place at prices that
compensate for the expected loss of purchasing power during the
credit period, even if the period is short
4. Interest rates, wages and prices are linked to a price index
5. The cumulative inflation rate over three years is approaching, or
exceeds, 100%.
Monetary items are money held and items to be received or paid in fixed or
determinable amount of money without reference to future prices of specific
goods or services. Monetary items include monetary assets and monetary
liabilities.
Examples of Monetary assets:
- Cash and cash equivalents
- Loans and receivables and their related allowances
- Financial assets at amortized cost (debt instruments)
- Finance lease receivables
- Cash surrender value

Examples of Monetary liabilities:

- Financial liabilities at amortized cost (debt instruments), e.g. accounts,
notes, bonds, and finance lease payables
- Accrued expenses payable in fixed and determinable amounts of
money
- Refundable deposits, e.g., security deposits on leases to be returned to
tenants at the end of the lease term and deposits for returnable
containers
73
 - Dividends payable
Examples of Nonmonetary assets:
- Physical assets such as inventories, property, plant, and equipment,
and investment properties and their related accumulated depreciation
- Intangible assets
- Financial assets measured at fair value
- Advances and prepayments not collectible in cash such as advances
to suppliers, prepaid insurance, prepaid rent, and the like
Examples of Nonmonetary liabilities:
- Financial liabilities measured at fair value
- Unearned items not payable in cash such as advances from
customers, unearned rent, deferred revenues, and the like
- Warranty obligations to be settled by future delivery of services (e.g.,
free repair service) or replacement with other non-monetary items (e.g.,
free replacement of parts or replacement of the good purchased)
Equity items such as share capital and share premium are also nonmonetary
items and thus restated.
Formula for restatement:

When it is impracticable to determine the historical price indices, such as for

transactions recurring very frequently, the average general price index for the
period may be used.

PAS 32 – Financial Instruments

74
Financial instrument – is “any contract that gives rise to a financial asset of one
entity and a financial liability or equity instrument of another entity.” (PAS 32.11)
Financial asset – is any asset that is:
a. Cash
b. An equity instrument of another entity
c. A contractual right to receive cash or another financial asset from another
entity
d. A contractual right to exchange financial instruments with another entity under
conditions that are potentially favorable
e. A contract that will or may be settled in the entity’s own equity instruments
and is not classified as the entity’s own equity instrument
Financial liability – is any liability that is:
a. A contractual obligation to deliver cash or another financial asset to another
entity
b. A contractual obligation to exchange financial assets or financial liabilities with
another entity under conditions that are potentially unfavorable to the entity
c. A contract that will or may be settled in the entity’s own equity instruments
and is not classified as the entity’s own equity instrument
Equity instrument – is “any contract that evidences a residual interest in the
assets of an entity after deducting all of its liabilities
Examples of financial assets:
- Cash and cash equivalents (e.g., cash on hand, in banks, short-term
money placements, and cash funds)
- Receivables such as accounts, notes, loans, and finance lease
receivables
- Investments in equity or debt instruments of other entities such as held
for trading securities, investments in subsidiaries, associates, joint
ventures, investments in bonds, and derivative assets
- Sinking fund and other long-term funds composed of cash and other
financial assets
The following are not financial assets:
75
 - Physical assets, such as inventories, biological assets, PPE and
investment property
- Intangible assets
- Prepaid expenses and advances to suppliers
- The entity’s own equity instrument (e.g., treasury shares)
Examples of financial liabilities:
- Payables such as accounts, notes, loans and bonds payable
- Lease liabilities
- Held for trading liabilities and derivative liabilities
- Redeemable preference shares issued
- Security deposits and other returnable deposits
The following are not financial liabilities:
- Unearned revenues and warranty obligations that are to be settled by
future delivery of goods or provision of services
- Taxes, SSS, Philhealth, and Pag-IBIG payables
- Constructive obligations
Presentation

Financial liability - The contract requires the delivery of (a) a variable number of
the entity’s own equity instruments in exchange for a fixed amount of cash or
another financial asset or (b) a fixed number of the entity’s own equity
instruments in exchange for a variable amount of cash or another financial asset
Equity instrument - The contract requires the delivery (receipt) of a fixed number

76
of the entity’s own equity instruments in exchange for a fixed amount of cash or
another financial asset

Redeemable vs. Callable Preference shares

Treasury shares
- Treasury shares are an entity’s own shares that were previously issued
but were subsequently reacquired but not retired
- Treasury shares are treated as deduction from equity
- Treasury share transactions are recognized directly in equity.
Therefore, they do not result to gains or losses

PAS 33 Earnings Per Share

77
 - Earnings per share (EPS) is a computation made for ordinary shares. It
is a form of profitability ratio which represents how much was earned
by each ordinary share during the period. No EPS is presented for
preference shares because these shares have a fixed return
represented by their dividend rates.
Types of Earnings per share
a. Basic earnings per share
b. Diluted earnings per share

Basic Earnings Per Share

Rights issue

Diluted earnings per share

- Diluted earnings per share is the amount of profit for the period per
share, reflecting the maximum dilutions that would have resulted from
conversions, exercises, and other contingent issuances that individually
would have decreased earnings per share and in the aggregate would
have had a dilutive effect
- Only basic earnings per share is presented if an entity has no dilutive

78
 potential ordinary shares (i.e., simple capital structure)

Financial statement Presentation

Basic and Diluted earnings per share are computed on the following:
a. Profit or loss from continuing operations
b. Profit or loss from discontinued operations, if the entity reports a discontinued
operation
c. Profit or loss for the year
- EPS is not computed on other comprehensive income and total
comprehensive income
- EPS computed on profit or loss from continuing operations and profit or
loss for the year are presented on the face of the statement of profit or
loss and other comprehensive income. If the entity uses a two-
statement presentation, EPS is presented only on the separate income
statement

Interim reporting pertains to the preparation and presentation of interim

financial report for an interim period
Interim period is a financial reporting period shorter than a full financial year
Interim financial report means a financial report containing either:
a. a complete set of financial statements (PAS 1): or

79
b. a set of condensed financial statements (PAS 34)
Content of an interim financial report
An entity presenting an interim financial report has the option of complying either
with PAS 1 (complete set of FS) or PAS 34 (condensed set of FS)
Complete set of financial statements under PAS 1
a. Statement of financial position
b. Statement of profit or loss and other comprehensive income
c. Statement of changes in equity
d. Statement of cash flows
e. Notes, comprising a summary of significant accounting policies and other
explanatory information
f. A statement of financial position as at the beginning of the preceding period
(i.e., in cases of retrospective application, retrospective restatement or
reclassification adjustment)
Minimum content of an interim financial report under PAS 34
a. Condensed statement of financial position
b. Condensed statement of profit or loss and other comprehensive income,
presented as either (a) a condensed single statement; or (b) a condensed
separate income statement and a condensed statement of comprehensive
income
c. Condensed statement of changes in equity
d. Condensed statement of cash flows; and
e. Selected explanatory notes
Additional concepts
- Relevance over Reliability – in the interest of timeliness and cost
considerations, less information may be provided at interim dates
- Materiality and Estimates – an entity may rely on estimates to a greater
extent when preparing interim financial reports
- Note disclosures – only selected explanatory notes are provided in
interim financial reports to avoid repetition
Recognition and measurement
80
 a. Gains and losses arising in an interim period are recognized immediately and
are not deferred, e.g., inventory write-downs & reversals; asset impairment
losses & reversals; discontinued operations; and fair value changes on assets
measured at fair value
b. Costs and expenses (income) that benefit the entire year or are incurred
(earned) over the year are spread out over the interim periods, e.g.,
depreciation, amortization; property taxes; insurance expense; interest
expense (income); 13th month pay and other year-end bonuses.
c. Discretionary income are recognized immediately in the period the income is
earned, e.g., dividend income
d. Income tax expense in the interim periods is computed using the best
estimate of the weighted average annual income tax rate expected for the full
financial year.

For further discussion please refer to the link provided: PAS 29 – Inflationary Economics
https://www.youtube.com/watch?v=LZkRWT2qXvs
For further discussion please refer to the link provided : PAS 32 – Financial Instruments
https://www.youtube.com/watch?v=F9tasMC4yvw
For further discussion please refer to the link provided : PAS 33 – Earning Per Share
https://www.youtube.com/watch?v=l-Sg4Z1fX1M

Reference Book:
Conceptual Framework and Accounting Standards
By: Zeus Vernon B. Millan, 2019 Edition
CHAPTER 6 - ACTIVITY / ASSIGNMENT

Answer the following questions/statements in not less than 5 sentences.

Explain the two types of earnings per share:

a. Basic earnings per share
b. Diluted earnings per share

CHAPTER 6 – POST TEST

Read and understand each question carefully. This test consists of 10 items Multiple Choice.

81
1. Entity A had 100,000, ₱10 par, 10% cumulative preference shares outstanding all throughout
20x1. Entity A reported profit after tax of ₱1,200,000 for the year ended December 31, 20x1.
The movements in the number of ordinary shares are as follows:

1/1/20x1 Ordinary shares outstanding 120,000

3/1/20x1 Shares issued for cash 42,000
9/30/20x1 Subscribed shares 20,000
11/1/20x1 Reacquisition of treasury shares (12,000)
Outstanding shares at the end of period 170,000

What is the basic earnings per share?

a. 5.92
b. 6.96
c. 7.09
d. 6.13

2. Entity A is computing for its basic earnings per share and has gathered the following information:
Loss for the year (800,000)
Preferred dividends 50,000
Outstanding ordinary shares 100,000

There have been no changes in the number of outstanding ordinary shares during the period. What is
the basic earnings (loss) per share?
a. -7.50
b. 7.50
c. -8.50
d. 8.50

3. Entity A had 200,000 ordinary shares outstanding all throughout 20x1. In 20x2, share issuances
occurred:
 On April 1, 20,000 shares were issued for cash.
 On September 30, a 10% bonus issue (share dividend) was declared.
 On November 1, a 2-for-1 share split was issued.

Entity A had the following profits: ₱1,200,000 in 20x2 and ₱900,000 in 20x1. What are the earnings
per share to be disclosed in Entity A’s 20x2 comparative financial statements?
20x2 20x1
a. 2.22 2.02
b. 2.54 2.05
c. 2.65 2.09
d. 2.78 2.12

4. Entity A has 200,000 ordinary shares outstanding on January 1, 20x1. Entity A offers rights issue
to its existing shareholders that enable them to acquire 1 ordinary share at a subscription price of
₱120 for every 5 rights held. The rights are exercised on May 1, 20x1. The market price of one
82
 ordinary share immediately before exercise is ₱180. Entity A reported profit after tax of
₱2,700,000 in 20x1. What is the basic earnings per share in 20x1?
a. 12.58
b. 12.67
c. 11.71
d. 11.67

5. Entity A had the following instruments outstanding all throughout 20x1:

12% convertible bonds payable issued at face amount, each

₱1,000 bond is convertible into 30 ordinary shares ₱2,000,000
Ordinary shares, ₱10 par, 100,000 shares issued and
outstanding 1,000,000

Profit for the year is ₱1,200,000. Entity A’s income tax rate is 30%.

What is the diluted earnings per share in 20x1?

a. 8.55
b. 8.15
c. 8.05
d. 8.98

6. Which of the following is correct regarding the provisions of PAS 34?

a. PAS 34 requires publicly listed entities to prepare at least a semi-annual financial report to be
issued not later than 60 days after the end of the interim period.
b. PAS 34 requires both publicly and non-publicly listed entities to prepare at least a semi-annual
financial report to be issued not later than 60 days after the end of the interim period.
c. PAS 34 encourages publicly listed entities to prepare at least a semi-annual financial report to
be issued not later than 60 days after the end of the interim period.
d. PAS 34 encourages publicly listed entities to prepare at least three quarterly financial reports
to be issued not later than 45 days after the end of each interim period.

7. According to PAS 34, measurements in the interim period are made on

a. a discrete basis.
b. a year-to-date basis.
c. an item-by-item basis.
d. a or b, as matter of accounting policy choice

8. Which of the following is within the scope of PAS 32?

a. Assets held for sale in the ordinary course of business
b. Contracts relating to employee benefits
c. Financial instruments that are within the scope of PFRS 9
d. Investments in associates and joint ventures

9. Which of the following is not a financial asset?

a. Cash
83
 b. Receivable
c. Inventory
d. Investment in associate

10. These are bonds that can be exchanged for shares of stocks of the issuer.
a. Exchangeable bonds
b. Callable bonds
c. Convertible bonds
d. Rock bonds

CHAPTER 7 - PRETEST

Read and understand each question carefully. This test consists of 10 items of Multiple choice.

1. According to PAS 36, an asset is impaired if

a. its carrying amount exceeds its recoverable amount.
b. its recoverable amount exceeds its carrying amount.
c. its carrying amount is less than its value in use.
d. its fair value less disposal costs exceeds its recoverable amount.

2. According to PAS 36, when measuring an asset’s value in use, the discount rate to be used in
discounting the estimated cash flows should be the
a. pre-tax rate that reflects current assessments of the time value of money and risks.
b. post-tax rate that reflects current assessments of the time value of money and risks.
c. pre-tax rate that reflects current assessments of market-based risks for similar replacement
assets.
d. post-tax rate that reflects current assessments of market-based risks for similar replacement
assets.

3. According to PAS 36, if an asset’s fair value less disposal costs cannot be determined, its
recoverable amount would be its
a. carrying amount.
b. replacement cost.
c. value in use.
d. current cost.

4. According to PAS 36, if it is not possible to determine the recoverable amount of an individual
asset,
a. that asset is not impaired.
b. the carrying amount of that asset should be written-off in its entirety, unless a rough-estimation
can be made.
c. the recoverable amount of that asset should be determined in relation to the cash-generating
unit to which it belongs.
d. that asset is useless; it should be given away to the garbage collection guy.

84
5. The reversal of an impairment loss results to
a. a gain and an adjustment to the depreciation charges in subsequent periods.
b. a gain, but no adjustment to the depreciation charges in subsequent periods.
c. a loss and an adjustment to the depreciation charges in subsequent periods.
d. a loss, but no adjustment to the depreciation charges in subsequent periods.

6. According to PAS 37, a present obligation that is possible and can be measured reliably is
a. recognized.
b. recognized and disclosed.
c. disclosed only.
d. ignored.

7. According to PAS 37, provisions are (choose the incorrect statement)

a. presented in the statement of financial position separately from other types of liabilities.
b. recognized and disclosed.
c. necessarily estimated because their settlement amount is not certain.
d. disclosed only, unless their expected occurrence is remote

8. The essential elements of an intangible asset do not include

a. identifiability.
b. probable outflow of resources embodying economic benefits.
c. control.
d. future economic benefits.

9. According to PAS 38, which of the following may be recognized as cost of intangible asset?
a. Research costs incurred in self-generating an intangible asset
b. Costs of an internally generated customer lists
c. Purchase cost of an externally acquired publishing title
d. Abnormal amount of wasted labor in self-generating an intangible asset

10. On January 1, 20x1, Entity A registers a patent for a total registration and legal costs of ₱600,000.
Entity A estimates that the patent has a remaining useful life of 25 years. How much is the
amortization expense for 20x1?
a. 30,000 c. 16,000
b. 24,000 d. 0

85
 CHAPTER 7
PAS 36 Impairment of Assets

Objectives:
Explain the account for the reversal of impairment
Discuss account for the impairment of individual assets and cash-
generating units

Core Principle
If the carrying amount of an asset is greater than its recoverable
amount, the asset is impaired. The excess is impairment loss
Computation of Impairment loss:
Recoverable amount xx
Less: Carrying amount (xx)
Impairment loss xx
Recoverable amount is the amount to be recovered through use or sale of an
asset. It is the higher of an asset’s:
a. Fair value less costs of disposal, and Value in use
Value in use is the present value of the future cash flows expected
to be derived from an asset or cash-generating unit.
Identifying an asset that may be impaired
- An entity shall assess at the end of each reporting period whether

86
 there is any indication that an asset may be impaired. If any such
indication exists, the entity shall estimate the recoverable amount of
the as
- If there is no indication that an asset may be impaired, an entity is
not required to estimate the recoverable amount of the asset
Required testing for impairment
The following assets are required to be tested for impairment at least
annually, whether or not there are indications for impairment:
a. Intangible asset with indefinite useful life
b. Intangible asset not yet available for use
c. Goodwill acquired in a business combination
Measuring recoverable amount
- Recoverable amount is the higher of the asset’s fair value less costs
of disposal and value in use
- However, if there is no reason to believe that an asset’s value in use
materially exceeds its fair value less costs of disposal, the asset’s
fair value less costs of disposal may be used as its recoverable
amount. This will often be the case for an asset that is held for
disposal
Value in use
- Value in use is the present value of the future cash flows expected
to be derived from an asset or cash-generating unit
- Any residual value of the asset and disposal costs should be
included in estimating future cash inflows and outflows
- Cash flow projections shall cover a maximum period of 5 years
- Projections beyond 5 years are extrapolated
Recognizing and measuring an impairment loss
Impairment loss is recognized in profit or loss, unless the asset is
carried at revalued amount, in which case revaluation surplus is decreased
first and any excess is recognized in profit or loss. The decrease in the
revaluation surplus is recognized in other comprehensive income
87
Depreciation after impairment
After the recognition of an impairment loss, the depreciation
(amortization) charge for the asset shall be adjusted in future periods to
allocate the asset’s revised carrying amount, less its residual value (if any),
on a systematic basis over its remaining useful life.
Cash-generating unit (CGU)
Cash-generating unit (CGU) is the smallest identifiable group of assets
that generates cash inflows that are largely independent of the cash inflows
from other assets or groups of assets.
Impairment of individual assets included in a CGU
- Assets whose recoverable amount can be determined reliably are
tested for impairment individually
- Assets whose recoverable amount cannot be determined reliably
(e.g., assets that do not generate their own cash flows) are included
in a CGU. The CGU is the one tested for impairment
Allocating goodwill to CGU’s
For purposes of impairment testing, goodwill acquired in a business
combination shall be allocated to each of the acquirer’s CGU in the year of
business combination.
Impairment loss for a CGU
The impairment loss on a CGU shall be allocated:
1. First, to any goodwill allocated to the CGU
2. Then, to the other assets of the unit pro rata on the basis
of the carrying amount of each asset in the unit.

PAS 37 Provisions, Contingent Liabilities, and Contingent Assets

88
Provisions
- A provision is a liability of uncertain timing or amount
- Provisions differ from other liabilities because of the uncertainty
about the timing or amount of expenditure required in settlement.
Unlike for other liabilities, provisions must be estimated. Although,
some other liabilities are also estimated, their uncertainty is
generally much less than for provisions.
- Other liabilities, such as accruals, are reported as part of “Trade and
other payables” whereas provisions are reported separately
Provision vs. Contingent liability

Recognition of provisions
A provision is recognized when all of the following conditions are met:

89
 1. The entity has a present obligation (legal or constructive)
as a result of a past event
2. It is probable that an outflow of resources embodying
economic benefits will be required to settle the obligation
3. A reliable estimate can be made of the amount of the
obligation

Measurement

Present value
Where the effect of the time value of money is material, the amount of
a provision shall be the present value of the expenditures expected to be
required to settle the obligation
Expected disposal of assets
Gains from the expected disposal of assets shall not be taken into
account in measuring a provision. Gains shall be recognized only when the
assets are actually disposed of
Reimbursement
- Where some or all of the expenditure required in settling a provision
is expected to be reimbursed by another party, the reimbursement is
recognized only when it is virtually certain that reimbursement will
be received if the entity settles the obligation
- The reimbursement shall be treated as a separate asset

90
 - In the statement of profit or loss and other comprehensive income,
the expense relating to a provision may be presented net of the
amount recognized for a reimbursement
Changes in provisions
- Provisions shall be reviewed at the end of each reporting period and
adjusted to reflect the current best estimate
- If it is no longer probable that an outflow of resources embodying
economic benefits will be required to settle the obligation, the
provision shall be reversed
Liability for premiums
- A customer option to acquire additional goods or services for free or
at a discount is accounted for under PFRS 15 if the option provides
the customer a material right that the customer would not receive
without entering into that contract
- A customer option that does not provide the customer with a
material right is not accounted for under PFRS 15; and therefore,
accounted for in accordance with PAS 37
Guarantee for indebtedness of others
A provision for the guarantee for indebtedness of others is recognized
when it becomes probable that the entity will be held liable for the guarantee,
such as when the original debtor defaults on the loan
Contingent assets

91
PAS 38 Intangible Assets

- An intangible asset is an identifiable non-monetary asset without

physical substance
- Goodwill acquired in a business combination is outside the scope of
PAS 38 because it is unidentifiable. Goodwill is accounted for under
PFRS 3 Business Combinations and PAS 36 Impairment of Assets
Essential criteria in the definition of intangible assets
1. Identifiability – separable or arises from contractual rights
2. Control – power to obtain (or restrict others from obtaining) the economic
benefits from an asset
3. Future economic benefits – may include revenue from the sale of products
or services, cost savings, or other benefits resulting from the use of the
asset by the entity
Recognition
An intangible asset shall be recognized if management can
demonstrate that:
a. The item meets the definition of intangible asset
b. It is probable that the expected future economic benefits will flow to the
entity
c. The cost of the asset can be measured reliably
Initial measurement
92
 An intangible asset shall be measured initially at cost. Measurement of
cost depends on how the intangible asset is acquired. Intangible assets may
be acquired through:
- Separate acquisition
- Acquisition as part of a business combination
- Acquisition by way of a government grant
- Exchanges of assets
- Internal generation
Acquisition by way of a government grant
Intangible assets acquired by way of government grant may be
recorded at either:
a. fair value
b. alternatively, at nominal amount or zero, plus direct costs incurred in
preparing the asset for its intended use
Internally generated intangible assets
The costs of self-creating an intangible asset are classified into:
1. Research costs – include costs of searching new knowledge and
identifying and selecting possible alternatives
2. Development costs – include costs of designing from selected alternative
and using knowledge gained from research
If an entity cannot identify in which phase a cost is incurred, the cost is
regarded as incurred in research phase.
Items of PPE used in R&D activities
- If the item of PPE can be used in various R&D activities or other
purposes, the cost of the PPE is capitalized and depreciated. The
amount of depreciation is included as R&D expense
- If the item of PPE is can only be used on one specific R&D project,
the cost of the PPE is expensed immediately in its entirety as R&D
expense
Items not recognized as intangible assets
The cost of internally generated brands, mastheads, publishing titles,
93
customer lists, goodwill and items similar in substance are expensed when
incurred
Subsequent expenditure
Subsequent expenditures on an intangible asset are generally
recognized as ex
Reinstatement of costs in subsequent period
Expenditure on an intangible item that was initially recognized as an
expense shall not be recognized as part of the cost of an intangible asset at a
later date
Amortization
- Intangible assets with finite useful life are amortized over the shorter
of the asset’s useful life and legal life
- Intangible assets with indefinite useful life are not amortized but
tested for impairment at least annually
- The default method of amortization is the straight line method

PAS 40 Investment Property

Investment property is “property (land or a building – or a part of a building –

or both) held (by the owner or by the lessee under finance lease) to earn
rentals or for capital appreciation or both, rather than for:
a. use in the production or supply of goods or services or for
administrative purposes
b. sale in the ordinary course of business
94
Investment property
- Held to earn rentals or for capital appreciation or both
- Generates cash flows largely independently of the other assets held
by an entity
- Includes only land and building
Property, plant and equipment
- Held for use in the production or supply of goods or services or for
administrative purposes
- Generates cash flows in conjunction with the other assets held by
an entity
- May include assets other than land and building
Examples of investment property
a. Land held for long-term capital appreciation rather than for short-term sale
in the ordinary course of business
b. Land held for a currently undetermined future use
c. A building owned by the entity (or held by the entity under a finance lease)
and leased out under one or more operating leases
d. A building that is vacant but is held to be leased out under one or more
operating leases
e. Property that is being constructed or developed for future use as
investment property
Ancillary services to occupants
When ancillary services are provided to the occupants of a property
held, the property is classified as investment property if the services are
insignificant to the arrangement as a whole
Measurement
a. Initial: Cost
b. Subsequent: Either the Cost model or Fair value model
Change in accounting policy
- A change from the cost model to the fair value is accounted for
prospectively
95
 - A change from the fair value model to the cost model is not
permitted
Determining fair value
PAS 40 requires all entities to determine the fair value of investment
property whether it uses the cost model or fair value model. Fair values
determined are used for measurement and disclosure purposes if the entity
uses the fair value model and for disclosure purposes only if the entity uses
the cost model.
Fair value model
- After initial recognition, an entity that chooses the fair value model
shall measure all of its investment property at fair value, except in
cases where the exemptions under PAS 40 applies
- Changes in fair values are recognized in profit or loss
- Depreciable assets classified as investment property measured
under fair value model are not depreciated
- If the fair value of an item of investment property cannot be
determined reliably on initial recognition, such item is subsequently
measured under the cost model
Cost model
After initial recognition, an entity that chooses the cost model shall
measure all of its investment property at cost less any accumulated
depreciation and impairment losses in accordance with PAS 16 Property,
plant, and equipment
Transfers
Transfers to, or from, investment property shall be made when, and
only when, there is a change in use, evidenced by:
a. Commencement of owner-occupation, for a transfer from investment
property to owner-occupied property
b. Commencement of development with a view to sale, for a transfer from
investment property to inventories
c. End of owner-occupation, for a transfer from owner-occupied property
96
 to investment property
d. Commencement of an operating lease to another party, for a transfer
from inventories to investment property

For further discussion please refer to the link provided: PAS 36 – Impairment of Assets
https://www.youtube.com/watch?v=QDxjMZp8X4U
For further discussion please refer to the link provided : PAS 38 – Intangible Assets
https://www.youtube.com/watch?v=kOFkm5Kq7DE
For further discussion please refer to the link provided : PAS 40 Investment Property
https://www.youtube.com/watch?v=IIVfvsBq88Q

Reference Book:
Conceptual Framework and Accounting Standards
By: Zeus Vernon B. Millan, 2019 Edition

CHAPTER 7 - ACTIVITY / ASSIGNMENT

Answer the following questions/statements in not less than 5 sentences.

1. Explain the following:

a. Contingent assets
b. Contingent liabilities
c. Intangible assets
d. Investment property

CHAPTER 7 – POST TEST

Read and understand each question carefully. This test consists of 10 items Multiple Choice.

1. Which of the following qualifies for classification as an investment property?

a. Property that is currently being developed for future use as investment property
b. Investment property that is currently being developed for future use as owner-occupied
property
c. Property that is leased out to another entity under a finance lease
97
 d. Building being rented from another entity and leased out under various operating sub-leases

2. The distinguishing characteristic that identifies an investment property from the other assets of an
entity is
a. changes in fair value of the asset is recognized in profit or loss.
b. the property does not derive cash flows separate from the other assets of the entity.
c. it generates separately identifiable cash flows from the other assets of the entity.
d. it earns rental as part of the ordinary operations of the entity.

3. Under this model, an investment property is measured at cost less accumulated depreciation and
accumulated impairment losses.
a. Impairment loss model c. Fair value model
b. Cost model d. Gorgeous model

Use the following information for the next two questions:

Entity A acquires an investment property for ₱1,000,000 cash. Additional costs incurred are as
follows:
 Repairs and remodelling before occupancy, ₱50,000.
 Legal costs of transferring title to the property, ₱20,000.
 Repairs after occupancy, ₱15,000.

The investment property is estimated to have a remaining useful life of 10 years and a residual
value equal to 5% of initial cost.

4. Entity A uses the straight line method of depreciation. How much is the carrying amount of the
investment property under the cost model after one year?
a. 914,850 c. 968,350
b. 923,100 d. 872,100

5. Entity A uses the straight line method of depreciation. The investment property has a fair value of
₱980,000 at the end of Year 1. How much is the carrying amount of the investment property under
the fair value model after one year?
a. 980,000 c. 986,350
b. 973,200 d. 837,900

6. The essential elements of an intangible asset do not include

b. identifiability.
c. probable outflow of resources embodying economic benefits.
d. control.
e. future economic benefits.

7. According to PAS 38, which of the following may be recognized as cost of intangible asset?
a. Research costs incurred in self-generating an intangible asset
b. Costs of an internally generated customer lists
c. Purchase cost of an externally acquired publishing title
d. Abnormal amount of wasted labor in self-generating an intangible asset
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8. On January 1, 20x1, Entity A registers a patent for a total registration and legal costs of ₱600,000.
Entity A estimates that the patent has a remaining useful life of 25 years. How much is the
amortization expense for 20x1?
a. 30,000 c. 16,000
b. 24,000 d. 0

9. According to PAS 37, a present obligation that is possible and can be measured reliably is
a. recognized.
b. recognized and disclosed.
c. disclosed only.
d. ignored.

10. According to PAS 37, provisions are (choose the incorrect statement)
a. presented in the statement of financial position separately from other types of liabilities.
b. recognized and disclosed.
c. necessarily estimated because their settlement amount is not certain.
d. disclosed only, unless their expected occurrence is remote.

CHAPTER 8 – PRETEST
Read and understand each question carefully. This test consists of 10 items of Multiple Choice.

1. An entity that presents its first PFRS financial statements is referred to under PFRS 1 as a
a. first-timer.
b. first-time adopter.
c. PFRS novice.
d. first-time PFRSer.

2. PFRS 1 requires an entity to prepare and present an

a. opening PFRS financial statements.
b. opening PFRS statement of financial position.
c. opening PFRS statement of profit or loss and other comprehensive income.
d. opening notes to the financial statements.

3. The date to transition to PFRSs is

a. the beginning of the earliest period for which an entity presents full comparative information
under PFRSs in its first PFRS financial statements.
b. the end of the earliest period for which an entity presents full comparative information under
PFRSs in its first PFRS financial statements.
c. the beginning of the first PFRS reporting period.
d. the end of the first PFRS reporting period.

4. The statement of financial position of ABC Co. as of January 1, 20x4 included an allowance for
bad debts computed using the “aging of accounts receivable” method. The “over 120 days”
category in the aging schedule included a ₱200,000 receivable which was actually written off on
January 5, 20x4 (the 20x3 financial statements were authorized for issue on March 1, 20x4). ABC
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 Co. could not have foreseen this event on December 31, 20x3. Does ABC Co. need to revise its
previous estimate of bad debts as of January 1, 20x4 (date of transition) on December 31, 20x5
(end of first PFRS reporting period)?
a. No. The receipt of the information on January 5, 20x4 is accounted for prospectively as a non-
adjusting event after the reporting period.
b. Yes. The receipt of the information on January 5, 20x4 is accounted for retrospectively as an
adjusting event after the reporting period.
c. No. The event should be ignored because it is within the scope of the previous GAAP and not
the PFRSs.
d. Yes. Although, PFRS 1 does not require the adjustment, other PFRSs do.

5. Under PFRS 1, the early application of PFRSs that have not yet become effective as of the
current reporting period
a. is required.
b. is permitted, but not required.
c. is required, but not permitted.
d. is prohibited.

6. PFRS 1 requires a first time adopter to do which of the following in the opening PFRS statement
of financial position?
a. Recognize all assets and liabilities whose recognition is required by PFRSs.
b. Not recognize items as assets or liabilities if PFRSs do not permit such recognition.
c. Reclassify items that it recognized in accordance with previous GAAP as one type of asset,
liability or component of equity, but are a different type of asset, liability or component of equity
in accordance with PFRSs.
d. Apply PFRSs in measuring all recognized assets and liabilities.
e. All of these

7. Retrospective application of accounting policies means

a. as if PFRSs have been used all along.
b. as if PFRSs are used only in prior periods.
c. as if PFRSs are used only in the current period.
d. restating the financial statements in order to correct all errors.

8. The “excess of the acquirer’s interest in the net fair value of acquiree’s identifiable assets,
liabilities, and contingent liabilities over cost” (formerly known as negative goodwill) should be
a. Amortized over the life of the assets acquired.
b. Reassessed as to the accuracy of its measurement and then recognized immediately in profit
or loss.
c. Reassessed as to the accuracy of its measurement and then recognized in retained earnings.
d. Carried as a capital reserve indefinitely

9. Many shares and most share options are not traded in an active market. Therefore, it is often
difficult to arrive at a fair value of the equity instruments being issued. Which of the following
option valuation techniques should not be used as a measure of fair value in the first instance?
a. Black-Scholes model.
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 b. Binomial model.
c. Monte-Carlo model.
d. Intrinsic value.

10. Elizabeth, a public limited company, has granted 100 share appreciation rights to each of its 1,000
employees in January 20X4. The management feels that as of December 31, 20X4, 90% of the
awards will vest on December 31, 20X6. The fair value of each share appreciation right on
December 31, 20X4, is P10. What is the fair value of the liability to be recorded in the financial
statements for the year ended December 31, 20X4?
a. P300,000
b. P10 million
c. P100,000
d. P90,000

CHAPTER 8 AGRICULTURE

Objectives:
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Differentiate the following: biological assets, bearer plants,
agricultural produce and inventory
Explain the initial and subsequent measurement of biological
assets and agricultural produce
PAS 41 Agriculture

PAS 41 is applied to account for the following when they relate to

agricultural activity:
a. Biological assets, except for bearer plants
b. Agricultural produce at the point of harvest
c. Unconditional government grants related to a biological asset measured at
its fair value less cost to sell

Consumable vs. Bearer biological assets

Biological assets are either consumable or bearer:
a. Consumable - those that are to be harvested as agricultural produce or
sold as biological assets. Ex. Timber
b. Bearer - those other than consumable biological assets. Ex. Fruit tree.
PAS 41 applies to both consumable and bearer animals. However, PAS 41
only to consumable plants but not to bearer plants.

Agricultural activity
- PAS 41 applies to biological assets, agricultural produce and gov’t.
grants only when they relate to agricultural activity

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 - Agricultural activity is the management by an entity of the biological
transformation of biological assets for sale, into agricultural produce,
or into additional biological assets
Common features of agricultural activity:
a. Capability to change – Living animals and plants are capable of
biological transformation
b. Management of change – Management facilitates biological
transformation by enhancing, or at least stabilizing, conditions
necessary for the process to take place
c. Measurement of change – The change in quality or quantity brought
about by biological transformation is measured and monitored as a
routine management function
Recognition
A biological asset or agricultural produce is recognized when:
a. the entity controls the asset as a result of past events
b. it is probable that future economic benefits associated with the asset
will flow to the entity
c. the fair value or cost of the asset can be measured reliably
Measurement
- A biological asset shall be measured on initial recognition and at the
end of each reporting period at its fair value less costs to sell
- Agricultural produce harvested from an entity’s biological assets
shall be measured at its fair value less costs to sell at the point of
harvest. Such measurement is the cost at that date when applying
PAS 2 Inventories or another applicable standard
Definitions
- Fair value is the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market
participants at the measurement date.
- Costs to sell are the incremental costs directly attributable to the
disposal of an asset, excluding finance costs and income taxes
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 (e.g., Commissions to brokers, Levies by regulatory agencies and
commodity exchanges, and Transfer taxes and duties)
- Costs to sell do not include transport costs, advertising costs,
income taxes, and interest expense
- If location is a characteristic of the biological asset, the price in the
principal (or most advantageous) market shall be adjusted for the
transport costs.
Encouraged disclosures
Disclosure of the following information is encouraged but not required:
1. Disclosure of consumable and bearer biological assets.
2. Disclosure of mature and immature biological assets.
a. Mature biological assets are those that have attained harvestable
specifications or are able to sustain regular harvests
b. Immature biological assets are those that have not yet attained
harvestable specifications or are not yet able to sustain regular
harvests
3. Disclosure of breakdown of total “Gain (loss) from changes in FVLCS”
during the period attributable to price change and physical change

PFRS 1 First-time Adoption of Philippine Financial Reporting Standards

First PFRS financial statements are “the first annual financial
statements in which an entity adopts PFRSs, by an explicit and unreserved
statement of compliance with PFRSs.” (PFRS 1.3)
Financial statements are considered “First PFRS financial statements” if the
previous financial statements:
a. were prepared in accordance with other reporting standards not consistent
with the PFRSs
b. did not contain an explicit and unreserved statement of compliance with
PFRSs
c. contained an explicit and unreserved statement of compliance with some,
but not all, PFRSs
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d. were prepared using some, but not all, applicable PFRSs
e. prepared in accordance with PFRSs but were used for internal reporting
purposes only
f. did not contain a complete set of financial statements as required under
PAS 1 Presentation of Financial Statements
g. The entity did not present financial statements in previous periods
Recognition and measurement
- PFRS 1 requires an entity to prepare and present an opening PFRS
statement of financial position at the date of transition to PFRSs
- The date to transition to PFRSs is the beginning of the earliest
period for which an entity presents full comparative information
under PFRSs in its first PFRS financial statements. The application
of the PFRSs starts on this date
Accounting policies
- The entity selects its accounting policies based on the latest
versions of PFRSs as at the current reporting date. The selected
polices are then applied to all financial statements presented
together with the first PFRS financial statements
Retrospective application
- In general (but subject to some exceptions which will be discussed
momentarily), PFRS 1 requires retrospective application of the
accounting policies selected by the first-time adopter
PFRS 1 requires an entity to do the following in its opening PFRS statement
of financial position:
a. Recognize all assets and liabilities whose recognition is required by
PFRSs
b. Not recognize items as assets or liabilities if PFRSs do not permit such
recognition
c. Reclassify items recognized under previous GAAP that have different
classifications under PFRSs
d. Apply PFRSs in measuring all recognized assets and liabilities.
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Exceptions to the requirements of PFRS 1
A first-time adopter is exempted from complying with the “retrospective
application” requirement of PFRS 1 if:
a. The cost of compliance exceeds the expected benefits.
b. Retrospective application requires management judgments about past
conditions after the outcome of a particular transaction is already known.
Presentation and disclosure
- The first PFRS financial statements shall include at least one-year
comparative information

PFRS 2 Share-based Payments

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 Scope of PFRS 2:
a. Equity-settled share-based payment transaction – is a transaction
whereby an entity acquires goods or services and instead of paying
in cash the entity issues its own shares of stocks or share options
b. Cash-settled share-based payment transaction – is a transaction
whereby an entity acquires goods or services and incurs an
obligation to pay cash at an amount that is based on the fair value of
equity instruments
c. Choice between equity-settled and cash-settled
Equity instrument is a contract that evidences a residual interest in the assets
of an entity after deducting all of its liabilities
Core principle
- An entity shall recognize in profit or loss and financial position the
effects of share-based payment transactions, including expenses
associated with transactions in which share options are granted to
employees
Recognition
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 - Goods and services received in share-based payment transactions
are recognized when the goods are received or as the services are
received. Goods or services received that do not qualify as assets
are recognized as expenses
- The entity shall recognize A corresponding increase in equity if the
goods or services were received in an equity-settled share-based
payment transaction, or a liability if the goods or services were
acquired in a cash-settled share-based payment transaction
Equity-settled share-based payment transactions

Intrinsic value is the difference between the fair value of the shares to which
the counterparty has the conditional or unconditional right to subscribe or the
right to receive and the subscription price (if any) that the counterparty is
required to pay for those shares
Employee share option plans equity settled
- Share option is a contract that gives the holder the right, but not the
obligation, to subscribe to the entity’s shares at a fixed or
determinable price for a specified period of time. Some share
options given to employees may not require any subscription price,
meaning shares will be issued to the employees in consideration
merely for services rendered
Measurement of compensation
Since employee share option plan is a transaction with an employee, the
following order of priority shall be used to measure the services received
(salaries expense):

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a. Fair value of equity instruments granted at grant date
b. Intrinsic value
Cash-settled share-based payment transactions
- A cash-settled share-based payment transaction is one whereby an
entity acquires goods or services and incurs an obligation to pay
cash at an amount that is based on the fair value of equity
instruments
- The goods or services acquired and the liability incurred on cash-
settled share-based payment transactions are measured at the fair
value of the liability
- At the end of each reporting period and even on settlement date, the
liability shall be remeasured to fair value. Changes in fair value are
recognized in profit or loss
Employee share appreciation rights (SARs) – cash-settled
- A share appreciation right is a form of compensation given to an
employee whereby the employee is entitled to future cash payment
(rather than an equity instrument), based on the increase in the
entity’s share price from a specified level over a specified period of
time
Measurement of compensation
- The liability for the future cash payment on share appreciation rights
shall be measured, initially and at the end of each reporting period
until settled, at the fair value of the share appreciation rights.
Changes in fair value are recognized in profit or loss
Recognition of cash-settled share-based compensation plans
- If the share appreciation rights granted vest immediately, the entity
shall recognize the related compensation expense on the services
received in full with a corresponding increase in liability at grant date
- If the share options granted do not vest until the employee
completes a specified period of service, the entity shall recognize
the services received, and a liability to pay for them, as the
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 employee renders service during that period
Share-based payment transactions with cash alternatives
- If the counterparty has the right to choose settlement between cash
(or other assets) or equity instruments, the entity has granted a
compound instrument
- For transactions with non-employees, the equity component is
computed as the difference between the fair value of goods or
services received and the fair value of the debt component at the
date the goods or services are received

PFRS 3 BUSINESS COMBINATIONS

A business combination is “a transaction or other event in which an

acquirer obtains control of one or more businesses.”
Control
- An investor controls an investee when the investor is exposed, or

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 has rights, to variable returns from its involvement with the investee
and has the ability to affect those returns through its power over the
investee.
- Control is normally presumed to exist when the ownership interest
acquired in the voting rights of the acquiree is more than 50% (or
51% or more)
Control may exist even if the acquirer holds less than 50% interest in the
voting rights of acquiree, such as in the following cases:
1. The acquirer has the power to appoint or remove the majority of the
board of directors of the acquire
2. The acquirer has the power to cast the majority of votes at board
meetings or equivalent bodies within the acquire
3. The acquirer has power over more than half of the voting rights of the
acquiree because of an agreement with other investors
4. The acquirer has power to control the financial and operating policies of
the acquiree because of a law or an agreement
Accounting for business combinations
Business combinations are accounted for using the acquisition method.
This method requires the following:
1. Identifying the acquirer
2. Determining the acquisition date
3. Recognizing and measuring goodwill. This requires recognizing and
measuring the following:
a. Consideration transferred
b. Non-controlling interest in the acquire
c. Previously held equity interest in the acquire
d. Identifiable assets acquired and liabilities assumed on the business
combination
Identifying the acquirer
- The acquirer is the entity that obtains control of the acquiree. The
acquiree is the business that the acquirer obtains control of in a
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 business combination
- The acquirer is normally the entity that:
a. Transfers cash or other assets and incurs liabilities
b. Issues its equity interests (except in reverse acquisitions)
c. Receives the largest portion of the voting rights
d. Has the ability to elect or appoint or to remove a majority
e. Dominates the management of the combined entity
f. Significantly larger of the combining entities
g. Initiated the combination
Determining the acquisition date
- The acquisition date is the date on which the acquirer obtains
control of the acquire
Non-controlling interest (NCI)
- Non-controlling interest (NCI) is the equity in a subsidiary not
attributable, directly or indirectly, to a parent
- NCI is measured either at:
a. Fair value
b. The NCI’s proportionate share of the acquiree’s identifiable net
assets
Previously held equity interest in the acquire
- Previously held equity interest in the acquiree pertains to any
interest held by the acquirer before the business combination
Net identifiable assets acquired
- On acquisition date, the acquirer shall recognize, separately from
goodwill, the identifiable assets acquired, the liabilities assumed and
any non-controlling interest in the acquire
- Any unidentifiable asset of the acquiree (e.g., any recorded goodwill
by the acquiree) shall not be recognized
- The identifiable assets acquired and the liabilities assumed are
measured at their acquisition-date fair values

For further discussion please refer to the link provided: PAS 41 – Biological Assets
112
https://www.youtube.com/watch?v=isjs48id-g0
For further discussion please refer to the link provided: PFRS 1 – First Time Adoption

https://www.youtube.com/watch?v=72kjAoOxjvE
For further discussion please refer to the link provided: PFRS 3 – Business Combination

https://www.youtube.com/watch?v=4ztDhzUDwmg
 Reference Book:
Conceptual Framework and Accounting Standards
By: Zeus Vernon B. Millan, 2019 Edition

CHAPTER 8 ACTIVITY / ASSIGNMENT

Answer the following questions/statements in not less than 5 sentences.

1. Explain the following:

a. Biological assets
b. Business combination
c. Acquirer
d. Acquiree

CHAPTER 8 – POST TEST

Read and understand each question carefully. This test consists 10 items of Multiple Choice.

1. The “excess of the acquirer’s interest in the net fair value of acquiree’s identifiable assets,
liabilities, and contingent liabilities over cost” (formerly known as negative goodwill) should be
a. Amortized over the life of the assets acquired.
b. Reassessed as to the accuracy of its measurement and then recognized immediately in
profit or loss.
c. Reassessed as to the accuracy of its measurement and then recognized in retained
earnings.
d. Carried as a capital reserve indefinitely.

2. The acquisition date is

a. the date on which the acquirer obtains control of the acquiree.
b. the opening date.
c. the date the acquirer transfers to the acquiree the consideration in a business combination.
d. any of these

3. On January 1, 20x1, ABC Co. acquired 60% interest in XYZ, Inc. for ₱2,000,000 cash. ABC Co.
incurred transaction costs of ₱100,000 in the business combination. ABC Co. elected to measure
NCI at the NCI’s proportionate share in XYZ, Inc.’s identifiable net assets. The fair values of XYZ’s
identifiable assets and liabilities at the acquisition date were ₱6,000,000 and ₱3,500,000,
respectively. How much is the goodwill (gain on a bargain purchase)?
a. 500,000
b. 478,000
c. (500,000)
d. (478,000)
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4. Many shares and most share options are not traded in an active market. Therefore, it is often
difficult to arrive at a fair value of the equity instruments being issued. Which of the following
option valuation techniques should not be used as a measure of fair value in the first instance?
a.Black-Scholes model.
b.Binomial model.
c.Monte-Carlo model.
d.Intrinsic value.

5. Elizabeth, a public limited company, has granted 100 share appreciation rights to each of its 1,000
employees in January 20X4. The management feels that as of December 31, 20X4, 90% of the
awards will vest on December 31, 20X6. The fair value of each share appreciation right on
December 31, 20X4, is P10. What is the fair value of the liability to be recorded in the financial
statements for the year ended December 31, 20X4?
a. P300,000
b. P10 million
c. P100,000
d. P90,000

6. Retrospective application of accounting policies means

a. as if PFRSs have been used all along.
b. as if PFRSs are used only in prior periods.
c. as if PFRSs are used only in the current period.
d. restating the financial statements in order to correct all errors
7. PFRS 1 requires an entity to prepare and present an
a. opening PFRS financial statements.
b. opening PFRS statement of financial position.
c. opening PFRS statement of profit or loss and other comprehensive income.
d. opening notes to the financial statements.

8. The date to transition to PFRSs is

a. the beginning of the earliest period for which an entity presents full comparative information
under PFRSs in its first PFRS financial statements.
b. the end of the earliest period for which an entity presents full comparative information under
PFRSs in its first PFRS financial statements.
c. the beginning of the first PFRS reporting period.
d. the end of the first PFRS reporting period

9. Retrospective application of accounting policies means

a. as if PFRSs have been used all along.
b. as if PFRSs are used only in prior periods.
c. as if PFRSs are used only in the current period.
d. restating the financial statements in order to correct all errors

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10. Under PFRS 1, the early application of PFRSs that have not yet become effective as of the
current reporting period
a.is required.
b.is permitted, but not required.
c.is required, but not permitted.
d.is prohibited

CHAPTER 9 - PRETEST
Read and understand each question carefully. This test consists of 10 items of Multiple Choice.

1. The statement of profit or loss includes which of the following?

a. Revenue, cost of goods sold, distribution costs, general and administrative expenses and
extraordinary items.
b. Discontinued operations.
c. Gains and losses arising from treasury share transactions.
d. Other comprehensive income.

2. Assets that are classified as held for sale under PFRS 5 are
a. required under PAS 36 to be tested for impairment annually.
b. amortized over a period not exceeding 5 years.
c. depreciated.
d. not depreciated.

3. According to PFRS 5, gains and losses on remeasurement of assets held for sale are
a. recognized in profit or loss.
b. recognized in other comprehensive income.
c. recognized only for impairment losses.
d. not recognized.

4. Which of the following statements is true regarding the accounting treatment of costs to sell under
PFRS 5?
a. Costs to sell are added to the fair value when determining the measurement basis for an asset
held for sale.
b. Costs to sell are never discounted because held for sale assets should be sold within one
year.
c. Costs to sell are discounted if it is expected that the sale will be made beyond one year.
d. a and c

5. According to PFRS 5, the assets and liabilities of a disposal group are presented
a. as one line item in either current assets or current liabilities.
b. as one line item in either noncurrent assets or noncurrent liabilities.
c. separately on the face of the statement of financial position.
d. a or b

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6. Exploration and evaluation assets are initially measured at
a. cost. c. fair value
b. revalued amount. d. a or b

7. Exploration and evaluation assets are exploration and evaluation expenditures recognized as
a. assets in accordance with the entity’s accounting policy.
b. expenses in accordance with applicable PFRSs.
c. assets in accordance with (a) above, subject to the limitations provided under PAS 8
Accounting Policies, Changes in Accounting Estimates and Errors.
d. any of these

8. Mark Ngina’s Sari-sari Store has a sign that reads “Your credit is good but I need cash.” What
type of risk is Mr. Mark trying to avoid by putting up that sign?
a. credit risk
b. market risk
c. liquidity risk
d. store risk

9. How does PFRS 7 define “liquidity risk”?

a. The risk that an entity will encounter difficulty in meeting obligations associated with financial
liabilities.
b. The risk that an entity will encounter difficulty in disposing a financial asset due to lack of
market liquidity.
c. The risk that an entity will encounter difficulty in meeting cash flow needs due to cash flow
problems.
d. The risk that an entity’s cash inflows will not be sufficient to meet the entity’s cash outflows

10. According to PFRS 8, a reportable operating segment is one which

a. management uses in making decisions about operating matters.
b. results from aggregation of two or more segments and qualify under any of the quantitative
thresholds.
c. a and b
d. none of these
CHAPTER 9 PFRS 5 Non-current assets Held for

Objectives:
Describe the criteria for held for sale classification
State the initial and subsequent measurement of held for sale
assets

116
 Sale and Discontinued Operations

Core Principle
A noncurrent asset is presented in the classified statement of financial
position as current asset only when it qualifies to be classified as “held for
sale” in accordance with PFRS 5.
Scope
PFRS 5 applies to the following non-current assets:
1. Property, plant and equipment
2. Investment property measured under the Cost model
3. Investments in associate or subsidiary or joint venture
4. Intangible assets
Classification of non-current assets (or disposal groups) as Held for Sale
A non-current asset (or disposal group) is classified as held for sale or
held for distribution to owners if its carrying amount will be recovered
principally through a sale transaction rather than through continuing use
Exception to the one-year requirement
An extension of the period required to complete a sale does not
preclude an asset (or disposal group) from being classified as held for sale if:
1. the delay is attributable to events or circumstances beyond
the entity’s control
2. there is sufficient evidence that the entity remains
committed to its plan to sell the asset (or disposal group)
Event after reporting period
If the criteria for classification as held for sale are met after the
reporting period, an entity shall not classify a non-current asset (or disposal
group) as held for sale in those financial statements when issued
Non-current assets that are to be abandoned
- An entity shall not classify as held for sale a non-current asset (or
disposal group) that is to be abandoned since the asset’s carrying
amount will be recovered through continuing use rather than

117
 principally through a sale
- An entity shall not account for a non-current asset that has been
temporarily taken out of use as if it had been abandoned
Discontinued operations
A discontinued operation is a component of an entity that either has
been disposed of or is classified as held for sale, and
1. Represents a major line of business or geographical area
of operations
2. Is part of a single coordinated plan to dispose of a separate
major line of business or geographical area of operations
3. Is a subsidiary acquired exclusively with a view to resale.
Component of an entity
A component of an entity comprises operations and cash flows that can
be clearly distinguished, operationally and for financial reporting purposes,
from the rest of the entity. It can be cash generating unit or group of cash
generating units
FS presentation
Non-current assets held for sale and assets and liabilities of disposal
groups are presented as current assets (current liabilities) but separately from
the other assets and liabilities in the statement of financial position
An entity shall not offset the assets and liabilities of a disposal group

PFRS 6 Exploration for and Evaluation of Mineral Resources

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 - Exploration for and evaluation of mineral resources is the search for
mineral resources, including minerals, oil, natural gas and similar
non-regenerative resources after the entity has obtained legal rights
to explore in a specific area, as well as the determination of the
technical feasibility and commercial viability of extracting the mineral
resource
- Exploration and evaluation expenditures are expenditures incurred
by an entity in connection with the exploration for and evaluation of
mineral resources before the technical feasibility and commercial
viability of extracting a mineral resource are demonstrable
Accounting for exploration and evaluation expenditures
- PFRS 6 permits entities to develop their own accounting policy for
exploration and evaluation assets which results in relevant and
reliable information based entirely on management’s judgment and
without the need to consider the hierarchy of standards in PAS 8
- This means that the entity may recognize exploration and evaluation
expenditures either as expense or asset depending on the entity’s
own accounting policy
Measurement at recognition
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 - If the entity opts to capitalize exploration and evaluation
expenditures as assets, it shall measure them at cost
- Subsequent to recognition, the exploration and evaluation assets
shall be measured using the cost model or the revaluation model

PFRS 7 Financial Instruments: Disclosures

PFRS 7 prescribes the disclosure requirements for financial instruments. The
disclosures are broadly classified into the following two main categories:
a. significance of financial instruments to the entity’s financial position and
performance; and
b. the nature and extent of risks arising from financial instruments to which the
entity is exposed, and how the entity manages those risks. (PFRS 7.1)
Significance of financial instruments
Statement of financial position
a. An entity is required to separately disclose the carrying amounts of each of the
categories of financial assets and financial liabilities under PFRS 9
b. If an entity has reclassified financial assets, it shall disclose the date of
reclassification, an explanation of the change in business model, and the
amount reclassified between categories
c. If an entity has offset financial assets and financial liabilities, it shall disclose
the gross amounts of those assets and liabilities, the amounts that were set-
off, the net amounts presented in the statement of financial position and a
description of the related legal right of set-off
Statement of profit or loss and other comprehensive income
a. An entity is required to disclose separately the income, expense, gains or
losses arising from the different classifications of financial instruments under
PFRS 9
b. The entity shall disclose the fair value of each class of financial assets and
financial liabilities in a way that the fair value can be compared with the
carrying amount
Nature and extent of risks arising from financial instruments

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 a. Credit risk – is “the risk that one party to a financial instrument will cause a
financial loss for the other party by failing to discharge an obligation.
b. Liquidity risk – is the risk that an entity will encounter difficulty in meeting
obligations associated with financial liabilities
c. Market risk – is “the risk that the fair value or future cash flows of a financial
instrument will fluctuate because of changes in market prices
Market risk comprises the following three types of risk:
i. Currency risk – the risk associated with fluctuations in foreign exchange
rates
ii. Interest rate risk –the risk associated with changes in market interest
rates
iii. Other price risk – the risk associated with fluctuations in market prices
other than those arising from interest rate risk or currency risk
Qualitative and Quantitative disclosures on risks
- The entity shall provide both qualitative and quantitative disclosures for
each type of the risks required by PFRS 7 to be disclosed

PFRS 8 Operating Segments

- An entity shall disclose information to enable users of its financial

statements to evaluate the nature and financial effects of the business
activities in which it engages and the economic environments in which it
operates.” (PFRS 8
-
An operating segment is a component of an entity:
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 - that engages in business activities from which it may earn revenues and
incur expenses (including revenues and expenses relating to transactions
with other components of the same entity)
- whose operating results are regularly reviewed by the entity’s chief
operating decision maker to make decisions about resources to be
allocated to the segment and assess its performance
- for which discrete financial information is available
A component of an entity comprises operations and cash flows that can be clearly
distinguished, operationally and for financial reporting purposes, from the rest of the
entity. It can be cash generating unit or group of cash generating units
Reportable segments
An entity shall report separately information about each operating segment
that:
- Management uses in making decisions about operating matters or those
which results from aggregating two or more of those segments
- Qualify under the quantitative thresholds
Disclosure of Major customer
A major customer is a single external customer providing revenues of 10% or
more of an entity’s revenues.

PFRS 9 Financial Instruments

Financial assets
A financial asset is any asset that is:
a. Cash
b. Equity instrument of another entity
c. Contractual right to receive cash or another financial asset
or to exchange financial assets or financial liabilities with
another entity under conditions that are potentially
favorable to the entity
Financial liabilities
A financial liability is any liability that is:
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 a. a contractual obligation to deliver cash or another financial asset to another
entity
b. a contractual obligation to exchange financial assets or financial liabilities with
another entity under conditions that are potentially unfavorable to the entity
Initial recognition and Classification
- Financial assets are recognized only when the entity becomes a party to
the contractual provisions of the instrument
Basis of classification
- The entity’s business model for managing the financial assets; and
- The contractual cash flow characteristics of the financial asset
Business models

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Reclassification
- After initial recognition, financial assets are reclassified only when the entity
changes its business model for managing financial assets
- Reclassification date is the first day of the first reporting period following
the change in business model that results in an entity reclassifying financial
assets
Impairment
- The impairment requirements of PFRS 9 apply equally to debt-type
financial assets that are measured either at amortized cost or at FVOCI
- Impairment gains or losses on debt instruments measured at FVOCI are
recognized in profit or loss. However, the loss allowance shall be
recognized in other comprehensive income and shall not reduce the
carrying amount of the financial asset in the statement of financial position
Dividends
- Dividends received from equity securities measured at FVPL or FVOCI
(except share dividend) are recognized as dividend revenue

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 PFRS 10 Consolidated Financial Statements
Definition of terms (PFRS 10)
a. Parent – an entity that controls one or more entities.
b. Subsidiary – an entity that is controlled by another entity
c. Group – a parent and its subsidiaries
d. Consolidated financial statements – the financial statements of a group in which the
assets, liabilities, equity, income, expenses and cash flows of the parent and its
subsidiaries are presented as those of a single economic entity
Preparation of Consolidated FS
A parent entity is required to present consolidated financial statements, except
when all of the following conditions are met:
a. The parent is a subsidiary of another entity and all its other owners do not object to
the parent not presenting consolidated financial statements
b. The parent’s debt or equity instruments are not traded in a public market (or being
processed for such purpose)
c. The parent’s ultimate or any intermediate parent produces consolidated financial
statements that are available for public use and comply with PFRSs
Elements of Control
Control exists if the investor has all of the following:
a. Power over the investee
b. Exposure, or rights, to variable returns from its involvement with the
investee
c. The ability to use its power over the investee to affect the amount of the
investor’s returns
Elements of Control

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Measurement
- Income and expenses of the subsidiary are based on the amounts of the
assets and liabilities recognized in the consolidated financial statements at
the acquisition date

PFRS 11 Joint Arrangements

- PFRS 11 defines a joint arrangement as “an arrangement of which two or

more parties have joint control.”
Types of Joint Arrangements
a. Joint operation – is a joint arrangement whereby the parties that have joint control
of the arrangement have rights to the assets and obligations for the liabilities,
relating to the arrangement. Those parties are called joint operators
b. Joint venture – is a joint arrangement whereby the parties that have joint control of
the arrangement have rights to the net assets of the arrangement. Those parties
are called joint venturers
Accounting for joint operation transactions
- Separate accounting records may or may not be required for the joint
operation itself and financial statements may or may not be prepared for
the joint operation. However, the joint operators may prepare management

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accounts so that they may assess the performance of the joint operation

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 For further discussion refer to the link provided: PFRS 8 - Operating Segments
https://www.youtube.com/watch?v=3SqJD7uJNUY
For further discussion refer to the link provided: PFRS 9 – Financial Instruments
https://www.youtube.com/watch?v=8kIKVoNdvoU
For further discussion refer to the link provided: PFRS 11 – Joints Arrangements
https://www.youtube.com/watch?v=sBPTFUX1ozI

Reference Book:
Conceptual Framework and Accounting Standards
By: Zeus Vernon B. Millan, 2019 Edition

CHAPTER 9 - ACTIVITY / ASSIGNMENT

Use the following information for the next two questions:

Parent Co. acquires Subsidiary Co. on January 1, 20x1. The financial statements of Parent and
Subsidiary on the acquisition date are shown below:

  Parent Co. Subsidiary Co.

Cash in bank 12,000 6,000
Accounts receivable 36,000 14,400
Inventory 48,000 27,600
Investment in subsidiary 90,000 -
Building, net 216,000 48,000
Total assets 402,000 96,000

Accounts payable 60,000 7,200

Share capital 204,000 60,000
Share premium 78,000 -
Retained earnings 60,000 28,800
Total liabilities and
402,000 96,000
equity

Additional information:
 The carrying amounts of subsidiary’s net identifiable assets approximate their acquisition-date fair
values, except for the following:
- Inventory, ₱37,200
- Building, net, ₱57,600

 The computations required under PFRS 3 resulted to the following:

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 - Goodwill, ₱3,600
- NCI in net assets, ₱21,600.

1. How much is the consolidated total assets on January 1, 20x1?

2. How much is the consolidated total equity on January 1, 20x1?

CHAPTER 9 – POST TEST

Read and understand each question carefully. This test consists of 10 items Multiple choice.

1. According to PFRS 9, it is the amount at which a financial asset or a financial liability is measured
at initial recognition minus principal repayments, plus or minus the cumulative amortization using
the effective interest method of any difference between that initial amount and the maturity amount
and, for financial assets adjusted for any loss allowance.
a. cost b. carrying amount c. amortized cost d. fair value
2. Which of the following is measured at fair value with fair value changes recognized in profit or
loss?
a. Held to maturity investments
b. Financial assets designated at FVPL
c. FVOCI
d. All of these

3. If the entity’s business model’s objective is to hold assets in order to collect contractual cash flows
and cash flows are solely payments of principal and interest on the principal amount outstanding,
the financial asset is classified
a. according to management’s intention of holding the securities.
b. as financial asset measured at amortized cost.
c. as financial asset measured at fair value through other comprehensive income.
d. any of these
4. Tech Co. and Robotics Co. are joint venturers of Mecha Co., a producer of high tech machinery.
Tech and Robotics, each have a 50% interest in the net assets of Mecha Co. During the year,
Tech Co. earns revenue of ₱1,000,000 from its own operations while Mecha Co. reports revenue
of ₱400,000. How much total revenue shall be reported in Tech Co.’s statement of profit or loss
for the year?
a. ₱1,000,000
b. ₱1,200,000
c. ₱1,400,000
d. Either a or b

5. Entity A acquires 50% interest in a joint venture for ₱1M and appropriately records the transaction
under an investment account. At the end of the period, the joint venture reports profit of ₱1M and
makes a total distribution of ₱600,000 to the owners. How much is the net effect of the transaction
in Entity A’s profit or loss for the current year?
a. ₱.5M
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 b. ₱.3M
c. ₱.2M
d. 0

6. ABC Co. has identified the following five operating segments: “Credit,” “Hotel,” “Transportation,”
“Grocery,” and “Events planning.” ABC Co. treats the “Hotel” and “Events planning” as a single
segment for internal reporting purposes. Each of the “Events planning” and “Transportation”
segments does not qualify under any of the quantitative thresholds of PFRS 8. How should ABC
Co. disclose its reportable segments?
a. ABC Co. shall treat each of the “Hotel,” “Credit,” and “Grocery” as reportable segments. The
other segments should not be disclosed.
b. ABC Co. shall treat each of the “Hotel,” “Credit,” and “Grocery” as reportable segments. The
other segments should be combined and disclosed in the “All other segments” category.
c. ABC Co. shall treat the “Hotel” and “Events planning” as a single reportable segment and each
of the “Credit” and “Grocery” segments also as reportable segments. The “Transportation”
segment shall be included in the “All other segments” category.
d. ABC Co. shall treat the “Hotel” and “Events planning” as a single reportable segment and
combine all the other segments and report them under the “All other segments” category.

7. An entity recently has acquired a new brand from a competitor company. The brand qualifies as a
component of an entity and represents a major line of business for which discrete financial
information is available. This operating segment does not meet any of the threshold criteria for a
reportable segment. Furthermore, this segment is unique and does not share similar
characteristics with the other operating segments of the entity. Which of the following statements
is correct?
a. The entity can disclose this new segment separately if it is a distinguishable component and is
used by management in internal reporting even though it does not meet the PFRS criteria.
b. The entity cannot voluntarily disclose this new segment separately because PFRS 8
discourages voluntary disclosure of operating segments. Operating segments are reportable
only if they either result from aggregation or qualify under any of the quantitative thresholds.
c. The entity can disclose this new segment separately only if it can be aggregated with another
operating segment and the combined segment qualifies in all of the quantitative thresholds.
d. The entity can disclose this new segment separately only if it can be aggregated with another
operating segment and the combined segment qualifies in any of the quantitative thresholds.

8. According to PFRS 8, a reportable operating segment is one which

a. management uses in making decisions about operating matters.
b. results from aggregation of two or more segments and qualify under any of the
quantitative thresholds.
c. a and b
d. none of these

9. Which of the following is not among the quantitative thresholds under PFRS 8?
a. at least 10% of total revenues (external and internal).
b. at least 10% of the higher of total profits of segments reporting profits and total losses of
segments reporting losses, in absolute amount.
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 c. at least 10% of total assets (inclusive of intersegment receivables).
d. at least 10% of total revenues (external only)

10. According to PFRS 8, disclosures for major customer shall be provided if revenues from
transactions with a single external customer amount to
a. at least 75% of the entity’s external and internal revenues.
b. at least 75% of the entity’s external revenues.
c. 10% or more of the entity’s external revenues.
d. less than 10% of the entity’s external revenues

CHAPTER 10 - PRETEST
Read and understand each question carefully. This test consists of 10 items of Multiple Choice.

1. PFRS 12 applies to
a. contracts relating to post-employment benefit plans.
b. interest in joint arrangements that does not give the entity joint control or significant influence
over the arrangement.
c. investments measured at fair value through other comprehensive income.
d. investments accounted for under the equity method.

2. According to PFRS 12, interest in another entity refers to

a. only contractual involvement that exposes an entity to variability of returns from the
performance of another entity.
b. only non-contractual involvement that exposes an entity to variability of returns from the
performance of another entity.
c. contractual and non-contractual involvement that exposes an entity to variability of returns from
the performance of another entity.
d. a typical customer-supplier relationship
3. Which of the following are not considered transaction costs or costs to sell?
a. commissions to brokers
b. levies by regulatory agencies and commodity exchanges
c. transfer taxes and duties
d. transport costs

4. There are multiple active markets for a financial asset with different observable market prices:
Market Quoted Price Transaction Costs
A ₱76 ₱5
B ₱74 ₱2

There is no principal market for the financial asset. What is the fair value of the asset?
a. 71 b. 72 c. 74 d. 76

5. According to PFRS 14, an entity presents regulatory deferral accounts in the statement of financial
position
a. showing those with debit balances separately from those with credit balances.
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 b. showing only the net debit or the net credit balance of the accounts.
c. a or b, as a matter of accounting policy choice
d.An entity shall not present regulatory deferral accounts in the statement of financial position, but
only disclose them in the notes.
6. Arrange the following steps of revenue recognition in accordance with PFRS 15.
I. Identify the performance obligations in the contract
II. Recognize revenue when (or as) the entity satisfies a performance obligation
III. Determine the transaction price
IV. Identify the contract with the customer
V. Allocate the transaction price to the performance obligations in the contract
a. IV, I, V, III, II c. III, IV, I, V, II
b. IV, I, III, V, II d. IV, III, I, V, II

7. Certain criteria must be met before a contract with a customer is accounted for under PFRS 15.
Which of the following precludes a contract from being accounted for under PFRS 15?
a. The consideration is collected in advanced.
b. The contract is made orally.
c. The contract does not result to a change in the risk, timing or amount of the entity’s future cash
flows.
d. The contract is neither oral nor written but rather implied by the entity’s business practices.
8. How does Entity B account for the insurance contract with Entity A?
a. General model
b. Premium Allocation Approach
c. a or b
d. Not accounted for under PFRS 17

9. How does Entity C account for the insurance contract ceded by Entity B?
a. General model
b. Premium Allocation Approach
c. a or b
d. Modification to general model for reinsurance contracts held

10. How does Entity B account for the insurance contract ceded to Entity C?
a. General model
b. Premium Allocation Approach
c. a or b
d. Modification to general model for reinsurance contracts held

CHAPTER 10
PFRS 12 Disclosure of Interest in Other Entities

Objectives:
Describe the objective of PFRS 12
State the types of investments that are within the scope of PFRS
12 132
 The objective of PFRS 12 is to prescribe the minimum disclosure
requirements for an entity’s interests in other entities, particularly (a) the
nature of, and risks associated with, those interests and (b) the effects of
those interests on the entity’s financial statements
Interest in another entity

Interest in another entity – refers to involvement that exposes an entity

to variability of returns from the performance of another entity. It is evidenced
by the holding of equity or debt instruments or other form of involvement,
such as the provision of funding, liquidity support, credit enhancement and
guarantees. It includes the means by which an entity obtains control, joint
control, or significant influence over another entity. An entity does not
necessarily have an interest in another entity solely because of a typical
customer-supplier relationship. (PFRS 12 Appendix A)

Scope
PFRS 12 applies to entities that have an interest in a(an):
a. Subsidiary
b. Joint arrangement (i.e., Joint operation or Joint venture);
c. Associate; or
d. Unconsolidated structured entity
PFRS 12 does not apply to an interest in another entity that is accounted for
in accordance with PFRS 9 Financial Instruments.
Minimum disclosures under PFRS 12

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 Significant judgments and assumptions in determining the existence of
control, joint control or significant influence over an investee or the type of a
joint arrangement

PFRS 13 Fair Value Measurement

Scope
PFRS 13 applies to the fair value measurement, and related
disclosures, of an asset, liability or equity when other PFRSs require
measurement at fair value or fair value less costs to sell
Fair value is “the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at the
measurement date.” (PFRS 13)
Fair Value Measurement
Fair value is based on the market price of the asset in:
a. a principal market; or
b. the most advantageous market (in the absence of a principal market)

PFRS 14 Regulatory Deferral Accounts

Scope
a. PFRS 14 specifies the financial reporting requirements for regulatory
deferral account balances arising from the sale of goods or services
that are subject to rate regulation
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 b. PFRS 14 is an optional standard that is available only to first-time
adopters. Existing PFRS users are prohibited from using PFRS 14
Definition of Terms
- Regulatory deferral account balance – “the balance of any expense (or
income) account that would not be recognized as an asset or a liability in
accordance with other Standards, but that qualifies for deferral because it
is included, or is expected to be included, by the rate regulator in
establishing the rate(s) that can be charged to customers.”
- Rate regulation – “a framework for establishing the prices that can be
charged to customers for goods or services and that framework is subject
to oversight and/or approval by a rate regulator.”
- Rate regulator – “an authorized body that is empowered by statute or
regulation to establish the rate or a range of rates that bind an entity. The
rate regulator may be a third-party body or a related party of the entity,
including the entity’s own governing board, if that body is required by
statute or regulation to set rates both in the interest of the customers and
to ensure the overall financial viability of the entity.”
Principles under PFRS 14
a. A first-time adopter continues to apply its previous GAAP to the
recognition, measurement, impairment and derecognition of regulatory
deferral account balances, except for changes in accounting policies
and the presentation of regulatory deferral accounts
b. An entity is prohibited from changing its accounting policy in order to
start recognizing regulatory deferral account balances.
Presentation
Statement of financial position
Separate line items are presented for the totals of:
a. regulatory deferral account debit balances; and
b. regulatory deferral account credit balances.
The regulatory deferral account balances are not presented as current
or noncurrent. Instead, they are presented separately from the sub-
135
 totals of assets and liabilities that are presented in accordance with
other Standards
Statement of profit or loss and other comprehensive income
Separate line items are presented:
a. in other comprehensive income for the net movement of regulatory
deferral account balances that relate to items recognized in OCI,
showing distinctions between those that will be and will not be
reclassified to profit or loss; and
b. in profit or loss for the remaining net movement of regulatory deferral
account balances excluding movements that are not reflected in profit
or loss.

PFRS 15 Revenue from Contracts with Customers

Income vs. Revenue

The Conceptual Framework provides the following definitions:
- Income – increases in economic benefits during the accounting period in
the form of inflows or enhancements of assets or decreases of liabilities
that result in increases in equity, other than those relating to contributions
from equity participants. Income encompasses both revenue and gains.
- Revenue – income arising in the course of an entity’s ordinary activities.
Core principle

136
 An entity recognizes revenue to depict the transfer of promised goods
or services to customers in an amount that reflects the consideration to which
the entity expects to be entitled in exchange for those goods or services
Steps in the recognition of revenue:
1. Identify the contract with the customer
Requirements before a contract with a customer is accounted
for under PFRS 15:
a. The contract must be approved and the contracting parties are
committed to it;
b. rights and payment terms are identifiable rights and payment terms are
identifiable
c. The contract has commercial substance; and
d. The consideration is probable of collection
2. Identify the performance obligations in the contract
Each promise in a contract to transfer a distinct good or service
is treated as a separate performance obligation
3. Determine the transaction price
The entity shall determine the transaction price because this is
the amount at which revenue will be measured
Transaction price is “the amount of consideration to which an
entity expects to be entitled in exchange for transferring
promised goods or services to a customer, excluding amounts
collected on behalf of third parties (e.g., some sales taxes).”
The consideration may include fixed amounts, variable
amounts, or both
4. Allocate the transaction price to the performance obligations
The transaction price shall be allocated to each performance
obligation identified in a contract based on the relative stand-
alone prices of the distinct goods or services promised to be
transferred
5. Recognize revenue when (or as) the entity satisfies a
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 performance obligation
A performance obligation is satisfied when the control over a
promised good or service is transferred to the customer
Revenue is measured at the amount of the transaction price
allocated to the satisfied performance obligation

PFRS 16 Leases

Identifying a lease
“A contract is, or contains, a lease if the contract conveys the right to
control the use of an identified asset for a period of time in exchange for
consideration.” (PFRS 16.9)
Right to Control
An entity has the right to control the use of an identified asset if it has
both of the following throughout the period of use:
1. the right to obtain substantially all of the economic benefits
from use of the identified asset; and
2. the right to direct the use of the identified asset
Identified asset
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 An asset can be identified by being explicitly stated in the contract or by
being implicitly specified at the time the asset is made available for use by the
customer
A portion of an asset can be identified if it is physically distinct
Right to direct the use
The customer has the right to direct how and for what purpose the
asset is used throughout the period of use
GENERAL RECOGNITION

139
Classification of lease by the lessor
- Finance lease - a lease that transfers substantially all the risks and
rewards incidental to ownership of an asset. Title may or may not
eventually be transferred
- Operating lease - a lease other than a finance lease.
Indicators of a finance lease

Accounting for operating lease

140
 The accounting for operating leases is straight-forward. The lessor
recognizes the lease payments as rent income on a straight line basis over
the lease term, unless another systematic basis is more representative of the
time pattern of user’s benefit

PFRS 17 Insurance Contracts

Scope
PFRS 17 prescribes the principles for the recognition, measurement,
presentation and disclosure of insurance contracts by an insurer. PFRS 17
applies to:
a. insurance and reinsurance contracts issued by an insurer
b. reinsurance contracts held by an insurer; and
c. investment contracts with discretionary participation features issued by an
insurer.
Insurer (issuer of insurance contract) is the party that has an obligation
under an insurance contract to compensate a policyholder if an insured
event occurs (e.g., insurance company).
Insurance contract

141
 An insurance contract is “a contract under which one party (the issuer)
accepts significant insurance risk from another party (the policyholder) by
agreeing to compensate the policyholder if a specified uncertain future event
(the insured event) adversely affects the policyholder.” (PFRS 17 Appendix A)
Policyholder – “a party that has a right to compensation under an
insurance contract if an insured event occurs.”
Insured event – “an uncertain future event that is covered by an
insurance contract and creates insurance risk.”
Examples of insurance contracts
1. Insurance against theft or damage
2. Insurance against product liability, professional liability, civil
liability or legal expenses
3. Life insurance and prepaid funeral plans
4. Life-contingent annuities and pensions
5. Disability and medical cover
6. Surety bonds, fidelity bonds, performance bonds and bid bonds.
7. Product warranties issued by another party for goods sold by a
manufacturer, dealer or retailer. Product warranties issued
directly by a manufacturer, dealer or retailer are outside the
scope of PFRS 17
8. Title insurance.
9. Travel insurance
10. Insurance swaps and other contracts that require a payment
depending on changes in physical variables that are specific to
a party to the contract. (PFRS 17.B26)
Types of insurance contracts
Direct insurance contract – an insurance contract where the insurer
directly accepts risk from the insured and assumes the sole obligation to
compensate the insured in case of a loss event.
Reinsurance contract – an insurance contract issued by one insurer (the
reinsurer) to compensate another insurer (the cedant) for losses on one or
142
more contracts issued by the cedant.
Reinsurer – the party that has an obligation under a reinsurance
contract to compensate a cedant if an insured event occurs.
Cedant – the policyholder under a reinsurance contract.
Initial Measurement
A group of insurance contracts is initially measured at the total of:
a. the fulfillment cash flows, and
b. the contractual service-margin

Contractual service margin

The contractual service margin is the unearned profit in a group of
insurance contracts

Onerous contracts
An insurance contract is onerous if the total of its fulfillment cash flows,
any previously recognized acquisition cash flows and any cash flows arising
from the contract at initial recognition date is a net outflow. The net outflow is
recognized as a loss in profit or loss. This results to a carrying amount of the
liability for the group equal to the fulfilment cash flows and a zero contractual
service margin
On subsequent measurement, any excess net outflow for a group of
insurance contracts that becomes onerous or more onerous is recognized in
profit or loss

Derecognition
An insurance contract is derecognized when:
a. it is extinguished, i.e., when the obligation in the insurance contract
expires or is discharged or cancelled; or
b. the contract is modified and the modification meets any of the
conditions for derecognition
Presentation
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 Statement of financial position
The carrying amounts of the following groups are presented separately
in the statement of financial position:
a. insurance contracts issued that are assets;
b. insurance contracts issued that are liabilities;
c. reinsurance contracts held that are assets; and
d. reinsurance contracts held that are liabilities.
Statement(s) of financial performance
The amounts recognized in the statement(s) of profit or loss and other
comprehensive income are disaggregated into to the following:
a. insurance service result, comprising insurance revenue and
insurance service expenses; and
b. insurance finance income or expenses

For further discussion please refer to the link provided: PFRS 15 – Revenue from Contracts
https://www.youtube.com/watch?v=2nDraDtK6Tc Reference Book:
For further discussion please refer to the link provided: PFRS 16 - Leases
Conceptual Framework and Accounting Standards
https://www.youtube.com/watch?v=kXZJWRHnxPI
For further discussion please
By:refer
Zeusto the link provided:
Vernon PFRS 17 2019
B. Millan, – Insurance Contracts
Edition
https://www.youtube.com/watch?v=llxwapGnDkU

CHAPTER 10 - ACTIVITY / ASSIGNMENT

Answer the following questions/statements in not less than 5 sentences.

1. Explain the following:

a. Leases
b. Insurance contracts

2. On January 1, 20x1, Entity X enters into a 3-year lease of equipment for an annual rent of
₱100,000 payable at the end of each year. The equipment has a remaining useful life of 10
years. The interest rate implicit in the lease is 10% while the lessee’s incremental borrowing
rate is 12%. Entity X uses the straight-line method of depreciation. The relevant present value
factors are as follows:
- PV of an ordinary annuity of ₱1 @10%, n=3………… 2.48685

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- PV of an ordinary annuity of ₱1 @12%, n=3………… 2.40183

How much is the lease liability to be recognized by Entity X on initial recognition?

CHAPTER 10 – POST TEST

Read and understand each question carefully. This test consists of 10 items Multiple Choice.

1.On January 1, 20x1, Entity X enters into a 3-year lease of equipment for an annual rent of ₱100,000
payable at the end of each year. The equipment has a remaining useful life of 10 years. The interest
rate implicit in the lease is 10% while the lessee’s incremental borrowing rate is 12%. Entity X uses
the straight-line method of depreciation. The relevant present value factors are as follows:
- PV of an ordinary annuity of ₱1 @10%, n=3………… 2.48685
- PV of an ordinary annuity of ₱1 @12%, n=3………… 2.40183

How much is the lease liability to be recognized by Entity X on initial recognition?

a. 240,183 c. 252,314
b. 248,685 d. 0

2.Assume the lease in problem #1 above qualifies for accounting under the recognition exemption
under PFRS 16. Which of the following statements is correct?
a. Entity X recognizes annual depreciation of ₱80,061 on the right-of-use asset.
b. Entity X recognizes a lease liability of ₱252,314 at the lease commencement date.
c. Entity X recognizes a lease liability of ₱200,000 at the lease commencement date.
d. Entity X recognizes lease expense of ₱100,000 in the first year of the lease.

3.Use the information in problem #1 above. Assume the lease is a finance lease. The lessor will
recognize a net investment in the lease at the lease commencement equal to
a. 240,183. c. 252,314.
b. 248,685 . d. 0.

4.Use the information in problem #1 above. Assume the lease is an operating lease. The lessor will
recognize a net investment in the lease at the lease commencement equal to
a.240,183. c. 200,000.
b.248,685 . d. 0..
5.How does Entity B account for the insurance contract with Entity A?
a.General model
b.Premium Allocation Approach
c.a or b
d.Not accounted for under PFRS 17

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6.How does Entity C account for the insurance contract ceded by Entity B?
a.General model
b.Premium Allocation Approach
c.a or b
d.Modification to general model for reinsurance contracts held

7.How does Entity B account for the insurance contract ceded to Entity C?
a.General model
b.Premium Allocation Approach
c.a or b
d.Modification to general model for reinsurance contracts held

8.The "premium allocation approach" cannot be applied to which of the following insurance contracts?
a. insurance contracts issued
b. reinsurance contracts issued
c. reinsurance contacts held
d. insurance contracts with significant variability in their fulfillment cash flows.

9.The unearned profit from a group of insurance contracts is referred to under PFRS 17 as
a. fulfillment cash flows.
b. contractual service margin.
c. onerous contracts.
d. discretionary participation feature.

10.According to PFRS 14, rate-regulation is

a. a framework for establishing the prices that can be charged to customers for goods or services
and that framework is subject to oversight and/or approval by a rate regulator.
b. the balance of any expense (or income) account that would not be recognized as an asset or a
liability in accordance with other Standards, but that qualifies for deferral because it is
included, or is expected to be included, by the rate regulator in establishing the rate(s) that can
be charged to customers.
c. an authorized body that is empowered by statute or regulation to establish the rate or a range
of rates that bind an entity. The rate regulator may be a third-party body or a related party of
the entity, including the entity’s own governing board, if that body is required by statute or
regulation to set rates both in the interest of the customers and to ensure the overall financial
viability of the entity.
d. all of these

PRELIM EXAM

1. Which of the following statements is true?

a. The basic purpose of accounting is to provide information about economic activities intended
to be useful in making economic decisions.
b. All events and transactions of an entity are recognized the books of accounts.

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 c. General purpose financial statements are those statements that cater to the common and
specific needs of a wide range of external users.
d. The accounting process of assigning numbers, commonly in monetary terms, to the economic
transactions and events is referred to as classifying.

2. The accounting standards used in the Philippines are adapted from the standards issued by the
a. Federal Accounting Standards Board (FASB).
b. International Accounting Standards Board (IASB).
c. Philippine Institute of Certified Public Accountants (PICPA).
d. Democratic People's Republic of Korea Accounting Standards Committee (DPKRASC).

3. Entity A appropriates ₱1M to fund employee benefits for the last quarter of the following year.
Entity A deposits the ₱1M fund in a payroll account. This economic activity is most appropriately
referred to as
a. production.
b. savings.
c. exchange.
d. investment.

4. It is the branch of accounting that focuses on the general purpose reports of financial position and
operating results known as financial statements.
a. Financial accounting
b. Auditing
c. Managerial accounting
d. Taxation

5. These are events that do not involve an external party.

a. external events
b. nonreciprocal
c. internal events
d. special event

6. Entity A computes for its profit or loss periodically instead of waiting until the end of the life of the
business before doing so. This is an application of which of the following accounting concepts?
a. historical cost
b. stable monetary unit
c. accrual basis
d. time period

7. This refers to the use of caution in the exercise of judgments needed in making estimates required
under conditions of uncertainty , such that assets or income are not overstated and liabilities or
expenses are not understated.
a. faithful representation
b. prudence
c. consistency
d. relevance
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8. The bottom part of each of Entity A’s financial statements states the following “This statement
should be read in conjunction with the accompanying notes.” This is most likely an application of
which of the following accounting concepts?
a. articulation
b. consistency
c. accrual basis
d. time period

9. Entity A’s asset has a carrying amount of ₱1M. At year end, Entity A obtains information that the
asset became obsolete, and therefore its usefulness has declined. Entity A estimates that the
asset has a recoverable amount of only ₱800K. Entity A recognizes a loss of ₱200K for the
difference. Although this accounting treatment is required, it violates which of the following
concepts?
a. historical cost
b. stable monetary unit
c. accrual basis
d. time period

10. Which of the following events is considered as an internal event?

a. sale of inventory on account
b. provision of capital by owners
c. borrowing of money
d. conversion of raw materials into finished goods
e. payment of liabilities

11. Which of the following events is considered as an external event?

a. production
b. payment of taxes
c. gifts and charitable contributions
d. provision of capital by owners
e. b, c and d

12. Financial statements are said to be a mixture of fact and opinion. Which of the following items is
factual?
a. cost of goods sold
b. discount on capital stock
c. retained earnings
d. patent amortization expense

13. The most common form of business organization is a

a. corporation
b. sole proprietorship
c. partnership
d. cell phone stand

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14. This concept defines the area of interest of the accountant. It determines which transactions are
recognized in the books of accounts and which are not.
a. Articulation
b. Matching
c. Separate entity
d. Full disclosure

15. A CPA employed as an accountant in a government agency is considered to be in

a. private practice.
b. public practice.
c. academe.
d. service.

16. Which of the following statements is correct?

I. Accounting provides qualitative information, financial information, and quantitative information.
II. Qualitative information is found in the notes to the financial statements only.
III. Accounting is considered an art because it is supported by an organized body of knowledge
IV. Accounting is considered a science because it involves the exercise of skill and judgment.
V. Measurement is the process of assigning numbers to objects such inventories or plant assets
and to events such as purchases or sales.
VI. All quantitative information is also financial in nature.
VII. The accounting process of assigning peso amounts or numbers to relevant objects and events
is known as identification.
a. I and V
b. I, II, VI and V
c. I, II, III, IV and V
d. II, VI and V

17. Which of the following statements about the Norwalk Agreement is correct?
a. The Norwalk Agreement requires all domestic companies in the U.S. to prepare financial
statements in accordance with the IFRSs.
b. The Norwalk Agreement is a short-term convergence between the FASB and the IASB which
has long-time been abolished.
c. The Norwalk Agreement is a convergence between the FASB and the IASB to make their
existing financial reporting standards compatible and coordinate their future work programs to
ensure that once achieved, compatibility is maintained.
d. The Norwalk Agreement does not affect the financial reporting standards in the Philippines.

18. The process of identifying, measuring, analyzing, and communicating financial information needed
by management to plan, evaluate, and control an organization’s operations is called
a. financial accounting.
b. tax accounting.
c. managerial accounting.
d. auditing.

19. The PFRSs consist of all of the following except

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 a. PFRSs.
b. PASs.
c. Interpretations.
d. Conceptual Framework.

20. It is the official accounting standard setting body in the Philippines. It is composed of a
chairperson and 14 members.
a. Financial Reporting Standards Committee (FRSC)
b. Financial Reporting Standards Council (FRSC)
c. Accounting Standards Committee (ASC)
d. Accounting Standards Council (ASC)

21. Financial reporting standards continuously change primarily in response to

a. users’ needs.
b. political influence.
c. government regulations.
d. changes in social environments.

22. Accounting is often called the "language of business" because

a. it is easy to understand.
b. it is fundamental to the communication of financial information.
c. all business owners have a good understanding of accounting principles.
d. accountants in many companies share financial information.

23. You are the accountant of ABC Co. During the period, your company purchased staplers worth
₱1,500. Although the staplers have an estimated useful life of 10 years, you have charged their
cost as expense. Which of the following is most likely to be true?
a. You are applying the concept of matching.
b. You are applying the concepts of materiality and cost-benefit consideration.
c. You are applying the concept of verifiability.
d. You are just lazy to compute for the periodic depreciation.

24. The foundation of the Conceptual Framework is formed from

a. the qualitative characteristics that makes information useful to users.
b. the objective of general purpose financial reporting.
c. the concept of reporting entity.
d. the various measurement requirements which results to fair presented financial information.

25. Under the Conceptual Framework, qualitative characteristics are sub-classified into
a. primary and secondary qualitative characteristics
b. major and minor qualitative characteristics
c. fundamental and enhancing qualitative characteristics
d. not sub-classified

26. Under this qualitative characteristic, users are assumed to have a reasonable knowledge of
business and economic activities and accounting and a willingness to study the information with
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 reasonable diligence. However, information about complex matters that should be included in the
financial statements because of its relevance to the economic decision-making needs of users
should not be excluded merely on the grounds that it may be too difficult for certain users to
understand.
a. Relevance
b. Reliability
c. Understandability
d. Comparability

27. The Conceptual Framework sets out general recognition principles of financial statement elements
which include all of the following except
a. asset recognition
b. equity recognition
c. liability recognition
d. expense recognition

28. Which of the following is most likely expensed under the ‘immediate recognition’ principle?
a. cost of inventories
b. impairment loss
c. cost of equipment
d. rentals paid

29. A secondary objective of financial statements

a. is to show information regarding assets and liabilities of an entity
b. is to show information regarding an entity’s financial position, performance, and changes in
financial position
c. is to show the results of the stewardship of management.
d. b and c

30. Which of the following statements is incorrect concerning materiality?

a. Materiality can be assessed quantitatively or qualitatively
b. There are no specific materiality thresholds provided under the PFRSs
c. Materiality is a matter of judgment
d. Materiality is a quantitative matter. It should never be assessed qualitatively.

31. The elements of faithful representation do not include

a. Comparability
b. Neutrality
c. Completeness
d. Free from error

32. The ability through consensus among measurers to ensure that information represents what it
purports to represent is an example of the concept of
a. Relevance
b. Comparability
c. Verifiability
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 d. Feedback value

33. According to the Conceptual Framework, it is a pervasive constraint on the information that can be
provided by financial reporting
a. materiality
b. historical
c. cost
d. going concern

34. The elements directly related to the measurement of performance

a. income
b. expenses
c. a and b
d. neither a nor b

35. Assets and liabilities are recognized if

a. they meet the definition of an element.
b. have probable future economic benefits and have cost or value that are measured reliably.
c. a and b
d. neither a nor b

36. The cost of purchases of inventory is recognized as expense

a. immediately.
b. using the matching concept.
c. by systematic allocation.
d. any of these as a matter of accounting policy choice

37. “I say red, you say green.” The information lacks which of the following qualitative characteristics?
a. Relevance
b. Verifiability
c. Timeliness
d. Colorfulness

38. Which of the following is not one of the decisions that primary users make?
a. deciding on how to run the day-to-day operations of the entity
b. deciding on whether to hold or sell investment in stocks
c. deciding on whether to buy investment in stocks
d. deciding on whether to extend loan to the reporting entity

39. Entity A is making a materiality judgment. Entity A considers an item to be material, and therefore
needs to be disclosed in the notes to the financial statements, if the item pertains to a related
party transaction. What type of materiality assessment is Entity A using?
a. quantitative
b. qualitative
c. faithful representation
d. relevance
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40. Which of the following financial statements would not be dated as covering a certain reporting
period?
a. Statement of financial position
b. Statement of profit or loss and other comprehensive income
c. Statement of cash flows
d. Statement of changes in equity

41. Comprehensive income (or total comprehensive income) includes

a. Profit or loss
b. Other comprehensive income
c. Transactions with owners
d. a and b
e. All of these

42. Comprehensive income excludes which of the following

a. Revaluation surplus
b. Gains and losses from investments measured at fair value through profit or loss
c. Income tax expense
d. Distributions to owners

43. Entity A needs guidance in accounting for its inventories. Entity A should refer to which of the
following?
a. PAS 1
b. PAS 2
c. PAS 7
d. PAS 8

44. Entity A needs guidance in preparing its statement of changes in equity. Entity A should refer to
which of the following?
a. PAS 1
b. PAS 2
c. PAS 7
d. PAS 8

45. Which of the following concepts is violated when measuring inventories at the lower of cost and
net realizable value?
a. The concept that assets shall not be carried at an amount in excess of its recoverable amount.
b. Historical cost concept
c. Prudence or conservatism concept
d. Offsetting concept

46. At the end of the period, Entity A has deductible temporary difference of ₱100,000. Entity A’s
income tax rate is 30%. Entity A’s statement of financial position would report which of the
following?
a. 30,000 deferred tax asset
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 b. 30,000 deferred tax liability
c. 30,000 deferred tax expense
d. 30,000 income tax expense

47. You are a business manager. During the period, you have authorized the acquisition of a machine
that will be used in your company’s manufacturing activities in the next 5 years. In your selection
of an appropriate accounting policy for the recognition and measurement of the machine, which of
the following reporting standards is most relevant?
a. PAS 1
b. PAS 2
c. PAS 16
d. PAS 32

48. Which of the following is not one of the principal issues in the accounting for PPE?
a. Recognition.
b. Initial measurement as asset.
c. Allocation of carrying amount over the period of use.
d. Recognition of carrying amount as expense when the related revenue is recognized

49. On January 1, 20x1, Entity A started the construction of a qualifying asset. The qualifying asset is
financed through general borrowings. The average expenditures during the year amounted to
₱9,500,000. The capitalization rate is 11%. The actual borrowing costs incurred during the period
were ₱1,990,000. How much are the borrowing costs eligible for capitalization?
a. 1,990,000
b. 1,045,000
c. 1,090,000
d. 990,000

50. The transfer of resources from the government to an entity in exchange for past or future
compliance with certain conditions relating to the operating activities of the entity is called
a. Government grants.
b. Government assistance.
c. Government financial assistance.
d. Government asset transfers

MIDTERM EXAM

1. Which of the following is correct regarding asset recognition?

a. Items that do not meet all the requirements for recognition are always ignored.
b. Before an entity recognizes an item as an asset, the item must be owned by the entity.
c. Physical form is necessary for an item to be recognized as an asset.
d. Costs are recognized as assets if they meet the definition of an asset as well as the
recognition criteria of “probable future economic benefits” and “reliable measurement of cost or
other value.”

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2. Which of the following is one of the fundamental qualitative characteristics?
a. Relevants
b. Comparability
c. Reliability
d. Faithful representation

3. According to the Conceptual Framework, the correct classifications of Relevance and Reliability,
respectively, are
a. Fundamental, Enhancing
b. Fundamental, Fundamental
c. Enhancing, Fundamental
d. Fundamental, None

4. The qualitative characteristics that enhance the usefulness of financial information includes all of
the following, except
a. Comparability
b. Verifiability
c. Timeliness
d. Materiality

5. The elements related to relevance do not include

a. Predictive value
b. Materiality
c. Feedback or Confirmatory value
d. Timeliness

6. Information has this quality when it influences the economic decisions of users by helping them
evaluate past, present or future events or confirming, or correcting, their past evaluations.
a. Predictive Value
b. Reliability
c. Relevance
d. Understandability

7. Which of the following is an element of the financial position of an entity?

a. income
b. loss
c. gains
d. none of these

8. Which of the following transactions results to the recognition of an asset?

a. An entity forecasts a purchase of inventory in the coming month. The purchase is highly
probable.
b. An entity enters into firm commitment to purchase inventory in the coming month. The entity
cannot cancel the commitment without paying a penalty. The contract is not onerous
c. During the period, one of the buildings of an entity was destroyed by a calamity.
d. An entity receives a non-monetary grant from the government.
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9. These are events that result to a sudden or unanticipated loss from fortuitous events.
a. Internal Events
b. External Events Other Than Transfers
c. Non-reciprocal transfers
d. Casualty

10. The manner in which the accounting records are organized and employed within a business is
referred to as
a. Accounting system
b. Voucher system
c. Business document
d. Special journals

11. The process of converting non-cash resources and rights into cash or equivalent claims to cash is
called
a. realization
b. recognition
c. allocation
d. disposition

12. A concept that states that all the components of a complete set of financial statement are
interrelated
a. Entity
b. Concept of Articulation
c. Accounting Process
d. Principle of Fair Presentation

13. PFRSs are adopted from the standards issued by the

a. IASC
b. IASCF
c. IASB
d. FASB

14. Choose the correct statement

a. Financial accounting is a social science and cannot be influenced by changes in legal, political,
business and social environments.
b. Financial accounting is an information system designed to provide information primarily to
internal users.
c. General-purpose financial statements must be prepared by a certified public accountant.
d. The preparation of general-purpose financial statements is usually based on the assumption
that the primary users of the information are external decision makers.

15. What type of users’ needs is catered by general purpose financial statements?
a. common needs
b. specific needs
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 c. a and b
d. neither a nor b

16. The issuance of financial reporting standards in the Philippines is the responsibility of the
a. PICPA
b. FRSC
c. AASC
d. CPE Council

17. Reporting entities commonly place the sentence “See notes to the financial statements” or “See
accompanying notes to the financial statements” or a similar sentence on the face of the financial
statements. This practice is most in keeping with what accounting concept?
a. Articulation
b. Materiality
c. Separate entity
d. Full disclosure

18. Comprehensive income excludes which of the following

a. Gains and losses arising from translation of foreign operation
b. Gains and losses from investments measured at fair value through other comprehensive
income
c. Correction of prior period error
d. Share in the profit or loss of an associate that is accounted for using the equity method.

19. Which of the following is not included among the general features of financial statement
presentation?
a. Growing concern
b. Accrual basis
c. Frequency of reporting
d. Comparative information

20. A company is issuing its comparative financial statements for the years 20x1 and 20x2. If the
company is required to issue an additional statement of financial position, such statement should
be dated
a. as of Jan. 1, 20x1.
b. as of Jan. 1, 20x2.
c. as of Dec. 31, 20x2.
d. as of Dec. 31, 20x1.

21. According to PAS 2, inventories are measured at

a. cost
b. fair value less costs to sell
c. net realizable value
d. lower of a and b

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22. This method of presenting cash flows from (used in) operating activities shows each major class
of gross cash receipts and gross cash payments..
a. Direct method
b. Inverse method
c. Indirect method
d. Straight method

23. According to PAS 10, this is the date when management authorizes the financial statements for
issue regardless of whether such authorization is final or subject to further approval.
a. Date of authorization of the financial statements
b. Date of declaration
c. Date of events after the reporting period
d. Adjustment date

24. Entity A’s inventories on December 31, 20x1 have a cost of ₱100,000 and a net realizable value
of ₱80,000. Accordingly, Entity A recognized a write-down of inventories of ₱20,000. Shortly after
December 31, 20x1, but before the financial statements were authorized for issue, the inventories
were sold for a net sale proceeds of ₱70,000. The correct amount of inventory write-down to be
reported in Entity A’s December 31, 20x1 financial statements is
a. 20,000
b. 0
c. 30,000
d. any of these

25. Which of the following is not considered an item of PPE?

a. land classified as investment property
b. land used in agricultural activity by a farming entity
c. equipment manufactured or acquired primarily to be held for rentals
d. all of these

26. Which of the following assets may not be depreciated?

a. Building that is measured under the revaluation model.
b. Equipment that becomes idle or is retired from active use.
c. Land
d. Landfill site

27. A change in depreciation method, estimate of useful life or residual value is accounted for as a
a. change in accounting policy
b. correction or error
c. change in accounting estimate
d. any of these

28. On January 1, 20x1, Entity A obtained a 10%, ₱5,000,000 loan, specifically to finance the
construction of a building. The proceeds of the loan were temporarily invested and earned interest
income of ₱180,000. The construction was completed on December 31, 20x1 for a total

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 construction costs of ₱7,000,000. How much are the borrowing costs capitalized to cost of the
building?
a. 320,000
b. 300,000
c. 500,000
d. 680,000

29. Entity B, a trustee, undertakes to manage the retirement benefit fund of Entity A for the benefit of
Entity A’s employees. When reporting to Entity A regarding the status and performance of the
fund, Entity B would most likely apply which of the following standards?
a. PAS 19
b. PAS 24
c. PAS 26
d. PFRS 6

30. According to PAS 27, investments in subsidiaries, associates or joint ventures are accounted for
in the separate financial statements
a. at cost.
b. at fair value in accordance with PFRS 9.
c. using the equity method under PAS 28.
d. any of these, as a matter of accounting policy choice.

31. On January 1, 20x1, Entity A acquires 30% interest in Entity B for ₱600,000. Entity B reports profit
of ₱200,000 and declares dividends of ₱50,000 in 20x1. How much is the carrying amount of the
investment in associate on December 31, 20x1?
a. 600,000
b. 660,000
c. 645,000
d. 630,000

32. Entity A issues convertible bonds with face amount of ₱2,000,000 for ₱2,600,000. Each ₱1,000
bond is convertible into 10 shares with par value of ₱60 per share. On issuance date, the bonds
are selling at 102 without the conversion option. What is the value allocated to the equity
component on initial recognition?
a. 2,040,000
b. 540,000
c. 560,000
d. 460,000

33. According to PAS 34, income tax expenses in interim periods are computed using
a. a weighted average annual income tax rate.
b. a substantially enacted future tax rate.
c. a uniform tax rate for all periods presented, including comparatives.
d. an imputed tax rate

34. If the carrying amount of an asset is less than its recoverable amount, the asset
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 a. is impaired.
b. should be written-down.
c. is not impaired.
d. should be written-off in profit or loss.

35. Which of the following assets is not tested for impairment in accordance with PAS 36?
a. Property, plant and equipment
b. Inventory
c. Intangible assets
d. Goodwill

36. According to PAS 37, contingent liabilities are

a. recognized and disclosed.
b. always disclosed.
c. disclosed, only if their expected occurrence is remote.
d. not disclosed if their expected occurrence is remote.

37. Which of the following assets can be measured using the revaluation model?
a. Property, plant and equipment
b. Investment property
c. Intangible assets
d. a and c
e. all of these

38. Entity A acquires a building for ₱1,000,000. The building is to be leased out under various
operating leases. The building has an estimated useful life of 10 years and zero residual value.
Entity A uses the cost model for its property, plant and equipment and the fair value model for its
investment property. At the end of Year 1, the building is assessed to have a fair value of
₱1,080,000. How much should Entity A recognize in profit or loss in relation to the building?
a. 80,000 gain on change in fair value
b. 100,000 depreciation
c. 180,000 gain on change in fair value
d. b and c

39. Which of the following is considered an agricultural activity under PAS 41?
a. fishing in the open seas
b. illegal logging
c. floriculture
d. farming in the computer or cellphone

40. Which of the following is accounted for under PAS 41?

a. bearer plants
b. bearer animals
c. government grants related to biological assets measured at cost
d. plants used in landscaping

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41. Prior to the full adoption of the IFRSs in 2005, the reporting standards used in the Philippines
were primarily based on
a. US GAAP (SFASs)
b. Japanese GAAP
c. Spaniard GAAP
d. combination of a, b and c

42. Which of the following assets of an acquiree may not be included when computing for the goodwill
arising from a business combination?
a. capitalized kitchen utensils and equipment
b. intangible assets not previously recorded
c. research and development costs charged as expenses
d. goodwill recorded by the acquiree prior to the business combination

43. Imagine you are an awesome auditor. Your “not-so-awesome” client does not know when to
classify assets and liabilities as current or non-current. Which of the following standards would you
suggest your client should refer to?
a. PAS 1
b. PAS 24
c. PAS 34
d. PFRS 1000

44. Imagine you are an awesome accountant. You client, Entity A which is engaged in farming
activities, asked you for an advice on how it will account for its agricultural land. Which of the
following standards would you advise Entity A should use?
a. PAS 7
b. PAS 16
c. PAS 40
d. PAS 41

45. Provisions, contingent liabilities and contingent assets are accounted for using
a. PAS 37
b. PFRS 6
c. PAS 29
d. PAS 8

46. To account for additions and disposals of items of property, plant and equipment, a CPA would
most likely refer to the accounting and disclosure requirements of
a. PAS 2
b. PAS 40
c. PFRS 5
d. PAS 16

47. Entity X acquires 90% interest in Entity Y in a business combination. The most relevant Standard
to be applied to this transaction is
a. PAS 28
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 b. PAS 3
c. PFRS 5
d. PFRS 3

48. Inventories are accounted for under

a. PAS 1
b. PAS 2
c. PFRS 1
d. PFRS 2

49. You are a member of the board of directors of ABC Co. Your company acquired a building to be
held solely for rentals. You are tasked in selecting an appropriate accounting policy for the
building. In this regard, you will most likely refer to which of the following standards?
a. PAS 17
b. PAS 39
c. PAS 40
d. PAS 41

50. You are the sole proprietor of Entity A. As a requisite to your business loan application, you were
required by the bank to submit audited financial statements. During the audit of your financial
statements, the auditor questioned the carrying amount of your land. The auditor believes that the
carrying amount is overstated and needs to be written down to its recoverable amount. In your
discussions with your auditor, the auditor would most likely refer to this standard in her report?
a. PAS 36
b. PFRS 1
c. PAS 26
d. PAS 12

FINAL EXAM

1. To be relevant, information should have which of the following?

a. Verifiability.
b. Confirmatory value.
c. Understandability.
d. Costs and benefits.

2. The PFRSs do not apply to

a. sole proprietorships.
b. partnerships.
c. cooperatives.
d. non-profit organizations.
e. The PFRSs apply to all of these entities.

3. "Aanhin mo pa ang damo kung patay na ang kabayo.”

a. Materiality
b. Relevance
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 c. Timeliness
d. Biological asset - Horse

4. This refers to financial statements that are intended to meet the needs of users who are not in a
position to require an entity to prepare reports tailored to their particular information needs.
a. All-purpose financial statements
b. General purpose financial statements
c. Managerial reports
d. Unisex financial statements

5. A complete set of financial statements does not include a

a. statement of financial position
b. statement of comprehensive income
c. statement of retained earnings
d. notes

6. Which of the following is an acceptable method of reporting other comprehensive income and its
components?
a. In a statement of profit or loss and other comprehensive income.
b. In a statement of changes in equity
c. In the notes only.
d. All of these

7. Which of the following may be included in the cost of inventories?

a. Storage costs of part-finished goods
b. Abnormal amount of wasted costs of materials, labor and factory overhead
c. Recoverable purchase taxes
d. Administrative costs

8. Which of the following cost formulas is not allowed under PAS 2?

a. FIFO
b. Weighted average
c. Specific identification
d. LIFO

9. Interest expense that is paid in cash is presented in the statement of cash flows under
a. operating activities.
b. investing activities
c. financing activities
d. a or c

10. When it is difficult to distinguish a change in accounting policy from a change in accounting
estimate, the change is treated as
a. a change in an accounting estimate.
b. a change in an accounting policy.
c. a correction of prior period error.
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 d. not accounted for.

11. ABC Co. completes the draft of its December 31, 20x1 year-end financial statements on January
31, 20x2. On February 5, 20x2, the board of directors reviews the financial statements and
authorizes them for issue. The entity announces its profit and selected other financial information
on February 23, 20x2. The financial statements are made available to shareholders and others on
March 1, 20x2. The shareholders approve the financial statements at their annual meeting on
March 18, 20x2 and the approved financial statements are then filed with a regulatory body on
April 1, 20x2. Events after the reporting period are those occurring
a. from December 31, 20x1 to February 5, 20x2.
b. from January 1, 20x2 to February 5, 20x2.
c. from January 1, 20x2 to February 23, 20x2.
d. from January 1, 20x2 to March 18, 20x2.

12. These are differences that do not have future tax consequences.
a. Permanent differences
b. Taxable differences
c. Temporary differences
d. Deductible differences

13. This type of difference will give rise to deferred tax asset.
a. Taxable temporary difference
b. Permanent difference
c. Deductible temporary difference
d. No difference

14. In accounting parlance, depreciation means

a. the amount derived by dividing the cost of an asset over its useful life.
b. the amount derived by multiplying the cost of an asset by its useful life.
c. the systematic allocation of the depreciable amount of an asset over its useful life.
d. the decline the in the value of an asset during the period.

15. It is a type of retirement plan where the employer assures a definite amount of benefit to be
received by the employee. The risk that funds needed to pay the agreed benefits may be
insufficient is retained by the employer.
a. Defined contribution plan
b. Defined benefit plan
c. Leche plan
d. Plan vs. zombies

16. According to PAS 23, borrowing costs are capitalized when

a. they relate directly to the acquisition, construction or production of a qualifying asset.
b. the entity chooses to capitalize them.
c. they are material and are expected to be incurred over more than one reporting period.
d. all of these

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17. Which of the following are not related parties?
a. A parent and its subsidiary
b. Two or more subsidiaries with the same parent
c. A company and its Chief Executive Officer
d. Two co-venturers of a common joint venture business

18. According to PAS 27, which of the following is required to present separate financial statements?
a. A publicly-listed entity
b. A parent
c. An entity with an investment in associate
d. None of these

19. On January 1, 20x1, Entity A acquires 25% interest in Entity B for ₱800,000. Entity B reports profit
of ₱1,000,000 and declares dividends of ₱100,000 in 20x1. How much is the carrying amount of
the investment in associate on December 31, 20x1?
a. 800,000
b. 1,250,000
c. 1,000,000
d. 1,025,000

20. Entity A issues convertible bonds with face amount of ₱2,000,000 for ₱2,600,000. Each ₱1,000
bond is convertible into 10 shares with par value of ₱60 per share. On issuance date, the bonds
are selling at 102 without the conversion option. What is value allocated to the equity component
on initial recognition?
a. 2,040,000
c. 540,000
d. 560,000
e. 460,000

21. Which of the following is correct regarding the provisions of PAS 34?
a. All entities should publish quarterly interim reports.
b. All publicly-listed entities should publish quarterly interim reports.
c. All publicly-listed entities should publish semi-annual interim reports.
d. PAS 34 does not require any entity to publish interim reports, and how often.

22. If a cash-generating unit (CGU) is impaired, the impairment loss is allocated first to
a. the goodwill in that CGU.
b. the noncurrent assets in that CGU.
c. the current assets in that CGU.
d. a and b

23. The amount at which an asset is recorded in the books of accounts minus any accumulated
depreciation and accumulated impairment losses is referred to as
a. fair value.
b. cost.
c. carrying amount.
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 d. amortized cost.

24. Which of the following is considered a bearer plant?

a. Palm oil
b. Corn oil
c. Baby oil
d. Oil palm

25. According to PFRS 5, assets held for sale are measured at

a. fair value.
b. fair value less costs to sell.
c. carrying amount.
d. lower of b and c

26. After recognition, exploration and evaluation assets are accounted for under the
a. cost model
b. fair value model
c. revaluation model
d. a or c

27. Entity A acquires a legal right to search for mineral resources in a specific area. What PFRS
should Entity A apply in accounting for the costs it incurs on its exploration and evaluation
activities?
a. PAS 26
b. PFRS 4
c. PFRS 5
d. PFRS 6

28. Which of the following properly describes credit risk?

a. The possibility that Entity A will not be able to settle its financial liabilities when they become
due.
b. The possibility that Entity A will incur loss on its foreign-currency denominated financial
instruments when there is an adverse change in foreign exchange rates.
c. The possibility that Entity A cannot collect on its receivables.
d. The possibility that Entity A will be required to pay higher interest on its variable-rate loan when
market interest rates increase.

29. Andrix Domingo’s Sari-sari Store has a sign that reads “Your credit is good but I need cash.” What
type of risk is Mr. Andrix trying to avoid by putting up that sign?
a. credit risk
b. market risk
c. liquidity risk
d. store risk

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30. Rex Banggawan Co. acquires investment in stocks of Darrell Joe Asuncion. The investment will
be held for trading and it gives Rex neither significant influence nor control over Darrell. Rex will
most likely measure the investment
a. at fair value through profit or loss.
b. using the equity method.
c. at amortized cost.
d. at historical cost

31. According to PFRS 10, which of the following is not an element of control?
a. power
b. exposure, or rights, to variable returns
c. major holdings
d. ability to affect return.

32. Which of the following is a peculiar characteristic of a joint arrangement?

a. significant influence
b. joint control
c. control
d. joint venture

33. This PFRS provides a single framework for measuring the fair value of an asset, liability or equity
when other PFRSs require or permit measurement at fair value or fair value less costs to sell. It
also prescribes the disclosures related to fair value measurement.
a. PFRS 3
b. PAS 1
c. PFRS 9
d. PFRS 13

34. The tenant (as opposed to the landlord) in a lease contract is referred to as the
a. Lessor
b. Lessee
c. Leasee
d. Tenor

35. Which of the following is a characteristic of a finance lease?

a. The lease term is substantially less than the estimated economic life of the leased property.
b. The lease contains a bargain-purchase option.
c. The present value of the minimum lease payments at the beginning of the lease term is 75% or
more of the fair value of the property at the inception of the lease.
d. The lease obligation does not appear in the balance sheet of the lessee.

36. Leases are accounted for under

a. PAS 16
b. PFRS 14
c. PFRS 15
d. PFRS 16
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37. PFRS 8 relates to which of the following?
a. Disclosure of operating segments
b. Disclosure of related party relationships and transactions
c. Disclosure of events after the reporting period
d. Interim financial reporting

38. You are the accountant of ABC Co. During the period, ABC Co. acquired short-term investment in
stocks, which of the following financial reporting standards would most likely be relevant in
accounting for the transaction?
a. PFRS 8
b. PFRS 9
c. PAS 28
d. b or c

39. You are a CPA and were engaged to audit the annual financial statements of ABC Co., a mining
company. Which of the following standards is most likely relevant to ABC Co.?
a. PFRS 4
b. PAS 34
c. PAS 41
d. PFRS 6

40. You are the accountant of ABC Co. During the period, your company acquired majority holdings in
XYZ, Inc. This transaction gave rise to goodwill. Which of the following standards will be referred
to in your company’s notes to the financial statements under summary of significant accounting
policies?
a. PFRS 3
b. PFRS 10
c. PAS 36
d. All of these

41. You are the accountant of Entity X. The board of directors asked you for an advice because they
feel like the company’s financial statements do not properly reflect the company’s financial
position. The board noted out that the company’s properties (i.e., land) are absurdly stated at their
historical cost. The properties were acquired 50 years ago and the market prices of the properties
have more than tripled since then. In providing your professional advice, you will most certainly
quote the provisions of which of the following standards?
a. PAS 7
b. PAS 33
c. PAS 16
d. All of these

42. When determining whether an investor controls an investee, the investor should refer to
a. PAS 21
b. PFRS 10
c. PAS 10
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 d. PAS 1

43. When measuring the fair value of an asset or a liability, an entity refers to
a. PFRS 13
b. PAS 28
c. PFRS 1
d. PFRS 7

44. Non-current assets held for sale and discontinued operations are accounted for under
a. PFRS 4
b. PAS 41
c. PFRS 5
d. PFRS 8

45. The equity method of accounting for investments is discussed under

a. PAS 28
b. PAS 29
c. PAS 21
d. PFRS 2

46. The computation of employee retirement benefits expense is addressed in this standard.
a. PAS 17
b. PFRS 7
c. PAS 19
d. PFRS 9

47. This standard deals with the recognition and measurement of financial instruments.
a. PAS 32
b. PFRS 7
c. PFRS 9
d. PFRS 3

48. Joint arrangements are discussed under

a. PFRS 1
b. PFRS 11
c. PAS 20
d. PAS 24

49. Entity A is preparing its first PFRS financial statements. Which of the following standards is most
relevant to Entity A?
a. PFRS 1
b. PAS 12
c. PAS 8
d. PFRS 9

50. This standard is most relevant to insurance companies.

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a. PFRS 14
b. PFRS 15
c. PFRS 16
d. PFRS 17

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