BATCH 2021: CONCEPTUAL FRAMEWORK 1

SAN BEDA UNIVERSITY - BS ACCOUNTANCY

Ora et Labora
PROFESSOR: Ma’am Pauline Fulgencio, CPA, MBA, CrFA

OUTLINE
COMBINED NOTES AND ANNOTATIONS FROM VALIX, & The Students

I. ACCOUNTANCY PROFESSION XV. PAS 16 (Property, Plant, and Equipment)

II. CONCEPTUAL FRAMEWORK (Objective of XVI. PAS 23 (Borrowing Costs)
Financial Reporting)
XVII. PAS 28 (Investment in Associates)
III. CONCEPTUAL FRAMEWORK (Qualitative
Characteristics) XVIII. PAS 38 (Intangible Assets)

IV. CONCEPTUAL FRAMEWORK (Financial XIX. PAS 40 (Investment Property)

Statements and Reporting Entity) XX. PAS 41 (Agriculture
V. CONCEPTUAL FRAMEWORK (Elements of XXI. PAS 37 (Provision, Contingent Liability
Financial Statements) and Asset)
VI. CONCEPTUAL FRAMEWORK (Recognition and XXII. PAS 34 (Interim Financial Reporting)
Measurement)
XXIII. PFRS 5 (Non current Asset Held for Sale)
VII. CONCEPTUAL FRAMEWORK (Presentation and
Disclosure) XXIV. PFRS 5 (Discontinued Operation)

VIII. PAS 1 (Statement of Financial Position) XXV. PFRS 6 (Exploration and Evaluation of
Mineral Resources)
IX. PAS 1 (Statement of Comprehensive Income)
XXVI. PFRS 8 (Operating Segments)
X. PAS 7 (Statement of Cash Flows)
XXVII. IFRS 9 (Financial Instruments)
XI. PAS 8 (Accounting Policies, Estimate and
Errors) XXVIII. CASH

XII. PAS 10 (Events After the Reporting Period) XXIX. RECEIVABLES

XIII. PAS 24 (Related Party Disclosures) XXX. SHAREHOLDERS’ EQUITY

XIV. PAS 2 (Inventories)

I. ACCOUNTANCY PROFESSION

ACCOUNTING

COMMITTEE ON ACCOUNTING AMERICAN ACCOUNTING

ACCOUNTING STANDARDS TERMINOLOGY OF THE AMERICAN ASSOCIATION
COUNCIL INSTITUTE OF CERTIFIED PUBLIC (The definition that stood the
ACCOUNTANTS test of time)

Accounting is a service activity Accounting is the process of

Accounting is the art of recording, identifying, measuring, and
and the function is to provide
classifying, and summarizing in a communicating economic
quantitative information,
significant manner and in terms of information to permit
primarily financial in nature,
money, transactions, and events which informed judgement and
about economic entities, that is
are part at least of a financial character decision by users of the
intended to be useful in making
and interpreting the results. information.
economic decisions.

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IMPORTANT POINTS IN THE DEFINITION OF ACCOUNTING

ONE
TWO THREE
(Overall objective of accounting)

Accounting is about quantitative Information is likely to be Information should be useful in

information financial in nature decision making

COMPONENTS OF ACCOUNTING

Recognition or nonrecognition of business activities as “accountable events”.

Not all business activities are accountable

It is accountable and quantifiable if it has an effect on assets, liabilities, and equity.

TRANSACTIONS

Economic events involving one entity and another entity

External
IDENTIFYING Transactions Example:
(Analytical (Exchange purchase of goods;
component) Transactions) borrowing of money from a bank; sale of goods to a customer;
payment of salaries/ taxes

Economic events involving the entity and within the entity only

Internal Ex:
Transactions Production : resources are transformed into products
Casualty : any sudden and unanticipated loss from an event
termed as an act of God.

Assigning peso amounts to accountable economic transactions and events.

MEASURING
(Technical Historical Cost : original acquisition cost; most common financial attribute in
component) measuring financial information
Current Value : fair value, value in use, fulfillment value, and current cost

Process of preparing and distributing accounting reports to potential users of

accounting information.
COMMUNICATING
The reason why accounting is called “universal language of business”
(Formal
component) Recording : maintaining a record of all business transactions
Classifying : sorting or grouping of similar or interrelated business transactions.
Summarizing : preparation of financial statements

ACCOUNTING AS AN INFORMATION SYSTEM

- Accounting is an information system that measures business activities, processes information into
reports and communicates the resorts to decision makers.
- Financial reports : tell us how well an entity is performing in terms of profit and losses and where it
stands in financial terms.

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ACCOUNTANCY
- RA 9298 or Philippine Accountancy Act of 2004. Law regulating the practice of accountancy in the
Philippines
- Board of Accountancy : the body authorized by law to promulgate rules and regulations affecting
the practice of the accountancy profession in the Philippines.
- CPA Examination : this computer-based examination is offered twice a year , one in May and
another in October in authorized testing centers around the country.

PRACTICE OF PUBLIC ACCOUNTANCY

- Single practitioners and partnerships for the practice of public accountancy shall be registered
CPAs in the Philippines.
- A certificate of accreditation shall be issued to CPAs in public practice upon showing: accordance
with rules and regulations promulgated by Board of accountancy and approved by the PRC and
has acquired a minimum of 3 years of meaningful experience in any areas of public practice.
- The SEC shall not register any corporation organized for the practice of public accountancy.
- Certificate of Registration to practice public accountancy is valid for 3 years and renewable every 3
years upon payment fees.
- CPAs are licensed by the state government

3 MAIN AREAS OF ACCOUNTING PRACTICE

Renders independent and expert financial service to the public

THREE KINDS OF SERVICES:

The primary service offered

Auditing The examination of financial statements by independent CPAs for the

(External purpose of expressing an opinion as to the fairness with which the financial
Auditing) statements are prepared.

External auditing is the attest function of independent CPAs

PUBLIC
Preparation of annual income tax returns and determination of tax
ACCOUNTING Taxation consequences.

Includes:
A. Advice on installation of computer system
Management B. Quality control
C. Installation and modification of accounting system
Advisory D. Budgeting
Services E. Forward planning and forecasting
F. Design and modification of retirement plans
G. Advice on mergers and consolidations

PRIVATE Maintains the record, producing the financial reports, prepares the budget, and controls
ACCOUNTING and allocates the resources of the entity.

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 Assists the management in planning and controlling the entity’s operations.

Controller : highest accounting officer in an entity

Encompasses the process of analyzing, classifying, summarizing, and communicating all

transactions involving the receipt and disposition of government funds and property and
interpreting the results.

Focus : Custody and administration of public funds

GOVERNMENT
ACCOUNTING CPAs employed in the branches of the government:
I. Bureau of Internal Revenue (BIR)
II. Commission on Audit
III. Department of Budget and Management (DBM)
IV. Securities and Exchange Commission (SEC)
V. Bangko Sentral ng Pilipinas (BSP)

CONTINUING PROFESSIONAL DEVELOPMENT (CPD)

- RA 10912. Law mandating and strengthening the continuing professional development program for
all regulated professions, including the accountancy profession.
- Incalculation and acquisition of advanced knowledge, skill, proficiency, and ethical and moral
values after the initial registration of the CPA.
- Raises and enhances the technical skill and competence of the CPAs.
- Mandatory for CPAs.
- CPD Credit units : CPD Credit hours required for the renewal of CPA license and accreditation
every 3 years.
- CPD Credit units : Renewal of CPA license : 15 CPD credit units
Accreditation of a CPA : 120 CPD credit units
- A CPA shall be permanently exempted from CPD requirements of the renewal of CPA license upon
reaching 65 years old.

ACCOUNTING vs. AUDITING

ACCOUNTING AUDITING

- Auditing is one of the areas of accounting specialization

- Broad : Accounting embraces
- Auditing is analytical.
auditing
- The auditor performs the task of auditing after the financial
- Limited : Accounting is constructive
statements are prepared.
in nature
- The auditor examines the financial statements whether
- Prepares the financial statements
they are in conformity with GAAP.

ACCOUNTING vs. BOOKKEEPING

ACCOUNTING BOOKKEEPING

Is conceptual and is concerned with - Procedural element of accounting and largely concerned with
the why, reason, or justification, for development and maintenance of accounting records
any action adopted. - “How” of accounting

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ACCOUNTING vs ACCOUNTANCY

ACCOUNTING ACCOUNTANCY

- Used in reference to a particular field of

- Profession of accounting practice
accountancy i.e., public accounting.

FINANCIAL ACCOUNTING vs MANAGERIAL ACCOUNTING

FINANCIAL ACCOUNTING MANAGERIAL ACCOUNTING

- Recording of business transactions and the

eventual preparation of financial statements - The accumulation and preparation of
- Focuses on general purpose reports on financial financial reports for internal users only.
statements and financial performance intended - The area of accounting that emphasizes
for internal and external users. developing accounting information for use
- The area of accounting that emphasizes reporting within an entity.
to creditors and investors. - Does not need to follow GAAP
- Must follow GAAP

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)

- Accounting rules, procedures, and practices that are developed on the basis of experience,
reason, custom, usage, and practical necessity.
- Are like laws that must be followed in financial reporting.
- Accounting principles that have been developed on the basis of such factors as usage and
practical necessity.
- Derive their credibility and authority from general recognition and acceptance by the accountancy
profession.
- It has a political process in establishing which incorporates political actions of various interested
user groups as well as professional judgement, logic, and research.
- Purpose : to identify proper accounting practice
- This creates a common understanding between preparers and users of financial statements
- A set of high-quality accounting standards is a necessity to ensure comparability and uniformity in
financial statements.

FINANCIAL REPORTING STANDARDS COUNCIL (FRSC)

- Replaces Accounting Standards Council (ASC)
- Is the accounting standard setting body created by the PRC upon recommendation of the Board of
Accountancy to assist the Board of Accountancy in carrying out its powers and functions provided
under RA 9298.
- Accounting standard setting : a political process which reflects political actions of various interested
user groups as well as a product or research and logic.
- Main function : to establish and improve accounting standards that will be generally accepted in the
Philippines.

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 - The accounting standards that are promulgated by the FRSC constitute the “highest hierarchy'' of
GAAP in the Philippines.
- Approved statements : Philippine Accounting Standards (PAS)
Philippine Financial Reporting Standards (PFRS)
- Composition :

Members Qty

1. Chairman 1
2. Board of Accountancy 1
3. Securities and Exchange Commission (SEC) 1
4. Bangko Sentral ng Pilipinas (BSP) 1
5. Bureau of Internal Revenue (BIR) 1
6. Commission on Audit 1
7. Major organization of preparers and users of financial
Composition of
statements -
FRSC
Financial Executives Institute of the Philippines
(FINEX) 1
8. Accredited national professional organization of CPAs:
Public Practice 2
Commerce and Industry 2
Academe or Education 2
Government 2

TOTAL 14

PHILIPPINE INTERPRETATIONS COMMITTEE (PIC)

- Was formed by the FRSC in August 2006 and has replaced the Interpretations Committee (IC)
formed by the ASC in May 2000.
- Role : to prepare interpretations that are intended to give authoritative guidance on issues that are
likely to receive unacceptable treatment .
- Its counterpart in the UK is the International Financial Reporting Interpretations Committee (IFRIC)
which has already replaced the Standing Interpretations Committee (SIC).

INTERNATIONAL ACCOUNTING STANDARDS COUNCIL (IASC)

- Is an independent private sector body
- Headquarters : London, United Kingdom
- Formed in 1973 through an agreement made by professional accountancy bodies from Australia,
Canada, France, Germany, Japan, Mexico, the Netherlands, the United Kingdom and Ireland, and
the United States of America.
- Objectives :

A. Achieving uniformity in the accounting principles which are used by business and other
organizations for financial reporting around the world.
Objectives B. To formulate and public in the public interest accounting standards
C. To work generally for the improvement and harmonization of regulations, accounting
standards, and procedures relating to the presentation of financial statements.

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 INTERNATIONAL ACCOUNTING STANDARDS BOARD (IASB)
- Replaces the International Accounting Standards Committee (IASC) but adopted its body of
standards
- Includes the correct order research, discussion paper, exposure draft, and accounting standard.
- Promotes the use of high-quality and understandable global accounting standards
- Publishes standards called International Financial Reporting Standards (IFRS)
- IFRIC Interpretations by IASB :

A. Are considered authoritative and must be followed

IFRIC
B. Cover newly identified financial reporting issues not specifically addressed
Interpretations
C. Cover issues where unsatisfactory or conflicting interpretations have developed.

- Due process in standard-setting:

A. IASB operates full view of the public

Due process B. Public hearings are held on proposed standards
C. Interested parties can make their views known

- Factors to be considered in deciding to move totally to IAS:

A. Support of international accounting standards by Philippine organizations, such as

Philippine SEC, Board of Accountancy, and PICPA
B. Increasing internalization of business which has heightened interest in common language
Factors for financial reporting
C. Improvement of IAS or removal of free choices of accounting treatments
D. Increasing recognition of IAS by the World Bank, Asian Development Bank, and World
Trade Organization.

PHILIPPINE FINANCIAL REPORTING STANDARDS (PFRS)

- Are standards in a series of pronouncements issued by the FRSC

A. The PFRS are numbered the same as their counterpart in IFRS

B. The PAS are numbered the same as their counterpart in IAS
PFRS
C. Philippine Interpretations which correspond to Interpretations of the IFRIC and the SIC, and
Interpretations developed by the PI.

II. CONCEPTUAL FRAMEWORK

(Objective of Financial Reporting)

CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING

- It is not a Standard but it is a summary of the terms and concepts that underlie the preparation and
presentation of financial statements for external users.
- Complete, comprehensive, and single document promulgated by IASB
- Describes the concepts for general purpose financial reporting

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 - Is an attempt to provide an overall theoretical foundation for accounting to guide standard-setters,
preparers, and users of financial information
- In the absence of a standard or an interpretation that specifically applies to a transaction,
management shall consider the applicability of the Conceptual Framework in developing and
applying an accounting policy that results in an information that is relevant and faithfully
represented.
- Its underlying theme is Decision Usefulness.
- Provides the foundation for Standards that:

A. Contribute to transparency
THE CONCEPTUAL FRAMEWORK PROVIDES THE
B. Strengthen accountability
FOUNDATION FOR STANDARDS THAT:
C. Contribute to economic efficiency

- Purposes of Revised Conceptual Framework:

PURPOSES OF A. To assist the IASB to develop IFRS Standards based on consistent concepts
B. To assist preparers of financial statements to develop consistent accounting
REVISED
policy when no Standard applies to a particular transaction or other event.
CONCEPTUAL C. To assist preparers of financial statements to develop accounting policy when a
Standard allows a choice of an accounting policy
FRAMEWORK
D. To assist all parties to understand and interpret the IFRS Standards

- The Conceptual Framework is not an IFRS. Nothing in the Conceptual Framework overrides any
IFRS

USERS OF FINANCIAL INFORMATION

Includes the existing and potential investors, lenders, and other creditors.

Are the parties to whom general purpose financial reports are primarily directed.

Concerned with the risk inherent in and return provided by their

PRIMARY Existing and investments
USERS Potential
Investors They need information to help them determine whether they should buy,
hold, sell, or the ability of the entity to pay dividends.

Lenders and Are interested in information which enables them to determine whether
other creditors their loans, interest, and other amounts owing to them will be paid in due.

Includes the employees, customers, governments and their agencies, and the public.

Parties that may find the general purpose financial reports useful but the reports are not
directed to them primarily.
OTHER
USERS Interested in information about the stability and profitability of the entity
Employees which enables them to assess the ability of the entity to provide
remuneration, retirement benefits, and employment opportunities.

Customers Interested in the information about the continuance of an entity especially

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 when they have a long-term involvement or dependent in the entity.

Governments Interested in the allocation of resources and activities of the entity.

and their Require information to regulate the activities of the entity, determine taxation
agencies policies, and as a basis for national income and similar statistics.

Interested in trends and recent developments where an entity makes a

Public
substantial contribution to the local economy.

SCOPE OF REVISED CONCEPTUAL FRAMEWORK

I. Objective of Financial Reporting

II. Qualitative characteristics of useful financial information
III. Financial statements and reporting entity
SCOPE OF REVISED
IV. Elements of financial statements
CONCEPTUAL
V. Recognition and derecognition
FRAMEWORK
VI. Measurement
VII. Presentation and disclosure
VIII. Concepts of capital and capital maintenance

FINANCIAL REPORTING
- Provision of financial information about an entity to external users that is useful to them in making
economic decisions and for assessing the effectiveness of the entity’s management.
- Also encompasses financial highlights, summary of important financial figures, analysis of financial
statements and significant ratios.
- Also include nonfinancial information such as description of major products and a listing of
corporate officers and directors.
- Should provide information useful in assessing the amount, timing, and uncertainty of prospects for
future net cash inflows to the entity.
- Target users : Primary user group
- Objectives:

A. 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
OBJECTIVES
resources to the entity.
B. “Why”, purpose or goal of accounting

A. To provide information useful in making decisions about providing resources in the

entity.
SPECIFIC
B. To provide information useful in assessing the cash flow prospects in the entity.
OBJECTIVES
C. To provide information about entity resources, claims and changes in the resources
and claims.

A. General purpose of financial reports do not and cannot provide all of the information
that existing and potential investors, lenders, and other creditors need. These users
LIMITATIONS
need to consider pertinent information from other sources.
B. General purpose of financial reports are not designed to show the value of an entity

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 but the reports provide information to help the primary users estimate the value of an
entity
C. General purpose of financial reports are intended to provide common information to
users and cannot accommodate every request for information.
D. General purpose of financial reports are based on estimate and judgement rather than
exact depletion.

FINANCIAL POSITION
- Is the information about the entity’s economic resources (assets, liabilities, and equity) and claims
against the reporting entity.
- Information about it can help users to assess the entity’s liquidity, solvency, and the need for
additional financing.

LIQUIDITY The availability of cash in the near future to cover currently maturing obligations

SOLVENCY The availability of cash over a long term to meet financial commitment when they fall due

FINANCIAL PERFORMANCE
- This results from the changes in economic resources and claims and other events or transactions
that comprises revenue, expenses, and net income or net loss for a period of time.
- It is the level of income earned by the entity through the efficient and effective use of its resources.
- Also known as “results of operation”
- This helps user to understand the return that the entity has produced on the economic resources
- Information about past financial performance : helps in predicting the future returns on the entity’s
economic resources
- Information of financial performance during a period : is useful in assessing the entity’s ability to
generate future cash inflows from operation.

ACCRUAL ACCOUNTING
- The effects of transactions and other events are recognized when they occur and not as cash
received or paid.
- Income is recognized when earned regardless of when received and expense is recognized when
incurred regardless of when paid.
- Information about financial performance measured in accordance with accrual accounting provides
a better basis for assessing past and future performance.

MANAGEMENT STEWARDSHIP
- Information about how efficiently and effectively management has discharged its responsibilities to
use the entity’s economic resources helps users to assess management stewardship of those
resources.

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 - It is also useful for predicting how management will use the entity’s economic resources in future
periods.

III. CONCEPTUAL FRAMEWORK

(Qualitative Characteristics)

QUALITATIVE CHARACTERISTICS
- Qualities or attributes that make financial accounting information useful to the users.
- The objective is to ensure that the information is useful to the users in making economic decisions.

APPLICATION OF QUALITATIVE CHARACTERISTICS

I. Identify an economic phenomenon that has the potential to be

more useful
Application of Qualitative
II. Identify the type of information about the phenomenon that would
Characteristics
be most relevant and be faithfully represented.
III. Determine whether the information is available

CLASSIFICATION OF QUALITATIVE CHARACTERISTICS

1. Fundamental Qualitative Characteristics - Relates to the content or substance of financial
information. Information must be both relevant and faithfully represented.

A. Relevance - Is the capacity of the information to influence a decision. To be relevant, the financial
information must be capable of making a difference in the decisions made by the users. It is
qualitative.
● Predictive Value : the likelihood of correctly or accurately predicting or forecasting the outcome
of events.

● Confirmatory Value : if it provides feedback about previous evaluations and when it enables
the users to confirm or correct earlier expectations.

● Materiality : Known as the Doctrine of Convenience

- It is a quantitative threshold
- The materiality of an item depends on relative size rather than absolute size.
- It is a practical rule in accounting which dictates the strict adherence to GAAP is not
required when the items are not significant enough to affect the evaluation, decision, and
fairness of the financial position.
- Definition according to IASB : Information is material if the omission, misstatement, or
obscuring of the information could reasonably affect the economic decision of primary users

Revised Definition of Materiality

a. Could reasonably be expected to influence

- Adds an element of reasonability of financial information.
- Limits the economic decision to primary users rather than to all users.
- Ensures that information is capable of influencing the economic decision of the
primary users shall be included in the financial statements.

b. Obscuring information

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 - Is a new concept added to the new definition of materiality
- Information is obscured if presenting or communicating it would have a similar
effect as omitting or misstating the information.
- Presentation of financial information not readily understood or not clearly
expressed.
- May be characterized by deliberate vagueness, ambiguity, and abstruseness.

c. Primary users
- People who are primarily affected by general purpose financial statements.
- Includes the existing and potential investors, lenders, and other creditors like
employees, customers, government agencies, and the public in general.

Factors of Materiality

A. Magnitude of the Financial Statements

- The size of the item in relation to the total of the group to which the item
belongs is taken into account.

B. Nature of the Financial Statements

- The nature of the item may be inherently material because its very nature
affects economic decision

B. Faithful Representation - means that the actual effects of the transactions shall be properly
accounted for and reported in the financial statements.

- The descriptions and figures must match what really existed or happened.

- Ingredients of Faithful Representation :

● Completeness : Relevant information should be presented in a way that facilitates
understanding and avoids erroneous implication. It is the result of the adequate disclosure
standard or the principle of full disclosure

Standard of Adequate Disclosure Noted to Financial Statements

- Means that all significant and relevant information

leading to the preparation of financial statements - To be complete, the financial statements shall
shall be clearly reported. be accompanied by “notes to financial
- The accountant shall disclose a material fact statements”
known to him/her which is not disclosed in the - The purpose is to provide necessary
financial statements but disclosure of which is disclosures required by the PFRS.
necessary in order that the financial statements
would not be misleading. - It also provides narrative description or
disaggregation of the items presented in the
- Is best described by disclosure of any financial financial statements and information about
facts significant enough to influence the items that do not qualify for recognition.
judgement of informed users.

● Neutrality : Is without bias in the preparation or presentation of financial information. The

information contained in financial statements must be free from bias and not favor one party
to detriment another party. The information is directed to the common needs of many users
and not the particular needs of the specific users. To be neutral is to be fair.

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 Prudence Conservatism

- Is the exercise of care and caution when dealing

- Means that when alternatives exist, the
with the uncertainties in the measurement process
alternative which has the least effect on equity
such that assets or income are not overstated and
should be chosen.
liabilities or expenses are not understated.
- In case of doubt, record any loss and do not
- Neutrality is supported by the exercise of
record any gain.
prudence.

● Free from Error : Means that no errors or omissions in the description of the phenomenon
or transaction. In this context, free from error does not mean perfectly accurate in all
aspects.

Measurement Uncertainty Substance over Form

- Arises when monetary amounts in financial reports

cannot be observed directly and must instead be
estimated.

- Can affect faithful representation if the level of - It is not considered a separate component of
uncertainty in providing an estimate is high. faithful representation because it would be
redundant.
- However, the use of reasonable estimates is an
essential part of providing financial information and - Means that the economic substance of
does not undermine the usefulness of financial transactions or events are emphasized when
information. economic substance differs from legal form.
- As long as the estimate is clearly and accurately
described and explained, even a high level of
measurement uncertainty does not affect the
usefulness of the financial information.

2. ENHANCING QUALITATIVE CHARACTERISTICS - Relates to the presentation or form of the

financial information. It is intended to increase the usefulness of the financial information.

A. Comparability : It is the ability to bring together for the purpose of noting points of likeness and
difference that can be made within an entity or between and across entities.

Like things must look alike, and different things must look different.

Within an entity Between and across entities Consistency

- Is the uniform application of

- Also known as horizontal - Also known as dimensional
accounting methods from
comparability or comparability or
period to period within an
Intracomparability. intercomparability.
entity.
- Is the quality of information that - Is the quality of information
- It is inappropriate for an
allows comparisons within a that allows comparison
entity to leave accounting
single entity through time or between two or more entities
policies unchanged when
from one accounting period to engaged in the same
better and acceptable
next. industry.
alternatives exist.

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 B. Understandability : Requires that financial information must be comprehensible or intelligible if it is
to be most useful.

C. Verifiability : Verifiability implies consensus

Direct Verification Indirect Verification Objectivity

Means checking the inputs to a

An accounting transaction shall be
Verifying an amount or other model, formula, or other
supported by sufficient evidence to
representation through direct technique and recalculating the
allow two or more qualified individuals
observation like counting cash. inputs using the same
to arrive at essentially similar decisions.
methodology.

D. Timeliness : Having information available to decision makers in time to influence their decisions.

a. The older the information, the less useful.

b. Cost constraint on useful information :

i. Cost is a pervasive constraint on the information that can be provided by financial
reporting.

ii. Is a consideration of the cost incurred in generating financial information against the
benefit to be obtained from having the information.

IV. CONCEPTUAL FRAMEWORK

(Financial Statements and Reporting Entity)

FINANCIAL STATEMENTS
- Provides information about economic resources of the reporting entity, claims against the entity,
and changes in the economic resources and claims.
- Provides financial information about an entity’s assets, liabilities, equity, income, and expenses
useful to users of financial statements in:
a. Assessing future cash flows to the reporting entity
b. Assessing management stewardship of the entity’s economic resources.

THE FINANCIAL INFORMATION IS PROVIDED IN THE FOLLOWING :

A. Statement of Financial Position, by recognizing assets, liabilities, and equity.

B. Statement of Financial Performance, by recognizing income and expenses.

The Financial C. Other statements and notes by presenting and disclosing information about:
Information is
provided in the a. Recognized assets, liabilities, equity, income, and expenses
following b. Unrecognized assets and liabilities.
c. Cash flows
d. Contribution from equity holders and distribution to equity holders
e. Method, assumption, and judgement in estimating the amount presented.

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TYPES OF FINANCIAL STATEMENTS

Are financial statements prepared when the reporting entity comprises both the
parent and its subsidiaries as a single reporting entity.

Is useful for existing and potential investors, lenders, and other creditors of the parent
Consolidated because net cash inflows to the parent include distributions to the parent from its
Financial subsidiaries.
Statements
These are not designed to provide separate information about the assets, liabilities,
equity, income, and expenses of a particular subsidiary.

Parent : the entity that exercises control over the subsidiaries.

Are financial statements prepared when the reporting entity is the parent alone.

Such information can be useful to the existing and potential investors, lenders, and
Unconsolidate other creditors of the parent because a claim against the parent typically does not
d Financial give the holder of that claim against subsidiaries.
Statements Information provided is typically not sufficient to meet the requirement needs of
primary users.

Cannot serve as substitute for consolidated financial statements.

Combined
Are the financial statements when the reporting entity comprises two or more entities
Financial
that are not linked by a parent and subsidiary relationship.
Statements

REPORTING ENTITY
- Is an entity that is required or choses to prepare financial statements.
- A reporting entity is not necessarily a legal entity.
- The following that can be considered as a reporting entity

A. Individual corporation, partnership, or proprietorship

Considered B. The parent alone
as a C. The parent and its subsidiaries as single reporting entity
Reporting D. Two or more entities without parent and subsidiary relationship as a single reporting
Entity entity
E. A reportable business segment of an entity.

REPORTING PERIOD
- Is the period when financial statements are prepared for general purpose financial reporting.
- Financial statements must be prepared on an annual basis or a period of twelve months. But can
also be prepared on an interim basis, not required but optional.
- To help users of financial statements to identify and assess change in trends, financial statements
also provide comparative information for at least one preceding reporting period.
- May include information about transactions and other events that occurred after the end of
reporting period if the information is necessary to meet the general objective of financial
statements.

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 - Financial statements are prepared for a specific period of time and provide information about:
a. Assets, liabilities, and equity at the end of the reporting period.
b. Income and expenses during the reporting period.

UNDERLYING ASSUMPTIONS
- Also known as Postulates
- Are the basic notions or fundamental premises on which the accounting process is based.
- Serve as the foundation or bedrock of accounting in order to avoid misunderstanding but rather
enhance the understanding and usefulness of the financial statements.

BASIC ASSUMPTIONS OF ACCOUNTING

Is the very foundation of the cost principle and thus, assets are normally recorded at
Going cost.
Concern
The ability of the entity to continue in operation for the foreseeable future.

Means that the transaction is separate from the owners, managers, and employees who
Accounting constitute the entity.
Entity
Each business is an independent accounting entity.

Means that the indefinite life of an entity is subdivided into accounting periods which are
usually of equal length for the purpose of preparing financial reports

The one-year period or fiscal period is traditionally the accounting period because it is
after one year that government reports are required.
Time Period
Periodicity : the life of a business can be divided into equal time periods.

Accounting period may be :

Calendar Year : 12 month period that ends on December 31.
Natural Business Year : 12 month period that ends on any month.

Quantifiability Aspect : the assets, liabilities, equity, income, and expenses should be
stated in terms of a unit of measure which is the Peso in the Philippines.

Monetary Stability of Peso :

Unit - Means that the purchasing power of the peso is stable or constant and that its
instability is insignificant and may be ignored.
- To account for nominal pesos only and not for constant pesos or changes in
purchasing power.

V. CONCEPTUAL FRAMEWORK
(Elements of Financial Statements)

ELEMENTS OF FINANCIAL STATEMENTS

- Financial statements portray the financial effects of transactions and other events by grouping
them into broad classes according to their economic characteristics. These broad classes are
termed the elements of financial statements

16 | Conceptual Framework 1 | BALANG, BACANI, CASTANEDA, DEANG, NAVARRO, PEREZ, RAMOS, SALVATIERRA | BATCH 2021
 - The elements of financial statements refer to the quantitative information reported in the statement
of financial position and income statement
- Are the “building blocks” from which financial statements are constructed
- The presentation of these elements in the statement of financial position and the income statement
involves a process of classification and subclassification

Elements directly related to the measurement of Elements directly related to the measurement of
financial position financial performance

- Asset - Income
- Liability - Expense
- Equity - residual interest in the assets of
the entity after deducting all of liabilities

ASSET
- A present economic resource controlled by the entity as a result of past events
- An economic resource is a right that has the potential to produce economic benefits

Essential characteristics of asset

- The asset is a present economic resource
- The economic resource is a right that has the potential to produce economic benefits
- The economic resource is controlled by the entity as a result of past events

Right
1. Rights that correspond to an obligation of another entity
- Right to receive cash
- Right to receive goods or services
- Right to exchange economic resources with another party on favorable terms
- Right to benefit from an obligation of another party if a specified uncertain future event occurs

2. Rights that do not correspond to an obligation of another entity

- Right over physical objects, such as property, plant, and equipment or inventories
- Right to intellectual property

3. Rights established by contract or legislation such as owning a debt instrument or an equity instrument
or owning a registered patent

Potential to produce economic benefits

- For the potential to exist, it does not need to be certain or even likely that the right will produce
economic benefits
- It is only necessary that the right already exists
- The economic resource is the present right that contains the potential and not the future economic
benefits that the right may produce

An economic resource could produce economic benefits if an entity is entitled:

- To receive contractual cash flows
- To exchange economic resources with another party on favorable terms
- To produce cash inflows or avoid cash outflows
- To receive cash by selling the economic resource
- To extinguish a liability by transferring an economic resource

Control of an economic resource

- An entity controls an asset if it has the present ability to direct the use of the asset and obtain the
economic benefits that flow from it.
- Control also includes the ability to prevent others from using such asset and therefore preventing
others from obtaining the economic benefits from the asset
- May arise if an entity enforces legal rights

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LIABILITY
- A present obligation of an entity to transfer an economic resource as a result of past events
- Obligation to transfer an economic resource and not the ultimate outflow of economic benefits

Essential characteristics of liability

- The entity has an obligation
- The obligation is to transfer an economic resource
- The obligation is a present obligation that exists as a result of past events

Obligation
- Is a duty or responsibility that an entity has no practical ability to avoid
- Can either be legal or constructive
- Obligations may be legally enforceable as a consequence of a binding contract or statutory
requirement (ex. Accounts payable for goods and services received)
- Constructive obligations arise from normal business practice, custom and a desire to maintain good
business relations or act in an equitable manner (ex. An entity decides as a matter of policy to rectify
faults in the products even when these become apparent after the warrant period)

Transfer of an economic resource

- Obligation to pay cash
- Obligation to deliver goods or noncash resources
- Obligation to provide services at some future time
- Obligation to exchange economic resources with another party on unfavorable terms
- Obligation to transfer an economic resource if specified uncertain future event occurs

Past event - An obligation exists as a result of past event if both of the ff conditions are satisfied:
- An entity has already obtained economic benefits
- An entity must transfer an economic resource

INCOME
- Increases in assets or decreases in liabilities that result in increase in equity, other than those relating
to contributions from equity holders
- Encompasses both revenue and gains
- Revenue - arises in the ordinary regular activities and is referred to by variety of different names
including sales, fees, interest, dividends, royalties and rent. The essence of revenue is regularity
- Gains - represent other items that meet the definition of income and do not arise in the course of the
ordinary regular activities. It includes gain from disposal of noncurrent assets, unrealized gain on
trading investment and gain from expropriation.

STATEMENT OF FINANCIAL PERFORMANCE

- Refers to the statement of profit or loss and a statement presenting other comprehensive income
- Statement of profit or loss - is the primary source of information about an entity’s financial
performance
- There are instances that an amount in other comprehensive income in one reporting period may be
recycled to profit or loss in another reporting period

EXPENSE
- Decreases in assets or increases in liabilities that result in decreases in equity, other than those
relating to distributions to equity holders
- Encompasses losses as well as those expenses that arise in the course of the ordinary regular
activities
- Arise in the course of ordinary regular activities include cost of goods sold, wages and depreciation
- Losses do not arise in the course of the ordinary regular activities and include losses resulting from
disasters. (Ex. Losses from fire, flood, storm surge, tsunami and hurricane, as well as those arising
from disposal of noncurrent assets)

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 VI. CONCEPTUAL FRAMEWORK
(Recognition and Measurement)

RECOGNITION
- It is the process of capturing for inclusion in the financial statements an item that meets the
definition of an asset, liability, equity, income or expense
- Carrying Amount - the amount at which an asset, liability or equity is recognized in the statement of
financial asset
- The recognition of expense happens simultaneously with the recognition of a decrease in asset or
increase in liability
- Only items that meet the definition of an asset, a liability or equity are recognized in the statement
of financial position and only items that meet the definition of income or expense are recognized
in the statement of financial performance
- Does not focus anymore on how probable economic benefits will flow to or from the entity and that
the cost can be measured reliably
- An asset or liability and any corresponding income or expense can exist even if the probability of
inflow or outflow of the benefits is low

- Income shall be recognized when earned

- With respect to sale of goods in the ordinary course of business, the point of
sale is unquestionably the point of income recognition
INCOME - It is at the point of sale that the entity has transferred control of the goods to
RECOGNITION the customer
- Under certain conditions, income may be recognized at the point of
production, during production and at the point of collection

- Expenses are recognized when incurred

- Is the application of the matching principle
- “There is no gain if there is no pain”

MATCHING PRINCIPLE
- Requires those costs and expenses incurred in earning a revenue shall be
reported in the same period

- Has three applications:

EXPENSE
RECOGNITION - Expense is recognized when the revenue is already
recognized

- The reason is the presumed direct association of the

CAUSE AND
expense with specific items of income. This is actually
EFFECT
the “strict matching concept”
ASSOCIATION
- Best example is the cost of merchandise inventory.
Other examples include doubtful accounts, warranty
expenses and sales commissions.

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 - Some costs are expensed by simply allocating them
over the periods benefited

- When economic benefits are expected to arise over

SYSTEMATIC several accounting periods and the association with
AND income can only be broadly or indirectly determined,
RATIONAL expenses are recognized on the basis of systematic
ALLOCATION and allocation procedures

- Examples include depreciation of PPE, amortization of

intangibles and allocation of prepaid rent, insurance
and other prepayments

- The cost incurred is expensed outright because of

uncertainty of future economic benefits or difficulty of
reliably associating certain costs with future revenue

- An expense is recognized immediately: (1) When an

expenditure produces no future economic benefit and
(2) When cost incurred does not qualify or ceases to
qualify for recognition as an asset
IMMEDIATE
RECOGNITION - Examples include officers’ salaries and most
administrative expenses, advertising and most selling
expenses, amount to settle lawsuit and worthless
tangibles

- Many losses such as loss from disposal of building, loss

from sale of investments and casualty loss, are
immediately recognized because they are not directly
related to specific revenue

- The removal of all or part of a recognized asset or liability from the statement
of financial position

- Normally occurs when an item no longer meets the definition of an asset or a

liability
DERECOGNITION
- Derecognition of an asset occurs when the entity loses control of all or part of
the asset

- Derecognition of a liability occurs when the entity no longer has a present

obligation for all or part of the liability

MEASUREMENT

- Is defined as quantifying in monetary terms the elements in the financial statements

- Also known as the original acquisition cost of an asset

HISTORICAL
- Is the entry price or entry value to acquire an asset or to incur a liability
COST
- Is the cost incurred in acquiring or creating the asset comprising the

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 consideration paid plus transaction cost

- Historical cost of a liability is the consideration received to incur the liability minus
transaction cost

- An application of the historical cost measurement is to measure financial asset

and financial liability at amortized cost

- The amortized cost reflects the estimate of future cash flows discounted at a rate
determined at initial recognition

Historical cost updated

- Depreciation and amortization

- Payment received as a result of disposing part or all of the

Historical asset
cost of an
- Impairment
asset is
updated - Accrual of interest to reflect any financing component of the
because of: asset

- Amortized cost measurement of financial asset

- Payment made or satisfying an obligation to deliver goods

Historical - Increase in value of the obligation to transfer economic
cost of a resources such that the liability becomes onerous
liability is
updated - Accrual of interest to reflect any financing component of the
because of: liability

- Amortized cost measurement of financial liability

Current value includes

- FV of an asset is the price that would be received to sell an

asset in an orderly transaction between market participants at
measurement date

- FV on a liability is the price that would paid to transfer a

liability in an orderly transaction between market participants
at measurement date
CURRENT Fair Value - Is an exit price or exit value
VALUE
- Can be observed directly using market price of the asset or
liability in an active market

- In cases where fair value cannot be directly measured, an

entity can use present value of cash flows

- Is not adjusted for transaction cost

Value in use - The present value of the cash flows that an entity expects to

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 for asset derive from the use of an asset and from the ultimate disposal

- Does not include transaction cost on acquiring the asset but

includes transaction cost on the disposal of the asset

- Is an exit price or exit value

- The present value of cash that an entity expects to transfer in

paying or settling a liability
Fulfillment
value for - Does not include transaction cost on incurring a liability but
liability includes transaction cost on fulfillment of a liability

- Is an exit price or exit value

- Current cost of an asset is the cost of an equivalent asset at

the measurement date comprising the consideration paid and
transaction cost

Current cost - Current cost of a liability is the consideration that would be

received less any transaction cost at a measurement date

- Is also based on the entry price or entry value but reflects

market conditions on measurement date

SELECTING A MEASUREMENT BASIS

- In most cases, no single factor will determine which measurement basis should be selected

- The relative importance of each factor will depend on facts and circumstances

- Historical cost is the measurement basis most commonly adopted in preparing financial
statements. In many situations, it is simpler and less costly to measure historical cost than it is to
measure a current value. In addition, historical cost is generally well understood and verifiable.

VII. CONCEPTUAL FRAMEWORK

(Presentation and Disclosure | Concepts of Capital)

- The presentation and disclosure can be an effective communication tool about the information in
financial statements

EFFECTIVE COMMUNICATION IN FINANCIAL STATEMENTS

- Makes the information more relevant and contributes to a faithful representation of an entity’s
assets, liabilities, income and expenses
- Enhances the understandability and comparability of financial information in the financial
statements
- Is supported by not duplicating information in different parts of the financial statements

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*Duplication is usually unnecessary and can make financial statements less understandable

CLASSIFICATION

- Is the sorting of assets, liabilities, equity, income and expenses on the basis of shared or similar
characteristics
- Classifying dissimilar assets, liabilities, equity, income and expenses can obscure relevant
information, reduce understandability and comparability and may not provide a faithful
representation of financial information

CLASSIFICATION OF INCOME AND EXPENSES

- Income and expenses are classified as components of profit loss and components of other
comprehensive income
- Statement of profit or loss - is the primary source of information about an entity’s financial
performance for the reporting period; all income and expenses should be appropriately classified
and included in the statement of profit or loss

AGGREGATION

- Is the adding together of assets, liabilities, equity, income and expenses that have similar or shared
characteristics and are included in the same classification
- Makes information more useful by summarizing a large volume of detail. However, aggregation
may conceal some of the detail
- The statement of financial position and the statement of financial performance provide summarized
or condensed information

CAPITAL MAINTENANCE

- The financial performance of an entity is determined using two approaches:(1) Transaction

approach - the traditional preparation of an income statement and (2) Capital maintenance - the
net income occurs only after the capital used from the beginning of the period is maintained
- In other words, net income is the amount an entity can distribute to its owners and be as “well-off”
at the end of the year as at the beginning
- The Conceptual Framework considered two concepts of capital maintenance or well-offness,
namely financial capital and physical capital

FINANCIAL CAPITAL

- Is the monetary amount of the net assets contributed by shareholders and the amount of the
increase in net assets resulting from earnings retained by the entity
- Is the traditional concept based on historical cost and adopted by most entities

Net income under financial capital

23 | Conceptual Framework 1 | BALANG, BACANI, CASTANEDA, DEANG, NAVARRO, PEREZ, RAMOS, SALVATIERRA | BATCH 2021
 - Under the financial capital concept, net income occurs “when the nominal amount of the net assets
at the end of the year exceeds the nominal amount of the net assets at the beginning of the period,
after excluding distribution to and contribution by owners during the period

PHYSICAL CAPITAL

- Is the quantitative measure of the physical productive capacity to produce goods and services
- This concept requires that productive assets be measured at current cost, rather than historical
cost
- Is equal to the net assets of the entity expressed in terms of current cost
- Productive assets include inventories and property, plant and equipment
- The physical concept of capital should be adopted if the main concern of users is the operating
capability of the entity, meaning, the resource or fund needed to achieve that operating capability
or capacity
- Under this concept, net income occurs “when the physical productive capital of the entity at the end
of the year exceeds the physical productive capital at the beginning of the period, also after
excluding distributions to and contributions from owners during the period

VIII. PAS 1 : PRESENTATION OF FINANCIAL STATEMENTS

(Statement of Financial Position)

FINANCIAL STATEMENTS
- Definition: the means by which the information accumulated and processed in financial accounting
is periodically communicated to users.
- They are the end product or main output of the financial accounting process.
- It is a structured financial representation of the financial position and performance of an entity.
- Must be presented in accordance with the International Financial Reporting Standards (IFRS).
- General purpose: 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; directed to all common users, not
specific users.

COMPONENTS OF FINANCIAL STATEMENTS

1. Statement of financial position (Balance sheet)
2. Income statement
3. Statement of comprehensive income
4. Statement of changes in equity
5. Statement of cash flows
6. Notes, comprising a summary of significant accounting policies and other explanatory notes

OBJECTIVE OF FINANCIAL STATEMENTS

To provide information about the financial position, financial performance, and cash flows of an entity that
is useful in making economic decisions.

To meet this objective, financial statements provide information about the ff:
a. Assets
b. Liabilities

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 c. Equity
d. Income and expenses, including gains and losses
e. Contributions and distributions to owners in their capacity as owners
f. Cash flows

FREQUENCY OF REPORTING
- Presented at least annually
- When financial statements are presented for a period longer or shorter than one year, an entity
shall disclose:
a. The period covered by the financial statements.
b. The reason for using a longer or shorter period.
c. The fact that amounts presented in financial statements are not entirely comparable.

STATEMENT OF FINANCIAL POSITION

- Definition: a formal statement showing the three elements comprising financial position, namely
assets, liabilities, and equity.
- Primary purpose: to evaluate entity’s liquidity, solvency, and the need for additional financing

ASSET

- an economic resource controlled by an entity as a result of past event

- economic resource: a right that has the potential to produce economic benefits

CLASSIFICATION OF ASSETS

- When an entity supplies goods and services within a clearly identifiable operating cycle, the
classification of assets is useful by distinguishing between net assets as working capital from the net
assets used in long-term operations.

- Two classifications: Current and noncurrent assets

- Operating cycle: the time between the acquisition of assets for processing and their realization of cash or
cash equivalents

- When entity’s normal operating cycle is not identifiable, it is assumed to be twelve months

Current Assets
PAS 1, paragraph 66

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 An entity shall classify an asset as current when:

a. Cash or cash equivalent is an asset, unless it is restricted to settle a liability for more than 12 months

after the reporting period.

b. The entity holds the asset primarily for the purpose of trading.

c. The entity expects to realize the asset within 12 months after the reporting period.

d. The entity expects to realize the asset or intends to sell/consume it within the normal operating cycle.

Presentation of Current Assets

PAS 1, paragraph 54

Line items under current assets are:

a. Cash and cash equivalents

b. Financial assets at fair value (FV), such as trading securities and other investments in quoted equity

instruments

c. Trade and other receivables

d. Inventories

e. Prepaid expenses

Noncurrent Assets
PAS 1, paragraph 66
“an entity shall classify all other assets not classified as current as noncurrent”

PPE are tangible assets which are held for:

- use in production or supply of goods and services

- rental to others

- administrative purposes;
a. Property,
plant and and are expected to be used during more than one period.
equipment
(PAS 16,
paragraph 16)

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 Examples:

Land, building, machinery, equipment, furniture, fixtures, patterns, molds, dies, and tools

*Most PPE, except land, are presented at cost less accumulated depreciation

Definition of investment per International Accounting Standards Committee:

b. Long-term “an asset held by an entity for the accretion of wealth through capital distribution, such as
investments interest, royalties, dividends and rentals, for capital appreciation or for other benefits to the
investing entity such as those obtained through trading relationships”

It is defined as an identifiable non monetary asset without physical substance.

Examples:

c. Intangible Identifiable intangible assets:

assets
- Patent, franchise, copyright, lease right, trademark, and computer software

Unidentifiable intangible assets:

- Goodwill

Assets that do not fit into the definition of the noncurrent assets.

d. Other
noncurrent
assets Examples:

Long-term advances to officers, directors, shareholders and employees, or abandoned

property and long-term refundable deposit.

LIABILITY

- a present obligation of an entity to transfer an economic resource as a result of past event

- Classified as current and noncurrent

Obligation

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 - a duty or responsibility that an entity has no practical ability to avoid
- can either be legal or constructive

Current Liabilities
PAS 1, paragraph 69

An entity shall classify a liability as current when:

a. The entity expects to settle the liability within the entity’s normal operating cycle.

b. The entity holds the liability primarily for the purpose of trading.

c. The liability is due to be settled within 12 months after the reporting period.

d. The entity does not have an unconditional right to defer settlement of the liability for at least 12

months after the reporting period.

Presentation of Current Liabilities

PAS 1, paragraph 54

Line items under current liabilities:

a. Trade and other payables

- a line item for accounts payable, notes payable, accrued interest on notes payable, dividends

payable, and accrued expenses

b. Current provisions

c. Short-term borrowing

d. Current portion of long-term debt

e. Current tax liability

Noncurrent Liabilities
PAS 1, paragraph 69
“all liabilities not classified as current are classified as noncurrent”

The following are noncurrent liabilities:

a. Noncurrent portion of long-term debt

b. Finance lease liability

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 c. Deferred tax liability

d. Long-term obligations to company officers

e. Long-term deferred revenue

Currently maturing long-term debt

A liability which is due to be settled within 12 months after the reporting period is classified as current,

even if:

a. The original term was for a period longer than 12 months

b. An agreement to refinance or reschedule payment on a long-term basis is completed after the

reporting period and before the financial statements are authorized for issue.

However, if the refinancing is completed on or before the end of the reporting period, the refinancing is an

adjusting event thus classified as noncurrent.

Discretion to refinance

If the entity has the discretion to refinance or roll over an obligation for at least 12 months after the

reporting period, the obligation is classified as noncurrent even if it would otherwise be due within a shorter

period.

Reason: the entity has an unconditional right under the existing loan agreement to defer payment for at least

12 months after the end of the reporting period.

Note: the refinancing must be at the discretion of the entity, otherwise the obligation is classified as a

current liability.

Covenants

- are often attached to borrowing agreements which represent undertakings by the borrower.

- are actually restrictions on the borrower as to undertaking further borrowings, paying dividends,

maintaining specified level of working capital and so forth.

- if certain conditions are breached, the liability becomes payable on demand.

Effects of breach of covenants

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 PAS 1, paragraph 74...

- Liability is classified as current even if the lender has agreed, after the reporting period and before

the statements are authorized for issue, not to demand payment as a consequence of the breach

- Classified as current because at reporting date, the borrower does not have an unconditional right to

defer payment at least 12 months after the reporting period

PAS 1, paragraph 75…

- Liability is classified as noncurrent if the lender has agreed on or before the end of the reporting

period to provide a grace period ending at least 12 months after the reporting period.

EQUITY

- the residual interest in the assets of the entity after deducting all of its liabilities
- “Net assets” or total assets minus liabilities

The term used in reporting the equity of an entity depending on the form of the business organization are:

a. Owner’s equity in a proprietorship

b. Partner’s equity in a partnership

c. Stockholders’ or Shareholders’ equity in a corporation

SHAREHOLDERS’ EQUITY

- the residual interest of owners in the net assets of a corporation measure by the excess of assets
over liabilities

Elements constituting shareholders’ equity with their equivalent IAS term are:

Philippine term IAS term

Capital stock Share capital

Subscribed capital stock Subscribed share capital

Preferred stock Preference share capital

Common stock Ordinary share capital

Additional paid capital Share premium

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 Retained earnings (deficit) Accumulated profits (losses)

Retained earnings appropriated Appropriation reserve

Revaluation surplus Revaluation reserve

Treasury stock Treasury share

Notes to financial statements

- provide narrative description or disaggregation of items presented in the financial statements and
information about items that do not qualify for recognition
- used to report information that does not fit into the body of the financial statements to enhance its
understandability
- Primary purpose: to provide the necessary disclosures required by Philippine Financial Reporting
Standards (PFRS)

FORMS OF STATEMENT OF FINANCIAL POSITIONS

a. Report form

This form sets forth the three major sections in a downward sequence of assets, liabilities, and

equity.

b. Account form

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 The assets are shown on the left side and the liabilities and equity on the right side of the

statement of financial position.

Line items in statement of financial position

PAS 1, paragraph 54, states that the face of the statement of financial position shall include the
following line items:
1. Cash and cash equivalents
2. Financial assets (other than 1, 3 and 6)
3. Trade and other receivables
4. Inventories
5. Property, plant and equipment
6. Investment in associates accounted for by the equity method
7. Intangible assets
8. Investment property
9. Biological assets
10. Total of assets classified as held for sale and assets included in disposal group classified as held
for sale
11. Trade and other payables
12. Current tax liability
13. Deferred tax asset and deferred tax liability
14. Provisions
15. Financial liabilities (other than 11 and 14)
16. Liabilities included in disposal group as classified as held for sale
17. Noncontrolling interest
18. Share capital and reserves
In the Philippines, the common practice is to present current assets before noncurrent assets, current
liabilities before noncurrent liabilities, and equity after liabilities.

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 IX. PAS 1 : PRESENTATION OF FINANCIAL STATEMENTS
(Statement of Comprehensive Income)

X. PAS 7 : STATEMENT OF CASH FLOWS

STATEMENT OF CASH FLOWS

- Definition: a component of financial statements summarizing the operating, investing,

and financing activities of an entity. It is designed to report changes in an entity’s cash and
cash equivalents. It is strictly a cash concept.

- Primary Purpose: To provide relevant information about cash receipts and cash
payments of an entity during a period.

CASH CASH EQUIVALENTS

- Comprises cash on hand and - Short-term highly liquid investments that are
demand deposits. readily convertible to known amounts of cash
and which are subject to insignificant risk of
- Includes money and any other change in value.
negotiable instrument that is
payable in money and - PAS 7, par. 7, provides that an investment
acceptable by the bank for normally qualifies as cash equivalent only when
deposit and immediate credit. it has a short maturity of three months or less
from date of acquisition.

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 ★ Checks ★ 3-month BSP Treasury Bill

★ Bank Drafts ★ BSP Treasury Bill (more than 3 months)

purchased 3 months before maturity date.
★ Money Orders
★ 3-month Time Deposit
★ Petty Cash Fund
★ 3-month Money Market Instrument
★ Payroll Fund
★ Preference shares (with specified redemption
★ Travel Fund
date) purchased 3 months before redemption
★ Interest Fund date

★ Dividend Fund

★ Tax Fund

Not included: ★ Equity securities – no maturity date

★ Treasury note maturing more than three months.
★ Sinking Fund
★ Preferred Redemption Fund
★ Plant Expansion Fund
★ Insurance Fund

VALUATION

IN LOCAL CURRENCY Face Value

IN FOREIGN CURRENCY Current Exchange Rate

IF RECOVERY VALUE < FACE VALUE Estimated Realizable Value

CLASSIFICATION OF CASH FLOWS

OPERATING ACTIVITIES INVESTING ACTIVITIES FINANCING ACTIVITIES

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 - cash flows derived primarily - cash flows derived from - cash flows derived from
from the principal revenue the acquisition and the equity capital and
activities of the entity. disposal of long term borrowings of the
- result from transactions and assets and other entity.
other events that enter into investments not included - result from equity
the determination of net in cash equivalents. (entity-owners) and
income and loss. - Include cash flows debt financing.
involving non operating - non trade liabilities and
assets. equity.
Cash receipts...

✓ from sale of goods and

Cash receipts… Cash receipts...
rendering of services.
✓ from sale of PPE, intangible ✓ from issuance of ordinary
✓ from royalties, rental, fees,
and long-term assets. and preference shares.
commissions, and other revenue.
✓ from sales of equity or debt ✓ from issuing debentures,
✓ for insurance entities for
instruments of other entities. loans, notes, bonds,
premiums and claims, annuities
mortgages, and other short or
and other policy benefits. ✓ from repayment of
long-term borrowings.
advances and loans made to
✓ For securities held for trading.
other parties. Cash payments...

Cash payments...
✓ from future contracts, ✓ to acquire treasury

✓ to suppliers for goods and forward contracts, option shares

services contracts, and swap contracts.

✓ for amounts borrowed

✓ for selling, administrative and Cash payments...

✓ by a lessee for the
other expenses
✓ to acquire PPE, intangible reduction of the outstanding

✓ for insurance entity for and other long-term assets. principal lease liability.

premiums and claims, annuities

✓ to acquire equity or debt
and other policy benefits.
instruments of other entities.

✓ for refunds of income taxes (current and long-term)

unless specifically identified with

✓ for future contracts, forward
financing and investing activities.
contracts, option contracts, and

✓ for security held for trading. swap contracts.

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 Cash advances and loans made by Cash advancements and loans to
financial institutions other parties other than advances
and loans made by financial
institutions.

OTHER EXAMPLES:

(PAS 7, par. 33)—interest paid and interest received shall be classified as

operating cash flow.
INTEREST
✓ Alternative: interest paid—financing; interest received—investing

(PAS 7, par. 33)—dividend received shall be classified as operating cash

flow.
✓ Alternative: dividend received—investing
DIVIDENDS
(PAS 7, par. 33)—dividend paid shall be classified as financing cash flow.
✓ Alternative: dividend paid—operating

INCOME (PAS 7, par. 35)—cash flows arising from income taxes shall be separately

TAXES disclosed as operating cash flow.

XI. PAS 8 : ACCOUNTING POLICIES, ESTIMATES, AND ERRORS

ACCOUNTING POLICIES

- Definition: the specific principles, bases, conventions, rules, and practices applied by an
entity in preparing and presenting financial statements.

- The entity shall select and apply the same accounting policies each period in order to
achieve comparability.

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 CHANGES IN ACCOUNTING POLICY

- Arises when the entity adopts a generally accepted accounting principle which is different
from the one previously used by the entity.
- To provide more reliable and relevant information about financial position, performance, and
cash flows.

A change in accounting policy shall be

Examples of changes in accounting policy
made only when:

➔ Change from FIFO to Weighted Average

A. Required by an accounting
inventory method.
standard.
➔ Change in accounting method from cost
B. The change will result in more
recovery method to percentage of
relevant and faithfully represented
completion method
information about the financial
➔ Initial adoption of policy to carry assets at
position, financial performance,
revalued amount (revaluation)
and cash flows of the entity.
➔ Change from cost model to fmv in
measuring investment property
➔ Chang to a new policy due to the
requirement of a new PFRS

REPORTING

- when it is required by a standard or an interpretation, it must be in accordance with

the transitional provisions therein. If there are no transitional provisions or if it is
changed voluntarily, the change should be applied retrospectively.

Retrospective—adjustment is determined as of the beginning of the year of change.

- If comparative information is presented, the financial statements of the prior period

presented shall be restated.

ABSENCE OF ACCOUNTING STANDARD

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 HIERARCHY OF GUIDANCE

(when selecting accounting policies)

a.) Apply a standard from IFRS if it specifically relates to the transaction

b.) Definition, recognition criteria, and measurement concepts

c.) Most recent pronouncements of other standard-setting bodies that use a similar
Conceptual Framework, other accounting literature, and accepted industry practices.

CHANGE IN ACCOUNTING ESTIMATE

- A normal recurring correction or adjustment of an asset or liability which is the

natural result of the use of an estimate.
- It is not a correction of error and does not relate to prior periods.

EXAMPLES OF ACCOUNTING ESTIMATE

a.) Doubtful Accounts

b.) Inventory obsolescence

c.) Useful life, residual value and expected pattern of

consumption of benefit of depreciable asset

d.) Warranty cost

e.) FV of asset and liability

REPORTING

- There is no need to restate amounts in the prior periods.

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 Current and Prospective—change is applied from the date of change in estimate.
Adjustment is determined as of:
a. The period of change if the change affects that period only.
b. The period of change and future periods if the change affects both.

PRIOR PERIOD ERRORS

- These are omissions and misstatements in the financial statements for one or more
periods arising for one or more periods arising from a failure to use or misuse of
reliable information.
- May occur as a result of mathematical mistakes, mistakes in applying accounting
policies, misinterpretation of facts, fraud or oversight.

Retrospective—adjustment in the opening balances of retained earnings and affected

assets and liabilities.
- if comparative statements are presented, the financial statements in the prior period
shall be restated.

XII. PAS 10 : EVENTS AFTER REPORTING PERIOD

EVENTS AFTER REPORTING PERIOD

- Those events, whether favorable or unfavorable, that occur between the end of the
reporting period and the date on which the financial statements are authorized for
issue.
- Also known as subsequent events.
TYPES OF EVENTS AFTER REPORTING PERIOD

Adjusting Events Non-Adjusting Events

➔ Those that provide evidence of conditions ➔ Those that are indicative of conditions that
that exist at the end of reporting period arise after the end of reporting period.
➔ Result of something already in existence. ➔ No need to adjust, but needs disclosure.
➔ Examples include: ➔ Examples include:
◆ Settlement of a court case after the ◆ Business combination after the
reporting period (confirms that it had a reporting period.
present obligation at the beginning). ◆ Plan to discontinue an operation.

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 ◆ Bankruptcy of a customer after the ◆ Major purchase and disposal of asset
reporting period. or expropriation of major asset by
◆ Sale of inventories after the reporting government.
period (gives evidence about the NRV ◆ Destruction of a major production
at reporting date). plant by fire after the reporting period.
◆ Determination after the reporting ◆ Major ordinary share transactions and
period of the cost of asset purchased potential ordinary share transactions
or the proceeds from assets sold after the reporting period.
before the end of the period. ◆ Announcing or commencing the
◆ Determination after the reporting implementation of a major
period of the profit sharing or bonus restructuring.
payment (if the entity has the present ◆ Abnormally large changes after the
obligation to make such payment). reporting period in asset prices or
◆ Discovery of fraud or errors. foregin exchange rates.
◆ Entering into significant commitments
or contingent liabilities, for example,
issuing guarantees.
◆ Commencing major litigation arising
solely from events that occurred after
the reporting period that has a
significant effect on current and
deferred tax asset and liability.

FINANCIAL STATEMENTS AUTHORIZED FOR ISSUE

- When the Board of Directors (BOD) reviews the financial statements and authorizes them to
issue.
- In some cases, the entity is required to submit the financial statements to the shareholders for
approval after it has been issued.
- The financial statements are issued on the date of issue by the BOD and not on the date of
approval of the shareholders.

XIII. PAS 24 : RELATED PARTY DISCLOSURES

Related party
- Parties are considered to be related if one party has: (1) the ability to control the other party, (2) the
ability to exercise significant influence over the other party, and (3) joint control over the reporting
entity

Control

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 - Is the power over the investee or the power to govern the financial and operating policies of an
entity so as to obtain benefits
- Is ownership directly or indirectly through subsidiaries of more than half of the voting power of an
entity

Significant influence
- The power to participate in the financial and operating policy decision of an entity, but not control of
those policies
- May be gained by share ownership of 20% or more
- Beyond the mere 20% threshold of ownership, the existence of significant influence is usually
evidenced by the following factors
● Representation in the board of directors
● Participation in policy making process
● Material transactions between the investor and the investee
● Interchange of managerial personnel
● Provision of essential technical information

Joint control
- Contractually agreed sharing of control over an economic activity

Examples of related parties

1. Affiliates - parent, the subsidiary and fellow subsidiaries
2. Associates - entities over which one party exercises significant influence
3. Venturer in a joint venture - Joint venture includes the subsidiary or subsidiaries of the joint venture
4. Key management personnel - those persons having authority and responsibility for planning,
directing and controlling the activities of the entity, directly or indirectly including any executive
director or non executive director
5. Close family members of an individual - includes the individual’s spouse and children, children of
the individual’s spouse, and dependents of the individual or the individual’s spouse
6. Individuals owning directly or indirectly an interest in the voting power of the reporting entity that
gives them significant influence over the entity, and close family members of such individuals
7. Postemployment benefit plan for the benefit of employees

Examples of related party transaction - is a transfer of resources or obligations between related parties,
regardless of whether a price is charged
- Purchase and sale of goods
- Purchase and sale of property and other asset
- Rendering or receiving services
- Leases
- Transfer of research and development
- License agreement
- Finance arrangements, including loans and equity contributions in cash or in kind
- Guarantee and collateral
- Settlement of liabilities on behalf of the entity or by the entity on behalf of another party

Related Party Disclosures

- Requires relationships where control exists irrespective of whether there have been transactions
between the related parties.
- Relationships between parents and subsidiaries shall be disclosed regardless of whether
there have been transactions between those related parties.

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 - An entity shall disclose the name of the entity’s parent and if different, the ultimate
controlling party.
- If neither the entity’s parent not the ultimate controlling party produces financial statements
available for public use, the name of the next most senior parent that does so shall also be
disclosed.

Disclosures of related party transaction

- If there have been transactions between related parties, an entity shall disclose the nature of the
related party relationship as well as information about the transactions and outstanding balances
necessary for an understanding of the financial statements.
- The disclosures of related party transaction shall included:
a. The amount of transaction
b. The amount of outstanding balance, terms and conditions, whether secured or unsecured,
and nature of consideration to be provided in settlement.
c. The allowance for doubtful accounts related to the outstanding balance.
d. The doubtful accounts expense recognized during the period in respect of amount due from
related parties.

Key Management Personnel Compensation

- This provides that an entity shall disclosed key management personnel compensation in total and
for each of the following categories:
a. Short-term employee benefits
b. Postemployment benefits (i.e. retirement pensions)
c. Other long-term benefits
d. Termination benefits
e. Share based payment transactions (i.e. share options)

Related Party Disclosures not Required

- This requires disclosure of related party transactions and outstanding balances in the separate
financial statements of a parent, subsidiary, associate, or adventurer.
- However, it provides that intragroup related party transactions and outstanding balances are
eliminated in the preparation of consolidated financial statements of the group.

Unrelated Parties
1. Two entities simply because they have a director or key management personnel in common.
2. Providers of finance, trade unions, public utilities, and government agencies in the course for their
normal dealings with an entity by virtue only of those dealings.
3. A single customer, supplier, franchiser or general agent with whom an entity transacts a significant
volume of business merely by virtue of the resulting economic dependence.
4. Two venturers simply because they share joint control over a joint venture.

XIV. PAS 2 : INVENTORIES

- Are assets held for sale in the ordinary course of business, in the process of production for such
sale or in the form of materials or supplies to be consumed in the production process or in the
rendering of services
- Encompass goods purchased and held for resale, for example: (a) Merchandise purchased by a
retailer and held for resale and (b) Land and other property held for resale by a subdivision entity
and real estate developer

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 - Encompass finished goods produced, goods in process and materials and supplies awaiting use in
the production process
Classes of inventories
- Trading concern - one that buys and sells goods in the same form purchased
- Manufacturing concern - one that buys goods which are altered or converted into another form
before they are made available for sale

Inventories of a manufacturing concern are:

- Finished goods
- Goods in process
- Raw materials
- Factory or manufacturing supplies

Cost of inventories

- Comprises the purchase price, import duties and irrecoverable taxes, freight,
handling and other costs directly attributable to the acquisition of finished
Cost of goods, materials and services
purchase - Trade discounts, rebates and other similar items are deducted in determining
the cost of purchase

- Include cost directly related to the units of production such as direct labor
- Includes a systematic allocation of fixed and variable production overhead that
is incurred in converting materials into finished goods
- Fixed production overhead - the indirect cost of production that remains
Cost of relatively constant regardless of the volume of production (ex. Depreciation
conversion and maintenance of factory building and equipment, and the cost of factory
management and administration
- Variable production overhead - the indirect cost of production that varies
directly with the volume of production (ex. Indirect labor and indirect materials)

- Is included in the cost of inventories only to the extent that it is incurred in

bringing the inventories to their present location and condition

Other cost The following costs are excluded from the cost of inventories and recognized as
incurred in expenses in the period when incurred:
bringing the - Abnormal amounts of wasted materials, labor and other production costs
inventories to - Storage costs, unless necessary in the production process prior to a further
their present production stage. Thus, storage costs on goods in process are capitalized but
location and storage costs on finished goods are expensed
condition - Administrative overheads
- Distribution or selling costs

Cost of inventories of a service provider

- Consists primarily of the labor and other costs of personnel directly engaged in providing the
service, including supervisory personnel and attributable to overhead

Cost formulas

- “The goods first purchased are first sold” and consequently the goods
First in, First
remaining in the inventory at the end of the period are those most recently
out
purchased or produced

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 - “First come, first sold”
- The inventory is thus expressed in terms of recent or new prices while the
cost of goods sold is representative of earlier or old prices
- Favors the statement of financial position in that the inventory is stated at
current replacement cost
- In a period of inflation or rising prices, the FIFO method would result to the
highest net income

- The cost of the beginning inventory plus the total cost of purchases during the
period is divided by the total units purchased plus those in the beginning
inventory to get a weighted average unit cost
Weighted
- The average unit cost is computed by dividing the total cost of goods available
average
for sale by the total number of units available for sale
- Weighted average method produces inventory valuation that approximates
current value if there is a rapid turnover of inventory

- Assumes that the goods last purchased are first sold and consequently the
goods remaining in the inventory at the end of the period are those first
purchased or produced
Last in, First
- The inventory is thus expressed in terms of earlier or old prices and the cost
Out
of goods sold is representative of recent or new prices
- In a period of rising prices, LIFO would result to the lowest net income and in
the period of declining prices, LIFO would result to the highest net income

- Specific costs are attributed to identified items of inventory

Specific
- The cost of inventory is determined by simply multiplying the units on hand by
Identification
the actual unit cost

Measurement of inventory

- Inventories shall be measured at the lower of cost and net realizable value

Net Realizable Value

- Is the estimated selling price in the ordinary course of business less the estimated cost of
completion and the estimated cost of disposal

Accounting for inventory writedown

- If the cost is lower than the net realizable value, there is no accounting problem because the
inventory is stated at cost and the increase in value is not recognized
- If the NRV is lower than cost, the inventory is measured at net realizable value
- The writedown of inventory to net realizable value is accounted for using the allowance method

Allowance Method

- The inventory is recorded at cost and any loss on inventory write down is accounted for
separately
- Also known as loss method because a loss account “loss on inventory writedown” is debited and a
valuation account “allowance for inventory writedown” is credited
- If the required allowance increases, an additional loss is recognized
- If the required allowance decreases, a gain on reversal of inventory writedown is recorded

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 XV. PAS 16 : PROPERTY, PLANT, AND EQUIPMENT

MAJOR CHARACTERISTICS:

Tangible Assets (have physical Substance).

Used in Business (for production, or supply of goods and services, rental purposes, and
administrative purposes).

Long term in nature

Examples:
A. Land used in business H. Equipment used in the production of goods
B. Land Held for future plant site I. Equipment held for environmental and safety reasons
C. Land improvements J. Equipment held for rentals
D. Building K. Major spare parts and long-lived stand-by equipment
E. Machinery L. Patterns, Molds, and Dies
F. Ship M. Tools
G. Aircraft N. Bearer Plants (PAS 41)
Note:
● Spare parts, stand-by equipment and servicing equipment are recognized as PPE if they meet the
definition of PPE (more than one period of use); Otherwise, they are classified as Inventories.
● Safety and environmental equipment are usually recognized as PPE because, although they do not
directly increase the future economic benefits of other existing assets, they are necessary in obtaining
the future economic benefits from other assets. Example: A building needs fire extinguishers as a
safety equipment to pass the local government safety protocols; not compliance would mean a
shutdown of operations.

RECOGNITION

A. It is probable that future economic benefits associated with the item will flow to the entity.

B. The cost of the asset can be measured reliably.

INITIAL MEASUREMENT

● AT COST

● Amount of cash or cash equivalent paid and the fair value of the other consideration given to

acquire an asset at the time of acquisition or construction.

ELEMENTS OF COST

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 A. Purchase Price, including import duties and non-refundable purchase taxes, after deducting

trade discounts and rebates. (PP-TD)

B. Cost directly attributable to bringing the asset to the location and condition.

C. Initial estimate of the cost dismantling and removing the item and restoring the site on which it is
located for which an entity has a present obligation.

DIRECTLY ATTRIBUTABLE COSTS:

A. Cost of employee benefit arising from acquisition or construction of PPE.
B. Cost of site preparation
C. Initial delivery and handling cost (freight)
D. Installation and assembly cost
E. Professional fee
F. Testing cost, net disposal of proceeds of samples generated during testing.

Cost not qualifying for recognition (expense rather than cost)

A. Cost of opening new facilities.
B. Cost of introducing a new product.
C. Cost of conducting business in a new location or with a new class of customers (including cost of
staff training)
D. Administration and other general overhead costs.

MEASUREMENT AFTER RECOGNITION

An entity may choose:

Cost Model
● Carried at cost less any accumulated depreciation and accumulated impairment loss

Revaluation Model

● Fair value at the date of revaluation less any subsequent accumulated depreciation and

accumulated impairment loss.

● Revaluation Surplus = Fair Value — Carrying amount

ACQUISITION:

● Cash Basis ● Equivalent cash price at the recognition

date

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 ● On Account ● Invoice Price less discount (if any),
regardless of whether it is taken or not.

● Installment Basis ● Cash price (not the installment price)

REVALUATION MODEL

- PPE may be revalued after three to five years due to significant fluctuations of fair value.

- Fair value at the date of revaluation less any subsequent accumulated depreciation and

accumulated impairment losses.

- Increase or decrease of assets resulting from revaluation is recognized in other comprehensive

income and accumulated in equity under the “revaluation surplus” account.

- Revaluation Surplus = Fair Value — Carrying amount

- Annual depreciation = Fair Value / remaining useful life

SUBSEQUENT ACCOUNTING FOR REVALUATION SURPLUS

- If non-depreciable, revaluation surplus is transferred directly to retained earnings when the asset is
derecognized.
- If depreciable, a portion of the revaluation surplus may be transferred directly to retained earnings as
the asset is used. Difference between depreciation based on revalued carrying amount and the
depreciation based on the original cost.

DEPRECIATION

Starts when:
- An asset is in the present location intended by management and available to use.

Stops when:

1. Derecognized
2. Held for sale
3. Fully depreciated

OTHER ESSENTIAL TERMS:

● Exchange – if an asset is acquired in exchange for a non-monetary asset, then it is measured at
fair value + any cash payment. If it lacks commercial substance, then it will be measured at
carrying amount.
● Self-constructed assets – same measurement as acquired asset. Excludes internal profits and
abnormal amounts incurred in construction.

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 ● Bearer Plants – used in the production of agricultural produce. Expected to bear more than one
operating cycle.
● Incidental operations – not part of PPE since it is incurred as expense or income depending on
either entity. Ex. Parking rent near the construction site

Source: Millan, Z. V. (2019). Conceptual framework and accounting standards (2019th ed.). Bandolin
Enterprise.

XVI. PAS 23 : BORROWING COSTS

Interest and other costs that an entity incurs in connection with borrowing of funds.

Note: This definition encompasses interest on all types of borrowing including finance leases and
ancillary costs incurred in connection with the arrangement of borrowing.

Paragraph 6 provides that borrowing costs specifically include:

Interest expense calculated using the effective interest method.
finance charges in respect of finance leases recognised in accordance with PAS 17 Leases, and
exchange differences arising from foreign currency borrowings to the extent that they are regarded as an
adjustment to interest costs

Qualifying Assets
An asset that takes a substantial period of time to get ready for its intended use or sale. That could be
property, plant, and equipment and investment property during the construction period, intangible assets
during the development period, or "made-to-order" inventories.
Qualifying assets are excluded from the scope of PAS 23:
qualifying assets measured at fair value, such as biological assets accounted for under PAS 41 -
Agriculture
inventories that are manufactured, or otherwise produced, in large quantities on a repetitive basis and
that take a substantial period to get ready for sale
assets that are ready for their intended use or sale when acquired

Recognition
Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying
asset form part of the cost of that asset and, therefore, should be capitalized. Other borrowing costs are
recognized as an expense.

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Measurement
Specific Borrowing General Borrowing
● Where funds are borrowed specifically, ● Where funds are part of a general pool,
costs eligible for capitalization are the the eligible amount is determined by
actual costs incurred less any income applying a capitalization rate to the
earned on the temporary investment of expenditure on that asset. The
such borrowings. capitalization rate will be the weighted
average of the borrowing costs applicable
to the general pool.
● Note: However, the capitalizable
borrowing cost shall not exceed the actual
interest incurred.
● The capitalization rate or average interest
rate is equal to the total annual borrowing
cost divided by the total general
borrowings outstanding during the period.
● Note: Under PAS 23, no specific guidance
is provided for general borrowing with
respect to investment income.
Accordingly, any investment income from
general borrowing is not deducted from
capitalizable borrowing cost.

Asset financed by specific and general borrowing, the capitalizable borrowing cost is equal to
the sum of the following:
● Actual borrowing cost on specific borrowing minus any investment income from the temporary
investment of the proceeds from borrowing.
● Average expenditure of the asset minus the specific borrowing equals the amount related to
general borrowing multiplied by the capitalization rate equals capitalizable borrowing cost.

Asset financed by specific borrowing but a portion is used for working capital purposes:
● The borrowing shall be treated as a general borrowing in the determining capitalizable borrowing
cost.
● Thus, the capitalizable borrowing cost is equal to the average expenditures on the asset
multiplied by the average interest rate.

Capitalization shall commence when all of the following are present:

● When the entity incurs expenditures for the asset.
● When the entity incurs borrowing cost
● When the entity undertakes activities that are necessary to prepare the asset for the intended
use or sale

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Other issues:
● Capitalization should be suspended during periods in which active development is interrupted.
[PAS 23.20]
● Capitalization should cease when substantially all of the activities necessary to prepare the asset
for its intended use or sale are complete. [PAS 23.22]
● If only minor modifications are outstanding, this indicates that substantially all of the activities are
complete. [PAS 23.23]
● Where construction is completed in stages, which can be used while construction of the other
parts continues, capitalization of attributable borrowing costs should cease when substantially all
of the activities necessary to prepare that part for its intended use or sale are complete. [PAS
23.24]

Disclosures [PAS 23.26]

● amount of borrowing cost capitalized during the period
● capitalization rate used

XVII. PAS 28 : INVESTMENT IN ASSOCIATES

Owns 20%-50% participation or has specifically stipulated that an investor has a significant influence
against the business.

● Significant influence - power to participate in the financial and operating policy decisions of the
investee but not control or joint control over those policies.
● Assessment/Criteria – A matter of judgment

A. Existence of Significant Influence

General Rule:
The investor has significant influence when the investor holds (direct or indirect) through subsidiaries
20% or more of the voting power (ordinary shares) of the investee.

Exception:
It is clearly demonstrated that there is no significant influence.

Note: An investor may still have a significant influence despite majority/substantial ownership by
another investor.

Some evidence of the existence of significant influence (PAS 28, par. 6)

a. Representation in the board of directors
b. Participation in the policy making process
c. Material transactions between the investor and the investee
d. Interchange of managerial personnel
e. Provision of essential technical information

B. Loss of Significant Influence

The loss of significant influence can occur with or without change in the absolute or relative ownership
interest.
Example:
An associate becomes subject to control of a government.
Loss of significant influence as a result of contractual agreement.
Treatment of Potential Voting Rights (PAS 28, par. 7)

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 Share warrants and convertible debt or equity instruments are considered in assessing whether an
entity has significant influence.

Note: The investor’s share of profit or loss of the investee and of changes in investee’s equity is
determined based on present ownership interest, thereby not reflecting potential voting rights.

Equity Method – Applicable when the investor has significant influence over the investee.

Initial Recognition and Measurement

The investment is initially recorded at cost.

Classification
The investment in associate shall be classified as noncurrent asset.
The carrying amount of investment in associate also includes other long-term interests in an associate
such as long-term receivables, loans and advances.
Note: Trade receivables and secured loans (where there is adequate collateral) are excluded in the
carrying amount of the investment in associate.
When the investor has incurred legal or constructive obligations or made payments on behalf of the
associate, additional losses and liabilities are recognized.

Subsequent Measurement
1. Excess of cost over carrying amount of interest acquired
a. Attributable to undervaluation of the investee’s depreciable assets
● The excess is amortized over the remaining life of depreciable assets.
b. Attributable to goodwill – when the investee’s assets are fairly valued
● The excess is tested for impairment at each reporting date.

2. Excess of net FV over cost

The excess is included as income in the determination of the investor’s share of the associate’s profit or
loss in the period in which the investment is acquired. (PAS 28, par. 32)

3. Share of investor from investee’s net income/loss

a. When the investee has an outstanding preference shares
● If the preference share is cumulative, preference dividends is deducted from share of profit or
loss (whether declared or not).
● If the preference share is noncumulative, preference dividends is deducted from share of profit
or loss (only when declared)
b. Amortization of excess attributable to investee’s depreciable assets
● Decrease in investment and share of income
c. Excess of net FV over cost
● Increase in investment and share of income
d. When the investee is with heavy losses
● If share of losses ≥ CA of Investment, discontinue recognizing share of losses
● The investment is reported at nil or zero value.
● The investor resumes recognizing share of income (if share of income = share of unrecognized
losses) when the associate subsequently reports income.
e. Some adjustments in the investee’s operations before computing share of income
● The most recent available financial statements of associate are used by the investor in applying
equity method.
● When reporting dates of investor and associate are different, the associate shall preparefinancial
● statement as of the same date as the financial statements of the investor (if practicable).
● If impracticable, difference in reporting dates shall be no more than 3 months.
● Adjustments shall be made to conform associate’s accounting policies to those of the investor.
● The unrealized profit and loss from upstream and downstream transactions must be eliminated
in determining share in the profit or loss of the associate.

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 4. Share of investor from investee’s dividend payments - ↓ Investment in Associate
a. When the investee has an outstanding preference shares
Share in dividend = % share (Total dividends declared – Preference share dividend)

5. Impairment(See PAS 36 Impairment of Assets)

6. Other changes in investee’s equity

The investor’s share of changes in equity of investee is recognized directly in equity (OCI) of the
investor.

7. Loss of significant influence

a. Measurement of investment in associate at the date significant influence is lost (PAS 28, par. 22)
● The investor shall measure any retained investment in associate at fair value.
● The investment may be accounted for as at FV through P/L or OCI or Nonmarketable
Investment
● FV of Financial Asset at FV = FV of Investment in Associate at the date it ceases to be an
associate
● CA of Investment in Associateat the date significant influence is lost – (FV of Retained
Investment + Disposal Proceeds) = Included in Profit or Loss
b. Treatment of OCI of an associate previously recognized by investor in OCI when significant influence
is lost
● Gain or loss in OCI is reclassified to P/L when gain or loss in OCI would be subsequently
reclassified to P/L upon disposal of related asset.
● Otherwise, it would not be subsequently reclassified. (See Line Items of OCI)
● Specific circumstances when investment in associate is not accounted for using equity
method(PAS 28, par. 17)
●
The investment is accounted for as at FV through P/L or OCI or Nonmarketable Investment
when:
1. The investor is a wholly-owned subsidiary, or a partially-owned subsidiary of another entity and its
other owners do not object to the investor not applying the equity method.
2. The investor’s debt and equity instruments are not traded in a public market.
3. The investor did not file or it is not in the process of filing its financial statements with the SEC for the
purpose of issuing any class of instruments in a public market.
4. The ultimate or any intermediate parent of the investor produces consolidated financial statements
available for public use that comply with PFRS.

Classified as Held for Sale

● The investment in associate is accounted for in accordance with PFRS 5.
● When the investment in associate no longer qualifies for “held for sale” classification, it is
accounted for using the equity method retrospectively from the date of classification as held for
sale.
● Financial statements for the periods since classification as held for sale shall be amended
accordingly.

Cost Method
● It is usually applied to investment in unquoted or nonmarketable equity instruments.
● The investor does not share in the profit or loss of the investee.
● Dividend received by the investor from the investee is accounted for as dividend income
(regardless of whether the dividends originated from preacquisition or postacquisition retained
earnings).

Investment in Associate Achieved in Stages(not covered by PAS 28; PFRS 3, par. 42 applies by

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 inference)
● The acquirer shall remeasure the previously held equity interest at fair value and recognize the
resulting gain or loss in P/L.
● The investor shall remeasure the previously held equity interest using the equity method.
● Remeasured Equity Amount = Considered FV of Investment in Associate
● Recognized Gain or Loss in P/L = Remeasured Equity Amount – CA of Investment
● Recognized Gain or Loss in P/L = Income previously reported – Income to be reported under
Equity Method

XVIII. PAS 38 : INTANGIBLE ASSETS

An intangible asset- an identifiable nonmonetary asset without physical substance. It must be

controlled by the entity as a result of past event and from which future economic benefits are expected
to flow to the entity. (PAS 38, par. 8)

Essential Criteria in Intangible Asset Definition

1. Identifiability

An asset is identifiable when:

a. It is separable.
b. It arises from contractual or other legal rights.

Identifiable Intangible Asset (if acquired through purchase and could be rented or sold separately)
Examples:
a. Patent
b. Copyright
c. Franchise
d. Trademark
e. Lease Rights
f. Computer Software
g. Broadcasting License
h. Airline Right
i. Fishing Right

Unidentifiable Intangible Asset (if can only be identified with the entity as a whole)
Example:
a. Goodwill

2. Control
It is the power of the entity to obtain the future economic benefits flowing from the intangible asset and
restrict the access of others to those benefits.
Example: Control arising from legal rights such as trademark, copyright or patent

3. Future Economic Benefits

It may include revenue from sale, cost savings and other benefits.
Example: Use of legal right to use a new technology to reduce future production costs

Cost of an Intangible Asset

1. Acquired separately
a. The cost comprises the purchase price, import duties, and nonrefundable purchase taxes and any

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 directly attributable cost of preparing the asset for its intended use.
b. When payment is deferred beyond normal credit terms, its cost is the cash price equivalent.

2. Acquired as part of Business Combination

a. When the FV of identifiable intangible asset can be measured with sufficient reliability, the cost is
based on its FV on acquisition date
b. When there is an active market, the FV is based on quoted market price/current bid price.
c. When there is no active market, the FV is equal to the amount that would be paid by the entity for the
asset in an arm’s length transaction between knowledgeable and willing parties.
Example: Discounted Net Cash Flows

3. Acquired by Government Grant(PAS 20)

Example: Airport land rights, licenses to operate radio or television stations, import licenses
a. Fair Value
b. Nominal amount or zero plus any directly attributable expenditure.
4. Internally generated
a. It comprises all directly attributable costs necessary to create, produce or prepare the asset to be
capable of operating it in the manner intended by the management.
Examples:
Cost of materials and services used or consumed
Cost of employee benefits
Registration fee for a legal right
Amortization of patents or licenses used to generate the asset

Examples of costs excluded in the cost of an intangible asset and expensed when incurred
● Cost of introducing a new product or service, advertising and promotional
● Relocation costs in a new location or with a new class of customers, reorganization costs
● Cost of staff training
● Administration and other general overhead costs
● Cost incurred while an asset has yet to be brought in the manner intended by the management
● Initial operating losses, start up costs

Recognition
1. It is probable that the future economic benefits that are attributable to the asset will flow to the entity.
2. The cost of the intangible asset can be measured reliably.

Initial Measurement
An entity shall measure an intangible asset initially at cost.

Subsequent Measurement
As its accounting policy, an entity shall choose either:

1. Cost model (Cost – Accum. Amortization – Accum. Impairment Losses)

2. Revaluation model (Revalued Amount – Subsequent Accum. Amortization – Subsequent Accum.
Impairment Losses)
Note: An intangible asset can only be carried at revalued amount if there is an active market for the
asset.

Treatment of subsequent expenditure

General Rule : A subsequent expenditure on an intangible asset shall be recognized as an expense.
Exception : A subsequent expenditure may be capitalized when:
1. It is probable that future economic benefits that are attributable to the subsequent expenditure will
flow to the entity.
2. The subsequent expenditure can be measured reliably.

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 Amortization is the systematic allocation of the depreciable amount of an intangible asset over the
asset’s useful life.

1. Method
The amortization method shall reflect the pattern in which the economic benefits from the asset are
consumed. If such pattern cannot be determined reliably, the straight line method is used.
2. Residual Value
General Rule : The residual value of an intangible asset shall be presumed to be zero.
Exception :
a. When at the end of its useful life, there is a committed third party buyer.
b. When at the end of its useful life, there is an active market for its residual value.

Impairment
Impairment of intangible assets is recognized in accordance with PAS 36 on impairment of assets

Useful Life
1. Factors in determining the useful life
a. Technical, technological and other type of obsolescence
b. Expected action by competitors or potential competitors
c. Expected usage of the asset by the entity
d. Typical product life cycle for the asset
e. Stability of the industry in which the asset operates
f. Level of maintenance expenditure required to obtain the expected future economic benefits from the
asset
g. The useful life of the asset may be dependent on the useful life of other assets of the entity
h. Period of control over the asset and legal or similar limits on the use of the asset

2. Assessment whether:
a. Finite or Limited Life (amortized over their useful life)
b. Indefinite Life (tested for impairment at least annually and whenever there is an indication of
impairment)
There is no foreseeable limit to the period over which the asset is expected to generate net cash flows.
Note: The useful life of an intangible asset that arises from contractual or other legal rights shall not
exceed the period of the contractual or legal rights.
If the limited term can be renewed, the renewal period shall be included only in cases of renewal by the
entity with insignificant cost.

Derecognition
An intangible asset shall be derecognized from the SFP:

a. On asset disposal
b. When no future economic benefits are expected from its use and disposal
Gain/Loss from derecognition (Net disposal proceeds – CA of asset) shall be recognized as other
income/expense in the income statement.

Disclosures

An entity shall disclose the following for each class of intangible assets, distinguishing between
internally generated intangible assets and other intangible assets.

1. Whether useful lives are indefinite or finite, and if finite, the useful lives or the amortization rate.
2. The amortization method.
3. The gross carrying amount and any accumulated amortization (aggregated with accumulated
impairment losses) at the beginning and end of the period.

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 4. The line item in the income statement in which any amortization of intangible assets is included.
5. Additions, separately showing those internally generated, those acquired separately and those
acquired through business combination.
6. Intangible assets classified as held for sale in accordance with PFRS 5.
7. Increases and decreases in intangible assets resulting from revaluations.
8. Impairment losses and reversal of impairment losses.
9. Net exchange differences on translation.
10. The carrying amount of intangible asset with indefinite life and the reason supporting the
assessment of indefinite life.
11. The carrying amount and remaining amortization period of intangible assets that are material to the
entity’s financial statements.
12. The carrying amount of intangible assets whose title is restricted or pledged as collateral security.
13. Contractual commitments for the acquisition of intangible assets.
14. Intangible assets acquired by way of government grant and initially recognized at fair value.
15. The amount of research and development expenditure recognized as expense during the period.

Illustrative Problems
1. Zekoki Company has developed a database of names and addresses of professional people who
reach their 25th birthdays between the years 2008 and 2014 and intends to exploit this by selling the
information to suppliers of life enhancement products and solutions for junior executives. The company
has incurred a total P500,000 to develop the database.
The company has also incurred a total P800,000 of promoting the databases to vendors of such
solutions, such as adventure holiday companies. The company has also incurred P500,000 losses as
there are substantial administrative costs and no income yet. Zekoki Company intends to capitalize all
the costs incurred in relation to the database promotion and administrative costs.
What amount of intangible asset should Zekoki Company recognize?

Solution: Cost of developing the database 500,000

2. On June 30, 2014, Black Company purchased the net assets of Decker Company. The acquisition
resulted in a purchased goodwill of P1,500,000. During 2014, Black incurred additional costs of
developing goodwill: P500,000 for employee training and P250,000 for hiring additional employees.
How much should Black report as goodwill in its December 31, 2014 statement of financial position?

Solution: Purchased goodwill 1,500,000

XIX. PAS 40 : INVESTMENT PROPERTY

Investment property
- a land or a building, or both, or part thereof.
- Held to earn rental income (operating lease)
- For capital appreciation.

Take note!
*The lessee ( a person whom a property has been leased) will recognize the property as an investment
property if it is leased under a finance lease.

Classified as Investment property Not classified

- Property held for long-term capital - Property leased out to someone (lessee)

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 appreciation. under a finance lease.
- Property leased out for operating lease. - Property held for sale in the course of
- Vacant property held for the purpose of ordinary course of business (Inventories
leasing in the future. IAS 2).
- Land and Buildings held for an - Property that is owner occupied (PPE IAS
underdetermined future use. 16).
- Property being developed / constructed for - Property used as storage of goods (PPE
the purpose of future investment property. IAS 16)
- Property constructed/ developed for future
operation of business (PPE IAS 16)

Initial recognition
- At cost.

● Purchase price if purchase

● Construction cost if developed
● Transaction cost
● Other costs directly attributable to the expenses of the said property. (legal fees; transfer cost)

- Does not include

● Abnormal waste
● Start-up cost
● Initial operational expenses

Subsequent recognition
- Cost model
● Cost - Accumulated depreciation - impairment loss
- Fair Value model
● Remeasured by the end of the period. Accounted in the Profit or Loss statement.
● Recommended by IAS 40 but not required.

Subsequent expenditures
- Capitalized if:
1. The probability of Future economic benefits flowing to the entity.
2. Cost being reliably measured.

XX. PAS 41 : AGRICULTURE

Biological assets are living plants and animals. (PAS 41)

Agricultural produce is the harvested product of the entity’s biological assets.
Harvest is the detachment of produce from a biological asset or the cessation of a biological asset’s life
process.
Agricultural activity or agriculture is the management by an entity of the biological transformation and
harvest of biological assets for sale or for conversion into agricultural produce or into additional biological
assets.
Biological transformation comprises the process of growth, degeneration, production and procreation that
cause qualitative changes in a biological asset.

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 Measurement

Initial Measurement Subsequent Measurement

Biological Assets Fair value less costs to sell Fair value less costs to sell

Agricultural Produce Fair value less costs to sell at the PAS 2 (Inventories) applies for
point of harvest agricultural produce after point of
harvest
Cost to Sell:
● commissions to brokers and dealers
● levies by regulatory agencies
● commodity exchanges
● transfer taxes and duties
● transport costs
● finance cost
● income taxes
Note: When reasonable assurance exists that fair value can NOT be reliably measured, biological assets
are measured at cost less accumulated depreciation and any accumulated impairment loss.

Gain or Loss from Fair Value Measurement of Biological Asset and Agricultural Produce
● Gain or loss arising from initial recognition of a biological asset at fair value less costs to sell and
any subsequent changes in fair value costs to sell shall be included in profit or loss.
● A loss may arise on initial recognition of a biological asset because costs to sell are deducted in
determining fair value costs to sell of a biological asset.
● A gain may arise on initial recognition of a biological asset. (e.g. when a calf is born)
● A gain or loss arising from initial recognition of agricultural produce at fair value less costs to sell
shall be included in profit or loss.
● A gain or loss may arise on initial recognition of agricultural produce as a result of harvesting.

XXI. PAS 37 : PROVISION, CONTINGENT LIABILITY, AND ASSET

Provision
● An existing liability of uncertain timing or uncertain amount. However, a liability definitely exists
despite the fact that the amount is indefinite or that the settlement of which is also indefinite.
● It is the uncertainty of a provision that distinguishes it from other liabilities since all other
liabilities are certain as to timing or amount. The uncertainty implied in a provision is generally
much more than any other liabilities although some other liabilities like accruals sometimes
require estimation of amounts.

Recognition of provision
PAS 37 states that a provision shall be recognized as a liability in the financial statements under the
following conditions:
● a. The entity has a preset obligation, legal or constructive, as a result of past event.
● b. It is probable that an outflow of resources embodying economic benefits would be required to
settle the obligation.
● c. The amount of the obligation can be measured reliably.
● A legal obligation is an obligation arising from contract, legislation, or other pattern of law.

A constructive obligation exists when the entity from an established pattern of practice or stated policy
has created a valid expectation that it will accept certain responsibilities.
A past event must be an obligating event. An obligating event is an event that creates legal or

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 constructive obligation because the entity has no other realistic alternative but to settle the obligation.

An event is probable if it is more likely to occur than not. Simply stated, an event is probable if the
happening of such an event is greater than the probability that such event will not occur. In practice,
probable means more than 50% likely.

The standard suggests that by using a range of possible outcomes, an entity could make an estimate of
the obligation that is sufficiently reliable.

When no reliable estimate can be made, no liability shall be recognized.

All of the requirements set under PAS 37 must be met in order for a provision to be recognized in the
financial statements.

Measurement of a provision
The amount recognized as a provision shall be the best estimate of the expenditure required to settle
the present obligation at the end of the reporting period.
When there is a continuous range of possible outcomes and each point in that range is as likely as any
other, the midpoint range shall be the best estimate.
Where the provision being measured involves a large population of items, the obligation is measured by
weighting all possible outcomes by their associated possibilities. This method is also known as
statistical method.

Present value of obligation

The provision shall be discounted using pretax rate that reflects current market assessment of time
value of money and risk specific to the liability where the effect of discounting the provision is material.

Reimbursements
● Reimbursement from other parties of some or all of the expenditure required to settle the
provision shall only be recognized separately as asset when it is virtually certain that the amount
will be received if the obligation is settled.
● The amount of reimbursement is recognized separately in the statement of financial position and
therefore must not be netted against the provision. The amount of reimbursement must not
exceed the amount of provision.
● However, expenses incurred in settling the provision may be netted against any reimbursement.

Changes in the provision

● Provisions shall be reviewed at every end of the reporting period and adjusted to reflect the best
estimate with the change effected in profit or loss.
● When a provision is no longer probable as to outflow of economic benefits, such provision shall
be reversed and shall also be recognized in profit or loss.
● Where a provision is discounted, the carrying amount of the provision shall be increased equal
to the amortization of the effect of discounting.

Use of a provision
A provision shall be used for expenditures for which the provision was originally recognized. Simply
stated, every provision must be established for every separate obligating event. A provision for
environmental pollution cannot be used in establishing a provision for a lawsuit filed against a company.
But of course, the recognition must always be complied with before recognizing a provision.

Future operating losses

A provision shall not be recognized for future operating losses simply because there is no obligating
event that leads to a present obligation.

Onerous contract
If an entity has an onerous contract, the present obligation under the contract shall be recognized and

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 measured as a provision. An onerous contract is a contract in which the unavoidable costs of meeting
the obligation under the contract exceed the economic benefits expected to be received under it.
PAS 37 mandates that the unavoidable costs under the contract represent the “least net cost of exiting
from the contract” which is the lower amount between the cost of fulfilling it and the compensation or
penalty arising from failure to fulfill it.

Restructuring
PAS 37 defines restructuring as a program that is planned and controlled by management and
materially changes either the scope of a business of an entity or the manner in which that business is
conducted.

Events that may qualify as restructuring include:

● a. Sale or termination of a line of business
● b. Closure of business location in a region or relocation of business activities from one location
to another or relocation of headquarters from one country to another.
● c. Change in management structure, such as elimination of a layer of a management or making
all functional units autonomous
● Fundamental reorganization of an entity that has a material and significant impact on its
operations.

Provision for restructuring

Recognition of the provision for restructuring is required because a constructive obligation may arise
from the decision to restructure. A constructive obligation for restructuring arises when two conditions
are present:
● a. The entity has a detailed formal plan for the restructuring outlining at least the business or part
of the business being restructured, the principal location affected, the location, function, and
approximate number of employees who will be compensated for terminating their employment,
when the plan will be implemented, and the expenditures that will be undertaken.
● b. The entity has raised valid expectation in the minds of those affected that the entity will carry
out the restructuring by starting to implement the plan and announcing its main features to those
affected by it.

Amount of restructuring provision

A restructuring provision shall include only direct expenditures arising from the restructuring, meaning,
those expenditures that are necessarily incurred for the restructuring and not associated with the
ongoing activities of the entity.

PAS 37 specifically excludes the following expenditures from the restructuring provision:
● a. Cost of retaining or relocating continuing staff
● b. Marketing or advertising program to promote the new company image
● c. Investment in new system and distribution network.
● These costs which are excluded from the restructuring provision are considered to be incurred
for the future conduct of the business of the entity and thus are not liabilities relating to the
restructuring.

Contingent Liability
PAS 37 defines contingent liability in two ways:
● A contingent liability is a possible obligation that arises from past event and whose existence will
be confirmed only by the occurrence or nonoccurrence of one or more uncertain future events
not wholly within the control of the entity.
● A contingent liability is a present obligation that arises from past event but is not recognized
because it is not probable that an outflow of resources embodying economic benefits will be
required to settle the obligation or the amount of the obligation cannot be measured reliably.

Contingent liability and provision

● Both a contingent liability and a provision are present obligations, the difference lies between the

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 probability and the measurability of such obligation.
● In order for a provision to be recognized, settlement must be probable and the amount of settling
the obligation must be measurable in a reliable way. While in a contingent liability, it is either that
the settlement of the obligation is probable or that the amount of settling the obligation can be
measured reliably however, both probability and measurability must not exist.

Accounting for contingent liability

A contingent liability shall not be recognized in the financial statements rather, necessary disclosures
are enough. The necessary disclosures include:
● Brief description of the nature of contingent liability
● An estimate of its financial effects
● An indication of the uncertainties that exist
● Possibility of any reimbursement
Remote contingent liability does not require any disclosure.

XXII. PAS 34 : INTERIM FINANCIAL REPORTING

● PAS 34 does not mandate which entities are required to publish interim financial reports, how
frequently, or how soon after the end of an interim period
● PAS 34 allows an entity to publish a set of condensed financial statements or complete set of
financial statements in the interim financial report
Interim Financial Reporting
- The presentation and preparation of financial statements for a period of less than one year
- May be presented monthly, quarterly or semiannually (Quarterly is the most common)
- In publicly traded entities, they are required to provide interim financial reports at least
semiannually and such reports are to be made available not later than 60 days after the end of
interim period

Components of an interim financial report

- Condensed SFP
- Condensed SCI
- Condensed SCE
- Condensed SCF
- Selected explanatory notes

Disclosure of compliance with PFRS

- If an entity’s interim financial report is in compliance with Philippine Financial Reporting Standards,
such fact shall be disclosed

Selected Explanatory notes

- Are designed to provide an explanation of significant events and transactions arising since the last
annual financial statements
- The standard reiterates that it is a superfluity to provide the same notes in the interim financial
report that appeared in the most recent annual financial report

Presentation of Comparative Interim Statements

1. Statement of financial position
- SFP at the end of current interim period
- Comparative statement of financial position at the end of the preceding year
2. Income Statement

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 -Income statement for the current interim period
-Income statement cumulatively for the current financial year to date
-Comparative income statement for the comparable interim period of the preceding year
-Comparative income statement cumulatively for the comparable financial year to date of the
preceding year
3. Statement of Comprehensive Income
- Statement of Comprehensive Income for the current interim period
- Statement of Comprehensive Income cumulatively for the current financial year to date
- Comparative statement of comprehensive income for the comparable interim period of the
preceding year
- Comparative statement of comprehensive income cumulatively for the comparable financial
year to date of the preceding year
4. Statement of changes in equity
- Statement of changes in equity cumulatively for the current financial year to date
- Comparative statement of changes in equity for the comparable interim period of the
preceding year
5. Statement of cash flows
- Statement of cash flows cumulatively for the current financial year to date
- Comparative statement of cash flows for the comparable interim period of the preceding
year

Basic principles
1. An entity shall apply the same accounting policies in the interim financial statements as are applied
in the annual financial statements.
- Measurements for interim reporting purposes shall be made on a year to date basis
2. Revenues from products sold or services rendered are generally recognized for interim reports on
the same basis as for the annual period
3. Cost and expenses are recognized as incurred in an interim period
- Expenses associated directly with revenue are matched against revenue in those interim
periods in which the related revenue is recognized
- Expenses not associated directly with revenue are recognized in interim periods as
incurred or allocated over the interim periods benefited
4. If the business is highly seasonal, in addition to the current interim period financial statements, the
entity is encouraged to disclose financial information:
- For the latest 12 months
- Comparative information for the prior comparable 12 month period
5. The preparation of interim financial reports generally requires a greater use of estimation than
annual financial reports

Inventories
- Are measured for interim financial reporting by the same principles as at financial year-end which
means that inventories shall be measured at the lower of cost or net realizable value even for
interm purposes
- May be estimated using the gross profit method or retail inventory method
- Full inventory and valuation procedures are not required for inventories at interim date
- If the net realizable value is lower than cost, a loss on inventory writedown shall be recognized
regardless of whether the writedown is temporary or non temporary

Seasonal, cyclical or occasional revenue

- Shall not be anticipated or deferred as of an interim date if anticipation or deferral would not be

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 appropriate at the end of the entity’s reporting period
- Dividend revenue, royalties and government grants shall be recognized in the interim period when
they occur

Uneven Costs
- Costs that are incurred unevenly during an entity’s financial year shall be anticipated or deferred
for interim purposes only if it is also appropriate to anticipate or defer that type of cost at the end of
the financial year

Year-end bonuses
- A bonus is anticipated for interim purposes if and only if:
a. The bonus is a legal obligation or past practice would make the bonus a constructive
obligation for which the entity has no realistic alternative but to make the payment
b. A reliable estimate of the obligation can be made

Irregular costs
- Certain costs are expected to be incurred irregularly during the financial year, such as charitable
contribution and employee training cost

Depreciation and amortization

- Depreciation and amortization shall be based only on assets owned during that interim period
- Asset acquisitions or dispositions planned for later in the financial year shall not be taken into
account

Paid vacation and holiday leave

- Shall be accrued for interim purposes because these are enforceable as legal commitments

Gain and loss

- Gain or loss from disposal of property, gain or loss from discontinued operation and other gain or
loss shall not be allocated over the interim periods
- The gain is reported in the interim period when realized and the loss is reported in the interim
period when incurred

Income tax
- Interim period income tax expense shall reflect the same general principles of income tax
accounting applicable to annual reporting
- It is accrued using the annual effective income tax rate applied to the pretax income of the interim
period

Change in accounting policy

- Shall be reflected by restating the financial statements of prior interim periods of the current year
and the comparable interim periods of the prior financial year
- The objective of this requirement is to ensure that a single accounting policy is applied throughout
the entire financial year

XXIII. PFRS 5 : NON CURRENT ASSET HELD FOR SALE

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 Noncurrent asset
- Assets that do not meet the definition of a current asset.

- May be an individual asset [ex. Land, building, Equipment, Disposal group]

- Non current asset or disposal group classified as held for sale if the carrying value will be
recovered principally through record of sale rather than continuing use.

Classifications that must be present

1. Available for sale in its present condition.

2. Sale is highly probable — with the terms being met:

● Management committed a plan to sell.
● Active program to locate buyers.
● Asset is marketed at a reasonable price in relation to fair value.
● Expected sale is within one year.
● Plans will be Unlikely to be changed or withdrawn.

Measurement
Main principle: Lower cost to either Carrying amount or Fair Value less costs to sell.

To record: Before classification After classification

Asset’s measurement In line with the applicable IFRS Lower CA and FV —cost to sell.

Impairment In line with the IFRS Adjusted CA — (FV — cost to

sell)

Impairment In P/L (or OCI if applicable) Always in P/L

Note: Do not charge any depreciation

Not classified as held for sale:

1. Temporary/ Total Abandonment of non-current assets.
2. Change in classification.

Presentation of asset classified as HELD FOR SALE:

1. Noncurrent asset if the criteria still not met.
2. Current asset if it is already reclassified as HELD FOR SALE.
3. Disposal groups classified is a group of assets to be disposed of, sale or otherwise, together as a
group in a single transaction, and liabilities directly associated with those assets that will be
transferred in the transaction. The assets and liabilities of the group shall be presented separately
and cannot be offset as a single amount.

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 XXIV. PFRS 5 : DISCONTINUED OPERATION

Component:
1. Actually disposed of operation (cash generating unit), or
2. Meets the criteria of assets HELD FOR SALE

AND;
● Separate major line of business/ geographical area
● Is a part of plan to dispose of it, or
● Is a subsidiary acquired to resale
Included:
1. Revenue, Income, and expense directly attributable to discontinued operation.
2. Impairment loss (CA — (FV—Cost of sale/disposal); if fair value < carrying amount.
3. Any gain/loss from actual disposal.
4. Termination cost.

Example Not an example

1. A car manufacturing company selling its 1. Apple Corp. Phasing out Iphone X
battery making business. production.
2. San Miguel Corp. selling fuel and oil 2. Binance Corp. shifting marketing activities
entities. from China to Singapore.
3. An owner of a real estate, basketball 3. Closing of Jollibee branch in Isabela.
franchise, food manufacturing business
selling one of its business activities.

Presentation
Statement of Financial Position:

- Asset classified as held for sale.

- Assets and liabilities in the disposal group classified as HELD FOR SALE.

Statement of comprehensive income:

- Single amount comprising of
● Post-tax P/L of discontinued operations.
● Post-tax gain/loss on the measurement or disposal.
- Analysis of the single amount in the notes or the statement of comprehensive income.

Statement of Cash Flows

- Net cash flows attributable to the operating, investing, and financing activities of a discontinued
operation.
- Can be presented in the notes.

XXV. PFRS 6 : EXPLORATION AND EVALUATION OF MINERAL RESOURCES

- Defined as the search for the mineral resources after the entity has obtained legal right to

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 explore in a specific area as well as determination of the technical disability and commercial
viability of extracting mineral resources.

- Expenditures are incurred by an entity in connection with the exploration and

evaluation of mineral resources before the technical feasibility and commercial viability
of extracting mineral resources.

Do not include: Included:

1. Before an entity has obtained legal 1. Acquisition of rights to explore
right to explore a specific area. (license/authorization from the
2. After the technical feasibility and government).
commercial viability of extracting a 2. Topographical, geological,
mineral resource are demonstrable. geochemical, and geophysical
studies. (cost from hiring experts to
study the specific area).
3. Exploratory drilling (to obtain
samples)
4. Trenching
5. Sampling (to determine the grade of
minerals)
6. Other activities in relation to
evaluating the technical feasibility
and commercial viability of extracting
a mineral resource.
7. General and administrative cost
directly attributed to exploration and
evaluation activities.

Measurement and Classification

As per Measurement: As per Classification:

● Initially: at cost ● Tangible assets - Ex. Vehicles,

drilling machines
● Subsequently: either cost model or
revaluation model ● Intangible assets - Ex. Drilling rights

Accounting for Exploration

1. Successful effort method 2. Full cost method

- Exploration cost directly - All expenditures are capitalizable
related to the discovery of regardless of the result of the
the commercially producible exploration and evaluation of the

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 natural resources capitalized specific land.
as cost of the resource
property.
- If successfully proven to
contain a grade that is a
commercially producible
natural resource then it will
be capitalizable. If
unsuccessful, it will be
considered an expense.

XXVI. PFRS 8 : OPERATING SEGMENTS

An entity shall disclose information to enable users of 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.

SEGMENT REPORTING
- disclosure of certain financial information about the products and services an entity produces and
the geographical areas in which an entity operates.

- Purpose: to enable investors and users to make better assessment of each business activity
leading to the understanding of the performance of the entity as a whole.

SCOPE OF IFRS 8

Separate or Consolidated financial statements to group with a parent:

individual a. Whose debt or equity instruments are traded in a public market.
financial b. That files or is in the process of filing the consolidated financial statements with
statements of a securities commission or other regulatory organization for the purpose of
an entity issuing any class of instruments in a public market.

Note: if a financial report contains both the consolidated financial statements of a parent and the parent’s separate
financial statements, segment information is required only in the consolidated financial statements.

OPERATING SEGMENT

- May engage in business activities for which it has yet to earn revenue. (i.e. start up operations)
- Not every part of an entity is necessarily an operating segment or part of an operating segment.
(i.e. corporate headquarters may or may not earn revenue that is incidental only to the activities of
the entity would not be operating segments.)

It is a component of an entity:

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 a. That engages in business activities from which it may earn revenue and incur expenses, including
revenue and expenses relating to transactions with other components of the same entity.

b. 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.

c. And for which discrete financial information is available.

CHIEF OPERATING DECISION MAKER

- Their function is to allocate resources to the segments and assess their performance.
- They can be the entity’s chief executive officer, chief operating officer, or a group of executive
directors depending on who within the organization is responsible for the allocation of resources
and assessing the performance of operating segments.

IDENTIFYING OPERATING SEGMENTS

- Management approach is used in identifying operating segments.

➔ This means that the operating segments are identified based on the components of the entity
that are considered to be important for internal management reporting purposes.

➔ Reporting of segment information is seen through the “eyes of management” and users would
wish to see the business as the chief operating decision maker sees it.

REPORTABLE OPERATING SEGMENTS (any of these must be met)

The segment revenue, Absolute amount of profit or loss of the segment is The assets of the
including both sales to 10% or more of the greater in absolute amount of: segment are 10%
external customers and or more of the
intersegment sales or 1. Combined profit of all operating segments that combined assets
transfers, is 10% or more of reported a profit of all operating
the combined revenue, segments.
internal and external, of all 2. Combined loss of all operating segments that
operating segments. reported a loss.

Note: when none of these three are met, it may be considered reportable and separately disclosed on a voluntary
basis if management believes that information about the segment would be useful to the users of the financial
statements.

OVERALL SIZE TEST

If the total external revenue of reportable operating segments constitutes less than 75% of the
entity external revenue, additional operating segments shall be identified as reportable segments even if
they do not meet the 10% quantitative thresholds until at least 75% of the entity external revenue is
included in reportable segments.

AGGREGATION OF SEGMENTS
- Two or more operating segments may be aggregated into a “single operating segment’ if the
segments have similar economic characteristics and the segments share a majority of the following
five aggregation criteria:

- Nature of product or service

- Nature of production process
- Type or class of customers

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 - Marketing method or the method used to distribute the product
- The nature of the regulatory environment (i.e. banking, insurance policy, public utility)

DISCLOSURE OF INFORMATION FOR EACH REPORTABLE SEGMENT

1. General information about the operating segment.

a. Factors used to identify reportable segments.
b. Type of products and services from which each reportable segment derives revenue

2. Information about the profit or loss, (including specified revenue and expenses included in the
measure of profit or loss).

a. An entity shall disclose a measure of profit or loss under all circumstances.

i. However, an entity shall disclose a measure of total assets and total liabilities for each
reportable segment if such an amount is regularly provided to the chief operating
decision maker.

3. Information about the segment assets and segment liabilities and the basis of measurement.

4. Reconciliations of the totals of segment revenue profit or loss, segment assets, segment liabilities
and other material segments to corresponding items in the entity’s financial statements.

ENTITY WIDE DISCLOSURES

- These are additional information that is required to be disclosed by all entities if such information is
not provided as part of the reportable segment information.

- An entity shall disclose information about the following:

a. Information about products and services

b. Information about geographical areas
c. Information about major customers

REVENUE FROM PRODUCTS AND SERVICES

- An entity shall disclose the revenue from external customers for each product and service.

REVENUE ASSETS FROM GEOGRAPHICAL AREA

- An entity shall disclose the following geographical information:
a. Revenue from external customers in the entity’s country of domicile, and in all foreign
operations in total.
b. Separate disclosure of material revenue from external customers in an individual foreign
country.

DISCLOSURE ABOUT MAJOR CUSTOMER

- Major customer - a single external customer providing revenue which amounts to 10% or more of
an entity’s external revenue.
- The entity shall disclose the fact of reliance on major customers, the total amount of revenue from
major customers and the identity of the segment or segments reporting the revenue.
- The entity is not required to disclose the identity of the major customer or the amount of revenue
that each segment reports from that customer.

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 XXVII. PFRS 9 : FINANCIAL INSTRUMENTS
(Measurement of Financial Asset)

REFER TO INTACC REVIEWER

XXVIII. CASH

CASH CASH EQUIVALENT

It includes money and any other negotiable These are short-term and highly liquid
instrument that is payable in money and investments that are readily convertible into cash
acceptable by the bank for deposit and and so near their maturity that they present
immediate credit. insignificant risk of changes in value because of
changes in interest rates. (PAS 7, par. 6)

Only highly liquid investments that are acquired

three months before maturity can qualify as cash
equivalents.

● Checks ● 3-month BSP Treasury Bill

● Bank Drafts ● BSP Treasury Bill (more than 3 months)
● Money Orders purchased 3 months before maturity date
● Petty Cash Fund ● 3-month Time Deposit
● Payroll Fund ● 3-month Money Market Instrument
● Travel Fund ● Preference shares (with specified
● Interest Fund redemption date) purchased 3 months
● Dividend Fund before redemption date
● Tax Fund ● Equity securities – no maturity date
● Sinking Fund
● Preferred Redemption Fund
● Plant Expansion

Valuation
In Local Currency In Foreign Currency If Recoverable Value < Face Value*
= Face Value = Current Exchange Rate = Estimated Realizable Value

Note: *Cash in bank or in financial institutions having financial difficulty or in bankruptcy should be
shown at its recoverable value

Financial Statement Presentation

Aggregate cash and cash equivalents should be shown as the 1st line item among the current assets.
Details comprising the cash and cash equivalents should be disclosed in the notes to financial
statements.

Financial Statement Classification

Classified as Cash and Cash Equivalents Classified as a separate line item
1. Unrestricted/Current Use Restricted/Noncurrent Use → Long-term Investment
Note: Classification of cash fund as current or noncurrent should parallel the classification of the related
liability.
If material, foreign bank deposits subject to foreign exchange restriction shall be classified separately

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among noncurrent assets and restriction clearly indicated.
2. Investment in Time Deposit, Money Market Instrument and Treasury Bills
If Term ≤ 3 months 3 months < Term ≤ 1 year → Short-term Investment
Term > 1 year → Long-term Investment

Note: There is an assumption of 3 month-term when the problem does not specify.

3. General Rule: Bank overdraft (Credit Balance Bank Account) → Current Liability
Exception: It can be an offset against other bank account if the amount is immaterial and/or when the
entity maintains 2 or more accounts in 1 bank.

4. Informal Compensating Balance Formal Compensating Balance

─ not legally restricted ─ legally restricted

If related loan is short-term → Cash held as compensating balance

If related loan is long-term → Noncurrent Investment

Note: In the absence of any information, compensating balance is always considered not available for
an unrestricted use.

Restoration of Cash Balance from: Check as payment Check as receipt

Unreleased Check ↑Cash ↓APP ↓Cash ↑AR

Postdated Check ↑Cash ↓AP ↓Cash ↑AR

Stale Check* ↑Cash ↓AP ↓Cash ↑AR

Note: *A check becomes stale if not encashed within 6 months from the issuance date. However, the
entity may issue a “stop payment order” for cancelation of stale check even for less than 6 months.

Misstatement Practices Concerning Cash Balance:

1. Window Dressing is a practice of opening the books of accounts beyond the close of the accounting
period for the purpose of showing a better financial position and performance.
2. Lapping consists of misappropriating a collection from one customer and concealing this defalcation
when collection is made from another customer.
3. Kiting is a transfer of cash from one bank to another bank usually employed at the end of the month.

Petty Cash Fund

1. Imprest Fund System
● Petty cash expenses are recorded upon replenishment.
Replenishment amount = Petty cash disbursements
2. Fluctuating Fund System
● Petty cash expenses are immediately recorded.
● Replenishment amount = or > or < Petty cash disbursements

Bank Reconciliation

Book reconciling items

1. Credit Memos – deposits credited by the bank; not yet recorded as cash receipts in books
2. Debit Memos – checks debited by the bank; not yet recorded as cash disbursements in books

Bank reconciling items

1. Deposits in transit – already recorded as cash receipts in books; not yet credited by the bank
2. Outstanding checks – already recorded as cash disbursements in books; not yet debited by the bank

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Forms
1. Adjusted balance method – book balance and bank balance → correct cash balance
2. Book to bank method
3. Bank to book method

Proof of cash - expanded reconciliation in that it includes proof of receipts and disbursements.

Illustrative Problem
1. On December 31, 2014, the cash account of Maktech Company showed the following details:
Undeposited collections 60,000
Cash in bank – PCIB checking account 500,000
Cash in bank – PNB (overdraft) (50,000)
Undeposited NSF check received from the customer, dated Dec. 1, 2014 15,000
Undeposited check from a customer, dated Jan. 15, 2015 25,000
Cash in bank – PCIB (fund for payroll) 150,000
Cash in bank – PCIB (saving deposit) 100,000
Cash in bank – PCIB (money market instrument, 90 days) 2,000,000
Cash in foreign bank (restricted) 100,000
IOUs from officers 30,000
Sinking fund cash 450,000
Listed shares held as trading investment 120,000
Petty cash fund (all funds were reimbursed on 12/31/2014) 50,000
Time deposit (due February 1,2015) 250,000
Treasury bills 1,000,000
Traveler’s check 50,000

Solution:
Undeposited collections 60,000
PCIB checking account 500,000
PCIB payroll fund 150,000
PCIB saving deposit 100,000
Petty cash fund 50,000
Time deposit 250,000
Treasury bills 1,000,000
Traveler’s check 50,000
PCIB money market 2,000,000
Total cash and cash equivalents 4,160,000

XXIX. RECEIVABLES

● Represents any legitimate claim from other companies (money, goods, service)
● (in accounting) claims that are expected to be settled in cash
● From sales, performance of service, from money lent, etc.
● Evidenced by promissory note or time draft

Trade Receivable Non-trade Receivable

Arises in Normal course of business; sale of Non operating course of the business;
goods and services interests, advances, etc.

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 Reporting Current assets Over 1 year - Non-current asset
Less than 1 year - current asset

Initial Original TRANSACTION PRICE Original TRANSACTION PRICE

recording

Subsequent Net realizable value Net realizable value

*for more information refer to INTACC reviewer

XXX. SHAREHOLDERS’ EQUITY

A corporation - artificial being created by operation of law, having the rights of succession, and the
powers, attributes, and properties expressly authorized by law or incident to its existence.

Preincorporation subscription requirement

The Corporation Code provides that the SEC shall not register any stock corporation unless 25% of its
authorized number of shares has been subscribed, and at least 25% of the subscription has been paid.
However, in no case shall the paid in capital be less than P5,000.

Organization Cost
Organization cost represents costs incurred in forming or organizing a corporation. These costs include:
● Legal fees in connection with the incorporation – drafting of articles of incorporation and by-laws
and corporation registration.
● Incorporation fees
● Share issuance costs – printing of stock certificates, cost of stock and transfer book, seal of
corporation, underwriting and promotional fees, accounting and legal fees related to share
issuance.

Note: Organization costs shall be recognized as expense when incurred except for share issuance cost
which is charged to share premium on the issuance of new shares. If share premium from issuance of
the new shares is not enough to absorb the share issuance costs, such amount shall be recognized as
expense.

Accounting for Share Capital

Memorandum method – no entry is made for authorization of share capital.
Only when share capital is issued that it is credited to Share Capital account

Journal entry method – authorization for share capital is recorded by debiting Unissued Share Capital
and crediting Authorized Share Capital.
Once issued, Authorized Share Capital is credited to Unissued Share Capital account.

Accounting treatment for:

Shares issued at discount ● Share capital is credited at par.

● The deficiency shall be debited to
Discount on Share Capital account.
Discount on Share Capital account is a
deduction from total shareholders’ equity.

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 Shares issued for noncash consideration Order of priority for measurement of equity:
1. Fair value of goods or services
2. Fair value of equity shares issued
3. Par or stated value

Delinquent subscription Delinquent subscriptions are sold in public

auction to the highest bidder for a price that
normally includes the balance due on
subscription, interest accrued on subscription due
and expenses of advertising and other costs of
sale.

Note: The highest bidder shall be the person who

is willing to accept to pay the offer price for the
smallest number of shares. If there are no
bidders, unissued subscription shall be
reacquired by the issuing company thus resulting
in treasury shares.

Callable and Redeemable Preference Shares ● Redemption Price > Original Issue Price,
the difference shall be charged to
Retained Earnings
● Redemption Price < Original Issue Price,
the difference shall be an addition to
Share Premium

Convertible Preference Share ● Par Value > Original Issue Price, the
difference shall be charged to Retained
Earnings
● Par Value < Original Issue Price, the
difference shall be an addition to Share
Premium

Rights issue Upon issuance of share warrants, no entry is

required since share warrants are usually without
consideration. Only upon exercise of the share
warrants that entry for the issuance of new
shares is necessary.

Share Warrants Issued with Preference Share Allocation of consideration for issuance:
Base on Fair Market Value of both
First to preference share when only preference
share has a determinable fair market value and
the residual amount shall be assigned to share
warrants
Base on intrinsic value if both has no
determinable fair value
Note: Intrinsic value is the market value of the
ordinary shares less option price or exercise
price.

Share Warrants Issued With Bonds Payable Amount assigned to share warrant shall be the
residual value between the consideration
received and the valuation of the liability. The

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 valuation of the liability shall be the market value
of the bonds ex-warrant.

Treasury shares Treasury shares shall be accounted for using the

cost method.
Reissuance at:
Cost, just credit treasury shares at cost
More than cost, the excess of the consideration
received over the cost of the treasury shares
shall be credited directly to share premium.

Below cost, the excess of the cost of treasury

shall be charged directly first to share premium
from treasury shares of same class and then to
retained earnings.

Retirement:
Equal to cost of treasury, share capital account is
debited at par or stated value and the treasury
shares shall be credited at cost.
When par exceeds cost of treasury, the difference
shall be credited to share premium-treasury
shares.

When treasury shares exceed the par value of

the shares to be retired, the difference shall be
charged to the following accounts:
1. Share premium to the extent of the credit
when the shares were originally issued
2. Share premium from treasury shares
3. Retained Earnings

Donated Shares Donated shares don’t affect any account in the

financial statements since recognition of donation
requires memorandum entry only. However, it is
reduces number of shares outstanding.

Recapitalization
Recapitalization occurs when there is a change in the capital structure of the entity. The old shares are
canceled and new shares are issued. The typical recapitalizations are:
● Change from par to no-par
● Change from no-par to par
● Reduction of par or stated value
● Split up
● Split down

Illustrative Problem
Raynum Corporation provided the following information on Shareholders Equity on December 31, 2012:
Ordinary share capital (500, 000 of P5 par authorized,
300, 000 shares issued and outstanding) 1, 500, 000
Share premium – ordinary shares 2, 500, 000
Preference share capital (100, 000 shares authorized,
50, 000 issued P10 par) 1, 000, 000

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 Share premium – preference shares 1, 500, 000
Retained Earnings 3, 000, 000
Total Shareholder’s Equity 9, 500, 000
Raynum had the following transactions during 2013:
a. Issued 50, 000 ordinary shares for P15 and 20, 000 preference shares for an equipment costing 400,
000 thousand and can be sold at the market for 350, 000.
b. Issued 50, 000 ordinary shares and 5, 000 preference shares for services rendered by outside
lawyers valued 700, 000. The ordinary and preference shares are selling in the market at 8 and 20
respectively.
c. Issued 25, 000 ordinary shares for P10. Incurred the following costs for the issue:
Legal fees 15, 000
Underwriting Fees 3, 000
Filing Fees with SEC 2, 000
Transfer agent fees 5, 000
d. Received 20, 000 ordinary shares subscription at P10. Later on, only half of the subscriptions were
paid. The unpaid subscriptions were offered at public auction for 117, 500 which includes interest of 10,
000 and advances on delinquency sale of 7, 500. Received the following offers:
A 10, 000
B 9, 000
C 8, 000
e. Reacquired 50, 000 ordinary shares for P11. The shares were originally issued at P12.50. On a later
date, half of the shares were reissued for 375, 000. The remaining shares were retired.
f. Received donations 10, 000 of its own shares which were selling at that date at P20. The shares were
then reissued for P10.

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