FAR NOTES

ACCOUNTING PROCESS

1ST: ANALYZE SOURCE DOCUMENTS

 Identifying a business transaction and analyzing whether or not that transaction affects the assets,
liabilities, equity, income or expense of a business.
 Source Documents
o Sales invoices
o Official receipts
o Purchase orders
o Bank statements
 Identify, Classify and Measure

2nd: JOURNALIZING
 Process of recording the transactions chronologically in the journal
 DOUBLE ENTRY SYSTEM:
o Every transaction is recorded with at least 1 debit and 1 credit
 JOURNAL: book of original entry
SPECIAL JOURNALS
PURCHASE JOURNAL CASH DISBURSEMENT JOURNAL
Purchases of inventory on account Transactions involving cash payments
SALES JOURNAL CASH RECEIPT JOURNAL
Sales on account Transactions involving cash collections

GENERAL JOURNAL
All other transactions not recorded in Special Journals

3rd: POSTING TO LEDGER

 Transferring the debit and credit items from the Journal to their respective accounts in the ledger

 LEDGER: book of final entry

GENERAL LEDGER SUBSIDIARY LEDGER
Set of accounts shown in trial balance Breakdown of balance of general ledger

4th: UNADJUSTED TRIAL BALANCE

 TRIAL BALANCE : list of general ledger accounts and their balances
: to test the equality of the debits and credits
5th: ADJUSTING ENTRIES
 To keep the accounts up to date at year end
ACCRUED REVENUE ACCRUED EXPENSE DEPRECIATION BAD DEBTS
Receivable xx Expense xx Depn expense xx BDE xx
Revenue xx Liability xx Accum. depn xx ADA xx

ENDING INVENTORY ENDING INVENTORY DEFERRED INCOME DEFERRED INCOME

Liabiity Method Income Method
Periodic System and Periodic System and Initial: Cash xx Initial: Cash xx
Nature of Expense Function of Expense Liability xx Income xx

Merch Invty, End xx Merch Invty, End xx AJE: Liability xx AJE: Income xx
Income Summary xx Cost of Sales xx Income xx Liability xx
PREPAID EXPENSE DEFERRED INCOME
Asset Method Liabiity Method
Initial: Prepaid xx Initial: Expense xx
Cash xx Cash xx

AJE: Expense xx AJE: Prepaid xx

Prepaid xx Expense xx

6th: FINANCIAL STATEMENTS

 SFP, SCI, SCIE, SCF and Notes
7th: CLOSING ENTRIES
 To close the nominal accounts
o Close the revenue account to Income Summary
o Close the expense account to Income Summary

SOLE PROPRIETORSHIP/PARTNERSHIP: CORPORATION:

Income Summary  Owner’s Capital Income Summary  Retained Earnings
Owner’s Drawing  Owner’s Capital

8th: POST CLOSING TRIAL BALANCE

 Contains Real accounts only: Assets, Liabilities and Equity
 Optional
9th: REVERSING ENTRIES
 Accruals  Accrued Income
 Accrued Expense

 Deferrals  Unearned Revenue  Income Method

 Prepaid Expense  Expense Method
 Optional
CONCEPTUAL FRAMEWORK
PURPOSE
 To assist the IASB to develop IFRS Standards based on consistent concept
 To assist preparers of financial reports to develop consistent accounting policies for transactions or
other events when no Standard applies or a Standard allows a choice of accounting policies
 To assist all parties to understand and interpret standards
SCOPE
1. OBJECTIVE OF GENERAL PURPOSE FINANCIAL REPORTING
 To provide financial information that is useful to users in making decisions relating to providing
resources to the entity
DECISIONS Buying, selling or holding equity or ASSESS
debt instruments
Future net cash inflow
Provide or settle loans
Management’s stewardship of
Voting the entity’s economic resources

Entity’s economic resources, claims against the entity and changes in

those resources and claims
INFO ABOUT
How efficiently and effectively management has discharged its
responsibilities to use the entity’s economic resources

2. QUALITATIVE CHARACTERISTICS
 FUNDAMENTAL QUALITATIVE CHARACTERISTICS
 RELEVANCE
 Capable of making a difference to the user’s decision
PREDICTIVE VALUE CONFIMATORY VALUE

 FAITHFUL REPRESENTATION
 Faithfully represent the substance of a transaction rather than its legal form
FREE FROM ERROR COMPLETENESS NEUTRALITY

 ENHANCING QUALITATIVE CHARACTERISTICS

 VERIFIABILITY
 Different knowledgeable and independent observers could reach consensus
 COMPARABILITY
 To identify similarities and differences
 UNDERSTANDABILITY
 Classifying, characterizing and presenting information clearly and concisely makes it
understandable.
 TIMELINESS
 Available to decision-makers in time to be capable of influencing their decisions

3. FINANCIAL STATEMENTS AND THE REPORTING ENTITY

 REPORTING ENTITY
 An entity that is required, or chooses, to prepare financial statements
 Not necessarily a legal entity – could be a portion of an entity or comprise more than one
entity

 FINANCIAL STATEMENTS
 Financial reports that provide information about the reporting entity’s assets, liabilities,
equity, income and expenses

CONSOLIDATED FS UNCONSOLIDATED FS COMBINED FS

4. ELEMENTS OF A FINANCIAL STATEMENT
STATEMENT ASSET A present economic resource controlled by the entity as a result of
OF S past events
FINANCIAL
POSTITION An economic resource is a right that has the potential to produce
economic benefits

LIABILITIES A present obligation of the entity to transfer an economic resource

as a result of past events
An obligation is a duty or responsibility that the entity has no
practical ability to avoid
EQUITY Residual definition

STATEMENT OF INCOME Increases in assets or decreases in liabilities resulting in increases

COMPREHENSIVE in equity, other than contributions from equity holders
INCOME Encompasses revenue and gains

EXPENSES Decreases in assets or increases in liabilities resulting in

decreases in equity, other than contributions to equity holders
Encompasses expenses and losses
5. RECOGNITION AND DERECOGNITION
 RECOGNITION
 Inclusion in the statement of financial position or the statement of financial performance an item
that meets the definition of an asset, a liability, equity, income or expenses
RECOGNITION RELEVANCE
CRITERIA FAITHFUL REPRESENTATION

 DERECOGNITION
 The removal of all or part of a recognized asset or liability from an entity’s statement of financial
position
ASSET When the entity loses control of all or part of the recognized asset

LIABILITY When the entity no longer has a present obligation for all or part
of the recognized liability

6. MEASUREMENT
 HISTORICAL COST
 Based on the transaction price at the time of initial recognition of the element

ASSET  Cost incurred to acquire the asset

 Consideration paid plus transaction cost

LIABILITY Value of consideration received to incur the liability minus

transaction cost
 Does not reflect changes in values, except to the extent that those changes relate to impairment

 CURRENT VALUE
 Elements are updated to values that reflect conditions at measurement date

FAIR VALUE The price that would be received to sell an asset, or paid to transfer a liability, in
an orderly transaction between market participants at the measurement date
 An exit price

VALUE IN USE Present value of cash flows expected from the continuing use of an asset and its
(asset) ultimate disposal
FULFILLMENT Present value of cash flows expected to settle a liability
VALUE (liability)
 An entity-specific value
 An exit price
 CURRENT ASSET: consideration that would be paid at the measurement date plus the
COST transaction costs to acquire an equivalent asset
LIABILITY: is the consideration that would be received or an equivalent liability
at the measurement date minus the transaction costs that would be incurred
 An entry price

7. PRESENTATION AND DISCLOSURES

 Information about assets, liabilities, equity, income and expenses is communicated through
presentation and disclosure in the financial statements.

 Effective communication of information in financial statements makes that information more relevant
and contributes to a faithful representation of an entity’s assets, liabilities, equity, income and
expenses

8. CONCEPT OF CAPITAL AND CAPITAL MAINTENANCE

CONCEPT OF CAPITAL

FINANCIAL CAPITAL PHYSICAL CAPITAL

 Net assets  Productive capacity
 Nominal monetary unit  Units of output per day
 Unit of constant purchasing
power

Profit = Net Asset End – Net Asset Beg Profit = Productive Capacity End
after excluding transactions with owners – Productive Capacity Beg
after excluding transactions with owners
STATEMENT OF FINANCIAL POSITION
The line items to be included on the face of the statement of financial position are: [IAS 1.54]
(a) Property, plant and equipment
(b) Investment property
(c) Intangible assets
(d) Financial assets (excluding amounts shown under (e), (h), and (i))
(e) Investments accounted for using the equity method
(f) Biological assets
(g) Inventories
(h) Trade and other receivables
(i) Cash and cash equivalents
(j) Assets held for sale
(k) Trade and other payables
(l) Provisions
(m) Financial liabilities (excluding amounts shown under (k) and (l))
(n) Current tax liabilities and current tax assets, as defined in IAS 12
(o) Deferred tax liabilities and deferred tax assets, as defined in IAS 12
(p) Liabilities included in disposal groups
(q) Non-controlling interests, presented within equity
(r) Issued capital and reserves attributable to owners of the parent

CURRENT ASSETS
 Presented as current asset if meets any of the following criteria:
 Cash or cash equivalent (presentation follows its purpose)
 Held for trading
 Expected to be realized within normal operating cycle
 To be realized within 12 months from balance sheet date
 Presented as Noncurrent asset if it does not meet any of the above criteria

CURRENT LIABILITIES
 Presented as current liability if meets any of the following criteria:
 Expected to be settled in the normal operating cycle
 To be settled within 12 months from balance sheet date
 Held for trading
 No right at the end of the reporting period to defer settlement of the liability for at least 12 months
after the reporting period
 Presented as Noncurrent liability if it does not meet any of the above criteria
REFINANCING OF CURRENTLY MATURING OBLIGATION

With existing right as of B/S

date to defer settlement at YES
Noncurrent Liability
least 12 months from B/S
date?

NO

Is refinancing completed on YES

Noncurrent Liability
or before B/S date?

NO Refinancing is done through:

current Liability  Extension of maturity date or

 Entering into a borrowing transaction,
proceeds of which will be used to settle
the maturing obligation
SUBSEQUENT EVENTS
An event which could be favorable or unfavorable, that occurs between the end of the reporting period and the
date that the financial statements are authorized for issue.
 Adjusting Events An event after the reporting period that provides further evidence or
conditions that existed at the end of the reporting period

Pre-existing Condition Subsequent Event

B/S date FS issuance date

 Non-adjusting Events An event after the reporting period that is indicative of a conditions
that arose after the end of the reporting period

Pre-existing Condition Subsequent Event

B/S date FS issuance date

Examples of adjusting events include:

 Events that indicate that the going concern assumption in relation to the whole or part of the entity is
not appropriate;
 Settlements after reporting date of court cases that confirm the entity had a present obligation at
reporting date;
 Receipt of information after reporting date indicating that an asset was impaired at reporting date;
 Bankruptcy of a customer that occurs after reporting date that confirms a loss existed at reporting date
on trade receivables;
 Sales of inventory after reporting date that give evidence about their net realizable value at reporting
date;
 Discovery of fraud or errors that show the financial statements are incorrect.
Examples of non-adjusting events, that would generally result in disclosure, include:

 Major business combinations or disposal of a major subsidiary;

 Major purchase or disposal of assets, classification of assets as held for sale or expropriation of major
assets by government;
 Destruction of a major production plant by fire after reporting date;
 Announcing a plan to discontinue operations.
STATEMENT OF COMPREHENSIVE INCOME
As a minimum, an entity shall include, in the statement of comprehensive income, line items that present the
following amounts for the period:

(a) Revenue [Refer: paragraph 2.25 (a)]

(b) Finance cost.
(c) Share of the profit or loss investments in associates (see Section 14 Investments in Associates) and
jointly controlled entity (see Section 15 Investment in Joint Ventures) accounted for using the equity
method [Refer: paragraphs 14.8 and 15.13].
(d) Tax expense excluding tax allocated to items (e), (g) and (h) below (see paragraph 29.27)
(e) A single amount comprising the total of
i. The post-tax profit or loss of a discontinued operation, and
ii. The post-tax gain or loss recognized on the measurement to fair value less costs to sell or on the
disposal of the net assets constituting the discontinued operation.
(f) Profit or loss (if an entity has no items of other comprehensive income, this line need not be presented)
(g) Each item of other comprehensive income (see paragraph 5.4 (b)) classified by nature (excluding
amounts in (h)).
(h) Share of the other comprehensive income of associates and jointly controlled entities accounted for by
the equity method.
(i) Total comprehensive income (if an entity has no items of other comprehensive income, it may use
another term for this line such as profit or loss).

Revenue 734,000
Gain in the fair value of investment property 1,000
Changes in inventories of finished goods and work in (26,480)
NATURE OF EXPENSE progress (378,000)
Raw material and consumables used
 Expenses are aggregated (78,000)
Employee benefits expense
according to their nature (25,600)
Depreciation and amortization expense -
 Examples Impairment of property, plant and equipment
(3,000)
 Depreciation expense Advertising costs
(2,000)
 Purchases Raw material freight costs
(400)
 Transportation fees Operating lease expense
(22,300)
 Salary expense Finance costs
(100)
Share of associate’s losses
Profit before tax 199,120
Income tax expense (49,780)
Profit for the year from continuing operations 149,340
Loss for the year from discontinued operations (24,780)
PROFIT FOR THE YEAR 124,560
Other comprehensive income:
Exchange differences on translating foreign operations, net 10,260
of tax (720)
Actuarial losses on defined benefit pension plans, net of (3,800)
tax 1,560
Change in the fair value of hedging instruments, net of tax
Reclassified gains (losses) on hedging instruments to profit
or loss
Other comprehensive income for the year, net of tax 7,300
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 131,860
 Revenue 734,000
Gain in the fair value of investment property 1,000
Cost of sales (a) (458,280)
FUNCTION OF EXPENSE Distribution Costs (b) (29,300)
Administrative expenses (c) (25,900)
 Expenses are grouped Finance costs (22,300)
according to their function Share of associate’s losses (100)
 Examples
Profit before tax 199,120
Income tax expense (49,780)
COST OF GOODS SOLD:
Profit for the year from continuing operations 149,340
Related to the cost of products sold
Loss for the year from discontinued operations (24,780)
SELLING EXPENSES: PROFIT FOR THE YEAR 124,560
related to selling, advertising and delivery Other comprehensive income:
Exchange differences on translating foreign operations, net 10,260
GENERAL AND ADMINISTRATIVE EXP: of tax (720)
related to cost of running the business Actuarial losses on defined benefit pension plans, net of tax (3,800)
Change in the fair value of hedging instruments, net of tax 1,560
Reclassified gains (losses) on hedging instruments to profit
or loss
Other comprehensive income for the year, net of tax 7,300
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 131,860

 ITEMS OF OCI RECYCLED TO P/L

 Gain and loss arising from translating the financial statements of a foreign operation
 Gain and loss on remeasurement of debt investment at FVOCI
 The effective portion of gain or loss on hedging instrument in a cash flow hedge

 ITEMS OF OCI NOT RECYCLED TO P/L

 Gain or loss on remeasurement of Define Benefit Obligation
 Gain or loss on remeasurement on Equity investment at FVOCI
 Gain or loss of financial liability designated at FVPL attributed to Credit risk
 Revaluation Surplus
ACCOUNTING CHANGES AND PRIOR PERIOD ERRORS
ACCOUNTING ESTIMATE
 Definition of Accounting Estimate
o Monetary amount in the financial statements that is subject to measurement uncertainty
o Monetary uncertainty
 Monetary amounts  cannot be directly observed
 Estimated
 Examples
o Loss allowance for expected credit loss
o NRV of inventory and inventory obsolescence
o Fair value of asset and liability
o Depreciation
o Provision of warranty
 Change in accounting estimate
o New information or new development
o Does not relate to prior periods  not correction of error
o Normal recurring correction or adjustment to an asset or liability
 Reporting change in accounting estimate
o Currently and prospectively by including in profit or loss
 Period of change only
 Period of change and future periods
ACCOUNTING POLICY
 Accounting policy
o Principles, bases, conventions, rules and practices applied in preparing and presenting the
financial statements
o Change in accounting policy
 Required by PFRS
 If there is no requirements by PFRS, the change will result more relevant and faithfully
represented information (voluntary change)
o Reporting change in accounting policy
 Transitional provisions
 If no transitional provisions, apply retrospectively
 If retrospectively, restate financial statements of prior periods.
PRIOR PERIOD ERROS
 Omissions and misstatements in the financial statements for one or more periods arising from a failure
to use or misuses of reliable information that:
o Was available when financial statements for those periods were authorized for issue
o Could reasonably be expected to have been obtained and taken into account in the preparation
and presentation of those financial statements
 Errors may result from the following:
o Mathematical mistakes
o Errors in applying accounting policies
o Misinterpretation of facts
o Fraud
o Oversight
 Treatment of prior period errors
o Retrospectively
o If comparative FS are presented
 FS of prior period shall be restated
 Retrospective restatement
NONCURRENT ASSET HELD FOR SALE AND DISCONTINUED OPERATIONS
NONCURRENT ASSET HELD FOR SALE
 Examples of noncurrent assets within the scope of IFRS 5
o Property, plant, equipment
o Intangible assets
o Investment property using cost model
 Examples of noncurrent assets outside the scope of IFRS 5
o Financial assets within the scope of IFRS 9
o Deferred tax asset
o Investment property using fair value model
 Held for sale
o Available for immediate sale in its present condition
o The sale is highly probable
 Highly probable
o Commitment to sell the asset
o Active program in locating a buyer
o Completed sale within 12 months after the date of classification as held for sale
o Sale price is reasonable
o Unlikely that the plan to sell will be changed or withdrawn
 Measurement
o Lower of carrying amount and fair value less cost of disposal (FVLCOD)
o If FVLCOD is lower, recognized impairment loss.
o Subsequent increase in FVLCOD – allowed to recognize gain on reversal of impairment loss but
limited to impairment losses previously recognized
o No depreciation or amortization
 Presentation in the financial statements
o Current asset
 Change in classification
o Criteria for being held for sale is no longer met.
o Measurement is lower of:
 Carrying amount before the asset was classified as held for sale adjusted for any
depreciation and amortization if it had not been held for sale
 Recoverable amount – higher of
 Fair value less cost of disposal
 Value in use
o Any difference between the carrying amount per books and measurement is
 Recognize immediately in profit or loss
 Recognize as revaluation increase or decrease, if the asset’s policy before held for
sale is the revaluation model
DISCONTINUED OPERATION
 Component of an entity
o Operation is clearly distinguishable operationally and for financial reporting purposes from the
rest of the entity
o Operation has its own assets, liabilities, income and expense
 Assets, liabilities, income and expense will be eliminated when the operation is
discontinued

 Discontinued operation
o Either actually disposed of or classified as held for sale
o Represents a separate major line of business or geographical area of operations
o Part of a single coordinated plan to dispose of a separate major line of business or geographical
area of operations
o Subsidiary acquired exclusively with a view to resale

 Income statement
o Income or loss from discontinued operations
o Presented, net of tax
o Presented below “continuing operations” but before “profit or loss”

 Included in income or loss from discontinued operations

o Revenue, expense and income or loss and the related income tax
o Impairment loss on assets
o Gain or loss on actual disposal of assets and settlement of liabilities
o Termination cost of employees

 Statement of financial position

o Assets of the operation are reported separately under current assets
o Assets are measured at lower of carrying amount and FVLCOD
o Noncurrent assets in the group are not depreciated
o Liabilities of the operation are reported separately under current liabilities

 Statement of cash flow

o Cash flows of the operation are reported separately, or
o Disclosed in the notes
OPERATING SEGMENT AND INTERIM REPORTING
OPERATING SEGMENT
 Core principle
o Disclose the financial information about the business activities in which an entity engages and
the economic environments in which it operates
 Scope of PFRS 8
o Shall apply separate financial statements and to consolidated financial statements
o Debt or equity instruments of the entity are traded in a public market
o Entity files or is in the process of filing the consolidated financial statements with securities
commission for the purpose of issuing any class of instrument in the public market
o If the financial report contains both separate FS of parent and consolidated FS of parent,
segment information is required only in the consolidated FS.

 Operating segment
o Engages in business activities including intersegment transactions
o Segment profit or loss is reviewed by the chief operating decision maker to allocate resources
and assess performance of the segment
o Discrete information is available

 Identifying operating segments

o Management approach
 Based on reports that are regularly reviewed by the chief operating decision maker
 Components that are important for internal management reporting.

 Reportable segment (satisfy any of the following criterion)

o Segment revenue is at least 10% of the total revenue of all operating segments
o Segment profit or loss is at least 10% of the greater between, in absolute amount:
 Total profit of all operating segments that reported profit
 Total loss of all operating segments that reported loss
o Segment assets are at least 10% of the total assets of all operating segments

 Operating segments that do not meet any of the quantitative thresholds

o May still be considered reportable, if management believes that information about the segment
will be useful to FS users

 75% external revenue threshold

o Total external revenue of the reportable segment should be at least 75% of the entity external
revenue
o If less that 75%, additional operating segments shall be identified as reportable even if the “10%
threshold” were not met, until at least the 75% threshold is met.
 Two or more segments may be aggregated into a single operating segment if the
segments have similar economic characteristics and share a majority of the following:
 Product, productions process, class of customer, marketing method, and
regulatory environment
INTERIM REPORTING
 Preparation and presentation of financial statements for a period of less than one year.
 Optional
 Publicly traded entities are encouraged to provide at least semiannual financial statements.
 Two views
o Integral view
 An interim period is an integral part of an annual period
 Costs which clearly benefit the entire year are allocated over the interim periods
benefited
o Independent view
 An interim period is separate accounting period
 Allocations are not allowed, unless such allocation is appropriate for annual reporting.
 Apply the same accounting policies in the interim financial statements as are applied in the annual
financial statements
 Interim measurements shall not affect annual measurements
o Year to date basis
PAS 24 RELATED PARTY DISCLOSURES
RELATED PARTIES
 RELATED PARTY
 A party that has the ability to (a) control the other party, or (b) exercise significant influence over the
other party in making financial and operating decisions, or if the related party entity and another entity
are subject to common control

 Joint venture
 Associate
 Control
 Key management personnel CLOSE FAMILY MEMBERS:
 Post-employment benefit plan
Children
Spouse or domestic partner
Dependents

RELATED PARTY DISCLOSURES

 RELATIONSHIP BETWEEN PARENT AND SUBSIDIARIES
 Name of Parent entity
 Ultimate Controlling party
 Next most senior parent that produces FS for public use

 MANAGEMENT COMPENSATION
 Short term employee benefit: Wages and salaries
 Post-employment benefit: Defined Benefit/Contribution Plans
 Other long-term benefit: Sabbatical Leave
 Termination benefits
 Share based payment benefits: Share options / Share Appreciation Rights

 RELATED PARTY TRANSACTIONS

 Nature of relationship
 Information about transactions and outstanding balance
- Amount of transactions - Allowance for doubtful accounts
- Outstanding balances - Bad debt expense
CASH AND CASH EQUIVALENTS
CASH
 DEFINITION
 Standard medium of exchange
 Must be unrestricted and immediately available for use in current operation

- On hand - Current assets

- Withdrawn immediately - Current liabilities
- Current operating expenses

CASH ON HAND: UNDEPOSITED CASH COLLECTIONS

- Bills and Coins
- Customer’s checks
- Traveler’s checks
- Money orders
CASH - Bank Drafts
ITEMS
WORKING FUNDS
- Petty cash fund
- Payroll fund
- Tax fund

CASH IN BANKS: DEMAND DEPOSITS

- Checking account
- Savings account

 PRESENTATION
 Current asset in the face of statement of financial position
 Presentation of cash must parallel the intention for which cash is held
Purchase of PPE next year: x Cash

Settlement of liability next year: ✓ Cash

 MEASUREMENT
 Generally at Face Value (equals fair value)
 Unrestricted Cash in foreign currency: convert to Peso
 Cash in closed banks: receivable at recoverable amount
ITEM TREATMENT
Customer’s post-dated check Receivable
Customer’s stale check Receivable
Company’s post-dated check Payable
Company’s stale check Cash
Company’s undelivered check Payable
Compensating balance
NOT LEGALLY restricted as to withdrawal Cash
LEGALLY restricted as to withdrawal Noncash
Bank Overdraft Generally: Liability
Exception: Offset

- Within Same Bank with two accounts

- Right of offset exist
CASH EQUIVALENT
 DEFINITION
 Short term, highly liquid investments that are readily convertible to cash
 Matures within 3 months (90 days) or less from acquisition date

ITEM TREATMENT
Treasury bills* Cash Equivalent
Treasury bonds and notes Noncurrent asset
Commercial papers* Cash Equivalent
Money market instruments* Cash Equivalent
Time deposits* Cash Equivalent
Equity Securities Current/noncurrent asset
Redeemable preference shares* Cash Equivalent

*Purchased 3 months or less from maturity date

PETTY CASH FUND

 DEFINITION
 Money set aside to pay small amount of expenses

 ACCOUNTING
 FLUCTUATING FUND SYSTEM
 Petty cash disbursements are immediately recorded resulting in a fluctuating petty cash
balance
 IMPREST FUND SYSTEM
 All cash receipts to be deposited intact and all cash disbursements to be made through checks

ESTABLISHMENT/INCREASE COUNT OF PCF

BAL Bills and coins
Cash Items xx Good checks
Petty cash fund xx Non-cash items xx
Cash in Bank xx TOTAL COUNT xx Expenses w/ PCF
IOUSs
DISBURSEMENTS
Total Count < PCF Bal
No entry = Cash shortage Various exp xx
Cash short xx
REPLENISHMENT Total Count > PCF Bal PCF xx
=Cash Overage
Various Expenses xx
Cash in Bank xx
Various exp xx
AJE PCF xx

Various Expenses xx Cash in Bank xx

Petty cash fund xx Cash over xx
ACCOUNTS RECEIVABLE
ACCOUNTS RECEIVABLE
 DEFINITION
 Receivable represent claim from others for money, goods or services
 ACCOUNTS RECEIVABLES are trade receivables on open accounts not evidenced by promissory
notes

 RECOGNITION
 Recognized when and only when the entity becomes a party to the contractual provision of the
instrument

 MEASUREMENT Amount an entity expects to be entitled in

 INITIAL: at Transaction Price: exchange for the transfer of goods and
services

CONTRACTUAL TERMS RECOGNITION OF RECEIVABLE AND OWNER OF GOODS

REVENUE
FOB Shipping point On Shipment Date Buyer
FOB Destination On Date of Receipt Seller

CONTRACTUAL TERMS SHOULD PAY FREIGHT PAID FREIGHT TREATMENT

FOB Shipping pt., Freight Prepaid Buyer Seller Plus receivables
FOB Shipping pt., Freight Collect Buyer Buyer No adjustments
FOB Destination, Freight Prepaid Seller Seller No adjustments
FOB Destination, Freight Collect Seller Buyer Minus receivables

DISCOUNTS
 TRADE DISCOUNTS
 Volume discounts (i.e., 5%, 10%, 15%)
 Deducted from list price to get invoice price
 Not recognized

 CASH DISCOUNTS (Sales Discount)

 Inducement for prompt payment (i.e., 2/10, n30)
 Deducted from invoice price to get the amount collectible
 Recognized - Gross method
- Net method
- Allowance method

SALES DISCOUNTS
GROSS METHOD NET METHOD ALLOWANCE METHOD
DATE OF SALE AR 1000 AR 980 AR 1000
P1000, 2/10, n/30 SALES 1000 SALES 980 ALLOW FOR SD 20
SALES 980
COLLECTION CASH 980 CASH 980 CASH 980
WITHIN SD 20 AR 980 ALLOW FOR SD 20
DISCOUNT AR 1000 AR 1000
PERIOD
COLLECTION CASH 1000 CASH 1000 CASH 1000
BEYOND AR 1000 AR 980 ALLOW FOR SD 20
DISCOUNT SD FORFEITED 20 AR 1000
PERIOD SD FORFEITED 20
YR AJE DISC SD 20 None None
PERIOD NOT ALLOW FOR SD 20
LAPSED
YR AJE DISC None AR 20 ALLOW FOR SD 20
PERIOD LAPSED SD FORFEITED 20 SD FORFEITED 20

SALES DISCOUNT – contra sales account

ALLOWANCE FOR SALES DISCOUNT – contra accounts receivable account
SALES DISCOUNT FORFEITED – reported as other income
SUBSEQUENT MEASUREMENT
 NET REALIZABLE VALUE
 Represents the amount of cash expected to be recovered from the contractual cash flow of the
receivable

Accounts Receivable xx ALLLOWANCE FOR DOUBTFUL ACCOUNTS

Allowance for Doubtful Accounts (xx)
Allowance for Sales Discount (xx) Bad Debts Expense xx
Allowance for Freight (xx) Allowance for Doubtful Accounts xx
Allowance for Sales Return (xx) ALLLOWANCE FOR SALES DISCOUNT
NET REALIZABLE VALUE
xx Sales Discount xx
Allowance for Sales Discount xx
ALLLOWANCE FOR SALES RETURN ALLLOWANCE FOR FREIGHT
Sales Return xx Freight Out xx
Allowance for Sales Return xx Allowance for Freight xx

ACCOUNTING FOR DOUBTFUL ACCOUNTS

 ESTIMATION METHODS
 PERCENTAGE OF CREDIT SALES
- % of Credit Sales = Bad Debt Expense
- Favors Income Statements
- ✓ matching principle

 PERCENTAGE OF RECEIVABLES
- % of AR end = ADA required end balance
- Favors Statement of Financial Position
- x matching principles

 AGING OF RECEIVABLES
- Various % x Various AR = ADA required end balance
- Favors Statement of Financial Position
- x matching principle
ALLOWANCE METHOD DIRECT WRITE-OFF METHOD
DOUBTFUL OF COLLECTION BDE xx None
ADA xx
WORTHLESS ADA xx BDE xx
(100% Uncollectible) AR xx AR xx
RECOVERY AR xx AR xx
ADA xx Recovery of BDE xx

Cash xx Cash xx
AR xx AR xx

ACCOUNTS RECEIVABLE
Beg Collection Bad debts expense is Bad debts expense is
Net Credit Sales Write-Off recognized when AR is only recognized when
Recovery Recovery doubtful collection AR is worthless
End
✓ Matching Principle x Matching Principle
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Write-off Beg
Recovery
Bad Debt Expense
End
RECEIVABLE FINANCING
RECEIVABLE FINANCING
 DEFINITION
 Advancing the collection of cash from receivables

PLEDGE NOTIFICATION

ACCOUNTS NON-NOTIFICATION
ASSIGNMENT
RECEIVABLES
FACTORING W/O RECOURSE
W/ RECOURSE

DISCOUNTING
NOTES W/O RECOURSE SECURED
RECEIVABLES BORROWING

DISCOUNTING
CONDITIONAL
W/ RECOURSE SALE
PLEDGE AND ASSIGNMENT

PLEDGE ASSIGNMENT
- Use of receivables as collateral for loan - Use of receivables as collateral for loan
- General assignment - Specific assignment
- No derecognition of receivable - No derecognition of receivables
- Only disclosure of AR used as collateral - AR assigned xx
AR xx
- Equity in Assigned AR = AR assign –
Notes Payable
NON-NOTIFICATION NOTIFICATION

BANK
COMPANY

PAY
PAY
CUSTOMER BANK CUSTOMER
COMPANY

FACTORING
 Selling of accounts receivable to a financing institution known as factor (i.e., bank)
 With transfer of ownership to the factor

 FACTOR’S HOLDBACK  SERVICE FEE AR Factored xx

 To cover for probable  % of receivables factored Factor’s Holdback (xx)
sales discounts, returns Service Fees (xx)
and allowances Interest expense (xx)
 INTEREST Proceeds xx
 Based on weighted
 Debit: Receivable from average time to maturity
Factor Loss on Factoring
 W/O RECOURSE W/ RECOURSE
- An outright sale (AR is derecognized) - Company guarantees payment to Factor in the
event the customer defaults
(AR is still derecognized)
- No liability in case the customer fails to pay - With liability to Factor
(Recourse Liability at Fair Value)
- Factor bears the loss for uncollectible accounts - Company bears the loss for uncollectible
accounts

 INITIAL ENTRY  CUSTOMER PAYS

Loss on recourse obligation xx Recourse Liability xx

Loss on recourse obligation xx
Recourse liability xx
 CUSTOMER DEFAULTS
Loss on recourse obligation xx (company pays)
Service Fees (xx)
Interest expense (xx) Recourse liability xx
Initial loss on Factoring xx Cash xx

DISCOUNTING
 Holder endorses the note to a bank in exchange for maturity value of the note less discount
 NET PROCEEDS = Maturity Value – Bank Discount

 NON-INTEREST-BEARING N/R: MV = Face Value

 INTEREST BEARING NR: MV = Face Value + Interest for Full Term

 BANK DISCOUNT = MV x Discount Rate x Unexpired term

W/O RECOURSE W/ RECOURSE

- Company is not liable if the maker defaults - Company is liable if the maker defaults
- Absolute sale (N/R is derecognized)

 CONDITIONAL SALE  SECURED BORROWING

 A contingent liability equal to the  A liability equal to the face of the
face of the NR is disclosed NR is recognized

 NR is derecognized thru NR  NR is not derecognized

Discounted account
 Cr: Liability on NR Discounted
 Cr: NR discounted

Loss on discounting: w/o Recourse

Net Proceeds xx : Conditional Sale
CV of NR on discount Date (xx)
xx Interest expense: Secured Borrowing
NOTES RECEIVABLE
NOTES RECEIVABLE
 DEFINITION
 A formal claim against another that is evidenced by a written promise

 INITIAL MEASUREMENT
 Initially measured at Trade receivable: transaction price
Other receivables: fair value plus transaction cost

TERM INITIAL MEASUREMENT

SHORT TERM Fair value = face value
LONG TERM
NON-INTEREST BEARING 1. Cash price equivalent
2. Fair value = present value of future cash flows using
prevailing interest rate

INTEREST BEARING
REALISTIC RATE (NOM = EFF) Fair value = face value
UNREALISTIC RATE (NOM ≠ EFF) 1. Cash price equivalent
NOM > EFF: Premium 2. Fair value = present value of future cash flows using
NOM < EFF: Discount prevailing interest rate

 SUBSEQUENT MEASUREMENT
 Initially measured at face value, at net realizable value
 Initially measured at present value, at amortized cost using the effective interest method

TERM SUBSEQUENT MEASUREMENT

SHORT TERM Face amount or expected settlement amount
LONG TERM
NON-INTEREST BEARING At amortized cost using effective interest method

INTEREST BEARING
REALISTIC RATE (NOM = EFF) Face amount or expected settlement amount
UNREALISTIC RATE (NOM ≠ EFF) At amortized cost using effective interest method
NOTES RECEIVABLE AND LOAN IMPAIRMENT
 VALUATION OF NOTES RECEIVABLE
o Short term notes receivable (whether interest bearing or noninterest bearing)
 Initial measurement
 Theoretically, should be measured at cash price or present value
 By convention, may be measured at face amount because the effect of
discounting is usually immaterial
 Subsequent measurement
 Amortized cost
 Face amount less principal collections less any impairment losses

o Long term notes receivable (interest bearing)

 Effective interest rate = stated interest rate
 Initial measurement
 At face amount (face amount = present value of note)
 Subsequent measurement
 Amortized cost
 Face amount less any principal collection less any impairment losses

o Long term notes receivable

 Noninterest bearing or interest bearing, but effective interest rate ≠ stated interest rate
 Initial measurement
 At present value

 Subsequent measurement
 Amortized cost
 Face amount plus any unamortized premium less any unamortized discounts
less any principal collections less any impairment losses

 IMPAIRMENT OF FINANCIAL ASSETS

o Present value of all cash shortfalls over the expected life of the financial instrument
o Cash shortfall: Difference between contractual cash flows that are due to the entity and the
expected cash flows to be received by the same entity. Note that the contractual
cash flows should be higher than the expected cash flows.

o Impairment is recognized if CA of the financial assets > PV of the expected future cash flows
o Unbiased and probability-weighted amounts

o Time value of money: original effective interest rate is the discount rate

o Reasonable and supportable information

o Expected credit loss (impairment) is presented through an allowance (valuation) account for
financial assets measured at amortized cost

o The following are examples of financial assets that are tested for impairment
 Debt instruments measured at amortized cost
 Debt instruments measured at FVOCI
 Lease receivables under PFRS 16

o The following are examples of financial assets that are not subject to impairment:
 Equity instruments measured at FVPL
 Equity instruments measured at FVOCI
 Debt instruments measured at FVPL
 3-STAGE IMPAIRMENT MODEL
o Recognition of impairment is “forward-looking”
o Recognize impairment once an entity purchases a debt-type financial asset or originates a loan
or receivable
o Recognition of impairment does not depend on identifying a credit loss event but estimates the
expected credit loss that may arise from this asset

o STAGE ONE
 No significant decline in credit quality since initial recognition
 Has low credit risk
 Recognize 12-month expected credit loss:
 Represents the ECL that are possible within 12 months after the end of the
reporting period
 Interest income is computed based on the gross carrying amount.
 Gross carrying amount is the carrying amount of the loan without deducting the
allowance for impairment loss

o STAGE TWO
 Significant decline in credit quality since initial recognition but has no objective evidence
of impairment.
 There is a rebuttable presumption that a significant decline in credit quality exist when the
contractual payments are more than 30 days past due.
 Recognize lifetime expected credit loss
 Expected credit loss from all default events over the expected life of the instrument
 Interest income is computed based on the gross carrying amount

o STAGE THREE
 Objective evidence impairment
 Significant financial difficulty of the issuer or obligor
 Breach of contract, such as a default or delinquency in interest or principal
payments
 The lender, for economic or legal reasons relating to the borrower’s financial
difficulty, granting to the borrower a concession that the lender would not
otherwise consider
 It is becoming probable that the borrower will enter bankruptcy or other financial
reorganization
 The disappearance of an active market for the financial assets because of
financial difficulties
 Observable data indicating that there is a measurable decrease in the estimated
future cash flows from the financial asset since the initial recognition of the asset.

 Recognize lifetime expected credit loss

 Interest income is computed based on the net carrying amount

 Net carrying amount is the carrying amount of the financial asset after deducting
allowance impairment loss
INVENTORY
 DEFINITION OF INVENTORIES
o Held for sale in the ordinary course of business (finished goods)
o In the process of production for such sale (work in process)
o Materials or supplies to be consumed in the production process or in the rendering of services
(raw materials and factory supplies

 OWNERSHIP
o An entity has title to the goods when:
 Goods are owned and on hand
 Goods in transit and sold FOB Destination
 Goods in transit and purchased FOB Shipping Point
 Goods out on consignment
 Goods in the hands of salesman or agents
 Goods held by customers on approval or trial

 FREIGHT TERMS
o Responsible for the freight
 FOB Shipping Point – Buyer
 FOB Destination – Seller
o Actually paid for freight but not necessarily responsible
 Freight prepaid – Seller
 Freight collect – Buyer

 GROSS METHOD VS NET METHOD

o Gross Method
 Purchases are recorded at gross amount
 Purchase discounts are recorded only when taken
 Purchase discounts are deducted from gross amount of purchase

o Net Method
 Purchases are recorded at net method
 Purchase discounts are deducted from invoice amount, whether taken or not
 Recognize purchase discounts lost if payment is beyond the discount period
 Purchase discount lost is treated as an expense
INVENTORY COST FLOW AND LCNRV
 INVENTORY COST FLOW ASSUMPTION
o If the goods are ordinarily interchangeable
 FIFO (periodic or perpetual)
 Inventory ending is stated at the most recent prices
 Costs of goods sold and inventory are the same whether periodic or perpetual

 Weighted average periodic

 Weighted average cost per unit is multiplied by the number of units on hand

 Weighted average unit cost is computed as:

o Total cost of goods available for sale ÷ Total units available for sale

 Weighted average perpetual (moving average)

 Weighted average unit cost has the same formula as above but is recomputed after every
purchase and purchase returns only.

o If the goods are not ordinarily interchangeable

 Specific identification
 Specific costs are attributed to specific inventory

 LOWER OF COST AND NET REALIZABLE VALUE

o Inventory is measured at the lower of cost or net realizable value (LCNRV)

o Net realizable value is the estimated selling price less estimated cost of completion and estimated
cost of disposal

o LCNRV method is applied on an item-by-item basis

o If NRV is lower than cost, the decrease is an expense included in computing cost of goods sold

o If there is a subsequent increase in NRV, a gain is recognized but is only limited to any cumulative
losses previously recognized. The gain is a deduction from cost of goods sold

o Allowance method
 Inventory write-down is maintained in a valuation account
 The loss or gain is reported separately but part cost of goods sold

o Direct method
 The loss or gain is not reported separately but buried in computing cost of goods sold

 PURCHASE COMMITMENT
o Purchase goods at a fixed price and fixed quantity at a certain future date
o Application of LCNRV
 Market price is below the fixed price, recognize loss and an estimated liability
 When market price increase, recognize gain but limited to previous loss only
 The amount or purchase is the lower of market price or fixed price
 Cash payment is always based on the fixed price
BIOLOGICAL ASSETS
PAS 41
 AGRICULTURAL ACTIVITY
o Management by an entity of the biological transformation and harvest or biological assets for
sale or conversion into agriculture produce or into biological assets

BIOLOGICAL TRANSFORMATION  Growth

 Degeneration
 Production
 Procreation

HARVEST  Detachment of produce from biological asset

 Cessation of biological asset’s life

APPLIES TO : Biological assets except bearer plants

: Agricultural produce at the point of harvest

 BIOLOGICAL ASSETS
 Living animals or plants
 Can either be:

CONSUMABLES BEARER
 Livestock intended for sale  Livestock from which milk is produced
 Fish in farms
 Crops such as wheat
 Trees grown for lumber

MEASUREMENT
 BIOLOGICAL ASSETS
 RECOGNITION PRINCIPLE
 Entity controls the asset as a result if past event
 Probable inflow of economic benefits
 Fair value or cost of the asset can be measured reliably

 INITIAL AND SUBSEQUENT MEASUREMENT:

 At fair value less cost to sell

 FAIR VALUE LESS COST TO SELL

Price that would be received to Incremental cost directly attributable to the disposal of an
sell an asset in an orderly asset, excluding finance cost and income tax
transaction between market
Includes:
participants at the measurement
date - Commissions to brokers and dealers
- Levies by regulatory agencies
- Transfer tax and duties

INPUT DESCRIPTION EXAMPLES

Level 1 Observable Quoted prices (unadjusted) in active markets for identical assets
Level 2 Observable Quoted prices for similar assets in active markets
(other than Level 1) Quoted prices for identical or similar assets in markets that are not active
Inputs other than quoted prices that are observable for the asset
Level 3 Unobservable Present value of future cash flows from the asset
  BIOLOGICAL ASSETS
 Changes in fair value less cost to sell: to P/L

PRICE Difference between prices at the beginning and end

CHANGE of the period w/o considering the physical growth.
SAME AGE, DIFFERENT DATES

PHYSICAL Difference between prices at the end of the period

CHANGE considering changes in the price due to physical growth
DIFFERENT AGE, SAME DATE
 IF FAIR VALUE CAN’T INITIALLY BE DETERMINED
 Initial: Cost
 Subsequent: Cost – Accumulated Impairment Loss – Accumulated Depreciation

AGRICULTURAL PRODUCE

 Harvested product of the biological asset or bearer plant

 INITIAL MEASUREMENT:
At fair value less cost to sell at point of harvest
 Recognized as a gain from agricultural produce upon harvest
 SUBSEQUENT MEASUREMENT
generally at LCNRV since it will be accounted for as inventory
Biological Assets Agricultural Produce Products that are the result of
processing after harvest
Sheep Wool Yarn, carpet
Trees in a timber plantation Felled trees Logs, lumber
Dairy cattle Milk Cheese
Pigs Carcass Sausages, cured hams
Cotton plants Harvested cotton Thread, clothing
Sugarcane Harvested cane Sugar
Tobacco plants Picked leaves Cured tobacco
Tea bushes Picked leaves Tea
Grape vines Picked grapes Wine
Fruit trees Picked fruit Processed fruit
Oil palms Picked fruit Palm oil
Rubber trees Harvested latex Rubber products
Some plants, for example, tea bushes, grape vines, oil palms and rubber trees, usually meet the
definition of a bearer plant and are within the scope of IAS 16. However, the produce growing on
bearer plants, for example, tea leaves, grapes, oil palm fruit and latex, is within the scope of IAS 41

BIOLOGICAL ASSETS
Under
BEARER PLANTS: living plant that is PPE
 Used in the production or supply of agricultural produce
 Expected to bear produce for more than one period
 Has a remote likelihood of being sold as agricultural produce
except as scrap
 Initial: at cost
 Subsequently: Cost model or Revaluation model
Biological
DUAL PURPOSE PLANTS PPE

 Cultivated for bearing agricultural produce

 Can be sold as a living plant or agricultural produce
AGRICULTURE
 Biological Assets
o Living animals and plants
o Fair value less cost of disposal (FVLCOD)
o Any adjustments to FVLCOD are recognized in profit or loss
o If on initial recognition, the fair value cannot be determined, the asset is measured at cost less
accumulated depreciation and accumulated impairment losses
o Once fair value can be clearly measured, measure the asset at FVLCOD

 Agricultural produce
o Harvested product of a biological asset or a bearer plant
o When the produce is still growing on a biological asset or bearer plant, the produce is measured
at FVLCOD
 Changes in FVLCOD is recognized in profit or loss
 The produce is classified as Biological Asset.
o When the produce is harvested, the produce is measured at FVLCOD at the point of harvest
 The produce is classified as Inventory.
 The harvested product is treated as a gain from agricultural produce.

 Bearer plant
o Used in the production or supply of agricultural produce
o Expected to bear produce for more than one period
o Remote likelihood of being sold as agricultural produce, except for incidental scrap sales
o Property, plant and equipment
 Cost model or Revaluation model

 Bearer animals
o To give birth to animals
o For simplicity, they remain as biological assets.

 Animals in recreational activities

o No agricultural
o Natural breeding is incidental only
o Property, plant and equipment
 Cost model or Revaluation model

 Plant with dual use

o Cultivated for bearing agricultural produce
o Plant can be sold as a living plant or agricultural produce
o The plant is a biological asset.
GROSS PROFIT METHOD
INVENTORY ESTIMATION
 USEFUL:
o When interim financial statements are prepared
o When inventory is destroyed by catastrophes
o When testing the validity of inventory cost using either Periodic or Perpetual Inventory System

 GROSS PROFIT METHOD:

 Assumes that the relationship of Gross Profit and Sales remains stable over time

 Useful when:
 Preparing interim FS
 When physical count is not possible or to test its reasonableness
 When inventory is destroyed by catastrophes

 COST OF GOODS SOLD

CGS FLA: CGS FLA:

Beg Inventory P xx
Net Purchases xx TGAS xx
TGAS xx CGS xx
End Inventory (xx) Estimated EI xx
CGS xx

GP based on COST:
GP based on SALES:
𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠
CGS =
CGS = (1 – GP%) x Net Sales 1+𝐺𝑃%

RETAIL INVENTORY METHOD

RETAIL INVENTORY
 Estimates the cost of inventory using Cost-to-Retail ratio

 Requires a retailer to keep a record of:

o Cost and retail prices of goods purchased
o Cost and retail prices of goods available for sale
o Sales for the period

 ADVANTAGES
o Can approximate inventory without physical count
o Expedites physical inventory count

𝑻𝑮𝑨𝑺 @ 𝑪𝒐𝒔𝒕
COST-TO-RETAIL RATIO =
𝑻𝑮𝑨𝑺 @ 𝑹𝒆𝒕𝒂𝒊𝒍
Beginning Inventory Mark up Mark down
Average Method ✔ ✔ ✔
Conservative Method ✔ ✔ ✖
FIFO Method ✖ ✔ ✔

*Conservative = Conventional = LCNRV

EQUITY INVESTMENTS
CLASSIFICATION OF EQUITY SECURITIES
0% 20% 50% 100%

Less than 20% 20% - 50% More than 50%

Presumption: Presumption: Presumption:
Investor doesn’t have Investor has significant Investor has control over the investee
significant influence influence over the investee company.
over the investee company.
Parent-subsidiary relationship exists.
company.
Investment in associates
EIFVPL or joint venture
EIFVOCI
EQUITY METHOD:
- No Share in NI/NL
- With Share in NI/NL
- No Share in OCI
- With Share in OCI
- Dividend Income
- Dividends are return of
investment

INVESTMENT IN EQUITY SECURITIES

HELD FOR NO AT INCEPTION DATE YES CARRY AT FAIR VALUE

TRADING? ELECTS TO CARRY THROUGH OCI?
AT FAIR VALUE
THROUGH OCI?
YES
NO

CARRY AT FAIR VALUE THROUGH PROFIT OR

LOSS

HELD FOR TRADING NOT HELD FOR TRADING

 EIFVPL  EIFVPL  generally
- Initial: Fair Value  EIFVOCI  irrevocable choice
Transaction Cost: Expensed - Initial: Fair Value + Transaction Cost
- Subseq: Fair Value - Subseq: Fair Value
∆Fair Value  P/L ∆Fair Value  OCI
- Dividends: Income - Dividends: Income
- Sale: G/L  P/L - Sale: Accumulated URG/L: to RE
- To P/L: ∆ FV - To P/L: Dividend income
: Dividend income
: Transaction cost
: G/L on sale

UNQUOTED EQUITY INVESTMENT

 COST MODEL

- Initial: Purchase Price + Transaction Cost

- Subseq: Cost less Impairment loss

- Dividends: Income

- Sale: G/L  P/L

- To P/L: Dividend income

: Gain/Loss on Sale
: Impairment Loss
SUBSEQUENT TRANSACTIONS
 SHARE SPLIT  BOND ISSUE/ SHARE DIVIDENDS (same
 Memorandum only: class)
X Company effected a 2:1 share split on  Memorandum only:
its ordinary shares. The entity now holds Received 200 ordinary shares of X Company
a total of 4,000 ordinary shares of X representing 20% bonus issue on 1,000
Company shares previously held
 Changes the number of shares held by investors

 Total Carrying value of investment is unchanged

𝑇𝑜𝑡𝑎𝑙 𝐶𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝑉𝑎𝑙𝑢𝑒 𝑖𝑛 𝑃𝑒𝑠𝑜

 Carrying value per share changes =
𝑂𝑙𝑑 𝑠ℎ𝑎𝑟𝑒𝑠+𝐴𝑑𝑑𝑙 𝑆ℎ𝑎𝑟𝑒𝑠

 BONUS ISSUE (different class)

Original Shares @ FV
 Cost of Original investment
Share Dividend @ FV

 JE: Investment in Preference Shares xx

Investment in Ordinary Shares xx

 CASH DIVIDEND
- As income
 Declaration Date Dividends - ON
 Record Date
EX - Dividends
 Distribution Date

 PROPERTY DIVIDEND
- As income at the fair value of the noncash asset

 LIQUIDATING DIVIDEND
- Return of investment
- Is received from a liquidating investee or a wasting asset corporation

 SHARE RIGHTS
 PRE-EMPTIVE RIGHT: share holder’s right to maintain his or her ownership percentage in a
corporation as the corporation issues additional new shares

 Declaration Date Rights - ON

 Record Date
EX - Rights
 Expiration Date

 Accounted for Separately

 Not Accounted for Separately

 ACCOUNTED FOR SEPARATELY

 Receipts: initially measured at Fair Value
Subscription Price xx
 Exercise: Fair Value of Share rights exercised xx
COST OF NEW INVESTMENT xx

 Sold: recognized gain or loss

 Expiration: Loss on share rights xx

Share rights xx

 THEORETICAL MARKET VALUE

 RIGHTS-ON:
FV of Share Rights on − Subscription Price
No. of rights needed to purchase one share + 𝟏

 EX-RIGHTS:
FV of Share Ex Rights − Subscription Price
No. of rights needed to purchase one share
 NOT ACCOUNTED FOR SEPARATELY
Received 5,000 share rights to subscribe for new
 Receipt: Memorandum:
shares at P100 per share for every 5 rights held
 Exercise: COST OF NEW INVESTMENT = subscription price
Cash xx
 Sold: No gain or loss
Equity Investment xx
 Expiration: Memorandum
INVESTMENT IN ASSOCIATE
 Significant Influence
o Power to participate in the financial and operating policy decisions of the investee but not
control nor joint control over those policies

o 20% up to 50% of the voting power of the investee, presumably an investor has significant
influence, unless otherwise

o Investment must be in ordinary shares. (Presumably, these are voting shares)

o Less than 20% of the voting power, provided that the investor can exercise significant
influence.

 Equity Method and Accounting Entries

o Investor and associate  “single economic entity”
o Transaction Cost  Capitalized

o Purchase of the investment:

Investment in Associate xx
Cash xx
o Share in the net income:
Investment in Associate xx
Investment Income xx

o Share in the net loss:

Investment Loss xx
Investment in Associate xx

o Share in OCI of associate:

Investment in Associate xx
Revaluation surplus – investee xx

o Dividend received:
Cash xx
Investment in Associate xx

o Share dividend (same class): Memo entry only

o Amortization of excess cost:

Investment Income/Loss xx
Investment in Associate xx

o Excess fair value (gain on purchase):

Investment in Associate xx
Investment Income/Los xx
 Associate has Preference Share Capital
o When an associate has outstanding preference shares, the basis for the investor’s share in the
profit or loss is the profit or los attributable to ordinary shareholders.
 Deduct the preference dividends from profit or loss whether declared or not, if the
preference shares are cumulative.
 Deduct the preference dividends from profit or loss only when declared, if the
preference shares are noncumulative.

 Investment in Associate Achieved in Stages

o From passive interest to significant influence
FV of existing interest xx
CA of existing interest (xx)
Gain (Loss) in P&L xx
 o If the existing interest is measured at FVOCI, any cumulative unrealized gain or loss in OCI is
reclassified to retained earnings

FV of existing interest xx
Cost of additional interest xx
Initial Cost of investment in associate xx
CA of net assets acquired (xx)
Excess Cost xx
Undervaluation / Overvaluation of identifiable net assets (xx)
Goodwill (excess fair value) xx

 Intercompany Transactions
o Profit and losses resulting from upstream and downstream transactions are recognized in the
investor’s financial statements only to the extent of the unrelated investor’s interest in the
associate.
o Upstream – investee sold assets to the investor
o Downstream – investor sold assets to the investee

 Investee with Heavy Losses

o Carrying amount of investment in associate
 Investment in ordinary shares of associate
 Investment in preference shares of associate
 Loans / Advances to associate

o Share in the net loss  allocated in the following order

 Investment in ordinary shares of associate
 Investment in preference shares of associate
 Loans / Advances to associate

o If share in the net loss equal or exceeds the CA of investment in associate

 Discontinue recognizing further losses
 CA of investment in associate  ZERO

o If associate subsequently reports net income

 Investor resumes recognizing share in net income after share in net income equals
share in unrecognized losses.

o Subsequent share in net income  allocated in the following order:

 Loans / Advances to associate
 Investment in preference shares of associate
 Investment in ordinary shares of associate

o Allocated share in net income to loans / advances and investment in preference shares
 Limited to previous allocated loss only

 Discontinuing the Equity Method

o Investor ceases to have significant influence over the investee.

Net Proceeds xx FV of retained investment xx

CA of investment sold (xx) CA of retained investment (xx)
Gain (Loss) on sale – P&L xx Gain (Loss) on remeasurement (P&L) xx

o The retained investment shall be accounted for as FVPL, FVOCI, or Cost.

BOND INVESTMENT

 Introduction
o Measurement of debt investment is based on:
 Business model of managing the financial asset
 Held for trading
 Realizing fair value changes
 Collecting contractual cash flows
 Collecting contractual cash flows and sell the asset
 Cash flow characteristics
 Interest
 Principal

 Held for Trading or Realizing Fair Value Changes

o This debt investment is measured at fair value through profit or loss (FVPL).
o Initial measurement – Fair value or Purchase Price
o Transaction Cost – Expense immediately
o Subsequent measurement – at Fair Value, with changes recognized immediately in profit or
loss
o Interest income (Face amount x Nominal Interest Rate)
o On derecognition or disposal, the difference between net proceeds and carrying amount on
disposal date is recognized as gain or loss on sale in profit or loss.

 Held for Collecting Contractual Cash Flows that are Composed of Interest and Principal
o This debt investment is measured at amortized cost.
o Initial measurement – Fair Value or Purchase Price, plus transaction cost
o Subsequent measurement -amortized cost is equal to initial measurement plus discount
amortization or minus premium amortization and minus any impairment losses.
o Effective Interest Method
 Interest Income (Carrying amount, beginning balance x effective interest rate xx
Interest received (Face Amount x nominal interest rate) xx
Discount (Premium) amortization xx

o The investment can also be measured at fair value through profit or loss (FVPL) even if the
Amortized Cots measurement is satisfied.
o The entity may elect to use the Fair Value Option on initial purchase of this investment.
o Such election is irrevocable and therefore cannot be reclassified out into another category.
o Recognition and measurement rules are same as “Held for Trading” or “Realizing Fair Value
Changes”.

 Held for Collecting Contractual Cash Flows and Sell the Financial Asset.
Cash Flows are Composed of Interest and Principal
o This debt investment is measured at fair value through OCI (FVOCI).
o Initial measurement – Fair value or purchase price plus transaction cot
o Subsequent measurement – at Fair value, and changes in FV after considering any
impairment loss are recognized in OCI. Any impairment loss is recognized in profit or loss.
o Interest income is computed using the effective interest method.
o On disposal, the difference between the net proceeds and carrying amount of the investment on
disposal date is recognized as gain or loss on sale in profit or loss. Any cumulative amount in
OCI is transferred to profit or loss (recycling to profit or loss).

o The investment can also be measured at fair value through profit or loss (FVPL) even if the
FVOCI measurement is satisfied.
o The entity may elect to use the Fair Value Option on initial purchase of this investment.
o Such election is irrevocable and therefore cannot be reclassified out into another category.
o Recognition and measurement rules are same as “Held for Trading” or “Realizing Fair Value
Changes”.
INVESTMENT PROPERTY AND CASH SURRENDER VALUE

INVESTMENT PROPERTY

DEFINITION

 LAND and/or BUILDING owned by an entity or held by a lessee under finance lease.
 Held for CAPITAL APPRECIATION or leased out to others under operating lease to EARN RENTALS

INVESTMENT PROPERTY NOT INVESTMENT PROPERTY

- Land held for capital appreciation - Property acquired for sale
- Land held for currently undetermined use - Owner occupied property
- Property leased under operating lease - Property occupied by employees (whether or not
the employees pay rent at market rate)
- Property leased out to others under finance lease

PROPERTY WITH DUAL PURPOSE

If the property can be split easily, Owner occupied: PPE

account accordingly to purpose Leased to others under operating lease: IP

If the property can’t be split easily, If INSIGNIFICANT portion is used as

use professional judgement owner occupied: IP
If SIGNIFICANT portion is used as owner
occupied: PPE

RECOGNITION AND MEASUREMENT

 RECOGNITION
- Recognized as an investment property if:
 It is probable that future economic benefits will flow to the entity
 Cost can be measured reliably

 INITIAL MEASUREMENT - Import duties

- Non-refundable taxes
- At COST
- Less trade discount and rebates
 Purchase Price
 Directly Attributable Cost - Employee benefits directly from construction
or purchase
- Professional fees
MEASUREMENT - Installation cost
- Freight cost
 SUBSEQUENT MEASUREMENT - Site preparation
- To be applied to ALL investment property

 COST MODEL
 Cost less accumulated depreciation less accumulated impairment loss
 Continue to depreciate the asset
 Tested for impairment
 With disclosure of fair value

 FAIR VALUE MODEL

 Every year end measured at its fair value
 Changes in fair value to P/L
 Not tested for impairment
 No depreciation
Lessee with Investment Property
FV of a specific IP can’t be determined - If a lessee uses the fair value model for its
- Measure that specific IP at cost IP, also apply the fair value model to ROUA
- The rest sill measure at FV that meets the definition of investment
- Residual value of such IP is zero property
CASH SURRENDER VALUE

Entity insures Beneficiary: other than ENTITY Insurance Expense

the life of its
key officer Beneficiary: ENTITY Cash Surrender Value
Represents a contractual right to receive
cash
 It arises when the
 Policy is a whole life policy
 Premiums for 3 years have been fully paid
 Policy is surrendered at the end of the 3 rd year or anytime thereafter

 PRESENTATION
 Non-current asset
INVESTMENT
A financial asset is any of the following:
 Cash
 An equity instrument of another entity/
 Contractual right to receive cash or another financial asset from another entity.
 Contractual right to exchange financial assets or financial liabilities with another entity under conditions
that are potentially favorable to the entity
A financial liability
 Is a contractual obligation to deliver cash or another financial asset to another entity.
 Is a contractual obligation to exchange financial asset or financial liabilities with another entity under
the conditions that are potentially unfavorable to the entity.
RECLASSIFICATION OF DEBT SECURITIES

 RECLASSIFICATION
- Reclassify an asset only when there is change in business model for managing the financial assets

- Done prospectively from the reclassification date

First day of the reporting period following the change in business model:

Change in business model: 10/20/23 (Hold to collect SPPI to trading purposes)

12/31/23: still at DIAC
Reclassification date: 1/1/24 DIFVPL

 EXEMPTIONS
- EIFVPL
- EIFVOCI and DIFVPL by irrevocable election

RECLASSIFICATION TO
R DIFVPL DIFVOCI DIAC
E
C DIFVPL 1. Fair value on reclassification date = 1. Fair Value on reclassification
L new carrying amount date = new carrying amount
A 2. EIR based on new carrying amount 2. EIR based on new carrying
S
S 3. No unrealized G/L amount
I 3. No unrealized G/L
F
I DIFVOCI 1. Fair value on reclassification date = 1. Fair value on reclassification
C new carrying amount date = new carrying amount
A 2. Reclassify accumulated OCI 2. Eliminate cumulative balance
T
I balance to P/L on reclassification from OCI through the
O date reclassified FV.
N
3. No unrealized G/L 3. Use same EIR
F DIAC 1. Fair value on reclassification date = 1. Remeasure to FV, with any
R new carrying amount difference recognized in OCI.
O
M 2. With unrealized G/L to P/L 2. With unrealized G/L to OCI
3. Use same EIR

TRANSFERS
 Only when there is a change of use
- IP to PPE: commencement of owner occupation
- PPE to IP: end of owner occupation
- IP to INVTY: commencement of development with a view to sale
- INVTY to IP: commencement of operating lease to another party

COST MODEL
FROM TO INITIAL CHANGE IN FV
Investment Property PPE/Inventory At Carrying Value None
PPE/Inventory Investment Property At Carrying Value None

FV MODEL
FROM TO INITIAL CHANGE IN FV
Investment Property PPE/Inventory At fair value P/L
PPE Investment Property At fair value RS (OCI); Loss (P/L
Inventory Investment Property At fair value P/L
PROPERTY, PLANT & EQUIPMENT
 CHARACTERISTICS
 Tangible assets (with physical substance)
 Used in business (used in the production or supply of goods or services, for rental, for
administrative purposes)
 Long-term in nature (expected to be used for more than one period)

EXAMPLE OF PPE NOT PPE

- Land held for future plant site - Land held for speculation
- Building used in business - Land held for undetermined future use
- Equipment used in production of goods - Land and building held for rental
- Equipment held for rental - Property held for sale in the ordinary course of business
- Major spare parts - Minor spare parts
- Bearer plants - Bearer animals

 RECOGNITION
- Recognized as property, plant and equipment if:
- It is probable that future economic benefits will flow to the entity
- Cost can be measured reliably
- Import duties
 INITIAL MEASUREMENT - Non-refundable taxes
- At COST - Less trade discount and rebates
- Purchase Price
- Employee benefits directly from construction
- Directly Attributable Cost
or purchase
- Estimated Dismantling Cost @ PV
- Professional fees
- Installation cost
Only if entity has a present obligation to - Freight cost
dismantle, remove or restore - Site preparation

MODES OF ACQUISITION

 CASH BASIS  ON ACCOUNT

 Cash price equivalent xx  Invoice Price xx
DAC xx Purchase Discount (xx)
Estimated Dismantling Cost xx COST OF PPE XX
COST OF PPE XX

 CASH BASIS  DEFERRED BASIS

 LUMP SUM PURCHASE
1st: Cash price equivalent
- Allocate purchase price to each item
2nd: Present Value of Cash flows
based on their relative: 1st Fair Value
2nd Appraised Value
3rd Assessed Value

 ISSUANCE OF SHARE CAPITAL  DONATION

 PPE at  PPE at Fair value when received or receivable.
1st: FV of asset received
2nd: FV of shares issued  SHAREHOLDER:
3rd: Par or stated value - CR: Donated Capital

 NON-SHAREHOLDER:
 SELF CONSTRUCTED
- CR: Income (no condition)
 Direct cost of materials
- CR Liability (w/ condition)
 Direct cost of labor
 Overhead  GOVERNMENT:
 Borrowing cost
- Government grant
 EXCHANGE OF NON-MONETARY ASSETS
WITH COMMERCIAL SUBSTANCE
o If the subsequent cash flows are expected to change significantly as a result of the exchange
(RISK, AMOUNT AND TIMING)

 PPE RECEIVED AT:

1st: Fair Value of asset GIVEN UP
*if with cash component: Payor + Cash Paid
: Payee – cash received

2nd: Fair Value of Asset RECEIVED

3rd: Carrying Value of asset GIVEN UP

*if with cash component: Payor + Cash Paid
: Payee – cash received

 GAIN OR LOSS ON EXCHANGE:

FV of asset GIVEN UP xx
CV of asset GIVEN UP (xx)
GAIN / LOSS xx

 EXCHANGE OF NON-MONETARY ASSETS

WITHOUT COMMERCIAL SUBSTANCE

 PPE RECEIVED AT:

Carrying Value of asset GIVEN UP
*if with cash component: Payor + Cash Paid
: Payee – cash received

 NO GAIN OR LOSS ON EXCHANGE

 TRADE IN
 A property is acquired by exchanging another property as part payment and the balance payable in
cash or any other form of payment

 PPE RECEIVED AT:

1st: Fair Value of asset GIVEN UP + Cash Paid
2nd: Trade in value of asset GIVEN UP + Cash Paid

FV of the asset received or FV or TIV given up xx

Cash Price w/o trade in CV given up (xx)
Gain or Loss xx
LAND, BUILDING & MACHINERY
LSP OF LAND WITH OLD BUILDING

Building is LSP  Land

UNUSABLE
Building is LSP  Land based on
USABLE  Building FV

OLD BUILDING Inventory:

immediately Allocated cost Capitalized
demolished for of old building
new building PPE/IP:
Land and Old Building Loss
at single cost OLD BUILDING
temporarily used Carrying value Inventory/PPE/
then subsequently of old building IP: Loss
demolished for
new building
DEMOLITION COST

OLD BUILDING
DEMOLISHED TO LAND
PREPARE LAND FOR
INTENDED USE

OLD BUILDING NEW BUILDING

Demolition Cost xx DEMOLISHED TO Whether
Sale of scrap (xx) CONSTRUCT NEW Inventory/PPE/IP
Net Demolition Cost xx BUILDING
GOVERNMENT GRANT AND BORROWING COST
GOVERNMENT GRANT
 DEFINITION, MEASUREMENT AND RECOGNITION
o Government  resources  Entity
o Entity  comply with conditions
o Recognition and measurement
 Grant is measured at fair value
 Reasonable assurance that entity will comply with the conditions attaching to the grant
 Grant will be received

 TWO CLASSIFICATIONS OF GOVERNMENT GRANT

o Grant related to asset
 Purchase, construct or otherwise acquire long-term asset
 Deferred income approach
 Deduction from cost approach

o Grant related to income

 Other than related to asset
 Deferred income when conditions are not yet satisfied
 When recognized as income, it is presented in the income statement separately,
included in other income, or netted against the related expense.

 RECOGNITION OF GOVERNMENT GRANT AS INCOME

o Grant in recognition of specific expense shall be recognize as income over the period of
expense.

o Grant related to depreciable asset shall be recognize as income over the periods and in
proportion to the depreciation method.

o Grant related to non-depreciable asset requiring fulfillment of certain conditions shall be

recognized as income over the periods which bear the cost of meeting the conditions

o Grant that becomes receivable as compensation for expense already incurred or giving
immediate financial support, shall be recognize as income of the period it becomes
receivable.

 REPAYMENT OF GOVERNMENT GRANT

o Conditions have been violated by the entity

o Change in accounting estimate

o If the deferred income approach is used, the payment if first applied to the unamortized deferred
income balance with any excess recognize in profit or loss.

o If the deduction from cost approach is used, the payment shall increase the carrying amount of
the asset. The cumulative additional depreciation that would have been recognize in the
absence of the grant, shall be recognized immediately as an expense.

BORROWING COST
o Interest and other cost that an entity incurs in connection with borrowing of funds.
o Borrowing cost is capitalized as cost of the asset if the borrowing is attributable to the acquisition,
production or development of a qualifying asset.
 Qualifying asset is an asset that takes a substantial period of time to get ready for intended use
or sale
 If specific borrowing, amount capitalized is the actual borrowing cost incurred during the
construction period less any investment income from temporary investment
 If general borrowing
 Average expenditures x Average capitalization rate x construction period LOWER
 Actual borrowing cost during the construction period
 Expense immediately if not attributable to a qualifying asset
DEPRECIATION AND DEPLETION
DEPRECIATION
o Systematic allocation of the depreciable amount over the useful life
o Depreciation methods
 Straight-line
 Variable methods
 Decreasing charge
 Double declining balance
 Sum of the year’s digit (SYD)

DEPLETION
o Wasting asset or natural resources are the asset that are subject to depletion
o Cost of wasting asset
 Acquisition cost of the property that contains the natural resources
 Exploration cost
 To locate the natural resources in the property
 Development cost
 To extract the natural resource from the property
 Estimated restoration cost at present value to restore property to original condition
 Present obligation should exist

o Tangible equipment used in mining operations

 Not part of the cost of wasting asset
 Depreciated separately
 No alternative use – useful life of equipment or useful life of wasting asset, whichever is
shorter
 Alternative use – useful life of

 Accounting for exploration cost

 Successful effort method
 Cost related to discovered resources are capitalized
 Cost of drilling “dry holes” are expensed immediately
 Full cost method
 Costs are always capitalized regardless of outcome (discovered or dry holes)
IMPAIRMENT
 INDIVIDUAL ASSET
o Recognize impairment loss when the carrying amount exceeds the recoverable amount.
o Recoverable amount is the higher or
 Fair value less cost of disposal
 Value in use

o Reversal of impairment loss

 Subsequent increase in recoverable amount
 Recognize the reversal as gain in profit or loss
 Increased carrying amount is the lower of
 Recoverable amount
 Carrying amount as if no impairment loss had been recognized

 CASH GENERATING UNIT

o If the impairment testing cannot be done for individual assets because the recoverable
amount of such asset cannot be determined, determine the recoverable amount of the cash
generating unit (CGU) to which that asset belongs.

o Test the entire CGU for impairment

 Carrying amount of CGU exceeds recoverable amount
 Impairment loss is allocated to
 Goodwill
 Any excess, all other noncash assets based on relative carrying amount

 After allocating impairment, note that the carrying amount of the assets in the unit should
not be reduced below the highest of fair value less cost of disposal, value in use and zero

 Reversal of impairment loss

 The gain is allocated to the noncash assets (except for Goodwill) based on the
relative carrying amounts
 Increased carrying amount is the lower of
o Recoverable amount
o Carrying amount as if no impairment loss had been recognized.
REVALUATION
REVALUATION MODEL
 PPE measured at revalued amount, being its fair value at the date of revaluation less subsequent
accumulated depreciation and less subsequent impairment losses

 REVALUED AMOUNT > CARRYING VALUE

 W/O PREVIOUS IMPAIRMENT LOSS: Difference as Revaluation Surplus

 W/ PREVIOUS IMPAIRMENT LOSS: Difference as 1st Recovery of Previous IL (P/L)

2nd Revaluation Surplus (OCI)
 REVALUED AMOUNT < CARRYING VALUE
 W/O REVALUATION SURPLUS: Difference as Impairment Loss (P/L)

 W/ REVALUATION SURPLUS: Difference as 1st Reduction Revaluation Surplus (OCI)

2nd Impairment Loss (P/L)

 TREATMENT OF ACCUMULATED DEPRECIATION ON REVALUATION DATE

Either:
 PROPORTIONATE METHOD
o Restated proportionately with the change in the gross carrying amount so that the
carrying amount of the asset equals its revalued amount

𝐴𝑐𝑐𝑢𝑚𝑢𝑙𝑎𝑡𝑒𝑑 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛
Revalued Accumulated Depreciation  %
𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑏𝑙𝑒 𝐶𝑜𝑠𝑡

 ELIMINATION METHOD
o Eliminated against the gross carrying amount and the asset account is restated to its
revalued amount
Revalued Accumulated Depreciation  0

 TRANSFER OF REVALUATION SURPLUS TO RETAINED EARNINGS

 AS THE ASSET IS USE
 Allocate revaluation surplus to retained earnings over the useful life of the asset

 UPON DERECOGNITION OF ASSET

 Transfer the balance of the revaluation surplus to retained earnings when the related
asset is derecognized.

IMPAIRMENT LOSS SUMMARY

COST MODEL REVALUATION MODEL

✖ ✔
initial initial
increase increase
from CV from CV

CARRYING
VALUE

Impairment Recovery Recovery Impairment Recovery Recovery

loss until CV beyond CV loss until CV beyond CV
✔ ✔
had no IL had no IL had no IL had no IL
✔ ✖ ✔ ✔
INTANGIBLE ASSETS
DEFINITION

 Identifiable, non-monetary assets without physical substance

DEFINITION CRITERIA

IDENTIFIABILITY CONTROL FUTURE ECONOMIC

BENEFIT

- Separable from the entity - Enjoy future economic - i.e., additional sales, cost
- Arises from legal rights: benefits savings
Contract of Law - Prevent others from
obtaining such
economic benefits
RECOGNITION AND MEASUREMENT
 RECOGNIZE WHEN
- It meets the definition criteria of intangible assets
- It meets the asset recognition criteria

Probable flow of future economic

benefit from the asset

Cost can be measured reliably

EXAMPLES
 TRADEMARK
 Symbol that distinguishes a company or product
 With indefinite number of renewals every 10 years

 CUSTOMER LIST
 If internally generated: Expensed
 If purchased: Asset

 COPYRIGHT
 Right given to authors, musicians, artists
 Legal life = life of the creator + 50 years after his/her death

 PATENT
 Gives the inventor an exclusive right to use, manufacture or sell a product or process
 Legal life = 20 years from date of filing of application

 MEASUREMENT Purchase Price

 Initially at COST Directly Attributable Cost

ACQUISITION INITIAL MEASUREMENT

Separate Acquisition Purchase Price + DAC
Business Combination Fair Value
Government Grant Either Fair Value or Nominal Amount + DAC
Exchange of Asset Fair Value, if none, Carrying Value
Internally Generated DAC after meeting 6 criteria

 Subsequently either Cost model or Revaluation Model

Cost – Accum. Depreciation – FV – Subseq. Accum. Depreciation

Accum. Impairment Loss – Subseq. Accum. Impairment Loss
AMORTIZATION
 AMORTIZATION EXPENSE
 Start: when asset is ready for use in the manner intended by management
 Stop: asset is derecognized or classified as held for sale
 Use method that best reflects the expected pattern of consumption of future economic benefits
Gen: SL method

 FINITE life:
 Use SHORTER between  legal life
 useful life

 INDEFINITE life:
 No amortization but tested for impairment annually and whenever there is an indication that the
asset may be impaired.

 PRESENTATION
 Part of cost of another asset (i.e., inventoriable)
 PERIOD COST (selling or administrative expense)

 RESIDUAL VALUE
 Assumed zero unless:
 3rd party committed to purchase at the end of useful life
 With active market where the asset can be sold at the end of useful life

INTERNALLY GENERATED
 RESEARCH PHASE
o To discover new knowledge to be used in developing new products or improving existing
products
o All cost expensed as incurred

 DEVELOPMENT PHASE
o Application of new knowledge
o GENERALLY expensed as incurred
o CAPITALIZED if ALL MET (PIRATE)
 Probable future economic benefits expensed capitalized
 Intention to complete and use/sell P
 Resources adequate and available I
 Ability to use or sell the asset R
 Technical feasibility A
 Expenditures reliably measurable T
E

COST OF INTERNALLY GENERATED

 Includes all directly attributable cost necessary to create, produce and prepare the asset for its intended
purpose as from the date of recognition criteria and the conditions for capitalization of development
costs have been met

o Materials consumed and services used in generating the intangible asset

o Employee benefits arising from the generation of the intangible asset
o Registration fees for legal rights
o Capitalizable borrowing cost

If a cost had been expensed previously, it can’t be capitalized subsequently

PPE USED IN R&D

 PPE WITH ALTERNATIVE USE
 Depreciation expense  R&D expense
 Carrying value  PPE
 PPE WITHOUT ALTERNATIVE USE
 Cost of PPE immediately expensed as part of R&D expense
GOODWILL
 Under IFRS: 3 Business Combination
 Internally generated Goodwill is not recorded
 Goodwill arising from Business Combination is recorded separately from other intangible asset
 Not amortized but tested for impairment annually however not subject to reversal of previous
impairment loss.

 MEASUREMENT
 RESIDUAL METHOD

Purchase Price xx
Fair Value of Net Assets Acquired (xx)

Purchase Price > Fair Value of Net Assets Acquired  Goodwill

Purchase Price < Fair Value of Net Assets Acquired  Bargain Purchase

 DIRECT VALUATION
o Goodwill is measured based on the future earnings of the entity

PURCHASED OF AVERAGE EXCESS EARNINGS CAPITALIZATION OF EARNINGS

𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑒𝑎𝑟𝑛𝑖𝑛𝑔𝑠
GW = average excess earnings x number of years Purchase Price = 𝑐𝑎𝑝𝑖𝑡𝑎𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑒

PRESENT VALUE METHOD NA fair value (xx)

Goodwill xx
GW = average excess earnings x PV Factor

CAPITALIZATION OF AVERAGE EXCESS EARNINGS

𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑒𝑥𝑐𝑒𝑠𝑠 𝑒𝑎𝑟𝑛𝑖𝑛𝑔𝑠
GW = 𝑐𝑎𝑝𝑖𝑡𝑎𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑒

COMPUTER SOFTWARE
 PURCHASED COMPUTER SOFTWARE
 Initially at COST Purchase Price
Directly Attributable Cost
 INTERNALLY GENERATED COMPUTER SOFTWARE
 Technological feasibility Is established if the entity has completed either:
a detailed program design or a working model

 Prior establishment of technological feasibility: expensed

 After establishment of technological feasibility: computer software
 Reproduction of computer software: inventory

 AMORTIZATION
 Over its useful life using a method that best reflects the pattern of consumption of economic
benefits: Amortization based on revenue no longer permitted

 INTEGRAL PART OF PPE

 Included as PPE

 USED INTERNALLY / LICENSING / RENTAL TO OTHERS

 Included as Intangible Assets

 REPRODUCED FROM PRODUCT MASTER OR PURCHASED FOR RESALE

 Included in Inventory
PREMIUM AND WARRANTY LIABILITY
PREMIUMS
o Items given to customer
 Past sales
 Sales promotion activities

o To stimulate sales of the primary product

o To recognize an expense and any corresponding liability at the point of sale
 Of the products sold, who among customers will take advantage of the promotion
 Future delivery of the premium items

WARRANTY

o Free repair service or replacement during a specified period if products are defective
o May involve significant costs
o Expense and liability at the point of sale
o Test accuracy of the warranty liability
 Change in accounting estimate
PROVISION AND CONTINGENT LIABILITY
PROVISION
o An existing liability of uncertain timing or amount
o To recognize a provision as a liability
 Present obligation as a result of a past event
 Probable that an outflow of economic benefits shall be required to settle an obligation
 Amount of obligation can be measured reliably

o Present obligation
 Legal obligation – contract, legislation or operation of law
 Constructive obligation – entity will accept certain responsibilities and created a valid
expectation on the part of other parties that entity will discharge those responsibilities.

o Obligating event
 Event that created the legal or constructive obligation
 No alternative but to settle

o Probable
 More than likely than not to occur
 More than 50% likely

o Measurement is the best estimate to settle the obligation

 Single obligation – individual most likely outcome and effect of other possible outcomes
 Range of possible outcomes and each point is as likely as any other, use midpoint of the
range
 Large population of items – expected value (use probabilities)

CONTINGENT LIABILITY
o Possible obligation that arises from a past event and whose existence will be confirmed by one or
more uncertain future events.

o Present obligation that arises from a past event, but not recognized
 Not probable that there will be outflow of benefits to settle the liability OR
 Amount of the obligation cannot be measured reliably

o Uncertainty in future events

 Probable – more than 50%
 Possible – 50% or less
 Remote – 10% or less

o Disclose only in the notes, but if the likelihood is remote, no disclosure

o Possible asset from a past event and whose existence will be confirmed by one or more future event

o Disclose only if likelihood is probable

o No disclosure if possible or remote

o Recognize as income if the realization of the asset is virtually certain

CUSTOMER LOYALTY PROGRAM AND COUPON OFFER
ACCOUNTING FOR REBATES
o Manufacturers sell products to retailers and retailers sell the product to end-customers
o End-customers may receive discount coupons to purchase future products from retailers at a lower
price
o Manufacturers may reimburse retailers for the discount
o Manufacturers therefore has two performance obligations
 To transfer goods and services to the retailer
 To reimburse retailers for discount (rebate liability)

o Transaction price is allocated to

 Product
Relative total stand-alone selling price
 Coupons

ACCOUNTING FOR FREE PRODUCTS AND DISCOUNTS

o Sellers may offer free products and discounts in order to stimulate sales
o Options to purchase additional goods or services
 Provide the customers with a material right, and
 Gives rise to a performance obligation that the seller must satisfy
o The seller has two performance obligations
 To transfer goods and services to customers
 To transfer the additional goods and services to customers (customer options)

o Transaction price is allocated to

 Product
Relative total stand-alone selling price
 Customer option

ACCOUNTING FOR GIFT CERTIFICATES

o Gift certificates or gift cards in exchange for future delivery of goods and services
o Nonrefundable
o Should consider non-redemption of gift certificates by customers
 Recognize “breakage” revenue
 Based on the value of certificates used in proportion to the expected value of the certificates to
be used.

CUSTOMER LOYALTY PROGRAM (AWARD CREDITS OR POINTS)

o Reward customers for previous purchases and to provide them with incentives to make further
purchases
o Customers are granted award credits or points when they purchase goods and services.
o Customers may redeem the points and the entity shall provide goods or services
o Consideration received from the customer shall be allocated between
 Product
Relative total stand-alone selling price
 Points

o Initial recognition is deferred revenue

 Obligation to deliver goods and services
o Revenue from points
 Amount of revenue is based on the points redeemed relative to the points expected to be
redeemed.
BONDS PAYABLE
DEFINITION
o Formal unconditional promise, made under seal
 To pay specified sum of money  determinable future date (principal)
 To make periodic interest payment until principal is paid

o Measurement
 Amortized cost
 Fair value through profit or loss

MEASUREMENT
o Amortized cost
 Initial measurement
 Fair value less any bond issue cost

 Bonds were issued at a

 Discount (Effective interest rate > Nominal interest rate)
 Premium (Effective interest rate < Nominal interest rate)

 Interest expense is computed based on effective interest method

 Interest expense (CA-beg x effective interest rate) xx
 Interest paid (Face x nominal interest rate) xx
 Discount (premium) amortization xx

 Subsequent measurement
 Face amount plus unamortized premium or minus unamortized discount
 Initial measurement plus discount amortization or minus premium amortization

o Fair value through profit or loss (incurred for trading or designated at FVPL)
 Initial measurement – Fair value
 Any bond issue cost is an expense

 Interest expense is based on the nominal interest rate (no amortization)

 Face amount x nominal interest rate

 At fair value every reporting period, with changes recognized in

 Incurred for trading  profit or loss
 Designated at FVPL (Fair value option)
 Change attributable to credit risk  OCI
 Not credit risk  profit or loss
COMPOUND FINANCIAL INSTRUMENT & BOND CONVERSION
COMPOUND FINANCIAL INSTRUMENT
 A financial instrument that has the characteristics of both liability and equity.

ISSUE PRICE OF COMPOUND FINANCIAL INSTRUMENT XX

ISSUE PRICE OF BONDS PAYABLE WITHOUT EQUITY (XX)
VALUE ASSIGNED TO EQUITY XX

 TYPES
 Bonds with Warrants
 Convertible Bonds

 BONDS WITH SHARE WARRANTS

 Bonds with warrants to acquire a fixed number of the entity’s own equity instrument for a fixed
amount
CREDITOR plus OWNER

 Ordinary Share Warrants Outstanding (Equity)

 2 TYPES
 Detachable Share Warrants
 Non-Detachable Share Warrants

 CONVERTIBLE BONDS
 Bonds with an option to convert into an equity instrument of the entity

CREDITOR to OWNER

 Bonds Conversion Privilege Outstanding (Equity)

 Contract or part of a contract that conveys the right to use the
Underlying sset for a period in exchange for consideration
FINANCE LEASE – LESSEE In a lease contract, the lessee controls the right to use an identified asset

LEASE DEFINITION Finance lease model - lessee shall recognize an asset and corresponding liability

IDENTIFIED Either explicitly specified in a contract or implicitly specified at the time it is made
ASSET available for use by the customer.
No identified asset if the supplier has substantive right to substitute the asset.
1) Practical ability to substitute the asset.
2) Would benefit economically.

RIGHT TO Right to obtain substantially all economic benefits AND right to direct the use.
CONTROL USE
Primary output, by-product.
How and for what purpose the asset is used

LEASE TERM The non-cancellable period of the lease, together with:

- Periods covered by an option to extend the lease if the lessee is reasonably
certain to exercise that option; and
Periods covered by an option to terminate the lease if the lessee is reasonably
certain not to exercise that option.

TWO PARTIES

“Risks and rewards” model “Right-of-use” model

Right to use leased asset

LESSOR LESSEE
Underlying Asset Right-of-use asset
Consideration
(lease rentals) At commencement date

Substantially all
risks and rewards
of ownership Recognize Recognize
transferred? “right-of-use” lease liability
asset
YES NO Represents a lessee’s A financial obligation
license to hold, to make the payments
operate, or occupy a arising from a lease,
Finance Lease Operating Lease leased item over the measured on a
lease term discounted basis.

LESSEE
 RIGHT OF USE ASSET
 Initially at COST

Bonus received from lessor (xx)  incentives received from lessor

Lease Liability xx
Advance payment to lessor xx  paid on or before commencement date
Initial Direct Cost xx  DAC in obtaining a lease
Estimated Dismantle Cost @ PV xx  if required by the terms and condition of the lease
COST OF RIGHT OF USE ASSET xx
 SUBSEQUENT MEASUREMENT OF ROUA Presented as a separate line item as noncurrent asset in the sfp
 Generally: At COST MODEL
Cost less accumulated depreciation and accumulated impairment losses

 Alternatively:
 If ROUA meets definition of Investment Property, and entity uses fair value model: ROUA must
be @ FV model

 If ROUA relates to a class of PPE and entity uses revaluation model: ROUA may be @
Revaluation model

 DEPRECIATION OF RIGHT OF USE ASSET

 If with TRANSFER OF OWNERSHIP AT THE END OF LEASE or with PURCHASE
OPTION that is reasonably certain to be exercised:
 DEPRECIATE OVER USEFUL LIFE and using the residual value at the end of the life
of the identified asset.

 OTHERWISE:
 Depreciate over SHORTER BETWEEN LEASE TERM AND USEFUL LIFE of the
identified asset and using the LGRV at the end of the lease term

 LEASE LIABILITY
 Initially at PRESENT VALUE OF LEASE PAYMENTS NOT YET MADE

DISCOUNT RATE
1st: implicit rate (if known by lessee)
PV Lease Payments and UGRV = FV asset and IDC
- True financing cost of leasing an asset

2nd: incremental borrowing rate

- rate of interest that a lessee would have to pay to borrow over a similar term, and with a similar security,
the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic
environment.
Fixed payments less incentives receivables
Annual Lease Payments xx
Variable lease payments that depend on an
LGRV or PO xx
index or a rate
Penalty for terminating lease xx
LEASE LIABILITY xx
PURCHASE OPTION
If reasonably certain to exercise the option
If the lease term reflects the lessee to purchase the asset at end of lease term
exercising an option to terminate
the lease.
LGRV IF GUARANTEED:
- By lessee or
- By party related to lessee

 SUBSEQUENT MEASUREMENT OF LEASE LIABILITY

Measure the lease liability by:

 Increasing the carrying amount to reflect interest on the lease liability;

 Reducing the carrying amount to reflect the lease payments made; and

 Remeasuring the carrying amount to reflect:

 Any reassessment or lease modifications and
 Revised in-substance fixed lease payments
 Lessee may use the operating lease
EXCEPTION TO FINANCE LEASE model under two optional exemptions
 SHORT TERM LEASE
 Lease tern of 12 months or less

 LOW VALUE LEASE

 Value is based pm a brand-new item of the identified asset regardless of age of the asset at
commencement date
Asset is of low value when brand new, regardless of its age
Not low value lease if asset is not of low value then
Can use operating lease brand new regardless of age
 No ROUA and Lease Liability May have a term of more than 12 months
 Rental payments as rent expense

LESSEE
Records Leased Asset NO
Depreciates Lease Asset NO
Rental Payments Rent expense on a straight-line basis
Initial Direct Cost Expensed
Lease Bonus Amortized as Prepaid expense over lease term
Refundable Security Deposits Receivable
Executory Cost (Taxes, Insurance, Repairs) Expensed
OPERATING LEASE
LESSOR’S VIEW

Non-
Cancellable
Lease
Agreement

Operating
Purchase option Lease term = PV of LP ≥
Transfer of NO reasonably
NO NO NO Specialized NO
Major part of Substantially
ownership? certain to be Asset?
economic life all of FV
exercised?

Y Y Y Y Y
E E E E E
S S S S S

(meets at least one criteria) Finance

OPERATING LEASE
LESSOR LESSEE
Records Leased Asset YES NO
Depreciates Lease Asset YES NO
Rental Payments Rent income on a straight-line Rent expense on a straight-line
basis basis
Initial Direct Cost Added to CV of lease asset
Expensed
Depreciated over lease term
Lease Bonus Amortized as Unearned rent Amortized as Prepaid expense over
over lease term lease term
Refundable Security Deposits Liability Receivable
Executory Cost (Taxes, Insurance, Expensed
Expensed
Repairs)
SALE AND LEASEBACK
SALE AND LEASEBACK
 A contract between a seller and a buyer where the former sells an asset to the latter and then enters
into a second contract to lease the asset back from the buyer.

 TRANSFER OF ASSET IS NOT A SALE

 Seller/Lessee continues to recognize the transferred asset and shall recognize a financial
liability equal to the transfer proceed.

Cash xx
Financial Liability xx

 Buyer/Lessor shall not recognize the transferred asset but shall recognize a financial
asset equal to the transfer proceed.

Financial Asset xx
Cash xx

 TRANSFER OF ASSET IS A SALE

 Seller/lessee recognizes ROUA (in relation to portion of interest retained by the seller-lessee)

Lease Liability
Gain or Loss (in relation to the rights transferred to the buyer-lessor)

 Buyer/lessor Records purchase of asset

Lease either: Operating Lease
Finance Lease

 Transactions shall be made at fair value, if not adjustments are necessary

 SELLING PRICE (SP) = FAIR VALUE OF ASSET (FV)
 SELLING PRICE > FAIR VALUE OF ASSET
 SELLING PRICE < FAIR VALUE OF ASSET

 COST OF ROUA OF LESSEE

𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑒𝑡𝑎𝑖𝑛𝑒𝑑 𝑏𝑦 𝑠𝑒𝑙𝑙𝑒𝑟−𝑙𝑒𝑠𝑠𝑒𝑒
 𝐹𝑎𝑖𝑟 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑙𝑒𝑎𝑠𝑒𝑑 𝑎𝑠𝑠𝑒𝑡
𝑥 𝐶𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑙𝑒𝑎𝑠𝑒𝑑 𝑎𝑠𝑠𝑒𝑡

 RIGHTS OF BUYER-LESSOR
𝐹𝑎𝑖𝑟 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑙𝑒𝑎𝑠𝑒𝑑 𝑎𝑠𝑠𝑒𝑡 𝑙𝑒𝑠𝑠 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑒𝑡𝑎𝑖𝑛𝑒𝑑 𝑏𝑦 𝑠𝑒𝑙𝑙𝑒𝑟−𝑙𝑒𝑠𝑠𝑒𝑒
 𝑅𝑖𝑔ℎ𝑡 𝑜𝑓 𝐵𝑢𝑦𝑒𝑟−𝑙𝑒𝑠𝑠𝑜𝑟

 TOTAL GAIN OR LOSS ON SALE

𝐹𝑎𝑖𝑟 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑙𝑒𝑎𝑠𝑒𝑑 𝑎𝑠𝑠𝑒𝑡 𝑙𝑒𝑠𝑠 𝑐𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑙𝑒𝑎𝑠𝑒𝑑 𝑎𝑠𝑠𝑒𝑡

𝑇𝑜𝑡𝑎𝑙 𝐺𝑎𝑖𝑛 𝑜𝑟 𝐿𝑜𝑠𝑠

 RECOGNIZED GAIN OR LOSS BY SELLER-LESSEE

𝑅𝑖𝑔ℎ𝑡 𝑜𝑓 𝐵𝑢𝑦𝑒𝑟−𝑙𝑒𝑠𝑠𝑜𝑟
 𝐹𝑎𝑖𝑟 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑙𝑒𝑎𝑠𝑒𝑑 𝑎𝑠𝑠𝑒𝑡
𝑥 𝑇𝑜𝑡𝑎𝑙 𝐺𝑎𝑖𝑛 𝑜𝑟 𝐿𝑜𝑠𝑠 𝑜𝑛 𝑠𝑎𝑙𝑒
SALES TYPE LEASE – LESSOR
MAJOR CRITERIA AND ACCOUNTING MODEL

 Satisfying any of these criteria would normally lead to finance lease

o Transfer of ownership to the lessee at the end of the lease term
o Purchase option that is reasonably certain to be exercised
o Lease term forms a major part (at least 75%) of the asset’s useful life
o PV of lease payments is a substantial part (at least 90%) of the fair value of the asset.

 Accounting model
o Sales-type
o Direct financing

SALE-TYPE LEASE

 Gross investment in the lease

o Gross rentals plus gross residual value whether guaranteed or unguaranteed

 Net investment in the lease

o PV of the rentals plus any PV of residual value whether guaranteed or unguaranteed

 Unearned interest income

o Gross investment less net investment

 Sales
o PV of lease payments or fair value of asset, whichever is lower

 Cost of goods sold

o Cost of the asset plus initial direct cost less any PV of unguaranteed residual value

 Gross profit or dealer’s profit

o Sales less cost of goods sold

 Initial direct cost

o Expensed immediately, but component of cost of goods sold

 Carrying amount of lease receivable = Lease receivable less unearned interest income.
DIRECT FINANCING LEASE – LESSOR
DIRECT FINANCING LEASE

 Gross investment in the lease

o Gross rentals plus gross residual value whether guaranteed or unguaranteed

 Net investment in the lease

o Cost of the asset plus initial direct cost

 Unearned interest income

o Gross investment less net investment

 Initial direct cost

o Capitalized as cost of the asset, therefore part of the net investment
o Implicit interest rate in the lease should consider effect of initial direct cost

 Carrying amount of lease receivable

o Lease receivable less unearned interest income
NOTE PAYABLE
NOTE PAYABLE

 Initial measurement
o Fair value less any directly attributable transaction costs on the issue of the note payable.
o However, if the note payable is measured at FVPL, transactions are expensed immediately.

 Subsequent measurement
o Amortized cost using the effective interest method
o At FVPL, if the note was designated irrevocably on issue to be measured at FVPL (FV Option)
 Interest expense = Face amount x nominal interest rate
 Change in FV
 Attributable to credit risk – OCI
 Not credit risk (residual) – Profit or Loss

REFINANCING OF AN EXISTING LIABILITY

 If the refinancing on a long-term basis was executed after the end of the reporting period but before
issue of financial statement, the liability remains to be current.

 If the refinancing on a long-term basis was executed on or before the end of the reporting period, the
liability is reclassified as non-current.

 If the entity has an existing right at the end of the reporting period, to defer settlement of the liability
for at least 12 months after the end of the reporting period, the liability is reclassified as noncurrent.
DEBT RESTRUCTURE
DEBT RESTRUCTURING

 The creditor grants to the debtor concession due to the latter’s financial difficulty.

 Creditor would like to maximize recovery of the investment in the debtor

 Common forms of debt restructuring

o Asset swap
o Equity swap
o Modification of terms

ASSET SWAP (IFRS)

 To settle the obligation, the debtor will transfer any asset, whether cash, noncash or a combination of
both.
 Carrying amount of liability extinguished xx
Carrying amount of asset transferred (xx)
Gain (Loss) on extinguishment of debt xx

ASSET SWAP (US GAAP)

 The debtor computes and recognizes the following:

o Gain or loss on exchange / transfer / disposal
 FV of asset transferred – CA of asset transferred

o Gain or loss on debt restructuring

 CA of liability – FV of asset transferred

EQUITY SWAP

 To settle the obligation, the debtor will issue share capital to the creditor.
 Measurement of share capital in order of priority:
o Fair value of shares
o Fair value of liability
o Carrying amount of liability

 Gain or loss on extinguishment = CA of liability extinguished – Measurement of shares

 Such gain or loss is a separate line item in the income statement

MODIFICATION OF TERMS (IFRS)

 Reduction of principal amount, reduce the interest rate or extend the term of the liability

 CA of old liability xx
PV of new / modified liability based on original effective interest rate xx
Total gain (loss) modification xx
Arrangement fee (xx)
Net gain (loss) on modification xx

 If the net gain or loss on modification is at least 10% of CA of old liability

o Substantial modification
o Extinguishment of an old liability and issue a new liability
 CA of old liability xx
PV of new / modified liability based on prevailing market interest rate xx
Total gain (loss) modification xx
Arrangement fee (xx)
Net gain (loss) on modification xx

 If the net gain or loss on modification is less than 10% of the carrying amount of the old liability, there
is no extinguishment (non-substantial modification).
o CA of old liability xx
PV of modified liability – old effective interest rate xx
Gain or loss on modification xx

o Any fees incurred as a result of non-substantial modification will be included in the carrying
amount of the modified liability.
 The original effective interest rate is adjusted to reflect such costs.
DEFERRED INCOME TAX
INCOME TAXES

ACCOUNTING INCOME TAXABLE INCOME

Profit or loss for the period Profit or loss for the period
before deducting income tax determined in accordance
expense. with taxation.

RECONCILIATION
PERMANENT DIFFERENCES
PRETAX FINANCIAL INCOME xx revenue and expenses recorded
Non-Deductible Expense xx for accounting purposes but not
Non-Taxable Revenue (xx) for tax purposes.
FINANCIAL INCOME SUBJECT TO TAX xx
Future Deductible Amount xx TEMPORARY DIFFERENCES
Future Taxable Amount (xx) Difference between the carrying
TAXABLE INCOME xx amount of an asset or liability
and its tax base.

PERMANENT DIFFERENCES
NON-TAXABLE REVENUES NON-DEDUCTIBLE EXPENSES
Included in financial income but not in taxable income. Deducted from financial income but not in taxable
income
- Dividend revenue received by a domestic
corporation from a domestic corporation. - Fines and penalties for violation of law

- Gain from settlement of life insurance where - Life insurance premium on employee where
the entity is the beneficiary. the entity is the beneficiary.

- Interest income from deposits.

TEMPORARY DIFFERENCES
- Difference between the carrying value of an asset or liability and its tax base in the statement of
financial position.

- Includes TIMING DIFFERENCES - Results in

When revenue or expense is FUTURE TAXABLE AMOUNTS
included in financial profit in one
period but reported for tax in FUTURE DEDUCTIBLE AMOUNTS
another period.

METHODS OF ACCOUNTING
B/S APPROACH I/S APPROACH
Includes: Includes:
Temporary Difference Timing Difference
Timing Difference
 FUTURE TAXABLE AMOUNT FUTURE DEDUCTIBLE AMOUNT
Financial Income > Taxable Income Financial Income < Taxable Income

CV of asset > Tax base of asset CV of asset < Tax base of asset

CV of liability < Tax base of liability CV of liability > Tax base of liability

EXAMPLES EXAMPLES
Accounts receivable > Tax base CV of PPE < Tax base
Notes payable < Tax base Unearned rent > Tax base
Revenue > Tax base Warranty expense > Tax base
Depreciation expense < Depreciation for tax

DEFERRED TAX LIABILITY DEFERRED TAX ASSET

- Amount of income taxes payable in future periods - Taxes recoverable in the future
- Operating loss carry forward
- Excess MCIT over NIT

INCOME TAXES
PRETAX FINANCIAL INCOME xx
Non-Deductible Expense xx
Non-Taxable Revenue (xx)
FINANCIAL INCOME SUBJECT TO TAX xx
Future Deductible Amount xx  FDA x Tax % = DTA (xx)
Future Taxable Amount (xx)  FTA x Tax % = DTL xx
TAXABLE INCOME xx  TI x Tax % = IT Payable xx
Total Income Tax Expense xx
or
TITE = FIST (applicable on if one tax) x Tax %

Current Portion – Use tax rate that has been

enacted or substantially enacted by year end.
TAX %
Deferred Portion – Use tax rate that are expected to apply to the period when the
temporary difference reverses that have been enacted or substantially enacted by year end.

 SFP PRESENTATION
 Current tax assets and current tax liabilities presented separately as current assets and current
liabilities.

 Deferred tax assets and Deferred tax liabilities presented separately as non-current assets and
non-current liabilities

 SCI PRESENTATION
 Tax consequences are accounted for in the same way as the related transactions or events.

TRANSACTION P/L : Sales products or services

WITHIN P/L

TRANSACTION SCE : Adjustment to RE, beg due to change in

OUTSIDE P/L accounting policy or prior period error

OCI : Revaluation Surplus

: Unrealized gain/loss on EIFVOCI
 OFFSETTING

- Permits offsetting of current tax assets and current tax liabilities only if entity has:
 Legally enforceable right to offset the recognized amounts.

 An intention to settle / realize the recognized amounts on a net basis or simultaneously.

- Permits offsetting of deferred tax assets and deferred tax liabilities only if:
- Has legally enforceable right to offset current tax assets against current tax liabilities.

- Deferred tax assets and deferred tax liabilities relate to income taxes levied by the same
taxation authority.
POST EMPLOYMENT BENEFIT
EMPLOYEE BENEFITS
 All forms of consideration given by an entity to its employees in exchange for services rendered by
employees of for the termination of employment.

 CATEGORIES
 SHORT TERM EMPLOYEE BENEFITS
 TERMINATION BENEFITS
 OTHER LONG-TERM BENEFITS
 POST EMPLOYMENT BENEFITS

POST EMPLOYMENT BENEFITS

 Employee benefits (other than termination benefits) which are payable after the completion of
employment.

DEFINED CONTRIBUTION PLAN DEFINED BENEFIT PLAN

 ENTITY  ENTITY
Required to give fixed/specific Required to contribute sufficient amount
contribution to the fund to the fund that will provide the specific
benefit to the employee.
 EMPLOYEE
Receives variable amount of benefit  EMPLOYEE
Received fixed amount of benefit

 DEFINED CONTRIBUTION PLAN

- Required contribution is recognized as Retirement Benefit Expense

- ACTUAL CONTRIBUTION > REQUIRED CONTRIBUTION:

- Prepaid Retirement Benefit Expense

- ACTUAL CONTRIBUTION < REQUIRED CONTRIBUTION:

- Accrued Retirement Benefit Expense

DEFINED BENEFIT PLAN

PROJECTED BENEFIT OBLIGATION
- PV of expected future payments required to settle the obligation resulting from employee service in the
current and prior period.

- Uses the Projected Unit Credit Method (Actuarial valuation)

- Arises employees rendering past and current services to the entity.

- Measurement reflects future compensation levels.

Beg Bal xx Interest Expense = Discount % x PBO, beg

Benefits Paid (xx)
Interest Expense xx Increase in PV of PBO due to employee
CV of PBO settled in advance (xx) service in the current period
Current Service Cost xx
Past Service Cost xx Increase / decrease in PV of PBO due to
Actuarial Gain/Loss xx plan amendment or curtailment
END BALANCE xx
LOSS : Increased in PBO
: Actual Obligation > Estimate
GAIN : Decreased in PBO
: Actual Obligation < Estimate
FAIR VALUE OF PLAN ASSET
- Fund set aside for the payment of retirement benefits

- May be returned to the entity only if:

- Reimbursement of benefits already paid by employer
- Surplus assets

Beg Bal xx Interest Income

Benefits Paid (xx)  Actuarial Gain/Loss
Actual Return on Plan Asset  xx ACTUAL RETURN
Settlement Price of PBO paid in advance (xx)
Contributions xx Interest Income = Discount % x FVPA, beg
END BALANCE xx

DEFICIT OR SUPLUS
 FVPA > PBO: surplus
 FVPA < PBO: deficit

PREPAID / ACCRUED BENEFIT COST

 ACCRUED BENEFIT COST = Deficit
 PREPAID BENEFIT COST PV of economic benefits available in the
o LOWER between  Surplus form of refunds from the plan or reductions
 Asset Ceiling in future contributions.

DEFINED BENEFIT COST

 Taken to P/L: Current Service Cost xx
Past Service Cost xx
Interest Expense PBO, beg xx
Interest Expense Effect of Asset Ceiling, beg xx
Interest Income FVPA, beg (xx)
Loss (gain) on early settlement xx
RETIREMENT BENEFIT EXPENSE xx

Settlement Price > CV PBO settled in advance: LOSS

Settlement Price < CV PBO settled in advance: GAIN

 Taken to OCI: Remeasurement Loss/Gain of PBO xx

Remeasurement Loss/Gain of FVPA xx
Remeasurement of Effect of Asset Ceiling xx
TOTAL REMEASUREMENT GAIN/LOSS xx

 OVERFUNDING OR UNDERFUNDING:
o Contribution > Defined Benefit Cost: OVER
o Contribution < Defined Benefit Cost: UNDER

 PREPAID / ACRRUED BENEFIT COST

o Accrued Benefit Cost, beg xx
+ Underfunding xx
- Overfunding (xx)
Accrued/Prepaid Benefit Cost, end xx

o Prepaid Benefit Cost, beg xx

- Underfunding (xx)
+ Overfunding xx
Prepaid/Accrued Benefit Cost, end xx
DEFINED BENEFIT PLAN
 ASSET CEILING
 PV of economic benefits available in the form of refunds from the plan or reductions in future
contributions.

 Affects the DEFINED BENEFIT COST

P/L: Retirement Benefit Expense  INTEREST EXPENSE = EAC, beg x Disc %
OCI: Remeasurement

EFFECT OF ASSET CEILING ↓Effect of Asset Ceiling – w/ remeasurement gain

↑Effect of Asset Ceiling – w/ remeasurement loss
- excess of prepaid benefit
cost over the asset ceiling.

∆ Effect of Asset Ceiling = End – Beg

OTHER EMPLOYEE BENEFIT
SHORT TERM EMPLOYEE BENEFITS
 Employee benefits (other than termination benefits) that are due to be settled wholly within 12 months
after the end of the period in which the employees rendered the related service.

 MEASUREMENT
o Recognized as expense in the period the employee rendered service.

o Either at the rate when the employee earned the leaves or at the expected rate when the
employee takes/avails the leave or upon retirement of the employee

 COMPENSATED ABSENCES
o Recognize a liability when all are met:
 Employer has an obligation to compensate employees for future absences
 Obligation relates to rights that accumulate from period to period
 It is probable that the amount will be paid
 A reliable estimate of the amount can be made

o ACCUMULATING
 Unused absences that can be carried forward to future period.
 VESTING: entitled to cash payments for unused leaves upon retirement.

 NONVESTING: not entitled to cash payments for unused leaves upon retirement

o NON-ACCUMULATING
 Unused absences are not carried forward and are not entitled to cash payment

TERMINATION BENEFITS
 Benefits provided in exchange for termination of employment
 Payable as a result of:
o An entity’s decision to terminate employment; or
o An employee’s decision to accept an entity’s offer of benefits in exchange for termination of
employment.

 MEASUREMENT
o Payable wholly in less than 12 months after B/S date – current liability

o Payable wholly at least 12 months after B/S date – noncurrent liability

 Examples
o Severance pay
o Health care coverage continuation

OTHER LONG-TERM BENEFITS

 Employee benefits (other than post-employment benefits and termination benefits) that are not due to be
settled within 12 months after the end of the period in which the employees render the related services.

 Includes:
o Sabbatical leave
o Long service benefit
o Profit sharing and bonuses payable 12 months or more after the end of the period.
SHAREHOLDER’S EQUITY
ACCOUNTING FOR SHARE CAPITAL

 Measurement of share capital for consideration (in order of priority)

o Fair value of the consideration received (cash, noncash, services)
o Fair value of shares issued
o Par or stated value of shares issued

 Share issue cost

o Deduction from share premium arising from the related issuance
o If the share premium from related issuance is insufficient, the balance is charged against
 Share premium from previous issue
 Retained earnings

 Subscribed share capital

o Not fully paid therefore not yet issued
o But already outstanding since these shares are entitled to full dividends under our law.
o Presented in equity, net of any subscription receivable not current collectible
 If the subscription receivable is currently collectible, present as a current asset.

 Share rights or rights issue

o Memo entry only when issued to shareholders
o Affects equity when the shareholder exercises the rights

 Share split (Memo entry)

o Split up – increase shares and decrease par or stated value per share and cost per treasury
share
o Split down – decrease shares and increase par or stated value per share and cost per treasury
share

TREASURY SHARES

 Issued shares, reacquired but not cancelled

 Can reacquire treasure shares up to the extent of retained earnings balance
 Deduction from equity
o Not considered as financial assets

COST METHOD

 Cash payment or carrying amount or noncash consideration given

 Reissuance of treasury shares at a “gain”
o Credit gain to share premium from treasury shares

 Reissuance of treasury shares at a “loss”

o Debit share premium from treasury shares
o Debit retained earnings

 Retirement of treasury shares at a “gain”

o Credit gain to share premium from treasury shares

 Retirement of treasury shares at a “loss”

o Debit share premium from original issuance
o Debit share premium from treasury shares
o Debit retained earnings
RETAINED EARNINGS
ITEM AFFECTING RETAINED EARNINGS
o Represents the following
 Cumulative balance of profit or loss
 Basis for dividend distributions
 Adjustment for prior period errors
 Changes in accounting policy
 Other equity adjustments

o Unappropriated retained earnings

 Can be declared as dividends

o Appropriated retained earnings

 Restricted and therefore cannot be declared as dividends

ACCOUNTING FOR SHARE DIVIDENDS

 Retained earnings are transferred to share capital

 There is no change in total assets and total equity
o Share dividend payable is a component of equity

 Measurement of capitalized retained earnings

o Less than 20% of the capital outstanding
 Fair value of share at the date of declaration
 Use par or stated value if the fair value is lower on date of declaration

o 20% or more of the capital outstanding

 Par or stated value

o If treasury shares will be reissued as dividends, use cost of treasury shares

ACCOUNTING FOR PROPERTY DIVIDENDS

 Dividend payable
o Measured at fair value of the property at the date of declaration
o Remeasured at year-end and at date of settlement based on fair value of the property.

 Property held for distribution (as if held for sale)

o Measured at the lower of carrying amount and fair value less cost to distribute
o Recognize impairment if fair value less cost to distribute is lower

 Recognize gain or loss at settlement date

o Difference between carrying amount of dividend payable and measurement of property.
BOOK VALUE PER SHARE AND PREFERENCE DIVIDEND
BOOK VALUE PER SHARE

 Amount paid to each type of shareholder assuming that the entity is liquidated.

 Book value per preference share

o Total preference shareholder’s equity ÷ Preference shares outstanding

 Book value per ordinary share

o Total ordinary shareholder’s equity ÷ Ordinary shares outstanding

 Total preference shareholder’s equity

o Total par or stated value outstanding
o Any liquidation premium (excess of liquidation price over the par or stated value)
o “Fixed” preference dividends (not declared)
 Cumulative preference shares (normally all dividends in arrears)
 Noncumulative preference shares (annual or current year only)
o Share in “Excess over the par” (participating)

 Total ordinary shareholder’s equity

o Total SHE – Total preference shareholder’s equity
BASIC EARNINGS PER SHARE
DEFINITION AND TYPES OF EARNINGS PER SHARE

 Amount attributable to each ordinary share outstanding

 Two presentations
o Basic EPS
o Diluted EPS

 Presentation of EPS is required for

o Entities whose ordinary shares are publicly traded
o Entities that are in the process of issuing ordinary shares or potential ordinary shares in
the public security market.

 Nonpublic entities are only encouraged to present EPS

BASIC EARNINGS PER SHARE

 Net income available to ordinary shareholders ÷ the weighted average ordinary shares
outstanding.

 Net income available to ordinary shareholders

o Adjust for preference dividend if an entity has preference share capital

o Deduct the annual or current year preference dividend from net income
 Whether declare or not, if the preference share capital is cumulative
 Only when declared, if the preference share capital is noncumulative

o Adjust for any “gain” or “loss” on preference share redemption

 Gain = Carrying amount of preference shares > redemption price (add to net income)
 Loss = Carrying amount of preference shares < redemption price (deduct from NI)
APPROPRIATION / QUASI REORGANIZATION
RETAINED EARNINGS
Represents the cumulative profits (net of losses, distribution to owners and other adjustments) which are retained
in the business and not yet distributed to shareholders.
 Total retained earnings may consist of:
 UNAPPROPRIATED - portion of retained earnings that is available for future distribution to
shareholders

 APPRORIATED - portion of retained earnings that is not available for future distribution to
shareholders

 May be a result of:

 LEGAL REQUIREMENT
 i.e., appropriated for the cost of treasury shares purchased

 CONTRACTUAL REQUIREMENT
 i.e., appropriated in compliance with loan agreements for protection of creditors

 DISCRETIONARY REQUIREMENT
 i.e., appropriated for expansion of factory

APPROPRIATION APPROPRIATION NO LONGER EXIST

RE – unappropriated xx RE –appropriated xx
RE – appropriated xx RE – unappropriated xx

QUASI – REORGANIZATION
 Is primarily an accounting procedure that involves a revaluation of corporate assets and liabilities and a
restatement of the corporate capital structure to enable the corporation to have a “fresh start” toward
financial solvency and profitability.

 Quasi-reorganization may be effected thru:

 Revaluation of entity’s PPE
 Recapitalization

 REVALUATION OF THE ENTITY’S PPE

 Assets and liabilities are revalued upwards or downwards
 Any resulting credit balance in revaluation surplus is used to eliminate the deficiency

 RECAPITALIZATION
 Refers to the change in the capital structure of an entity:
 Change from par to no par, or vice versa
 Reduction of par value or stated value

 Any resulting share premium is used to eliminate the deficiency

 SEC GUIDELINES FOR QUASI-REORGANIZATION
1. The company is allowed to undergo quasi-reorganization only if it is in financial distress.
2. Any revaluation surplus from fixed assets as appraised by a reputable licensed appraiser is used
to absorb the company’s accumulated past losses (i.e., deficit)
3. The revaluation surplus to be considered in the plan shall be limited to real properties, permanently
installed fixed assets, and other machineries and equipment directly needed and actually used in
the operations of the company.
4. Revaluation surplus on fixed assets undergoing repair or will require repair before the same can be
put into productive use shall not be included for purposes of quasi-reorganization.
5. The company shall present a project study on its future operations to support its quasi-
reorganization.
6. Any remaining revaluation surplus after quasi-reorganization shall not be used to absorb future
losses without prior approval of the Commission.
7. For purposes of dividend declaration, the retained earnings of the company shall be restricted to
the extent of the deficit wiped out of the revaluation surplus. Any subsequent piecemeal transfer of
revaluation surplus to retained earnings shall not be used for dividend declaration
Disclose in the notes to FS the mechanics, purpose and effect of the quasi-reorganization for a minimum
period of 3 years.
SHARE OPTIONS
SHARE BASED PAYMENTS
 A transaction in which an entity obtains goods or services as consideration either for its own equity
instruments or a payment based on the price of its equity instruments

3rd Party
Employee

TYPES OF SHARE-BASED PAYMENTS

EQUITY CASH CHOICE BETWEEN EQUITY

SETTLED SETTLED SETTLED AND CASH
SETTLED

Entity receives goods/services Entity receives goods/services Entity receives goods/services

and pays for them by issuing its and incurs an obligation to pay and either the entity or the
shares of stocks or share cash at an amount that is counterparty is given a choice
options based on the fair value of its for settlement in the form of
equity instrument equity instrument or cash
based on the fair value of the
equity instrument.
VESTING CONDITIONS
Determined whether the entity receives the required services from the employee that will entitle the employee
to receive cash, other assets or equity instruments under a share-based payment arrangement.

Does it only require a specified period of

service to be completed?

YES NO
SERVICE CONDITION PERFORMANCE CONDITION

Is it related to the market price of the

entity’s equity instrument?

YES NO
MARKET CONDITION NON-MARKET CONDITION
i.e., target share price i.e., sales
EQUITY SETTLED
Entity receives goods/services and pays for them by issuing its own shares of stocks
MEASUREMENT
NON- EMPLOYEE EMPLOYEE
st st
1 : FV of goods or services received 1 : FV of share options granted on grant date
2nd: FV of shares issued 2nd: Intrinsic Value
rd:
3 Par value or stated value of shares issued = excess of FV shares over option price

Date in which the entity and the supplier agreed to a share-based payment
Most common: SHARE OPTIONS

 SHARE OPTIONS
 A contract that gives the holder the right, but not the obligation, to subscribe to the entity’s shares
at a fixed or determinable price for a specified period. Option Price

 Additional compensation granted to officers and key employees

 Share Options Outstanding (Part of Share premium)

 RECOGNITION OF COMPENSATION EXPENSE

 SHARE OPTION VESTS IMMEDIATELY
 Recognized in FULL with a corresponding increase in equity

 SHARE OPTION DO NOT VEST IMMEDIATELY

 Recognized OVER THE VESTING PERIOD as the employees render service

COMPENSATION EXPENSE = Value of component x number of components

Fair value of equity instrument at grant date

Expected number of equity instrument to vest
SHARE APPRECIATION RIGHT
CASH SETTLED
Entity receives goods/services and incurs an obligation to pay cash at an amount that is based on the fair value
of its equity instrument.
 INITIAL MEASUREMENT
 Goods or services received and the related liability are measured at the fair value of the liability

 Liability is remeasured at fair value

Balance sheet date
Until date of settlement

Most Common: SHARE APPRECIATION RIGHTS

SHARE APPRECIATION RIGHTS

 DEFINITION
 A form of compensation whereby the employee is entitled to future cash payment based on the
increase in the entity’s share price over a specified level over a specified period of time.

 Recognized a liability for future cash payment

Initially and subsequently measured at the

Fair value of the Share Appreciation Rights

= Excess of the market value of the share over a predetermined price

 RECOGNITION OF COMPENSATION EXPENSE

 SHARE APPRECIATION RIGHTS VESTS IMMEDIATELY
 Recognized in FULL with a corresponding increase in liability at grant date

 SHARE APPRECIATION RIGHTS DO NOT VEST IMMEDIATELY

 Recognized OVER THE VESTING PERIOD as the employees render service
SHARE OPTIONS OUTSTANDING & SHARE APPRECIATION RIGHTS
SHARE BASED TRANSACTION WITH CASH ALTERNATIVES
 RIGHT TO CHOOSE SETTLEMENT
 ENTITY

With present obligation to settle in cash?

YES NO
CASH SETTLED EQUITY SETTLED

If at settlement date, the entity settles in cash, the

cash payment is accounted as repurchase of
equity instrument
SOO xx
Compensation Expense xx
Cash xx

 PROVIDER OF GOODS OR SERVICES

 With compound financial instrument (partly liability and partly equity)

PROVIDER: EMPLOYEE PROVIDER: 3RD PARTY

FV of share alternative xx FV of goods/services xx
FV liability at grant date (xx) FV liability at grant date (xx)
Value assigned to equity xx Value assigned to equity xx

COMPENSATION EXPENSE = SOO + SARS PAYABLE

BOOK VALUE AND PREFERENCE DIVIDENDS
BOOK VALUE PER SHARE
 Theoretically the amount that would be paid on each share assuming the entity is liquidated

Total shareholders equity

Book Value per Share =
Number of shares outstanding

SHARE CAPITAL OUTSTANDING # OF SHARES

Issued Share Capital ₱xx ₱xx
Subscribed share capital xx xx
Total xx xx
Less: Treasury shares (xx) (xx)
Total xx xx

*Treasury shares are treated as retired shares

*Subscription receivable is not deducted in computing for total shareholder’s equity

 MORE THAN ONE CLASS OF SHARE CAPITAL

Preference shareholders′ 𝑒𝑞𝑢𝑖𝑡𝑦

BVPS Preference =
Number of preference shares outstanding

Ordinary shareholders equity

BVPS Ordinary =
Number of ordinary shares outstanding

Preference SHE Ordinary SHE

Preference Share Capital at par xx Total Shareholders’ equity xx
Liquidation Premium xx Preference SHE xx
Dividends xx xx
xx
Liquidation Value or Price

 DIVIDENDS FOR PREFERENCE SHE COMPUTATION

 If no dividends in arrears, no dividend shall be allocated to preference shares

 NON-CUMULATIVE: allocated current year dividends only

 CUMULATIVE: allocate all dividends in arrears

 NON-PARTICIPATING: allocate dividends equal to the fix rate only

 PARTICIPATING: allocate additional dividends in proportion to ordinary shareholders on the

basis of par value, in excess of the fixed rate

 ASSUMED AVAILABLE FOR DIVIDENDS

 Retained earnings
 Share premium
 Revaluation Surplus
BASIC EARNINGS PER SHARE
EARNINGS PER SHARE
 Amount of profit or loss attributable to each ordinary equity holders

 TYPES
o BASIC EARNINGS PER SHARE
o DILUTED EARNINGS PER SHARE

 Required to be presented by
o Entities whose ordinary share (or potential ordinary shares) are publicly traded
o Entities that are in the process of issuing ordinary (or potential ordinary share) share to the
public

 BEPS AND DEPS PRESENTATION

 CONTINUING OPERATIONS AND TOTAL OPERATIONS: Face of Profit or Loss

 DISCONTINUED OPERATIONS: Disclosed either on the face of Face of Profit or Loss or in the
notes

 IF ENTITY PRESENTS BOTH CONSOLIDATED FS AND SEPARATE FS: Conso FS: Face of P/L

BASIC EARNINGS PER SHARE

 Aims to provide a measure of interest of each ordinary share in the performance of the entity

NI−Preference Share Dividends

BEPS =
WANOSO

Weighted by the fraction of period outstanding CUMULATIVE

- Issuance of shares: issue date deduct from NI one entitled year
- Business Combination: acquisition date dividend whether declared or not
- Conversion to ordinary shares: conversion
- Purchase of treasury shares: acquisition date NON-CUMULATIVE
- Settlement of liability: settlement date deduct from NI only the dividend
- Subscribed shares: subscription date declared during the period. No
declaration, no deduction
REDEEMABLE PREFERENCE SHARES
- Dividends (treated as interest expense) are ignored

 Changes in ordinary share WITHOUT corresponding changes in resources

 Bonus issue or share dividend
 Share split

Apply RETROSPECTIVELY:
 As if the change occurred at the beginning of the earliest period the information is
presented

 Still applicable, if such changes occur after the balance sheet date but prior to the date
of financial statements are authorized for issue

 REDEMPTION OF PREFERENCE SHARE

CV of Preference Share > Redemption Price: GAIN

NI−Preference Dividends + Gain on Redemption

BEPS =
WANOSO

CV of Preference Share > Redemption Price: LOSS

NI−Preference Dividends − Loss on Redemption

BEPS =
WANOSO
Fair value of the shares immediately prior to the exercise of the rights

SHARE RIGHTS
Fair value of Share−Rights On
Adjustment Factor =
Theoretical Value of Ex−Rights

FV Share – Rights On xx
FV of Share Rights On − Subscription Price
Theoretical Value of Rights On (xx)
Theoretical Value Ex Rights xx # of Rights for 1 share + 1
DILUTED EARNINGS PER SHARE
DILUTED EARNINGS PER SHARE
 DILUTION
o A reduction in earnings per share or an increase in loss per share resulting from the assumption
that convertible instruments are converted, that options or warrants are exercised

 POTENTIAL ORDINARY SHARES (POS)

o A financial instrument or other contract that may entitle its holder to ordinary shares.

 OBJECTIVE
o To reflect the maximum possible dilutive effect arising from POS outstanding during the
reporting period

 POTENTIAL ORDINARY SHARES

 CONVERTIBLE BONDS PAYABLE  AS IF converted to Ordinary shares
 Dilutive if its conversion decrease BEPS or increase BLPS

 CONVERTIBLE PREFERENCE SHARES  AS IF converted to Ordinary shares

 Dilutive if its conversion decrease BEPS or increase BLPS

 SHARE OPTIONS AND WARRANTS  AS IF exercised to purchase Ordinary shares

 Dilutive if “in the money”

CALL OPTION: Exercise Price < Average Market Price of ordinary share
PUT OPTION: Exercise Price > Average Market Price of ordinary share

SOURCES OF POS ADJUSTMENT TO BEPS ADJUSTMENT TO BEPS

NUMERATOR DENOMINATOR
CONVERTIBLE PREFERENCE SHARE + Preference share dividends + WANOSO POS
CONVERTIBLE BONDS SHARE + After tax interest expense + WANOSO POS
SHARE OPTIONS None + WANOSO POS

 MULTIPLE POTENTIAL ORDINARY SHARES

 Rank from Most dilutive to Least dilutive

Lease Incremental EPS Highest incremental EPS

 CONVERTIBLE BONDS
After tax interest expense
INCREMENTAL EPS =
# of Potential ordinary shares

 CONVERTIBLE PREFERENCE SHARES

Preference Dividends
INCREMENTAL EPS =
# of Potential ordinary shares

 OPTIONS AND WARRANTS

o Most dilutive since no incremental EPS
CASH AND ACCRUAL BASIS
CASH BASIS VS ACCRUAL BASIS
 CASH BASIS
 REVENUE is recognized when CASH is RECEIVED
 EXPENSES is recognized when CASH is PAID
 NI/NL = collection – payment

 ACCRUAL BASIS
 REVENUE is recognized when EARNED regardless when cash is received
 EXPENSE is recognized when INCURRED regardless when cash is paid

 SALES
CASH BASIS ACCRUAL BASIS
Cash Sales Cash Sales
Collection of trade receivables Credit Sales
Advances from customers

 PURCHASES
CASH BASIS ACCRUAL BASIS
Cash purchase Cash purchase
Payment of trade payables Purchase on account
Advances to suppliers

 BAD DEBTS
CASH BASIS ACCRUAL BASIS
Not recorded since AR is not recognized Treated as bad debts expense

 OTHER INCOME
CASH BASIS ACCRUAL BASIS
Collection of other income Other income earned
Deferred income for the year Accrued income for the year

 OTHER EXPENSES
CASH BASIS ACCRUAL BASIS
Payment of expenses Expenses incurred
Prepaid expenses for the year Accrued expenses for the year

 DEPRECIATION
CASH BASIS ACCRUAL BASIS
Normally provided Normally provided
SINGLE ENTRY AND ERROR
SINGLE ENTRY
 DEFINITION
 A system of record keeping in which transactions are not analyzed and recorded using the
double entry system

 BOOKS
 DAY BOOK / GENERAL JOURNAL
 Records transactions in chronological order

 CASH BOOK
 Records all transactions affecting cash

 DEBTOR’S AND CREDITOR’S LEDGER

 Records accounts receivable and accounts payable with list of customers and creditors
with corresponding balances

 STATEMENT OF FINANCIAL POSITION

ACCOUNT SOURCE/S
Cash Cash on hand as counted and cash records reconciled with
bank statements

Accounts receivable Unpaid sales invoices

Confirmation from customer

Inventory Physical count

Inventory purchase invoices

Property, plant and equipment Official receipts

Deed of sale

Accounts payable Confirmation from creditors

Accrued expenses Reference from supporting documents

Confirmation from outside parties

Equity Total assets – total liabilities

 INCOME STATEMENT
 Profit or loss is determined using the
CAPITAL MAINTENANCE APPROACH

NET INCOME (LOSS)

Capital / RE end xx
Capital / RE beg (xx)
Increase (decrease) xx
Add: Withdrawals xx
Dividends xx
Less: Additional investments (xx)
Net Income (loss) xx
ERRORS
 DEFINITION
 Omissions and misstatements in the financial statement
TYPES CURRENT - Errors committed and
ACCORDING PERIOD discovered in the same period
TO PERIODS
- AJE: Real and Nominal
accounts affected

PRIOR COUNTER BALANCING

PERIOD if not detected, will automatically
be corrected in the subsequent
- Errors committed in prior period
periods and discovered in
NON-COUNTER BALANCING
subsequent period
if not detected, will not
automatically be corrected in the
- AJE: RE beg
subsequent period

COUNTER BALANCING ERROR Failure to accrue salaries payable

 EFFECTS Y1 Y2
 I/S for two successive periods incorrect SCI NI over NI under
 Asset or liability at end of first period is incorrect SFP Liab under Liab ✔
 Asset or liability at end of second period is correct

EXAMPLES EFFECT ON PROFIT

ERROR CURRENT YEAR NEXT YEAR
All Accruals: Accrued Income EI over Over Under
Accrued Expense EI under Under Over
Accrued Exp under Over Under
Prepayments: Expense Method
Accrued Exp over Under Over
Deferrals: Income Method Accrued Rev under Under Over
Accrued Rev over Over Under
Inventories: Under or Over Prepaid Exp under Under Over
Prepaid Exp over Over Under

Only CB errors committed in the immediate prior year should be corrected

No need to correct CB errors committed earlier than immediate prior year

NON-COUNTE BALANCING ERROR

 EFFECTS
 I/S in year of error is incorrect; I/S in succeeding year is not affected
 SFP in year of error and succeeding SFP are incorrect until error is corrected

Under depreciation expense EXAMPLES

Y1 Y2 Prepayments: Asset Method
SCI NI over NI ✔ Deferrals: Liability Method
SFP PPE over PPE over Depreciation
Capitalization of expense

All NCB errors whether committed in the immediate prior year or earlier should be corrected
STATEMENT OF CASH FLOWS
STATEMENT OF CASH FLOWS
 CASH FLOW ACTIVITY
 Transactions that result in inflow or outflow of cash and cash equivalents

 NON-CASH TRANSACTIONS
 Transactions regarding investing and financing activities during a period that affect assets or
liabilities but do not result in cash flows are not reported in SCF.

Cash flows xx
Operating Activities xx
Investing Activities xx
Financing Activities xx
Net increase or decrease in cash and cash equivalent xx
Cash and cash equivalents, beg xx
Cash and cash equivalents, end xx

From principal revenue From the activities involving

producing activities non-trade liabilities, borrowings
Involves the acquisition and
disposal of non-current assets and equity transactions
and non-trade investments

SUMMARY
ACTIVITY AFFECTED
OPERATING Profit or loss
Current assets and liabilities
INVESTING Non-current assets and non-trade investments
FINANCING Borrowings and Equity

 OPERATING ACTIVITIES
DIRECT METHOD INDIRECT METHOD
Shows gross cash receipts and gross Profit or loss is adjusted for the effects of non-cash
cash payments items and changes in operating assets and liabilities

Cash flows from operating activities: Cash flows from operating activities
Cash receipts from customers xx Net Income after tax xx
Cash paid to suppliers (xx) Adjustments for:
Cash paid for other expenses (xx) Interest expense xx
Cash generated from operations xx Income tax expense xx
Interest paid (xx) Depreciation xx
Income taxes paid (xx) Gain from sale of PPE (xx)
Net Cash from Operating Activities xx Increase in trade receivables (xx)
Decrease in inventories xx
Decrease in trade payables (xx)
Cash generated from operations xx
Interest paid (xx)
Income taxes paid (xx)
Net Cash from Operating Activities xx

CURRENT ACCOUNTS ADJUSTMENT TO NI

INC Current Assets Minus
DEC Current Assets Plus
INC Current Liabilities Plus
DEC Current Liabilities Minus
 INTEREST
 PAID generally: operating
alternatively: financing

 RECEIVED generally: operating

alternatively: investing

 DIVIDENDS
 PAID generally: financing
alternatively: operating

 RECEIVED generally: operating

alternatively: investing

 INCOME TAX
 PAID generally: operating
 REFUND generally: operating

 ALTERNATIVE: either investing or financing

STATEMENT OF CASH FLOWS
INTRODUCTION

 Required financial statement which summarizes the operating, investing and financing activities of
an entity.

 Primary purpose of a statement of cash flows is to provide relevant information about an entity’s cash
receipts and cash payments during a period.

OPERATING ACTIVITIES

 Primary or principal activities of an entity

 Generally, this activity pertains to

o Collection of income
o Payment of expense

 Items connected to determining profit or loss.

INVESTING ACTIVITIES

 Cash receipts and payments connected to the following:

o Acquisition and disposal of property, plant and equipment

o Acquisition and disposal of intangible assets

o Acquisition and disposal of short-term and long-term investments, except

 Trading investments (operating activities)
 Cash equivalents (no effect on the cash flow statement)

o Making and collecting loans (if the entity is not a financial institution)
 If entity is a financial institution  Operating Activities

FINANCING ACTIVITIES

 Cash receipts and payments connected to

o Nontrade liabilities (if trade liabilities, they are part of operating activities)
 Bonds payable
 Bank loan
 Lease liability under lessee accounting

o Equity transaction
 Share capital
 Treasury shares
 Dividends declared.

INTEREST AND DIVIDEND PRESENTATION

Default Alternative
Interest paid Operating Financing
Interest received Operating Investing
Dividend received Operating Investing
Dividend paid Financing Operating
DIRECT METHOD AND INDIRECT METHOD

 Direct method
o Show in detail the major class of gross receipts and gross payments
o Applicable to operating, investing and financing activities

 Indirect method
o Applicable to operating activities only

o From profit or loss to net cash flow from operating activities

o Adjust for collection of income and payment of expense if not yet included in profit or loss.

o Remove any noncash income and noncash expense

o Remove any gain or loss on disposal of PPE, Intangible Assets and Investments
 Already included in investing activities

o Remove any gain or loss on early settlement of nontrade liabilities

 Already included in financing activities
SMALL & MEDIUM ENTITIES
SMALL & MEDIUM ENTITY
 The IASB describes “small and medium-sized entities” or SMEs as entities that
a. Do not have public accountability
b. Publish general purpose financial reports for external users

 Has public accountability if:

a. Its debt or equity instruments are traded in a public market or it is in the process of issuing such
instruments for trading in public market.

b. It holds assets in fiduciary capacity for a broad group of outsiders as one of its primary
businesses.

 SME under Philippine Jurisdiction

a. With total assets between ₱3M and ₱350M, OR with total liabilities between ₱3M and ₱250M.

b. That is not required to file financial statements under SRC Rule 68.1. This SRC Rule 68.1 pertains
to “listed entities” whose shares are traded in a public market.

c. That is not in the process of filing financial statements for the purpose of issuing any class of
instruments in a public market.

d. That is not a holder of a secondary license issued by a regulatory agency such as a bank (all
types of banks), an investment house, a finance company, an insurance company, securities
broker or dealer, a mutual fund and pre-need company.

e. That is not a public utility.

INVESTMENT IN ASSOCIATES
COST MODEL EQUITY MODEL FAIR VALUE MODEL
Purchase Price + Purchase Price + Purchase Price
Initial Measurement
Transaction Cost Transaction Cost Transaction Cost (EXP)
Subsequent Measure Cost – Accum. Imp Loss With adjustment Fair value
Change in FV N/A N/A To P/L
Share in NI/NL N/A P/L (adjustment to CV) N/A
Share in OCI N/A OCI (adjustment to CV) N/A
Amortization of Excess
N/A P/L (decreases CV) N/A
Cost
Dividends Income Liquidating Dividend Income
Impairment Loss CV > FVLCTS CV > FVLCTS N/A
With Published Price
N/A 2nd priority 1st priority
Quotation

INTANGIBLE ASSETS
 INITIAL MEASUREMENT: at COST
 SUBSEQ MEASUREMENT: Cost Model

 All intangible Assets including GW have finite life

o Finite life can’t be determined: use max of 10 years
o Amortized
 12/31/24: First time to adopt IFRS for SME
2023: Latest period using previous framework

1/1/23 12/31/23 12/31/24

Date of Transition End of latest period using
Previous framework FS prepared at IFRS for SME
Equity at previous framework xx
Adjustment of A & L through RE xx P&L at previous framework xx
Equity at IFRS for SME xx Adjustment of Profit & Loss xx
P&L at IFRS for SME xx

12/31/23
End of latest period using
Previous framework
Equity at previous framework xx
Adjustment of A & L through RE xx
Equity at IFRS for SME xx

Micro-business entities
Micro-business entities are entities whose total assets or total liabilities are below the P3,000,000 floor threshold.
Under SEC ruling, Micro-business entities have the option to use any of the following in the preparation of
financial statements:
a. PFRS for Small Entities
b. Income tax basis

Exemptions from IFRS for SMEs

The Philippine SEC on October 7, 2010 resolved to exempt from the mandatory adoption of IFRS for SMEs small
and medium-sized entity that meets any of the following criteria:
1. It is subsidiary of a parent company reporting under full IFRS.
2. It is a subsidiary of a foreign parent company that will be moving towards full IFRS.
3. It is a subsidiary of a foreign parent company that has been applying the standards for a nonpublicly
accountable entity for local reporting purposes and is considering moving to full IFRS.
4. It has short-term projections that it will breach the quantitative thresholds set in the criteria for an SME
and the breach is expected to be significant and continuing.
5. It is part of a group, either as a joint venture or an associate, reporting under full IFRS.
6. It is a branch office of a foreign entity reporting under full IFRS.
7. It has concrete plans to conduct an initial public offering within the next two years.
8. It has a subsidiary that is mandated to report under full IFRS.
9. It has been preparing financial statements using full IFRS and has decided to liquidate its assets.

Significant and continuing

If an SME that uses the IFRS for SMEs in a current year breaches the floor and ceiling size criteria at the end of
the current year, the entity shall be required to transition to full IFRS in the next year if the ceiling threshold is
breached or another acceptable accounting basis if the floor threshold is breached.
This transition must be made provided the event that caused the change is considered “significant and
continuing”. As a general rule, 20% or more of total assets or total liabilities would be considered significant.

First-Time adopter
A first-time adopter of the IFRS for SMEs is an entity that presents the first annual financial statements that
conform with the IFRS for SMEs.
Date of transition
The date of transition to IFRS for SMEs is the beginning of the earliest period for which full comparative
information is presented in accordance with the IFRS for SMEs. Thus, if the first-time adopter presents the first
annual financial statements in conformity with the IFRS for SMEs on December 31, 2023 on comparative basis,
the date of transition to IFRS for SMEs is January 1, 2022.

Opening statement of financial position

The opening statement of financial position is the statement of financial position as of the date of transition to
the IFRS for SMEs. In the opening statement of financial position, a first-time adopter shall:
a. Recognize all assets and liabilities whose recognition is required by the IFRS for SMEs.
b. Not recognize as assets or liabilities if the IFRS for SMEs does not permit such recognition.
c. Reclassify items that it recognized under the previous accounting framework as one type of asset, liability
or component of equity, but a different type of asset, liability or equity under the IFRS for SMEs.
d. Apply the IFRS for SMEs in measuring all recognized assets and liabilities.
The resulting adjustments arising from transactions, other events and conditions before the date of transition to
IFRS for SMEs shall be recognized directly in retained earnings or another category of equity, if appropriate.

SIGNIFICANT DIFFERENCES BETWEEN IFRS FOR SMEs AND FULL IFRS

1. Components of financial statements – Basically similar to full IFRS
When the only changes to the equity are a result of profit or loss, payment of dividends, prior periods
errors, changes in accounting policy, an SME is permitted but not required to present a “single
statement of income and retained earnings” instead of both a statement of comprehensive income and
statement of changes in equity.

Under Full IFRS, a statement of changes in equity is always required. A single statement of income and
retained earnings is prohibited under Full IFRS

2. Statement of financial position

Same definition of current assets, noncurrent assets, current liabilities and noncurrent liabilities

Same line items for SMEs and Full IFRS, except that the following line items are not required for SMEs:
Full IFRS requires presentation of investments in associates but not investment in joint ventures.

IFRS for SMEs requires presentation of both investments in associates and investments in
joint ventures as separate line items.

Paragraph 4.2 of IFRS for SMEs is amended to include as a separate line-item investment
property carried at cost less accumulated depreciation and impairment.

3. Other of comprehensive income

Under full IFRS, the components of other comprehensive income include:
Reclassified to profit or loss
a. Translation gain or loss of foreign operation
b. Unrealized gain or loss on derivative contract as a cash flow hedge
c. Unrealized gain or loss on debt investment measured at FVOCI
Reclassified to retained earnings
a. Unrealized gain or loss on equity investment measured at FVOCI
b. Remeasurements of defined benefit plan
c. Revaluation surplus
d. Change in fair value attributable to the credit risk of financial liability designated at FVPL.

COMPONENTS OF OCI UNDER IFRS FOR SMEs

Reclassified to retained earnings
a. Translation gain or loss of a foreign operation
 b. Actuarial gain and loss – reporting actuarial gain and loss as OCI is optional because this may
be recognized in profit or loss
c. Revaluation surplus of property, plant and equipment
Reclassified to profit or loss
d. Change in fair value of hedging instrument
PFRS FOR SMALL ENTITIES
The Philippine Securities and Exchange Commission defines Small Entities (SEs) as those entities:
a. With total assets between ₱3M and ₱100M, or total liabilities between ₱3M and ₱100M.

b. That are not required to file financial statements under SEC SRC Rule 68.

c. That are not in the process of filing financial statements for the purpose of issuing any class of instruments
in a public market.

d. That are not holders of secondary license issued by a regulatory agency, such as bank, investment house
and other financial institutions.

MICRO ENTITIES SMALL ENTITIES MEDIUM ENTITIES SME

SIZE CRITERIA
₱3M - ₱350M
ASSETS < ₱3M ₱3M - ₱100M Over ₱100M - ₱350M
₱3M - ₱250M
LIABILITIES < ₱3M ₱3M - ₱100M Over ₱100M - ₱250M
APPLICABLE
Income Tax Basis PFRS for SE PFRS for SME PFRS for SME
STANDARDS