Chapter 1: History, Development and Functions of The Standard-Setting Bodies

PART 1: Development of Financial Reporting Framework, FAR 1
Standard-Setting Bodies and Regulation of the Accountancy Profession
CHAPTER 1: HISTORY, DEVELOPMENT AND FUNCTIONS OF THE

STANDARD-SETTING BODIES
A. IASB (International Accounting Standards Board)

- Standard-setting body of the IFRS foundation
- Replaced International Accounting Standards Committee (IASC) on April 1, 2001
- Issued the International Financial Reporting Standards (IFRSs)
B. IFRIC (International Financial Reporting Interpretations Committee )

- Committee that prepares interpretations of how specific issues should be accounted under the application of IFRS
- Replaced Standing Interpretations Committee (SIC) in 2002
C. FRSC (Financial Reporting Standards Council)

- Official accounting standard-setting body in the Philippines
- Replaced the Accounting Standards Council (ASC)
- Created under the Philippine Accountancy Act of 2004 (RA no. 9298) by the Professional Regulation Commission
(PRC) upon the recommendation of the Board of Accountancy (BOA)
- Approved the Philippine Accounting Standards (PAS) and Philippine Financial Reporting Standards (PFRS)
- Composed of 15 individuals that have a term of 3 years renewable of another term
- 1 Chairman - senior accounting practitioner
- 14 Representatives:
o 1 BOA o 1 FINEX - major organization of
o 1 SEC preparers and users
o 1 BSP o CPA organizations
o 1 BIR  2 Public Practice
o 1 COA  2 Commerce and Industry
 2 Academe
 2 Government
D. PIC (Philippine Interpretations Committee)

- Prepare interpretations of PFRS for approval by the FRSC
- Formed by the FRSC in August 2006
- Replaced the Interpretations Committee (IC)
PART 1: Development of Financial Reporting Framework, FAR 2
Standard-Setting Bodies and Regulation of the Accountancy Profession
CHAPTER 2: REGULATION AND ENVIRONMENT OF THE

ACCOUNTING PROFESSION IN THE PHILIPPINES
A. BOA (Professional Regulatory Board of Accountancy)

- Supervise the registration, licensure and practice of accountancy in the Philippines
- Created under RA no. 9298
- Consists of a chairperson and 6 members appointed by the President of the Philippines
B. PICPA (Philippine Institute of Certified Public Accountants)

- Accredited professional organization of professional accountants in the Philippines
- founded in November 1929 and was accredited on October 2, 1973
C. Sectors of practice of accountancy profession

1. Commerce and Industry
- Employment in the private sector in a position that requires professional knowledge in accounting
2. Public Practice
- Rendering of accounting our audit related services to more than one client on a fee basis
3. Government
- Employment to a position in an accounting professional group in the government
4. Education / Academe
- Employment in an educational institution which involves teaching of subjects related to accounting
D. Accreditation requirements
- For the renewal of CPA license and accreditation of CPA to practice the accountancy profession, it is
mandatory to abide with the RA no. 10912 (Continuing Professional Development) by earning 120 CPD
credit units in a compliance period of 3 years.
- Excess credit units earned shall not be carried over to the next three-year period, except credit units earned
for masteral and doctoral degrees.
- A CPA shall be permanently exempted from CPD requirements upon reaching the age of 65 years. However,
this exemption applies only to the renewal of CPA license and not for the purpose of accreditation to practice
the accountancy profession.
PART 2: Conceptual Framework, Accounting Process and FAR 3
Presentation of Financial Statements
CHAPTER 3: THE CONCEPTUAL FRAMEWORK FOR FINANCIAL

REPORTING
A. Purpose of the Conceptual Framework

 assist the International Accounting Standards Board (Board) to develop IFRS Standards (Standards) that are
based on consistent concepts
 assist preparers to develop consistent accounting policies when no Standard applies to a particular
transaction or other event, or when a Standard allows a choice of accounting policy; and
 assist all parties to understand and interpret the Standards.
B. Contribution of Conceptual Framework to the Foundation for the Development of Standards

 contribute to transparency by enhancing the international comparability and quality of financial information,
enabling investors and other market participants to make informed economic decisions.
 strengthen accountability by reducing the information gap between the providers of capital and the people to
whom they have entrusted their money
 contribute to economic efficiency by helping investors to identify opportunities and risks across the world, thus
improving capital allocation, lowering the cost of capital and reducing international reporting costs
C. Status of Conceptual Framework

- The Conceptual Framework sets out the concepts that underlie the preparation and presentation of financial
statements for external users.
- The Conceptual Framework is not an IFRS and hence does not define standards for any particular
measurement or disclosure issue. It does not override any specific IFRS. In cases where there is a conflict,
the requirements of the IFRS prevail over those of the Conceptual Framework.
- When a Standard departs from the Conceptual Framework, the explanation can be found in the Basis for
Conclusions on the Standard.
- Conceptual Framework may be revised from time to time; however, it does not result automatically to
changes in Standards.
D. Scope of the Conceptual Framework

 objective of financial reporting
 qualitative characteristics of useful financial information
 financial statements and the reporting entity
 elements of financial statements
 recognition and derecognition
 measurement
 presentation and disclosure
 concepts of capital and capital maintenance
Conceptual Framework  General Purpose Financial Reporting  General Purpose Financial Statements
E. Objective of Financial Reporting

- To provide financial information about the reporting entity that is useful to existing and potential investors,
lenders and other creditors in making decisions relating to providing resources to the entity.
General Purpose Financial Reporting

- Aims to provide information that caters to the common needs of the maximum number of primary users
- Do not and cannot provide all the information needs of primary users
- Do not directly show the value of a reporting entity but helps users estimate the value of an entity
- based on estimates, judgements and models rather than exact depictions
Primary users
- existing and potential investors, lenders and other creditors
- cannot demand information directly from reporting entities
- to whom general purpose financial reports are directed to
Decisions relating to providing resources

 buying, selling or holding equity and debt instrument

 providing or settling loans and other forms of credit
 exercising rights to vote on, or otherwise influence, management’s actions that affect the use of the entity’s
economic resources.
Prospects for future Economic resources,

Expected
Financial information provided by General Purpose Financial
net cashReports
inflows and claims and changes and
Decisions
 Financial position (resources and claims against the reporting
Returns
entity)
Management
How effective and
efficient the management
- Helps in assessing:
o Liquidity and solvency
stewardship utilized resources
o Needs for additional financing and how successful it is likely to be obtaining that financing
o Management’s stewardship on the use of economic resources
 Changes in economic resources and claims

- Resulted from:
o Financial performance (income and expenses)
 Financial performance
- Helps in assessing ability to produce return
 Helps in assessing how effective and efficient the management used the entity’s
resources
o Helps in assessing management’s stewardship
o Helps in predicting how effective and efficient the resources will be used in the future
o Helps in assessing prospects for future net cash inflows
 Variability of return
- Assess the uncertainty of future cash flows
 Accrual accounting
- Provides better basis for assessing an entity’s financial performance
 Past cash flows

- Helps assess the ability to generate future cash flows
o Other events and transactions

- May come from issuing debt and equity instruments
F. Qualitative Characteristics of Useful Financial Information

1. Fundamental qualitative characteristics
- Characteristics that make the information useful
o Relevance
- Can make a difference in the decision of users
 Predictive value – help make predictions
 Confirmatory value – help confirm previous predictions
Materiality
- Omitting, misstating or obscuring it could reasonably be expected to influence decisions
- “Entity-specific” aspect of relevance
- Identify  Assess  Organize  Review (Materiality Process)
o Faithful representation
- Information provides a true, correct and complete depiction of the economic phenomena that it purports to
represent
- When an economic phenomenon’s substance differs from its legal form, it requires the depiction of the
substance (Substance over form)
 Completeness – all information necessary to understand the phenomenon being depicted is provided
 Neutrality – information is selected without bias

 Free from error – no errors in the description and in the process by which the information is selected and
applied
Prudence
- Use of caution when making judgments under conditions of uncertainty
- Assets or income are not overstated, and liabilities or expenses are not understated
2. Enhancing qualitative characteristics

- Enhance the usefulness of information
o Comparability
- Helps users identify similarities and differences between different sets of information
 Intra-comparability – single entity but in different periods
 Inter-comparability – different entities in a single period
Consistency
- Use of the same methods for the same items
“Comparability is the goal while consistency is the means of achieving that goal.”
o Verifiability
- Different users could reach a general agreement as to what the information purports to represent
 Direct verification – involves direct observation
 Indirect verification – checking the inputs to a model or formula and recalculating the outputs using the
same methodology
o Timeliness
- Available to users in time to be able to influence their decisions
o Understandability
- Presented in a clear and concise manner
Cost constraint
- Pervasive constraint on the entity’s ability to provide useful financial information
- Costs must not outweigh the benefits
G. Financial Statements
Objective
To provide financial information about the reporting entity’s assets, liabilities, equity, income and expenses that is
useful to users of financial statements in assessing the prospects for future net cash inflows to the reporting entity and
in assessing management’s stewardship of the entity’s economic resources.
Scope of Financial Statements

o statement of financial position, by recognizing assets, liabilities and equity
o statement(s) of financial performance,9 by recognizing income and expenses
o other statements and notes, by presenting and disclosing information about:
 recognized assets, liabilities, equity, income and expenses
 assets and liabilities that have not been recognized
 cash flows
 contributions from holders of equity claims and distributions to them
 the methods, assumptions and judgements used in estimating the amounts presented or disclosed,
and changes in those methods, assumptions and judgements
Reporting Period
- Financial statements are prepared for a specified period of time and provide information about assets, liabilities
and equity that existed at the end of the reporting period, or during the reporting period and income and
expenses for the reporting period.
Comparative information
- Financial statements also provide comparative information for at least one preceding reporting period.
Forward looking information

- Financial statements are designed to provide information about past events.
- Information about possible future transactions and other possible future events (forward-looking information) is
included in financial statements if it relates to the entity’s assets, liabilities or equity that existed at the end of the
reporting period, or during the reporting period, or to income or expenses for the reporting period; and is useful
to users of financial statements.
- Financial statements include information about transactions and other events that have occurred after the end of
the reporting period if providing that information is necessary to meet the objective of financial statements
Perspective adopted in financial statements

- Financial statements provide information about transactions and other events viewed from the perspective of the
reporting entity as a whole
Going concern assumption

- Financial statements are normally prepared on the assumption that the reporting entity is a going concern and
will continue in operation for the foreseeable future. Hence, it is assumed that the entity has neither the intention
nor the need to enter liquidation or to cease trading.
- If such an intention or need exists, the financial statements may have to be prepared on a different basis.
H. Reporting entity
- an entity that is required, or chooses, to prepare financial statements.
- can be a single entity or a portion of an entity or can comprise more than one entity.
- not necessarily a legal entity.
Financial Statement Scope

1. Consolidated financial statements Parent and subsidiaries
2. Unconsolidated financial statements Parent only
3. Combined financial statements Two or more entities that do not have parent-
subsidiary relationship
4. Individual financial statements Subsidiary
I. Elements of Financial Statements

Asset
- a present economic resource controlled by the entity as a result of past events.
- An economic resource is a right that has the potential to produce economic benefits.
- The asset is the present right that has the potential to produce economic benefits and not the future economic
benefits that the right may produce.
 Right
- May either be:
o rights that correspond to an obligation of another party
 rights to receive cash.
 rights to receive goods or services.
 rights to exchange economic resources with another party on favorable terms.
 rights to benefit from an obligation of another party to transfer an economic resource if a
specified uncertain future event occurs (see paragraph 4.37).
o rights that do not correspond to an obligation of another party
 rights over physical objects, such as property, plant and equipment or inventories
 rights to use intellectual property.
- May arise from:
o Law
o Contract
o Creating a know how that is not in the public domain
o Constructive obligation created by another party
- An entity cannot have a right to obtain economic benefits from itself.
 Potential to produce economic benefits

- it does not need to be certain, or even likely, that the right will produce economic benefits. It is only
necessary that the right already exists and that, in at least one circumstance, it would produce for the
entity economic benefits beyond those available to all other parties.
 Control
- has the present ability to direct the use of the economic resource and to prevent other parties from
directing the use of the economic resource and from obtaining the economic benefits that may flow from it.
Liability
- a present obligation of the entity to transfer an economic resource as a result of past events
 Obligation
- duty or responsibility that an entity has no practical ability to avoid
- It is not necessary to know the identity of the party (or parties) to whom the obligation is owed.
- May either be:
o Legal obligation – results from a contract, legislation or other operation of law
o Constructive obligation – results from an entity’s actions that create a valid expectation on others
that the entity will accept and discharge certain responsibilities
 Transfer of an economic resource

- obligation must have the potential to require the entity to transfer an economic resource to another party
- it does not need to be certain, or even likely, that the entity will be required to transfer an economic
resource. It is only necessary that the obligation already exists and that, in at least one circumstance, it
would require the entity to transfer an economic resource.
 Present obligation as a result of past event

- A present obligation exists as a result of past events only if:
(a) the entity has already obtained economic benefits or taken an action
(b) as a consequence, the entity will or may have to transfer an economic resource that it would
not otherwise have had to transfer.
Equity
- residual interest in the assets of the entity after deducting all its liabilities
Income
- increases in assets, or decreases in liabilities, that result in increases in equity, other than those relating to
contributions from holders of equity claims.
Expenses
- decreases in assets, or increases in liabilities, that result in decreases in equity, other than those relating to
distributions to holders of equity claims
Unit of accounts
- right or the group of rights, the obligation or the group of obligations, or the group of rights and
obligations, to which recognition criteria and measurement concepts are applied
Executory contracts
- a contract, or a portion of a contract, that is equally unperformed—neither party has fulfilled any of its
obligations, or both parties have partially fulfilled their obligations to an equal extent.
J. Recognition
- the process of capturing for inclusion in the statement of financial position or the statement(s) of financial
performance an item that meets the definition of one of the elements of financial statements—an asset, a liability,
equity, income or expenses
Recognition criteria
1. Meets the definition of an asset, liability, equity, income or expense
2. Recognizing it would provide useful information (i.e. relevant, faithfully represented)
K. Derecognition
- removal of all or part of a recognized asset or liability from an entity’s statement of financial position.
- it normally occurs when that item no longer meets the definition of an asset or of a liability:
 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
L. Measurement bases
 Historical cost
- Asset  consideration paid to acquire or create the asset plus transaction costs (entry value)
- Liability  consideration received to incur or take on the liability minus transaction costs (entry value)
- If cost cannot be identified, it can be initially recognized at current value
- It does not reflect the changes in value is updated to depict transactions such as depreciation, impairment,
amortization, extinguishments and increases
 Current value
- Reflect changes in values at measurement date
 Fair value
- 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 (exit value)
- reflects the perspective of market participants
- not an entity-specific measurement
- determined directly by observing prices in an active market and indirectly by measurement techniques
- not adjusted by transaction costs
 Value in use
- present value of the cash flows, or other economic benefits, that an entity expects to derive from the
use of an asset and from its ultimate disposal (exit value)
Fulfillment value
- present value of the cash, or other economic resources, that an entity expects to be obliged to transfer
as it fulfills a liability (exit value)
Notes:
- Both reflect entity-specific assumptions.
- Measured indirectly using cash-flow-based measurement techniques
- Do not include transaction costs in the acquisition but include the transaction costs expected to be
incurred on the ultimate disposal of the asset or fulfillment of the liability
 Current cost
- Asset  cost of an equivalent asset at the measurement date, comprising the consideration that would
be paid at the measurement date plus the transaction costs that would be incurred at that date.
- Liability  consideration that would be received for an equivalent liability at the measurement date
minus the transaction costs that would be incurred at that date.
- reflects prices in the market in which the entity would acquire the asset or would incur the liability (entry
value)
Considerations when selecting measurement basis

 nature of the information that the measurement basis
 qualitative characteristics, cost constraints and other factors
Qualitative Characteristics Effect of measurement bases

1. Relevance  Measurement bases affects the following:
o Characteristic of the asset or liability
o How that asset or liability contributes to future cash flow
2. Faithful representation  Using different measurement bases for those assets and
liabilities can create a measurement inconsistency (accounting
mismatch).
 The level of measurement uncertainty associated with a
particular measurement basis may affect whether information
faithful represented. A high level of measurement uncertainty
does not necessarily prevent the use of a measurement basis

that provides relevant information; however, it might not
provide a sufficiently faithful representation
3. Comparability  Consistently using the same measurement bases makes the
financial statements more comparable
4. Understandability  The more different measurement bases are used, the more
complex the resulting information become and hence, less
understandable.
5. Verifiability  Using measurement bases that can be independently
corroborated enhances verifiability.
Other notes on measurement bases:

o In transactions on market terms, the cost of an asset acquired, or of a liability incurred, is normally similar
to its fair value at that date, unless transaction costs are significant.
o Initial and subsequent measurement bases usually parallel each other.
o When more than one measurement basis is used, it is applied in such a way that:
 to use a single measurement basis both for the asset or liability in the statement of financial
position and for related income and expenses in the statement(s) of financial performance
 to provide in the notes additional information applying a different measurement basis.
o Total equity is not measured directly. Some of its components can be measured directly; however, at
least one of its components cannot be measured directly (i.e. retained earnings)
o Total equity is generally positive; however, it can be negative when liabilities exceed assets.
o If a measure cannot be observed directly and needs to be estimated, cash-flow based measurement
techniques can be used.
o When making an estimate from a range of possible outcomes, the most relevant one is usually found in
the central part of the range.
 Statistical mean / expected value / probability-weighted average
- reflects the entire range of outcomes and gives more weight to the outcomes that are more
likely.
 Statistical median / the maximum amount that is more likely than not to occur
- indicates that the probability of a subsequent loss is no more than 50% and that the
probability of a subsequent gain is no more than 50%.
 Statistical mode / the most likely outcome

- ultimate inflow or outflow arising from an asset or liability.
M. Presentation and Disclosures

Effective communication of information in financial statements
It makes that information more relevant and contributes to a faithful representation of an entity’s assets, liabilities,
equity, income and expenses. It also enhances the understandability and comparability of information in financial
statements.
Effective communication of information in financial statements requires:

o focusing on presentation and disclosure objectives and principles rather than focusing on rules.
o classifying information in a manner that groups similar items and separates dissimilar items; and
o aggregating information in such a way that it is not obscured either by unnecessary detail or by excessive
aggregation.
In making decisions about presentation and disclosure, it is important to consider whether the benefits provided to
users of financial statements by presenting or disclosing particular information are likely to justify the costs of
providing and using that information.
Presentation and disclosure principles

 balance is needed between:
o giving entities the flexibility to provide relevant information that faithfully represents the entity’s
assets, liabilities, equity, income and expenses; and
o requiring information that is comparable, both from period to period for a reporting entity and in a
single reporting period across entities.
 Entity-specific information is more useful than standardized descriptions (“boilerplate”)
 Duplication of information is usually unnecessary as it can make financial statements less understandable
Classification
- sorting of assets, liabilities, equity, income or expenses on the basis of shared characteristics for
presentation and disclosure purposes
Offsetting
- occurs when an entity recognizes and measures both an asset and liability as separate units of
account, but groups them into a single net amount in the statement of financial position.
- Offsetting classifies dissimilar items together and therefore is generally not appropriate.
Aggregation
- adding together of assets, liabilities, equity, income or expenses that have shared characteristics and
are included in the same classification.
- Aggregation makes information more useful by summarizing a large volume of detail.
N. Concept of Capital and Capital Maintenance

- Choice of appropriate concept is based on users’ needs
Concept of Capital
o Financial concept of capital
- adopted by most entities in preparing their financial statements.
- Regarded as invested money or invested purchasing power
- Synonymous with the net assets or equity of the entity.
o Physical concept of capital

- Regarded as the operating capability or the productive capacity of the entity based on, for example, units of
output per day.
Concepts of Capital Maintenance

o Financial capital maintenance
- profit is earned only if the financial amount of the net assets at the end of the period exceeds the financial
amount of net assets at the beginning of the period, after excluding any distributions to, and contributions
from, owners during the period
o Nominal monetary unit
- Profit represents the increase in nominal money capital over the period
- Increases in the prices of assets (holding gains) are profits but are recognized only when the
assets are disposed of.
o Unit of constant purchasing power
- Profit represents the increase in invested purchasing power over the period
- Only the portion of the increase in prices in excess of the increase in the general level of price is
regarded as profit. The remainder is treated as capital maintenance adjustment.
o Physical capital maintenance

- profit is earned only if the physical productive capacity of the entity at the end of the period exceeds the
physical productive capacity at the beginning of the period, after excluding any distributions to, and
contributions from, owners during the period.
- Requires the use of current cost
- All prices changes are treated as capital maintenance adjustments that are part of equity and not as
profit.
Capital maintenance adjustments

- revaluation or restatement of assets and liabilities that gives rise to increases or decreases in equity as
capital maintenance adjustments or revaluation reserves.
CHAPTER 4: THE ACCOUNTING PROCESS

A. The Steps in the Accounting Process
1. Identifying and analyzing business transactions
2. Journalizing
3. Posting
4. Preparing the unadjusted trial balance
5. Preparing the adjusting entries
6. Preparing the adjusted trial balance / worksheet preparation \
7. Preparing the financial statements
8. Closing the books
9. Preparing the post-closing trial balance
10. Recording of reversing entries
B. Books of Accounts
 Journals  also called as the “book of original entries”; the accounting record where business transactions are
recorded
o Special journal  used to record transactions of a similar nature
 Sales journal
 Purchases journal
 Cash receipts journal
 Cash disbursements journal
o General journal  used to record all other transactions that cannot be recorded in the special journals
 Ledgers  also called as the “book of secondary / final entries”; systematic compilation of a group of accounts
that is used to classify the effects of business transactions on the accounts
o General ledger  contains all the accounts appearing in the balance
o Subsidiary ledger  provides a breakdown of the balance of controlling account (one which consists of a
group of accounts with similar nature)
C. Accounting Cycle
1. Identifying and analyzing the business transactions
- Only accountable events are recorded in the accounting records. Accountable events are those that affect
the accounts.
- There are two types of events: internal events (involve the business only) and external events (involve the
business and external party)
2. Journalizing
- Process of recording transactions in the journal by means of journal entries (may be simple or compound
journal entry)
3. Posting
- Process of transferring the amounts of debits and credits in a recorded journal entry to the ledger
4. Trial balance
- List of general ledger accounts and their balances that is prepared to check the equality of total debits and
total credits of the ledger
- There are 3 types: unadjusted trial balance, adjusted trial balance and post-closing trial balance
5. Adjusting entries
- Entries made prior to the preparation of financial statements to update certain accounts so that they
reflect correct balances as of the designated time
Types of Adjusting Entries

o Accruals (Receivables and Payables)
- Income already earned but not yet collected or expense already incurred but not yet paid
- Can be recorded using either the:

o Liability method  initially credited to a liability account; earned portion is recognized as income
and unearned portion remains as liability
o Income method  initially credited to an income account; unearned portion is recognized as
liability and earned portion remains as income
o Deferrals (Unearned income and Prepaid expenses)

- Income already collected but not yet earned or expense already paid but not yet incurred
- Can be recorder using either the:
o Asset method  initially debited to an asset account; incurred portion is recognized as expense
and unused portion remains as asset
o Expense method  initially debited to an expense account; unused portion is recognized as asset
and incurred portion remains as expense
o Other related income and expenses (Bad debts, depreciation etc.)
Expense recognition principles

o Matching  expenses are recognized in the same period in which the related revenue is recognized
o Systematic and rational allocation  expenses are recognized over the periods in which economic benefits
are consumed
o Immediate recognition  expenses are recognized immediately
Types of accounts
o Real accounts  also called as permanent accounts; they include balance sheet accounts except “Owner’s
drawings” accounts which are NOT closed at the end of the reporting period
o Nominal Accounts  also called as temporary accounts; include income statement accounts, drawing
account, clearing account and suspense account which are closed at the end of the reporting period
 Clearing account  temporarily store amounts that will eventually be transferred to another account
(i.e. income summary)
 Suspense account  temporarily stores discrepancies in the accounts pending their analysis and
permanent classification (i.e. cash shortage or overage)
o Mixed Accounts  accounts that have both real and nominal account components and are subject to
adjustments
6. Worksheet
- Analytical device used to facilitate the gathering of data for adjustments, the preparation of financial statements
and closing entries
7. Financial Statements
- End-product of the accounting process
- Means by which the information accumulated and processed in accounting are communicated to the users
8. Closing entries
- Entries prepared at the end of the accounting period to zero out all nominal accounts in the ledger
- Also called as the “closing of the books”
- Application of the time-period concept
9. Post-closing trial balance

- Amounts in it will be the beginning balances of accounts in the next accounting period
10. Reversing entries

- Entries usually made on the first day of the next accounting period to reverse certain adjusting entries in the
immediately preceding period
- It facilitates recording of cash receipts and cash disbursements, promotes convenience in recording adjustments
for accruals, promotes consistency of accounting period
- The adjusting entries that may be reversed are:
o Accruals for income or expense
o Prepayments initially recorded using expense method
o Advance collections recorded using the income method

CHAPTER 5: PRESENTATION OF FINANCIAL STATEMENTS

A. General Features
 Fair representation and compliance with the IFRS
- requires the faithful representation of the effects of transactions, other events and conditions in accordance
with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the
Conceptual Framework
- can be done through:
o compliance with applicable IFRSs with additional disclosure when necessary
 An entity whose financial statements comply with IFRSs shall make an explicit and unreserved
statement of such compliance in the notes. An entity shall not describe financial statements as
complying with IFRSs unless they comply with all the requirements of IFRSs.
 In the extremely rare circumstances in which management concludes that compliance with a
requirement in an IFRS would be so misleading, the entity shall depart from PFRS requirement if
the relevant regulatory framework requires, or otherwise does not prohibit, such a departure. It
must also disclose the following:
 Management’s conclusion that all other requirements of the PFRS are complied with
 Title of the PFRS from which the entity has departed
 Financial effect of the departure
o selection and application of appropriate accounting policies
 An entity cannot rectify inappropriate accounting policies either by disclosure of the accounting
policies used or by notes or explanatory material.
o proper presentation of information
 Going concern
- An entity shall prepare financial statements on a going concern basis unless management either intends to
liquidate the entity or to cease trading or has no realistic alternative but to do so.
- Management shall assess the entity’s ability to continue as a going concern taking into account all available
information about at least 12 months from the reporting period.
- If there are material uncertainties on the entity’s ability to continue as a going concern, those uncertainties
shall be disclosed.
- If the entity is not a going concern, its financial statement shall be prepared using another basis. It must
disclose this fact, the basis used and the reason why the entity is not regarded as a going concern.
 Accrual basis of accounting

- An entity shall prepare its financial statements, except for cash flow information, using the accrual basis of
accounting.
- Assets are recognized when receivable, liabilities are recognized when payable, income is recognized
when earned, expense is recognized when incurred
 Materiality and aggregation

- An entity shall present separately
 each material class of similar items.
 items of a dissimilar nature or function unless they are immaterial.
- An item is material if knowledge of it would affect the decision of the informed users of the financial
statements
- Materiality depends on the relative size and nature of the item
 Offsetting
- An entity shall not offset assets and liabilities or income and expenses, unless required or permitted by an
IFRS. It is only permitted when it reflects the substance of the transactions.
Notes:
o Gains and losses on disposal of non-current assets are reported by deducting from the proceeds, the
carrying amount and related selling expense.
o Expenditure related to a provision and any reimbursement from a third party can be offset and only the
net expenditure is presented as expense.
o Gains and losses arising from group of similar transactions are reported on a net basis (i.e. foreign
exchange gains and losses and gains and losses from trading securities)
o Measuring assets net of valuation allowances—for example, obsolescence allowances on inventories
and doubtful debts allowances on receivables—is not offsetting.
 Frequency of reporting
- An entity shall present a complete set of financial statements (including comparative information) at least
annually.
- When an entity changes the end of its reporting period and presents financial statements for a period longer
or shorter than one year, it must disclose the following:
o Period covered by the financial statements
o the reason for using a longer or shorter period
o the fact that amounts presented in the financial statements are not entirely comparable.
 Comparative information
- Except when IFRSs permit or require otherwise, an entity shall present comparative information in respect
of the preceding period for all amounts reported in the current period’s financial statements.
o An entity shall include comparative information for narrative and descriptive information if it is
relevant to understanding the current period’s financial statements.
- An entity shall present, as a minimum, two statements of financial position, two statements of profit or loss
and other comprehensive income, two separate statements of profit or loss (if presented), two statements
of cash flows and two statements of changes in equity, and related notes.
- Narrative information provided in the financial statements for the preceding period(s) must still be
disclosed if it continues to be relevant in the current period.
Additional statement of financial position

- An entity shall present a third statement of financial position as at the beginning of the preceding
period in addition to the minimum comparative financial statements required if:
o it applies an accounting policy retrospectively, makes a retrospective restatement of items in its
financial statements or reclassifies items in its financial statements
o the retrospective application, retrospective restatement or the reclassification has a material effect
on the information in the statement of financial position at the beginning of the preceding period.
 Consistency of presentation
- An entity shall retain the presentation and classification of items in the financial statements from one
period to the next unless:
o an IFRS requires a change in presentation.
o results in information that is reliable and more relevant
- It is inappropriate for an entity to leave accounting policies unchanged when better and acceptable
alternatives exist.
Identification of financial statements

- The following information shall be displayed prominently and repeatedly
1. The name of the reporting entity
2. Whether the financial statements are for the individual entity or for a group of entities
3. The date of the end of the reporting period or period covered by the financial statements
4. Presentation currency
5. Level of rounding used
Management’s responsibilities over Financial Statements

- Must be expressly stated in a document called “Statement of Management’s Responsibility for Financial
Statements” which is attached as the cover letter of the financial statements and signed by the Chairman of the
Board, CEO and CFO
o Preparation and fair presentation of financial statements in accordance with the PFRSs
o Internal control over financial reporting
o Going concern assessment
o Oversight over the financial reporting process
o Review and approval of financial statements
B. Statement of Financial Position

- Formal statement showing the three elements composing the financial position, namely assets, liabilities and
equities that may be used in evaluating liquidity, solvency and need for additional financing at a certain period
Definition of elements
1. Asset  present economic resource controlled by the entity as a result of past events
Current assets  are assets that are:

o Expected to be realized, sold or consumed in the entity’s normal operating cycle
o Held primarily for trading
o Expected to be realized within 12 months after the reporting period
o Cash or cash equivalent unless restricted from being exchanged or used to settle a liability for at least
12 months after the reporting period
Items under Current Assets

 Cash  comprises of cash on hand and demand deposits
 Cash equivalent  short term highly liquid investments that are readily convertible to known amount
of cash and which are subject to an insignificant risk of change in value; has a short-term maturity of
3 months or less from the acquisition date
 Financial assets held for trading  debt and equity securities that are purchased with the intent of
selling them in the near term to generate short term gains or profits
 Short term non-trade receivables  claims arising from sources other than the sale of
merchandise or services in the ordinary course of business that are collectible within one year from
the end of the reporting period
 Trade receivables, inventories, prepayments  expected to be realized, sold or consumed within
the normal operating cycle or one year, whichever is longer
Non-Current Assets  all other assets not classified as current
Items under Non-Current Assets

 Property, plant and equipment  tangible assets which are held by an entity for use for
production or supply of goods and services, for rental to others or for administrative purposes and
are expected to be used during more than one period
 Long term investments  assets held by an entity for the accretion of wealth through capital
distribution, for capital appreciation or for other benefits to the investing entity that are intended to
be held for more than one year
 Intangible assets  identifiable nonmonetary assets without physical substance that are
controlled by the entity as a result of past event and from which the future economic benefits are
expected to flow to the entity
 Other non-current assets
2. Liabilities  present obligation of an entity to transfer an economic resource as a result of past events
Current liabilities  are liabilities that are:

o expected to be settled in the entity’s normal operating cycle
o held primarily for trading
o due to be settled within 12 months after the reporting period
o the entity does not have the unconditional right to defer settlement of the liability for at least 12 months
after the reporting period
Note:
o The operating cycle of an entity is the time between the acquisition of assets for processing and their
realization in cash or cash equivalent.
o When the operating cycle is unidentifiable, it is assumed to be 12 months
o Deferred tax and liabilities are always presented as non-current items.
Non-current liabilities  other liabilities that are not classified as current
Examples of liabilities
1. Long term obligation that is maturing within 12 months after the reporting period
a. Current liability  default, or even when there is a refinancing agreement (replacement of an existing
debt with a new one but with different terms) after the reporting period but before the financial
statements are authorized for issue or there is refinancing that is not at the discretion of the entity
b. Non-current liability  when entity expects and has the discretion to refinance it on a long-term basis
under an existing loan facility
2. Liabilities payable on demand / Covenant

a. Current liabilities  default; or even if the lender agreed, after the reporting period and before the
authorization of the financial statement for issue not to defer payment
b. Non-current liabilities  when the lender provides the entity by the end of the reporting period a grace
period ending at least 12 months after the reporting period, within which the entity can rectify the breach
and during which the lender cannot demand immediate repayment
3. Equity  residual interest in the assets of the entity after deducting all of the liabilities
Items under Equity

o Share capital  portion of the paid-in capital representing the total par or stated value of the shares issued
o Share premium  contributed capital in excess of the par or stated value of the shares subscribed or
issued
o Retained Earnings  cumulative balance of periodic net income or loss, dividend distributions, prior
period errors, changes in accounting policies and other capital adjustments
o Revaluation surplus  excess of sound value (fair value or depreciated replacement cost) over carrying
amount of revalued asset
o Treasury shares  entity’s own shares that have been issued and then reacquire but not canceled
Presentation of statement of financial position

- The standard does not prescribe the order or format in which line items are to be presented
1. Classified presentation  shows distinction between current and noncurrent assets and liabilities which
highlights the entity’s working capital and facilitates the computation of liquidity and solvency ratios
a. Accounts Form  assets are shown on the left side and liabilities and equities on the right side
b. Report Form  three major sections are presented in a downward sequence of assets, liabilities
and equities
Working capital = Current Assets – Current Liabilities
2. Unclassified presentation  shows no distinction between current and noncurrent assets and liabilities;
it is based on liquidity
C. Statement of Comprehensive Income

- Formal statement showing the financial performance of an entity for a period of time
- Statement that shows the change in equity during a period resulting from transactions and other event, other
than changes resulting from transactions with owners in their capacity as owners
 Components of Profit from Continued Operations

 Profit or loss
- Total of income less expense, excluding the components of other comprehensive income
Items in profit or loss

o Revenue  Increases in economic benefits during the accounting period in the form of inflows or
enhancements of assets or decreases of liabilities that result in increases in equity, other than those
relating to contributions from equity participants. It arises in the course of the ordinary activities of an
entity and is referred to by a variety of different names including sales, fees, interest, dividends, royalties
and rent.
o Gains  represent other items that meet the definition of income and may, or may not, arise in the
course of the ordinary activities of an entity.
o Expenses  decreases in economic benefits during the accounting period in the form of outflows or
depletions of assets or incurrences of liabilities that result in decreases in equity, other than those
relating to distributions to equity participants. It arises in the course of the ordinary activities of the entity
include, for example, cost of sales, wages and depreciation. They usually take the form of an outflow or
depletion of assets such as cash and cash equivalents, inventory, property, plant and equipment.
o Losses  represent other items that meet the definition of expenses and may, or may not, arise in the
course of the ordinary activities of the entity. Losses represent decreases in economic benefits and as
such they are no different in nature from other expenses. Hence, they are not regarded as a separate
element in this Framework.
Presentation of expenses
o Functional presentation
- It is also known as the cost of goods sold method. Expenses are classified according to their
function as part of cost of goods sold, distribution costs, administrative expenses and other
expenses. Additional disclosures on the nature of expenses shall be provided
Classification of expenses according to function

 Cost of sales
 Distribution cost or selling expense  Costs which are directly related to selling, advertising and
delivery of goods
 Administrative expenses  Cost of administering the business
 Other expenses  Expenses which are not directly related to distribution and administrative
expenses.
o Natural presentation
- It is also known as the nature of expense method. Expenses are aggregated according to their
nature and not allocated among the various functions within the entity. It is simpler to apply.
Example of items presented in profit or loss

o Revenue presenting separately interest revenue
o Finance costs
o Gain or losses arising from the derecognition of FAAC
o Tax expense
o Impairment gains and losses on financial assets
o Gain and loss on reclassifications of financial assets from FAAC or FVTOCI to FVTPL
o Share in the profit or loss of associates and joint venture
 Other comprehensive income

- Compromises items of income and expense including reclassification adjustments that are not recognized in
profit or loss as required or permitted by PFRSs
Example of Items in other comprehensive income

o Change in revaluation surplus
o Remeasurements in the net defined benefit liability (asset)
o Gains or losses on investments measured at FVTOCI
o Gains or losses arising from translating the financial statements of a foreign operation
o Effective portion of gains and losses on hedging instruments in a cash flow hedge
o Change in fair value of a financial liability designated at FVTPL that are attributable to change in credit risk
o Change in the time value of option when the option’s intrinsic value and time value are separated and only
the change in intrinsic value is designated as the hedging instrument
o Changes in the value of the forward elements of forward contracts when separating the forward element
and spot element of a forward contract and designating as the hedging instrument only the changes in the
spot element, and changes in the value of the foreign currency basis spread of a financial instrument when
excluding it from the designation of that financial instrument as the hedging instrument
 Components of Discontinued Operations

Discontinued operation  a component of an entity that either has been disposed of, or is classified as held for
sale, presented in the profit or loss and
o represents a separate major line of business or geographical area of operations,

o is part of a single coordinated plan to dispose of a separate major line of business or geographical area
of operations or
o is a subsidiary acquired exclusively with a view to resale
D. Statement of Changes in Equity

- Formal statement shows the movements in the elements or components of the shareholder’s equity
Components of statement of changes in equity

1. Total comprehensive income for the period
2. Effects of changes in accounting policy (retrospective application) or prior period error (retrospective
restatement)
3. For each component of equity, reconciliations between the carrying amounts at the beginning and the end of
the period for each component of equity, separately disclosing:
 profit or loss
 other comprehensive income
 transactions with owners, showing separately contributions by and distributions to owners and changes in
ownership interests in subsidiaries that do not result in a loss of control
Statement of retained earnings

- It shows the changes affecting directly the retained earnings. It includes the ff.:
 Net income or loss for the period
 Prior period errors
 Dividends declared and paid to shareholders
 Effect of change in accounting policy
 Appropriation of retained earnings
 Legal requirement
 Contractual requirement
 Entity policy
E. Statement of Cash Flows

- Provides information about the sources and utilization of cash and cash equivalents during the period
Sections of the statement of cash flow

 Operating activities
- main revenue-producing activities of the entity that are not investing or financing activities
- those that affect the profit or loss
Examples of operating activities

o cash received from customers
o cash paid to suppliers
o cash payments for operating expenses
o cash flows from buying or selling held for trading securities
o loans to other parties and collections if reporting entity is a financial institution
o Cash flows arising from taxes on income
o Cash flows related to interest
o Cash received from dividends
 Investing activities
- acquisition and disposal of long-term assets and other investments that are not considered to be
cash equivalents
- those that affect non-current assets
Example of investing activities

o cash receipts and payments related to non-current assets
o cash receipts and payment related to acquisition and sale of debt or equity instruments of
other entity that are not held for trading
o cash receipts and payment related to derivative assets and liabilities not held for trading
o loans to other and collections if reporting entity is not a financial institution
 Financing activities
- are activities that alter the equity capital and borrowing structure of the entity
- those that affect the borrowings and equity
Example of financing activities

o cash receipts from issuing shares and cash payments to redeem them
o cash receipts from issuing notes, bonds and other short term and long-term borrowings and
their repayments
o cash payments by a lessee for the reduction of the outstanding liability relating to a lease
o bank overdrafts that can be offset
cash dividends paid to owners
Method of presentation
 Operating Cash Flows
- the direct method of presentation is encouraged as it is useful in estimating future cash flows, but the
indirect method is acceptable and more commonly used as it is easier to apply
Direct method
- shows each major class of gross cash receipts and gross cash payments
Cash receipts from customers xx,xxx
Cash paid to suppliers xx,xxx
Cash paid to employees xx,xxx
Cash paid for other operating xx,xxx

expenses
Interest paid xx,xxx
Income taxes paid xx,xxx
Net cash from operating activities xx,xxx
Indirect method
- adjusts accrual basis net profit or loss for the effects of non-cash transactions
Profit before interest and income taxes xx,xxx
Add back depreciation xx,xxx
Add back impairment of assets xx,xxx
Increase in receivables xx,xx

x
Decrease in inventories xx,xxx
Increase in trade payables xx,xxx
Interest expense xx,xx

x
Less Interest accrued but not yet paid xx,xx

x
Interest paid xx,xxx
Income taxes paid xx,xxx
Net cash from operating activities xx,xxx

 Investing and Financing Activities

- Presented using the direct method (gross cash receipts and payment for the related transactions are
presented separately
F. Notes to the Financial Statements

- provides narrative description or disaggregation of items presented in the financial statements and information
about items that do not qualify for recognition
- presented in a systematic manner and cross-referenced from the face of the financial statements to the relevant
note.
Purpose
- provide the necessary disclosures required by the PFRSs specifically the following:
• present information about the basis of preparation of the financial statements and the specific accounting
policies used
• disclose any information required by IFRSs that is not presented elsewhere in the financial statements
• provide additional information that is not presented elsewhere in the financial statements but is relevant to
an understanding of any of them
Order of presentation
• General information on the reporting entity
 Domicile and legal form of the entity
 Country of incorporation
 Address of registered office or principal place of business
 Description of the entity's operations and principal activities
 If it is part of a group, the name of its parent and the ultimate parent of the group
 If it is a limited life entity, information regarding the length of the life
• A statement of compliance with PFRSs
• A summary of significant accounting policies applied, including:
 The measurement basis used in preparing the financial statements
 The other accounting policies used that are relevant to an understanding of the financial
statements
• Supporting information for items presented on the face of the statement of financial position, statement of
profit or loss and other comprehensive income, statement of changes in equity and statement of cash flows,
in the order in which each statement and each line item is presented
• Other disclosures, including:
 Contingent liabilities and unrecognized contractual commitments
 Non-financial disclosures, such as the entity's financial risk management objectives and policies
 Events after the reporting period, if material
 Changes in accounting estimates and accounting policies and corrections of prior period errors
 Related party disclosures
 Judgments and estimations
 Capital management
 Dividends declared after the reporting period but before the financial statements were authorized
for issue and the related amount per share
 The amount of any cumulative preference dividends not recognized
 Other disclosures not required by the PFRSs, but the management deems relevant to the
understanding of the financial statements
G. Earnings per Share

- Amount attributable to every ordinary share outstanding during the period
- Required to be presented by entities whose ordinary shares are publicly traded or those who are in
the process of issuing ordinary shares or potential ordinary shares in the public securities market
- It is a determinant of the market price of ordinary share, indicator of attractiveness of the ordinary
share as an investment, a measurement of performance of management in conducting operations,
basis of dividend policy of an entity
- The earnings of the following must be presented in:
o continuing operations  present in the face of the income statement
o discontinued operations  disclose in the face of the income statement or notes
1. Basic earnings per share (BEPS)

- provide a measure of the interests of each ordinary share of a parent entity in the performance of the
entity over the reporting period
- used by entities with simple capital structure (common and preferred shares)
BEPS=Profit∨Loss attributable ¿ theOrdinary Shareholders−Preference share dividends ¿

Weighted Average Number of O
Numerator
o Cumulative preference share  preference dividend for the current year only is deducted from
the net income whether such dividend is declared or not
o Non-cumulative preference share  preference dividend for the current year is deducted from the
net income only it is declared
o Participating preference share
 Compute for the basic dividends that preference and ordinary share received
 Deduct total basic dividends to net income to get the balance for participation
 Distribute balance for participation depending on terms of participation.
 Fully participating  pro-rata
 Limited participating  compute
 Combine basic dividends and dividends from participation for each kind of share
Denominator
- The weighted average number of ordinary shares outstanding during the period is the number of
ordinary shares outstanding at the beginning of the period, adjusted by the number of ordinary shares
bought back or issued during the period multiplied by a time-weighting factor. The time-weighting
factor is the number of days that the shares are outstanding as a proportion of the total number of
days in the period; a reasonable approximation of the weighted average is adequate in many
circumstances.
Shares are usually included in the weighted average number of shares from the date consideration
is receivable (which is generally the date of their issue), for example:
o ordinary shares issued in exchange for cash are included when cash is receivable
o ordinary shares issued on the voluntary reinvestment of dividends on ordinary or preference
shares are included when dividends are reinvested
o ordinary shares issued as a result of the conversion of a debt instrument to ordinary shares
are included from the date that interest ceases to accrue
o ordinary shares issued in place of interest or principal on other financial instruments are
included from the date that interest ceases to accrue
o ordinary shares issued in exchange for the settlement of a liability of the entity are included
from the settlement date
o ordinary shares issued as consideration for the acquisition of an asset other than cash are
included as of the date on which the acquisition is recognized
o ordinary shares issued for the rendering of services to the entity are included as the services
are rendered.
o The timing of the inclusion of ordinary shares is determined by the terms and conditions
attaching to their issue. Due consideration is given to the substance of any contract associated
with the issue.
Share issue without consideration

- The following cause the change in the number of ordinary shares outstanding without a corresponding
change in resources.
 a capitalization or bonus issue (sometimes referred to as a stock dividend)
 a bonus element in any other issue, for example a bonus element in a rights issue to existing
shareholders
 a share split or a reverse share split (consolidation of shares).
Bonus issue / Stock dividend / Stock split

- The number of ordinary shares outstanding before the event is adjusted for the proportionate
change in the number of ordinary shares outstanding as if the event had occurred at the beginning
of the earliest period presented.
o Bonus issue = whole number (i.e. 2 O/S for each O/S = x 2)

o Stock dividend = 1 + percentage of dividend (i.e. 20% stock dividend = x 1.20)
o Stock split = whole number (i.e. 2 for 1 = x 2)
o Reverse stock split = whole number (i.e. 1 for 2 = x ½)
Rights issue
o Compute for Theoretical ex-rights value per share
( FV × Outstanding shares before stock rights ) +total amount received ¿ exercise of stock rights
Total number of shares outst
o Compute for Bonus Adjustment Factor
Fair Value per share before stock rights
Theoretical exright value per share
o Compute for number of shares issued without consideration.
Outstanding shares before exercise x (1-Adjustment Factor)
o Compute for number of shares issued with consideration
Shares issued through exercise of stock rights – Shares issued with consideration
o Treatment for the shares issued through exercise of stock rights are the following:
 Shares issued with consideration  like other ordinary shares
 Shares issued without consideration  multiply adjustment factor to outstanding shares
before exercise of right
2. Diluted Earnings per Share

- For entities with complex structure and has common shares, preference shares, securities convertible to
common shares and options, stock rights and warrants outstanding
- Dilution is 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, or that ordinary shares are
issued upon the satisfaction of specified conditions.
- Worst case scenario EPS
- An entity shall calculate diluted earnings per share amounts for profit or loss attributable to ordinary equity
holders of the parent entity and, if presented, profit or loss from continuing operations attributable to those
equity holders.
- For the purpose of calculating diluted earnings per share, an entity shall adjust profit or loss attributable to
ordinary equity holders of the parent entity, and the weighted average number of shares outstanding, for the
effects of all dilutive potential ordinary shares.
Kinds of potentially dilutive shares

i. Convertible securities
A. Convertible preferred shares
- as if converted at the beginning of the year (if outstanding at the beginning of the year) or date of
issuance (if issued during the year)
- Convertible preference shares are antidilutive whenever the amount of the dividend on such shares
declared in or accumulated for the current period per ordinary share obtainable on conversion
exceeds basic earnings per share
Profit ∨Loss−PS dividends NC

conversion (time−weight )¿
WACSObasic +CS ¿
B. Convertible bonds
- as if converted at the beginning of the year (if outstanding at the beginning of the year) or date of
issuance (if issued during the year)
- convertible debt is antidilutive whenever its interest (net of tax and other changes in income or
expense) per ordinary share obtainable on conversion exceeds basic earnings per share.
Profit ∨Loss−PS dividends+interest expense

conversion(time−weight) ¿
WACSObasic +CS ¿
ii. Options and warrants
- dilutive when they would result in the issue of ordinary shares for less than the average market price
of ordinary shares during the period.
- have a dilutive effect only when the average market price of ordinary shares during the period
exceeds the exercise price of the options or warrants (ie they are ‘in the money’). Previously reported
earnings per share are not retroactively adjusted to reflect changes in prices of ordinary shares.
- The amount of the dilution is the average market price of ordinary shares during the period minus the
issue price. Therefore, to calculate diluted earnings per share, potential ordinary shares are treated
as consisting of both the following:
1. a contract to issue a certain number of the ordinary shares at their average market price during
the period. Such ordinary shares are assumed to be fairly priced and to be neither dilutive nor
antidilutive. They are ignored in the calculation of diluted earnings per share.
2. a contract to issue the remaining ordinary shares for no consideration. Such ordinary shares
generate no proceeds and have no effect on profit or loss attributable to ordinary shares
outstanding. Therefore, such shares are dilutive and are added to the number of ordinary shares
outstanding in the calculation of diluted earnings per share.
iii. Multiple Potentially Dilutive Securities

- In determining whether potential ordinary shares are dilutive or antidilutive, each issue or series of
potential ordinary shares is considered separately rather than in aggregate. The sequence in which
potential ordinary shares are considered may affect whether they are dilutive. Therefore, to maximize
the dilution of basic earnings per share, each issue or series of potential ordinary shares is
considered in sequence from the most dilutive to the least dilutive, ie dilutive potential ordinary
shares with the lowest ‘earnings per incremental share’ are included in the diluted earnings per share
calculation before those with a higher earnings per incremental share. Options and warrants are
generally included first because they do not affect the numerator of the calculation
PART 3: Cash and Other Financial Assets FAR 25
CHAPTER 6: CASH
A. Definition and Composition of Cash
- Cash comprises cash on hand and demand deposits
A. Cash on hand  includes undeposited money and negotiable instruments

o Money  includes coins and currency notes
o Negotiable instruments  includes bank drafts, money orders, certified checks, manager’s
checks / cashier’s checks, dated personal / customers’ checks, traveler’s checks
B. Demand deposits  cash in bank; amounts on deposit in checking and savings account which are
unrestricted to withdrawal
C. Cash fund  set aside for current operational purposes
o Petty cash fund  Money set aside to pay small expense which cannot be paid conveniently by
means of check
o Change fund
o Payroll fund
o Dividend fund

A. Definition of Cash Equivalents
- Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of
cash and which are subject to an insignificant risk of changes in value

 Short term  must be purchased three months or less before maturity date
 Highly liquid  easily sold in the market
 Readily convertible to known amounts of cash  Amount of cash that will be received must be known
at the time of the initial investment
 Insignificant risk of changes in value  Should not be subject to price fluctuations and not be
expected to change significantly before redemption or maturity

B. Valuation of Cash
 Cash is generally measured at face value
 Cash in foreign currency is measured at the current exchange rate
 Cash in bank or financial institution having financial difficulty or in bankruptcy should be shown at its estimated
realizable value if the amount recoverable is estimated to be lower than the face value.

C. Presentation of Cash Items
 All cash items must be presented under one item captioned as cash and cash equivalents
 Cash and cash equivalent should be shown as the first line item under current assets.
 Details under comprising the cash and cash equivalents should be disclosed in the notes to financial
statements.
D. Special Items in Cash and Cash Equivalents

1. Restricted cash / Cash fund
- Cash is restricted for / allocated for:
o Current operational purposes  report as cash and cash equivalent
o Current, non-operational purposes  report under current assets
o Non-current purposes  report under non-current assets

2. Commercial paper, certificate of deposits, treasury bills, money market fund and other investments
- by default, they are not considered as cash equivalents
- classification depends usually on its terms:
a. if term is three months or less  report as cash and cash equivalents
b. if term is more than three months but within one year  report as short-term investment under
current assets
c. if term is more than one year  report as long-term investment under non-current assets
d. if investments can be withdrawn anytime or has checking privileges  report as cash and cash
equivalents

3. Compensating balance
- Minimum checking or demand deposit account balance that must be maintained in connection with a
borrowing arrangement with a bank. In effect, it provides a higher effective interest rate higher than its
stated interest rate and a reduction of the amount borrowed
- Treatment depends on its legality:
a. If legally restricted and held for short term borrowings  report under current assets
b. If legally restricted and held for short term borrowings  report under non-current assets
c. If unrestricted  report as part of cash and cash equivalents
d. If not stated  not part of cash and cash equivalents

4. Bank overdraft
- Happens when the cash in bank account has credit balance.
- In general, it is classified as current liability and should not be offset against other bank accounts with
debit balance
- It can be offset to another same bank account if:
a. it has a condition of repayable on demand that forms part of an entity’s cash management
b. the amount is immaterial
c. offsetting is allowed
d. accounts involved are both checking account and in the same bank

5. Cash in closed bank
- not considered as cash

6. Checks
 Post-dated check  report as receivable
 NSF check  should not be offset with the bank account
 Outstanding check  should be deducted from the balance per bank
 Undelivered check  checks that are drawn and recorded but not given to payee must be added back to
cash
 Stale check  checks that is not in cashed by the payee within six months can be debited back to cash
and credited as miscellaneous income (if immaterial) or accounts payable (if material and expected to be
paid)

1. Minimum deposit / minimum maintaining balance
- Must not be deducted from cash if not restricted

2. Bad debts and depreciation expense
- These are non-cash accounts. Therefore, it has no effect on the cash accounts

3. IOU’s / Cash advances
- Recorded as receivables

4. Postages on hand
- Recorded as supplies or prepaid expense

5. Paid vouchers from petty cash fund
- Must be deducted from cash

E. Accounting for Petty Cash (Imprest Fund System)
1. Establishment of Petty Cash Fund
Dr. Petty cash fund. xxx
Cr. Cash in bank xxx

2. Replenishment of Petty Cash Payments within Accounting Period
1. Know how much money is left and deduct it from the original amount of petty cash fund. The
results will be used as the amount for credit, cash.
2. Get the total of all petty cash vouchers and deduct it from the original amount of petty cash fund.
3. In case amounts are not equal, a shortage or overage happened. To determine cash short or
over, use the formula:

Total Accountability - Total Accounted for

If result is:
 Positive  there is a cash shortage
 Negative  there is cash overage

At the end of an accounting period, adjust it to become a miscellaneous income or expense if no one is
claiming; or a receivable or payable if receiver is determined.

Dr. Expenses xxx
Dr. Cash short xxx
Cr. Cash in bank xxx
Cr. Cash over xxx

1. Unreplenished Petty Cash Fund at the end of accounting period
Adjusting entry:
Dr. Expenses. xxx
Cr. Petty Cash Fund xxx

Reversing entry:
Dr. Petty Cash Fund xxx
Cr. Expenses. xxx

2. Increase Petty Cash Fund
Dr. Petty cash fund xxx
` Cr. Cash in bank xxx

3. Decrease Petty Cash Fund
Dr. Cash in bank xxx
Cr. Petty cash fund xxx

Note: In some cases, petty cash box also contains another company funds like employee funds.
o If fund is properly segregated  do not count as part of petty cash fund.
o If co-mingled with each other  total accountability will be petty cash fund plus the other funds.

F. Bank Reconciliation
- a schedule explaining the difference between the balance per bank statement and per accounting records. It
determines the adjusted (correct) cash balance from the bank statement and cash ledger balance

 Bank side
1. Get the unadjusted bank balance.
- It usually appears as the current balance in the bank statement or the bank balance as of the end of
the reconciling month.

2. Determine deposit in transit.
- If given a bank statement, compare its deposits and credits part to your recorded cash receipts.
Those checks that are in your books but not in the bank statement are deposits in transit.
- If only given with figures, use the formula:
-
Deposit in transit, prior month
Add: Cash receipts deposited during the month
Less: Deposits acknowledged by bank during the month
= Deposit in transit, current month

3. Determine outstanding checks.
- If given a bank statement, compare the checks and debits part to your recorded cash disbursements.
Those checks that are in your books but not in the bank statement are outstanding checks.
- If only given with figures, use the formula:
Outstanding checks, prior month

Add: Checks drawn by the depositor during the month
Less: Checks paid by bank during the month
= Outstanding checks, current month

Note: Certified checks must be deducted from the total outstanding checks if it is still included because it is
already paid.

1. Determine bank errors
- Add errors if the recorded deposit of the bank is lacking or the recorded disbursement of the bank is
over
- Deduct errors if recorded deposit of the bank is over or the recorded disbursement of the bank is
lacking

1. Determine adjusted bank balance.
Pro-forma:
Balance per bank
Add: Deposits in transit
Less: Outstanding checks
Add/ Less: Bank errors
Adjusted bank balance

 Book side
1. Get the unadjusted book balance.
- It usually appears as the last line in the balance column.
- If not given, use the formula:
Balance per book, prior month

Add: Total recorded cash receipts during the month
Less: Total recorded cash disbursements during the month
Balance per book, current month

1. Determine bank credits / credit memos
- Increase bank balance but not recorded in the books of the depositor
- See the deposits and credits part of the bank statement and find those that are labeled CM and IN.
Example:
 payment of notes collected by the bank
 proceeds of bank loan
 matured time deposits
 Interest Income (IN)

2. Determine bank debits / debit memos.
- decrease bank balance but not recorded in the books of the depositor
- See the deposits and credits part of the bank statement and find those that are labeled BSC and NSF.
Example:
 NSF or no sufficient fund checks / DAIF or drawn against insufficient fund
 Technically defective checks
 Bank service charges
 Reduction of loan

3. Determine book errors.
- Add errors if receipts recorded is insufficient or disbursements recorded is over
- Deduct errors if receipts recorded is over or disbursements recorded is insufficient.

4. Determine adjusted bank balance.
Pro-forma:
Balance per book
Add: Bank credits
Less: Bank debits
Add/ Less: Book errors
Adjusted book balance
Name of Company
Bank Reconciliation
For the month of __

Balance per bank xxx Balance per book xxx
Add: Deposits in transit xxx Add: Bank credits xxx
Less: Outstanding checks (xxx) Less: Bank debits (xxx)
Add/ Less: Bank errors xxx Add/Less: Book errors xxx
Adjusted bank balance xxx Adjusted book balance xxx

G. Proof of Cash
- Expanded reconciliation in that it includes proof of receipts and disbursements

Name of Company
Proof of Cash
For the month of __

Prev. Month Receipts Disbursements Current Month
Balance per bank. xxx xxx xxx xxx
Deposit in transit
Prev. Month. Xxx (xxx)
Current Month . xxx xxx
Outstanding Checks
Prev. Month. (xxx) (xxx)
Current Month. xxx (xxx)
Adjusted book balance. xxx xxx xxx xxx

Balance per book. xxx xxx xxx xxx
Credit memo
Prev. Month. xxx (xxx)
Current Month. xxx xxx
Debit memo
Prev. Month (xxx) (xxx)
Current Month xxx (xxx)
Adjusted book balance xxx xxx xxx xxx

Formulas:
Computation of bank balance
Bank, Beg Bal
Add: Bank credits
Less: Bank debits
Bank, End Bal

Computation for book balance
Book, Beg Bal
Add: Book debits
Less: Book credits
Book, End Bal
CHAPTER 7: OTHER FINANCIAL ASSETS

Financial Instruments
 Any contract --> financial asset of an entity
--> financial liability or equity instrument of another entity

Initial recognition
 Recognized in statement of financial position only when the entity becomes a party to the contractual provisions of
the instruments

Classification
It must based on the following:
o The entity's business model for managing the financial assets
o The contractual cash flow characteristics of the financial asset
 Principal is the fair value of the financial asset at initial recognition
 Interest consists of consideration for the following:
 time value of money
 Credit risk associated with the principal amount outstanding during a particular period of time
 Other basic lending risks and costs
 Profit margin

The following are the classification of financial assets
o Measured at amortized cost
o Fair value through other comprehensive income
o Fair value through profit or loss

How to tell whether it is a debt instrument or equity instrument?
o Is the contractual cash flow characteristic of the financial asset principal + interest?
 Yes? Debt instrument
 No? Equity instrument
A. Investment in equity instruments

 Active management -- strategic partnership -- significant influence -- equity method
-- joint control -- equity method
-- control -- consolidation

 Passive investment -- capital gains and dividends -- FVTPL
-- FVTOCI

Initial recognition
 FVTPL -- fair value ( transaction cost are expensed)
 FVTOCI -- fair value + transaction cost

Transaction cost
 Directly attributable to the acquisition or issue

Dividends
 FVTPL and FVTOCI -- Dividends are recognized in profit or loss when
 Right to receive dividend payment is established
 Probable the economic benefits will flow to the entity
 Amount can be measured reliably

In other words, recognize dividends in declaration date.

Subsequent measurement
Mark to market every end of the reporting period

 FVTPL -- recognized in profit or loss
 FVTOCI -- recognized in other comprehensive income

Derecognition
The difference between the carrying amount and consideration received shall be:
 FVTPL - recognized in profit or loss
 FVTOCI - recognized in OCI; cumulative must be transferred in retained earnings

FVTPL FVTOCI
Initial recognition Dr. FVTPL - IIES Dr. FVTOCI - IIES
Cr. Consideration given Cr. Consideration given

Transaction costs Dr. Expense Dr. FVTOCI - IIES
Cr. Consideration given Cr. Consideration given

Dividends  Declaration date  Declaration date
Dr. Dividends receivable Dr. Dividends receivable
Cr. Dividend income Cr. Dividend income

 Record date  Record date
(No entry) (No entry)

 Payment date  Payment date
Dr. Cash Dr. Cash
Cr. Dividends receivable Cr. Dividends receivable
Subsequent  Increase in fair  Increase in fair value
measurement value Dr. FVTOCI - IIES
Dr. FVTPL - IIES Cr. UGL - OCI
Cr. Gain
 Decrease in fair value
 Decrease in fair Dr. UGL - OCI
value Cr. FVTOCI - IIES
Dr. Loss
Cr. FVTPL - IIES
Derecognition Update CV Update CV
Dr. / Cr. FVTPL - IIES Dr. / Cr. FVTOCI - IIES
Dr. / Cr. Gain / Loss Dr. / Cr. UGL - OCI

Derecognize Derecognize
Dr. Consideration received Dr. Consideration received
Cr. FVTPL - IIES Cr. FVTOCI - IIES

Transfer cumulative gain or loss in
retained earnings
Dr. / Cr. UGL - OCI
Dr. / Cr. Retained earnings

Special cases:
1. Investment sold/bought cash dividends-on or before ex - cash dividend date
NOTE: Dividends on will reduced the amount the CV of IIES

Seller's books upon sale
<Derecognition entry>

Dr. Cash
Cr. Dividends receivable

Buyer's books
Upon purchase
Dr. IIES
Dr. Dividends receivable
Cr. Cash

Upon dividend payment date
Dr. Cash
Cr. Dividends receivable

2. Investment received stock dividends
Declaration Date
(No entry)

Record Date
(No entry)

Payment Date
(No entry)

Note: Effect of stock dividends can only be seen when investment is mark to market or when it is
derecognized.

3. Investment sold/bought rights-on or before ex-rights date
<Update CV>

<Derecognize>

4. Investment sold/bought ex-right or after ex-rights date
The CV must be the fair value of investment ex-right plus fair value of stock right
Dr. FVTPL - IIES
Cr. Gain

Dr. FVTOCI - IIES
Cr. UGL - OCI

The, transfer value of stock rights to another account
Dr. FVTPL - IISR
Cr. FVTPL - IIES

Dr. FVTOCI - IISR
Cr. FVTOCI - IIES

Estimating the fair value of stock rights
FV (Stock right) = FV (combined contracts) - FV (host)

FV (Stock right = MV (rights - on) - MV (ex-rights)

Theoretical or parity value of stock rights
A. Rights-on
market value of s h ares rig h ts−on−exercise price
Value of 1 right = purc h ase one s h are+ 1¿
No. of rig h ts¿

B. Ex-rights
market value of s h ares ex−rig h ts−exercise price
Value of 1 right = purc h ase one s h are ¿
No . of rig h ts ¿
C. Investment in Debt Securities
Classification
 FAAC  hold to collect
 FVTPL  hold to sell
 FVOCI  hold to collect and sell
Initial measurement
 FAAC  FV + TC
 FVTPL  FV
 FVOCI  FV + TC
Special cases
 With transaction costs  find new MR if FAAC or FVTOCI
 With accrued interests  Get clean price (PV + AI then PV)
Note: To get dirty price, get the initial measurement plus accrued interests.
Subsequent Measurement
 FAAC  record interest income from interest payment +/- amortization
 FVTPL  record interest payment from interest payment, adjust for changes in FV
 FVOCI  record interest income from interest payment +/- amortization, valuation allowance must be
equal to FV – CV (amortization)

PART 4: Non-Financial Assets FAR 34
CHAPTER 8: INVENTORIES
B. Nature of Inventory
Definition
Inventories are assets
o held for sale in the ordinary course of business
o in the process of production for such sale
o in the form of materials or supplies to be consumed in the production process or in the rendering of services
Classifications
a. Trading concern  buys and sells good in the same form purchased
o Merchandise inventory
b. Manufacturing concern  buys goods which are altered and converted into another form before they are
made available for sale
o Raw materials
o Production supplies
o Work in progress
o Finished goods
What to include in the inventory?

 Goods 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 the salesmen or agents
 Goods held by customers on approval or on trial
 Goods purchased in installment
Who owns goods in transit?

 FOB shipping point  buyer
 FOB destination  seller
Who pays for the freight?

 Freight prepaid  seller
 Freight collect  buyer
C. Capitalizable cost at initial recognition

The cost of inventories shall comprise of
o costs of purchase
- Comprise of
 purchase price, import duties and other non-refundable taxes, and transport, handling and other
costs directly attributable to the acquisition of finished goods, materials and services.
 Trade discounts, rebates and other similar items are deducted in determining the costs of purchase.
o costs of conversion
- costs directly related to the units of production
 direct labor
 production overheads
o Fixed production overheads
- those indirect costs of production that remain relatively constant regardless of the volume
of production
 depreciation and maintenance of factory buildings, equipment
 right-of-use assets used in the production process
 cost of factory management and administration.
o Variable production overheads

- those indirect costs of production that vary directly, or nearly directly, with the volume of
production
 indirect materials
 indirect labor
o other costs incurred in bringing the inventories to their present location and condition
Notes:
- If inventory meets the definition of qualifying asset, interest expense on loans to finance the production of
inventories can be capitalized as cost.
- Examples of costs excluded from the cost of inventories and recognized as expenses in the period in which
they are incurred are:
 abnormal amounts of wasted materials, labor or other production costs
 storage costs, unless those costs are necessary in the production process before a further
production stage
 administrative overheads that do not contribute to bringing inventories to their present location and
condition
 selling costs
Recording of inventory transactions

 Recording of cash discounts
 Gross Method  initially records the inventory at invoice price
 Net Method  initially records the inventory at its discounted price
 2 inventory systems
 Perpetual Inventory Transactions directly affect the inventory.
 Periodic Inventory Uses several accounts to arrive at the balance of ending inventory
Beginning inventory
Add: Gross purchases
Less: Purchase discounts / returns / allowances
Add: Freight-in
Cost of Goods Available for Sale
Less: Ending Inventory
Cost of goods sold
D. Inventory cost of flow assumptions

- Those that are allowed by the Standards are the ff.:
a. Specific identification
- for inventories of items that are not ordinarily interchangeable and goods or services produced and
segregated for specific projects.
- specific costs are attributed to identified items of inventory
b. FIFO
- assumes that the items of inventory that were purchased or produced first are sold first and
consequently the items remaining in inventory at the end of the period are those most recently
purchased or produced.
c. Weighted average cost

- the cost of each item is determined from the weighted average of the cost of similar items at the
beginning of a period and the cost of similar items purchased or produced during the period. The
average may be calculated on a periodic basis, or as each additional shipment is received,

depending upon the circumstances of the entity
Note: An entity shall use the same cost formula for all inventories having a similar nature and use to the entity
E. Subsequent Measurement
- An inventory shall be measured at lower of cost and net realizable value.
Net realizable value

- Estimated selling price in the ordinary course of business less the estimated cost of completion and the
estimated cost of disposal
Method of Inventory write down

1. LCNRV per item
2. LCNRV per group
3. LCNRV for the whole inventory
Accounting for inventory write down

1. Direct method or cost of goods method
Dr. Cost of goods method
Cr. Inventory
2. Allowance method
Dr. Loss on inventory write down
Cr. Allowance for inventory write down
Note:
 Loss recognized can be reversed only to the extent of the allowance balance.
Dr. Allowance for inventory write down
Cr. Gain on reversal of inventory write down
 Inventory items charged to expense
o Amount of inventories recognized as expense for during the period (cost of goods sold)
o Amount of any write down of inventories
o Reversal of inventory write down
F. Estimation Procedures
1. Gross Profit Method
- Standard costs take into account normal levels of materials and supplies, labor, efficiency and capacity.
utilization. They are regularly reviewed and, if necessary, revised in the light of current conditions.
i. Based on net sales

Net sales 100
COGS 100-xx
GP xx
ii. Based on cost

Net sales 100+xx
COGS 100
GP xx
2. Net Profit Method

- cost of the inventory is determined by reducing the sales value of the inventory by the appropriate
percentage gross margin. The percentage used takes into consideration inventory that has been marked
down to below its original selling price. An average percentage for each retail department is often used.
3 approaches
1. Conservative / conventional / Lower of cost approach Considers only net mark up at computing
cost ratio
2. Average cost approach Considers both net markup and net markdown at computing cost ratio
3. FIFO  Considers both net markup and net markdown but applied only to net purchases in computing
cost ratio
Pro forma
Cost Retail
Beginning inventory XXX XXX

 Gross Purchases XXX XXX
 Purchase discount and allowance (XXX)
 Purchase return (XXX) (XXX)
 Freight in XXX
 Departmental transfer in XXX XXX
 Departmental transfer out (XXX) (XXX)
Net purchases XXX XXX

Abnormal shortages XXX XXX
Mark-up XXX
Mark-up cancellation (XXX)
GAS - conservative XXX XXX
Mark down (XXX)
Markdown cancellation XXX
GAS - average XXX XXX

Gross sales XXX
Sales return (XXX)
Sales discount and allowance
Employee discount XXX
Normal breakage XXX
Total XXX

GAS - average XXX
Less: Total XXX
EI at retail XXX
CHAPTER 9: PROPERTY, PLANT AND EQUIPMENT

A. Nature
Property, Plant and equipment are tangible items that are
I. Held for use in production or supply to others, for rental to others and for administrative purposes
II. Are expected to be used during more than one period

It must be recognized as an asset when
o It is probable that future economic benefits associated with the asset will flow to the entity
o Cost of the asset can be measured reliably

B. Capitalizable cost initial recognition
Initial measurement
- It must be measured at cost. Cost is the amount of cash or cash equivalent paid and the fair value of the
other considerations given to acquire an asset at the time of acquisition or construction. It comprises of:
 Purchase price, including import duties and non-refundable purchase taxes and deducting trade
discounts and rebates
 Cost directly attributable to the bringing of the asset to the location and condition necessary for it
to be capable of operating in a manner intended by the management
 Cost of employee benefits arising directly from acquisition of PPE
 Cost of site preparation
 Initial delivery and handling cost
 Installation and assembly cost
 Professional fees
 Cost of testing whether the asset is functioning properly
 Initial estimate of the cost of dismantling and removing the item and restoring the site on which it
is located, the obligation for which the entity incurs

Cost not qualified for recognition
 Cost of opening new facility
 Cos of advertising and promoting new product
 Cost of conducting business in new location or customer
 Administration and general overhead costs
 Cost incurred while an item capable of operating in the manner intended by management has yet to be
brought into use or is operated at less than full capacity
 Initial operating loss
 Cost of relocating or reorganizing entity’s operations

Cost of property based on its acquisition
 Cash basis
- Cash paid plus directly attributable costs

 Lump sum purchase / basket purchase
- Apportion single price to the asset acquired on the basis of relative fair value

 Acquisition on account
- Invoice price less discount, regardless whether it is taken or not
- If not take, charge to purchase discount lost reported as other expense

 Acquisition on instalment basis
- Cash price, difference with instalment price shall be amortized over the credit period

 No available cash price
- Present value of all payments using an implied interest rate

 Issuance of share capital
- Fair value of the property received
- Fair value of the share capital
- Par value or stated value of the share capital

 Issuance of bonds payable
- Fair value of the bonds payable
- Fair value of the asset received
- Face amount of the bonds payable

 Exchange
A. With commercial substance  Causes significant change in the entity specific value (present
value of the cash flows an entity expects to arise from the continuing use of the asset and from the
disposal at the end of the useful life or expects to incur when settling liability)
- Fair value of asset given (plus cash payment if payor, minus cash received if recipient)
- Fair value of asset received

B. No commercial substance
- Carrying amount of the asset given up

 Self-constructed
- Shall include:
A. Direct cost of materials
B. Direct cost of labor
C. Indirect cost and incremental overhead specifically identifiable or traceable to the construction

Note: Cost of abnormal amount of wasted material, labor or overhead incurred are expensed while
income and expense from incidental operations are recognized in profit or loss.

Capitalizable costs for major classification of PPE
Land Building (purchased) Building (constructed) Machineries
A. Purch O. U. HH.
Material used, labor
ase price P. employed, and over II.
B. Legal Q. head incurred storage, and
fees date of acquisition V. Building
otherpermit
acquisition
C. Broker R. W. Architect
cost fee
or agent commission liens and other X. JJ.
Superintendent fee
D. Escro encumbrances Y. Costtransit
of excavation
w fees assumed by the Z. KK.
Cost of temporary
E. Fees buyer buildings LL.
for registration and transfer S. AA. Interest
dismantling
on if the
of title to induce them to construction loans entity has a
F. Cost vacate building and insurances present
of relocation or T. BB. Expenditures
obligation for
reconstruction of property remodelling cost to service equipment MM.
belonging to other in order bring it to intended and fixtures that are consultants for
to acquire possession use permanent advice
G. Mortg CC. NN.
Cost of building and
ages, encumbrances and removing temporary and platform
interest assumed by the fence OO.
buyer DD. Safety
device
inspection
to keepfee
H. Unpai EE. Sidewalks,
machine cool
d taxes up to date of pavements, parking PP.
acquisition assumed by the lots driveways that tax paid
buyer are part of the
I. Cost blueprint
of survey FF. Immovable building
J. Paym fixtures
ents to tenants to induce GG. Ventilating system,
them to vacate land to lighting system and
prepare it for intended use elevator installed
K. Cost during construction
of permanent improvements
such as cost of clearing,
grading, levelling and

landfill
L. Cost
of option to buy the
acquired land
M. Land
improvements not subject to
depreciation such as cost of
surveying, clearing, grading,
levelling, landfill and
subdividing
N. Specia
l assessments (taxes paid
by landowner as a
contribution to the cost of
public improvements)

Note: There are different cases for land and building:
 Land and old building are purchased at single cost
A. Old building is usable  allocate cost based on relative fair value
B. Old building is unusable  allocate cost to land only
 Old building is demolished immediately
A. Carrying amount is either recognized as:
 Loss  for PPE and investment property
 Capitalized as cost  for inventory
B. Net demolition cost is either capitalized to
 Building  if new building will be constructed
 Land  if it is for preparation to use the land
 Old building is used in a prior period
A. Carrying amount is recognised as loss
B. Net demolition cost is either capitalized to
 Building  if new building will be constructed
 Land  if it is for preparation to use the land
C. Borrowing Costs
- Interest and other cost that an entity incurs in connection with the borrowing of funds

Composition of borrowing cost
 Interest expense calculated using effective interest method
 Finance charge with respect to a finance lease
 Exchange difference arising from foreign currency borrowing that is regarded as an adjustment to interest
cost

Qualifying asset
- Asset that necessarily takes a substantial period of time to get ready for the intended use or sale

Example:
 Manufacturing plant
 Power generation facility
 Intangible asst investment property

Capitalization of borrowing cost
- The borrowing cost that are directly attributable to the acquisition, construction or production of a qualifying
asset is required to be capitalised.

When does capitalization begins?
- It begins at the commencement date in which all of the ff. conditions are met:
 Incurs expenditure for the asset
 Only those that have resulted in payment of cash, transfer of asset or assumption of interest
bearing liabilities net of any progress payment and grant received
 Incurs borrowing cost
 Undertakes activities necessary to prepare asset for its intended use or sale
 Include technical and administrative works prior to the commencement of physical construction

When should capitalization be temporarily suspended?
During extended periods in which it suspends active development of a qualifying asset

When should capitalization end?
When substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are
complete.

Types of borrowing
 Specific borrowing
- Funds that are borrowed specifically for the purpose of acquiring a qualifying asset
- Amount of capitalizable borrowing cost is the actual borrowing cost incurred during the period less any
investment income from temporary investment of those borrowings

 General borrowing
- Funds that are borrowed generally and used for acquiring a qualifying asset
- Amount of capitalizable borrowing cost is equal to the average carrying amount of the asset during the
period multiplied by a capitalization rate
- Capitalization rate is total annual borrowing cost divided by total general borrowing outstanding during the
period

Note: If more than one year, the borrowing cost previously capitalized must be included (actual expenditure in
previous year + capitalized borrowing cost)

Steps in solving:
 Get the average expenditures for the period.
 Allocate expenditure between specific and general borrowing.
 To get capitalizable costs,
 For specific borrowing, multiply interest rate to expenditure
 For general borrowing, multiply capitalizable rate to expenditure
 Carry over actual expenditures and borrowing cost previously capitalized next period.
D. Subsequent expenditures
Subsequent expenditures for PPE that may either be expensed or capitalized:
 Additions
 Improvements
 Replacements
 Repairs
 Rearrangement cost

Capitalized subsequent expenditures if:
 It is probable that future economic benefits associated with the subsequent cost will flow to the
entity
A. Extends life
B. Increase capacity
C. Increase efficiency and safety
 Subsequent cost can be measured reliably

Note: Derecognize replaced part at its carrying value or discounted replacement cost

E. Subsequent measurement
- An entity shall choose either the cost model or the revaluation model as its accounting policy and shall apply it
to an entire class of PPE

Cost model
- PPE must be carried at its cost less any accumulated depreciation and any accumulated impairment losses

Depreciation
- Systematic allocation of the depreciable amount of an asset over the useful life
- Begins when asset is available for use
- Ceases at earlier date in which it is classified as held for sale or date in which it is derecognized

Factors of depreciation
 Depreciable amount
 Residual value  estimated net amount currently obtainable at the end of the useful life
 Useful life  period over which an asset is expected to be available for use by the entity

Factors affecting useful life / service life
 Expected usage of the asset
 Expected physical wear and tear
 Technical or commercial obsolescence
 Legal limits

Aside from major class of PPEs, the following must be depreciated over their useful life
 Land improvements
A. Fences, water systems, drainage systems, sidewalks, pavements, landscaping, parking lot,
driveways not part of the blueprint
 Movable building fixture
 Building improvements
A. Ventilating system, lighting system elevator installed after construction of the building
 Tools
 Patterns and dies that are not for specially order product
 Equipment, delivery equipment, store equipment, office equipment and furniture and fixtures
Methods of depreciation
- must reflect the pattern in which economic benefits from the asset are expected to be consumed by the
entity. A depreciation method based on revenue that is generated through the use of an asset is not
appropriate.

2. Straight line depreciation
- Allocate depreciable amount equally over the useful life
- Considers depreciation as a function of time

Annual depreciation = (Cost - residual value) / useful life in years

Straight line rate = 100% / useful life

3. Variable charge or activity method
- Considers depreciation as function of use

 Service hours method
Depreciation rate per hour = Depreciable amount / useful life in years
Annual depreciation = Depreciation rate x actual hours worked in a year

o Productive output
Depreciation rate per unit = Depreciable amount / useful life in terms of output
Annual depreciation = Depreciation rate x yearly output

1. Accelerated methods
- Assumed that new assets are generally capable of producing more revenue in the earlier years than the
later years
- Used to have uniform charge as repairs tend to increase with age of the asset

 Sum of years digits
SYD = Life x ((Life + 1) / 2)
Annual depreciation = (Remaining useful life / SYD) x depreciable amount

 Declining method
Depreciable rate = Straight line rate x declining rate
Annual depreciation = Carrying amount x depreciable rate

Change in useful life / residual value / depreciable method
- Treated as accounting estimate
- Allocate the remaining revised carrying amount of the asset over the revised useful life

Correcting depreciation errors
Dr. / Cr. Retained earnings
Dr. / Cr. Accumulated depreciation

Revaluation model
- After recognition as an asset, an item of PPE whose fair value can be measured reliably shall be carried
at a revalued amount.
- Shall be made with sufficient regularity and applied to entire class of PPE

Revalued amount
- Fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent
accumulated impairment loss

2 Methods of Revaluation
 Elimination method
Steps:
 Recognize depreciation.
 Derecognize accumulated depreciation to the PPE.
 Recognize the difference between carrying value and the fair value as revaluation surplus or revaluation
loss.

 Gross CA is adjusted
Steps:
1. Recognize depreciation
2. Construct table.
Book value FMV Adjustment
Gross Amount
Accumulated Depreciation
Net amount
Notes:
o If increase,
Dr. Building
Cr. Accumulated depreciation
Cr. Revaluation surplus / reversal of revaluation loss

o If decrease,
Dr. Revaluation loss / revaluation surplus
Dr. Accumulated depreciation
Cr. Building

o If piecemeal is applied, revaluation surplus must be allocated over the remaining period.

G. Impairment
When to recognize impairment loss?
- If the recoverable amount of the asset is less than its carrying amount

Note: Reversal of impairment loss shall not exceed the carrying amount that would have been recognized if there
are no impairment loss recognized.

Recoverable amount
- The higher of
 fair value less costs to sell
 value in use

Fair value
- market's expectation of the present value of the future cash flows to be derived from the asset
- Price that would be received to sell an asset in an orderly transaction between market participants
at the measurement date

Cost to sell
- Legal costs, stamp duty, transaction taxes, cost of removing the asset and direct incremental cost to
bring an asset into condition for its sale

Value in use
- Enterprise's estimate of the present value of the future cash flow to be derived from continuing use and
disposal of the asset

Composition of future cash flows:
1. Cash inflows from continuing use of the asset
2. Cash outflows associated with the cash inflows
3. Net cash flows to be received for the disposal of the asset at the end of its useful life

It must not include:
1. Cash inflow or outflow from financing activities
2. Income tax receipts or payments
3. Cash inflow or outflow from future restructuring to which an entity is not committed yet
4. Cash inflow or outflow from improving or enhancing asset's performance

Foreign currency future cash flows
- Estimates and discounted based on their currency and translated using spot exchange rate at the
date of the value in use calculation

Discount rate
- Pre-tax rate that reflects current market assessments of
 Time value of money
 Risks specific to asset to which estimated cash flows are not adjusted
- The effect of price increases attributable to general inflation
 If included in the discount rate - future cash flows are estimated in nominal terms
 If not included in the discount rate - future cash flows are estimated in real terms

How often to test for impairment?
 Assess if there is an indication of impairment at the end of each accounting period
 In the case of intangible asset with indefinite life or not yet available for use, test annually

H. Derecognition
It shall be derecognized on disposal or when no future economic benefits are expected from the use or disposal .
CHAPTER 10: INVESTMENT PROPERTIES

A. Nature
- Investment properties are properties (land or a building, or a portion of a building) held to earn rentals or for
capital appreciation or both. They generate cash flows largely independently of the other assets held by an entity

Examples of investing properties:
o land held for long-term capital appreciation
o land held for a currently undetermined future use
o a building owned by the entity (or a right-of-use asset relating to a building held by
the entity) and leased out under one or more operating leases
o a building that is vacant but is held to be leased out under one or more operating
leases.
o property that is being constructed or developed for future use as investment
property.

Items that are not an investment property:
o property intended for sale in the ordinary course of business or in the process of
construction or development for such sale for development and resale.
o owner-occupied property
o property held for future use as owner-occupied property
o property occupied by employees (whether or not the employees pay rent at market rates)
o Owner occupied property awaiting disposal.
o property that is leased to another entity under a finance lease
o Property being constructed or developed on behalf of third parties

Treatment for Mixed used properties
 properties comprise a portion that is held to earn rentals or for capital appreciation and another portion that is
held for use in the production or supply of goods or services or for administrative purposes
 If the portions could be sold or leased out separately
 entity accounts for the portions separately.
 If the portions could not be sold separately
 the property is investment property only if an insignificant portion is held for use in the production
or supply of goods or services or for administrative purposes.

Treatment for entity providing ancilliary services
o If the services are insignificant to the arrangement as a whole
 the entity treats such a property as investment property.
Example: The owner of an office building provides security and maintenance services to the lessees
who occupy the building.

o If the services provided are significant
 the entity is considered owner-occupied
Example: If an entity owns and manages a hotel, services provided to guests are significant to the
arrangement as a whole (owner-managed hotel)

Treatment for property leased to an affiliate
o If from the perspective of the individual entity
- It is recognized as investment property

o If for the purpose of consolidated financial statements
- It is treated as owner-occupied property

Recognition
An owned investment property shall be recognized as an asset when, and only when:
o it is probable that the future economic benefits that are associated with the investment property will flow to the
entity
o the cost of the investment property can be measured reliably.

This criteria must also be used for capitalization of subsequent expenditures for investment property.

C. Capitalizable cost at initial recognition
An investment property must be measured initially at cost. Transaction costs shall be included.

Cost comprises of:
o Purchase price
o Any directly attributable expenditure
 Professional fees for legal services
 Property transfer taxes
 Other transaction cost

Cost excludes the following:
o Start up costs
o Operating losses incurred
o Abnormal amount of wastages

Amount of costs for the following cases:
o If payment for an investment property is deferred (note payable, bonds payable)
- cost is the cash price equivalent.

The difference between this amount and the total payments is recognized as interest expense over the period
of credit.

Note: Cash price equivalent = present value of the note = fair value of the investment property

o In an exchange of asset with commercial substance and the entity is able to measure reliably the fair value of
either the asset received or the asset given up,
- Cost is either fair value of the asset given up or fair value of the asset received

o In an exchange of asset without commercial substance
- Cost is the carrying value of the asset given up

D. Subsequent measurement
An entity shall choose as its accounting policy either the fair value model or
the cost model shall apply that policy to all of its investment property.

Note: Fair value must be known in wither of the models.
 Fair value model - measurement
 Cost model - disclosure

Fair Value Model
After initial recognition, an entity that chooses the fair value model shall
measure all of its investment property at fair value.

Exceptions:
 the fair value of the investment property is not reliably measurable on a continuing basis.
 market is inactive (i.e. there are few recent transactions, price quotations are not current or
observed transaction prices indicate that the seller was forced to sell)
 alternative reliable measurements of fair value (for example, based on discounted cash flow
projections) are not available

Treatment to exception:
 The entity shall measure that investment property using the cost model.
 The residual value of the investment property shall be assumed to be zero.
 The entity shall continue to apply IAS 16 or IFRS 16 until disposal of the investment property.

 If an entity determines that the fair value of an investment property under construction is not reliably
measurable but expects the fair value of the property to be reliably measurable when construction is
complete, i

Treatment to exception:
 measure that investment property under construction at cost until either its fair value become
reliably measurable or construction is completed.

Note:
 If an entity has previously measured an investment property at fair value, it shall continue to
measure the property at fair value until disposal (or until the property becomes owner-occupied
property or the entity begins to develop the property for subsequent sale in the ordinary course of
business even if comparable market transactions become less frequent or market prices become
less readily available.
 A gain or loss arising from a change in the fair value of investment property shall be recognized
in profit or loss for the period in which it arises.

Journal entry:
Dr. / Cr. Investment property
Dr. / Cr, Loss / Gain in valuation from valuation of investment property

Cost Model
After initial recognition, an entity that chooses the cost model shall measure
investment property:
 in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations if it meets
the criteria to be classified as held for sale.
 in accordance with IFRS 16 if it is held by a lessee as a right-of-use asset
 in accordance with the requirements in IAS 16 for the cost model in all other cases.

Journal entry:
Dr. / Cr. Depreciation expense
Dr. / Cr. Accumulated depreciation

E. Reclassification
An entity shall transfer a property to, or from, investment property when, and only when, there is a change in use.

Change in use
 commencement of owner-occupation, or of development with a view to owner-occupation, for a transfer
from investment property to owner-occupied property
 commencement of development with a view to sale, for a transfer from investment property to
inventories;

Note: When an entity decides to dispose of an investment property without development, it
continues to treat the property as an investment property until it is derecognized (eliminated from
the statement of financial position) and does not reclassify it as inventory.

 end of owner-occupation, for a transfer from owner-occupied property to investment property
 inception of an operating lease to another party, for a transfer from inventories to investment property.

Investment property (cost) to owner occupied property or inventory
When an entity uses the cost model, transfers between investment property, owner-occupied property
and inventories do not change the carrying amount of the property transferred and they do not change
the cost of that property for measurement or disclosure purposes.

1. Update investment property
Dr. Depreciation expense
2. Reclassify to PPE or inventory

Dr. Inventory / PPE
Cr. Investment property

Investment property (fair value) to owner-occupied property or inventories

1. Remeasure investment property at fair value on the date of change.
Dr. / Cr. Investment property
Dr. / Cr. Gain or loss form valuation of investment property

2. Reclassify to PPE or inventory
3. Dr. PPE / Inventory

Owner-occupied property, inventory, CIP to investment property (cost)
1. Update book value
A. PPE - cost
Dr. Depreciation expense

B. Inventory - LCNRV
Dr. Loss from valuation of inventory
Cr. Allowance for inventory valuation

C. Construction in progress - fair value
Dr. / Cr. Construction in progress
Dr. / Cr. Gain or loss from valuation

2. Reclassify to Investment property
Dr. Investment property
Dr. Accumulated depreciation / allowance for inventory valuation
Cr. PPE / Inventory / CIP

Owner-occupied property, inventory, CIP to investment property (fair value)
1. Update book value
1. PPE - revaluation
Dr. PPE
Cr. Revaluation surplus

Dr. Revaluation loss
Cr. PPE

2. Inventory - fair value
Dr. / Cr. Loss/Gain from valuation of inventory
Dr. /Cr. Allowance for inventory valuation

3. Construction in progress - fair value
Dr. / Cr. Construction in progress
Dr. / Cr. Gain or loss from valuation

2. Reclassify to Investment property
Dr. Investment property
Dr. Accumulated depreciation / allowance for inventory valuation
Cr. PPE / Inventory / CIP

F. Derecognition
An investment property shall be derecognized on disposal or when the investment property is permanently
withdrawn from use and no future economic benefits

Dr. Cash
Dr. / Cr. Gain or loss from disposal

CHAPTER 11: INTANGIBLE ASSETS

A. Definition
An intangible asset is an identifiable non-monetary asset without physical substance.

B. Recognition
It must be recognized if it meets:
o Definition of intangible asset
 Probable that expected future economic benefits that are attributable to the asset will flow to the
entity
 Cost of asset can be measured reliably
o Recognition criteria
 Identifiability
- Separable
- Arises from contractual or other legal rights
 Control
- Power to obtain future economic benefits
- Restrict access of other to the benefits
 Future economic benefit
- Include revenue from sale
- Cost savings
- Other benefits from use of asset

Different Kinds of intangible assets
1. Patent
- Grant issued by the government through Intellectual Property Office of the Philippines
- Exclusive right granted for a things that are new, inventive and useful to the inventor to exclude other
from making, using or selling his invention
- Has a term of 20 years

1. Trademark
- Symbol that is used to differentiate goods and services from others
- Has a term of 10 years, renewable indefinitely

2. Copyright
- Legal protection for original work
- Term is lifetime of the author plus 50 years after death

3. Industrial designs
- For aesthetic nature
- Term is 5 year, extendible twice for same duration

4. Franchising
- Provide one with operating system, brand and support through license

C. Initial Measurement
- Measured initially at cost

For separately acquired, cost includes
- Purchase price including import duties and non refundable taxes after deducting trade discounts and
rebates
- Any directly attributable cost of preparing the asset for its intended use
 Cost of employee benefits
 Professional fees
 Cost of testing

For acquisition as part of business combination,
- Fair value on the date of acquisition

For acquisition by government grant
- Fair value
- Nominal amount or zero plus any expenditures directly attributable to preparing asset for its intended use

For acquisition by exchange
 With commercial substance
- Fair value of the asset given up plus any cash payment
 Without commercial substance
- Carrying amount of asset given up plus any cash payment

For internally generated intangible asset
 Cost comprises of all directly attributable costs necessary to create produce, and prepare the
asset to be capable of operating at a manner intended by management
 Cost of materials and services used in generating the asset
 Cost of employee benefits
 Fees to register a legal right
 Amortization of patents and licenses
 Cost is the sum of expenditures incurred from the date when the intangible asset meets the
recognition criteria
Note: Internally generated brands, mastheads, publishing titles, customer lists, goodwill are not recognized
as intangible assets

The following expenditures must be expensed:
 Start up costs such as organization cost, pre opening costs, and pre operating costs
 Training costs
 Advertising and promotional costs
 Business relocation or reorganization cost

Classification of expenditures of an internally generated asset according to generation:
 Research phase  all expenses incurred in this phase is expensed
Example:
 Research aimed to obtain or to discover new knowledge
 Searching for application of research finding
 Conceptual formulation and design of possible product or alternative
 Testing in search for product or alternative

 Development phase  expenses from this phase can be capitalized only if:
 Technical feasibility of completing the intangible asset
 Producing prototype or model
 Intention to complete and use or sell it
 Ability to use or sell it
 How the intangible asset will generate probable future benefits
 Business plan and securing resources
 Availability of resources or funding to complete development
 Obtaining lender's indication of willingness to fund
 Ability to measure reliably the expenditure attributable to the intangible asset during development
phase
 Costing system of an entity

If research phase cannot be distinguished from the development phase, it is considered that
expenditures are incurred in the research phase only.

Treatment for other expenditures that are incurred in research and development phase:
 Those with alternative future use
- Capitalize
- Depreciation and amortization is recognized as research and development expense

 Those with single use only
- Recognize as research and development expense

Research and development expense

- Those that occur prior to the beginning of commercial production and distribution of
product and not relate to commercial production

Activities not considered as R & D expense
 Engineering follow through in an early phase of commercial production
 Quality control during commercial production
 Troubleshooting breakdown during production
 Routine on going effort to refine, improve or enrich quality of product
 Adaptation of an existing capability to particular requirement
 Periodic design changes
 Routine design of tools

D. Subsequent measurement
An entity shall choose either
a. Cost model
- Shall be carried at its cost less accumulated amortization and accumulated impairment

Kinds of intangible asset according to length of useful life
a. Finite life
- Amortized over useful life
 Begins when it is available for use
 Cease at earlier the date is classified as held for sale or the date it is derecognized
 Use straight line method or other that will reflect the pattern in which future economic benefits are
consumed by the entity (predominant limiting factor)
 Residual value is zero unless:
 There is a commitment by a third party to purchase the asset at the end of useful life
 There is an active market for the asset and
 Residual value can be determined by reference to that market
 It is probable that a market will exist at the end of the assets useful life
Its amount must be based on the amount recoverable from disposal using prices prevailing at
the date of the estimate for the sale that has reached the end of its useful life and has operated
under conditions similar to those in which the asset will be used.
b. Amortization method and period must be reviewed at least at each financial year-end.

a. Indefinite life
-Shall not be amortized
-Test for impairment
 Annually
 Whenever there is an indication that intangible asset may be impaired

b. Revaluation model
- Shall be carried at revalued amount being its fair value at date of revaluation less any subsequent
amortization and any subsequent accumulated impairment losses.
- Shall be made with regularity so carrying amount does not differ with fair value
- Fair value shall be measured by reference to an active market. However, it is uncommon to have an
active market for intangible asset. Contracts in which price are negotiated cannot be a basis for fair
value.

E. Derecognition
An entity shall derecognize an intangible asset
- On disposal
- When no future economic benefits are expected from its use or disposal

Gains or loss from derecognition is the difference between net disposal proceeds and carrying amount of the
asset. It shall not be classified as revenue.

F. Goodwill
- Unidentifiable and not separable from the business
- Unrecorded asset that allows the company to generate greater than average income
- May be from efficient, well trained employees, good location, customer service, secret recipes and good
reputation of the company
- Arises only when a company acquires another entire business
- Computed as the acquisition cost less fair market value of net identifiable asset
- Subject to annual impairment test

Acquisition cost
-Present value of net cash flow from operating the business
-Number of stocks purchased X stock price

Fair market value of net identifiable asset
-Fair market value of tangible assets
-Fair market value of intangible assets that can be identified even if unrecorded
-Fair market of the liabilities of the acquired company assumed by acquiring company

Computing goodwill
-List of assets and liabilities are given
Goodwill = acquisition cost - fair market value of tangible and intangible asset less fair market value of
liabilities

-When ROA for total assets is given
ROA total assets = Average net income / (Identifiable Assets + Goodwill)

-When ROA for identifiable assets is given
ROA identifiable asset X identifiable asset = Average normal net income
ROA goodwill x Goodwill = Excess income
Average normal net income + excess income = average net income

-When goodwill is based on the perceived number of hears that the company is expected to generate
excess income
Goodwill = Excess income X Number of years excess income will persist
CHAPTER 12: BIOLOGICAL ASSETS

A. What is the scope of IAS 41?
1. Biological assets
o Living plants
 Cultivated to be harvested as a agricultural produce
 Cultivated to produce agricultural produce when there is more than a remote likelihood that the
entity will also harvest and sell the plant as agricultural produce
 Annual crops
o Living animals
2. Agricultural produce at the point of harvest
3. Government grants in relation to biological assets

Note: These three must relate to an agricultural activity.

Agricultural activity
- Management by an entity of the biological transformation and harvest of biological assets for the purpose
of either
 sale
 conversion into agricultural produce or additional biological asset

Biological transformation
- Comprises of the growth, degeneration, production and procreation that cause qualitative or quantitative
changes in biological assets

B. Kinds of Biological Assets
1. Consumable biological assets
- those that are to be harvested as agricultural produce or sold as biological assets
Examples:
o livestock intended for the production of meat
o livestock held for sale
o fish in farms
o crops such as maize and wheat
o produce on a bearer plant and trees being grown for lumber

2. Bearer biological assets
- those other than consumable biological assets that are held to bear produce
Examples:
o livestock from which milk is produced
o fruit trees from which fruit is harvested

3. Mature biological assets
- those that have attained harvestable specifications (for consumable biological assets) or are able to
sustain regular harvests (for bearer biological assets)

4. Immature biological assets
- Those that are not mature yet

C. Recognition
An entity shall recognize a biological asset when:
a. The entity controls the asset as a result of past event
 May be evidenced by legal ownership, branding or marking
b. It is probable that future economic benefits associated with the asset will flow to the entity
 May be assessed by measuring the physical attributes
c. The fair value or cost of the asset can be measured reliably

D. Measurement
A biological asset shall be measured on initial recognition and at the end of each reporting period at fair value less
cost of disposal.

An agriculture produce shall be measured at fair value less cost of disposal at point of harvest.

Notes:
o Cost of disposal includes incremental cost directly attributable to the disposal of an asset such as commission
to broker and dealer, levy by regulatory agency and commodity exchange and transfer tax and duty. It
excludes transport cost, finance cost and income tax.
o If there is no quoted market price and alternative measurements are unreliable, biological asset shall be
measured at cost less accumulated depreciation and accumulated impairment. However, it is only allowed at
initial recognition.

Journal entries on Initial recognition:
A. Purchased biological assets
Dr. Biological assets (FV less cost to sell)
Dr. Loss from valuation of biological assets (FV less cost to sell - Cost)
Cr. Instrument exchanged (Cost)

B. Birth of biological asset
Dr. Biological asset
Cr. Gain from valuation of biological assets

C. Harvesting agricultural produce
At point of harvest
Dr. Agricultural produce
Cr. Gain on agricultural produce

Dr. Inventory
Cr. Agricultural produce

Journal entries on Subsequent measurement:
A. Unrecorded biological assets
Dr. Biological assets

B. From recorded fruits, flowers, vegetables to agricultural produce
Dr. Agricultural produce
Cr. Biological assets
Dr. / Cr. Gain or loss from valuation of biological assets

Journal entries on subsequent expenditures
Dr. Expense
Cr. Cash / Accounts payable

Journal entries on sale of biological assets in the ordinary course of the business
Dr. Biological assets

Dr. Cash / Accounts receivables
Cr. Sales

Dr. Cost of goods sold
Cr. Biological assets

Notes:
Price change - same age, different price
Physical change - different age, different price
CHAPTER 13: NON-CURRENT ASSETS HELD FOR SALE AND

DISPOSAL GROUP
I. Recognition
I. It shall be classified as held for sale if the carrying amount will be recovered principally through a sale
transaction.
o Available for immediate sale in its present condition
o Subject to terms that are usual and customary
o Sale must be highly probable
 Management must be committed to plan to sell the asset
 Active program to locate buyer and complete the plan must have been initiated
 Must be actively marketed for sale at a price that is reasonable relative to the fair value
 Sale must be completed within one year from the date of classification
 It can be more than one year if the delay is caused by events or circumstances
that is beyond the entity's control and the entity is still committed to its plan to sell the asset
 It is unlikely that significant changes will happen to the plan
 Probability of shareholder's approval must be considered

I. Initial Measurement
It must be measured at lower of its carrying amount and fair value less costs to sell.

Recognize an impairment loss if the fair value less costs to sell is lower than the carrying amount.

I. Subsequent measurement
1. Depreciation  no deprecation must be recognized
2. Interest and other expenses related to the liabilities  continue to recognize
3. Impairment loss  recognize if carrying amount is higher than the fair value less costs to sell
4. Reversal of impairment loss  can be made only up to the cumulative balance of impairment loss

II. Eventual sale
Recognize a gain or loss amounting to the difference between the net disposal proceeds and carrying amount.

I. Change in plans of sale
It shall be measured at lower of:
o Would be carrying amount
o Recoverable amount
II. Disposal group

- Group of assets and liabilities to be disposed of by sale or other together in a single transaction

Steps:
1. Update the carrying amount of the items in accordance with applicable IFRS.
2. Measure the group at lower the carrying amount and fair value less cost to sell.
3. Allocate the impairment loss to the items of the disposal group.
a. Exhaust it first to the goodwill.
b. Distribute it pro rata to other items in the disposal group except:
i. Inventories
ii. Contract assets
iii. Deferred tax assets
iv. Employee benefits
v. Financial assets
vi. Investment property
vii. Biological assets
viii. Insurance contracts
ix. NCAHFS

Do not allocate impairment loss to assets with carrying amount of
 Fair value less cost of disposal
 value in use
 Zero

4. Reversal of impairment loss can be made only up to cumulative impairment loss except those exhausted in the
goodwill

Discontinued operations
- Component of an entity that has been disposed or is classified as held for sale

Component of an entity
- Comprises operations and cash flows that can be clearly distinguished operationally and for financial
purposes

Example:
o Represent major line of business or geographical area of operations
o Part of single coordinated plan to dispose of the first bullet
o Subsidiary acquired exclusively with a view to resale

Gain or loss from discontinued operations
 Includes the ff.:
o Post tax profit or loss of discontinued operations
o Post tax gain or loss recognized on the measurement to fair value less cost to sell
o Post tax gain or loss on the disposal of the asset constituting discontinued operations

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Chapter 1: History, Development and Functions of The Standard-Setting Bodies

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PART 1: Development of Financial Reporting Framework, FAR 1

Standard-Setting Bodies and Regulation of the Accountancy Profession

CHAPTER 1: HISTORY, DEVELOPMENT AND FUNCTIONS OF THE

A. IASB (International Accounting Standards Board)

B. IFRIC (International Financial Reporting Interpretations Committee )

C. FRSC (Financial Reporting Standards Council)

D. PIC (Philippine Interpretations Committee)

CHAPTER 2: REGULATION AND ENVIRONMENT OF THE

A. BOA (Professional Regulatory Board of Accountancy)

B. PICPA (Philippine Institute of Certified Public Accountants)

C. Sectors of practice of accountancy profession

CHAPTER 3: THE CONCEPTUAL FRAMEWORK FOR FINANCIAL

A. Purpose of the Conceptual Framework

B. Contribution of Conceptual Framework to the Foundation for the Development of Standards

C. Status of Conceptual Framework

D. Scope of the Conceptual Framework

E. Objective of Financial Reporting

General Purpose Financial Reporting

Decisions relating to providing resources

 buying, selling or holding equity and debt instrument

Prospects for future Economic resources,

 Changes in economic resources and claims

 Past cash flows

o Other events and transactions

F. Qualitative Characteristics of Useful Financial Information

 Neutrality – information is selected without bias

2. Enhancing qualitative characteristics

Scope of Financial Statements

Forward looking information

Perspective adopted in financial statements

Going concern assumption

Financial Statement Scope

I. Elements of Financial Statements

 Potential to produce economic benefits

 Transfer of an economic resource

 Present obligation as a result of past event

Considerations when selecting measurement basis

Qualitative Characteristics Effect of measurement bases

does not necessarily prevent the use of a measurement basis

Other notes on measurement bases:

 Statistical mode / the most likely outcome

M. Presentation and Disclosures

Effective communication of information in financial statements requires:

Presentation and disclosure principles

N. Concept of Capital and Capital Maintenance

o Physical concept of capital

Concepts of Capital Maintenance

o Physical capital maintenance

Capital maintenance adjustments

CHAPTER 4: THE ACCOUNTING PROCESS

o General ledger  contains all the accounts appearing in the balance

Types of Adjusting Entries

- Can be recorded using either the:

o Deferrals (Unearned income and Prepaid expenses)

o Other related income and expenses (Bad debts, depreciation etc.)

Expense recognition principles

9. Post-closing trial balance

10. Reversing entries

o Advance collections recorded using the income method