CHAPTER 1 – THE ACCOUNTANCY PROFESSION

DEFINITION OF ACCOUNTING

ACCOUNTING STANDARDS COUNCIL PROVIDES THE FOLLOWING DEFINITION:

 Accounting is a service activity

1. Provide quantitative information.
2. Primarily financial in nature.
3. Useful in making economic decision.

THE COMMITTEE ON ACCOUNTING TERMINOLOGY OF THE AMERICAN INSTITUTE OF CERTIFIED PUBLIC

ACCOUNTANTS DEFINES ACCOUNTING:

 Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions
and events which are in part at least of a financial character and interpreting the results thereof.

THE AMERICAN ACCOUNTING ASSOCIATION IN ITS STATEMENT OF BASIC ACCOUNTING THEORY DEFINES
ACCOUNTING:

 Accounting is the process of identifying, measuring and communicating economic information to permit informed judgment
and decision by users of the information.

IMPORTANT POINTS

 ONE – accounting is about quantitative information.

 TWO – the information is likely to be financial in nature.
 THREE – the information should be useful in decision making.

THE DEFINTION ALSO STATES THAT ACCOUNTING HAS A NUMBER OF COMPONENTS:

a. IDENTIFYING – ANALYTICAL COMPONENT

b. MEASURING – TECHNICAL COMPONENT
c. COMMUNICATING – FORMAL COMPONENT

 IDENTIFYING
- The recognition or nonrecognition of business activities as “accountable” events.
 An event is accountable or quantifiable when it has an effect on assets, liabilities and equity.
A. External activities (exchange transaction)
- Economic events involving one entity and another entity.
B. Internal activities
- Economic activities involving the entity only.
- Production and Casualty.

 MEASURING
- Assigning of peso amounts.
- The measurement bases are historical cost, current cost, realizable value and present value.
 Historical cost is the most common measure of financial transactions.
 COMMUNICATING
- The process of preparing and distributing accounting reports to potential users of accounting information.
- It is the reason why accounting has been called the “universal language of business.”

NOTE:
 1. Recording or Journalizing is the process of systematically maintaining a record of all economic business transactions after
they have been identified and measured.
2. Classifying is the sorting or grouping of similar and interrelated economic transactions into their respective classes.
3. Summarizing is the preparation of financial statements.

ACCOUNTING AS AN INFORMATION SYSTEM

- Measures business activities, process information into reports and communicates the reports to decision makers.
- Key product is the financial statements.

THE ACCOUNTANCY PROFESSION

R.A. 9298 – law regulating the practice of Accountancy known as the “Philippine Accountancy Act of 2004”; status equivalent to law
or medicine.

IN ORDER TO QUALIFY TO PRACTICE THE ACCOUNTANCY PROFESSION:

1. Finish a degree in Bachelor of Science in Accountancy
2. Pass the Board exam given by the Board of Accountancy.

IT REQUIRES:
 Creative Thinking - involves the use of imagination and insights to solve problems; important in identifying alternative
solutions
 Critical Thinking - involves the use of logic analysis of issues; use of indicative or deductive reasoning to test new
relationships to determine their effectiveness; important in evaluating alternative solutions

PRINCIPLE UPON WHICH THE PROCESS OF ACCOUNTING IS BASED. USE INTERCHANGEABLE WITH THE
FOLLOWING TERMS:
 Accounting Assumptions (Postulates) - fundamental concepts or principles that provide the foundation of accounting
process
 Accounting Theory – logical reasoning in the form of a set of broad principles; organized set of concepts and related
principles that guide the accountants’ actions in IMC accounting information; comprises the Conceptual Framework and the
Phil. Financial Reporting Standards (PFRS)

ACCOUNTANCY - refers to the profession or practice of accounting

1. Public Practice – does not involve an employer
2. Private Practice – accountant is an employee

QUALIFICATIONS TO PRACTICE ACCOUNTANCY

 Graduate of Bachelor of Science in Accountancy
 Passed the CPA Licensure Examination given by the Board of Accountancy
BOARD OF ACCOUNTANCY - body authorized by Law to promulgate rules and regulations affecting the practice of Accountancy
profession in the Philippines; responsible for preparing and grading the CPA Licensure Examination which is a computerized
examination offered twice a year (May & Oct.) all over the country.
REGISTERED CPAs’ IN THE PHILIPPINES - with a Certificate of Accreditation from BOA and approved by PRC that the
registrant has a minimum gainful experience of 3 years in any area of public practice including taxation; accreditation is valid for 3
years and renewable every 3 years upon payment of required fees.
4 SECTORS IN THE PRACTICE OF ACCOUNTANCY
1. PUBLIC ACCOUNTANCY - rendering of audit, taxation, accounting-related services to more than one (1) client for a fee
basis.
2. COMMERCE & INDUSTRY - employment in the private sector requiring positions for CPAs in various capacities.
3. Education/Academe - employment in an educational institution which involves teaching of accounting, auditing, business
law and other technically related subjects.
 4. Government - employment in the government to a position in an accounting professional group where eligibility as a CPA is
required.

CONTINUING PROFESSIONAL DEVELOPMENT (CPD)

R.A. 1012 – law mandating the CPD program for all regulated professions; promulgated by the BOA, subject to the approval of PRC
and accredited organization for CPAs’ or educational institutions; raises and enhances the technical skill of the CPA
CPD credit unit requirements (3 years)
 2018 - 100 units
 2019 - 120 units
 Mandatory for CPAs’ since it is a requirement for license renewal* and accreditation to practice accountancy (excluding
CPAs’ 65 years old and up)
BRANCHES OF ACCOUNTING:
1. FINANCIAL ACCOUNTING - focus is on the preparation of general-purpose financial statements that cater to the needs
of: external users” – users who have interest on the company but do not have authority to demand reports tailored to their
needs; governed by PFRS
2. MANAGEMENT ACCOUNTING - focus is on the preparation of financial reports that cater to the needs of internal
users or management; “Management Advisory Services” - services to clients with regards to many other phases of business
conduct and operations.
3. COST ACCOUNTING - systematic recording and analysis of the cost of materials, labor and overhead incident to
production.
4. AUDITING - process of evaluating the financial statements based on established criteria and expressing an opinion thereof.
5. TAX ACCOUNTING - preparation of tax returns and rendering of tax advice and determination of tax consequences.
6. GOVERNMENT ACCOUNTING - accounting for government and its instrumentalities for the custody and administration
of public funds.
7. FIDUCIARY ACCOUNTING - handling of accounts managed by a person entrusted with the custody and management of
property for the benefit of another.
8. ESTATE ACCOUNTING - handling of accounts for fiduciaries wind up the affairs of a deceased person.
9. SOCIAL RESPONSIBILITY ACCOUNTING - process of communicating the social and environmental effects of an
entity’s economic actions to the society.
10. INSTITUTIONAL ACCOUNTING - accounting for non-profit entities other than the government
11. ACCOUNTING SYSTEMS - installation of accounting procedures for the accumulation of financial data and designing of
accounting forms to be used in data gathering.
12. ACCOUNTING RESEARCH - pertains to the careful analysis of economic events and other variables to understand their
impact on decisions.
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES - represents the accounting rules, procedures, practice and
standards followed in the preparation and presentation of financial statements.
PHILIPPINE FINANCIAL REPORTING STANDARDS (PFRS) - standards and interpretations adopted by the Financial
Reporting Standards Council (FRSC); accompanied by a guidance which states if a requirement is an “integral part” (mandatory).
Comprised of:
 PFRS
 Philippine Accounting Standards (PAS)
 Interpretations
ACCOUNTING STANDARDS - identify proper accounting practices for the preparation and presentation of financial statements
regarding measurement of assets and liabilities; to ensure comparability and uniformity in the presentation of financial statements
based on the same financial information.
ACCOUNTING STANDARD-SETTING BODIES AND OTHER RELEVANT ORGANIZATIONS:
1. FINANCIAL REPORTING STANDARDS COUNCIL - official accounting standard-setting body in the Philippines
created under the Philippine Accountancy Act of 2004 or (RA 9298); replaced the Accounting Standards Council (ASC)
COMPOSITION OF FRSC:
Composed of 15 members with a Chairman and
Representatives from: (Total -14)
 BOA - 1
  SEC - 1
 BSP- 1
 BIR – 1
 COA – 1
 FINEX (Fin. Exec. Inst. of the Phils.) - 1
 Accredited Professional Organization of CPAS’s:
 Public Practice – 2
 Commerce and Industry – 2
 Academe/ Education - 2
 Government - 2
2. PHIL. INTERPRETATIONS COMMITTEE - committee formed by the FRSC (replacing the Interpretations Committee
formed by the ASC); role is to review the interpretations of the International Financial Interpretations Committee (IFRIC) for
approval and adoption by the FRSC
3. Board of Accountancy (BOA) - professional regulatory board created under RA 9298 to supervise the registration and
licensure; and practice of accountancy in the Philippines; consists of a Chairperson and 6 members appointed by the
President of the Philippines; the Board shall elect among its members a Vice-Chairman for a term of 1 year.
4. PROFESSIONAL REGULATIONS COMMISSION (PRC) - government body in charge of regulating and licensing the
practice of professions.
5. PHILIPPINE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS (PICPA) - national professional organization
of CPAs’ in the Philippines
 NACPAE
 GACPA
 AIA
 ACPACI
6. SECURITIES AND EXCHANGE COMM. (SEC) - government agency tasked in regulating corporations, partnerships,
capital and investment markets and the investing public; SEC rulings affect the accounting requirements of entities and the
adoption and application of accounting policies
7. BUREAU OF INTERNAL REVENUE (BIR) - administers the provisions of the Internal Revenue Code; influence at times
the choice of accounting methods and procedures
8. BANGKO SENTRAL NG PILIPINAS (BSP) - influences the selection and application of accounting policies by banks
and other entities performing banking functions
9. COOPERATIVE DEV. AUTHORITY (CDA) - influences the selection and application of accounting policies by
Cooperatives
10. INTERNATIONAL ACCOUNTING STANDARDS BOARD (IASB) - the standard-setting body of the IFRS Foundation
with the main objective of developing and promoting global accounting standards; based in London; established in 04/01/01
as part of the International Accounting Standards Committee (IASC) Foundation, which is an NPO based in the USA, the
parent of IASB. It was renamed International Financial Reporting Standards Foundation or IFRS Foundation. STANDARDS
ISSUED BY THE IASB:
 International Financial Reporting Standards composed of:
 IFRS
 IAS
 Interpretations
11. PHIL. FINANCIAL REPORTING STANDARDS COUNCIL (PFRSC) - the FRSC issues standards in a series of
pronouncements called PFRS. The PFRS collectively includes the ff.:
 PFRS which corresponds to the IFRS (numbered the same)
 PAS which corresponds to the IAS (numbered the same)
 Phil. Interpretations which corresponds to the interpretations of the IFRIC and the SIC
OTHER RELEVANT INTERNATIONAL ORGANIZATIONS:
1. INTERNATIONAL FINANCIAL REPORTING INTERPRETATIONS COMMITTEE (IFRIC) - prepares
interpretations of how specific issues should be accounted for under the application of the IFRS
 CHAPTER 2 – CONCEPTUAL FRAMEWORK (FINANCIAL AND REPORTING AND ASSUMPTIONS)

HISTORY OF THE CONCEPTUAL FRAMEWORK

 Original CF was issued in 1989

 It was updated in Sept 2010
 Revised CF was issued on April 2018 now provides a more complete, clearer and updated set of concepts; guidance on:
measurement, financial performance, derecognition, and the reporting entity

CHAPTERS OF THE CF: (SPOQERMPCO)

1. Status and Purpose

2. Objective of Gen. Purpose Fin. Reporting
3. Qualitative Characteristics of useful Fin. Info.
4. Elements of the Financial Statement
5. Recognition and Derecognition
6. Measurement
7. Presentation and Disclosure
8. Concepts of capital and capital maintenance

CONCEPTUAL FRAMEWORK - summary of the terms and concepts that underlie the preparation and presentation of financial
statements for external users; promulgated by the IASB; theoretical foundation for accounting; concerned with general purpose
financial statements (excluding special financial reports)

PURPOSES OF CONCEPTUAL FRAMEWORK

1. assist FRSC in developing accounting standards and reviewing existing accounting standards
2. assists preparers of FS in applying accounting standards and dealing with issues not yet covered by GAAP
3. assist FRSC in the review and adoption of IFRS
4. assist users of FS in interpreting the info in the FS
5. assist auditors in forming an opinion as to whether FS conforms with GAAP
6. provide information to those interested in the work of FRSC in the formulation of the PFRS

AUTHORITATIVE STATUS OF THE CONCEPTUAL FRAMEWORK

 not a PFRS
 does not define any standard for any particular measurement or disclosure issue.
 If there is a conflict between the CF and the PFRS, the PFRS will prevail
 In the absence of a PFRS, management shall consider the application of the CF

USERS OF FINANCIAL INFORMATION

1. Primary Users – existing and potential investors (risk and return; determine whether they should buy, hold, or sell their
shares; assess the ability of the entity to pay dividends), lenders and other creditors (loans, interests, and other amounts owing
to them will be paid when due)
2. Other users – employees (remuneration, retirement benefits, and employment opportunities); customers (interested on the
continuity wherein they have loyalty and dependence); government agencies (regulation, taxation, and national income and
similar statistics); public (jobs and local supplier patronage; trend and range of their activities)

LIMITATIONS OF FINANCIAL REPORTING

Gen. Purpose Financial reports

 cannot provide all the information needed by its primary users

 not designed to show the true value of the entity (only estimated value)
 provides common information to users (cannot accommodate request for information)
 based on estimate and judgement rather exact depiction

UNDERLYING ASSUMPTIONS:
 1. Accounting Assumptions (postulates) - basic notions or fundamental premises where the accounting process is based
(foundation)
2. Going Concern Assumption
 that the entity will continue in operation indefinitely
 assets are normally recorded at cost (as a rule: market values are ignored)
 to be abandoned if the entity has to be terminated due to large and pertinent loses.
 only assumption explicitly mentioned in the Conceptual Framework
3. Accounting Entity Assumption - that the entity is separate from its owners
4. Time-period Assumption - the entity is subdivided into accounting periods which are usually equal in length for the purpose
of preparing financial reports on financial position, performance and cash flow
 Accounting period or fiscal period – period of 12 months
 Calendar year – ends in Dec. 31
 Natural business year – ends at any month when the business is at its lowest or slack season
5. Monetary Unit Assumption
2 ASPECTS
 Quantifiability - assets, liabilities, equity and income should be stated in terms of a unit of measure (Peso)
 Stability of the peso - purchasing power of the peso is stable or constant (instability is insignificant and maybe
ignored) but if there is significant gap between historical and current replacement cost. Entity may choose the
revaluation model as an accounting policy.

SCOPE OF CONCEPTUAL FRAMEWORK (OQDRMC)

 Objective of Financial Reporting

 Qualitative Characteristics
 Definition, Recognition and Measurement of the elements
 Concepts of capital and capital maintenance

OVERALL 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 about providing resources to the entity.

SPECIFIC OBJECTIVE OF FINANCIAL REPORTING:

 To provide information that is useful in making economic decisions about providing resources to the entity (buy, sell or hold
investments; provide or settle loans); useful in assessing the cash flow prospects of the entity (returns; principal and interest
payments); about entity economic resources, claims and changes in resources and claims (financial position).

FINANCIAL POSITION OF THE ENTITY (represented in the Balance Sheet) - economic resources – assets; and claims –
liabilities and equity

It shows information about the liquidity, solvency and need for additional financing.

 Liquidity – availability of cash to cover currently maturing obligations

 Solvency – availability of cash to meet long term obligations when they fall due

FINANCIAL PERFORMANCE (represented in the Statement of Financial Performance/Income Statement, or in the

Statement of Comprehensive Income) - changes in resources and claims composed of: Revenues, Expenses, Net Income or Loss,
Level of income earned by the entity through the efficient and effective use of its resources also known as the results of its operation

Usefulness of Financial Performance

 Past financial performance - helps in predicting future returns on the entity’s economic resources
 Financial Performance for the period - helps to assess the ability of the entity to generate future cash inflow from
operations.

ACCRUAL ACCOUNTING: INCOME recognized when earned (not when received) and EXPENSES recognized when incurred
(not when paid)
 CHAPTER 3- QUALITATIVE CHARACTERISTICS

QUALITATIVE CHARACTERISTICS - are the qualities or attributes that make financial accounting information useful to users;
objective is to ensure that the information is useful to the users in making economic decisions

2 CLASSIFICATIONS OF QUALITATIVE CHARACTERISTICS

1. FUNDAMENTAL QUALITATIVE CHARACTERISTICS – relates to the content or substance of financial information

a. RELEVANCE - capacity of the information to influence a user to make a meaningful decision.
It must reflect:
 Confirmatory value (feedback value) - confirms or corrects previous predictions (shows past performance of the
business)
 Predictive value – forecast outcome of events (what might happen in the future)
Materiality - “Doctrine of Convenience”; information is material if its omission or misstatement could influence the
economic decision of the user.
Materiality is a matter of professional judgement based on the following factors:
 size or amount of the item (threshold)
 nature of the item
 structure of the business
b. FAITHFUL REPRESENTATION - financial reports must depict what really happened during the year.
Characteristics:
 Completeness- all information must have been taken into account so as not to be misleading; may warrant an
adequate disclosure or full disclosure in the notes to financial statements.
 Neutrality – “Principle of fairness”
 Free from error
 Substance over Form - substance or economic reality should always prevail over legal form.
 Prudence/Conservatism –
accountant should exercise caution when using estimates or information marked with uncertainty; no
overstatement of assets /revenues; no understatement of liabilities/expenses
2. ENHANCING QUALITATIVE CHARACTERISTICS - relates to the presentation or form of the financial information;
Intended to increase the usefulness of the financial information that is relevant and faithfully represented.
a. COMPARABILITY - enables users to understand similarities between one information to another information.
 Intra-comparability (horizontal) - comparability within an entity from one accounting period to another,
determines the change or trend of its performance or position
 Inter-comparability (dimensional) - comparability between 2 or more entities from accounting period to another;
determines the competitiveness of the entity.
b. UNDERSTANDABILITY - financial information must be comprehensible to be useful, terminologies must be clear,
presentation of the reports must be orderly, users must have reasonable knowledge of business and economic activities to
come up with a good judgement.
c. VERIFIABILITY (CONSENSUS) - the financial information is supported by evidence such as invoices or receipts to
show that the transaction really transpired.
Types of verification:
 Direct – direct observation
 Indirect – check inputs /recalculate formulas
d. TIMELINESS - information is available within the period of time that it is needed to form judgement or decisions so as
not to lose its usefulness.

Cost Constraint - the benefit derived from the information should exceed the cost incurred in obtaining the information.

CHAPTER 4 – ELEMENTS OF FINANCIAL STATEMENTS

FINANCIAL STATEMENTS

- Portray the financial effects of transactions and other events by grouping them according to their characteristics.
 BROAD CLASSES – elements of financial statements
Refers to the quantitative information and the “building blocks.”
ELEMENTS DIRECTLY RELATED TO FINANCIAL POSITION

- Assets, Liabilities and Equity

ELEMENTS DIRECLTY RELATED TO FINANCIAL PERFORMANCE

- Income and Expense

RECOGNITION OF ELEMENTS

Recognition – reporting of an asset, liability, and Income or Expense on the face of financial statements.

FOUR MAIN RECOGNITION PRINCIPLES

a. Asset recognition principle

b. Liability recognition principle
c. Income recognition principle
d. Expense recognition principle

 ASSET RECOGNITION PRINCIPLE

Asset – resource controlled by an entity and result of past events.

TWO CONDITIONS

 PROBABLE – future economic will flow (arising).

 RELIABLY – cost/value can be measured.

FUTURE ECONOMIC BENEFIT

- Potential to contribute directly/indirectly to the flow of cash and cash equivalents.

COST PRINCIPLE

- Requires that asset should be recorded initially at original acquisition cost:

 CASH TRANSACTION – cost is equivalent to the cash payment.
 NON-CASH/EXCHANGE TRANSACTION – cost is equal to fair value of the asset given or fair value of
the asset received.
 ABSENCE OF FAIR VALUE – cost is equal to the carrying amount of the asset given.

 LIABILITY RECOGNTION PRINCIPLE

Liability- obligation and outflow of an entity.

CONDITIONS

 PROBABLE – outflow of economic benefit

 MEASURED RELIABLY

 INCOME RECOGNITION PRINCIPLE

Income – inflow or increase in asset or decrease in liability and encompasses both revenue and gains.

- Recognized when earned or recognized when it is probable increase in future economic benefits and related to an increase in
an asset or decrease in liability.

Revenue – arises in ordinary regular activities and essence is regularity.

Gains – represent other items of increase and do not arise in ordinary regular activities.

POINT OF SALE – point of income recognition, usually the point of delivery and transfer of ownership from the seller to the buyer.

EXCEPTIONS TO THE POINT OF SALE

METHODS APPLIED IN RECOGNIZING INCOME

A. INSTALLMENT METHOD – Point of collection and multiplying gross profit rate by amount of collections.
B. COST RECOVERY METHOD/SUNK COST METHOD – point of collection
C. PERCENTAGE OF COMPLETION METHOD – stage of completion
D. PRODUCTION OF METHOD – point of production

OTHER INCOME RECOGNITION

1. INTEREST REVENU – on a time proportion

2. ROYALTIES – accrual basis
3. INSTALLATION FEES – over the period of installation
4. SUBSCRIPTION REVENUE – on a straight-line basis over the subscription period
5. ADMISSION FEES – event takes place
6. TUITION FEES – over the period

 EXPENSE RECOGNITION PRINCIPLE

Recognized when incurred and probable when decrease in economic benefits and decrease in asset.

DEFINITION OF EXPENSE

- Decrease in economic benefit and outflow/decrease in asset and increase in Liability.

- Encompasses losses
- Ordinary regular activities
 LOSSES – do not arise in ordinary activities and results from disaster.

MATCHING PRINCIPLE

- Requires cost and expense incurred in earning a revenue shall be reported in the same period.

3 APPLICATION

1. Cause and effect association – expense recognized when the revenue is already recognized
2. Systematic and rational allocation – some costs are expensed by simply allocating them over the periods.
3. Immediate recognition – cost incurred is expensed outright because of uncertainty of future economic benefits.

MEASUREMENT OF ELEMENTS – the process of determining the monetary amounts

FOUR MEASUREEMNT BASIS OR FINANCIAL ATTRIBUTES

1. Historical cost
 Amount of cash or cash equivalent paid
 Fair value of the consideration given at the time of acquisition
 Known as “past purchase exchange price”
 Most commonly adopted in the FS
2. Current Cost (replacement/repurchase cost)
 Amount of cash or cash equivalent to be paid if the same or equivalent asset was acquired currently
 known as “current purchase exchange price”
3. Realizable value (settlement value)
 Amount of cash or cash equivalent that could be currently obtained by selling the asset in an orderly disposal.
(net selling price)
 Undiscounted amount of cash expected to be paid to satisfy the liabilities
 Known as “current sale exchange price”
4. Present value (amortized cost)
 Discounted value of the future net cash inflow expected to be derived from the asset
 Discounted value of the future net cash outflow expected to be paid to settle a liability
 Known as “future exchange price”
CONCEPTS OF CAPITAL

1. Financial Concept – capital is regarded as: Equity or net assets (A - L = E); Invested money
2. Physical concept - capital is regarded as: Entity’s operating capability (output/day); measurement base- current cost;

[Choice of the concept is based on the users need and it will affect the determination of profit.]

CONCEPTS OF CAPITAL MAINTENANCE - net worth method of measuring profit

1. Financial Capital Maintenance - profit is earned if: Net asset end > Net Asset Beg. excluding any -distribution to, or
contribution from owners during the period. Profit is measured either thru:
 Nominal monetary units
 Units of constant purchasing power
2. Physical Capital Maintenance - profit is earned if: Productive capacity, End is > the Productive capacity, Beg. excluding
any -distribution to, or contribution from owner during the period; Measurement base – current cost

CHAPTER 5 – PAS 1 PRESENTATION OF FINANCIAL STATEMENTS

“STATEMENT OF FINANCIAL POSITION”

DEFINITION

FINANCIAL STATEMENTS are the means by which the information accumulated and processed in financial accounting is
periodically communicated to the users.

- End product or main output of the financial accounting process.

- Structured financial presentation of the financial position and financial performance of an entity.

GENERAL PURPOSE FINANCIAL STATEMENTS

An entity shall prepare and present general-purpose financial statements in accordance with IFRS.

- Referred to as financial statements are those intended to meet the needs of users who are not in a position to require an
entity to prepare reports tailored to their particular information needs.
- Directed to common users and not to specific users.

COMPONENTS OF FINANCIAL STATEMENTS

1. Statement of Financial Position

2. Income Statement
3. Statement of Comprehensive income
4. Statement of Changes in equity
5. Statement of Cash flows
6. Notes, compromising a summary of significant accounting policies and other explanatory notes.

OBJECTIVE OF FINANCIAL STATEMENTS

- To provide information about the financial position, financial performance and cash flows of an entity that is useful to a wide
range of users in making economic decisions.

INFORMATION UNDER FINANCIAL STATEMENRS

a. Asset
b. Liabilities
c. Equity
d. Income and expenses, including gains and losses
e. Contributions by and distribution to owners in their capacity as owners.
f. Cash flows
FREQUENCY OF REPORTING

- Shall be presented at least annually.

Presented for longer o shorter than one year an entity shall disclose:

a. The period covered by the financial statements.

b. The reason for using a longer or shorter period.
c. The fact that amounts presented in the financial statements are not entirely comparable.

STATEMENTS OF FINANCIAL POSITION

- A formal statement showing the three elements compromising financial position namely assets, liabilities and equity.

NOTE: investors, creditors and other statement users used this to evaluate such factors as liquidity, solvency and the need of the
entity for additional financing.

DEFINITION OF ASSET

- Resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to
the entity.

CHARACTERISTICS

a. Controlled by the entity

b. Result of a past transaction or event
c. Provides future economic benefits
d. Can be measured reliably

CLASSIFICATION OF ASSETS

1. CURRENT ASSETS
a. Asset is cash or cash equivalent unless the asset is restricted to settle a liability for more than 12 months after the reporting
period.
b. Assets primarily for the purpose of trading.
c. Expects to realize within 12 months after the reporting period.
d. Expects to realize or intends to sell or consume it within the entity’s normal operating cycle.

PRESENTATION OF CURRENT ASSETS

a. Cash and cash equivalents

b. Financial assets at fair value such as trading securities and other investments in quoted equity instruments
c. Trade and other receivables
d. Inventories
e. Prepaid expenses

NON-CURRENT ASSETS

- A residual definition
a. Property, plant and equipment
b. Long-term investments
c. Intangible assets
d. Deferred tax assets
e. Other noncurrent assets

PROPERTY, PLANT AND EQUIPMENT

- Tangible assets which are held by an entity for use in 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.
- Presented at cost less accumulated depreciation.

LONG-TERM INVESTMENT
 - An asset held by an entity for the accretion of wealth through capital distribution such as interest, royalties, dividends and
rentals, for capital appreciation or for other benefits to the investing entity such as those obtained through trading
relationships.

INTANGIBLE ASSETS

- An identifiable nonmonetary asset without physical substance

OTHER NONCURRENT ASSETS

- Those do not fit into the definition of the previously mentioned noncurrent assets.

DEFINITION OF LIABILITY

Present obligation of an entity arising form past events, the settlement of which is expected to result in an outflow from the entity of
resources embodying economic benefits.

CHARACTERISTICS

a. Present obligation of a particular entity

b. Arise from the past transaction or event
c. An outflow of resources embodying economic benefits.

CURRENT LIABILITES

a. Expect to settle within the entity’s normal operating cycle

b. Purpose of trading
c. Due to be settled within 12 months after the reporting period.
d. Does not have an unconditional right to defer settlement of the liability for at least 12 months after the reporting period.

PRESENTATION OF CURRENT LIABILITES

a. Trade and other payables

b. Current provisions
c. Short – term borrowing
d. Current portion of long-term debt
e. Current tax liability

NONCURRENT LIABILITES

a. Noncurrent portion of long-term debt

b. Finance lease liability
c. Deferred tax liability
d. Long-term obligations to company officers
e. Long-term deferred revenue

CURRENTLY MATURING LONG-TERM DEBT

Classified as current, even if:

1. Original term was for a period longer than 12 months.

2. Agreement to refinance or to reschedule payment on a long-term basis is completed after the reporting period and before the
financial statements are authorized for issue.

NOTE: if the refinancing on a long-term basis is completed on or before the end of the reporting period, therefore the obligation is
classified as noncurrent asset.

DEFINTION OF EQUITY

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

TERM USED IN REPORTING EQUITY

 a. Owner’s equity in a proprietorship
b. Partner’s equity in a partnership
c. Stockholder’s equity or shareholder’s equity in a corporation

SHAREHOLDERS’ EQUITY

- The residual interest of owners in the net assets of a corporation measured by the excess of assets over liabilities.

NOTES TO FINANCIAL STATEMENTS

- Provide narrative description or disaggregation of items presented in the financial statements and information about items
that do not qualify for recognition.
- Contain information in addition to that presented in the statement of financial position, income statement, statement of
comprehensive income, statement of changes in equity and statement of cash flows.
- Are used to report information that does not fit into the body of the financial statements in order to enhance the
understandability of the financial statements.
- To provide the necessary disclosures required by PFRS.

FORMS OF STATEMENT OF FINANCIAL POSITION

a. Report form
- Sets forth the three major sections in a downward sequence of assets, liabilities and equity.
b. Account form
- Assets are shown on the left side and the liabilities and equity on the right side of the statement of financial position.

CHAPTER 6 – PAS 1 PRESENTATION OF FINANCIAL STATEMENTS

“STATEMENT OF FINANCIAL COMPREHENSIVE INCOME”

INCOME STATEMENT – is a formal statement showing the financial performance of an entity for a given period of time.
- presents the income

Financial Performance of an Entity – is primarily measured in terms of the level of income earned by the entity through the
effective and efficient utilization of its resources. It is also known as the results of the operations of the entity

Transaction Approach – the traditional preparation of the income statement in conformity with the accounting standards.

COMPREHENSIVE INCOME – is the change in equity during a given period resulting from transactions and other events, other
than changes resulting from transactions with the owners in their capacity as owners.

Comprehensive income includes:

a. Components of profit or loss
b. Components of other comprehensive income

Profit of Loss – total of income less expenses, excluding the components of the other comprehensive income.
- this is the “bottom line” in the traditional income statement
- an entity may use “net income” or “net loss” to describe profit or loss”

OTHER COMPREHENSIVE INCOME (OCI) – comprises of items of income and expenses including reclassification adjustments
that are not recognized in profit or loss as require or permitted by the PFRS.

The components if the “other comprehensive income” include the following:

1. Unrealized gain or loss on equity investment measured at fair value through other comprehensive income
2. Unrealized gain or loss on debt investment measured at fair value through other comprehensive income.
3. Gain or loss from translation of the financial statements of a foreign operation
4. Revaluation surplus during the year
5. Unrealized gain or loss from derivative contracts designated as cash flow hedge.
 6. “Remeasurements” of defined benefit plan, including actuarial gain or loss.
7. Change in fair value attributable to credit risk of a financial liability designated at fair value through profit or loss.

Presentation of Other Comprehensive Income

The line items for amounts of OCI shall be grouped as follows:

a. OCI that will be reclassified subsequently to profit of loss when specific conditions are met.
b. OCI that will not be reclassified subsequently to profit or loss but to retained earnings.

OCI that will be reclassified to profit or loss

a. Unrealized gain or loss on debt investment measured at fair value through other comprehensive income.
b. Gain or loss from translating financial statements if a foreign operation
c. Unrealized gain or loss on derivative contracts designated as cash flow hedge.

OCI that will be reclassified to retained earnings

a. Unrealized gain or loss on equity investments measured at fair value through other comprehensive income.
b. Revaluation of surplus during the year
c. Remeasurements of defined benefit plan, including actuarial gain or loss
d. Change in fair value attributable to credit risk of a financial liability designated at fair value through profit of loss.

Presentation of Comprehensive Income

1. Two Statements
a. An income statements showing the components of profit or loss.
b. A statement of comprehensive income beginning with profit or loss as shown in the income statements plus or
minus the components of other comprehensive income.

2. Single Statement of Comprehensive Income

a. This is the combined statement showing the components of profit or loss and components of other comprehensive
income in a single statement.

Sources of Income

a. Sale of merchandise to customers

b. Rendering of services
c. Use of entity resources
d. Disposal of resources other than products

Components of Expense

a. Cost of goods sold or cost of sales

b. Distribution costs or selling expense
c. Administrative Expenses
d. Other expenses
e. Income tax expense

CLASSIFICATION OF EXPENSES

Distribution Costs – constitute costs which are directly related to selling, advertising and delivery of goods to customers.

Administrative Expenses – constitute costs of administering the business

- ordinarily include all the operating expenses not related to selling and cost of goods sold.

Other Expenses – are those expenses which are not directly related to the selling and administrative function.

No more extraordinary items

An entity shall not present any item of income and expense as extraordinary either on the face of the income statement or statement of
comprehensive income

FORMS OF INCOME STATEMENT

Functional Presentation – classifies expenses according to their function as part of cost of goods sold, distribution costs,
administrative expenses and other expenses.
- Also known a s the cost of goods sold method
- An entity classifying expenses by function shall disclose additional information on the nature of expenses, including
depreciation, amortization and employee benefit costs.

Natural Presentation – referred to as the nature of expense method.

- Expenses are aggregated according to their natured and form and not allocated among the various functions within the
entity
- Expenses are no longer classified as COGS, distribution costs, administrative expenses and other expenses.

STATEMENT OF RETAINED EARNINGS – shows the changes affecting the retained earnings of an entity and relates the income
statement of financial position.

Important data affecting the retained earnings that should be disclosed are:

a. Profit of loss for the period

b. Prior period errors
c. Dividends declared and paid to shareholders
d. Effect of change in accounting policy
e. Appropriation of retained earnings

STATEMENT OF CHANGES IN EQUITY – basic statement that shows the movements in the elements or components of the
shareholder’s equity. The statement of retained earnings is no longer a required basic statement but it is part of the statement of
changes in equity.

An entity shall present a statement of changes in equity showing the following:

1. Comprehensive income for the period

2. For each component of equity, the effects of changes in accounting policies and corrections of errors.
3. For each component of equity, a reconciliation between the carrying amount at the beginning and end of the period,
separately disclosing changes from:
a. Profit or loss
b. Each item of other comprehensive income
c. Transactions with owners in their capacity as owners showing separately contributions by and distributions to owners

STATEMENT OF CASH FLOWS – is a basic component of the financial statements which summarizes the operating, investing
and financing activities of an entity. In simple language, it provides information about the cash receipts and cash payments of an entity
during a period.

CHAPTER 7 – PAS 2 INVENTORIES

INVENTORIES - are assets: held for sale in the ordinary course of business (finished goods); in the production for such sale (work in
process); in the form of materials or supplies to be consumed in the production process or in the rendering of services (raw materials
and manufacturing supplies)

CLASSES OF INVENTORIES

1. Inventories of a trading concern

2. Inventories of a manufacturing concern

COST OF INVENTORIES

A. COST OF PURCHASE - include the ff:

  purchase price (net of trade discount and rebate)
 import duties and irrecoverable taxes
 freight/ handling
 other cost attributable to the acquisition of finished goods, materials and services
B. COST OF CONVERSION - cost necessary in converting raw materials to finished goods; includes cost of direct labor and
production overhead
C. OTHER COST - incurred in bringing inventories to their present location and condition EXCEPT:
 Abnormal amounts of wasted materials, labor and other production
 Storage costs (not necessary in the production process)
 Administrative overhead
 Distribution or selling cost

COST FORMULAS - cost flow assumptions; deals with the computation of cost of inventories that are charged as expense when the
related revenue is recognized

Examples: Cost of sales or COGS; Cost of unsold inventories or Inventory, end

3 COST FORMULAS

1. Specific Identification – used for inventories that are not ordinarily interchangeable (unique), segregated for specific
projects; Formula: Inv.,End x actual unit costs
2. First –in, First-out (FIFO) – inventories first purchased or produced are the first to be sold; Formula: Inv.,End x recent
purchase
3. Weighted Average - Cost of Sales and ending inventory is based on the weighted average of the cost of beg. inventory and
total cost of purchase

MEASUREMENT OF INVENTORY - at the lower of cost and net realizable value known as LCNRV (pas 2 p9)

Net Realizable Value – estimated selling price in the ordinary cost of business less: estimated cost of completion; and estimated cost
of disposal Inventories are usually written down to NRV on an item by item or individual basis

UNRECOVERABLE COST OF INVENTORIES

 Inventory is damaged
 Inventory is obsolete
 Inventory selling price has declined
 Estimated cost of completion/disposal has increased

ACCOUNTING FOR WRITEDOWN - if the

 COST < NRV then Inv. = COST

 COST > NRV then Inv. = NRV

Rules:

1. Compare item by item the Total Cost and NRV to get LCNRV
2. Get the total of Cost, NRV and LCNRV
3. Compare NRV and LCNRV to get Inventory write down

ACCOUNTING FOR WRITEDOWN - write down of inventory to NRV is accounted using the: allowance method or loss method

 Inventory end is recorded at cost

 “Loss on inventory write down” is debited
 “Allowance for inventory write down” is credited
- included in the computation of COGS
- presented as deduction from the Inv. End

DISCLOSURE - PAS 2, p 36 requires disclosure of the:

 amount of any inventory written down and

  the amount of reversal of the former if any

excluded from PAS 2

 inventories for agricultural, forest and mineral products measured at NRV

 inventories of commodity broker- traders measured at NRV

CHAPTER 8 – PAS 7 STATEMENT OF CASH FLOWS

STATEMENT OF CASH FLOWS - provides information about the

 inflow and outflow of cash and cash equivalents during the period or
 sources and uses of funds or
 cash receipts and cash payment

DEFINITION OF TERMS

1. Cash - cash on hand and cash in bank

2. Cash equivalents - short term highly liquid investments that are readily convertible into cash (subject to significant risk or
changes) which includes:
a. debt instruments acquired which are about to mature within 3 months or less
b. 90-day money market instrument
c. 90-day time-deposit

CASH FLOWS - includes inflows (sources) and outflows (uses) of cash and cash equivalents. The Statement of Cash Flows helps to
assess the:

 Ability of the entity to generate cash and cash equivalents

 Timing and certainty of the generation of cash flows
 Needs of the entity to utilize those Cash Flows

CLASSIFICATION OF CASH FLOWS

1. Operating Activities - derived from the revenue producing activities of the entity (revenue & exp.); affect profit or loss. It
includes:
 Cash receipts from customers
 Cash payments to suppliers
 Cash payments for operating expenses
 Cash receipts and payments for securities held for trading
2. Investing Activities - derived from the acquisition and disposal of long-term assets and other investments not included in the
equity. It includes:
Cash receipts from sale of PPE / Long-term assets and intangibles
Cash payments to acquire PPE / Long-term assets and intangibles
Cash advances/loans to other parties
Cash receipts from repayments of loans
3. Financing Activities - derived from equity capital and borrowings of the entity. It includes cash receipts or cash
payments/repayments for:
a. Equity financing –issuance of shares, redemption
b. Debt financing – issuance of bond, notes, loans, mortgage payables and other short term or long-term borrowings

GENERAL CONCEPT – SCF

 include only transactions that affect cash

 include only interest received and paid

Operating Activity:

 Interest income received & paid (PAS 7,p 33)

  Dividend income received
 Payment of Income Tax (separate disclosed)

Financing Activity:

 Dividends paid to owners (PAS 7,p34)

PRESENTATION OF THE CASH FLOWS

1. Direct Method – shows each major class of Gross Cash Receipts and Gross cash payments. (encourage by PAS – useful in
estimating future Flow)
2. Indirect Method – profit or loss is adjusted for the effects of non-cash items and changes in operating assets and liabilities

CHANGES IN OWNERSHIP INTEREST IN SUBSIDIARIES

Investing Activity

 arising from acquisition or

 disposal of subsidiaries
 business units resulting to loss

If not, then it is classified as Financing Activity

DISCLOSURE

 Components of Cash and Cash equivalent

 Reconciliation of amounts in the SCF with the equivalent items in the SCF
 Cash and Cash equivalent held by the entity that are not available for use of the group.

CHAPTER 9 – PAS 8 ACCOUNTING POLICIES, ESTIMATE AND ERRORS

ACCOUNTING POLICIES - specific principles, bases, conventions, rules and practices applied by an entity in preparing and
presenting the financial statements. In the selection and application of accounting policies, the entity shall refer to the hierarchy
guidance on reporting standards:

1. PFRS
2. Judgement –requirements in other PFRS; Conceptual Framework

The entity shall apply the same accounting policies each period:

 to achieve comparability of financial statements or

 identify trends in the financial position, performance and cash flow of an entity

A change in accounting policy shall be made only when:

 required by the accounting standard

 change will result in a more relevant and faithfully represented information

A change in accounting policy arises when an entity adopts a GAAP which is different from the one previously used by the entity.

 Involuntary Change in accounting policy – If it is required by the IFRS

 Voluntary Change in accounting policy – If management assesses that the FS will be more relevant to the user

CHANGES IN ACCOUNTING POLICIES - change in measurement basis

 Change in Cost formula for Inventories

 Change from Cost Model to fair value model of measuring investment property
 Change from Cost Model to Revaluation model of measuring PPE and Intangible Assets
 Change in business model for classifying assets
 Change in revenue recognition methods from long term to construction contracts
  Change to a new policy resulting from the requirement of a new PFRS
 Change in Financial reporting Framework

Reporting a Change in Accounting Policy

1. Change shall be applied in accordance with transitional provisions

2. If no transitional provisions (change is voluntary), change shall be applied:
Retrospectively – effect of adjustment is on the Beg. balance of Retained Earnings; amount of adjustment is determined on
the year of change; if comparative information is presented, FS of prior period is restated
Retrospective application - applying a new accounting policy as if the policy had always been applied, in the absence of a
standard that specifically applies to a transaction or event, judgement shall be used in selecting an accounting policy that
results to a more relevant and faithfully represented information.

Hierarchy of guidance in selecting policies:

1. Requirement of current standards

2. Definition-recognition criteria and measurement concepts for Assets, Liabilities and expenses in the CFW
3. More recent pronouncements of other standard setting bodies

ERRORS - includes misapplication of accounting policies, mathematical mistakes, oversight or misinterpretations of facts, and fraud.

1. Material errors - cause the FS to be misstated

2. Intentional errors – fraud (does not matter is error is material or immaterial)
3. Error of commission- mistake
4. Error of omission – failure to correct the mistake.
5. Errors according to period of occurrence - current and prior

Errors according to period

1. Prior Period Errors - omissions or misstatement in the FS for one or more periods arising from a failure to use or misuse of
reliable information. It results from:
 a mathematical error
 mistake in applying an accounting policy
 misinterpretation of facts, fraud, oversight

Errors shall be corrected retrospectively, or on the beg. balance of RE and affected assets and liabilities. If comparative
statement are presented, FS of prior periods shall be restated, to reflect the retroactive application of the prior period errors as
retrospective restatement. If impracticable, correction can be made prospectively from the earliest date possible.

2. Current Period Errors - errors in the current period that were discovered during the accounting period or after the
accounting period but before the authorized issuance of the FS. These errors are simply corrected by correcting entries.

CHAPTER 10 – PAS 10 EVENTS AFTER THE REPORTING PERIOD

EVENTS AFTER THE REPORTING PERIOD - those events whether favorable or unfavorable, that occur between the end of the
reporting period and the date when the FS are authorized to issue (also known as subsequent events); may require adjustment or
disclosure

Date of authorization of the FS - date when management authorizes the FS to issue (regardless if it is final or subject to approval)

2 TYPES OF EVENTS AFTER THE REPORTING PERIOD

1. Adjusting Events - provide evidence of conditions that exist after the reporting period; required adjustments in the FS
Example:
a. Settlement of a court case that the entity has a present obligation
b. Bankruptcy of a customer
c. Sale of inventories – evidence to the NRV
2. Non-Adjusting Events - indicative of conditions that arise after the end of the reporting period; needs no adjustment but
require disclosure if material
PAS 10 prohibition - FS on a going concern basis shall not be prepared if management determines that after the reporting period the
entity intends to:

 Liquidate the entity

 Cease trading
 Has no realistic alternative but to do so

CHAPTER 11 – PAS 12 INCOME TAXES

Deferred taxes accounting is applicable to all entities, whether public or nonpublic entities.

A PUBLIC ENTITY IS AN ENTITY:

a. Whose equity and debt securities are traded in a stock exchange or over-the-counter market.
b. Whose equity or debt securities are registered with securities and exchange commission in preparation for sale of the
securities.

ACCOUNTING INCOME

- Or financial income is the net income for the period before deducting income tax expense.
- Appearing on the traditional income statement and computed in accordance with accounting standards.

TAXABLE INCOME

- Income for the period determined in accordance with the rules established by the taxation authorities upon which income
taxes are payable or recoverable.
- Excess of taxable revenue over tax deductible expense and exemptions for the period.

DIFFERENCES BETWEEN ACCOUNTING AND TAXABLE INCOME

A. PERMANENT DIFFERENCES
- Items of revenue and expense which are included in either accounting income or taxable income but will never be included in
the other.
- Pertain to nontaxable revenue and nondeductible expense.
- Do not give rise to deferred tax asset and liability because they have no future tax consequences.
B. TEMPORARY DIFFERENCES
- Items of income and expenses which are included in both accounting income and taxable income but ate different time
periods.
- Give rise either to a deferred tax liability or deferred tax asset.

DEFERRED TAX LIABILITY

- Shall be recognized for all taxable temporary differences.

- Amount of income tax payable in future periods.
- Will result in future taxable amount in determining taxable income of future periods.
- Arises when accounting income is higher tax taxable income because of future taxable amount.

DEFERRED TAX ASSET

- Shall be recognized for all deductible temporary differences and operating loss carryforward when it is probable that taxable
income will be available against which the deferred tax asset.
 OPERATING LOSS CARRYFORWARD – an excess of tax deductions over gross income in a year that may be
carried forward to reduce taxable income in a future year.
- arise when taxable income is higher than accounting income because of future deductible amount.

CURRENT TAX LIABILITY AND CURENT TAX ASSET

 A. CURRENT TAX LIABILITY
- Current tax expense or the amount of income tax actually payable. Classified as current liability.
B. CURRENT TAX ASSET
- If the amount of tax already paid for the current period exceeds the amount actually payable for the period, the excess is
recognized as a current tax asset.

NOTE: current tax liability and current tax asset shall be measured using the tax rate.

CHAPTER 12 – PAS 16 PROPERTY, PLANT AND EQUIPMENT

PROPERTY, PLANT AND EQUIPMENT - are:

 tangible assets (physical substance)

 used in business (used in the production or supply of gods or services, for rental or for administrative purposes); and
 long-term in nature (expected to be used for more than one period)

EXAMPLES OF PPE

1. Land
2. Land improvements
3. Building
4. Machinery
5. Ship
6. Aircraft
7. Motor vehicle
8. Furniture and fixture
9. Office equipment
10. Patterns, molds and dies
11. Tool
12. Bearer plants

RECOGNITION - if it is probable that future economic benefits will flow to the entity; cost of the asset is measured reliably

MEASUREMENT OF PPE - PPE shall be measured at cost

Cost – the amount of cash or cash equivalent paid and the fair value of the other consideration given to acquire an asset at the time of
acquisition or construction

ELEMENTS OF COST

 Purchase price
 Cost of bringing the asset to its present location and condition
 Initial estimate of the:
 cost of dismantling
 removing the item
 restoring the site on which it was located for which an entity has a present obligation

Directly Attributable Costs

1. Cost of employee benefits arising from its construction

2. Cost of site preparation
3. Initial delivery and handling cost
4. Installation and assembly cost
5. Professional fee
6. Cost of testing (ensure functioning properly).

Expensed rather Cost of PPE

1. Cost of opening a new facility

 2. Cost of introducing a new product or service
3. Cost of conducting business in a new location
4. Administration and general overhead cost
5. Break-in of the PPE
6. Initial operating loss
7. Cost of operating/reorganizing entity’s operation

Measurement after recognition

Cost Model =

Cost of Property xxx

Less: Acc. Depreciation xxx

Impairment Loss xxx xxx

Revaluation Model =

FV at the date of revaluation xxx

less: Subsq. Accum. depreciation xxx

Subsq. Impairment loss xxx xxx

MEASUREMENT OF COST

 Cash basis - cash price equivalent at recognition date.

 On Account - Invoice price less: discount (taken or not)
 Issuance of share capital
 FV of Consideration received
 FV of the share capital
 FV of stated value of the share capital

Exchange has commercial substance when/if/in:

 Event or transaction will the cash flow of the entity to change significantly by reason of the exchange
 Cash flow of the asset received differ significantly from the asset transferred

Construction –same as thru acquisition which includes:

1. Direct Materials
2. Direct labor
3. Indirect and incremental overhead

DERECOGNITION

 Cost of property and the corresponding accumulated depreciation shall be removed from the account
 Carrying amount of an item of property, plant and equipment shall be derecognized on:
1. Disposal
2. When no future economic benefits are expected from the use or disposal

Gain or Loss arising from the Derecognition - shall be included in profit or loss

 Gains included as revenue under Other Income

 Difference between the net disposal proceeds and the carrying amount of the item
Net disposal = Proceeds from sale less disposal cost
Carrying amount = Cost less accumulated depreciation

Fully Depreciated Property

 Carrying amount = Zero

 Cost = accumulated depreciation
Carrying amount = salvage /residual value
 If remaining in service shall not be removed from the accounts (ordinarily) but if removed from accounts shall be disclosed
as FDP

Concept of Depreciation

 systematic allocation of the cost of the asset over its useful life.
 objective is to have each period bear an equitable share of the asset cost.
 it is an expense
 begins when asset is available for use
 ceases when asset is derecognized

3 FACTORS OF DEPRECIATION

1. Depreciable amount - cost of the asset less residual value

2. Residual value - estimated net amount currently obtainable at the end of its useful life
3. Useful life - period over which the asset is expected to be available for use by the entity; or no. of production units
expected to obtained from the entity

Factors in determining useful Life

 Expected usage of the asset

 Expected physical wear and tear
 Technical or commercial obsolescence
 Legal limits for the use of the asset

Depreciation Methods - shall be reviewed at least every year end. If there has been a significant change in economic benefit, the
method shall be changed (change in accounting estimate).

1. Straight line method – constant charge over the useful life of the asset
2. Production method – cost / output or cost/ no. of hours work
3. Diminishing balance or accelerated methods – decreasing depreciation over the useful life (sum of yrs. or double
declining)

CHAPTER 13 – PAS 19 EMPLOYEE BENEFITS

EMPLOYEE BENEFIT - all forms of consideration given up by an entity in exchange for services rendered by the employee or for
termination of employment; both for employees and management

Recognition: recognized as an expense when employees have rendered service; recognized as liability if unpaid

KIND OF EMPLOYEE BENEFITS

1. SHORT TERM EMPLOYEE BENEFITS - employee benefits (other than termination benefits) which are expected to be
settled within 12 months after the end of the annual reporting period.
Includes:
 salaries, wages, ss Contributions
 Short term compensated or paid absences
 profit sharing and bonuses payable within 12 months
 non-monetary benefits, medical, housing, car and free subsidized goods
Recognition and Measurement
 Recognized as an expense during the reporting period; Any amount unpaid at the end of the accounting period is
recognized as an accrued liability
Categories of Paid Absences - absences such as vacation, sickness, short term disability, maternity, paternity etc.
 Accumulating – can be carried to future periods
 Vesting – employees entitled to cash payment for unused entitlement or leaving the entity
  Non-vesting – employees not entitled to a cash payment for unused entitlement on leaving the entity
 NONACCUMULATING - not carried forward to future periods if not used and no cash payment upon leaving the
entity

2. POST EMPLOYMENT BENEFITS - employee benefits (other than termination and short-term benefits) which are payable
upon completion of employment; plans which are formal arrangement between employer and employee and part of their
remuneration package
 Retirement benefits
 Post-employment life insurance
 Post-employment medical care

Classification of Post EB Plans

 Defined Contribution Plan - entity pays fixed contribution into a separate entity known as a fund. Contribution is
definite but the benefit is indefinite. [Note: Employee bears the risks.]
Accounting:
 Contribution – expense
 Unpaid contribution- accrued
 Excess contribution – prepaid
 Defined Benefit Plan - entity has obligation to provide agreed benefits to the employee. Employee is guaranteed a
specific or definite amount of benefit based on salary and years of service. Entity assumes investment risk.
Accounting: requires actuarial valuation

3. OTHER LONG-TERM BENEFITS - Examples:

 Long-term compensated absences
 Jubilee or other long service benefits
 Long term disability benefits
 Profit sharing and bonus
 Deferred compensation

4. TERMINATION BENEFITS - result of entity’s decision to terminate the employee before normal retirement date. Employees
decision to accept employer’s offer of benefits in exchange for termination. It is recognized as liability and expense at the earlier
of the following dates. Entity can no longer withdraw the offer of those benefits. Entity recognizes restructuring costs
MEASUREMENT - If termination benefits are:
 Payable within 12 mos., they are accounted for similar to other long-term benefits
 Accounting is similar to Short term employee benefits
 Payable beyond 12 months
 Accounting similar to other long-term benefits