BUSINESS TAX (Chapter 1) Capacity and intent to make a will

Succession ▪ All persons who are not expressly prohibited by law may make
Succession is a mode of acquisition by virtue of which, the property, rights a will. Persons of either sex under eighteen years of age, which is
and obligation to the extent of the value of the inheritance, of a person are
the age of majority, cannot make a will.
transmitted through his death to another or others either by his will or by
operation of law (Art. 774 NCC) . The inheritance includes all the property,
right and obligation of a person which are not extinguished by his death (Art. ▪ In order to make a will, it is essential that the testator be a
776 NCC).
sound mind at the time of its execution.

Under the Civil Code (CC), ownership may be acquired through: ▪ A married woman may make a will without the consent of her
1. Occupation husband, and without the authority of the court. A married woman
2. Intellectual creation may dispose by will of all her separate property as well as her share
of the conjugal partnership or absolute community property.
3. Law
4. Donation Capacity to succeed by will or by intestacy

5. Tradition
6. Contract ▪ Persons not incapacitated by law may succeed by will or ab in
7. Prescription testator. In order to be capacitated to inherent, the heir, devisee or
8. Succession legatee be living at the moment the succession opens, expected in
case representation, when it is proper.

Kind of succession ▪ A testamentary disposition may be made to the state,

Testamentary or testate – is that which result from provinces, municipal corporations, private corporations,
the designation of an heirs, made in a will executed in the form prescribed by organizations, or associations for religious, scientific, culture,
law. education, or charitable purposes. All other corporation or entities
may succeed under a will, unless there us a provision to the contrary
Legal or intestate – is that effected by operation of in their charter or the laws of their creation, and always subject to
law since the decedent did not execute a will. the same.

Mixed (Testamentary and Legal) – is that affected Forms of Wills

partly by will and partly by operation of law.
Holographic Will – a will written entirely by the testator with his
Elements of succession won hands and not witnessed or attested. A person may execute a
holographic will which must be entirely written, dated, and signed by
▪ Death of the decedent
the hand of the testator himself. The testator’s handwriting is
▪ Inheritance deemed a sufficient assurance of the will’s authenticity.
▪ Successors
Probate of a holographic will – its shall be necessary that at
▪ Acceptance least one witness who knows the handwriting and signature of the
testator explicitly declare that the will and the signature are in the
EXECUTORS handwriting of the testator himself. If the signature of the testator in
a will is contested, at least three of such witnesses shall be required.
🞄 An executor is a person appointed
by a testator to carry out the directions and requests in his will, and to dispose Revocation of Will and testamentary disposition
of the property according to his testamentary provision after his death.
▪ A will may be revoked by the testator at any time before his
ADMINISTRATORS
death. Any waiver or restriction of this right is void.
🞄 An administrator is a person ▪ A revocation done outside the Philippines by a person who
appointed by the court to administer the assets and liabilities of a decedent.
does have his domicile in this country, is valid when it is done
TESTAMENTARY SUCCESSION according to the law of the place where the will was made or
according to the law of the place which the, testator had his domicile
at the time; and if the revocation takes place in this country, when it
A person may make legal declaration before his death regarding how he is in accordance with the provision of the civil code.
wants his property transferred after his death. This declaration is know as will. Institution of Heir

Will – is an act whereby a person is permitted. With the formalities ▪ Institution of Heir - is an act by virtue of which a testator
prescribed by law, to control to a certain degree the disposition of his estate to designates in his will the person or persons who are to succeed him
take effects after his death. in property and transmissible rights and obligation.

Codicil – is an instrument that amends that provision of a will. Legitime

Probate of a will – is the court procedure by which a will is proved to be Legitime - Is the part of the testator’s property which he cannot
valid or invalid. dispose of because the law has reserved it for certain heirs who are,
 therefore called compulsory heirs.

Types of Heirs
1. Compulsory or Forace Heirs
2. Voluntary heirs
Collateral Relatives
3. Legal or intestate heirs
Consanguinity is the relation of persons descending from the
same stock or common ancestors. These persons are known
COMPULSORY HEIRS — those who succeed by force of law to some portion as blood relatives, and are said to be related by blood or
of the inheritance, in an amount predetermined by law, known as the consanguinity. It may be lineal or. collateral. Lineal
legitime. They succeed whether the testator likes it or not. They cannot consanguinity, which may be descending or ascending, is that
be deprived by the testator of their legitime except by disinheritance which subsists between persons of whom one is descended in
properly effected. a direct line from the other. Collateral consanguinity is that
which subsists between persons who have the same
ancestors, but who not descend (or ascend) one from the
other. Proximity of relationship is determined by the number of
Kinds of compulsory heirs: generations. Each generation forms a degree. As illustrated
Primary — those who have precedence over and exclude other compulsory below:
heirs (i-e., legitimate children and descendants). Determining blood relationship
Secondary — those who ‘succeed only in the absence of the primary
compulsory heirs; (i.¢.,. legitimate parents and ascendants).
Concurring — those who succeed together with the primary or secondary
compulsory heirs: (i.e., illegitimate children and descendants and
surviving spouse).

VOLUNTARY HEIRS —- those instituted by the testator in his will to succeed

to the inheritance of the portion thereof of which the testator can freely
dispose. Free portion refers to the portion or value left in the estate after
deducting the legitime of the compulsory heirs. The share of a voluntary
heir is determined through the last will and testament.
LEGAL OR INTESTATE HEIRS — those who succeed to the estate of the
decedent by operation of law (decedent died without a valid will or his
estate was not entirely disposed of by will)

COMPOSITION OF GROSS ESTATE:

The gross estate is divided into two main categories for succession purposes,
the legitime and free portion as shown below:

LEGITIME is part of a testator's property which he cannot dispose of because

the law has reserved it for certain heirs who are, therefore, called ILLUSTRATION (LEGITIMEs and FREE PORTION of the
compulsory heirs (Art. 886 CC). The compulsory heirs cannot be deprived ESTATE):
of their legitime by the testator except by disinheritance properly effected.
On the other hand, Free Portion is that portion of the estate which the Case A: Namaalam Nha died leaving an estate valued at.
testator can freely dispose of. Hence, anyone may inherit from free P12,000,000. The surviving ° heirs were his spouse, 2
portion (compulsory or voluntary heirs). Nonetheless, voluntary heirs may legitimate children and 1 illegitimate child.
inherit only if mentioned in the will. In the absence of a provision in the Required: Distribute the estate by applying the rules on legitime.
will, voluntary heirs will not inherit anything. In such cases, the free
portion shall be disposed of to intestate heirs based in the order of priority Answer:
as presented below:
The distribution of his estate should be as follows (Based on Table
1-3)
Legitimate Children (1/2):
▪ Effected only through a valid will
P6,000,000
Legitimate child # 1 P3,000,000 ▪ For a cause expressly stated by law
Legitimate child # 2 3,000,000
▪ Cause must be stated in the will itself Cause must be certain
Illegitimate child (1/2 of 1 LC)
1,500,000 and true

Surviving Spouse (1/4) ▪ Unconditional

3,000,000
Free Portion (remainder) ▪ Total (there is no partial disinheritance)
1,500,000
Total ▪ The heir disinherited must be designated in such a manner
P42,000,000 that there can be no doubt as to his identity

Note: COMMON CAUSES FOR ODISINHERITANCE of children’ or

descendants, parents or ascendants, and spouse;
▪ The legitime of the legitimate children as provided in the table
1. When the heir has been found guilty of an attempt against the
of legitime is % of the total estate (regardless of the number of life of the testator, his/her descendants or ascendants; and
legitimate children). spouse in case of children and parents;

▪ The legitime of an illegitimate child is % of the legitime of 1 2. When the heir has accused the testator of a crime for which
the law prescribes imprisonment for 6 years or more, if the
legitimate child.
accusation has been found groundless;
▪ The legitime of the surviving spouse is 4 as provided in the 3. When the heir by fraud, violence, intimidation. or undue
table of legitime influence causes the testator to make a will or to change one
already made;
▪ The remaining portion in this particular case is the free 4. Refusal without justifiable cause to support the testator who
portion. It may be given by the testator to anyone in disinherits such heir.
accordance with his wishes. However, only those voluntary
heirs included in the provisions of the will should be Peculiar Causes for Disinheritance
recognized.

1. CHILDREN/DESCENDANTS:
Case B: Assume the amount of estate is P12 000,000 and the a. When the child or descendant has been convicted of adultery or
decedent is survived only by his two (2) illegitimate children. concubinage with the spouse of the testator;
The distribution of the estate under intestate succession
should be: b. Maltreatment of the testator by word or deed by the
child/descendant;
Illegitimate Child (1/2); (P3M Ee 1.C.)
P6,000,000 c. When the child or descendant leads a dishonorable or
disgraceful life; d. When the child or descendant is convicted
Free Portion (1/2) of a crime which carries with it a penalty of civil interdiction.
6,000,000
2. PARENTS/ASCENDANTS:
Total
P12, 000, 000 a. When the parents have abandoned their children or induced
their daughters to live a corrupt or immoral life, or attempted
Case C: Assume the same’ data in Case B except that the testator against their virtue;
provided P8,000,000 to Ana (his secretary) through his last
will and testament. Obviously, the legitime of the two. (2) b. When the parent or ascendant has been convicted of adultery or
illegitimate children were impaired. The amount of estate left concubinage with the spouse of the testator;
after deducting the P8,000,000 will not be enough to satisfy
c. Loss of parental authority for causes specified in the Civil Code;
the legitime of the compulsory heirs amounting to P6,000,000.
and
Hence, the amount to be given to the secretary should be
modified or | reduced to P6,000,000 to the legitime. The d. Attempt by one of the parents against the life of the other,
distribution of the decedent's estate should be as follows: unless there has been reconciliation between them.
Illegitimate Child (1/2); (P3M Ee 1.C.) 3. SPOUSE:
P6,000,000
a. When the spouse has given cause for legal separation;
Secretary (Free Portion) (1/2)
6,000,000 b. When the spouse has given grounds for loss of parental
authority.
Total
P12, 000, 000
Right of Representation

Disinheritance It a “right” created by fiction of law where the representative is

raised to the place and degree of the person represented, and
Disinheritance is a testamentary disposition by which a compulsory acquires the rights which the latter would have if he were
heir is deprived of, or excluded from: the inheritance to which living or could have inherited. Representation may arise either
he has a right. Disinheritance is not applicable to voluntary because of:
heirs.
1. Death
REQUISITES for Disinheritance:
2. Incapacity
3. Disinheritance ● Answer: November 1, 2023. The rights to the succession are
transmitted from the moment of death of the decedent (Nov. 1,
2023), notwithstanding the actual transfer dated June 30,
TRANSFER TAXES 2024 (Art. 777 CC).
Question 2: When should the estate tax accrue?

Types of Transfer
● Gratuitous Transfer – without consideration (Donation) Answer: November 4, 2023

● Onerous Transfer – with consideration (Sales, Barter, ● The estate tax accrues immediately at the time of death,
Exchange) irrespective of actual date of filing the estate tax rectum. It
shall be noted that the accrual of the estate tax is distinct from
the obligation to pay the same (RR 2-2003); (Lorenzo vs.
Posadas, 64 Phil. 353).
Taxes on Gratuitous Transfer
● Under the TRAIN Law, the filing of estate tax rectum is within
(transfer without consideration; donation) one (1) year from date of death.

Types of Donation Effectivity Question 3: Assume that Pedro's total outstanding liabilities as of
Tax the time of his death amounted to 12,000,000, how much of
a. Donation inter-vivos During the lifetime of the donor the outstanding ‘liabilities of the decedent should.be assumed
& the done Donor’s Tax by Juan?

b. Donation mortis causa Upon death of the donor

Estate Tax Answer: P10,000,000 —
● The amount of liability to be assumed by the heir(s) shall be
Nature of Transfer limited only to the extent of the value of properties and rights
inherited.
The subject matter of a transfer tax is the privilege of the transferor
to gratuitously transfer property or rights which takes effect at ● Art.774 of the Civil Code provides:
the date of death of the transferor (known as transfer mortis “Succession is a mode of acquisition by virtue of which, the property,
causa subject to estate tax) or during the lifetime of the donor rights and o obligations to the extent of the value of the
and the done(know as transfer inter vivos subject to donor’s inheritance, of a person are transmitted through his death to
tax). Although the amount of transfer tax is based on net another or others either by his will or by operation of law.”
edetate or net gifts, it shall not be construed as a property tax.
On this basis, transfer tax is classified as “excise tax” or
privilege tax imposed on the act of passing the ownership of
property and not on the value of the property or right. (Chapter 2)
ESTATE TAX – is the tax on right to transmit property at death
and on certain transfers which are made by law the
The Law that governs the imposition of Estate Tax
equivalent of testamentary dispositions. It is not a tax on the
It is a well-settled rule that estate taxation is governed by the property, transferor or transferee. It os an excise tax or
statute in force at the time of death of the decedent. The
estate tax accrues as of the death of the decedent and the
privilege tax and its object is to tax the shifting of economic,
accrual of the tax is distinct from the obligation to pay the benefits and enjoyment of property from the dead to the
same. Upon the death of the decedent, succession takes living. The estate tax is generated by the laws at the time of
place and the right of the State to tax the privilege to transmit death notwithstanding the postponement of the actual
the estate vests instantly upon death. (RR No. 12-2018)
possession or enjoyment of the estate by the beneficiary.

Illustration:
Estate Tax - Definition and Nature

Pedro suffered an unexpected heart attack causing his death on In the Philippines, Estate Tax is a tax imposed on the privilege
November 1, 2023. His estate is composed of the following: that a person is given in controlling to a certain extent, the
Cash in bank P1,000,000 disposition of his property to take effect upon death. As
discussed in Chapter 1, it is an excise tax imposed on the act
Commercial building 5,000,000
of passing the ownership of property at the time of death and
Cars not on the value of the property or right. On this basis, estate
1,000,000 tax should not be construed as a direct tax on the property of
House and lot 3,000,000 the decedent although the tax is based thereon. Since estate
tax accrues as of the time death, the right of the State to tax
the privilege to transmit the estate vests instantly upon death.
Juan is the only heir of the decedent. Pedro’s remains were The accrual of the tax is distinct from the obligation to pay the
cremated on November 8, 2023. The executor of Pedro’s
same.
estate filed the estate tax return and paid the corresponding
estate tax on April 30, 2024. The properties left by the
decedent were finally distributed to Juan on June 30, 2024. Justification for the Imposition of Estate Tax

1. Benefit-Received Theory
Answer the following: The law considers the service tendered by the government in the
distribution of the estate of the decedent, either by law or in
Question 1: When will the transfer of ownership from the goat to
the heir take effect? accordance with his wishes. For the performance of these
 services and other benefits that accrue to the estate and the 2. Estate tax accrues as of the death of the decedent. The
heirs, the State collects the tax. accrual of the tax is distinct from the obligation to pay the
same.
2. Privilege or State Partnership Theory 3. Succession takes place upon the death of the decedent. The
Under this theory, inheritance is not a right but a privilege right pf the state to tax the privilege to transmit the estate
granted by the State and legatees have been acquired only vests instantly upon death.
with the protection of the State. Consequently, the State as a 4. The tax rates and procedures prescribed under R.A. 10963
passive silent partner in the accumulation of property has of the tax reform for acceleration and inclusion law (TRAIN
the right to collect the share which is properly due to it. LAW) and Section 3 of Revenue Regulation 12-2018 shall
govern the estate of the decedent who dies on or after
January 1, 2018. For estate taxes falling due or have accrued
beginning Jan. 1, 1998 up to December 31, 2017, the tax
3. Ability to Pay Theory rates prescribed under R.A. 8424 or The Tax Reform Act of
Receipt of inheritance which is in the nature of an unearned 1997 shall apply.
wealth or windfall, are place assets into the hands of the
heirs and beneficiaries. This creates an ability to pay the tax PURPOSE OF ESTATE TAX
and thus contributes to government income.
While it is true that transfer taxes provide income to the
4. Redistribution of Wealth Theory government, there are other justifications for their
imposition. One theory is the benefit-received theory. It
The receipt of inheritance is a contributing factor to the recognizes the role of the state in the distribution of the
inequalities in wealth and incomes. The imposition of estate estate of decedent to the heirs whether it be in accordance
tax reduces the property received by the successor, thus with the decedent’s will or by operation of law. For the
helping to promote equitable distribution of wealth in service, estate tax is collected. Another theory id the
society. The tax base is the value of the property and the privilege theory or state partnership theory. Since
progressive scheme of taxation is precisely motivated by the inheritance is a privilege granted by the state and since
desire to mitigate the evils of inheritance in the present estate acquired and accumulated is under the state’s
form. protection. It is but righteous that the state collect its share.
Classification of Decedents and Composition of Gross Estate The ability to pay theory asserts that the heirs because of the
inheritance the received are able and capable to pay taxes
For estate taxation purposes, decedents are classified into three (3); due the state. The redistribution of wealth theory reduces the
citizens, resident aliens and nonresident aliens.
property received by the heirs through taxes hence there is a
Section 85 of the Tax Code provides that the value of the gross more equitable distribution of earth in the society.
estate of the decedent should be: determined by including the
value at the time of his death of all property, real or personal, GROSS ESTATE
tangible or intangible, wherever situated; Provided, however,
that in the case of a nonresident decedent who at the time of The Gross estate of a decedent shall ne comprised of properties
his death was not a citizen of the Philippines, only that part of and interest therein at the time of his/her death, including
the entire gross estate which is situated in the Philippines shall
revocable transfers and transfers for insufficient
be included in his taxable estate. The composition of the
estate may be summarized as follows: consideration, etc.

Decedent’s estate

Is defined as all property, wherever located, in which the

decedent owned a beneficial interest at the time of death.

In case of real property, it may happen that the certificate of title

lor the tax declaration of the property has not been
transferred in the name of the decedent and is still in the
RECIPROCITY CLAUSE (Section 104 of the Tax Code, as name of the previous owner.
amended)
RESIDENT CITIZEN, NON-RESIDENT CITIZEN AND
The Tax-Code excludes “intangible” personal property with situs RESIDENT ALIEN DECEDENTS
in the Philippines from the gross estate of a non-resident alien
decedent if there is reciprocity. There is reciprocity if: The gross estate of a resident citizen, a non-resident citizen or a
The decedent at the time of his death was a resident citizen of a resident alien decedent shall include all his properties and
foreign country which. at the time of his death did not impose interests therein wherever situated. The following shall
an estate tax of any character in respect of comprise his gross estate:

LAW THAT GOVERNS THE IMPOSITION OF ESTATE 1. a. Tangible personal property. Personal property that can
TAX be seen and touched. These include appliances, jewelry, car
1. Estate taxation is governed by the statute in force at the time and other movable property which can be transported from
of death of the decedent. one place to another.
b. Intangible personal property. Personal property that cannot be The person who creates the power of appointment is the donor of
seen and touched because they have no physical form. the power.

2. Real or immovable property. These consist of land, The person who is given the right to exercise the power is the
building pr anything attached to the soil with permanence. done of the power (decedent).

3. Taxable Transfer. Non-Resident Alien Decedent

Inter vivos - is a Latin phrase which means “while alive” or If the decedent was a non-resident alien, only
“between the living.” This phrase is primarily used in his property located in the Philippines shall
property law and refers to various legal actions taken by a form part of his gross estate . His gross estate
given person while still alive, such as giving gifts, creating shall include the following:
trusts, or conveying property.
1. Franchise which must be exercised in the Philippine
Mortis causa - is a Latin term referring to the awareness that
death is approaching. In property law, when a party, acting 2. Share, obligation, or bonds issued by any corporation or
with awareness that their death is approaching, gives sociided anomina organized or constituted in the Philippines
something to another party, the resulting gift is known as a in accordance with its law
gift causa mortis.
3. Share, obligations or bonds issued by any foreign
a. Transfer in contemplation of death- In a transfer in
corporation 85% of the business of which is located in the
contemplation of death, the thought of death is the
Philippines
motivating factor for the transfer although death may not be
imminent.
4. Share, obligations, or bonds issued by any foreighn
corporation if such shares, obligations or bonds have
A donation mortis causa os a transfer in contemplation of death
acquired a business situs in the Philippines
Factors to consider are the following;
5. Share or rights in any partnership, business or industry
● Age and state of the decedent at the time of the gift. established in the Philippines
● Length of time between the gift and the death.
● Execution of a will within a short time of the making of the The inclusion of intangible personal property located in the
gift. Philippines in the gross estate of a non-resident alien
b. Revocable transfer – is a transfer by trust or otherwise decedent is subject to reciprocity rule.
where the decedent may revoke, alter, amend or terminate
Intangible personal property shall not be included in the gross
the terms of enjoyment of the property. estate in the following:

Trust – is the legal relationship created when a grantor known as a. If the decedent at the time of his death was a resident of a
the trustor, transfers property with the intention that it be foreign country which at the time of death did not impose a
managed by a trustee for the benefit of a beneficiary or transfer tax or death tax of any character in respect of
beneficiaries. Even though the decedent did not exercise his intangible personal property of citizen of the Philippines not
power to revoke, the transfer just the same is included in his residing in that foreign country.
gross estate.
b. If the laws of the foreign country of which the decedent was
Proceeds of Life Insurance a resident at the time of his death allow a similar exemption
from transfer taxes or death taxes of every character in
An insurance contract, often described as an insurance policy, is a
respect of intangible personal property owned by citizen of
common will- related document. Insurance is a contract of
the Phi
protection against a natural risk, such as death.
c. lippines not residing in that foreign country.
Proceeds of insurance under policies taken ot by the decedent
VALUATION OF GROSS ESTATE
upon his life shall constitute part of the gross estate if the
beneficiary is: The imposition of estate tax arises from the death of a person and
the nee for that person’s property to be eventually
a. The estate of the decedent, his executor or administrator; or
distributed to his heirs. Without the death and property, no
b. A third person other than the estate, his executor, or estate tax can be imposed.
administrator, and designation of the beneficiary or
Generally, the properties comprising the gross estate shall be
revocable.
valued based on their fair market value as of the time of
death. Fair market value is the price which a property will
Transfer under a general power of appointment bring when its offered for sale by one who desires, but is not
obliged to sell, and is brought by one who is under no
A power of appointment is the right to designate the person who
necessity of buying it.
will succeed to the property of a prior decedent.
1. Real Property 2. Amounts received from the Philippines and U.S
governments for damage during the last war
● FMV (zonal value) as determined by the Commissioner
● FMV as shown in the schedule of value fixed by the 3. Benefits received by Philippine residents under laws
provincial and city assessors, whichever is higher. administered by the U.S Veterans Administration
2. Share of stock 4. Bequest, legacies or donations mortis causa to social
welfare, cultural or charitable organizations
● Unlisted shares
5. Grants and donations to the Intramuros Administration
o Common-book value
o Preferred – par value 6. Proceeds of group insurance policy taken out by the
● Listed shares ( in the stock exchange) company for the benefits of its employee
3. Right to usufruct, use or habitation, annuity
7. Proceeds of accident insurance

Units of Participation 8. All grants, endowments, donations or contributions used

actually, directly and exclusively for educational purposes.
SITUS OF PROPERTY
As a general rule, the situs of real property is the place or country 9. Personal and Equity retirement account assets of the decedent
where uts is situated contributor
Generally, the situs of tangible personal property is the place or 10. Compensation paid to public and private workers who
contracted COVID_19 infection in the line of duty and died
country where such is actually; located at the time of the
due to COVID-19 as indicated in the death certificate.
decedent’s death.

In addition to the ones already enumerated, the following test of (Chapter 3)

situs apply:
To compute the net estate of the deceased, there are certain items
1. Accounts receivable – residence of the debtor that can be deducted from the value of the gross estate-under
the Tax Code. RR 12-2018 in relation to sections 86(A) and
2. Bank deposit – location of depository bank 86(B) of the Tax Code, as amended under TRAIN Law,
allows deductions from the gross estate to arrive at the taxable
3. Copyright, trademark, patent and franchise- place or country net estate which is used as a basis in determining the
where the intangible is used or exercised. applicable estate tax due.

The intangible personal property of a non-resident alien decedent

may not be subject to estate tax just once. Deductions from the gross estate are classified as follows:
1. Ordinary deductions
EXEMPTION FROM ESTATE TAX
2. Special deductions
The following are exempt from the estate tax under the Tax code:
3. Share of the surviving spouse, if the decedent is married
1. The merger of usufruct in the owner of the naked title. Beginning January 1, 2018 or upon the effectivity of the TRAIN
Law, the allowable deductions from the gross estate are
2. The transmission or delivery of the inheritance or legacy of summarized as follows:
the fiduciary heir or legates to the fideicommissary.

3. The transmission from the first heir, legatee or done in favor Summary of Allowable Deduction from the Gross Estate
of another beneficiary, in accordance with the will of the
predecessor.

4. All bequests, devices, legacies or transfer to social welfare,

culture and charitable institutions no part of the net income
of which insures to the benefit of any individual, provided
that not more than thirty percent (30%) of the said bequests,
legacies or transfers shall be used by institutions for
administration purposes.

5. Separate property of the surviving spouse

6. Proceeds of the life insurance where the beneficiary

is irrevocably designated.

The following are also exempt from the estate tax:

1. Benefits received by members from the government service ORDINARY DEDUCTIONS

insurance system and the Social Security System
A. LITe (Losses, Indebtedness, Taxes, atc.)
1. Losses Answer: PO.
For purposes of estate taxation, deductible losses from the - gross Gross estate shall compose of the properties of the decedent at the
estate shall pertain to “casualty losses. time of his death. If the incident happened before death, then
the property is no longer existing as of the date of death,
Casualty losses include losses arising from acts of God such as hence, should no longer be included in his gross estate.
losses due to storms, shipwreck and other casualties. It also
includes losses arising from acts of man, specifically from
robbery, theft or embezzlement. The amount deductible is the
value of the property lost. Question 6: In relation to question # 5, what amount should be
included as deduction from the gross estate of the decedent?
Requisites for Deductibility:
Answer: PO.
a) Arising exclusively from:
Aside from the requirement that losses, to be deductible, should
● acts of God such as fire, storm, shipwreck and other similar. have been incurred after death but during the settlement
casualty period, the property is no longer included in the gross estate
of the decedent. Consequently, no deduction from the gross
● acts of man such as robbery, theft, embezzlement estate should be allowed.
b) Not compensated by insurance or otherwise.
c) Not claimed as a deduction in an income tax return of the estate
subject to income tax (refer to Illustration #1, Case B).
CASE B: Use the same data in Case A. In addition, assume that the
d) Incurred during the settlement period of the estate. Settlement property earned gross income of P6M and incurred operating
period pertains to the period prescribed by law to file and pay expenses of P2 from the date of death of the decedent up to
the estate tax, which is, under the TRAIN Law, within one (1) the time of the incident or the calamity (typhoon). Assume
year from the date of death. further that the loss incurred due to the typhoon was
CASE A: recognized as additional operating expenses for purposes of
computing the net taxable income of the estate.
Among the properties included in the gross estate of the decedent
at the time of his death was a newly developed tourist Question: How much should be allowed as deduction from the
destination in Siargao valued at P20,000,000. George is the gross estate?
sole heir to the property. During the settlement of the estate Answer: PO.
and before the last day of filing the estate tax return, a super
typhoon hit Siargao partially destroying the newly developed Since the loss was already claimed as deduction for purposes of
property. It was determined that the fair market value of the determining the taxable net income of the estate, such loss
property after the incident was reduced to P18,000,000. should no longer be allowed as deduction in determining the
taxable gross estate.

Question 1: What amount should be included in the decedent's

gross estate? 2. Indebtedness or Claims against the Estate “Claims” is
generally construed to mean debts or demands of a pecuniary
Answer: P20,000,000 (FMV at the time of death) nature which could have been enforced against the deceased
Question 2: How much should be the allowable deduction from the in his lifetime and could have been reduced to simple money
gross estate? judgments. The liability represents a personal obligation of
the deceased existing at the time of his death, contracted in
Answer: P2,000,000. good faith (during his lifetime) for adequate and full
Deductible loss = P20M - P 18,000,000 =P2M consideration in money or money's worth. Claims against the
estate (CAE) or indebtedness in respect of property may arise
out of the following sources:
Question 3: What amount should be included as part of the ● Contract
allowable deductions from the gross estate assuming the
property was insured for 225,000,000. ● Tort

Answer: PO ● Operation of Law

Since the loss was fully compensated by insurance, no deduction REQUISITES FOR DEDUCTIBILITY (RR 12-2018):
shall be claimed against the gross estate of the decedent. a. The liability represents personal obligation of the deceased
existing at the time of his death;

Question 4: What amount should be included as deductible loss b. The liability was contracted in good faith and for adequate
assuming the incident happened beyond the settlement period and full consideration in money or money's worth;
of one (1) year, and the property was not insured. c. The liability must be a debt or claim which is valid in law and
Answer: PO. enforceable in court;

Only losses incurred during the settlement period (within 1 year d. The debt must not have been condoned, by the creditor or the
after death) are allowed as deduction from the gross estate. action to collect from the decedent must not have been
prescribed.

Question 5: What amount should be included in the gross estate of

the decedent assuming the incident happened one (1) day SUBSTANTIATION REQUIREMENTS:
before the death of the decedent?
All unpaid obligations and liabilities of the decedent at the time of by decedent-debtor and creditor, and statement of account
his death are allowed as deduction from gross estate. given by the creditor as duly received by the decedent-debtor.
Provided, however, that the following
requirements/documents are complied with/submitted: b) Duly notarized Certification from the creditor as to the unpaid
balance of the debt, including interest as of the time of death.

In case of simple loan (including advances):

lf the creditor is a corporation, the sworn certification should be
a) The debt instrument must be duly notarized at the time the signed by the President, or Vice President; or another
indebtedness was incurred, such as promissory note or principal officer of the corporation.
contract of loan, except for loans granted by financial
institutions where notarization is not part of the business If the creditor is a partnership, the sworn certification should be
practice/policy of the financial institution-lender. signed by any of the general partners.

b) Duly notarized Certification from the creditor as to the unpaid If the creditor is a bank or other financial institutions, the
' balance of the debt, including interest as of the time of death. Certification shall be signed by the branch manager of the
If the creditor is a corporation, the sworn certification should bank/financial institution which monitors and manages the.
be signed by the President, or Vice President, or other loan of the decedent-debtor.
principal officer of the corporation. lf the creditor is a sole proprietorship; the sworn certification
If the creditor is a partnership, the sworn certification should be should be signed by the owner of the business.
signed by any of the general partners. In any of these cases, the one who should certify must not be a
If the creditor is a bank or. other financial institutions, the relative of the borrower within the fourth civil degree, either
Certification shall be signed, by the branch manager of the by consanguinity or affinity, except when the requirement
bank/financial institution which monitors and manages the below is complied with:
loan of the decedent-debtor. When the lender, or the President/Vice-President or principal
If the creditor is an individual, the sworn certification should be officer of the creditor-corporation, or the. general partner of
signed by him. the creditorpartnership is a relative of the debtor in the degree
mentioned above, a copy of the promissory note or other
In any of these cases, the one who should certify must not be a evidence of indebtedness must be filed with RDO having
relative of the borrower within the fourth civil degree, either jurisdiction over the borrower within fifteen days from
by consanguinity, or affinity, except when the requirement execution thereof,
below is complied with:
c) Certified true copy of the latest audited balance sheet of the
When the lender, or the President/Vice-President or Principal creditor with a detailed schedule of its receivable showing the
Officer of the creditor-corporation, or the. General Partner of unpaid balance of the decedent-debtor. Moreover, a certified
the creditor-partnership is a relative of. the. debtor in the true copy of the updated latest subsidiary ledgers/records of
degree mentioned above, a copy of the promissory note or the debt of the debtor-decedent (certified by the creditor, i.e.,
other evidence of indebtedness must be filed with RDO certified by the officers in the preceding paragraphs) should
having jurisdiction over the borrower within fifteen days from likewise be submitted,
execution thereof.
d) Where the settlement is made through the Court in a testate or
intestate proceeding, pertinent documents filed with the Court
evidencing the claims against the estate, and the Court Order
c). In accordance with the requirements as prescribed in existing or approving the said claims, if already issued, in addition to the
prevailing internal revenue issuances, proof of financial documents mentioned in the preceding paragraphs.
capacity of the creditor to lend the amount at the time the loan
was granted, as well as its latest audited balance sheet with a
detailed schedule of its receivable showing the unpaid balance
of the decedent-debtor. In case the creditor is individual who Funeral, Medical, and Judicial Expenses
is no longer required to file an income tax return with the Beginning January 1, 2018 or upon effectivity of the TRAIN Law,
Bureau, a duly notarized Declaration by the creditor of his the following expenses are no longer allowed as deduction
capacity to lend at the time when the loan was granted from the gross estate of a decedent:
without prejudice to verification that may be made by the BIR
to substantiate such declaration of the creditor. If the creditor ● Funeral expenses
is a non-resident, the executor/administrator or any of the ● Medical expenses
legal heirs must submit a duly notarized declaration of his
capacity to lend at the time when the loan was granted, ● Judicial expenses
authenticated or certified to as such by the tax authority of the
country where the non-resident creditor is a resident.
ILLUSTRATION:
d) A statement under oath executed by the administrator or
executor of the estate reflecting the disposition of the
proceeds of the loan if said loan was contracted within three
(3) years prior to the death of the decedent. A resident decedent died on April 1, 2023. He availed of a
P500,000 salary loan from ABC Manufacturing Corporation
lf the unpaid obligation arose from purchase of goods or services: (his employer) by issuing a promissory note during his
lifetime.
Question 1: If all the requisites in order to be allowed as a
a) Pertinent documents evidencing the purchase of goods or
deduction as claims against the estate were present, what
service, such as sales invoice/delivery receipt (for sale of
amount may be deducted from the gross estate?
goods), or contract for the services agreed to be rendered (for
sale of service), as duly acknowledged, executed and signed Answer: P500,0000
Question 2: If the obligation has prescribed as at the time of his 2. Deductions for “unpaid mortgage”
death, what amount may be deducted from the gross estate?
Answer: PO
Answers:
Question 3: If the loan document (promissory note) was not duly
notarized, what amount may be deducted from the gross estate 1. 37,600,000
pertaining to the claim? Cash in bank (peso accounts)
Answer: PO. P8,000,000

If the indebtedness arises from a debt instrument (ie., loan Cash in bank (FCDU’ accounts)
document), it must be notarized to be’ deductible. 9,600,000

Question 4: If the loan was contracted three (3) years ago and the Real properties Philippines
executor cannot determine how the loan proceeds were 10,000,000
disposed of, what amount may be deducted from the gross Real properties abroad)
estate pertaining to the claim? 10,000,000
Answer: PO Gross Estate
RR 2-2003/RR 12-2018 provides that if the loan was contracted P37,600,000
within three (3) years before the death of the decedent, a
statement under oath (by the executor/administrator) must be
executed and must be attached therewith a statement showing 2. P8,000,000
the disposition of the proceeds of the loan.

CASE B:
UNPAID MORTGAGEs OR INDEBTEDNESS ON Pedro died in 2023. The following claims against Pedro's estate
PROPERTY were claimed by his heirs as deductions from the decedent's
gross estate.

These are deductions allowed when a decedent leaves property Notes (notarized)
encumbered by a mortgage or indebtedness contracted in P500,000
good faith and for adequate and full consideration. To be Notes payable (not notarized)
allowed as a deduction, his gross estate must include the fair 200,000
market value of the property encumbered. The amount
allowed as a deduction would be the outstanding debt or Unpaid property taxes before his death
mortgage. In case unpaid mortgage payable is being claimed 300,000
by the estate, verification must be made, as to who was the
Unpaid property taxes on his estate (after death)
beneficiary of the loan proceeds.
100,000
ACCOMODATION LOAN
Unpaid mortgage on his properties before death
If the loan is found to be merely an accommodation loan where 50,000
the loan proceeds went to another person, the value of the
Debts from gambling losses questioned by decedent while still
unpaid loan must be included as a receivable of the estate. If
alive 50,000
there is a legal impediment to recognize the same as
receivable of the estate, said unpaid obligation/mortgage Question: How much is the deductible Indebtedness or claim
payable shall not be allowed as a deduction from the gross against the estate?
estate. In all instances, the mortgaged property, to the extent
of the decedent’s interest therein, should always form part of
the gross estate. Answer:-P850,000 computed as follows:
Notes payable (notarized)
ILLUSTRATION P500,000

CASE A | Unpaid property taxes before death

300,000
A resident decedent left the following upon his death:
Unpaid mortgage before death
Cash in bank (from various peso accounts) P8,000,000 50,000
Cash in bank (from various FCDU accounts) Claim against the estate
9,600,000 P850,000
Real property, Philippines ● Claims against the estate should pertain only to valid claims
10,000,000 as of the date of death. Claims arising after death are not
allowed as deductions from gross estate.
Real property abroad
10,000,000 ● Receivables from gambling (wagering gains) before death are
inclusions from the decedent's gross estate, however, debts
The real property located in the Philippines was mortgaged for
from wagering or gambling losses are not allowed as
P8,000,000.
deductions from the gross estate.
Determine the following:
3. Taxes
1. Gross estate of the decedent
These are unpaid taxes that accrued prior to the death of the Answer: Yes.
decedent. However, the following are not allowed as a
deduction: The 21M is a valid and enforceable claim of Pedro as of the date of
his death.
● Income tax on income received after death
● Property taxes accrued after death
Question 2:
● Estate tax
Should the 21,000,000 collectibles from Juan be deducted in
Pedro's gross estate?
ILLUSTRATION: Answer: No.
Which among the following should be allowed as deduction from Only uncollectible claims against insolvent persons are deductible
the Gross Estate of a Filipino decedent who died on March from the gross estate. In the case provided, Juan is obviously
30, 2023? not an insolvent person for estate tax purposes.

Case B:
Assume the same data in Case A, except that during 2022, Juan
experienced financial difficulty and his assets are no longer
sufficient to settle his liabilities. Consequently, Juan was only
able to pay 500,000 to Pedro in 2022. In the same year, Juan
asked a competent court for a judicial declaration that he is
insolvent. The court is yet to decide on Juan's petition. In
2023, Pedro died.
Question 1: Should the remaining amount of P500,000 collectible
from Juan be included in the gross estate of Pedro?
Answer: Items 1, 2, 3, 4, 6, 7, 9, 11 and 12 Answer: Yes
Question 2:
1. Claims Against Insolvent Persons (CAIP) Should the unpaid amount of 500,000 collectible from Juan be
deducted in Pedro's gross estate?
Claims against the estate are “receivables due or owing from
persons who are not financially capable of meeting their Answer: Yes
obligations”. Hence, these are claims by the decedent during
Judicial declaration of insolvency is not required to consider a
his lifetime that are not collectible. An insolvent is a person
person insolvent. It is sufficient that the person’s insolvency is
whose properties are not sufficient to satisfy, whether fully or
proven.
partially, his debt(s).
Case C:
REQUISITES. FOR DEDUCTIBILITY
Pedro died in 2023. At the time of his death, he has a collectible
sum of P1,000,000 from a debtor who was subsequently
For purposes of estate taxation, a judicial declaration of insolvency declared by a court as insolvent for having total liabilities of
is not required but a) The incapacity of the debtor to pay his 24,000,000 against his total properties valued at P800,000
obligation should be proven; only.
b) The full amount owed by the insolvent must first be included in. Question 1:
the decedent's gross estate and the amount uncollectible shall
How much should be included in the gross estate of Pedro?
be allowed as a deduction; and
Answer: P1,000,000.

c) If the insolvent could only pay partial amount, the full amount
owed shall be included in the gross estate, and the amount Question 2: How much may be claimed as deduction from the
uncollectible shall be allowed as a deduction. gross estate of Pedro? Answer: P800,000 computed as
follows:

Case A:
Answer: P800,000 computed as follows
Juan is indebted to Pedro for 1,000,000. For the past ten (10) years,
the credit standing and reputation of Juan is outstanding.
However, during 2022, the relationship of Juan and Pedro was
tainted by a personal disagreement. Consequently, Pedro was Amount of claim
unable to collect the amount of P1,000,000 due from Juan. P1,000,000.00
Juan intentionally ignored several collection/demand letters Collectibles: ¼ x P800,000.00
from Pedro. In 2023, Pedro died. (200,000.00)
Uncollectible portion
Question 1: P800,000.00

Should the P1,000,000 collectible from in Ke included in the gross Or

estate of Pedro?
 4. Inclusion of the property — the property must have formed
part of the gross estate situated in the Philippines of the prior
Amount of claim decedent or have been included in the total amount of the gifts
P1,000,000.00 of the donor made within five (5) years prior to the present
Collectibles: P800,000.00/P1M decedent's death.
(200,000.00) 5. Previous taxation of the property — the estate tax on the prior
Uncollectible portion succession or the donor’s tax on the gift must have been
P800,000.00 finally determined and paid by the prior decedent or by the
donor as the case maybe and
6. No previous vanishing deduction on the property — no. such
B. TRANSFER FOR PUBLIC USE deduction on the property, or the property given in exchange _
therefore, was allowed in determining the value of the net
estate of the prior decedent.
Transfers For Public Use (TFPU) are dispositions in a last will. and
testament or transfers to take effect after the death in favor of
the government of the ‘Philippines or any of its political VANISHING DEDUCTION RATES:
subdivisions thereof (e.g. barangay, province,
city/municipality) for exclusively public purposes. Period (from receipt up to the decedent's death)
Rate
In order for a transfer for public’ use to be allowed as a deduction
from the gross estate of a decedent, the same amount shall be Within one year
included in the computation of the decedent's gross estate. 100%
Beyond one year to 2 years
80%
Legacies to the Philippine Red Cross (PRC)
Beyond 2 years to 3 years
Under RA 10072 (An Act Recognizing the Philippine Red Cross as 60%
an independent, autonomous, nongovemmental organization
auxiliary to the authorities of the Republic of the Philippines Beyond 3 years to 4 years
in the Humanitarian Field, to be known as “The Philippine 40%
Red Cross Act _ of 2009"), all donations, legacies and gifts Beyond 4 years to 5 years
made legacies to the PRC to support its purposes and 20%
objectives shall be exempt from donor's tax and shall'be
deductible from the gross income of the donor for income tax
purposes or from the computation of the donor-decedent's net
estate as a “transfer for public use” for estate tax purposes. PRO-FORMA COMPUTATION OF VANISHING
DEDUCTION:

C. VANISHING DEDUCTIONS (PROPERTY PREVIOUSLY

TAXED)

This deduction is also referred to as a deduction for “property

previously taxed”. It is an amount allowed to reduce the
taxable estate of a decedent where a property included in his
gross estate was previously received by him, either:
a. From a prior decedent by way of inheritance; or
b. From a donor by way of gift or donation
The aforementioned property has been the object of a previous
transfer taxation, either estate. tax or donor’s tax (thus, the
term property previously taxed).' Therefore, vanishing
deduction is allowed as a deduction from the gross estate to **Under the Tax Code, as amended under the TRAIN Law, the
minimize the effect of or as a remedy against indirect double multiplier to the ratio of Initial Basis over the Gross Estate is
taxation. the total of LITe, plus Transfer for Public Use.
REQUISITES FOR DEDUCTIBILITY:
ILLUSTRATIONS:
1. Death — the present decedent died within 5 years from the CASE A:
date of death of the prior decedent or date of gift.
Determine the correct vanishing deduction rate of the following:
2. Identity of property — the property with respect to which
deduction’ is sought: can be identified as the one received 1) Ana died in April 1, 2023. A vehicle included in her gross
from the prior decedent, or from the donor, or as the property estate was previously received by her as inheritance from her
acquired in exchange for the original property so received. father on January 8, 2020.

3. Location — the property on which vanishing deduction is 2) Pedro died in April 1, 2023, A parcel of land which was
being claimed must be located in the Philippines. included in his gross estate Was previously received by him as
donation from his best friend on May 3, 2020.
3) Juan died in April 1, 2023. A parcel of land was donated to him Unpaid taxes
by his sister as a wedding gift on September 7, 2017. before death 100,000.00
Transfer for
4) Lorna died on June 1, 2023. Included in her estate is a vacation public use
house which she purchased on June 30, 2021. (Donation mortus
causa to
Quezon City) 500,000.00
Answers:
TOTAL*** 900,000.00
1. 40% (more than 3 years but not more than 4 years)
2. 60% (more than 2 years but not more than 3 years)
Question 2:
3. NA. The property was received as donation more than five (5)
years before death of the decedent. Assume the corresponding donor's tax was not paid by Juan upon
donation, how much is the allowable vanishing deduction?
4. NA. Vanishing deduction is applicable only to gratuitous
transfers. In this particular case, Lorna purchased (acquired
through onerous-transfer) the property. Answer: PO
CASE B: Vanishing deduction is a mode of ‘tax relief” from multiple
Pedro received a car as a gift from Juan on January 1, 2021. The imposition of indirect taxes. This is the reason why payment
value of the car at the time it was donated to Pedro was of donor's tax or estate tax from the grantor is a requisite
P1,000,000. However, Pedro assumed a P200,000 mortgage before vanishing deduction is allowed. Hence, if the donor’s
on the car. The corresponding donor's tax was paid by Juan. tax was not paid at the time of the donation, vanishing
Pedro paid a total of P100,000 on the mortgage in 2021 and deduction is not allowed due to the absence of “indirect
2022. double taxation”.
Question 3:

On Nov. 1, 2023, Pedro died. His gross estate at the time of his Assume the corresponding donor's tax was paid by. Juan upon
death amounted to P5,000,000 including the car received from perfection of the donation. Assume further that the donation
Pedro valued at P700,000. was made on January 1, 2015. How much is the allowable
vanishing deduction?
The following deductions were also claimed by his beneficiaries:
Answer: PO
Losses
100,000 The donation was made more than five (5) years prior to Pedro's
death.
Unpaid mortgage (including the mortgage on the car)
200,000
Unpaid taxes before death. CASE C:
100,000 In 2023, Pedro died, leaving a property worth 210,000,000 which
Unpaid taxes after death he inherited 4h years ago from Juan. The property's fair
25,000 market value at the time of Juan’s death was P8,000,000. An
unpaid mortgage of P1,000,000 was also. Assumed by Pedro
Donation mortis causa to Quezon City for public purpose which remained unpaid at the time of his death. Other
500,000 properties in Pedro's gross estate had fair market value of
P30,000,000. The losses, taxes and transfer for public purpose
Question 1: How much is the allowable vanishing deduction?
amounted to P4,000,000.
Answer:
Question 1: What is the correct amount of vanishing deduction?

Value taken
(lower Value taken 8,000,000.00
amount) 700,000.00 1st Deduction -
1st Deduction - 100,000.00 Initial basis 8,000,000.00
Less: 2nd
Deduction
Initial basis 600,000.00 (8000/40,00
Less: 2nd 0** X (4M) - 800,000.00
Deduction Final Basis 7,200,000.00
(600/5,000 X x Rate 20%
(P900,000** Vanishing
*) - 108,000.00 Deduction 1,440,000.00
Final Basis 492,000.00
x Rate (within 3 Correct amount of
years) 60% GE**
Vanishing FV of the property
Deduction 492,000.60 inherited upon
Pedro’s death 10,000,000.00
Losses 100,000.00 Other properties in
Pedro's estate 30,000,000.00
Unpaid mortgage 200,000.00
 2. The family home as well as the land on which it stands must be
TOTAL GE 40,000,000.00
owned by the decedent. Therefore, the fair market value of the
family home should have been included in the computation of
the decedent's gross estate.
SPECIAL DEDUCTIONS
3. The family home must be the actual residential home of the
decedent and his family at the time of his death, as certified
A. STANDARD DEDUCTION by the Barangay Captain of the locality where the family
home is situated.
The law allows a standard deduction without qualification,
condition. nor requisite, whatsoever: This amount shall be 4. Allowable deduction must be in an amount equivalent to the
allowed as an additional deduction without need of current fair market value of the family home as declared of
substantiation. The full amount shall be allowed as deduction included in the gross estate, or the extent of the decedent's
for the benefit of the decedent. The allowable amounts under interest (whether conjugal/community or exclusive property),
the TRAIN Law are: whichever is lower, but not exceeding 10,000,000, as
amended.
✔ If the decedents a citizen or resident — P5,000,000
✔ If the decedent is a nonresident alien — P500,000
ILLUSTRATIONS:
B. Family Home- The dwelling house, including the land on
which it is situated, where the husband and wife, or a head of Determine the allowable deduction for Family Home (FH) from
the family, and members of their family reside, as certified to the following independent cases:
by the Barangay Captain of the locality. Case A: FH valued at P15,000,000. Decedent was single.
Answer: P0
This is the only special deduction allowed to a nonresident alien Case B: FH valued at P15,000,000. Decedent was head of the
decedent. The other special deductions (family home and RA family.
4917) can be claimed only by citizen and resident decedents.
Answer: P10,000,000.00
The amount of family home allowable as a deduction would be
whichever is lower of 10,000,000 or the fair market value at Case C: FH valued at P5,000,000. Decedent was head of the
the time of the decedent’s death, of the family home and the family.
land on which it stands. Answer: P5,000,000.00
The family home is deemed constituted on the house and lot from Case D: FH valued at P15,000,000 (exclusive). Decedent was
the time it is actually occupied as a family residence and is married.
considered as such for as long as any of its beneficiaries
actually resides therein. (Arts. 152 and 153, Family Code) Answer: P10,000,000.00
Case E: FH valued at P15,000,000 (conjugal). Decedent was
married.
UNMARRIED HEAD OF A FAMILY
Answer: P7,500,000.00
An unmarried or legally man or woman with one or both parents,
or with one or more brothers or sisters, or with one or more For married decedents, the FMV of the family home should be
legitimate, recognized natural or legally adopted children divided by two (2) if the same is conjugal or community
living with ~ and dependent upon him or her for their chief property.
support, where such brothers or sisters or children are not
Case F: FH valued at P15,000,000 of which, P10,000,000 is
more than twenty one (21) years of age, unmarried and not
allocated to the land
gainfully employed or where such children, brothers or
sisters, regardless of age are incapable of self-support because (exclusive) and P5,000,000 to the house (conjugal). Decedent is
of mental or physical defect, or, any of the beneficiaries married
mentioned in Article 154 of the Family Code who is living in
the family home and dependent upon the head of the family Answer: P10,000,000.00
for legal support. Land 10,000,000.00
BENEFICIARIES OF A FAMILY HOME: House (conjugal) P5M/2 2,500,000.00
✔ The husband and wife, or the head of a family; and Total 12,500,000.00
✔ Their parents, ascendants, descendants including legally *** Maximum deductible amount of P10M.
adopted children, brothers and sisters, whether the
relationship be legitimate or illegitimate, who are living in the Case G: The fair market value of the family home which is partly
family home and who depend upon the head of the e family exclusive and partly common follows:
for legal support.
Family Lot (exclusive)
LIMITATION P5,000,000.00
For purposes of availing of a family home deduction to the extent Family house (common)
allowable, a person may constitute only one (1) family home. 9,000,000.00
REQUISITES FOR DEDUCTIBILITY: Answer:
Land (exclusive)
P5,000,000.00
1. The decedent was married or if single, was a head of the family
 House(common) P9M/2 Claims against
4,500,000.00 insolvent
person 500,000.00
Total
9,500,000.00 Judicial expenses 100,000.00
Medical expenses 200,000.00
C. AMOUNTS RECEIVED BY HEIRS UNDER RA 4917
Family Home 1,500,000.00
Any amount received by heir(s) from the decedent's employer as a Standard
consequence of the death of the decedent-employee in Deduction 1,200,000.00
accordance with R.A. No. 4917 (An Act Providing that
Retirement Benefits of Employees of Private Firms shall not
be subject to Attachment, Levy, Execution or Any Tax Required:
Whatsoever), provided such amount is included as part of the
gross estate of the decedent. Determine the net taxable net estate:
NET SHARE OF THE SURVIVING SPOUSE Solution:
The amount deductible under this category is the net share of the GROSS ESTATE
surviving spouse in the conjugal partnership property. The net Condominium unit
share is equivalent to % or 50% of the conjugal property after in Makati City 4,500,000.00
deducting the obligations chargeable (ordinary deductions Jewelries 500,000.00
only) to such property. The share of the surviving spouse must Car in BGC Taguig
be removed to ensure that only the decedent's interest in the City 1,000,000.00
estate is taxed. Claims against
insolvent
person 500,000.00
Deductions from the Gross Estate of a Nonresident Alien Total Gross Estate -
Philippines 6,500,000.00
The value of the net estate of a decedent who is a non-resident
alien in the Philippines shall be determined by deducting from
the value of that part of his gross estate which at the time of ALLOWABLE
his death is situated in the Philippines. The summary of DEDUCTION
allowable deductions, as discussed in Table 3-1, page 89 are S
shown below (based on RR2-2003; RR 12-2018): Ordinary
Deduction:
LITe= (P6.5M
/P16.250M x
P1M) - 400,000.00
Vanishing
Deductions** - 469,231.00
Special Deduction:
Standard Deduction - 500,000.00
Taxable Estate 5,130,769.00

ILLUSTRATION:
**Computation of
Mr. Krung, a resident of Seoul, South Korea and a Korean citizen Vanishing
died on July 4, 2023 Deduction:
Leaving the following properties: Value Taken 500,000.00
Condominium unit Less: Mortgage paid -
in Makati City 4,500,000.00
Family Home in Initial Basis 500,000.00
South Korea 7,000,000.00 Less: Proportion
Rest House in deduction
Austria 2,750,000.00 (500/6,500xP400,00
Jewelries received 0) - 30,769
as gift dated Final Basis 469,231
August 25, x Vanishing
2022 500,000.00 deduction rate
Car in BGC Taguig (within 1year) 100%
City 1,000,000.00
Vanishing deduction 469,231

▪ Funeral and judicial expenses are no longer allowed under

The heirs of Mr. Krung claimed the following deductions: TRAIN Law.
Funeral expenses 300,000.00 ▪ GE** =include claim against insolvent person
Claims against the
estate 500,000.00 ▪ LITe of P1M*** = Claim against the estate and claim against
insolvent person. However, the allowable amount shall only
 be the proportional amount of GE Phils. over GE world if the
decedent is a nonresident alien Less: 2nd Deduction XXX

▪ Standard deduction of P500,000 is allowed as deduction from Final Basis XXX

the gross estate of nonresident alien decedents under the Multiply by percentage of
TRAIN Law. deduction X%

Vanishing Deduction XXX

PRO-FROMA OF GROSS ESTATE

GROSS ESTATE XXXX (Chapter 4)

Less: Allowable The RELATIONS
Deduction XXX
Ordinary The system of property relationship is applicable only to married
Deduction: XXX persons. It is used to
Funeral Expenses
distinguish a conjugal or community property from an exclusive
and Judicial
property. Under Art. 74 of the Family Code, the property relationship
Expenses XXX
between husband and wife shall be governed in the following order:
Claims against the
estate XXX The property relationship between husband and wife shall be
Claims against governed in the following order:
insolvent
person XXX 1. By Marriage settlements executed before the Marriage

Mortgage XXX 2. By the provision of law

Transfer for 3. By the Local custom
public used XXX
Vanishing
Deduction XXX XXXX
Types of Property Relations or Marriage Settlements (Art. 75
Special
FC)
Deduction:
Family Home XXX The future spouses may, in the marriage settlements, agree upon
Standard the following systems of property relationship:
Deduction XXX (1) Absolute community of Property (ACoP)
Medical Expenses XXX
(2) Conjugal partnership of gains (CPG)
R.A 4917 XXX
Share of Serving (3) Complete separation of property
Spouse XXX XXXX (4) Any other regime
NET ESTATE XXXX In order that any modification in the marriage settlements may be
valid, it must be made before the celebration of the marriage (Art. 76
FC). The marriage settlements and any modification thereof shall be in
PRO-FORMA OF VANISHING DEDUCTION: writing, signed by the parties and executed before the celebration of the
marriage. They shall not prejudice third persons unless they are
registered in the local civil registry where the marriage contract is
1. recorded as well as in the proper registries of properties.
Value Taken of PPT XXX Law Governing Property Relations
Less: Mortgage debt (or
other Irrespective of the place of the celebration of the marriage and
lien paid, if any (1st their residence, the provisions of the Family Code (E.0. No.209) shall
deduction) XXX govern the property relations between husband and wife whose marriage
was celebrated on or after its effectivity (August 3, 1988). The provisions
Initial Basis XXX of the Civil Code shall govern the property relations of husband and wife
whose marriage was celebrated before August 3, 1988.
In the event the couple had not adopted or agreed upee a system
before their marriage, the rule is
2.
Initial Basis Losses, etc. Date of Marriage Property relationship
and transfer 2nd
X =
Value of gross estate of for public Deduction Before August 3,1988 —> CPG
present decedent purposes
On or After August 3, 1988 —> ACoP

3.
ABSOLUTE COMMUNITY OF PROPERTY (ACoP)
Initial Basis XXX
 This the most common regime in Philippine marital property unless otherwise agreed in the marriage settlements (Art. 106 Family
relations. If the spouses do not have a valid marriage settlement, this _ Code).
system will govern the property relations of the couple and it is more in
keeping with Philippine custom and family unity. /n general, the
provisions on co-ownership shall apply to the absolute community of CPG APPLIES (Art. 105):
property between the spouses. In a nutshell, the spouses become
co-owners of all property they bring into the marriage and those acquired 1. When the future spouses agree to it in the marriage
by each or both of them during marriage, save for the exceptions settlement; or
expressly enumerated by law. The rules on co-ownership applies in all 2. To conjugal partnerships of gains already established
matters not provided in the Family Code. between spouses before the effectivity of the Family Code (August 3,
COMMUNITY PROPERTY under ACoP 1988), without prejudice to vested rights.

In general, property will be presumed to belong to the Exclusive property under CPG (Art. 109):
community, unless it can be proven to be exclusive property. Article 1. That which is brought to the marriage as his or her own.
91 of the Family Code provides:
2. That which each acquires during the marriage by gratuitous
Unless otherwise provided or in the marriage settlements, the title.
community property shall consist of ALL the property owned by the
spouses at the time of the celebration of the marriage or acquired 3. That which is acquired by right of redemption or by
thereafter (Art. 91). exchange with ' property belonging to only one of the spouses.
4. That which is purchased with the exclusive money of the
wife or of the husband.
EXCLUSIVE PROPERTY under ACoP
The following shall be excluded from the community property
(Art. 92): CONJ UGAL PROPERTY - CPG:
1. Art. 92(1) of the Family Code - Property acquired All property acquired during the marriage, wither the
during marriage by gratuitous title by either spouse and the fruits acquisition appears to have been made, contracted or registered in the
as-well as the income thereof, if any, unless the: donor, testator, or name of one or both spouses, is presumed to be conjugal unless the
grantor expressly provided that it be part of community. It shall be contrary is proved (Art. 116).
noted that under absolute community of property, the classification of
Article 117 of the Family Code provides that the following
“fruits” or income shall depend on the Classification of the principal
are conjugal partnership properties:
or source. of the fruits. Therefore, if the income or fruit came from
exclusive property, the fruits or income shall likewise be classified as
exclusive property. However, Fruits from “labor” of either spouse
shall always form part of community or conjugal property. 1. That which is acquired by onerous title during the
marriage at the expense of the common: fund, whether the acquisition
2. Art. 92(2) of the Family Code - Property for be for the partnership or for only one of the spouses;
personal and exclusive use of either spouse. However, jewelry shall
form part of the community property. 2. That which is obtained by labor, industry, or work or
profession of either or both of the spouses;
Personal effects or belongings such as clothing, wearing
apparel, shoes, and the like for personal and exclusive use of either 3. The fruits received or due during the marriage
spouse are considered exclusive property regardless of what was used coming from the common property or from the exclusive property of
to acquire the property. In general, property acquired during marriage each spouse. Under conjugal partnership of gains, “fruits” regardless
by purchase with exclusive money or by exchange with exclusive of the source (either from exclusive or conjugal property including
property, shall be considered exclusive property. fruits from labor) are classified as conjugal property;

3. Art. 92(3) of the Family Code - Property acquired before 4. The share in the hidden treasure discovered during
the marriage .by either spouse who has legitimate descendants by a marriage which the law awards to the spouses or to either of them as
former marriage, and the fruits as well as the income, if any of such finder or proprietor;
property, 5. Property acquired by occupation such as hunting or
fishing by spouses or by either of them;
6. Livestock existing upon the dissolution of the
partnership in excess of the number of each kind brought to the
marriage by either spouse; and
7. Those which are acquired ‘by chance, such as
winnings from gambling or betting. However, losses therefrom. shall
be borne’ exclusively by the loser-spouse.

CONJUGAL PARTNERSHIP OF GAINS (CPG)

Oftentimes referred to as the CPG, it is one of the property
relations between the spouses, under which the husband and wife
place in a common fund the proceeds, products, fruits and income
from their separate properties and those acquired by either or both
spouses through their efforts or by chance, and, upon dissolution of
the marriage or of the partnership, the net gains or benefits obtained
by either or both spouses shall be divided equally between them,
 CONJUGAL 5. E DEDUCTIONS, 10.C whether 15.C under
absolute — 20.E community or property or conjugal partnership of
gains:

1. The support of the spouses, their common children,

and legitimate
children of either spouse.
2. All debts and obligations contracted during marriage
by the designated administrator — spouse for the benefit of the
conjugal partnership, or by both spouses, or by one of them with the
consent of the other.
3. Debts and obligations contracted by either spouse
without the consent of the other to the extent that the family may
have benefited.

4. All taxes; liens, charges, and ‘expenses including

major and minor repairs upon conjugal property.
5. All taxes and expenses for mere preservation made
during the marriage, upon the separate property of either spouse.
6. Expenses to enable either spouse to commence or
complete a professional, vocational, or other activity for
self-improvement.
7. Debts before marriage of either spouse in so far as
they have redounded to the benefit of the family.
ILLUSTRATION BASE ON RR 12-2018
8. The value of what is donated or promised by both
spouses in favor of their common legitimate children for the
exclusive purpose of commencing or completing a professional or
vocational course or activity for self-improvement.
9. Expenses of litigation between spouses, unless the
suit is found to be groundless.
● Obligations contracted during marriage are presumed
to have benefited the family and therefore conjugal deductions. While
obligations contracted by either spouse before marriage are exclusive
deductions unless shown that the family gained benefits from the said
obligations.
● Share of the surviving spouse (% of net conjugal
property), family home, medical expenses, and standard deduction
are deductions to. be-made from the net estate (total of net conjugal
estate and net exclusive estate) to arrive at the net taxable estate.
● Other deductions are either conjugal or exclusive
deductions depending on whether chargeable against conjugal
property or exclusive property, or depending on whether the property
to which the deduction is related is conjugal or exclusive property. =
Wagering loss during marriage shall be borne by the loser.
● Winnings, however, shall form part of conjugal
property.
● Fines and pecuniary damages or indemnities imposed
upon either spouse shall be charges against exclusive property.
 PROPERTY REGIME OF UNIONS WITHOUT
MARRIAGE
(Title IV, Chapter 7 of the Family Code)
CAPACITATED TO MARRY
When a man and a woman who are capacitated to marry each
other, live exclusively with each other as husband and wife without
the benefit of ' marriage or under a void marriage, the following rules
shall apply:
1. Wages and salaries shall be owned by them in equal shares.
2. Property acquired by both of them through their work or
industry shall be governed by the rules on co-ownership.
3. Neither party can encumber or dispose by act inter-vivos
his or share in the property acquired during cohabitation and owned
in common, without the consent of the other, until after the
termination of their cohabitation.

INCAPACITATED TO MARRY
1. Only the property acquired by both of them through
their actual joint contribution of money, property or industry shall be
owned in common in proportion to their respective contributions. (If
silent, assume equal shares).
2. 2. The share of any party who is married to another
shall accrue to the absolute community or conjugal partnership, as the
case may be, if existing under the valid marriage.
Estate Tax Credit
Estate Tax credit refers to the taxpayer's right to deduct from the
tax due the amount of tax it has paid to a foreign country. The amount
could be claimed as a deduction if such taxes pertain to properties which
are included in the gross estate for Philippine estate tax computation.
This deduction is allowed by law to lessen the harshness of international
double taxation where the same estate is being subject to both the foreign
estate tax and the Philippine estate tax.

Nonresident alien decedents are not entitled to estate tax credit.

This is because under the law, the properties of nonresident alien
decedents located abroad or with situs abroad are excluded in the
computation of gross estate subject to estate tax in the Philippines. Thus,
not affected by the harshness of indirect international double taxation.

COMPLETE SEPARATION OF PROPERTY

The spouses shall be governed by complete separation of Philippine Estate Tax Due
property if the future spouses agree in the marriage settlements that
their property relations during the marriage shall be. governed by the In determining the allowable estate tax credit, the estate tax due
regime of separation of property. To each spouse shall belong all in the Philippines shall be computed first based before the estate tax
earnings from his or her profession, business or industry and all credit may be deducted, as follows:
fruits, natural, industrial, or civil, due or received during the marriage
from his or her separate property.
Both spouses shall bear the family expenses in proportion to
their income, or, in case of insufficiency or default thereof, to the
current market value of their separate properties. The liability of the
spouses to creditors for family expenses shall, however, be solidary.
 Net estate, Japan
3,000,000
STATUTORY FORMULA FOR THE COMPUTATION OF Estate tax paid, Japan
ESTATE TAX CREDIT: 200,000
Net estate, UK
2,000,000
Estate tax paid, UK
100,000
Net estate, Russia
(1,000,000)

ILLUSTRATION 1: How much is the estate tax payable after estate tax credit?

A resident citizen died in 2023 leaving the following:

Solution:
Taxable net estate, Philippines
P8,000,000
Taxable net estate, USA Total
2,000,000 taxable net estate 2000000
Estate tax rate
Estate tax paid, USA (TRAIN LAW) %
400,000
How much is the estate tax payable? Est 720,000.
ate tax due 00

Solution: (DI MAAYOS ARRGGG) Less: 240,000.

Estate tax credit 00

Estate tax still due 480,000.

and payable 00

Lli
mit allowed (DI RIN MAAYOS DITO AHHHH)

2,0 APA
00, N:
000 Actual
.00 im
P1 Allowed
600,000* it
20,000 120,000
10, *
000 ,000, 2
,00 000. 0
0.0 00 ,
80,
0 0 180,000.0
00
0 0
0.0
2,00 0
Estate Tax P6 0
0,00 .
(P10M x 6%) 00,000** 0.00 0
0
ess:
Estate K:
tax -12
credit 0,000.00
Estate tax
still due and payable 480,000.00
im
it Allowed

2,00 7
0,00 2
0.00 0
, 12
0 0,0
100,000.00
0 00.
12,0 0 00
00,0 .
ILLUSTRATION 2: 00.0 0
0 0
A nonresident citizen died in 2023 leaving the following:
Net estate, Philippines (net of special deductions)
P8,000,000 280,000.00
 ❖ **No longer allowed as deductions from gross estate
beginning January 1, 2018.
❖ The rules in classifying property into conjugal and
IMIT exclusive property are the same for purposes of computing the net
2: distributable estate.
❖ The estate tax due shall be deducted in computing the
net distributable estate
im Allowed
it ❖ For purposes of illustration, assume the decedent in
the Formula above is a citizen decedent.

7
2
0 ILLUSTRATION: 3
, 24
0 0,0 A resident alien decedent, head of the family, died in 2023
240,000.00 leaving the following:
0 00.
0 00
4,00 . House and Lot, Ayala
0,00 0 Alabang (Family Home) 30,000,000.00
0.00 0
Car in Ayala Alabang 5,000,000.00
12,0 Cash in bank, Ayala
00,0 Alabang 15,000,000.00
00.0 House and Lot-Global
0 City 10,000,000.00
Cash in bank-Global
City 15,000,000.00
ALLOWABLE TAX CREDIT (Lower between Limit 1 House and Lot-Libis,
& 2) P240,000** Q.C. 10,000,000.00
Cash in bank-Libis,
Q.C 15,000,000.00
NOTE: Funeral expenses 1,000,000.00
Under Limit 1, the allowed tax credit for Russia was not Judicial expenses 1,500,000.00
computed because the net estate therein was negative. There was no Claim against the
estate tax paid in Russia. However, for purposes of computing Limit estate 3,000,000.00
2, the negative net estate of a foreign country shall be included in the Losses 4,000,000.00
numerator (net estate all foreign countries). (50% were incurred
more than 1 year after
death) Medical
NET DISTRIBUTABLE ESTATE expenses 3,000,000.00
Net taxable estate is the result of the application of the law
under estate taxation. Net distributable estate, on the other hand, is
the amount arrived at from gross estate consisting all properties in the Determine the correct amount of estate tax due and the net
possession and control of the decedent at the time of death and actual distributable estate.
expenses, charges, and payments from the gross estate.

Shown below is a comparative schedule of net taxable

estate and net distributable estate.

Solution – ESTATE TAX DUE:

Gross Estate 100,000,000.00

Deductions:

Claim against the

estate 3,000,000.00
 Accounting is the art of recording, classifying and summarizing in a
significant manner and in terms of money, transactions and events which
Losses (within are in part at least of a financial character and interpreting the results
the settlement thereof. (Committee on Accounting Terminologies of American Institute of
period) 2,000,000.00 Certified Public Accountant AICPA)

Accounting is “the process of identifying measuring, and communicating

Medical expenses Not Allowed
economic information to permit informed judgment and decision by users
of information. “(American Association of Accountants)
Standard
deduction 5,000,000.00
Important points from the definition:
-
1. Accounting is about quantitative information
Family Home 10,000,000.00 20,000,000.00
2. The information is likely to be financial in nature.
Net Taxable
Estate 80,000,000.00 3. The information should be useful in decision making.

X Estate tax rate 6% The definition also states that accounting ha a number of components.
1. Identification as the analytical component.

Estate Tax Due 4,800,000.00 2. Measuring as the technical component.

3. Communicating as the formal component.
Three Important Activities
1. Identifying – the process of analyzing events and transaction to
determine whether or not they will be recognized, only accountable events
are recognized.
2. Measuring- involves assigning numbers, normally in money
terms, to the economic transactions and events.
3. Communicating – the process of transforming economic data
into useful accounting information, such as financial statements and other
accounting reports, for dissemination to users.
4.
Solution- NET DISTRIBUTABLE ESTATE:
Accounting Cycle
● Identifying and analyzing transactions and events.
Gross Estate 100,000,000.00
● Journalizing accounting transactions and other events.
Deductions:
Funeral ● Posting journal entries to the ledger.
Expenses 1,000,000.00
● Preparing unadjusted trial balance.
Juridical
Expenses 1,500,000.00 ● Journalizing and posting entries.
Claims
against the ● Preparing the adjusted trial balance.
estate 3,000,000.00 ● Preparing Financial Statement
Losses 4,000,000.00 ● Preparing the closing entries
Medical
Expenses 3,000,000.00 ● Preparing post-closing trial balance
Estate Tax
● Journalizing and posting reversing journal entries
Due 4,800,000.00 - 17,300,000.00
Net
Distributable
Estate 82,700,000.00

CFAS (Chapter 1&2)

DEFINATION OF ACCOUNTING

Accounting is a service activity. The accounting function is to provide

quantitative information, primarily financial in nature, about economic
entities, that is intended to be useful in making economic decision.
(Accounting Standard Council ASC)
TYPES OF EVENTS ► Special purpose accounting information- designed to meet the
● External Events – events that involves an external party. specific needs of particular statement users. This information is provided
a. Exchange (reciprocal transfer)- reciprocal giving and by other type of accounting e.g., managerial accounting, tax basis
receiving accounting etc.
b. Non-reciprocal transfer- “one way” transactions.
c. External events other than transfer- an event that involves
changes in BASIC ACCOUNTING CONCEPTS
the economic resources or obligation of an entity caused by an external • Double –entry system - each accountable event is recorded in
party or external source but does not involve transfer of resources or two parts- debit and credit.
obligation. • Going concern - the entity is assumed to carry on its operations
Examples: for an indefinite period of time.
► Purchase of goods from a supplier. • Separate entity - the entity is treated separately from its
► Borrowing money from a bank. owners.
► Sale of goods to a customer. • Stable monetary unit - amount in the financial statements are
► Payment of salaries to employees. stated in terms of common unit of measures; changes in purchasing power
► Payment of taxes to government. are ignored.
• Time period - the life of the business is divided into series of
reporting periods.
❖ Internal Events – events that do not involve an external party. • Materiality concept – information is material if its omission or
a. Production- process by which resources are transformed into misstatement could influence economic decision.
finished goods. • Cost-benefit - the cost of processing and communicating
b. Casualty- an unanticipated loss from disasters or other information should be not exceed the benefits to be derived from it.
similar events. • Accrual Basis of accounting – effects of transactions are
recognized when they occur (and not as cash is received or paid) and they
Measurements are recognized in the accounting periods to which they relate.
► The several measurement bases used in account included, but • Historical Cost Concept – the value of an assets is determined
not limited to the following. the basis of acquisition cost.
1. Historical Cost • Concept of Articulation – all of the components of a complete
2. Fair value set of financial statements are interrelated.
3. Present value • Full disclosure principle – financial statements provided
4. Realizable value sufficient detail to disclose matters that make a difference to users, yet
5. Current Cos, and sufficient condensation to make the information understandable, keeping
6. Sometimes inflation-adjustment costs in mind the cases of preparing and using it.
The most commonly used is historical cost. This is usually combined with • Consistency concept – financial statements are prepared on the
the other measurement bases. Accordingly, financial statements are said to basis of accounting policies which are applied consistently from one
be prepared using a mixture of costs and values. period to next.
• Matching – cost is recognized as expenses when the related
Valuation by Fact or Opinion revenue is recognized.
• Residual equity theory– this theory is applicable where there are
► When measurement is affected by estimates, the items measured two classes of shares issued, ordinary and preferred. The equation is
are said to be valued by opinion. “Assets – Liability – Preferred Shareholders’ Equity = Ordinary
Shareholders’ Equity.”
► When measurement is unaffected by estimates, the items • Fund theory– the accounting objectives is the custody and
measured are said to be valued by fact. administration of funds.
• Realization– the process of converting non-cash or cash.
• Prudence (Conservatism) – the inclusion of a degree of caution
Communicating
in the exercise of the judgments needed in making the estimates required
► Involves in three aspects
under conditions of uncertainty, such that assets or income are not
a. Recording
overstated and liabilities or expenses are not understated.
b. Classifying
c. Summarizing
COMMON BRANCHES OF ACCOUNTING
o Financial Accounting – focuses on general purpose financial
BASIC PURPOSE OF ACCOUN TING
accounting.
The basic purpose of accounting is to provide information about economic o Management Accounting – focuses on special purpose financial
activities intended to be useful in making economic decision. reports for use by an entity’s management.
o Cost Accounting – the systematic recording and analysis of the
costs of materials, labor, and overhead incident to production.
TYPES OF INFORMATION PROVIDED BY ACCOUNTING o Auditing – the process of evaluating the correspondence of
► QUANTITATIVE Information –information expresses in certain assertions with established criteria and expressing an opinion
numbers, quantities, or units. thereon.
► QUALITATIVE Information – information expresses in words o Tax Accounting – the reparation of tax returns and rendering of
or descriptive form. tax advice, such as the determination of tax consequences of certain
► Financial Information – information expresses in monetary. proposed business endeavors.
o Government Accounting – refers to the accounting for the
government and its instrumentalities, placing emphasis on the custody of
TYPES OF ACCOUNTING INFORMATION CLASSIFICATION AS public funds, the purposes for which those funds are committed, and the
TO USERS’ NEEDS responsibility and accountability of the individual entrusted with those
► General purpose accounting information- designed to meet the funds.
common needs of the most users. This information is governed by the
Philippine Reporting Standards (PFRS).
FOUR SECTORS IN THE PRACTICE OF ACCOUNTANCY • Accounting is conceptual and is concerned with the “WHY”,
• Practice of Public Accountancy – involves the rendering of audit reason or justification for any action adopted.
or accounting services to more than one client on a fee basis.
• Practice in Commerce and Industry- refers to employment in Accounting versus Accountancy
the private sector in a position which involves decision making requiring • Accountancy refers to the profession of accounting practice.
professional knowledge in the science of accounting and such position
requires that the holder thereof must be a CPA. • Accounting is used in reference only to a particular field of
• Practice in Education/Academe – employment in an educational accountancy such as public accounting. Private accounting and
institution which involves teaching of accounting, auditing, management government accounting.
advisory services, finance, business law, taxation, and other technically Financial Accounting versus Managerial Accounting
related subjects.
• Practice in the Government – employment or appointment to a • Financial Accounting is primarily concerned with the recording
position in an accounting professional group in the government or in the of business transactions and the eventual preparation of financial
government-owned and/or controlled corporation which decision making statements.
requires professional knowledge in the science of accounting, or where
• Financial accounting on general purpose reports known as
civil service eligibility as a CPA is prerequisite.
financial statements intended for internal and external users.
• Managerial accounting is the area of accounting that emphasizes
CONTINUING PROFESSIONAL DEVELOPMENT (CPD)
reporting to creditors and investors. In other words, managerial accounting
Republic Act No. 10912 is the law mandates and strengthening the is the area of accounting that empathizes development accounting
continuing professional development program for all regulated information for use within an entity.
professions, including the accountancy profession.

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

o All certifies public accountants shall abide by the requirements.
GAAP represent the rules, procedures, practice and standards followed in
Rules and regulations on continuing professional development to be
the preparation and presentation of financial statements.
promulgated by the Borad of Accountancy, subject to the approval of the
Professional Regulation Commission.
o Continuing professional development is the acquisition of Purpose of accounting standards
advanced knowledge, skill and proficiency.
The overall purpose of accounting standards is to identify proper
o Continuing professional development raises and enhances the accounting practices for the preparation and presentation of financial
technical skill and competence of the Certified Public Accountants. statements.

CPD credit units ACCOUNTING STANDARDS IN THE PHILIPPINES

• Philippine Financial Reporting Standards (PFRSs) are Standards
• CPD credit hours required for the renewal of CPA license and
and Interpretations adopted by the Financial Reporting Standard Council
accreditation of a CPA to practice the accountancy profession every (3)
(FRSC). They comprise:
three years.
a. Philippine Financial Reporting Standards
• BOA regulation, all Certified Public Accountants regardless of (PFRSs);
areas or sector of practice shall required to comply with 120 CPD credit b. Philippine Accounting Standards (PASs); and
units. c. Interpretations
• CPD has become mandatory for CPA. Composition of FRSC or FSRSC
• Renewal of CPA license required 15 CPD credit unit.
The Financial and Sustainability Reporting Standards Council (FSRSC)
• Accreditation of a CPA to practice the accountancy profession was established by the Professional Regulatory Commission (PRC) under
required 120CPD units. the Implementing Rules and Regulations of the Philippine Accountancy
Act of 2004 to assist the Board of Accountancy (BOA) in carrying out its
power and function to promulgate accounting standards in the Philippines.
Accounting versus Auditing The FSRSC’s main function is to establish generally accepted accounting
principles in the Philippines.
• Accounting embraces auditing.
• Auditing is one of the areas of accounting specialization. The FSRSC consists of a chairman and 15 members who are appointed
by the BOA and include representatives from the BOA, Securities and
• Accounting is essentially constructive in nature, accounting Exchange Commission (SEC), Bangko Sentral ng Pilipinas (BSP), Bureau
ceases when financial statements are already prepared. of Internal Revenue (BIR), Insurance Commission (IC), Commission on
• Auditing is analytical. The work of an auditor begins the work Audit (COA), Financial Executives Institute of the Philippines (FINEX),
of the accountant ends. and PICPA.

Board of Accountancy
1
Accounting versus Bookkeeping
Securities and Exchange Commission
• Bookkeeping is procedural and largely concerned with 1
development and maintenance of accounting records. Bangko Sentral ng Pilipinas
1
• Bookkeeping is the “HOW” of accounting. Bureau of Internal Revenue
• Bookkeeping is a procedural element of accounting as arithmetic 1
is a procedural element of mathematics.
**Insurance Commission ● The role of the PIC to prepare interpretations of PFRS for
1 approval by the FRSC and to provide timely guidance on financial
Commission on Audit reporting issues not specifically addressed in current PFRS.
1 ● In other words, interpretations are intended to give
Financial Executives Institute of the Philippines (FINEX) authoritative guidance on issues that are likely to receive divergent or
1 unacceptable treatment because the standards do not provide specific
Accredited national professional organization of CPAs:
and clear-cut rules and guidelines.
Public Practice
2 ● The counterpart of the PIC in the United Kingdom is the
Commerce and Industry International Financial Reporting Interpretations Committee or
2 IFRIC which has already replaced the Standing Interpretations
Academe or Education Committee or SIC.
2
Government
2 International Accounting Standards Committee (IASC)
Total
15 ● The International Accounting Standards Committee or IASC is
an independent private sector body, with the objective of achieving
** Professional Regulatory Board of Accountancy Resolution No. 29 uniformity in the accounting principles which are used by business and
dated June 6, 2022. other organizations for financial reporting around the world.
Increasing the membership and designating new members of the ● It was formed in June 1973 through an agreement made by
financial reporting standard council. professional accountancy bodies from Australia, Canada, France,
Germany, Japan, Mexico, the United States of America. The IASC is
headquartered in London, United Kingdom
The Chairman and members of FRSC shall have a term of 3 years
renewable for another term. Any member of the ASC shall not be Objectives of IASC
disqualified from appointed to the FRSC.
● To formulate and publish in the public interest accounting
THE NEED FOR REPORTING STANDARDS standards to be observed in the presentation of financial statements
• Entities should follow a uniform set of generally acceptable and to promote their worldwide acceptance and observance.
reporting standards when preparing and presenting financial statements; ● To work generally for the improvement and harmonization
otherwise, financial statements would be misleading. of regulations, accounting standards and procedures relating to the
• The term “Generally Acceptable” means that either: presentation of financial statements.
a. the standard has established by an authoritative
accounting rule-making body; or International Accounting Standards Board (IASB)
b. the principle has gained general acceptance due to practice
over time and has been proven to be most useful. ● The International Accounting Standards Board or IASB now
• The process of establishing financial accounting standards is a replaces IASC.
democratic process in that a majority of practicing accountants must agree ● The IASB publishes standards in a series of pronouncements
with a standard before it becomes implemented. called International Financial Reporting Standards or IFRS.
● However, the IASB has adopted the body of standards issued
Hierarchy of Reporting Standards by the IASC.
● The pronouncements of the IASC continued to be designated
• Philippine Financial Reporting Standards (PFRSs)
as “International Accounting Standards” or IAS.
• In the absence of PFRS that specifically applies to a transaction
or events, management shall use its judgment in developing and applying ● The IASB standard -setting process includes in the correct
an accounting policy that result in information that is relevant and reliable. order research, discussion paper, exposure draft and accounting
Note: standard
“If there is a conflict between the conceptual framework and an
accounting standard, standards will prevail. “ Move toward IFRS

● In developing accounting standards that will be generally

ACCOUNTING STANDARD SETTING BODIES AND OTHER
accepted in the Philippines, standards issued by other standards setting
Relevant ORGANIATION
• Financial Reporting Standards Council (FRSC) bodies such as the USA Financial Accounting Standards Board (FASB)
• Philippine Interpretation Committee (PIC) and the IASB are considered.
• Board of Accountancy (BOA) ● In the past years, most of the Philippine standards issued are
• Securities and Exchange Commission (SEC) based on American accounting standards.

⚫
•

•
Bureau of Internal Revenue (BIR)
Bangko Sentral ng Pilipinas (BSP)
Cooperative Development Authority (CDA)
● At present, the FRSC has adopted in their entirety all
International Accounting Standards and International Financial
Reporting Standards.
● The move toward IFRS is essential to achieve the goal of one
uniform and globally accepted financial reporting standards.
Philippine Interpretations Committee (PIC) ● The Philippines is fully compliant with IFRS effective
● The Philippine Interpretations Committee or PIC was formed January 2005, a process which was started back in 1997 in moving from
by the FRSC in August 2006 and has replaced the Interpretations USA GAAP to IFRS.
Committee or IC formed by the Accounting Standards Council in The following factors are considered in deciding to move totally to
May 2000. international accounting standards:
a. Support of international accounting standards by Philippine In the simplest terms, relevance is the capacity of the information to
organizations, such as the Philippine SEC, Board of Accountancy and influence a decision.
PICPA.
b. Increasing internalization of business which has heightened To be relevant, the financial information must be capable of making a
interest in a common language for financial reporting. difference in the decisions made by users.
c. Improvement of international accounting standards or
In other words, relevance requires that the financial information should
removal of free choice of accounting treatments.
be related or pertinent to the economic decision.
d. Increasing recognition of international accounting standards
by the World Bank, Asian Development Bank and World Trade Information that does not bear on an economic decision is useless.
Organization.
To be useful, information must be relevant to the decision-making needs
Philippine Financial Reporting Standards of users.
● The Financial Reporting Standard Council issues standards in a For example, broadly, the statement of financial position is relevant in
series of pronouncements called the “Philippine Financial Reporting determining financial position, and the income statement is relevant in
Standards” or PFRS. determining performance.
The Philippine Financial Reporting Standards collectively include all of More specifically, the earnings per share information is more relevant
the following: than book value per share in determining the attractiveness of an
investment.
a. Philippine Financial Reporting Standards which correspond to
International Financial Reporting Standards. Ingredients of relevance
b. Philippine Accounting Standard which corresponds to
International Accounting Standards. a) Financial information is capable of making a difference in a
c. Philippine Interpretations which correspond to Interpretations decision if it has predictive value and confirmatory value.
of the International Financial Reporting Interpretations Committee
(IFRIC) and the Standing Interpretations Committee, and b) Financial information has predictive value if it can be used as
Interpretations developed by the PIC. an input to processes employed by users to predict future outcome.

c) In other words, financial information has predictive value

(Chapter 3) when it can help users increase the likelihood of correctly or accurately
predicting or forecasting outcome of events.
Definition
Qualitative characteristics are the qualities or attributes that make d) Financial information has confirmatory value if it provides
financial accounting information useful to the users. feedback about previous evaluations.
In deciding which information to include in financial statements, the e) In other words, financial information has confirmatory value
objective is to ensure that the information is useful to the users in making when it enables users confirm or correct earlier expectations.
economic decisions.
Materiality
Under the Conceptual Framework for Financial Reporting, qualitative
characteristics are classified into fundamental qualitative characteristics
a) Materiality is a practical rule in accounting which dictates
and enhancing qualitative characteristics.
that strict adherence to GAAP is not required when the items are not
Fundamental qualitative characteristics significant enough to affect the evaluation, decision and fairness of the
financial statements.
The fundamental qualitative characteristics relate to the content or
b) The materiality concept is also known as the doctrine of
substance of financial information.
convenience.
The fundamental qualitative characteristics are relevance and faithful
c) Materiality is really a quantitative "threshold" linked very
representation. Information must be both relevant and faithfully closely to the qualitative characteristic of relevance.

represented if it is to be useful. d) The relevance of information is affected by its nature and

materiality.
Neither a faithful representation of an irrelevant phenomenon nor an
unfaithful representation of a relevant phenomenon helps users make e) In other words, materiality is a "subquality" of relevance
good decisions. based on the nature or magnitude or both of the items to which the
information relates.
Application of qualitative characteristics
f) The Conceptual Framework does not specify a uniform
The most efficient and effective process of applying the fundamental quantitative threshold for materiality or predetermine what could be
qualitative characteristics would usually be: material in a particular situation.
● Identify an economic phenomenon that has the potential to be Materiality is a relativity
useful.
● Identify the type of information about the phenomenon that Materiality of an item depends on relative
would be most relevant.
● Determine whether the information is available size rather than absolute size. What is

Relevance material for one entity may be immaterial for

another. Ingredients of faithful representation

An error of P100,000 in the financial statements of a multinational entity To be a perfectly faithful representation, a depiction should have three
may not be important but may be so critical for a small entity. characteristics, namely:

When is an item material? ● Completeness

There is no strict or uniform rule for determining whether an item is ● Neutrality

material or not.
● Free from error
Very often, this is dependent on good judgment, professional expertise

and common sense. However, a general guide may be given, to wit:

Completeness
"An item is material if knowledge of it would affect or influence the
decision of the informed users of the financial statements". Completeness requires that relevant information should be presented
in a way that facilitates understanding and avoids erroneous
Information is material if its omission or misstatement could influence implication.
the economic decision that the users make on the basis of the financial
information about an entity. Completeness is the result of the adequate disclosure standard or the
principle of full disclosure.
For example, small expenditures for tools are often expensed
immediately rather than depreciated over their useful lives to save on A complete depiction includes all information necessary for a user to
clerical costs of recording depreciation because the effect on the understand the phenomenon being depicted, including all necessary
financial statements is not large enough to affect economic decision. descriptions and explanations.

Another example of the application of materiality is the common practice

For example, a complete depiction of a group of assets would include
of large entities of rounding amounts to the nearest thousand pesos in
description of the assets, numerical depiction and description of the
their financial statements.
numerical depiction, such as cost, current cost or fair value.
Small entities may round off to the nearest peso. The purpose of the notes is to provide the necessary disclosures by
Philippine Financial Reporting Standards.

Factors of materiality
Standard of adequate disclosure
In the exercise of judgment in determining materiality, the relative size
and nature of an item are considered. The standard of adequate disclosure means that all significant and
relevant information leading to the preparation of financial statements
The size of the item in relation to the total of the group to which the shall be clearly reported.
item belongs is taken into account.
Adequate disclosure however does not mean disclosure of just any data.
For example, the amount of advertising in relation to total selling
expenses, the amount of office salaries to total administrative expenses, The accountant shall disclose a material fact known to him which is not
the amount of prepaid expenses to total current assets and the amount disclosed in the financial statements but disclosure of which is
of leasehold improvements to total property, plant and equipment. necessary in order that the financial statements would not be
misleading.
The nature of the item may be inherently material because by its very
nature it affects economic decision. In other words, the standard of adequate disclosure is best described by
disclosure of any financial facts significant enough to influence the
For example, the discovery of a P20,000 bribe is a material event even
for a very large entity. judgment of informed users.

Faithful representation

Faithful representation means that financial reports represent economic Notes to financial statements
phenomena or transactions in words and numbers.
Actually, to be complete, the financial statements shall be accompanied
Stated differently, the descriptions and figures must match what really by "notes to financial statements".
existed or happened.
The purpose of the notes is to provide the necessary disclosures
Simply worded, faithful representation means that the actual effects of required by Philippine Financial Reporting Standards.
the transactions shall be properly accounted for and reported in the
financial statements. Notes to financial statements provide narrative description or
disaggregation of the items presented in the financial statements and
For example, if the entity reports purchases of P5,000,000 when the information about items that do not qualify for recognition.
actual amount is P8,000,000, the information would not be faithfully
represented. Neutrality

To record a sale of merchandise as miscellaneous income would not A neutral depiction is without bias in the preparation or presentation of
also be a faithful representation of the sale transaction. financial information.

A neutral depiction is not slanted, weighted. emphasized,

de-emphasized or otherwise manipulated to increase the probability that
financial information will be received favorably or unfavorably by But in substance, in reality, if the "transfer of ownership provision" is
users. to be considered, the real intent of the parties is an installment purchase
of an asset by the lessee from the lessor.
In other words, to be neutral, the information contained in the financial
statements must be free from bias. Accordingly, the lessee shall record an acquisition of right of use asset
and set up a liability to the lessor.
The financial information should not favor one party to the detriment of
another party. The periodic rental is conceived as an installment payment representing

The information is directed to the common needs of many users, and not interest and principal. Another example is the computation of earnings
to the particular needs of specific users.
per share.
Neutrality is synonymous with the
Normally, earnings per share would simply involve dividing the net
all-encompassing principle of fairness. income for a period by the average number of ordinary shares
outstanding.
To be neutral is to be fair.
However, certain securities such as bonds that are convertible into
ordinary shares are treated as "potential ordinary shares."
Free from error
Accordingly, the ordinary shares into which the bonds are convertible
Free from error means there are no errors or omissions in the are included in the computation of diluted earnings per share in
description of the phenomenon or transaction. recognition of the concept of economic substance over legal form.
Moreover, the process used to produce the reported information has What about conservatism?
been selected and applied with no errors in the process.
The Conceptual Framework did not include conservatism or prudence
In this context, free from error does not mean perfectly accurate in all as an aspect of faithful representation because to do so would be
respects. inconsistent with neutrality.
For example, an estimate of an unobservable price or value cannot be Most often, a conservative or prudent approach is subjective and may
determined to be accurate or inaccurate. contain an element of bias.
However, a representation of that estimate can be faithful if the amount is However, discussion of the qualities of financial information would not
described clearly
be complete without discussion of conservatism.
and accurately as an estimate.
Conservatism
Moreover, the nature and limitations of the estimating process are
explained, and no errors have been made in selecting and applying an Conservatism means that when alternatives exist, the alternative which
appropriate process for developing the estimate. has the least effect on equity should be chosen.
Substance over form Stated differently, managers, investors and accountants have generally
preferred that possible errors in measurement be in the direction of
If information is to represent faithfully the transactions and other events understatement rather than overstatement of net income and net assets.
it purports to represent, it is necessary that the transactions and events
are accounted in accordance with their substance and reality and not In the simplest words, conservatism means "in case of doubt, record
merely their legal form. any loss and do not record any gain."

The economic substance of transactions and events are usually For example, if there is a choice between two acceptable asset values,
emphasized when economic substance differs from legal form. the lower figure is selected.

Substance over form is not considered a separate component of faithful Accordingly, inventories are measured at the lower of cost and net
representation because it would be redundant. realizable value.

Faithful representation inherently represents the substance of an Contingent loss is recognized as a "provision" if the loss is probable
economic phenomenon or transaction rather than merely representing and the amount can be reliably measured.
the legal form.
Contingent gain is not recognized but disclosed only.
Representing a legal form that differs from the economic substance of
the underlying economic phenomenon or transaction could not result in It is to be emphasized that "conservatism is not a license to deliberately
a faithful representation. understate net income and net assets".
For example, if an entity has a cash of P500,000 and reports only
P100,000, this is not conservatism but fraud or inaccurate reporting.
Example of substance over form Prudence
An example is when the lessee leased property from the lessor. Conservatism is synonymous with prudence.
The terms of the lease provide that the lease transfers ownership of the
Prudence is the desire to exercise care and caution when dealing with the
asset to the lessee by the end of the lease term.
uncertainties in the measurement process such that assets or income are
In form, the contract is a lease as popularly understood. not overstated and liabilities or expenses are not understated.
 Consistency is not the same as comparability.

Expressions of conservatism In a broad sense, consistency refers to the use of the same method for the
same item, either from period to period within an entity or in a single
"Anticipate no profit and provide for probable and measurable loss." period accross entities.
In the matter of income recognition, the accountant takes the position Comparability is the goal and consistency helps to achieve that goal.
that no matter how sure the businessman might be in capturing the bird
in the bush, he, the accountant, must see it in the hand." In a limited sense, consistency is the uniform application of accounting
method from period to period within an entity.
"Don't count your chicks until the eggs hatch".
On the other hand, comparability is the uniform application of
accounting method between and across entities in the same industry.
Enhancing qualitative characteristics An entity cannot use the FIFO method of inventory valuation in one
year, the average method in the next year, again the FIFO method in
The enhancing qualitative characteristics relate to the presentation or succeeding year and so on.
form of the financial information.
If the FIFO method is adopted in one year, such method is followed from
The enhancing qualitative characteristics are intended to increase the year to year. Consistency is desirable and essential to achieve
usefulness of the financial information that is relevant and faithfully comparability of financial statements.
represented.
However, consistency does not mean that no change in accounting
The enhancing qualitative characteristics are comparability, method can be made.
understandability, verifiability and timeliness.
If the change would result to more useful and meaningful information,
Relevant and faithfully represented financial information is useful but then such change shall be made.
the information would be most useful if it is comparable,
understandable, verifiable and timely. But there shall be full disclosure of the change and the peso effect
thereof.

It is inappropriate for an entity to leave accounting policies unchanged

when better and acceptable alternatives exist.
Comparability

Comparability means the ability to bring together for the purpose of

Understandability
noting points of likeness and difference.

Comparability is the enhancing qualitative characteristic that enables Understandability requires that financial information must be
users to identify and understand similarities and dissimilarities among comprehensible or intelligible if it is to be most useful.
items. Accordingly, the information should be presented in a form and
Comparability may be made within an entity or between and across expressed in terminology that a user understands.
entities. Classifying, characterizing and presenting information "clearly and
concisely" makes it understandable.
Comparability within an entity is the quality of information that allows
comparisons within a single entity through time or from one accounting An essential quality of the information provided in financial statements is
period to the next. that it is readily understandable by users.
Comparability within an entity is also known as horizontal comparability But the complex economic activities make it impossible to reduce the
or intra-comparability. financial information to the simplest terms.
Comparability between and across entities is the quality of information Accordingly, the users shall have an understanding of the complex
that allows comparisons between two or more entities engaged in the economic activities, the financial accounting process and the
same industry. terminology in the financial statements.
Comparability across entities is also known as inter-comparability or Financial statements cannot realistically be understandable to everyone.
dimensional comparability.
Financial reports are prepared for users who have a reasonable
For information to be comparable, like things must look alike and knowledge of business and economic activities and who review and
different things must look different. analyze the information diligently.

Comparability is not enhanced by making unlike things look alike or At times, even well-informed and diligent users may need to seek the
making like things look different. aid of an adviser to understand information about complex phenomena
or transactions.

Understandability is very essential because a relevant and faithfully

Consistency represented information may prove useless if it is not understood by
Implicit in the qualitative characteristic of comparability is the principle users.
of consistency.
Verifiability The benefit derived from the information should exceed the cost
incurred in obtaining the information.
Verifiability means that different knowledgeable and independent
observers could reach consensus, although not necessarily complete However, the evaluation of the cost constraint is substantially a
agreement, that a particular depiction is a faithful representation. judgmental process.

In other words, verifiability implies consensus. Assessing whether the cost of reporting outweighs or falls short of the
benefit is difficult to measure and becomes a matter of professional
The financial information is verifiable in the sense that it is supported judgment.
by evidence so that an accountant that would look into the same
evidence would arrive at the same economic decision or conclusion.

Verifiable financial information provides results that would be

(Chapter 4)
substantially duplicated by measurers using the same measurement
GENERAL OBJECTIVE OF FINANCIAL STATEMENTS
method.

Accordingly, verifiability helps assure users that information represents Financial statements provide information about economic resources of
the economic phenomenon or transaction it purports to represent. the reporting entity, claims against the entity and changes in the
economic resources and claims.
Types of verification
Financial statements provide financial information about an entity's
Verification can be direct or indirect. assets, liabilities, equity, income and expenses useful to users of financial
statements in:
Direct verification means verifying an amount or other representation
. Assessing future cash flows to the reporting entity.
through direct observation, for example, by counting cash.
b. Assessing management stewardship of the entity's economic
Indirect verification means checking the inputs to a model, formula or resources.
other technique and recalculating the inputs using the same
methodology.
The financial information is provided in the following:
An example is verifying the carrying amount of inventory by checking 1. Statement of financial position, by recognizing assets, liabilities and
the inputs in quantities and costs, and recalculating the ending inventory equity.
using the same cost flow assumption, such as first-in, first-out. 2. Statement of financial performance, by recognizing income and
expenses.
Timeliness 3. Other statements and notes by presenting and disclosing information
about
Timeliness means that financial information must be available or
communicated early enough when a decision is to be made. a. Recognized assets, liabilities, equity, income and expenses
b. Unrecognized assets and liabilities
Relevant and faithfully represented financial information furnished c. Cash flow
after a decision is made is useless or of no value. d. Contribution from equity holders and distribution to
equity holders
"For example, the most important attribute of quarterly or interim e. Method, assumption, and judgment in estimating
financial information is its timeliness. amount presented
Generally, the older the information, the less useful. Types of financial statements
However, some information may continue to be timely long after the end The Revised Conceptual Framework recognizes three types of financial
of reporting period because some users may need to identify and assess statements.
trends.
1. Consolidated financial statements — These are the financial
Timeliness enhances the truism that without knowledge of the past, the
statements prepared when the reporting entity comprises both the parent
basis for prediction will usually be lacking and without interest in the
and its subsidiaries.
future, knowledge of the past is sterile.

What happened in the past would become the basis of what would 2. Unconsolidated financial statements — These are the
happen in the future. financial statements prepared when the reporting entity is the parent
alone.

Cost constraint on useful information 3. Combined financial statements — These are the financial
statements when the reporting entity comprises two or more that are not
Cost is a pervasive constraint on the information that can be provided by linked by a parent and subsidiary relationship.
financial reporting.

Reporting financial information imposes cost and it is important that such Consolidated financial statements
cost is justified by the benefit derived from the financial information.

In other words, the cost constraint is a consideration of the cost incurred Consolidated financial statements provide information about the assets,
in generating financial information against the benefit to be obtained liabilities, equity, income and expenses of both the parent and its
subsidiaries as a single reporting entity.
from having the information.
The parent is the entity that exercises control over the subsidiaries.
Consolidated information is useful for existing and potential investors, Financial statements may be prepared on an interim basis, for example,
lenders and other creditors of the parent in their assessment of future net three months, six months or nine months.
cash inflows to the parent.
Interim financial statements are not required but optional.
This is because net cash inflows to the parent include distributions to the However, financial statements must be prepared on an annual basis or a
parent from its subsidiaries. period of twelve months.

Consolidated financial statements are not designed to provide separate Financial statements are prepared for a specified period of time and
information about the assets, liabilities equity, income and expenses of a provide information about:
particular subsidiary.
a. Assets, liabilities and equity at the end of the reporting period.
A subsidiary's own financial statements are designed to provide such b. Income and expenses during the reporting period
information.
● To help users of financial statements to identify and assess
change in trends, financial statements also provide comparative
Unconsolidated financial statements information for at least one preceding reporting period.
● Financial statements may include information about
Unconsolidated financial statements are designed to provide information transactions and other events that occurred after the end of
about the parent's assets, liabilities, income and expenses and not about reporting period if the information is necessary to meet the
those of the subsidiaries. general objective of financial statements.

Such information can be useful to the existing and potential investors,

lenders and other creditors of the parent because a-claim against the UNDERLYING ASSUMPTIONS
parent typically does not give the holder of that claim against Accounting assumptions are the basic notions or fundamental premises
subsidiaries. on which the accounting process is based. Accounting assumptions are
also known as postulates. Like a building structure that requires a solid
Information provided in unconsolidated financial statements is typically foundation to avoid or prevent future collapse and provide room for
not sufficient to meet the requirement needs of primary users. expansion, and so with accounting.

Accordingly, when consolidated financial statements are required, Accounting assumptions serve as the foundation or bedrock of
unconsolidated financial statements cannot serve as substitute for accounting in order to avoid misunderstanding but rather enhance the
consolidated financial statements. understanding and usefulness of the financial statements.

Combined financial statements The Conceptual Framework for Financial Reporting mentions only one
assumption, namely going concern.
However, implicit in accounting are the basic assumptions of accounting
Combined financial statements provide financial information about the entity, time period and monetary unit.
assets, liabilities, equity, income and expenses of two or more entities not Going concern
linked with parent and subsidiary relationship.
The going concern or continuity assumption means that in the absence of
evidence to the contrary, the accounting entity is viewed as continuing in
operation indefinitely.
Reporting entity
In other words, the financial statements are normally prepared on the
A reporting entity is an entity that is required or chooses to prepare assumption that the entity will continue in operations for-the foreseeable
financial statements. future.

The going concern postulate is the very foundation of the cost principle.
The reporting entity can be a single entity or a portion of an entity, or can
comprise more than one entity. Thus, assets are normally recorded at cost. As a rule, market values are
ignored.
A reporting entity is not necessarily a legal entity.
However, some new standards require measurement of certain assets at
Accordingly, the following can be considered a reporting fair value.
entity:
If there is evidence that the entity would experience large and persistent
a. Individual corporation, partnership or losses or that the entity's operations are to be terminated, the going
proprietorship. concern assumption is abandoned.
b. The parent alone. In this case, the users of the statements will have a great interest in the
c. The parent and its subsidiaries as single reporting
amount of cash that will be generated from the entity's assets in the short
entity
term.
d. Two or more entities without parent and subsidiary relationship
as a single reporting entity.
e. A reportable business segment of an entity. Accounting entity

Reporting period In financial accounting, the accounting entity is the specific business
organization, which may be a proprietorship, partnership or corporation.
The reporting period is the period when financial statements are prepared Under this assumption, the entity is separate from the owners, managers,
for general purpose financial reporting. and employees who constitute the entity.
Accordingly, the transactions of the entity shall not be merged with the Monetary unit
transactions of the owners.
▪ The monetary unit assumption has two aspects, namely
quantifiability and stability of the peso.
The reason for the entity assumption is to have a fair presentation of
financial statements. ▪ The quantifiability aspect means that the assets, liabilities,
equity. income and expenses should be stated in terms of a unit
of measure which is the peso in the Philippines.
The personal transactions of the owners shall not be allowed to distort the ▪ How awkward to see financial statements without any common
financial statements of the entity. unit of measure. Such statements would be largely
unintelligible and incomprehensible.
For example, the cash invested by the proprietor is treated as an asset of ▪ The stability of the peso assumption means that the purchasing
the proprietorship. power of the peso is stable or constant and that its instability is
insignificant and therefore may be ignored.
If an enterprising entrepreneur owns department store, restaurant and ▪ The stable peso postulate is actually an amplification of the
bookstore, separate statements shall be prepared for each business in going concern assumption so much so that adjustments are
order to determine which business is profitable. unnecessary to reflect any changes in purchasing power.
▪ The accounting function is to account for nominal pesos only
and not for constant pesos or changes in purchasing power.
Each business is an independent accounting entity.
▪ In today's world, the assumption that the peso is a stable
When a major shareholder of a corporation borrows money from a bank measure over time is not necessarily valid.
on his own personal account, the loan is a liability of the shareholder ▪ Consider an equipment that was imported 10 years ago from
alone and not of the corporation. the United States for $100,000 when the exchange rate was
P35 to $1 or an equivalent of
The shareholder is not the corporation and the corporation is not the ▪ If the same equipment is purchased now and assuming there is
shareholder. no change in the $100,000 purchase price, the replacement cost
However, where parent and subsidiary relationship exists, consolidated
in terms of pesos would be in the vicinity of considering a
statements for the affiliates are usually made because for practical and
current exchange rate of P54 to $1.
economic purposes, the parent and the subsidiary are a "single economic
▪ Obviously, there is a significant gap between historical cost and
entity".
current replacement cost.
▪ In this regard, an entity may choose the revaluation model as
The consolidation, however, does not eliminate the legal boundary an accounting policy.
segregating the affiliated entities.
(Chapter 5)
Accounting will continue to be done separately for each entity.
ELEMENTS OF FINANCIAL STATEMENTS

Time period Financial statements portray the financial effects of transactions and
other events by grouping them into broad classes according to their
economic characteristics.
▪ A completely accurate report on the financial position and These broad classes are termed the elements of financial statements.
performance of an entity cannot be obtained until the entity is
finally dissolved and liquidated.
The elements of financial statements refer to the quantitative
▪ Only then can the final net income and net worth of the entity
information reported in the statement of financial position and income
be determined precisely.
statement.
▪ However, users of financial information need timely
information for making an economic decision.
▪ It becomes necessary therefore to prepare periodic reports on
The elements of financial statements are the "building blocks" from
financial position, performance and cash flows of an entity.
which financial statements are constructed.
▪ The time period assumption requires that the indefinite life of
an entity is subdivided into accounting periods which are
usually of equal length for the purpose of preparing financial The presentation of these elements in the statement of financial position
reports on financial position, performance and cash flows. and the income statement involves a process of classification and
▪ By convention, the accounting period or fiscal period is one subclassification.
year or a period of twelve months.
For example, assets and liabilities may be classified by their nature or
▪ The "one-year period" is traditionally the accounting period
function in the business of the entity in order to display information in a
because usually it is after one year that government reports are
manner most useful to users for purposes of making economic decisions.
required.
▪ The accounting period may be a calendar year or a natural
business year. The elements directly related to the measurement of financial position
▪ A calendar year is a twelve-month period that ends on are:
December 31. a. Asset
b. Liability
A natural business year is a twelve-month period that ends on any month c. Equity
when the business is at the lowest or experiencing slack season.
The elements directly related to the measurement of financial
performance are:
 a. Income The economic resource is the present right that contains the potential and
b. Expense not the future economic benefits that the right may produce.

An economic resource could produce economic benefits if an entity is

The Conceptual Framework identifies no elements that are unique to the
entitled:
statement of changes in equity because such statement comprises items
that appear in the statement of financial position and the income a. To receive contractual cash flows
statement,
b. To exchange economic resources with another party on favorable
terms
Equity is the residual interest in the assets of the entity after deducting all c. To produce cash inflows or avoid cash outflows
of the liabilities. d. To receive cash by selling the economic resource
e. To extinguish a liability by transferring an economic resource

ASSET
Control of an economic resource
Under the Revised Conceptual Framework, an asset is defined as o
present economic resource controlled by the entity as a result of past An entity controls an asset if it has the present ability to direct the use of
events. the asset and obtain the economic benefits that flow from it,
● An economic resource is a right that has the potential to
produce economic benefits. Control also includes the ability to prevent others from using such asset
● The new definition clarifies that an asset is an economic and therefore preventing others from obtaining the economic benefits
resource and that the potential economic benefits no longer from the asset.
need to be expected to flow to the entity.
Control may arise if an entity enforces legal rights,
Essential characteristics of asset
a. The asset is a present economic resource. If there are no legal rights, control can still exist if an entity has other
b. The economic resource is a right that has the potential to produce means of ensuring that no other party can benefit from an asset.
economic benefits.
c. The economic resource is controlled by the entity as a result of past For example, an entity has access to technical know-how and has the
events. ability to keep this know-how secret.
Right

Rights that have the potential to produce economic benefits may take the LIABILITY
following forms:
Under the Revised Conceptual Framework, a liability is defined as
1. Rights that correspond to an obligation of another entity present obligation of an entity to transfer an economic resource as a
result of past events.
a. Right to receive cash
b. Right to receive goods or services ● The new definition clarifies that a liability is the obligation to
c. Right to exchange economic resources with another party on transfer an economic resource and not the ultimate outflow of
favorable terms economic benefits.
d. Right to benefit from an obligation of another party if a ● The outflow of economic benefits no longer needs to be
specified uncertain future event occurs expected similar to the definition of an asset.
● The new definition of liability to some extent is inconsistent
with the definition of liability under IAS 37.
2. Rights that do not correspond to an obligation of another entity
● In case of conflict, the IASB stated that the requirements of a
a. Right over physical objects, such as property, plant and Standard shall always prevail over the Conceptual Framework.
equipment or inventories Essential characteristics of liability
b. Right to intellectual property
a. The entity has an obligation.
3. Rights established by contract or legislation such as owning a The entity liable must be identified. It is not necessary that the payee
debt instrument or an equity instrument or owning a registered patent. or the entity to whom the obligation is owed be identified.
b. The obligation is to transfer an economic resource.
c. The obligation is a present obligation that exists as a result of past
Potential to produce economic benefits
event.
This means that a liability is not recognized until it is incurred.
An, economic resource is a right that has the potential to produce
economic benefits.
Obligation
An obligation is a duty or responsibility that an entity has no practical
For the potential to exist, it does not need to be certain or even likely that ability to avoid. Obligations can either be legal or constructive.
the right will produce economic benefits.
Obligations may be legally enforceable as a consequence of a binding
It is only necessary that the right already exists. contract or statutory requirement.

A right can meet the definition of an economic resource even if the This is normally the case, for example, with accounts payable for goods
probability that it will produce economic benefit is low. and services received.
Constructive obligations arise from normal business practice, custom and
a desire to maintain good business relations or act in an equitable Definition of expense
manner.
Expense is defined as decreases in assets or increases in liabilities that
For example, an entity decides as a matter of policy to rectify faults in result in decreases in equity, other than those relating to distributions to
the products even when these become apparent after the warranty period. equity holders.

Transfer of an economic resource ● The definition of expense has changed to reflect the change in
the definition of asset and liability.
Obligations to transfer an economic resource include: ● Expenses encompass losses as well as those expenses that arise
a. Obligation to pay cash in the course of the ordinary regular activities.
b. Obligation to deliver goods or noncash resources ● Expenses that arise in the course of ordinary regular activities
include cost of goods sold, wages and depreciation.
c. Obligation to provide services at some future time
● Losses do not arise in the course of the ordinary regular
d. Obligation to exchange economic resources with another party on
activities and include losses resulting from disasters.
unfavorable terms
e. Obligation to transfer an economic resource if specified uncertain
● Examples include losses from fire, flood, storm from surge,
future event occurs
disposal tsunami and hurricane, as well as those arising
noncurrent assets.
Past event
An obligation exists as a result of past event if both of the following (Chapter 6)
conditions are satisfied: Recognition

a. An entity has already obtained economic benefits. The Revised Conceptual Framework defines recognition as the process
b. An entity must transfer an economic resource. of capturing for inclusion in the financial statements an item that meets
the definition of an asset, liability, equity, income or expense.
Definition of income Recognition links the elements to the statement of financial position and
statement of financial performance.
Income is defined as increases in assets or decreases in liabilities that
result in increases in equity, other than those relating to contributions The statements are linked because the recognition of an item in one
from equity holders. statement requires the recognition of the same item in another statement.

Recognition criteria
The definition of income has changed to reflect the change in the
definition of asset and liability. Only items that meet the definition of an asset, a liability or equity are
recognized in the statement of financial position.
The definition of income encompasses both revenue and gains.
Similarly, only items that meet the definition of income or expense are
recognized in the statement of financial performance.
Revenue arises in the course of the ordinary regular activities and is
referred to by variety of different names including sales, fees, interest, An asset or liability and any corresponding income or expense can exist
dividends, royalties and rent. even if the probability of inflow or outflow of the benefits is low.
The essence of revenue is regularity.
Point of sale income recognition
Gains represent other items that meet the definition of income and do not
arise in the course of the ordinary regular activities. The basic principle of income recognition is that income shall be
Gains include gain from disposal of noncurrent asset, unrealized gain on recognized when earned.
investment and gain from expropriation.
With respect to sale of goods in the ordinary course of business, the point
Statement of financial performance of sale is unquestionably the point of income recognition.

Expense recognition
● The Revised Conceptual Framework introduces the term
statement of financial performance. The basic expense recognition means that expenses are recognized when
● This statement refers to the statement of profit or loss and a incurred.
statement presenting other comprehensive income.
● The statement of profit or loss is the primary source of The expense recognition principle is the application of the matching
information about an entity's financial performance. As general principle. The matching principle requires that those costs and expenses
rule, all income and expenses are included in profit or loss. incurred in earning a revenue shall be reported in the same period.
● However, in developing accounting standards, there are Some
items of income and expenses that are included in other The matching principle has three applications, namely:
comprehensive income and not in profit or loss if such
presentation would provide more relevant and faithfully a) Cause and effect association
represented information about financial performance. b) Systematic and rational allocation
● There are instances that an amount in other comprehensive c) Immediate recognition
income in one reporting period may be recycled to profit or
loss in another reporting period. Cause and effect association
● Such recycling is permitted as long as it would result to
relevant and faithfully represented information about financial Under this principle, the expense is recognized when the revenue is
performance. already recognized
The matching of cost with revenue involves the simultaneous or Historical cost updated
combined recognition of revenue and expenses that result directly and
jointly from the same transactions or events. 1. Historical cost of an asset is updated because of:
a) Depreciation and amortization
The best example is the cost of merchandise inventory. b) Payment received as a result of disposing part or all
of the asset
Such cost is considered as an asset in the meantime that the merchandise c) Impairment
is on hand. When the merchandise is sold, the cost thereof is expensed in d) Accrual of interest to reflect any financing
the form of “cost of goods sold” because at such time revenue may be component of the asset
recognized. e) Amortized cost measurement of financial asset
2. Historical cost of a liability is updated because of:
Systematic and rational allocation
a) Payment made or satisfying an obligation to deliver
Under this principle, some costs are expensed by simply allocating goods
them over the period benefited. b) Increase in value of the obligation to transfer
economic resources such that the liability becomes
When economic benefits are expected to arise over several accounting onerous
periods and the association with income can only be broadly or indirectly c) Accrual of interest to reflect any financing
determined, expenses are recognized on the basis of systematic and component of the liability
allocation procedures. d) Amortized cost measurement of financial liability
Immediate recognition Current value
Under this principle, the cost incurred is expensed outright because of Current value includes:
uncertainty of future economic benefits or difficulty of reliably
association certain costs with future revenue. a) Fair value
b) Value in use for asset
An expense is recognized immediately: c) Fulfillment value for liability
d) Current cost
a) When an expenditure produces no future economic benefit.
b) When cost incurred does not qualify or ceases to qualify for Fair value
recognition as an asset.
Fair value is an exit price or exit value. Fair value can be observed
Derecognition directly using market price of the asset or liability in an active market.
Derecognition is defined as the removal of all or part of a recognized Fair value of an asset is the price that would be received to sell an asset
asset or liability from the statement of financial position. Derecognition in an orderly transaction between market participants at measurement
normally occurs when an item no longer meets the definition of an asset date.
or a liability.
Fair value of liability is the price that would be paid to transfer a liability
Derecognition of an asset occurs when the entity loses control of all or in an orderly transaction between market participants at the measurement
part of the asset. date.
Derecognition of a liability occurs when the entity no longer has a
present obligation for all or part of the liability.
Value in use
Measurement
Value in use is the present value of the cash flows that an entity expects
Measurement is defined as quantifying in monetary terms the elements to derive from the use of an asset and from the ultimate disposal.
in the financial statements.
Fulfillment value
The Revised Conceptual Framework mentions two categories:
Fulfillment value is the present value of cash that an entity expects to
a) Historical cost transfer in paying or settling a liability.
b) Current value
Current cost
Historical cost
Current cost of an asset is the cost of an equivalent asset at the
Historical cost is the entry price or entry value to acquire an asset or to measurement date comprising the consideration paid and transaction
incur a liability. cost.
The historical cost or original acquisition cost of an asset is the cost Current cost of a liability is the consideration that would be received less
incurred in acquiring or creating the asset comprising the consideration any transaction cost at measurement date.
paid plus transaction cost.
Selecting a measurement basis
The historical cost of a liability is the consideration received to incur the
liability minus transaction cost. In selecting a measurement basis for an asset or a liability and for the
related income and expense, it is necessary to consider the nature of the
An application of the historical cost measurement is to measure financial information that the measurement basis will produce.
asset and financial liability at amortized cost. The amortized cost reflects
the estimate of future cash flows discounted at a rate determined at initial
recognition.
The information produced by the measurement basis must be useful to The capital maintenance approach means that net income occurs only
the users of financial statements. To achieve this, the information must be after the capital used from the beginning of the period is maintained.
both relevant and faithfully represented.
The distinction between return of capital and return on capital is
Historical cost is the measurement basis most commonly adopted in important to the understanding of net income.
preparing financial statements. In many situations, it is simpler and less
costly to measure historical cost than it is to measure a current value. Shareholders invest in equity to earn a return on capital or an amount in
excess of their original investment. Return of capital is an erosion of the
capital invested in the entity.
(Chapter 7)
The Conceptual Framework considered two concepts of capital
Presentation and disclosure maintenance or well-offness, namely financial capital and physical
A reporting entity communicates information about its assets, liabilities, capital.
equity, income and expenses by presenting and disclosing information in Financial capital
the financial statements.
Under a financial capital concept, such invested money or invested
Effective communication of information in financial statements: purchasing power, capital is synonymous with net assets or equity of the
a) makes the information more relevant and contributes to a entity.
faithful representation of an entity’s assets, liabilities, income Financial capital is the monetary amount of the net assets contributed by
and expenses. shareholders and the amount of the increase in net assets resulting from
b) enhances the understandability and comparability of earnings retained by the entity.
information in the financial statements.
c) supported by not duplicating information in different parts of Net income under financial capital
the financial statements.
Under the financial capital concept, net income occurs “when the
Classification nominal amount of the net assets at the end of the year exceeds the
nominal amount of the net assets at the beginning of the period, after
Classification is the sorting of assets, liabilities, equity, income and excluding distributions to and contributions by owners during the
expenses on the basis of shared or similar characteristics. period.”
Classification of income and expenses Illustration
Income and expenses are classified as components of profit and loss and The following assets, liabilities and other financial data pertain to the
components of other comprehensive income. current year:
● The Revised Conceptual Framework has introduced the term
statement of financial performance to refer to the statement of January 1 December 31
profit or loss together with the statement presenting other
comprehensive income. Total assets 1,500,000 2,500,000
● The components of other comprehensive income are Total liabilities 1,000,000 1,200,000
subsequently recycled or reclassified to profit or loss or Additional investments during the year 400,000
retained earnings. Dividends paid during the year 300,000

Aggregation Computation of net income

Aggregation is the adding together of assets, liabilities, equity, income Net assets – December 31 1,300,000
and expenses that have similar or shared characteristics and are included Add: Dividends paid 300,000
in the same classification.
Total 1,600,000
Aggregation makes information more useful by summarizing a large Less: Net assets – January 11, 2020 500,000
volume of detail. However, aggregation may conceal some of the detail. Additional investments 400,000
900,000
Typically, the statement of financial position and the statement of
financial position and the statement of financial performance provide Net income 700,000
summarized or condensed information. More detailed information is
provided in the notes to financial statements. Note that the amount of net assets is “the excess of total assets over the
total liabilities”.
This is the reason this approach is also known as the net assets approach.
Physical capital

Physical capital is the quantitative measure of the physical productive

Capital Maintenance capacity to produce goods and services.
The financial performance of an entity is determined using two The physical productive capacity may be based on, for example, units of
approaches, namely transaction approach and capital maintenance output per day or physical capacity of productive assets to produce goods
approach. and services.
The transaction approach is the traditional preparation of an income This concept requires that productive assets be measured at current cost,
statement. rather than historical cost.
 Productive assets include inventories and property, plant and equipment. Financial statements also show the results of the management's
The current cost for these productive assets must be maintained in order stewardship of the resources entrusted to it.
that physical capital is also maintained.
To meet this objective, financial statements provide information about
Under this concept, net income occurs “when the physical productive the following:
capital of the entity at the end of the year exceeds the physical productive a. Assets
capital at the beginning of the period, also after excluding distributions b. Liabilities
to and contributions from owners during the period.” c. Equity
d. Income and expenses, including gains and losses
Illustration
e. Contributions by and distributions to owners in their capacity
Assume in the previously given illustration, the net assets of P500,000 on as owners.
January 1 had a current cost of P800,000 by reason of inflationary f. Cash flows
condition.
Frequency of reporting
Net assets – December 31 1,300,000
Financial statements shall be presented at least annually.
Add: Dividends paid 300,000
When an entity's end of reporting period changes and financial
Total 1,600,000 statements are presented for a period longer or shorter than one year, an
Less: Net assets at current cost, January 11, 2020 800,000 entity shall disclose:
Additional investments 400,000
1,200,000 a. The period covered by the financial statements.
b. The reason for using a longer or shorter period.
Net income 400,000
c. The fact that amounts presented in the financial statements are not
(Chapter 8) entirely comparable.

FINANCIAL STATEMENTS Statement of financial position

Financial statements are the means by which the information statement of financial position is a formal statement showing the three
accumulated and processed in financial accounting is periodically elements comprising financial position, namely assets, liabilities and
communicated to the users. equity.
The financial statements are the end product or main output of the Investors, creditors and other statement users analyze the statement of
financial accounting process. Financial statements are a structured financial position to evaluate such factors as liquidity, solvency and the
financial representation of the financial position and financial need of the entity for additional financing.
performance of an entity.
Definition of asset
General purpose financial statements
An asset is an economic resource controlled by an entity as result of past
An entity shall prepare and present general purpose financial statements event.
in accordance with the International Financial Reporting Standards.
An economic resource is a right that has the potential to produce
General purpose financial statements or simply referred to as financial economic benefits.
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. Classification of assets
Assets are classified only into two, namely current assets and
In other words, general purpose financial statements are directed to all noncurrent assets.
common users and not to specific users.
When an entity supplies goods or services within a clearly identifiable
Components of financial statements operating cycle, the separate classification of current and noncurrent
assets is a useful information by• distinguishing between net assets that
A complete set of financial statements comprises the following are continuously circulating as working capital from the net assets used
components: in long-term operations.
1. Statement of financial position
2. Income statement
The operating cycle of an entity is the time between the acquisition of
3. Statement of comprehensive income assets for processing and their realization in cash or cash equivalents.
4. Statement of changes in equity
5. Statement of cash flows
When the entity's normal operating cycle is not clearly identifiable, the
6. Notes, comprising a summary of significant accounting
duration is assumed to be twelve months.
policies and other explanatory notes

Current assets
PAS 1, paragraph 66, provides that an entity shall classify an asset as
current when:
Objective financial statements
a. The asset is cash or cash equivalent unless the asset is restricted
The objective of financial statements is to provide information about the
to settle a liability for more than twelve months after the
financial position, financial performance and cash flows of an entity that
reporting period.
is useful to a wide range of users in making economic decisions.
b. The entity holds the asset primarily for the purpose of trading.
 c. The entity expects to realize the asset within twelve months
after the reporting period. Definition of liability
d. The entity expects to realize the asset or intends to sell or ● A liability is a present obligation of an entity to transfer an
consume it within the entity's normal operating cycle. economic resource as a result of past event.
● An obligation is a duty or responsibility that an entity has no
Presentation of current assets practical ability to avoid.
Current assets are usually listed in the order of liquidity, PAS 1, ● An obligation can either be legal or constructive.
paragraph 54, provides that as a minimum, the line items under current ● A liability is classified as current and noncurrent.
assets are:
Current liabilities
a. Cash and cash equivalents PAS 1, paragraph 69, provides that an entity shall classify a liability as
b. Financial assets at fair value such as trading securities and current when:
other investments in quoted equity instruments
c. Trade and other receivables a. The entity expects to settle the liability within the entity's
normal Operating cycle.
d. Inventories
e. Prepaid expenses b. The entity holds the liability primarily for the purpose of
trading.
PAS 1, paragraph 66, simply states that "an entity shall classify all other c. The liability is due to be settled within twelve months after the
assets not classified as current as noncurrent". In other words, what is not reporting period.
included in the definition of current assets is deemed excluded. All others
d. The entity does not have an unconditional right to defer
are classified as noncurrent assets. Accordingly, noncurrent assets
settlement of the liability for at least twelve months after the
include the following:
reporting period.
a. Property, plant and equipment
b. Long-term investment
c. Intangible assets The term "trade and other payables" is a line item for accounts payable,
d. Deferred tax assets notes payable, accrued interest on note payable, dividends payable and
e. Other noncurrent assets accrued expenses.

No objection can be raised if the trade accounts and notes payable are
Property, plant and equipment separately presented.

PAS 16, paragraph 6, defines property, plant and equipment as "tangible

assets which are held by an entity for use in production or supply of
Noncurrent liabilities
goods and services, for rental to others, or for administrative purposes,
and are expected to be used during more than one period". The term "noncurrent liabilities" is also a residual definition.

Examples of property, plant and equipment include land, building, PAS 1, paragraph 69, provides that all liabilities not classified as current
machinery, equipment, furniture, fixtures, patterns, molds, dies and tools. are classified as noncurrent.

Most property, plant and equipment, except land, are presented at cost a. Noncurrent portion of long-term debt
less accumulated depreciation. b. Finance lease liability
c. Deferred tax liability
Long-term investments
d. Long-term obligations to company officers
The International Accounting Standards Committee define g investment
e. Long-term deferred revenue
as "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
Currently maturing long-term debt
obtained through trading relationships"
A liability which is due to be settled within twelve months after the
reporting period is classified as current, even if:
Intangible assets
a. The original term was for a period longer than twelve months.
An intangible asset is simply defined as an identifiable nonmoneta.1Y b. An agreement to refinance or to reschedule payment on a
asset without physical substance. long-term basis is completed after the reporting period and
before the financial statements are authorized for issue
The common examples of identifiable intangible assets include patent,
franchise, copyright, lease right, trademark and computer software. However, if the refinancing on a long-term basis is completed on or
before the end of the reporting period, the refinancing is an adjusting
An example of an unidentifiable intangible asset is goodwill. event and therefore the obligation is classified as noncurrent.

Discretion to refinance
Other noncurrent assets
If the entity has the discretion to refinance or roll over an obligation for
Other noncurrent assets are those assets that do not fit into the definition at least twelve months after the reporting period under an existing loan
of the previously mentioned noncurrent assets. facility, the obligation is classified as noncurrent even if it would
otherwise be due within a shorter period.
Examples of other noncurrent assets include long-term advances to
officers, directors, shareholders and employees, or abandoned property The reason for this treatment is that such obligation is considered to form
and long-term refundable deposit. part of the entity's long-term refinancing because the entity has an
unconditional right under the existing loan agreement to defer payment Philippine Term IAS Term
for at least twelve months after the end of the reporting period. Capital stock Share capital

Note that the refinancing or rolling over must be at the discretion of the Subscribed capital stock Subscribed share capital
entity. Preferred stock Preference share capital
Otherwise, if the refinancing or rolling over is not at the discretion of the Common stock Ordinary share capital
entity, the obligation is classified as a current liability. Additional paid capital Share premium
Retained earnings (deficit) Accumulated profits (losses)
Covenants Retained earnings appropriated Appropriation reserve
Covenants are often attached to borrowing agreements which represent Revaluation surplus Revaluation reserve
undertakings by the borrower. Treasury stock Treasury share

Covenants are actually restrictions on the borrower as to undertaking

further borrowings, paying dividends, maintaining specified level of
working capital and so forth.
Notes to financial statements
Notes to financial statements provide narrative description or
Under these covenants, if certain conditions relating to the borrower's
disaggregation of items presented in the financial statements and
financial situation are breached, the liability becomes payable on
information about items that do not qualify for recognition.
demand.

Notes 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.
Effect of breach of covenants
In other words, notes to financial statements are used to report
PAS 1, paragraph 74, provides that the liability is classified as current
information that does not fit into the body of the financial statements in
even if the lender has agreed, after the reporting period and before the
order to enhance the understandability of the financial statements.
statements are authorized for issue, not to demand payment as a
consequence of the breach.
The purpose of the notes to financial statements is "to provide the
necessary disclosures required by Philippine Financial Reporting
This liability is classified as current because at reporting date the
Standards."
borrower does not have an unconditional right to defer payment for at
least twelve months after the reporting period.
Forms of statement of financial position
However, Paragraph 75 provides that the liability is classified as In practice, there are two customary forms in presenting the statement of
noncurrent if the lender has agreed on or before the end of reporting financial position, namely:
period to provide a grace period ending at least twelve months after the
end of reporting period.
a. Report form

Definition of equity This form sets forth the three major sections in a downward
The term equity is the residual interest in the assets of the entity after sequence of assets, liabilities and equity.
deducting all of its liabilities.

Simply stated, equity means "net assets" or total assets minus liabilities. b. Account form

The terms used in reporting the equity of an entity depending on the form As the title suggests, the presentation follows that of an account,
of the business organization are: meaning, the assets are shown on the left side and the liabilities
and equity on the right side of the statement of financial position.

a. Owner's equity in a proprietorship

b. Partners' equity in a partnership
c. Stockholders' equity or shareholders' equity in a corporation The following is an illustration of the two forms of statement of financial
position.
However, the term equity may simply be used for all business entities. Report form

Under PAS 1, paragraph 7, the holders of instruments classified as equity SAMPLAR COMPANY
are simply known as owners. Statement of Financial Position
December 31, 2020

Shareholders' equity
Shareholders' equity is the residual interest of owners in the net assets of
a corporation measured by the excess of assets over liabilities.

Generally, the elements constituting shareholders’ equity with their

equivalent IAS are:
 Current Assets: Note
Cash and cash equivalents (1) 500,000
Financial assets at fair value 200,000
Trade and other receivables (2) 700,000
Inventories (3) 900,000
Prepaid expenses (4) 50,000
Total current assets 2,350,000

Noncurrent assets:
Property, plant and equipment (5) 5,000,000
Investment in associate, at 1,000,000
equity
Long-term investments (6) 5,100,000
Intangible assets (7) 2,000,000
Other noncurrent assets (8) 100,000
Total noncurrent assets 13,200,000
Total assets 15,550,000

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:
Trade and other payables (9) 750,000
Note payable – short-term debt 400,000
Current portion of bonds payable 200,000
Warranty liability 50,000
Total current liabilities 1,400,000

Noncurrent liabilities: SS hirap ayusin pashnea

Bonds payable – remaining 1,800,000
portion
Note payable – due July 1, 2022 600,000
Deferred tax liability 100,000 Note 7 – Intangible assets
Total noncurrent 2,500,000 Patent 500,000
liabilities Franchise 1,500,000
Total intangible assets 2,000,000

Shareholders’ equity:
Share capital, ₱100 par 5,000,000 Note 8 – Other noncurrent
Reserves (10) 3,000,000 assets
Retained earnings 3,650,000 Long-term refundable deposit 20,000
Total shareholders’ equity 11,650,000
Long-term advances to officers 80,000
Total liabilities and shareholder’s equity 15,550,000 Total other noncurrent assets 100,000

Note 1 — Cash and cash equivalents

Cash on hand 40,000
Note 9 – Trade and other
Cash in bank 300,000
payables
Petty cash fund 10,000 Accounts payable 350,000
BSP Treasury bill, purchased on December 1, 2020
Notes payable 150,000
and due March 1, 2021 150,000 Accrued interest on note payable 15,000
Income tax payable 50,000
Total cash and cash equivalents 500,000
Dividends payable 100,000

Note 2 – Trade and other receivables Accrued expenses 85,000

Accounts receivable 580,000 Total trade and other payables 750,000

Allowance for doubtful account (20,000)
Notes receivable 100,000 Note 10 – Reserves
2,000,000
Accrued interest on notes receivable 10,000 Share premium
Retained earnings appropriated for contingencies 1,000,000
Advances to employees, collectible currently 30,000
Total reserves 3,000,000
Total trade and other receivables 700,000
Line items in statement of financial position
PAS 1, paragraph 54, states that as a minimum, the face of the statement
of financial position shall include the following line items:

1. Cash and cash equivalents

2. Financial assets (other than 1,3 and 6)
3. Trade and other receivables
4. Inventories
5. Property, plant and equipment
6. Investment in associates accounted for by the equity method
7. Intangible assets
8. Biological assets
9. Total od assets classified as held for sale and assets included in
disposal group classified as held for sale
10. Trade and other payables
11. Current tax liability
12. deferred tax asset and deferred tax liability
13. Provisions
14. Financial liabilities (other than 11 and 14)
15. Liabilities included in disposal group classified as held for sale
16. Noncontrolling interest
17. Share capital and reserves
PAS 1, paragraph 57, provides that the standard does not prescribe the
order or format in which items are to be presented in the statement of
financial position.
(Yours,Axl)