lOMoARcPSD|53638477

CFAS- Midterms - Lecture notes 1

Accountancy (University of San Carlos)

Scan to open on Studocu

Studocu is not sponsored or endorsed by any college or university

Downloaded by Nathaniel Calabroso (nathanielcalabroso@gmail.com)
 lOMoARcPSD|53638477

OVERVIEW
Accounting is “the process of identifying, measuring, and communicating economic
information to permit informed judgment and decisions by users of information.”

Three important activities

1. Identifying - the process of analyzing events and transactions to determine whether or not
they will be recognized. Only accountable events are recognized.

2. Measuring - involves assigning numbers, normally in monetary 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.

1. External events – events that involve an external party.

• Exchange (reciprocal transfer) – reciprocal giving and

receiving

• Non-reciprocal transfer – “one way” transaction

• External event other than transfer – an event that

involves changes in the economic resources or obligations of an entity
caused by an external party or external source but does not involve
transfers of resources or obligations.

2. Internal events – events that do not involve an external party.

• Production – the process by which resources are transformed

into finished goods.

• Casualty – an unanticipated loss from disasters or other

similar events.

Measurement

The several measurement bases used in accounting include, but not

limited to, the following:

1. historical cost,

2. fair value,

3. present value,

4. realizable value,

5. current cost, and

6. sometimes inflation-adjusted costs.

The most commonly used is historical cost. This is usually combined with the other
measurement bases. Accordingly, financial statements are said to be prepared using a
mixture of costs and values.

Downloaded by Nathaniel Calabroso (nathanielcalabroso@gmail.com)

 lOMoARcPSD|53638477

Valuation by fact or opinion

• When measurement is affected by estimates, the items measured are said to be valued by
opinion.

• When measurement is unaffected by estimates, the items measured are said to be valued by
fact.

Basic purpose of accounting

• The basic purpose of accounting is to provide information about economic activities intended
to be useful in making economic decisions.

Types of accounting information classified as to users’ needs

• General purpose accounting information - designed to meet the common needs of most
statement users. This information is governed by the Philippine Financial Reporting
Standards (PFRSs).

• Special purpose accounting information - designed to meet the specific needs of particular
statement users. This information is provided by other types of accounting, e.g., managerial
accounting, tax basis accounting, etc.

Basic Accounting Concepts

• Double-entry system – each accountable event is recorded in two parts – debit and
credit.

• Going concern - the entity is assumed to carry on its operations for an indefinite
period of time.

• Separate entity – the entity is treated separately from its owners.

• Stable monetary unit - amounts in the financial statements are stated

in terms of a common unit of measure; changes in purchasing power are
ignored.

• Time Period – the life of the business is divided into series of reporting
periods.

• Materiality concept – information is material if its omission or

misstatement could influence economic decisions.

• Cost-benefit – the cost of processing and communicating information

should not exceed the benefits to be derived from it.

Basic Accounting Concepts - Continuation

• Accrual Basis of accounting – effects of transactions are recognized when they

occur (and not as cash is received or paid) and they are recognized in the accounting
periods to which they relate.

Downloaded by Nathaniel Calabroso (nathanielcalabroso@gmail.com)

 lOMoARcPSD|53638477

• Historical cost concept – the value of an asset is determined on the basis of

acquisition cost.

• Concept of Articulation – all of the components of a complete set of financial

statements are interrelated.

• Full disclosure principle – financial statements provide sufficient detail to disclose

matters that make a difference to users, yet sufficient condensation to make the
information understandable, keeping in mind the costs of preparing and using it.

• Consistency concept – financial statements are prepared on the basis of accounting

policies which are applied consistently from one period to the next.

Basic Accounting Concepts - Continuation

• Matching – costs are recognized as expenses when the related revenue is recognized.

• Residual equity theory – this theory is applicable where there are two classes of
shares issued, ordinary and preferred. The equation is “Assets – Liabilities – Preferred
Shareholders’ Equity = Ordinary Shareholders’ Equity.”

• Fund theory – the accounting objective is the custody and administration of funds.

• Realization – the process of converting non-cash assets into cash or claims for cash.

• Prudence (Conservatism) – the inclusion of a degree of caution in the exercise of the

judgments needed in making the estimates required under conditions of uncertainty ,
such that assets or income are not overstated and liabilities or expenses are not
understated.

Common branches of accounting

• Financial accounting - focuses on general purpose financial statements.

• Management accounting – focuses on special purpose financial reports for use by

an entity’s management.

• Cost accounting - the systematic recording and analysis of the costs of materials,
labor, and overhead incident to production.

• Auditing - the process of evaluating the correspondence of certain assertions with

established criteria and expressing an opinion thereon.

Downloaded by Nathaniel Calabroso (nathanielcalabroso@gmail.com)

 lOMoARcPSD|53638477

• Tax accounting - the preparation of tax returns and rendering of tax

advice, such as the determination of tax consequences of certain
proposed business endeavors.

• Government accounting - refers to the accounting for the

government and its instrumentalities, placing emphasis on the custody of public funds,
the purposes for which those funds are committed, and the responsibility and
accountability of the individuals entrusted with those funds.

Four sectors in the practice of accountancy

1. Practice of Public Accountancy - involves the rendering of audit or accounting related

services to more than one client on a fee basis.

2. Practice in Commerce and Industry - refers to employment in the private sector in a

position which involves decision making requiring professional knowledge in the science of
accounting and such position requires that the holder thereof must be a CPA.

3. Practice in Education/Academe – employment in an educational institution which

involves teaching of accounting, auditing, management advisory services, finance, business
law, taxation, and other technically related subjects.

4. Practice in the Government – employment or appointment to a position in an

accounting professional group in the government or in a government–owned and/or controlled
corporation where decision making requires professional knowledge in the science of
accounting, or where civil service eligibility as a CPA is a prerequisite.

Accounting standards in the Philippines

• Philippine Financial Reporting Standards (PFRSs) are Standards and

Interpretations adopted by the Financial Reporting Standards Council (FRSC). They comprise:

1. Philippine Financial Reporting Standards (PFRSs);

2. Philippine Accounting Standards (PASs); and

3. Interpretations

The need for reporting standards

• Entities should follow a uniform set of generally acceptable reporting standards when
preparing and presenting financial statements; otherwise, financial statements would be
misleading.
The term “generally acceptable” means that either:

• the standard has been established by an authoritative accounting rule-making body; or

• the principle has gained general acceptance due to practice over time and has been
proven to be most useful.

The process of establishing financial accounting standards is a democratic process in that a

majority of practicing accountants must agree with a standard before it becomes implemented.

Downloaded by Nathaniel Calabroso (nathanielcalabroso@gmail.com)

 lOMoARcPSD|53638477

CONCEPTUAL FRAMEWORK
Purpose of the Conceptual Framework

• The Conceptual Framework prescribes the concepts for general

purpose financial reporting. Its purpose is to:

• assist the International Accounting Standards Board (IASB) in

dEveloping Standards that are based on consistent concepts;

• assist preparers in developing consistent accounting policies

when no Standard applies to a particular transaction or when a
Standard allows a choice of accounting policy; and

• assist all parties in understanding and interpreting the Standards.

Status of the Conceptual Framework

• The Conceptual Framework is not a PFRS. When there is a

conflict between the Conceptual Framework and a PFRS, the

PFRS will prevail.

• In the absence of a standard, management shall consider the Conceptual Framework in
making its judgment in developing and applying an accounting policy that results in useful
information.

Scope of the Conceptual Framework

The Conceptual Framework is concerned with general purpose financial reporting.

General purpose financial reporting involves the preparation of general purpose financial
statements. The Conceptual Framework provides the concepts regarding the following:

1. The objective of financial reporting

2. Qualitative characteristics of useful financial information

3. Financial statements and the reporting entity

4. The elements of financial statements

5. Recognition and derecognition

6. Measurement

7. Presentation and disclosure

8. Concepts of capital and capital maintenance

Objective of general purpose financial reporting

Downloaded by Nathaniel Calabroso (nathanielcalabroso@gmail.com)

 lOMoARcPSD|53638477

• The objective of general purpose financial reporting is to provide financial

information about the reporting entity that is useful to primary users in making
decisions about providing resources to the entity.

• The objective of general purpose financial reporting forms the foundation of the
Conceptual Framework.

Primary Users

• Primary users – are those who cannot demand information directly from reporting
entities. The primary users are:
(a) Existing and potential investors (b) Lenders and other creditors.

• Only the common needs of primary users are met by the financial statements.

Qualitative Characteristics

I. Fundamental qualitative characteristics

(1) Relevance
(a) Predictive value (b) Feedback value

➢ Materiality – entity-specific aspect of relevance (2) Faithful representation

(a) Completeness (b) Neutrality

(c) Free from error

II. Enhancing qualitative characteristics

(1) Comparability
(2) Verifiability
(3) Timeliness
(4) Understandability

Fundamental vs. Enhancing

• The fundamental qualitative characteristics are the characteristics that make

information useful to users.

• The enhancing qualitative characteristics are the characteristics that enhance

the usefulness of information

Relevance

Information is relevant if it can affect the decisions of users.

Relevant information has the following:

• Predictive value – the information can be used in making predictions

Downloaded by Nathaniel Calabroso (nathanielcalabroso@gmail.com)

 lOMoARcPSD|53638477

• Confirmatory value – the information can be used in confirming

past predictions
➢ Materiality – is an ‘entity-specific’ aspect of relevance.

Faithful Representation

Faithful representation means the information provides a true, correct and complete depiction
of what it purports to represent. Faithfully represented information has the following:

• Completeness – all information necessary for users to understand the

phenomenon being depicted is provided.

• Neutrality – information is selected or presented without bias.

• Free from error – there are no errors in the description and in

the process by which the information is selected and applied.

Enhancing Qualitative Characteristics

1. Comparability–the information helps users in identifying similarities and differences

between different sets of information.

2. Verifiability – different users could reach consensus as to what the information purports
to represent.

3. Timeliness – the information is available to users in time to be able to influence their

decisions.

4. Understandability – users are expected to have:

• reasonable knowledge of business activities; and

• willingness to analyze the information diligently.

Financial statements and the Reporting entity

Objective and scope of financial statements

The objective of general purpose financial statements is to provide financial information about
the reporting entity’s assets, liabilities, equity, income and expenses that is useful in assessing:

• the entity’s ability to generate future net cash inflows; and

• management’s stewardship over economic resources.

Financial statements and the Reporting entity

Reporting period

• Financial statements are prepared for a specific period of time (i.e., the reporting period) and
include comparative information for at least one preceding reporting period.

Going concern

• Financial statements are normally prepared on the assumption that the reporting entity is a
going concern, meaning the entity has neither the intention nor the need to end its
operations in the foreseeable future.

Downloaded by Nathaniel Calabroso (nathanielcalabroso@gmail.com)

 lOMoARcPSD|53638477

Financial statements and the Reporting entity

Reporting entity

• A reporting entity is one that is required, or chooses, to prepare financial statements, and is
not necessarily a legal entity. It can be a single entity or a group or combination of two or more
entities.

Elements of Financial Statements

Asset

• Asset is “a present economic resource controlled by the entity as a result of past events. An
economic resource is a right that has the potential to produce economic benefits.” (Conceptual
Framework 4.3 & 4.4)

Three aspects in the definition of an asset

1. Right – asset refers to a right, and not necessarily to a physical object, e.g.,
the right to use, sell, lease or transfer a building.

2. Potential to produce economic benefits – the right has a potential to

produce economic benefits for the entity that are beyond the benefits
available to all others. Such potential need not be certain or even likely –
what is important is that the right already exists and that, in at least one
circumstance, it would produce economic benefits for the entity.

3. Control – means the entity has the exclusive right over the benefits of an asset and the
ability to prevent others from accessing those benefits.

Liability

• Liability is “a present obligation of the entity to transfer an economic resource as a result of

past events.” (Conceptual Framework 4.26)

Three aspects in the definition of a liability

1. Obligation – An obligation is “a duty or responsibility that an entity has no

practical ability to avoid.” (CF 4.29) An obligation can be either legal
obligation or constructive obligation.

2. Transfer of an economic resource – the obligation has the potential to

require the transfer of an economic resource to another party. Such
potential need not be certain or even likely – what is important is that the
obligation already exists and that, in at least one circumstance, it would
require the transfer of an economic resource.

Downloaded by Nathaniel Calabroso (nathanielcalabroso@gmail.com)

 lOMoARcPSD|53638477

3. Present obligation as a result of past events – A present obligation exists as a

result of past events if:

the entity has already obtained economic benefits or taken an action; and
as a consequence, the entity will or may have to transfer an economic resource that it would
not otherwise have had to transfer. (Conceptual Framework 4.43)

Executory contracts

• An executory contract “is a contract that is equally unperformed – neither party has
fulfilled any of its obligations, or both parties have partially fulfilled their obligations to
an equal extent.” (CF 4.56)

• An executory contract establishes a combined right and obligation to exchange

economic resources.

• The contract ceases to be executory when one party performs its obligation.
➢If the entity performs first, the entity’s combined right and obligation changes to an
asset.
➢If the other party performs first, the entity’s combined right and obligation changes to
a liability.

Equity

• “Equity is the residual interest in the assets of the entity after deducting all its
liabilities.” (Conceptual Framework 4.63)

• Equity equals Assets minus Liabilities

Income and Expenses

• Income
Income is “increases in assets, or decreases in liabilities, that result in increases in equity, other
than those relating to contributions from holders of equity claims.” (Conceptual Framework
4.68)

• Expenses
Expenses are “decreases in assets, or increases in liabilities, that result in decreases in equity,
other than those relating to distributions to holders of equity claims.” (Conceptual Framework
4.69)

Recognition & Derecognition

The recognition process

• Recognition is the process of including in the statement of financial position or the

statement(s) of financial performance an item that meets the definition of one of the financial
statement elements (i.e., asset, liability, equity, income or expense). This involves recording the
item in words and in monetary amount and including that amount in the totals of either of
those statements.

Downloaded by Nathaniel Calabroso (nathanielcalabroso@gmail.com)

 lOMoARcPSD|53638477

Recognition & Derecognition

Recognition criteria

• An item is recognized if:

• it meets the definition of an asset, liability, equity, income or

expense; and

• recognizing it would provide useful information, i.e., relevant and faithfully represented
information.

Recognition & Derecognition

Relevance

• The recognition of an item may not provide relevant information if,

for example:

• it is uncertain whether an asset or liability exists; or

• an asset or liability exists, but the probability of an inflow or

outflow of economic benefits is low. (Conceptual Framework 5.12)

However, the presence of one or both of the foregoing does not automatically lead to the non-
recognition of an item. Other factors should also be considered.

Recognition & Derecognition

Faithful representation

• The level of measurement uncertainty and other factors can affect an item’s faithful
representation, but not necessarily its relevance.

Measurement uncertainty

• Measurement uncertainty exists if the asset or liability needs to be estimated. A high

level of measurement uncertainty does not necessarily lead to the non-recognition of an
asset or liability if the estimate provides relevant information and is clearly and
accurately described and explained.

• However, measurement uncertainty can lead to the non-recognition of

an asset or a liability if making an estimate is exceptionally difficult or exceptionally
subjective.

Recognition & Derecognition

Derecognition

• Derecognition is the removal of a previously recognized asset or liability from the

entity’s statement of financial position.

• Derecognition occurs when the item ceases to meet the definition of an asset or
liability.

Downloaded by Nathaniel Calabroso (nathanielcalabroso@gmail.com)

 lOMoARcPSD|53638477

Unit of account

• Unit of account is “the right or the group of rights, the obligation or

the group of obligations, or the group of rights and obligations, to which recognition criteria
and measurement concepts are applied.” (Conceptual Framework 4.48)

Measurement bases

1. Historical cost 2. Current value

• Fair value

• Value in use and fulfilment value

• Current cost

Historical cost

• The historical cost of:

• an asset is the consideration paid to acquire the asset plus

transaction costs.

• a liability is the consideration received to incur the liability minus transaction costs.

Historical cost is updated over time to depict the following:

✓ !Depreciation, amortization, or impairment of assets

✓ !Collections or payments that extinguish part or all of the asset or liability

✓ !Unwinding of discount or premium when the asset or liability is measured at

amortized cost

Fair value

• Fair value is “the price that would be received to sell an asset, or paid to transfer a liability, in
an orderly transaction between market participants at the measurement date.” (Conceptual
Framework 6.12)

Value in use and fulfilment value

• Value in use is “the present value of the cash flows, or other economic benefits, that an
entity expects to derive from the use of an asset and from its ultimate
disposal.” (Conceptual Framework 6.17)

• Fulfilment value is “the present value of the cash, or other economic resources, that an
entity expects to be obliged to transfer as it fulfils a liability.” (Conceptual Framework
6.17)

Downloaded by Nathaniel Calabroso (nathanielcalabroso@gmail.com)

 lOMoARcPSD|53638477

Current cost

• The current cost of:

a. an asset is “the cost of an equivalent asset at the measurement

date, comprising the consideration that would be paid at the measurement date plus the
transaction costs that would be incurred at that date.”

b. a liability is“the consideration that would be received for an equivalent liability at the
measurement date minus the transaction costs that would be incurred at that date.”

Entry values vs. Exit values

• Current cost and historical cost are entry values (i.e., they reflect prices in acquiring an
asset or incurring a liability), whereas fair value, value in use and fulfilment value are exit
values (i.e., they reflect prices in selling or using an asset or transferring or fulfilling a
liability).

Considerations when selecting a measurement basis

• When selecting a measurement basis, it is important to consider the following:

• The nature of information provided by a particular measurement basis

(e.g., measuring an asset at historical cost may lead to the subsequent recognition of
depreciation or impairment, while measuring that asset at fair value would lead to the
subsequent recognition of gain or loss from changes in fair value).

• The qualitative characteristics, the cost-constraint, and other factors (e.g., a

particular measurement basis may be more verifiable or more costly to apply than the
other measurement bases).

Measurement of Equity

• Total equity is not measured directly. It is simply equal to difference between the total
assets and total liabilities.

• Because different measurement bases are used for different assets and liabilities, total
equity cannot be expected to be equal to the entity’s market value nor the amount that
can be raised from either selling or liquidating the entity.

• Equity is generally positive, although some of its components can be negative. In some
cases, even total equity can be negative such as when total liabilities exceed total assets.

Presentation and Disclosure

Information is communicated through presentation and disclosure in the financial statements.

Effective communication makes information more useful. Effective communication requires:

• focusing on presentation and disclosure objectives and principles rather than on rules.

• classifying information by grouping similar items and separating dissimilar items.

Downloaded by Nathaniel Calabroso (nathanielcalabroso@gmail.com)

 lOMoARcPSD|53638477

• aggregating information in a manner that it is not obscured either by excessive detail

or by excessive summarization.

Presentation and disclosure objectives and principles

• The objectives are specified in the Standards. • Theprinciplesinclude:

• the use of entity-specific information is more useful that standardized descriptions, and

• duplication of information is usually unnecessary.

Classification

• Classifying means combining similar items and separating dissimilar items.

• Offsetting of assets and liabilities is generally not appropriate. Classification of

Income and expenses

Income and expenses are classified as recognized either in:

• profit or loss; or

• other comprehensive income.

Aggregation

• Aggregation is “the adding together of assets, liabilities, equity, income or expenses that have
shared characteristics and are included in the same classification.” (Conceptual Framework
7.20)

Concepts of Capital and Capital Maintenance

• Financial concept of capital – capital is regarded as the invested money or invested

purchasing power. Capital is synonymous with equity, net assets, and net worth.

• Physical concept of capital – capital is regarded as the entity’s productive capacity, e.g.,
units of output per day.

Downloaded by Nathaniel Calabroso (nathanielcalabroso@gmail.com)

 lOMoARcPSD|53638477

PAS 7 STATEMENT OF CASH FLOWS

Statement of Cash Flows

• The statement of cash flows provides information about the sources and utilization (i.e.,
historical changes) of cash and cash equivalents during the period. The statement of cash flows
presents cash flows according to the following classifications:
1. Operating activities
2. Investing activities
3. Financing activities

Activities

1. Operating activities include transactions that enter into the determination of profit or
loss. These transactions normally affect income statement accounts.

2. Investing activities include transactions that affect long- term assets and other non-
operating assets.

3. Financing activities include transactions that affect equity and non-operating liabilities.

Examples of cash flows from Operating Activities

• cash receipts from the sale of goods, rendering of services, or other forms of income

• cash payments for purchases of goods and services

• cash payments for operating expenses, such as

employee benefits, insurance, and the like, and
payments or refunds of income taxes

• cash receipts and payments from contracts held for dealing or trading purposes

Examples of cash flows from Investing Activities

• cash receipts and cash payments in the acquisition and disposal of property, plant and
equipment, investment property, intangible assets and other non-current assets

• cash receipts and cash payments in the acquisition and sale of equity or debt
instruments of other entities (other than those that are classified as cash equivalents or
held for trading)

• cash receipts and cash payments on derivative assets and liabilities (other than those
that are held for trading or classified as financing activities)

• loans to other parties and collections thereof (other than loans made by a financial
institution)

Downloaded by Nathaniel Calabroso (nathanielcalabroso@gmail.com)

 lOMoARcPSD|53638477

Examples of cash flows from Financing Activities

• cash receipts from issuing shares or other equity instruments and cash payments to
redeem them

• cash receipts from issuing notes, loans, bonds and mortgage payable and other short-
term or long-term borrowings, and their repayments

• cash payments by a lessee for the reduction of the outstanding liability relating to a
lease.

Core principle

Interests and Dividends

Reporting cash flows from operating activities

1. Direct method - shows each major class of gross cash receipts and gross cash payments.

2. Indirect method - adjusts accrual basis profit or loss for the effects of changes in
operating assets and liabilities and effects of non-cash items.

Downloaded by Nathaniel Calabroso (nathanielcalabroso@gmail.com)

 lOMoARcPSD|53638477

PAS 8 ACCOUNTING POLICIES, CHANGES IN ACCOUNTING

ESTIMATES AND ERRORS
Objective and Scope

• PAS 8 prescribes the criteria for selecting, applying, and changing accounting policies and the
accounting and disclosure of changes in accounting policies, changes in accounting estimates
and correction of prior period errors.

Accounting policies

• Accounting policies are “the specific principles, bases, conventions, rules and practices
applied by an entity in preparing and presenting financial statements.” (PAS 8.5)

• Accounting policies are the relevant PFRSs adopted by an entity in preparing and presenting
its financial statements

PFRSs

• Philippine Financial Reporting Standards (PFRSs) are Standards and Interpretations

adopted by the Financial Reporting Standards Council (FRSC). They comprise the following:

1. Philippine Financial Reporting Standards (PFRSs); 2. Philippine Accounting Standards

(PASs); and
3. Interpretations

Downloaded by Nathaniel Calabroso (nathanielcalabroso@gmail.com)

 lOMoARcPSD|53638477

•When it is difficult to distinguish a change in accounting policy from a change in accounting

estimate, the change is treated as a change in an accounting estimate.

An entity shall change an accounting policy only if the change:

1. is required by a PFRS; or

2. results to a more relevant and reliable information about an entity’s financial

position, performance, and cash flows.

Examples of changes in accounting policy

1. Change from FIFO cost formula for inventories to the Average cost formula.

2. Change in the method of recognizing revenue from long-term construction contracts.

3. Change to a new policy resulting from the requirement of a new PFRS.

4. Change in financial reporting framework, such as from PFRS for SMEs

to full PFRSs.

5. Initial adoption of the revaluation model for property, plant, and

equipment and intangible assets.

6. Change from the cost model to the fair value model of measuring
investment property.

Downloaded by Nathaniel Calabroso (nathanielcalabroso@gmail.com)

 lOMoARcPSD|53638477

7. Change in business model for classifying financial assets resulting to reclassification

between financial asset categories.

Examples of changes in accounting estimate

1. Change in depreciation or amortization methods

2. Change in estimated useful lives of depreciable assets

3. Change in estimated residual values of depreciable assets

4. Change in required allowances for impairment losses and uncollectible accounts

5. Changes in fair values less cost to sell of non-current assets held for sale and biological
assets

Errors

• Errors include the effects of:

1. Mathematical mistakes
2. Mistakes in applying accounting policies
3. Oversights or misinterpretations of facts; and 4. Fraud

Downloaded by Nathaniel Calabroso (nathanielcalabroso@gmail.com)

 lOMoARcPSD|53638477

PAS 10 Events after the Reporting Period

Events after the Reporting Period

• Events after the reporting period are“those events, favorable or unfavorable, that occur
between the end of the reporting period and the date that the financial statements are
authorized for issue.” (PAS 10)

Two types of events after the reporting period

1. Adjusting events after the reporting period – are those that provide evidence of conditions
that existed at the end of the reporting period.

2. Non-adjusting events after the reporting period–those that are indicative of conditions that
arose after the reporting period

Date of authorization of the financial statements

• This date is the date when management authorizes the financial statements for issue
regardless of whether such authorization for issue is for further approval or for final issuance
to users.

Examples of adjusting events:

1. The settlement after the reporting period of a court case that confirms that the entity has a
present obligation at the end of reporting period.

2. The receipt of information after the reporting period indicating that an asset was impaired
at the end of reporting period. For example:

i. The bankruptcy of a customer that occurs after the reporting

period may indicate that the carrying amount of a trade
receivable at the end of reporting period is impaired.

ii. The sale of inventories after the reporting period may give
evidence to their net realizable value at the end of reporting period

3. The determination after the reporting period of the cost of asset purchased, or the proceeds
from asset sold, before the end of reporting period.

4. The discovery of fraud or errors that indicate that the financial statements are incorrect.

Examples of non-adjusting events normally requiring disclosures:

1. Changes in fair values, foreign exchange rates, interest rates or market prices after the
reporting period.

2. Casualty losses (e.g., fire, storm, or earthquake) occurring after the reporting period but
before the financial statements were authorized for issue.

3. Litigation arising solely from events occurring after the reporting period.

4. Major ordinary share transactions and potential ordinary share transactions after the
reporting period.

Downloaded by Nathaniel Calabroso (nathanielcalabroso@gmail.com)

 lOMoARcPSD|53638477

5. Major business combination after the reporting period.

6. Announcing a plan to discontinue an operation after the reporting

period.

7. Declaration of dividends after the reporting period

Disclosures

• Date of authorization for issue

• Adjusting events

• Material Non-adjusting events

Downloaded by Nathaniel Calabroso (nathanielcalabroso@gmail.com)

 lOMoARcPSD|53638477

PAS 12 Income Taxes

Accounting profit vs. Taxable profit

• The varying treatments of economic activities between the PFRSs and tax laws result to
permanent and temporary differences.

Permanent differences

• Permanent differences are those that do not have future tax consequences.

• Examples:

• Interest income on government bonds and treasury bills

• Interest income on bank deposits

• Dividend income

• Fines, surcharges, and penalties arising from violation of law

• Life insurance premium on employees where the entity is the irrevocable beneficiary

Temporary differences

•Temporary differences are those that have future tax consequences.

Temporary differences are either:

• Taxable temporary differences – arise, for example, when financial income is greater
than taxable income or the carrying amount of an asset is greater than its tax base.

• Deductible temporary differences arise in case of the opposites of

the foregoing.

Taxable temporary differences result to deferred tax liabilities while deductible temporary
differences result to deferred tax assets.

Deferred taxes

Downloaded by Nathaniel Calabroso (nathanielcalabroso@gmail.com)

 lOMoARcPSD|53638477

• If the increase in deferred tax liability exceeds the increase in deferred tax asset,
the difference is deferred tax expense. If it is the opposite, the difference is deferred
tax income or benefit.

• A deferred tax asset is recognized only to the extent that it is realizable.

• Deferred taxes are measured using enacted or substantially enacted tax rates that are
applicable to the periods of their expected reversals.

• Deferred tax assets and liabilities are not discounted.

• Deferred tax asset and liabilities are presented as non-current.

Downloaded by Nathaniel Calabroso (nathanielcalabroso@gmail.com)

 lOMoARcPSD|53638477

PAS 16 PROPERTY, PLANT AND EQUIPMENT

Characteristics of PPE

a. Tangible assets – items of PPE have physical substance

b. b. Used in normal operations –items of PPE are used in the production or supply of goods
or services, for rental, or for administrative purposes

c. c. Long-term in nature – items of PPE are expected to be used from more than a year

Examples of items of PPE

• Land used in business

• Land held for future plant site

• Building used in business

• Equipment used in the production of goods

• Equipment held for environmental and safety reasons

• Equipment held for rentals

• Major spare parts and long-lived stand-by equipment

• Furniture and fixture

• Bearer plants

Recognition

The cost of an item of property, plant and equipment shall be recognized as an asset only if:
a. it is probable that future economic benefits associated with the item will flow to the entity;
and
b. the cost of the item can be measured reliably.

Initial measurement

• An item of PPE is initially measured at its cost.

Elements of Cost

1. Purchase price, including non-refundable purchase taxes, after deducting trade discounts
and rebates.

Downloaded by Nathaniel Calabroso (nathanielcalabroso@gmail.com)

 lOMoARcPSD|53638477

2. Costs directly attributable to bringing the asset to the location and condition necessary for it
to be capable of operating in the manner intended by the management.

3. Present value of decommissioning and restoration costs to the extent that they are
recognized as obligation

Examples of directly attributable costs

• Costs of employee benefits arising directly from the construction or acquisition of PPE;

• Costs of site preparation;

• Initial delivery and handling costs (e.g., freight costs);

• Installation and assembly costs;

• Testing costs, net of disposal proceeds of samples generated during

testing; and

• Professional fees.

Cessation of capitalizing costs to PPE

• Recognition of costs in the carrying amount of an item of PPE ceases when the item is in the
location and condition necessary for it to be capable of operating in the manner intended by
management.

Measurement of Cost

• The cost of an item of PPE is the cash price equivalent at the recognition date. If
payment is deferred beyond normal credit terms, the difference between the cash price
equivalent and the total payment is recognized as interest over the period of credit unless such
interest is capitalized in accordance with PAS 23 Borrowing Costs.

Acquisition through exchange

• If the exchange has commercial substance, the asset received from the exchange is
measured using the following order of priority:

• Fair value of asset Given up

• Fair value of asset Received

• Carrying amount of asset Given up

If the exchange lacks commercial substance, the asset received from the exchange is measured
at (c) above.

Downloaded by Nathaniel Calabroso (nathanielcalabroso@gmail.com)

 lOMoARcPSD|53638477

Subsequent measurement

• Subsequent to initial recognition, an entity shall choose either:

(a) the cost model or

(b) the revaluation model

as its accounting policy and shall apply that policy to an entire class of PPE.

Cost Model

• After recognition, an item of PPE is measured at its cost less any accumulated
depreciation and any accumulated impairment losses.

Depreciation

• Depreciation is the systematic allocation of the depreciable amount of an asset over its
estimated useful life.

• When computing for depreciation, each part of an item of PPE with a cost that is
significant in relation to the total cost of the item shall be depreciated separately.

Depreciation - continuation

• Depreciation begins when the asset is available for use, i.e., when it is in the location and
condition necessary for it to be capable of operating in the manner intended by management.

• Depreciation ceases when the asset is derecognized or when it is classified as “held for
sale” under PFRS 5, whichever comes earlier.

Selection of depreciation method

• There are various methods of depreciation. The entity shall select the method that most
closely reflects the expected pattern of consumption of the future economic
benefits embodied in the asset.

• However, a depreciation method that is based on revenue that is generated by an activity

that includes the use of an asset is not appropriate.

The Straight-line method of Depreciation

Straight line method – depreciation is recognized evenly over the life of the asset by
dividing the depreciable amount by the estimated useful life.

Depreciation = (Historical cost – Residual value) ÷ Estimated useful life

Changes in depreciation method, useful life, and residual value

• A change in depreciation method, useful life, or residual value is a change in accounting

estimate accounted for prospectively.

• Prospective accounting means the change affects only the current period and/or future
periods. The change does not affect past periods.

Downloaded by Nathaniel Calabroso (nathanielcalabroso@gmail.com)

 lOMoARcPSD|53638477

Revaluation Model

• After recognition as an asset, an item of PPE whose fair value can be measured reliably shall
be carried at a revalued amount, being its fair value at the date of the revaluation less
any subsequent accumulated depreciation and subsequent accumulated impairment losses.

Revaluation surplus

Fair value* xx Less: Carrying amount (xx) Revaluation surplus – gross of tax xx

*The fair value is determined using an appropriate valuation technique, taking into account the
principles set forth under PFRS 13.

Frequency of revaluation

• For items with significant and volatile changes in fair value, annual revaluation is
necessary. For items with insignificant changes in fair value, revaluation may be made every
3 or 5 years.

Revaluation applied to all assets in a class

• If an item of PPE is revalued, the entire class of PPE to which that asset belongs shall
be revalued.

• The items within a class of PPE are revalued simultaneously to avoid selective
revaluation of assets and the reporting of amounts in the financial statements that are a
mixture of costs and values as at different dates.

Downloaded by Nathaniel Calabroso (nathanielcalabroso@gmail.com)

 lOMoARcPSD|53638477

PAS 19 EMPLOYEE BENEFITS

• Employee benefits are “all forms of consideration given by an entity in exchange for service
rendered by employees.” (PAS 19.8)

Four categories of employee benefits under PAS 19

1. Short-term employee benefits

2. Post-employment benefits
3. Other long-term employee benefits 4. Termination benefits.

Short-term employee benefits

• Short-term employee benefits are employee benefits (other than termination benefits) that
are due to be settled within 12 months after the end of the period in which the employees
render the related service.

Recognition and measurement

When an employee has rendered service to an entity during an accounting period, the entity
shall recognize the undiscounted amount of short-term employee benefits expected to be paid
in exchange for that service:

1. as a liability (accrued expense), after deducting any amount already

paid.

2. as an asset (prepaid expense) if the amount paid is in excess of the

undiscounted amount of the benefits incurred; provided, the prepayment will lead to a
reduction in future payments or a cash refund; and

3. as an expense, unless the employee benefit forms part of the cost of an asset, e.g., as
part of the cost of inventories or property, plant and equipment.

Short-term compensated absences

• Accumulating compensated absences are those that are carried forward and can be used in
future periods if the current period’s entitlement is not used in full. Accumulating compensated
absences may either be

1. Vesting – wherein employees are entitled to a cash payment for unused entitlement on
leaving the entity ; or

2. Non-vesting - wherein employees are not entitled to a cash payment for unused
entitlement on leaving the entity

• Non-accumulating compensated absences are those that are not carried forward. No
liability or expense is recognized until the absences occur, because employee service does not
increase the amount of the benefit.

Downloaded by Nathaniel Calabroso (nathanielcalabroso@gmail.com)

 lOMoARcPSD|53638477

Post-employment benefits

• Post-employment benefits are employee benefits (other than termination benefits) that are
payable after the completion of employment. Post-employment benefit

plans are classified as either:

1. Defined contribution plans

2. Defined benefit plans

Defined contribution vs. Defined benefit

Other relevant terms

Accounting for defined contribution plan

• The accounting for defined contribution plans is straightforward because the reporting
entity’s obligation for each period is determined by the amounts to be contributed for that
period. Consequently, no actuarial assumptions are required to measure the obligation
or the expense and there is no possibility of any actuarial gain or loss.

Accounting for Defined benefit plan

• The accounting for defined benefit plans is complex because actuarial assumptions are
required to measure the obligation and the expense and there is a possibility of actuarial
gains and losses.

Downloaded by Nathaniel Calabroso (nathanielcalabroso@gmail.com)

 lOMoARcPSD|53638477

• Obligations are measured on a discounted basis.

Accounting procedures for defined benefit plans

Step #1:

Determine the deficit or surplus (Deficit) Surplus = FVPA – PV of DBO

Step #2: Determine the Net defined benefit liability (asset)

➢If there is a deficit, the deficit is the Net defined benefit liability. ➢If there is a surplus, the
Net defined benefit asset is the lower of the

surplus and the asset ceiling.

The asset ceiling is the present value of any economic benefits available in the form of
refunds from the plan or reductions in future contributions to the plan.

Step #3: Determine the defined benefit cost

Definition of terms

1. Current service cost - is the increase in the present value of a defined benefit obligation
resulting from employee service in the current period.

2. Past service cost - is the change in the present value of the defined benefit obligation
resulting from a plan amendment or curtailment.

3. Gain or loss on settlement – the difference between the present value of the defined
benefit obligation and the settlement price.

Downloaded by Nathaniel Calabroso (nathanielcalabroso@gmail.com)

 lOMoARcPSD|53638477

Definition of terms (Continuation)

4. Interest cost on the defined benefit obligation – is the increase during a period in the
present value of a defined benefit obligation which arises because the benefits are one period
closer to settlement.

5. Actuarial gains and losses – are changes in the present value of the defined benefit
obligation resulting from experience adjustments and the effects of changes in actuarial
assumptions.

Actuarial assumptions

• Actuarial assumptions are an entity’s best estimates of the variables that will determine the
ultimate cost of providing post-employment benefits.

1. Demographic assumptions about the future characteristics of employees who are

eligible for benefits. Demographic assumptions deal with matters such as:

• mortality, both during and after employment

• rates of employee turnover, disability and early retirement

• the proportion of plan members with dependents who will be eligible for
benefits

• claim rates under medical plans

2. Financial assumptions, dealing with items such as:

• the discount rate

• future salary and benefit levels

• future medical costs, if any, including cost of administering claims and payments

• the expected rate of return on plan assets

Actuarial assumption – Discount rate

• The rate used to discount post-employment benefit obligations shall be determined by

reference to market yields at the end of the reporting period on high quality corporate
bonds.

• In countries where there is no deep market in such bonds, the market yields at the end of the
reporting period on government bonds shall be used.

Other long-term employee benefits

• Other long-term employee benefits are employee benefits (other than post-employment
benefits and termination benefits) that are due to be settled beyond 12 months after the end
of the period in which the employees render the related service.

• Other long-term employee benefits are accounted for using the procedures applicable for a
defined benefit plan. However, all of the components of the net benefit cost are recognized in
profit or loss.

Downloaded by Nathaniel Calabroso (nathanielcalabroso@gmail.com)

 lOMoARcPSD|53638477

Termination benefits

Termination benefits are employee benefits provided in exchange for the termination of an
employee’s employment as a result of either:
1. an entity’s decision to terminate an employee’s employment before the normal retirement
date; or

2. an employee’s decision to accept an entity’s offer of benefits in exchange for the termination
of employment.

Measurement

Termination benefits are initially and subsequently recognized in accordance with the nature of
the employee benefit.

• If the termination benefits are payable within 12 months, the entity

shall account for the termination benefits similarly with short-term
employee benefits.

• If the termination benefits are payable beyond 12 months, the entity shall account for
the termination benefits similarly with other long-term benefits.

• If the termination benefits are, in substance, enhancement to post- employment

benefits, the entity shall account for the benefits as post-employment benefits.

Downloaded by Nathaniel Calabroso (nathanielcalabroso@gmail.com)

 lOMoARcPSD|53638477

PAS 20: ACCOUNTING FOR GOVERNMENT GRANTS AND

DISCLOSURE OF GOVERNMENT ASSISTANCE
PAS 20 prescribes
The accounting and disclosure of government grants and the disclosure of other forms of
government assistance.

PAS 20 does NOT apply:

a. Accounting for government grants under hyperin8lationary economies
b. Tax bene8its such as income tax holidays, investment tax credits, accelerated depreciation
allowances and reduced income tax rates;
c. Government participation in the ownership of the entity; and
d. Government grants covered by PAS 41 agriculture

GOVERNMENT GRANTS
Are assistance received from the government in the form of transfers of resources in exchange for
compliance with certain conditions.

Examples:
A. Receipt of cash, land, or other non-cash assets from the government subject to compliance
with certain conditions.
B. Receipt of 8inancial aid in case of loss from a calamity
C. Forgiveness of an existing loan from the government
D. Bene8it of a government loan with below-market rate of interest

Government grants EXCLUDE

Government assistance whose value cannot be reasonably measured or cannot be distinguished
from the entity’s normal trading transactions.

If signi8icant, these are disclosed but not recognized as government grants

The following are not government grants:
a. Tax bene8its,
b. Free technical or marketing advice,
c. Provision of guarantees,
d. Government procurement policy that is responsible for a portion of the entity’s sales, and
e. Public improvements that bene8it the entire community.

NON government grants and not disclosed nor recognized:

a. Public improvements that bene8it the entire community
b. Imposition of trading constraints on competitors

RECOGNIZED:
Government grants are recognized if there is reasonable assurance that:

a. the attached conditions will be complied with; and

b. the grants will be received

The mere receipt of a grant is not a conclusive evidence that the attached condition has been or
will be satis8ied.

ClassiJications of government grants according to attached condition

a. Grants related to assets – grants whose primary condition is that an entity qualifying for
them should purchase, construct or otherwise acquire long-term assets.

Downloaded by Nathaniel Calabroso (nathanielcalabroso@gmail.com)

 lOMoARcPSD|53638477

b. Grants related to income – grants other than those related to assets.

INITIAL MEASUREMENT
• Monetary grants are measured at the
a. Amount of cash received; or
b. The fair value of amount receivable; or
c. Carrying amount of loan payable to government for which repayment is forgiven; or
d. Discount on loan payable to government at a below-market rate of interest.

• Non-monetary grants (e.g., land and other resources) are measured at the
a. Fair value of non-monetary asset received.
b. Alternatively, at nominal amount or zero, plus direct costs incurred in
a. Preparing the asset for its intended use.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date

Government grants that may also be in the form of loan, such as:
Forgivable loan- a loan that the lender (government) waives repayment subject to certain
conditions
MEASURED at the carrying amount of the loan forgiven
Loan at below-market rate of interest or zero-interest
MEASURED as the difference between the initial carrying amount of the loan determined in
accordance with PFRS 9 Financial Instruments and the proceeds received

ACCOUNTING for Government Grants

“are recognized in pro:it or loss on a systematic basis over the periods in which the
entity recognizes as expenses the related costs for which the grants are intended to
compensate”

• Main concept in accounting for government grants is the MATCHING CONCEPT.

• Means that the government grant is recognized as income as the entity recognizes as expense
the related cost for which the grant is intended to compensate.
a. Depreciable assets are recognized in pro8it or loss over periods and in the proportions in
which depreciation expense on those assets is recognized
b. Non-depreciable assets are recognized in pro8it or loss when the costs of ful8illing the
attached condition are incurred
c. Grants received as 8inancial aid fro expenses or losses already incurred are recognized
immediately in pro:it or loss when the grant becomes receivable (because the related
costs have already been expensed)

Recognizing government grants in pro8it or loss on a receipt basis is prohibited as it violated the
accrual basis of accounting

Approaches to the accounting for government grants:

CAPITAL APPROACH
Grant is recognized outside pro8it or loss in equity
INCOME APPROACH
Grant is recognized in pro8it or loss over one or more periods.

Presentation of Government grants related to ASSETS

Government grants related to assets are presented in the statement of 8inancial position either by:
a. Gross presentation –the grant is presented as deferred income (liability); or
b. Net presentation – the grant is deducted when computing for the carrying amount of the
asset

Downloaded by Nathaniel Calabroso (nathanielcalabroso@gmail.com)

 lOMoARcPSD|53638477

Presentation of Government grants related to income

Grants related to income are sometimes presented in the income statement either by:
a. Gross presentation – the grant is presented separately or under a general heading such as
“Other income”, or
b. Net presentation – the grant is deducted in reporting the related expense

Repayment of Government Grants

A government grant that becomes repayable is accounted for as a change in accounting estimate
that is treated
prospectively under PAS 8.

Downloaded by Nathaniel Calabroso (nathanielcalabroso@gmail.com)

 lOMoARcPSD|53638477

PAS 21: THE EFFECTS OF CHANGES IN FOREIGN

EXCHANGE RATES
PAS 21 prescribes the accounting for foreign activities and the translation of 8inancial statements
into presentation currency

Two ways of conducting foreign activities

1. Foreign currency transactions – individual entities often enter into transactions in a foreign
currency.
2. Foreign operations – groups often include overseas entities.

Two main accounting issues

Exchange rates are constantly changing. Therefore, the principal issues in accounting for foreign
activities are determining:
1. Which exchange rate(s) to use; and
2. How to report the effects of changes in exchange rates the 8inancial statements.

Functional currency
When preparing 8inancial statements, a reporting entity must identify its functional currency.
• Functional currency is the currency of the primary economic environment in which the
entity operates.
o The primary economic environment in which an entity operates is normally the one
in which it primarily generates and expends cash.

Factors in determining functional currency

Primary factors
An entity’s functional currency is:
1. The currency that mainly in8luences:
o Sales prices
o Cost of goods sold / Cost of services provided
Secondary factors
2. The currency in which funds from Jinancing activities are generated.
3. The currency in which receipts from operating activities are usually retained.

Foreign currency transactions

Initial recognition:
The foreign currency amount is translated at the spot exchange rate at the date of the
transaction.
Subsequent recognition: At the end of each reporting period:
1. Foreign currency monetary items are re-translated using the closing rate;
2. Non-monetary items that are measured at historical cost in a foreign currency shall be
translated using the exchange rate at the date of the transaction; and
3. Non-monetary items that are measured at fair value in a foreign currency shall be
translated using the exchange rates at the date when the fair value was determined.

Monetary items – are units of currency held and assets and liabilities to be received or paid in a
:ixed or determinable number of units of currency.

Recognition of exchange differences

When a foreign currency transaction occurred in one period and settled in another period:
a. The exchange difference between the transaction date and the end of reporting period is
recognized in the period of transaction, while

Downloaded by Nathaniel Calabroso (nathanielcalabroso@gmail.com)

 lOMoARcPSD|53638477

b. The exchange difference between the end of the previous reporting period and the date of
settlement is recognized in the period of settlement.
• When a foreign currency transaction occurred and settled in the same period, all the exchange
difference is recognized in that period.
A foreign operation is an entity that is a subsidiary, associate, joint venture or branch of a
reporting entity, the activities of which are based or conducted in a country or currency other than
those of the reporting entity.

Translation to the presentation currency

1. Assets and liabilities are translated at the closing rate at the date of the statement of
>inancial position.
2. Income and expenses, including other comprehensive income, are translated at spot
exchange rates at the dates of the transactions.
For practical reasons, average rates for a period may be used, if they provide a reasonable
approximation of the spot rates when the transactions took place. However, if exchange
rates 8luctuate signi8icantly, the use of the average rate is inappropriate.
3. The resulting exchange difference is recognized in other comprehensive income.

Downloaded by Nathaniel Calabroso (nathanielcalabroso@gmail.com)

 lOMoARcPSD|53638477

PAS 23: BORROWING COSTS

“Borrowing costs that are directly attributable to the acquisition, construction or
production of a qualifying asset form part of the cost of that asset. Other borrowing costs
are recognized as an expense.”

Borrowing costs are interest and other costs incurred by an entity in connection with the
borrowing of funds.
Borrowing costs may include:
1. Interest expense on 8inancial liabilities or lease liabilities computed using the effective
interest method
2. Exchange differences arising from foreign currency borrowings to the extent that they are
regarded as an adjustment to interest costs.

Qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its
intended use or sale. Depending on the circumstances, any of the following may be qualifying
assets:
a. Inventories
b. Manufacturing plants
c. Power generation facilities
d. Intangible assets
e. Investment properties measured under cost model

The following are not qualifying assets

A. Financial assets, and inventories that are manufactured, or otherwise produced, over a
short period of time.
B. Assets that are ready for their intended use or sale when acquired are not qualifying assets.
C. Assets that are routinely manufactured or otherwise produced in large quantities on a
repetitive basis.
D. Assets measured at fair value.

Commencement of capitalization
The capitalization of borrowing costs as part of the cost of a qualifying asset commences on the
date when all of the following conditions are met:
a. The entity incurs expenditures for the asset;
b. The entity incurs borrowing costs; and
c. It undertakes activities that are necessary to prepare the asset for its intended use or sale.

Suspension of capitalization
Capitalization of borrowing costs shall be suspended during extended periods of suspension of
active development of a qualifying asset.

Cessation of capitalization
An entity shall cease capitalizing borrowing costs when substantially all the activities necessary
to prepare the qualifying asset for its intended use or sale are complete.

Downloaded by Nathaniel Calabroso (nathanielcalabroso@gmail.com)

 lOMoARcPSD|53638477

Determining borrowing costs eligible for capitalization

1. Qualifying assets :inanced through Speci:ic borrowing
Interest expense on speci8ic borrowing ₱ xx
Less: Investment income earned on speci8ic borrowing xx
Borrowing cost eligible for capitalization ₱ xx

Determining borrowing costs eligible for capitalization

2. Qualifying assets :inanced through General borrowing
Total interest expense on general borrowings ₱ xx
Divide by: Total general borrowings xx
Capitalization rate %

Average expenditure on the asset ₱ xx

Multiply by: Capitalization rate %
Borrowing cost that may be eligible for capitalization ₱ xx

The amount computed in the formula above shall be compared with the actual borrowing costs
incurred during the period. The amount to be capitalized is the lower amount.

Financial statement presentation

Qualifying assets are not segregated from other assets in the 8inancial statements. They are
presented as regular assets under their normal classi8ication as provided under other standards.

Downloaded by Nathaniel Calabroso (nathanielcalabroso@gmail.com)

 lOMoARcPSD|53638477

PAS 24: RELATED PARTY DISCLOSURE

PAS 24 prescribes the necessary disclosures regarding related party relationships and
transactions, outstanding balances and commitments between an entity and its related parties.

Core principle
The :inancial position and pro:it or loss of an entity may be affected by a related party
relationship even if related party transactions do not occur. The mere existence of the relationship
may be suf>icient to affect the transactions of the entity with other parties.

Necessary disclosures, therefore, should be provided to draw users’ attention to the possible
effects of such relationships and transactions on the 8inancial statements presented.

Related parties
A related party is “a person or entity that is related to the reporting entity that is preparing its
8inancial statements.” (PAS 24)

• Examples of related parties:

1. Investor and investee relationship where control, joint control or signi8icant
in8luence exists.
2. Key management personnel
3. Close family member
4. Post-employment bene8it plan

De8inition of terms
• Control – an investor controls an investee when the investor is exposed, or has rights, to variable
returns from its involvement with the investee and has the ability to affect those returns through
its power over the investee..
• SigniJicant inJluence is the power to participate in the 8inancial and operating policy decisions
of an entity, but is not control over those policies. Signi8icant in8luence may be gained by share
ownership, statute or agreement.
• Joint control is the contractually agreed sharing of control over an economic activity.

• Key management personnel are those persons having authority and responsibility for
planning, directing and controlling the activities of the entity, directly or indirectly, including any
director (whether executive or
otherwise) of that entity.

• Close members of the family of an individual

a. The individual’s domestic partner and children;
b. Children of the individual’s domestic partner; and
c. Dependents of the individual or the individual’s domestic partner.

• A related party transaction is a transfer of resources, services or obligations between a

reporting entity and a related party, regardless of whether a price is charged.

Unrelated parties
The following are NOT related parties:
1. Two entities simply because they have a director in common.
2. Two venturers simply because they share joint control over a joint venture.
3. Providers of 8inance, trade unions, public utilities, and departments and agencies of a
government that does not control, jointly control or signi8icantly in8luence the reporting
entity, simply by virtue of their normal dealings with an entity.

Downloaded by Nathaniel Calabroso (nathanielcalabroso@gmail.com)

 lOMoARcPSD|53638477

4. A customer, supplier, franchisor, distributor or general agent with whom an entity transacts
a signi8icant volume of business, simply by virtue of the resulting economic dependence.

Disclosure
1. Parent-subsidiary relationship regardless of whether there have been transactions
between them.
2. Key management personnel compensation broken down into the following categories
SPOTS and loans to key management personnel.
3. Related party transactions – nature of transaction and outstanding balances

• Disclosures that related party transactions were made on terms equivalent to those that prevail
in arm’s length transactions are made only if such terms can be substantiated.

Downloaded by Nathaniel Calabroso (nathanielcalabroso@gmail.com)

 lOMoARcPSD|53638477

PAS 26: ACCOUNTING AND REPORTING BY RETIREMENT

BENEFIT PLANS

Applicability

PAS 19 PAS 26

➢ Applied by an employer ➢ Applied by, for example, a trustee,

in (among others) determining when preparing the 8inancial
the cost of providing retirement statements of a retirement bene8it
bene8its. plan. PAS 26 complements PAS 19.

Financial Statements of a DeJined Contribution Plan

• A statement of net assets available for bene8its;

• A statement of changes in net assets available for Bene8its; and
• Accompanying notes to the 8inancial statements

Financial Statements of a De8ined Bene8it Plan

1. A statement that shows:
A. The net assets available for bene8its;
B. The actuarial present value of promised retirement bene8its, distinguishing between
vested bene8its and non-vested bene8its; and
C. The resulting excess or de8icit (pas 26.17) or

2. A statement of net assets available for bene8its including either:

A. A note disclosing the actuarial present value of promised retirement bene8its,
distinguishing between vested bene8its and non-vested bene8its; or
B. A reference to this information in an accompanying actuarial report. (pas 26.17)

• A statement of changes in net assets available for bene8its and accompanying notes are provided
in both (1) and (2) above.

PAS 27: SEPARATE FINANCIAL STATEMENTS

Scope
PAS 27 does not mandate which entities should produce separate Jinancial statements.
An entity shall apply PAS 27 in accounting for investments in subsidiaries, joint ventures
and associates when it elects, or is required by local regulations, to present separate
8inancial statements.

Separate Jinancial statements

Separate 8inancial statements are those presented in addition to consolidated 8inancial statements
or in addition to 8inancial statements in which investments in associates or joint ventures are
accounted for using the equity method. Separate 8inancial statements need not be appended to, or
accompany, those statements.

Preparation of separate Jinancial statements

Separate 8inancial statements shall be prepared in accordance with all applicable PFRSs, except
as follows:

Investments in subsidiaries, associates and joint ventures are accounted for in the separate
8inancial statements either:
1. At cost,
2. In accordance with PFRS 9 8inancial instruments,
3. Using the equity method

• The entity shall apply the same accounting for each category of investments

Downloaded by Nathaniel Calabroso (nathanielcalabroso@gmail.com)

 lOMoARcPSD|53638477

PAS 28: INVESTMENTS IN ASSOCIATES AND JOINT VENTURES

Associate – an entity, including an unincorporated entity such as a partnership, over which the
investor has signi8icant in8luence.

SigniJicant inJluence – the power to participate in the 8inancial and operating policy decisions of
the investee but is not control or joint control over those policies. (PAS 28)

Signi8icant in8luence
• SigniJicant inJluence is presumed to exist if the investor holds, directly or indirectly (e.g.
through subsidiaries), 20% or more of the voting power of the investee, unless it can be clearly
demonstrated that this is not the case.

Evidence of existence of signi8icant in8luence by an investor

The following may provide evidence of signi8icant in8luence even if the percentage of ownership
interest is less than 20%.
a) Representation on the board of directors or equivalent governing body of the investee;
b) Participation in policy-making processes, including participation in decisions about
dividends or other distributions;
c) Material transactions between the investor and the investee;
d) Interchange of managerial personnel; or
e) Provision of essential technical information.

Equity method

• Investments in associates or joint ventures are accounted for using the equity method. Under
this method, the investment is initially recognized at cost and subsequently adjusted for the
investor’s share in the changes in the EQUITY of the investee.

Preference shares issued by an associate

If an associate has outstanding preference shares that are held by parties other than the investor,
the investor computes its share of pro8its or losses after making the following adjustments.

Share in associate’s Effect on investment in Effect on investment income

associate
A. Profit or loss Increase for share in profit Increase for share in profit
Decrease for share in loss Decrease for share in loss
B. Dividends Decrease No effect
C. Other comprehensive income Increase for share in gain No effect
Decrease for share in loss The share in OCI is included in
the investor’s OCI

Discontinuance of the use of equity method

• An investor starts to apply the equity method on the date it obtains signi8icant in8luence and
ceases to apply the equity method on the date it loses signi8icant in8luence.

• On the loss of signi8icant in8luence, the investor shall measure at fair value any investment the
investor retains in the former associate. The investor shall recognize in pro8it or loss any difference
between:

a. The fair value of any retained investment and any proceeds from disposing of the part
interest in the associate; and
b. The carrying amount of the investment at the date when
signi8icant in8luence is lost.

Downloaded by Nathaniel Calabroso (nathanielcalabroso@gmail.com)

 lOMoARcPSD|53638477

Classi8ication of retained interest

Following the discontinuance of equity method, the retained interest shall be classi8ied as follows:

Loss of signi8icant in8luence due to Accounting treatment

• Decrease of ownership interest ➢ Financial asset at fair value under PFRS 9

below 20%

• Increase of ownership above ➢ Investment in subsidiary under PFRS 3

and PFRS 10
50%

ReclassiJication of cumulative OCI

• If an investor loses signi8icant in8luence over an associate, all amounts recognized in other
comprehensive income in relation to the associate shall be accounted on the same basis as would
be required if the associate had directly disposed of the related assets or liabilities.

Share in losses of associate

If an investor’s share of losses of an associate equals or exceeds its interest in the associate, the
investor discontinues recognizing its share of further losses.

Interest in the associate includes the following:

1. Investment in associate measured under equity method
2. Investment in preference shares of the associate
3. Unsecured long-term receivables or loans

Interest in the associate does not include the following:

1. Trade receivables and payables
2. Secured long-term receivables or loans

After the investor’s interest in the associate is reduced to zero, additional losses are provided for,
and a liability is recognized, only to the extent that the investor has incurred
a. Legal or constructive obligations or
b. Made payments on behalf of the associate.

• Any other losses are not recognized.

• If the associate subsequently reports pro8its, the investor resumes recognizing its share of those
pro8its only after its share of the pro8its equals the share of losses not recognized.

Downloaded by Nathaniel Calabroso (nathanielcalabroso@gmail.com)

 lOMoARcPSD|53638477

PAS 29: Financial Reporting in HyperinJlationary Economies

The Stable Monetary Assumption

• Under the stable monetary assumption, the purchasing power of money is assumed to be stable.
Therefore, in8lation is ignored.

• The exception to this concept is hyperin8lation.

Price level changes

• General price level changes and the purchasing power of money have an inverse relationship.
➢If the general price level increases, this means that the
purchasing power of money has decreased – a condition known
as inJlation.
➢If the general price level decreases, this means that the
purchasing power of money has increased – a condition known
as deJlation.

HyperinJlation

• Hyperin8lation occurs when in8lation is “very high.”

• PAS 29 does not establish an absolute rate at which hyperin8lation is deemed to arise. This is a
matter of judgment.

Indicators of hyperin8lation

1. The general population prefers to keep its wealth in non-monetary assets or in a relatively
stable foreign currency. Amounts of local currency held are immediately invested to maintain
purchasing power;

2. The general population regards monetary amounts not in terms of the local currency but in
terms of a relatively stable foreign currency. Prices may be quoted in that currency;

3. Sales and purchases on credit take place at prices that compensate for the expected loss of
purchasing power during the credit period, even if the period is short;

4. Interest rates, wages and prices are linked to a price index; and

5. The cumulative in8lation rate over three years is approaching, or exceeds, 100%.

Core principle

• The 8inancial statements of an entity whose functional currency is the currency of a

hyperin8lationary economy shall be stated in terms of the measuring unit current at the end of the
reporting period.
• The comparative information for the previous period shall also be stated in terms of the
measuring unit current at the end of the reporting period.
• Presentation of information as a supplement to unrestated 8inancial statements is not permitted.
• Separate presentation of the 8inancial statements before restatement is discouraged.

Restatement of Jinancial statements

Statement of >inancial position

• Only non-monetary items, statement of 8inancial position amounts not already expressed in
terms of the measuring unit current at the end of the reporting period, are restated when using the
constant peso accounting.

• Monetary items are not restated because they are already expressed in terms of the monetary
unit current at the end of the reporting period.

Downloaded by Nathaniel Calabroso (nathanielcalabroso@gmail.com)

 lOMoARcPSD|53638477

• Monetary items are money held and items to be received or paid in 8ixed or determinable
amount of money without reference to future prices of speci8ic goods or services. Monetary items
include monetary assets and
monetary liabilities.

Examples of Monetary assets

1. Cash and cash equivalents

2. Loans and receivables and their related allowances
3. Financial assets at amortized cost (debt instruments)
4. Finance lease receivables
5. Cash surrender value

Examples of Monetary liabilities

1. Financial liabilities at amortized cost (debt instruments), e.g., accounts, notes, bonds, and
8inance lease payables.
2. Accrued expenses payable in 8ixed and determinable amounts of money.
3. Refundable deposits, e.g., security deposits on leases to be returned to tenants at the end of the
lease term and deposits for returnable containers.
4. Dividends payable

• All other items that cannot be classi8ied as monetary items are non-
monetary items, except of “retained earnings.” Retained earnings is the a balancing 8igure after
restatement.

Examples of Nonmonetary assets

1. Physical assets such as inventories, property, plant, and equipment, and investment properties
and their related accumulated depreciation
2. Intangible assets
3. Financial assets measured at fair value
4. Advances and prepayments not collectible in cash such as advances to suppliers, prepaid
insurance, prepaid rent, and the like.

Examples of Nonmonetary liabilities

1. Financial liabilities measured at fair value

2. Unearned items not payable in cash such as advances from customers, unearned rent, deferred
revenues, and the like.
3. Warranty obligations to be settled by future delivery of services (e.g., free repair service) or
replacement with other non-monetary items (e.g., free replacement of parts or replacement of the
good purchased).

• Equity items such as share capital and share premium are also nonmonetary items and thus
restated.

Non-monetary items carried at other than cost

• As a general guide, only non-monetary measured at cost are restated.
The following non-monetary items need not be restated:
1. Non-monetary items measured at net realizable value (NRV) or Fair value as at the end of
reporting period*.
2. Non-monetary items measured at revalued amounts as at the end of reporting period*.

* If the NRV, fair value or revalued amount is determined at a date other than the end of reporting
period, the nonmonetary item is nevertheless restated.

Restatement of Jinancial statements

• All items in the statement of pro8it or loss and other comprehensive income are restated.

Formula for restatement

Downloaded by Nathaniel Calabroso (nathanielcalabroso@gmail.com)

 lOMoARcPSD|53638477

*When it is impracticable to determine the historical price indices, such as for transactions
recurring very frequently, the average general price index for the period may be used.

PAS 32 FINANCIAL INSTRUMENTS: PRESENTATION

Financial assets

• Financial asset – is any asset that is:

• Cash;

• An equity instrument of another entity;

• A contractual right to receive cash or another financial asset from another entity;

• A contractual right to exchange financial instruments with another entity under

conditions that are potentially favorable; or

• A contract that will or may be settled in the entity’s own equity instruments and is not
classified as the entity’s own equity instrument.

Financial liabilities

•Financial liability – is any liability that is:

• A contractual obligation to deliver cash or another financial asset to

another entity;

• A contractual obligation to exchange financial assets or financial

liabilities with another entity under conditions that are potentially
unfavorable to the entity; or

• A contract that will or may be settled in the entity’s own equity

instruments and is not classified as the entity’s own equity instrument.

Equity instrument

• Equity instrument – is “any contract that evidences a residual interest in the assets of an
entity after deducting all of its liabilities.” (PAS 32.11)

Examples of financial assets

• Cash and cash equivalents (e.g., cash on hand, in banks, short-term money
placements, and cash funds)

• Receivables such as accounts, notes, loans, and finance lease receivables.

• Investments in equity or debt instruments of other entities such as held for trading
securities, investments in subsidiaries, associates, joint ventures, investments in bonds,
and derivative assets

• Sinking fund and other long-term funds composed of cash and other financial assets.

Downloaded by Nathaniel Calabroso (nathanielcalabroso@gmail.com)

 lOMoARcPSD|53638477

• The following are not financial assets:

a. Physical assets, such as inventories, biological assets, PPE and investment property
b. Intangible assets
c. Prepaid expenses and advances to suppliers
d. The entity’s own equity instrument (e.g., treasury shares)

Examples of financial liabilities

• Payables such as accounts, notes, loans and bonds payable.

• Lease liabilities

• Held for trading liabilities and derivative liabilities

• Redeemable preference shares issued.

• Security deposits and other returnable deposits

The following are not financial liabilities:

• Unearned revenues and warranty obligations that are to be settled by future delivery of goods
or provision of services.

• Taxes, SSS, Philhealth, and Pag-IBIG payables

• Constructive obligations

Presentation

Downloaded by Nathaniel Calabroso (nathanielcalabroso@gmail.com)

 lOMoARcPSD|53638477

Contracts settled through equity instruments

Financial liability Equity instrument

➢ The contract requires the delivery of (a) a
variable number of the entity’s own equity ➢ The contract requires the delivery
instruments in exchange for a fixed amount of (receipt) of a fixed number of the entity’s
cash or another financial asset or (b) a fixed own equity instruments in exchange for a
number of the entity’s own equity instruments fixed amount of cash or another financial
in exchange for a variable amount of cash asset.
or another financial asset.

Redeemable vs. Callable Preference shares

Compound financial instruments

• A compound financial instrument is a financial instrument that, from the issuer’s perspective,
contains both a liability and an equity component. These components are classified and
accounted for separately, as follows:

• The value assigned to the liability component is its fair value without the equity
feature.

• The value assigned to the equity component is the residual amount after deducting
the value assigned to the liability component from the total fair value of the compound
instrument.

Treasury shares

• Treasury shares are an entity’s own shares that were previously issued but were
subsequently reacquired but not retired.

• Treasury shares are treated as deduction from equity.

• Treasury share transactions are recognized directly in equity.

Therefore, they do not result to gains or losses.

Downloaded by Nathaniel Calabroso (nathanielcalabroso@gmail.com)

 lOMoARcPSD|53638477

Interest, Dividends, Losses and Gains

Offsetting of financial assets & financial liabilities

• A financial asset and a financial liability are offset and only the net

amount is presented in the statement of financial position when the

entity has both:

• a legal right of setoff and

• an intention to settle the amounts on a net basis or simultaneously

Downloaded by Nathaniel Calabroso (nathanielcalabroso@gmail.com)

 lOMoARcPSD|53638477

PAS 33 EARNINGS PER SHARE

Earnings per share (EPS) is a computation made for ordinary shares. It is a form of
profitability ratio which represents how much was earned by each ordinary share during the
period. No EPS is presented for preference shares because these shares have a fixed return
represented by their dividend rates.

Types of Earnings per share

1. Basic earnings per share 2. Diluted earnings per share

Basic Earnings Per Share

Considerations in computing “Profit or loss”

a. Profit or loss should be net of income tax expense

b. Profit or loss should be adjusted for the after-tax amounts of

preference dividends, differences arising on the settlement of preference shares, and other
similar effects of preference shares classified as equity.

Adjustments for preference dividends

a. If the preference shares are cumulative, one-year dividend is deducted from profit or loss
whether declared or not.

b. If the preference shares are non-cumulative, only the dividend declared is deducted from
profit or loss.

Weighted average number of outstanding ordinary shares

• Shares are usually time-weighted from the date consideration is receivable (which is generally
the date of their issue). Thus:
a. Shares issued outright are averaged from the issuance date. b.Subscribed shares are
averaged from the subscription date.

c. Treasury shares are averaged

i. as reduction to the number of outstanding shares from the reacquisition date; or

ii. as addition to the number of outstanding shares from the reissuance date

Restatement of EPS

• EPS in previous periods are adjusted retrospectively when an

entity issues any of the following:

• A capitalization or bonus issue (e.g., share dividend);

Downloaded by Nathaniel Calabroso (nathanielcalabroso@gmail.com)

 lOMoARcPSD|53638477

• A bonus element in any other issue, for example a bonus element

in a rights issue to existing shareholders (also referred to as preemptive stock rights);

• A share split (increase in number of shares with corresponding

decrease in par value); and

• A reverse share split (consolidation of shares or decrease in

number of shares with corresponding increase in par value).

Rights issue

Diluted earnings per share

• Diluted earnings per share is the amount of profit for the period per share, reflecting the
maximum dilutions that would have resulted from conversions, exercises, and other contingent
issuances that individually would have decreased earnings per share and in the aggregate
would have had a dilutive effect.

• Only basic earnings per share is presented if an entity has no dilutive potential ordinary
shares (i.e., simple capital structure).

The computation of diluted earnings per share is based on the assumption that the dilutive
potential ordinary shares were converted or exercised. It is:

“As if” the convertible preference shares or convertible bonds have been converted; or
“As if” the options or warrants have been exercised.

The conversion or exercise is assumed to have taken place on the date the potential
ordinary shares became outstanding, regardless of the date of actual conversion or
exercise.

Options, warrants and their equivalents

• When computing for diluted earnings per share, the “treasury share method” shall be
used in computing for the incremental shares. This method assumes that:

1. The options or warrants are exercised and

2. The proceeds received from the exercise are used to purchase

treasury shares at the average market price.

3. The difference between the treasury shares assumed to have been

purchased and the option shares represents the incremental shares.

Downloaded by Nathaniel Calabroso (nathanielcalabroso@gmail.com)

 lOMoARcPSD|53638477

Treasury share method

Financial statement Presentation

• Basic and Diluted earnings per share are computed on the following:

1. Profit or loss from continuing operations

2. Profit or loss from discontinued operations, if the entity reports

a discontinued operation. 3. Profit or loss for the year

• EPS is not computed on other comprehensive income and total comprehensive income.

Financial statement Presentation (Continuation)

• EPS computed on profit or loss from continuing operations and profit or loss for the year are
presented on the face of the statement of profit or loss and other comprehensive income. If
the entity uses a two- statement presentation, EPS is presented only on the separate income
statement.

Downloaded by Nathaniel Calabroso (nathanielcalabroso@gmail.com)

 lOMoARcPSD|53638477

PAS 34 INTERIM FINANCIAL REPORTING

Definition of terms

• Interim reporting pertains to the preparation and presentation of interim financial

report for an interim period.

• Interim period is a financial reporting period shorter than a full financial year.

• Interim financial report means a financial report containing either:

• a complete set of financial statements (PAS 1); or

• a set of condensed financial statements (PAS 34) .........for an interim period.

Scope

• PAS 34 does not require entities to provide interim financial reports.

• PAS 34 applies if an entity is (a) required by government, securities regulators, stock

exchanges, and accountancy bodies or (b) the entity elects or chooses to publish an
interim financial report in accordance with PFRSs.

• PAS 34 encourages publicly traded entities to provide at least semi-annual interim

financial report and publish them not later than 60 days after the end of the interim
period.

Content of an interim financial report

• An entity presenting an interim financial report has the option of complying either with PAS
1 (complete set of FS) or PAS 34 (condensed set of FS).

Complete set of financial statements under PAS 1

1. Statement of financial position;

2. Statement of profit or loss and other comprehensive income;

3. Statement of changes in equity;

4. Statement of cash flows;

5. Notes, comprising a summary of significant accounting policies and

other explanatory information
(5a) comparative information in respect of the preceding period; and

Downloaded by Nathaniel Calabroso (nathanielcalabroso@gmail.com)

 lOMoARcPSD|53638477

6. A statement of financial position as at the beginning of the preceding period (i.e., in

cases of retrospective application, retrospective restatement or reclassification
adjustment).

Minimum content of an interim financial report under PAS 34

1. Condensed statement of financial position;

2. Condensed statement of profit or loss and other comprehensive

income, presented as either (a) a condensed single statement; or (b) a condensed
separate income statement and a condensed statement of comprehensive income;

3. Condensed statement of changes in equity;

4. Condensed statement of cash flows; and

5. Selected explanatory notes.

• The term “condensed” means an entity needs only to provide the minimum information
required under PAS 34.

• However, an entity is not prohibited from publishing a complete set of financial

statements in accordance with PAS 1 in its interim financial report.

• Furthermore, an entity is also not prohibited from including in its condensed interim
financial statements information that is more than the minimum line items or selected
explanatory notes set out under PAS 34.

Additional concepts

• Relevance over Reliability – in the interest of timeliness and cost considerations, less
information may be provided at interim dates.

• Materiality and Estimates – an entity may rely on estimates to a greater extent when
preparing interim financial reports.

• Note disclosures – only selected explanatory notes are provided in interim financial
reports to avoid repetition.

Downloaded by Nathaniel Calabroso (nathanielcalabroso@gmail.com)

 lOMoARcPSD|53638477

Periods for which interim financial statements are presented

• Semi-annual interim financial reporting

Periods for which interim financial statements are presented (continuation)

rd
• Quarterly interim financial reporting (3 qtr.)

Business is highly seasonal

• If an entity's business is highly seasonal, PAS 34 encourages disclosure of financial

information for the latest 12 months and comparative information for the prior 12-month
period in addition to the interim period financial statements.

Recognition and measurement

• Gains and losses arising in an interim period are recognized immediately and are not
deferred, e.g., inventory write-downs & reversals; asset impairment losses & reversals;
discontinued operations; and fair value changes on assets measured at fair value.

• Costs and expenses (income) that benefit the entire year or are incurred (earned) over
the year are spread out over the interim periods, e.g., depreciation, amortization;
th
property taxes; insurance expense; interest expense (income); 13 month pay and other
year-end bonuses.

Downloaded by Nathaniel Calabroso (nathanielcalabroso@gmail.com)

 lOMoARcPSD|53638477

Recognition and measurement (continuation)

• Discretionary income are recognized immediately in the period the income is earned,
e.g., dividend income.

• Income tax expense in the interim periods is computed using the best estimate of the
weighted average annual income tax rate expected for the full financial year.

PAS 36 IMPAIRMENT OF ASSETS

Core Principle

• If the carrying amount of an asset is greater than its recoverable amount, the asset is
impaired. The excess is impairment loss.

Computation of Impairment loss

Recoverable amount xx Less: Carrying amount (xx) Impairment loss xx

• Recoverable amount is the amount to be recovered through use or sale of an asset. It is the
higher of an asset’s:

• Fair value less costs of disposal, and

• Value in use

Value in use is the present value of the future cash flows expected to be derived from an asset
or cash-generating unit.

Identifying an asset that may be impaired

• An entity shall assess at the end of each reporting period whether there is any indication
that an asset may be impaired. If any such indication exists, the entity shall estimate the
recoverable amount of the asset.

• If there is no indication that an asset may be impaired, an entity is not required to estimate
the recoverable amount of the asset.

Indications of impairment

I. External sources of information

• Significant decline in the asset’s value more than what is expected as a result of
passage of time of normal use.

• Significant changes in technological, market, economic or legal environment in which

the entity operates or in the market to which an asset is dedicated.

• Increase in market interest rates or other market rates of return on investments which
are likely to affect discount rates used in calculating asset’s value in use and decrease
asset’s recoverable amount materially.

Downloaded by Nathaniel Calabroso (nathanielcalabroso@gmail.com)

 lOMoARcPSD|53638477

• Carrying amount of the net assets is more than its market capitalization.

II. Internal sources of information

• Evidence of obsolescence or physical damage

• Significant change with adverse effect to the entity has taken place or will take
place, which will affect expected use of asset, e.g., discontinuance, disposal,
restructuring plans.

• Evidence is available from internal reporting that indicates that the economic
performance of an asset is, or will be, worse than expected.

Required testing for impairment

• The following assets are required to be tested for impairment at least annually, whether or
not there are indications for impairment:

• Intangible asset with indefinite useful life

• Intangible asset not yet available for use

• Goodwill acquired in a business combination

Measuring recoverable amount

• Recoverable amount is the higher of the asset’s fair value less costs of disposal and value in
use.

• However, if there is no reason to believe that an asset’s value in use materially exceeds its
fair value less costs of disposal, the asset’s fair value less costs of disposal may be used as its
recoverable amount. This will often be the case for an asset that is held for disposal.

Value in use

• Value in use is the present value of the future cash flows expected to be derived from an asset
or cash-generating unit. ✓Any residual value of the asset and disposal costs should be
included in estimating future cash inflows and outflows.
✓Cash flow projections shall cover a maximum period of 5 years.
✓Projections beyond 5 years are extrapolated.

✓The discount rate to be used shall be a pre-tax rate F

Downloaded by Nathaniel Calabroso (nathanielcalabroso@gmail.com)

 lOMoARcPSD|53638477

Value in use - continuation

"When making estimates of future cash flows for purposes of computing value in use:

Exclude cash flows arising from: Include cash flows arising from:
1.Revenues to be derived from the continuing
use of the asset
1. Future restructurings not yet committed

2. Improving or enhancing the asset’s

performance 2.Day-to-day costs of using the asset

3. Income taxes
4. Financing activities
3.Any residual value of the asset and disposal
costs

Recognizing and measuring an impairment loss

• Impairment loss is recognized in profit or loss, unless the asset is carried at revalued
amount, in which case revaluation surplus is decreased first and any excess is recognized in
profit or loss. The decrease in the revaluation surplus is recognized in other comprehensive
income.

Depreciation after impairment

• After the recognition of an impairment loss, the depreciation (amortization) charge for the
asset shall be adjusted in future periods to allocate the asset’s revised carrying amount,
less its residual value (if any), on a systematic basis over its remaining useful life.

Cash-generating unit (CGU)

• Cash-generating unit (CGU) is the smallest identifiable group of assets that generates cash
inflows that are largely independent of the cash inflows from other assets or groups of assets.

Impairment of individual assets included in a CGU

• Assets whose recoverable amount can be determined reliably are tested for impairment
individually.

• Assets whose recoverable amount cannot be determined reliably (e.g., assets that do not
generate their own cash flows) are included in a CGU. The CGU is the one tested for
impairment.

Allocating goodwill to CGU’s

• For purposes of impairment testing, goodwill acquired in a business combination shall be

allocated to each of the acquirer’s CGU in the year of business combination.

Impairment loss for a CGU

• The impairment loss on a CGU shall be allocated

1. First, to any goodwill allocated to the CGU

2. Then, to the other assets of the unit pro rata on the basis of the carrying amount of
each asset in the unit.

Downloaded by Nathaniel Calabroso (nathanielcalabroso@gmail.com)

 lOMoARcPSD|53638477

Reversal of Impairment loss

d Recoverable amount on date of reversal

c CA if no IL had been recognized previously

b CA on date of reversal

• (d) – (c) = Reversal of impairment loss recognized in other comprehensive

income

• (c) – (b) = Reversal of impairment loss recognized in profit or loss

PAS 37 PROVISIONS, CONTINGENT

LIABILITIES AND CONTINGENT
ASSETS
Provisions

• A provision is a liability of uncertain timing or amount.

• Provisions differ from other liabilities because of the uncertainty about the timing or
amount of expenditure required in settlement. Unlike for other liabilities, provisions must be
estimated. Although, some other liabilities are also estimated, their uncertainty is generally
much less than for provisions.

• Other liabilities, such as accruals, are reported as part of “Trade and other payables” whereas
provisions are reported separately.

Downloaded by Nathaniel Calabroso (nathanielcalabroso@gmail.com)

 lOMoARcPSD|53638477

Provision vs. Contingent liability

Recognition of provisions

• A provision is recognized when all of the following conditions are met:

1. The entity has a present obligation (legal or constructive) as a result of a past event;

2. It is probable that an outflow of resources embodying economic benefits will be required to

settle the obligation; and

3. A reliable estimate can be made of the amount of the obligation.

Measurement

Present value

• Where the effect of the time value of money is material, the amount of a provision shall be
the present value of the expenditures expected to be required to settle the obligation.

Expected disposal of assets

• Gains from the expected disposal of assets shall not be taken into account in measuring a
provision. Gains shall be recognized only when the assets are actually disposed of.

Downloaded by Nathaniel Calabroso (nathanielcalabroso@gmail.com)

 lOMoARcPSD|53638477

Reimbursements

• Where some or all of the expenditure required in settling a provision is expected to be

reimbursed by another party, the reimbursement is recognized only when it is virtually
certain that reimbursement will be received if the entity settles the obligation.

• The reimbursement shall be treated as a separate asset. •In the statement of profit or loss
and other comprehensive income, the expense relating to a provision may be presented net of
the amount recognized for a reimbursement.

Changes in provisions

• Provisions shall be reviewed at the end of each reporting period and adjusted to reflect the
current best estimate.

• If it is no longer probable that an outflow of resources embodying economic benefits will be

required to settle the obligation, the provision shall be reversed.

Product warranties and guarantees

• If a customer has the option to purchase a warranty separately (for example,

because the warranty is priced or negotiated separately), the warranty is accounted for
in accordance with PFRS 15 Revenue from Contracts with Customers.

• If a customer does not have the option to purchase a warranty separately, the warranty
is accounted for in accordance with PAS 37 Provisions, Contingent Liabilities and
Contingent Assets unless the promised warranty provides the customer with a service in
addition to the assurance that the product complies with agreed-upon specifications.

Liability for premiums

• A customer option to acquire additional goods or services for free or at a discount is

accounted for under PFRS 15 if the option provides the customer a material right that the
customer would not receive without entering into that contract.

• A customer option that does not provide the customer with a material right is not accounted
for under PFRS 15; and therefore, accounted for in accordance with PAS 37.

Guarantee for indebtedness of others

• A provision for the guarantee for indebtedness of others is recognized when it becomes
probable that the entity will be held liable for the guarantee, such as when the original debtor
defaults on the loan.

Contingent assets

Downloaded by Nathaniel Calabroso (nathanielcalabroso@gmail.com)

 lOMoARcPSD|53638477

PAS 38 INTANGIBLE ASSETS

Intangible assets

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

• Goodwill acquired in a business combination is outside the scope of PAS 38 because it

is unidentifiable. Goodwill is accounted for under PFRS 3 Business Combinations
and PAS 36 Impairment of Assets.

Essential criteria in the definition of intangible assets

1. Identifiability – separable or arises from contractual rights

2. Control – power to obtain (or restrict others from obtaining) the economic benefits from
an asset.

3. Future economic benefits – may include revenue from the sale of products or services,
cost savings, or other benefits resulting from the use of the asset by the entity.

Recognition

An intangible asset shall be recognized if management can demonstrate that:

1. The item meets the definition of intangible asset;
2. It is probable that the expected future economic

benefits will flow to the entity; and

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

Initial measurement

An intangible asset shall be measured initially at cost. Measurement of cost depends on how
the intangible asset is acquired. Intangible assets may be acquired through:
1. Separate acquisition

2. Acquisition as part of a business combination 3. Acquisition by way of a government grant

4. Exchanges of assets
5. Internal generation

Separate acquisition

The cost of a separately acquired intangible asset comprises:

1. Its purchase price, including import duties and non- refundable purchase taxes, after
deducting trade discounts and rebates; and

2. Any directly attributable cost of preparing the asset for its intended use.

Acquisition as part of a business combination

• The cost of intangible asset acquired in a business combination is its fair value at the
acquisition date.

Downloaded by Nathaniel Calabroso (nathanielcalabroso@gmail.com)

 lOMoARcPSD|53638477

Acquisition by way of a government grant

Intangible assets acquired by way of government grant may be recorded at either:

1. fair value

2. alternatively, at nominal amount or zero, plus direct costs incurred in preparing the asset
for its intended use

Exchanges of assets

If the exchange has commercial substance, the intangible asset is initially

recognized using the following order of priority:

• Fair value of the asset Given up (Plus cash Paid or minus cash received)

• Fair value of the asset Received

• Carrying amount of the asset Given up (Plus cash Paid or minus cash received)

If the exchange has lacks commercial substance, the intangible asset is initially recognized
using (c) above.

An exchange transaction has a commercial substance if the expected future cash flows
from the asset received significantly differ from those of the asset given up.

Internally generated intangible assets

The costs of self-creating an intangible asset are classified into:

a. Research costs – include costs of searching new knowledge and identifying and
selecting possible alternatives.

b. Development costs – include costs of designing from selected alternative and using
knowledge gained from research.
• If an entity cannot identify in which phase a cost is incurred, the cost is regarded as incurred
in research phase.

R&D Costs

1. Costs incurred in research phase are expensed immediately.

2. Costs incurred in development phase are expensed

immediately, unless they meet all of the following conditions for capitalization:

(1) Technical feasibility,

(2) Intention to complete,

(3) Ability to use or sell,

(4) Probable economic benefits,

(5) Availability of adequate resources, and

(6) Measured reliably.

Downloaded by Nathaniel Calabroso (nathanielcalabroso@gmail.com)

 lOMoARcPSD|53638477

R&D Costs (continuation)

The following are not R&D expenses but rather regular expenses.

• Costs incurred during commercial production:

i. Trouble-shooting during commercial production
ii. Periodic or routine design changes to existing products iii.Modification of design for a
specific customer
iv. Design, construction and operation of plant that is feasible for
commercial production
v. Engineering follow through in an early phase of commercial production vi. Quality
control during commercial production

• Advertising and other marketing expenses

• Training costs

(HINT: R&D expense relates to something that is still in the process of being invented. It does
not relate to periodic changes to an existing product . The following terms generally indicate
that a cost is not an R&D expense: ‘commercial,’ ‘customer,’ ‘advertising’ and ‘market’.)

Items of PPE used in R&D activities

• If the item of PPE can be used in various R&D activities or other purposes, the cost of
the PPE is capitalized and depreciated. The amount of depreciation is included as R&D
expense.

• If the item of PPE is can only be used on one specific R&D project, the cost of the
PPE is expensed immediately in its entirety as R&D expense.

Items not recognized as intangible assets

• The cost of internally generated brands, mastheads, publishing titles, customer lists,
goodwill and items similar in substance are expensed when incurred.

Subsequent expenditure

• Subsequent expenditures on an intangible asset are generally recognized as expense.

Reinstatement of costs in subsequent period

• Expenditure on an intangible item that was initially recognized as an expense shall not be
recognized as part of the cost of an intangible asset at a later date.

Measurement after recognition

• After initial recognition, an entity shall choose as its accounting policy either the

a. Cost model, or
b. Revaluation model – applicable only if the intangible asset has an active market.

Downloaded by Nathaniel Calabroso (nathanielcalabroso@gmail.com)

 lOMoARcPSD|53638477

Amortization

• Intangible assets with finite useful life are amortized over the shorter of the asset’s useful
life and legal life.

• Intangible assets with indefinite useful life are not amortized but tested for impairment at
least annually.

• The default method of amortization is the straight line method.

Downloaded by Nathaniel Calabroso (nathanielcalabroso@gmail.com)