INTRODUCTION TO ACCOUNTANCY

Definition of Accounting
a. Accounting Standards Council (ASC)
> a service activity; function is to provide quantitative information, primarily financial in nature, about economic
entities, that is intended to be useful in making economic decision

b. Committee on Accounting Terminology of the American Institute of Certified Public Accountants (CAT of AICPA)
> art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions, and
events which are in part at least of a financial character and interpreting the results thereof

c. American Accounting Association (AAA)

> process of identifying, measuring, and communicating economic information to permit informed judgment
and decision by users of the information
> used definition

Note: Accounting is quantitative in nature.

Process of Accounting
1. Identifying Process (Analytical Component)
฀ determine whether or not transactions will be recognized
฀ only accountable events (has impact on company’s assets, liabilities, or equity) are recognized
● External – involving entity and another entity
o Exchange – reciprocal giving and receiving (e.g., sale, purchase, payment of liability)
o Non-reciprocal transfer – one way transaction (e.g., donation, taxes, theft)
o Other than transfer – e.g., change in fair value, obsolescence
● Internal – do not involve outside party (e.g., production, casualty)
฀ non-accountable events are only disclosed in the notes if relevant
2. Measuring Process (Technical Component)
฀ assigning amounts to items
3. Communicating Process (Formal Component)
฀ preparing and distributing accounting reports

The Accountancy Law

● RA 9298 Philippine Accountancy Act of May 13, 2004 (Sen Bill 2748 + House Bill 6678 02/06/04 to 02/07/04) –
law regulating the practice of accountancy in PH; primary duty of PRC and BOA legally advised by secretary of
justice and assisted by law enforcement agencies
o Standardization and regulation of accounting education (syllabi changes not be more often than 3 years)
o Examination for registration of CPAs
o Supervision, control, and regulation of the practice
Note: Penal provision is a fine of not less than 50k or imprisonment for a period not exceeding 2 years
● Professional Regulatory Board of Accountancy (PRBOA) – body authorized by law to promulgate rules and
regulations; under the supervision of the Professional Regulation Commission (PRC);
o composed of a chairman and 6 members including vice chairman (1 year), in coordination with APO
recommended by PRC and appointed by the president
 o must be citizen/resident, at least 10 years work experience as CPA, good moral character, no pecuniary
interest, not a director/officer of APO
o no person who has served 2 successive complete terms shall be reappointed until the lapse of 1 year
and no person shall serve the board for more than 12 years
o shall receive compensation and allowances comparable to that being received by other existing
regulatory boards under General Appropriations Act
o president may, upon recommendation of commission, suspend or remove any member
▪ neglect of duty
▪ violation or tolerance of any violation of this act
▪ final judgment of crimes involving moral turpitudes
▪ manipulation/rigging of exam results
o submit annual report to president
● Philippine Institute of Certified Public Accountants (PICPA) – accredited professional organization (APO) of CPAs

The Accountancy Fields

● Public Accountancy – independent professional services on a fee basis (e.g., auditing, tax returns, consultancy);
ACPAPP
Note: For this practice, CPAs will need Certificate of Accreditation. Also, no corporation form is allowed.
● Commerce and Industry (Private Accountancy) – employed by a private company; assisting management;
NACPAE
Note: For supervisory level, entities with annual revenue of at least P10M or paid-up capital of at least
P5M should be CPAs.
● Education/Academe – teaching of accounting; deans or department heads for institutions offering BSA should
be CPAs; ACPACI
● Government – employed in government; GACPA

CPA Profession
1. Application
● Filipino resident
● Of good moral character
● BS Accountancy holder (Oct 2008 onwards)
2. Ratings – within 10 calendar days
● Passed – general average of at least 75% AND no grade lower than 65%
o Certificate of Registration – full name and assigned number; signature of commission chairperson,
chairman & members of BOA, and its official seal; remain in full force and effect unless withdrawn
o Professional ID Card – bears registration number, date of issuance, expiry date; renewable every 3 years
o Professional Tax Receipt

o CPA Seal
 ● Conditional – has obtained at least 75% in majority (4 of 6) subjects; retake remaining subjects within 2 years
● Failed – to take refresher course (24 units) after 2 complete exams
3. Suspension/Revocation
● convicted of criminal offense involving moral turpitude
● immoral and dishonorable conduct
● of unsound mind
● any unprofessional/unethical conduct
● malpractice
● violation of provisions of RA 9298 and its IRR, code of ethics, or technical and professional standards
4. Reinstatement – the board may, after the expiration of 2 years from revocation
5. Renewal — 2 years after year of application before end of exact month applied
6. Foreign Applicant – there must be foreign reciprocity and practice will have an essential contribution to the PH; must
apply for accreditation
● letter of request to practice
● authenticated official copy of law by foreign
● original/authenticated copy of TOR or equivalent document
● original/certified copy of documents by bureau of immigration and deportation
● COR or its equivalent
● passport
● other documents
7. Death/Disability/Dissolution/Liquidation – reported to the board not later than 30 days; resulting sole proprietor may
continue to practice under the name for a period of not more than 2 years

RA 10912: Continuing Professional Development (CPD)

฀ An on-going training requirement to enhance CPAs from any sector of practice valid for 3 years
฀ For accreditation, at least 120 units (minimum of 20 per year)
o Technical competence – 30 units
o Professional skills – 5 units
o Professional values – 5 units
o Flexible CPD units – 80 units
฀ 3 years meaningful experience
o Public practice – 1 year as audit assistant, 2 years as auditor in charge
o Commerce and industry – significant involvement
o Academe/Education – teaching for at least 3 trimesters or 2 semesters in not less than 3 school years
o Government – significant involvement
฀ For renewal, at least 15 units (exemption to OFWs and newly licensed on first renewal cycle)
฀ Failure to renew for a period of 5 consecutive years shall be declared delinquent
฀ Excess units cannot be carried over except for masteral and doctoral degrees (30 units)
฀ Upon reaching the age of 65, CPA is permanently exempted from CPD renewal requirements (OLD RULE)

Organizations Affecting the Accountancy Profession

1. Financial and Sustainability Reporting Standards Council (FSRSC) – any member of ASC is not disqualified from being
appointed to FRSC; part-time basis without compensation
2. Auditing and Assurance Standards Council (AASC)
3. Quality Review Committee (QRC) – conduct an oversight into the quality of audit of FS and applicants for registration
to practice
4. Education Technical Council (ETC) – regulation of accounting education
FRSC AASC QRC ETC

Chairman 1 - any scope 1 - public practice 1 - public practice 1 - academe

BOA 1 1 1 1

COA 1 1 - -

SEC 1 1 - -

BSP 1 1 - -

BIR 1 - - -

IC 1 1 - -

FINEX 1 - - -

PICPA - 1 - -

Public Practice Sector 2 9 2 1

Commerce and Industry Sector 2 1 1 1

Academe Sector 2 1 1 2

Government Sector 2 - 1 1

Total 16 18 7 7

Term 3 years

PREFACE TO PFRS

Philippine Financial Reporting Standards (PFRS) or simply GAAP

฀ laws in accounting, used as a guide in the preparation of FS
฀ principle-based rather than rule based
฀ apply to all profit-oriented entities preparing general purpose FS
฀ collectively known as PFRS, PAS, and Philippine Interpretations
฀ any limitation of the scope is made clear on the standard itself
฀ with bold and plain type paragraphs but with equal authority

Standard Setting Bodies

International Financial and International Philippine
Accounting Standards Sustainability Financial Reporting Interpretations
Board (IASB) Reporting Standards Standards Committee (PIC)
 Council (FRSC) Interpretations
Committee (IFRS IC)
Purpose Issue accounting Standard-setting body Interpretative body of Established by
standard; private established by PRC to IASB FRSC to develop
sector body assist BOA interpretations
Scope Global PH Global PH
Predecessor International Accounting Standards Standards Interpretations
Accounting Standards Council (ASC) created Interpretations Committee
Council (IASC) by PICPA Committee (SIC) established by ASC
Standards issued IFRS or IAS PFRS or PAS IFRIC or SIC PIC Interpretations
Interpretations
IASB Standard Setting Process
1. Project Agenda
2. Discussion Paper
3. Exposure Draft
4. Finalized Accounting Standard
5. Post-standard publishing procedures

FRSC/AASC Standard Setting Process

1. Consideration of pronouncements of IASB
2. Formation of a task force – discussion papers
3. Issuing for comment an exposure draft approved by majority of FRSC members (at least 60/90 days, or with
urgent need, not less than 30 days for FRSC)
4. Consideration of comments and preparing a comment letter to IASB
5. Approval of standard by majority of FRSC members and at least 10 members for AASC
CONCEPTUAL FRAMEWORK

The conceptual framework is the underlying theory for the development and revision of accounting standards; summary
of the terms and concepts that underlie the preparation and presentation of general-purpose FS.
฀ To assist the IASB in the development of standards
฀ To assist financial statement preparers when no standard applies to a transaction or allows a choice of
treatment
฀ To assist all parties in understanding and interpreting standards

Note: The Conceptual Framework is not a standard. It is considered only when there is no accounting standard.

Hierarchy
1. PFRS
2. PAS
3. Conceptual Framework
4. Other GAAP

Underlying Assumptions
● Going Concern (Continuity Assumption) – the only recognized assumption by conceptual framework; entity is
viewed as continuing in operation indefinitely in the absence of evidence to the contrary (e.g., current and non-
current classification, accrual of income and expenses, depreciation of PPE)
● Accrual Principle – income (expense) is recognized when earned (incurred) rather than when received (paid)
● Accounting Entity Concept – entity is viewed separately from its owners
● Time Period Principle – life of the entity is divided into series of reporting periods
● Monetary Unit Principle – accounting information should be stated in a common measurement basis; purchasing
power of peso is regarded as constant

Objective of Financial Reporting

● To provide financial information that is useful for making decisions about providing resources to the entity

Users of Financial Information

o Employees – stability & profitability
● Primary Users
o Customers – continuity
o Investors – risk & return of investment
o Government – regulatory
o Lenders and other Creditors – liquidity
o General Public – various
& solvency
● Other Users

Limitations of Financial Reporting

● Do not and cannot provide all of the information
● Not designed to show the value of an entity, only helps users estimate the value
● Cannot accommodate every request for information
● Based on estimates and judgements rather than exact depiction
Qualitative Characteristics of Useful Financial Information
1. Fundamental – relate to the content or substance; makes the information useful
a. Relevance – capacity to affect decision; has one or both
i. Predictive Value – predicts future outcomes
ii. Confirmatory Value – confirm or correct earlier expectations
Note: Materiality is also an aspect of relevance. Strict adherence to accounting standards is not required
when the items are not significant enough (relative size or nature).
b. Faithful Representation – reports should match what really existed
i. Completeness – all information necessary must be included and clearly stated
ii. Neutrality – should not favor one party to the detriment of another party
Note: Keep in mind also the concept of prudence/conservatism.
iii. Free from Error – does not necessarily mean perfectly accurate
Note: Keep in mind also the concept of substance over form (e.g., zero interest bonds), and
conservatism.
2. Enhancing Qualitative Characteristics (VCUT) – increases the usefulness of financial information
a. Verifiability – observers could reach consensus, not necessarily complete agreement
b. Comparability – understand similarities and differences among items; not synonymous to uniformity
i. Consistency – use of the same methods for the same items, either within a company (focus) or
across companies
c. Understandability – presented in a form that users understand, although complex matters cannot be
eliminated
d. Timeliness – information available in time to be capable of influencing decisions
Note: It is important that costs are justified by the benefits of reporting information also known as Cost-Benefit
Consideration

Financial Statements and the Reporting Entity

Reporting Period – at least annually; also provide comparative information for at least one preceding period
Perspective – reporting entity
Reporting Entity – entity that is required or chooses to prepare FS; not necessarily a legal entity
Types of FS:
● Consolidated – both the parent and its subsidiaries
● Unconsolidated – parent company only
● Combined – two or more entities that are not linked

Elements of Financial Statements – quantitative information reported in FS

● Financial Position
o Asset – present economic resource (right that has the potential to produce economic benefits)
controlled by the entity as a result of past events
▪ Rights that correspond to an obligation
▪ Rights that do not correspond
▪ Rights established by contract/legislation
Note: Tangibility, ownership, and expenditure are not essential characteristics of assets.
o Liability – present obligation (duty that entity has no practical ability to avoid) of an entity to transfer
economic resource as a result of past events
▪ Legal – consequence of a binding contract or statutory requirement
 ▪ Constructive – normal business practice or custom
Note: Identification of payee and certainty of settlement are not essential characteristics of
liabilities.
o Equity – residual interest; aka as net assets; no recognition principle
● Financial Performance – matching principle for recognition
o Income – increase in assets or decrease in liabilities
Types:
▪ Revenue – from ordinary course of business
▪ Gains – other than ordinary course of business
Classification:
▪ P/L – general rule
▪ OCI
● Unrealized G/L on financial asset measured @FVOCI
● Unrealized G/L from derivative contracts as cash flow hedge
● Translation G/L
● Revaluation surplus
● Remeasurements of defined benefit plan/Actuarial G/L
o Expense – increase in liabilities or decrease in assets
▪ Regular – from ordinary course of business
▪ Loss – other than ordinary course of business

Recognition
฀ Process of capturing for inclusion
฀ Only items that meet definition of elements and provides useful information are recognized

Derecognition
฀ Removal of all or part of recognized element
฀ Results from transfer of control
฀ For asset, when entity loses control
฀ For liability, when entity no longer has a present obligation
฀ Results to income/expense
฀ Not all transfer requires derecognition

Measurement
฀ Process of quantifying the elements
฀ Bases:
o Historical Cost – entry price including transaction costs; most commonly adopted in preparing FS
o Current Value – updated to reflect conditions as of the measurement date
 ▪ Fair Value – observed directly using market price in an active market; not an entity-specific
measurement
▪ Value in Use/Fulfillment Value – if FV cannot be directly measured, this method is used or simply
the present value of cash flows
▪ Current Cost – consideration that would be paid/received plus/minus transaction costs
฀ IASB did not mandate a single measurement basis

Presentation and Disclosure

฀ Achieved by classification (sorting) and aggregation (adding together) of elements
฀ Offsetting is generally not appropriate

Concepts of Capital and Capital Maintenance

Financial Concept Physical Concept
Concept of Capital Synonymous with the net assets or Regarded as the productive capacity
equity of the entity; adopted by most of the entity
entities
Concept of Capital Maintenance Profit is earned if net assets, beg. Profit is earned if physical productive
exceed net assets, end. capacity, beg. exceed physical
productive capacity, end.
Measurement Basis Does not require the use of a Requires the adoption of current cost
particular basis basis

Capital Maintenance Approach

Net Changes in Equity xx
Less: Adtl Investment by Owners xx
Add: Withdrawals and Distributions to Owners xx
Comprehensive Income xx
Less: Other Comprehensive Income xx
Add: Other Comprehensive Loss xx
Profit or Loss / Net Income xx
ACCOUNTING PROCESS / ACCOUNTING CYCLE

1. Identifying and Analyzing Business Transactions – whether transactions affect the accounting elements

2. Journalizing Transactions – recording transactions in a chronological manner

Journal – company’s record of its daily transactions; also known as the book of original entry
 Parts of a Journal
o Date – when the transaction takes place
o Particulars – show the accounts affected
o Posting Reference – indicates the account numbers
o Debit Column – amounts entered in the left side
o Credit Column – amounts entered in the right side
 Types of Journals
o General – all transactions that cannot be recorded in any special journals
o Sales Journal – only credit sales of merchandise
o Purchase Journal – only credit purchase of merchandise
o Cash Receipts Journal – all inflows of cash; always includes a debit to cash
o Cash Disbursement Journal – all outflows of cash; always includes a credit to cash
Journal Entry – consists of the date, account and amounts, and a brief explanation of the transaction
 Types of Journal Entries
o Simple – one debit and one credit only
o Compound – more than one debit and/or credit
T-account – simplest tool used to analyze changes in an account
Accounting Equation: ASSETS = LIABILITIES + OWNER’S EQUITY

3. Posting to the Ledger – transferring journal entries from journal to ledger

Ledger – book of final entry because this is the book where all journal entries are finally summarized; systematic
compilation of group of accounts
 Types of Ledgers
o General – master or controlling account since it reflects the total balance
o Subsidiary – contains supporting details or breakdown of general ledger accounts
Account – term used to describe the assigned accounting devise to summarize the effects of business transactions
 Types of Accounts
o Nominal – income statement
o Real – balance sheet
o Adjunct – valuation account; add
o Contra – valuation account; deduct
Chart of Accounts – list of accounts the entity uses
Account Balances – amounts reported in the FS
Footing – process of computing the sum of the amounts entered in the debit and credit columns

4. Preparing the Unadjusted Trial Balance (optional)

Trial Balance – listing of accounts with open balances; proves the equality of debits and credits
 Errors revealed by TB
o Transplacement/Sliding – wrong placement of decimal point (e.g., 150,000 > 15,000)
o Transposition – digits are interchanged (e.g., 1,200 > 1,020)
o Mixed Error – combination of transposition and transplacement (e.g., 3,250 > 352)
o Misposting – placed on the opposite/wrong side
 Errors not revealed by TB
 o Omission – transaction was not recorded
o Journalizing/Posting entry twice
o Classification Error

5. Preparation of the Adjusting Entries

 To bring the accounts up to date on an accrual basis
 Affects at least one real (permanent/balance sheet) account and one nominal (temporary/income statement)
account
 Often prepared after year-end and dated as of year-end

6. Preparation of the Worksheet (optional) – multi-column sheet used in compiling and summarizing information; not
part of the formal accounting records
Income Statement Balance Sheet
Debits > Credits Net Loss Net Income
Debits < Credits Net Income Net Loss

7. Preparation of the FS
 Statement of Financial Position (Balance Sheet) – shows all the assets, liabilities, and equities
 Statement of Comprehensive Income/Financial Performance – shows all the income and expenses
 Statement of Changes in Equity – summary of all the transactions relative to the equity
 Statement of Cash Flows – reflects all the cash inflows and outflows of an entity
 Notes to Financial Statements – narrative description of items reported in the FS

8. Preparation of the Closing Entries – bring temporary accounts to zero balance; periodicity assumption
1st. Close all income accounts (debit).
2nd. Close all expense accounts (credit).
3rd. Close the balance of the income summary account.
4th. Close the drawing/dividends account.

[From this step onward is an optional step]

9. Preparation of the Post-Closing Trial Balance – to check the equality of debits and credits after closing entries

10. Preparation of the Reversing Journal Entries – reverse certain adjusting entries to promote convenience &
consistency on the accounting process; done at the beginning of the next accounting period
 Accrued Income
 Accrued Expense
 Unearned Income: Income Method or for the unexpired
 Prepaid Expense: Expense Method or for the unexpired
Cash to Accrual Basis

Cash Basis Accrual Basis

Sales Cash Sales + Collections (no A/R Cash Sales + Credit Sales
Account)

Purchases Cash Purchases + Payment to Cash Purchases + Credit Purchases

Suppliers

Income other than Sales Amount Received Amount Earned

Expense other than Purchases Amount Paid Amount Incurred

Depreciation Yes Yes

Bad Debts No Yes

Income Tax Expense Tax Paid Tax Paid + Deferred Tax Expense
(Benefit)

Amortization of Discount & Premium No Yes

OCI No Yes

Fair Value Changes No Yes

Relevant Formulas – advances beginning are added, ending are deducted; receivables beginning are deducted, ending
are added
● Sales Formula – similar with Accounts Receivable T-account
Cash Received – Cash Basis Sales xx
Advances from Customers - Beg xx
Less: Advances from Customers - End (xx)
Less: Trade Receivables - Beg (xx)
Trade Receivables - End xx
Less: Recoveries included on collection (xx)
Sales Discount, Return, & Allw on Credit xx
Write-off xx
Accrual Basis Sales – Gross xx
Less: Sales Discount, Return, & Allw (xx)
Accrual Basis Sales – Net xx
● Purchases Formula – same with Accounts Payable T-Account
Cash Payments – Cash Basis Purchases xx
Advances to Suppliers - Beg xx
Less: Advances to Suppliers - End (xx)
Less: Trade Payables - Beg (xx)
Trade Payables - End xx
Purchase Discount, Return, & Allw on Credit xx
Accrual Basis Purchases – Gross xx
Less: Purchase Discount, Return & Allw (xx)
Accrual Basis Purchases – Net xx
● Other Income Formula (UUAA/BEBE/+--+)
 Cash Received – Cash Basis Income xx
Unearned Income - Beg xx
Less: Unearned Income - End (xx) – just like advances
Less: Accrued Income - Beg (xx) – just like receivables
Accrued Income - End xx
Accrual Basis Other Income xx
● Other Expenses Formula (PPAA/BEBE/+--+)
Cash Payments – Cash Basis Expense xx
Prepaid Expense - Beg xx
Less: Prepaid Expense - End (xx) – just like advances
Less: Accrued Expense - Beg (xx) – just like receivables
Accrued Expense - End xx
Accrual Basis Other Expense xx
CASH & CASH EQUIVALENTS

CASH
- includes money and any other negotiable instrument that is payable in money and acceptable by the bank for
deposit and immediate credit
- current when it is not restricted from being exchanged or used for at least 12 months after the end of reporting
period (PAS 1)

Measurement
● in local currency – face value
● in foreign currency – face value translated to PHP using closing rate
● banks in bankruptcy – net realizable value

Composition
Category Item Definition Part of Cash Classification
Coins and Currencies Yes
Normal Customer’s Yes
Check
Cashiers’, Managers’, Yes
& Travelers’ Check
Cash on hand Entity as maker Yes Revert to payable /
Undelivered, Post- other income
Dated, & Stale Entity as receiver No Receivable
Checks
Money Order Yes
Bank Drafts Yes
Demand (Checking) Non-interest bearing Yes
Deposit
Savings Deposit Interest bearing Yes
Escrow Deposit Interest bearing No Long-term
investment
Cash equivalent or
Time Deposit Interest bearing No Short-term
Cash in Bank Investment
Unrestricted ** use if Yes
Compensating silent
balance Restricted (Formal) No Long/short term
investment
If silent No Current liability
Bank Overdraft (not 2 or more accounts Yes Offset from other
allowed here in PH) in the same bank bank accounts
If immaterial Yes Offset from other
cash accounts
For Asset Acquisition Current Yes
or Settlement of Non-current No Long-term
Cash Fund Liabilities investment
For Use in Operations Payroll, revolving, Yes
travel funds
CASH EQUIVALENTS – debt instruments acquired within 3 months or less before maturity date (also redeemable
preference shares that are mandatory); if problem is silent, cash equivalents
● Time Deposits ● Commercial Paper
● Money Market Instruments ● Treasury Bills

PETTY CASH FUND – money set aside to defray relatively small amount of cash disbursements
Imprest Fund System (if silent) Fluctuating Fund System
Establishment Petty Cash Fund xx
Cash in Bank xx
Upon Incurrence of Expenses Memo Entry only Expenses xx
Petty Cash Fund xx
Replenishment Expenses xx Petty Cash Fund xx
Cash in Bank xx Cash in Bank xx
Adjustment when there is no Expenses xx No entry
replenishment Expenses xx
Increase in Fund Petty Cash Fund xx
Cash in Bank xx
Decrease in Fund Cash in Bank xx
Petty Cash Fund xx
Petty Cash Accounted: Petty Cash Accountabilities:
● Coins & Currencies ● Ledger Balance
● Unexpected Employee Contributions – only ● Impurities except checks issued in settlement of
when intact cash advanced – e.g., customer checks,
company checks
● Collections of AR/Sales – only when intact;
evidenced by invoices ● Checks in payment of a Liability
● Unclaimed Salary – only when intact ● Unexpected Employee Contributions – intact or
not
● Checks for Deposits – e.g., employee checks
whether good, nsf, postdated or stale ● Collections of AR/Sales – intact or not
● Unreplenished Vouchers ● Unclaimed Salary – intact or not
● Unused Stamps – if no payment made in
vouchers

Accounting for Cash Shortage/Overage – accountability (should be amount) is not equal to accounted for (actual
amount)
Cash Shortage Cash Overage
Discovery Cash Short/Over xx Cash on Hand xx
Cash on Hand xx Cash Short/Over xx
After Investigation – cashier is Due from Cashier xx Cash Short/Over xx
accountable Cash Short/Over xx Due to Cashier xx
After Investigation – cannot be Loss from Shortage xx Cash Short/Over xx
traced Cash Short/Over xx Other Income xx

Fraudulent Activities in Cash

● Lapping – misappropriating a collection from one customer and concealing this when collection is made from
another customer
 ● Window Dressing – opening book of accounts beyond the close of accounting period for the purpose of showing
a better financial position and performance
● Kiting – transfer of cash from one bank to another to cover shortage in the latter bank; usually employed at the
end of the month; receiving per bank earlier than disbursing per book

Audit Considerations
● Bank Transfer Schedule – shows the date of all transfers before and after year-end; primary purpose is to help
detect kiting
● Bank Cutoff Statements – statement for the first 8-10 business days after year-end; primary purpose is to help
verify reconciling items on year-end
● Bank Confirmation/Standard Confirmation Form – requests information on deposits and loans; evidence on the
existence assertion
● Bank Reconciliation
● Proof of Cash

Bank Reconciliation – statement which brings into agreement the cash balance per book and per bank; prepared
monthly
● Adjusted Balance Method – book and bank balances are brought to a correct cash balance
● Book to Bank Method – book is reconciled to equal bank balance
● Bank to Book Method – bank is reconciled to equal book balance
Note: The above methods are not independent methods, rather inter-related.

Solution Guide for Bank Reconciliation

Unadjusted Balance per Book xx Unadjusted Balance per Bank xx
Add: Credit Memos xx Add: Deposit in Transit xx
Less: Debit Memos (xx) Less: Outstanding Checks (xx)
+/- Book Errors xx +/- Bank Errors xx
(xx) (xx)
Adjusted Balance xx Adjusted Balance xx

Note: Certified checks are deducted from outstanding checks because they are good as cash.
Constructive Guide for Bank Reconciliation
Deposit in Transit, Beg. xx Outstanding Checks, Beg. xx
Add: Deposits Made xx Add: Checks Issued xx
Less: Deposits Acknowledged (xx) Less: Checks Paid (xx)
Deposit in Transit, End xx Outstanding Checks, End xx

Proof of Cash – expanded reconciliation useful in discovering possible discrepancies in handling cash
Per Book/Balance Prior Month Receipts (+) Disbursements (-) Current Month
Unadjusted Balance XX XX XX XX
CM/DIT: Prior XX (XX)
CM/DIT: Current XX XX
DM/OC: Prior (XX) (XX)
DM/OC: Current XX (XX)
Adjusted Balance XX XX XX XX
 Special Cases:
NSF Returned and (xx) (xx)
Redeposited (Bank
Side): Current
Prior Error not yet (xx)/xx (xx)/xx
corrected
PFRS 9: RECEIVABLES
- Financial asset representing a contractual right to receive cash or other financial assets from another party
- Entity’s unconditional (only the passage of time is required) right to consideration

Measurement:
● Initial – Fair Value + Transaction Costs (directly attributable costs)
● Subsequent – Amortized Cost (Beg Bal +/- Amortization – Principal Repayment – Impairment Loss)

Classification:

Normal Operating Cycle – time between acquisition and realization in cash; if not clearly identifiable, assumed to be 12
months
Special Considerations: the following are nontrade
● Advances to Affiliates/Subsidiary/Officers – generally noncurrent
● Subscription Receivable – current asset if within 12 months, deduction from subscribed share capital if beyond
● Suppliers’ Debit Balances – current unless immaterial
● Special Deposits / Contract Bids – generally noncurrent
● Claims Receivables – always current
● Customers’ Credit Balances – current liability

Recognition: when entity becomes a party to the contractual provision

Trade Receivables
Measurement: Note: Short-term receivables are not discounted
because effect is immaterial.
● Initial – Invoice or Transaction Price, net of
T-Account:
trade discount and amounts collected in behalf
of third parties e.g., VAT
● Subsequent – Net Realizable Value (Gross End
Bal – Allowances)
 *Only include if also included in collections. Collections
are gross of cash discounts.

Types of Discounts:
● Trade – to encourage to buy in bulk; known as quantity discounts; not recognized in the books
● Cash – to encourage to pay dues early; known as early payments discount (e.g., 2/10, n/30); only one discount
will be given
o Gross Method – initially, cash discount is not yet deducted and recognized only when actually taken;
most common and widely used as it is the practically correct method
o Net Method – net of discounts offered; theoretically correct method
o Allowance Method – receivable is recorded at gross while sales is recorded at net; difference is credited
to allowance for sales discount account and also uses sales discount forfeited account.

Pro-forma Entries Gross Method Net Method

Initial Recording A/R xx A/R xx
Sales xx Sales xx
Payment – within discount period Cash xx Cash xx
Sales Discount xx A/R xx
A/R xx
Payment – beyond discount period Cash xx Cash xx
A/R xx A/R xx
Sales Discount Forfeited xx
Account still Outstanding as of Year- Sales Discount xx No entry.
End – within discount period Allowance for SD xx
Account still Outstanding as of Year- No entry. A/R xx
End – beyond discount period Sales Discount Forfeited xx

Allowances:
● Allowance for Sales Return – deducted in computing net sales, while actual sales return is deducted when
computing for A/R
● Allowance for Sales Discount – deducted in computing net sales, while actual sales discount is deducted when
computing for A/R
● Allowance for Freight Charge
● Allowance for Doubtful Accounts
o Direct Write-off Method – not permitted under GAAP; used only for income tax purposes
o Allowance Method – promotes conservatism thus permitted
Direct Write-Off Allowance*
Estimation of Doubtful Accounts No entry. Doubtful Accounts Expense xx
Allowance for DAE xx
Write-off Doubtful Accounts Expense xx Allowance for DAE xx
A/R xx A/R xx
Recovery A/R xx A/R xx
DAE or Gain xx Allowance for DAE xx
 Cash xx Cash xx
A/R xx A/R xx
*only bad debt expenses decrease working capital.

Methods of Estimating Doubtful Accounts Expense: changes are considered a change in accounting estimate
● Percentage of Sales – income statement approach thus DAE
Sales xx
Multiply by: Uncollectability %
Doubtful Accounts Expense xx
● Percentage of Accounts Receivable – balance sheet approach thus ADA
Accounts Receivable, end xx
Multiply by: Uncollectability %
Allowance for Doubtful accounts, End xx
Less: Allowance for Doubtful Accounts, Beg. (xx)
Doubtful Accounts Expense xx
● Aging of Accounts Receivable – similar to % of accounts receivable but involves classification of accounts
according to their ages
Age* Amount Uncollectability Total (Amount x %)

Not due XX % XX

1-30 days past due XX % XX

31-60 days past due XX % XX

More than 60 days past due XX % XX

Allowance for Doubtful Accounts, End XX

Less: Allowance for Doubtful Accounts, Beg (XX)

Doubtful Accounts Expense XX

*Credit terms will determine the age past due. Ex: 2/10, n/30 and account is 50 days old, it is considered
to be 20 days past due
Note: Combination of different methods is allowed under GAAP.

Notes Receivable – receivable presented as a promissory note

Measurement:
● Initial
 ● Subsequent – Amortized Cost

Computing the Present Value – sum of all future cash flows discounted using the prevailing market rate of interest
(effective interest rate) at date of issuance of note
1. Know the contractual cash flows.
a. Long-term Non-interest Bearing – Principal only
b. Long-term Interest Bearing – Principal & Nominal Interest
2. Know the timing of cash flows.
a. Lumpsum or Unequal or w/interruption:
PV of 1

b. Annual & Equal w/o interruption:

i. 1st payment is 1 period after:
PV of Ordinary Annuity

ii. 1st payment is today: or simply PV of Ordinary Annuity

PV of Annuity Due x (1 + interest)

Further Clarifications:
● Revenue or Selling Price = Down Payment + Initial Measurement of N/R
● Net Amount Presented in P/L
o Trade P/L = Sales – Cost of Sales + Interest Income
o Non-trade P/L = G/L on sale + Interest Income
● Interest Income is always based on effective interest, while interest receivable is based on nominal interest
● Dishonored Notes – not paid at maturity date; should be transferred from note receivable to account receivable
account including its interest and other fees charged
● There is implied interest revenue when cash price equivalent is
used.
● To compute carrying amount, use amortization table.

Date Nominal Effective Amortization Principal Carrying

Interest (% x Interest (% x (NI - EI) Repayment (-) Amount
FA) CA)

1/1/20x1 XX

12/31/20x1 XX XX XX XX XX

12/31/20x2 XX XX XX XX XX*

*This is the noncurrent portion for 20x1 while the current portion will be the difference in CA.
Loans Receivable – financial institution grants or lends money to another entity; same nature with long-term note
receivable interest bearing with unreasonable rate thus most of the time on a discount

Measurement:
● Initial = Face Value + Direct Origination Costs (transaction costs) – Origination Fees (unearned interest income)
● Subsequent = Amortized Cost
Note: Indirect origination costs are expensed outright.

Impairment of Loans – expensed in P/L

Carrying Amount (Amortized Cost + Accrued Interest) xx
Less: Recoverable Amount (PV of Future Cash Flows @ Orig. EIR) (xx)
Impairment Loss xx

Evidence of Impairment
● Significant financial difficulty of the obligor ● Probability of bankruptcy
● Breach of contract ● Disappearance of an active market
● Debt restructuring ● Measurable decrease in estimated future cash
flows
● Lender grants borrower a concession that the
lender would not otherwise consider
Note: Individually significant receivables not impaired shall be included in other receivables not individually significant
for collective assessment of impairment (Valix, 2011).

Three-Stage Impairment Approach

Stage 1 Stage 2 Stage 3
Scope Have not declined Have declined significantly Have objective evidence
significantly but do not have objective
evidence
Recognition of Impairment 12-month Lifetime
Computation Base of Face Amount or Gross Carrying Amount Net Carrying Amount
Interest Income

Sale of Loan
Cash Proceed xx
Interest Rate Swap xx
Call Option xx
Recourse Obligation (xx)
Fair Value of Service (xx)
Net Proceeds/Sale Price/Fair Value xx
Less: Carrying Amount (xx)
Gain/Loss on Sale xx

Receivable Financing – process of inducing cash inflows on receivables other than collections
● Pledging/Hypothecation – transferring general receivables as a collateral to a bank to obtain a loan; receivable
balance remains the same; informal thus doesn’t require journal entry but still needs to be disclosed; without
transfer of right to collect
Formula:
Face Value of Loan xx
 Less: Discount on Loans Payable (xx)
Net Proceeds xx
● Assignment – just like pledge but for specific receivables; formal transaction thus requires journal entry; with
transfer of right to collect
o Notification Basis – debtors are notified thus they can direct payment to bank
o Non-notification Basis – debtors are not notified thus will continue to pay the entity
Formula:
Face Value of Loan xx Accounts Receivable xx
Less: Other Charges (xx) CA of Loans Payable* (xx)
Net Proceeds xx Equity on Assigned Accounts xx – disclosed
Note: Payment from debtors’ payment which first must be accounted for the interest then principal.
● Factoring – sale of accounts receivable to another entity (factor), usually a bank; always on a notification basis
o Without Recourse/Guarantee – outright sale thus derecognized; G/L shouldered by the bank; use if
problem is silent
Formula:
Face Value of A/R xx
Less: Other Charges (xx)
Factor’s Holdback/RFF (xx)
Net Proceeds xx
Receivable from Factor xx
Less: CA of A/R (xx)
G/L on Factoring xx

o With Recourse/Guarantee – borrowing with collateral transaction in substance; G/L shouldered by the
entity
Formula: same as without recourse but no G/L is recognized.
● Discounting – transfer or endorsement of N/R to another entity
o Without Recourse
o With Recourse
▪ Conditional Sale – creates contingent liability (equal to principal); with G/L; use if problem is
silent
▪ Secured Borrowing – creates actual liability; no G/L; pay protest fee if maker of note dishonors
Formula:
Maturity Value (Principal + Interest) xx
Less: Discount (MV x DR x DP) (xx) – consider also if period ends at end of year
Net Proceeds xx
Less: CA of N/R including Accrued Interest (xx)
G/L on Discounting xx – interest expense if secured borrowing
PAS 2: Inventories
- Assets (1) held for sale in the ordinary course of business, (2) in the process of production, (3) or to be consumed
in the production process or in the rendering of services
- Exception: Financial Instruments, Biological Assets, Agricultural Produce @ Point of Harvest, Agricultural
Products, Commodity Brokers

Recognition – when company has legal title (possession) to the goods, except
● In Transit – freight terms determine who owns the goods and who is responsible for paying freight
o FOB Shipping Point – title of the goods is transferred to the buyer upon shipment
o FOB Destination – title of the goods is transferred to the buyer only upon receipt at point of destination
thus seller is responsible for costs incurred for transporting (e.g., freight, packaging, handling charges)
o Free Along Side (FAS) – essentially the same as FOB Shipping Point; seller is responsible for all costs and
risks associated with getting goods only until the dock next to the vessel
o Cost, Insurance, and Freight (CIF) – buyer agrees to pay cost of products, insurance, and freight; still
same as FOB Shipping Point
o Ex-Ship – seller is responsible for all costs and risks until the goods are unloaded; same as FOB
Destination
Note: whoever owns the goods during shipment should also pay for the freight
● Under Consignment – agreement between two parties wherein the consignor is contracting consignee to sell the
goods on its behalf; ownership remains with the consignor; capitalize freight out costs but not on returned
goods
o Goods held on consignment – not form part of its inventories
o Goods out on consignment – forms part of its inventories
● In the Hands of a Sales Agency – when any potential sales should be approved first by the entity, entity that
owns sales agency is entitled to the ownership
● Held by Customer for Approval/Trial – ownership remains with the seller
● Bill-and-Hold Sales – a contract under which a seller bills a customer but retains physical possession; excluded
from the seller’s inventory and included in the buyer’s provided
o Reason for arrangement is substantive (e.g., customer requested)
o Goods are identified separately as belonging to customer
o Goods are available for immediate transfer
o Seller cannot use or sell the goods
● Special Order Goods – manufactured according to customer specifications should be considered sold when
completed; excluded from seller’s inventory
● Installment Sales – included in buyer’s inventory; control over goods has already passed to buyer at the time of
sale
● Lay-Away Sale – included in seller’s inventory
● Buyback Arrangements – owner of goods sells the inventory to another party and agrees to repurchase the
goods at a specified price; included in the inventory of transferor (seller)
● Sold with Refund Offers – excluded from the inventory of seller

Inventory Systems
Periodic Perpetual
Records Does not maintain records during the Maintains a detailed record by using
year inventory stock cards
Physical Count Required Performed but not required
Type of Goods Low priced – Large quantity goods High value – limited number goods
Cost of Goods Sold Residual Account Maintained Account
Purchase Entry Purchases XX Merchandise Inventory XX
A/P XX A/P XX
Return to Supplier Entry A/P XX A/P XX
Purchase Ret & Allow XX Merchandise Inventory XX
Sale Entry Cash or A/R XX Cash or A/R XX
Sales XX Sales XX

COGS XX
Merchandise Inventory XX
Sale Returns Sales Return XX Sales Return XX
A/R XX A/R XX

Merchandise Inventory XX
COGS XX

Initial Measurement – at cost

Inclusions:
● Purchase Cost – purchase price (net of trade discounts and rebates), import duties, irrevocable taxes, and
transport costs directly attributable to the acquisition
o Regular Purchase – invoice price
o Deferred Settlement – cash price equivalent
o Lump-Sum Purchase – allocated cost based on relative sales price or FV
Note: VAT is generally recoverable except when the entity is non-VAT registered.
● Conversion Cost – costs necessary in converting raw materials into finished goods (e.g., direct labor and
overhead)
Note: If with cash discounts, usually ignored. Only trade discounts are deducted from list price.
Exclusions – are rather expensed in the period incurred
● Abnormal amounts of wasted production costs
● Selling Costs
● Administrative Overheads that do not contribute to bringing inventories
● Storage Costs unless necessary in production process

Subsequent Measurement – lower of cost and net realizable value (LCNRV); applied per item and not per total;
replacement cost may be the best available measure of NRV or:
Estimated Selling Price xx
Less: Estimated Cost of Disposal (xx)
Estimated Cost to Complete (xx)
Net Realizable Value xx

Relative Sales Price Method

● Joint Cost – allocate costs according to total selling price
● Individually Identifiable Allocated Cost – add directly to allocated joint cost
Inventory Writedown – when NRV (SP - Costs to Sell) is less than cost; applied by individual item (except when stated
at total approach)
Direct Method Allowance Method
Entry for Writedown Ending Inventory xx at NRV xx Ending Inventory xx total cost xx
Cost of Sales xx at NRV xx Cost of Sales xx total cost xx

Loss on Inventory Writedown xx

Allow on Inventory Writedown xx
Entry if Reversal of No entry Allow on Inventory Writedown xx
Writedown Gain on Reversal xx
Entry if Additional No entry Loss on Inventory Writedown xx
Writedown Allow on Inventory Writedown xx
*Whatever is the option applied, COGS will be the same.
**Raw Materials are not written down if finished products are expected to be sold at or above cost.

Sale – don’t forget matching concept (only recognize sale when related cost/COGS is debited); also, cash equivalent is
credited as revenue, the difference is treated as implied interest
● Forward Contracts on Agricultural/Mineral/Forest Products – revenue is recognized at point of production; even
further revenues is treated as revenue for that period, and not an adjustment to initially recorded revenue
● Purchase Agreements – revenue within scope of agreement
● With Right to Return – deduct allowance for sales return; cost of allowance is called recover asset
● Other Revenues – point of sale, which is usually point of delivery, then prorate

Inventory Cost Flow Methods

● Specific Identification Method – used for items not ordinarily interchangeable; commonly applicable to high
value inventories (e.g., cars, jewelries)
● First-in, First-out (FIFO) Method – items purchased/produced first are sold first; assumes that all products are of
the same identification
● Average Method – applied when goods cannot be distinguished therefore assessed at an average of the costs
o Periodic (Weighted Average Method)
▪ Weighted Average Unit Cost = Cost of Goods Available for Sale / # of Units Available for Sale
▪ Cost of Sales = # of Units Sold x Weighted Average Unit Cost
▪ Ending Inventory = # of Units on Hand x Weighted Average Unit Cost
o Perpetual (Moving Average Method) – a new unit cost is computed and changes every time there is new
purchase or purchase return transaction
● Last-in, First-out (LIFO) – not allowed; use LIFO reserve as a valuation allowance charged to COGS to conform
with LIFO inventory

Purchase Commitments – commitment to acquire specified commodities at a predetermined price and quantity at
some point in the future; disclosed in the notes when significant and unusual
● Accounts Payable – entry at commitment price
● Purchases – entry at lower of FV and commitment price
● Cancellable – no entry is required
● Non-cancellable – recognize loss in the period of price reduction
 Loss Loss on Purchase Commitment xx
Estimated Liability for Purchase Commitment xx

Gain – only to the loss Estimated Liability for Purchase Commitment xx

previously recognized Gain on Purchase Commitment xx

Inventory Estimation – necessary when physical count is deemed impossible

● Gross Profit Method
o Based on Sales (use if silent)– net sales is assumed to be 100%; sales allowances and discounts are not
taken into account as they have no effect on the physical flow of goods
o Based on Cost – cost of goods sold is assumed to be 100%
Formula:
Beginning Inventory xx
Net Purchases xx
Cost of Goods Available for Sale xx
Less: Estimated Cost of Goods Sold (xx)
Inventory that should be On Hand xx
Less: Inventory based on Physical Count (xx)
Inventory Shortage (Overage) xx
● Retail Inventory Method – applicable for businesses that have numerous products to offer (e.g., groceries)
o Conservative Method – all markups but not markdowns; aka approximate lower of average cost or
market
o Average Method – both markups and markdowns
o FIFO Method – only based on current period purchases thus excludes beginning inventory
Formula:
Cost Retail
Inventory, beg. xx xx
Purchases xx xx
Purchase Returns (xx) (xx)
Purchase Discounts (xx)
Purchase Allowance (xx)
Freight In xx
Departmental Transfer In xx xx
Departmental Transfer Out (xx) (xx)
Markups xx – do not include original markups
Markup Cancellations (xx)
Markdowns (xx)
Markdown Cancellations xx
Abnormal Loss (xx) (xx)
Goods Available for Sale xx xx

Sales xx
Sales Returns (xx)
Employee Discounts xx
Normal Loss xx
Cost of Goods Sold or Net sales xx

Goods Available for Sale xx

 Cost of Goods Sold or Net Sales (xx)
Estimated Ending Inventory at Retail xx
Multiply by: Cost-to-Retail Ratio %
Estimated Cost of Ending Inventory xx

General Formula
Raw Materials, beg xx
Purchases xx
Raw Materials, available for use xx
Raw Materials, end (xx)
Raw Materials, used xx
Direct Labor xx
Manufacturing Overhead xx
Work in Process, beg xx
Work in Process, end (xx)
Cost of Goods Manufactured xx
Finished Goods, beg xx
Total Goods Available for Sale xx
Finished Goods, end (xx)
Cost of Goods Sold xx
PAS 41: BIOLOGICAL ASSETS

Scope and Definition

Agriculture – art, science, and practice of farming
Agricultural Activity – management by an entity of the biological transformation and harvest of biological assets for sale
Biological Transformation – qualitative or quantitative changes in a living plant/animal
● Growth – increase in quantity or improvement in quality
● Degeneration – decrease in quantity or deterioration in quality
● Procreation – creation of additional living animals/plant
● Production – of agricultural produce such as latex, wool, and milk
Biological Asset – living animal/plant related to agriculture
● Consumable – to be harvested as agricultural produce (e.g., fish in farms, trees for lumber, crops)
● Bearer – held to bear produce; only the produce is harvested while the bearer remains (e.g., fruit trees, livestock
from which milk is produced)
Agricultural Produce – harvested produce of the entity’s biological assets
Harvest – detachment of produce or the cessation of a biological asset’s life processes (e.g., apples, mangoes)

Classification:

Note: Land and farm houses used in agricultural activities is PPE

Further Examples:
Biological Asset (PAS41) Bearer Plant (PAS16: PPE) Agricultural Prod. (PAS41) Processed (PAS2:
Inventory)
Sheep Wool Yarn, Carpet
Trees in a Timber Felled trees Logs, Lumber
Dairy Cattle Milk Cheese
Pig Carcass Sausages, Cured Hams
Cotton Plants Rubber Trees Harvested Cotton Thread, Cotton
Tea Bushes Tea
Grape Vines Picked Grapes Wine
 Fruit Trees Picked Fruit Processes Fruit
Oil Palms Palm Oil
Plants with Dual Use Harvested Latex Furniture

Recognition – when (1) controls the asset, (2) probable for future economic benefits, and (3) measured reliably

Measurement
● Biological Assets – initial and subsequent is FV less costs to sell; if cannot be measured reliably, at carrying
amount or cost
o Costs to sell – broker’s commissions, levies, transfer taxes and duties (excludes income taxes, finance,
transportation and advertising costs
o Harvest Costs – expensed as incurred
Note: Basis of fair value for value assets are market prices, not contract prices.
● Agricultural Produce – initial is FV less costs to sell at point of harvest; subsequent is inventories with
corresponding gain on agricultural produce; the rest is same treatment above

Gains & Losses – presented in P/L

● On initial recognition – initial cash outlay vs initial measurement
● Change in FV
o Price Change – same age, different date
o Physical Change – different age, same date (year-end); if newborn include price on birthday
● Government Grants
o Unconditional – when grant becomes receivable
o Conditional – when conditions are met
o Conditional but a certain portion can be retained – as time passes on a straight-line basis

Presentation
● Biological Assets – noncurrent
● Agricultural Produce – subsequently inventory or PPE

Disclosure
● Required – none
● Encouraged
o Classification of biological asset into bearer or consumable
o Classification of biological asset into mature or immature
o Breakdown of change in fair value – required if production cycle is more than one year
PAS 16: Property, Plant, and Equipment
- held for use in production/supply of goods/services
- for rental to others (operating other than land & building, yes; finance, no)
- for administrative use

Characteristics:
● Tangibility (physical form) ● Long term in nature (more than 1 year)
● Used in business

Exclusions:
● PPE Held for Sale – PAS 2/PFRS 5 ● Intangible Assets – PAS 38
● Biological Assets, except Bearer Plants – PAS 41 ● Land held for an undetermined future use
● Exploration & Evaluation Assets – PFRS 6 ● Land held for speculation
● Mineral Reserves – PFRS 6 ● Investment Property – PAS 40
● Mineral Rights – PAS 38
Inclusions:
● Major Spare Part ● Land held for future plant site
● Environmental & Safety Equipment

Recognition – when probable and measurable

Derecognition – when disposed or no future economic benefit could be obtained

Initial Measurement
● Cost of Purchase – acquisition cost, import duties, irrecoverable taxes (VAT not capitalizable unless non-VAT
registered), freight, insurance while in transit, excluding trade discounts and rebates
● Directly Attributable Costs – testing (proceeds @ P/L), initial handling & delivery, professional fees, site
preparation, installation and assembly, employee benefits
● Initial Estimate of Cost of Dismantling – capitalize only if required by law or contract @PV
Note: Capitalization of costs ceases when PPE is in location and condition necessary for it to operate.

Acquisition Costs:
● Cash Purchase – invoice price
● Purchase on Account (within credit term) – invoice price less cash discount whether taken or not, thus, always
net method
● Deferred Settlement (more than 1 year) – cash price equivalent > PV of future cash flow
● Issuance of Shares – FV of PPE > FV of Shares > Par of Shares
● Issuance of Bonds – FV of PPE > FV of Bonds > Face Value of Bonds
● Lump Sum or Basket Purchase – allocated cost using relative fair values
● Second Hand Purchase – FV of Second Hand
● Donation – FV of PPE
o Credit – income if from unrelated party otherwise donated capital
 o Costs – deducted to income/donated capital if related to donation; capitalized if related to asset
● Government Grant
● Construction – direct material, direct labor, factory overhead, borrowing cost
o Any internal profit or savings are eliminated
o If costs of construction exceed price if purchased from third parties, record at true cost with no
recognition of loss unless there is clear evidence that real cost is materially high
o Abnormal amounts of wasted material are not included in the cost of asset
o In the absence of any statement, overhead is allocated in basis of direct labor
● Exchange – transaction with non-dealer
o With commercial substance – FV of asset given + Boot > FV of asset received > CA of asset given + Boot
Note: Gain/Loss is the difference between FV and CA of asset given up, thus excluding boots.
o Without commercial substance – CA of asset given + boot
● Trade-In – transaction with dealer; TIV + Boot > FV of Asset Received
Note: Assessed value cannot be a substitute for fair value.

Cost of Property/Land (not subject to depreciation):

● Purchase Price (including unusable building if ● Unpaid Taxes Assumed (up to date of
bought at single cost) acquisition)
Note: Real Property Taxes are expensed
● Legal Fees
outright, except when assumed by buyer but
● Commission only up to date of acquisition.
● Escrow Fees ● Cost of Survey (before constructions)
● Relocating/Reconstructing Costs ● Permanent Improvements
● Mortgages ● Cost of Option to Buy (only if acquired)
● Cost to Prepare Land (not for construction of ● Special Assessments
new building): e.g., payments to tenants, cost of
demolition, clearing, landfill, leveling
Cost of Land Improvements (subject to depreciation):
● Improvements not part of original blueprint ● Sidewalks
● Fences ● Landscaping
● Drainage Systems

Cost of Plant/Building:
● Purchase Price (split if usable and purchased ● Excavation Costs
with land at single cost)
● Cost to Prepare Site (for construction of new
● Legal and Professional Fees building): e.g., payments to tenants, cost of
demolition if still usable
● Unpaid Taxes Assumed (up to date of
acquisition) ● Demolition Costs of Usable Old Building (for
preparation of new building)
● Mortgages
● Interest/Insurance Premiums (if insurance not
● Renovating/Remodeling Costs
taken, payment for damages is expensed
● Construction Costs (including temporary outright)
structures and their costs of removal)
 ● Service Equipment & Fixtures (made permanent ● Land/Building improvements part of original
part) blueprint (planned cost)
Cost of Building Improvements:
● Improvements not part of original blueprint ● Ventilation System
● Escalator/Elevator ● Immovable fixtures
● Lighting System

Cost of Equipment/Machinery:
● Purchase Price ● Cost of Dismantling (provided entity has
obligation)
● Freight & Handling
● Professional Fees
● Insurance (while in transit)
Note: Costs of training for staff is not capitalizable.
● Installation Costs
● Costs of Safety Rail
● Testing Costs

Subsequent Measurement – applied to entire class, not entire PPE

● Cost Model – original cost less depreciation less impairment loss
● Revaluation Model (fresh start accounting) – fair value (depreciated replacement cost if not available) less
subsequent depreciation less subsequent impairment
o if there is increase, creates OCI because of revaluation surplus (net of tax); if there is decrease, reflect as
impairment loss; always consider if there are previous entries
● amortized using remaining useful life
● tax liability also amortized
o can be done on a rolling basis to be completed in a short period of time, if simultaneous revaluation is not
applicable
o revalue annually if there is significant & volatile movement, otherwise every 3-5 years

Depreciation
● Depreciable Amount (Cost – RV)
● Residual Value – final carrying amount; if exceeds CA, depreciation stops
● Useful Life

Commencement: When available for use

Cessation: When derecognized or becomes NCA-HFS, whichever is earlier

Methods – management can choose what best reflects

● Fixed/Uniform Charge – based on passage of time
o Straight Line Method = Depreciable Amount / Useful Life
o Group (similar) or Composite (dissimilar) Method = Cost x (Total SL Depreciation / Total Cost)
● accumulated depreciation – not related to any individual item of PPE; no G/L on sale, instead
credited in full to accumulated depreciation
● residual value – not deducted in computing depreciation but considered in computing
composite years
● Variable Charge – based on actual usage
 o Units of Production (Appropriate) Method = (Depreciable Amount / Est. Units) x Actual Units
o Working Hours Method = (Depreciable Amount / Est. Working Hours) x Actual WH
● Decreasing Charge (Accelerated) – higher on earlier years
o SYD Method = Depreciable Amount x (Decreasing # of years / SYD)
o Declining Balance Method = CA x (SL Rate x Rate); does not consider residual value
● Other
o Retirement Method = (# of Tools Retired x Cost) – Proceeds from Sale; no depreciation unless asset is
retired
o Replacement Method = (# of Tools Retired x Replacement Cost) – Proceeds from Sale; no depreciation
unless tools are replaced
o Inventory Method = no depreciation until there is physical count; squeezed amount

Revaluation Surplus
Initial:
● Proportionate/Restatement Method – gross CA is restated proportionately to the change in net CA
Asset xx
Accumulated Depreciation xx
Revaluation Surplus xx
● Elimination Method – accumulated depreciation is eliminated against gross CA
Accumulated Depreciation xx
Asset xx
Revaluation Surplus xx
Note: Replacement cost needs depreciation. Sound value means already depreciated amount.
Subsequent – transferred to retained earnings
Lump Sum (Sale) Piece Meal (Depreciation)
Depreciable Yes Yes
Non-depreciable Yes No

Valuation Process Example – as if revaluation occurred at the start

Note that in calculating accumulated depreciation for the cost method, the initial residual value is used. Then, the rest
uses new residual value.
Subsequent Costs – generally not capitalizable except capital expenditures (e.g., addition, expansion, improvement,
replacements, major repairs & inspection, reinstallation)
● Probable if increases
o capacity o safety
o efficiency
● Measurable
PAS 20: GOVERNMENT GRANTS
- Assistance by the government beneficial for only the entity in return for past or future compliance with certain
conditions
- Exclude those which cannot (1) reasonably have a value placed upon them (disclosed only) and (2) be
distinguished from the normal trading transactions of the entity

Recognition – when there is reasonable assurance that (1) entity will comply the conditions and (2) grant will be
received
 Specific Expenses – in same period as expenses
 Depreciable Assets – over the period in proportion of depreciation recognized
 Non-Depreciable Assets – over the periods that bear the cost of meeting obligation
 Receivable as Compensation – period it becomes receivable
Note: Receipt of grant does not directly mean compliance.

Measurement
 Cash – Face Value
 Receivable – FV
 Forgivable Loan – CA of Payable
 Zero/Below Interest Loan – Discount on Loan
 Non-Monetary – FV or Nominal + Direct Costs

Accounting – always recognized in P/L on a systematic basis (matching principle)

Presentation
 Related to Assets – primary condition is that entity shall purchase, construct, or acquire long-term asset; if net
method, no DIGG
 R
Gross Method Net Method
e
l CASH XX CASH XX
a DEFERRED GRANT INCOME XX FIXED ASSET XX
t DEFERRED GRANT INCOME XX
e GRANT INCOME XX (ALWAYS NO INCOME)
d
to Income – other than those related to assets; always has DIGG

Note: Deferred income approach is commonly applied if problem is silent.

Repayment of Grants
- entity did not comply subsequently to the conditions
- accounted as change in accounting estimate, thus prospectively

Approach #1 Approach #2

DEFERRED GRANT INCOME XX ASSET XX

LOSS XX CASH XX
CASH XX (REVERSAL)
(THEN ASSUME ADDITIONAL DEPRECIATION)
DEP. EXPENSE XX
ACC. DEP XX
PAS 23: BORROWING COSTS
- Interest and other costs that an entity incurs in connection with the funding of specific assets
- E.g., interest expense, finance cost in finance lease liabilities, exchange differences regarded as adjustment to
interest
- Does not include actual cost of equity

Qualifying Asset – asset that necessarily takes a substantial period of time to get ready for its intended use or sale
Examples:
● Financial assets
● Manufacturing plants
● Assets @ FV (e.g., biological assets)
● Power generation facilities
● Inventories manufactured in large quantities on
● Intangible assets a repetitive basis
● Investment properties (Cost Model) ● Assets that are ready for their intended use or
sale
● Inventories (Special Order)

Not an example:
Recognition
● Part of the Cost of Asset – if directly attributable or would have been avoided if the expenditure had not been
made
● Expensed – other borrowing costs

Capitalization Period
● Commencement – when the entity (1) incurs expenditures, (2) incurs borrowing costs, and (3) undertakes
activities that are necessary to prepare asset
● Suspension – during extended periods; except when temporary delay is a necessary part of the process
● Cessation – when all the activities necessary to prepare asset are substantially complete (normally ready when
the physical construction is complete)

Accounting for Borrowing Costs

● Specific Borrowings
Actual Interest Cost xx
Less: Income on Temporary Investment of Borrowed Funds (xx)
Capitalizable Borrowing Cost xx

● General Borrowings – lower amount of average/avoidable and actual borrowing cost

Weighted Average CapEx xx
Multiply by: Capitalization Rate (Annual Interest/Principal) %
Average Borrowing Cost xx
Less: Actual Interest Cost (xx)
Interest Expense (xx)

● Mixed Borrowings – combined concepts

Weighted Average CapEx xx
Less: Specific Borrowed Amount (xx)
CapEx for General Borrowings xx
 Multiply by: Capitalization Rate %
Average Borrowing Cost xx

Specific Borrowing Cost xx

General Borrowing Cost xx
Capitalizable Borrowing Cost xx

Traditional Method of computing Weighted Average CapEx: use if silent

Weighted Average CapEx xx
Less: Specific Borrowing Cost (xx)
Weighted Average CapEx – General xx
Contemporary (Avoidable Interest) Method:
Total Expenditures xx
Less: Specific Borrowing Cost (xx)
Weighted Average CapEx – General xx

Required Disclosures – amount of borrowing costs capitalized & capitalization rate

Things to Remember
● If started/completed in the middle of the year, fractional month is up to month started/completed only
● If 2 or more years, beginning expenditure is accumulated costs
● Accumulated Costs are actual expenditures (not weighted) + capitalized interest + previously accumulated costs
(if any)
● Interest Income is deducted only for specific borrowings
● Always consider months incurred for interest
PFRS 6: MINERAL RESOURCES

Exploration & Evaluation Asset – expenditures incurred in relation to exploration and evaluation of mineral resources
before technical feasibility and commercial viability are demonstrable

Recognition – PAS 16 for tangible and PAS 38 for intangible; entity must develop its own accounting policy, exempting
the need to consider hierarchy of standards

Measurement – initially at cost, subsequently at cost or revaluation model

Impairment of Exploration & Evaluation Asset

● Right to explore has expired and is not expected to be renewed
● Substantive expenditure is neither budgeted nor planned
● Activities have not led to the discovery of commercially viable resource and the entity decided to discontinue
● CA is unlikely to be recovered in full

Presentation – separate non-current asset in the balance sheet

Disclosure – PAS 16 for tangible and PAS 38 for intangible

Wasting/Natural Assets – material objects of economic value and utility to man produced by nature; physically
consumed and cannot be replaced;

Cost of Wasting Assets – after technical feasibility and commercial viability

● Acquisition – price paid to obtain the property right to search; residual value of wasting asset is value of land
● Exploration – incurred after obtaining legal right but before technical feasibility
o Full Cost – whether successful or unsuccessful; usually used by small corporation
o Successful Effort – only successful exploration; usually used by large corporation
Note: Depreciation expenses incurred in exploration are part of intangible exploration assets.
● Development – incurred to exploit or extract the natural resource that has been located through exploration
o Intangible – wasting asset
o Tangible – not a wasting asset, rather PPE
▪ Movable – useful life
▪ Immovable – shorter between its own life (straight-line method) and life of wasting asset
(output method)
● Restoration – incurred in order to bring the property to its original condition; capitalized only when the entity
incurs the obligation; PV of the future cash flows to be incurred

Depletion – systematic allocation of the amount of wasting asset over the period

Depletion Period
● Commencement – when extraction starts
● Shutdown – in periods of no extraction; depreciation continues using remaining useful life
● Resumption – from straight line to output method, use total remaining # of reserves
 ● Cessation – full consumption or exhaustion of mineral resource, whichever is earlier

Depletion (Output) Method Formula:

Depletion/Unit = Depletable Amount .
Total Est. # of Reserves x Actual Extraction
Note: Changes in estimate are accounted for prospectively. Update carrying amount then apply depletion changes.

Presentation – cost of inventories; direct material is depletion

Wasting Asset Doctrine – applies only to wasting asset corporations; exception of trust fund doctrine
Maximum Dividend Formula:
Retained Earnings – Unappropriated xx
Add: Accumulated Depletion xx
Less: Unrealized Depletion in Ending Inventory (xx)
Capital Liquidated in Prior Years (xx) – liquidating dividend already paid
Maximum Dividend xx
PAS 38: Intangible Assets
- Identifiable (separable or arises from legal/contractual right) non-monetary asset without physical
substance/form controlled by entity (power to govern economic benefits while restricting others from enjoying
the same)

Exclusions from Scope:

● Goodwill – PFRS 3 ● Intangible Assets Held for Sale (NCAHFS) – PFRS
5
● Financial Assets – PFRS 9
● Deferred Taxes – PAS 12
● Rights Arising from Exploration & Evaluation –
PFRS 6 ● Leases – PFRS 16
● Expenditure on Development & Extraction of ● Deferred Acquisition Cost arising from
Mineral Resource – PFRS 6 Insurance – PFRS 4
● Intangible Assets Held for Sale in the Ordinary ● Employee Benefits – PAS 19
Course – PAS 2

Initial Measurement – at cost

● Separate Acquisition – purchase price (FV) + DACs
● Deferred Settlement – cash price equivalent
● Business Combination – FV at date of combination
● Government Grant – FV or nominal amount/zero
● Exchange
o w/commercial substance – FV of asset given & boot > FV of asset received > CA of asset given & boot
o w/o commercial substance – CA of asset given & boot; no G/L
● Internally Generated – DAC; brands, mastheads, publishing titles, goodwill & customer lists are not IA thus
expensed
o Research – purpose of obtaining new knowledge; expensed except capitalize initially when acquired in
process
o Development – application of new knowledge obtained before commercial production (designing);
expensed except capitalizable if
▪ Probable and measurable; ▪ Availability of funds &
resources; and
▪ Technical feasibility
(prototype/model); ▪ Asset is available for use/sale
▪ Intention to complete;
Note: If unable to distinguish, assume it is still in the research stage.
Note: PPE, intangible assets, and materials used with alternative use are expensed upon consumption,
otherwise expense in full.

Subsequent Measurement
● Cost Model
● Revaluation Model – allowed only if asset has an active market

Amortization – process of allocating the cost over its useful life

Factors:
● Amortizable Amount = Cost – Residual Value
● Residual Value – presumed to be zero except when there is 3rd party committed to buy or there is active market
at the end of its useful life
● Useful Life – whichever is shorter between legal and useful life
Finite Indefinite

Determinable life Not endless, rather undeterminable

Subject to amortization Not subject to amortization

Tested for impairment only when indicators exist Tested for impairment annually regardless of
indicators

Commencement – when available for use

Cessation – when derecognized or becomes available for sale, whichever is earlier
Amortization Method – use best method; if unable to determine, use straight-line
Presentation – expensed except when DAC of another asset

Subsequent Costs – expensed except capitalize if probable and measurable; legal costs and assets are expensed when
unsuccessful, otherwise, only legal costs are expensed

Major Categories (under US GAAP)

● Marketing Related
o Trademark – indefinite life (REO); could be definite (Villaluz)
o Mastheads – only if purchased separately
o Website Development – except for external use which customers cannot place an order as its purpose is
only for advertising and promotion
▪ Planning – research
▪ Application & Infrastructure – development
▪ Graphical Design – development
▪ Content Development – marketing
▪ Operating – subsequent cost
● Customer Related
o Customer List – only if purchased separately
● Technology Related
o Patent – 20 years legal life
▪ Purchased – remaining legal life or useful life, whichever is shorter
▪ Internally Generated – legal life or useful life, whichever is shorter
▪ Acquisition of Competitive Patent to protect Original – remaining life of old patent
▪ Acquisition of Related Patent
● To extend life of Old – cost of new + unamortized cost of old over the extended life
● No extension – as ease
 o Computer Software
▪ Integral part of PPE (Operating System) – PPE
▪ Rental to others/licensing – Intangible Asset
▪ Sale in ordinary course – Inventory once product masters is reproduced (IA before but after
technical feasibility is established)
● Contract Related
o Franchise – only initial franchise fee is capitalized, continuing franchise fee or periodic payments are
expensed outright
o Leasehold/Lease Right/Bonus
● Artistic Related
o Copyright – shorter between useful and legal life
● Others
o Goodwill (only if acquired under business combination) – average earnings > normal earnings
▪ Residual Approach = Purchase Price – FV of Net Assets
▪ Direct Approach – averaged; exclude non-recurring expenses
● Purchase of Excess Earnings (Goodwill)
Average Earnings xx
Less: Normal Earnings (xx)
Excess Earnings xx
X: Relevant Number of Periods xx
Goodwill xx

● Capitalization of Excess Earnings

Future Earnings xx
Less: Normal Earnings (xx)
Excess Earnings xx
Divide: Capitalization Rate %
Goodwill xx

● Present Value of Excess Earnings

Future Earnings xx
Less: Normal Earnings (xx)
Excess Earnings xx
X: PV of Ordinary Annuity xx
Goodwill xx

● Capitalization of Average Earnings

Average Earnings xx
Divide: Capitalization Rate %
Proposed Acquisition Price xx
Less: FV of Net Assets (xx)
Goodwill xx
PAS 36: Impairment of Assets
- Decline in value of asset because recoverable amount is lower than carrying amount
- Thus, recoverable amount will be the new CA as no asset shall be carried above its recoverable amount

Scope:
● PPE
● Intangible Assets
● Investment Property (Cost Model)
● Investment in Associates & Joint Venture

Identification of Impaired Assets – if there are no indicators, no impairment testing needed except annually for (1)
intangible assets w/indefinite life, (2) goodwill acquired in a business combination, and (3) PPE not yet ready for their
intended purpose
● External
o Change in market value of asset
o Change in technical, market, legal, or economic environment
o Change in interest/market rate
● Internal
o Change in manner or extent in which asset is used
o Physical damage

Measurement of Recoverable Amount (Impairment Testing) – higher between

● FVCTS – net exit price
● Value in Use – PV of net cash flow from using the asset until disposal (pre-tax)
o Reasonable cash inflows & outflows – most recent forecast/budget usually up to 5 years, otherwise
extrapolate
o Residual value
Note: For the concept of perpetuity, just divide annual cash flows to a discount rate.

Recognition of Impairment
● Individual Asset – credited to accumulated depreciation
o No Revaluation Surplus – P/L
o w/ Revaluation Surplus – OCI > P/L
● Cash Generating Unit – represents group of assets that generate cash flows that are independent from other
assets; computed per unit
o Allocate impairment to goodwill
o Allocate excess pro-rata to other assets’ CA (excluding cash and AR if considered collectible)
o Liabilities not included in group except if problem stated

Reversal of Impairment
Recoverable Amount Cost Model – X Revaluation – /
Limit (Recoverable amount had there been no impairment)
Carrying Amount Cost Model – / Revaluation – /
● Individual Asset – if previously impaired asset’s RA exceeds CA but limited only to CA as if no impairment
● Cash Generating Unit – allocate gain on reversal prorate to other assets’ CA limited to asset’s CA as if no
impairment; no reversal of impairment loss for goodwill
PFRS 9: Investment in Equity Securities
- Investments represented by contracts that evidence residual interest in a corporation

Investment in Shares
● Ordinary Shares – depends on ownership %
o Less than 20% – equity securities (PFRS 9)
o 20% to 50% – significant influence presumed; associates (PAS 28)
o More than 50% – control presumed; subsidiary (PFRS 3)
● Preference Shares – regardless of ownership %, classification is equity security

Classificatio Description Initial Subsequent Changes in Presentation Sale of

n Measuremen Measuremen FV Investment
t t
FVPL (FV Held for trading/hold to FV* FV P/L Current Net SP* -
Model) sell (should not be Assets CA = G/L
designated as hedging)
FVOCI (FV Not held for trading FV* + TC FV OCI (net of Generally No G/L
Model) (available for sale/hold tax)** non-current
to collect and sell) or by but Current
irrevocable election if within 12
months
Amortized Unquoted/unlisted Cost Cost – N/A Depends on Net SP - CA
(Cost Model) (hold to collect) Impairment when = G/L
Loss expected to
be sold
*FV excludes dividends when acquired dividend-on (declaration – record), unlike if dividend-ex (record – payment).
**Presented in OCI are only the movements, but presented in the balance sheet is the cumulative (per item) amount.

Accounting for Dividends – recognized only when rights are established (date of declaration); everything at P/L
● Cash Dividends – considered income
● Property/In Kind Dividends – considered income
● Share Dividends – not income because it affects only # of shares and decreases cost per share
o Same Class – memo entry only
o Different Class – allocate cost based on FV; adjust new cost using journal entry
● Shares in lieu of Cash – considered income; measured at FV > Original Cash Dividend
● Cash in lieu of Shares – not dividend income because original declaration is shares; measured at updated cost of
share, difference is recognized in G/L
● Liquidating Dividends (Out of Capital) – not income

Accounting for Share Splits – outstanding shares are called in and replaced with a larger/smaller amount with a
corresponding increase/decrease in Par or Cost per share; memo entry only
# of Shares Cost per Share Cost

Split up (2 for 1) Increase Decrease No effect

Split down (1 for 2) Decrease Increase No effect

Accounting for Special Assessment – decision made by board directors requiring the shareholders to contribute
additional amount of cash
# of Shares Cost per Share Cost

Special Assessment No effect Decrease Increase

Accounting for Stock Rights – pre-emptive right to protect shareholders’ interest; buy shares in the future at a pre-
determined (exercise) price; FVPL
● Separately – debit FV or theoretical value of stock rights, credits investment in shares
o Residual Approach = FV of Shares Right-on – Ex-right
o Direct Approach
▪ Right-on = (FV of Shares Right-on – Exercise Price) / # of rights to purchase 1 share + 1
▪ Ex-right = (FV of Shares Ex-right – Exercise Price) / # of rights to purchase 1 share
● Not Separately – memo entry

Reclassifications – not allowed

Impairment & Reversal – not applicable for FV model

Note: Transfers of investments between categories are accounted for at FV for all transfers.
PAS 28: Investment in Associates
- Entity of which the investor can exercise significant influence (power to participate in the financial and operating
policy of an entity other than control)

Significant Influence
● Quantitative threshold – presumed to exist if at least 20% including potential voting rights
o Ownership
o Warrants & Options
o Convertible Securities
● Qualitative threshold – if there is proof of the ff even if not at least 20%
o Participation in policy making
o Representation in the board of directors
o Provision of technical information
o Material transactions between
o Interchange of managerial personnel

Measurement – Equity Method

● Initial – Cost plus DACs or transaction costs
o Cost > Share in FV Net Assets: Goodwill but not accounted for separately
o Cost < Share in FV Net Assets: Gain on Bargain Purchase (Investment Income)
Note: Undervalued, deduction; Overvalued, addition
● Subsequent – Cost plus/minus Adjustments for Investor’s Share in Changes in Equity of Investee
o Investment Income – add
▪ Share in P/L – add or deduct
▪ Amortization of FV Adjustments – add or deduct; direct relationship treatment with initial
measurement
▪ Intercompany Transactions – profit from these transactions shall be eliminated but added back
if realized; add or deduct amortizations, including previous year
● Upstream – based on % ownership
● Downstream – no consideration on ownership (no clear guidance yet)
Note: The one who sells is the one who adjusts.
▪ Gain on Bargain Purchase – add
▪ Dividends in PS – deduct
● Cumulative – whether declared or not
● Non-cumulative – only if declared
● Redeemable – no adjustment
o Dividends Receivable – deduct
o Share in OCI – add or deduct
o Impairment Loss – deduct

Investee with Heavy Losses – stop recognizing further losses (just disclose) if investor’s share in losses exceed
investor’s interest including the ff:
● Investment in Associate
 ● Investment in PS of Associate
● Unsecured Long-term Receivables
Note: Unrecognized loss must be redeemed first (no entry) before recognizing income for the next years and
charged in the reversed order above.

Changes in Ownership Percentage

● Step-Acquisition (increase) – significant influence was achieved in series of purchases/stages
o FV Approach (PFRS) – FV Original (using new FV) + Cost of New; use if problem is silent
o Cost Approach (US GAAP)
▪ Without catch-up – prospectively; cost of original + cost of new
▪ With catch-up – retrospectively; cost of original (as if equity method) + cost of new
● Dilution (decrease) – not resulting to loss of significant influence; continue equity method
Formula for Gain/Loss:
Net SP (if deemed sale: Proceeds from Issuance x New %) xx
Portion of CA (xx)
G/L on Dilution xx
Portion of OCI/OCL Recycled xx
Total G/L on Dilution xx
● Cessation (decrease) – resulting to loss of significant influence; discontinue equity method change to FV method
Formula for Gain/Loss Realized (Lost):
Net SP (if deemed sale: Proceeds from Issuance x New %) xx
Portion of CA (xx)
G/L on Cessation xx
Portion of OCI/OCL Recycled xx
Total G/L on Cessation xx

Formula for Gain/Loss Unrealized (Retain):

FMV xx
Portion of CA (xx)
G/L on Cessation xx
Portion of OCI/OCL Recycled xx
Total G/L on Cessation xx

Presentation – non current

Reporting – most recent FS of investee
● Difference in accounting period – should not be more than 3 months
● Difference in accounting policy – investee/associate should adjust

When not to apply Equity Method

● investor is a wholly owned subsidiary
● investor is a partly owned subsidiary and its owners do not object to the method not being used
● investor’s security is not traded in a public market
● investor has not filed FS with a regulatory organization
● ultimate parent of investor publishes consolidated FS
PFRS 9: Investment in Debt Securities (Bonds)

Issuer – borrower
Investor – creditor
Bond Certificate – certifies the borrowed funds from investor
Bond Indenture – contract of debt

Types of Bonds:
● Serial Bonds – series of maturities; installment
● Term Bonds – one maturity; lump-sum
● Registered Bonds – bondholder is registered in the books of issuer
● Coupon/Bearer Bonds – bondholder is not registered thus easily transferrable
● Callable Bonds – issuer has option to pay before maturity date
● Convertible Bonds – issuer has option to issue equity securities as payment

Classification Business Initial Subsequent Amortizatio Interest Change Presentatio

Model Measuremen Measuremen n Income in FV n
t t
FVPL Hold for FV* FV No Nominal P/L Current
short-term
profits or
elected
FVOCI Hold to collect FV + TC FV Yes EIR OCI** Noncurrent
and sell
Amortized Hold to collect FV + TC AC Yes EIR X Noncurrent
Cost or maturity
*FV excludes Accrued Interest if acquired between interest dates. Also, FV is the PV of contractual cash flows using EIR.
**computation results to cumulative

Disposal of Investments
FVPL FVOCI Amortized Cost
Net Proceeds* – Previous CA = G/L Net Proceeds – Amortized Cost = G/L Net Proceeds – Amortized Cost = G/L
Cumulative UG/UL transferred to RE
*Excludes Accrued Interest if sold between payment dates.

Reclassification
● only when there is change in business model
● accounted for prospectively
● difference is always classified as gain on reclassification (P/L)
● Rates
o transfers to FVPL – original nominal
o transfers to FVOCI – EIR on reclassification
o transfers to AC – EIR on reclassification

Impairment & Reversal – does not apply to FVPL

Formula:
Recoverable Amount (PV of FCF @Orig EIR) xx
Less: Carrying Amount (@AC) (xx)
Impairment Loss xx
Reversal:
Fair Value FVOCI – / Amortized Cost – X
Limit (AC had there been no impairment)
Amortized Cost FVOCI – / Amortized Cost – X
PAS 40: Investment Property
- Land or building that is owned or held under finance lease for purposes of capital appreciation or for rental to
others otherwise recognized as owner occupied property
- Generates cash flows independent from other assets held

Investment Property (IP) Owner Occupied Property (OOP)

Purpose of Holding Capital appreciation or for rental Production/supply of goods/services
or Administrative
Cash Flowe Generation Independent In conjunction with other assets
Assets included Land or building Assets other than land or building
PFRS PAS 40 PAS 16 or other applicable
Examples
● Land held for long-term ● Property to be used in the
capital appreciation future as owner occupied
● Land held for currently ● Property occupied by
undetermined use employees (regardless if they
pay rent)
● Building (whether vacant or
not) leased out under ● Property held for sale
operating lease
● Property being developed on
● Property being developed for behalf of 3rd parties
purpose of investment
● Property leased out under
property
finance lease

Other Classification Issues:

● Partly IP & Partly OOP
o Can be sold/leased out separately – classify separately
o Cannot be sold/leased out separately – classify whole based on significant purpose
● Ancillary Services – extra services to tenants (e.g., maintenance)
o Insignificant or Incidental – IP
o Significant – OOP (e.g., hotel)
● Intercompany Rentals – applies only to parent-subsidiary relationships
o Separate FS – IP
o Consolidated FS – OOP

Initial Measurement – cost plus transaction cost

● Cost – same with PPE except
o Properties Held Under FL – PV of Lease Payments or FV of Asset, whichever is lower
● Transaction Cost
Included: Excluded:
o Professional/Legal Fees o Start-Up Costs
o Employee Benefits o Initial Operating Losses
o Irrevocable Taxes o Abnormal Amounts

Subsequent Measurement – FV or Cost Model

FV Model Cost Model
Year End Balance Sheet FV Cost – Acc Dep – Acc Impairment
Loss
Year End Comprehensive Income Unrealized Gains & Losess (P/L) Dep. Exp & Impairment Loss
FV Significance Measurement and Disclosure Disclosure and Impairment
*If held under finance lease, only FV Model.
**Inability to determine FV at initial measurement, use cost model until disposal. Under this, residual value is presumed
to be zero.

Changes in Accounting Policy

● prospectively
● change from FV to cost model is not allowed.

Transfers – allowed only when there is change in use;

Evidenced by:
● Commencement/End of owner occupation
● Commencement of development with a view to sell
● Commencement of operating lease
Measurement:
● Cost Model – @CA; no accounting problem
● FV Model – FV will become new CA
o IP to PPE/OOP– gain or loss is presented in P/L
o Inventory to IP – gain or loss is presented in P/L
o PPE to IP
▪ gain is charged to impairment loss, if any, then revaluation surplus
▪ loss is charged to revaluation surplus, if any, then impairment loss

Disclosures
● FV Model
○ Detailed reconciliation between CA at beginning and end
○ Method of determining FV
○ Net G/L from FV adjustments
○ Whether significant fixtures have been separately recognized
● Cost Model – FV of property
Cash Surrender Value
- Amount of cash to be received from the insurance company incase insurance contract is cancelled before
insured employee dies
- Entity should be the beneficiary
- Applies to whole insurance, not term insurance

Accounting
● Initial Recognition – allocate CSV over holding period (usually 3 years)
CSV xx cumulative balance xx
Life Insurance Exp xx 1 yr expense xx
Retained Earnings xx other yrs’ expense xx
● Update balance of CSV
CSV xx
Life Insurance Exp xx
● Dividends – not recognized as dividend income because it’s not the entity’s dividends
Cash xx
Life Insurance Exp xx
● Life Insurance Expense
Insurance Premium xx
Allocated Initial Recognition of CSV (xx)
Decrease in CSV xx
Increase in CSV (xx)
Unexpired Premium (xx)
Dividends Received (xx)
Life Insurance Expense xx
● Upon Death of Employee – update balance of CSV then compute G/L on settlement
Proceeds xx
CA CSV (xx)
Unexpired Premium (xx)
G/L on Settlement xx

Bond Sinking Fund

- Fund set aside to settle bonds payable in the future

Establishment:
● Mandatory – required by a contract
● Voluntary

Administration:
Decision Transaction Recording

Entity Entity’s management All transactions

Trustee Trustee Contributions, Fund Balance, and

Expenses Paid
Balance Computation:
Beg Balance xx
Contributions xx (consider future value of money)
Investment Income xx
Expenses/Losses (xx)
End Balance xx

Other Long-Term Investment

● Preference Share Redemption Fund
● Asset Acquisition/Expansion Fund
● Contingency Fund
Current Liabilities
- Present obligations arising from past events, the settlements of which requires an outflow of economic benefits
- Not required for payee, amount, and timing of settlement to be identified

Essential Characteristics:
● Present Obligation
● Past (Obligating) Event
o Legal – arising from law or contract
o Constructive – arising from entity’s past actions
● Settlement – needs the outflow of economic benefits
o Cash o Services
o Non-Cash
Note: Thus, stock dividends payable is not a liability, rather presented in the equity section as an addition in
share capital.

Measurement:
Definition Initial Subsequent Change in FV Amortization Interest
Expense
FVPL If held through FV FV P/L No Nominal
trading or through
irrevocable
designation
Amortize Otherwise; use if FV – TC AC N/A Yes Effective
d Cost problem is silent
Non- Best estimate Best estimate N/A Yes (if initially Effective
Financial of outflow of outflow measured at
FV)

Presentation (PAS 1) – current liability if

● Settled within normal operating cycle
● Settled within 12mos after end of reporting period
● Held for trading
● No unconditional right to defer settlement for at least 12mos after end of reporting period
Examples:
● Trade payables ● Unearned income realizable within 12mos –
“deferred income” is used for noncurrent
● Current portion of long-term debt
liabilities
● Short-term borrowing
● Accrued expenses
● Current provisions
● Long-term debt currently maturing
● Current tax liability
● Refundable deposits
● Bank overdrafts
● Payroll taxes payable – withholding taxes,
● Credit balances in A/R employee contributions, employer
contributions
● VAT payable
 ● Escrow liability ● Breach of covenants – consider term of grace
period; however, if grace period is given after
● Dividends payable – except stocks
year-end, classify as current
● Refinancing after year end with no right to
refinance – not an adjusting event

Specific Current Liabilities:

● Trade A/P
Unadjusted Balance xx
Undelivered/Post-Dated Checks xx
Debit Balances xx
Effect of Freight Terms xx
Adjusted Balance xx
● Unearned Income – goods, services, use of entity’s resources, gift certificates
Beginning Balance xx
Cash Receipts/Sales xx
Earned Portion/Redemption (xx)
Expected not to be Redeemed (xx)
Ending Balance xx
Note: Expiration of gift certificates is not allowed here in the Philippines.
● Refundable Deposits
Beginning Balance xx
Receipts xx
Deposits Returned (xx) charged to cash/property
Deposits Expired (xx) charged to other income
Deposits Cancelled (xx) charged to other income
Ending Balance xx
● Escrow Liability – when entity as intermediary
Beginning Balance xx
Cash Receipts xx
Interest Income xx
Remittances (xx)
Expenses Paid (xx)
Ending Balance xx
● Purchased Annuity for payment of Prize
Note Payable xx
Contest Prize Expense (Purchased Annuity) (xx) note payable, net of current portion
Discount on Note Payable xx
Notes Payable
- Payable with certain document called promissory note
- Measurement: FVPL or at Amortized Cost

Debt Restructuring
- Creditor grants debtor a concession, not normally given on a business transaction, because the debtor is having
financial difficulties

Asset Swap
● under PFRS
CA of Liability xx (includes accrued interest)
CA of Asset (xx)
Gain on Extinguishment xx (divided into restructuring and exchange)

● under US GAAP
CA of Liability xx FV of Asset xx
FV of Asset (xx) CA of Asset (xx)
Gain on Restructuring xx Gain on Exchange/Transfer xx

Equity Swap
CA of Liability xx (includes accrued interest)
Initial Measurement of Equity (xx) (FV of equity > FV of liability > CA of liability)
Gain on Extinguishment xx (no gain, only premium, if CA of liability is used)

Modification of Terms
● Decrease in interest rate
● Forgiveness of accrued interest
● Extension of maturity date
● Decrease in principal amount

CA of Liability xx (includes accrued interest)

PV of Modified Obligation (xx) (use original EIR @ PV, new EIR becomes nominal)
Gain on Extinguishment xx
Note: There is gain only if there is substantial modification or if at least 10% of CA of old liability

Loans Payable
- Financial liability arising from a loan granted by a financial institution for a certain borrower
- Initial Measurement: FV less origination fee
Note: Direct origination costs are ignored unlike loans receivable because it is incurred by the lender
- Subsequent Measurement: Amortized Cost

Bonds Payable
- Contract of debt wherein one party borrows funds from another party
- Issuer – debtor; Holder – creditor/investor
- Formula:
Issue Price xx
 Accrued Interest, if any xx
Less: Bond Issue Cost (xx) – transaction costs

Types:
● As to Maturity
o Term – one maturity date on a lumpsum basis
o Serial – series of maturity dates or through installment
o Extendable – holder has right to extend maturity date
o Retractable – holder has right to retract maturity date
● As to Transferability & Payment of Interest
o Registered – requires the bondholder to be registered in the corporation books
o Bearer/Coupon – no need for registration with annual interest payments
o Zero-Coupon – no periodical interest payments
o Income – requires interest payments only when there is income
o Participating – bondholder participates in p/l sharing aside from interest payments
● As to Risks & Security
o Mortgage – requires real property as collateral
o Collateral Trust – requires personal property as collateral
o Debenture – no collateral required
o Junk – investment on corporations having financial difficulties; highest risk among all
● As to Redemption
o Callable – issuer has option for early retirement/settlement of bonds
o Convertible – issuer has option to settle bonds with equity instruments

Classification & Measurement

Initial Subsequent Changes in FV Interest Expense
FVPL FV* FV* P/L Nominal
AC* FV* – TC AC N/A Effective
*FV excludes accrued interest. However, included in looking for issue price.
**Use if silent.

Retirement – extinguishing/settling the liability

● At maturity – no accounting problem because CA = Face Value
● Before maturity (Early Retirement)
Retirement Price xx excludes accrued interest
CA at Retirement Date (xx)
G/L on Retirement xx

PFRS 9 & PAS 32: Compound Financial Instrument

- Contains both liability and equity component from perspective of issuer
- Residual approach: Net Proceeds less Liability @FV > @PV = Equity

Bonds (liability) with Warrants (equity) – instruments giving the holder a right to purchase shares in the future at a
fixed (exercise) price; each component is independent from each other
Issuance Cash xx
Discount on Bonds xx
 Bonds Payable @ Face Value xx
Premium on Bonds xx
Share Warrants Outstanding – SP xx

Exercise of Share Warrants Cash @ Exercise Price xx

– issuance of shares Share Capital xx
Share Premium xx

Share Warrants Outstanding – SP xx

Share Premium xx

Convertible Bonds – with bond conversion privilege (BCP) as equity component; components are interdependent from
each other thus the exercise/retirement of a component extinguishes the other
Issuance Cash xx
Discount on Bonds xx
Bonds Payable @ Face Value xx
Premium on Bonds xx

SP - BCP xx
Exercise of BCP – issuance Bonds Payable xx
of shares to extinguish Premium on Bonds xx
liability Share Capital xx
Share Premium (excess) xx
Discount on Bonds xx

CA of Bonds less SP - BCP xx

Conversion at Par Share Premium xx
Retirement Liability: Bonds Payable@FV vs CA = (P/L)
Equity: BCP vs CA = (Equity)
PAS 37: Provisions
- Present obligations of uncertain timing and/or amount
- Commonly known as estimated liabilities

Recognition Criteria:
● Present Obligation
● Probable
Likelihood Outcome Liability Asset
More than 95% Virtually certain Asset – Accrue
51%-95% Probable Provision – Accrue Contingent Asset –
Disclose
21%-50% Possible Contingent Liability –
Disclose Ignore
Below 20% Remote Ignore
● Measurable

Measurement – at best estimate of expenditures required to settle obligation

● General Rule – most likely outcome
● Distributed Probability – expected value/weighted average amount
● Range of Possibility – midpoint + disclose excess contingency
● Onerous Contract – lower of cost of fulfilling or cost of penalty
● Other Measurement Consideration
o Risk & Uncertainty – amount of provision is multiplied to a risk adjustment factor
o Present Value – if discounting is material
o Future Events – if there is sufficient and objective evidence
o Expected Disposal of Assets – not considered
o Reimbursement – if virtually certain; considered as separate asset and not netted on liability but
allowed to be offset on income/loss
o Change in Estimate – accounted prospectively
o Future Operating Losses – not a provision
o With deductible clause – deductible clause for loss contingency but liability should still bel the estimate

Recording
General Rule: thus, could aso record Expense/Loss xx
gain for settlement Est. Liability xx
Exception: When directly attributable Asset xx
cost of an asset Est. Liability xx

Common Types
● Court Cases/Lawsuits – upon inflicting damage/harm
● Premiums Liability – upon sale
Beginning Balance xx
Premiums Expense xx = est. premiums to be distributed x net cost
Less: Actual Liability (xx) = actual premium distributed x net cost
Ending Balance xx
● Warranty Liability – upon sale
Beginning Balance xx
Warranty Expense xx = total % during warranty period regardless of timing
Less: Actual Liability (xx)
Ending Balance xx

● Guarantee – default of party guaranteed

● Point System – e.g., loyalty cards
Stand-alone Selling Price % – prorated
Stand-alone Selling Price of Points % – prorated
Unadjusted Sales Revenue 100% – usually given; transaction price

Product Sales Revenue xx

Revenue from Points xx – (actual / estimated) x stand-alone SP
Adjusted Sales Revenue xx
● Decommissioning Liability – provision of law/contract; consider PV thus amortized
● Restructuring Liability – when there is detailed formal plan that created valid expectations; only those cost
directly associated to the restructuring, the ff are excluded:
o Retraining/relocation costs
o Marketing costs
o Investment in new systems
PAS 19r: Employee Benefits
- All forms of considerations given by the entity to its employee in relation to rendition of services or termination
of employment

Types:
● Short Term – to be settled wholly within the next 12 months after the reporting period
● Post-Employment – given after completion of employment (e.g., retirement)
● Termination – as a result of termination from employment; accounted as short term if to be settled wholly
within 12 months, otherwise as long term
o Employee’s decision – accepted offer
o Employer’s decision – forced termination with offer
● Other Long Term – residual definition; accounted same as defined benefit plan except all of the DBC is presented
at P/L, no OCIs

Short Term Employee Benefits – expensed as incurred or cost of asset if directly attributable cost
● Salaries & wages
● Compensated absences
o Accumulating – carried forward; recognize future salary according to service rendered + current salary
according to leaves used/taken
▪ Vesting – employee gets paid for unused credits when they leave company
▪ Non-vesting – employee does not get paid
o Non-accumulating – not carried forward thus no liability; recognize current salary according to leaves
used/taken only
● Profit-sharing & bonuses – recognize only when there is obligation to make payment and reliable estimate can
be made
o Before bonus before tax = BR x NI
o After bonus before tax = BR x NI / 1 + BR
o Before bonus after tax = BR x NIAT / 1 – (BR x TR)
o After bonus after tax = BR x NIAT / 1 + BRAT

Post-Employment Benefits
● Defined Contribution Plan – employee has risk of loss; no actuarial assumptions thus undiscounted; required
contribution is the amount recognized as expense
Required= Actual Contribution Retirement Benefit Expense xx
Cash xx

Required > Actual Contribution Retirement Benefit Expense xx

Cash xx
Accrued Salaries xx

Required < Actual Contribution Retirement Benefit Expense xx

Accrued Salaries xx
Prepaid Expense xx
Cash xx
● Defined Benefit Plan – employer has risk of loss; with actuarial assumptions thus discounted
1. Defined Benefit Obligation – PV of any expected future payments required to settle the plan through
projected unit credit method (as years of service increase, benefit increases); for the whole, not per
employee
Beg. Balance xx
Current Service Cost xx PV of adtl benefit as another year of service is rendered
Past Service Cost xx change in DBO balance after amendment/curtailment
Interest Cost xx beg. balance x (settlement) discount rate
Actuarial Loss xx changes in best estimate of the variables that will
Actuarial Gain (xx) determine the ultimate amount of obligation
Benefits Paid (xx) payment of benefit on due date/normal time
CA of DBO Settled in Adv (xx) early retirement; creates G/L
End Balance xx could also be PV of service cost according to years
of service

2. FV of Plan Assets – balance of any fund set aside to settle retirement obligation; considered as
separate entity (through long term assets or qualifying insurance policies) thus not available for
exhaustion by creditors unless there is surplus
Beg. Balance xx
Contributions xx
Actual Return xx interest/dividend income and remeasurements
Benefits Paid (xx)
Settlement Price (xx) for early retirement; creates G/L
End Balance xx

3. Surplus/Deficit
FV of Plan Asset xx
DBO (xx)
Surplus/Deficit xx

or

Defined Benefit Cost xx

Contribution to Plan xx
Surplus/Deficit xx

4. Net Defined Liability/Asset – only account that affects balance sheet of entity; the rest are
considered separate entity
▪ Liability (Accrued Pension) – deficit
▪ Asset (Prepaid Pension) – surplus vs asset ceiling, whichever is lower

5. Defined Benefit Cost – only account that affects comprehensive income

▪ Service Cost (P/L)
Current Service Cost xx
Past Service Cost xx
Loss on Settlement xx
Gain on Settlement (xx)
 xx
▪ Net Interest (P/L) – on beginning balances
Interest Expense xx on DBO (market yield > entity issued)
Interest Income (xx) on FV of Plan Asset
Use of Asset Ceiling xx on excess
xx
▪ Remeasurements (OCI)
Actuarial Loss xx
Actuarial Gain (xx)
Remeasurement on Asset Ceiling xx +/- use of asset ceiling
Remeasurement of FVPA xx charged first to interest income
xx
6. Over/Under Funding = DBC less Actual Contributions
7. Accumulated Benefit Obligation – disregard; computed using current salary
Note: If plan has attributes of both defined contribution and defined benefit, account as defined benefit.
● Contributory Plan – both employee and employer contribute
● Non-Contributory Plan – only employer contributes
● Funded Plan – managed by third person (e.g., bank)
● Unfunded Plan – managed by own entity
● Multi-employer Plans – two or more employer contributes to the fund
● Insured Benefits – employer pays insurance premium to insurance company for the plan; generally same as
defined contribution
PAS 12: Income Taxes
- All entities (whether public or private) are required to comply

Types of Income – most of the time, are unequal; differences are reconciled
Accounting Income Taxable Income
Based on PFRS Based on
Usually on accrual basis Usually on cash basis
For external reporting To compute income tax payable

Types of Differences
● Permanent Differences – included in one income but will never be included in the other; not result to any
deferred tax
o Nontaxable income
o Nondeductible expense
o Income subject to final tax
● Temporary Differences– included in one income currently, but will be included in the other in the future; could
be due to timing differences
Taxable Temporary Difference Deductible Temporary Difference
Creates future taxable amounts Creates future deductible amounts
*AI > TI *AI < TI
**Asset: CA > TB **Asset: CA < TB
**Liability: CA < TB **Liability: CA > TB
Creates DTL Creates DTA
e.g.., Installment Sales, Prepaid Expenses, e.g., Accrued Expenses, Unearned Income, Bad
Revaluation Surplus Debts Expense
*Income Statement Approach
**Balance Sheet Approach – prescribed by PAS 12

Tax Base
= Cost – Accumulated Depreciation (Tax Code)
● Asset = future deductible amount
● Transaction is Taxable when Cash is
● Liability = CA – future deductible amount
Paid/Collected = Zero
● No Tax Consequence = CA
● Asset is Depreciable/Amortizable

Computation of Tax Expense

Accounting Income xx
Nondeductible Expense xx
Nontaxable Income (xx)
Income Subject to Final Tax (xx)
Profit Subject to Tax xx x tax rate (only if same future & current) = TITE
Deductible Temporary Difference xx x future enacted tax rate = DTB; DTA; P/L
Taxable Temporary Difference (xx) x future enacted tax rate = DTE; DTL; P/L
Taxable Income/NOLCO xx
Multiplied by: Current Tax Rate %.
Current Tax Expense xx = current tax liability net of tax credits & payments
Deferred Tax Expense/Benefit xx(xx) = noncurrent liability/asset section
Total Income Tax Expense xx
Initial Recognition
● DTL – all taxable temporary difference except
o Goodwill arising from business combinations
o Initial recognition on transactions that neither affect either income
o Undistributed earnings on subsidiary, joint venture, and associate if investor can control timing of
reversal
● DTA – all deductible temporary difference and NOLCO when it is probable that there is taxable income in the
future
Note: DTA and DTL could be offset if levied by the same authority and has the legal right to do so.

Tax Allocations
● Intraperiod – allocation on same period but to different items
o Profit or Loss
▪ From continuing operations
▪ From discontinued operations
o OCI/OCL
o Certain Equity Items (Retained Earnings)
▪ Change in accounting policy
▪ Correction in prior period error
● Interperiod – allocation between different periods (e.g., TTD and DTD)
PFRS 16: Leases
- Contract that conveys (lessor) the right to use an asset to another party (lessee) in exchange for consideration

Characteristics:
● Right to Control the Use of Asset – if both right to obtain substantially all economic benefits and right to direct
the use are present
● Identified Asset – explicitly or implicitly
o Portion of Assets – identified as long as physically distinct
o Substantive Substitution Rights – should not exist and not identified
● Lease Term – non cancellable period of lease
o Option to extend – added if reasonably certain to exercise
o Option to terminate – as is if reasonably certain not to exercise

Types:
● Finance/Capital Lease – lease transaction in form but in substance, purchase/sale of an asset in installment
● Operating Lease – regular lease

Accounting for LESSEE – recognize right-of-use asset and lease liability

● Generally finance/capital lease unless
o Short-term Lease unless there is purchase option
o Low-value Lease (considering brand new asset)
● Lease Liability
o Initial Measurement – PV of lease payments using implicit > incremental borrowing rate
▪ Fixed Lease Payments
▪ Variable Lease Payments – modifications are considered as if new cost
Initially Subsequently

Based on Index ROU Asset & Lease Liab Adjust for changes

Based on Sales/Usage Expensed as incurred

In-Substance Fixed ROU Asset & Lease Liab Not adjusted for changes

▪ Guaranteed Residual Value – only if asset will revert back to lessor and guaranteed by lessee;
assumed will revert back
● Guaranteed by Lessor – lessee, related party, or unrelated party
● Guaranteed by Lessee – lessee or party related to lessee
▪ Purchase Option – only if reasonably certain to be exercised
After Exercised After Not Exercised

Lease Liability xx Accum. Dep xx

Cash xx Lease Liability xx
Loss on Finance Lease xx
ROA Asset xx
Gain on Finance Lease xx
 ▪ Termination Cost
▪ Penalties
▪ Ignore: Executory Cost
o Subsequent Measurement – amortized cost
● Right of Use asset
o Initial Measurement – cost
▪ Initial Measurement of Lease ▪ PV of Estimated Dismantling
Liability Cost
▪ Lease Payments Made ▪ Net: Lease Incentives
at/before Commencement
▪ Initial Direct Cost
o Subsequent Measurement
▪ Cost Model – generally ▪ FV Model
▪ Revaluation Model
o Depreciation – deduct guaranteed residual value
▪ Use Asset’s Useful Life if
● Transfer of Ownership
● Purchase Option (reasonably certain to exercise)
▪ Shorter between Useful Life & Lease Term
● Separating Components of Contract
o Lease Component – relative standalone price
o Non-Lease Component – aggregate standalone price
● Lease Extension – increase in lease term
PV of Lease Payments: Remaining Term @ New Rate xx
PV of Lease Payments: (Extension Term @ New Rate) (PVof1 Remaining Term) xx
New CA of Lease Liability xx
Previous Lease Liability (xx)
Increase in Lease Liability xx
CA of Right of Use Asset xx
New CA of Right of Use Asset xx
● Lease Modification – accounted as separate lease thus original terms must not be adjusted
o increase in scope – remaining term @ new rate
▪ lease liability – new terms
▪ right of use asset – CA add/deduct changes brought by new terms to lease liability
o decrease in scope – following items are based on % decrease in scope
Decrease in CA of Lease Liability xx
Decrease in CA of Right of Use Asset xx
Termination Gain/Loss xx
● Purchase of Underlying Asset
Cash Payment xx
CA of Right of Use Asset xx
Total Consideration xx
 CA of Lease Liability (xx)
Cost of Asset Acquired xx
● Presentation
o ROU Asset – noncurrent
▪ Separate
▪ Combined/aggregated to another asset (with disclosures)
o Lease Liability – current and noncurrent portion
▪ Separate
▪ Combined/aggregated to another liability (with disclosures)

Accounting for LESSOR

● Generally operating lease unless there is
o Transfer of Ownership
o Bargain Purchase Option
o Lease Term represents Major Portion (at least 75%) of Asset’s Economic Life
o PV of Minimum Lease Payments is Substantially All (at least 90%) of the FV of Asset
● If Finance Lease
o Direct-Financing – lessor is engaged in financing operations; income is limited to interest income
o Sales-Type – lessor’s nature of business is manufacturing/dealership; interest income and gross profit
Direct-Financing Sales-Type
Gross Investment/Receivable* Lease Payments & Residual Value (guaranteed or not)
Net Investment/Receivable – Cost + Initial Direct Cost Lease Liability of Lessee
amortized over lease term (guaranteed or not)
Unearned Interest Income Gross Investment – Net Investment
Sales N/A Net Investment or FV of Asset,
whichever is lower
COGS N/A Cost of Asset + Initial Direct Cost
Gross Profit N/A Sales – COGS
Interest Income Based on Net Investment Based on sale
Total Income N/A Profit + Interest Income
*If cannot be determined, Net Investment – PV of RV = PV of LP; PV of LP / PV of Annuity = Annual Rental

Accounting for Operating Lease

Lessor Lessee
Rental Payments – straight line basis Income Expense
(all payments averaged)
Initial Direct Costs – over lease term; Added to CA of Asset N/A
except minor costs expensed outright Expensed on same basis as income
Depreciation – over useful life Expensed N/A
Lease Bonus – over lease term; Unearned Rent Income (Current Prepaid Rent
straight line basis Liability)
Security Deposit Non Current Liability Receivable
Rent Receivable/Payable Revenue less Actual Rent Received

Journal Entries
Lessor Lessee
Acquisition of Equipment Equipment xx
Cash xx
Executory Costs Expense xx No Entry
Cash xx
Initial Direct Costs IDC xx
Cash xx
Lease Bonus Cash xx Prepaid Rent xx
Unearned Income xx Cash xx
Depreciation of Equipment Dep Exp xx
Accum. Dep. xx No Entry
Amortization of Initial Direct Costs Amort Exp xx
IDC xx
Amortization of Lease Bonus Unearned Income xx Rent Expense xx
Rent Income xx Prepaid Rent xx
Accrual of Rent Income Rent Receivable xx Rent Expense xx
Rent Income xx Rent Payable xx
Receipt of Rent Payment Cash xx Rent Payable xx
Rent Receivable xx Cash xx

Sale and Leaseback – transaction wherein an entity sells a property to another entity and immediately leases it back
from its new owner
● Sale Transaction (PFRS 15)
o Seller-Lessee – Finance Lease
▪ Lease Liability – same as regular using lease term
▪ ROU Asset – proportional to the rights retained by seller
● SP = FV: CA x (Lease Liability / FV of Asset); Regular
● SP > FV: CA x [(Lease Liability – Excess) / FV of Asset]; use FV in determining
depreciation; with financial liability for seller-lessee
● SP < FV: CA x [(Lease Liability + Excess) / FV of Asset]; use SP in determining depreciation
with financial liability for buyer-lessor
▪ G/L on Sale – proportional based on rights transferred; (Regular SP – CA) x (Rights Transferred /
CA); allowed not to proportionate if short-term lease
o Buyer-Lessor – Purchase of Asset
● Not Sale Transaction (PFRS 9)
o Seller-Lessee – recognize finance liability based on cash received
o Buyer-Lessor – recognize financial asset based on cash paid
Shareholder’s Equity (SHE)
- Residual interest of the owners of the assets of the entity after deducting liabilities

Components of SHE
● Contributed Capital – owner transactions
o Legal Capital
▪ Outstanding Shares (deduct also treasury shares although not included as legal capital)
● Share Capital – issued shares or fully paid shares; measured at par value; with stock
certificate; includes stock dividends payable
●Subscribed Share Capital – not yet paid or fully paid shares; measured at par value;
without stock certificate but still entitled to dividends
o Share Premium – any other owner transaction that is not under share capital
Included as Legal Capital only if no
● Capital gains (e.g., treasury, retirement,
par value shares
conversion))
● Excess over stated
● Share options, warrants, and bond
value
conversion privilege
● Declaration of stock
● Quasi-reorganization & recapitalization
dividends (MP > Par or
Stated) ● Donated capital

Excluded from Legal Capital

o (Subscription Receivable) – receivable from subscribed shares; deduction from contributed capital
(contra-equity), unless short-term (trade receivables)
● Accumulated Comprehensive Income
o Retained Earnings – accumulated P/L
Note: Should follow trust fund doctrine where investments should not be returned to investors unless there
is excess earnings (unrestricted RE) or during liquidation.
o Accumulated OCI/OCL
● Deductions from SHE
o Treasury Shares
o Watered Shares/Discount on Share Capital – shares issued below par value
o Liquidated Capital – only if entity is a wasting asset corporation

Reserves – minimum line item according to PAS 1

● Share Premium
● OCI/OCL
● Appropriated Retained Earnings

Issuance, Subscription, and Retirement of Shares

● Journal Entries
Memorandum Method (use if Journal Entry Method
problem is silent)
Authorization Memo Entry Unissued Share Capital xx
Authorized Share Capital xx
 Issuance for Cash Cash xx Cash xx
Share Capital xx Unissued Share Capital xx
Share Premium xx Share Premium xx
Subscription Subscription Receivable xx Subscription Receivable xx
Subscribed SC xx Subscribed SC xx
Share Premium xx Share Premium xx
Full Payment of Subscription Cash xx Cash xx
Subscription Receivable xx Subscription Receivable xx

Subscribed SC xx Subscribed SC xx
Share Capital xx Unissued Share Capital xx
Retirement – Gain Share Capital xx Unissued Share Capital xx
Share Premium xx Share Premium xx
Cash xx Cash xx
SP – Gain xx SP – Gain xx
Retirement – Loss Share Capital xx Unissued Share Capital xx
Share Premium xx Share Premium xx
SP – Gain (1) xx SP – Gain (1) xx
Retained Earnings (2) xx Retained Earnings (2) xx
Cash xx Cash xx
● Measurement of Consideration
o Cash – face value
o Non-cash Assets – FV of noncash > FV of shares > par value of shares
o Services – FV of noncash > FV of shares > par value of shares
o Liability – FV of shares > FV of liability > par value of shares
● Shares to be Issued
o One Class
Ordinary Preferred

Return on Investment Residual Fixed

Liquidation Least Priority Priority

Voting Power Yes None

Issuance Par or No Par* Always at Par

*If no par, stated value should not be less than 5php

o Two Classes for a Lumpsum Consideration – split the consideration
1. FV Approach – in accordance with their FV or sales price; priority
2. Residual Approach
● Related Costs
o Share Issuance Costs (SIC) – deduction (net of tax) from share premium of original issuance > retained
earnings
o Listing Cost – expensed outright
o Joint Cost – allocate according to number of shares
● Delinquent Subscriptions – subscriber failed to pay subscription price in full within the day fixed by BOD
1. Compute Bid Price – Subscription Balance + Accrued Interest + Other Cost
2. Offer to highest bidder – willing to pay with lowest # of shares; remaining shares will be given to
delinquent subscriber
3. If no highest bidder, offered to corporation itself – no shares will be given to delinquent subscriber
 ● Retirement – cancellation of issued shares; different from treasury shares; follow trust fund doctrine

Treasury Shares – entity’s own shares that are previously issued and then reacquired by the entity; can now be
reissued above or below par value; limited to trust fund doctrine thus should then be appropriated (requirement even if
problem is silent)
● Characteristics
o Entity’s own shares
o Previously issued and not canceled
o Not outstanding shares
● Reacquisition – measured at cost; also at par value method but not allowed
Treasury Shares xx
Cash xx
● Reissuance
Selling Price xx @ face or fair value
Less: Cost of Treasury Shares (xx) @ specific identification, FIFO, or weighted average
G/L on Reissuance xx @ SP > RE

GAIN LOSS
Cash xx Cash xx
Treasury Shares xx Share Premium – TS xx – (1st prio)
Share Premium – TS xx Retained Earnings xx – (2nd prio)
Treasury Shares xx
● Retirement – capital gains/losses are charged to SP of original issuance > RE
GAIN LOSS
Share Capital xx Share Capital xx
Share Premium xx Share Premium xx – (1st prio)
Treasury Shares xx Share Premium – TS xx – (2nd prio)
Share Premium – TS xx Retained Earnings xx – (3rd prio)
Treasury Shares xx

Other Equity Instruments

● Redeemable Preference Shares
● Callable Preference Shares
Redeemable Preference Shares Callable Preference Shares
Acquisition Option Holder Issuer
Redemption Period Mandatory Indefinite
Classification Liability Equity
Redemption Extinguishment of Liability Retirement of Shares
Gain on Redemption P/L Share Premium
Loss on Redemption P/L SP > RE
Dividends treated as Interest Dividends
Dividends deducted from Income Retained Earnings
● Convertible Preference Shares
o Retirement of Preference Share – capital gains/losses are charged to SP > RE
o Issuance of Ordinary Share
● Stock Options – given to executives, directors, & other employees in exchange for future services
 ● Stock Warrants – given to principal holders; attached to
o Bonds – compound financial instrument; residual approach
o Preference Shares – not a compound financial instrument; FV approach > residual approach
● Stock Rights – given to shareholders as compliance to preemptive rights; without consideration
Warrants Rights

Issuance Cash xx Memorandum Entry

Warrants Outstanding xx

Exercise Cash (@EP) xx Cash (@EP) xx

Share Capital xx Share Capital xx
Share Premium xx Share Premium xx

Warrants Outstanding xx
Share Premium xx

Expiration Warrants Outstanding xx Memorandum Entry

Share Premium xx

Donations
● Source
o Unrelated party – credited to other income
o Related party – credited to donated capital
● Measurement
o Cash – face value
o Non-cash asset – fair value less directly attributable cost of donation
o Entity’s own share – memorandum entry because classified as treasury shares (thus deducted from
outstanding shares)
Upon Reissuance:
Cash xx
Donated Capital xx

Retained Earnings
● Types
o Unappropriated/Unrestricted
o Appropriated – restricting RE for it not to be declared as dividends; however, restricting does not always
require appropriating (has to be explicit)
▪ Legal – required by law (e.g., appropriation for treasury shares)
▪ Contractual – required by a contract (e.g., appropriation for bond sinking fund)
▪ Voluntary – based on discretion of management (e.g., appropriation for plant expansion)
Note: If RE has negative balance, it is called deficit. However, if entire SHE is negative, it is called capital deficiency
● Statement of Retained Earnings (Components) – shows movement of RE during the year; not part of complete
set of FS
Unappropriated RE, Beg xx
Cumulative Effect of Change in Accounting Policy xx
Cumulative Effect of Correction of Prior Period Errors xx
 Adjusted Unappropriated RE, Beg xx
Net Income xx
Less: Dividends (xx)
Movement of Appropriations xx
Unappropriated RE, End xx

Accounting for Dividends – distributions of earnings/capital to shareholders in proportion to their shareholdings; not
allowed if deficit balance
● Relevant Dates
o Date of Declaration – formal announcement by BOD in relation to dividends; generally, date liability is
recognized, unless further approval is required
o Date of Record – date shareholders entitled to receive dividends are listed; no journal entry needed
o Date of Payment/Settlement
● Types
o Out of Earnings – return on investment; net income
▪ Cash Dividends
▪ Scrip/Liability Dividends – deferred cash dividends; generally, interest bearing
▪ Property Dividends – dividend in kind; remeasured every year end
● Payable – fair value of asset; remeasured at year end and date of settlement; difference
is recognized as G/L on settlement
● Asset to be Distributed – remeasured lower of CA and FV less cost to sell @ year end;
difference is recognized as impairment loss; becomes NCAHFS thus not subject to
depreciation
▪ Stock Dividends – not a liability, rather an addition to SHE
● Unissued Shares
o Large (20% or more) – par value charged to RE
o Small (less than 20%) – FV at declaration > par value charged to RE
● Treasury Shares – cost of treasury shares
o Out of Capital – return of investment
▪ Liquidating Dividends – allowed only when (1) at process of liquidation or if (2) entity is wasting
asset corporation; any amount paid in excess of retained earnings
Summary of Journal Entries:
Declaration Settlement
Cash Dividends Retained Earnings Dividends Payable
Div. Payable Cash
Scrip Dividends Retained Earnings Interest Expense
Scrip Div. Payable Scrip Div. Payable
Cash
Property Dividends Retained Earnings Prop. Div. Payable
Prop. Div. Payable Loss
NCAHFS
Gain
Optional Dividends (Property or Retained Earnings If Cash:
Cash) – based on estimated Div. Payable Prop. Div. Payable
probability Prop. Div. Payable Retained Earnings
Div. Payable
 If Property:
Prop. Div. Payable
Asset
Gain
Stock Dividends – Unissued Retained Earnings Stock Div. Payable
Stock Div. Payable Share Capital
Share Premium
Stock Dividends – Treasury Retained Earnings Treasury Shares
Treasury Shares Share Capital
*Basis: Outstanding Shares
● Dividends for Preference Share
o Cumulative – entitlements are carried over; dividends in arrears; only disclosed in notes if not declared
o Noncumulative – not carried over; paid only dividends for the current year; assume if silent
o Participating – entitled not just for fixed entitlement, but also for remaining entitlement based on share
capital; basic dividend is also given to ordinary with lowest rate of preference share from ordinary par
for current year if two or more are participating
o Nonparticipating – only entitled for fixed entitlement; assume if silent

Recapitalization – change in capital structure of an entity brought about by cancellation of old shares and issuance of
new shares; total SHE remains the same
● Change from Par to No Par or Vice Versa
Share Capital (@Par) xx
Share Premium xx
Share Capital (@Stated Value) xx
Share Premium xx
● Reduction in Par/Stated Value
Share Capital (@Par) xx
Share Premium xx
Share Capital (@Lower Par) xx
Share Premium xx
● Share Splits – no journal entry
● Declaration of Stock Dividends

Quasi-Reorganization – permissive procedure (subject to approval of SEC) which an entity with financial difficulty is
allowed to establish a fresh start accounting and eliminate deficit in retained earnings; affects SHE
1. Revalue Assets and Liabilities charged to Revaluation Surplus/Retained Earnings (mostly write downs)
2. Wipe out deficit through revaluation surplus or SP from recapitalization
PFRS 2: Share-Based Payments
- Transaction where entity acquires goods/services and pays for them through issuance of its own equity instrument
or through cash but based on the FV of its own equity instrument

Types:
● Equity-settled – increases equity
○ Non-employees – FV of Asset Received > FV of Equity Issued on receipt date
○ Employees (Share-Based Compensation/Options) – FV of Equity Issued (Option) > Intrinsic Value (FV
of Shares at Year End – Exercise Price) on grant/agreement date
■ Compensation Expense
● FV of Options – until vesting period
● Intrinsic Value – until options are all exercised; once vesting period is done, intrinsic
value is the increase in FV (if decrease, considered gain on reversal)
Note: Consider estimates at year end.
■ Vesting/Service Period – period by which all specified conditions attached to the options are met
or before options are exercisable
● No Vesting Period – full recognition of expense; use if problem is silent
● With Vesting Period — allocate compensation expense
■ Vesting Conditions
● Service Condition – to stay with the company; consider both employees who left and is
expected to leave then update annual expense
● Performance Condition – conditions other than staying
○ Non-Market Condition – not related; discontinue recognition of expense when
there is non-fulfillment
○ Market Condition – related; ignore when there is non-fulfillment
■ Modifications – only those beneficial are accounted, otherwise ignored
● Increase in FV – additional compensation expense allocated over the remaining vesting
period
● Decrease in Vesting Period – remaining compensation expense is recognized over
shortened period
■ Acceleration of Vesting – cancellation/settlement of options during vesting period
● Unrecognized Compensation Expense – recognized immediately
● Cash Settlement
○ FV > Cash Price – deducted from the balance of ordinary share options
outstanding
○ FV < Cash Price – additional expense
● Cash-settled (Share Appreciation Rights) – increases liability
○ Compensation Expense – until full settlement
○ Measurement – FV of Equity Issued (Right) > Intrinsic Value (FV of Shares at Year End –
Predetermined Price) at each reporting date
Note: Unlike equity-settled, no need to separate increases in FV from computation. Always use updated
FV.
○ Vesting Period – period by which all specified conditions attached to the options are met or before
options are exercisable
■ No Vesting Period – full recognition of expense; use if problem is silent
■ With Vesting Period — allocate compensation expense
○ Modified to Equity-Settled
1. Update accrued liability using original vesting period
2. Updated accrued liability recognized is canceled
 3. Share option to be measured at FV
4. Difference between accrued liability and FV of option is recognized as additional compensation
expense
5. Further compensation expenses are computed using original vesting period
○ Use both FV (for vesting period and remaining SARs) and intrinsic value (exercised SARs).
○ Do not forget to deduct accrued liability once everything is exercised.
● Choice between Equity or Cash Settled
○ Choice is on counterparty – compound financial instrument; recognize both
○ Choice is on entity itself – not compound; recognize either but not both
Note: Only FV measurements are cumulative, intrinsic value should not.

Scope:
● Applies to all entities
● Applies to all share-based payment transactions except
○ Transaction with owners in their capacity as owners (e.g., issuance of stock rights)
○ Business Combinations (PFRS 3)
○ Issuance of shares to settle forward and future contracts (PFRS 9)

Recognition – either asset (equity settled) or expense (cash-settled) when received or rendered

Journal Entries
Equity-Settled Cash-Settled Choice on CounterParty

Initial Compensation Exp xx Compensation Exp xx Compensation Exp xx

OSOO xx Accrued Salaries xx OSOO xx

Compensation Exp xx
Accrued Salaries xx

Exercised Cash xx Accrued Salaries xx Assume Equity Alternative:

or Settled Share Capital xx Cash xx OSOO xx
Share Premium xx Accrued Salaries xx
Share Capital xx
OSOO xx Share Premium xx
Share Premium xx
Assume Cash Alternative:
OSOO xx
Accrued Salaries xx
Cash xx
Share Premium xx

\
Book Value Per Share (BVPS)
- Represents amount per share that will be received if entity is under liquidation

One Class = Total SHE / # of Outstanding Shares

● Subscription receivable is ignored.
● Treasury shares are considered retired.

Two Classes – BVPS are computed separately

● Preferred = Total PSHE / # of Outstanding PS
○ Total PSHE = PSC + PSSC + Share in Excess of Par
○ Share in Excess of Par = consider liquidation value and type of PS
● Ordinary = Total OSHE / # of Outstanding OS
○ Total OSHE = OSC + OSSC + Share in Excess of Par
○ Share in Excess of Par = residual equity theory

PAS 33: Earnings Per Share (EPS)

- Represents the amount an ordinary shareholder expects to receive as a return of investment
- Profitability ratio
- Applies only to ordinary shares
- Required for public entities, while non-public entities are only encouraged

Uses:
● Assessing value of shares ● Basis for dividend policy
● Promotes comparability

Types – required to present both

● Basic = Net Income – Preferred Dividends / Weighted Average Ordinary Shares Outstanding
○ Preferred Dividends – deduct 1 year if cumulative, whether declared or not, otherwise deduct only
dividend declared
○ Weighted Average OSO – time weighted factor from date of issue/receivable; the following has
retrospective application as of earliest period presented
■ Share Split
■ Stock Dividends
■ Stock Rights = FV of Shares-Right On / FV of Shares-Ex Right; averaged only up to date of
exercise
● Diluted – shows maximum dilution that would have resulted from potential ordinary shares (as if ordinary shares
at issuance); considered only if dilutive or decreases BEPS
○ Convertible PS = Net Income / WA Actual + Potential Ordinary Shares
○ Convertible Bonds = Net Income – Preferred Dividends + Interest Expense after Tax / WA Actual +
Potential Ordinary Shares; use most favorable terms
○ Contingent Shares = included; restatement is not permitted
○ Options & Warrants (most dilutive) = Net Income – Preferred Dividends / WA Actual + Potential OS
■ Options and warrants is automatically dilutive when market price > exercise price; except for
written put options
■ Averaged only up to date of exercise. At the date of exercise, actual conversion is weighted.
■ Potential OS are incremental shares only (exercise divide by market); not included in calculation
of share splits/dividends
 ○ Multiple Potential OS – rank securities according to dilutive effect on BEPS (lowest-high); stop when
computed diluted EPS increases; goal is to get lowest EPS
Note: Potential OS are not weighted, unless recently issued.

Presentation & Disclosure

● Income from Continuing Operations – Income Statement
● Income from Discontinued Operations – either (1) Notes to FS or (2) Income Statement
● Parent-Subsidiary – Income Statement; basis is consolidated information
PAS 1 Financial Statements
- Structured financial representations of an entity’s financial position and performance
- End product of financial accounting/reporting

Objectives
● Primary – provide information about entity’s financial position, performance, and cash flows that is to be used in
making rational decisions
● Secondary – show the results of management’s stewardship on the resources entrusted to them

Headings & Titles – must be presented with equal prominence

● Name of Reporting Entity
● Indication whether FS pertains to Individual or Group Entity
● Date of Reporting Period
○ As of – Balance Sheet
○ For the Year – all other statements
● Presentation Currency
● Truncation

General Features (FreFair GAM COC)

● Frequency of Reporting – at least annually; if ever shorter or longer, disclose the following
○ Period covered
○ Reason
○ Fact that amounts presented is not equal for 12 months and are not entirely comparable
● Fair Presentation – achieved upon compliance with all relevant PFRS; if departed, disclose the following
○ Conclusion of management as to FS fairness
○ Complied with all PFRS except
○ Financial effect of the departure
Note: Statement of Compliance presented in Notes to FS
● Going Concern Basis – unless entity is to be liquidated/ceased operations
● Accrual Basis – all except statement of cash flows
● Materiality and Aggregation – for each material class of items, there is one line item; dissimilar items are
presented separately unless immaterial
● Comparative Information – for all amounts and for certain narrative information
● Offsetting – provided allowed by PFRS; generally, permitted on Income Statement
● Consistency of Presentation – allowed only to change if
○ Permitted by PFRS
○ Result to more relevant and reliable information

Complete Set of FS – standard allows the use of other titles.

● Statement of Financial Position (Balance Sheet)
● Statement of Comprehensive Income (Statement of P/L & OCI)
● Statement of Changes in Equity
● Statement of Cash Flows
● Notes to FS
● Additional Statement of Financial Position (Third Balance Sheet) – beginning balance of prior year; if there is
○ Retrospective Application(Change in Accounting Policy)
○ Retrospective Restatement (Errors)
○ Reclassification of Items
Statement of Financial Position (SFP) – formal report showing assets, liabilities, and equity
● Information Provided
○ Liquidity & Solvency
○ Need of entity for additional financing
● Order of Presentation
○ Classified – current & noncurrent presentation; must be used
■ Current Asset
● Realizable within ● Investments @ FVPL
normal operating cycles ● Cash & Cash
● Realizable within 12 Equivalents unless
months restricted for more than
● Held for sale/trading 12 months
■ Current Liability
● Payable within normal ● Held for sale/trading
operating cycles ● No unconditional right
● Payable within 12 to defer settlement for
months at least 12 months
■ Noncurrent – if not current
○ NonClassified – order of liquidity; allowed only if results to more relevant and reliable (e.g., financial
institutions)
● Formats
○ Report form – vertical
○ Account Form – horizontal
● Minimum Line Items – shall disclose to notes or SFP subclassifications of line items provided
○ Cash and Cash Equivalents ○ Trade and Other Payables
○ Financial Assets @ FVPL ○ Current Tax Liability
○ Trade and Other Receivables ○ Deferred Tax Asset
○ Inventories ○ Deferred Tax Liability
○ PPE ○ Provisions
○ Investment in Associates: Equity ○ Financial Liabilities @ FVPL and some
Method @ AC
○ Intangible Assets ○ Liabilities in Disposal Group classified
○ Investment Property as HFS
○ Biological Assets ○ Non-Controlling Interest
○ NCAHFS ○ Share Capital and Reserves

Statement of Comprehensive Income – shows financial performance year per year; total change in equity excluding
owner transactions
● Components
○ Profit/Loss (Net Income)
○ Other Comprehensive Income/Loss
■ Allowed reclassification
● Unrealized G/L @ FVOCI – Debt
● Translation G/L from ForEx
● Effective portion of G/L on Hedging Instrument under Cash Flow Hedge
■ Not Allowed Reclassification
● Revaluation Surplus
● Unrealized G/L @ FVOCI – Equity
 ● Remeasurements on Defined Benefit Plan
■ Other OCI which is not yet specified if Allowed or Not
● Changes in FV of Financial Liability @ FVPL that are attributable to Credit Risk
● Changes in Time Value of Option – when intrinsic and time value are separated and only
changes in intrinsic is designated as hedging instrument
● Changes in Value of Forward Element – when separating the forward and spot element
and only changes in spot is designated as hedging instrument
● Approaches
○ Transactional/Traditional Approach
○ Capital Maintenance Approach
● Presentation – no more extraordinary items
○ Single Statement
○ Two Statements
■ Statement of P/L (Income Statement) – P/L
■ Statement of Comprehensive Income – P/L + OCI
● Formats
○ Function of Expense – e.g., COGS, OPEX; required to disclose nature of employee benefits, depreciation,
and amortization expense
Sales xx
COGS (xx)
Gross Profit xx
OPEX (xx)
Operating Income xx
Interest Expense (xx)
Other Income xx
Other Expense (xx)
Income Before Tax xx
Tax Expense (xx)
Income From Continuing Operations xx
Income From Discontinuing Operations,
net of tax xx
Net Income xx
OCI, net of tax xx
Comprehensive Income xx
● Nature of Expense – e.g., Depreciation, Purchases, Employee Benefits; per item deduction
Sales xx
Purchases (xx)
Depreciation and Amortization (xx)
Employee Benefits (xx)
Changes in Inventory (xx)
Raw Materials Consumed (xx)
Interest Expense (xx)
Other Income xx
Other Expense (xx)
Income Before Tax xx
Note: Allocate P/L and OCI to NCI and owners of the parent for consolidation purposes.
● Minimum Line Items
○ Revenue ○ G/L from Derecognition of Financial
Asset @ AC
 ○ Finance Cost ○ Discontinued Operation
○ Share of P/L of Associate and Joint ○ P/L for the Period
Venture: Equity Method ○ Total OCI
○ Income Tax Expense ○ Comprehensive Income for the Period

Statement of Changes in Equity – shows movement of equity during the year

● Information Provided
○ Effect of Retrospective Application of Change in Accounting Policy
○ Effect of Retrospective Restatement Due to Correction of Prior Period Errors
○ Total Comprehensive Income
○ Reconciliation of Beginning and Ending Balance of Each Component – showing separately changes from
P/L, OCI/L, and owner transactions
● Disclosure Requirements
○ Option to disclose dividends and dividends per share either in (1) Changes in Equity or (2) Notes to FS

Notes to FS – provide a narrative description or disaggregation of items presented on the financial statements and other
items that do not qualify for recognition but relevant
1. General Information about Entity
2. Statement of Compliance with PFRS
3. Summary of Significant Accounting Policies Used
4. Supporting Information and Disaggregation
5. Other Required Disclosures
a. Judgment and Uncertainties authorized for issue but not recognized
b. Non-financial Disclosures as distribution during the period
c. Changes in Accounting Policies and f. Amount of any Cumulative Preference
Estimates Dividends not recognized
d. Capital Management g. Related Party Disclosure
e. Amount of Dividends h. Events After Reporting Period
Proposed/Declared before FS were i. Contingent Liabilities
PAS 7: Statement of Cash Flows
- Shows in and out of cash within entity

Uses:
● Assessing ability to generate cash & cash equivalents
● Assessing timing and certainty of cash flows
● Assessing need to utilize these cash flows

Classification
● Operating Activities – blue
● Investing Activities – yellow Current Liabilities
● Financing Activities – green (except bank loans are
Current Assets financing)
(except short term
The following can be presented in two classifications: investments, unless trading) Non Current
● Interest/Divided Received – generally, operating, Liabilities
but could be investing
● Interest Paid – generally, operating, but could be
financing Non Current Equity
● Dividend Paid – generally, financing, but could Assets
be operating
● Income Tax Paid – generally, operating, but could be investing on some instances only

Presentation
● Operating Activities
○ Direct Method – itemized; purely cash basis
○ Indirect Method – starting point of computation is profit based on accrual basis then reverse transactions
Profit Before Tax xx
Non Cash Transactions
(e.g., depreciation, forex G/L) xx/(xx)
Items Related to Financing & Investing
(e.g., G/L on disposal of PPE, interest expense,
investment income) xx/(xx)
Movement of Current Assets xx/(xx)
Movement of Trade Liabilities xx/(xx)
Interest Paid (xx)
Dividend and Interest Received xx
Income Tax Paid (xx) .
Net Cash From Operating Activity xx
● Investing & Financing Activities – direct method only
PFRS 8: Operating Segments
- Component of an entity that engages in business activities whose operating results are regularly reviewed by
Chief Operating Decision Maker (allocate and monitor resources) and for which discrete financial information is
available
- Headquarters and post-employment plans are not considered as operating segments

Scope – public or in the process of being public entities’

● Separate FS
● Consolidated FS
Note: If contains both, treated as consolidated

Reportable Segments – disclosed separately on notes to FS, otherwise disclosed as one single item; practical limit is 10
segments
● Qualitative Threshold – used for internal decision making/reporting (management approach)
● Quantitative Threshold
○ Aggregation Criteria – similar characteristics are aggregated
■ Nature of products & services
■ Nature of production process
■ Type/class of customers
■ Marketing method
■ Nature of regulatory environment
○ Meets any of the following
■ Revenue Test – 10% of total revenue (internal and external)
■ Asset Test – 10% of total asset
■ Profit/Loss Test – 10% of absolute amount of higher between profit or loss; general corporate,
interest, and income tax expenses are generally not included in computation unless reviewed by
CODM
○ Aggregate majority operating segments, then Overall Size Test – total external revenue of determined
reportable segments are at least 75% of total external revenue

Presentation
● Segments ceasing to be reportable – if still with continuing significance, still considered reportable segment
● Segments becoming reportable – restate prior year FS to conform with the results of the current year

Disclosures
● General
○ General information about segment
○ Segment P/L, assets, and liabilities
○ Reconciliation of revenue, P/L, assets, and liabilities
● Entity-wide
○ Information about product and service
○ Information about geographical areas
○ Information about major customer (at least 10% of total external revenue) – does not involve identity and
total amount bought
PAS 34: Interim Reporting
- Preparation and presentation of financial information for a period of less than a year
- No requirement by the standard for an entity to prepare interim report but SEC requires quarterly interim report
within 45 days after end of each of the first three quarters
- Encouraged to prepare at least semi-annual reports and published within 60 days after end of interim period
- Each interim period is an independent report

Contents
● Complete Set of FS (PAS 1) or
● Set of Condensed FS (PAS 34) – less detailed
○ Condensed Statement of Financial Position
○ Condensed Statement of Comprehensive Income
○ Condensed Statement of Changes in Equity
○ Condensed Statement of Cash Flows
○ Selected Explanatory Notes

Presentation of Comparative Interim Reports

● Financial Position (as of balances) – current interim period VS. preceding year-end statement
● Comprehensive Income (for the period) – current interim period & cumulative as of period end VS. interim
statement of preceding year & cumulative as of period of preceding year
● Changes in Equity and Cash Flows (for the period) – cumulative interim period VS. cumulative interim of
preceding

Recognition – same accounting policy

Measurement – mixed
● Integral View – each interim period is an integral part of annual FS
○ Allocated expenses ○ Year-end bonuses
○ Depreciation and amortization ○ Employee Benefits
○ Tax expense (averaged rate)
● Discrete View – each interim period is an independent/discrete/separate reporting period
○ Revenues
○ COGS
○ Inventory write-down and reversals
○ Impairment loss and reversals
○ G/L from disposal of property, discontinued operations changes in FV and in exchange rates
○ Contingent rent
○ Dividend income and declarations
○ Employee Training Costs
○ Changes in accounting estimates
 FULL PFRS PFRS FOR SME Small Entity
Additional Required when
Balance Sheet Not required
● Applying accounting policy
● Retrospective restatement

Reclassification adjustments
Statement of Always presented either as (1) single if entity has no items of OCI, has the option to No statement because no OCI
Comprehensiv statement or as (2) two-statement present (1) only income statement or (2)
e Income statement of comprehensive income – bottom
line is labeled as P/L
Revenue from Five-step principle Simpler principle – transfer of significant risk
Contracts and rewards
Components of Does not recognize OCI
● FOREX ● FOREX
OCI
● Cash flow hedge ● Some hedging instruments
● Investments @FVOCI ● Revaluation Surplus
● Revaluation Surplus ● Defined Benefit Plan (option to
present as OCI or P/L)
● Defined Benefit Plan
● Credit risk of financial liab @FVPL
FVOCI classification is not available for SMEs
Statement of Always presented Allowed to omit, in lieu thereof, a single statement of income and retained earnings if the
Changes in only changes are:
Equity
● P/L
● Dividend Pays
● Prior Period Errors
● Change in Accounting Policy

Operating
Segment Info Required to listed entities Not required
& EPS
Financial Classified as: Classified as: Subsequent Measurement:
Instruments
● Amortized Cost ● Basic – amortized cost or @FVPL if (1) ● Debt – amortized cost
publicly traded or (2) FV can be
● FVOCI ● Unquoted Shares – cost less
reliably measured; contractual
 o Cash impairment
● FVPL
o Receivables/Payables
● Shares traded in active market –
o Debt instrument where
lower of cost or FV (change
Permitted to designate financial assets returns are fixed
recognized in P/L)
@FVPL o Nonconvertibles &
Nonputtables
o Commitments to receive a Impairment:
loan (only if cannot be net ● Amortized Cost – CA over PV of
settled in cash) cash flows
o On demand loans
● Cost – CA over best estimate of
● Non-basic – @FVPL or cost less selling price
impairment if FV cannot be reliably
measured; not contractual

o Asset-backed securities

o Investments in
subsidiaries/associates

o Derivatives/Hedging

o Provisions

o Income tax payable

o Commitments to make a loan

o Own equity instruments

o Leases

o Employee benefit plans

No option to designate financial assets @FVPL

Inventories Lower of Cost & Net Realizable Value Lower of Cost & Selling Price less Cost to Lower of Cost & Market Value
Complete and Dispose
If NRV is lower, loss on inventory writedown
(COGS) If SP is lower, impairment loss
Investment in Equity Model Cost, Equity, or Fair Value Model Cost and Equity Model
Associate
 Cost model is not permitted if there is
published price quotation
Goodwill Included in carrying amount Recognized as goodwill

No amortization and separate impairment Amortized over its (1) estimated life or (2) best
testing estimate but not exceeding 10yrs
Investment Cost or Fair Value Model Fair Value Model if can be measured reliably Cost or Fair Value Model
Property –
Subsequent Cost Model otherwise FV not available, use cost model. CA
Measurement becomes initial cost of property
Biological Asset FV less cost to sell FV less cost to sell only if readily determinable Cost model – cost less accumulated
depreciation AND impairment losses
If FV cannot be measured, use cost less If not, use cost less accumulated depreciation
accumulated depreciation AND impairment losses Current market price model (esp for
agricultural produce)

Changes in market price are recognized in

P/L
Bearer Plant PPE Biological Asset
Research and Generally expensed, however capitalized if Expensed unless they form part of the cost of another asset
Development conditions are met
Cost
Intangible Cost or Revaluation Model Cost Model
Asset (other
than goodwill)
– Subsequent
Measurement
Intangible With finite life, amortized All intangibles are considered finite
Asset (other
than goodwill) With indefinite life, not amortized but tested Useful life shall not exceed its legal life. If undeterminable, base on best estimate but not to
– Amortization for impairment at least annually exceed 10 years
Review of At least at each financial year-end Only if there are indicators that there have
Depreciation been changes
Government Recognized over period necessary
● Does not impose future performance ● Does not impose future
Grants –
– when receivable performance – when receivable
Recognition If grant intends to compensate losses, grant
is immediately recognized ● Impose conditions – when met ● Impose conditions – when met
● Received prior to satisfying – as ● Received prior to satisfying – as
liability
 liability
● Nonmonetary – nonrecognition or
@ FV

Government FV of asset received or receivable

● Amount of cash received
Grants –
Measurement ● FV of amount receivable
● CA of loans forgiven
● Discount on loans

Borrowing If attributable to the acquisition, part of All are recognized as expense

Costs cost. Otherwise, expensed
Defined Projected unit credit method Projected unit credit method only if entity is
Benefit Liability able
Leases If qualified as sale, (1) measure right-of-use Finance lease – seller shall (1) defer and All leases shall be accounted as operating
asset and recognize G/L amortize any gain or (2) recognize leases
immediately any loss

Operating Lease
● at FV – G/L recognized immediately
● below FV – recognized immediately,
however, if loss is compensated, it
shall be deferred and amortized
● above FV – deferred and amortized

Share Options Measured at fair value Fair Value

If FV cannot be measured reliably, intrinsic

value
Exploration Tangible and Intangible shall be measured Tangible – cost or revaluation model
and Evaluation subsequently using cost or revaluation
Assets model Intangible – cost model only
Income Tax Taxes Payable Method – shall not
recognized deferred

Deferred Taxes Method – recognize

deferred
Post- Accounted using accrual method
Employment
Benefits No consideration made for changes in
future salary. No recognition of actuarial
gains and losses
Share-based Net asset value or Total Assets – Total Liab
Payments /# of Shares Outstanding
PFRS 5: Non-Current Assets Held for Sale (NCAHFS)
- If carrying amount is to be recovered principally through a sale transaction (incidentally) rather than from
continuing use
- Could be an individual asset or a disposal group (PAS 36)

Recognition – if both of the ff. conditions are met

● Available for immediate sale
● Sale is highly probable
○ Active program to locate buyer and sell asset
○ Management is committed to a plan
○ Sale is completed within 1 year from date of classification as NCAHFS, except when beyond entity’s
control
○ Sale is actively marketed at a reasonable price
○ Actions indicate that it is unlikely that plan will be changed/withdrawn

Measurement
● Initially and subsequently at lower between CA and FVCTS
● To recognize impairment and reversal (limited to impairment loss previously recognized)
○ Individual Asset – direct
○ Disposal Group – goodwill then other assets
● Not subject to depreciation
● Changes to a plan of sale
○ Lower between FVCTS and CA as if not reclassified as NCAHFS (depreciation adjusted)
○ Difference is presented as G/L within P/L

Presentation
● Individual Asset – current asset
● Disposal Group – current assets/liability; should not be offset

PFRS 5: Discontinued Operations

- Component of an entity that is either actually disposed or reclassified as held for sale

Examples:
● Represents a separate major line of business or geographical area of operations
● Part of a single coordinated plan
● Subsidiary acquired exclusively

Recognition – earlier date of actual disposal or when conditions of being held for sale are met

Accounting for Results of Operations – regardless if before or after reclassification

Sales/Revenue xx
Expenses (xx)
Impairment Loss (xx)
G/L on Sale xx
Termination Costs (xx)
Income/Loss from Discontinued Operations xx – presented in P/L; should be after tax

Presentation
● Income Statement – P/L after tax
● Balance Sheet – current assets/liabilities
PAS 10: Events After The Reporting Period (Subsequent Events)
- Occur between reporting and authorization (by management event if subject for further approval) date

Types:
● Adjusting Events – provide evidence to the conditions that exist as of date of reporting period; mostly based on
estimation events; requires adjusting entries
○ Resolution of Court Case
○ Bankruptcy of Customers
○ Sale of Inventories
○ Determination of Purchase Cost or Net Proceeds from Selling Items of PPE
○ Determination of Bonus/Profit Sharing
○ Discovery of Errors and Fraud
● Non-Adjusting Events – gives rise to conditions that happened after reporting period; requires only disclosure
PAS 8: ACCOUNTING CHANGES

Change in Accounting Estimate

- change in flow of future benefits and obligations (e.g., percentage, depreciation method)
- considered to be part of normal accounting process
- accounted for prospectively
o Compute the CA as at the beginning of the period of change.
o Then, apply the changes.
- use if there is difficulty in identifying change

Change in Accounting Policy

- change in measurement basis (e.g., cost to revaluation model, change in reporting entity)
- permitted only when (1) required by PFRS or (2) results to a more relevant and reliable info
- accounted for retrospectively (in the beg. balance of RE, net of tax) only when there is no transitional provision
in PFRS such as
o Investment Property Model – prospective
- if impracticable, use prospective application
Note: Early application of a PFRS is not a voluntary change in accounting policy.

Hierarchy of Reporting Standards

1. PFRS
2. Management’s Judgement
3. Requirement in other PFRS dealing with similar transactions
4. Conceptual Framework
5. Standards issued by other setting bodies
6. Other Accounting Literature

PAS 8: ERROR CORRECTION

- unintentional misstatement in financial statements including the omission of an amount or a disclosure
- different from fraud as fraud is intentional

Types of Errors:
● Current Period – before authorized for issue; corrected as adjusting events after reporting period
● Prior Period – after authorized for issue; retrospective restatement as practicable as possible
o Income Statement – classification error; ignore because only temporary accounts are affected
o Balance Sheet – classification error; ignore
o Mixed
▪ Counter Balancing – self-correcting errors, usually after 2 years and applies for current
assets/liabilities (e.g., errors on inventories, prepaid assets, unearned income, and accrued
expense)
▪ Non-counter Balancing – do not offset in the next period (e.g., income and expense method,
depreciation)

1st Year 2nd Year 3rd Year

Unadjusted RE, Beg XX XX XX
Unadjusted Net Income XX XX XX
Unadjusted RE, End XX XX XX
Adjustments:
Counter Balancing (XX) XX*
XX (XX)
XX
Non-Counter Balancing XX XX** XX
Adjusted RE, End*** XX XX XX
*Counter balancing items are not included in the next year adjustments as it has already self-corrected.
**Non-counter balancing items are carried forward until year of adjustment.
***For convenience: Adjusted RE, Yr1 End + Adjusted NI – Dividends Declared = Adjusted RE, Yr2 End
PAS 24: Related Parties
- Entity/person which is related to another entity that is preparing a financial statement and can affect the financial
and operating policy of that entity

Entity affects another entity through:

● Control – power to govern the financial and operating policy of a certain entity so that the former can obtain
benefits from the latter
● Significant Influence – participation of an entity on the decision making process of another entity in relation to the
financial and operating policy of another entity but not control
● Joint Control – contractually agreed sharing of control through unanimous consent

Examples of Related Parties

● Affiliates – parent & subsidiary, subsidiary & subsidiary under a common parent
● Associates
● Venturer & Joint Venture
● Key Management Personnel – involved in planning, directing, and controlling activities, whether direct or indirect
● Close Family Members – spouse, children (including children of spouse, if any), dependents of individual and
spouse
● Post Employment Benefit Plans

Disclosures
● Relationship between parents and subsidiaries, regardless if there is transaction or not – name of parent > ultimate
parent > most senior payment
● Key management personnel compensation – in total and per category (short & long, post employment,
termination, and share-based), except outsourced personnel
● Related Party Transactions – regardless if charged or not
○ Nature of relationship
○ Nature, term, amount, and outstanding balances of transaction
○ Bad debts recognized on outstanding balances
● Government Related Entities
○ Nature of relationship
○ Name of government agency
○ Nature and amount of individually significant transactions