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*Conceptually, all liabilities are measured at present value
1. The essence of provision is that there is an uncertainty about the timing or amount of the future expenditure.
2. Recognition of provision
a. present obligation- legal or constructive
b. probable outflow of benefit
c. amount of obligation can be measure reliably
3. Constructive obligation is derived from entity’s actions. Creates a valid expectation
4. An accounting provision cannot be created in anticipation of future event.
5. An entity shall determine whether a present obligation exists at the end of reporting period by taking into
account all available evidence, including the opinion of experts. Evidence considered includes any additional
evidence provided by events after the end of the reporting period
6. The estimates of outcome are determined by the judgement of management of the entity supplemented by the
experience of similar transactions and reports from independent experts
7. Midpoint of the range is used
8. Other measurement considerations:
a. Risks and uncertainties—describes the variability of outcome. May increase or decrease the amount of
liability. Prudence is required
b. present value
c. Future events—there must be sufficient evidence that they will occur (new legislation, changes in
technology)
d. Cash inflows from disposal are treated separately from provision
e. Reimbursement shall be treated as a separate asset and not netted against estimated liability
f. Change in provision—should be reversed if it is no longer probable
g. Expectation of future operating losses is an indication that certain assets may be impaired. An
impairment test is necessary.
9. Restructuring is a program that is planned and controlled by management and materially changes either the
scope of a business of an entity or the manner in which that business is conducted
a. Sale or termination of a line of business
b. closure of business location or relocation
c. Change in management structure
d. fundamental reorganization of an entity
10. In Provision for restructuring there must be a detailed plan and valid expectation
11. It shall include only direct expenditures that are necessarily incurred for the restructuring and not associated
with the ongoing activities of the entity. Example: salaries and benefits of employees to be incurred after
operations cease and that are associated with the closure of operation. It excludes:
a. cost of retraining and relocating continuing staff
b. Mktg and admin
c. Investment in new system and distribution network.
*These are considered to be expenses relating to the future conduct of business.
12. Onerous contract is measured at the least net cost of exiting from the contract or the lower of cost between
to pay for the penalty of not fulfilling it or for the lease payments.
Bonds payable
1. Bond indenture or deed of trust is the document which shows in detail the terms of the loan and the
rights and duties of the borrower and other parties to the contract.
2. If property is pledged as security for the loan, a trustee is named to hold title to the property serving as
security. Trustee acts as the representative of the bondholders and is usually a bank or trust entity
3. First mortgage bonds—bonds with senior claims on entity assets.
4. Second mortgage—bonds with subordinated claims on entity assets
5. Collateral trust bonds—bonds secured by stocks and bonds of other corporation
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6. Debenture—without collateral. Unsecured and therefore rank as general creditors in the preference of
credit.
7. Coupon or bearer bonds- interest is paid to the person submitting a detachable interest coupon.
8. Registered bonds—interest is paid to bondholders of record.
9. Journal entry:
Unissued
Authorized
10. Bond issue costs or transaction costs include printing and engraving cost, legal and accounting fee,
registration fee, commission paid to agents and underwriters. It is amortized over the life of the bond
issue. It is conceived as cost of borrowing and therefore will increase interest expense. It shall be
included in the initial measurement of a financial liability. It shall be presented as a deduction from
bonds payable. Under effective interest method, bond issue cost must be lumped with the discount on
bonds payable and netted against premium
(if not effective)Interest expense
Bond issue cost
11. If bonds are sold between interest dates, an accrued interest is involved and it is paid by the buyer. The
unexpired life is computed from the date of sale to the maturity date. Monthly amortization would be the
best approach.
12. In premature retirement, the discount and bond issue cost are updated up to the date of retirement. Total
cash payment is equal to retirement price + accrued interest from the last payment date up to the
retirement date.
Operating lease
1. Operating lease is the rental approach
2. Lease bonus is treated as a prepaid rent expense to be amortized over the lease term on the part of the lessee.
On the part of the lessor, it is unearned income.
3. Lessor may pass to the lessee the payment insurance and maintenance cost.
4. Initial direct cost shall be added to the CV of the leased asset
5. Security deposit refundable should be accounted for as a liability by the lessor
Rent deposit-lessee
Cash
Prepaid rent(lease bonus)
deferred initial direct cost
Cash
Cash
Cash-lessor
Rent deposit
Amortization of initial direct cost
Cash-lessor
deferred initial
Unearned
6. Idle property is subject to depreciation as long as it is available for its intended use.
7.The balance of deferred shall be presented as an addition to the CV of machinery.
8. Unequal rental payments(rent free of 6months):
2010(1Mx6/12)
500,000
2011
1,250,000
2012
1,250,000
3,000,000/3= 1,000,000
2010
Cash
Rent receivable
Rent income
500,000
500,000
1,000,000
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Cash
1,250,000
Rent income
Rent receivable
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1,000,000
250,000
2012
Cash
Rent income
Rent receivable
1,250,000
1,000,000
250,000
9. If the sale and leaseback transaction is an operating lease, any gain or loss shall be recognized immediately. If
it is a finance lease, any gain on sale is deferred and amortized over the lease term but any loss is recognized
immediately. In finance lease, depreciation is based on the life of asset because ultimately, the asset would
become the property of the lease by reason of bargain purchase option that is certain.
10. Leaseback as an operating:
Cash
2,000,000
Acc. Dep.
1,200,000
Machinery
3,000,000
Gain
200,000
Rent Exp.
100,000
Cash
100,000
Leaseback as a finance lease:
Seller-lessee
Cash
Accumulated depreciation
Equipment
Deferred gain on sale and leaseback
Equipment
Lease liability
*depreciation is based on useful life
*amortization is based on lease term
Purchaser-lessor:
Equipment
Cash
Lease receivable
equipment
Unearned
4,520,000
1,250,000
5,000,000
770,000
4,520,000
4,520,000
Cash
Lease receivable.
Unearned
Income
Finance lease-lessee
1. Commencement is the date which the lessee is entitled to use the leased asset. Date of which recognition of
assets, liabilities, income and expenses.
2. A land lease with a lease term of several decades or longer may be classified as a finance lease even if title
will not pass to the lessee at the end of lease term
3. The minimum lease payments are allocated between the land and building elements in proportion to the
relative fair value of the leasehold interests in the land and building elements at the inception of the lease. If the
lease payments cannot be allocated reliably between the 2 elements, entire lease is classified as a finance lease
or operating
4. Fair value or present value of lease payments, whichever is lower.
5. Minimum lease payments:
a. rental payments
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b. Bargain purchase option
c. Guaranteed residual value
6. Exercise of bargain purchase option:
Lease liability
Cash
7. If not exercised:
Acc depreciation
Lease liability
Loss on finance lease
Machinery
8. Criteria for finance lease:
a. Transfer of ownership
b. Bargain purchase
c.75% of the economic life of the asset even if title is not transferred
d. Leased asset is of such specialized nature that only the lessee can use it without major modification
e. The lessee can cancel the lease; the lessor’s losses associated with the cancellation are borne by the lessee.
f. Gains or losses from the fluctuation in the fair value of the residual accrue to the lessee in the form of a rent
rebate equaling most of the sale proceeds at the end of the lease.
g. The lessee has the ability to continue the lease for a secondary period at a rent that is substantially lower than
the market rent.
9. In general, if there is an option to cancel the lease and the lessee likely to exercise such an option, then the
lease is likely to be an operating lease.
Finance lease-Lessor
1. On the part of the lessor, a finance lease is either the following:
a. Direct financing lease
b. Sales type lease
2. In direct financing lease, the net investment in the lease is the present value of rental payments so that there
would be no gross profit to be realized—only interest income
3. Lease receivable
2,000,000
Machinery
1,518,650
Unearned interest income
481,350
4. Cost of machinery
Initial direct cost
Net investment
1,518,650
66,300
1,584,950
*this requires computation of new effective rate. This reduces the interest income because the initial cost is
effective spread over the lease term. In direct financing, initial direct cost is added to the cost of the leased asset
while in sales type, it is expensed immediately
Machinery(initial direct cost)
Cash
66,300
Lease receivable
Machinery
Unearned interest income
2,000,000
5. Direct financing lease-with residual value
Cost of machinery
66,300
1,584,950
415,050
3,194,410
Financial Accounting vol2 summary
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Present value of residual value(500Tx.683)
(341,500)
Net investment to be recovered from rental
2,852,910
Divide by PV of ordinary annuity
3.1699
Annual rental
900,000
Gross rentals(900Tx4)
Residual value
Gross investment
Cost of machinery
Unearned
Machinery
Lease receivable
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3,600,000
500,000
4,100,000
(3,194,410)
905,590
500T
500T
Under guaranteed scenario (fair value is 400T):
Cash
100T
Machinery
400T
LR
500T
Unguaranteed:
Machinery
Loss on finance lease
LR
400T
100T
500T
6. In sales type lease, present value of lease payments does not necessarily equal to the cost of the leased asset;
so that, there would be a gross profit or loss to be realized.
(no residual value):
Lease receivable
2,000,000
Sales
1,440,000
Unearned interest
560,000
Cost of sales
Inventory
1,000,000
1,000,000
1,440,000
(1,000,000)
Gross profit:
440,000
7. With guaranteed residual value:
Lease receivable
4,200,000(800Tx5+residual value, 200T)
Cost of sales
2,000,000
Sales
3,156,820
Unearned
1,043,180
Inventory
2,000,000
Initial direct cost
Cash
8. Unguaranteed residual:
LR
Cost of Sales
100T
100T
4,200,000
1,875,820
Initial 100T
Cash
100T
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Sales
3,032,640
Unearned
1,043,180
Inventory
2,000,000
*The present value of residual value is deducted from cost of sales and revenue because the asset is conceived
as not sold. But the same method of accounting for LR and unearned is applied. Gross income is the same in
both guaranteed and unguaranteed.
Inventory
200T
Lease receivable
200T * If it is guaranteed, lessee pays for the excess of residual
Cash
Inventory
LR
Inventory
Loss
LR
9. Actual sale:
Cash
Unearned
Loss on sale
Lease receivable
50T
150T
value over fair value of the asset. If unguaranteed, it is
accounted for as a loss
200T
150T
50T
200T
3,500,000
1,200,000
300,000
5,000,000
Note Payable and Debt Restructuring
1. Note Payable is initially measured at fair value which is equal to the present value and subsequently
measured at amortized cost
2. When the note is issued solely for cash, the cash proceed is the present value using a discount rate. Straight
line method of depreciation is used. Using 12%, the entry is:
Cash
880,000
Discount on N/P
120,000
Note payable
1,000,000
3. If a promissory note is interest-bearing, the purchase price is the present value. Example: an entity acquired
equipment for 1,000,000 payable in 5 annual equal installments every dec.31 of each year. Interest is 10percent
on the unpaid balance.
1/1/11:
Equipment
Note payable
12/31 Interest Expense
Note payable
Cash
12/31/12:
Interest Expense
Note Payable
Cash
1M
1M
100T
200T
300T
80T
200T
280T
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4. When a noninterest-bearing note is issued for a property with cash price, the cash price is assumed to be the
present value of the note issued. Entity acquired an equipment with a cash price of 350T for 500T, 100T down
and the balance payable in 4 equal annual installments:
1/1 Equipment
Discount on N/P
Cash
N/P
350T
150T
12/31 NP
Cash
100T
400T
Interest Exp
Disc. On NP
100T
100T
60T
60T
* Bond outstanding method is used to amortize discount.
* the cash paid is not added to the cost of equipment since the 350T cash value includes already the 100T cash
paid. So the 400T note payable applies to the 250T portion of the equipment. Thus, 400-250=150T discount on
note payable.
5. If there is no cash price in a noninterest bearing note, present value/cash price is determined by multiplying
the annual installment by the present value factor. Entity acquired an equipment for 1M payable in 5 annual
installments on every dec.31 of each year. Using 10percent prevailing market interest, the entry is:
1/1 equipment
Discount on N/P
Note payable
758,160
241,840
12/31 NP
1,000,000
Cash
Interest exp
Disc.on NP
200T
200T
75,816
75,816
*Effective interest method is used.
6. Note Payable Lumpsum using a present value factor of .7513:
Equipment
776,170
Discount on NP
223,830
Cash
100,000
Note payable
900,000
*Since the equipment has no established fair value, we shall discount the 900T payable + 100T cash paid to get
the cash value of the equipment. The discount is 900T minus the PV. Interest Method is used.
7. In Dacion en pago accounting, mortgage properties are being given to extinguish a liability. Book value is
used.
Mortgage Payable
3M
Accrued interest
200T
Bank service
50T
Loss on extinguishment
450T
Acc. Depreciation
800T
Land
500T
Building
4M
8. Debt restructuring- granting of concession to the debtor to maximize investment recovery.
a. Asset swap(PAS39):
Note payable
2M
Accrued interest
400T
Land
1.5M
Financial Accounting vol2 summary
Gain on extinguishment
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900T
USA GAAP:
Note Payable
Accrued interest
Land
Gain on exchange
Gain on debt restructuring
b. Equity Swap:
Bonds payable
Accrued interest
Share capital
Share premium
Gain on extinguishment
2M
400T
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*fair value is 2.2M. To recognized the
increase in value, gain on exchange is
1.5M credited. 2-way transaction. It is as if
700T the land was sold and the proceeds is used
200T to extinguish the obligation
5M
500T
*fair value of SC is 4.5M. 2-way transaction
2M
2.5M
1M
Bonds payable
Accrued
Share capital
Share premium
Gain
5M
500T
Bonds payable
Accrued
Share capital
Share premium
5M
500T
*fair value of Bonds is 4.7M
2M
2.7M
800T
*carrying amount of bonds is used
*no gain is recognized(PAS32)
2M
3.5M
9. Modification of terms
a. Interest concession-reduction of interest rate or forgiveness of unpaid interest
b. Maturity value-extension of maturity date or reduction of the maturity value.
10. There is a substantial modification if the gain/loss is at least 10perecent of the old liability. Accordingly, it
shall be accounted for as an extinguishment of the old liability and the recognition of a new liability. Any costs
or fees incurred are recognized as part of gain or loss.
Illustration:
Note payable-due now-14% 5M
Note payable old
5M
Accrued
1M
Accrued interest
1M
Discount
466,120
-accrued interest is forgiven
Note payable-new
4M
-principal is reduced to 4M
Gain
2,466,120
-new interest is 10percent payable very dec.31
-new date of maturity is dec.31,2013
11. Under USA GAAP, old liability minus the absolute amount of restructured liability (total cash to be paid) is
gain or loss on debt restructuring.
Note payable-old
Accrued interest
Note payable-restructured
Gain
5M
1M
5.6M
400T
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12. If the gain/loss is not atleast 10percent of the old liability, there would be no gain or loss to be recognized.
The carrying amount of the old liability shall be the aggregate present value of the principal liability and future
interest payments of the new liability using a NEW EFFECTIVE RATE. Thus, there would be no gain or loss to
be recognized upon modification. Any costs incurred in modifying the terms are adjusted to the carrying
amount of the old liability and amortized over the remaining term of the modified liability
Note payable-old
Accrued
NP-new
Premium on NP
5M
1M
PV
5M
1M
Accounting for Income Tax:
1. Public entity is an entity whose equity and debt securities are traded in stock exchange or over-the-counter
market or whose equity or debt securities are registered with SEC in preparation for the sale of it.
2. Accounting income-financial income or the net income for the period before income tax expense. It is income
seen in the income statement computed in accordance with accounting standards.
3. Taxable income- the income for the period determined by the rules of taxation authorities. Income tax return.
4. Permanent differences- items of revenue and expenses which are included in either accounting income or
taxable but will never be included/recognized in the other. It pertains to nontaxable revenue and nondeductible
expenses. It doesn’t give rise to deferred tax asset and liability because they have no future tax consequences.
Nontaxable: Interest income on deposits and dividends received. Nondeductible: Life insurance premium, tax
penalties, surcharges, fines
5. Accounting income after permanent differences is equal to accounting income subject to tax. Accounting
income subject to tax after temporary difference is equal to taxable income
6. Timing differences are items of income and expenses which are included in both accounting and taxable
income but at different time periods (what is recognized in accounting income now may not be recognized yet
in taxable until future periods), resulting to a temporary difference. It is temporary because eventually a certain
item’s treatment will be the same in accounting and taxable income.
7. Taxable temporary difference-will result in future taxable amount in determining taxable income of future
periods when the asset or liability is recovered or settled.
8. Deductible temporary difference- will result to a future deductible amount
9. Deferred tax liability- amount of income tax payable in future periods with respect to taxable temporary diff.
10. Tax base- amount of asset or liability that is recognized or allowed for tax purposes.
11. Other taxable temporary differences:
A. When asset is revalued upward and no equivalent adjustment is made for tax purposes
B. Subsidiaries, associates or joint venture has not distributed its entire income to the parent or investor
resulting to higher carrying amount of investment in subsidiary, associate or joint venture
C. Cost of a business combination that is accounted for as purchase is allocated to the identifiable assets
and liabilities acquired at fair value and no equivalent adjustment is made for tax purposes.
12. Deferred tax liability is not recognized when the taxable temporary difference arises from:
A. goodwill resulting from a business combination and which is nondeductible for tax purposes
B. Initial recognition of an asset or liability in a transaction that is not a business combination and affects
neither accounting or taxable income.
C. When the parent,investor, or venturer is able to control the timing of the reversal of undistributed profit
or temporary difference or the temporary difference is not probable to reverse in the future.
13. Standard prohibits a deferred tax liability for goodwill on initial recognition or where any reduction in the
value of goodwill is not allowed for tax purposes.
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14. deferred tax liability for goodwill could be recognized to the extent that it does not arise from initial
recognition.
15. If the goodwill arises from business combination and the goodwill is not deductible for tax purposes,
deferred tax liability shall not be recognized. If it deductible, deferred tax liability exists.
16. In deferred tax asset, entity is at first at loss but will receive benefit in the future in the form of reduced
taxable income (future deductible amount). Just a reversal. While in deferred tax liability, entity benefits
but later suffer from an increase in future taxable income.
17. Income statement approach focuses in timing differences only while statement of financial approach
considers all temporary differences(asset revaluation)
18. Interperiod tax allocation- recognition of a deferred tax asset or liability
19. Current tax expense- taxable income times tax rate. It is the amount of income tax paid or payable for a year
20. Total income tax expense- accounting income subject to tax multiply by the tax rate.
21. It is deferred asset if the items are on the disadvantage of the entity at the first year (accrual of expenses)
and deferred tax liability if it is on the advantage of the entity (excess tax depreciation or installment
sale).
22. Acctg income per book
6,000,000
Permanent differences:
Nondeductible
500,000
Nontaxable
(300,000)
Accounting subject to tax
6,200,000
Deductible temporary:
Doubtful
200,000
Est.Warranty cost
400,000
Taxable temporary:
Excess tax depreciation
(200,000)
Installment sale
(100,000)
Taxable Income
6,500,000
23. Deferred tax and liability shall be classified as noncurrent regardless of the reversal period.
24. deferred tax asset and liability shall be presented separately on balance sheet as line items.
25. Intraperiod tax allocation- allocation of income tax expense to the various revenues that brought about the
tax.
26. Current tax liability or asset is measured at the current tax rate but deferred liability and asset shall be
measured at the newly enacted tax rate at the end of the period which is expected to apply next periods
Employee Benefits:
1. Employees include directors and other management personnel under PAS 19
2. Short-term benefits include:
a. Salaries, wages, and SSS contributions
b. Short-term compensated absences such as paid annual leave and sick leave
c. Profit sharing and bonuses payable
d. Nonmonetary benefits ( medical care, housing, car, free or subsidized goods)
3. Short-term employee benefits require no actuarial assumptions because they are all payable no later than
12 months and thus are not discounted.
4. Entitlement to compensated absences may be accumulating and nonaccumulating. Accumulating are
those that are carried forward and can be used in future periods if current period’s entitlement is not used
in full. Non-accumulating is common for sick pay, maternity or paternity leave, military service.
5. Postemployment benefits include retirement benefits(pension), life insurance, medical care.
6. Postemployment benefit plans are informal if evidenced only by an entity’s practice to pay
postemployment benefits and formal if required by law whereby entities are required to contribute to
national benefit plans(SSS) or to provide postemployment benefits to qualified public sectors.
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7. Postemployment benefit plan may be contributory/noncontributory or funded and unfunded. In
contributory, employer and employee contribute to the fund but they do not necessarily contribute equal
amounts. In noncontributory, only the employer makes contributions. Under funded plan. Entity sets
aside funds for future retirement benefits by making payments to a funding agency, such as trustee, bank
or insurance company. Under unfunded, the entity retains the obligation for the payment of retirement
benefits without the establishment of a separate fund.
8. Under Defined contribution plan, contribution is definite but the benefit is indefinite. Employee
therefore bears the investment risk. Once the defined contribution is paid, employer has no more
obligation under the plan. Benefit expense is equal to the contribution
9. Under Defined benefit plan, the benefit is definite but the contribution is indefinite. If the plan is poor,
entity must make additional contributions for any expected shortfall in order to satisfy the promised
future benefits
10. SSS is classified as defined contribution plan because entity’s obligation is limited to specified
contributions to the plan as a percentage of salary.
11. RA 7641 is a defined benefit plan because the entity’s obligation is to provide specific level of benefit
for every year of service.
12. PAS19 encourages but does not require an entity to involve an actuary in measuring benefit obligation
under defined benefit plan. It also requires that the projected unit credit method(accrued benefit method)
shall be used in determining the present value of the defined benefit obligation
13. Plan assets include assets held by a long-term benefit fund and qualifying insurance policies. The
conditions are: (1)The fund is legally separate from the reporting entity (2)assets are available only to
pay only employee benefits(3)assets are not available to the reporting entity’s own creditors even in
bankruptcy (4) assets cannot be returned or can be returned only if there is surplus funds or to reimburse
it for employee benefits already paid.
14. Qualifying insurance policy is an insurance policy issued by an insurer that is not a related party of a
reporting entity and the proceeds of the policy can be used only to pay employee benefits and are not
available to the reporting entity’s own creditors even in bankruptcy
15. Plan assets exclude unpaid contributions due from the reporting entity to the fund, as well as any
nontransferable financial instruments held by the fund.
16. The expected return on plan assets is based on the market expectations at the beginning of the period, for
returns over the entire life of the related obligation. It reflects changes in the fair value of plan assets as a
result of contribution and benefits paid. In determining the expected and actual, an entity deducts
expected administration costs
17. Accumulated benefit obligation is based on current salary while projected is based on future salary
18. Corridor approach is the deferral approach required by the standard
19. Full recognition approach is an option available when fluctuations are so great that deferral is not
deemed to be wise.
20. The 10percent corridor represents materiality threshold in determining whether actuarial gains and
losses are included in the computation of total benefit expense
21. Only unrecognized gains and losses from prior years or at the beginning of the year are subject to
amortization. Actuarial gains and losses in the current year are amortized starting next year
22. Under full recognition approach, actuarial gains and losses occurring in the current year are recognized
immediately in the current year as component of OCI rather than as part of total benefit expense. Thus,
the reported benefit expense is not saddled with the amortization of deferred gains and losses that may
have occurred years before. In corridor approach, benefit expense or accrued or deferred benefit cost is
yet to be adjusted next year or the following year
23. Unamortized past service cost and actuarial losses are added to the fair value of plan assets and
unamortized actuarial gain is added to the benefit obligation in reconciliation to get the prepaid/accrued
benefit cost per book. This is to conform with the expected balance or actuarial assumption
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24. Unamortized past service cost is already included in the benefit obligation. Expense is deferred. As it is
amortized, benefit expense for the current year increases and prepaid/accrued decreases/increases.
25. Actuarial assumptions are mutually compatible if they reflect the economic relationships between
factors such as inflation, rates of salary increase, return on plan assets and discount rates. It is unbiased
if they are neither imprudent nor excessively prudent.
26. Actuarial assumptions comprise of demographic and financial assumptions. Demographic deal with
mortality, rate of employee turnover, early retirement, claim rates under medical plans. Financial deals
with discount rate, future salary and benefit levels, future medical costs and expected return.
27. Discount rate shall be determined by reference to market yields at the balance sheet date on high quality
bonds. If there is no such bonds, market yields on government bonds is used.
28. Settlement occurs with a curtailment if a plan is terminated
29. The measurement of other long-term employee benefits expense includes actuarial gains and losses and
past service cost recognized immediately.
30. Termination is the event which gives rise to an obligation rather than the employee service.
31. If transitional liability is more than the liability that would have been recognized at the same date under
the entity’s previous accounting policy, it shall recognize the transition loss as expense immediately to
be included in the total benefit expense or amortize it over a maximum of 5years(the choice is
irrevocable. Transition gain is recognized immediately.
32. Hybrid plan is deemed to be a defined benefit plan
33. Plan assets shall be carried at fair value. In many cases, plan assets will have determinable fair value
because in discharge of their fiduciary responsibility, plan trustees will mandate that retirement plans
hold only marketable investments
34. In many countries, actuarial valuations are every 3 years. The standard does not make it incumbent upon
the plan to use annual actuarial valuation. If an actuarial valuation has not been prepared on the date of
report, the most recent valuation is used and the date of actuarial valuation is disclosed.
35. Unamortized actuarial losses and past service cost are shown as debit in the memorandum records.
Shareholders Equity:
1. Certificate of incorporation- right to do business. Juridical personality and legal existence commences.
2. Organization cost shall be expensed immediately. However, share issuance cost shall be debited to share
premium arising from the issuance of share capital. The excess is charged to expense.
3. Ordinary shareholders have no fixed or specific return on investment. Their financial reward is dependent on
the operations of the entity.
4. In case of par value share, legal capital is the aggregate par value of the shares issued and subscribed.
5. Articles of incorporation- corporation’s right to do business, juridical personality and legal existence
commences.
6. Corporation must formally organize and commence operations within 2 years from the date of incorporation
7. Formal organization -adoption of by laws and election of officers by the board of directors.
8. By-laws-rules of action adopted by the corporation for its internal government and for the government of its
officers, shareholders, or members.
9. Place of shareholders meeting must be the principal place of business.
10. 25 percent of authorized shall be subscribed and at least 25% of the subscription has been paid.
11. Artificial person- corporation
12. Natural- incorporators/corporators
13. Share issuance cost- shall be debited to share premium arising from issuance of share capital. If SP is not
sufficient to absorb the issuance cost, excess is charged to expense.
14. Contributed capital includes SP, aggregate par value of issued and subscribed
15. Par value- minimum issue price; no indication of market price.
16. Ordinary shareholders have no fixed or specific return on investment. Financial reward is dependent on the
operation of the entity
17. No par shares contributed capital is the total consideration received
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18. Corporation can pay dividends to shareholders limited only to the retained earnings balance. But in wasting
asset entity, it is up to the accumulated depletion balance
19. It is illegal to pay dividends if the entity has a deficit.
20. Normal balance of unissued share capital is debit.
21. Authorized share capital
4,000,000-beg
Unissued share capital
(2,900,000)-end
Issued
1,100,000
22. Corporation code prohibits the issue of share at a discount.
Cash
800T
Disc.in SC
200T
Share capital
1M
23. Discount is a deduction from total SHE
24. Watered Share: land’s FV is 800T
Land 1M
SC
1M
no discount is recorded. Debited all to land account
25. Secret reserve-opposite of watered share. Asset is understated or liability is overstated
26. Call-official declaration of due and payable unpaid subscription
27. Mae failed to pay the remaining balance of 400,000. Delinquency sale followed with an offer price of
450,000, including interest and other costs
A- 4,500 shares
B- 5,000 shares
C- 6,000 shares
* the 10,000 are deemed fully paid, A gets 4,500 while Mae gets 5,500
Advances on delinquency sale
30,000
Cash
30,000
Cash
Subscription receivable
Interest Income
Advances
450,000
400,000
20,000
30,000
28. Callable preference- can be called in for redemption at a specified price at the option of the corporation.
29. Redeemable- at the option of the holder. Mandatory. Classified as a financial liability
30. Right of preemption- legal right of stockholders
31. Rights issue-accounting term for preemptive right (stock right)
32. No entry is required when share warrants are issued to existing shareholders because these warrants are
issued usually without consideration. Just indicate the no. of rights issued to shareholders and the number of
shares that can be purchased through the exercise of rights
33. If rights are exercised, memorandum is made for the decrease in the no. of shares claimable through the
exercise of rights
34. If bonds payable is issued with warrants, the value of the warrants is the residual after deducting the market
price of the bonds.
Reissuance of TS below cost:
a. SP-TS
b. RE
Retirement:
Financial Accounting vol2 summary
VALIX
a. SP- original issuance
b. SP-treasury
c. RE
35.Donated shares are treasury shares.
“Received from shareholders as donation 10,000 OS with par value of 100”
Reissuance:
Cash
xx
Donated capital
xx
Canceled:
OS
xx
Donated capital
xx
Subterfuge
Land’s value is 800T
Land
OSC
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xx
xx
Correcting entry upon reissuance:
Cash
xx
Land
xx
Donated capital
xx
* the should-have-been payment has been recovered upon reissuance of donated shares
Share split: Issued 50,000 new shares with par value of 20, as a result of 5-for-1 split of 10,000 old shares with
par value of 100.
Share-based compensation
1. Equity settled—share option
2. Cash settled—incurs liability and the liability is based on the entity’s equity instruments(share
appreciation rights)
3. Share option- at the option of a shareholder, therefore not a liability
4. 2 methods for measuring compensation:
a. Fair value—compensation is equal to the fair value of SO on the date of grant. Mandated by
PFRS 2
b. Intrinsic—excess of market price over option price
Rules:
1. If SO vest immediately, employee is not required to complete a specified period of service before
unconditionally entitled to SO. On grant date, entity shall recognize the compensation expense in full
with corresponding increase in equity
2. If it doesn’t vest immediately, compensation is recognized as expense over the service period
(matching)
Salaries—SO (100Tx20fair value)
2,000,000
SOO
2,000,000
Exercise:
Cash
SOO
OSC
SP
6,000,000
2,000,000
5,000,000
3,000,000
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*In effect, it is capitalization of RE. From RE (salaries) to SWO or SP. It is like the entity pays cash
and the same was subsequently invested.
3. With vesting period:
Total fair value/compensation(100Tx15)
Dec.31,2010:
Salaries—SO
SWO
2011:
Salaries—SO
SWO
2012:
Cash
SWO
OS
SP
1,500,000/2=750,000
750,000
750,000
750,000
750,000
6,000,000
1,500,000
5,000,000
2,500,000
*So outstanding account is reported as component of share premium. IF not subsequently exercised, SO shall be
adjusted and credited to SP
2010:
No of employees
Employees who left 2010
Expected
Employees entitled to SO
SO
Total SO
Fair value
Total compensation
500
(30)
(30)
440
X100
4,000
30
1,320,000/3=440,000
No of employees
2010
2011
Expected
500
(30)
(28)
(25)
417x100=41,700x30=1,251,000/3x2=834,000-440,000=394,000
No of employees
2010
2011
2012
500
(30)
(28)
(22)
420x100=42,000x30=1,260,000-834,000=426,000
2011:
2012:
4. Intrinsic value:
MV(OS). dec.31,2010
Option price
2011
150
(125)
25x10,000=250,000/2=125,000
180
Financial Accounting vol2 summary
VALIX
(125)
55x10,000=550,000-125,000=425,000(end of vesting period)
Dec 31,2012(exercise date) 200
2011
(180)
Increase in intrinsic 20x10,000=200,000(additional compensation)
2010 salaries-SO
125,000
SO
125,000
2011 Salaries-SO
425,000
SOO
425,000
2012 Salaries
200,000
SOO
200,000
Execise:
Cash
SOO
OS
SP
jkycpa
1,250,000
750,000
1,000,000
1,000,000
5. If SO are canceled or settled during the vesting period, it is as if the vesting date had been brought
forward and the balance of the fair value not yet expensed is recognized immediately
Total compensation
4,000,000
Cumulative 2010 and 2011
2,050,000
Compensation expense 2012
1,950,000
Exercise in 2012
Cash
SOO
SC
SP
3,000,000
4,000,000
2,500,000
4,500,000
6. If it is settled in cash:
SOO
2,050,000
Salaries (expense)
450,000
Cash
2,500,000
7. Share appreciation creates liability.
8. During the vesting period from the date of grant to the exercise date, if there are increases or decreases in
the market value of share over a predetermined price for a given number of shares, the liability for the
compensation shall be adjusted. The predetermined price is the beginning of the earliest period.
9. Market value of shares at the end of the period less the predetermined price times the no. of shares equals
the total compensation to be distributed equally over the service period. If there is no increase at the end of
the service period, the entry is:
Accrued salaries payable
Gain on reversal of SAR
10. If the entity has the choice of settlement, entity shall account for the instrument either as a liability or
equity. If the employee has the right to choose the settlement, entity is deemed to have issued a compound
financial instrument. It shall be accounted for as partly liability (cash alternative) and partly equity (share
alternative)
11. Fair value of share alternative(12,000x48)
576,000
Fair value of liability on grant date,jan1(10,000x51)
510,000
Equity component
66,000
Financial Accounting vol2 summary
12. Cash alternative:
Accrued salaries payable
Share options outstanding
Cash
Share premium
Share alternative:
13. Accrued salaries payable
Share options outstanding
Share capital
Share premium
14. Fair value of the equipment purchased
Fair value of the liability(40Tx110)
Equity component
Equipment
Accounts payable
Share options outstanding
VALIX
650,000(65x10,000)
66,000
650,000
66,000
650,000
66,000
300,000
416,000
5,000,000
4,400,000
600,000
5,000,000
4,400,000
600,000
Cash alternative(market price is 130,dec.31)
Accounts payable
4,400,000
Share options outstanding
600,000
Interest expense
800,000
Cash
Share premium
Share alternative:
Accounts payable
Share options outstanding
SC
Share premium
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5,200,000
600,000
4,400,000
600,000
2,500,000
2,500,000
Retained earnings and Book value per share
1. Property dividends is distribution of noncash assets or shares of another entity to owners
2. Entity shall measure a noncurrent asset classified for distribution at the lower of carrying amount and
fair value less cost to distribute. If fair value is lower, there is impairment loss.
3. In closely held entities, if stock dividends are declared, retained earnings shall be capitalized only to the
extent of par value or stated value of the shares.
4. Wasting asset doctrine states that entity can declare dividends not only to the extent of the retained
earnings balance but also to the extent of the accumulated depreciation balance
Retained earnings
3,000,000
Capital liquidated-acc. Depletion
2,000,000
Dividends payable
5,000,000
5. Distribution to holders of an equity instrument classified as financial liability are recognized in the same
way as interest expense on a bond. Dividends paid to holders of mandatorily redeemable preference
share shall be accounted for as interest expense as component of finance cost
6. Appropriation may be legal, contractual, or voluntary.
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7. Quasi-reorganization is a permissive but not a mandatory procedure under which a financially troubled
entity restates its accounts and establishes a fresh start in accounting sense. It is called corporate
readjustment. It may be accomplished through recapitalization or revaluation of PPE.
(PPE’s fair value is 6,000,000)
Accumulated dep
1,000,000
RE
500,000
PPe
1,500,000
Revaluation:
PPE
Acc. Dep
Revaluation surplus
4,000,000
1,200,000
2,800,000
Cost Replacement cost
PPE
5,000,000
9,000,000
4,000,000
Acc. Dep(30%)
(1,500,000)
2,700,000
1,200,000
3,500,000
6,300,000
2,800,000
8. The result of revaluation of PPE must be made by an independent expert or specialist
9. The resulting deficit from the reorganization is offset against the revaluation surplus
10. Retained earnings subsequent to the quasi-reorg shall be restricted to the extent of the deficit wiped out
during the reorganization and therefore cannot be declared as a dividend
11. The quasi-reorg shall be disclosed for at least 3 years—date, mechanics, purpose and effect of quasireorg on the entity’s statement
12. Quasi-reorganization must be approved by SEC.
13. When preference as to assets, the preference shareholders are entitled to payment not only for the
liquidation value but also for dividends in arrears.
14. Dividends in arrears usually include current dividends
15. In case where there are two classes of preference share with different dividend rates and both are
participating, the lower rate shall be the basis for allocation to the ordinary share.
16. Participating up to 16% means that the preference share shall receive for the current year a maximum of
16 percent on the par value. Since the preference share already receives 12% as basic dividend for the current
year, then it participates only to the extent of 4% on the par of 2,500,000 or 100,000.
17. When dividends has preference as to assets, it shall be given dividends even when there is a deficit.
Total deficit is charged to Ordinary shareholders.
18. Preference as to dividends means that preference holders will receive first dividends if and when
dividends are declared. No dividends can be declared when there is deficit. Preference and ordinary share on the
deficit on a pro rata basis.
19. Subscribed shares are entitled to dividends.
Issued
2,500,000
Subscribed
1,000,000
Total
3,500,000
Treasury at par
(500,000)
Outstanding
3,000,000
 treasury shares are treated as retired for book value purposes.
1. Preference share capital 500T
Treasury
400T
SP
100T
20. Subscription receivable is not deducted for book value purposes.
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Earnings per share:
1. EPS pertains only to ordinary shareholders.
2. 2 computations of earnings per share is covered by PAS 33 which requires two presentations of earnings
per share: basic earnings per share and diluted
3. Public entities are required to present earnings per share
4. An entity shall present basic and diluted earnings per share on the face of income statement with equal
prominence for all periods presented
5. When an entity presents both consolidated and separate, disclosures required by the standard need be
presented only on the basis of the consolidated info.
6. An entity that chooses to disclose earnings per share on its separate financial statements shall present
such earnings per share info on the face of its separate income statement. An entity shall not present
such earnings per share on the consolidated financial statements.
7. Net income is equal to the amount after deducting dividends on preference share
8. If the preference share is cumulative, preference dividend for the current year only is deducted from the
net income whether such dividend is declared or not. If the preference share is noncumulative,
preference dividend for the current year is deducted from net income only if there is declaration
9. If there is a significant change in the ordinary share capital during the year, weighted average no. of
ordinary shares outstanding during the period should be used.
10. Where stock dividends or share splits create a change in the capital structure, the increase and decrease
in the number of shares shall be recognized retroactively, meaning the stock dividends or split shall be
treated as a change from the date the original shares were issued.
JKYAP