Government Accounting
&
Accounting for non-profit
organizations
by: ZEUS VERNON B. MILLAN
Chapter 9
Investment Property
Lear n in g Objectives
1. Define investment property and give
examples.
2. State the initial and subsequent
measurements of an investment property.
3. Account for the impairment of investment
property, and the reversal thereof.
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
Investment Property
• Investment Property – is land and/or building held for
rentals or capital appreciation.
• Examples:
a. Land held for long-term capital appreciation rather than
for short-term sale in the ordinary course of operations.
b. Land held for a currently undetermined future use.
c. A building owned by the entity (or held by the entity
under a finance lease) and leased out under one or more
operating leases on a commercial basis.
d. A building that is vacant but is held to be leased out
under one or more operating leases.
e. Property that is being constructed or developed for
future use as investment property.
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
Investment Property
•
•
•
•
•
•
•
•
•
•
•
The following are NOT considered investment property:
Biological assets and Mineral rights and mineral reserves
Property held for sale in the ordinary course of operations
Property being constructed on behalf of third parties.
Property held for future development and subsequent use as
owner-occupied property.
Property occupied by employees.
Owner-occupied property awaiting disposal.
Property that is leased to another entity under a finance lease.
Property held to provide a social service and which also generates
cash inflows.
Property held for strategic purposes.
Property held for use in the production or supply of goods or
services or for administrative purposes.
Initial Measurement
• An investment property is initially measured at
cost. The measurement of cost depends on the
mode of acquisition.
• Modes of Acquisition
a. Cash purchase – purchase price plus direct costs
necessary in bringing the asset to its intended
condition.
b. Installment purchase – cash price equivalent
c. Non-exchange transaction – fair value at
acquisition date
d. Self-construction – direct materials, labor, and
construction overhead
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
Subsequent Measurement
• Investment properties are subsequently measured
at cost less accumulated depreciation and
accumulated impairment losses (i.e., Cost Model).
• Note: The fair value model is not allowed for
government entities.
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
Transfers To or From Investment Property
• Transfers to or from investment property shall be
made only when there is a change in use.
• A government entity accounts for transfers to or
from investment property at cost. Accordingly, no
gain or loss shall arise from the transfer, except
when the transferred asset is impaired.
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
Derecognition
• An investment property is derecognized when it is
disposed or when it is permanently withdrawn
from use and no future economic benefits or
service potential is expected from its disposal.
• The difference between the net disposal proceeds
(if any) and the carrying amount is recognized as
gain or loss in surplus or deficit.
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
Impairment
• An asset is impaired if its carrying amount exceeds
its recoverable amount. The excess represents
impairment loss which shall be recognized in
surplus or deficit.
• Recoverable amount is the higher of an asset’s fair
value less costs to sell and value in use.
• Value in use is the present value of the estimated
future cash flows expected to be derived from the
continuing use of an asset and from its disposal at
the end of its useful life.
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
Reversal of Impairment
• The reversal of impairment shall not result to a
carrying amount in excess of the asset’s carrying
amount had no impairment loss been recognized
in prior periods.
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
Compensation from third parties
• Compensation from third parties for an investment
property that was impaired, lost or given up shall
be recognized in surplus or deficit when the
compensation becomes receivable.
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
APPLICATION OF CONCEPTS
PROBLEM 9-3: FOR CLASSROOM DISCUSSION
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
OPEN FORUM
 QUESTIONS????
 REACTIONS!!!!!
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
END
GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan
Government Accounting
&
Accounting for non-profit
organizations
by: ZEUS VERNON B. MILLAN
Chapter 10
Property, Plant and Equipment
L e a rn i n g Objectives
1. State the initial and subsequent
measurements of items of PPE of
government entities.
2. Describe the following and state their
peculiar accounting requirements: Heritage
Assets, Infrastructure Assets, and
Reforestation Projects.
3. Account for Borrowing Costs by a
government entity.
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
Property, Plant and Equipment
…are:
a. tangible assets;
b. held for use in the production or supply of
goods, services or program outputs, for
rental to others, or for administrative
purposes, and not intended for resale in
the ordinary course of operations; and
c. expected to be used for more than one
reporting period
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
Recognition
• An item of PPE is recognized if it meets the definition of a
PPE and the recognition criteria for assets, as well as the
capitalization threshold of ₱15,000.
• The threshold is applied on a per item basis, except as
follows:
– Individual items with values below the threshold but
work together as a group are recognized as PPE if the
total cost of the group is ₱15,000 or more
– Bulk acquisitions of small items of PPE are recognized
as PPE if their aggregate cost is ₱15,000 or more.
• Items below the capitalization threshold are recognized as
inventories (i.e., Semi-Expendable Property).
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
Initial Measurement
• PPE are initially measured at cost. Cost comprises
the following:
a. Purchase price, including non-refundable taxes
but excluding trade and cash discounts;
b. Direct costs; and
c. Present value of decommissioning and
restoration costs.
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
Examples of directly attributable costs
• Costs of employee benefits arising directly from
the construction or acquisition of PPE;
• Costs of site preparation;
• Initial delivery and handling costs (e.g., freight
costs);
• Installation and assembly costs;
• Testing costs, net of disposal proceeds of samples
generated during testing; and
• Professional fees.
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
Examples of costs that are expensed outright
• Costs of opening a new facility.
• Costs of introducing a new product or service
(including costs of advertising and promotional
activities).
• Costs of conducting business in a new location or
with a new class of customers (including costs of
staff training).
• Administration and other general overhead costs.
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
Modes of
a. Acquisition by Purchase
Acquisition
– Cash discounts, whether taken or not, are excluded from the
initial measurement. Cash discounts not taken are recognized
as “Other Losses.”
– A PPE purchased under installment basis is initially measured
at the cash price equivalent.
– Promotional items are accounted for as follows:
• If the promotional item is the same as those purchased, the
total acquisition cost is allocated to all the items acquired
including the promotional item.
• If the promotional item is different from the other items
acquired, the initial cost of the promotional item is its fair
value. The purchase price, net of the fair value of the
promotional item, is allocated to the other assets acquired.
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
b.
Modes of
Acquisition
Acquisition by Construction
1. Acquisition through Construction Contracts awarded to
contractors – the cost is the contract price.
2. Construction by Administration (Self-construction) – the
cost includes direct materials, labor and other
construction overheads.
• Construction costs are initially recorded in the
“Construction in Progress” account pending the
completion of the asset. Upon completion, the
construction costs are reclassified to the appropriate PPE
account.
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
c.
Modes of
Acquisition
Acquisition through
Exchange
– With Commercial Substance (order of priority):
1. Fair value of asset Given up (plus any cash
paid or minus any cash received);
2. Fair value of asset Received; or
3. Carrying amount of asset Given up (plus any
cash paid or minus any cash received)
– Lacks Commercial Substance: Carrying amount of
asset Given up (plus any cash paid or minus any
cash received)
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
d.
Modes of
Acquisition
Acquisition through
Non-Exchange Transaction
– measured at fair value at the acquisition date.
i. If without condition, recognized
immediately as income.
ii. If with condition, initially recognized as
liability (i.e., ‘Other Deferred Credits’) and
subsequently recognized as income when
the condition is met.
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
e.
Modes of
Acquisition
Acquisition through
Intra-agency or Inter-agency
Transfers
– measured at the carrying amount of the asset
received
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
Subsequent Expenditures on recognized PPE
• Capitalization of costs ceases when the PPE
is in the location and condition necessary
for it to be capable of operating in the
manner intended by management.
Therefore, costs incurred in using or
redeploying a PPE are not capitalized.
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
Subsequent Expenditures on recognized PPE
a. Repairs and Maintenance
1. Minor repairs – costs of day-to-day
servicing of an item of PPE, necessary to
maintain its operating capability. These are
charged as expenses.
2. Major repairs – are considered
‘betterments’ and are capitalized.
• If it is not clear whether a repair is minor or
major, it is treated as minor.
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
Subsequent Expenditures on recognized PPE
b. Replacement costs
– The carrying amount of the old part is
derecognized and charged as loss.
– The cost of the new part is capitalized.
– If the carrying amount of the old part
cannot be determined, the cost of the new
part is used as the basis.
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
Subsequent Expenditures on recognized PPE
c. Spare parts and servicing equipment
– Minor spare parts are recognized as
inventory and charged as expense when
consumed.
– Major spare parts and stand-by equipment
are recognized as PPE when they meet the
recognition criteria, e.g., they are expected
to be used over more than one period.
– Spare parts and servicing equipment that
can only be used in conjunction with an
item of PPE are accounted for as PPE.
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
Subsequent Expenditures on recognized PPE
d.
Betterments
– are enhancements to the future economic benefits of a PPE, such as:
• increase in previously assessed physical output or service capacity;
• reduction in associated operating costs;
• extension of the estimated useful life; or
• improvement in the quality of output.
– Costs of betterments are capitalized (if they meet the recognition
criteria for PPE) and are subsequently depreciated as follows:
a. Over the remaining useful life, if the betterment increases the
service potential of the asset without extending its useful life; or
b. Over the extended useful life, if the betterment extends the
useful life of the asset. The extended period shall not exceed the
original estimate of useful life of the asset.
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
Subsequent Expenditures on recognized PPE
e. Additions and Rearrangements
– Additions are modifications which increase the physical size or
function of the PPE. An addition can be:
a. a new unit that is physically distinct from the old unit; or
b. an expansion, extension or enlargement of the old unit.
– The cost of a new unit is depreciated over its own useful life.
– An expansion cost is depreciated over the shorter of its useful life and
the remaining life of the PPE of which it is part.
– Rearrangement is the relocation or reinstallation of an asset which
proves to be less efficient in its original location.
– As the PPSAS provides that capitalization of costs ceases when an
asset is in the location and condition originally intended by
management, rearrangement costs shall be capitalized only when it is
clear that the PPE recognition criteria are met.
Subsequent Measurement
• PPE are subsequently measured using the cost model.
• Depreciation begins when the asset is available for its
intended use. For simplicity, if a PPE becomes available for
its intended use:
– On or before the 15th of the month – depreciation is
computed at the beginning of that month.
– After the 15th of the month – depreciation is computed
at the beginning of the following month.
• Depreciation ceases when the asset is derecognized or
fully depreciated. Depreciation does not cease when the
asset becomes idle or retired from active use and held for
disposal.
• The straight line method of depreciation shall be used
unless another method is more appropriate.
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
Subsequent Measurement
• Residual value shall be at least 5% of cost, unless an
entity determines a more appropriate estimate,
subject to the approval of COA.
• The residual value and the useful life of an asset shall
be reviewed at least at each annual reporting date
and, if expectations differ from previous estimates,
the change(s) shall be accounted for as a change in
an accounting estimate
• Depreciation shall be recognized on a monthly basis.
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
Impairment
• A PPE is impaired if its carrying amount exceeds its
recoverable service amount or recoverable
amount.
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
Computation of Value in Use
1. Depreciated Replacement Cost Approach
– Value in use is equal to the asset’s replacement cost adjusted
for depreciation to reflect the asset’s used condition.
– Replacement cost is the cost of replacing or reproducing the
asset, whichever is lower.
2. Restoration Cost Approach
– Value in use = Depreciated replacement cost minus Estimated
restoration cost.
– Restoration cost is the cost of restoring the service potential of
an asset to its pre-impaired level.
3. Service Units Approach
– Value in use = Depreciated replacement cost minus a
proportionate reduction to reflect the reduced number of
service units expected from the asset in its impaired state.
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
Reversal of Impairment
• The principles used in recognizing reversals of
impairment loss on items of PPE are the same as
those used for investment property.
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
Heritage Assets
• Heritage assets are those which have historical,
cultural and environmental significance, and are
intended to be preserved for future generations.
• Heritage assets are measured at cost. They are not
depreciated, but subject to impairment.
• However, heritage assets that have future
economic benefits other than their heritage value
are depreciated similar to the other items of PPE,
e.g., a historic building being used as office.
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
Infrastructure Assets
•
Infrastructure assets include road
networks (including facilities, such as
traffic lights and road signage), flood
•
control, sewer, water and power supply
systems, communications networks,
• railways, seaports, airports, and the like.
Infrastructure assets are accounted for
similar to the other items of PPE, i.e., they
are initially measured at cost and
subsequently
GOVT ACCTGdepreciated.
& ACCTG FOR NPOs by:
Z.B.Millan
Reforestation Projects
• Reforestation refers to the renewal of a forest
cover by planting seeds or young trees.
• Reforestation projects are recorded as land
improvements.
• Subsequent costs are accounted for as follows:
– Maintenance and protection costs incurred
within the duration of the project are
capitalized.
– Those incurred after the turn-over of the
project are charged as expense.
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
Derecognition
•
• A PPE is derecognized when it is disposed
or when no future economic benefits is
expected from it.
On derecognition, the difference between
the carrying amount and the net disposal
proceeds, if any, is recognized as gain or
loss in surplus or deficit.
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
Idle, Fully Depreciated, & Unserviceable PPE
• Idle PPE refers to assets that are temporarily
taken out of active use or temporarily
abandoned. Idle PPE are not derecognized but
continued to be depreciated.
• A PPE is fully depreciated when its carrying
amount is equal to zero or its residual value. Fully
depreciated PPE are not derecognized.
• Unserviceable property are those which do not
have future economic benefits. Unserviceable
property is derecognized.
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
Lost PPE
• When a PPE is lost, e.g., through force majeure, the officer
having custody of the PPE shall immediately notify the COA
within 30 days and shall submit an application for relief, together
with supporting evidence. If warranted by the evidence, a credit
for loss shall be allowed. Failure to do the requirements will not
relieve the officer of liability. (P.D. No. 1445, Sec. 73)
• The carrying amount of the lost PPE is derecognized and charged
as loss.
• Pending the result of the investigation, the accountability of the
officer shall be established, equal to the depreciated
replacement cost of the lost PPE. If a credit for loss is
subsequently allowed to the officer, the accountability is simply
reversed. If not, the officer shall pay cash to settle his
accountability.
Receipt and Disposition of PPE
•
• The procedures in the receipt and
disposition of PPE are similar to those of
inventories.
Property Card – used by the
•
Supply/Property Division to record all
movements in items of PPE. This is the
equivalent of the Stock Card used for
inventories.
Property, Plant and Equipment Ledger
GOVT ACCTG
& ACCTG
FOR Accounting
NPOs by:
Card – used
by
the
Division to
Z.B.Millan
Receipt and Disposition of PPE
• Property Acknowledgement Receipt – used by the
Supply/Property Division to record the issuance
of PPE to the end user. This is based on the
approved Requisition and Issue Slip (RIS)
submitted by the requesting individual. This is the
equivalent of the Report of Supplies and
Materials Issued used for inventories.
• Report on the Physical Count of Property, Plant
and Equipment – At the end of each year, the
entity shall perform a physical count of PPE and
prepare this report. This report shall be submitted
to the COA not later than January 31 of the
following year.
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
Receipt and Disposition of PPE
• Inventory and Inspection Report for Unserviceable
Property – used to account for all unserviceable
property subject to disposal.
• Report of Lost, Stolen, Damaged or Destroyed
Property – used by the accountable officer to
notify the concerned officials of the lost, stolen,
damaged or destroyed property.
• Property Transfer Report – used to record
transfers of property from one accountable
officer to another.
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
Borrowing Costs
• Borrowing costs – are interest and other expenses
incurred by an entity in connection with the
borrowing of funds. (PPSAS 5.5)
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
Recognition of Borrowing costs
1. Benchmark Treatment – expensed in the period
incurred.
2. Allowed Alternative Treatment – capitalized if
the borrowing costs are directly attributable to
the acquisition of a qualifying asset.
• Qualifying asset – is an asset that necessarily
takes a substantial period of time to get ready for
its intended use or sale. (PPSAS 5.5)
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
Recognition of Borrowing costs
Applications:
The borrowing costs on loans borrowed by:
a. National Government (recorded by BTr) are
expensed (i.e., Benchmark Treatment).
b. Government agencies are capitalized, if they
relate to the acquisition of a qualifying asset (i.e.,
Allowed Alternative Treatment).
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
APPLICATION OF CONCEPTS
PROBLEM 10-4: FOR CLASSROOM DISCUSSION
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
OPEN FORUM
 QUESTIONS????
 REACTIONS!!!!!
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
END
GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan
Government Accounting
&
Accounting for non-profit
organizations
by: ZEUS VERNONB. MI LLAN
Chapter 11
Intangible Assets
Lear n in g Objectives
1. Define intangible assets.
2. State the recognition, and account for the
initial and subsequent measurements, of
intangible assets.
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
Intangible Assets
• Intangible Assets are identifiable nonmonetary assets without physical
substance.
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
Essential elements of an intangible asset
1. Identifiability
a. separable; or
b. arises from binding arrangements
2. Control – the entity has the ability to
benefit from the intangible asset or
prevent others from benefitting from it.
3. Future economic benefits or service
potential
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
Examples of Intangible assets
•
•
•
•
•
•
•
•
•
Computer software
Patents
Copyrights
Franchise
Motion picture films
Trademarks or brand names
Licenses
Acquired import quotas
Customer lists
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
Recognition
• An intangible asset is recognized if it meets
the definition of an intangible asset and the
recognition criteria for assets.
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
Initial Measurement
• An intangible asset is initially measured at cost.
Mode of Acquisition
a. Purchase



b. Non-exchange
transaction
c. Exchange
d. Entity Combination
Measurement of Initial Cost
Purchase price plus Direct costs (including
non-refundable taxes but excluding trade
discounts and rebates).
If payment is deferred, the cost is the cash
price equivalent.
fair value at the acquisition date
 With commercial substance:
a. FV of asset given up (+ cash paid/- cash
received).
b. FV of asset received.
c. CA of asset given up (+ cash paid/- cash
received).
 Without commercial substance: CA of
asset given up (plus cash paid/minus cash
received).
 fair value at the acquisition date
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
Internal Generation
1. Research – undertaken to gain new knowledge.
Expenditures are recognized as expense.
2. Development – application of research findings to design
new or substantially improved products, processes, or
systems before the start of commercial production or use.
Expenditures are capitalized only if all of the following are
met:
a. Ability to use or sell
b. Intention to complete
c. Technical feasibility
d. Availability of adequate resources
e. probable future Economic benefits
f. Measured reliably
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
•
Other accounting
If it is not clear whether an expenditure is a research or a
requirements
development cost,
it is treated as research cost.
• Reinstatement of expenditure previously recognized as an
expense is prohibited.
• Internally generated brands, mastheads, publishing titles,
customer lists, and similar items are not recognized as intangible
assets.
• Selling, administrative and other general overhead, costs of
inefficiencies, initial operating losses, and training costs are
expensed.
• Subsequent expenditures on recognized intangible assets are
generally expensed, unless they meet the definition of an
intangible asset and the asset recognition criteria.
• The accounting for replacement of a part of an intangible asset is
the same as those of PPE and investment property.
Subsequent Measurement
1. Indefinite life – not amortized but
tested for impairment at least
annually.
2. Finite life – amortized using the straight
line method over a period of 2 to 10
years. The residual value is assumed to be
zero except when the entity has the
ability to sell the asset at the end of its
useful life.
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
Impairment
• An entity is required to test for impairment an
intangible asset with indefinite useful life or an
intangible asset not yet available for use at least
annually or whenever there is an indication of
impairment.
• An entity shall test for impairment an intangible
asset with definite useful life only when an
indication of impairment exists. Indications of
impairment shall be assessed at each reporting
date.
• The accounting for impairment of intangible assets,
and reversal thereof, is the same as those of
investment property and PPE.
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
Derecognition
•
An intangible asset is derecognized when it
•
is disposed or when no future economic
benefits or service potential is expected
from the asset.
On derecognition, the difference between
the carrying amount and the net disposal
proceeds, if any, is recognized as gain or
loss in surplus or deficit.
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
APPLICATION OF CONCEPTS
PROBLEM 11-3: FOR CLASSROOM DISCUSSION
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
OPEN FORUM
 QUESTIONS????
 REACTIONS!!!!!
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
END
GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan
Government Accounting
&
Accounting for non-profit
organizations
by: ZEUS VERNON B. MILLAN
Learning
Chapter 12
Objectives
Liabilities
1. State the recognition criteria for liabilities.
2. State the initial and subsequent
measurements of financial liabilities.
3. State the measurement of provisions,
contingent liabilities and contingent
assets.
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
Liability
• Liability – is a present obligation arising from past event,
the settlement of which is expected to result in an outflow
of resources embodying economic benefits or service
potential.
• Present obligation means that as of the reporting date, an
obligating event must have already occurred.
• An obligating event is an event that creates either:
a. Legal Obligation – is an obligation that results from a
contract, legislation, or other operation of law; or
b. Constructive Obligation – is an obligation that results
from an entity’s actions (e.g., past practice, published
policies) that create a valid expectation from others
that the entity will accept and discharge certain
responsibilities.
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
Liability Recognition Criteria
• A liability is recognized only when all of the
following are met:
a.
The item meets the definition of a liability
(i.e., present obligation);
b.
It is probable that an outflow of resources
embodying economic benefits will be
required to settle the obligation; and
c.
The obligation has a cost or value (e.g., fair
value) that can be measured reliably.
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
Financial Liabilities
• A financial liability is any liability that is:
a. A contractual obligation to deliver cash or
another financial asset to another entity;
b. A contractual obligation to exchange
financial instruments with another entity
under conditions that are potentially
unfavorable to the entity; or
c. A contract that will or may be settled in
the entity’s own equity instruments.
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
Examples of financial liabilities
•
•
•
•
•
•
Accounts Payable
Notes Payable
Interest Payable
Loans Payable
Bonds Payable
Accrued Payables
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
Initial Recognition
• A financial liability is recognized
when an entity becomes a party
to the contractual provisions of
the instrument. (PPSAS 29.16)
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
Initial Measurement
• Financial liabilities are initially measured
at fair value minus transaction costs,
except for financial liabilities at fair value
through surplus or deficit (e.g.,
designated financial liabilities and
derivative liabilities) whose transaction
costs are expensed. (PPSAS 29.45)
• Transaction costs are incremental costs
that are directly attributable to the
GOVT ACCTG
& ACCTG FOR
NPOs
by:
acquisition,
issue,
or
disposal
of a financial
Z.B.Millan
Subsequent Measurement
• Financial liabilities are subsequently
measured at amortized cost, except for
financial liabilities at fair value through
surplus or deficit which are subsequently
measured at fair value.
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
Derecognition of Financial Liability
• A financial liability is
derecognized when it is
extinguished, such as when it is
discharged, waived, cancelled, or
it expires.
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
Provisions
•
• Provision – is a liability of uncertain timing
or amount.
A provision is recognized if all the
recognition criteria for a liability are met
(i.e., present obligation, probable outflow,
and reliable measurement). If one or more
of the criteria are not met, the item is a
contingent liability, not a provision, and
therefore not recognized as liability.
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
Contingent Liability
• Contingent Liability is:
• A possible obligation that arises from past events, and
whose existence will be confirmed only by the occurrence
or non-occurrence of one or more uncertain future events
not wholly within the control of the entity; or
• A present obligation that arises from past events, but is not
recognized because:
a. It is not probable that an outflow of resources
embodying economic benefits or service potential will be
required to settle the obligation; or
b.The amount of the obligation cannot be measured with
sufficient reliability.
(PPSAS 19.18)
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
Contingent Asset
•
Contingent Asset – is a possible asset that
arises from past events, and whose
existence will be confirmed only by the
occurrence or non- occurrence of one or
more uncertain future events not wholly
within the control of the entity. (PPSAS
19.18)
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
Summary:
Contingent
Possible
Disclose
only
Remote
 Liability
Probable
Recognize and
Disclose
 Asset
Disclose only
Ignore
Ignore
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
Ignore
Measurement
•
A provision is measured at the
• entity’s best estimate of the amount
needed to settle the liability at the
reporting date.
If the effect of time value of money is
material, the provision is measured at
present value.
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
Reimbursements
• If another party is expected to reimburse the
settlement amount of a provision, a
reimbursement asset is recognized and presented
in the statement of financial position separately
from the provision.
• However, in the statement of financial
performance, the expense related to the provision
may be presented net of the reimbursement.
• The amount recognized for the reimbursement
shall not exceed the amount of the provision.
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
APPLICATION OF CONCEPTS
PROBLEM 12-3: FOR CLASSROOM DISCUSSION
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
OPEN FORUM
 QUESTIONS????
 REACTIONS!!!!!
GOVT ACCTG & ACCTG FOR NPOs by:
Z.B.Millan
END
GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan