Summary Note: Financial Accounting & Reporting
CONCEPTUAL FRAMEWORK
1. The objective of financial reporting is to provide financial information about the entity that is useful
to present and potential equity investors, lenders, and other creditors in making decisions about
providing resources to the entity.
2. Qualitative characteristics
a. Relevance. The information is relevant if:
i. It is capable of making a difference in the decisions made by the capital providers as
users of financial information.
ii. It has predictive value, confirmatory value or both. Predictive value occurs where the
information is useful as an input into the user's decision models and affects their
expectations about the future. Confirmatory value arises where the information
provides feedback that confirms or changes past or present expectations based on
previous evaluations.
iii. It is capable of making a difference whether the users use it or not. It is not necessary
that the information has made a difference in the past or will make a difference in the
future.
b. Faithful representation is attained when the depiction of the economic phenomenon is
complete, neutral, and free from material error. A depiction is complete if it includes all
information necessary for the faithful representation. Neutrality is the absence of bias
intended to attain a predetermined result. Providers of information should not influence the
making of a decision or judgment to achieve a predetermined result.
3. Enhancing qualitative characteristics
a. Comparability is the quality of information that enables users to identify similarities in and
differences between two sets of economic phenomena. Making decisions about one entity
may be enhanced if comparable information is available about similar entities.
b. Verifiability is achieved if different independent observers could reach the same general
conclusions that the information represents the economic phenomena or that a particular
recognition or measurement model has been appropriately applied.
c. Timeliness means having information available to decision makers before it loses its capacity
to influence decisions. If such capacity is lost, then the information loses its relevance.
Information may continue to be timely after it has been initially provided.
d. Understandability is the quality of information that enables users to comprehend its meaning.
Information may be more understandable if it is classified, characterized and presented
clearly and concisely.
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Summary Note: Financial Accounting & Reporting
4. Elements of financial information
a. An asset is a present economic resource to which, through an enforceable right or other
means, the entity has access or can limit the access of others.
b. Liability is a present obligation of the entity arising from past events, the settlement of which
is expected to result in an outflow from the entity of resources embodying economic benefits
c. Equity is the residual interest in the assets of the entity after deducting all its liabilities’.
Equity cannot be identified independently of the other elements in the statement of financial
position/balance sheet.
d. Income is increasing in economic benefits during the accounting period in the form of
inflows or enhancements of assets or decreases of liabilities that result in increases in equity,
other than those relating to contributions from equity participants.
5. Financial and physical capital
a. Financial capital is synonymous with the net assets or equity of the entity, measured either in
terms of the actual amount of pesos by subtracting the total of liabilities from assets, or in
terms of the purchasing power of the peso amount recorded as equity. Profit exists only after
the entity has maintained its capital, measured as either the peso value of equity at the
beginning of the period or the purchasing power of those pesos in the equity at the beginning
of the period.
b. Physical capital is seen not so much as the equity recorded by the entity but as the operating
capability of the entity’s assets. Profit exists only after the entity has set aside enough capital
to maintain the operating capability of its assets.
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Summary Note: Financial Accounting & Reporting
PRESENTATION OF FINANCIAL STATEMENTS
1. General features of a financial statement
a. Fair presentation and compliance with PFRSs
FS should faithfully represent the transactions, events, and conditions of the entity by the
definitions and recognition criteria specified in the Framework, and that compliance with
PFRSs is presumed to result in a fair presentation
b. Going concern
FS should be prepared on a going concern basis, unless management intends to liquidate or
cease trading, or has no realistic alternative but to do so.
c. Accrual basis of accounting
It is applied to financial statements other than the statement of cash flows, which is prepared
on a cash basis.
d. Consistency of presentation
The presentation and classification of financial statements items should be consistent from
one period to the next unless changes are required by accounting standards or in the interests
of more reliable and relevant presentation of financial information as may arise when there is
a significant change like the entity’s operations.
e. Materiality and aggregation
Each material class of similar items should be presented separately in the financial statements,
with material items being defined as those items for which omission or misstatement could
individually or collectively influence the economic decisions of users.
f.
Offsetting
Assets and liabilities, and income and expenses shall not be offset unless required or
permitted by a PFRS, but income and expenses are presented on a net basis when this
presentation reflects the substances of the transactions or events.
g. Frequency of reporting
FS should be presented at least annually, with disclosure where the length of the reporting
period is affected by the change of the end of the reporting period.
h. Comparative information
FS must be presented for all financial statement items unless a PFRS permits otherwise.
2. Current and non-current assets and liabilities
One of the criteria for classifying an asset/liability as current under PAS 1 is that it is expected to be
realized/paid, or is intended for sale or consumption, in the entity’s normal operating cycle. Thus, if
an entity’s operating cycle is longer than 12 months, it is possible for an asset/liability that is not
realizable within 12 months to be classified as a current asset/liability. Examples of operating cycles
that may extend beyond 12 months include property development, construction, wine and cheese
making.
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Summary Note: Financial Accounting & Reporting
The presentation of the statement of financial position based on liquidity, rather than on a
current/non-current basis is adopted when a presentation based on liquidity is considered to provide
more relevant and reliable information. This situation is largely confined to entities such as financial
institutions which do not have an identifiable operating cycle, as does a manufacturer or a retailer.
3. Profit from continuing operation
The distinction between profit and other components of comprehensive income is a function of the
treatment of recognized gains and losses prescribed by accounting standards. The distinction
becomes blurred when similar items, such as an asset revaluation under PAS 16, are included in profit
(if a loss on revaluation) and other components of comprehensive income (if again on revaluation).
4. Adjusting and non-adjusting events after the reporting period
Adjusting events are those that provide further evidence about conditions existing at the end of the
reporting period. A non-adjusting event provides evidence of conditions arising after the reporting
period.
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Summary Note: Financial Accounting & Reporting
RECEIVABLES
1. Receivables are claims against a customer for cash, goods, or services. Receivables are considered
liquid but not as liquid as cash because some accounts probably will not be paid.
2. Receivables are classified as current or noncurrent, trade or nontrade. Trade receivables include
accounts receivable and notes receivable. Current receivables are due to be collected within the longer
of a year or the current operating cycle. Noncurrent receivables are due after one year or the current
operating cycle, whichever is longer.
3. Accounts receivable are subject to trade discounts and cash discounts.
4. Discounts
Trade discounts (or volume or quantity discounts) allow a business to list a single price in a catalog
and then sell the item to various types of customers at different percentage discounts from the list
price.
Cash discounts are incentives for early or prompt payment. Buyers can apply this type of discount
automatically if they make payment by the specified deadline. Cash discounts are expressed in
shorthand, such as 2/10, n/30). This means a 2% discount is available if payment is made within ten
days or the net amount is due within 30 days.
5. Allowance for doubtful accounts is sales made on account raise the possibility that a firm may not be
able to collect the full amount of accounts receivable.
The allowance method estimates the expected uncollectible accounts from all credit sales or all
outstanding receivables. The allowance for doubtful accounts is netted against accounts receivable to
determine net realizable value. This is the amount the company expects to collect. The bad debts
expense is also reported as an operating expense.
a. Percentage of outstanding receivable method assesses the historical relationship between
actual debts and accounts receivable over a period without identifying specific accounts. The
resulting percentage of bad debts per average account receivable level is multiplied against
the current accounts receivable at the end of a period to determine the required ending
balances in the allowance for doubtful accounts.
b. Percentage of sales may be used if there is a stable relationship between cash and credit sales.
This approach is based on the matching principle inherent in the income statement; expenses
are matched against revenues in the same period.
c. Aging categorizes accounts receivable by the length of time the debts have been outstanding.
The older the debts are, the higher the estimated percentage of doubtful accounts.
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Summary Note: Financial Accounting & Reporting
6. Disposition of receivables
Companies usually dispose of receivables to generate cash to satisfy short-term liquidity needs
without borrowing more or issuing more stock. Purchasers of receivables do so mainly because they
get a discount on the receivables and can specialize in the efficient collection.
a. Secured borrowing
b. Factoring of receivables
In factoring, factors buy receivables and often take on the billing and collection
functions. Most factors transfer only 80% to 90% of the value of the receivables to allow
for sales returns and allowances and bad debts. Also, factor charges a percentage commission
dependent on the gross amount of receivables transferred and on the perceived risk of
noncollection. The company records the factor's commission as an expense or a loss.
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Summary Note: Financial Accounting & Reporting
INVENTORIES
1. All goods available for sale and still owned by the company are included in inventory. Inventory
includes goods on consignment, goods in transit, goods shipped FOB destination as well as owned
goods on hand.
Its use classifies inventory. Retailers have merchandise and manufacturers have raw materials, work
in process or finished goods.
Beginning inventory + Purchases (net) - Cost of Goods Sold = Ending inventory
2. Inventory valuation
Inventory valuation is the process of determining what items to include in inventory, what costs
should be included in inventory and which cost flow assumptions should be used (FIFO, Specific
Identification, and Average)
Cost of goods acquired (produced) during the year
Purchases are recorded when the title passes to the buyer who is normally when the goods are
received. Take note of consigned goods and goods in transit:
Consigned goods
The consignor retains the item on its inventory until the sale to a third party. The consignee never
records the item as inventory.
Goods in transit
Before title transfers, the goods are the property of the seller; after transfer, they must be accounted
for on the books of the buyer.
The cost to include in inventory cost
Product costs include all costs recorded as part of the inventory, including shipping costs, labor costs,
and direct costs of acquisition, production, and processing.
Manufacturing overhead cost for manufacturers. Selling expenses are not included.
Cash discounts are only recorded if taken as deductions from net purchases.
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Summary Note: Financial Accounting & Reporting
3. Cost flow assumptions are used for accounting and have nothing t do with the actual physical
movement of the goods. It simply determines which costs are allocated to inventory and which are
allocated to cost of goods sold. Each method will have a different impact on income.
a. First in and first out makes the assumption that goods purchased earlier are used or sold
before goods purchased later. The cost incurred farthest in the past should be included in the
cost of goods sold, and the cost incurred most recently should be included in ending
inventory.
An objective of FIFO is to approximate the actual flow of inventory. When the oldest goods
are sold first, FIFO approximates the specific identification method. FIFO ending inventory
values provide a reasonable estimate of inventory replacement costs, especially when
turnover is rapid, or prices are stable. FIFO does not match current costs with current
revenues on the income statement. Because the oldest cost is matched with revenue, FIFO
can distort net income.
b. Specific identification tracks the cost of each item and records the item in the cost of goods
sold or inventory as appropriate. This method is feasible only if all items are uniquely tagged
and works best with small numbers of expensive items. These matches cost directly with
revenues.
Specific identification can be abused to manipulate profits by selecting units at a particular
price for sale to alter the gross profit for a period.
c. Average cost aggregates cost for all similar inventory items and produce an average cost for
the period. A new average cost must be calculated after each purchase. This amount is used
as the cost until another purchase is made. The average cost per unit is calculated as the cost
of the units available for sale after each purchase divided by the number of units available for
sale.
The average method is objective and simple to use, and the results are not as subject to
manipulation as other methods.
FIFO
Weighted
average
Ending inventory (newest cost);
cost of goods sold (oldest cost)
Ending inventory (average cost);
cost of goods sold (average cost)
Effect on income and assets of FIFO
Rising prices
Falling prices
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FIFO
Low cost of sales, high net income, high inventory
The high cost of sales, low net income, low inventory
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Summary Note: Financial Accounting & Reporting
4. Inventory estimation is used when inventory is needed to be estimated.
a. Gross profit method is used to determine sales at cost. This percentage is determined based
on records from prior periods. It has three assumptions:
i. Beginning inventory plus purchases equals total goods to be accounted for.
ii. Goods not sold are in inventory
iii. The ending inventory is equal to beginning inventory plus purchases minus sales at
cost.
b. Retail inventory method estimates inventory value using retail prices, converting this data to
cost using a formula that reflects the Company's average markup.
5. Inventory errors
Two common inventory errors: misstatements in ending inventory, purchases, and inventory.
To illustrate, ending inventory is overstated by P10,000 in the current year.
Effects
Ending inventory
Cost of sales
Operating income
Tax expense (40% tax rate)
Net income
Retained earnings
Beginning inventory
Current Year
+ 10,000
- 10,000
+ 10,000
+ 4,000
+ 6,000
+ 6,000
Next Year
Correct
+ 10,000
- 10,000
- 4,000
- 6,000
- 6,000
+ 10,000
An error in the end-of-period inventory will affect the
Current period
Next period
Cost of sales, net income and ending retained earnings
Beginning inventory, cost of sales and net income
The cost of sales and net income errors in the next period would be in the opposite direction from those in
the first period. The retained earnings at the end of the next period would be correct.
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Summary Note: Financial Accounting & Reporting
INVESTMENTS
1. Debt securities are a form of a loan to another entity, including government securities, commercial
paper, corporate bonds, and convertible debt. Debt securities are categorized as held to maturity,
trading and available for sale.
a. Held to maturity is equity securities have no maturity date, only debt securities can be held
to maturity. To classify securities as held to maturity, the reporting entity must have both the
positive intent and the ability to hold the securities to maturity. Held to maturity are valued at
amortized cost, so no unrealized holding gains or losses are recognized.
When they are sold, the amortized cost amount of the sold or transferred security, the related
gain or loss shall be disclosed in the notes to the financial statements.
b. Trading securities are intended to be sold in the short-term to generate income from shortterm differences in price. Trading securities are traded at fair values, and any unrealized
holding gains or losses must be included in net income.
At the date of acquisition, the security is recorded at its cost including commissions, fees, and
taxes. The security is reported at its fair market value in the next and succeeding statement
dates.
c. Available for sale securities include all securities that do not fit in the trading and the heldto-maturity such as securities that have an indeterminate use of indefinite holding time. These
securities are reported at fair value, and any unrealized gains or losses are reported in the
other comprehensive income and as a separate component of the stockholder's equity until
realized by a sale.
On the balance sheet, companies report individual held-to-maturity, available-for-sale, and
trading securities as either current or noncurrent depending on the whether they are expected
to be converted to cash within a year or operating cycle if longer.
2. Equity securities are securities that convey an ownership interest in another Company. They include
common and preferred stock, warrants, options and rights. Equity securities do not include
convertible debt securities or redeemable preferred stocks. Initially, they are valued at acquisition cost
plus brokerage and other fees.
Holdings of less than 20% (passive
interest)
Holdings between 20% and 50%
(significant influence)
Holdings of greater than 50% controlling
interest)
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The investor uses the fair value method
The investor uses the equity method
Investor issues consolidated financial
statements.
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Summary Note: Financial Accounting & Reporting
a. Holdings of less than 20%
Equity securities held at a level of less than 20% ownership interest are accounted for as
either available-for-sale or trading securities. Having no maturity date, they cannot be
classified as held to maturity securities.
Investments of less than 20% initially are recorded at their acquisition date cost including
fees and then are revalued to fair value at each balance sheet date. Securities acquired in a
noncash exchange are recorded at the fair value of the noncash consideration paid or the fair
value of the security received, whichever is more readily available.
b. Available for sale securities
Cash dividends declared by the investee are reported as income by the investor. Securities
initially are recorded at cost. At each balance sheet date, the portfolio is valued at fair value,
with any net unrealized gain or loss calculated.
The net unrealized gain or loss on the portfolio is reported as part of other comprehensive
income and as a component of stockholders' equity.
When a stock in the portfolio is sold, a realized gain or loss is calculated by deducting the
acquisition cost from the net proceeds from the sale. A realized gain would be accounted for
as of the date of the sale.
c. Trading securities
The accounting for trading securities is the same as the accounting for available-for-sale
securities, with the exception that unrealized holding gains or losses are reported in net
income instead of other comprehensive income. The account is unrealized holding gain or
loss, and the sale of the security requires any reminder of the gain or loss to be recognized in
income.
d. Holdings between 20% and 50%
The equity method is required for any investor who can exercise significant influence over an
investee's operating and financial policies.
Under the equity method, an investment initially is recorded at acquisition cost plus fees. The
investment's carrying amount is increased or decreased by the investor's percentage of the
earnings or losses of the investee and is decreased by any dividends received from (or
declared by) the investee.
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Summary Note: Financial Accounting & Reporting
PROPERTY, PLANT & EQUIPMENT
1. To be considered PPE, an asset must have these three characteristics:
a. The asset is held for use in operations and not for resale
b. The asset is long-term in nature and if other than land is depreciable.
c. The asset must be tangible.
2. Initial recognition: The historical cost is the basis used to value PPE.
a. Building
Architect's fees, building permits, materials, labor and overhead
b. Equipment
Purchasing, shipping, preparing a site, and installation of equipment
c. Purchase in the form of stock
If the stock is being actively traded, its current market value is used. If the stock value cannot
be determined because the stock is not actively traded, an estimate of the market value of the
property should be made and used as the basis for recording the value of both the asset and
the issuance of stock.
d. Exchange
Exchanges of nonmonetary assets (inventory or PPE) are recorded based on fair values as
long as there is a commercial substance1.
e. Deferred payment
The amount of interest capitalized is based on the lower of the amount of interest incurred
during the construction period or the amount of interest that would have been avoidable if
expenditures for the asset had not been made.
f.
Self-construction
The Company must allocate costs and expenses carefully between operating and construction
activities to determine the asset's cost.
3. Measurement after recognition
Costs after the acquisition of PP&E are either capitalized or expensed as operating expenditures. To
qualify as the cost to be capitalized, the cost should extend the life of the asset or increase the
productivity of the asset.
a. Additions should be capitalized because they are effectively new assets. If the addition results
in modifications to the existing structure, the cost of those modifications would be capitalized
provided the addition had been planned when the existing structure was constructed;
otherwise, the costs would be expensed.
1
There is commercial substance if the exchange will change the timing and amount of the firm's future cash flow
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Summary Note: Financial Accounting & Reporting
b. An improvement substitutes a more effective asset for one in place; replacements replace
aging assets with newer versions of the same thing. Both should be capitalized.
c. Movements of assets from one location to another are capitalized and expensed throughout
benefit. If certain of these costs cannot be separated from other operating benefits or if the
costs are immaterial, they should be expensed immediately.
d. Repairs that maintain a normal level of asset functions are expensed as incurred.
4. Depreciation methods
Depreciation is the systematic, rational allocation of a tangible's asset's cost less salvage value over
the estimated life of the asset. The periodic depreciation is debited to the depreciation expense in the
income statement and credited to the accumulated depreciation account.
a. Straight-line depreciation produces a constant amount of depreciation per period calculated as
cost less salvage value divided by the estimated asset life.
Depreciation = Depreciable Base / Estimated Service Life
b. Accelerated depreciation produces a declining amount of depreciation per period calculated
as the declining balance percentage divided by the estimated life times the net book value of
the asset at the beginning of the period. The salvage value is ignored in the calculation.
Deprecation Fraction = Years of Useful Life Remaining / Sum of all years of Useful Life
c. Units of production produce a varying amount of depreciation per period calculated as the
cost less estimated residual value divided by the estimated production or activity level
expected over the life of the asset times the amount of actual production.
Depreciation Charge = Depreciable Base x Units Produced or Hours Used / Total Units of
Production or Total Hours Usable Over Life
5. Impairment
The determination of impairment of a long-term asset involves two steps. The first is a recoverability
test, where the carrying value of the asset is compared with the expected undiscounted cash flows
from the assets' use and disposal. If the carrying value exceeds the expected cash flows, an
impairment loss calculation is required. The impairment loss is the amount by which the carrying
value exceeds the fair value of the asset.
6. Disposition of PPE
PPE can be sold or abandoned. The Company should depreciate the asset to the date of the disposal
and then remove all related accounts from the books. At the time of disposition, any difference
between the depreciated book value and the asset's disposal value must be recognized as gain or loss
reported as part
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Summary Note: Financial Accounting & Reporting
7.
of income from continuing operations.
a. Sale
When PPE is sold, depreciation must be recorded from the date of the last depreciation entry
until the date of disposal. This brings the book value of the asset up to date to correctly
measure the gain or loss from the sale of the asset.
b. Abandonment
If any scrap value is received, a gain or loss is recognized for the difference between the
scrap value and the asset's books value.
Fully depreciated assets that are still in use should be disclosed in the notes to financial
statements.
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Summary Note: Financial Accounting & Reporting
INVESTMENT PROPERTY
1. Investment property is a property (land or a building or both) held under a finance lease to earn
rentals or for capital appreciation rather than in the ordinary course of business.
2. Initial recognition
An investment property shall be measured initially at its cost, comprises purchase price and any
directly attributable expenditure (professional fees for legal services, property transfer taxes, and
other transactions costs)
If payment for an investment property is deferred, its costs are the cash price equivalent. The
difference between this amount and the total payments I recognized as interest expense throughout
credit.
The initial cost of a property interest held under a lease and classified as an investment property shall
be for as a finance lease. The asset shall be recognized at the lower of the fair value of the property
and the present value of the minimum lease payments. An equivalent amount shall be recognized as a
liability.
3. Measurement after recognition
The investment property measure all of its investment property at fair value. A gain or loss arising
from a change in the fair value of investment property shall be recognized in the profit or loss for the
period in which it arises.
4. Transfers
Transfers to, or from, investment property shall be made when, and only when, there is a change in
use.
For a transfer from investment property carried at fair value to owner-occupied property2 or
inventories, the properties deemed cost for subsequent accounting shall be its fair value at the date of
the change in use.
If an owner-occupied property becomes an investment property that will be carried at fair value, the
entity shall treat any difference at that date between the carrying amount of the property and its fair
value as a revaluation.
For a transfer from inventories to investment property that will be carried at fair value, any difference
will be recognized in the profit and loss.
When an entity completes the construction or development of a self-constructed investment property
that will be carried at fair value, any difference between the fair value of the property at that date and
its previous carrying amount shall be recognized in the profit or loss.
2
Property used in the production, supply of goods or services or for administrative purposes.
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Summary Note: Financial Accounting & Reporting
5. Disposal
An investment property shall be derecognized3 on disposal or when the investment property is
permanently withdrawn from use.
Gains or losses arising from the retirement or disposal of investment property shall be determined as
the difference between the net disposal proceeds and the carrying amount of the asset and shall be
recognized in the profit or loss in the period of the retirement or disposal.
Compensation from third parties for an investment property that was impaired, lost or given up shall
be recognized in profit or loss when the compensation becomes receivable.
3
eliminated from the statement of financial position
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Summary Note: Financial Accounting & Reporting
INTANGIBLE ASSETS
1. Intangible assets lack physical substance and are not financial instruments, Their values may fluctuate
due to competitive conditions, they may be valuable only to the company possessing them, their
future benefits may not be readily determinable, and they may have indeterminate lives.
Some common intangibles are: Marketing intangibles (trademarks, trade name, internet domain
names, and non compete agreements); Customer intangibles (customer list); Artistic intangibles
(copyrights); Contract intangibles (franchises, licensing agreements, right); Technological intangibles
(patented technology); Goodwill
2. Initial recognition
Intangibles are recorded differently depending on whether they were purchased or created internally.
Purchased intangibles
Intangibles are recorded at cost plus additional cost such as legal fees.
If intangibles are acquired in exchange for stock or noncash assets, the exchange is recorded at the
more reliable of the fair value of the consideration given or the intangible asset received.
If tangible assets are part of a basket purchase, the lump-sum price is allocated between the assets
received based upon relative fair values.
Intangibles created internally
R&D costs incurred to develop a patent internally are expensed as incurred. Only direct costs, such as
legal fees, related to internally developed patents may be capitalized.
3. Research and Development
R&D costs are charged to expense when incurred because of the uncertainties inherent in estimating
the magnitude of expected benefits.
4. Amortization
Intangibles with an indefinite life are not amortized but are tested for impairment at least annually.
Intangibles with a definite life are amortized using the straight-line method.
5. Impairment
An impairment loss is recognized if the carrying amount of an intangible asset is not recoverable and
its carrying amount exceeds its fair value.
6. Goodwill
Goodwill is the excess of the cost of an acquired entity over the net of the amounts assigned to assets
acquired and liabilities assumed in a business acquisition transaction.
Only purchased goodwill is capitalized. Internally created goodwill is never reported as an asset.
Purchased goodwill is recorded as an asset only when an entire business is purchased; it cannot be
separated from the business as a whole but is an integral part of the going concern.
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Summary Note: Financial Accounting & Reporting
AGRICULTURE
1. Examples of agriculture products
Biological assets
Sheep
Trees in a plantation forest
Plants
Dairy cattle
Pigs
Bushes
Vines
Fruit trees
Wool
Products that are the result of
processing after harvest
Yarn, carpet
Felled trees
Cotton
Harvested cane
Milk
Carcass
Leaf
Grapes
Picked fruit
Logs, lumber
Thread, clothing
Sugar
Cheese
Sausages, cured hams
Tead, cured tobacco
Wine
Processed fruit
Agricultural Produce
2. Initial recognition
The biological asset4 and agricultural produce 5shall be measured on initial recognition at its fair
value fewer costs to sell at the point of harvest.
A gain or loss arising on initial recognition of a biological asset at fair value fewer costs to sell and
from a change in fair value fewer costs to sell of a biological asset shall be included in profit or loss
for the period in which it arises.
3. Government grants
An unconditional government grant related to a biological asset measured at its fair value fewer costs
to sell shall be recognized in profit or loss when, and only when, the government grant becomes
receivable.
If a government grant related to a biological asset measured at its fair value fewer costs to sell
conditional, including when a government grant requires an entity not to engage in specified
agricultural activity, an entity shall recognize the government grant in profit or loss when and only
when the conditions attaching to the government grant are met.
4
5
Living animal or plant
Harvested product of the biological assets
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Summary Note: Financial Accounting & Reporting
NONCURRENT ASSETS HELD FOR SALE
1. An entity shall classify a non-current asset as held for sale if its carrying amount will be recovered
principally through a sale transaction rather than through continuing use.
2. An entity shall measure a non-current asset classified as held for sale at the lower of its carrying
amount and fair value fewer costs to sell.
3. An entity shall measure a non-current asset classified as held for distribution to owners at the lower of
its carrying amount and the fair value less cost to distribute6.
BORROWING COSTS
1. Borrowing costs are interest and other costs incurred by an entity in connection with the borrowing of
funds to construct a qualifying asset.
2. A qualifying asset is an asset that necessarily takes a substantial period to get ready for its intended
use or sale.
3. Recognition and measurement
a. Borrowing costs must be capitalized as part of the cost of the asset if they are directly
attributable to the acquisition, construction, and production. Other borrowing costs must be
expensed.
b. Borrowing costs eligible for capitalization are those that would have been avoided otherwise.
Use judgment where a range of debt instruments is held for general finance.
c. Amount of borrowing costs available for capitalization is actual borrowing costs incurred less
any investment income from the temporary investment of those borrowings.
d. For borrowings, generally obtained, apply the capitalization rate to the expenditure on the
asset (weighted average borrowing cost). It must not exceed actual borrowing costs.
e. Capitalization is suspended if active development is interrupted for extended periods.
f.
Capitalization ceases (normally) when physical construction of the asset is completed,
capitalization should cease when each stage or part is completed.
g. Where the carrying amount of the asset falls below cost, it must be written down/off.
4. Disclosure requirements
a. Accounting policy note, Amount of borrowing costs capitalized during the period.
b. Capitalization rate used to determine borrowing costs eligible for capitalization.
6
Costs to distribute are the incremental costs directly attributable to the distribution, excluding finance costs and
income tax expense.
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GOVERNMENT GRANT
1. Government assistance is the action by the government designed to provide an economic benefit
specific to an entity or range of entities qualifying under certain criteria.
2. Government grants are the assistance by the government in the form of transfers of resources to an
entity in return for past or future compliance with certain conditions relating to the operating activities
of the entity. They exclude those forms of government assistance which cannot reasonably have a
value placed upon them and transactions with the government which cannot be distinguished from the
normal trading transactions of the entity.
3. Grants related to assets are government grants whose primary condition is that an entity qualifying for
them should purchase, construct or acquire long-term assets. Subsidiary conditions may also be
attached restricting the type or location of the assets or the periods during which they are to be
acquired or held.
4. Grants related to income are government grants other than those related to assets.
5. Forgivable loans are loans which the lender undertakes to waive repayment of under certain
prescribed conditions.
6. Recognition and measurement
a. Recognize government grants and forgivable loans once conditions complied with, and
receipt/waiver is assured.
b. Grants are recognized under the income approach; recognize grants as income to match them
with related costs that they have been received to compensate.
c. Use a systematic basis of matching over the relevant periods.
d. Grants for depreciable assets should be recognized as income on the same basis as the asset is
depreciated.
e. Grants for non-depreciable assets should be recognized as income over the periods in which
the cost of meeting the obligation is incurred.
f.
A grant may be split into parts and allocated on different bases where there are a series of
conditions attached.
g. Where related costs have already been incurred, the grant may be recognized as income in
full immediately.
h. A grant in the form of a non-monetary asset may be valued at fair value or a nominal value.
i.
Grants related to assets may be presented in the statement of financial position either as
deferred income or deducted in arriving at the carrying value of the asset.
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j.
Grants related to income may be presented in profit or loss for the year either as a separate
credit or deducted from the related expense.
k. Repayment of government grants should be accounted for as a revision of an accounting
estimate.
7. Disclosure requirements
a. Accounting policy note
b. Nature and extent of government grants and other forms of assistance received.
c. Unfulfilled conditions and other contingencies attached to recognized government assistance.
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CHANGES IN ACCOUNTING POLICIES, ESTIMATES & ERRORS
1. Accounting policies are the specific principles, bases, conventions, rules, and practices adopted by an
entity in preparing and presenting financial statements.
2. Changes in accounting policies
a. These are rare and only required by accounting standards.
b. Adoption of new accounting standard: follow transitional provisions. If there are no
transitional provisions, retrospective application.
c. Retrospective application is applying a new accounting policy to transactions, other events,
and conditions as if that policy had always been applied.
d. Other changes in accounting policy: Retrospective application. Adjust the opening balance of
each affected component of equity, as if new policy has always been applied.
e. Retrospective application is applying a new accounting policy to transactions, other events,
and conditions as if that policy had always been applied.
f.
Prospective application is no longer allowed unless it is impracticable to determine the
cumulative effect of the change.
i. Applies the new accounting policy to transactions, other events and conditions
occurring after the date as at which the policy changes;
ii. Recognizes the effect of the change in the accounting estimate in the current and
future periods affected by the change.
g. An entity should disclose information relevant to assessing the impact of new accounting
standards on the financial statements where these have been issued but have not yet come into
force.
3. Changes in accounting estimates
a. A change in accounting estimate is an adjustment of the carrying amount of an asset or a
liability or the amount of the periodic consumption of an asset that results from the
assessment of the present status of expected future benefits and obligations associated with
assets and liabilities. Changes in accounting estimates result from new information or new
developments and are not corrections of errors.
b. Estimates arise because of uncertainties inherent within them, judgment is required, but this
does not undermine reliability.
c. Effect of a change in an accounting estimate should be included in net profit or loss in.
i. Period of change, if the change affects only the current period, or
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ii. Period of change and future periods, if the change affects both.
4. Errors
a. Errors are omissions from, and misstatements in, the entity's financial statements for one or
more prior periods arising from a failure to use, or misuse of, reliable information that:
i. Was available when financial statements for those periods were authorized for issue
ii. Could reasonably be expected to have been obtained and taken into account in the
preparation and presentation of those financial statements.
iii. Such errors include the effects of mathematical mistakes, mistakes in applying
accounting policies, oversights or misinterpretations of facts, and fraud.
b. Prior period errors are corrected retrospectively. There is no longer any allowed alternative
treatment. It involves:
i. Either restating the comparative amounts for the prior period (s) in which the error
occurred.
ii. Either restating the comparative amounts for the prior period (s) in which the error
occurred.
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EARNINGS PER SHARE
1. The earnings per share ratio are used to compare the after-tax profit available to ordinary shareholders
of an entity on a per share basis, with that of other entities.
2. Earnings per share are measured by dividing profit (or loss) attributable to ordinary shareholders by
the weighted average number of ordinary shares outstanding during the period. This ratio is
comprised of two components: a numerator (top line), and a denominator (bottom line) as follows:
a. Numerator: Profit attributable to ordinary shareholders of the parent entity
b. Denominator: Weighted average number of ordinary shares outstanding during the reporting
period
3. As the earnings per share calculation are focused on the ordinary equity of an entity, the denominator
in the calculation contains only ordinary share capital. Because entities can make new share issues
during a reporting period, the number of shares on the issue can increase. They are also able to
repurchase or cancel shares, which will decrease the number of shares on issue, and to split or to
consolidate shares which will vary the number of shares on issue. Other actions, including the
conversion of convertible preference shares or other convertible securities into ordinary shares, can
also vary the number of shares outstanding.
4. The number of ordinary shares that are used in the calculation of basic earnings per share is adjusted
by a time-weighting factor, which is the number of days in the reporting period that the shares are
outstanding as a proportion of the total number of days in the period.
5. Shares that are repurchased and held by the issuing entity are termed ‘Treasury’ shares. If a purchase
of Treasury shares (share repurchase) occurs, then the weighted average number of shares outstanding
for the period in which the transaction takes place must be adjusted for the reduction in the number of
shares from the date of the event
6. Basic earnings per share is a ratio of the profit (or loss) attributable to ordinary shareholders, and the
weighted average number of ordinary shares outstanding during the relevant reporting period.
7. Diluted earnings per share is a ratio which recognizes the potential dilutive effect of the basic EPS
ratio from the assumption that the entity’s convertible securities are converted, its warrants or options
are exercised, or that its contingently issuable shares are issued.
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8. Effect of potential ordinary shares on the calculation of diluted EPS
In the measurement of diluted earnings per share, adjustments must be made to the profit (or loss)
attributable to ordinary shareholders for: the after-tax amount of dividends, interest or other income or
expenses recognized in the reporting period in respect of dilutive securities that would no longer arise
if they were converted to ordinary shares.
Adjustments must also be made to increase the weighted average number of ordinary shares
outstanding to reflect what the weighted average would have been; assuming that all potential
ordinary shares (dilutive securities) had been converted.
9. How the amount of dilution from options is determined
When determining the effect of options on diluted earnings per share, the difference between the
number of ordinary shares issued and the number that would have been issued at the average market
price is treated as an issue of ordinary shares for no consideration.
Options are regarded as dilutive if they would result in the issue of ordinary shares for less than the
average market price during the reporting period. The amount of the dilution is determined as the
average market price of ordinary shares during the period, minus the issue price.
10. How is the average share price established when determining the amount of the proceeds from
options and warrants?
The proceeds from options and warrants are regarded as received from the issue of ordinary shares at
the average market price during the period. The difference between the number of ordinary shares
issued and the number that would have been issued at the average market price, be treated as an issue
of ordinary shares for no consideration.
11. Why are retrospective adjustments made to earnings per share ratios?
Retrospective adjustments are made to earnings per share ratios to restate the values of relevant items
so that valid comparisons across time can be made.
If, for example, the number of issued shares increases during a reporting period as a result of a bonus
issue for no consideration, then the operating profit for the whole period in which the bonus issue
occurred will be attributable to the increased number of shares, and not to the lesser number of shares
outstanding at the beginning of the reporting period.
12. Presentation of the basic and diluted EPS in the FS
The basic and diluted earnings per share ratios must be presented in an entity’s statement of profit or
loss and other comprehensive income, even if the amounts are negative.
If the items of profit or loss are presented in a separate statement, then the basic and diluted earnings
per share ratios are required to be presented in that statement.
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Summary Note: Financial Accounting & Reporting
SHARE-BASED PAYMENT
1. A share-based payment is a transaction in which the entity receives goods or services either as
consideration for its equity instruments or by incurring liabilities for amounts based on the price of
the entity's shares or other equity instruments of the entity. It applies when a company acquires or
receives goods and services for equity-based payment. These goods can include inventories, property,
plant and equipment, intangible assets, and other non-financial assets.
2. Before the introduction of PFRS 2 Share-based payment, there was no requirement to recognize the
cost of compensation payments to employees and transactions for the acquisition of goods and
services from others in the financial statement. This situation can be criticized as reducing the
transparency and reliability of financial statements. Standard setters have argued that recognizing the
cost of share-based payments in the financial statements of entities improves the relevance, reliability,
and comparability of that financial information and helps users of financial information to understand
better the economic transactions affecting an enterprise and supports resource allocation decisions.
3. Examples: call options, share appreciation rights, share ownership schemes, and payments for
services made to external consultants based on the company’s equity capital.
4. Recognition of a share-based payment
PFRS 2 requires an expense to be recognized for the goods or services received by a company. The
corresponding entry in the accounting records will either be a liability or an increase in the equity of
the company, depending on whether the transaction is to be settled in cash or equity shares. Goods or
services acquired in a share-based payment transaction should be recognized when they are received.
In the case of goods, this is the date when this occurs. However, it is often more difficult to determine
when services are received. If shares are issued that vest immediately, then it can be assumed that
these are in consideration of past services. As a result, the expense should be recognized immediately.
Alternatively, if the share options vest in the future, then it is assumed that the equity instruments
relate to future services and recognition is therefore spread over that period.
5. Equity-settled share-based payment transactions
Equity-settled share-based payment transactions arise when an entity receives goods or services as
consideration for its equity instruments (including shares and share options).
Equity-settled transactions with employees and directors would normally be expensed and would be
based on their fair value at the grant date. Fair value should be based on market price wherever this is
possible. Many shares and share options will not be traded on an active market. If this is the case then
valuation techniques, such as the option pricing model, would be used. IFRS 2 does not set out which
pricing model should be used but describes the factors that should be taken into account. It says that
‘intrinsic value’ should only be used where the fair value cannot be reliably estimated. Intrinsic value
is the difference between the fair value of the shares and the price that is to be paid for the shares by
the counterparty.
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The objective of PFRS 2 is to determine and recognize the compensation costs over the period in
which the services are rendered. For example, if a company grants share options to employees that
vest in the future only if they are still employed, then the accounting process is as follows:
a. The fair value of the options will be calculated at the date the options are granted.
b. This fair value will be charged to profit or loss equally over the vesting period, with
adjustments made at each accounting date to reflect the best estimate of the number of
options that will eventually vest.
c. Shareholders’ equity will be increased by an amount equal to the charge in profit or loss. The
charge in the income statement reflects the number of options vested. If employees decide not
to exercise their options, because the share price is lower than the exercise price, then no
adjustment is made to profit or loss. On early settlement of an award without replacement, a
company should charge the balance that would have been charged over the remaining period.
6. Cash-settled share-based payment transactions
Cash-settled share-based payment transactions arise when an entity acquires goods or receives
services by incurring liabilities (debt) for amounts based on the value of its equities.
Other share-based payment transactions may arise in which the entity receives or acquires goods or
services, and either the entity or the supplier has the choice of whether the transaction is settled in
cash or equity instruments.
7. Accounting treatment for instruments classified as debt and those classified as equity
Instruments classified as debt (liabilities) are accounted for by recognizing an increase in an expense
(or asset) and a corresponding increase in debt (a liability). The fair value of such liabilities
determines the measurement of the transaction. Additionally, the debt (liability) must be remeasured
at each reporting date and settlement date.
Instruments classified as equity are accounted for by recognizing an increase in an expense (or asset)
and a corresponding increase in equity. The fair value of the goods or services received is measured at
the grant date fair value of the goods or services received, and it is not subsequently remeasured. If
the fair value of the goods or services received cannot be measured reliably, the transaction amount is
determined indirectly by reference to the fair value of the equity instruments granted.
8. Accounting treatment for the recognition of an equity-settled share-based payment transaction
Equity-settled share-based payment transactions are recognized as an increase in the goods or services
received and a corresponding increase in equity measured at the grant date at the fair value of the
goods or services received, or it the fair value of the equity instruments granted.
9. When a counterparty’s entitlement to receive equity instruments of an entity vests
A counterparty (sometimes contra party) is a legal entity, unincorporated entity, or collection of
entities to which exposure to financial risk might exist. The word became widely used in the 1980s,
particularly at the time of the Basel I in 1988. Sometimes it is used instead of unincorporation.
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A counterparty’s entitlement to receive equity instruments of an entity vest when the vesting
conditions are met. These are typically service criteria, ie, the employee remaining employed by the
entity for a specified period and performance conditions such as the entity achieving a specified
growth in profit or a specified increase in the entity’s share price.
10. Minimum factors required under IFRS 2 to be taken into account in option pricing models
The standard supplies a list of factors that all option pricing models take into account as a minimum.
These include the exercise price of the option, the life of the option, the current price of the
underlying shares, expected volatility of the share price, dividends expected on the shares and the
risk-free interest rate for the life of the option.
Expected volatility - is a measure of the amount by which a price is expected to fluctuate during a
period. Volatility is typically expressed in annualized terms, for example, daily or monthly price
observations. Often a range of reasonable expectations about future volatility can be determined, and
if so, an expected value should be calculated by weighting each amount within the range by its
associated probability of occurrence.
Expectations about the future are generally based on experience, modified if the future is reasonably
expected to differ from the past. There may be cases where historical patterns may not be the best
indicator of reasonable expectations for the future, for instance where a significant business segment
has been acquired or disposed of.
Whether dividends should be taken into account depends on the counterparty’s entitlement to those
dividends. Generally, assumptions about dividends are to be based on publicly available information.
The risk-free interest rate is the implied yield currently available on zero-coupon government issues
of the country in whose currency the exercise price is expressed, with a remaining term equal to the
expected term of the option being valued.
11. Performance conditions
Schemes often contain conditions which must be met before there is an entitlement to the shares.
These are called vesting conditions. If the conditions are specifically related to the market price of the
company’s shares, then such conditions are ignored to estimate the number of equity shares that will
vest. The thinking behind this is that these conditions have already been taken into account when fair
valuing the shares. If the vesting or performance conditions are based on, for example, the growth in
profit or earnings per share, then it will have to be taken into account in estimating the fair value of
the option at the grant date.
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12. ‘Retesting’ of share options
Retesting (or repricing) of share options occurs when an entity chooses to modify the terms and
conditions on which it granted equity instruments. For example, it might change (reprice/retest) the
exercise price of share options previously granted to employees at prices that were higher than the
current price of the entity’s shares. It might accelerate the vesting of share options to make the
options more favorable to employees, or it might remove or alter a performance condition. If the
exercise price of options is modified, the fair value of the options changes.
A reduction in the exercise price would increase the fair value of share options. Irrespective of any
modifications to the terms and conditions on which equity instruments are granted, paragraph 27 of
PFRS 2 requires the services received, measured at the grant-date fair value of the equity instruments,
to be recognized unless those equity instruments do not vest. Although some companies provide for
retesting to allow for the potential volatility of earnings and the cyclical nature of the market, many
companies limit the retesting opportunities, and others do not allow retesting at all.
13. Measurement approach for cash-settled share-based payment transactions
If a share-based payment is settled in cash, the general principle employed in PFRS 2 is that the goods
or services received and the liability incurred is measured at the fair value of the liability (PFRS 2
paragraph 10). The fair value of the liability must be remeasured at the end of each reporting period,
and the date of settlement and any changes in fair value are recognized in profit or loss (PFRS 2
paragraph 30)
14. Deferred tax implications
In some jurisdictions, a tax allowance is often available for share-based transactions. It is unlikely that
the amount of tax deducted will equal the amount charged to profit or loss under the standard. Often,
the tax deduction is based on the option’s intrinsic value, which is the difference between the fair
value and exercise price of the share. A deferred tax asset will, therefore, arise which represents the
difference between a tax base of the employee’s services received to date and the carrying amount,
which will effectively normally be zero. A deferred tax asset will be recognized if the company has
sufficient future taxable profits against which it can be offset.
For cash-settled share-based payment transactions, the standard requires the estimated tax deduction
to be based on the current share price. As a result, all tax benefits received (or expected to be received)
are recognized in the profit or loss.
15. Disclosure requirements
a. Information that enables users of financial statements to understand the nature and extent of
the share-based payment transactions that existed during the period.
b. Information that allows users of financial statements to understand how the fair value of the
goods or services received, or the fair value of the equity instruments which have been
granted during the period, was determined.
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Information that allows users of financial statements to understand the effect of expenses, which have
arisen from share-based payment transactions, on the entity’s profit or loss in the period.
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