PARTNERSHIP FORMATION
VALUATION
1. Cash at FACE VALUE (if foregin currency at current
exchange rate)
2. Inventory at LCNRV or Fair Value
3. Other Non-Cash Assets (Order of Priority)
a. Agreed Value
b. Fair Value
c. Appraised Value
d. Carrying Value
4. Liabilities are considered ASSUMED unless otherwise
stated to the contrary
5. Capital Accounts are accounted using 2 methods:
a. BONUS METHOD
- No goodwill recognition
- Total Assets & Total Liabilities remain
unchanged
- Total Contributed Capital (TCC) = Total
Agreed Capital (TAC)
- Partner’s Contribution NOT EQUAL to
Partner’s Capital
- There’s only a transfer of capital among
partners
PARTNERSHIP OPERATIONS
1. Interest
2. Salaries
3. Bonus to MP
Remainder as agreed
Total Share in PL
A
xxx
xxx
xxx
xxx
xxx
B
xxx
xxx
xxx
xxx
xxx
TOTAL
xxx
xxx
xxx
xxx
PL
1. INTEREST (on beginning/ending/average/original
capital)
- would be a fractional year
- given REGARDLESS of the result of operation (whether
NI or NL)
- Interest is NOT AN EXPENSE
- If the base is not specified, use AVERAGE Capital
- must be specifically agreed upon by partners
NOTE: In averaging of capital, only the following is
considered:
a. Additional Investment
b. Permanent Withdrawals
 If based on Capital, interest is ADDED to partner’s share
in NI
 If based on Drawings, interest is DEDUCTED from
partner’s share in NI
b. INVESTMENT (WITHDRAWAL) METHOD
- If Adjusted Capital > Unadjusted Capital (Investment)
- If Adjusted Capital < Unadjusted Capital (Withdrawal)
- Total Contributed Capital (TCC) >< Total
Agreed Capital (TAC)
- Partner’s Contribution = Partner’s Capital
- Results to Additional Contribution or
Withdrawal
6. Adjusting entries for Depreciable Assets (& Other
Assets) require adjustment to their CONTRA
ACCOUNTS with the capital balance.
Ex.
Capital Account
xxx
Accumulated Depreciation
xxx
(to record decrease in PPE)
7. To transfer Depreciable Assets to the new book of
partnership, these shall be recorded at NET AMOUNT
8. To transfer accounts receivables to the new book of
partnership, these shall be recorded at GROSS
AMOUNT (can still be recorded eventually)
9. PL ratio is IRRELEVANT in this stage.
2. SALARIES
- would be a fractional year
- given REGARDLESS of the result of operation (whether
NI or NL)
- Interest is NOT AN EXPENSE
- must be specifically agreed upon by partners
Special note:
- If there’s an agreement that the amount to be distributed
among the partners is limited up to the extent of profit
only or based on the following priority, USE the SALARY
RATIO/INTEREST RATIO, whichever is applicable
3. BONUS TO MANAGING PARTNER
- provided if there’s a PROFIT ONLY
- if based on NI before bonus, it is not an expense
- if based on NI after bonus, it is considered as EXPENSE
FORMULA:
a. Bonus is at NI AFTER BONUS and/or others (S/I)
𝑁𝐼 𝑙𝑒𝑠𝑠 𝑟𝑒𝑞𝑢𝑖𝑟𝑒𝑑 𝑑𝑒𝑑𝑢𝑐𝑡𝑖𝑜𝑛𝑠 (𝑆/𝐼)
𝐵𝑜𝑛𝑢𝑠 =
𝑋𝐵𝑅
(1 + 𝐵𝑜𝑛𝑢𝑠 𝑅𝑎𝑡𝑒)
PARTNERSHIP DISSOLUTION
1.
2.
3.
4.
ADMISSION OF NEW PARTNERS
RETIREMENT/WITHDRAWAL OF EXISTING PARTNER
DEATH OF EXISTING PARTNER
INCORPORATION OF PARTNERSHIP
ADMISSION OF NEW PARTNER
A. BY PURCHASE
WITHOUT REVALUATION (If Silent) (Payment = Interest
acquired)
 Personal-transaction between old and new partners
 NO goodwill recognition
 Total assets and total capital remains unchanged
 The purchase transaction is not recorded in partnership’s
book. What shall be recorded is only the transfer of
interest from old to new partner
Old A Old B New C Total
Contribution
xxx
xxx
xxx
Transfer of Interest
(xxx)
xxx
Agreed Capital
xxx
xxx
xxx
xxx
WITH REVALUATION (Indicator: Payment >< Interest
acquired)
 2 Steps to determine the balance of old partners AFTER
ADMISSION
1. Determine the revaluation (over/under) AND
distribute to old partners using their PL ratio
2. Transfer Capital to the new partner
Contribution
Revaluation
Balance
Transfer of Interest
Agreed Capital
Old A
xxx
xxx
Old B
xxx
xxx
New C
Total
xxx
xxx
xxx
(xxx)
xxx
xxx
xxx
xxx
NOTE: If asset revaluation is the appropriate method, but
the amount of over/under valuation (or adjustment in
assets) is not given. The BALANCE AFTER REVALUATION OF
THE SELLING PARTNER is computed as follows: [New
Partner Payment / Acquired Interest (%) from selling
partner]. The, SQUEEZED.
SPECIAL CASE: ASSET REVALUATION AND BONUS
COMBINED
 Total Contributed Capital (TCC) NOT EQUAL Total Agreed
Capital (TAC)
 Partners’ contributed capital (before admission) NOT
EQUAL their agreed capital (after admission)
 Old partners accounts are adjusted twice, (1) for asset
revaluation (2) for bonus
 New partner account is adjusted ONLY by Bonus
Contribution
Revaluation
Balance
Transfer of Interest
Agreed Capital
Old A
xxx
xxx
Old B
xxx
xxx
New C
Total
xxx
xxx
xxx
(xxx)
xxx
xxx
xxx
xxx
NOTE: If asset revaluation is the appropriate method, but
the amount of over/under valuation (or adjustment in
assets) is not given, TOTAL AGREED CAPITAL is computed
as follows: [New Partner Payment / Acquired Interest (%) in
the firm].
B. BY INVESTMENT
DETERMINATION OF NEW PARTNER’S AGREED CAPITAL
Old Partners’ Contributed Capital
xxx
New Partner’s Contributed Capital
xxx [A]
Under-Valuation of assets (if any)
xxx
Over-Valuation of assets (if any)
(xxx)
TOTAL CONTRIBUTIONS
xxx
(x) Interest acquired
%
AGREED CAPITAL OF NEW PARTNER
xxx [B]
A=B NO revaluation or bonus or goodwill
A>B UNDER-valuation or Bonus to OLD partners
A<B OVER-valuation or Bonus to NEW partner
METHOD 1: BONUS METHOD (if silent)
 Total Contributed Capital (TCC) = Total Agreed Capital
(TAC)
 Partner’s Contributed Capital (before admission) NOT
EQUAL their Agreed Capital (after admission)
 The change between partners’ capital account before
and after admission is either BONUS from old partner to
new partner or vice versa.
Contribution
Bonus
Agreed Capital
Old A
xxx
xxx
xxx
Old B
xxx
(xxx)
xxx
New C
xxx
xxx
xxx
Total
xxx
xxx
METHOD 2: ASSET REVALUATION METHOD (not implied)
 Total Contributed Capital (TCC) NOT EQUAL Total Agreed
Capital (TAC)
 Old partners’ contributed capital (before admission) NOT
EQUAL their agreed capital (after admission)
 New partners’ contributed capital = agreed capital
 Over/Under Valuation is distributed to OLD PARTNERS
using their PL RATIO
Contribution
Bonus
Agreed Capital
Old A
xxx
xxx
xxx
Old B
xxx
(xxx)
xxx
New C
xxx
xxx
Total
xxx
xxx
xxx
NOTE: If asset revaluation is the appropriate method, but
the amount of over/under valuation (or adjustment in
assets) is not given. TOTAL AGREED CAPITAL is computed
as follows: [New Partner Contribution / Acquired Interest
(%) in the firm].
RETIREMENT/WITHDRAWAL OF OLD PARTNER
 At date of retirement, partners’ capital accounts shall be
adjusted for:
o Their share in profit or loss as of the date of
retirement
o
Their share in asset revaluation (not implied, thus
must be indicated)
o Loan Balances
 The Adjusted Capital of the retiring partner may be
recovered thru:
1. Sales to Outsider – mere transfer of interest (same
with admission by purchase)
2. Sale to remaining partners – mere transfer of
interest between partners
3. Payment of his share by the partnership:
Settlement Price = Adjusted Capital
Settlement Price > Adjusted Capital
Settlement Price < Adjusted Capital
NO BONUS
Bonus to RETIRING partner
Bonus to REMAINING partner
INCORPORATION
Step 1: Adjust capital accounts
Step 2: Close Adjusted capital accounts into Share Capital
and APIC if any.
DEATH OF PARTNER
 Settlement is EITHER.
Option 1
BEG OF THE YEAR
DATE OF DEATH
1. In determining the Capital Accounts of partners
before liquidation:
2. Gain or loss is distributed to capital accounts based
on partners’ PL ratio
3. Liabilities should be paid in full OR cash sufficient
to ensure payment of all liabilities and future
expense must be withheld.
4. After payment of all liabilities, partners loan
accounts must be paid with right of offset,
5. Cash distribution to partners should be made with
the objective of systematically bringing the ratio of
capital accounts in agreement with partners PL
ratio. Thus, in the end, PL RATIO = CAPITAL RATIO.
DETERMINATION OF CASH DISTRIBUTION (TWO
ALTERNATIVE METHODS)
SAFE PAYMENT
-done every cash payment to partners
A
B
Capital Balance
xxx
xxx
(-) Maximum Loss
(xxx)
(xxx)
note 1
Free Interest
xxx
xxx
(+/-) Absorption
(xxx)
xxx
note 2
SETTLEMENT
To be Distributed
xxx
xxx
Pro-rata2 share
plus for the WHOLE
InterestYEAR
on Capital
Option
Shareininprofits
the Profit
PARTNERSHIP LIQUIDATION
2 Methods:
1. LUMP SUM LIQUIDATION
2. LIQUIDATION BY INSTALLMENT
LUMP SUM LIQUIDATION – one time payment
LIQUIDATION PROCESS
STEP 1: Sale of Non-Cash Assets and Distribution of Gain or
Loss to partners (Realization of NCA)
STEP 2: Payment of Liabilities (does not affect capital
balances)
STEP 3: Elimination of Deficiency (order of priority)
A. Right of Offset (If DP has loans receivable from
the partnership)
B. Additional Investment (If DP is solvent; up to
extent of his solvency)
C. Absorption of others with adequate balance (If
DP is insolvent allocate based on remaining PL
ratio)
STEP 4: Payment to partners (order of priority)
A. Loan Accounts
B. Capital Accounts
Note 1: Maximum Loss is composed of:
1. Unrealized Non-Cash Assets
2. Cash Withheld
Other Components
3. Unrealized Loss
4. Liabilities
Note 2: In case, there is a deficient partner during safe
payment, deficiency shall be ABSORBED ONLY by
other partners, as they are all considered insolvent
under safe payment. If no deficiency, free interest
= distributable cash.
CASH DISTRIBUTION PROGRAM
-determines partner to be paid first
A
B
Capital Balance
xxx
xxx
(+/-) Loans
(xxx)
(xxx)
Adjusted Capital Balance
xxx
xxx
(+) Corresponding PL ratio %
%
note 2
Loss Absorption Ability
xxx
xxx
Note: whatever has the HIGHEST LAA shall be the FIRST
PRIORITY in cash distribution, so on and so forth.
1st Priority LAA
xxx
(-) 2nd Priority LAA
(xxx)
Excess
xxx
(x) corresponding PL ratio
%
NOTE: Before Liquidation, All Account Balances MUST BE
st
To
be
distributed
–
1
Priority
xxx
ADJUSTED, specifically capital accounts of partners
* Any EXCESS CASH after paying all the priorities for cash
distribution shall be distributed to all partners based on
LIQUIDATION BY INSTALLMENT – series of payment
-SAME liquidation process as lump sum liquidation, but it is their PL RATIO.
done by installment
SHORTCUT SOLUTION
Cash, Beginning Balance
proceeds from sale of NCA
Liquidation Expense
Liabilities paid
Distributable Cash
Cash withheld
Distributable Cash
xxx
xxx
(xxx)
(xxx)
xxx
(xxx)
xxx
STATEMENT OF REALIZATION AND LIQUIDATION
(periodically prepared by Receiver/Trustee – Actual
Amounts)
Total Assets (EXCEPT CASH)
Assets To Be Liquidated
Assets Liquidated
Assets Acquired - new
Assets not Liquidated
xxx
xxx
Lump Sum
Installment
Total Liabilities
Liabilities Liquidated
Liabilities To Be Liquidated
Liabilities not Liquidated
Liabilities Incurred - new
CORPORATE LIQUIDATION
xxx
STATEMENT OF AFFAIRS (Initially prepared by
Corporation before Liquidation process – Estimated
Amounts only)
TOTAL ASSETS (at NRV or FMV)
 ASSETS PLEDGED TO FULLY SECURED
CREDITORS
 ASSETS PLEDGED TO PARTIALLY SECURED
CREDITORS
 FREE ASSETS
(a) Assets not pledged
(b) Excess of Assets pledged to fully secured
creditors
TOTAL LIABILITIES (at required amount to
settle or BV)
 UNSECURED DEBTS WITH PRIORITY
a) Administrative Expenses of Receiver
b) Unpaid Employee’s salaries, wages,
and benefit plans
c) Corporate Crimes
d) Taxes (National, Provincial,
City/Municipality)
e) Corporate Torts
f) Notarized Debts/Judgement Debts
 FULLY SECURED DEBTS
 PARTIALLY SECURED DEBTS – SECURED
PORTION
Cash Available for Unsecured Liabilities (Or
Net Free Assets) [A]
 UNSECURED DEBTS WITHOUT PRIORITY
(a) Partially Secured Liabilities – Unsecured
Portion
(b) Purely Unsecured Liabilities
Estimated Deficiency [B]
xx
xx
xx
xx
xx
xx
xx
xx
(x)
xx
(x)
xx
RECOVERY RATE = A/B
RECOVERABLE AMOUNT OF CREDITORS:
(A) Unsecured Debts with priority
100%
(B) Fully Secured Debts
100%
(C) Partially Secured Debts
NRV of Asset
pledge +
Balance at
Recovery Rate
(D) Unsecured Debts without priority Balance at
Recovery Rate
xxx
Supplementary Accounts
Expenses and Losses
Revenue and Gains
xxx
xxx
Notes:
 The receiver normally open NEW accounting books for
the liquidating corporation and RECORDS assets and
liabilities at their BOOK VALUES
 The DIFFERENCE of corporation’s assets and liabilities is
CLOSED to ESTATE EQUITY account.
 During liquidation process, the following are DIRECTLY
CLOSED to ESTATE EQUITY account:
1. Unrecorded assets and liabilities arises (new)
2. Expenses and Revenue during liquidation
3. Gains and Losses upon realization of assets
Special Notes:
- Insolvency means sum of debts > sum of assets of
corporation at FV
- In times of insolvency, corporation has 3 alternatives:
1. Liquidation – operation ceases (voluntary)
2. Debt restructuring – operation continues (if
accepted by the parties)
3. Reorganization – operation continues (if accepted
by the parties)
- Statements to be prepared:
 By the liquidating corporation:
o Statement of Affairs – prepared by
corporation before liquidation
- not a going concern statement, thus
historical costs are IRRELEVANT
 By the receiver/trustee assigned by the SEC:
1. Statement of Cash Receipts and Disbursement
2. Statement of Estate Equity (Deficit)
3. Statement of Realization and Liquidation
INSTALLMENT SALES
*Revenue Recognition at the Point in Time
A. SALE OF MERCHANDISE INVENTORY
INSTALLMENT SALES
RECEIVABLE
Installment Acct
Receivables, Beg
xxx
(-) Repossessions (xxx)
(-) Write Offs
(xxx)
(-) Collections
(excluding
interests)
(xxx)
Installment Acct
Receivables, End
xxx
DEFERRED GROSS PROFIT
IAR, Beg X GPR
IAR, Repo. Bal X GPR
IAR, W/O Bal X GPR
IAR Collections X GPR
IAR, End X GPR
xxx
(xxx)
(xxx)
(xxx)
xxx
* TRUE MARKET VALUE/NRV:
Estimated Selling Price
xxx
(-) Cost to Sell
(xxx)
(-) Reconditioning Costs
(xxx)
(-) Normal Profit Margin (at GPR of the year of
repossession)
(xxx)
True Market Value/NRV
xxx
NOTE: Use of the formula above ONLY, when the FAIR
VALUE IS NOT GIVEN
* GROSS PROFIT RATE
Installment Sales
(-) Over Allowance for TMV
(+) Under Allowance for TMV
Adjusted Installment Sales
Cost of Installments Sales
Deferred Gross Profit
xxx
(xxx)
(xxx)
xxx
xxx
xxx
Note 1 REPOSSESSIONS
Journal Entry:
Repossessed Item (at NRV)
Deferred Gross Profit (at GPR)
Loss on Repossession (plug*)
Installment Acct. Rec. (at Gross)
(plug*)
True MV/ NRV of Repo Item
(-) Unrecovered Cost:
(ISR (at Gross) X Cost Ratio)
Gain (Loss) on repossessions
xxx
xxx
xxx
xxx
xxx
xxx
xxx
(plug*)
Trade in Allow (actual)
(-) True MV/NRV of item
Over (Under) Allowance
xxx
(xxx)
xxx
Note:
Installment Sales
(-) Over-allowance or
(+) Under-allowance
Adjusted Sales
xxx
(xxx)
xxx
xxx
xxx
xxx
B. SALE OF REAL PROPERTY
* CASUAL SALE
Sales Price
(-) Book Value:
Cost
xxx
Acc. Dep, if any xxx
Deferred GP
xxx
xxx
xxx
* AS A REAL ESTATE (INVENTORY)
Sales Price
xxx
(-) Cost of Sales
(xxx)
Deferred GP
xxx
* RGP IN INSTALLMENT SALES
Probability of Collection
Method Used
Reasonable
Accrual Basis
Remote
Cost Recovery Method
Neither of the two
Installment Method
* Measurement of Sales Revenue in Installment Sales (IAS
18)
1. Cash (at Face Value)
2. Traded Inventory (True Market Value/FMV)
3. Notes Receivable (at either Present Value or Face
Value, whichever is appropriate)
*Deferred Gross Profit (DGP) is a CONTRA-IAR ACCOUNT
NOTE: Gains on Repossession is NOT RECOGNIZED
Note 2 WRITE OFF
Journal Entry:
Deferred Gross Profit (at GPR)
Operating Expenses (at Cost Ratio)
Installment Acct. Rec. (at Gross)
* INSTALLMENT SALES WITH TRADE INS
Journal Entry:
Traded in Item (at NRV)
xxx
Over-allowance (plug*)
xxx
Installment Acct. Receivables (excess)
Installment Sales (at Gross)
xxx
xxx
xxx
NOTE: Loss on Repossessions and Impairment of IAR in case
of write off, shall be presented in PROFIT/LOSS.
Note 3 COLLECTIONS
- Collections EXCLUDE interests collected, nut INCLUDES
down payment and Traded in items at its NRV
- Base on REALIZED GP, which is a YEAR END ADJUSTMENT
LONG-TERM CONSTRUCTION CONTRACTS
Revenue Recognition Over Time
Under IFRS 15, following are methods in computing for the
percentage of completion:
1. Cost to Cost Method
2. Survey Method
3. Input Method
4. Output Method
A. PERCENTAGE OF COMPLETION (COST TO COST)
- used if the outcome of the contract can be measured
reliably
If
Expected
GP
Total Contract Price:
Initial Contract Price
Variations (ex. bonus)
(-)Total Estimated Cost:
Cost incurred to date
Estimated cost to complete
Expected Gross Profit (Loss)
(x) % of Completion rate
Cumulative Gross Profit (Loss)
(-) Cumulative GP(L), prior yrs
Realized GP(L), current yr
xxx
xxx
xxx
xxx
xxx
If
Expected
GL
xxx
xxx
xxx (xxx)
xxx
xxx
%
100%
xxx
xxx
(xxx)
(xxx)
xxx
xxx
Cost incurred TO DATE
Total Estimated Cost
- In BOTH method, expected Gross Loss shall be recognized
immediately at its FULL AMOUNT. Thus, EXPECTED GROSS
LOSS = CUM. GROSS LOSS
- Variations is included in the contract price IF:
a. It is probable that it will result to revenue
b. It can be measured reliably
*PRESENTATION IN INCOME STATEMENT
Construction Revenue
Cost of Construction
Realized Gross
PROFIT
Construction Revenue
Cost of Construction
xxx
(xxx)
xxx
xxx
(xxx)
Realized Gross LOSS
(xxx)
* Beginning Balance
*Cost Incurred during the yr
*Realized GP during the yr
(Contract Price X %)
Cost incurred during the year
taken from solution table
above
(Contract Price X %)
SQUEEZED (Revenue +
RGLoss)
taken from solution table
above
Note: POC rate to be used in getting the Construction
Revenue, current year to be presented in the Income
Statement:
Cum. POC rate, DURING the year
%
(-)Cum. POC rate, LAST year
(%)
POC rate, CURRENT YEAR
%
*Realized GP during the yr
*Ending Balance
* Instances where CIP in BOTH METHODS are equal:
a. In the year of project completion, CIP=CONTRACT PRICE
b. In the year there is expected gross loss. (CPrice<Total
Cost)
ALTERNATIVE SOLUTION FOR CIP
CASE 1. IF THERE IS EXPECTED GROSS PROFIT
Solution A
Cost Incurred TO DATE
(+) Cumulative Gross Profit
CIP, Ending Balance
Solution B
xxx
xxx xxx
NOTE:
Percentage of Completion rate
*RELATED ACCOUNT BALANCES
CONSTRUCTION IN PROGRESS (CIP) – Current Asset
xxx
xxx
xxx
Contract Price
(x) % of completion
CIP, Ending Balance
xxx
xxx
xxx
CASE 2. IF THERE IS EXPECTED GROSS LOSS
Solution A
Cost Incurred TO DATE
(-) Cumulative Gross Loss
CIP, Ending Balance
xxx
xxx
xxx
PROGRESS BILLINGS (PB) – Current Liability
*Ending Balance
* Beginning Balance
*Billings during the year
*At date of completion, PB = CONTRACT PRICE
ACCOUNTS RECEIVABLE
* Beginning Balance
*Billings during the year
*Mobilization Fee
*Retention Fee
*Collections
*Ending Balance
NOTE:
- Under the SAME CONTRACT, CIP and PB may be OFFSET
for presentation purposes in the Balance Sheet.
If CIP End balance > PB End balance:
 Difference = Due FROM Customer (CA)
If CIP End balance < PB End balance:
 Difference = Due TO Customer (CL)
B. COST RECOVERY METHOD (ZERO PROFIT)
If
Expected
GP
Total Contract Price:
Initial Contract Price
xxx
Variations (ex. bonus)
xxx xxx
(-)Total Estimated Cost:
Cost incurred to date
xxx
Estimated cost to complete
xxx xxx
Expected Gross Profit (Loss)
xxx
(x) % of Completion rate
0%
Cumulative Gross Profit
ZERO
(Loss)
(-) Cumulative GP(L), prior yrs
ZERO
Realized GP(L), current yr
ZERO
NOTE:
If
Expected
GL
xxx
xxx xxx
xxx
xxx (xxx)
xxx
100%
xxx
(xxx)
xxx
-Under Cost Recovery Method, Profit shall only be
recognized at the DATE OF COMPLETION. However, Profit
may be realized if it is a result of the RECOVERY of Gross
Loss previously recognized. (Or as long as, GP is ZERO)
- Same procedure for CIP and PB computations (TACCOUNT APPROACH)
*PRESENTATION IN INCOME STATEMENT
Construction Revenue
Cost of Construction
Realized Gross
PROFIT
xxx
(xxx)
Construction Revenue
Cost of Construction
xxx
xxx
(xxx)
Realized Gross LOSS
(xxx)
(Contract Price X %)
Cost incurred during the year
taken from solution table
above
(Contract Price X %)
SQUEEZED (Revenue +
RGLoss)
taken from solution table
above
Note: POC rate to be used in getting the Construction
Revenue, current year to be presented in the Income
Statement:
Cum. POC rate, DURING the year
%
(-)Cum. POC rate, LAST year
(%)
POC rate, CURRENT YEAR
%
NOTE: TOTAL ESTIMATED COST INCLUDES ALL COSTS that
are SPECIFICALLY CHARGEABLE TO & ARE REIMBURSEABLE
BY CUSTOMER, regardless of cost function (Ex.
General/Admin Expense)
FRANCHISE ACCOUNTING
* REVENUE RECOGNITION
REVENUES
US GAAP (POINT
IN TIME)
INITIAL
 REQUISITES:
FRANCHISE FEE
1. With
REVENUE (IFF)
Substantial (at
least 90%)
Performance
of services
2. Nonrefundable
3. Period of
return has
expired
CONTINGENT
 REQUISITES:
FRANCHISE FEE
1. With
REVENUE (CFF)
Substantial
(at least
90%)
Performance
of services
2. Nonrefundable
3. Period of
return has
expired
4. Sale of
Franchise
occurs
IFRS 15 (OVER
TIME)
 REQUISITES:
1. Satisfaction of
Performance
Obligation
 REQUISITES:
1. Satisfaction of
Performance
Obligation
2. Sale of
Franchise occurs
INTEREST
REVENUE
Based on
passage of time
(under IAS 18)
NOTE: Initial Franchise Fee
Contingent Franchise Fee
Total Franchise FEE Revenue
Interest Income
Total Franchise Revenue
using effective
interest method
(under IAS 18)
xxx
xxx
xxx
xxx
xxx
*RECOGNITION OF GROSS PROFIT IN FRANCHISE
Collectability
Method
Treatment
Reasonably
Assured
ACCRUAL
BASIS
NOT
Reasonably
Assured
INSTALLMENT
METHOD
Recognize
GP at FULL
AMOUNT
GP is
DEFERRED
* ACCOUNTING THE BALANCE OF IFF
Type of Note
Measurement
* If interest
FACE VALUE
bearing
* If non-interest
PRESENT
bearing
VALUE
When
Realized?
Immediately
When there’s
collection
Interest Revenue
Face Value X NR
CA X NR
STEP 1: Determine if IFF shall be recognized
STEP 2: If IFF is to be recognized, determine the method in
recognizing GP
STEP 3: Determine the period asked
ACCRUAL BASIS
Cash (for Down Payment)
(+) Notes Receivables (for Balance)
Initial Franchise Fee
(-) Direct Cost – Initial Service
GROSS PROFIT
(+) Contingent Franchise Fee
(+) Interest Revenue
Total Franchise Revenue
(-) Indirect Cost – Initial Service
(-) All Cost – Continuing Service
NET INCOME OF FRANCHISOR
xxx
xxx (see table)
xxx
(xxx)
xxx
xxx
xxx (see table)
xxx
(xxx)
(xxx)
xxx
INSTALLMENT METHOD
Cash (for Down Payment)
(+) Notes Receivables (for Balance)
Initial Franchise Fee
(-) Direct Cost – Initial Service
DEFERRED GROSS PROFIT
xxx
xxx (see table)
xxx
(xxx)
xxx (DGP %)
Cash (for Down Payment), year of sale
Principal Collection of NR
Total Collection
(x) DGP rate
REALIZED GROSS PROFIT
(+) Contingent Franchise Fee
(+) Interest Revenue
Total Franchise Revenue
(-) Indirect Cost – Initial Service
(-) All Cost – Continuing Service
NET INCOME OF FRANCHISOR
xxx
xxx
xxx
(xxx)
xxx
xxx
xxx (see table)
xxx
(xxx)
(xxx)
xxx
 Its Provisional Amount must be obtained from those
facts and circumstances EXISTING on acquisition date.
Otherwise, CHANGE IN VALUE within or beyond the
IFRS 3 defines Business Combination as “Acquirer
measurement period shall reflect to PROFIT or LOSS,
(parent) obtains CONTROL over the acquire
thus, NO EFFECT to GW (GBP)
(subsidiary)”
Use ACQUISITION METHOD ONLY
IF ASSET
IF EQUITY
Steps to consider under acquisition method:
 On Acquisition Date
 On Acquisition Date
1. Identify the ACQUIRER
- recognize CONTINGENT
- Contingent Liability is
2. Determine the ACQUISITION DATE
LIABILITY (FIN. LIAB.)
NOT RECOGNIZED
3. Determine the CONSIDERATION
whether probable or
4. Recognize & measure the identiable assets possible
acquired, liabilities assumed, any NCI in the
acquire
 Change in value WITHIN  Change in value WITHIN
5. Recognize & measure any resulting Goodwill or
the measurement
the measurement
Gain on Bargain Purchase on business
period:
period:
combination
- adjust GW (GBP)
- DOES NOT affect GW
FV of consideration & net assets acquired shall be
(GBP)
measured at their ACQUISITION DATE FAIR VALUES
 Change in value BEYOND - record only additional
Such fair values are subject to ONE (1) – YR
shares issuance. Thus,
the measurement
MEASUREMENT PERIOD from Acquisition Date.
original amount NOT
period:
Changes in Values within that period are called - adjust contingent
remeasured
MEASUREMENT PERIOD ADJUSTMENTS affecting GW consideration to profit or
Entry: APIC
xxx
(GBP). Thus, generally, shall be accounted for loss
SC
xxx
RETROSPECTIVELY.
BUSINESS COMBINATION





BASIC FORMULA
FV of Consideration Given Up
(+) Non-Controlling Interest (NCI)
(+) FV of Previously Held Interest
Initial Carrying Amount
(-) FV of Net Assets Acquired
Goodwill (Gain on Barg. Purc.)
Additional Notes
 Asset Acquisition
 Stock Acquisition
NOTE 1
NOTE 2
xxx
xxx
xxx
xxx
(xxx)
xxx
note 1
note 2
note 3
NON CONTROLLING INTEREST (NCI)
- arises in <100% interest acquisition but >50% interest of
Sub’s Ordinary Shares (partially owned Subsidiary)
INITIAL MEASUREMENT OF NCI
FV of Net Assets Acquired
xxx
(x) NCI %
%
Proportionate Share of NCI
xxx
note 4
note 5
FV of Consideration (EXCL. control premium) xxx (see note)
(x) NCI % / Acquired %
%
Implied Fair Value of NCI (unless given)
xxx
(a) Merger: A + B = A or B
(b) Consolidation: A + B = C
NOTE: FV of Consideration INCLUDES the following (IN
CASE OF STEP ACQUISITION)
(a) FV of consideration for NEWLY ACQUIRED INTEREST
(b) FV of Previously Held Interest
(a) wholly owned (100%)
(b) partially owned (<100% but >
50%)
FAIR VALUE OF CONSIDERATION
PS on FVNAA > FV of NCI
1. Cash or Other Non-Cash Assets
 DECREASES CONSO ASSET on Acquisition Date
Consolidation
 Journal Entry:
Investment in Subsidiary
Cash/Other Assets
2. Equity Interest
 INCREASES CONSO EQUITY on Acquisition Date
Consolidation
 Journal Entry:
Investment in Subsidiary
Share Capital
Share Premium
OR;
FV of NCI > PS on FVNAA
xx
xx
Excess
Goodwill
Gain on BP
xx
xx
xx
3. Contingent Consideration
 At FAIR VALUE or if not measured reliably, at PRESENT
VALUE
 Prop Share of NCI
automatically
 Fair Value of NCI
 Prop Share of NCI
(whichever is
appropriate)
PS on FVNAA
Partial
Partial
OR;
FV OF NCI
Total/full
Partial
 If PARTIAL – affects CNI to PARENT (CONSO RE) only
 If TOTAL – affects BOTH CNI to PARENT (CONSO RE) and
NCINI (NCINAS)
NOTE: NCI is presented SEPARATELY in CONSO EQUITY on
Acquisition Date Consolidation
NOTE 3
PREVIOUSLY HELD INTEREST
- Part of Total Consideration/Initial CA of Investment in
Subsidiary in case of ACHIEVED IN STAGES ACQUISITION
(STEP ACQUISITION)
FV of Previous Investment *
(-) CA of Previous Investment **
Gain or Loss on Remeasurement
xxx
(xxx)
xxx
* (Sub FV of NA at the time Control is achieved X Previous
Interest (%) Held = FV of Previous Investment)
** CA as of the date control is achieved
Entry:
Investment in Subsidiary @ FV xxx
Loss on Remeasurement
xxx
Previous Investment@ CA
xxx
Gain on Remeasurement
xxx
NOTE: GL on Remeasurement is presented in PROFIT or
LOSS. Thus, this AFFECTS CONSO EQUITY on Acquisition
Date Consolidation
NOTE 6
SPECIAL NOTES TO REMEMBER
ACQ DATE COSTS
SME
NON-SME
Capitalized
Expensed (PL)
 DIRECT COSTS
Expensed
(PL)
Expensed (PL)
 INDIRECT COSTS
- These costs are assumed paid in cash, thus, DECREASES
CONSO ASSETS at Acquisition Date Consolidation
 STOCK ISSUANCE COSTS (in case equity interest is part of
consideration)
1. Debit to SHARE PREMIUM FROM ORIGINAL
ISSUANCE
2. Credit/Debit to SIC ACCOUNT (contra equity
account of the ff:)
a. Other SP – Other issuance
b. Retained Earnings
 Listing Fee – Expensed as Incurred (Profit or Loss)
CONSOLIDATION
AT THE TIME OF ACQUISITON

At
the
acquisition
date ONLY the BALANCE SHEET shall
NOTE 4
FAIR VALUE OF NET ASSETS ACQUIRED
be consolidated.
* Generally, at acquisition date, Sub’s Identiable Assets
BS ELEMENTS
Parent
Subsidiary
acquired and Liabilities assumed by the parent shall be
Assets
Book Value
Fair Value
adjusted to their ACQUISITION DATE FAIR VALUES
Liabilities
Book Value
Fair Value
Equity
Book Value
NCI
* Exception: NCA Held for Sale of Sub shall be measured at
the LOWER of Book Value & FV – COD
CONSOLIDATED ASSETS
Parent Total Assets at Acquisition date
xxx
* GOODWILL OF SUBSIDIARY shall be REDUCED TO ZERO
(-) Consideration Given Up (Cash or NCA)
(xxx)
(0)
(-) Payment to Acq Date Costs
(xxx)
xxx
NOTE 5 GOODWILL (GAIN ON BARGAIN PURCHASE) (+) Goodwill on business combination
Parents Adjusted TA @ Book Values
xxx
(+) Subs Adjusted TA @ Fair Values
xxx
* In case of ASSET ACQUISITION, GW (GBP) shall be
CONSOLIDATED
ASSETS
at
Acq
Date
xxx
recognized at acquisition date since consolidation is
Note: “Investment in Subsidiary” account of Parent shall be
AUTOMATIC
ELIMINATED upon consolidation
* In case of STOCK ACQUISITON, GW (GBP) shall be
recognized upon CONSOLIDATION ONLY
CONSOLIDATED LIABILITIES
Parent Total Liabilities at Acquisition date
xxx
GOODWILL
(+) Contingent Consideration (if asset)
xxx
- shall be presented as NON CURRENT ASSET @ Balance
Parents Adjusted TL @ Book Values
xxx
Sheet
(+)
Subs
Adjusted
TL
@
Fair
Values
xxx
- INCREASES CONSO ASSETS at Acquisition Date
CONSOLIDATED LIABILITIES at Acq Date
xxx
SME
Amortized over 10 years (max)
CONSOLIDATED EQUITY
NONSME
Not amortized but subject to impairment
Parent Equity at Acquisition date
xxx
test at least annually
(+) Shares Issued as Consideration at TFV
xxx Equity
(+) Gain on Bargain Purchase
xxx
PL
GAIN ON BARGAIN PURCHASE
(-)
Acq
Date
Costs
(xxx)
PL
- shall be presented as part of PROFIT OR LOSS @ Income
(-) Stock Issuance Costs
(xxx) Equity
Statement
(+/-) Remeasurement GL of Prev. Int. Held
(xxx)
PL
- at Acquisition Date Consolidation, this AFFECTS CONSO
(+/-)
Others
presented
at
P/L
(xxx)
PL
RE thus, CONSO EQUITY
Parents Adjusted Equity @ Book Values
xxx
xxx
FLOW: PL – IE SUMMARY – CONSO RE – CONSO EQUITY (+) Non Controlling Interest of Sub
CONSOLIDATED EQUITY at Acq Date
xxx
Note: “Equity Accounts” of SUBSIDIARY shall be
ELIMINATED upon consolidation
TWO COLUMN METHOD
TOTAL
(-) Fair Value of Sub’s Net Assets
Total Goodwill (Partial Gain on Barg Pur)
Total Goodwill (partial Gain on Barg Pur)
PARENT
XXX
XXX
XXX
(XXX)
(XXX)
(XXX)
XXX
XXX
XXX
NCI
(20%)
* PARENT ADJUSTED NET INCOME
CNI
(100%)
PARENT
(80%)
Reported Net Income (Cost Method)
(+) Gain on Bargain Purchase
(-) Acquisition Cost of BC (year of BC)
(-) Dividend Income from Sub
(+/-) Effects of Downstream
Transactions
XXX
XXX
* SUBSIDIARY’S ADJUSTED NI
Reported Net Income (Book Value)
(+/-) Effects of Amortization
Difference on BV & FV of Sub’s Assets
and Liabilities
(+/-) Effects of Upstream Transactions
(+/-) Effects of Sub- Transactions
(+/-) Effects of Downstream
Transactions
(-) Impairment Loss of Total Goodwill
CONSOLIDATED COMPREHENSIVE INC
NCI
XXX
XXX
(XXX)
(XXX)
(XXX)
(XXX)
XXX
XXX
CNI
(100%)
PARENT
(80%)
NCI
(20%)
XXX
XXX
XXX
(-) Unrealized GP (End Invty*GPR)
Non-Depreciable Assets
(-) Unrealized GL (year of intercompany sale)
(+) Realized GL (when sold to outsider)
Depreciable Assets
(-) Unrealized GL (year of intercompany sale)
(+) Realized GL (when sold to outsider)
NET EFFECT
(xxx)
(xxx)
xxx
(xxx)
xxx
XXX
NOTE: INTERCOMPANY TRANSACTION (GRANT LOAN)
This results to INTEREST INCOME on the Grantor-affiliate
& INTEREST EXPENSE on the Grantee-affiliate. Thus,
upon consolidation, the effect of grant loan shall be
ELIMINATED
CONSOLIDATED SALES, COST OF SALES, GROSS PROFIT
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
(XXX)
(XXX)
(XXX)
XXX
XXX
XXX
Observation: Parent (1-5) affects CNI to Parent Only. Sub
(1-4) affect BOTH CNI to Parent & NCINI
NOTE: Use TWO COLUMN METHOD ONLY IF the
following are PRESENT:
1. Control Premium OR;
2. Express Fair Value for NCI
CONSOLIDATED SALES
Reported Sales of Parent
(+) Reported Sales of Sub
Total Sales
(-) Intercompany Sales related to
INVENTORY (US & DS)
xxx
xxx
xxx
(xxx)
CONSOLIDATED COST OF SALES
Reported COS of Parent
(+) Reported COS of Sub
Total Cost of Sales
(-) Intercompany COS related to
INVENTORY (US & DS)
xxx
xxx
xxx
(xxx)
CONSOLIDATED GROSS PROFIT
AFTER ACQUISITION DATE
xxx
xxx
xxx
OR;
CONSOLIDATED COMPREHENSIVE INCOME
* PARENT’S ADJUSTED NET INCOME
Reported Net Income (Cost Method)
1 (+) Gain on Bargain Purchase
2 (-) Acquisition Cost of BC (year of BC)
3 (-) Dividend Income from Sub
4 (-) Impairment Loss of Partial/Total GW
5 (+/-)Effects of Downstream Transactions
xxx
xxx
xxx
(xxx)
(xxx)
(xxx)
* SUBSIDIARY’S ADJUSTED NET INCOME
Reported Net Income (Book Value)
1 (+/-)Effects of Amortization Difference on
xxx
xxx
BV & FV of Sub’s Assets and Liabilities
2 (+/-) Effects of Upstream Transactions
3 (+/-) Effects of Sub- Transactions
4 (-) Impairment Loss of Total GW
CONSOLIDATED COMPREHENSIVE INCOME
xxx
(xxx)
(xxx)
xxx
xxx
xxx
xxx
xxx
(xxx)
(xxx)
xxx
xxx
NOTE: INVENTORY BALANCES refers to those acquired
through intercompany transaction and taken from record
of the BUYING affiliate
CONSOLIDATED RETAINED EARNINGS (PARENT)
xxx
xxx
CNI Attributable to Parent (squeezed)
xxx
CNI Attributable to NCI (Sub’s Adjusted NI x NCI %) xxx
CONSOLIDATED COMPREHENSIVE INCOME
xxx
* EFFECTS OF DOWNSTREAM & UPSTREAM TRANSATIONS
Inventories
(+) Realized GP (Beg Invty * GPR)
Reported GP of Parent
(+) Reported GP of Sub
Total Gross Profit
(+) Realized GP – Beg Invty
(-) Unrealized GP – End Invty
(-) Realized GL – Beg Invty
(+) Unrealized GL – End Invty
CONSOLIDATED GROSS PROFIT
xxx
Consolidated RE of Parent, Beginning
(+) CNI Attributable to Parent
Consolidated RE of Parent, Ending
xxx
xxx
xxx
NON-CONTROLLING INTEREST (NCI)
Non-Controlling Interest, Beginning
(+) CNI Attributable to NCI (NCINI)
(-) Dividends Declared by Sub to NCI
Non-Controlling Interest, Ending
xxx
xxx
(xxx)
xxx