CHAPTER 10 (2020): Accounting Changes
Change in accounting estimate
Two categories of accounting changes:
a. Change in accounting estimate
b. Change in accounting policy
Change in accounting estimate
Adjustment of the CA 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 and expected future benefit and
obligation associated with the asset and liability (PAS 8, paragraph 5)
-
Normal, recurring correction or adjustment of an asset or liability
Natural result of the use of an estimate
Does not relate to prior periods
Examples
a.
b.
c.
d.
e.
Doubtful accounts
Inventory obsolescence
Useful life, residual value, expected pattern of consumption of depreciable asset
Warranty costs
FV of financial assets/liabilities
Reasonable estimates: essential in preparing FS, does not undermine their reliability
- May need revision if changes occur
- Circumstances on which the estimate was based
- New information
- More experience
- Subsequent development
Change in accounting estimate vs. policy
● Change in measurement basis ➔ policy
● If difficult to distinguish a change in accounting policy or estimate,
○ Then treat as change in accounting estimate
○ With proper disclosure
Treatment ➔ currently and prospectively
Effect is reflected in the income/loss of:
● Period the change was made - if it affects that period only
● Period the change was made + future periods - if it affects both
● Adjust CA of related asset/liability/equity in period of change
CHAPTER 11 (2020): Accounting Changes
Change in accounting policies, Prior period errors
Accounting policies
Specific principles, bases, conventions, rules and practices applied by an entity in preparing
and presenting financial statements
-
Comparability: must elect and apply same accounting policies in each period
Once selected, must be applied consistently for similar transactions and events
Change in accounting policy
Arises when an entity adopts a generally accepted accounting principle different from the one
previously used
Can be made only when:
a. Required by accounting standard or interpretation of a standard
b. The change results in more relevant and faithfully-represented information about the
financial position, performance, and cash flows
Examples of changes in accounting policies
●
●
●
●
●
Method of inventory pricing
(FIFO ➔ Weighted average)
Method of accounting for long term
construction contract
(Cost recovery method to ➔
Percentage of completion)
Initial adoption to carry assets at
revalued amount (PAS 16)
Measuring investment property
(Cost model ➔ Fair value model)
New policy resulting from requirement
of a new PFRS
Not changes in accounting policy
●
●
Applying a policy for transactions that
differ in substance from previously
occurring transactions
Applying new policy for transactions
that did not occur previously or were
immaterial
How to report a change in policy
Applied in accordance with the transitional provisions of the standard that required such change
➔ If: No transitional provisions / Change was made voluntarily
◆ Then: Apply retrospectively or retroactively
Retrospective application
Applying new policy as if that policy had always been applied
PAS 8, paragraph 22 provides that the entity shall adjust:
● Opening balance of each affected component of equity for the earliest prior period
presented, and
● Comparative amounts disclosed for each prior period presented
As if the new policy had always been applied
-
Report as an adjustment to the opening balance of retained earnings
Adjustment amount is determined at the beginning of year of change
However: adjustment can be made to component other than RE if another standard requires
Limitation of retrospective application
Not required if impracticable to determine the cumulative effect of the change
Impracticable: entity cannot apply it after making every effort to do so
● Effects are not determinable
● Requires assumptions about what management’s intentions were at that time
● Requires significant estimate, impossible to distinguish objectively info that
○ Provides evidence of circumstances at that time
○ Would have been available at that time
If impracticable, then: Entity applies new policy prospectively from the earliest period practicable
Prospective application
New policy is applied after the date at which the policy is changed
- No adjustments relating to prior periods are made
- Existing balances are not recalculated
Change in reporting entity
Entities change their nature and report their operations in such a way that the financial
statements are in effect those of a different reporting entity
E.g. Changing subsidiaries comprising group for which consolidated FS are presented
Considered as a change in accounting policy ➔ retrospective application
- Disclose what the FSs would’ve looked like if current entity had been in existence in prior
year
Absence of accounting standard ➔ use judgment
PAS 8, paragraph 10:
Use judgment in selecting and applying an accounting policy that results in information that is
relevant and faithfully represented
Hierarchy of guidance (par 11 and 12)
a. Requirements of current standards dealing with similar matters
b. Definition, recognition, measurement concepts for A/L/Income/Expenses in CFFR
c. Most recent pronouncements of other standard-setting bodies
i.
(that use a similar CF, other accounting literature, accepted industry practices)
Prior period errors
● Omissions and misstatements in the financial statements for one or more periods
● Arising from a failure to use, or a misuse of reliable information that
○ Was available when the FS of those periods of error were authorized for issue
○ Was reasonably expected to have been obtained/taken into account during the
preparation and presentation of the FS of those periods of error
CHAPTER 10 (2021): Operating Segment
Reportable segments (meet any 1 of the following):
1. Segment revenue accounts for 10% or more of the combined revenue of all operating
segments.
2. Absolute amount of P/L of the segment is 10% or more of the greater in absolute amount
of:
a. Combined profit of all operating segments that reported a profit
b. Combined loss of all operating segments that reported a loss
3. Assets of the segment are 10% or more of the combined assets of all operating
segments.
*Segments that do not meet any of the 3 may still be reportable if the management believes that
information would be useful to users.
Computation to identify reportable segments
a. Based on Revenue
1. Compute for total revenue
2. Compute 10% of total revenue
3. Any segment whose revenue is equal to or greater than the amount computed in
#2 is reportable. Those less than the amount are not reportable.
b. Based on Segment Assets
1. Compute for total segment assets
2. Compute 10% of total segment assets
3. Any segment whose assets is equal to or greater than the amount computed in
#2 is reportable. Those less than the amount are not reportable.
c. Based on P/L
1. Separately compute for total profit, and total losses
2. Whichever amount is higher will be the basis for the 10% reportable segment
3. Any segment whose P/Lis equal to or greater than the amount computed in #2 is
reportable. Those less than the amount are not reportable.
75% Threshold
Total external reportable revenue of reportable segments must reach at least 75%, otherwise
additional operating segments shall be identified until it reaches the threshold.
Aggregation of segments
Two or more operating segments may be aggregated into a single operating segment if such
segments have similar economic characteristics, sharing majority of the following criteria:
1. Nature of product or services
2. Nature of production process
3. Type or class of customers
4. Marketing method or method used to distribute the product
5. Nature of the regulatory environment, i.e. banking, insurance or public utility
Limit to number of segments
No precise limit has been determined, but as soon as the number of reported segments
exceeds 10, the entity must consider whether a practical limit has been reached.
Segment no longer reportable
If management decides that the previously-identified reportable segment is of continuing
significance, information about the segment shall continue to be reported even if it no longer
meets the 10% threshold.
Segment becoming reportable
If a segment becomes reportable based on the 10% threshold, information about the segment
shall be restated to reflect the newly reportable segment even if that segment did not meet the
10% threshold in the previous period. The exception to the restatement is if doing so would
incur excessive costs and if data on prior period/s is not available.
CHAPTER 11 (2021): Derivatives - Interest Rate
Swap
Derivative
- A financial instrument that derives its value from movement in commodity price, foreign
exchange rate, and interest rate of an underlying asset or financial instrument
- An executory contract, or exchange of promises about future action
Financial risks
a. Price risk
b. Credit risk
c. Interest rate risk
d. Foreign currency risk
Measurement of derivatives
- As asset or liability at fair value
Change in fair value
- Unrealized gain or loss is recognized
Recognition of change in fair value (OCI or P/L) depends on:
a. Derivative is not designated as a hedging instrument - P/L
b. Derivative is designated as a cash flow hedge
- Recognized in OCI
- Ineffective portion is recognized in P/L
c. Derivative is designated as a fair value hedge - P/L
CHAPTER 14: Cash and Accrual Basis
Cash Basis
Accrual Basis
Recognition:
a. Income - when received, regardless of
when earned
b. Expense - when paid, regardless of
when incurred
Recognition:
a. Income - when earned, regardless of
when received
b. Expense - when incurred, regardless
of when paid
Item
Cash Basis
Accrual Basis
Sales
Cash sales
Add: Collections from customers
Cash sales
Add: Sales on account
Purchases
Cash purchases
Add: Payments to trade
creditors
Cash purchases
Add: Purchases on account
Income other than sales
*Items received
*Items earned
Expenses, in general
*Items paid
*Items incurred
Depreciation
Normal
Normal
Bad debts
N/A
Doubtful accounts
Cash basis
Cash sales
Sales on account
Collection from customer
Total sales
Cash purchases
Purchases on account
Payments to trade creditors
Total purchases
Accrual basis
xx
xx
-
xx
xx
-
=
=
xx
xx
-
xx
xx
-
=
=
Interest received
xx
xx
Accrued interest receivable
-
(xx)
Interest income
=
=
xx
xx
Accrued salaries payable
-
(xx)
Salaries expense
=
=
Office supplies paid
xx
xx
Office supplies unused
-
(xx)
Office supplies expense
=
=
xx
xx
Salaries paid
Depreciation
Cash sales
xx
Sales on account:
Trade accounts and notes receivable, end
xx
Collection of trade accounts and notes receivable
xx
Sales returns, discounts, and allowances
xx
Accounts and notes receivable written off
xx
Trade notes receivable discounted (NR directly credited)
xx
Total
xx
Less: Trade accounts and notes receivable, beg
Total sales - Accrual basis
(xx)
xx
xx
Cash purchases
xx
Purchases on account:
Trade accounts and notes payable, end
xx
Payment of trade accounts and notes payable
xx
Purchase returns, discounts, and allowances
xx
Total
xx
Less: Trade accounts and notes receivable, beg
(xx)
xx
Total purchases - Accrual basis
xx
Income received - Cash basis
xx
Add: Deferred (Unearned) income, beg [Received PY, Earned CY]
xx
Accrued income, end [Receive NY, Earned CY]
xx
Total
xx
Less: Deferred (Unearned) income, end [Received CY, Earn NY]
Accrued income, beg [Received CY, Earned PY]
xx
xx
Income for the current year - Accrual basis
(xx)
xx
*Basically, whatever income is EARNED in the Current Year is ADDED.
Expenses paid - Cash basis
xx
Add: Prepaid expenses, beg [Paid PY, Incurred CY]
xx
Accrued expenses, end [Pay NY, Incurred CY]
xx
Total
xx
Less: Prepaid expenses, end [Pay CY, Incur NY]
Accrued expenses, beg [Paid CY, Incurred PY]
Expenses - Accrual basis
*Basically, whatever expense is INCURRED in the Current Year is ADDED.
xx
xx
(xx)
xx
CHAPTER 15: Single Entry
PARTNERSHIP
Capital, end
xx
Add: Withdrawals
xx
Total
xx
Less: Capital, beginning
Additional investments
xx
xx
Net income (loss)
xx
xx
CORPORATION
Retained earnings, end
Add: Dividends declared or paid
Other items that decrease RE but not P/L
xx
xx
xx
Total
xx
xx
Retained earnings, beginning
Other items that increase RE but not P/L
xx
xx
xx
Net income (loss)
xx
Net increase in assets
xx
Add: Divided paid
xx
Total
xx
Less: Increase in share capital
Increase in share premium
Net income
xx
xx
xx
xx
Sale price
xx
Less: Carrying amount of equipment sold
xx
Gain on sale of equipment
xx
Equipment, beginning
xx
Add: Equipment acquired
xx
Total
xx
Less: Equipment, end
Carrying amount of equipment sold
Depreciation
xx
xx
xx
xx
Chapter 16: Error Correction
Prior Period Errors
● Omissions and misstatements in the financial statements
● Arises from failure to use or a misuse of information that was
○ available for use in the period these statements were authorized for issue
○ reasonably expected to be obtained and used in the preparation of FS
Examples: mathematical mistakes, mistakes in applying accounting policies, oversights,
misinterpretation of facts, or fraud
Accounting treatment ➔ Retrospective restatement
● In the first set of financial statements authorized for issue after discovery
● In comparative statements, prior years are restated to correct that error
● Adjustment of of beginning balance of RE for earliest period presented
SFP Errors
Affects real accounts only
➔ Improper classification of assets, liabilities, or capital accounts
Treatment: entry is made to reclassify account balances
IS Errors
Affects nominal accounts only
➔ Improper classification of revenue and expense accounts
Treatment
● Error discovered in same year committed: entry is made to
reclassify account balances
● Error discovered in year/s after committed: no entry needed
○ Nominal accounts for current year are properly stated
Note: income and expense balances are closed at the end of each reporting period, so
the effect of an error in one year will not reflect in the next year anymore
Combined SFP and IS
Errors
Affects both real and nominal accounts
➔ Misstatement of net income
➔ Categorized into
◆ Counterbalancing errors
◆ Noncounterbalancing errors
Example: accrued salaries payable (liability) is overlooked
● Salaries expense (expense) is not recorded - understated
● Accrued salaries payable (liability) is not recorded - understated
● Net income (income) was not deducted from - overstated
● RE (capital) was not deducted from - overstated
Combined SFP and IS Errors are classified into
Counterbalancing Errors
Noncounterbalancing Errors
Automatically counterbalanced or corrected in Not automatically counterbalanced or
the next accounting period
corrected in the next accounting period, if not
detected
Effects on Income Statement
● IS for 2 successive periods are correct
Effects on Income Statement
● IS in year of error is incorrect
● IS in year/s after error is not affected
Effects on Statement of Financial Position
● SFP at end of 1st period is incorrect
● SFP at end of 2nd period is correct
Effects on Statement of Financial Position
● SFP in year of error and years after
will be incorrect until corrected
Examples
● Inventory (incl. purchases and sales)
● Prepaid expense
● Accrued expense
● Deferred income
● Accrued income
Example:
● Misstatement of depreciation
●
●
Counterbalancing Errors
Books have been closed ➔ No entry necessary, will be counterbalanced
Books have NOT been closed ➔ The following journal entries will be necessary
Inventory (including purchases and sales)
1. Overstatement of
Ending Inventory
Dr: Retained earnings
Cr:
Inventory, Jan 1 20xx
2. Understatement of
Ending Inventory
Dr: Inventory, Jan 1 20xx
Cr:
Retained earnings
3. Understatement of
Purchases
Dr: Retained earnings
Cr:
Purchases
4. Overstatement of
Purchases and
Ending Inventory
Books have NOT been closed
Dr: Purchases
Cr:
Retained earnings
Dr: Retained earnings
Cr:
Inventory, Jan 1 20xx
5. Understatement of
Sales
Dr: Sales
Cr:
Retained earnings
6. Overstatement of
Sales and
Understatement of
Ending Inventory
Dr: Retained earnings
Cr:
Sales
Dr: Inventory, Jan 1 20xx
Cr:
Retained earnings
Dr: Expense account (related to prepaid expense asset)
Cr:
Retained earnings
Failure to record prepaid
expenses
-
Expense is debited (increased) because the prepaid
expense in prior year (that went unrecorded) became an
expense in the current year
RE is credited (increased) because the net income in prior
year was understated
Dr: Retained earnings
Cr:
Expense account (related to accrued expense liability)
Failure to record accrued
expense
-
RE is debited (decreased) because net income was
overstated in prior year
Expense is credited (decreased) because accrual was
already paid in current year, which overstated the
expense account
Dr: Retained earnings
Cr:
Income account (related to deferred income liability)
Failure to record deferred
income
-
RE is debited (decreased) because net income was
overstated in prior year
Income is credited (increased) because the deferred
income became earned in the current year
Dr: Income account (related to accrued income asset)
Cr:
Retained earnings
Failure to record accrued
income
-
Income is debited (decreased) because it was earned in
prior year and is overstated this year
RE is credited (increased) because prior year net income
was understated
Noncounterbalancing Errors
Dr: Equipment
Cr:
Retained earnings
Books have been closed
Dr: Depreciation
Dr: Retained earnings
Cr:
Accumulated depreciation
-
Income is debited (decreased) because it was earned in
prior year and is overstated this year
RE is credited (increased) because prior year net income
was understated
CHAPTER 18: Book Value Per Share
The amount that would be paid on each share, assuming:
● The entity is liquidated
● Amount available to shareholders = amount reported as shareholder’s equity
Other definitions
- Financial ratio representing amount of company’s equity allocated to each outstanding
share of common stock
- Theoretical amount that each shareholder would receive if the company were to liquidate
all of its assets and pay all of its debts
- Benchmark to determine whether a stock is under/overvalued
Only one class of share capital:
𝐵𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 =
𝑇𝑜𝑡𝑎𝑙 𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠' 𝑒𝑞𝑢𝑖𝑡𝑦
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔
Two classes of share capital (apportion between preference shares and ordinary shares)
𝐵𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑝𝑒𝑟 𝑝𝑟𝑒𝑓𝑒𝑟𝑒𝑛𝑐𝑒 𝑠ℎ𝑎𝑟𝑒 =
𝐵𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑝𝑒𝑟 𝑜𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑠ℎ𝑎𝑟𝑒 =
𝑃𝑟𝑒𝑓𝑒𝑟𝑒𝑛𝑐𝑒 𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠' 𝑒𝑞𝑢𝑖𝑡𝑦
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑝𝑟𝑒𝑓𝑒𝑟𝑒𝑛𝑐𝑒 𝑠ℎ𝑎𝑟𝑒𝑠 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔
𝑂𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠' 𝑒𝑞𝑢𝑖𝑡𝑦
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑠ℎ𝑎𝑟𝑒𝑠 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔
CHAPTER 19: Basic Earnings per Share
Notes:
1. Earnings per share information pertain only to ordinary shares
2. Public entities are required to present earnings per share, while nonpublic entities are
not but are encouraged to do so
Uses of earnings per share:
1. Determinant of the market price of ordinary shares, and is indicative of the share’s
attractiveness as an investment
2. Measure of performance of management in conducting operations
3. Basis of dividend policy of an entity
Presentation:
1. Income statement - basic and diluted earnings per share for income or loss from
continuing operations
𝐵𝑎𝑠𝑖𝑐 𝑒𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 =
𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒
𝑂𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑠ℎ𝑎𝑟𝑒𝑠 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔
CHAPTER 21: Dilutive Earnings per Share
Multiple Potential Ordinary Shares
Two or more dilutive potential ordinary shares
- Consider separately whether dilutive or antidilutive
- Sequence: most dilutive to least dilutive
- Rank based on contribution (incremental EPS)
- Lowest incremental EPS ranked first
Test for dilution
Incremental OS
Incremental EPS
Dilutive when
Options and warrants
Convertible
preference share
Convertible bond
payable
Most dilutive
-
-
-
-
Option shares
Less: Assumed TS*
-
Option price <
Average market price
Annual PS dividend
÷ No. of OS from
Convertible PS
IntEx, net of tax
÷ No. of OS from
Convertible bonds
Incremental EPS
< Basic EPS
Incremental EPS
< Basic EPS
*Assumed Treasury Shares
= Proceeds from exercise of options (Option shares x Option price) ÷ Average market price
Procedures
Step 1: Compute for Basic EPS (will be used as benchmark in comparing the incremental EPS).
Step 2: Compute for the Incremental OS for options and warrants.
Step 3: Compute for the Incremental EPS for a) Convertible PS, and b) Convertible BP.
Step 4: T_T
Step 01: GO LEILA Chapter 20 be like: …
CHAPTER 22 (2020): Hyperinflation
●
●
Hyperinflation
PAS 29: no absolute rate, but characteristics
A matter of judgment to determine if restatement of FS is needed
ChatGPT
definition
●
●
●
prices rise rapidly and uncontrollably in an economy
erodes the real value of the local currency
traditional accounting may not accurately reflect entity’s financials
PAS 29:
FSs are restated, reflect changes in purchasing power of local currency
Population keeps wealth in nonmonetary assets or stable foreign currency
Local currency immediately invested to maintain purchase power
Population regards monetary amounts in relatively stable foreign currency
Characteristics
Sales/purchases on credit take place at prices that compensate for
expected loss of purchasing power during the credit period
Interest rates/wages/prices are linked to a price index
Cumulative rate over 3 years is approaching or exceeding 100%
Financial
reporting in a
hyperinflationary
economy
Wa jud ko kasabot
Constant peso accounting
Aka “Purchasing power or price level accounting”
Nominal peso accounting
Restatement of historical financial statements
In terms of current purchasing power
Using index number
Traditional concept of preparing financial
statements
Based on historical cost
Objective: report elements of FS in pesos that have same purchasing power
Monetary item
Nonmonetary item
Money held
A/L to be received/paid in fixed money
Items that cannot be classified as monetary
Amount in FS ≠ Amount to be realized
Right/obligation to a fixed amount of money
Absence of right/obligation to money
No longer restated in constant peso FS
Restated in constant peso FS
Formula for restatement
𝑅𝑒𝑠𝑡𝑎𝑡𝑒𝑑 𝑎𝑚𝑜𝑢𝑛𝑡 =
𝐼𝑛𝑑𝑒𝑥 𝑛𝑢𝑚𝑏𝑒𝑟 𝑎𝑡 𝑒𝑛𝑑 𝑜𝑓 𝑟𝑒𝑝𝑜𝑟𝑡𝑖𝑛𝑔 𝑝𝑒𝑟𝑖𝑜𝑑
𝐼𝑛𝑑𝑒𝑥 𝑛𝑢𝑚𝑏𝑒𝑟 𝑎𝑡 𝑎𝑐𝑞𝑢𝑖𝑠𝑖𝑡𝑖𝑜𝑛 𝑑𝑎𝑡𝑒
General price index
× 𝐻𝑖𝑠𝑡𝑜𝑟𝑖𝑐𝑎𝑙 𝑐𝑜𝑠𝑡
Specific price index
Gain or loss on purchasing power
Purchasing power: goods and services that money can buy
Inflation
Deflation
Monetary assets
Loss
Gain
Monetary liabilities
Gain
Loss
Procedures for restatement
1. Classify items in FS: monetary or nonmonetary
a. Monetary items are not restated
b. Nonmonetary items are restated
➔ Apply GPI from acquisition to end of period
➔ Some are already carried at amounts current, i.e. NRV and FV
2. Some nonmonetary items are carried at amount current at a date other than acquisition
date, i.e. revalued PPE
➔ Restate the carrying amounts from the date of revaluation
3. All income statement items are restated
➔ Apply change in GPI from when I/E were initially recorded
➔ Average index
4. Compute general PP gain or loss for monetary items, include in P/L Statement
5. Reduce restated PPE, goodwill, intangibles amounts if it exceeds recoverable amount
6. Eliminate revaluation surplus previously recognized
7. RE is balancing figure in restated SFP
8. For comparative statements, express monetary items of prev year in terms of index no at
end of current year
INDEX NO. OR FRACTIONS TO USE
Income Statement Accounts
Sales, Purchases, Expenses
(If earned and incurred evenly)
Index number at end of year
Average index number (beg + end divided by 2)
Beginning inventory
Index number at end of year
Index number at beginning of year
Ending inventory
(No restatement)
Index number at end of year
Index number at end of year
Depreciation expense
●
Index number at end of year
Index number at acquisition of related asset
For COGS, restated:
○ (Beginning inventory, restated) + (Purchases, restated)
- (Ending inventory, restated)
CHAPTER 28: SMEs - Liabilities
LEASE
FINANCE LEASE
Lessee
Lessor
Recognize:
- Asset
- Liability = Fair value of asset or
Present value of minimum lease
payments, whichever is lower
Classify:
- Direct financing recognizes interest
income
- Sales type lease recognizes interest
income and gross profit on sale
*Initial direct cost paid by lessee is added to
cost of asset.
*Depreciate over Useful life, but if ownership
reverts to lessor, depreciate over the lower
between UL and LT.
*Apportion Minimum lease payments using
effective interest method.
*Charge contingent rent as expense in the
period incurred.
Direct Financing Lease
Gross investment
Annual payment * Lease term
Add: Residual value G or U (unless ownership transfers
to lessee, in which case, ignore)
Net investment aka Receivable
Cost of asset
Add: Initial direct cost incurred by lessor
Total interest income
Gross investment
Less: Net investment
Sales Type Lease
Gross investment
Annual payment * Lease term
Add: Residual value G or U (unless ownership transfers
to lessee, in which case, ignore)
Net investment aka Receivable
Present value of gross investment
Total interest income
Gross investment
Less: Net investment
Sales revenue
Net investment or Fair value of asset at commencement
of lease, whichever is lower
COGS
Cost of asset
Add: Initial direct cost incurred by lessor
EMPLOYEE BENEFITS
Short-term benefits
-
Postemployment benefits
Benefits other than termination benefits
Expected to be settled wholly within 12 months after the
end of the period in which the employee renders the
related service
Examples:
a. Salaries, wages, SS contributions
b. Short-term paid absences e.g. paid annual leave,
paid sick leave
c. Profit sharing, bonuses payable within 12 months
d. Non-monetary benefits e.g. medical care,
housing, free or subsidized goods