AFAR NOTES
PARTNERSHIP
Stages:
 Civil Code (Art. 1767); Partnership Law
 IFRS/PFRS
Contract  Agreement
1. Formation – Creation
2. Operation – allocation of Net Income/Loss
Oral
Written
3. Dissolution
2 or more persons (partners  owners)
PARTNERSHIP
Bind themselves to contribute
Dividing profits
Characteristics of Partnership






Ease of formation
Limited life
Mutual agency
Separate legal entity
Sharing of profit and losses
Unlimited liability
4. Liquidation
Money (Cash)
Property (NCA)
Industry (Services/Skills)
Lump-sum
Installment
Types of Partnership


Accounting for Partnership Activities
Admission
Withdrawal
General Partnership
 Each partner is personally liable to the partnership’s
creditors if the partnership assets are not enough to
pay such creditors.
 There is at least one general partner in each
partnership.
Limited Partnership
 Partners are liable only up to the extent of their capital
contributions.

Capital Account (normal balance: credit)
 Increases
 Initial investment
 Additional investment
 Share in net income
 Decreases
 Permanent withdrawal
 Drawings in excess of a specific amount
 Share in net loss

Drawing Account (normal balance: debit)
 Increases
 Regular drawings
Loan Accounts


Transactions between the partners and the partnership.
Must be reported as separate balance sheet items.
 Loan from partners – presented as a liability.
 Loan to partners – presented as other receivable (current asset).

The capital ratio is a claim against the net asset of the partnership as shown by the balance in the partner’s capital
account.
The profit and loss ratio (P&L ratio) determines how much will the income or loss be distributed among the partners.

Reference: Sir Brad’s Lecture + Pinnacle Handout
Compiled by: CPM
FORMATION
Cash  Face Value
Valuation
Noncash Assets
Liabilities
Example:
XY Partnership
JE:
1,000
X, Capital
Cash
1. Agreed Value
2. FMV
3. Carrying Value
Land
1,000
If silent: EQUAL
5,000
Y, Capital
Y, Capital
MP
5,000
2,000
2,000

Cash investment
 Local currency is valued at face value.
 Foreign currency is valued at the current exchange rate

Liabilities assumed by the partnership should be value at the present value (fair value) of the remaining cash
flows.

If partner’s initial investment  partner’s agreed capital  Bonus Method
Bonus Method Pro-forma Entry
A, Capital
B, Capital
xx
xx
Total agreed capital
x Capital interest
Partner’s individual capital interest
Less: B, capital interest
Bonus to B
xx
xx %
xx
(xx)
xx
OPERATIONS
 Allocation of NI/L
 Generate revenues
 Incur expenses
Dec. 31  NI/L
Rule: Allocate based on the partnership agreement (Art. of Partnership)
 (P/L Ratio)
Capitalist
Types
Cash
Noncash Assets
Industrialist  Services/Skills
Typical Terms:
1. Salaries  Industrial Partners
2. Bonuses
3. Interest
Managing Partner
Based on % on NI
If NL, no bonus
Capitalist Partner
Based on % of Capital Balances
Original (formation)
Beginning
End
Simple
Average
Weighted (if silent)
* Salaries, Bonuses, Interest are not recorded as expense of the partnership
* Salaries and Interest are pro-rated.
Reference: Sir Brad’s Lecture + Pinnacle Handout
Compiled by: CPM
Partner Capital:
Beginning Balance
Share in NI/L
Additional Investment
Withdrawal
Ending Balance
xx
xx
xx
(xx)
xx
Drawings
Regular  will not affect WACC balance
Permanent (withdrawal)
Division of Profits and Losses (in order)
1.
2.
3.
4.
5.
By Agreement
Original Capital Contribution
If Profit agreement only  losses shall be divided in the same manner.
If Loss agreement only  use original capital contribution
Equally
DISSOLUTION
 Change in the interest of the partnership
 addition/reduction in the # of partners
Purchase of Interest
1. Admission
Admission
Withdrawal / Retirement
Incorporation of a Partnership
Private/Personal Transaction (outside)
No change in partnership capital
Investment in Partnership  ↑ Capital, ↑ Asset
Scenarios
CC = AC
Bonus
Ø
CC > AC
Old Partner
CC < AC
New Partner
TCC > TAC  Overstatement of the asset or diminution in partner’s capital.
TCC < TAC  Unrecorded net assets or the required additional investment in partner’s capital.
Total agreed capital
Less: Total contributed capital
Difference
xx
xx
xx
* Capital Ratio  used to know agreed capital
* P/L Ratio  used to allocate NI / Bonuses
Purchase of Interest (ex. B buys interest of C)
2. Withdrawal / Retirement
 same rules w/ admission
Settlement by partnership
Advantages:
3. Incorporation of a Partnership
Partnership  Corporation
(Partners)
(Shareholders)
Limited Liability
Ease of raising additional capital
Unlimited Life
Easy transfer of ownership
Note: Whenever there’s dissolution, update the capital balances
1. Allocate NI/L to the partners
2. Revalue Assets or Liabilities
Reference: Sir Brad’s Lecture + Pinnacle Handout
Compiled by: CPM
LIQUIDATION
 Termination phase of the partnership’s activities
 Liquidation Process
1. Sell all NCA @ NRV (NCA  Cash)
2. Pay the Creditors
3. Distribute remaining cash to partners
Order of Priority (Partnership Assets)
1. Partnership’s Creditors  if insufficient, can run after personal assets
2. Internal Creditors (Partner’s Loan)
3. Partner’s Capital Balance
Order of Priority (Personal Assets)
1. Personal Creditors
2. Partnership Creditors
Lump-sum  liquidation process is completed at a short period of time
Types
Installment
Liquidation process takes time to complete
To determine how much cash can be safely distributed to the partners
Maximum Possible Loss: Worst case scenario
1. Estimated Liquidation Expense
2. Cash withheld for future use
3. Remaining BV of NCA
Basic Principles in Installment Liquidation



Schedule of Safe Payments
 Method of computing the amount of safe payments and preventing excessive payments to any partners.

Assume total loss on all remaining noncash assets. Provide all possible losses, including potential
liquidation cost and unrecorded liabilities.  Maximum Possible Loss

Assume that partners with a potential capital deficit will be unable to pay anything to the partnership
(assumed to be personally insolvent).
 Hypothetical or assumed deficit balance is allocated to the partners who have credit balances
using profit and loss ratio.
 This portion is the maximum potential loss on noncash assets.
Cash Priority Program (Cash Distribution Program)
 Ranking of the partners’ vulnerability level.

Total interest (equity) account = balance of the capital account +/- loans from (to) the partners

Loss Absorption Ability = Total interest account/Profit and Loss assigned ratio
Vulnerability Rankings
 The partner with the lowest absorption ability is the most vulnerable to partnership losses.
Reference: Sir Brad’s Lecture + Pinnacle Handout
Compiled by: CPM
CORPORATE LIQUIDATION
 A financial condition in which the sum of all debts is greater than all of its assets at a fair valuation.
 A bankruptcy filing can be voluntary or involuntary.
 A petition to liquidate a company can be made to the applicable court by creditors who have not been paid by the
company; if granted, the business will involuntarily enter bankruptcy.
 Liquidation Process
1. Sell all NCA @ NRV (NCA  Cash)
2. Pay the Creditors
3. Distribute remaining cash to partners
Reports (FS)
1. Statement of Affairs (B/S)
 financial condition prepared for a corporation entering into the stage of liquidation or bankruptcy.

ASSETS (@ NRV)
i. Assets pledged to Fully Secured Creditors  Assets > Liabilities
ii. Assets pledged to Partially Secured Creditors  Assets < Liabilities
iii. Free Assets
 Not pledged to any liabilities
 Includes the excess of assets pledged to fully secured liabilities

LIABILITIES  at settlement amounts; usually = to BV
i. Fully Secured Liabilities
 NRV of Assets > Liabilities
ii. Partially Secured Liabilities
 NRV of Assets < Liabilities
iii. Unsecured Creditors w/ Priority
 Salaries & Wages
 Taxes
 Legal fees
 Employee benefits
iv. Unsecured Creditors w/o Priority
 No assets securing these liabilities
 Includes unsecured portion of partially secured creditors

EQUITY  Deficit = Liabilities > Assets
Formula:
NRV of Cash & NCA
FSC
PSC
Liabilities w/ Priority
xx
(xx)
(xx)
(xx)
PSC (unsecured portion)
Liabilities w/o Priority
Total Unsecured Liabilities
Net Free Assets
xx
Recovery Percentage =
xx
(xx)
xx
𝑁𝑒𝑡 𝐹𝑟𝑒𝑒 𝐴𝑠𝑠𝑒𝑡𝑠
𝑇𝑜𝑡𝑎𝑙 𝑈𝑛𝑠𝑒𝑐𝑢𝑟𝑒𝑑 𝐶𝑟𝑒𝑑𝑖𝑡𝑜𝑟𝑠
Estimated Deficiency = Net Free Assets – Total Unsecured Liabilities
2. Statement of Realization & Liquidation (I/S)
 An activity statement which shows the progress of the liquidation.
 Shows the actual transactions that transpired during the period covered
Assets
Liabilities
To be realized  Total NCA to be sold as of Jan. 1
Acquired  Additional assets during liquidation (ex. interest receivable)
Realized  Actual Net Proceeds
Not Realized  Unsold NCA as of Jan. 31
To be liquidated  Total liabilities to be settled as of Jan. 1
Assumed  Additional liabilities during liquidation (ex. interest payable)
Liquidated  Actual payment or settlement
Not Liquidated  Unpaid liabilities as of Jan. 31
Supplementary Items
Income & Expense arose during liquidation
Income  Dividend Income
Expense  Admin Expense
Reference: Sir Brad’s Lecture + Pinnacle Handout
Compiled by: CPM
Statement of Realization & Liquidation
Assets to be realized
Assets acquired
Liabilities liquidated
Liabilities not liquidated
Supplementary Charges
Gain
Assets realized
Assets not realized
Liabilities to be liquidated
Liabilities assumed
Supplementary Credits
Loss
STATEMENT OF AFFAIRS
DATE
Book
Value
Pxx
xx
xx
Pxx
Book
Value
Pxx
xx
xx
xx
xx
Pxx
Assets
Assets Pledged to Fully Secured Creditors:
Less: Liabilities to Fully Secured Creditors
Assets Pledged to Partially Secured Creditors:
Free Assets:
Total Free Assets
Less: Unsecured Liabilities with Priority
Net Free Assets
Estimated deficiency to Unsecured Creditors
Total
Liabilities and Equity
Fully Secured Creditors
Partial Secured Creditors
Less: Value of Pledged Assets
Unsecured Creditors with Priority
Unsecured Creditors without Priority:
Stockholder’s Equity
Total
Reference: Sir Brad’s Lecture + Pinnacle Handout
Estimated
Realizable Value
P xx
xx
P xx
P xx
Creditor’s Claim
P xx
P xx
xx
P xx
Free Assets
P xx
xx
P xx
xx
P xx
xx
P xx
Unsecured
Liabilities
P xx
xx
P xx
P xx
Compiled by: CPM
HOME OFFICE AND BRANCH ACCOUNTING
 Branches are established to decentralize operations or to expand into new markets.
 Branches are with regulated autonomy to operate as an independent entity.
 The branch has its own complete set of accounting records, all its transactions including those with the home
office are recorded in its books.
 It also presents its own set of financial statements called separate financial statements.
 A branch and its home office represent two accounting systems but just one accounting and reporting entity.
Ex. Macao Milk Tea
100
20
HO
FS
1/1
120
Cash, Inventory,
Equipment
+
Br 1 Br 2
FS + FS + FS
Investment in Branch
Cash
Ship to Branch 100
AOI
200
Equipment
At the end of the year, prepare Combined FS
Br 3
+
Cash
Ship from HO 120
Equipment
Home Office
Working Paper Eliminating Entries (WPEE)
= Combined FS
 Eliminates reciprocal Accounts
Home Office
IIB
AOI
Ship to Br
Ship from HO
 does not reflect in the separate FS of HO & Br
Cash
Sales
Note:
COGS
 The Branch do not know how much was the
mark-up applied by the Home Office
 Allowance for Overvaluation of Inventory (AOI)
 Mark-up
 Reciprocal account
Inventory
OPEX
Cash
12/31
Investment in Branch
Income from Br
Sales
COGS
OPEX
I/S
Agency
I/S
HO
 Investment in Branch / Branch Current  asset account
 Home Office Account  equity account
 If silent
o GP / Mark-up  based on sales
o Exc: HOBA  based on costs





Acts on behalf of the HO
Not a separate entity
No reciprocal accounts
No need to prepare combined FS
Normal NI computation
Sir Brad’s Magic Table: (should only contain transactions between the HO and Branch)
BI
Ship
GAS
EI
COGS
Cost
xx
xx
xx
(xx)
xx
Billed
xx
xx
xx
(xx)
xx
AOI
xx
xx
xx
(xx)
xx
Outside:
BI
Purchases
EI
COGS
xx
xx
(xx)
xx
Formulas:
NI by Branch
NI by HO
Sales
Less:
COGS (from HO & Outside)
Expenses
Net Income
True NI
NI of Branch
+ Realized Income (AOI)
True NI of Branch
Sales
COGS
Expenses
Net Income
+
Beginning Inventory
Purchases
Ship to Branch
GAS
Ending Inventory
COGS
Combined NI
NI - HO
NI – Br (True NI)
Combined NI
Reference: Sir Brad’s Lecture + Pinnacle Handout
Compiled by: CPM
ILLUSTRATIVE JOURNAL ENTRIES:
 Cost = Billed price ÷ 100% + % markup on cost = Markup on cost / % markup on cost.
 The amount of allowance considered realized will be the allowance carried by the cost of goods sold.
 When a company is composed of a home office and more than one branch, the home office records include a
separate investment in branch account and a separate allowance for overvaluation account for each branch.
Separate worksheet adjustments are made for each branch.
 When assets are transferred from one branch to another branch, the home office account on each branch’s records
is used to record the transfers. The transferring branch reverses the entry to record the transfer from the home
office, and the receiving branch enters a transfer as if it comes from the home office.
Reference: Sir Brad’s Lecture + Pinnacle Handout
Compiled by: CPM
COST ACCOUNTING
 Involves the measuring, recording, and reporting of product costs.
Total
Goal: to determine the product cost
Unit
Unit Cost  basis of SP = Unit Cost + Markup
↑ SP, ↓ Demand
↓ SP, not profitable
Selling Price (SP)  influences the demand of the product
Costing
Cost Accounting Systems
1. Job Order
2.
Small volume
Unique / distinct products
Heterogenous
Large volume
Similar / identical products
Homogenous
Process Costing
Inventory
Ex. buildings, aircrafts, personalized jewelries
RM/DM
WIP
FG
RM/DM
DL
OH
Mass Production (Ex. markers, paper, calculator, automobile)
UNIT COST =
𝑊𝐼𝑃
# 𝑜𝑓 𝐺𝑜𝑜𝑑 𝑈𝑛𝑖𝑡𝑠
JOB ORDER COSTING
1. RM Inventory
Accounts Payable
FORMULA: COGM / COGS
Upon purchase
DM Used
+ DL
+ OH
TMC
+ WIP, beg
- WIP, end
COGM
+ FG, beg
- FG, end
COGS
RM
2. Work-in-Process
RM Inventory
usage
3. Salaries Expense
Salaries Payable
DL (AR x AH)
DL
4. Work-in-Process
Salaries Expense
5. Depreciation Expense
Utilities Expense
Rent Expense
Accumulated Depreciation
Utilities Payable
Rent Payable
6. OH Control
Depreciation Expense
Utilities Expense
Rent Expense
7. Work-in-Process
OH Applied
OH-A < OH-C  Underapplied (+)
Actual OH
OH
OH-A > OH-C  Overapplied (-)
Actual OH
Standard Cost
(SR x SH)
Normal Costing
8. Dec. 31
OH Applied
OH Control
Difference
Immaterial / Insignificant  COGS
Material / Significant
Costing
WIP
FG
COGS
Actual
Normal (if silent)
Reference: Sir Brad’s Lecture + Pinnacle Handout
Compiled by: CPM
Spoiled Units


Cannot be sold at original price
No longer good units
Normal
 w/n expectations
Spoilage
Unit Cost
Specific
 due to exacting specification from customer
 charged to customer
 WIP
Common
 internal failure
 charged to all units
 OH-C
No effect
 Loss
No effect
Abnormal
 outside expectations
↑
SPOILED GOODS
NRV of spoiled
Cost of spoiled
Loss
xx
(xx)
xx
Total units
Spoiled units
Good units
xx
(xx)
xx
CASE 1: If the rework costs are charged to the entity/to all production/internal failure.
Total Cost of Goods*
xx
Cost of Spoiled
(xx)
Cost transferred to FG xx
Divide: Good units
xx
Cost per unit
xx
 * include allowance to cost
Note: Loss will be charged to manufacturing overhead
(MOH) and will be an actual overhead (OH).
CASE 2: Charged to customer/ “exacting specification”/specific job
Total Cost of Goods
xx
NRV of Spoiled
(xx)
Cost transferred to FG xx
Divide: Good units
xx
Cost per unit
xx
Note: Loss will be included in the costs
transferred to FG.
Reference: Sir Brad’s Lecture + Pinnacle Handout
Compiled by: CPM
Defective Units



Can be sold at original SP
Still good units
Incur rework cost
Unit Cost
Specific
Common
Normal
Defective / Rework
Abnormal
 WIP
 OH-C
 Loss
↑


Components of rework cost:
1. Direct material
2. Direct labor
3. Manufacturing overhead
CASE 1: If the rework costs are charged to the entity/to all production/internal failure.
Total cost of goods
Divide: Good units*
Cost per unit
xx
xx
xx
 *Good units = Total units
Note: Rework costs will be charged to manufacturing
overhead (MOH) and will be an actual overhead (OH).
CASE 2: Charged to customer/ “exacting specification”/specific job
Total cost of goods
Rework costs
Cost transferred to FG
Divide: Good units
Cost per unit
xx
xx
xx
xx
xx
Note: Rework costs will be included in the costs
transferred to FG.
Reference: Sir Brad’s Lecture + Pinnacle Handout
Compiled by: CPM
PROCESS COSTING



High volume, similar, identical, homogenous products
Assembly / Production line
Ex. Pfizer, Unilab, Toyota, Lenovo, SMC
Objective: to determine the Unit Cost  SP  Demand
Cost of Production Report (CPR)
1.
2.
3.
4.
5.
JEs:
30%
0%
FIFO
100%
0%
Units to Accounts For (UTAF)
Units
Units Accounted For (UAF)
Equivalent Units of Production (EUP)
Cost per EUP  Unit Cost
Cost Accounted For
UTAF
Total Units
@ the start
1. Work-in-Process
Various Accounts
UAF
2. Finished Goods
Work-in-Process
3. Cost of Goods Sold
Finished Goods
100%
WIP, beg
Methods
30%
0%
WAVE
100%
WIP, beg
Normal  increases UC
Spoilage
Discrete
 w/ inspection point
Continuous
 no inspection point
 method of neglect
 as if the spoilage did not occur
Normal Spoilage
Abnormal  Loss
Formulas:
1. UTAF
WIP, beg
Started
UTAF
N. Spoilage  0%
Ab. Spoilage  100%  Loss
xx
xx
xx
2. UAF
FIFO:
Materials
Transferred-Out
WIP, beg
Started
Normal Spoilage
Abnormal Spoilage
WIP, end
UAF
WAVE:
TO
Normal Spoilage
Abnormal Spoilage
WIP, end
UAF
xx
xx
xx
xx
xx
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐶𝑜𝑠𝑡
WAVE =
Conversion Cost
EUP
xx
xx
0%
100%
Ø
xx
(1 – WIP, beg %)
100%
xx
xx
xx
xx
xx
xx
100%
100%
100%
xx
xx
xx
xx
100%
100%
(WIP, end %)
xx
xx
xx
xx
Materials
100%
100%
100%
100%
EUP
xx
xx
xx
xx
xx
Conversion Cost
100%
100%
100%
(WIP, end %)
EUP
xx
xx
xx
xx
xx
Shortcut for EUP by Sir RMV
4. Cost per EUP
FIFO =
EUP
𝐸𝑈𝑃
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐶𝑜𝑠𝑡+𝑊𝐼𝑃,𝑏𝑒𝑔 𝑐𝑜𝑠𝑡
𝐸𝑈𝑃
5. Cost Accounted For
EUP x Cost Per EUP (Materials)
+ EUP x Cost Per EUP (Conversion)
Cost Accounted For
Reference: Sir Brad’s Lecture + Pinnacle Handout
100%
% Complete
Materials Conversion
Completed / Transferred-out
xx
xx
EI EUP (EI units x % complete)
xx
xx
N. Spoilage
xx
xx
Ab. Spoilage
xx
xx
Weighted Average EUP
xx
xx
BI EUP LY (BI units x % Complete)
(xx)
(xx)
FIFO EUP
xx
xx
Compiled by: CPM
Formula to compute completed/transferred-out units:
Beginning inventory in units
Started/transferred-in units
Ending inventory in units
Lost units (normal + abnormal)
Completed/transferred-out units
xxx
xxx
(xxx)
(xxx)
xxx
Formulas to compute started and completed units:
Started/transferred-in units
Ending inventory in units
Lost units
Started & completed units
xxx
(xxx)
(xxx)
xxx
Completed/transferred-out units
Beginning inventory in units
Started & completed units
xxx
(xxx)
xxx
Lost units: EUP SCHEDULE

Discrete: Normal/Abnormal
 Direct materials
 If the placement took place first, then 100%
 If the inspection took place first, then 0%


Conversion costs
 Lost units x % of inspection
Continuous Loss – method of neglect
 Normal loss = 0% as to materials and conversion costs

Abnormal loss = 100% as to materials and conversion costs.
Reference: Sir Brad’s Lecture + Pinnacle Handout
Compiled by: CPM
JOINT AND BY-PRODUCT COSTING

two or more different products are manufactured in the same production process
Example:
Company X
Chairs, Tables, Cabinets
Common to
all products
A (Chairs)
B (Tables)
C (Cabinets)
Joint Cost
0%
DM, DL, OH (WIP)
30%
X (By-Product)


Split-off point
Main Products
Saw dust
Relatively
small value
Separable Cost
100%
(Further
Processing Cost)
(FPC)
Issue #1: How to allocate Joint Cost to the main products?
1. Physical Measure
(# of units, kg, meters)
2. Sales Value at Split-off (# of units x SP @ S.O.)
(MV)
3. NRV @ Split-off
(# of units x SP – CTS) @ S.O
4. Approximated / Estimated / Hypothetical NRV (# of units x Final SP – CTS – FPC) @ S.O
Issue #2: How to report by-products?
 always measured at NRV
Significant / Material
By-Product
 recognized @ point of production
(inventory)
Insignificant / Immaterial recognized @ point of sale
Alternative Presentation for Other Income
S.O / Production
Sale
By-Product Invty
WIP (↓ JC)
Cash
By-P Invty
no entry
Cash
Other Inc.
Addition to sales revenue of the main product
Reduction from cost of sales
Reference: Sir Brad’s Lecture + Pinnacle Handout
Compiled by: CPM
JUST-IN-TIME & BACKFLUSH COSTING
 inventory management system; produce as needed
Traditional: manufacture  warehouse  order  deliver
JIT
 Benefits: reduces inventory storage cost & obsolescence
A JIT system requires an attitude that places emphasis on the following:






Cooperation with a value chain perspective
Respect for people at all levels
Quality at the source
Simplification or just enough resources
Continuous improvement
A long-term perspective
A JIT system also incorporates the following practices:







Just-in-time purchasing
Focused factories
Cellular manufacturing
Just-in-time production
Just-in-time distribution
Simplified accounting
Process oriented performance measurements
 simplified accounting
 trigger points (points wherein we make JEs)
Backflush Costing
Traditional JE (4 TP)
Backflush (3 Trigger Points)
1. RM
1. MIP (RIP)
AP
AP
Purchase
2. WIP
Var. Accts
3. FG
WIP
4. COGS
FG
Production
Completion
Purchase
3. FG
MIP
CC-Applied
4. COGS
FG
Sale
Reference: Sir Brad’s Lecture + Pinnacle Handout
Sale
Completion
V1
2 Trigger Points
1 Trigger Point
1. MIP
4. COGS
AP
CC-Applied
AP
Purchase
4. COGS
MIP
CC-Applied
Sale
Sale
V2 3. FG
AP
CC-Applied
4. COGS
FG
Sale
Purchase
Dec. 31
CC-Applied
CC-Control
Diff  COGS
Compiled by: CPM
ACTIVITY-BASED COSTING


allocates overhead to multiple activity cost pools and assigns the activity cost pools to products and services by
means of cost drivers.
A cost driver is any factor or activity that has a direct cause-effect relationship with the resources consumed.
Recall: Manufacturing Cost
DM
DL
OH
Factory
✔
5hrs
rent, dep’n, taxes, insurance
₱100,000
A
B
300 units
𝑇𝑜𝑡𝑎𝑙 𝑂𝐻
OH Rate = 𝐶𝑜𝑠𝑡 𝐷𝑟𝑖𝑣𝑒𝑟
(Units produced, MH, LH)
Example:
Units Produced
Machine Hours
DM
DL
OH
A
100
40
₱2,000
₱5,000
B
200
60
₱4,000
₱10,000
Total
300
100
DM
DL
OH
₱60,000
÷ 100
600/hr
UC
A
2,000
5,000
24,000
31,000
÷ 100
310
B
4,000
10,000
36,000
50,000
÷200
250
Traditional Costing
OH  Product
1 OH Rate
Activity-Based Costing  more accurate cost allocation method
Products  Activities  Resources (MH, LH)
Steps:
1.
2.
3.
4.
Identify Activities
Identify Cost Driver per activity
Compute OH rate per activity (multiple OH rate)
Allocate OH to proceeds
Activity-Based Management (ABM)
Process of identifying value-adding activities  necessary to produce a product; maximize
Nonvalue-adding activities  do not add value to products; minimize
↓ Costs,
↑ Profitability
Activity Levels:
1.
2.
3.
4.
5.
Unit Level
 activities performed for each unit of production.
Batch Level
 activities performed for each batch of products rather than each unit.
Product Level  activities performed in support of an entire product line.
Factory/Facility Level  activities required to support an entire production process.
Organizational Level
Quality Cost: High-quality products; ↓ defects / spoilages; ↑ profitability
1. Prevention Cost - cost to avoid defects during production
- Ex. Training workers, proper maintenance
2. Appraisal Cost - identification of defects before shipment
- Ex. Inspection cost / point
3. Internal Failure Cost
- actual removal of defects before shipment
- Rework Cost
4. External Failure Cost
- already been shipped with defects
- Ex. warranty, replacement
Reference: Sir Brad’s Lecture + Pinnacle Handout
Compiled by: CPM
FOREIGN EXCHANGE (FOREX)
 IAS 21 Foreign Currency
Transactions  import/export
Operations  branch/sub/associate
Example:
Sales:
JFC
3000+ shares (PH)
200+ shares (Abroad)
HK, US, SG, UAE, JPN
Purchases:
PH: Cash
Sales
HK: Cash
Sales
PHP 100k
HKD 50k
PH: Inventory
AP
SG: Inventory
AP
PHP 200k
SGD 150k
IAS 21:
1. What exchange rates to use?
2. How to report G/L from foreign exchange?
Choice?
Types of
Currencies
1. Functional
- currency of the primary economic environment in which the
entity operates.
- dominant currency (PHP)
✖
1 currency
2. Foreign
- currency other than functional currency
(HKD, USD, SDG, JPY)
✖
> 1 currency
3. Presentation
- currency in which financial statements are presented
- option of the entity
✔
> 1 currency
Jan. 1
Dec. 31
Subsequent
Initial
 spot rate
 rate that day
Foreign  Functional (Remeasurement)
 temporal method; ∆s in Forex (G/L)  P/L
Functional  Presentation (Translation)
 closing/current rate method; ∆s in Forex G/L  OCI
Monetary  closing rate (Dec. 31 rate)
B/S Item
Historical  date of transaction (Inventory, PPE, IA)
Non-monetary
Temporal
Method
FV  rate at the date when FV is determined (IP @ FV method)
1. Date of Transaction
 If Inventory
I/S Item
1. Quarterly
2. Date of Purchase
2. Average Rate (practicable)
Yes  Monetary (Cash, AR, AP, Debt Securities)
Is there a right or obligation
to deliver fixed or determinate
amount of currency?
Closing/Current
Rate Method
B/S
No  Nonmonetary – variable (Inventory, PPE, IA, Equity Securities)
Assets/Liabilities  Closing Rate (Dec. 31)
CS, APIC  Date of Transaction
RE
NI  average rate
Dividends  date of transactions
Bid Rate = Buying Rate  Seller
Offer Rate = Selling Rate  Buyer
I/S  average rate
Reference: Sir Brad’s Lecture + Pinnacle Handout
Compiled by: CPM
The primary economic environment is normally the one in which the entity primarily generates and expends the cash.
The following factors can be considered:



What currency does mainly influence sales prices for goods and services?
In what currency are the labor, material and other costs denominated and settled?
In what currency are funds from financing activities generated (loans, issued equity instruments)?
An entity can decide to present its financial statements in a currency different from its functional currency
– for example, when preparing consolidation reporting package for its parent in a foreign country.
How to translate financial statements into a Presentation Currency?

When an entity presents its financial in the presentation currency different from its functional currency, then the
rules depend on whether the entity operates in a non-hyperinflationary economy or not.

Non-hyperinflationary economy
o When an entity’s functional currency is NOT the currency of a hyperinflationary economy, then an entity
should translate:
 Assets / Liabilities  closing rate; the same applies to goodwill & FV adjustments
 Income, Expenses, OCI  date of transactions
 PAS 21 permits using some period average rates for the practical reasons, but if the
exchange rates fluctuate a lot during the reporting period, then the use of averages is not
appropriate.
 All resulting exchange differences shall be recognized in other comprehensive income as a
separate component of equity.
 When an entity disposes the foreign operation, then the cumulative amount of exchange
differences relating to that foreign operation shall be reclassified from equity to profit or loss when
the gain or loss on disposal is recognized.
Reference: Sir Brad’s Lecture + Pinnacle Handout
Compiled by: CPM
Stock price  PLDT shares @ ₱1k/ share
 Price Risk
DERIVATIVES
 A financial instrument that derives its value from an underlying  Ex.
 FVPL (Derivative Asset / Liabilities)
 Used for hedging (risk management)
Exchange Rate  import/export
 Forex Risk
1. Hedging Instrument / Derivatives
2. Hedged Items
 Hedge Accounting (IFRS 9)
Jan. 1
Interest Rate  BDO @ 10% Fixed Rate
 Interest Rate Risk
Commodity Price  crude oil, fuel
 Price Risks
₱20/liter (fixed)
Agreement w/ a
counterparty (banks)
Buy @ ₱20
Basic Types of Derivatives / Hedge Instrument
1. Forwards  over the counter (private)
2. Futures  traded in futures exchange (public)
Call  option to buy
Put  option to sell
3. Options  right
Obligation to buy/sell at a fixed price in the future
Pay option premium
Call  Intrinsic Value = Spot Price (S) – Exercise/Fixed/Strike Price (X)
Put  IV = X - S
Fair Value
S<X
S=X
S>X
=
Notional amount /
Principal
✔

✖
in the money
at the money
out of the money
Intrinsic Value
-
Depends on the spot price
(effective portion)
4. Swaps
 Interest rate swap (IRS)
 Plain vanilla swap
 Series of forward contracts
To hedge
interest rate
risk of loan
S>X
S=X
S<X
in the money
at the money
out of the money
✔

✖
Table:
Time Value
IV
TV
FV
Balancing figure
Always decreasing
(ineffective portion)
1/1
Ø
xx
xx
6/30
xx
xx
xx
12/31
xx
Ø
xx
Fixed to floating (variable)
 you expect that the rate
will decrease
Floating to fixed
 you expect that the rate
will increase
Hedged Items
1. Firm Commitment
(Purchase Commitment)
Jan. 1
₱100/unit
Dec. 31
CF Hedge (Variable)
✔
₱50
Jan. 1
2. Highly Probable
Future Transaction
FV Hedge (Fixed CF)
(no commitment)
₱100
Dec. 31
₱150
3. Fixed Interest Rate
10% Fixed Rate
4. Floating Interest Rate
Market in PDEX + 3%
Reference: Sir Brad’s Lecture + Pinnacle Handout
✔
✔
✔
Compiled by: CPM
Hedge Accounting
Effective (IV)  OCI
Ineffective (TV)  P/L
FV Hedge
CF Hedge
1. Hedged Instrument
MTM  P&L (Gain)
MTM  OCI
2. Hedged Item
MTM  P&L (Loss)
Normal Accounting
 Inventory  IAS 2 LCNRV
 PPE  IAS 16
3. Hedge of a net investment in a foreign operation (same as CF Hedge)
Loan
JFC
Int Exp
(PH)
 parent (HKD)
JFC
(HK)
 subsidiary
Objective: To minimize the fluctuations in P/L (I/S)
Instrument
Item
Financial risks are of four (4) types:
 Price risk – uncertainty in future price of an asset.
 Credit risk – uncertainty over whether a counterparty or the party on the other side of the contract will honor the
terms of the contract.
 Interest rate risk – uncertainty about future interest rates and their impact on cash flows and the fair value of the
financial instruments.
 Foreign exchange risk – uncertainty about future Philippine peso cash flows stemming from assets and liabilities
denominated in foreign currency.
Characteristics of a Derivative

Its value changes in response to the change in an “underlying” variable.
 An underlying is a specified interest rate, commodity price, foreign exchange rate, index of prices or rates
and other variables.
 An underlying may be a price or rate of an asset or a liability but not the asset or liability itself.
 A derivative has a speculative amount of currency, number of shares, or number of units or volume.

It requires either no initial net investment or a little initial net investment that would be required for other types of
contracts that have similar response to changes in market conditions.

It is readily settled at a future date by a net cash payment.
Reference: Sir Brad’s Lecture + Pinnacle Handout
Compiled by: CPM
BUSINESS COMBINATION (IFRS 3)
Accomplished through:
Set of FS
Merger
A (Acquirer) + B (Acquiree) = A or B
✔
✖
 surviving entity
Asset Acquisition
 acquires assets
 assume liabilities
1
FS of A
Consolidation
A (Parent) + B (Subsidiary) = C (new entity)
Stock Acquisition
 shares
 >50% (control)
3
FS of A, B, C
Types
A (Parent)
B (Sub)
Separate
+
FS
Separate
FS
+ WPEEs
=
Conso
FS
Acquisition Method:
1. Identify the acquirer
 The entity that obtains control over the acquiree
2. Determine the acquisition date
 The date on which the acquirer obtains control
 Measure FV of assets & liabilities (acquiree)
3. Recognize and measure Goodwill or Gain on Bargain Purchase (GBP)
Formula:
1. Consideration Transferred (CT) (a)
+ Noncontrolling Interest (NCI) (b)
+ Previously Held Interest (PHI) (c)
Total
2. FV of Net Identifiable Assets (FVNIA) (d)
1>2
 GW (B/S)
1<2
 GBP (P/L)
If
a. Consideration Transferred (CT)
Cash
Noncash Assets
Equity (shares)
Debt (Bonds)
Contingent Consideration
b. Parent
80%
Subsidiary
EXCLUDES acquisition related cost
 Finder’s Fee
 Professional fee / due diligence fee
 advisory / legal fees
 General Admin Costs
 Cost of registering / issuing
 shares  APIC
 bonds  ↑ discount, ↓ premium
Subsidiary
80% Parent (Controlling Interest)
20% Noncontrolling Interest
NCI measured at
FV (must not be lower than the proportionate share)
or
Proportionate share in acquiree’s net asset
c. BC achieved in stages
Year 1 P
Year 2 P
15%
40%
S
S
55%
d. FVNIA
 Asset – Liabilities @ FV
 Not Book Value
 Excludes GW of acquiree
Reference: Sir Brad’s Lecture + Pinnacle Handout
Compiled by: CPM
Expense
Consolidation
Date of Acquisition (Jan. 1)
Subsequent to date of acquisition (Dec. 31)
Intercompany transactions
Working Paper Eliminating Entries (WPPEs)
1. Common Stock
xx
APIC
xx
Retained Earnings
xx
Investment in Subsidiary
Noncontrolling Interest
2. Inventory
xx
Equipment
xx
Notes Payable
Investment in Subsidiary
Noncontrolling Interest
Old SH
xx
xx
To eliminate the pre-acquisition
equity of subsidiary
New
FV > BV (Subsidiary)
3. Goodwill
xx
Investment in Subsidiary
Noncontrolling Interest
To recognize excess of FV over
BV (FVNIA)
xx
xx
xx
xx
xx
To recognize Goodwill or
Gain on Bargain Purchase
Or
Investment in Subsidiary
xx
Gain on Bargain Purchase
4. Dividend Income
xx
NCI
xx
Retained Earnings
5. Gain
xx
To eliminate intercompany dividends
xx
xx
Land
xx
Or
Land
xx
Loss
xx
6. Equipment
Loss
Gain
Equipment
or
Depreciation Expense
Accumulated Depreciation
7. Ending Inventory:
Sales
COGS
Inventory
 EI x GPR
or
Accumulated Depreciation
Depreciation Expense
Beginning Inventory:
RE, beg
COGS
 BI x GPR
Measurement Period



Within 12 months from the acquisition date (1/1/21 – 12/31/21)
Provisional amounts
Changes in FV is allowed; can affect computation of GW or GBP
Investment in Subsidiary
NCI or RE
Beg. Bal
Dividends Net Income
End Bal
At cost
IFRS 9 (FVPL, FVOCI)
Equity Method
Reference: Sir Brad’s Lecture + Pinnacle Handout
Compiled by: CPM
Intercompany Transactions
 must be eliminated
Parent
Downstream (P  S)
Types
Upstream (S  P)
Parent 100%
NCI
0%
D
Parent 80%
NCI
20%
U
Subsidiary
Parent 80%
NCI
20%
1. Sale of Non-Depreciable Assets (ex. Land)
Parent
Subsidiary
Cash
100
Land
Gain
Land
80
20
WPPE
100
Cash
Gain
100
Land
2. Sale of Depreciable Assets (ex. Equipment)
Parent
Subsidiary
Cash
80
Equipment
80
Loss
20
Cash
80
Equipment
100
Depreciation Expense
Accumulated Depreciation
3. Sale of Inventory
Parent
Cash
Sales
Subsidiary
Inventory
Cash
WPPE
Equipment
Loss
Depreciation
Acc Depreciation
WPPE
Sales
COGS
Inventory
BI
RE, beg
COGS
COGS
Inventory
Control as the basis for consolidation (PFRS 10)
o
The basic rule is:
 If an investor controls its investee, then investor must consolidate.
 If an investor does NOT control its investee, then investor does NOT consolidate.
o
What is control?
 An investor controls an investee when the investor:
 Is exposed to, or has right to variable returns from its involvement with the investee.
 Has the ability to affect those returns.
 Through its power over the investee.
SMEs:
1.
2.
3.
4.
GW is amortized not exceeding 10 years
NCI is always measured at proportionate share
Acquisition related cost are included in the cost
FV of Consideration given
vs
Acquiree’s Interest in Net Asset
+ Acquisition related cost
= GW or Gain on Bargain Purchase
(Purchase Method)
Reference: Sir Brad’s Lecture + Pinnacle Handout
Compiled by: CPM
Formulas Mostly Used in PFRS 3 & 10
Reference: Sir Brad’s Lecture + Pinnacle Handout
Compiled by: CPM
JOINT ARRANGEMENT


PFRS 11
contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant
activities require the unanimous consent of the parties sharing control.
Objective: to establish principles for financial reporting by entities that have an interest in arrangements that are
controlled jointly.
To meet this objective, PFRS 11:



Defines joint control;
Requires determining the type of joint arrangement; and
Account for the interest in a joint arrangement based on the type.
Example : Ayala Land Inc. (ALI)
 forming partnerships w/ landowners
ALI  expertise
Joint Arrangement
Land owners (ABC)  Land
Structure #1 (JV)
Dividend
ALI
ABC
50%
share
Net Income
Structure #2 (JO)
ALI
50%
share
XYZ Corp.
 Separate entity / vehicle
 Separate purpose vehicle
Condo
ABC
A&L
cash,
materials,
labor
A&L
Land,
mortgage
Condo
JEs:
1.
Cash – JO 10M
Equip – JO 20M
Cash
Equip
Land-JO
30M
Land
30M
10M
20M
Elements of Joint Control:
1. Contractual arrangement  written contract
2. Sharing of control  no single party can decide
3. Unanimous consent  all parties must agree
before making a decision
2.
3.
4.
Joint Venture (JV)
Types
Joint Operation (JO)
Structure
LP
5M
LP – JO
5M
MP
Cash
2M
Rev – JO
2M
Cash
2M
Rev – JO
2M
Exp – JO
Cash
1M
Exp – JO
Cash
1M
1M
7M
MP-JO
Right to net asset
Equity Method
Right to assets & liabilities
Proportionate share in assets, liabilities, revenues, expense
JV
JO
Separate Vehicle
✔
✔
(if silent)
✔
✖
w/o Separate Vehicle
✖
✔
Reference: Sir Brad’s Lecture + Pinnacle Handout
Compiled by: CPM
7M
1M
Accounting for SMEs

Jointly controlled operations
 The venturer should recognize assets that it controls and liabilities it incurs as well as its share of income
earned and expenses that are incurred.

Jointly controlled assets
 The venture should recognize its share of the assets and liabilities it incurs as well as income it earns and
expenses that are incurred.

Jointly controlled entities
There is an option for the venture to use:
 Fair value model
 Cost model
 Equity method
Initial Measurement
Transaction Cost
Subsequent Measurement
Gain or Loss on changes in
fair value
Dividend Income from
Investee
Share in Net Income (Loss),
OCI of Investee
Impairment Loss
FVPL
Fair Value
Expensed
Fair Value
Cost Method
Historical Cost
Capitalizable
Cost – Impairment
Equity Method
Historical Cost or FVNIA, higher
Capitalizable
Book Value – Impairment
Yes, in P/L
None
None
Yes
Yes
None (Deduction from investment
account)
None
None
Yes
None
Yes, if BV > RA
Yes, if BV > RA
Reference: Sir Brad’s Lecture + Pinnacle Handout
Compiled by: CPM
NON-PROFIT ORGANIZATION (NPOs)






Do not include governmental units
They operate for purposes other than profits
Ex. PH Red Cross, UNICEF, GK
Funds  contributions or donations from the public
No shareholders  no dividends
FASB 116 & 117
+
Applicable IFRS
 US GAAP
 PPE (IAS 16)
Financial Statements
1. SFP (B/S)
Assets  same accounting treatment
Liabilities  same accounting treatment
Donations / Contributions
Unrestricted Net Assets (URNA)
Net Assets
Temporarily Restricted Net Assets (TRNA)
No restriction  available
for immediate use
Time  1 year after
Purpose  Medical Mission
Permanently Restricted Net Assets (PRNA)  Cannot spend the principal
2. Statement of Activities
 I/S & Changes in Equity
URNA
40,000
(30,000)
20,000
30,000
10,000
40,000
Revenues
Expenses
Reclassification
∆’s in Net Assets
Net Assets, beg
Net Assets, end
JEs:
1. Cash
URCR
40,000
2. Cash
TRCR
30,000
TRCR
TRNA
30,000
PRNA
10,000
TOTAL
80,000
(30,000)
(20,000)
10,000
10,000
20,000
10,000
10,000
20,000
50,000
30,000
80,000
3. Cash
40,000
URCR
URNA
TRNA
30,000
PRCR
PRCR
PRNA
4. Expense
Cash
URNA
Expense
10,000
10,000
30,000
30,000
5. TRNA
URNA
Unrestricted Contributions Revenue
(URCR)
Temporarily Restricted Contributions
Revenue (TRCR)
Permanently Restricted Contributions
Revenue (PRCR)
Operating  unrestricted donations
3. Statement of Cashflows
Investing  purchase & sale of PPE
Financing  restricted donations (whether temporary / permanent)
4. Notes to FS
FASB 116 & 117 Provisions
1. Healthcare organizations – Hospitals & Clinics
Gross patients service revenues
Less: Contractual Adjustments (Philhealth)
Less: Employee Discounts
Net patients service revenue
Charity Care  disclosed in FS
Reference: Sir Brad’s Lecture + Pinnacle Handout
20,000
Compiled by: CPM
2. Private non-profit colleges & universities
Gross Tuition Fees
Less: Scholarship Grants
Less: Refunds & cancellations / withdrawals
Net Revenue from tuition fees
3. Voluntary Health & Welfare Organizations
(ex. UNICEF)
 prepare Statement of Functional Expenses
Program  medical missions; related to missions
Support  before program (fund raising)
 admin expenses; everyday expenses
Endowment Funds
1. Regular
 spend only interest & dividends
2. Term
 can use a portion each period
3. Quasi
 BOD / BOT
Unconditional
Pledge (Promise)
 Permanently Restricted
 Temporarily Restricted
 Unrestricted
w/o restriction  UR
w/ restriction  TR
Conditional  Liability
Reference: Sir Brad’s Lecture + Pinnacle Handout
Compiled by: CPM
GOVERNMENT ACCOUNTING
Objective: to provide information that is useful in making economic decisions
Sources & uses of government funds (ex. National Budget 2022 5 trillion)
Emphasis
Accountability of Government Agencies (GA)
Uses (Outflows)  Programs / Projects
Sources (Inflows)
1.
2.
3.
4.
Taxes
Tariffs & Duties
Fees & Licenses
Borrowings
5 trillion
DepEd & CHED
DPWH
DILG
DOTr, DSWD, DOH, DENR, DOLE
Involved Government Agencies
1. Commission on Audit (COA)  audits government agencies
 promulgates accounting & auditing rules & regulations
 submits annual reports to the President & Congress
 keeps the general accounts
 Recording
2. Department of Budget and Management
3. Bureau of Treasury
 formulation & implementation of the National Budget
 Authentication
 cash custodian
 under the Department of Finance
 Custody
4. Government Agencies  Execution
NGAs
GAs
Departments  cabinet members
Offices  President, V. President
Others  CHED, MMDA
LGUs  provinces, cities, municipalities, barangay
Accounting
Departments
GOCCs  functions related to the public needs
 LBP, Lung Center of the Phil., Heart Center, PDIC,
PCSO, NFA, PNR
Government Accounting Manual (GAM) for NGAs
 Accounting standards for Government Accounting
 Based on IPSAS (International Public Sector Accounting Standards)
 Philippines  PPSAS
Budget Cycle
Preparation
Legislation
Execution
Accountability
Stages
Reference: Sir Brad’s Lecture + Pinnacle Handout
Compiled by: CPM
Stages
1. Budget Preparation
a. Budget Call
 DBM issues budget call to government agencies
 Government agencies prepare budget proposal
b. Budget Hearing
 Government agencies defend / justify before DBM
 DBM  deliberate, recommend, consolidate
 Submits proposal to the President
c.
Presentation to the Office of the Philippines
 President & Cabinet Members review
 President’s Budget
2. Legislations
a. House Deliberation:
Congress
Upper House  Senate
Lower House  House of Representatives
 conducts hearings
 prepares the General Appropriation Bill (GAB)
 House Version
b. Senate Deliberation
 Conduct hearings
 Senate Versions
c.
Bicameral Deliberation
 Bicameral conference committee
 Final Version  President
d. President’s Enactment
 GAB  General Appropriations Act (GAA)
3. Budget Execution
a. DBM releases guidelines to government agencies
 Government agencies submits Budget Execution Documents (BEDs)
 details, plans, timeline, costing
b. Allotment
 DBM formulates the Allotment Release Program (ARP)
 Sets the limit (control)
c.
Incurrence of Obligations  hire, contracts, order
d. Disbursement  actual payment
 DBM issues Notice of Cash Allocation (NCA)
 Modified Disbursement Systems (MDS) checks  BTr
4. Budget Accountability
a. Budget Accountability Reports
 Government agencies submits monthly & quarterly reports
b. Performance reviews
 DBM & COA
 Budget vs Actual
c.
Audit  COA
 Audit reports  President & Congress
Reference: Sir Brad’s Lecture + Pinnacle Handout
Compiled by: CPM
Accounting / Recording Process
1. Journals
 General Journal, Cash Receipts Journal, Cash Disbursement Journal, Check
Disbursement Journal
2. Ledgers
 General Ledger, Subsidiary Ledger
Recording
3. Registries  monitoring purposes (logbook)
a. Registry of Revenue & Other Receipts (RROR)
b. Registry of Appropriation & Allotment (RAPAL)
c. Registry of Allotments Obligations & Disbursements (RAOD))
d. Registry of Budget, Utilization & Disbursements (RBUD)
PS
MOOE
FE
CO
 Personnel Services (PS)
 Maintenance & Other Operating Expenses (MOOE)
 Financial Expenses (FE)
 Capital Outlays (CO)
Chart of Accounts (GAM)
1.
2.
3.
4.
5.
Cash - Collecting Officer (CO)
Cash in Bank – Local Currency (LC)
Cash – Treasury/Agency Deposit, Regular (T/A)
Cash – MDS, Regular
Cash – Tax Remittance Advice (TRA)
Reference: Sir Brad’s Lecture + Pinnacle Handout
 Collections
 Deposited to bank
 Deposited to BTr (authorized agent banks)
 Notice of Cash Allocations
 Withholding of Taxes
Compiled by: CPM
Reference: Sir Brad’s Lecture + Pinnacle Handout
Compiled by: CPM
IFRS 15: REVENUE FROM CONTRACTS WITH CUSTOMERS
 Replaced IAS 18: Revenues, IAS 11: Contracts, SIC 31, IFRIC 13, 15, 18
5-Step Model Framework
Step 1: Identify the contract with the customer.
Step 2: Identify the performance obligations (PO) in the contract
Step 3: Determine the transaction price (TP)
Step 4: Allocate the TP to the PO  using stand-alone selling price
Step 5: Recognize revenue as the PO are fulfilled
Over time
At a point in time (100%)
 offer bundle of products & services
 ex. Telecom
Ex.
Globe Postpaid Plan
iPhone 13
Data, unli calls & text
₱2,500 / month
24 months
Ex.
IAS 18
Jan. 1 AR
Revenues
xx
xx
Step 1: Postpaid Plan
Step 2: Deliver iPhone 13
Data, unli calls & text
Step 3: ₱2,500 x 24 = ₱60,000
Step 4:
PO
Stand-Alone
iPhone 13
50,000 (50/74)
Data
24,000 (24/74)
74,000
Allocation
40,540
19,460
60,000
At a point in time
Over time
Step 5: Jan. 31 40,540 + (19,460 ÷ 24) = 41,351
AR
41,351
Revenue
41,351
LONG-TERM CONSTRUCTION CONTRACTS (LTCC)


Construction Period: more than 1 year
POV: Contractor
DC Builders
(Contractor)
1. Construction Contract
2. PO
Construct the condo building in 2 years
Design, construction, finishing
3. TP  ₱100M (Contract Price)
4. Allocate
2 years
5. Recognize
Methods
IAS 16
CP
Const. Cost
GP
 2 years
 ₱100M
100M
(80M)
20M
Directly attributable to the project
 DM, DL, OH
 chargeable & reimbursable
w/ reliable estimate  % of Completion Methods (POC)
(over time)
w/o reliable estimate  Zero Profit Method (ZPM)
or Cost Recovery Method (CRM)
(at a point in time)
Reference: Sir Brad’s Lecture + Pinnacle Handout
Mr. X (Client)
 5-storey condo
Input Measures
Books
Building xx
Cash
xx
Dep’n Exp xx
Acc Dep’n xx
Cost incurred  cost to cost method
Labor Hours
Machine Hours
Output Measures
Estimates / Surveys
Milestones
Compiled by: CPM
FRANCHISE


Under licensing topics
POV: Franchisor
Jollibee
(Franchisor
Franchise (License – IP)
Cash (Franchise Fee)
10 years
Mr. X
(Franchisee)
₱30M
1. Franchise Contract
Initial services (location, crew training, construction store)
2. PO
Deliver equipment, inventory, supplies
Tradename
3. TP
IFF
CFF
4. Allocate
5. Recognize

₱30M
Royalty  % of Sales
Overtime
At a point in time
If license is distinct  separate performance obligation
License
Right to access  over time (Ex. Microsoft 365)
 IP changes through the license period
Right to use
 at a point in time
 IP does not change throughout the license period
CONSIGNMENT
Jan. 1
Products
P&G
₱100
(consignor)
Jan. 31
Remittance
7-Eleven
(consignee)
Jan. 31
Products
₱120
Commission
Mark-up
Customers
Cash
Consignor
Consignee (no inventory & sales)
1. Shipment of Consigned Goods
Inventory on Consignment
Inventory
Memo Entry
2. Payment of expenses by consignor
(Freight, Insurance)
Inventory on Consignment
Cash
No Entry
3. Payment of reimbursable expenses
by consignee
Inventory on Consignment
Consignment Receivable
Consignment Payable
Cash
4. Sale of inventory by the consignee
No Entry
Cash
Consignment Payable
5. Notification of sale to consignor &
remittance
Reference: Sir Brad’s Lecture + Pinnacle Handout
Consignment Payable
Consignment Payable
Commission Expense
Cash
Cash
Consignment Receivable
Consignment Revenue
Commission Income
Compiled by: CPM
Formulas:
Percentage of Completion (Over time)
Total Cost
POC
Billings
Collections
20x1
xx
xx
xx
xx
20x2
xx
xx
xx
xx
20x3
xx
xx
xx
xx
20x2
xx
(xx)
xx
YTD
xx
(xx)
(xx)
 Cost incurred + Cost to Complete
 Cost incurred ÷ Total Cost
Sir Brad’s Magic Table
Revenue
Cost
Gross Profit
20x1
xx
(xx)
xx
20x3
xx
(xx)
xx
YTD
xx
(xx)
(xx)
20x1
Contract Price xx
Total Cost
(xx)
Gross Profit
xx
20x2
xx
(xx)
(xx)
20x3
xx
(xx)
xx
Difference  Provision for loss
Journal Entries:
1. Contract Costs
Cash
xx
2. Contract Asset
Contract Revenue
xx
3. Cost of Construction
Contract Cost
xx
xx
xx
xx
4. Loss on Construction Contract xx
Est. Loss on CC
Actual cost incurred
To recognize revenue
To recognize COGS

xx
Billings:
Collections:
Receivables
xx
Contract Liability
Cash
xx
Est. Loss on CC
Gain on Reversal
xx
Receivables
xx
xx
xx
Zero Profit Method (At a point in time)
20x1
xx
(xx)
Ø
20x2
xx
(xx)
Ø
YTD
xx
(xx)
Ø
20x1
Contract Price xx
Total Cost
(xx)
Gross Profit
xx
20x2
xx
(xx)
(xx)
20x3
xx
(xx)
xx
Revenue
Cost
Gross Profit
20x3
xx
(xx)
xx
YTD
xx
(xx)
xx
 reflect the profit
If w/ loss, recognize / record immediately.
Loss on CC
xx
Est. Loss on CC
xx
Reference: Sir Brad’s Lecture + Pinnacle Handout
Compiled by: CPM
INSTALLMENT SALES
Types
Cash
Credit
Installment
0 1 2 3 4 5
Toyota Fortuner
✔✔✔ ✔✔
 risk of uncollectibility
 Installment method
 revenue is recognized in proportion to
cash collections
Journal Entries:
Date of Sale
1. Installment AR xx
Sales
COGS
Dec. 31
2. Sales
xx
Inventory
xx
xx
xx
COGS
Deferred Gross Profit
Date of Collection
3. Cash
xx
Installment AR
xx
xx
 contra-installment AR
Sales
- COGS
GP ÷ Sales = GPR
xx
Deferred Gross Profit xx
Realized Gross Profit
xx
Cash collection x GP Rate
DGP ÷ IAR = GPR
Two Issues:
0 1 2 3 4 5
1. Repossession
✔✔ ✖
Toyota (seller):
Repossessed Inventory (@NRV)
Deferred Gross Profit
Loss
Installment AR
Resale Value (SP)
- Reconstruction Cost (Repair)
- Gross Profit Margin
Net Realizable Value (NRV)
NRV / FMV ✔
Resale Value
xx
SP (new car) – Trade In (old car)
2. Trade-In
Old car + Cash
Mr. X
xx
xx
xx
Toyota
New car
Toyota (Seller)
SP
Cost
Trade-In
DP
2M
1.4M
500k
20%
600k; 30%
Scene 1: FMV 600K
Scene 2: FMV 400K
Scene 2: GPR 26%
Cash
400k
Inventory
400k
Inst. AR
1.1M
Sales
COGS
1.4M
Inventory
Scene 1: GPR 33%
Cash
400k
Inventory
600k
Inst. AR
1.1M
Sales
COGS
1.4M
Inventory
[(2M x 80%) – 500k]
2.1M  (2M + (600k – 500k))
1.4M
Trade-In < FMV  Under allowance
Trade-In > FMV  Over allowance
1.9M
 (2M – (400k – 500k)
1.4M
Reference: Sir Brad’s Lecture + Pinnacle Handout
Compiled by: CPM