FAR
COMPREHENSIVE
HANDOUT
CASH
Cash includes money and any other negotiable instrument that is payable in money and
acceptable by the bank for deposit and immediate credit.
No Specific Standard.
Governed by PAS 1, paragraph 66: “An entity shall classify an asset as current when it is cash
or a cash equivalent unless it is restricted from being exchanged or used to settle a liability
for at least twelve months after the end of reporting period."
Measurement
Cash in Local Currency
At Face Value
Cash in Foreign Currency
At Exchange Rate
Cash in Closed Bank (or in Bankruptcy)
Estimated Realizable Value
Categories
Cash on Hand
Cash in Bank
Coins and Currencies, Checks (Customer’s, Cashier’s, Manager’s, and
Traveler’s Check), Money Order, Bank Drafts
Demand Deposit, Savings Deposit, Escrow Deposit, Time Deposit,
Unrestricted Deposit in a Foreign Bank
Cash Fund for Current Asset, Operation Activities, Current Liability (e.g.,
Petty Cash Fund, Payroll Fund, Dividend Fund)
Cash Fund
*If cash fund Is set aside for non-current purpose (asset/liability), it is
recognized as long-term investment (ex. Sinking fund, Preference
Redemption Fund, Contingent Fund.)
Bank Overdraft
Only offset if on the same bank. Otherwise, ignore.
TREATMENTS WITH CHECKS
Post-dated
Checks
Undelivered
Checks
Stale
Checks
It cannot be considered as cash yet because it is unacceptable by bank for
deposit and immediate credit.
DRAWN:
DR. Cash; CR. Accounts Receivable
RECEIVED:
DR. Accounts Receivable; CR. Cash
Drawn and recorded but not given to the payee.
DR. Cash; CR. Accounts Payable
A check not encashed by the payee withing a relatively long period of time.
IMMATERIAL:
DR. Cash; CR. Miscellaneous Income
MATERIAL:
DR. Cash; CR. Accounts Payable
ACCOUNTING FOR PETTY CASH FUND
IMPREST FUND SYSTEM
Establishment
Payment of Expense
Replenishment
Unreplenished Fund
FLUCTUATING FUND SYSTEM
DR. Petty Cash Fund
DR. Petty Cash Fund
CR. Cash in Bank
CR. Cash in Bank
*Memo Entry
DR. Expenses
CR. Petty Cash Fund
DR. Expenses
CR. Petty Cash Fund
DR. Petty Cash Fund
CR. Cash in Bank
DR. Expenses
CR. Petty Cash Fund
NO ENTRY
Increase in Fund
DR. Petty Cash Fund
CR. Cash in Bank
DR. Petty Cash Fund
CR. Cash in Bank
Decrease in Fund
DR. Cash in Bank
CR. Petty Cash Fund
DR. Cash in Bank
CR. Petty Cash Fund
ACCOUNTING FOR CASH SHORTAGE AND OVERAGE
CASH SHORTAGE
CASH OVERAGE
Upon Discovery
DR. Cash Short/Over
CR. Cash on Hand
DR. Cash on Hand
CR. Cash Short/Over
Cashier is Accountable
DR. Due from Cashier
CR. Cash Short/Over
DR. Cash Short/Over
CR. Due to Cashier
Cause is Non-
DR. Loss from Shortage
DR. Cash Short/Over
Traceable
CR. Cash Short/Over
CR. Other Income
CASH EQUIVALENTS
Definition
Short-term and highly liquid investments that are readily convertible into
cash and so near their maturity that they present insignificant risk of changes
in value.
Only debt instruments acquired within 3 months or less before their maturity
Recognition
date can qualify as cash equivalents.
*Equity Securities cannot qualify as CE – no maturity date.
i.e.
3-month Time Deposit, Money Market Placement, Commercial Paper,
Treasury Bills, Treasury Notes, Treasury Bonds, Redeemable Preference Shares
BANK RECONCILIATION
Definition
A statement which brings into agreement the cash balance per book and
cash balance per bank.
Book Reconciling Items
Credit
Memo
Items not representing deposits credited by the bank but not yet recorded by
the depositor as cash receipts.
EX.: Notes Receivable collected by bank, Proceeds of bank loan, Matured
time deposits, Direct wire transfers from another bank
items not representing checks paid by bank but not yet recorded by the
Debit Memo
Errors
depositor as cash disbursements.
EX.: NSF Check, Defective Checks, Bank Service Charge, Reduction of Loan
Non-recording of cash receipts, understatement in the recording of cash
receipts, overstatement in the recording of check made.
Bank Reconciling Items
Deposits in
Transit
•
•
Collections deposited but not yet recorded (credited) by the bank.
Undeposited Collections or Cash on Hand awaiting to be deposited.
Outstanding
Checks
Checks already recorded by the depositor as cash disbursements but not yet
reflected on the bank statement.
Errors
Non-recording of the check made, overstatement in the recording of cash
receipts, understatement in the recording of check made.
PROFORMA RECONCILIATION
Adjusted Balance Method
Unadjusted Book Balance
Add: Credit Memos
xx
xx
Total
xx
Less: Debit Memos
xx
Adjusted Book Balance
xx
Unadjusted Bank Balance
Add: Deposits in Transit
xx
xx
xx
Total
Less: Outstanding Checks
xx
xx
Adjusted Bank Balance
xx
Book to Bank Method:
Bank to Book Method:
Book Balance
Add: Cr. Memo
OC
xx
Bank Balance
Add: DIT
Dr. Memo
xx
Total
xx
xx
xx
Total
Less: Dr. Memo
xx
DIT
xx
Bank Balance
xx
xx
xx
xx
xx
Less: OC
xx
Cr. Memo
xx
Bank Balance
xx
xx
xx
xx
PROOF OF CASH – A two-date reconciliation showing the total amounts of receipts and
disbursements during a particular period.
PROOF OF CASH
Unadjusted Book Balance
PRIOR
MONTH
RECEIPTS
DISBURSEMENTS
CURRENT
MONTH
xx
xx
xx
xx
xx
(xx)
Add:
Credit Memos – Prior Month
Credit Memos – Current Month
xx
xx
Less:
Debit Memos – Prior Month
(xx)
(xx)
Debit Memos – Current Month
xx
(xx)
Errors:
Under Receipt – Prior Month
xx
Under Receipt – Current Month
Over Receipt – Prior Month
xx
(xx)
Over Receipt - Current Month
Under Disbursement – Prior Month
(xx)
(xx)
(xx)
(xx)
(xx)
Under Disbursement – Current Month
Over Disbursement – Prior Month
xx
(xx)
xx
(xx)
xx
(xx)
(xx)
xx
Adjusted Balances
xx
xx
xx
xx
Unadjusted Bank Balance
xx
xx
xx
xx
xx
(xx)
Over Disbursement – Current Month
Add:
Deposits in Transit – Prior Month
Deposits in Transit – Current Month
xx
xx
Less:
Outstanding Checks – Prior Month
(xx)
(xx)
Outstanding Checks – Current Month
xx
(xx)
Errors:
Under Receipt – Prior Month
xx
Under Receipt – Current Month
Over Receipt – Prior Month
xx
(xx)
Over Receipt - Current Month
Under Disbursement – Prior Month
Under Disbursement – Current Month
(xx)
xx
(xx)
(xx)
(xx)
(xx)
(xx)
xx
(xx)
Over Disbursement – Prior Month
xx
(xx)
xx
xx
Over Disbursement – Current Month
Adjusted Balances
(xx)
xx
xx
xx
FORMULAS:
Deposits in Transit, beg.
Add: Deposits made per book
xx
xx
Outstanding Checks, beg.
Add: Checks Drawn per Book
xx
xx
Total
xx
Total
xx
Less: Deposits received per bank
xx
Less: Checks Paid per bank
xx
Deposits in Transit, end.
xx
Outstanding Checks, end.
xx
Book Debits
xx
Bank Credits
xx
xx
Under Receipt – Current Month
Over Receipt – Current Month
Under Receipt – Current Month
Credit Memo – Prior Month
xx
Under Receipt – Prior Month
(xx)
(xx)
Credit Memo – Current Month
(xx)
(xx)
Over Disbursement – Prior Month
(xx)
Under Receipt – Prior Month
(xx)
Over Receipt – Current Month
(xx)
Over Disbursement – Prior Month
(xx)
Deposits made per book
xx
Deposit received per bank
xx
Book Credits
Under Disbursement – Current Month
xx
xx
Bank Debits
Under Disbursement – Current Month
xx
xx
Over Disbursement – Current Month
(xx)
(xx)
Over Disbursement – Current Month
(xx)
(xx)
(xx)
(xx)
xx
Debit Memo – Prior Month
Debit Memo – Current Month
Under Disbursement – Prior Month
Over Receipt – Prior Month
(xx)
Under Disbursement – Prior Month
Over Receipt– Prior Month
Checks Drawn per Book
xx
Checks Paid per Bank
(xx)
RECEIVABLES IN GENERAL
Definition
Measurement
Financial Assets because they represent a contractual right to receive
cash or another financial asset from another entity.
INITIAL MEASUREMENT:
• Fair Value + Transaction Costs
SUBSEQUENT MEASUREMENT:
• Amortized Cost
TRADE RECEIVABLES
• Receivables arising from
Classification
NON-TRADE RECEIVABLES
• Receivables arising from
the sale of goods and
services in the ordinary
course of business.
•
•
sources other than
ordinary
course
business.
the
of
Classified as current assets when they are expected to be
realized in cash within normal operating cycle or one year,
whichever is longer.
Classified as non-current assets when they are expected to be
realized in cash beyond one year from reporting period.
Presentation
All trade and current non-trade receivables are presented in one line
item in the current asset section of the Statement of Financial Position
as “Trade and Other Receivables”.
ACCOUNTS RECEIVABLE
INITIAL MEASUREMENT:
•
Transaction
SUBSEQUENT MEASUREMENT:
Price
or
Original Invoice Amount
o Invoice price should
be net of trade
Measurement
•
Net Realizable Value
List Price
Less: Trade Discounts
xxx
xxx
discount or volume
discount and net of
Less Sales Returns
xxx
xxx
cash discount.
Gross Amt. of AR
Less: Cash Discounts
Less: Freight Charge*
Less: ADA
xxx
xxx
xxx
NRV of AR
xxx
List Price
Less: 1st Trade Disc.
Balance
Less: 2nd Trade Disc.
xxx
xxx
xxx
xxx
Invoice Price
xxx
* FOB Destination, Freight Collect
NOTES RECEIVABLE
Definition
Claims supported by formal promises to pay usually in the form of notes, a
promissory note is a written contract in which one person, known as the
maker, promises to pay another person, known as the payee, a definite sum
of money.
Initial
Measurement
Classification
ShortTerm
Measurement
LongTerm
Subsequent
Measurement
Interest
Bearing
Non-interest
Bearing
FACE VALUE
w/ reasonable
rate*
Interest
Bearing
w/ unreasonable
rate**
AMORTIZED
COST
PRESENT
VALUE
Non-interest
Bearing
*Assuming discounting is immaterial; otherwise, it should be presented in PV.
**Notes with unreasonable rate bears an interest which is not equal to the market rate of interest
LOANS RECEIVABLE
Definition
A financial asset arising from a loan granted by a bank or other financial
institution to a borrower or client. The term of the loan may be short-term
but, in most cases, the repayment periods cover several years.
INITIAL MEASUREMENT:
Measurement
Face Value
xxx
Direct Origination Costs
Origination Fee
xxx
xxx
Initial Carrying Value
xxx
SUBSEQUENT MEASUREMENT:
• Amortized Cost using Effective Interest Method
IF
SCENARIO
INTEREST
TREATMENT TO AMORTIZATION
ICV > Face Value
Premium
NI > EI
Deduct from CA
ICV < Face Value
Discount
NI < EI
Add to CA
IMPAIRMENT OF LOANS:
• Impairment is the decrease in the carrying amount of a receivable due objective
evidence of loss events.
•
•
•
•
PFRS 9, paragraph 5.2.2, in conjunction with PAS 39, paragraph 58, provides that an
entity shall assess at every end of reporting period whether there is objective evidence
that a financial asset or group of financial assets is impaired. If such evidence exists,
the entity shall determine and recognize the amount of any impairment loss.
The carrying amount of the loan receivable shall be reduced either directly or through
the use of an allowance account.
The amount of the impairment loss shall be recognized in profit or loss:
Objective evidence of impairment may result from the following "loss events" occurring
after the initial recognition of the financial asset:
1. Significant financial difficulty of the issuer or obligor
2.
3.
Breach of contract, such as default or delinquency in interest or principal
payment.
Debt restructuring
4. Probability that the borrower will enter bankruptcy or other financial
reorganization.
5. The disappearance of an active market for the financial asset because of
financial difficulty.
6. Measurable decrease in the estimated future cash flows from a group of
financial assets since the initial recognition, although the decrease cannot
yet be identified with the individual financial assets in the group.
CA of Loan Receivable*
PV of Recoverable Amount**
xxx
xxx
*Carrying amount of loan receivable must include
any related accrued interest income.
Impairment Loss
xxx
**The PV of the recoverable amount shall be
computed using the ORIGINAL EFFECTIVE INTEREST
RATE.
NOTE: After the recognition of impairment, the new carrying amount of the loan is the PV of
the recoverable amount amortized using the effective interest method.
RECEIVABLE FINANCING
Definition
This refers to the act of inducing cash inflows from the receivables other than
collection on a normal basis. Simply stated, it is the financial flexibility of an
entity to raise money out of its receivable.
Common
Forms
1.
2.
Pledge/Hypothecation
Assignment
3. Factoring
4. Discounting
NOTE:
1-3
is
applicable for AR,
while 4 is for NR only.
Pledging
•
•
•
Receivables serve as collateral security for loans. (Pledge is a secured borrowing
transaction)
Pledge receivables are not derecognized, thus there is no change in receivable balance.
Disclosure of AR pledged is required.
SOLUTION GUIDE:
Face Value of Loan
Less: Discount on Loan
Net Proceeds from Pledge
xxx
xxx
xxx
Assignment
• The loanable amount is only a percentage of the face value of AR.
• Bank charges a service fee or commission in advance.
•
•
Equity on assigned accounts should be disclosed in notes to FS.
Forms of Assignment:
o Notification Basis - debtors whose receivables have been assigned are notified
o
of the assignment Hence, the debtors will remit payments on the receivables not
to the assignor but to the assignee.
Non-notification Basis - debtors whose receivables have been assigned are
NOT notified of the assignment Hence, the debtors will continue to remit
payments on the receivables to the assignor. Assignments are commonly made
on a non-notification basis
SOLUTION GUIDE:
FV of Loan (Certain % x Face Value of AR)
xxx
Less: Commission and Other Charges
Net Proceeds from Assignment
xxx
xxx
CA of AR
Less: CA of Loans Payable
Equity on Assigned Accounts
xxx
xxx
xxx
Factoring
• It is a sale of accounts receivable usually on a without recourse, notification basis to a
factor (usually a bank). The factor then assumes responsibility for uncollectible
accounts.
o Factoring without recourse (if silent) - the transferor is not liable in case the
debtor fails to pay.
o
Factoring with recourse - the transferor guarantees payment in the event the
debtor fails to pay.
SOLUTION GUIDE:
Face Value of A/R
xxx
Add: Factor’s Holdback
Less: Commission and Other Charges
Net Proceeds from Factoring
xxx
xxx
xxx
Selling Price (Net Proceeds + Factor’s Holdback)
Less: Carrying Amount of Net Realizable Value
xxx
xxx
Gain or Loss on Factoring
xxx
*No gain or loss on factoring if with recourse basis.
Discounting
• This is a transfer or endorsement of a promissory note by the payee in favor of another
party, usually a bank.
•
Forms of Discounting:
o Discounting without Recourse Basis – The holder is not held liable in the case
the maker fails to pay. The note discounted has been essentially sold outright
o
and therefore derecognized.
Discounting with Recourse Basis – The holder is held liable in case the maker
fails to pay. The note receivable is not derecognized.
▪ Conditional Sale – A contingent liability is disclosed in the notes to
financial statements.
▪ Secured Borrowing – A liability is recognized on the discounting.
SOLUTION GUIDE:
Maturity Value (Principal + Total Interest)
xxx
Less: Discount (MV x DR x Discount Period) xxx
Net Proceeds from Discounting
xxx
Selling Price (Net Proceeds)
xxx
Less: CA of AR (including Accrued Interest) xxx
Gain or Loss on Discounting
xxx
NOTE:
• Note receivable discounted account is presented as a contra-asset account (deducted
•
from note receivable account).
Based on the entries above, gain or loss on discounting is applicable only to without
recourse basis and conditional sale basis.
Dishonored Notes
• Notes receivable not collected at maturity are considered dishonored notes.
Dishonored notes are transferred from notes receivable to accounts receivable the
amount of which is equal to the maturity value of the note plus any direct costs or
protest fees.
INVENTORY
Definition
•
•
Held for sale in the ordinary course of business
In the process of production for such sale
•
In the form of materials/supplies to be consumed in the production
process or in the rendering services.
•
•
Merchandising – Merchandise Inventory
Manufacturing
o Finished Goods Inventory
o Work in Process Inventory
Classes of
Inventories
•
Scope as to
Measurement
o Raw Materials Inventory
Service – Work in Process Inventory
•
Inventories of producers of agricultural, forest, and mineral products
– Net Realizable Value
•
Inventories of commodity broke-traders – Fair Value less Cost to Sell
GENERAL RULE: POSSESSION = LEGAL TITLE
EXCEPTIONS:
1)
Good In Transit
o FOB Shipping Point – Owner is Buyer
o FOB Destination – Seller
o Free Alongside – Buyer
o Cost, Insurance, Freight – Buyer
o Ex-ship – Seller
2) Consignment Goods
o
Recognition
o
COST
▪ Freight out cost
NOT COST
▪
▪
Freight Cost of Return Goods
Original Freight Cost
▪
Commission and Other Charge
▪ Freight Cost to Final Customer
3) Inventory Financial Management
o Sales with a Repurchase Agreement – Seller
o Pledge of Inventories – Pledger or Borrower
o Loan of Inventory – Borrower
4) Sale or Return – Buyer
5) Sale on Trial/Approval – Seller
6) Installment Sale – Buyer
7) Bill and Hold Sale – Buyer
8) Lay – Away Sale – Seller
9) Special Order Sale – Buyer upon completion
•
Cost of Purchase
o Purchase Price
o Import Duties
o Irrecoverable Taxes
o
o
Freight and handling costs
Insurance while Inventories are in Transit
o
o
Broker’s commission
Exclusions:
▪
▪
▪
Initial
Measurement
•
•
•
Cost of Conversion
o Variable FOH
o Fixed FOH (Normal Capacity)
Other Costs
Exclusions from Costs
o Abnormal Losses
o
o
o
•
Subsequent
Measurement
•
Trade Discount, Rebates, and other similar items
Foreign exchange differences
Interest Expense
Administrative Expenses, unless traceable
Storage Costs of FG, unless related to RM or WIP
Selling Costs (always expensed)
Cost Formulas
o
o
FIFO Method
Average Method
o
Specific Identification
Net Realizable Value
o Concept of NRV
o Determination of NRV Accounting
o For Inventory Write-Down
▪ Direct Method
▪ Allowance Method
COST FORMULAS:
FIFO METHOD:
• Cost of EI = EI in Units x Cost of Latest Purchases
• COGS = No. of Units Sold x Cost of Oldest Purchases
AVERAGE METHOD:
• Weighted Average (Periodic System)
o Cost of EI = EI in Units x Weighted Ave. Unit Costs
o COGS = No. of Units Sold x Weighted Ave. Unit Costs
• Moving Average (Perpetual System)
o
o
Cost of EI = EI in units x Moving Ave. Unit Costs
COGS = No. of Units Sold x Moving Ave. Unit Costs
NET REALIZABLE VALUE:
•
•
Cost > NRV → Writedown
Cost < NRV → No. of Inventory Writedown but possible reveral writedown if there is a
previous writedown
NET REALIZABLE VALUE
Finished Goods / Merchandise Inventories
ESP – ECTS
Work in Process Inventories
ESP – ECTS – ECTC
Raw Materials and Factory Supplies
Current Replacement Cost
AUTOMATIC WRITEDOWN
1) Direct Method (COGS Method) → @LCNRV
2) Allowance Method (LOSS Method) → @COST
METHODS USED IN INVENTORY ESTIMATION:
Gross Method
•
Based on major assumption that the rate of gross profit remains approximately the
same from period to period.
Cost of Goods Available for Sale
Less: Ending Inventory
Cost of Goods Sold
xxx
xxx
xxx
(SQUEEZE)
Retail Method
• The selling price or retail price is tagged to each item and therefore the ending
inventory is stated at selling price.
Beginning Inventory
Purchases
Freight In
Purchase Discount
Cost
xx
xx
xx
(xx)
Retail
xx
xx
Purchase Returns and Allowances
Departmental Transfer – In (DEBIT)
Departmental Transfer – Out (CREDIT)
Abnormal Losses
(xx)
xx
(xx)
(xx)
(xx)
xx
(xx)
(xx)
Net Mark – Ups
Net Mark – Downs
Total Goods Available for Sale
xx
xx
Ending Inventory
xx
Xx
Cost of Goods Sold
xx
xx
Cost Ratios
𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝑴𝒆𝒕𝒉𝒐𝒅 =
𝑭𝑰𝑭𝑶 𝑴𝒆𝒕𝒉𝒐𝒅 =
xx
(xx)
𝑻𝑮𝑨𝑺 𝒂𝒕 𝑪𝒐𝒔𝒕
𝑻𝑮𝑨𝑺 𝒂𝒕 𝑹𝒆𝒕𝒂𝒊𝒍
𝑻𝑮𝑨𝑺 @ 𝑪𝒐𝒔𝒕 − 𝑩𝒆𝒈𝒊𝒏𝒏𝒊𝒏𝒈 𝑰𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚 @ 𝑪𝒐𝒔𝒕
𝑻𝑮𝑨𝑺 @ 𝑹𝒆𝒕𝒂𝒊𝒍 − 𝑩𝒆𝒈𝒊𝒏𝒏𝒊𝒏𝒈 𝑰𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚 @ 𝑹𝒆𝒕𝒂𝒊𝒍
𝑪𝒐𝒏𝒔𝒆𝒓𝒗𝒂𝒕𝒊𝒗𝒆 𝑴𝒆𝒕𝒉𝒐𝒅 =
𝑻𝑮𝑨𝑺 𝒂𝒕 𝑪𝒐𝒔𝒕
𝑻𝑮𝑨𝑺 𝒂𝒕 𝑹𝒆𝒕𝒂𝒊𝒍 + 𝑵𝒆𝒕 𝑴𝒂𝒓𝒌𝒅𝒐𝒘𝒏𝒔
DEFINITION OF TERMS
Biological Asset
A living plant or animal. (NON-CURRENT ASSET)
The harvested product of the entity’s biological assets.
Agricultural Produce
Note: PROCESSED Agricultural
Inventories (covered by PAS 2).
Produce
are
treated
as
Agricultural Activity
The management by an entity of the biological transformation
of biological assets for sale, into agricultural produce, or into
additional biological assets.
Biological Transformation
The processes of growth, degeneration, production, and
procreation that cause qualitative or quantitative changes in
a biological asset.
A living plant that:
• Used in the production or supply of agricultural
Bearer Plant
produce.
•
•
Is expected to bear produce for more than one period.
Has a remote likelihood of being sold as agricultural
produce, except for incidental scrap scales.
NOTES:
• Agricultural produce growing on bearer plants remains within the scope of PAS 41.
• A plant with dual use is reported as BIOLOGICAL ASSET and not as bearer plant. A plant
may have a dual use, namely:
(a) The plant is cultivated for bearing agricultural produce.
(b) The plant itself is being sold either as living plant or an agricultural produce.
BIOLOGICAL ASSETS are covered by PAS 41.
INCLUSION
PAS 41, applies to the ff. when they relate to
Agricultural Activity:
1. Biological Assets, EXCEPT bearer plants.
2. Agricultural produce at the point of
harvest.
3. Unconditional
government
grants
related to biological assets.
EXCLUSION
PAS 41 DOES NOT apply to the ff.:
1.
2.
3.
Land related to agriculture activity (PAS 16)
Bearer plants (PAS 16)
Government grant related to bearer plants
(PAS 20)
4. Intangible assets related to agricultural
activity (PAS 38)
EXAMPLES
BIOLOGICAL ASSETS
AGRICULTURAL PRODUCE
PRODUCTS AFTER HARVEST
Sheep
Wool
Yarn, Carpet
Trees in a Plantation Forest
Felled Trees
Logs, Lumber
Cotton Plant
Cotton
Thread, Clothing
Sugarcane
Harvested Cane
Sugar
Dairy Cattle
Milk
Cheese
Pigs
Carcass
Sausages, Cured Hams
Bushes
Leaf
Tea, Cured Tobacco
Vines
Grapes
Wine
Fruit Trees
Picked Fruit
Processed Fruit
BIOLOGICAL ASSET
An enterprise should recognize a biological asset or agriculture produce
Recognition
when, and only when:
• the enterprise controls the asset as a result of past events;
• it is probable that future economic benefits will flow to the
enterprise;
• the fair value or cost of the asset can be measured reliably.
Measurement
Biological Asset
Agricultural Produce
Initial Measurement
FV less Cost to Sell / CA / Cost
FV less Cost to Sell (at the
point of harvest)
Subsequent Measurement
FV less Cost to Sell
Cost to Sell INCLUSIONS:
PAS 2 or other Applicable
Cost to Sell EXCLUSIONS:
•
Commission to Brokers
•
Transport Cost
•
•
Levies by Regulatory Agencies
Transfer Taxes and Duties
•
•
Income Taxes
Interest Expense
Standards
GAINS AND LOSSES
ON INITIAL RECOGNITION
Initial Recognition of Biological Assets
Initial Recognition of Agricultural Produce
Gain on Initial Recognition
• TCOBA < FV – Cost to Sell
Loss on Initial Recognition
• TCOBA > FV – Cost to Sell
Gain arises on initial recognition of
agricultural produce unless it was harvested
from a consumable biological asset then
loss on initial recognition may arise.
ON CHANGES IN FAIR VALUE (P/L)
Due to Price Change
•
Same Age (Beg. Age);
Different Date
(PRICE END, Beg. Age – PRICE BEG., Beg. Age) x Quantity
Due to Physical Change
• Different Age; Same
Date (Year-end)
(PRICE END, End Age – PRICE END, Beg. Age) x Quantity /
FVCLS of Newborn
TOTAL CHANGE IN FV
Change in FV due to Price Change + Change in FV due to
Physical Change
ON GOVERNMENT GRANT
Nature of Condition
When to Recognize Income
Unconditional
When the grants become receivable
Conditional (upon compliance)
When the attached conditions are met
Conditional but a certain
portion can be retained
Income as time passes using straight line method
PROPERTY, PLANT, AND EQUIPMENT
Tangible Assets that are:
• Held for use in the production or supply of goods and services
• For administration purposes that are expected to be used for
more than one year
•
For rental purposes
Definition
Operational
Land/Building – X PPE
Other PPE – √ PPE
Lease Rental
X PPE
Finance
X Asset
Leasee
INITIAL MEASUREMENT:
• Cost of Purchase
o Purchase Price/Acquisition Cost
o
o
o
o
o
Measurement
Import Duties
Irrecoverable Taxes
Freight Cost
Insurance Cost while the PPE is in Transit
Exclusions:
▪ Trade Discounts
▪ Rebates and Other Similar Deductions
SUBSEQUENT MEASUREMENT:
• The model chosen applies to entire class of PPE
• Cost Model = Original Cost – Accumulated Depreciation –
Accumulated Impairment Loss
Means of Acquisition
Cash Basis
On Account (Net Method)
Deferred Settlement
Issuance of Shares
Acquisition Cost = FV of Assets Received
Invoice Price
Invoice Price – Cash Discount (taken or not)
1) Cash Price Equivalent
2) PV of Future Cash Flows
1) FV of Assets Received
2) FV of Bonds Issued
3) Par Value of Bonds Issued
Lump-sum of Basket Purchase
Trade-In (DEALER)
Construction
Government Grant
Donation
Allocated Cost using FV
1) FV of Asset Given Up + Cash Given
2) FV of Asset Received
Direct Cost of Materials, DL, OH, and BC
FAR 06
CREDITED
a. Income – If the donor is an unrelated party
b. Donated Capital – If donor is a related party
COST INCURRED
a. Related Donations – Deducted from income or
donated capital
b. Related to Assets –Capitalized as cost of PPE
Exchange
WITH COMMERCIAL SUBSTANCE
1) FV of Asset given up ± boot
2) FV of Asset Received
3) CA of Asset given up ± boot
WITHOUT COMMERICAL SUBSTANCE
1) Carrying Amount
INCLUSIONS:
• Testing cost (net of proceeds of samples)
•
•
•
•
•
Initial handling and delivery cost
Professional costs
Site preparation cost
Installation and assembly
Employee benefits (salaries)
EXCLUSIONS:
• Cost of opening a new facility
Direct
Attributable
Costs
•
•
Cost of introducing a new product or service, including cost of
advertising and promotion
Cost of conducting business in a new location or with a new class of
customer, including cost of staff training
Administration and other general overhead cost capacity
Cost incurred while an item capable of operating in the manner
•
intended by management has yet to be brought into use or is
operated at less than full
Initial operating loss
•
•
•
Cost of relocating or reorganizing part or all of an entity's operations
Income from incidental operations
Savings on self-constructed assets
•
•
DEPRECIATION METHODS:
• Uniform or Fixed Charged Methods
o Straight-Line Method
▪ Dep. Expense = (Cost – Residual Value) / Useful Life
o Composite and Group Method
▪ Dep, Expense = Total Cost x (Composite / Group Rate)
Variable Charge Methods
o Depreciation is related to the estimated production capability of the asset and
is expressed in a rate per unit of output OUTPUT METHOD or per hour of use
•
WORKING HOURS METHOD.
▪
𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑏𝑙𝑒 𝐴𝑚𝑜𝑢𝑡
𝐴𝑐𝑡𝑢𝑎𝑙 𝑂𝑢𝑡𝑝𝑢𝑡
Dep. Expense = 𝑇𝑜𝑡𝑎𝑙 𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑂𝑢𝑡𝑝𝑢𝑡/𝐻𝑜𝑢𝑟𝑠 𝑥 𝐻𝑜𝑢𝑟𝑠 𝐷𝑢𝑟𝑖𝑛𝑔 𝑡ℎ𝑒 𝑌𝑒𝑎𝑟
Decreasing Charge or Accelerated Methods
o Sum-of-the-Years-Digits (SYD) Methods
▪ Dep. Expense = Depreciable Amount x (Decreasing No. of Years/SYD)
o Declining Balance Method
•
▪ First Year: Dep. Expense = Cost x Declining Rate
▪ Subsequent Year: Dep. Expense = CA x Declining Rate
Other Methods
o Retirement Method
▪ Dep. Expense = (Tools Disposed x Cost of Earlier Purchase) – Proceeds
from Disposal
•
o
Replacement Method
o
Dep. Expense = (Tools Disposed x Cost of Latest Purchase) – Proceeds
from Disposal
Inventory Method
▪
TOOLS
Beginning Balance
xx
xx
Salvage from Disposal
Acquisition Cost
xx
xx
Depreciation
Ending Balance
xx
REVALUATION MODEL – Carried at revalued amount.
• FV at date of revaluation = Any subsequent Accumulated Dep. – Subsequent
Accumulated Impairment Loss
Frequency of Revaluation
Application of Revaluation
•
Depends upon the movement int the FV of
the items in the PPE.
•
Entire class of PPE; To avoid selective
revaluation.
•
•
Significant and Volatile (annual moment)
Significant and involative (3-5 years
•
Simultaneous
applicable.
movement)
o
revaluation
is
not
Rolling Basis; provided completed
within short period of time.
Revaluation Surplus
• Difference between the CA and Revalued Amount; Net of applicable Tax.
• Initial Recognition:
o
o
•
Proportional Method – The accumulated depreciation at the date of revaluation
is restated proportionately with the change in the gross carrying amount of the
asset so that the carrying amount of the asset after revaluation equals the
revalued amount.
Elimination Method – The accumulated depreciation is eliminated against the
gross CA of the asset and the net amount restated to the revalued amount of
the asset.
Subsequent Recognition
a) Transfer to Retained Earnings
Lump- Sump Transfer
Piecemeal Transfer
Depreciable Amount
√
√
Non-Depreciable PPE
√
X
b) Revaluation Decreases
√ Charged to Revaluation Surplus
√ Impairment Loss
c) Revaluation Increases
√ Impairment Loss
√ Charged to Revaluation Surplus
CLASSES OF PPE
Cost of Land Improvements:
• Permanent fences, water system, and sidewalks
• Cost of trees and other landscaping
•
Streetlights and parking lots
Cost of Land:
PROPERTY
•
Purchase price
•
•
•
•
•
Attorney fees and other expenditures for establishing clean title
Broker commission
Escrow fees
Fees from registration and transfer of title
Cost of relocation or reconstruction of property belonging in
order to acquire possession
•
•
•
•
•
•
•
•
Mortgages, encumbrances and interest on such mortgages
assumed by the buyer
Unpaid taxes up to date of acquisition assumed by the buyer
Cost of survery
Cost of clearing, grading and demolishing unwanted old
building, less proceeds from salvage
Payments to tenants to induce them to vacate the premises
Cost of permanent improvements, cost of grading, leveling, and
landfill
Cost of option to buy the acquired land. If the land is not
acquired, the cost of option is expensed outright.
Special assessment
Cost of Building Improvements:
•
•
•
Cost of elevator, escalator and similar items
Ventilation systems, plumbing and lighting systems
Immovable fixtures attached to the building
Cost of Building:
• Purchase price
• Legal fees incurred in connection with the purchase
• Unpaid taxes up to date of purchase assumed by the buyer
• Interest, liens and other encumbrances assumed by the buyer
• Payments to tenants to induce them to vacate the building
PROPERTY
•
Any renovating or remodelling costs incurred to put the building
purchased in a condition suitable for the intended use
Cost of Self-Constructed Building
•
•
•
Costs Directly Attributable to Construction (e.g., Material, Labor)
Building permit or license
Architect fee
•
•
•
Superintendent fee
Cost of excavation
Cost of temporary building used as construction office and tools
or materials shed
Expenditures incurred during the construction period such as
borrowing cost and insurance
•
•
•
•
•
Expenditures for service equipment and fixtures made a
permanent part of the structure.
Cost of temporary safety fence around construction site and
cost of subsequent removal thereof. However, the construction
of a permanent fence after the completion of the building is
recognized as land improvement
Safety inspection feeCost of option to buy the acquired land. If
the land is not acquired, the cost of option is expensed outright.
Special assessment
NOTES:
• Land and Building purchased on a lump-sum price
o
The acquisition cost of land and building acquired on a
lump-sum price is allocated to both land and building
based on their relative fair values at purchase date
regardless of the intention on the old building. If the
building is unusable, the acquisition cost is allocated to
the land only.
Cost of Equipment:
• Purchase price
• Freight, handling, storage and cost srelated to the acquisition
• Insurance while in transit
• Installation cost, including site preparation and assembling
EQUIPMENT
•
Cost of testing and trial run, and other cost necessary in
•
preparing the machinery for use
Initial estimate of cost of dismantling and removing the
machinery and restoring the site on which it is located, for which
•
the entity has a present obligation
Consultant’s Fee for advice on the acquisition of the machinery
•
Cost of safety rail and platform surrounding machine.
•
•
Cost of water device to keep machine cool
Irrecoverable Taxes
SUBSEQUENT COSTS
CAPITAL EXPENDITURE (CAPEX)
REVENUE EXPENDITURE
•
Subsequent Costs that meet
•
Does not qualify under the recognition criteria
•
EXPENSED
•
the definition of the asset and
recognition criteria for assets
CAPITALIZED
EXAMPLES OF CAPEX
FUTURE ECONOMIC BENEFITS MAY BE IN THE FORM
•
•
Additions/Expansion
Betterment/Improvement
•
•
An extension in the assets’ useful life
An increase in assets capacity or efficiency
•
•
•
Replacement
Repairs/Inspection
Reinstallation
•
An improvement on safety
PRESENTATION:
•
Property, Plant and Equipment are presented in the Statement of Financial Position
within the Non-current Assets section.
GOVERNMENT GRANT
Definition
Government Grant is an assistance by government in the form of
transfer of resources to an entity in return for part or future compliance
with certain conditions relating to the operating activities of the entity.
Inclusions
PAS 20 applies to:
• Accounting and Disclosure of Government Grants
• Disclosure of Government Assistance
PAS 20 does not apply to:
• Government Grant related to biological assets
Exclusions
•
•
•
Government Grant under hyperinflationary economy
Tax Benefits
Government Participation in the ownership of the entity
Government Assistance
Non-Government Assistance
Free Technical or Marketing Advice
Infrastructure Constructed/Developed
Provision off Guarantee
Imposition of Trading Constraints on Competitors
Government
procurement
policies
responsibility for entity’s sales
Improved Facilities
Tax Benefits
RECOGNITION OF GOVERNMENT GRANT
• Government Grant, including non-monetary grant at fair value, shall be recognized
when there is REASONABLE ASSURANCE that:
a. The entity will comply with the conditions attaching to the grant.
•
b. The grant will be received.
Government Grant shall not be recognized on a cash basis as this is not consistent with
generally accepted accounting practice.
ACCOUNTING FOR GOVERNMENT GRANTS
•
•
•
Government Grants are recognized in profit or loss on a SYSTEMATIC BASIS over the
periods in which the entity recognizes as expenses the related costs for which the grants
are intended to compensate.
Government Grants are accounted using MATCHING PRINCIPLE.
No recognition of related expense, means no recognition of income. Accordingly:
a. Grant in recognition of specific expenses shall be recognized as income over
the period of the related expense.
b. Grant related to depreciable asset shall be recognized as income over the
periods and in proportion to the depreciation of the related asset.
c. Grant related to non-depreciable asset requiring fulfilment of certain
conditions shall be recognized as income over the periods which bear the
cost of meeting the conditions.
d. A government grant that becomes receivable as compensation for
expenses or losses already incurred or for the purpose of giving immediate
financial support to the entity with no further related costs shall be
recognized as income of the period in which it becomes receivable.
PRESENTATION OF GOVERNMENT GRANTS
GRANTS RELATED TO ASSETS
GROSS PRESENTATION
NET PRESENTATION
Statement of FP
Presented as DEFERRED INCOME
(LIABILITY)
DEDUCTED FROM CA of related asset
Statement of CI
Reported separately in OTHER
DEDUCTED FROM DEPRECIATION
INCOME
EXPENSES
GRANTS RELATED TO INCOME
Statement of CI
GROSS PRESENTATION
NET PRESENTATION
Reported separately in OTHER
INCOME
DEDUCTED FROM RELATED EXPENSE
REPAYMENT OF GOVERNMENT GRANT
• A government grant that becomes repayable because conditions of receipt have not
been met shall be accounted for as a change in accounting estimate and accounted
for prospectively.
GRANT RELATED TO
INCOME
(Profit/Loss)
GRANT RELATED TO
ASSETS
(Profit/Loss & BS)
GROSS PRESENTATION
NET PRESENTATION
NET PRESENTATION
APPROACH 1:
1.
2.
Balance DIGG
Excess → Loss (P/L)
APPROACH 2:
Step 1: Increase CA of asset as a result of
repayment
Step 2: Recognize additional cumulative
depreciation expense
BORROWING COST
Definition
Borrowing Costs are interest and other costs that an entity incurs in
connection with borrowing of funds.
Inclusions
a. Interest expense calculated using the effective interest method.
b. Finance charge with respect to a finance lease.
c. Exchange difference arising from foreign currency borrowing to
the extent that it is regarded as an adjustment to interest cost.
Exclusion
Actual or imputed cost o equity or capital.
Qualifying Asset – Assets that takes substantial period of time to get ready for the intended
use or sale.
QUALIFYING ASSETS
NON-QUALIFYING ASSETS
Inventories (Long Period of Time)
Assets measured at Fair Value
Property, Plant, and Equipment
Financial Assets
Inventories that are routinely produced over a short
Intangible Assets
period of time or a mass produced on a repetitive basis
Investment Property (Cost Model)
Assets that are ready for the intended use or sale when
acquired.
RECOGNITION OF BORROWING COSTS
• Borrowing Costs directly attributable to the acquisition, construction or production of
Qualifying Assets are CAPITALIZED as cost of asset.
•
Otherwise, borrowing costs are expensed when incurred.
COMMENCEMENT, SUSPENSION, AND CESSATION OF CAPITALIZATION
COMMENCEMENT
SUSPENSION
CESSATION
When 3 conditions are met:
Capitalization of BC shall be
suspended during extended
Capitalization of BC shall
cease when substantially
a. Entity incurs Expenditures
b. Entity incurs Borrowing
Costs.
c. Entity undertakes Activities
(admin work before physical
construction).
periods
in
which
active
development is interrupted.
all
the
activities
necessary to prepare the
qualifying asset for the
intended use or sale are
complete.
However, it is not normally
suspended during a period
when substantial technical and
admin work is being carried out.
ACCOUNTING FOR BORROWING COSTS
SPECIFIC
BORROWING
Funds are borrowed specifically for acquiring a qualifying asset.
Capitalizable BC = Actual Borrowing Costs – Investment Income
Funds are borrowed for more than one purpose other than construction or
acquisition of qualifying asset.
Capitalizable BC is LOWER of:
• Actual Borrowing Costs
GENERAL
BORROWING
•
Maximum Borrowing Costs
*MAXIMUM BORROWING COSTS = Ave. Expenditures x Capitalization Rate
*CAPITALIZABLE RATE =
NOTES:
•
•
𝑇𝑜𝑡𝑎𝑙 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒 𝑜𝑛 𝐺𝑒𝑛𝑒𝑟𝑎𝑙 𝐵𝑜𝑟𝑟𝑜𝑤𝑖𝑛𝑔𝑠
𝑇𝑜𝑡𝑎𝑙 𝐺𝑒𝑛𝑒𝑟𝑎𝑙 𝐵𝑜𝑟𝑟𝑜𝑤𝑖𝑛𝑔𝑠
Investment income is NOT DEDUCTED for general BC computation
Actual BC > Maximum BC → Excess is EXPENSED
• Actual BC < Maximum BC → Excess is NOT RECOGNIZED
Specific Borrowings (Actual BC – Investment Income)
Add: General Borrowings (Lower of Actual and *Max. BC)
CAPITALIZABLE BORROWING COST
AVERAGE ACCUMULATED EXPENDITURE METHOD
MIXED
BORROWING
* Average Expenditure (Total Exp.)
Less: Specific Borrowings
Average Expenditure financed by BC
Multiply: Capitalizable Rate
MAXIMUM BORROWING COST
AVOIDABLE INTEREST METHOD
* Average Expenditures (Total Exp. For General Borrowings Only)
Multiply: Capitalizable Rate
MAXIMUM BORROWING COST
INTANGIBLE ASSET
Definition
An identifiable nonmonetary asset without physical substance. It must
be controlled by the entity as a result of past event and from which
future economic benefits are expected to flow to the entity.
Essential Criteria
•
Identifiability
Control
Future Economic
Benefits
•
It must be identifiable in order to distinguish it clearly from
goodwill.
An asset is identifiable when (1) it is separable, and (2) it arises
from contractual or other legal rights.
The power of the entity to obtain the future economic benefits flowing
from the intangible asset and restrict the access of others to those
benefits.
It may include revenue from the sale of products or services, cost
savings or other benefits resulting from the use of the asset by the
entity.
Initial Measurement
Separate
Acquisition
Purchase Price
Import Duties
Non-recoverable Taxes
Trade Discounts, Rebates, and Similar Discounts
Directly Attributable Costs (DACs)
Professional Fees
xx
xx
(xx)
xx
Employee Benefits
xx
Testing Costs
xx
xx
Acquisition
through
Government
Either: (1) Fair Value, or (2) Nominal amount or zero, plus any expenditure
that is directly attributable to preparing the asset for its intended use.
Grant
Acquisition
through Business
Combination
Acquisition by
Exchange
Fair Value on the date of acquisition.
WITH COMMERCIAL SUBSTANCE:
1. Fair Value of the asset given up plus any cash payment.
2.
Fair Value of asset received.
3. Carrying Amount of asset given up plus any cash payment.
LACKS COMMERCIAL SUBSTANCE:
Carrying Amount of asset given up plus any cash payment.
Acquisition by
self-creation or
Internal
Cost comprises all DACs necessary to create, produce, and prepare the
asset to be capable of operating it in the manner intended by the
management.
• Cost of materials and services used or consumed in generating
the intangible assets.
• Cost of employee benefits arising from the generation of
Generation
intangible assets.
Fees to register a legal right.
•
Amortization of patent and license that are used to generate the
intangible asset.
•
Subsequent Measurement
Cost Model:
Revaluation Model:
Cost
Less: Accumulated Depreciation
Accumulated Impairment Loss
Total
Revalued Amount
Less: Subsequent Amortization
Subsequent Accumulated Impairment Loss
Total
Notes on Directly Attributable Costs:
Research
Phase is
Expensed.
Development
Phase is
Expensed (as a
General Rule)
•
•
•
Laboratory Research
Searching for application of research finding
Conceptual formulation of possible product or process alternatives
•
Testing in search or evaluation of product or process alternatives
•
Design, construction and testing of preproduction prototypes
•
Design of tools, jigs, molds, and dies involving new technology
•
•
Design, construction and operation of a pilot plant
Design, construction and testing of a chosen alternative
EXCEPTION TO THE GENERAL RULE
Development Phase is Capitalized as Intangible Asset:
• Technical Feasibility
• Intention to Complete
•
•
•
Ability to use or sell
Generate probable future economic benefits
Availability of Resources
•
Ability to measure reliably
*If an entity cannot distinguish research from development phase, it shall treat it as research
phase.
AMORTIZATION OF INTANGIBLE ASSETS
Definition
Systematic allocation of depreciable amount of an intangible asset over
the asset’s useful life.
Amortization
Period
•
•
Commencement: When the asset is available for use.
Cessation: Earlier of derecognition or classified as held for sale.
TYPE OF INTANGIBLE ASSET
Patent
BASIS OF AMORTIZATION
SHORTER: Useful Life and Legal Life (20 years)
Copyright
SHORTER: Useful Life and Legal Life (creator’s life + 50 years)
Franchise
IF FINITE: Useful Life
IF INDEFINITE: Not Amortized
Trademark
NOT AMORTIZED
Computer Software
Useful Life
Website Cot
Useful Life
Brands, Masterheads,
Customerlist
Useful Life
Subsequent Costs are outright EXPENSED as a GENERAL RULE.
EXCEPTIONS TO GR:
o It is capitalized if cost of intangible is probable or measurable.
Impairment of Intangible Assets
• Finite Life – Impairment Indicators are present.
• Indefinite Life – Tested annually and impairment indicators exists.
MEASUREMENT OF GOODWILL
Residual Approach
Purchase Price
Fair Value of Net Asset Acquired
xx
(xx)
GOODWILL
xx
PURCHASE OF AVERAGE EXCESS EARNINGS:
Average Earnings
Normal Earnings
xx
(xx)
Average Excess Earnings
MULTIPLY: Years preceding sale
xx
xx
GOODWILL
xx
CAPITALIZATION OF AVERAGE EXCESS EARNINGS:
Direct Approach
Average Excess Earnings
xx
DIVIDE: Capitalization Rate
xx
GOODWILL
xx
CAPITALIZATION OF AVERAGE EARNINGS
Average Excess Earnings
DIVIDE: Capitalization Rate
xx
xx
Net Assets w/ Goodwill
Net Assets w/o Goodwill
xx
(xx)
GOODWILL
xx
PRESENT VALUE METHOD
Average Excess Earnings
MULTIPLY: PV Factor
xx
xx
GOODWILL
xx
IMPAIRMENT OF ASSETS
•
•
Decrease/decline in the value of an asset
Recoverable Amount < Carrying Amount in the Statement of
•
Financial Position
Recoverable Amount is the new carrying amount
Basic Concepts
CORE PRINCIPLE OF PAS 36: No asset shall be carried above its recoverable
amount.
• RA < CA = Impairment
Scope
•
RA > CA = No impairment
•
•
•
•
Property, Plant and Equipment
Investment Properties measured under cost model
Intangible Asset
Investment in Associates, joint ventures and subsidiaries
•
Goodwill
DEFINITION OF TERMS:
•
•
•
•
Carrying Amount - the amount at which an asset is recognized after deducting any
accumulated depreciation.
Recoverable Amount - the amount expected to be recovered from the sale or use of
an asset.
Impairment - is a fall in the market value of an asset so that the recoverable amount
is now less than the carrying amount in the statement of financial position.
Value in Use - is the present value of the future cash flows expected to be derived
•
from an asset or cash-generating unit
Cost of Disposal - the smallest identifiable group of assets that generates cash
inflows that are largely independent of the cash inflows from other assets or groups of
•
assets.
Cash-Generating Unit (CGU) - are "incremental costs directly attributable to the
disposal of an asset or CGU, excluding finance costs and income tax expense."
REQUIRED TESTING FOR IMPAIRMENT
The following assets are required to be tested for impairment at least annually even if there
are no indications for impairment:
• Intangible asset with indefinite useful life
• Intangible asset not yet available for use
• Goodwill acquired in a business combination
IDENTIFICATION OF IMPAIRMENT ASSETS
General Rule: No impairment indicators = no impairment testing
Exceptions: Annually tested for impairment regardless of existence of impairment indicators.
• Intangible assets with indefinite life
•
•
PPE and intangible assets not yet ready for their intended purpose
Goodwill acquired in a business combination
IMPAIRMENT INDICATORS
EXTERNAL SOURCES
INTERNAL SOURCES
Decrease/decline in the market value of
the asset
Evidence of obsolescence or physical damage of
asset
Change in technological, market, legal,
or economic environment
Change in the manner or extent in which the
asset is used with an adverse effect on the entity
Increase in the interest rate or market
Evidence that the economic performance of an
rate of return on investment
asset will be worse than expected
Carrying amount of net assets is more
than market capitalization
MEASUREMENT OF R.A
Impairment Testing – involves the computation of recoverable amount
Recoverable Amount – higher amount between: (1) Fair Value less Cost to Sell net exit price
and (2) Value in Use (VIU)
NOTE:
- It is NOT ALWAYS necessary to determine both FV-CTS and VIU; either one these amount
> CA, asset is NOT IMPAIRED
FAIR VALUE LESS COST TO SELL
- FV is the price would be received to sell an asset or paid (EXIT PRICE)
-
Cost of Disposal – an incremental cost directly attributable to the disposal of an asset
or cash generating unit EXCLUDING FINANCE COST AND INCOME TAX EXPENSE.
(Example: legal cost, stamp duty, and similar transactions tax, cost of removing the
asset, and direct cost
VALUE IN USE
-
Present value of net cash flows from using the asset until disposal
The cash flows are PRE-TAX CASH FLOWS and PRE-TAX DISCOUNT RATE
INCLUSIONS
●
Cash flows from continuing use of the
asset
●
Cash flows necessarily incurred to
generate cash flows from continuing use
of the asset
Net cash flows received or paid on the
disposal of the asset at the end of its
useful life in an arm's length transaction.
●
(Residual Value and Disposal Costs)
EXCLUSIONS
●
●
●
●
Future cash flows relating
restructuring the entity is not yet
committed
Future costs of improving or
enhancing the asset’s
performance
Cash inflows or outflows from
financing activities
Income tax receipts or payments
GUIDELINES IN ESTIMATING VALUE IN USE:
•
Cash flows projections shall be based on reasonable and supportable assumptions.
•
Cash flow projections shall be based on the most recent budgets on financial
forecasts, usually up to a maximum period of 5 years, unless a longer period can be
justified.
•
Cash flow projections beyond the 5-year period shall be estimated by extrapolating
the 5-year projections using a steady or declining growth rate each subsequent year,
unless an increasing rate can be justified.
NOTE: The value in use of an intangible asset with an indefinite life is computed as (Cash flows
+ Discount rate). This is an application of perpetuity.
RECOGNITION OF IMPAIRMENT
IMPAIRMENT OF CASH GENERATING UNIT (CGU)
- Smallest identifiable group of assets that generate cash inflows from continuing use
that are largely independently of the cash inflows from other assets or group of assets
STEP 1: Allocate the goodwill to CGU
STEP 2: Allocate the excess pro-rata on the other assets’ CA
NOTE: RA after impairment loss allocation should not be lower than the asset’s own RA or Zero.
IMPAIRMENT OF CORPORATE ASSETS
- Assets other than goodwill that contribute to the future cash flows of both the cash
generating unit under review and other CGus
-
Group or divisional assets such as head office building, EDP, equipment or a research
center
Do not generate cash inflows independently from other assets > RA cannot be
determined unless management has decided to dispose of the asset
-
RA of the CGU to which the corporate asset belongs is determined and compared with
the CA of the CGU
REVERSAL OF IMPAIRMENT USE
The entity assesses at the end of each reporting period whether there is an indication that an
impairment loss recognized in prior periods for an asset may no longer exist or may have
decreased.
●
●
If such an indication exists, the entity estimates the recoverable amount of that asset.
In making the assessment, the entity considers the exact opposites of the indications of
impairment provided earlier (e.g., significant increase in the asset’s market value rather than decline, significant changes in technology that favorably affect the
recoverable amount of an asset - rather than adversely, etc.)
●
If the recoverable amount of the previously impaired asset exceeds its carrying
amount, the carrying amount is increased to equal the recoverable amount
●
The increase is the reversal of impairment loss
This is subject to the following limitations:
a. The reversal of impairment loss shall not result to a carrying amount in excess of the
assets would be carrying amount had no impairment loss been recognized in prior
periods
b. Impairment loss on goodwill is never reversed
An indication that a previously recognized impairment loss may no longer exist or may have
decreased may signify that the remaining useful life, the depreciation or amortization
method, or the residual value of the asset needs to be reviewed and adjusted even if no
reversal of impairment loss is recognized.
REVERSAL OF IMPAIRMENT LOSS OF CGUs
- Allocate the gain on reversal pro-rata with their carrying amount (other assets other
than goodwill)
o Should not be higher than the asset's own RA/maximum RA.
- No reversal of impairment loss of goodwill.
NOTE: Impairment loss recognized for goodwill shall NOT BE REVERSED in a subsequent period.
INVESTMENT IN EQUITY SECURITIES
PURPOSE OF INVESTMENTS:
• To earn profit (passive income)
To serve operating and financial arrangements of beneficial
relationship with another entity
• To serve as protection for future possible losses
INVESTMENT IN EQUITY SECURITIES:
• Investments represented by contracts that evidence residual
interest in a corporation
•
Basic Concepts
•
•
Investment in shares
DO NOT include redeemable preference shares, treasury shares,
and convertible debt
Scope
TYPE OF
INVESTMENT
•
•
Property, Plant and Equipment
Investment Properties measured under cost model
•
•
Intangible Asset
Investment in Associates, joint ventures and subsidiaries
•
Goodwill
OWNERSHIP
CLASSIFICATION
GOVERNING
STANDARD
ACCOUNTING
Less than 20%
Investment in
Equity Securities
PFRS 9
FV Method or
Cost Model
20% - 50%
Investment in
Associates
PAS 28
Equity Method
More than 50%
Investment in
Subsidiary
PFRS 3
Acquisition
Method
PREFERENCE
Regardless of
Investment in
SHARES
Ownership
Equity Securities
ORDINARY
SHARES
PFRS 9
FV Method or
Cost Model
DEFINITION OF TERMS
SECURITY
EQUITY SECURITIES
interest or a share in a debt or equity of another entity that is
represented in a financial instrument and is one that is being dealt in
on capital markets.
represent ownership in a company or rights to acquire ownership
interests at an agreed-upon or determinable price.
PREEMPTIVE
RIGHTS
Basic right of existing shareholders to maintain his/her ownership
percentage in a corporation as the company issues additional shares
of stock to new investors.
SHARE WARRANTS
Certificate evidencing a shareholder’s preemptive right.
THEORETICAL
MARKET VALUE OF
SHARE RIGHTS
Used to assign some value to the stock right when the actual fair
market value of the share rights is absent.
SHARE/STOCK
SPLIT
DIVIDENDS
SHARE RIGHTS
Reduction in the par or stated value of share capital accompanied by
a proportionate increase in the number of shares outstanding. A share
split does not affect the equity of a shareholder in the issuing
corporation, nor does it affect the issuing corporation’s total
shareholder’s equity.
Corporate distributions to its shareholders proportionate to the
number of shares held by the latter.
A dividend of subscription rights to buy additional securities in a
company made to the company’s existing security holders.
EXAMPLES OF EQUITY SECURITIES
1. Preference Shares/Preferred Stock
2. Ordinary Shares/Common Stock
3. Share Warrants/Stock Rights
4. Call Options
5. Put Options
REASONS WHY THE SHARE CAPITAL/CAPITAL STOCK OF OTHER COMPANIES MAY BE PURCHASED
BY AN ENTERPRISE
• as temporary placements of excess cash and held primarily for sale in the near term to
generate income on short-term price fluctuations;
•
to obtain long-term customer or supplier or creditor relationship to secure certain
•
operating or financing arrangements with these companies; or
to exercise significant influence or even control over the operating policies of another
entity.
CLASSIFICATION OF EQUITY SECURITIES
1. Equity Investments at Fair Value through Profit or Loss (FVPL)
2. Equity Investments at Fair Value through Other Comprehensive Income (OCI)
3. Investment in Associate
4. Investment in Subsidiaries
CLASSIFICATIONS, MEASUREMENT, AND PRESENTATIONS
QUOTED – can be measured reliably (fair value method)
•
o
FVPL – held for trading or known as “trading securities”
o
FVOCI – not held for trading available for sale investment
Under PFRS 9, an entity is allowed to make an irrevocable designation of an investment
in equity securities to FVOCI
UNQUOTED – cost model
•
CLASSIFICATION
FVPL
QUOTED
INITIAL
SUBSEQUENT
PRESENTATION OF
FS
MEASUREMENT
MEASUREMENT
CHANGES IN FV
PRESENTATION
FV
FV
Profit/Loss
Current Asset
GR: NCA
SHARES
(FV
FVOCI
FV + TC
FV
OCI
MODEL)
MODEL)
expected w/n
12 mos
UNQUOTED
SHARES (COST
XPN: CA if
COST
Cost - IL
(if impaired)
N/A
NOTES:
•
FV excludes dividends when shares are acquired dividend-on.
•
FV is determined using FV hierarchy under PFRS 13
•
Journal entries to record unrealized gain/loss on changes in FV.
Either CA or
NCA
TRADITIONAL
METHOD
GAIN
FVPL
Investment in FVPL
Unrealized Gain
LOSS
FVOCI
Investment in FVPL
xx
Unrealized Gain
Deferred Liability
xx
Unrealized Loss
xx
Investment in FVPL
xx
xx
xx
xx
Unrealized Loss
xx
Deferred Tax Asset
xx
Investment in FVPL
xx
EQUITY INVESTMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS
● The determination of the gain or loss on the sale of securities is based on the difference
between the net proceeds from sale and the carrying amount of the investment.
○ Carrying Amount, Beginning > Fair Value, End = Unrealized Loss
○ Carrying Amount, Beginning < Fair Value, End = Unrealized Gain
● Actual Sale:
○
○
Carrying Amount > Selling Price Less Cost To Sell = Realized Loss
Carrying Amount < Selling Price Less Cost To Sell = Realized Gain
EQUITY INVESTMENTS AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME
● Any change in fair value of the investment during the period is taken to other
comprehensive income in the statement of comprehensive income.
●
At the date of sale, the investment account shall be adjusted to fair value, presumably
the selling price, through other comprehensive income.
○ Carrying Amount>Selling Price=Realized Loss
○ Carrying Amount<Selling Price=Realized Gain
●
The cumulative balance of unrealized gain or loss in equity shall remain in equity and
is not subsequently reversed in profit or loss. However, the entity may transfer the
cumulative gain or loss within equity.
ACCOUNTING FOR DIVIDENDS
THREE IMPORTANT DATES:
1.
2.
Date of Declaration (Dividend on)
• date on which the payment of dividends is approved by the BOD
• revenue or income from dividends shall be recognized only when the
shareholder’s right to receive was already established
• recognize dividend income
Date of Record (Ex-dividend)
•
•
•
3.
date on which the stock and transfer book is closed for registration
only those shareholders registered up to this date are entitled to receive
dividends
no journal entry
Date of Settlement / Payment (Ex-dividend)
• date on which the dividends declared shall be paid
TYPES OF DIVIDENDS
1. Cash Dividends – distribution of funds or money paid to stockholders generally as part
of the corporation’s current earnings or accumulated profits.
2. Bonus Issue or Stock Dividends – dividend payment to shareholders that is made in
shares rather than as cash. Distribution of bonus issue in the same class of share capital
increases the number of shares held by each shareholder, without any change in the
total shareholders’ equity balance or net assets of the distributing corporation. The
equity of each shareholder after the receipt of the bonus issue is also unchanged. Thus,
an investor receiving a bonus issue records the transaction by making a memorandum
3.
entry. The transaction merely adjusts the carrying value per share held by the investor.
Property Dividends – dividend paid to investors in the form of assets and not cash. The
investor records the asset received as dividend revenue at the asset’s fair market value.
4. Scrip Dividends
5. Liquidating Dividends
ACCOUNTING FOR SHARE SPLITS
- Transaction whereby the outstanding share are called in and replaced by a larger
number, accompanied by a reduction in the par or stated value of each share
- Memorandum entry only – receipt of new shares by virtue of share split
No. of Shares
Cost per Share
SPLIT UP
Increase
Decrease
SPLIT DOWN
Decrease
Increase
Total Cost
No Effect
ACCOUNTING FOR SPECIAL ASSESSMENT
Special Assessment – a decision by the BOD requiring the investors to make additional
contributions or investments when the corporation is under financial difficulty.
SPECIAL ASSESSMENT
No. of Shares
Cost per Share
Total Cost
No Effect
Increase
Increase
Additional Investment
Investment Shares
Cash
xx
xx
xx
ACCOUNTING FOR STOCK RIGHTS
Accounted for separately - as derivative @FVPL
Stock Rights
xx
Investment in Shares
xx
MEASURING STOCKS
1.
Residual Approach
FV Shares (right on)
FV Shares (ex-right)
Theoretical Value assigned to Stock Rights
2.
Direct Approach
Not Accounted for separately
- Memorandum entry (upon receipt of stock rights)
xx
xx
xx
RECLASSIFICATIONS
Transfer in and out of investment at FVPL is NOT ALLOWED.
IMPAIRMENT AND REVERSAL OF IMPAIRMENT
- FA measured at FVPL or FVOCI, all gains and losses are EITHER presented in profit or loss
or in other comprehensive income; not necessary to assess financial assets measured
at fair value for impairment.
- Subsequent increase in FV (reversal or impairment) shall be recognized in P/L or OCI
depending on classification of the investment.
INVESTMENT IN ASSOCIATES
Basic Concepts
•
Associate – an entity, such as partnership, over the investor has
significant influence.
•
Significant Influence – power to participate in the financial and
operating policy decision (investor–investee relationship)
Control – power to govern in the financial and operating policies
of an entity (parent-subsidiary relationship)
•
QUANTITATIVE THRESHOLD – at least 20% or more voting power; includes
potential voting rights
Significant
Influence
Acquired
• Warrants and Options
• Convertible Securities
QUALITATIVE THRESHOLD
• Participation in the policy making process
• Representation in the BOD
•
•
Provision of technical information
Material Transactions
•
Interchange of Managerial Personnel
ACCOUNTING FOR ASSOCIATES
• In its consolidated financial statements, an investor should use the equity method
Equity method
•
Is a method of accounting whereby the investment is initially recognized at cost and
adjusted thereafter for the post acquisition change in the investor’s share of net assets
of the investee. The profit or loss of the investor includes the investor's share of the profit
or loss of the investee.
Applying the Equity Method
•
•
The equity investment is initially recorded at cost and is subsequently adjusted to reflect
the investor's share of the net profit or loss of the associate.
Distributions and other adjustments to carrying amount - Distributions received from
the investee reduce the carrying amount of the investment. Adjustments to the carrying
amount may also be required arising from OTHER changes in the investee's equity
(revaluation surplus and translation gains and losses.
Share in profit or loss
1. With cumulative preference shares
• The investor computes its share of profits or losses after adjusting for the
2.
3.
dividends on such shares, whether or not the dividends have been declared on
cumulative preference shares.
With non-cumulative preference share
• if the preference shares are non-cumulative, adjustments for dividends are
made only if there is a declaration.
Undervaluation of depreciable asset
•
•
•
If a depreciable asset is undervalued the depreciation expense presented in the
income statement of the associate is understated and net income will be
overstated.
Undervaluation of depreciable assets should be amortized over remaining
useful life.
The amortization of undervaluation of assets decreases the net income of the
associate.
4. Undervaluation of inventory at the time of purchase
• Undervaluation of inventory at the time of purchase will understate the cost of
goods sold and will overstate the net income presented by the associate.
5. Undervaluation of non-depreciable asset
• No adjustment to net income of the associate because revenue and expenses
presented are not affected by the undervaluation.
MEASUREMENT
At cost + Transaction Cost
Initial
Measurement
Cost or Purchase Price ≠ Share in FVNA (Associate)
Cost or Purchase Price > Share in FVNA − Goodwill
Cost or Purchase Price < Share in FVNA − Gain on Bargain Purchase (P/L –
Investment Income)
Subsequent
Measurement
•
•
cost ± adjustment for investor’s share in changes in equity of
investee
equity method
INVESTEE WITH HEAVY LOSSES
PAS 28
Investor′s Share in Losses > Investor′s Interest in the Associate − Stop Recognizing Further
Losses (Inv.in Assoc). −ZERO
INTEREST:
1. Investment in Associate
2. Investment in Preferred Shares (Associate)
3. Unsecured Long-term Receivables
INTERCOMPANY TRANSACTIONS
Transactions in the form of sale of goods or services between the investor and the associate.
CHANGES IN PERCENTAGE OWNERSHIP
PRESENTATION AND REPORTING
INVESTMENT IN ASSOCIATES – NCA
EQUITY IN MOST RECENT FS (INVESTEE)
1. Difference in Reporting Period – not more than 3 months
2. Difference in Accounting Policy – the investee/associate should adjust
BASIC CONCEPTS
DEBT SECURITIES – instruments representing a creditor relationship with an enterprise.
CHARACTERISTICS OF DEBT SECURITIES
1.
2.
maturity value;
interest rate that specifies the periodic interest payments; and
3.
maturity date
EXAMPLES OF DEBT SECURITIES
● Government Securities such as Philippine Treasury Bills and Warrants
● Corporate Bonds
● Convertible Debt
●
●
Commercial Papers
Bond Certificates – certificates of indebtedness issued by a company or government
agency guaranteeing payment of a principal amount at a specified future date plus
periodic interest. They may be divided into different denominations to encourage a
substantial number of investors to purchase the bond issue.
PRICE DIFFERENCE OF DEBT SECURITIES
●
●
●
Stated/Nominal/Coupon Rate = Effective/Yield/Market/Actual Rate bonds will sell at
face value
Stated/Nominal/Coupon Rate > Effective/Yield/Market/Actual Rate purchasers of the
bonds will pay more than face value, resulting to a bond premium
Stated/Nominal/Coupon Rate < Effective/Yield/Market/Actual Rate less than face value,
resulting to a bond discount
REASONS FOR THE PRICE DIFFERENCES OF DEBT SECURITIES
● risk relating to the bonds
● credit image of the issuing corporation
●
●
●
current interest rates
expected future interest rates
stated rate of interest on the investments
TYPE OF BONDS
1. TERM BONDS – mature on single date
2. SERIAL BONDS – have series of maturity dates; payable in installments
3. CALLABLE BONDS – called or redeemed by issuer prior to date of maturity
4. CONVERTIBLE BONDS – give the bondholders the right to exchange bonds for share
capital
5. REGISTERED BONDS – require the registration of the name of the bondholder on the
books of the corporation
6. COUPON BONDS – bondholder is not registered
7.
COLLATERAL TRUST BONDS – bonds secured by investments in stocks and bonds
CLASSIFICATION, MEASUREMENT, AND PRESENTATION
A) INVESTMENT AT FAIR VALUE THROUGH P/L (Trading Securities) – short-term profits
B) INVESTMENT AT FAIR VALUE THROUGH OCI (Available For Sale Investments) – collect
contractual cash flows, an objective of HOLDING the debt security for SALE to take
advantage of business opportunities
C) INVESTMENT AT AMORTIZED COST (Held to Maturity Investments) – collect contractual
cash flows
INITIAL
SUBSEQUENT
CHANGE IN
MEASUREMENT
MEASUREMENT
FAIR VALUE
FVPL
FV
FV
P/L
FVOCI
FV + TC
FV
FAC
FV + TC
AC
CLASSIFICATION
INTEREST
BALANCE
INCOME
SHEET
NO
Nominal
CA
OCI/OCL
YES
Effective
NCA
N/A
YES
Effective
NCA
AMORTIZATION
FAIR VALUE
FV excludes accrued interest if the bonds were acquired between interest
payment dates
FV is the present value of the contractual cash flows using the effective
interest rate
FVOCI AND AMORTIZED COST OF INVESTMENT
1. Initial Measurement > Face Value of Bonds = Premium
2. Initial Measurement < Face Value of Bonds = Discount
DISPOSAL OF INVESTMENTS
DISPOSAL OF INVESTMENTS
FVPL
Net Proceeds
Carrying Amount
Realized G/L
FVOCI
XX
(XX)
XX/(XX)
Amortized Cost
Net Proceeds
Amortized Costs
Realized G/L
XX
(XX)
XX/(XX)
Net Proceeds
Amortized Costs
Realized G/L
XX
(XX)
XX/(XX)
NOTES:
1. FVOCI – Cumulative Unrealized Gain/Unrealized Loss Retained Earnings
2. Net Proceeds excludes accrued interest if the bonds were sold between payment
interest dates
BASIS OF THE CLASSIFICATION OF DEBT SECURITIES
1. business model for managing the financial asset
2.
contractual cash flow characteristics of the financial asset
BUSINESS MODEL – refers to how an entity manages its financial assets to generate cash flows.
The entity’s business model is determined at a level that reflects how groups of financial assets
are managed together to achieve a particular objective.
TYPES OF BUSINESS MODEL FOR MANAGING ITS FINANCIAL ASSET
1. collecting cash flows that are solely payment for principal and interest (SPPI)
2. selling financial assets when opportunity from profit-taking arises because of
fluctuations in fair values and interest rates
3.
both collecting cash flows that are payment for principal and interest and selling the
asset when opportunity arises
DEBT INVESTMENTS AT AMORTIZED COST
● Upon initial recognition, financial asset at amortized cost shall be measured at
purchase price plus transaction costs that are directly attributable to acquisition cost
(i.e. original cost of the investment)
● The resulting premium or discount is amortized over the term of the debt instrument
using the effective interest method.
●
●
The amortization of discount or premium adjusts the nominal interest to the effective
interest.
If the bond year does not coincide with the accounting period, the amortization of
premium or discount must be updated at each reporting date.
●
If bond investment is purchased between interest payment dates, the buyer should pay,
in addition to the purchase price of the bonds, the amount of accrued interest from the
last interest payment date to date of purchase.
●
Disposal of Debt Investment at Amortized Cost
○ When an investment measured at amortized cost is sold before maturity date,
the investor shall update the amount of premium or discount amortization.
Amortization should be taken up until the date of sale to update the carrying
value of the investment sold.
○ Any gain on sale of investments is presented in profit or loss as part of other
operating income, while any loss on the sale of investment is classified as part
of other operating expenses or losses.
NOT QUALIFIED AT AMORTIZED COST
● derivatives, such as option, forwards and swaps
● bonds convertible into equity instruments
●
●
a loan that pays an interest rate that has inverse relationship to market rate
a bond that pays variable interest rate and whose maturity is periodically reset
DEBT INVESTMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS
● Debt investments at fair value through profit or loss are initially recognized at purchase
price, which is the fair value at the date of acquisition. Transaction costs, even if directly
attributable to acquisition of assets, are taken to profit or loss.
●
Discount and premium are not amortized; hence, the interest revenue is based on the
stated interest rate. At reporting date, the debt investments are measured at fair value
and the unrealized gains and losses are taken to profit or loss.
●
If a debt security is purchased between two interest payment dates, the buyer pays, in
addition to the purchase price, the amount of interest accrued from last interest date
to the date of purchase. Such accrued interest is charged to Interest Receivable.
DEBT INVESTMENTS AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME
● Investments designated as at fair value through other comprehensive income are
●
●
●
initially recognized at purchase price plus transaction costs.
Interest earned and recognized on these investments is based on
effective/yield/market/actual interest, computed in a similar manner for investments
that are measured at amortized cost.
Any change in fair value from date of acquisition or from beginning to the end of the
reporting period is taken as an unrealized gain or loss in other comprehensive income.
Upon sale of debt investments designated as at fair value through other
comprehensive income, the accumulated amount in equity (Unrealized Gains/Losses
on Debt Investments at FV through OCI) shall be transferred to Profit or Loss.
RECLASSIFICATION
-
Change in the business model
Reclassification is accounted for prospectively
-
Difference between carrying amount and initial measurement, accounted for as a gain
on reclassification (P/L)
Transfer to amortized cost investment (effective interest rate = effective interest rate on
-
the date of reclassification)
CIRCUMSTANCES WHERE RECLASSIFICATION OF DEBT INVESTMENT IS REQUIRED
1.
2.
If an entity has a portfolio of commercial loans that it sells in the short term and then
subsequently acquires a company that manages commercial loans and has a
business model that holds the loans to collect the contractual cash flows
(Reclassification from FVPL to amortized cost)
If a financial services entity decided to shut down its retail mortgage business and is
now actively trading its portfolio
CIRCUMSTANCES WHERE RECLASSIFICATION OF DEBT INVESTMENT IS PROHIBITED
1. change in management intention
2. temporary disappearance of a particular market
3.
transfer of assets between existing model
GUIDE IN ACCOUNTING FOR RECLASSIFICATION
RECLASSIFICATION
AC > FVPL
AC > FVOCI
FVPL > FVOCI
FVPL > AC
ADJUSTMENT
Difference between FV and amortized cost is taken to profit or loss
Difference between FV and amortized cost is taken to other
comprehensive income; Effective interest rate is not adjusted
Fair value at reclassification date becomes its new carrying amount.
Effective interest rate shall be calculated based on fair value on
reclassification date
Fair value on date of reclassification is the initial amortized cost
Calculate an effective interest rate
The effective interest rate is not adjusted. The amount accumulated in
FVOCI > AC
FVOCI > FVPL
equity is removed to adjust the asset to amortized cost, as if it had been
designated at amortized cost from date of initial recognition.
Transfer the cumulative unrealized gains and losses in OCI to profit or
loss
IMPAIRMENT AND REVERSAL OF IMPAIRMENT
NOTE: Only applies in FVOCI and Amortized Cost
INVESTMENT PROPERTY
Land or building (or part of a building), or both, held (by the owner or by
the lessee under finance lease) to earn rentals and/or for capital
Definition
appreciation, rather than for use in the production or supply of goods or
services or for administrative purposes or sale in the ordinary course of
business.
•
land held for long-term capital appreciation rather than for shortterm sale in the ordinary course of business
•
land held for a currently undetermined future use (it is presumed
to be held for capital appreciation)
Examples
•
building owned by the entity (or held by the entity under a finance
lease) and leased out under one or more operating leases
•
building that is vacant but is held to be leased out under one or
more operating leases
•
property that is being constructed or developed for future use as
investment property
CRITERIA FOR A PROPERTY INTEREST HELD BY THE ENTITY UNDER AN OPERATING LEASE TO BE
RECOGNIZED AS INVESTMENT PROPERTY
1. the definition of investment property is met;
2.
the operating lease is accounted for as if finance lease; and
3.
the lessee uses the fair value model as the measurement basis for all investment
property held
•
Inventory: property intended for sale in the ordinary course of
business or in the process of construction or development for such
sale (e.g. property acquired exclusively with a view to subsequent
disposal in the near future or for development and resale);
Examples of
NOT Investment
Property
•
•
Construction in Progress: property being constructed or developed
on behalf of third parties;
PPE: owner-occupied property, including property held for future
use as owner-occupied property, property held for future
development and subsequent use as owner-occupied property,
property occupied by employees and owner occupied property
awaiting disposal; and
Ways to
acquire
Investment
Property
•
Property that is being leased to another entity under a finance
lease
•
cash purchase;
•
on a deferred payment plant;
•
in exchange for a non-monetary asset;
•
by issuing the company’s own equity securities; or
•
under a lease classified as finance lease
INITIAL MEASUREMENT
*at COST + TRANSACTIONS COSTS + DIRECT ATTRIBUTABLE COSTS (DACs)
SUBSEQUENT MEASUREMENT
FAIR VALUE MODEL
COST MODEL
@ FV
Cost – Accum. Dep. – Imp. Losses
Statement of OCI
Unrealized gain on changes in FV
(Profit or Loss)
Depreciation
Significance of Fair
Value
For measurement and disclosure
For Disclosure only
Balance Sheet (SFP)
Expense
Impairment Losses
and
NOTES:
1. Held under finance lease - fair value model only
2. Inability to determine fair value
a. Cost model until disposal
b. Residual value is presumed to ZERO
CHANGE IN ACCOUNTING POLICY
• Prospectively
• ONLY change from cost model to fair value model is ALLOWED
TRANSFERS
• Change of Use
o Commencement of owner occupation – from IP to OOP
o
Commencement of development (renovation) with a new view to sale – from
investment property to inventory
o
End of owner occupation – from OOP to IP
o
Commencement of an operating lease to another entity – from inventory to
investment property
FROM
Investment
TRANSFERRED CATEGORY
Property
TREATMENT
Owner-occupied
Fair value at the change of use is the
carried at fair value
property or inventories
‘cost’ of the property under its new
classification
Owner-occupied
Investment
Difference in carrying amount and fair
property
carried at fair value
value as revaluation under PAS 16
Inventories
Investment
Property
carried at fair value
Difference in carrying amount and fair
value is recognized in profit or loss
Investment
property
under construction or
development
Completed
Investment
Property that will be
carried at fair value
Difference between the fair value at
the date of transfer and the previous
carrying
amount
should
be
recognized in net profit or loss
Investment Property
under the cost model
Owner-occupied
property or inventories
No change in the carrying amount of
the property transferred
Property
DERECOGNITION:
● An investment property shall be derecognized (i.e. eliminated from the statement of
financial position) on disposal or when the investment property is permanently
withdrawn from use and no future economic benefits are expected from its disposal.
●
At the date of the disposal, the difference between the net disposal proceeds and the
carrying amount of the investment property shall be recognized as a gain or loss on the
statement of comprehensive income.
CURRENT LIABILITIES
•
A present obligation that arises from past transactions or
events.
•
Obligating events:
o Legal Events – settlement of liability can be enforced by
law.
o Constructive Events – events that arise from entity’s
past transactions.
Settlement requires and outflow of economic benefits through:
Basic Concepts
•
o
o
Payment of Cash
Payment of Non-Cash
o
Payment of Services
Measurement
Initial
Measurement
Subsequent
Measurement
Amortized?
Basis of IE
@FVPL
Fair Value
Fair Value
X
Nominal Rate
@Amortized
Cost
Fair Value less
Transaction
Costs
Amortized
Cost
√
Non-Financial
Best Estimate
Best Estimate
Liabilities
of Cash Flow
of Cash Flow
Classification
Financial
Liabilities
•
•
Usually, ER if
initially measured
at PV
Within 12 months after the reporting period
Held for trading – Financial Liability at FVPL
The entity has no unconditional right to defer settlement
for at least 12 months
If any of the aforementioned criteria are NOT MET, present as
Non-current Liability.
Non-Trade Payables are classified as CURRENT LIABILITIES if due
for settlement within 12 months AFTER reporting period.
o
•
√
Any of the following criteria set by PAS 1:
o Settled within normal operating cycle – Trade Payables
o
o
Financial
Presentation
Effective Rate
REFINANCING OF CURRENTLY MATURING OBLIGATION
• Creates a right to defer
• Applies to long-term currently – GENERAL RULE: Current Liability
•
May be done through extension of maturity date or through issuance of bonds. The
proceeds of which is used to settle the currently maturing obligation.
PRESENTATION OF REFINANCING
• GENERAL RULE: Liable within 12 months → Current
• EXCEPTION:
o
The entity has the discretion to refinance or roll over an obligation for at least
12 months AFTER the reporting date. → Non-Current
PRESENTATION OF BREACH OF CONTRACTS
•
•
GENERAL RULE: Liable due beyond 12 months → Non-Current
EXCEPTION:
o Breach of contract to pay on demand → Current
o
Lender agreed to provide GRACE PERIOD, of 12 months AFTER the reporting
date, on or before the end of reporting date → Non-Current
TRADE AND OTHER PAYABLES
(POV: BUYER)
Unadjusted Balance
Add: Post-date checks and Unreleased Checks
Add: Debit Balances in AP
xxx
xxx
xxx
Less: Unrecorded Purchase Returns and Allowances
Less: Discount Forfeited
Effect of Freight Terms
xxx
xxx
→ Under NET METHOD
xx/(xx)
Adjusted Balance
xxx
→ If unadj. is a NET AMT.
UNEARNED INCOME
• Income already received but not yet earned
• May be realized within one year or in more than one year from the END OF REPORTING
PERIOD
•
May come from:
o Goods (Advances from customers)
o Services (Unearned Income from service contracts, unearned subscription revenue)
o
o
Use of entity’s resources (Unearned interest income, unearned rental income)
Gift certificates
Unearned Income
Earned Portion
xxx
xxx
xxx
Beginning Balance
Cash Receipts
xxx
Ending Balance
Gift Certificates Payable
Redemption
Expired Portion
xxx
xxx
xxx
xxx
Beginning Balance
Cash Receipts fr. Sales
xxx
Ending Balance
REFUNDABLE DEPOSITS
• Cash or property received from customers but which are refundable after compliance
with certain conditions.
Liability for Deposits
Deposits Returned/Applied
xxx
xxx
Beginning Balance
Deposits Cancelled
xxx
xxx
Cash Receipts
Deposits Expired
xxx
xxx
Ending Balance
PAYROLL TAXES PAYABLE
• Withholding Taxes
•
•
EmployEE Contributions
EmployER Contributions
→ Deducted from the salary of the employee
→ Deducted from the salary of the employee
ESCROW LIABILITY
• ESCROW – the use of third party / intermediary (bank) – holds an asset or funds
before they are transferred from one party to another.
Escrow Liability
Cash transfers or payments
Interest and other charges paid
xxx
xxx
xxx
xxx
xxx
Beginning Balance
Cash Receipts
Interest Income
xxx
Ending Balance
NOTES PAYABLE
Definition
Recognition
A liability evidenced by written document called “promissory note.”
Subsequent
Change in
Measurement
Measurement
Fair Value
FVPL
FV
FV
√
(P/L)
X
Nominal
Rate
Amortized
Cost
FV - TC
AC
x
√
Effective
Rate
Classification of Financial Liability at Amortized Cost
SHORT
TERM
Amortized?
Interest
Expense
Initial Measurement
Interest-Bearing
Face Value
Non-Interest
Bearing
Face Value (unless
discounting is material)
Interest-Bearing
LONG TERM
Basis of
Initial
With
rate
reasonable
interest
Without reasonable interest
rate
Present Value
Non-Interest
Bearing
Interest-Bearing Note Issued for Property
When a property or noncash asset is acquired by issuing an interest-bearing note, the
property or asset is recorded at purchase.
Non-Interest Bearing Note Issued for Property
•
•
When a property or noncash asset is acquired by issuing an noninterest-bearing note,
the property or asset is recorded at cash price.
LOANS PAYABLE
Definition
A liability evidenced by written document called “promissory note.”
Initial Measurement
Recognition
Face Value
Origination Fee
Initial Measurement
xx
xx
xx
Subsequent Measurement
At amortized cost using the effective
interest method.
DEBT RESTRUCTURING
Definition
A situation where the creditor, for economic, or legal reasons related to the
debtor’s financial difficulties, grants to the debtor concession that would not
otherwise be granted in a normal business relationship.
ASSET SWAP
• Transfer of any assets by the debtor to creditor in full settlement of
obligation.
• Results to derecognition of financial liability.
*Gain or Loss on Restructuring = CA of Liability – FV of Asset
*Gain or Loss on Exchange = FV of Asset – CA of Liability
EQUITY SWAP
• Liability is fully or partially extinguished by the debtor issuing equity
instrument to the creditor.
*Gain on Extinguishment (P/L) = CA of Liability – Initial Meas. of Equity
Order of Priority for IM of Equity Instrument:
Forms of Debt
Restructuring
•
•
•
FV of Equity Instrument
FV of Liability
CA of Liability
MODIFICATION OF TERMS
• It can be done through:
o Interest Concession
▪
▪
▪
o
Reduction of Interest Rate
Forgiveness of Unpaid Interest
Moratorium on Interest
Maturity Value Concession
▪ Extension of Maturity Date
▪ Reduction of Principal Amount
CA of Liability (includes Accrued Interest)
Initial Measurement of Equity Instrument
xx
xx
Gain on Extinguishment (P/L)
xx
*Direct Cost involved in modification of terms – deducted from the CA of
OLD Liability
SUBSTANTIAL
Modification of Terms
•
•
•
•
•
•
•
•
•
Gain or Loss ≥ 10% of the old liability.
Gain if CA old liability > PV of new
liability.
Loss if CA old liability < PV of new
liability
OLD financial liability—EXTINGUISHED
NEW financial liability—RECOGNIZED
Old effective rate is used in
computing the PV of the new
liability.
Interest expense—use old rate
Interest paid—use new rate
Any costs incurred shall be
recognized as part of gain or loss on
extinguishment
NO SUBSTANTIAL
Modification of Terms
•
•
•
•
•
•
•
Gain or Loss < 10% of the old liability
Gain of CA old liability > PV of new
liability
Loss if CA old liability < PV of new liability
NO new journal entries to close the old
liability and to recognize the new
liability*
Old effective rate is used in computing
the PV of the new liability.
Interest expense—use of old rate
Interest paid—use new rate
* UPDATE: Gain or loss on modification should
be recognized in profit or loss even if there is
no substantial modification of terms.
PROVISIONS
Definition
A present obligation of uncertain timing or uncertain amount.
Provision is recognized when ALL conditions are met:
•
Recognition
•
•
The entity has present obligation, legal or constructive, as a
result of a past event.
It is probable that an outflow of resources embodying economic
benefits would be required to settle the obligation.
The amount of the obligation can be measured reliably.
Likelihood
Outcome
Treatment if LIABILITY
More than 95%
Virtually Certain
51% to 95%
Probable
5% to 50%
Possible
Less than 5%
Remote
Treatment if ASSET
Provision (Accrue)
Provision (Accrue)
Contingent Liability
(Disclose to Notes)
Contingent Liability
(Disclose to Notes)
DO NOTHING
DO NOTHING
Nature of Outflow
Measurement Basis
General Rule
Best Estimate
Large Population (Distributed
Probability)
Expected Value/ Weighted
Average Value
Range of Possibility (Point of
Midpoint
Range is as likely to happen)
Other Measurement Considerations
Measurement
Risk and Uncertainties
Amt. of Provision x Risk Adj Factor
Present Value
Discounting is Material
Future Events
Sufficient & Objective Evidence
Expected Disposal of Assets
NOT CONSIDERED
Reimbursement
SHALL BE RECOGNIZED when it is
virtually certain
Changes in Provision
Accounted Prospectively
Future Operating Losses
NOT RECOGNIZED
Onerous Contract
Recognized and measured
Recording of
Provisions
GENERAL RULE:
DR. Expenses or Loss
CR. Estimated Liability
EXCEPTION:
DR. Asset
CR. Estimated Liability
COMMON TYPES OF PROVISIONS
Lawsuit/ Court Cases
•
Present Obligation arises upon causing damage/harm.
•
•
•
Present Obligation arises upon provision of law/contract.
Presented as Non-current Liability.
Decommissioning Liability is the estimated cost of
abandonment or decommissioning of an asset at the end of
its useful life after full exhaustion of its economic benefits.
Decommissioning
Cost
Increase in the balance decommissioning liability
DR. Asset or Impairment Loss
CR. Estimated Liability
Decrease in the balance of decommissioning liability
DR. Estimated Liability
CR. Asset
•
•
•
Present Obligation arises upon sale.
Presented as Current Liability.
Warranties Liability is the agreement to provide customers
free repair service or replacement if in case the product are
defectives.
Warranties
Estimated Warranty Liability
Actual Expenses
Premiums
XX
XX
XX
Beginning Balance
Accrual of Expense
XX
Ending Balance
•
Present Obligation arises upon sale.
•
Presented as Current Liability.
•
Premiums Liability are articles of value such as toys, dishes,
and other goods. In some cases, cash payments are given
to customers as a result of past sales or sales promotion
activities.
Estimated Premiums Liability
Actual Expenses
XX
XX
XX
Beginning Balance
Accrual of Expense
XX
Ending Balance
Accrual of Expense = No. of estimated Premiums x Net Cost
Actual Expenses = Actual Premiums Distributed x Net Cost
Net Cost = Cost – Reimbursement from Customers
Guarantee
•
Present Obligation arises upon default of party guaranteed.
•
Present Obligation arises when there is:
a. Detailed Formal Plan
b. Valid Expectation to the Parties
Restructuring Provision is a program that is planned and
•
Restructuring
controlled by management and materially changes either
the scope of a business of an entity or the manner in which
that business is conducted.
EXCLUDED:
- Retraining / Relocating Continuing staff
-
Marketing Cost
-
Investment in New Systems
EMPLOYEE BENEFITS
All forms of consideration given by an entity in exchange for servicesrendered by employees (includes directors and management personnel) or
for termination of employment.
Definition
It includes:
• Postemployment benefits
•
Short-term employee benefits
•
Other long-term employee benefits
•
Termination benefits
POSTEMPLOYMENT BENEFITS
• Employee benefits after completion of employment (except termination benefits and
short-term employee benefits)
EXAMPLES:
•
o
Retirement Benefits
o
Post-employment Life Insurance
o
Post-employment Medical Care
CLASSIFICATION OF POSTEMPLOYMENT BENEFITS
Defined Contribution Plan
(The entity pays fixed
contributions)
Defined Benefit Plan
(The entity provides
agreed benefits)
Contributions are DEFINITE.
Benefits are INDEFINITE.
Employee bears the investment risk.
Contributions are INDEFINITE.
Benefits are DEFINITE.
The entity assumes the investment risk.
CONTRIBUTORY VS. NON-CONTRIBUTORY PLAN
Contributory Plan
Non-Contributory Plan
The employer contributes
The
employee
contributes
to
to retirement benefit plan
retirement benefit plan.
The employer contributes
to retirement benefit plan
The employee DOES NOT contribute
to retirement benefit plan
FUNDED VS. UNFUNDED
Funded Plan
The entity sets aside funds for future retirement benefits making
payments to a funding agency such as trustee, bank, or insurance
company.
Unfunded Plan
The entity retains the obligation for the payment of retirement benefits
without the establishment of a separate fund.
•
No actuarial assumptions (UNDISCOUNTED).
o Required Contribution = Expense
•
No possibility of any actuarial gain or loss.
ACCRUED EXPENSE = Actual Contribution < Required Contribution
PREPAID EXPENSE = Actual Contribution > Required Contribution
Journal Entries (POV of employer):
Accounting for Defined
Contribution Plan
DR. Employee Benefit Expense
CR. Cash
*To record the accrual benefit
DR. Employee Benefit Expense
CR. Accrued Benefit Payable
*To record the payment of the contribution
DR. Accrued Benefit Payable
CR. Cash
•
There is an actuarial assumption (DISCOUNTED).
o
Accounting for
Defined Benefit Plan
Required Contribution ≠ Expense
Step 1: Determine DBO
Defined Benefit Obligation
Actuarial Gain
Benefits Paid
CA of DBO settle in advance
xx
xx
xx
xx
xx
xx
Beginning Balance
Current Service Cost
Past Service Cost
xx
xx
Interest Expense
Actuarial Loss
xx
Ending Balance
Step 2: Determine the FV of Plan Assets
FV of Plan Asset
Beginning Balance
Actual Return*
Contributions Made
xx
xx
xx
xx
xx
Benefits Paid
Settlement Price of PBO
xx
Ending Balance
*Actual Return = Remeasurement Gain or Loss on Plan Assets +
Interest Income on Plan Assets
Remeasurement Gain: Actual > II on PA
Remeasurement Loss: Actual < II on PA
Step 3: Determine the Deficit or Surplus
FVPA < DBO = Deficit
FVPA > DBO = Surplus
*This appears on Statement of Financial Position
Step 4: Determine the Net Defined Liability (NDL) or Asset
NDL (Accrued Pension) = Deficit
NDBA (Prepaid Pension) = LOWER: Surplus or Asset Ceiling
*This appears on Statement of Financial Position
Step 5: Determine the Defined Benefit Cost
PRESENTED IN PROFIT OR LOSS
SERVICE COST
Current Service Cost
Past Service Cost
Loss or (Gain) on Early Retirement
xx
xx
xx
Total
xx
NET INTEREST
Interest Expense
Interest Income
xx
(xx)
Interest on effect of Asset Ceiling
xx
Total
xx
PRESENTED IN OCI or OCL
REMEASUREMENTS
Remeasurement on FVPA
x(x)
Remeasurement on PBO
Change in effect of Asset Ceiling
x(x)
x(x)
Total
x(x)
SHORT-TERM EMPLOYEE BENEFITS
• Employee benefits other than termination benefits to be settled wholly within 12 months.
• Benefits include the following:
o
o
o
o
•
Salaries, Wages, and Social Security Contributions
Short-term compensated or paid absences such as paid annual leave and paid
sick leave
Profit sharing and bonuses payable within 12 months
Nonmonetary benefits such as medical care housing, car, and free or subsidized
goods
Recognition and Measurement:
o Fairly straight forward; no actuarial assumptions.
o Unpaid short-term employee benefits at the end of the accounting period shall
be recognized as accrued expense.
o
Any short-term employee benefits paid in advance shall be recognized as a
prepayment.
o
The cost of short-term beenfits shall be recognized as expense.
o
Short-term
Compensated or Paid
Advances
•
•
An entity may pay employees for absences such as
vacation, sickness, and short-term disability, maternity or
paternity and military service.
Categories of paid absences:
o
o
Accumulating Paid Absences—carried forward in
future periods if unused. May be either:
▪ Vesting—employees are entitled to a cash
payment for unused entitlement on leaving
the entity.
▪ Non-Vesting—employees are NOT entitled
to a cash payment for unused entitlement
on leaving the entity.
Non-accumulating paid absences—NOT carried
forward and expired automatically after the end of
the period.
Profit Sharing and
An entity shall recognize the expected cost of profit sharing and
bonus payment when all of the following conditions are present:
Bonuses
1.
2.
The entity has a present legal or constructive obligation to
make such payment as a result of past event.
A reliable estimate of the obligation can be made.
TERMINATION BENEFITS
• Employee benefits provided in exchange for termination of an employee’s employment
as a result of either:
o
An entity’s decision to terminate an employee’s employment before the normal
retirement date.
o
An employee’s decision to accept an offer of benefits in exchange for the
termination of employemnt.
•
The event that gives rise to an obligation is the termination of employment rather than
employee service.
•
Do NOT include employee benefits resulting from termination of employemnt at the
request of the employee without an entity offer or as a result of mandatory retirement.
•
•
Settled wholly within 12 months: Account using the requirements of Short-term
employee benefits; Otherwise: Account using the requirements of Other Long-term
Benefits.
Recognize expense or liability for termination at the EARLIER of the ff:
o Entity can no longer withdraw the offer of termination benefits.
o Entity recognizes the cost of restructuring.
OTHER LONG-TERM BENEFITS
• All employee benefits except short-term employee benefits, postemployment
benefits, and termination benefits.
•
•
•
•
NOT expected to be settled within 12 months after the end of the reporting period.
Benefits include:
o Long-term paid absences such as long-term service or sabbatical leave
o Jubilee or other long service benefit
o Long-term disability benefits
o Profit sharing and bonuses
o Deferred compensation
Account using the accounting for defined benefit plan.
Liability to be recognized = PV of Benefit Liability + FV of Plan Assets
ACCOUNTING INCOME (AI) VS. TAXABLE INCOME (TI)
Accounting Income or Financial Income
•
•
•
Taxable Income
Net income for the period before
The excess of taxable revenue over
•
deducting income tax expense (pretax
accounting income).
The income presented in the income
statement.
Computed
in
accordance
with
accounting standards.
tax
deductible
expense
and
exemptions.
The income presented in the income
tax return.
Computed in accordance with the
income tax law.
•
•
Note: Accounting Income ≠ Taxable Income
DIFFERENCES BETWEEN AI and TI
Permanent Differences
Temporary Differences
•
Items of revenue and expenses which
are included in either AI or TI but will
never be included in the other.
1. Non-taxable Revenue
2. Non-deductible expenses
3. NO future tax consequences
4. Do NOT give rise to deferred tax.
5. To get the AI subject to tax:
o
•
Carrying Amount (CA) of the asset or
liability and Tax Base (TB)
•
•
Include timing difference or items of
income and expenses which are included
in BOTH accounting income (AI) and
taxable income (TI) but at DIFFERENT time
periods.
Gives rise to either to:
AI subject to tax = AI per
o
Deferred Tax Liability
book + Non-deductible
expenses – Non-taxable
revenue
o
Deferred Tax Asset
Examples (D-I-L-T):
•
•
•
Difference between:
Dividends Received
Interest Income on Deposits
Life Insurance Premium (the
entity as the beneficiary)
Tax Penalties, Surcharges, and
Fines
TAX BASE - amount of the asset or liability that is
recognized or allows for tax purposes.
• Tax Base of an ASSET
Amount that will be deductible for
tax purposes against future
income.
Tax Base of a LIABILITY
o Carrying amount less the amount
that will be deductible for tax
purposes against future income.
o
•
SIMPLE GUIDE IN DETERMINING THE TAX BASE:
1. Asset is Depreciable/Amortizable
o TAX BASE = Cost – Accumulated Depreciation (Tax Code)
2.
Transaction is Taxable only under CASH BASIS
o TAX BASE = Zero
3. NO Tax Consequence
o TAX BASE = Carrying Amount
POSTEMPLOYMENT BENEFITS
• Employee benefits after completion of employment (except termination benefits and
short-term employee benefits)
•
EXAMPLES:
o
Retirement Benefits
o
Post-employment Life Insurance
o
Post-employment Medical Care
KINDS OF TEMPORARY DIFFERENCES
Taxable Temporary Difference (TTD)
Deductible Temporary Difference (DTD)
Future TAXABLE Amount
Future RECOVERABLE or DEDUCTIBLE Amount
Deferred Tax Liability (DTL)
Deferred Tax Asset (DTA)
AI > TI
TI > AI
CA of Asset > Tax Base of Asset
Tax Base of Asset > CA of Asset
CA of Liability < Tax Base of Liability
Tax Base of Liability < CA of Liability
COMPUTATION AND MEASUREMENT OF TAX EXPENSE
REFERENCES:
MAY 2024 CPALE REVIEW NOTES
(Compiled notes sourced from an anonymous user, referred to as AMBE.)
Valix, C.T. (2020). Intermediate Accounting Vol. 1. GIC ENTERPRISES & CO., INC.