FAR Notes

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RA 9298 – Accountancy Act of 2004 Accounting Cycle

Objectives: 1. Analysing the source documents


 Standardization and Regulation of Accounting Education 2. Recording in journal Recording Phase
 Examination for Registration of CPAs 3. Posting ledger
 Suspension, Control and Regulation of Practice of Accountancy 4. Unadjusted Trial Balance
5. Adjusting Entries
 Ending Inventory
Organization Creation Members Term
 Depreciation
Chairman + 6 3 yrs  Doubtful Accounts
BOA
Members Renewable
 Accrued Expenses
60 days from Chairman + 14 3 yrs  Accrued Income
FRSC
IRR Effectivity Members Renewable  Deferred Expenses
90 days from Chairman + 14 3 yrs  Deferred Income
AASC
IRR Effectivity Members Renewable 6. Financial Statements
7. Closing Entries – Nominal Accounts
60 days from Chairman + 6 3 yrs
ETC 8. Post-Closing Trial Balance
IRR Effectivity Members Renewable
9. Reversing Entries
Chairman + 6 3 yrs
QRC
Members Renewable
PRC CPE 30 days from Chairman + 1
COUNCIL IRR Effectivity Member

BOA (Chairman & 6 Members) APO (5 Nominees per Position)

(60 days)

PRESIDENT PRC (3 Nominees per Position)


Financial Reporting Standard Council Conceptual Framework
FRSC – to establish Philippine GAAP Purpose:
- considers standard issued by IASB  To assist FRSC on development of future PFRS & Review
- monitors and issues invitations to comment  To assist FRSC in promoting harmonization of regulation
- succeeded by ASC which created by PICPA  To assist preparers of FS in applying PFRS
Composition: 1 Chairman and 14 Members appointed by PRC  To assist auditors in forming an opinion
Term of Office: 3 years Renewable  To assist users of FS in interpreting information in the FS

Philippine Interpretation Committee Overall Objectives: To provide financial information about the
 To issue implementation guidance on PFRS reporting entity that is useful to existing and potential investors,
 Members are appointed by FRSC lenders and other creditors in making decisions about providing
 Replaces International Committee of ASC in 2000 resources to the entity.

Philippine Financial Reporting Standards Specific Objectives:


Scope: Apply to General-Purpose FS  To provide information useful in making decisions about
 Profit-Oriented Entities providing resources to the entity
 Not-For-Profit = If they find it appropriate  To provide information useful in assessing the prospects of
future net cash flows to the entity
Structure: *Paragraphs in Bold  To provide information about entity resources, claims and
*Paragraphs in Plain changes in resources and claims
*Bold Type – Main Principles
Underlying Assumptions:
Due Process:  Going Concern
 Consideration of IASB Pronouncements  Accounting Entity
 Task force formation, when deemed necessary  Time Period
 Issuing for comment an Exposure Draft  Monetary Unit
o Approved by majority of FRSC members
o At least 60 days comment period (@least 30days=shorter) Fundamentals Qualitative Characteristics
 Consideration of ALL comment  RELEVANCE – capacity of the information to influence a
 Approval of a standard/interpretation by majority of FRSC decision.
 Each final standard/interpretation shall be issued/submitted to o Predictive Value – used as an input to processes
PRC through the BOA for approval employed by users to predict future outcome
o Confirmatory Value – it provides feedback about
previous evaluations
o Materiality – its omission or misstatement could Recognition of Elements
influence the economic decision.  Asset Recognition Principle
 Liability Recognition Principle
 FAITHFUL REPRESENTATION – actual effects of the transactions  Income Recognition Principle
shall be properly accounted for and reported in the financial o Point of Sale – entity has transferred to the buyer the
statements. significant risks and rewards of ownership of goods.
o Completeness – information should be presented in a o Installment Method – revenue is recognized at point of
way that facilitates understanding and avoids collection
erroneous implication o Cost Recovery Method – revenue is recognized at point
o Neutrality – free from bias of collection but all collections are first applied to the
o Free from Error – no errors or omissions in the cost of the merchandise sold
description of the transaction o Percentage of Completion Method – revenue and cost
o Substance over Form – not considered a separate are recognized base on the stage of completion of the
component of FR because it would be redundant. contract activity.
o Production Method – revenue is recognized at the
 CONSERVATISM – means not overstating assets and point of production.
understating liabilities  Expense Recognition Principle
o Cause and Effect Association – expense is recognized
 PRUDENCE – desire to exercise care and caution when dealing when revenue is already recognized
with the uncertainties in the measurement process o Systematic and Rational Allocation – costs are
expensed by simply allocating them over the periods
Enhancing Qualitative Characteristics benefited
 TIMELINESS – financial information must be available early o Immediate Recognition – cost incurred are expensed
enough when a decision is to be made. outright.
 VERIFIABILITY – helps to give assurance to users that
information represents the transaction it purports to represent Measurement of Elements
 UNDERSTANDABILITY – financial information must be  Historical Cost
comprehensive or intelligible if it is to be most useful.  Current Cost
 COMPARABILITY – enables users to identify and understand  Realizable Value
similarities and dissimilarities among items.  Present Value
o Consistency – refers to the use of the same method for
the same item
Statement of Financial Position  Retained Earnings
 Treasury Shares
ASSETS  Other Comprehensive Income
Current:
 Cash and Cash Equivalents
 Trade and Other Receivables
 Inventory
 Prepaid Expenses
 Trading Securities Statement of Comprehensive Income
 Assets Held for Sale
Noncurrent: Profit or Loss
 Property, Plant and Equipment
 Intangibles Other Comprehensive Income
 Long-Term Investments (CSV and AVFS)
 Deferred Taxes  Will be Reclassify to Profit or Loss
o Gain or Loss from translating FS of foreign operation
LIABILITIES o Unrealized Gain or Loss on derivatives designated as
Current: cash flow hedge
 Trade and Other Payables o Unrealized Gain or Loss on debt investment measured
 Short-term Debt at FVOCI
 Current portion of LT Debt
 Taxes Payable  Will NOT be Reclassify to Profit or Loss
 Current Provisions o Unrealized Gain or Loss on equity investment measured
Noncurrent at FVOCI (Retained Earnings)
 Long-Term Debt o Revaluation Surplus during the year
 Deferred Taxes o Remeasurement of defined benefit plan including
 Defined Benefit Obligations actuarial gain or loss
 Finance Lease Liability o Change in fair value attributable to credit risk of a
financial liability designated at FVPL.
SHAREHOLDER’S EQUITY
 Contributed Capital
o Common Stock
o Preference Share
o Share Premium
o Subscribed Capital Stock
o Stock Dividend Payable Statement of Cash Flow
OPERATING ACTIVITIES CASH:
 Collection of income  On Hand
 Payment of expenses o Customer’s Check
 Items that affect profit or loss o Cashier’s/Manager’s Check
o Traveler’s Check
INVESTING ACTIVITIES o Bank Drafts
 PPE o Money Orders
 Intangibles
 Making/Collecting of Loans  In Bank
 Investment o Demand Deposit
o X FVPL o Checking Deposit Unrestricted as to withdrawal
o X Cash Equivalents o Saving Deposit

FINANCING ACTIVITIES  Cash Fund


 Debt o Funds set aside for CURRENT purposes
 Equity
CASH EQUIVALENTS
*Trading Securities = Operating  3 month BSP Treasury Bill
*Available for Sale = Investing  3 year BSP Treasury Bill purchased 3months before maturity
*Interest Received / Paid = Operating  3 month Time Deposit
*Dividend Received = Operating  3 month Money Market Placement / Commercial Paper
*Dividend Paid = Financing
*Returnable Customer Deposits = Financing *If the deposit is NOT LEGALLY RESTRICTED as to withdrawal,
Compensating Balance is PART OF CASH

* If the deposit is LEGALLY RESTRICTED as to withdrawal, Compensating


Balance is NOT PART OF CASH

Cash and Cash Equivalents Bank Reconciliation


BOOK:
BOOK: Account Beginning Receipts Disbursement Ending
Beg. Book Balance XX Unadj. Bal. XX XX XX XX
Add: Credit Memos XX Collection:
Total XX Beg. XX (XX)
Less: Debit Memos XX End. XX XX
+/- Errors XX NSF:
Adjusted Book Balance XX Beg. (XX) (XX)
End. XX (XX)
BANK: Service Charge:
Beg. Bank Balance XX Beg. (XX) (XX)
Add: Deposits in Transit XX End. XX (XX)
Total XX Error:
Less: Outstanding Checks XX
+/- Errors XX
Adjusted Bank Balance XX
Adj. Bal. XX XX XX XX

*Adjusted Book Balance must be equal to Adjusted Bank Balance


BANK:
Account Beginning Receipts Disbursement Ending
Unadj. Bal. XX XX XX XX
DIT:
Beg. XX (XX)
End. XX XX
OC:
Beg. (XX) (XX)
End. XX (XX)
Error:

Adj. Bal. XX XX XX XX

Poof of Cash
Account Receivables
Trade: Selling of Merchandise Initial Measurement:
Non-trade: Collectible within a year other than trade Principal Amount XX
 Subscription Receivable; if collectible w/in 1yr Origination Fees (XX)
 Advances to or Receivables from SH, Directors, etc Direct Origination Cost XX
 Accrued Revenue Initial Carrying Amount XX
 Advances to affiliates
 Advances to suppliers *Initial Carrying Amount is used as basis to compute the effective
 Creditor’s account debit balance interest.
 Special Deposits on contract bids
 Claims Receivables

*FOB Destination = SELLER shall be responsible for the freight


Receivable Financing
*FOB Shipping Point = BUYER shall be responsible for the freight
PLEDGING
*Freight Collect = Freight was actually paid by the BUYER *ALL accounts receivables were pledged as collateral

*Freight Prepaid = Freight was actually paid by the SELLER Cash XXX
Discount on Note Payable XXX
Allowance for Doubtful Account Note Payable – bank XXX
 PERCENTAGE OF SALE = Bad Debt Expense
 PERCENTAGE OF ACCOUNT RECEIVABLES = Ending ADA Interest Expense XXX
 AGING OF ACCOUNTS RECEIVABLES = Ending ADA Discount on Note Payable XXX

Note Payable – bank XXX


Notes Receivables Cash XXX

Interest Expense XXX


INTEREST BEARING – initially measured at FACE VALUE
Discount on Note Payable XXX
NON-INTEREST BEARING – initially measured at PRESENT VALUE

Loan Receivables ASSIGNMENT


 NON-NOTIFICATION BASIS
*Entity assigned P700,000 of AR to a bank. The bank advances 80% less Note Payable – bank 266,000
service charge of P5,000. The entity signed a promissory note that Interest Expense 2,660
provides for 1% per month on unpaid balance of loan. Cash 268,660

Accounts Receivable – assigned 700,000 ~transfer the remaining balance of assigned accounts to AR
Accounts Receivable 700,000
Accounts Receivable 365,000
Cash 555,000 Accounts Receivable – assigned 365,000
Service Charge 5,000
Note Payable – bank 560,000
 NOTIFICATION BASIS
~issued credit memo for sales return on AR assigned P20,000 **Entity assigned P1,000,000 of AR to a bank. The bank advances 80%
less service charge of 4% of the face amount. The entity signed a
Sales Return 20,000 promissory note that provides for 1% per month on unpaid balance of
Accounts Receivable – assigned 20,000 loan.

~collected P300,000 of the AR assigned less 2% discount Accounts Receivable – assigned 1,000,000
Accounts Receivable 1,000,000
Cash 294,000
Sales Discount 6,000 Cash 760,000
Accounts Receivable – assigned 300,000 Service Charge 40,000
Note Payable – bank 800,000
~remitted total collections to bank plus interest for 1month
~collected P600,000 of the AR assigned less 2% discount. A check was
Note Payable – bank 294,000 sent to bank for interest due.
Interest Expense 5,600
Cash 299,600 Cash 588,000
Sales Discount 12,000
~assigned accounts of P15,000 proved worthless Accounts Receivable – assigned 600,000

Allowance for Doubtful Accounts 15,000 Interest Expense 8,000


Accounts Receivable – assigned 15,000 Cash 8,000

~received notice from the bank that P300,000 of the assigned AR were
~remitted the total amount due to bank plus interest collected. Final settlement was made by the bank for the excess
collections together with the uncollected assigned accounts of
P100,000 CONDITIONAL SALE

Cash 85,880 Cash 2,385,000


Interest Expense 2,120 Loss on Discounting 39,000
Note Payable – bank 212,000 Note Receivable Discounted 2,400,000
Accounts Receivable – assigned 300,000 Interest Income 24,000

Accounts Receivable 100,000


Accounts Receivable – assigned 100,000 SECURED BORROWING

FACTORING Cash 2,385,000


Interest Expense 39,000
Cash XXX Liability for NR Discounted 2,400,000
Allowance for Doubtful Accounts XXX Interest Income 24,000
Loss on Factoring XXX
Accounts Receivable XXX

DISCOUNTING
 Without Recourse
*A P1,000,000 180-day, 12% note dated July 1 was received from a
customer and discounted without recourse on August 30 at 15%
discount rate.

Principal 1,000,000
Interest (1,000,000 X 12% X 180/360) 60,000
Maturity Value 1,060,000
Discount (1,060,000 X 15% X 120/360) (53,000)
Net Proceeds 1,007,000

Cash 1,007,000
Loss on Discounting 13,000
Notes Receivable 1,000,000
Interest Income (1,000,000 X 12% X 60/360) 20,000 Inventories
 With Recourse
~*A P2,400,000 6-month, 12% note dated February 1 was received
from a customer and discounted on March 1 at 15% discount rate.
Periodic System – calls for the physical counting of goods on hand at *If there is a decline in purchase price after a purchase commitment
the end of the accounting period to determine quantities. has been made, a loss is recorded in the period of the price decline.

Perpetual System – requires the maintenance of records that usually ~The contract purchase price is P500,000 and the replacement cost at
offer a running summary of the inventory inflow & outflow. year-end is P450,000.

COST OF INVENTORIES Loss on Purchase Commitment 50,000


 Cost of Purchase Estimated Liability for Purchase Commitment 50,000
o Purchase Price
o Import Duties ~When the actual purchase is made in the subsequent period and the
o Irrevocable Taxes current replacement cost drops further to P420,000.
o Freight
o Handling Cost Purchases 420,000
o Other costs directly attributable to the acquisition Loss on Purchase Commitment 30,000
 Cost of Conversion Estimated Liability for Purchase Commitment 50,000
o Direct Labor Accounts Payable 500,000
o Allocated Fixed Overhead
o Allocated Variable Overhead ~If the replacement cost of the purchase commitment is P600,000
when the actual purchase was made.
 Other cost incurred in bringing the inventories to their present
location and condition
Purchase 480,000
Estimated Liability for Purchase Commitment 50,000
× Abnormal Cost
Accounts Payable 500,000
× Storage Cost (WIP = Capitalizable) Expensed Outright
Gain on Purchase Commitment 30,000
× Administrative Overheads when incurred
× Distribution or Selling Cost

*Loss on Inventory Writedown is incurred when the NRV is LESS THAN


the cost.

*Gain on Reversal of Inventory Writedown is recorded ONLY to the


extent of the allowance balance.

PURCHASE COMMITMENTS
Biological Assets Price Change = (New Price Old Age X # of Bio-asset)
Less (Old Price Old Age X # of Bio-asset)
 Living Animals and Plants = B.A.
 Agricultural Produce Physical Change = (New Price New Age X # of Bio-asset)
o As the produce grows = B.A. Less (New Price Old Age X # of Bio-asset)
o When harvested = Inventory (FV-COD @point of harvest)
 Animals for Recreational Activities = PPE
 Bearer Plants = PPE
o Used for supply of goods and services
o Expected to bear agricultural produce for more than 1yr
o Remote likelihood that the plant itself will be sold as
agricultural produce except for incidental scrap sales
*IMMATURE = Accumulated Cost
*MATURE = Cost or Revaluation Model
 Bearer Animals = B.A.
 Dual-Use Plants = B.A.
o Expected to bear agricultural produce
o The plant itself will be sold as living plant or agricultural
produce

*An unconditional government grant related to a biological asset that


has been measured at FV less COD shall be recognized as income when
the grant becomes receivable

*If a government grant related to a biological asset measured at FV less


COD is conditional, the grant shall be recognized as income ONLY when
the conditions attaching to the grant are met.

*If a government grant relates to a biological asset measured at cost


less any accumulated depreciation and any accumulated impairment
loss, PAS 20 on “government grant” is applied.
Retail Inventory Method Sales XX
Add: Employee Discount XX
Items Cost Retail Less: Sales Return (XX)
Beg. Inventory XX XX Normal Shortage, Shrinkage,
Purchases XX XX Spoilage, Breakage (XX)
Purchase Discount (XX) Net Sales XX
Purchase Return (XX) (XX)
Freight In XX
Departmental Transfer In XX XX TGAS @ Retail XX
Departmental Transfer Out (XX) (XX) Less: Net Sales (XX)
Abnormal Shortage, Shrinkage, Ending Inventory @ Retail XX
Spoilage, Breakage (XX) (XX) X Cost Ratio %
Mark-up XX Ending Inventory @ Cost XX
Mark-up Cancellation (XX)
Markdown (XX)
Markdown Cancellation XX
Goods Available for Sale XX XX

Average Cost Ratio = TGAS @ Cost = %


TGAS @ Retail

Conservative Ratio = TGAS @ Cost =%


TGAS @ Retail (w/o markdown)

FIFO Ratio = TGAS @ Cost =%


TGAS @ Retail (w/o Beg.)
Financial Instruments RECLASSIFICATION from FVPL to AMORTIZED COST

Equity Investments *The fair value at the reclassification date becomes the new carrying
amount of the financial asset at amortized cost.
Securities Measurement
Held for Trading FVPL *The difference between the new carrying amount of the financial
asset at amortized cost and the face value of the financial asset shall be
Not Held for Trading FVPL
AMORTIZED THHROUGH P/L over the remaining life of the financial
*Not Held for Trading FVOCI by irrevocable election asset using EFFECTIVE INTEREST METHOD.

Quoted Investment FVPL


Unquoted Investment Cost Method
RECLASSIFICATION from AMORTIZED COST to FVPL
Investment in Associate Equity Method
Investment in Subsidiary Consolidated Method *The fair value is determined at reclassification date.

*The difference between the previous carrying amount and the fair
Debt Investments value is recognized in profit or loss.
Securities Measurement
Held for Trading FVPL
Held for Collection of RECLASSIFICATION from AMORTIZED COST to FVOCI
Amortized Cost
Contractual Cash Flows
*The fair value is determined at reclassification date.
Held for Collection of FVPL by irrevocable designation
Contractual Cash Flows or fair value option *The difference between the previous carrying amount and the fair
value is recognized in other comprehensive
Held for Collection of
Contractual Cash Flows and for FVOCI
*The effective interest rate and the measurement of expected credit
Sale of the Financial Asset
losses are NOT ADJUSTED as a result of the reclassification
Held for Collection of
FVOCI by irrevocable
Contractual Cash Flows and for
designation or fair value option
Sale of the Financial Asset
RECLASSIFICATION from FVOCI to AMORTIZED COST Sale of Equity Securities:
 The difference of the carrying amount and the consideration
*The cumulative gain or loss previously recognized in other received on the sale of equity securities shall be recognized in
comprehensive income is removed from equity and adjusted against profit or loss.
the FV at reclassification date
RECLASSIFICATION from FVPL to FVOCI Dividends
 Date of Declaration – date on which the payment of dividends
*The financial asset continues to be measured at fair value is approved by the BOD
 Date of Record – date on which the stock and transfer book is
*Effective Rate is NOT ADJUSTED. closed for registration. Only those SH registered are entitled to
receive dividends.
 Date of Payment – date on which the dividends declared shall
RECLASSIFICATION from FVOCI to FVPL be paid.

*The financial asset continues to be measured at fair value *Between the Date of Declaration and Date of record, the shares are
selling DIVIDEND ON.
*The cumulative gain or loss previously recognized in other *Between the Date of Record and Date of payment, the shares are
comprehensive income is reclassified to profit or loss at reclassification selling EX-DIVIDEND.
date.
 Cash Dividend
*If the equity securities are measured at FVPL or FVOCI or at Cost,
dividends earned are considered INCOME.
Investment in Equity Instruments
Acquisition by Exchange:  Property Dividend
1.) Fair Value of Asset Given Up *Considered as INCOME and recorded at FAIR VALUE.
2.) Fair Value of Asset Received *Shares of another entity declared as dividends.
3.) Carrying Amount of Asset Given Up
Noncash Asset XX
Lump-Sum Acquisition: Dividend Income XX
 If two or more equity securities are acquired at a lump-sum,
the single cost is allocated to the securities on the basis of their
FAIR VALUE.
 If only one security has a known market value, the amount
allocated to it is equal to its market value. The remainder will
be allocated to the other security with no known market value.
 Liquidating Dividend  Shares Received in Lieu of Cash Dividends
*Represent return of invested capital and therefore, NOT AN INCOME. ~A shareholder owns 10,000 shares costing P1,000,000. Subsequently
the shareholder receives 1,000 shares in lieu of cash dividend of P10
Cash/Other Appropriate Amount XX per share. The market value of the share is P150.
Investment in Equity Securities XX
Investment in Equity Securities 150,000
Dividend Income 150,000

 Stock Dividend
*Form of issuing entity’s own shares. -If there is NO MARKET VALUE of share;

 Stock Dividend of Same Class Investment in Equity Securities 100,000


~A shareholder owns 10,000 shares costing P120 each. Subsequently, Dividend Income 100,000
the shareholders receives 20% stock dividend.

Shares Cost per Share Total Cost  Cash Received in Lieu of Stock Dividend
Original Shares 10,000 120 P1,200,000 *In this case, the “AS IF” approach is followed. This means that the
Stock Dividends 2,000 - - stock dividends are assumed to be received and subsequently sold at
12,000 100 P1,200,000 the cash received. Therefore, a gain or loss may be recognized.

~A shareholder owns a 10,000 shares costing P1,100,000.


 Stock Dividend Different from those held Subsequently, the shareholder receives P150,000 cash in lieu of 1,000
~A shareholder owns 10,000 ordinary shares costing P800,000. shares originally declared as 10% stock dividend.
Subsequently, the shareholder receives 10% stock dividend in the form
of Preference Share. The market value of OS is P150, and the market Cash 150,000
value of PS is P100. Investment in Equity Securities 100,000
Gain on Investment 50,000
Market Value Fraction Allocated Cost
Ordinary Shares
(10,000 X 150) 1,500,000 15/16 750,000 *Special Assessments are additional capital contribution of the
Preference Shares shareholders.
(1,000 X 100) 100,000 1/16 50,000
1,600,000 800,000  Redemption of Share
~If a shareholder acquires 10,000 PS for P100 per share.

Investment in Preference Shares 50,000 Investment in Preference Share 1,000,000


Investment in Ordinary Shares 50,000 Cash 1,000,000
~If subsequently, the Preference shares are called in by the issuing ~If the stock rights are not exercised but EXPIRED
entity at P110 per share.
Loss on Stock Rights 100,000
Cash 1,100,000 Stock Rights 100,000
Investment in Preference Shares 1,000,000
Gain on Investment 100,000
 Not Accounted for Separately
*same problem
 Stock Rights
 Accounted for Separately ~ACQUISITION
~A shareholder acquired 10,000 shares costing P1,800,000.
Subsequently, the shareholder received 10,000 stock rights to subscribe Investment in Equity Securities 1,800,000
for new shares at P100 per share for every five rights held. The market Cash 1,800,000
value of the share is P150 and the market value of the right is P10.

Investment in Equity Securities 1,800,000 ~RECEIPT of Stock Rights


Cash 1,800,000
Memorandum Entry

Stock Rights 100,000


Investment in Equity Securities 100,000 ~EXERCISE Stock Rights

Investment in Equity Securities 200,000


~If the shareholder EXERCISE the stock rights to acquire new shares for Cash 200,000
P200,000.

Investment in Equity Securities 300,000 ~SALE of Stock Rights


Cash 200,000
Stock rights 100,000 Cash 150,000
Investment in Equity Securities 150,000
~If the shareholder SOLD the stock rights for P150,000
*NO GAIN OR LOSS recognized from the sale
Cash 150,000
Stock Rights 100,000 ~EXPIRATION of Stock Right
Gain on Sale of Stock right 50,000
Memorandum Entry
Investment in Associate
*When the share is selling RIGHT-ON
*An investor is presumed to have significant influence if he holds 20%
MV of Share – Subscription Price = Value of One Right or more of the voting power of the investee. Inversely, if he holds less
N+1 than 20%, it is presumed that the investor has no significant influence
unless such influence can be clearly determined by the following
factors:
*When the share is selling EX-RIGHT
 Participation in policy making process
MV of Share – Subscription Price = Value of One Right  Representation in the board of directors
N  Interchange of managerial personnel
 Material transactions between investor and investee
 Provision of essential technical information

EQUITY METHOD

*Acquisition

Investment in Associate XX
Cash XX

*Investee reported net income

Investment in Associate XX
Investment Income XX

*Declared and paid Dividend

Cash XX
Investment in Associate XX
Excess of Cost over Carrying Amount Investee with Preference Share

*If the assets of investee are FAIRLY VALUED, the undervaluation is *The investor shall compute its share of earnings or losses after
attributable to GOODWILL. deducting the preference dividends whether declared or not, if it is a
cumulative preference share. Conversely, if the PS is noncumulative, it
*If the excess is attributable to undervaluation of depreciable asset, it is deducted only when the dividend is declared.
is amortized over the remaining life of the asset.

*If the excess is attributable to undervaluation of land, it is not Discontinuance of Equity Method
amortized.
*The investor shall discontinue the use of the equity method from the
*If the excess is attributable to inventory, the amount is expensed date that it ceases to have significant influence over an associate.
when the inventory is already sold.
*The investor shall measure any retained investment in associate at fair
*Same as to excess of net FV over cost. value which will be the initial recognition as a financial asset.

*The difference between the CA of the retained investment at the date


Investee with Heavy Losses the significant influence is lost and the fair value of the retained
investment shall be included in profit and loss.
*If an investor’s share of losses of an associate equals or exceeds the
carrying amount of an investment, the investor discontinues
recognizing its share of further losses. Equity Method Not Applicable

*The investment is reported at nil or zero value. *Investment in Associate shall not be accounted using the equity
method if the investor is a parent that is exempt from preparing
*Additional losses are provided for or a liability is recognized, to the Conso-FS or if ALL of the following apply:
extent that the investor has incurred legal or constructive obligations or
made payments on behalf of the associate.  The investor is a wholly-owned subsidiary or a partially-owned
of another entity and the other owners do not object to the
*If the associate subsequently reports income, the investor resumes investor not applying the equity method
including its share on income after its share on income equals the share  The investor’s debt and equity instruments are NOT TRADED in
of losses recognized. a public market or “over the counter” market.
 The investor did not file or it is not in the process of filing FS
with the SEC for the purpose of issuing any class of instruments
in a public market.
 The ultimate or any intermediate parent of the investor Investment Property
produces Conso-FS available for public use that comply with
PFRS.
Investment Property – a property held by an owner or by the lessee
under a finance lease to earn rentals or for capital appreciation or
BOTH.
–only land and building can be qualified as
Investment in Bonds investment property.

Held to Maturity / Not Held:


Trading Securities Long term Investment a.) For use in the production or supply of goods or services or for
/ Amortized Cost administrative purposes.
b.) For sale in the ordinary course of business
Initial FV FV + TC *The property held by an owner or by the lessee under a finance lease
for use in the production or supply of goods or services or for
Date of FS FV C.A or Amortized Cost administrative purposes is known as Owner-Occupied Property.
Unrealized G/L Profit or Loss N/A
SP XX SP XX Example of Investment Property
CA (XX) *last FV CA (XX) *A.C a.) Land held for long-term capital appreciation.
Realized G/L b.) Land held for a currently undetermined use.
G/L XX G/L XX
c.) Building that is vacant but is held to be leased out under an
Income Face Amt. X SR C.A X ER operating lease.
d.) Building owned by the reporting entity and leased out under an
operating lease.
e.) Property that is being constructed or developed for future use
as investment property.

Items Not Considered as Investment Property


a.) Owner-occupied property
b.) Property held for future development or future use as owner-
occupied property
c.) Property occupied by employees
d.) Owner-occupied property awaiting disposal
e.) Property held for sale in the ordinary course of business
f.) Property being constructed or developed by third parties
g.) Property that is leased to another entity under a finance lease
Fair Value Hierarchy Fund and Other Investment
1.) Quoted prices in an active market for identical assets
2.) Quoted prices for similar assets in an active market and quoted Sinking Fund – is a fund set aside for the liquidation of long-term debt,
prices for identical or similar assets in a market that is not more particularly long-term bonds payable.
active.
3.) Unobservable inputs for the asset. *When the fund is under the administration of the entity, the entity
records the fund transactions currently and thus makes a distinction
whether the fund is in the form of cash, securities and other assets.
Measurement of Transfers of Investment Property
Carried Difference *If the fund is under the administration of a trustee, fund transactions
From To Initial C.A
at (CA & FV) are not currently recorded by the entity. Individual transactions
FV on pertaining to purchase and sale of securities, and to earnings and
Constructe Investment expenses of the fund are recorded by the entity periodically when
FV P/L reclassification
d Property Property report is received from the trustee.
date

FV on
Investment Inventory
FV P/L reclassification Sinking Fund Contribution may be Voluntary and Mandatory
Property or PPE
date
*It is VOLUNTARY if the sinking fund contribution is the result of a
FV on discretionary action of management
Inventory Investment
FV P/L reclassification
(as if sold) Property
date *It is MANDATORY if the sinking fund contribution is required by
FV on contract, usually with bondholders.
PPE Invst. Prop. Revaluation
FV reclassification
(revalue) / Inventory Surplus
date
Preference Share Redemption Fund
I.I Cost / C.A of *The terms of the preference share issue may provide that PS may be
No Gain or called in for redemption by the issuing entity. The issuing entity may set
Inventory ANY COST reclassification
Loss up a fund to insure the eventual redemption of the PS.
PPE date

Fund for Acquisition of Property


*Replacement fund is cash set aside in anticipation of future
replacement of depreciable asset.
*Plant Expansion Fund is cash set aside in anticipation of future  Dividends received on the life policy are not income but a reduction
acquisition of additional property because of expanded or increased of life insurance expense
volume of operations.
Cash XX
Life Insurance Expense XX
Contingency Fund – is cash set aside for the purpose of meeting
obligations that may arise from contingencies like pending lawsuits or  Initial recognition of the cash surrender value at the end of the third
taxes in dispute. year

Cash Surrender Value XX


Insurance Fund – is cash set aside for the purpose of meeting Life Insurance Expense XX
obligations that may arise from certain risks not insured against Retained Earnings XX
casualties.
 Recognition of CSV subsequent to the third year

Cash Surrender Value Cash Surrender Value XX


*The purpose of this arrangement is to compensate the entity for the Life Insurance Expense XX
loss of services arising from the untimely death of important members
of management.  Receipt of the proceeds of the life policy

*The beneficiary of the insurance must not be a family of the dead Cash XX
officer and the payment of the premium is simply charged to insurance Cash Surrender Value XX
expense. Life Insurance Expense XX
Gain of life Insurance Settlement XX

 Payment of the insurance premium

Life Insurance Expense XX


Cash XX

 Adjustment of the unexpired premium at the end of the period

Prepaid Life Insurance XX


Life Insurance Expense XX
Property, Plant, and Equipment Donation
*Philippine GAAP provides that contributions received from
Initial Measurement: SHAREHOLDERS shall be recorded at the fair value with the credit going
 Purchase Price, includes import duties and non-refundable to donated capital.
purchase taxes, after deducting trade discounts and rebates
 Cost Directly Attributable to bringing the asset to the location *Expensed incurred in connection with the donation, like payment of
and condition necessary for it to be capable of operating registration fees and legal fees shall be charged to the donated capital
 Initial estimate of the cost of dismantling and removing the account.
item and restoring the site on which it is located.

IFRS PIC
 Amount paid to relocate squatters LAND BLDG
 Cost to tear down old building LAND BLDG
 Amt. recovered from salvage of demolition (LAND) (BLDG)

Acquisition of PPE in exchange of Shares


1.) FV of Property Received
2.) FV of the Share Capital
3.) Par Value of the Share Capital

Acquisition of PPE in exchange of Bonds


1.) FV of Bonds Payable
2.) FV of Property Received
3.) Face Amount of Bonds Payable

Acquisition of PPE in exchange of Asset (W/ Commercial Substance)


1.) FV of Property Given Up + Cash Payment / - Cash Received
2.) FV of Property Received
3.) CA of Property Given Up + Cash Payment / - Cash Received

Acquisition of PPE in exchange of Asset (No Commercial Substance)


1.) CA of Property Given Up + Cash Payment / - Cash Received
Government Grant Borrowing Cost
Grant Related to Asset – this government grant whose primary Qualifying Asset – is an asset that necessarily takes substantial period
condition is that an entity qualifying for the grant shall purchase of time to get ready for the intended use or sale.
construct or otherwise acquire long-term asset.

Grant Related to Income – this is government grant other than grant Excluded from Capitalization
related to asset. 1.) Assets measured at FV such as Biological asset.
2.) Inventories that are manufactured or produced in large
*A grant in recognition of specific expense shall be recognized as quantities on a repetitive basis
income over the period of the related expense. 3.) Assets those are ready for their intended use or sale when
acquired.
*A grant related to depreciable asset shall be recognized as income
over the periods and in proportion to the depreciation of the related
asset. Asset Financed by “Specific Borrowing”
*The amount of capitalizable borrowing cost is the actual borrowing
*A grant related to non-depreciable asset requiring fulfilment of certain cost incurred during the period less any investment income from
conditions shall be recognized as income over the periods which bear temporary investment of those borrowings.
the cost of meeting the conditions.

*A grant that becomes receivable as compensation for expenses or Asset Financed by “General Borrowing”
losses already incurred or for the purpose of giving immediate financial *The amount of capitalizable borrowing cost is equal to the average
support to the entity with no further related costs shall be recognized carrying amount of the asset during the period multiplied by a
as income of the period in which it becomes receivable. capitalization rate or average interest rate.

1.) Capitalization Rate = Total Interest Expense


Total General Borrowings

2.) Capitalizable Borrowing Cost = Weighted Ave. Expenditures


X Capitalization Rate

Asset Financed both by Specific and General Borrowing

1.) Capitalization Rate = Total Interest Expense


Total General Borrowings
2.) Capitalizable Borrowing Cost Land, Building and Machinery
=W.A.E is computed after deducting Specific Borrowing
X Capitalization Rate LAND (P3R2EMUSOLBC)
General Borrowing Cost Purchase Price
+ Specific Borrowing Cost Payments to tenants to induce them to vacate the land to prepare the
Capitalizable Borrowing Cost land for its intended use
Permanent Improvements (Clearing, Grading, Levelling, Landfill, Special
Assessment)
Relocation or Reconstruction of properties belonging to others
Registration and transfer of title
Escrow Fees
Mortgages, encumbrances and interests assumed
Unpaid taxes up to date of acquisition assumed
Survey
Option to buy the acquired land *If not acquired, cost of option is
EXPENSED
Legal fees for establishing clean title
Broker commission
Clearing cost of unwanted old structures less proceeds from salvage
materials excluding demolition cost

Land Improvement
*Must not be part of the blueprint, if it does, then it is part of building.

Building (P2LUMR)
Purchase price
Payment to tenants to induce them to vacant the building
Legal fess
Unpaid taxes up to date of purchase assumed
Mortgages, Interests and Liens assumed
Renovating and remodelling cost incurred
Royalty Payments on Machines:
 Units Produced – based on Factory Overhead
 Units Produced and Sold – based on Selling Expense

*Cost of removing OLD Machine is EXPENSE IMMEDIATELY


*Present obligation for removing NEW Machine at the end of its life is
CAPITALIZABLE.

Directly Attributable Costs (PIISTEA)


Professional fees
Initial delivery and handling costs
Installation and assembly
Site preparation
Testing less proceeds from selling items produced
Employee benefits
Asset retirement

Costs Not Qualifying for Recognition (RAI2C2O)


Relocating or reorganizing part of all of enitity’s operation
Administration and other general overhead costs
Introducing new products, advertising and promotion
Initial operating losses
MACHINE (CUPANSWI3FT) Costs of conducting business in a new location
Consultant fees for advice on the acquisition Costs incurred when item is operating at less than full capacity
Unloading Costs Opening a new facility
Purchase price
Adjustments for operational efficiency Subsequent Cost will be capitalizable if:
Non-refundable sales tax 1.) The expenditure extends the life of the property
Safety rail and platform surrounding machine 2.) The expenditure increases the capacity of the property and
Water device to keep the machine cool quality of output.
Insurance while in transit 3.) The expenditure improves the efficiency and safety of the
Installation cost, site preparation and assembly property.
Initial estimate of cost of dismantling, removing and restoring
Freight, handling, storage and other cost of acquisition *Repairs will be capitalizable if it is extraordinary and has future
Testing and trial run benefit. Otherwise, it is recognized as maintenance expense.
Depreciation Depletion
Methods of Depreciation *The exploration and evaluation of mineral resources is defined as the
 Equal or Uniform Charge Methods search for mineral resources AFTER the entity has obtained legal right
 Straight Line to explore in a specific area as well as the determination of technical
Annual Depreciation = Cost - Residual Value feasibility and commercial viability of extracting the mineral resources.
Useful Life
 Composite Method *If the expenditures pertain to development of mineral resources, it
Composite Rate = Annual Depreciation cannot be recognized as exploration and evaluation expenditures.
Total Cost
Composite Life = Depreciable Amount (Cost – SV) Cost Included:
Annual Depreciation a.) Acquisition of rights to explore
Annual Depreciation = End Year Cost b.) Topographical, geological, geochemical & geophysical studies
X Composite Rate c.) Exploratory drilling
d.) Trenching
 Group Method e.) Sampling
Annual Depreciation =(# of PPE - # of PPE Retired) f.) Activities in relation to evaluating the technical feasibility and
X Average Cost commercial viability of extracting the mineral resources.
X Depreciation Rate g.) General & administrative cost directly attributable to exploration
and evaluation activities
 Variable Charge or Activity Method
 Output / Production and Working Hours Method 2 Main Features of Wasting Asset
Annual Depreciation =(Cost / Total Est. Operation) 1.) Physically consumed
X Actual Operations 2.) Irreplaceable

 Decreasing or Accelerated Method 4 Categories of Wasting Asset


 Sum of the Years’ Digits 1.) Acquisition Cost – is the price paid to obtain the property
SYD = Life X (Life + 1) containing the natural resources
2 2.) Exploration Cost – is the cost incurred in an attempt to locate
Annual Depreciation = Cost X Remaining Life the natural resources that can economically be extracted.
SYD 3.) Development Cost – is the cost incurred to extract the natural
resources that has been located through successful exploration
 Declining Balance Method *It is capitalizable when it is an intangible development cost.
Annual Depreciation = 1 X Carrying Amount 4.) Restoration Cost – is the cost incurred in order to bring the
Life property to its original condition.
*Silent rule; it is capitalizable.
Revaluation
Depletion:
Depletion Rate per Unit = Total Cost *After recognition as an asset, an item of PPE whose fair value can be
Estimated Units to be Extracted measured reliably can be carried at a revalued amount.

Depletion of the year = Depletion Rate X Units Extracted Revalued Amount – is the fair value at the date of the revaluation less
any subsequent accumulated depreciation and subsequent
Depreciation of Mining Property: accumulated impairment loss.
*Life of Natural Resources > Life of PPE = Straight Line
*Life of Natural Resources < Life of PPE = Output Method Basis of Revaluation
1.) Fair Value
2.) Depreciated Replacement Cost – is the replacement cost of
*Trust Fund Doctrine = Declaration of Div. < Unappropriated RE PPE minus the corresponding accumulated depreciation.
*It is the Sound Value of the asset.
*Wasting Asset Doctrine = Declaration of Div. > Unappropriated RE *It is used when market value is not available

Retained Earnings 2 Approaches in Recording the Revaluation


+ Accumulated Depletion 1.) Proportional Approach – AD @ date of revaluation is restated
(Capital Liquidated) proportionately with the change in gross CA so that the CA after
(Unrealized Depletion) revaluation EQUALS the revalued amount.
Maximum Dividend 2.) Elimination Approach – AD is eliminated against the gross CA
and the net amount restated to the revalued amount of the
asset.

Example:
Cost Replacement Cost Appreciation
Machinery 8,000,000 12,000,000 4,000,000
Accum. Dep’n 2,000,000 3,000,000 1,000,000
CA / SV / RS 6,000,000 9,000,000 3,000,000

Proportional Approach

Machinery 4,000,000
Accum. Depreciation 1,000,000
Revaluation Surplus 3,000,000
Elimination Approach Impairment of Asset
Accum. Depreciation 2,000,000 *The recognition of an impairment loss is covered by PAS 36 which
Machinery 2,000,000 deals with impairment of assets.

Machinery 3,000,000 Indication of Impairment


Revaluation Surplus 3,000,000 External Sources
1. Significant decrease or decline in the market value of the asset
as a result of passage of time or normal use or a new
Piecemeal Realization – it is when the revaluation surplus is realized competitor entering the market
and transferred directly to retained earnings. 2. Significant change in the technological, market, legal, or
economic environment of the business in which the asset is
~Given the same example, the remaining useful life is 15 years. employed.
3. An increase in the interest rate of return on investment which
Revaluation Surplus 200,000 will likely affect the discount rate used in calculating the value
Retained Earnings 200,000 in use.
4. The carrying amount of net assets of the entity is more than the
market capitalization

Internal Sources
1. Evidence of obsolescence or physical damage of an asset
2. Significant change in the manner or extent in which the asset is
used with an adverse effect on the entity
3. Evidence that the economic performance of an asset will worse
than those budgeted.

Measurement of Recoverable Amount


Fair Value – is the price that would be received to sell an asset
– less cost to disposal*
*incremental cost directly attributable to disposal of an asset or cash
generating unit, excluding finance cost and income tax expense.

Value In Use – is measured as the present value or discounted value of


future net cash flows expected to be derived from an asset.
a. Cash flow projections shall be based on reasonable and Intangibles Assets
supportable assumptions
b. Cash flow projections shall be based on the most recent
budgets on financial forecasts, usually up to a maximum period Intangible Assets – is an identifiable nonmonetary asset without
of 5 years, unless longer period can be justified. physical substance. It must also be under the control of the entity as a
c. Cash flow projections beyond the 5-year period shall be result of past event.
estimated by extrapolating the 5-year projections using a
steady or declining growth rate each subsequent year. An asset is identifiable when:
 It is separable
*The RECOVERABLE AMOUNT of an asset is the fair value less cost to  It arises from contractual or other legal rights
disposal or value in use, whichever is HIGHER.
Initial Measurement
a. Separate Acquisition
 Purchase Price
 Import Duties
 Directly Attributable Costs of Preparing the asset for
intended use
*If the payment is deferred beyond credit terms, the cost is the
cash price equivalent.

b. Acquisition by Government Grant


 Fair Value
 Nominal amount or zero, plus any expenditure that is
directly attributable to preparing the asset for its intended

c. Acquisition by Exchange
 Fair Value
 Carrying Amount of Asset Given Up

d. Internally Generated
 Borrowing Costs
 Employee Benefits
 Amortization of patents and licenses used to generate the
asset
 Materials used and services consumed
 Other direct costs, legal fees to register legal right
*Internally Generated that CANNOT be capitalize: Patent and Trademark
 Brands
 Mastheads Patent (20 years LEGAL LIFE)
 Customer List  Acquired by Purchase : Purchase Price + Direct Costs
 Publishing Titles  Internally Generated : Licensing and other related legal fees
Engineering and consulting cost to
Amortization of Intangible Assets develop and design changes
1. Intangible asset with FINITE or LIMITED life are amortized over
their life Amortization:
2. Intangible asset with INDEFINITE life are NOT amortized but are Indefinite Life: NO amortization
TESTED for IMPAIRMENT Impairment Test

*Residual Value shall be presumed to be zero, except: Finite Life: ORIGINAL PATENT – Legal or useful life whichever is shorter
 When a 3rd party is committed to buy the asset at the end of COMPETITIVE PATENT – Remaining useful life of old patent
the useful life RELATED PATENT – to extend life; cost of related patent &
 When there is an active market that the residual value can be unamortized cost of old is amortized over extended life
measured reliably - no extension; new patent is amortized
over its own life
Software Development Costs

Project Technological Available for Commercial *Legal fees and other costs of successfully prosecuting or defending a
Sold patent shall be expensed.
Initiated Feasibility Production

Trademark (10 years LEGAL Life; Renewable for Another 10yrs)


EXPENSED INTANGIBLE ASSET INVENTORIABLE COST  Acquired by Purchase: Purchase Price + Direct Costs
 Internally Generated: Expenditures to establish it, Filing Fees,
Classification: Registry Fees and Design Cost
 As a Rule INTANGIBLE ASSET
 Purchased for Resale INVENTORY Amortization:
 Not an integral part of related hardware PPE Indefinite Life: Renewable; NO amortization but subject to impairment
 Purchased as integral part of a computer
machine tool that cannot operate without INTANGIBLE ASSET Definite Life: Amortized over useful life
the specific software
*The costs of successfully prosecuting or defending a patent is an
outright expense.

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