AFAR

PARTNERSHIP
FORMATION
 PARTNERSHIP FORMATION

PARTNERSHIP ACCOUNTING FOR CAPITAL FORMATION

• contract between 2 or more persons
Contributes: 1. Transfer of Capital or Bonus Method (if silent)
Money or property - capitalist partner • the only method accepted by PFRS
Industry - industrial partner • Total Contributed Capital = Total Agreed Capital
How to record Industrial partner upon formation?
MEMO ENTRY ONLY 2 Investment or Withdrawal
• Dividing the profits among themselves
• Goodwill method or method of recording unidentifiable
• CONSENSUAL (always requires consent of
asset resulting to increase in TAC is not allowed under
partners)
PFRS
• Life of business: LIMITED
• Unidentifiable assets is not recorded in Goodwill method.
• Liability of partners: UNLIMITED
• Total Contributed Capital ≠ Total Agreed Capital
• Difference from corporation: ACCOUNTING
OF EQUITY 3 Net Investment Method (Investment/Withdrawal
• Agreed Capital is known, therefore, partners will
FORMATION contribute an amount which is the same as their agreed
the objective is to determine the original capital capital
which is the agreed capital
• There is a basis partner.
Amount of ASSET investment shall depend on the
ARTICLES OF PARTNERSHIP (or in the following order
or priority)
1. Value agreed upon by partners
2. Fair Value/Market Value
3. Appraised value (not assessed value)
4. Carrying value (if none of the above is stated)

CAPITAL CONTRIBUTIONS
• net assets contributed by the partner
CAPITAL CREDIT
• the agreed capital for the partner
NET ADJUSTEMENTS

WITHDRAWAL ADDITIONAL INVESTMENT

BONUS METHOD INEQUITY

PARTNERSHIP FORMATION - PHYSICAL HO1)

PARTNERSHIP
OPERATIONS
 PARTNERSHIP OPERATIONS
• How much is the net income or loss.? BONUS
• Correcting errors -Given as a compensation for good performance
-Given to a managing partner
Indication of net income or loss
-Given if: net income and base is positive (except if
(Debit balance in income summary - loss) stipulated)
(Credit balance of income summary - income) -No bonus if it is a net loss
(If income summary was debited when it was closed to the
-not time proportioned
capital - income)

MAIN ACCOUNTING ISSUE: Note: if net income is already stated before bonus, salary,
1. Allocation of profit or loss. and interest, BIS is not an expense
2. Periodic adjustment of capital after operation
REMAINDER
ALLOCATION OF PROFIT AND LOSS • divided based on the P/L ratio of partners
• note that profit and loss ration is not always the same
SALARIES • if there is no profit ratio: use the original capital ratio
-Given as a compensation for services
-For industrial partner • if there is no loss ratio: use the 1) profit ratio or
-Time proportioned 2) original capital ratio (initial capital upon formation)
-If silent as to period: annual or monthly/compare to other • if there is no P/L ratio stated and there is an
information INDUSTRIAL PARTNER (when there is no agreement)
-not a salary expense, but as a basis of allocation of net income give an amount which is JUST AND EQUITABLE
• Pactum leonina – a stipulation in a partnership agreement. which
INTEREST excludes one or more partners from any share in the. profits or
-Given as a compensation for capitalist partner losses (VOID)
-return of investment of a capitalist partner
-Time proportioned NOTE: SALARIES, INTEREST, AND BONUS IS NOT REQUIRED
-Can be based on different capital base (simple, weighted)
PERIODIC ADJUSTMENT OF CAPITAL AFTER
Simple Average: (can be manipulated) OPERATION
(Beg + End) / 2 Beg capital
Add: additional investment
Weighted Average (if silent) Less: withdrawal
HAS 2 METHODS Less: drawings
(drawings are either deducted or not deducted, it depends on Add: share in Net income
the stipulation) Less: share in Net loss
(if there are drawings and it is a net loss, drawings may be Ending capital, after closing
deducted on capital balance)
Notes: Unidentifiable assets are not recorded using the
Withdrawal = Permanent (affects capital balances immediately) bonus method.
Drawings = Temporary (made on anticipated share in profits)

Peso month (normally used)

Peso day
WEIGHTED AVERAGE CAPITAL
 BONUS IS UP TO THE EXTENT OF INCOME ONLY

Scenario: if the net income isn't enough to cover interest, it

should be based on ratio of the total interest of both partners

Example: 99k net income

INDIFFERENCE POINT
PARTNERSHIP OPERATIONS (PHYSICAL HO1)
PARTNERSHIP
DISSOLUTION
 RETIREMENT or WITHDRAWAL
• change in ownership = new partnership
• admission of new partner or retirement of old partner 1. Can be sold to third parties
• dissolution does not always lead to liquidation in partnership 2. Can be sold to old partners
3. Can be sold to partnership
Accounting procedures a. Purchase price = Book value = NO ISSUE
1. Adjust the capital for share in profit or loss b. PP > BV
2. Adjust the capital for other agreed adjustments = Bonus to retiring partner
(Revalue or adjust) = Revaluation upwards (All or specific)
3. To record dissolution. = Goodwill (All or specific)
c. PP < BV
ADMISSION OF NEW PARTNER
= Bonus to remaining partners
⁃ asset revaluation is only for old partners
= Revaluation downwards (All or specific)
⁃ new partners do not share for asset revaluation because
technically old partners originally own the assets
⁃ asset revaluation is divided by P/L ratio INCAPACITY OF A PARTNER
• same with retirement or withdrawal
a.) ADMISSION THROUGH PURCHASE (settled personally by
partners) DEATH OF A PARTNER
i. Book value method (no adjustments) IF SILENT • after death: the deceased partner will be a
ii. Revaluation method (revalue of assets of existing partnerships) creditor
• Debit capital; Credit to the Estate
b.) ADMISSION BY INVESTMENT (New partner vs. Partnership) • Interest: can have interest due to late
settlement (considered partnership expense)
i. TCC = TAC
a. Bonus method with c/s INCORPORATION
b. Bonus method without c/s • from partners to incorporators
ii. TCC > TAC • capital from partnership will be the share
a. Withdrawal capital for corporation except when there
b. Revaluation downwards are adjustments in asset (or asset revaluation)
iii. TCC < TAC
a. Additional investment
b. Revaluation upwards
c. Goodwill

GOODWILL METHOD IS NOT ACCEPTABLE BY PFRS

ADMISSION OF A NEW PARTNER

GOODWILL SHOULD BE WRITTEN OFF

RETIREMENT or WITHDRAWAL INCORPORATION

GOODWILL IS NEVER RECORDED FOR EXTERNAL PURPOSES

Goodwill is not recorded in the books of the corporation.

DEATH OF A PARTNER
PARTNERSHIP DISSOLUTION - PHYSICAL HO1
PARTNERSHIP
LIQUIDATION
• winding up of affairs of business HOW TO COMPUTE FOR INSTALLMENT
• liquidating concern (going concern assumption will not SETTLEMENT TO PARTNERS:
apply)
Result of CPP and SPS is the same.
• all assets are already current
• identify cash and non-cash assets
MODES OF ALLOCATING DISTRIBUTION AVAILABLE TO
PARTNERS EVERY MONTH
STEPS:
1. Cash Priority Program
1. Convert non-cash assets to cash through realization
Loss absorption potential/capacity/power
• realization (sale of inventory, PPE, collection of AR,
• Vulnerability ranking (least vulnerable, first priority)
refund of prepaid exp)
2. Settle to 3rd party obligations • Priority ranking
3. If there is excess: distribute to partners according to
their claims -for more than 1 month problems
4. If there is a capital deficient partner after deducting -identifies the priority partner (prioty is the least
the loss of converting non cash to cash: vulnerable or the one who can absorb loss the most)
• the partner who is capital deficient will invest if he
is solvent 2. Schedule of Safe Payment (alternative solution)
Assumed loss or the maximum possible loss
• or it will be absorbed by other partners
consists of:
• remaining non-cash asset
Order of Priority of settlement of
obligations from • cash witthheld for contingent expense (cash withheld
for unpaid liability is not assumed loss)
PARTNERSHIP ASSETS
1. Creditors other than partners (external creditors) GUIDED STEPS
2. Partners other than for capital and profits 1. Compute for the TOTAL INTEREST OR TOTAL EQUITY
3. Partners in respect of capital • Capital balance + Payable to partner - Receivable from
4. Partners in respect of profits. partner
2. Compute for the CASH AVAILABLE FOR DISTRIBUTION
Note: This is applicable to general partners, if limited 3. Absorption or Contribution of partners
partners, profits is #3.
CAPITAL DEFICIT
PERSONAL ASSETS 1. Installment Liquidation
1. Separate creditors or personal creditors • absorbed by other partners with positive
2. Partnership creditors (unlimited liability theory applies) balance
3. To partners as way of contribution (in case of capital • personal insolvency is irrelevant
deficiency of other partners)
2. Lump sum liquidation/Final stage of Installment
Note: Applies only to General (limited partners is not liable Liquidation
for liabilities of partnership) and Solvent partners. • first contribution by GENERAL AND SOLVENT
SOLVENT = Personal Assets > Personal liability PARTNERS
If silent and PA < PL, INSOLVENT unless proven otherwise. • then, Absorbed by other partners with
- Positive balance
- Negative balance (General and Solvent)
2 ways of Liquidating
1. Lump sum
2. Installment
LUMP SUM DISTRIBUTION

• Beginning balance of subsequent months is equal to cash wittheld

INSTALLMENT DISTRIBUTION
• It is allowed to pay the partners before external creditors
as long as there is cash withheld for external creditors
SHORTCUT METHODS FOR INSTALLMENT
PARTNERSHIP LIQUIDATION - PHYSICAL HO1
CORPORATE
LIQUIDATION
PRE RECORDED PROBLEMS
 CORPORATE LIQUIDATION

Reports to be made: Statement of Realization and Liquidation

1. Statement of Affairs (SOA)
• made preliminary (at the beginning of
liquidation) (Beg.) Assets to be realized Assets realized (Decrease)
(Increase) Assets acquired Assets not realized (End.)
• for planning purposes
• estimated amount are made (Decrease) Liabilities liquidated Liabilities to be liquidated (Beg.)
(End.) Liabilities not liquidated Liabilities assumed (Increase)
2. Statement of Realization and
Liquidation (SoRaL) Supplementary debits Supplementary credits
• made periodically (monthly or quarterly
or semi annually)
• for reporting purposes
• actual amounts or BV is used
• cash is not included
• the purpose is to identify gain or loss on
realization and liquidation
• not balanced
• GAIN = CREDIT > DEBIT
• LOSS = CREDIT < DEBIT

STATEMENT OF AFFAIRS

Liabilities
1. Fully Secured
Liability < FV of Collateral asset
2. Partially Secured
Liability > FV of Collateral asset
3 Unsecured with priority
a. Administrative or Liquidation expenses
b. Salaries and wages
c. Taxes
4. Unsecured without priority

Assets
1. Assets pledged to Fully Secured liabilities
2. Assets pledged to Partially Secured liabilities
3. Free assets

ASSETS should be equal to FV

Liquidation concern (AFAR TOPICS)
if silent FV = 0 except cash

Going concern
if silent FV = BV
except goodwill
 REVENUE
RECOGNITION
PFRS 15
 OVERVIEW OF PFRS 15 5 STEP PROCESS
Income
increases in assets, or decreases in liabilities, 1. Identify the contract/s
that result in increases in equity, other than
those relating to contributions from holders • there is Commercial substance
of equity claims. • Payment terms are identified
• Encompasses both revenue and gains
• accepted o approved by the customer
Revenue
Income arising in the course of an entity's • identify rights of both parties
ordinary activities. • collection of payment is probable (new standard) as to
intention and ability
SCOPE
PFRS 15 Combination of Contract
PO satisfied overtime if one or more of the following criteria are met:
PO satisfied at a point in time a. negotiated as a package
b. one contract depends on the price or performance of the
• Sale of services other contract;
• Sale of goods c. the goods or services are a single performance obligation.
• Construction contracts
• Royalties 2. Identify the Performance Obligations
• Franchise
A performance obligation is a promise to transfer to the
PFRS 9 IAS 18 Revenue customer either:
Dividends IAS 11 Construction contracts • A distinct good or service
Interest Combined in IFRS 15 • A series of distinct goods or services that are substantially
the same and have the same pattern of transfer
PFRS 4/17
Insurance contract No transfer = No performance obligation

PFRS 16 Customer Options for Additional Goods or Ser vices

Lease income 1. Material right - Separate performance obligations (e.g., buy 1
take 1 for a lesser price)
Other income 2. Not a material right - not separate p.o
Government grants, investment property, etc.

The 5-step process

• Contract with customers
• Performance obligations
• Transaction price
• Allocate the transaction price
• Revenue recognition DISTINCT IF:
• Separately identifiable
• With separate use/benefit
Other revenue recognition issues • Not integrated with other goods or services in the
• Right of return contract; or
• Bill-and-hold arrangement • Does not modify or customize another goods or services
• Principal-agent relationships in the contract; or
• Non-refundable upfront fees • Does not depend on or relate to other goods or services
• Repurchase agreements promised in the contract
• Licenses
• Consignments
3. Determine the Transaction Price FS PRESENTATION
Variable consideration (discounts, rebates, refunds,
credits, price concessions, incentives, performance bonuses, STATEMENT OF FINANCIAL POSITION
penalties or other similar items) Contract Asset
• Expected value (weighted average) if there is large
• Before payment or before payment is due
population of events • Performance obligation is already satisfied
• Most likely amount • Earned but not yet billed.
Non-cash consideration Receivable
Time value of money • Entity's right to consideration is unconditional
• Significant financing component (with interest) • Performance obligation already satisfied
• Insignificant financing component (without interest or
immaterial interest) Contract Liability
• Practical expedient ( short term or. 12 months or less) Record contract liability if:
Consideration payable to a customer • Customer pays a consideration or entity has right to
• In exchange for distinct goods or services - Revenue amount of consideration that is conditional
• otherwise - reduction from transaction price • performance obligations is not satisfactory yet
Step 4. Allocate transaction price to • conditions of contract is not satisfied yet
performance obligations STATEMENT OF COMPREHENSIVE INCOME
Stand alone selling price (basis for allocating transaction • Contract revenue
price) • Contract cost
1. Directly observable selling price
2.1 Adjusted market approach (based on CONTRACT MODIFICATION
competitor)
2.2 Estimated cost + margin
3. Residual approach (last resort)

Step 5. Recognize revenue when or as

performance obligation are satisfied
Satisfied when CONTROL is already in the buyer.
There is control when (PAROL)
1. Physical possession (not always)
2. Acceptance of buyer
3. Risk and reward (he who bears)
4. Obligation to pay (not always) except mobilization fee
5. Legal title CONTRACT COSTS

Recognize revenue: Cost to obtain contract

1. Point in time • Capitalized and amortized
• revenue is recognized immediately as whole • Practical expedient - expensed
• when an entity creates an asset with an alternative • Expensed if incurred even if the contract is not
use obtained

2. Over time Cost to fulfill a contract

• customer simultaneously receives /consumes the • Covered by other standard
benefits provided
• Customer controls asset as it is created Not covered by other standard
• when an asset is created specifically for the buyer • Directly related
even (it means the buyer has control) and the seller • Generates or enhances resources
has right to receive payment for the. work completed. • Cost expected to be recovered
• has no alternative use to seller
 Cost Direct to a Contract RIGHT OF RETURN
• Direct labor
• Direct materials Grants the customer the right to return the product for
• Allocations of costs that relate directly to the various reasons (such as dissatisfaction with the product)
contract or to contract activities and receive any combination of the following:
• Costs that are explicitly chargeable or • a full or partial refund of any consideration paid
reimbursable to the customer under the contract • a credit that can be applied against amounts owed,
• Other costs that are incurred only because an or that will be owed, to the entity; and
entity entered into the contract • another product in exchange

Cost that are Expensed NOT EXPECTED TO BE RETURNED

• General and administrative costs; • Recognize revenue
• Costs of wasted materials, labor or other
resources to fulfill the contract that were not EXPECTED TO BE RETURNED
reflected in the contract price • Revenue not recognized
• Costs that relate to satisfied performance
obligations (or partially satisfied performance
obligations) in the contract (i.e. costs that relate to
past performance); and
• Costs for which an entity cannot distinguish
whether the costs relate to unsatisfied
performance obligations or to satisfied
performance otolations (or partially satisfied
performance obligations).

Expected Loss (PFRS for SME or PAS 11) WARRANTY

When it is probable that total contract costs will exceed
ASSURANCE TYPE WARRANTY (PAS 37)
total contract revenue on a contract, the expected loss • Not a separate obligation
shall be recognised as an expense immediately.
EXTENDED WARRANTY/SERVICE TYPE
(PFRS15)
• Option of customer
• Additional service
• Separate obligation if it is MATERIAL RIGHT.
Impairment/Expected Loss (PFRS 15) MATERIAL RIGHT - if it can be purchased at a lower price if
it is purchased at the same time as the product.

PRINCIPAL-AGENT RELATIONSHIP

Principal
• Primary responsible for G/S
• Inventory risk
• Establishing prices
• Customer credit risk

Agent
• transfers goods to customer
 LICENSING

• a license establishes a customer's rights to Franchise

the intellectual property (IP) of an entity • Involves the grant from the business owner
• IP is a work or invention that is the result of (franchisor) to the applicant (franchisee), the legal
creativity. rights to obtain the trade name, market the service or
goods and operate the business with an equivalent of a
Licenses of IP may include, but are not limited to, one-time fee.
licenses of any of the following: Initial Franchise Fee
• software and technology • It refers to the contractual consideration for the
• motion pictures, music and other forms of franchise and initial services to be rendered by the
media and entertainment; franchisor.
• franchises and • Initial services rendered by the franchisor prior to the
• patents, trademarks and copyrights. opening (i.e., pre-opening) of the franchisee's
operations usually include the following:
1. Assistance in site selection for the construction of the
building.
Right to Use (RTU) 2. Architectural planning and design fees
• customer can control 3. Building and leasehold improvements and other relevant
• point in time site dorks necessary
4. Provision of bookkeeping and advisory services.
Right to Access (RTA) 5. Provision of employee and management training.
• Customer cannot control 6. Provision of quality control.
• May be evidenced by sales-based or usage based 7. Provision of advertising and promotion.
royalty
• Recognized over time Continuing Franchise Fee
• the contract requires, or the customer • Represents continues payment to the franchisor for
reasonably expects, that the entity will undertake providing specific future services, such as advertising,
activities that significantly affect the intellectual and for continued use of intangible rights by the
property to which the customer has rights franchisee.
• the rights granted by the license directly expose • Also known as sales-based or usage-base royalty
the customer to any positive or negative effects
of the entity's activities: and
Franchise Cost
• those activities do not result in the transfer of a Direct cost
good or a service to the customer as those
activities occur • contract cost (cost to obtain or cost to fulfil)

Indirect cost
• expensed outright
Sales-based or Usage-based Royalties
Recognize revenue when (as) the following
events occurs (whichever is LATER)
a. the subsequent sale or usage occurs; and
b. the PO to which some or all of the sales-
based or usage-based royalty has been allocated
has been satisfied (or partially satisfied).
 NON-REFUNDABLE UPFRONT FEES CONSIGNMENT

Account for as a promised goods or services

If control over inventories is transferred to dealer
• Recognize allocated consideration as revenue
on transfer of promised goods or services Owned by dealer

Account for as an advanced payment for future Control is not transferred to dealer
goods or services Seller’s inventory
• Recognize as revenue when future goods or Deposit: other receivable
services are provided (may include renewal)
Indicators:
• Product controlled by the seller until specified event occurs
REPURCHASE AGREEMENTS • The seller can require the return of the product or
transfer to another party
Customer buys or has the option to buy the
• The customer (dealer) does not have an unconditional
same asset back at the later date
obligation to pay for the product
FORWARD CONTRACT
• obligation to repurchase
• Customer does not obtain control customer BILL AND HOLD ARRANGEMENTS

CALL OPTION Asset remains in the possession of seller for specified period
• right to repurchase Customer obtain control of the product and revenue is recognized
when:
PUT OPTION • The reason for bill-and-hold is substantive
• obligation to repurchase if requested by • The product is separately identified as belonging to the
the customer customer
• customer may obtain control • The product is ready for physical transfer to the customer
• The entity has no obligation to use the product or to
Forward contract + Call Option transfer it to another customer
Repurchase price vs Original selling price

Others
Customer Incentives
Put Option Examples
Repurchase price vs Original selling price • Buy 3, Get 1 Free
• Loyalty programs
• Discount coupons
Accounting - separate PO (i.e., material right)

Gift Cards/Certificates
 CONSTRUCTION CONTRACTS - PFRS 15

Definition (PAS 11)

a contract specifically negotiated for the
construction of an asset or a group of interrelated
assets or a combination of assets that are closely
interrelated or interdependent in terms of their
design, technology or their ultimate purpose or use.

Classification
• Fixed price contract
• Cost plus contract
FS Presentation
Statement of Financial Position
• Contract Asset
• Accounts Receivable
• Contract Liability
• Unused Supplies
• Asset (CTO + CTF)*
Statement of Comprehensive Income
• Revenue
• Cost
• Expenses

Methods for Measuring Progress

Output methods
• Recognize revenue on the basis of direct
measurements of the value transferred to the
customer to date relative to the remaining
goods or services promised under the contract.
• Examples: surveys of performance completed
to date, appraisals of results achieved,
milestones reached, time elapsed and units
produced or units delivered.

Input methods
• Recognize revenue on the basis of the entity's
efforts or inputs to the satisfaction of a
performance obligation (for example, resources
consumed, labor hours expended, costs
incurred, timg elapsed or machine hours used)
relative to the total expected inputs to the
satisfaction of that performance obligation.
• If the entity's efforts or inputs are expended
evenly throughout the performance period, it
may be appropriate for the entity to recognize
revenue on a straight-line basis.
 LONG TERM CONSTRUCTION CONTRACTS
Applies to qualifying assets (yachts, ship, spaceship)

Template: Construction in Progress, net or

Contract asset/Contract liability
Transaction price (selling price) - Fixed & Variable xx Formula:
Total estimated cost of construction(cost of goods sold) Cost incurred to date
COST INCURRED TO DATE (xx) + Gross profit to date or - Gross loss
ESTIMATED COST TO COMPLETE (xx) - Previous billing
Gross profit xx
% of completion x % of C *for cost-to-cost method only
Realized gross profit to date xx
GP from previous years (xx) ALTERNATIVE
Realized gross profit current year xx TP x %C (for profitable contracts)

(for nonprofitable or onerous contracts)

VARIABLE CONSIDERATION WILL NOW BE INCLUDED IN THE
(TP x %C) - (Gross loss x %Incomplete)
TRANSACTION PRICE AT THE DATE OF INCEPTION
2 methods of allocating revenue: (by priority)
1. Cost-to-cost method/Percentage of completion If CIP, gross > Progress billing = Contract asset
method
2. Cost recovery method/Zero-profit method If CIP, gross < Progress billing = Contract liability
• Defer the gross profit until completion (GP is 0 except in
the year of completion.
• Instances where GP is not O
1. Year of completion
2. Onerous or Unprofitable contracts (less than 0 or loss)

If the problem is silent: use the cost-to-cost method (input

method) OTHERS
In real world: it is given by the engineer or an expert (output Pre-selling (PIC Q&A 2018-12)
method) • Reservation
• Contract to Sell (CTS)
• Deed of Absolute Sale
Cost to include:
• Directly attributable costs (Product costs)
Uninstalled materials (PIC Q&A 2020-02)
• May include period cost but only if it is reimbursable • Customized - part of CITD
• Not customized - part of ECTC
CONTRACT RETENTION
is a provision in a contract to protect the buyer or customer in Percentage of Completion> buyer's payment
which the buyer will pay only a partial amount and pay the (PIC Q&A 2020-05
balance if he is satisfied with the result. • Contract asset under PFRS 15.107
• Receivable under PFRS 15.10&,
Mobilization fee
• To protect the seller Incidental income
• Somewhat a downpayment PAS 11/SME = Deduction from cost
PFRS 15 = Other income
LIVE LECTURE
If expected Gross Profit = loss (such as
in an onerous contract or unprofitable
contract), loss is recognizes 100%
regardless of % of completion

Therefore, cost of
construction in FS does
not always equal cost
incurred to date.
 LICENSES: FRANCHISES
Franchisor - the one who buys franchise
Franchisee - the one who grants franchise

Revenue from Initial Franchise Fee (UNDER IFRS 15)

Revenue from continuing franchise fee (not under IFRS 15)

TOTAL FRANCHISE REVENUE = RIFF + RFCFF

TOTAL REVENUE = RIFF + RFCFF + Interest if there is any
 CONSIGNMENT AND INSTALLMENT SALES

• Consignee doesn’t include consigned goods as inventory

• Consignor always include consigned good as inventory
even when it is not physically in possession
• Gross profit belongs to the consignor

COMMISSIONS REVENUE
• revenue of consignee
• expense of consignor, deducted from gross profit as
selling expense

REMITTED TO CONSIGNOR
• Sales net of freight out reimbursement and commission
(Reflected in a statement of account of sale)

Freight
• Freight in: Product cost
• Freight to consignee is also a product cost (cartage)
• Freight out to customer is an expense
 REVENUE RECOGNITION FOR SME - PFRS FOR SME
SALE OF GOODS
An entity shall recognize revenue from the sale of goods Contract Revenue Contract Cost
when all the following conditions are satisfied • Fixed price Direct cost
1. transferred to the buyer the significant risks and • Penalty Allocated cost
rewards of ownership of the goods • Incentives Chargeable to customer
• Cost escalation
2. The entity doesn’t retain continuing managerial • Claims
involvement associated with ownership and effective • Change order
control over the goods solid
3. The amount of revenue can be measured reliably Sale of Services/Construction Contracts
4. It is probable that the economic benefits associated with
the transaction will flow to the entity; and Outcome can be estimated reliably
5. The costs incurred or to be incurred in respect of the 1. The amount of revenue can be measured reliably
transaction can be measured reliably. 2. It is probable that the economic benefits associated
with the transaction will flow to the entity;
Section 23: SCOPE 3. The stage of completion of the transaction at the end
Revenue from: of the reporting period can be measured reliably; and
1. The sale of goods; 4. The costs incurred for the transaction and the costs
2. The rendering of services to complete the transaction can be measured reliably.
3. Construction contracts in which the entity is the
contractor
4. The use by others of entity assets yielding interest, Outcome cannot be estimated reliably
royalties or dividends. 1. Recognize revenue only to the extent of contract
costs incurred that it is probable will be recoverable;
Out of Scope and
• Lease agreements 2. Recognize contract costs as an expense in the
• Dividends and other income arising from investments period in which they are incurred
that are accounted for using the equity method
• Changes in the fair value of financial assets and
financial liabilities or their disposal Use by Others of Entity's Assets
• Changes in the fair value of investment property An entity shall recognize revenue arising from the use by
• Initial recognition and changes in the fair value of others of entity assets when
biological assets related to agricultural • It is probable that the economic benefits associate
• Initial recognition of agricultural produce. with the transaction will flow to the entity; and
• The amount of the revenue can be measured reliably.
Measurement of Revenue
• Fair value of the consideration received or receivable. An entity shall recognize revenue on the following bases:
• Interest - Effective interest
Consideration received • Royalties - accrual method
• Cash • Dividends - when right to receive dividends is
• Non-cash established (declaration)
Consideration receivable
• Interest-bearing (with reasonable interest rate)
• Interest-bearing (with unreasonabie interest rate)
• Non-interest bearing
 FS PRESENTATION
Gross amount due from customers
CIP > PB = Current assets

Gross amount due to customers

CIP < PB = Current liability

Construction in Progress
Cost incurred to date
+ Gross profit to date (or - Gross loss to date)

Methods of Recognizing Gross Profit

Accrual method
• Used when collection of the balance is
reasonably assured

Installment sales method

• Used when collections of the balance are not
reasonably assured or the possibility of
cancelation of the installment sales contract
• Used when collections are for a period of time
and no reasonable basis for estimating degree
of collectability

Cost recovery method

• used when the collection is very uncertain or
highly speculative.
• used when the cash price is determined by
future events
 Franchise - Other Considerations Accounting procedures for
DEFAULTS AND REPOSSESSION
• Supplies of equipment and other tangible assets
• Supplies of initial and subsequent services 1. The installment account receivable and the deferred
• Continuing franchise fees gross profit are eliminated.
• Agency transactions 2. The repossessed merchandise is recorded as used
• Fees from the development of customized software inventory at its net realizable value. / FV
• Collection of the balance is subject to significant 3. Bad debt expense and a gain or loss on repossession
uncertainty are recognized.
If the collectability of an amount already recognised
TRADE-INS
as contract revenue is no longer probable, the 1. Trade-in value = fair value
entity shall recognize the uncollectable
2. Trade-in value > fair value: over-allowance
amount as an expense (bad debts expense)
3. Trade-in value < fair value: under-allowance
instead of as an adjustment of the amount of
contract revenue. Contract price
Less: Over allowance
Add: Under allowance
Fair value of Revenue

INSTALLMENT SALES - OLD US GAAP

Installment Sale
> a financing arrangement in which the seller allows the
buyer to make payments over an extended period of time
> the buyer receives the goods at the beginning of the
installment period and makes payments over the installment
period

Accounting for Installment Sales

PFRS 15 Old US GAAP

• Over time • Accrual
• Point in time • Installment sales method
• Cost recovery method
 FRANCHISE - OLD US GAAP

REVENUE
• Initial franchise fee (IFF)
• Continuing franchise fee (CFF)

COST
• Direct cost
• Indirect cost (Expensed)

Substantial performance
1. The franchisor is not obliged in any way (trade
practice, law, intent, or agreement) to refund cash
already received or forgive unpaid debt. Acceptability Under PFRS
2. The initial services required to the franchisor by
contract or otherwise have been substantially 1. Accrual method Right to use (Point in time)
performed. 2. Installment sales method Micro entity (income tax
3. No other material conditions or obligations exist basis)
3. Cost recovery method
ACCOUNTING METHOD 4. Deposit method Unearned income/Current liability
5. Limited accrual Right to use - partially satisfied
Collection before substantial performance performance obligation
• Deposit method - treat amount received as
unearned revenue or current liability
Exception
• Non refundable DP
• The DP commensurate (i.e., represents a fair
measure) to the extent of services already
performed

Collection after substantial Performance

• Accrual
• Installment
• Cost recovery
Exception
1. The franchise contract provides for a conditional buy-
buck agreement
2. The grant is subject to refund which is still
outstanding
3. The franchise may be cancelled subject to a
contingency which has not yet prescribed
HOME OFFICE,
BRANCH, AND
AGENCY
Accounting Issues AGENCY (FAQs)
Agency • Home agency received sales order by agency
General procedures - shipments billed at cost does not require journal entry.
Special procedures - shipments billed above cost • Incurrence of various expenses by agency does
Special procedures - interbranch transfers of cash not require journal entry in Home office
Special procedures - interbranch transfers of (IMPREST SYSTEM)
merchandise • Replenishment of fund (WITH ENTRY)
• If samples decreased at the end, it should be
Reconciliation of reciprocal accounts
recognized as expense.
Home Office
This where the top management oversees the BRANCH AGENCY
various aspects of operations, including the branches. Degree of Autonomy More Less
Samples vs. Stocks Stocks Samples
Branch Credit approval Branch Home Office
A self-contained business which acts independently, Collections & payments Branch Home Office
but within the bounds of company policy and subject Books Single Entry & Double Single Entry
to the control of the home office. Entry

• A branch can qualify as an investment center

Agency
Not a self- contained business but rather acts only
on behalf of the principal (i.e., home office).

- an agency is a profit center.

 ASSUMED FIGURE

Home Office Books Branch Books

MI, beginning MI, beginning
Add: Purchases Add: Purchases
Less: STB Add: SHO
TGAS TGAS
Less: MI, ending Less: MI, ending
Cost of Goods Sold Cost of Goods Sold
DEPRECIABLE ASSET
Acquirer: Cr CIB or AP
Recorder: Dr Asset Cr. Acc. Dep
User: Dr. Depreciation expense
UNIQUE ACCOUNT TITLES
HOME OFFICE BOOKS RECIPROCAL ACCOUNTS
Branch current/ Shipment to branch Branch current
Investment in branch (Inventory) • Investment account
Branch loading (excess of billing price • Credited of there is remittance from branch
over cost/mark up/allowance/gross (this is a treated as return of investment)
profit/allowance for overvaluation
BRANCH BOOKS Home office account
Shipment from Home office Home office (Reciprocal • An equity account
account of branch current)

IF SHIPMENT IS BILLED @ COST IF SHIPMENT IS BILLED ABOVE COST

• BRANCH CURRENT ACCOUNT AND HOME OFFICE • BRANCH CURRENT ACCOUNT AND HOME OFFICE
ACCOUNT IS EQUAL ACCOUNT IS NOT EQUAL

NOTES FOR JOURNAL ENTRY OF

TRANSACTIONS
1. Transactions of the branch and home office with an
external party are recorded in a regular manner.
2. Transactions between the home office and the branch
are recorded in a regular manner except for shipments
of merchandise to branch which is either billed at cost
or above cost.
3. The transactions between a branch and another
branch are accounted for as if each of the branches is
transacting with the home office.

NOTES FOR UNIQUE ACCOUNTS

1. Branch loading is ordinarily presented as a contra-asset (i.e., branch
current) in the individual FS of the home office.
2. Branch loading is debited when realized and added to the branch
reported net income to arrive at the true branch net income.
3. Realized branch loading is computed by deducting the adjusted balance
from the unadjusted balance.
COMBINED FS COMBINATION ENTRIES
Financial statements of a reporting entity that 1. To eliminate/close reciprocal account
comprises two or more entities that are not all 2. To eliminate unrealized overvaluation on
linked by a parent-subsidiary relationship. inter-office transfer of merchandise

Home office FS
+
Branch FS
-
Combined
Entries
=
Combined FS

NOTES
1. Non-reciprocal accounts are not eliminated
2. Reciprocal accounts and unrealized mark-up or loading are eliminated.
3. Shipments to branch and shipments from home office are zeroed out after
preparing the adjusting entry to record the ending inventory.

SUMMARY OF UNIQUE ACCOUNT TITLES

Accounts Books of Normal Account Adjusted Post closing Combined
balance trial bal trial balance FS
INTER-BRANCH TRANSFERS

Reconciliation

Reciprocal Method
Home Office & Branch Current

Method
Adiusted balance method

Reconciling items:
Bookkeeping or mechanical errors
Timing difference
 Billed price - cost = allowance for overvaluation
NOTES FOR UNIQUE ACCOUNTS
1. Branch loading is ordinarily presented as a contra-asset (i.e., branch
current) in the individual FS of the home office.
2. Branch loading is debited when realized and added to the branch
reported net income to arrive at the true branch net income.
3. Realized branch loading is computed by deducting the adjusted balance
from the unadjusted balance.
Agency Branch
• no own books • has own management
• has own books
• Only one books is submitted as external report: COMBINED FS
• Home office and Branch office is for internal or managerial reporting
purposes only.
• Home and branch is one entity only, economically
• Home and branch can transact with each other
• Reciprocal accounts should always be equal at gross amounts
• Home office can transfer goods to branch at a higher price from cost.
This results to OVERVALUATION OF BRANCH INVENTORY ACCOUNT.
Home office books Branch office books

Home office FS Branch FS

COMBINED FS
HOME OFFICE BOOKS BRANCH OFFICE BOOKS
Transfer of cash Dr. Investment in branch or Branch current Dr. Cash
(Asset account) Cr. Home office current (equity account)
Cr. Cash

Transfer of Inventory Dr. Investment in branch or Branch current Dr. Shipment from home office (at billed price)
Cr. Shipment to branch (at cost) Cr. Home office current
Overvaluation of branch Cr. Allowance for overvaluation of branch
inventory inventory account

Customer paid to home office Dr. Cash Dr. Home office current
instead to branch Cr. Investment in branch or Branch current Cr. Accounts Receivable

Expenses paid by home office Dr. Branch current Dr. Expense

for branch Cr. Accounts Payable or Cash Cr. Home office current

Home office purchased PPE Dr. PPE Memorandum entry

for the branch (if company Cr. Accounts Payable
policy states that home office
records PPE)

Depreciation expense of Dr. Branch current Dr. Depreciation expense

branch Cr. Accumulated Depreciation Cr. Home office current
LIVE HANDOUT
 BUSINESS
COMBINATION
SUMMARY FROM LIVE DISCUSSION
ACQUISITION METHOD (acquire more than 50%) CONSIDERATIONS (@FV) FVNA ACQUIRED
1. Identify acquirer 1. Cash FVA - FVL
2. Determine date of acquisition 2. Non-cash or
3. Recognize & measure: Assets acquired, 3. Liabilities BVNA + adjustments
Liabilities assumed, & NCI. 4. Shares
4. Recognize & measure: Goodwill of GBP 5. Contingent consideration

CONTINGENT CONSIDERATION DACs and Indirect cost DEBT ISSUE COST

Measured @PV Expensed at AC: contra liability
at FV: expensed
Adjust GW/GBP Share issue cost
if event discovered existed at acquisition date Charged from SP or RE

MEASUREMENT OR LIMIT PERIOD

1 year from acquisition

ASSET LIABILITIES SHARE CAPITAL RETAINED EARNINGS

1. Acquirer’s assets at BV 1. Acquirer’s 1. Acquirer’s at BV 1. Acquirer’s at BV
2. Acquiree’s assets at FV liabilities at BV 2. Consideration @ PAR 2. Gain on bargain purchase
3. (Consideration) 2. Acquiree’s 3. (Expenses)
4. (Expenses PAID) liabilities at FV SHARE PREMIUMS 4. (SIC not absorbed)
5. Goodwill 3. Contingent 1. Acquirer’s at BV 5. Adjustments outside the
Consideration 2. Consideration excess measurement period
3. (Share issue cost)
NCI
 ✔
❌

NOT UNDER BUSINESS COMBINATION PFRS 3 CLASSIFICATIONS OF BUSINESS COMBINATION

Formation of a joint venture A. AS TO STRUCTURE

Combination of entities under common control
Acquisition of an asset that does not constitute a HORIZONTAL INTEGRATION
business It is a business strategy consummated through business
Business combination combination in which one entity acquires another entity at
the same level within the same industry.
Business Combination
• A business combination is a transaction or event in VERTICAL INTEGRATION
It is a business strategy consummated through business
which an acquirer obtains control of one or more
combination in which one entity acquires another entity at
businesses.
different level but within the same industry.
Business is defined as an integrated set of activities and
assets that is capable of being conducted and managed for CONGLOMERATE COMBINATION
the purpose of providing goods or services to customers, It is a business strategy consummated through business
generating investment income (such as dividends or interest) combination in which one entity acquires another entity that
or generating other income from ordinary activities. belongs to different industry.
It has
• Input B. AS TO METHOD OR FROM A LEGAL
• Process POINT OF VIEW
• Output (may be none in case of business still not 1. Acquisition of Net Assets (Asset - Liabilities)
operating and eventually sold) (and as long as it is a. Statutory Merger: A + B = A or B
capable of producing output) b Statutory Consolidation: A + B = C
FS: COMBINED FS
INDICATION OF CONTROL
1. POWER 2. Stock Acquisition or Acquisition of Ordinary
Shares (PARENT - SUBSIDIARY)
• Voting shares (more than 50%)
FS of A Corp + FS of B Corp.
• By contract
= Consolidated FS of A Corp. and B Corp.
2. RIGHT TO VARIABLE RETURNS

3. ABILITY TO EXERCISE POWER

WHEN DOES THE ENTITY GAINS CONTROL?

This is a rebuttable assumption

In case the problem is silent, the assumption is based
on the rules (more than 50%)

WHEN IS THE ACQUISITION DATE

As early as the entity gains control which is more than 50%
It can also be explicitly stated.
C. AS TO ACCOUNTING METHOD
1. Pooling of interest method
This is used to account combination of entities under
common control under PIC Q&A No. 2012-01. @BV

2. Purchase method
This method is used to account for business combination
under PFRS for SME.

3. Acquisition method
This method is used to account for business combination
under full PFRS, specifically PFRS 3. (Use this if the
problem is silent.)

Applying the acquisition method

Acquisition method. The acquisition method (called the
'purchase method' in the previous version of PFRS 3) is
used for all business combinations.
 PURCHASE ACQUISITION
Applicability SME FULL PFRS
Non controlling interest Partial only Partial or Full
DACS Capitalized Separate FS - Capitalized
Consolidated FS - Expensed
(if silent: expensed)
Indirect costs Expensed Expensed
Share issuance cost Debited to Share premium Debit to SP or RE net of tax benefit
Debt issue cost Deducted in the Cost of debt Financial Liability at Amortized Cost -
Deducted(contra liability)
Financial Liability at FV - Expensed
DIRECTLY ATTRIBUTABLE COST
Could include Steps in applying the acquisition method
• pre-audit
• finder's fees 1. Identification of the acquirer - the combining entity
• advisory fee that obtains control of the acquirer
• broker's fees 2. Determination of the acquisition date - the date on
• legal fees which the acquirer obtains control of the acquire
• valuation and other professional or 3. Recognition and measurement of the identifiable
consulting fees; assets acquired, the liabilities assumed and any
• and general administrative costs, non-controlling interest (NCI, formerly called
including the costs of maintaining an minority interest) in the acquiree
internal acquisitions department 4. Recognition and measurement of goodwill or a gain
from a bargain purchase
INDIRECT COST 5. Recognition and measurement of goodwill or a gain from
Allocation of existing expenses of the a bargain purchase
acquiring firm connected to negotiating and
consummating the purchase.
• Could include salaries for employees who
worked on the acquisition and related
overhead expenses.
• listing fees

SHARE ISSUANCE COST

• Printing of stock certificates
• SEC registration fees

DEBT ISSUE COST

Cost incurred in issuing bonds
 CONSIDERATION TRANSFERRED
Measurement of Consideration Transferred
Consideration transferred shall be measured at the sum of EQUITY CASH
the acquisition-date fair values of the: Date of acquisition @ FV @ FV
a. Assets transferred by the acquirer Credit: SP - CC Credit: Estimated
b. Liabilities incurred by the acquirer to former owners of liability on contingent
the acquiree (including cash contingent consideration) consideration
c. Equity interests issued by the acquirer (including Subsequent Not remeasured Not remeasured
contingent equity consideration) Contingent event Gain - credited to SP Gain/Loss = P/L
happens Loss - debited to SP
CONTINGENT CONSIDERATION and RE
Contingent consideration must be measured at fair value at Contingent event SP - CC transferred Close ELCC and gain
the time of the business combination. If the amount of did not happen to SP - General to P/L
contingent consideration changes as a result of a post-
acquisition event (such as meeting an earnings target),
accounting for the change in consideration is as follows:

a. Equity contingent consideration

(SHARE PREMIUM - CC)
• credit to share premium account
• original amount is not remeasured
• any difference between the amount paid and the
amount recognized is accounted for within equity.
b. Cash or other assets paid or owed
(Estimated liability on contingent consideration) PROVISIONAL ACCOUNTING
• the changed amount is recognized in profit or loss. • If the initial accounting for a business combination is
• remeasured @ FV incomplete by the end of the reporting period in which the
combination occurs, the acquirer shall report in its financial
ADJUSTING THE GW/GBP
Facts and Circumstances discovered and statement's provisional amounts for the items for
Existing at date of acquisition which the accounting is incomplete.
The measurement period (w/e is earlier)
adjust goodwill or (gain on bargain purchase) • ends as soon as the acquirer receives the information it
was seeking about facts and circumstances that existed
Exist at Post acquisition date as of the acquisition date or learns that more information
no adjustment of goodwill or (gain on bargain purchase) is not obtainable.
• shall not exceed one year from the acquisition date.

ADJUSTING THE GW/GBP

WITHIN the measurement period
Adjust GW (GBP)

BEYOND
Not adjust GW (GBP) unless it is an error
B. STAGES IN BUSINESS COMBINATION (step
acquisitions) IDENTIFIABLE NET ASSET ACQUIRED

PREVIOUSLY HELD EQUITY INTEREST Acquisition-date fair value, except for the following:
Prior to control being obtained, the investment is accounted • Existing goodwill is not included.
for under (PREVIOUSLY HELD EQUITY INTEREST)
• PAS 28 (INVESTMENT IN ASSOCIATE) If no FV
• PFRS 11 (JOINT ARRANGEMENTS), BV of net assets/BV of SHE
• PFRS 9 (INVESTMENT IN EQUITY)
+ Undervaluation of assets or Overvaluation of Liabilities
On the date that control is obtained - Overvaluation of assets or Undervaluation of Liabilities
• the acquirer shall remeasure its previously held equity - Existing Goodwill
interest in the acquiree at its acquisition-date fair value
• recognize the resulting gain or loss, if any, in profit or FV of Net assets
loss or other comprehensive income, as appropriate
• In prior reporting periods, the acquirer may have Alternative solution (Starts at excess)
recognized changes in the value of its equity interest in FV of subsidiary
the acquiree in other comprehensive income. If so, the
amount that was recognized in other comprehensive Book value of net assets
income shall be recognized on the same basis as would Excess
be required if the acquirer had disposed directly of the - Undervaluation of assets or Overvaluation of Liabilities
previously held equity interest. + Overvaluation or Undervaluation of Liabilities
+ Existing Goodwill
Goodwill (Gain on Bargain Purchase)
NON CONTROLLING INTEREST
For each business combination, the acquirer shall measure at
the acquisition date components of non-controlling interests in
the acquiree that are present ownership interests and
entitle their holders to a proportionate share of the entity's
net assets in the event of liquidation at either:
a. Full goodwill method - NCI is measured at fair value
• FV given
• FV computed
NCI = Consideration - Control premium + Control discount x %NCI
% Acquired

Control Premium = at above FV of interest acquired

Control discounts = below FV of interest acquired
b. Partial goodwill method
the NCI is measured at the present ownership instruments'
proportionate share in the recognized amounts of the
acquiree's identifiable net assets.

NCI = FV of Identifiable Net Assets x % NCI

All other components of non-controlling interests shall be
measured at their acquisition-date fair values, unless another
measurement basis is required by PFRSs.
 GOODWILL/GAIN ON BARGAIN PURCHASE
GW GBP
1. Full GW CI/Parent & NCI CI/Paremt IF THE RESULT IS GAIN ON BARGAIN PURCHASE
CI/Parent CI/Parent • Reassess first as to the accuracy of
2. Partial GW
measurement
Paragraph 34 of PFRS 3 • If confirmed, recognize in P/L
There is no such thing as full gain or partial gain
Any gain on bargain purchases is attributable only to the controlling
interest ✔ ❌
✔

(Starts at excess) PRESENTATION

FV of subsidiary GOODWILL
Book value of net assets presented in Statement of Financial Position
Excess
- Undervaluation of assets or Overvaluation of Liabilities GAIN ON BP
+ Overvaluation or Undervaluation of Liabilities • presented in Statement in Comprehensive Income
+ Existing Goodwill • then transferred or closed to RE.
Goodwill (Gain on Bargain Purchase) •
Notes:
• All items should be measured at the date of
acquisition.
Consideration
• If tax rate is given and the corporate is subject
FV of Identifiable Net Assets
to tax (not exempt or under income tax holiday),
Goodwill (Gain in Bargain Purchase) include the effect of tax (DTA or DTL) in
computing the fair value of identifiable net asset.
THIS FORMULA IS VALID ONLY FOR PARTIAL
GOODWILL (Associate & Joint Venture)

Computation of Goodwill / Bargain

purchase (negative goodwill)
STOCKS NET ASSETS
Fair value of consideration transferred
Non-controlling interest
Fair value of previously held equity interest
Total or the FV OF SUBSIDIARY
Less: Fair value of identifiable net asset
Goodwill (gain on bargain purchase)
a. Exception to the recognition principle
Contingent Liability. PRE-EXISTING RELATIONSHIP
Only those contingent liabilities assumed in a business combination • If the acquirer and acquire were parties to a pre-
that are a present obligation and can be measured existing relationship (for instance, the acquirer had
reliably are recognized. That is, it is not necessary that an granted the acquire a right to use its intellectual
outflow of future economic benefits is probable. property)
(ex: bad debts) • this must be accounted for separately from
the business combination. In most cases, this will
b. Exceptions to both the recognition and lead to the recognition of a gain or loss for the
measurement principles
• Income tax. The acquirer shall recognize and measure a amount of the consideration transferred to the
deferred tax asset or liability arising from the assets vendor which effectively represents a 'settlement'
acquired and liabilities assumed in a business combination in of the pre-existing relationship. The amount of the
accordance with PAS 12. gain or loss is measured as follows
• Employee benefits. The acquirer shall recognize and
measure a liability (or asset, if any) related to the a. for pre-existing non-contractual relationships (for
acquiree's employee benefit arrangements in accordance
with PAS 19. example, a lawsuit): by reference to fair value
• Indemnification asset. Indemnification assets are b. for pre-existing contractual relationships:
recognized and measured on a basis that is consistent with at the lesser of
the item that is subject to the indemnification, even if that (a) the favorable/unfavorable contract position and
measure is not fair value. PAS 37 (CONTINGENT ASSET) (b) any stated settlement provisions in the contract
• Leases in which the acquiree is the lessee. The acquirer available to the counterparty to whom the contract is
shall recognize right-of-use assets and lease liabilities for
leases identified in accordance with PFRS 16 unfavorable.
c. Exceptions to the measurement principle
• Share-based payment. The acquirer shall measure a liability, INTANGIBLE ASSETS
or an equity instrument related to share-based payment Included in acquired assets under PFRS 3 (Note: this are
transactions of the acquire or the replacement of an not recognized as intangible asset under PAS 38)
acquiree's share-based payment transactions with share- • In process Research and Development
based payment transactions of the acquirer in accordance • Brands, Mastheads, Publishing title, and Customer
with the method in PFRS 2 at the acquisition date. (This list
PFRS refers to the result of that method as the 'market- Existing goodwill of the acquiree is not recognized as
based measure' of the share-based payment transaction.)
• Non-current assets held for sale. The acquirer shall identifiable intangible asset.
measure an acquired non-current asset (or disposal group)
that is classified as held for sale at the acquisition date in Only condition: Fair value must be reliably measurable.
accordance with PFRS 5 at fair value less costs to sell The probability of the outflow of future economic
• Reacquired rights. The acquirer may reacquire a right that benefits need not be tested
it had previously granted to the acquiree; for example, the
right to use the acquirer's technology under a technology
licensing agreement. The acquirer recognizes the
reacquired intangible right as an asset and determines its
fair value on the basis of the remaining contractual term
of the contract, regardless of whether market
participants would consider potential contractual renewals
in determining its fair value. The asset is then subsequently
amortized over the remaining contractual term, excluding
any renewals.
• Insurance contracts. The acquirer shall measure a group of
contracts within the scope of PFRS 4/17 Insurance
Contracts acquired in a business combination as a liability
or asset at the acquisition date.
 GW GBP
1. Full GW CI/Parent & NCI CI/Parent
2. Partial GW CI/Parent CI/Parent
Paragraph 34 of PFRS 3
There is no such thing as full gain or partial gain
Any gain on bargain purchases is attributable only to the controlling
interest
SEPARATE (PAS 27)
AND
CONSOLIDATED FS
(PFRS 10)
SEPARATE FINANCIAL STATEMENTS (PAS 27)
PAS 27 APPLICABILITY Combined FS
accounting for Financial statements of a reporting entity that
• investments in subsidiaries comprises two or more entities that are not all linked
• joint ventures by a parent-subsidiary relationship.
• investment in associates • HOME - BRANCH
• ACQUIRER - ACQUIREE
IS IT REQUIRED TO PRESENT SEPARATE FS?
• No. It is not required Consolidated FS
• Present separate FS only when an entity elects, or is • The financial statements of a group in which
required by local regulations, to present separate financial assets, liabilities, equity, income, expenses and
statements. cash flow of the parent and its subsidiaries are
presented as those of a single economic entity.
DEFINITION • Financial statements of a reporting entity that
Separate financial statements are those presented by a comprises both the parent and its subsidiaries.
parent (i.e. an investor with control of a subsidiary) or an
investor with joint control (JOINT VENTURE) of, or significant
influence (ASSOCIATE) over, an (investee) in which the
investments are accounted for
• at cost
• in accordance with PFRS 9 Financial Instruments
• using the equity method as described in PAS 28
Investments in Associates and Joint Ventures.

The entity shall apply the same accounting for each

category of investments.
• Investments accounted for at cost or equity method shall
be accounted for in accordance with PFRS 5 Non-current
Assets Held for Sale and Discontinued Operations when
they are classified as held for sale or included in a
disposal group that is classified as held for sale).
• The measurement of investments accounted for in
accordance with PFRS 9 is not changed in such
circumstances.

Dividends from a subsidiary, a joint venture or an

associate
• are recognized in the separate financial statements of an
entity when the entity's right to receive the dividend is
established. The dividend is recognized in profit or loss
• unless the entity elects to use the equity method, in
which case the dividend is recognized as a reduction from
the carrying amount of the investment.
CONSOLIDATED FINANCIAL BASIS: Control unless exempted
STATEMENTS (PFRS 10)
The financial statements of a group in which the Economic entity theory
assets, liabilities, equity, income, expenses and cash
flows of the parent and its subsidiaries are presented Substance over form
as those of a single economic entity
Uniform accounting policy
Control Same reporting date (if there are any
An investor controls an investee if and only if the differences: 3 months only)
investor has all of the following elements:
• power over the investee Exemption from preparation of
• exposure, or rights, to variable returns from its consolidated financial statements
involvement with the investee
• the ability to use its power over the investee to A parent need not present consolidated financial
affect the amount of the investor's returns. statements if it meets all of the following
conditions:
Note: a. it is a wholly-owned subsidiary or is a partially-owned
1. Power arises from rights. Such rights can be subsidiary of another entity and its other owners,
straightforward (e.g. through voting rights) or be including those not otherwise entitled to vote, have been
complex (e.g. embedded in contractual informed about, and do not object to, the parent not
arrangements). presenting consolidated financial statements
2. An investor that holds only protective rights
cannot have power over an investee and so b. its debt or equity instruments are not traded in a public
market (a domestic or foreign stock exchange or an
cannot control an investee. over-the-counter market, including local and regional
3. An investor must be exposed, or have rights, to markets)
variable returns from its involvement with an
investee to control the investee. Such returns c. it did not file, nor is it in the process of filing, its
must have the potential to vary as a result of the financial statements with a securities commission or
investee's performance and can be positive, other regulatory organization for the purpose of issuing
negative, or both. any class of instruments in a public market, and (INITIAL
PUBLIC OFFERING)
4. When assessing whether an investor controls an
investee an investor with decision-making rights d. its ultimate or any intermediate parent of the parent
determines whether it acts as principal or as an produces consolidated financial statements available for
agent of other parties. A number of factors are public use that comply with PFRSs, in which subsidiaries
considered in making this assessment. For are consolidated or are measured at fair value through
instance, the remuneration of the decision-maker profit or loss in accordance with PFRS 10.
is considered in determining whether it is an agent.
• Post-employment benefit plans or other long-term
employee benefit plans to which PAS 19 Employee
Benefits applies are not required to apply the
requirements of PFRS 10.
 Even if they belong to different industries needs CONSOLIDATION TIMELINE
to prepare consolidated FS unless exempted.
DATE OF ACQUISITION (DOA)
Beginning of year
• SFP (P + S)
• NOTES TO FS (P + S)

End of year or BS date

• SFP (P + S)
• SCI (Parent only)
• NOTES TO FS (P + S)

During the year

• SFP (P + S)
• SCI (Parent only)
• NOTES TO FS (P + S)

WHEN TO CONSOLIDATE
De facto control 1. Date of acquisition
Under PFRS 10, it refers to the term used to describe 2. Interim (for listed)
ownership of the largest block of voting rights in a 3. Year end (listed and not listed
situation where the remaining rights are widely dispersed
even if it is less than the majority interest thereby
requiring the holder of such interest to prepare
consolidated financial statements.
CONSOLIDATION PROCEDURES Eliminating Entry
Share capital (subsidiary)
1. combine like items of assets, liabilities, equity, income, Share premium (subsidiary)
expenses and cash flows of the parent with those Other SHE items (subsidiary)
of its subsidiaries Undervaluation of assets
2. offset (eliminate) the carrying amount of the Overvaluation of liabilities
parent's investment in each subsidiary and the Goodwill
parent's portion of equity of each subsidiary Investment in subsidiary
3. eliminate in full intragroup assets and liabilities, equity, Noncontrolling interest (NCI)
income, expenses and cash flows relating to Gain from bargain purchase
transactions between entities of the group (profits Overvaluation of assets
or losses resulting from intragroup transactions that Undervaluation of liabilities
are recognized in assets, such as inventory and fixed To eliminate investment and SHE of subsidiary.
assets, are eliminated in full).

• A reporting entity includes the income and expenses of a subsidiary in the consolidated
financial statements from the date it gains control until the date when the reporting
entity ceases to control the subsidiary.
• Income and expenses of the subsidiary are based on the amounts of the assets and
liabilities recognized in the consolidated financial statements at the acquisition date.
• An entity must use uniform accounting policies for reporting like transactions and
other events in similar circumstances.
• The parent and subsidiaries are required to have the same reporting dates, or
consolidation based on additional financial information prepared by subsidiary, unless
impracticable.
• Where impracticable, the most recent financial statements of the subsidiary are used,
adjusted for the effects of significant transactions or events between the reporting
dates of the subsidiary and consolidated financial statements.
• The difference between the date of the subsidiary's financial statements and that of
the consolidated financial statements shall be no more than three months.
 Eliminating Entries Investment Income

Cost of Goods Sold - SUBSIDIARY

Merchandise Inventory, beg.
To record amortization of UVA - MI. Income Summary Retained Earnings
Retained Earnings. Dividends Payable
Depreciation Expense To record net income To record dividend declared.
Accumulated Depreciation
To record amortization of UVA - Depreciable Asset. PARENT - SEPARATE FS

Gain (Loss) on Sale COST AND FV METHOD EQUITY METHOD

Accumulated Depreciation Dividend Receivable Dividend Receivable
Depreciable Asset (Undervaluation) Dividend Income - P&L Investment in Affiliate
To record amortization of UVA - Depreciable Asset. To record dividends. To record dividends.

Gain (Loss) on Sale

Land (Undervaluation) Not applicable Investment in Affiliate
To record amortization of UVA - Nondepreciable Asset. Investment Income
To record share in net income. To record share in net income.
Impairment Loss - Controlling (full or partial)
Impairment Loss - Noncontrolling (full only)
Goodwill Eliminating Entries
To record impairment of goodwill. COST AND FV METHOD EQUITY METHOD
Dividend Income Investment in Affiliate
Noncontrolling interest (NCI) Noncontrolling interest (NCI)
Retained Earnings (subsidiary) Retained Earnings (subsidiary)
To eliminate dividends To eliminate dividends

Dividend payable Dividend payable

Dividend Receivable Dividend Receivable
To eliminate intercompany To eliminate intercompany
balances. balances.

Investment Income
Investment in Affiliate
To eliminate investment income
@ equity method
Parent Net Income (Own Operations) CONSOLIDATED APIC OR SHARE PREMIUM
APIC of Parent
Parent Net Income + APIC from issuance (if any)
Less: Investment Income or Dividend income* - SIC related to issuance
Parent Net Income, Own Operations + Other items adjusted to APIC

*from consolidated subsidiary. CONSOLIDATED RE

Parents R/E
CONSOLIDATED ASSET + Conso nI attributed to Parent
- Remove investment income from subsidiary
Parent @ BV + Share in SNI
+ Subsidiary @ BV + Intercompany - DS (100%), US (Share)
+ FVA + FVA (share)
+ Amortization of FVA + Gain on bargain purchase aV
+ DTA related to business combination - Impairment loss of goodwill (Share)
+ Goodwill from business combination - DACS
- Impairment loss of goodwill - I-DACS
- Decrease in asset not yet reflected in the - Listing fee
balance presented - SIC not absorbed by SP or APIC
- Investment in subsidiary - Dividends declared or paid by parent
- UG or UPEI on intercompany sale + OCI not recycled (i.e., closed to R/E)
- Intercompany receivable
+ Adjustment to have uniform accounting policy
+ Adjustment for significant transactions if not CONSOLIDATED NCI
same reporting date NCI measured either at P or F
+ CNI - NCI
CONSOLIDATED LIABILITIES + Share in SNI
Parent @. BV + Intercompany (US only)
+ Subsidiary @ BV + FVA (share only)
+ FVA - Impairment of loss goodwill
+ Amortization of FVA attributable to NCI
+ CT (liability) including CC - ELCC + COCI - NCI
+ DTL related to business combination - Dividend by Subsidiary to NCI
- Intercompany payable
+ Adjustment to have uniform accounting policy
+ Adjustment for significant transactions if not
same reporting date

CONSOLIDATED SHE
Consolidated Asset - Consolidated Liability or

Parent SHE (CS, PS, APIC, RUE, OCI)

+ CT including CC (equity)
+ Add: NCI - one line item
NON-CONTROLLING INTERESTS (NCI)
• Non-controlling interests in subsidiaries must be presented in
the consolidated statement of financial position within equity,
separately from the equity of the owners of the parent.
• A reporting entity attributes the profit or loss and each
component of other comprehensive income to the owners of
the parent and to the non-controlling interests. The proportion
allocated to the parent and non-controlling interests are
determined on the basis of present ownership interests.
• The reporting entity also attributes total comprehensive
income to the owners of the parent and to the non-controlling
interests even if this results in the non-controlling interests
having a deficit balance.
• TREATMENT OR MOVEMENT OF NCI IS SIMILAR TO EQUITY
METHOD,
INTER-COMPANY TRANSACTIONS

1. DIVIDENDS From Subsidiary to Parent

2. Sale of Inventories
3. Sale of Depreciable assets
4. Sale of Non depreciable assets

UPSTREAM
Subsidiary sold to Parent

DOWNSTREAM
Parent sold to Subsidiary

INTERCOMPANY SALE OF INVENTORIES

 INTERCOMPANY SALE OF NON DEPRECIABLE OF ASSETS

INTERCOMPANY SALE OF DEPRECIABLE OF ASSETS

CHANGES IN THE OWNERSHIP INTERESTS
Examples of loss of control
No Loss of Control 1. Liquidation, receivership and administration. When
Changes in a parent's ownership interest in a subsidiary that a subsidiary becomes a subject of insolvency proceedings
do not result in the parent losing control of the subsidiary involving the appointment of a receiver or liquidator, if the
• are equity transactions (i.e. transactions with effect is that the shareholders cease to have the power
owners in their capacity as owners). to govern the financial and operating policies. Although this
• Goodwill or gain on bargain purchase is not remeasured.
will often be the case in a liquidation, a receivership or
Loss of control / Deconsolidation administration order may not involve loss of control by
If a parent loses control of a subsidiary, the parent: shareholders.
2. Seizure of assets or operation. An example of loss
DERECOGNIZE of control is seizure of assets or operations of a foreign
a. The assets, liabilities, and goodwill of the subsidiary at their subsidiary by local government.
carrying amounts on the date when control is lost; Note: Short-term restrictions on cash flows from a
b. The carrying amount of any non-controlling interests on subsidiary and severe long-term restriction impairing the
the date when control is lost. ability to transfer funds to the parent does not necessarily
preclude control.
RECOGNIZE
a. The fair value of any consideration received and any
distribution of shares of the former subsidiary;
b. If the transaction, event or circumstances that resulted in Consideration Received (@FV)
the loss of control involves a distribution of shares of the Add: Retained Interest (@FV)
subsidiary to owners in their capacity as owners, that Add: NCI (@CV)
distribution; Total
c. Any investment retained in the former subsidiary at its Less: BVINA
fair value on the date when control is lost. Less: Goodwill (@CV)
Gain (Loss) on Deconsolidation
RECLASSIFY to profit or loss (or transfer directly to
retained earnings if required in accordance with other
PFRSs) the amounts needed to account for all items
recognized in other comprehensive income in relation to that
subsidiary on the same basis as would be required if the
parent had directly disposed of the related assets or Disclosure
liabilities. The disclosure reguirements for interests in subsidiaries
are specified in PFRS 12 Disclosure of Interests in
Recognize any resulting DIFFERENCE IN PROFIT OR Other Entities.
LOSS, attributable to controlling interest.
REVERSE ACQUISITIONS Backdoor Listing
• A reverse acquisition occurs when the entity that • Occurs when a listed company acquires or merges or
issues securities (the legal acquirer) is identified as combines with an unlisted company, or when a listed
the acquiree for accounting purposes. company is acquired by, merged or combined with an
• The entity whose equity interests are acquired (the unlisted company, and which acquisition, merger or
legal acquiree) must be the acquirer for accounting combination results in a substantial change in the business,
purposes for the transaction to be considered a membership or the board of directors, or voting
reverse acquisition. structure of the listed company.
• For example, reverse acquisitions sometimes occur • Any reorganization or transactions involving a group of
when a private operating entity wants to become a companies where a listed company is a member of the
public entity but does not want to register its equity group or when the transactions result in the listed
shares. To accomplish that, the private entity will company becoming the controlling shareholder of the
arrange for a public entity to acquire its equity members of the group of companies.
interests in exchange for the equity interests of
the public entity. In this example, the public entity is
the legal acquirer because it issued its equity
interests, and the private entity is the legal acquiree
because its equity interests were acquired.
However, application of the guidance in paragraphs
B13-B18 results in identifying:
a. the public entity as the acquiree for accounting
purposes (the accounting acquiree); and
b. the private entity as the acquirer for accounting
purposes (the accounting acquirer).
The accounting acquiree must meet the definition of a
business for the transaction to be accounted for as a
reverse acquisition, and all of the recognition and
measurement principles in this PFRS, including the
requirement to recognize goodwill, apply.
Preparation and presentation of
consolidated financial statements
- REVERSE ACQUISITIONS Non-controlling interest - reverse
acquisition
The consolidated financial statements represent the Non-controlling interest reflects the non-controlling
continuation of the financial statements of the legal shareholders' proportionate interest in the pre-combination
subsidiary except for its capital structure, the consolidated carrying amounts of the legal acquiree's net assets (even if
financial statements reflect: the non-controlling interests in other acquisitions are
measured at their fair value at the acquisition date).
Assets and liabilities of:
a. Legal subsidiary (the accounting acquirer) - recognized and Disclosure
measured at their pre-combination carrying amounts. The PFRS requires the acquirer to disclose information that
b. Legal parent (the accounting acquiree) - recognized and enables users of its financial statements to evaluate the
measured in at fair values. nature and financial effect of business combinations that
occurred during the current reporting period or after the
Retained earnings and other equity balances of the reporting date but before the financial statements are
legal subsidiary (accounting acquirer) before the authorized for issue.
business combination.
• The amount recognized as issued equity interests in the After a business combination, the acquirer must disclose any
consolidated financial statements determined by adding adjustments recognized in the current reporting period that
the issued equity interest of the legal subsidiary (the relate to business combinations that occurred in the current
accounting acquirer) outstanding immediately before the or previous reporting periods.
business combination to the fair value of the legal
parent (accounting acquiree).
• However, the equity structure (ie the number and type
of equity interests issued) reflects the equity structure
of the legal parent (the accounting acquiree), including
the equity interests the legal parent issued to effect
the combination.
• Accordingly, the equity structure of the legal subsidiary
(the accounting acquirer) is restated using the
exchange ratio established in the acquisition agreement
to reflect the number of shares of the legal parent
(the accounting acquire) issued in the reverse
acquisition.

The non-controlling interest's proportionate share of

the legal subsidiary's (accounting acquirer's) pre-combination
carrying amounts of retained earnings and other equity
interests.
 JOINT
ARRANGEMENTS
 INTERACTION OF PFRSs 9, 10, 11, 12 and PAS 28

JOINT ARRANGEMENT Key Definitions

Joint arrangement is an arrangement of which two or
more parties have joint control. Joint venturer
A party to a joint venture that has joint control of that
A joint arrangement has the following joint venture
characteristics:
1. The parties are bound by a contractual arrangement Separate vehicle
2. The contractual arrangement gives two or more of A separately identifiable financial structure, including
those parties joint control of the arrangement. separate legal entities or entities recognized by statute,
regardless of whether those entities have a legal
Joint control personality
Joint control is the contractually agreed sharing of control
of an arrangement, which exists only when decisions about Party to a joint venture - an entity that participates
the relevant activities require the unanimous consent of the in a joint arrangement, regardless of whether that
parties sharing control. entity has joint control of the arrangement

Investor
Unanimous consent means that any party with joint a party that participates but does not have joint control
control of the arrangement can prevent any of the other to a joint venture.
parties, or a group of the parties, from making unilateral
decisions (about the relevant activities) without its consent.
Steps in determining joint control:
1. An entity assesses whether the parties, or a group of
the parties, control the arrangement (in accordance with
the definition of control in PFRS 10 Consolidated Financial
Statements)
2. After concluding that all the parties, or a group of the
parties, control the arrangement collectively, an entity shall
assess whether it has joint control of the arrangement.
Joint operation
A joint arrangement whereby the parties that have
joint control of the arrangement have rights to the
assets, and obligations for the liabilities, relating to the
arrangement.

• Parties are called joint operators.

• Joint operators have general liability
• May or may not be structured through a separate
vehicle.

Characteristics:
a. Co-ownership of assets
• Joint control or operation of an oil pipeline by oil,
gas or mineral extraction companies
• Two companies jointly own a condominium and
shares on the rents and expenses.

b. Sharing of tasks
• Two or more entities combine their operation,
resources and expertise to manufacture a
particular commodity (i.e. aircraft, sports car, sea
vessel).
• Two or more entities contributed resources to sell
at a particular event.

Joint venture
A joint arrangement whereby the parties that have
joint control of the arrangement have rights to the net
assets of the arrangement.

• Parties are called joint venturers

• Joint venturers have limited liability
• Structured through a separate vehicle.
• It normally involves the establishment of a
corporation, partnership or other entity (financial
structure or an investment vehicle) in which the
venturers has interests. Being a separate financial
structure, the jointly venture maintains its own
records and prepares financial statements.
Financial Statements of Parties to a Joint
Arrangement

JOINT OPERATIONS JOINT VENTURE

A joint venturer recognizes its interest in a joint
A joint operator recognizes in relation to its interest in a joint venture as an investment and shall account for that
operation investment using the equity method in accordance
• its assets, including its share of any assets held jointly; with PAS 28 Investments in Associates and Joint
• its liabilities, including its share of any liabilities incurred Ventures unless the entity is exempted from applying
jointly; the equity method.
• its revenue from the sale of its share of the output of
the joint operation; A party that participates in, but does not have joint
• its share of the revenue from the sale of the output control of, a joint venture accounts for its interest in
by the joint operation; and the arrangement in accordance with PFRS 9 Financial
• its expenses, including its share of any expenses Instruments unless it has significant influence over the
incurred jointly. joint venture, in which case it accounts for it in
accordance with PAS 28
A joint operator accounts for the assets, liabilities, revenues
and expenses relating to its involvement in a joint operation in
accordance with the relevant PFRS
A party that participates in, but does not have joint control
of, a joint operation shall also account for its interest in the
arrangement in accordance with the above if that party has
rights to the assets, and obligations for the liabilities, relating
to the joint operation.

Traditional joint operations:

• Without a separate set of books - normal entry
• With a separate set of books - due to short term or size
Joint Operations
Merchandise contribution Merchandise withdrawals
Purchases Merchandise returned to joint operators
Freight-in Purchase return and allowance
Sales return Purchase discount
Sales discount Sales
Expenses Other income
completed joint operations Credit balance will equal to the net income
Uncompleted joint operation Add: Unsold merchandise to get the profit
INTERCOMPANY TRANSACTIONS

INVENTORIES

SALE OF LOSS

DEPRECIABLE ASSET NON DEPRECIABLE ASSET

EXCESSIVE LOSSES CHANGE IN OWNERSHIP

1. Carrying amount of the investment No loss of joint control

2. Long-term interests that, in substance, form part of • Increase
the entity's net investment (reverse order of seniority) • Decrease
3. Liability (to the extent that the entity has incurred legal
or constructive obligations or made payments on behalf Loss of joint control
of the associate or joint venture) • Significant influence
• Control
• At fair value
• Zero balance

PFRS for SME: Jointly Controlled Entity

1. Cost model
• Measured initially at the transaction price plus transaction cost.
• Measured subsequently at cost less any accumulated impairment losses.
• Dividends received from the associate are accounted for as income.
• Net income and changes in OCI component of the associates does not affect the investment balance.
• Not applicable if the investment in associate has a published price quotation.

2. Equity model
• Measured initially at the transaction price plus transaction cost.
• Dividends received from an associate are accounted for reduction in the carrying amount of the investment.
• Adjustments are made to reflect the investor's share in the associate's net income or loss and change in the OCI
component.
• Subject to impairment testing.

3. Fair value model

• Measured initially at the transaction price only.
• Subsequently measured at fair value and changes in fair value are recognized in profit or loss.
• Not subject to impairment testing.
• Used if there is published price quotation

PAS 31 (old full PFRS) PFRS 11 (JOINT ARRANGEMENTS) PFRS FOR SME 31 (SEC. 15)

Joint Controlled Asset Joint Operation Joint Controlled Asset

Jointly Controlled Operations Joint Venture Jointly Controlled Operations

Joint Controlled Entity Joint Controlled Entity

FOREX AND
HYPER
INFLATION
(PAS 21)
REFERENCES/PRONOUNCEMENTS EXCHANGE RATE
PAS 21 The value of a country's currency vs. that of another
The Effects of Changes in Foreign Exchange Rates country or economic zone
PAS 29 Quotation:
Financial Reporting in Hyper inflationary Economies 1. Direct - one unit of FCU is expressed in terms of the LCU
Example: $1: P50 $1,000 x 50 = 50,000
PFRS 9
Financial Instruments
2. Indirect - one unit of LCU is expressed in terms of FCU
IFRIC 22 Example: P1: $.02 $1,000 ÷ $.02 = P50,000
Foreign Currency Transactions and Advance
Consideration
RATES
CURRENCIES
Spot exchange rate FUTURE RATE
LOCAL CURRENCY the exchange rate for immediate used for future contracts
a currency that can be spent in a particular delivery
geographical locality at participating AVERAGE RATE
organisations CURRENT RATE Used for practical reasons
spot rate at the present
Functional Currency Buying Rate (Bid)
the currency of the primary economic HISTORICAL RATE • Used for Exports and
environment in which the entity operates. spot rate in the past Lending
• Bank buy dollars from entity
Foreign Currency Closing rate in exchange of dollars that
a currency other than the functional currency the spot exchange rate at the was received from the
of the entity reporting date (interim or year end) foreign customer

Presentation Currency Forward exchange rate SELLING RATE (Offer)

the currency in which financial statements are • the exchange rate for two • Used for imports and
presented. currencies set at a future date borrowings
• used for forward contracts • Bank sell dollar to entity for
FUNCTIONAL CURRENCY
payment to foreign sellers
PRIMARY INDICATORS
• Revenue and operating cash inflows
• Operating expense, and cash outflows

SECONDARY INDICATORS
• Financing activities (FINANCING)
• Retention of operating income (Investing)

DIRECT RATE INDIRECT RATE PHP usd acc. receivable acc. payable
MONETARY ITEMS
• units of currency held and
• assets and liabilities to be received or paid in a
fixed or determinable number of units of
currency

UNITS OF CURRENCY HELD

• cash in bank
• cash in hand

ASSETS RECEIVABLE IN FIXED/DETERMINABLE FINANCIAL ONLY

CURRENCY UNITS • Financial asset at FVPL
• Accounts receivable • Financial asset at FVOCI
• Allowance for bad debts • Derivatives
• Lease receivable
• Loan receivable FINANCIAL AND MONETARY
• Financial asset at amortized cost • Cash
• A/R and ADA
LIABILITIES PAYABLE IN FIXED/DETERMINABLE • Financial asset at AC
CURRENCY UNITS • Prepaid interest
• Accounts payable
• Lease payable MONETARY ONLY
• Loan payable SSS Payable
• Financial Liability at amortized cost
NEITHER FINANCIAL NOR MONETARY
GENERAL RULE • Biological Assets
Equity securities: Non monetary • PPE
Debt securities: Monetary • Warranty
@FV: Non monetary • Prepaid Rent
 FOREX CURRENCY DENOMINATED
TRANSACTIONS
a transaction that is
• denominated in a foreign currency
• measured using the functional currency

Ordering Date - Ignore

Transaction Date
spot exchange rate at the date of transactions.

Balance Sheet Date/Reporting date

Monetary items
Closing rate - P&L

Non-monetary items measured @ cost

Rate of exchange at the date of the original
transaction (historical rate) - No gain or loss
not retranslated

Non-monetary items measured @ FV

Exchange rate at the date when FV was determined.
This is ordinarily the closing rate - P&L or OCI
retranslated

Settlement Date
Current rate at settlement date

DETERMINATION OF EXCHANGE
DIFFERENCES
1. Identify the foreign currency exposure (asset position
or liability position)
2. Evaluate the exchange difference
a. Increase in asset value for asset position = forex gain
b. Increase in liability value for liability position = forex loss
IFRIC 22 FOREIGN CURRENCY FOREIGN OPERATION
TRANSACTIONS AND ADVANCE It is an entity that is a subsidiary, associate, joint arrangement or
CONSIDERATION branch of a reporting entity, the activities of which are based or
conducted in a country or currency other than those of the
Applying paragraphs 21-22 of IAS 21 reporting entity.
DATE OF TRANSACTION FOREIGN OPERATION PRESENTATION TRANSLATION
• date on which an entity initially recognises the
non-monetary asset or non-monetary liability
arising from the payment or receipt of advance
consideration.
• If there are multiple payments or receipts in
advance, the entity shall determine a date of
the transaction for each payment or receipt
of advance consideration. Steps
1. The reporting entity determines its functional currency
2. The entity translates all foreign currency items into its
NON MONETARY ITEMS MEASURED @ FV functional currency
3. The entity reports the effects of such translation
Change in FV at reporting date
P/L or OCI (unrealized gain) Foreign Operation is not hyperinflationary
1. Assets and liabilities - the closing rate
2. Income and expenditure
Change in exchange rate at FV determination • THEORETICAL - HISTORICAL DATE
date • PRACTICAL - AVERAGE RATE when exchange rate does not
P/L or OCI fluctuate significantly
3. Goodwill arising on the acquisition of a foreign operation and any
FVPL = P/L FVOCI = OCI fair value adjustments to the carrying amounts of assets and
liabilities arising on the acquisition
• treated as assets and liabilities of the foreign operation
• the closing rate.
4. Exchange differences or TRANSLATION G/L
• recognized in OCI
• must be allocated to controlling and non-controlling interest
• cumulative - in BS
• for the year only - SCI
5. Dividends - when declared
6. Capital stock - acquisition date
TRANSLATION G/L PRESENTATION

BRANCH: Combined FS
SUBSIDIARY: Consolidated FS

Separate FS: if Equity method is used

TRANSLATION vs. TRANSACTION
PAS 29 FINANCIAL REPORTING IN FOREIGN OPERATIONS IS HYPER INFLATIONARY
HYPERINFLATIONARY ECONOMIES 1. Restate the financial statement based on PAS 29
PAS 29 is applied to the individual financial statements, and the 2. Translate all account using the closing rate. (No translation
consolidated financial statements, of any entity whose
gain or loss since all items are translated using the closing rate.)
functional currency is the currency of a hyperinflationary
economy.
FS RESTATEMENT
PAS 29 does not establish an absolute rate at which
hyperinflation is deemed to arise. It is a matter of judgment Statement of Financial Position
when restatement of financial statements becomes
necessary.
MONETARY - not restated
INFLATION NONMONETARY @ Cost - GPI, historical
is the decline of purchasing power of a given currency over NONMONETARY @ FV - not restated
time.
Retained earnings - balancing figure
PRICE CHANGE
Dividends - GPI, historical
General price change Revaluation surplus - eliminated (deemed realized)
increase or decrease in the overall level of prices of goods Other SHE item - GPI, Historical
and services throughout the economy.
An increase in the general price, where the purchasing STATEMENT OF COMPREHENSIVE INCOME &
power of money has decreased, is known as inflation. STATEMENT OF CASH FLOW
An increase in the purchasing power of money is known as
deflation. THEORETICAL - GPI, historical
PRACTICAL - GPI, average (beg + end/2)
Specific price change
increase or decrease in the price of a specific good or MONETARY GAIN OR LOSS OR
service. It occurs primarily because of supply and demand for PURCHASING POWER GAIN OR LOSS OR
a particular good or service. RESTATEMENT GAIN O LOSS
Remember:
Characteristics Monetary asset - loss
1. The general population prefers to keep its wealth in non- Monetary liability - gain
monetary assets or in a relatively stable foreign currency;
amounts of local currency held are immediately invested to
maintain purchasing power MA > ML
Net monetary asset position: Net purchasing power loss
2. The general population regards monetary amounts not in
terms of the local currency but in terms of a relatively
stable foreign currency; prices may be quoted in that MA < ML
currency; Net monetary liability position: Net purchasing power gain
3. Sales and purchases on credit take place at prices that
compensate for the expected loss of Purchasing power FOREIGN OPERATION FS TRANSLATION
during the credit period, even if the period is short IN HYPER ECONOMY
4. Interest rates, wages and prices are linked to a price • All items translated using the closing rate
index • No translation GL
5. The cumulative inflation rate over 3 years is approaching,
or exceeds, 100%
DIRECT RATE INDIRECT RATE PHP usd acc. receivable acc. payable
DERIVATIVES
AND HEDGE
ACCOUNTING
DERIVATIVE EXAMPLES OF DERIVATIVES
• is a financial instrument that derives its value from
the value of an underlying. FORWARD BASED
• covered by PFRS 9 Forwards:
• if derivative is not used as a hedging instrument, Contracts to purchase or sell a specific quantity of a financial
this will be accounted as Financial Asset @FVTPL instrument, a commodity, or a foreign currency at a specified
price determined at the outset, with delivery or settlement at a
DERIVATIVES specified future date.
A derivative is a financial instrument: Settlement at maturity
a. Whose value changes in response to the change in an • by actual delivery of the item specified in the contract,
underlying variable such as an interest rate, commodity or • or by a net cash settlement.
security price, or index;
Interest rate swaps and forward rate agreements:
b. That requires no initial investment, or one that is smaller Contracts to exchange cash flows as of a specified date or a
than would be required for a contract with similar series of specified dates based on a notional amount and fixed
response to changes in market factors; and and floating rates.

c. That is settled at a future date. Futures:

Contracts similar to forwards but with the following differences:
In general derivatives are a product that has been • futures are generic exchange-traded, whereas forwards
developed to manage the risks due to changes in market are individually tailored.
prices and include such things as interest-rate swaps and • Futures are generally settled through an offsetting
options and current futures and options, stock-index (reversing) trade, whereas forwards are generally settled
future and options, cap, floors, commodity futures, by delivery of the underlying item or cash settlement.
swaptions, leaps, and collateralized mortgage obligations. OPTIONS BASED
Options
They are called derivatives because their value is derived Contracts that give the purchaser the right, but not the
from values of other assets (for example stock, bonds, obligation, to buy (call option) or sell (put option) a specified
or commodities or is related to a market-determined quantity of a particular financial instrument, commodity, or
indicator such as interest rates or stock index. foreign currency, at a specified price (strike price), during or at a
specified period of time. These can be individually written or
exchange-traded. The purchaser of the option pays the seller
(writer) of the option a fee (premium) to compensate the seller
for the risk of payments under the option.

Caps and floors

These are contracts sometimes referred to as interest rate
options. An interest rate cap will compensate the purchaser of
the cap if interest rates rise above a predetermined rate (strike
rate) while an interest rate floor will compensate the purchaser
if rates fall below a predetermined rate.
OPTIONS FUTURES FORWARD CONTRACT

TYPES TYPES TYPES

FIXED TO VARIABLE • Forward contract to buy
CALL pay fix, receive variable • Forward contract to sell
Gives the holder the right to buy
VARIABLE TO FIXED
PUT pay variable, receive fix
Gives the holder the right to sell
FAIR VALUE
FAIR VALUE can be ASSET or LIABILITY
Intrinsic Value = in the money (always positive)
Time value = Prepayment
INTEREST RATE SWAP

FORWARD vs. FUTURE

FORWARD FUTURES
RATES FORWARD FUTURES
MARKET/TRADING PRIMARY (OTC) PRIMARY (Over the Counter)
& SECONDARY (EXCHANGE)
CONTRACT NATURE CUSTOMIZED STANDARDIZED/GENERIC
BY DELIVERY BY DELIVERY
OR NET CASH
SETTLEMENT
INITIAL RECOGNITION AND MEASUREMENT OF OTHER HYBRID CONTRACT
DERIVATIVES If a hybrid contract contains a host that is not an asset
• Financial instruments, including derivatives, is recognized within the scope of PFRS 9, an embedded derivative shall be
when entity becomes a party to the contract. separated (i.e., bifurcated) from the host and accounted for
• initially measured at fair value (xpn: if no amount of as a derivative under PFRS 9 if, and only if:
cash or other assets paid.) a. the economic characteristics and risks of the embedded
derivative are not closely related to the economic
SUBSEQUENT TO INITIAL RECOGNITION characteristics and risks of the host;
• at fair value. b. a separate instrument with the same terms as the
• As time passes by, the value of the underlying variable embedded derivative would meet the definition of a
(rate, price, or index) changes, hence, the derivative derivative; and
can have a positive (asset) or negative (liability) value. c. the hybrid contract is not measured at fair value with
changes in fair value recognized in profit or loss (i.e. a
FS PRESENTATION derivative that is embedded in a financial liability at fair value
Financial Asset @ FVTPL through profit or loss is not separated).
If an embedded derivative is separated, the host contract
EMBEDDED DERIVATIVE shall be accounted for in accordance with the appropriate
An embedded derivative is a component of a hybrid contract Standards. PFRS 9 does not address whether an embedded
that also includes a non-derivative host with the effect that derivative shall be presented separately in the statement of
some of the cash flows of the combined instrument vary in financial position.
a way similar to a stand-alone derivative.

A derivative that is attached to a financial instrument but is UNDESIGNATED HEDGE

contractually transferable independently of that instrument,
or has a different counterparty, is not an embedded
derivative, but a separate financial instrument.

HYBRID CONTRACTS WITH FINANCIAL

ASSET HOSTS
If a hybrid contract contains a host that is an asset within
the scope of PFRS 9, no bifurcation is necessary and the
whole instrument is accounted either as FVTPL, FVTOCI or
FAAmo.
UNDESIGNATED HEDGE FOREIGN CURRENCY DENOMINATED TRANSACTION + FORWARD CONTRACT TO BUY

THIS IS USUALLY DONE TO MINIMIZE OR OFFSET LOSSES

OR THE EFFECT OF FOREIGN CURRENCY CHANGES
FORWARD CONTRACT TO SELL
USES OF DERIVATIVES QUALIFYING CRITERIA FOR HEDGE ACCOUNTING
A hedging relationship qualifies for hedge accounting only if
Speculation all of the following criteria are met:
the purchase of an asset with the hope that it will 1. The hedging relationship consists only of eligible hedging
become more valuable shortly. instruments and eligible hedged items.
2. At the inception of the hedging relationship there is
Hedging formal designation and documentation of the hedging
A risk management technique that involves using one relationship and the entity's risk management objective
or more derivatives or other hedging instruments to and strategy for undertaking the hedge.
offset changes in fair value or cash flows of one or DOCUMENTATION
more assets, liabilities or future transactions shall include
• identification of the hedging instrument
HEDGE ACCOUNTING • the hedged item
The objective of hedge accounting is to represent, in • the nature of the risk being hedged
the financial statements, the effect of an entity's risk • how the entity will assess whether the hedging
management activities that use financial instruments to relationship meets the hedge effectiveness
manage exposures arising from particular risks that requirements (including its analysis of the sources of
could affect profit or loss (or other comprehensive hedge ineffectiveness and how it determines the
income, in the case of investments in equity instruments hedge ratio).
for which an entity has elected to present changes in
fair value in other comprehensive income 3. The hedging relationship meets ALL of the following
hedge effectiveness requirements:
PFRS 9 contains • There is an economic relationship between the hedged
special accounting principles for hedging activities. item and the hedging instrument
• When certain conditions are met, entities are permitted • The effect of credit risk does not dominate the value
to depart from some of the ordinary accounting changes that result from that economic relationship
requirements (should be more on market risk)
• and instead apply hedge accounting to assets and • The hedge ratio of the hedging relationship is the same
liabilities that form part of hedging relationships. as that resulting from the quantity of the hedged item
• These requirements are optional (i.e., entities are not that the entity actually hedges and the quantity of the
required to apply hedge accounting unless they decide hedging instrument that the entity actually uses to
to do so). hedge that quantity of hedged item. However, that
• The effect of hedge accounting is that gains and designation shall not reflect an imbalance between the
losses on the hedging instrument and the hedged item weightings of the hedged item and the hedging
are recognized in the same periods (i.e., gains and instrument that would create hedge ineffectiveness
losses are matched). (irrespective of whether recognized or not) that could
result in an accounting outcome that would be
inconsistent with the purpose of hedge accounting
FINANCIAL RISK
The risk of a possible future change in one or more of a
specified interest rate, financial instrument price,
commodity price, foreign exchange rate, index of prices
or rates, credit rating or credit index or other variable,
provided in the case of a non-financial variable that the
variable is not specific to a party to the contract. TYPES OF MARKET RISK
Currency risk
The risk that the fair value or future cash flows of a
CREDIT RISK
financial instrument will fluctuate because of changes in
The risk that one party to a financial instrument will
foreign exchange rates.
cause a financial loss for the other party by failing to
discharge an obligation.
Interest Rate Risk
The risk that the fair value or future cash flows of a
LIQUIDITY RISK
financial instrument will fluctuate because of changes in
The risk that an entity will encounter difficulty in
market interest rates.
meeting obligations associated with financial liabilities
that are settled by delivering cash or another financial
asset. Other Price risk
The risk that the fair value or future cash flows of a
financial instrument will fluctuate because of changes in
MARKET RISK
market prices (other than those arising from interest
The risk that the fair value or future cash flows of a
rate risk or currency risk), whether those changes are
financial instrument will fluctuate because of changes in
caused by factors specific to the individual financial
market prices. Market risk comprises three types of
instrument or its issuer or by factors affecting all
risk currency risk, interest rate risk and other price
similar financial instruments traded in the market.
risk.
 ✔
HEDGING INSTRUMENTS HEDGED ITEMS (EXPOSED ASSET OR LIABILITY
POSITION)
a. A derivative measured at FVTPL may be designated as a Hedged item is an item that exposes the entity to risk of
hedging instrument, except for some written options. changes in fair value or future cash flows and is designated as
being hedged.
b. A non-derivative financial instrument measured at
FVTPL may be designated as a hedging instrument (xpn: A hedged item can be:
financial liability designated as at FVTPL for which the change A single, group , or component of such single or group of
in fair value that is attributable to changes in the credit risk recognized asset or liability
of that liability is presented in OCI.) • unrecognized firm commitment
• highly probable transaction
For a hedge of foreign currency risk, the foreign currency • net investment in a foreign operation (with similar risk
risk component of a non-derivative financial instrument may characteristics)
be designated as a hedging instrument provided that it is not Foreign currency risk of a highly probable intragroup
an investment designated as FVTOCI. forecast transaction in consolidated financial statements -
provided that the transaction is denominated in currency other
For hedge accounting purposes, only instruments that involve than the functional currency of the entity entering into that
a party external to the reporting entity can be designated as transaction and the foreign currency risk will affect
a hedging instrument. consolidated financial statements.
This applies to intragroup transactions as well (with the
exception of certain foreign currency hedges of forecast FORECAST TRANSACTION
intragroup transactions). However, they may qualify for An uncommitted but anticipated future transaction.
hedge accounting in individual financial statements.
FIRM COMMITMENT
DESIGNATION OF HEDGING INSTRUMENTS A binding agreement for the exchange of a specified
A qualifying instrument must be designated in its entirety as a quantity of resources at a specified price on a
hedging instrument, with the following exceptions: specified future date or dates.

a. Separating the intrinsic value and time value of an option HIGHLY PROBABLE
Significantly more likely than probable.
contract and designating as the hedging instrument only the
change in intrinsic value of an option and not the change in
its time value;

b. Separating the forward element and the spot element of a

forward contract and designating as the hedging instrument
only the change in the value of the spot element of a
forward contract and not the forward element; similarly,
the foreign currency basis spread may be separated and
excluded from the designation of a financial instrument as
the hedging instrument, and

c. A proportion of the entire hedging instrument (e.g., 50% of

the nominal amount) but not a time portion (e.g. the first 6
years of cash flows of a 10-year instrument), may be
designated as the hedging instrument in a hedging
relationship.
DESIGNATION OF HEDGED ITEM FAIR VALUE HEDGE
An entity may designate an item in its entirety or a hedge of the exposure to changes in fair value of a recognized
component of an item as the hedged item in a hedging asset or liability or a previously unrecognized firm commitment or
relationship. an identified portion of such an asset, liability or firm commitment
that is attributable to a particular risk and could affect profit or
entire item comprises all changes in the cash flows or loss
fair value of an item.
component comprises less than the entire fair value Examples of fair value hedges:
change or cash flow variability of an item. a. A hedge of the exposure to changes in the fair value of a
fixed interest rate loan due to changes in market interest rates.
In that case, an entity may designate only the following Such a hedge could be entered into by either the borrower or
types of components (including combinations) as hedged the lender.
items: b. A hedge of the exposure to changes in the fair value of a
financial asset through other comprehensive income
• only changes in the cash flows or fair value of an
item attributable to a specific risk or risks (risk
c. A hedge of the exposure to changes in the fair value of a
component) (risk component should be separately
nonfinancial asset (e.g., inventory)
identifiable and reliably measurable)
d. A hedge of the exposure to changes in the fair value of a firm
commitment to purchase or sell a nonfinancial item (e.g., a
Risk components include a designation of only changes in
contract to purchase or sell gold for a fixed price on a future
the cash flows or the fair value of a hedged item above or
date)
below a specified price or other variable (a one-sided risk).
CASH FLOW HEDGE
• one or more selected contractual cash flows.
hedge of the exposure to variability in cash flows that is
• components of a nominal amount (i.e. a specified part
attributable to a particular risk associated with a recognized
of the amount of an item)
asset or liability (such as all or some future interest payments on
variable rate debt) or a highly probable forecast transaction and
could affect profit or loss

Recognized asset CFH or FVH Examples of cash flow hedge:

CFH or FVH 1. A hedge of the exposure to variable interest cash flows on a
Recognized liability
1. FVG 2. CFH bond that pays floating interest payments
Firm commitment
2. A hedge of the cash flows from a forecast sale of an asset
Forecast transaction (Highly Probable) CFH
3. A hedge of the foreign currency exposure associated with a
Net investment in a foreign operation CFH
FVH firm commitment to purchase or sell a nonfinancial item
Fixed to variable
Variable to fixed CFH
HEDGE OF A NET INVESTMENT IN A FOREIGN OPERATION
Accounted similarly to cash flow hedge
 GAIN OR LOSS ON FAIR VALUE HEDGE GAIN OR LOSS OF CASH FLOW HEDGE
Hedging Instrument a.) the separate component of equity associated with the
• P&L hedged item (cash flow hedge reserve) is adjusted to the
• OCI if the hedging instrument hedges an equity lower of the following (in absolute amounts):
instrument designated as FVTOCI • the cumulative gain or loss on the hedging instrument
from inception of the hedge; and
Hedged Item • the cumulative change in fair value (present value) of
• Shall adjust the carrying amount of the hedged item (if the hedged item (i.e. the present value of the
applicable) and be recognized in profit or loss. cumulative change in the hedged expected future cash
• FA@FVTOCI (debt) - P&L flows) from inception of the hedge.
• FA@FVTOCI (equity) - OCI
• Unrecognized firm commitment - Basis adjustment with b.) Effective portion - OCI (with reclassification)
a corresponding gain or loss recognized in P&L. c) Ineffective portion - P&L
• Firm commitment to acquire an asset or assume a
liability - Basis adjustment with a corresponding gain the amount that has been accumulated in the cash flow
or loss recognized in P&L. hedge reserve in accordance with (a) shall be accounted
for as follows:
i. Will result in recognition of non financial asset/non
financial liability - Basis adjustment (removed from
HEDGES OF A NET INVESTMENT IN A equity and is included in the initial cost or other carrying
FOREIGN OPERATIONS amount of the acquired non-financial asset or liability.)
Hedges of a net investment in a foreign operation, including
a hedge of a monetary item that is accounted for as part ii.. Loss not expected to be recovered in future periods -
of the net investment, shall be accounted for similarly to
Reclassification adjustment
cash flow hedges:
a. Effective portion- OCI (w/ reclassification) iii.. Others - Reclassification adjustment
b. Ineffective portion - P&L

Cumulative Gain or Loss in OCI Discontinuation of Hedge Accounting

The cumulative gain or loss on the hedging instrument In any of these circumstances, an entity should discontinue
relating to the effective portion of the hedge that has hedge accounting prospectively:
been accumulated in the foreign currency translation 1. The hedging instrument expires or is sold, terminated, or
reserve shall be reclassified from equity to profit or loss exercised.
as a reclassification adjustment (see PAS 1) on the 2. The hedge no longer meets the hedge accounting
disposal or partial disposal of the foreign operation. conditions.
3. The entity revokes the hedge designation.
4. A hedged forecasted transaction is no longer expected
to occur.
 NOT FOR
PROFIT
ORGANIZATION
NATURE
For benefit of society as a whole

CHARACTERISTICS CLASSIFICATION OF DONATION

• Primary purpose is not to provide goods services Unrestricted
• Substantial portion of resources are provided by • Available for immediate use without restriction
donors in non-reciprocal transaction • No donor-imposed restrictions
• Absence of defined and transferable ownership • If restriction made by Board of Trustees: classified as
interest unrestricted
MAJOR CLASSIFICATIONS Restricted
Governmental: Accounted using Govt Acct Manual (GAM) Subject to restrictions by donor
Temporary: may expire or be removed
Non-governmental Permanent: does not expire nor removed
• Colleges and universities
• Hospitals and other health care
organizations Under ASU 2016-14, Temporarily Restricted and Permanently
• Voluntary health and welfare organizations Restricted items are presented under a single account
(VHWO) "Restricted"
• Other NPOs
CONDITIONS vs RESTRICTIONS
ACCOUNTING STANDARDS USED Conditions
• PFRS (Full, SME or ME) • Donors money may be returned
• Conceptual framework • Donor may be released from payment if not met
• ASU 2016-14 (Presentation of Financial Statements of
Restrictions
Not-for-Profit Entities) • Limits the use of contributed assets
• Accrual basis of accounting • expire upon satisfaction of all restrictions.
If it is unclear whether donor's stipulations are conditions or
OLD STANDARDS restrictions, the organization should presume that the
SFAS 116 Accounting for Contributions Received and promise is conditional.
Contributions Made
SFAS 117 Financial Statements of Not-for-Profit
Organizations

PECULIARITY OF ACCOUNTING
• Classification of net assets, revenues, gains and
losses
• Recognition of donations and contrbutions as revenue

MAJOR SOURCES OF REVENUE

REGULAR: Always unrestricted (e.g. tuition for schools)
CONTRIBUTIONS: May be restricted or unrestricted
TYPES OF RESTRICTIONS PLEDGE (Promise to Give)
1. Donor-imposed restrictions • Is a written or oral agreement to contribute cash or
a. Time restriction other assets to an entity
b. Purpose restriction • Recognized as contributions if verifiable and
substantiated by evidence such as pledge cards or tape
2. Internal restriction or Quasi-endowment recording of oral promises.
• restriction either as to time or purpose by the
board of trustees Accounting depends whether promise is
• Such internal restriction is ignored and should be • Conditional
reported as unrestricted. • Unconditional

Fulfillment of restrictions during the year of Conditional promise to give

receipt of contributions • Depends on the occurrence of a specified future and
Entities may report the restricted contribution received as uncertain events to bind the promisor.
unrestricted if: • Initially recognized as liabilities (conditional grants)
1. Such accounting policy is adequately disclosed and is • Recognized as contribution revenue and receivable when
consistently applied the conditions are substantially met or when the
2. Same accounting policy is employed with investment promise becomes unconditional.
income whose restrictions are met in the same period
as the income is recognized. Unconditional promise to give
• the possibility that a condition will not be met is remote.
Effects of Non-Fulfillment or Restrictions • Depends only on the passage of time or demand by the
• Conditional gift of cash or other assets that may promise for performance.
have to be returned to the donor if the condition is • Recognized as contribution revenue and receivable in the
not met is treated as a liability (refundable advance). period received.
• Contributions with restrictions that do not lapse are • Reported as restricted support (temporary due to natural
called permanently restricted. These include pure restriction), even if the resource is not restricted by
endowments wherein both principal and income are the donor for specific purposes
non-expendable by the entity. • When the donor explicitly stipulates that the
unconditionally promised contribution is intended to
support current-period activities, it is reported as
unrestricted support. (conditional grants)
• Recognized as contribution revenue and receivable when
the conditions are substantially met or when the
promise becomes unconditional.

Special disclosures required for unconditional

promises
Unconditional promises to give should be disclosed as amounts
of promises receivable in:
• Less than a year
• 1 to 5 years
• More than 5 years
MEASUREMENT AND VALUATION OF DONATIONS
CONTRIBUTIONS
• at fair value Cash: Face value
• recognized in the period received. Deferred cash: Present value
• contributions in kind: if fair value cannot be determinable, no
Non-cash asset: Present value
value is assigned but they are recorded as sales revenue
when they are eventually sold.
Facilities/Usage
• Multi-year promises are recorded as revenues at the present
Dr. Rent expense
value of the future collections net of estimated uncollectibles.
• Contributed pledges If the fair value changes substantially Cr. Contrib revenue
from the pledge date to the receipt date, any increase is Services - criteria
conservatively not recognized; an impairment in value is fully
• Enhances non financial assets: or
recognized in the period of occurrence.
• Require specialized skills
• Collectors' items (historical treasures or works of art)
Dr. expense
received by the entity is encouraged, but not required, to be Cr. Contrib revenue
capitalized at either cost or fair value. If collection items are
capitalized, they are credited to revenues or gains. Collection items
Not contribution revenue, under the ff conditions:
DONATED SERVICES
• Held in furtherance of public service
• Creates or enhances nonfinancial assets; or
• Protected, encumbered, cared for, preserved
• Require specialized skills and typically would have to be
• Proceeds are used to acquire other items for
purchased if not provided by donation
collections

INVESTMENT AND INVESTMENT INCOME

Similar accounting policies under PFRS 9, PAS 27, PAS 28
or PFRS 11 are employed.

ACCOUNTING FOR TRANSFERS OTHER THAN CONTRIBUTIONS

1. Exchange Transactions
• Exchange occurs when a donor receive gift from the entity (fund raising premiums such as giveaways, calendars, etc.)
that approximate the value of their donations.
• Resources received in an exchange transaction are treated as revenue as they are earned
• classified as unrestricted revenues even if the resource provider limits the use of the resources.
2. Agency Transactions
• entity has no or little discretion over the use of the asset
• asset is designated by the transferor to a third party
• merely acts as an intermediary or pass-through entity for the asset.
• Assets received from such transfers are recognized as a liability and not as contributions.
3. Non-Cash Contributions
a. With little or no discretion as to use - account as if agency transactions
b. With discretion as to use - recognized as contributions
HOSPITALS AND OTHER HEALTH CARE
ORGANIZATIONS Non-operating Revenues
Organizations that provide offerings to clinical authorities Not related directly to an entity's principal operations
like nurses, doctors, pharmacists, etc.
a. Gifts and bequests
Purpose b. Investment income (dividends and interests)
to provide well being services at lower price and in better
amount Donation of medical related supplies as forgiveness of accounts
payable is considered operating revenue
EXAMPLES
World Health Organizations (WHO) DEDUCTIONS FROM REVENUES
Philippine Foundation for Breast Care. Inc • Courtesy allowance/staff discounts
PGH Medical Foundation. Inc • Contractual adiustments

REVENUES EXPENSES
Patient services revenues (excluding charity care) 1. Nursing services - medical and surgical, intensive care,
• Includes room and board, nursing services, and other nurseries and operating rooms.
professional services. 2. Other professional services - laboratory, radiology,
• Recorded at established (gross) rates as the services anesthesiology and pharmacy
are provided 3. General services - housekeeping, maintenance and laundry
4. Fiscal services - accounting, cashier, credit and collections
Premium fees and interest
• subscriber fee or capitation fees 5. Administrative services - personnel, purchasing, insurance,
• Revenues from agreements which a hospital provides governing boards, data processing and depreciation
any necessary patient services (perhaps from a provisions
contractually established list of services) for a
specific fee. Gross Patient Service Rendered
• The fee is usually a specific fee per member per Less: Charity Care
month Gross Patient service revenue
Contractual Adjustments
Other Operating Revenues Courtesy Allowance
Includes revenue from services Net Patient Service Revenue
• other than health care provided to patients
• sales and services to persons other than patients.
Charity care services
Provided free of charge to patients who qualify under
Examples:
a hospital's charity care policy
a. telephone or television charges on hospital rooms
b. tuition from schools operated by hospitals
Courtesy allowances/ staff discounts
c. rental of hospital space Discounts to doctors and employees
d. medical reproduction charge
e. proceeds from cafeterias, gift shops and snack bars Contractual adjustments
Discounts arranged with third-party payors (e.g.,
PhilHealth) that frequently have agreements to
reimburse at less-than-established rates.
COLLEGES AND UNIVERSITIES VOLUNTARY HEALTH AND WELFARE
ORGANIZATIONS (VHWO)
COLLEGES Derives principal funding from general public in the form of
Smaller institutions that emphasize undergraduate voluntary contributions from governments, and from grants,
education in broad range of academic areas which are then used to support health, welfare, and
community service projects.
UNIVERSITIES
Larger institutions that offer variety of EXAMPLES
• Red Cross
undergraduate and graduate degree programs
• GMA Kapuso Foundation
• Childhope Philippines Foundation, Inc.
EXAMPLES • Gawad Kalinga
• Our Lady of Lourdes Catholic School of Camarin • Angat Pinas, Inc (Angat Buhay)
• Greenhills Christian Fellowship, Inc.
• University of Santo Tomas REVENUES
REVENUES
Public support
• Contributions
Educational and general revenues • Special events support
• tuitions, Government appropriations; • Legacies and bequest
Government grants and contracts; Gifts and
private grants; Endowment income
Revenues
• Membership fees
Auxiliary revenue • Program service fees
• dormitories, cafeteria, intercollegiate, student • Sale of publication and supplies
unions, dormitories, as well as sales and • Investment income
receipts from college stores, barber shops,
movie houses, etc. EXPENSES
• Program services
Expired term endowments • Supporting services
reclassified from tempo restricted to unrestricted

TUITION AND FEES OTHER NPOs

UNIVERSITY-SPONSORED DESCRIPTION
Employment type: Included in Revenues and expenses Includes non-business organizations
Non-employment type: Reduction in Revenues
EXAMPLES
• Cemetery organizations
TUITION AND FEE REIMBURSEMENTS • Private and community foundations
Reversal of revenues • Professional associations
• Libraries
EXPENSES • Museums
• Educational and general expenses (instruction, • Religious organizations
support, operation) • Political parties
• Auxiliary expense (related to auxiliary revenues)
FINANCIAL STATEMENTS STATEMENT OF FINANCIAL POSITION
1. Total assets
PROFIT ORIENTED ENTITIES 2. Total liabilities
• Statement of Financial Position (SP) 3. Net assets
• Statement of Cash Flows (SCF)
• Statement of Comprehensive Income (SCI) NET ASSETS
• Statement of Changes in Equity (SCE) • Unrestricted
• Notes to SS • Temporarily restricted*
• Permanently restricted
NPO ORGANIZATIONS
• Statement of Financial Position (SFP) May be classified into two as:
• Statement of Cash Flows (SCF) 1. Unrestricted without donor-imposed restriction
• Statement of Activities (SOA) 2. Restricted with donor-imposed restriction
• Notes to SS
STATEMENT OF ACTIVITIES
HEALTHCARE Equivalent of Income Statement and Changes in Equity
• Statement of Operations (in lieu of SoA)
• Statement of Changes in Net Assets (optional) • Uses accrual basis of accounting.
• Shows the changes in the net asset categories.
VHWO • Focuses on the organization as a whole and not on the
SoA (Expenses: Functional and Natural) reporting of funds held by the non-profit entity.

Functional Classification of Expense Revenues and expenses are reported at gross amounts, except:
Program services a. Gains or losses from peripheral or incidental transactions or
• Activities involved in distribution of goods or events beyond the control of the organization
services that fulfill the purpose or mission of the b. Investment income - reported net of related expenses
organization to beneficiaries c. Further classifications such as operating and non-operating,
• Research; public education; professional education; recurring or non-recurring, etc. are optional.
community services
Revenues and gains:
Supporting services • Unrestricted
• Catchall category for all expenses not classifiable as • Temporarily restricted
program services • Permanently restricted
• Management and general, fund-raising and
Membership-development activities Expenses: Deduct form Unrestricted only.
a. Program services - distribution of goods or services that fulfill
PRACTICE the purpose or mission of the organization to beneficiaries.
• Statement of Assets, Liabilities and Fund Balance
• Statement of Receipts and Expenses or Statement b. Supporting services catchall category for all expenses not
of Comprehensive Income classifiable as program services.
• Statement of Changes in Fund Balance 1. Management and general - oversight, business management,
• Statement of Cash Flows (SCF) record keeping, financing and related administrative activities.
• Notes to SS 2. Fundraising - fund-raising campaigns, events, fundraising
manual distribution and other activities to solicit contributions.
3. Membership-development activities - soliciting for prospective
members and membership dues or membership relations.
FOR HOSPITALS
"Statement of Operations and
Statement of changes in Net Assets

FOR VHWO
must also provide
"Statement of Functional Expenses"

STATEMENT OF CASH FLOW

Contributions with restrictions - Financing activities
Contributions unrestricted- Operating activities
Non-financial asset (PPE) - Investing

Operating Activities
• Includes unrestricted cash contributions, unrestricted
investment earnings, revenue restricted for operating
purposes (Program Restrictions), revenue from
exchange transactions, and operating expenditures
(salaries, supplies, interest expense).
• It does not include contributions restricted to capital
purposes.
• May be presented using direct (encouraged) or
indirect method.

Financing Activities
• Includes contributions and investment revenues
restricted for long-term purposes (e.g., restrictions
for acquisition of capital assets, endowments)
• Includes debt-related activities (debt proceeds,
repayments, lease payments, etc.).
• Presented using direct method.

Investing Activities
• Includes inflows and outflows from the sale and
purchase of capital assets and investment assets.
• It does not include contributions restricted to capital
purposes.
• Presented using direct method.

NOTES TO FS
Same as with commercia accountne
 STATEMENT OF ACTIVITIES

UNRESTRICTED TEMPORARILY PERMANENTIY TOTAL

RESTRICTED RESTRICTED
Revenues, gains and other support
Net Asset Released from Restriction (NARFR)
TOTAL
Expenses and losses
Change in net assets = ex. (def.)
Net assets, beg
Net assets, end

SELECTION AND APPLICATION OF ACCOUNTING POLICIES

1. Consider whether an IRS Standard specifically applies to a transaction,
other event or condition
2. Management must use its judgement and consider the applicability of,
the following sources in descending order:
a. Consider whether IRS Standard deal with similar or related issue
b. Refer to and consider the applicability of the Conceptual Framework

Management may also consider the most recent pronouncements of other

standard-setting bodies
GOVERNMENT
ACCOUNTING
REFERENCES ACCOUNTING RESPONSIBILITY
Legal
Govemment Accounting Manual (GAM) for NGAs Commission on Audit (COA)
Presidential Decree No. 1445 - Government 1. Has the exclusive authority to promulgate accounting and
Auditing Code of the Philippines auditing rules and regulations
2. Keeps the general accounts of the government, supporting
Professional vouchers, and other source documents
Philippine Public Sector Accounting Standards 3. Submits to the President and the Congress not later than
(PPSAS) the last day of September, an annual report of the
Government non-business enterprise government, its subdivisions, agencies and instrumentalities,
including government-owned or controlled corporations.
PFRS (Full, SME or SE), as applicable
• Government business enterprise Department of Budget and Management (DBM)
• 1. The formulation and implementation of the National Budget
Conceptual Framework 2. Efficient and sound utilization of government funds and
PPSAS revenues
• Adopted from IPSAS (1 to 42)
• PPSAS 1 to 32, 33 to 38 Bureau of Treasury (BTr)
• Not adopted - 7, 10, 11, 15, 18, 22 & 25 The BTr functions under the Department of Finance (DO) and
is the cash custodian of the government.
GOVERNMENT ACCOUNTING
Government accounting encompasses the processes of 1. Receipt and keeping of national funds, management and
analyzing, recording, classifying, summarizing and control of disbursements
communicating all transactions involving the receipt and 2. Maintenance of accounts of financial transaction of all
disposition of government funds and property, and national government, offices, agencies and instrumentalities
interpreting the results thereof.
• Maintains the Registry of NCA and Replenishments for
OBJECTIVE OF GOVERNMENT ACCOUNTING control and monitoring of NCA released by the DBM
a. To produce information concerning past operation and • also monitors bank transfers it makes in replenishing its
present condition MDS accounts.
b. To provide a basis for guidance for future operation
Government agencies
c. To provide for control of the acts of public bodies and
any department, bureau or office of the national government,
offices in the receipts, disposition and utilization of funds
or any of its branches and instrumentalities, or any political
and property; and
subdivision, as well as any GOCCs, including its subsidiaries, or
d. To report on the financial position and the result of
other self-governing board or commission of the government.
operation of government agencies for the information
and guidance of all persons concerned
Accounting personnel in an agency shall:
1. Maintain and keep current the accounts of the agency
SUBJECTS 2. Provide advice on the financial condition and status of the
1. National government - consisting of departments, appropriations and allotment of the agency as its Head may
bureaus, commissions, boards, state colleges and require
universities. 3. Develop and conduct procedures designed to meet the
2. Local Government - provinces, chartered cities, needs of the government
municipalities, and barangays.
3. Government-owned and/or government
controlled corporations - created by law to
manage specific type of business.
GOVERNMENT ACCOUNTING MANUAL
(GAM) BASIC GOVERNMENT ACCOUNTING AND
Recent developments brought about by the Philippine Public BUDGET REPORTING PRINCIPLES
Financial Management Reforms Each entity shall recognize and present its financial
FORMER: New Government Accounting System (GAS) transactions and operations conformably to the following:
Replaced on January 1, 2016 • generally accepted government accounting principles
• accrual basis of accounting
LEGAL BASIS
The Commission on Audit shall have exclusive authority to • budget basis for presentation of budget information in
define the scope of its audit and examination, establish the the financial statements (FSs)
techniques and methods required therefor, and promulgate • Revised chart of accounts prescribed by COA;
accounting and auditing rules and regulations, including those • double entry bookkeeping;
for the prevention and disallowance of irregular, • financial statements based on accounting and
unnecessary, excessive, extravagant, or unconscionable budgetary records; and
expenditures, or uses of government funds and properties • fund cluster accounting.

PRESENTS THE in accordance with the PPSAS and pertinent laws, rules and
• basic accounting policies regulations;
• the accounting procedures
• books, registries, records, forms, reports, and
financial statements; and illustrative accounting entries. RESPONSIBILITY FOR FINANCIAL STATEMENTS

USED BY ALL NATIONAL GOV AGENCIES Individual entity/department FS

(NGAs) in the: • the head of the entity/department central office
a. preparation of the general purpose financial statements (COf) or regional office (RO) or operating unit (OU)
in accordance with the PPSAS and other financial reports • or his/her authorized representative jointly with the
as may be required by laws, rules and regulations; and head of the finance/accounting division/unit; and
b. reporting of budget, revenue and expenditure in
accordance with laws, rules and regulations. Department/entity FSs as a single entity
• the head of the entity/department COf jointly with
OBJECTIVE OF THE MANUAL the head of the finance unit.
The Manual aims to update the following:
Statement of Management Responsibility for
a. standards, policies, guidelines and procedures in Financial Statements
accounting for government funds and property; shall serve as the covering letter in transmitting the entity
b. coding structure and accounts; and
financial statements to the COA, and other regulatory
c. accounting books, registries, records, forms, reports
agencies and other entities. It shows the entity's
and financial statements.
responsibility for the preparation and presentation of the
financial statements.
VOLUMES
1. Accounting Policies
2. Accounting Books, Registies, Records, Forms and
Reports
3. The Chart of Accounts
COMPONENTS OF GENERAL PURPOSE FS
QUALITATIVE CHARACTERISTICS OF FINANCIAL
REPORTING
Statement of Financial Position (SP) An entity shall present information including accounting
difference: equity is only a one line item
policies in a manner that meets the following qualitative
characteristics enumerated in PPSAS 1:
Statement of Financial Performance (SFPer)
The Statement of Financial Performance (SPer) shall include
line items that present the revenue, expenses and net
surplus or deficit for the period.

Statement of Changes in Net Assets/Equity (SCNA/E)

An entity shall present in the Statement of Changes in Net
Assets/Equity (SCNA/E) the following:

1. Net Income or Deficit for the period;

2. Each item of revenue and expenses for the period that, as
required by Standards, is recognized directly in net assets/
equity, and the total of these items;
3. Total revenue and expenses for the period; and
4. For each component of net assets/equity separately
disclosed, the effects of changes in accounting policies and
corrections of errors recognized in accordance with PPSAS
3-Accounting Policies, Changes in Accounting Estimates and
Errors.

Statement of Cash Flows (SCF)

The Statement of Cash Flows (SC provides information to
users of FSs a basis to assess the ability of the entity to
generate cash and cash equivalents and to determine the
entity's utilization of funds. This also provides information on
how the entity generates income authorized to be used in
their operation and its utilization.

Statement of Comparison of Budget and Actual

Amounts (SCBAA)
A comparison of budget and actual amounts will enhance the
transparency of financial reporting in government.

Notes to Financial Statements

The Notes to FSs contain information in addition to that
presented in the SP, SFPer, SCNA/E, SCF and SCBAA. Notes
provide narrative descriptions or disaggregation of items
disclosed in those FSs and information about items that do not
qualify for recognition in those statements.
GOVERNMENT BUDGET PROCESS
BUDGET CALL
GOVERNMENT BUDGET • defines the budget framework
Government budget is the financial plan of a government for • sets economic and fiscal targets
a given period, usually for a fiscal year, which shows what • prescribe the priority thrusts and budget levels; and
its resources are, and how they will be generated and used • spells out the guidelines and procedures, technical
over the fiscal period. The budget is the government's key instructions and the timetable for budget preparation
instrument for promoting its socio-economic objectives. The • prepared at the end of the year 2 years before (e.g.
government budget also refers to the income, expenditures BUDGET FOR 2025: Budget call is December 2023)
and sources of borrowings of the National Government (NG)
that are used to achieve national objectives, strategies and GENERAL APPROPRIATIONS ACT (GAA)
programs.
the legislative authorization that contains the new
CHARACTERISTICS OF GOV BUDGETING appropriations in terms of specific amounts for salaries,
• ZERO BASED BUDGETING wages and other personnel benefits; maintenance and
• Bottom up budgeting other operating expenses; and capital outlays authorized to
be spent for the implementation of various programs/
FOUR PHASES OF BUDGET CYCLE projects and activities of all departments, bureaus and
A. Budget Preparation offices of the government for a given year.
B. Budget Legislation/Authorization
c. Budget Execution and Operation
D. Budget Accountability

The cycle can be further subdivided as follows:

1. Budget call
BUDGET PREPARATION
2. Budget hearings (by executive, legislative, branch)
3. Presentation to the Office of the President
(PRESIDENT’S BUDGET)
4. House deliberations
5. Senate deliberations LEGISLATION
6. Bicameral deliberations General Appropriations bills → General Appropriations act
7. Ratification and enrollment If by the end of any fiscal year, Congress
8. President's enactment failed to pass the General Appropriations
9. Release guidelines and BEDs Bill (GAB) for the ensuing year, the
10. Allotment EXECUTION General Appropriations Act (GAA) for the
11. Incurrence of obligations preceding year shall be deemed
12. Disbursement authority reenacted and shall remain in force and in
13. Budget accountability reports effect until the GAB is passed by
14. Performance reviews ACCOUNTABILITY
Congress.
15. Audit
BUDGETARY ACCOUNTS SOURCE OF REVENUE AND OTHER RECEIPTS

Appropriation Revenue from Exchange Transactions

authorization made by a legislative body to allocate funds for • Sale of goods or provisions of services to third parties
purposes specified by the legislative or similar authority. or to other NGAs
• Use by other entity of assets yielding interest, royalties
Allotment and dividends or similar distributions
an authorization issued by the DBM to GAs to incur
obligations for specified amounts contained in a legislative Revenue from Non-Exchange Transactions
appropriation in the form of budget release documents. It is • Tax Revenue
also referred to as Obligational Authority. • Fines and Penalties
• Shares, Grants and Donations
Obligation
an act of a duly authorized official which binds the MODES OF DISBURSEMENT
government to the immediate or eventual payment of a sum
of money. 1. Disbursement by check
Obligation maybe referred to as a commitment that • Modified Disbursement System Checks
encompasses possible future liabilities based on current • Commercial Checks
contractual agreement.
2 Cash
Disbursements 3 Advice to debit the account (ADA)
actual amounts spent or paid out of the budgeted amounts. 4 Tax remittance advice
5. Working Fund/CDC
6 Direct payment method
BOOKS OF ACCOUNTS AND REGISTRIES FUND ACCOUNTING
: The books of accounts shall be maintained by fund cluster
Journals as follows:
1. General Journal (GJ) Code Description
2. Cash Disbursements Journal (CDJ) 01 Regular Agency Fund
3. Cash Receipts Journal (CRJ) 02 Foreign Assisted Projects Fund
4. Check Disbursements Journal (CkDJ) 03 Special Account-Locally Funded/Domestic Grants Fund
04 Special Account-Foreign Assisted/Foreign Grants Fund
Ledgers 05 Internally Generated Funds
1. General Ledgers (GL) 06 Business Related Funds
2. Subsidiary Ledgers (SL) 07 Trust Receipts

Budget Registries
Registries of Revenue and Other Receipts (RROR)
used to monitor the revenue and other receipts estimated/
budgeted, collected and remitted/deposited.

Registry of Appropriations and Allotments (RAPAL)

to monitor appropriations and allotments charged thereto. It
shall show the original, supplemental and final budget for the
year and all allotments received charged against the
corresponding appropriation. The balance is extracted every
time an entry is made to prevent incurrence of overdraft in
appropriations.

Registries of Allotments, Obligations and Disbursements

(RAOD)
to record allotments, obligations and disbursements. It shall TERMS
show the allotments received for the year, obligations RANCA Registry of Appropriation and Notice of Cash
incurred against the corresponding allotment and the actual Allocation
disbursements made. The balance is extracted every time an SING Subsidy Income from National Government
entry is made to prevent incurrence of obligations in excess
of allotment and overdraft in disbursements against LCCA Local currency checking account
obligations incurred. The RODs shall be maintained by
appropriation act, fund cluster, MO/PAP, and allotment class.

Registries of Budget, Utilization and Disbursements (RBUD)

to record the approved special budget and the corresponding
utilizations and disbursements charged to retained income.
Separate BUDs are also maintained for each object of
expenditure.
 ACCOUNTING

CASH PROPERTY, PLANT, AND EQUIPMENT

Petty Cash Initial recognition
• Imprest system only • should be equal or greater than 50k
• Custodian should be bonded if fund is 5k • less than 50k non expendable
• Max amount per transaction - 15k
• Replenishment - at least 75% or when Subsequent measurement
needed Cost model only (C-D-I)

BANK RECONCILIATION Depreciation

• Adjusted balance method Monthly recording
• 4 copies Method - Straight-line method
Commencement: ready/available for use
FINANCIAL ASSETS • On or before 15 - Beg of month
1. Loan and receivables • After 15 - EOM / Beg of next month
2. Available for Sale (AFS)
3. Held-to-Maturity (HTM) Residual value
4. FA@FVTS(D) through surplus or deficit minimum of 5% of cost
INVENTORIES
USEFUL LIFE
Subsequent measurement (for distribution) - 2 to 50 years
Lower of Cost or Replacement Cost Except for - land and unrecognized heritage asset
System - perpetual
Specific Identification CESSATION OF DEPRECIATION RV > CV
Cost Formula - weighted average
(unique since GR if perpetual, Fully depreciated - not derecognized
moving average)
BORROWING COST
INVESTMENT PROPERTY Benchmark - expensed
Subsequent measurement
Cost model only (Cost - Dep. - Imp.) Alternative
• Qualifying asset - capitalized (NGAs)
• Non-qualifying asset - expensed (National
government)
AGRICULTURE STATEMENT OF CASH FLOWS
Bearer Animals - BIOLOGICAL ASSET
Bearer Plants - BIOLOGICAL ASSET Operating cash flows
Zoo animals - PPE Direct method

INTANGIBLE ASSETS Investing cash flows

Subsequent measurement Direct method
Cost model only (C-A-I)
Financing cash flows
Amortization Method - SL Direct method
RESIDUAL VALUE - zero (unless 3rd party)
USEFUL LIFE -2 to 10 years CONSOLIDATION - Basis
Control - power to govern
LEASES in PFRS, control depends on % of ownership
Same with PAS 17 (old standard for
leases) INTERIM FS
Quarterly

SERVICE CONCESSION ARRANGEMENT

Financial Liability Method
• Reimbursed by goverment
• liability of government

Grant of Right to Operate Model (GORTOM)

deferred revenue

JOINT VENTURE
PAS 31 (old standard)

Jointly Controlled Operations (JCO)

Jointly Controlled Assets (JCA)
Jointly Controlled Entities (JCE)
EXERCISE 1
EXERCISE 2

EXERCISE 3
EXERCISE 4

EXERCISE 5
JOB ORDER
COSTING
COST ACCOUNTING AND JOB ORDER COSTING COSTING SYSTEMS
Product costing involves accumulating, classifying and
Introduction assigning direct materials, direct labor, and factory overhead
• Cost accounting focuses on the manufacturing cost of costs to products, jobs or services.
a manufacturing company. In developing costing system,
• Inventoriable cost is determined in accordance with the following three costing methods must be
PAS 2 Inventories and classification of cost is normally considered:
based on function as provided by PAS 1 Presentation 1. Cost measurement method (actual, normal or
of Financial Statements. standard)
• Incidentally, these rules or format is also used in your 2. Cost accumulation (job or process)
MS topic Absorption Costing which is otherwise 3. Method used to allocate overhead (volume-based
known as Conventional or GAP Costing.
or activity-based)
COST ACCOUNTING
Cost accounting is a process of collecting, analyzing,
summarizing and evaluating various alternative courses of
action. Its goal is to advise the management on the most
appropriate course of action based on the cost efficiency
and capability.

Combination of:
1. Managerial accounting (internal reports)
2. Financial accounting because its product-costing function
satisfies external reporting requirements
UNDERAPPLIED OVERHEAD (UNFAVORABLE)
Exists when the amount of overhead applied to jobs during the
period using the predetermined overhead rate is less than the
total amount of overhead actually incurred during the
period.

OVERAPPLIED OVERHEAD (FAVORABLE)

Exists when the amount of overhead applied to jobs during the
period using the predetermined overhead rate is greater than
the total amount of overhead actually incurred during the
period

DISPOSITION OF UNDER (OVER) APPLIED

If material:
Allocate to COGS and Inventories (FG or WIP)

If immaterial
COGs
JOB ORDER COSTING FLOW OF DOCUMENTS IN A JOB ORDER COSTING SYSTEM
Job order costing is a system for accumulating costs used
by entities that make relatively small quantities or distinct
batches of identifiable, unique products (services).

Best suited for: unique, heterogeneous or specifically

identifiable products or service

Cost accumulation: Per job (job becomes a cost center)

Documents used: Job cost sheet.

Job order cost sheet (or job cost record) is a source
document that provides virtually all the financial
information about a particular job.

Example application: METHODS OF ALLOCATING OVERHEAD

providing legal services for the client of a law firm
Volume-based or Traditional Methods
Accounts used: this method allocates manufacturing overhead to products or
jobs based on cost driver such as number of units produced,
Raw Materials, Work-in-Process and Finished Goods
number of direct labor hours or number of machine hours.

Activity-based
this method allocates overhead to units or jobs using multiple
cost drivers based on cause-and-effect criteria.
Direct materials 108,000
Add: Direct Labor 144,000
Add: FOH applied 129,600
Work in process, beg 125,000
TOTAL MANUFACTURING COST PUT IN TO PROCESS 506,600
Less: WIP, end (156,200)
TOTAL GOODS MANUFACTURED 350,400
Finished goods, beg 70,000
TOTAL GOODS AVAILABLE FOR SALE 420,400
Less: Finished goods, end (205,300)
Cost of good sold 215,100
SCRAP, WASTE, REWORK and SPOILAGE PRODUCTION LOSSES IN JOB ORDER COSTING

Scrap ACCOUNTING FOR SCRAP

• raw materials left over from the production cycle Recognizing scrap at the time of sale
• but still usable for purposes other than those for a. Recorded as income at the time of sale
which it was originally intended. b. Scrap attributable to specific job
• may be sold to outside customers, usually for a nominal c. Scrap common to all jobs
amount, or may be used for a different production
process. Recognizing scrap at the time of production
a. Scrap attributable to specific job
Waste b. Scrap common to all jobs
• raw materials left over from a production process or
production cycle for which there is no further use. ACCOUNTING FOR WASTE
• usually not salable at any price and must be discarded. 1. Waste attributable to specific job
2. Waste common to all jobs
Rework
consists of end products that do not meet standards of ACCOUNTING FOR SPOILED GOODS
salability but can be brought to salable condition with 1. Spoilage attributable to a specific job (due to changing
additional effort. customers specifications)
2. Spoilage common to all jobs (due to internal failure)
Spoilage
consists of goods that have been damaged through ACCOUNTING FOR REWORK COST ON DEFECTIVE UNITS
imperfect machining or processing. 1. Rework cost charged to a specific job (due to changing
• Normal spoilage - spoilage that occurs under normal customers specifications)
operating conditions. It is essentially uncontrollable in 2. Rework cost charged to all jobs (due to internal failure)
the short run. Normal spoilage arises under efficient
operations and is treated as a product cost. ACCOUNTING FOR OVERTIME
• Abnormal spoilage - spoilage that is not expected to 1. Basic pay - charged to direct labor
2. Overtime premium
occur under normal, efficient operating conditions. The a. Charged to specific job if the job is taken as a rush order
cost of abnormal spoilage should be separately
b. Charged to all jobs if the job is a regular order which cannot
identified and reported to management. Abnormal
spoilage is typically treated as a period cost (a loss) be completed in the regular working hours
because of its unusual nature.
PROBLEM 3: REWORK COST

PROBLEM 4: SPOILED GOODS

PROCESS
COSTING
BASIC CONCEPT COST ELEMENTS
• Homogenous with equal amount of materials, labor and
overhead EVEN APPLICATION
• Cost accumulation of DM, DL, and OH is by department • DM, DL and OH are applied at the same rate
or cost center • EUP is of equal amounts
• Cost per unit = Total cost of cost center / no of units
UNEVEN APPLICATION
RELATED REPORTS • DM, DL and OH are applied at different stage
of production
• EUP is of unequal amounts
PRODUCTION REPORT
• No of units in process at start of month
• No of units transferred out of the department during DIRECT MATERIALS CONSIDERATIONS
the month • Added at the beginning of the process; or
• No of units still in WIP at end of month • Added at the end of the process; or
• Percentage of completion of units still in process • Added at some point in the middle of the process; or
• Added evenly throughout the process
COST OF PRODUCTION REPORT
• Total costs of products completed and transferred out
• Cost related to ending inv of WIP
• Source of journal entries for the period

BEGINNING INVENTORY

FIFO
• Only cost incurred this period are allocated between
FG and WIP
• BI is maintained separately from current period
costs
• Accurately represent physical flow of units

WEIGHTED AVERAGE
• Averages costs incurred in beg WIP and this period
• No differentiation between goods prior and current
period
PROBLEM 3 Fifo method
SPOILAGE OR LOST UNITS

NORMAL
• Expected/anticipated, inherent, usual
• Unavoidable, Uncontrollable
• Accounted as product costs
• Part of cost of all finished units or WIP
• Increases cost of production of usable goods

May be due to:

• Weight losses
• Shrinkage
• Evaporation
• Rusting of usable goods

ABNORMAL
• Unexpected, not inherent, unusual
• Avoidable/Controllable
• Account as period costs (opex) expensed
outright
May be due to:
• Abnormal working conditions
• Accidents
• Strikes
• Machine breakdowns
• Fortuitous events
• Inefficient workers
• Low quality or defective RM

WHEN TO RECOGNIZE

Continuous
• Occurs evenly throughout the production
process

Discrete
• Occurs at specific point in the production
process
• Detected upon quality inspection
• Normal LU - allocated to good units
• Abnormal LU - considered as period costs
PROBLEM 4 SPOILAGE PROBLEM 5 SPOILAGE (EUP in FIFO/AVERAGE)
PROBLEM 6
HYBRID COSTING/OPERATIONS COSTING
BACKFLUSH
AND JIT
COSTING
BACKFLUSH COSTING JUST IN TIME (JIT) SYSTEM
Backflush costing is a cost accounting system which Just-in-time (JIT) purchasing is the purchase of materials (or
focuses on the output of an organization and then works goods) so that they are delivered just as needed for
backwards to attributed costs to stock and cost of sales. production (or sales).

CHARACTERISTICS Benefits include lower inventory holdings (reduced warehouse

1. Usually employed in parallel with JIT space required and less money tied up in inventory) and less
2. Uses "demand pull" system - production is pulled by risk of inventory obsolescence and spoilage.
customer demand and this in turn pulls the purchasing
Just-in-time (JIT) production is a "demand-pull" manufacturing
procedures.
3. Minimal or zero stocks of inventories system that has the following features:
4. It focuses on output - costs are first associated with 1. Organize production in manufacturing cells
2. Hire and retain workers who are multi-skilled
output (measured as either sales or completed
production) and then allocated between stocks and 3. Aggressively pursue total quality management (TQM) to
costs of goods sold by working back. eliminate defects
5. Conversion costs (labor and overheads) are never 4. Place emphasis on reducing both setup time and
attached to products until they are complete (or even manufacturing lead time, and
sold) - thus the traditional WIP account doesn't exist. 5. Carefully select suppliers who are capable of delivering
6. Materials are recognized at different points according quality materials in a timely manner.
to the variant used, but only to the extent of being
either stock of raw materials or part of the cost of The philosophy of traditional cost accounting
stock of finished goods. Hence, materials are not methods
Traditional cost accounting methods are based upon the
attached to WIP. principle that value is obtained by the creation of the assets
7. Omits recording some of the journal entries relating known as stock. As a consequence this value must be
to the cycle from purchase of direct materials to sale measured and cost accumulation systems are used for this
of finished goods (i.e., it has fewer trigger points at purpose.
which journal entries are made and the journal entries
for the subsequent stage use normal or standard costs
to work backward to "flush out" the costs in the cycle
for which journal entries were not made.
Variances in relation to backflush costing is normally closed to Cost of goods sold
ACTIVITY
BASED
COSTING
TRADITIONAL COSTING Activity - an event, task or unit of work with specified
Under the traditional costing purpose.
• FOH costs are allocated to products using a single Examples: designing products, setting up machines, operating
activity or cost driver (usually labor hours or machine machines, making orders or distributing products.
hours)
• sometimes called peanut-butter costing or volume-based Cost object - anything for which costs are accumulated for
costing. managerial purposes.
Examples: specific job, a product line, a market or certain
Cost allocation in traditional costing customers.
1. Accumulate costs within a production or non-production
department. Drivers - factors that cause changes. It can be:
2. Allocate non-production costs to production departments. a. Resource driver - measures the demands placed on
3. Allocate the resulting production department costs to resources by activities, and are used to assign the cost of
various products, services or customers. resources to
b. Activity driver - measures the demands placed on activities
ACTIVITY-BASED COSTING (ABC) by cost objects and are used to assign the cost of activities to
ABC is a costing method that cost objects.
• identifies the causal relationship between the
incurrence of cost and activities A cost driver is anything (it can be an activity, an event or
• determines the underlying driver of activities volume of something) that causes cost to be incurred each
• establishes cost pools related to individual drivers time the driver occurs.
• develops costing rates, and
• applies costs to product on the basis of resources Cost drivers can be:
consumed (drivers). a. Structural cost drivers relate to actual structure of
ABC focuses on individual activities as the fundamental cost company's operations and the complexity of the technologies
objects. the company uses. A more complex working environment leads
to higher structural costs.
b. Executional cost drivers relate to the actual processes
performed. The cost of executing activites is determined by
company's effective use of staff and processes used.
Examples of executional cost drivers are set-ups, moving,
number of parts, casting, packaging or handling.
STEPS IN IMPLEMENTING ACTIVITY-BASED COSTING

1. Identify activities. ACTIVITY

An event that causes the consumption of overhead
2. Assign resource costs to activities. This involves resources
tracing costs to cost objects to determine why the cost
occurred. Costs can be categorized in three ways: ACTIVITY COST POOLS
a. Direct - costs that can be traced directly to one output. A "cost bucket" in which costs related to a single
b. Indirect - costs that cannot be allocated to an individual output, activity measure ar«O coumulated.
that is, they benefit two or more outputs, but not all outputs.
For example, maintenance costs or storage costs. Classification of Activities
c. General/administration - costs that cannot be associated with 1. Unit level
any product or service. These costs are likely to remain performed each time a unit is produced.
unchanged, whatever output is produced. For example, salaries e.g., costs of DM, DL, and machine maintenance
of administration staff, security costs or depreciation.
2. Batch level
performed each time a batch is produced.
3. Calculate for the rate per cost driver.
e.g., Purchase orders, machine setup, and quality tests
ABC Cost per Unit
Total Activity Cost 3. Product level
Total Number of Units for Activity performed as needed to support the various products
produced.
e.g., engineering changes made in the assembly line,
4. Identify outputs.
product design changes, and warehousing and storage
Outputs might be products, services or customers.
costs for each product line, advertising
5. Assign activity costs to outputs. This is done using
4. Facility level/PLANT LEVEL/ORG SUSTAINING
activity drivers. Activity drivers assign activity costs to those that sustain a factory's general manufacturing
outputs (cost objects) based on the consumption or demand process. These costs are administrative in nature
for activities. e.g., building depreciation, property taxes, plant security,
Cost = ABC Cost per Unit x Number of Units for Activity insurance, accounting, outside landscape and
Consumed maintenance, and plant management's and support
staff's salaries.
SELECTING AN ALLOCATION BASE ACTIVITY-BASED MANAGEMENT (ABM)

Criterion Nature
Cause-and-Effect Relationship Used in conjunction with ABC to identify areas that would
benefit from process improvements
Possible Drivers
• Units produced Operational ABM (SHORT TERM)
• DL hours Actions based on activity driver analysis that
• DL cost • Increases efficiency
• Machine hours • Lowers costs
• Direct materials • Improves asset utilization

PREDETERMINED OH RATE Strategic ABM (LONG TERM)

Choice of activity base used in calculation of the • Actions based on activity-based cost analysis
Predetermined OH Rate • Aims to change demand for activities to improve
profitability
LIMITATIONS
• Substantial resources required to implement and
maintain
• Resistance to unfamiliar numbers and reports
• Desire to fully allocate all costs to products
• Potential misinterpretation of unfamiliar numbers
• Does not conform to GAAP
 JOINT AND
BY-PRODUCTS
JOINT PRODUCTS
• Two or more productions by common series of Net Realizable Value (NRV) Method
processing operations • allocates joint costs based on hypothetical sales values
• Cost common to also called "joint cost” because there may not be a ready market for the
• Split-off point is the point where products become product at the split-off point.
identifiable • useful when one or more products cannot be sold at
• All costs beyond split-off are called "separable costs" the split-off point and must be processed further.

METHOD FOR ALLOCATING JOINT COST

PHYSICAL MEASURES Constant Gross Margin Percentage Method

• allocates joint costs such that the gross margin
PHYSICAL OUTPUT METHOD percentage is the same for each product.
• Assumption: Total joint cost is charged based on • This method assumes that the further processing yields
units produced an identical profit percentage across all products.
• Physical units may have no relationship to revenue
capacity

WAVG/SURVEY METHOD
• Yields a more logical allocation than other methods Joint product gross margin = Market price × Grand gross margin
• Uses the weight factors to include such diverse
elements as amount of material used, difficulty to Joint cost allocated to product
manufacture, time consumed, difference in type of = Market value - Gross margin - Separable costs
labor used, and size of unit.
• Complicated and time consuming

QUANTI UNIT METHOD Sales-to-Production Ratio

• Based on measurements e g. weight, linear • allocates joint costs in accordance with a weighting factor
measurement, or volume that compares the percentage of sales with the percentage
• Normally used by industrial engineer using scientific of production.
basis • In this method, the products that sell the most are allocated a
larger share of the joint cost of current production.
RELATIVE MARKET VALUE APPROACHES
The methods in this approach try to assign costs based on
the product's ability to absorb joint costs. They are based
on the assumption that the joint costs would not be
incurred unless the products vield enough revenues to Joint cost allocations must be done for financial reporting
cover all costs plus a reasonable profit. purposes: to value inventory and to determine income.
An allocation method must be found, though arbitrary, to
Sales-Value-at-Split-Off Method or Gross Market allocate the joint costs as reasonably as possible.
Value Method
• allocates joint cost based on each product's sales
value at the split-off point.
• can be used only if all of the joint products can be
sold at split off point
BY PRODUCTS
The main objective of by-product accounting is to determine By-Product Revenue Deducted from Main Product
income and inventory for financial reporting purposes. Cost
The net sales of by-products will be treated as a deduction
By-products are of less significance than the main products from the cost of the main product.
and may not require precise cost allocation.
Example: The beef-packing industry uses this method
Relevant factors that influence by-product valuation and because of the great variety of products resulting from
accounting include: operations and the complexity of the processing.
• The uncertainty of by-product value at the time of
Disadvantages
production.
• The use of the by-product in other production. • The method tends to understate the value of the main
• The use of the by-product as an alternative to main product
products. • The cost of the main product can vary from month to
• The need for separate profit calculations for sales month because of the varying quantities of byproducts
incentives or for control. sold.

ACCOUNTING FOR BY PRODUCTS Cost Method or Production Method

Cost methods attempt to allocate some joint costs to by-
Non-cost Method or Sales Method products and to carry inventories at the allocated cost levels.
make no attempt to allocate joint cost to the by-product or
its inventory but instead make some credit either to income Replacement Cost Method
or to the main product. • values the by-product inventory at its opportunity cost
of purchasing or replacing the by-products
Other Income Method • credits production cost of the main products at the
The net sales of by-products for the current period is current market or placement rate.
recognized as "Other Income" or "Miscellaneous Income" and Example: In the oil refining industry, increasing output of one
is reported in the income statement. product will cause a reduction in the output and the profit of
the other product.
USED WHEN
• value of the by-product is small Total Costs Less By-Products Valued at Standard
• cost benefit Price Method
• Carrying by-products with the main products would • A variance account is used to account for the
not appreciably affect the cost of the main product. difference between actual and standard prices.
• The standard price may be set arbitrarily, or it may
Disadvantages reflect an average price over time.
• The standard price approach shelters the main product
• Inventories on the statement of financial position are cost from any fluctuations in the by-product price.
misstated since no value is placed on the by-products. • By-products are valued at a standard price to avoid
• Matching of revenues with expenses is improper if fluctuations in by-product value.
production of by-products occurs in one accounting
period and sales occur in another. No entry for by-
products is made at the time of production, only at the
time of sale.
• No attempt is made to control the inventory of by-
products and to prevent them from losses due to
fraud or errors.
SERVICE COST
ALLOCATION
SERVICE COST ALLOCATION Reasons for Charging Service Department Costs
• Allocation orocedure or service debanmen costs
• Process of pooling, allocating, re-pooling and 1. To encourage operating departments to wisely use
reallocating costs service department resources.
2. To provide operating departments with more
SERVICE DEPARTMENT COST complete cost data for making decisions.
Service department costs are costs allocated to the service 3. To help measure the profitability of operating
department which are part of overhead (indirect cost) and departments.
should be allocated to the production departments that use 4. To create an incentive for service departments to
the service. operate efficiently.
DEPARTMENTALIZATION METHODS OF ALLOCATING SERVICE CENTER
is dividing the plant into segments to which overhead costs COSTS TO PRODUCING DEPARTMENTS
are charged.
Direct method
Departments are classified as: service department costs are distributed only to producing
1. Producing Department departments
those involves in manufacturing products
Step/Step-down/Sequential method
2. Servicing Department • distribute the costs of service departments in a
renders services that contributes indirectly to the sequence of steps to producing departments.
manufacture of a product • SD can allocate to other SD but not allocated back
Priority in allocation
Direct departmental cost 1. SD that services the most other SDs
costs that are traceable to a particular department 2. Highest costs

Indirect departmental cost Simultaneous/Reciprocal/Algebraic method

costs that do not originate in any specific department and is • considers completely all interrelationship among all
incurred by the entity for the benefit of all departments; service departments.
hence, it is allocated to all departments • It uses simultaneous equations to allocate each service
department's costs among the departments providing
Plant-wide overhead rate mutual services before reallocation to other users.
a single factory overhead rate used for all jobs processed in
the factory regardless of the specific departments involved NOTE:
in the processing. • Service department costs allocated to producing
departments are treated as additional overhead to the
Departmental overhead rate producing department.
the factory overhead rate for a particular department • Service department costs allocated to administrative
within the factory departments are expensed.
e.
 INSURANCE
CONTRACT
(PFRS 17 or 4 )
REFERENCES/PRONOUNCEMENTS ACCOUNTING POLICIES
• currently covered by PFRS 4. The PFRS exempts an insurer temporarily (until completion of
• PFRS 17 will replace PFRS 4 starting January 1, 2025. Phase II of the Insurance Project) from some requirements of
• Insurance code P.D 612 other PFRSs, including the requirement to consider PAS 8
• Amended Insurance Code R.A 10607 Accounting Policies, Changes in Accounting Estimates and
Errors in selecting accounting policies for insurance contracts.
NATURE However, the standard: (PFRS 4.14)
Insurer accepts significant insurance risks from policyholder • prohibits provisions for possible claims under contracts
that are not in existence at the reporting date (such as
CONSIDERATIONS catastrophe and equalization provisions)
Contestability period is 2 years • requires a test for the adequacy of recognized insurance
liabilities
SCOPE • requires impairment test for reinsurance assets
Applies to almost all insurance contracts • requires an insurer to keep insurance liabilities in its
balance sheet until they are discharged or cancelled, or
PARTIES
expire
• prohibits offsetting insurance liabilities against related
DIRECT INSURANCE CONTRACT reinsurance assets and income or expense from
1. Policyholder
2. Insurer reinsurance contracts against the expense or income
from the related insurance contract.
REINSURANCE CONTRACT LIABILITY ADEQUACY TEST (PFRS 4)
1. Cedent/Cedant
Use existing test if minimum requirements met.
2. Reinsurer
• Consider current estimates of all contractual cash flows
such as claims handling costs, including embedded options
RETROCESSION CONTRACT and guarantees
1. Retrocedent
• Recognize any loss immediately in profit or loss
2. Retrocessionaire

CHANGE IN ACCOUNTING POLICY Otherwise, test using provisions standard (PAS 37)
Allowed if
• More relevant, no less reliable FS; or
• More reliable, no less relevant FS

In particular, an insurer cannot introduce any of the

following practices, although it may continue using accounting
policies that involve them:
• measuring insurance liabilities on an undiscounted basis
• measuring contractual rights to future investment
management fees at an amount that exceeds their
fair value as implied by a comparison with current
market-based fees for similar services
• using non-uniform accounting policies for the insurance
liabilities of subsidiaries.
 ❌

METHODS OBJECTIVES OF PFRS 17

• Fixed percentage method
• Eights (1/8) method 1. Measure the value of an insurance contract
• Twenty-fourths (1/24) Method 2. Spread profit over the life of the contract
• Prorata Method 3. Disaggregate insurance income and costs from financing
4. Promote greater consistency and comparabiltiy
FIXED PERCENTAGE
• the unearned premium reserves are determined by PFRS 17 SCOPE
simply applying a fixed percentage on the full year • Insurance issued
treaty premiums written by the cedant/reinsured. • Reinsurance issued or held
• This percentage is pre agreed between the cedant • Contracts issued with discretionary participation feature
and reinsurer and is stated in the schedule of the (DPF)
treaty slip and usually ranges between 35%- 40%.
LEVEL OF AGGREGATION
THE EIGHTS METHOD (1/8) An entity shall identify portfolios of insurance contracts, which
• This method relies on the basis that policies issued comprises contracts that are subject to similar risks and
evenly within each quarter. managed together.
• The assumption is that policies issued/written within
the first quarter of an expiring treaty year would Each portfolio of insurance contracts issues shall be divided into
expire by the end of the first quarter of the a minimum of:
following year; the same would apply for the • A group of contracts that are onerous at initial
subsequent quarters. recognition, if any;
• A group of contracts that at initial recognition have no
THE TWENTY-FOURTHS (24) METHOD significant possibility of becoming onerous subsequently, if
• The twelve calendar months in a treaty year are any; and
divided into two equal parts of earned and unearned • A group of the remaining contracts in the portfolio, if any.
premium to make twenty-four blocks.
• Each month therefore has an equal block of earned An entity is not permitted to include contracts issued more
premium and unearned premium. Each block than one year apart in the same group.
represents a fraction of 24 i.e., "1/24".
If contracts within a portfolio would fall into different
PRO-RATA METHOD (PRORATA TEMPORIS) groups only because law or regulation specifically constrains the
The earned and unearned premium is determined basing on entity's practical ability to set a different price or level of
the number of days from expiry of treaty to the expiry benefits for policyholders with different characteristics, the
of policy. entity may include those contracts in the same group.

RECOGNITION
An entity shall recognise a group of insurance contracts it
issues from the earliest of the following:
• the beginning of the coverage period of the group of
contracts;
• the date when the first payment from a policyholder in
the group becomes due; and
• for a group of onerous contracts, when the group
becomes onerous.
PFRS 17: LIABILITY MEASUREMENT PREMIUM ALLOCATION APPROACH
1. Building Block Approach (BBA) An entity may simplify the measurement of the liability for
2. Premium Allocation Approach (PAA) remaining coverage of a group of insurance contracts using the
3. Variable Fee Approach. (VFA) PAA on the condition that, at the inception of the group:
• the entity reasonably expects that this will be a
BUILDING BLOCK APPROACH (BBA) reasonable approximation of the general model, or
• the coverage period of each contract in the group is one
INITIAL MEASUREMENT year or less.
• at the inception date, if entity expects significant
FULFILLMENT CASH FLOW (FCF) variances in the FCF during the period before a claim is
• Estimates of future cash flows (inflows less outflows) incurred, such contracts are not eligible to apply the PAA.
• Adjustment to reflect the time value of money (TVM)
• Financial risks related to the future cash flows INITIAL RECOGNITION
• A risk adjustment for nonfinancial risk
Premiums received at initial recognition (if any)
CONTRACTUAL SERVICE MARGIN Less: Insurance acquisition cash flow or cost
• represents unearned profit of the group of LIABILITY
insurance contracts that the entity will recognise as
it provides services in the future. SUBSEQUENT
• Only when the group of contracts are not onerous
• This is measured on initial recognition of a group of CA at the start of the reporting period
insurance contracts at an amount that results in no + Premiums received in the period
income or expenses arising from: - Insurance acquisition cash flows
a. the initial recognition of an amount for the FCF; + Amortization of acquisition cash flows
b. the derecognition at that date of any asset or liability - Insurance revenue for coverage provided in that period
recognised for insurance acquisition cash flows; and - any investment component paid or transferred to the liability
c. any cash flows arising from the contracts in the group for incurred claims.
at that date. + Adjustments to time value of money
CA OF LIABILITY
SUBSEQUENT MEASUREMENT
CA of a group of insurance contracts at the end of each
reporting period is the sum of
a. the liability for remaining coverage comprising: VARIABLE FEE APPROACH (VFA)
• FCF related to future services and; • More of a refinement of the GMM/BBA
• the CSM of the group at that date; • Only necessary for contracts with discretionary
participation feature (DPF)
b. the liability for incurred claims
comprising the FCF related to past service allocated to the Investment contracts with a DPF
group at that date. • a financial instrument and it does not include a transfer
of significant insurance risk.
• It is in the scope of the standard only if the issuer also
issues insurance contracts.
• The requirements of the Standard are modified for such
investment contracts.
DERECOGNITION
An entity shall derecognize an insurance contract
• when it is extinguished, or
• if any of the conditions of a substantive modification
of an insurance contract are met.
 SERVICE
CONCESSIONS
ARRANGEMENT
(IFRIC 12)
NATURE TWO TYPES OF SERVICE CONCESSION
• Government contracts with a private operator to ARRANGEMENTS
develop assets (or upgrade), operate and maintain
the grantor's infrastructure assets such as roads, Financial asset model
bridges, tunnels, airports, energy distribution if the operator receives an unconditional contractual right to
networks, prisons or hospitals. receive a specified or determinable amount of cash or another
• Grantor controls or regulates what services the financial asset from the government in return for constructing or
operator must provide the assets, to whom, and upgrading a public sector asset, and then operating and
at what price, and also controls any significant maintaining the asset for a specified period of time.
residual interest in the assets at the end of the • Right to receive cash or another financial instrument
term of the arrangement. (REIMBURSED BY THE GOVERNMENT)
• Pay based on specified or determinable amt or the shortfall,
OTHER TERMS if any
• Build-Operate-Transfer (BOT) • Measure financial asset at FV (PFRS 9)
• Rehabilitate-Operate-Transfer • Operating revenue: PFRS15
• Public to Private • Borrowing costs: expensed
• Public-Private Partnership (PPP)

PARTIES Intangible asset model

if the operator receives a right to charge for use of a public
Grantor (public or private) PPSAS 32
• GORTOM Grant of Right to Operator Model sector asset that it constructs or upgrades and then must
• FLM Financial Liability Model operate and maintain for a specified period of time.
• Right to charge users of public services
Operator (private) IFRIC 12 • Measure intangible asset at FV (PAS 38)
• Intangible asset model (IAM) • Operating revenue: PFRS 15
• Financial asset model (FAM) • Borrowing costs: Capitalized

Examples
• Tarlac-Pangasinan-La Union Expressway (TPLEX)
• NLEX Corporation
Accounting by the government (grantor)
• IFRIC 12 does not address accounting for the • Metropolitan Waterworks and Sewerage System
government side of service concession and Maynilad Water Services
arrangements.
• PFRSs are not designed to apply to not for-
profit activities in the private sector or the NOTE:
public sector. Operator cannot recognize the concession assets as its PPE.
• However, under the Government Accounting
Manual, service concession arrangement should
be accounted under PPSAS 32.