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PARTIDO STATE UNIVERSITY COLLEGE OF BUSINESS AND MANAGEMENT GOA, CAMARINES SUR A/Y 2012-2013

THE ASSETS PROJECT IN FINANCIAL ACCOUNTING III


Submitted by:

CRISTY CAMATO DANNA MAE R. BALIBADO DAVID CON M. RIVERO FRANCIS KIM H. PAGA GIL JAMES C. MILLESCA JANICA ARRA P. OJENAR JOANNA MARIE S. TESORO JOHN ADAM NERY MALYN C. VERA MAR JOSE ADAYO MARIA SHAREN F. AMARO MARIFE R. PERICO RANDOLPH F. SABENORIO ROY S. NAMORA SULPICIO O. RELLOSO JR. BSA-3A Submitted to: MR. KARLO PEDRO L. MEDROSO II, CPA Instructor

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TABLE OF CONTENTS

I. II.

Cash and cash equivalents..1 Receivables a. Accounts Receivables...8 b. Notes receivables.10 c. Loan receivable.......12

III. IV. V. VI.

Biological asset......18 Investements..24 Financial Asset At Fair value..31 Investment In Equity Securities..39

VII. financial asset at amortized cost..53 VIII. Derivatives.60 IX. X. Property, plant and equipment...69 Intangibles.87

CASH 2|Page

Money and other negotiable instrument that is payable in money and acceptable by the bank for deposit and immediate credit. PAS 1,paragraph 66, provides that an entity shall classify an asset as current when the asset is cash or cash equivalent unless it is restricted from being exchanged or used to settle a liability for at least twelve months after the end of the reporting period. Accordingly, to be reported as cash, an item must be unrestricted in use. This means that the cash must be readily available in the payment of current obligations and not be subject to any restrictions, contractual or otherwise. The following cash items are included in cash: a. Cash on hand This includes undeposited cash collections and other cash items awaiting deposit such as customers check, cashiers or managers checks, travelers checks, bank drafts, and money orders. b. Cash in bank This includes demand deposit or checking account and saving deposit which are unrestricted as to withdrawal. c. Cash fund set aside for current purposes such as petty cash fund, payroll fund and dividend fund. Cash Equivalents PAS 7, paragraph 6 defines cash equivalents as short-term and highly liquid investments that are readily convertible into cash and so near maturity that they present insignificant risk of changes in value because of changes in interest rates. The standard further states that only highly liquid investments that are acquired three months before maturity can qualify as cash equivalents. Examples of cash equivalents are: a. Three-month BSP Treasury bill. 3|Page

b. Three-year BSP Treasury bill purchased three months before date of maturity. c. Three-month time deposit. d. Three-month money market instrument or commercial paper. Equity securities cannot qualify as cash equivalents because shares do not have a maturity date. However, preference shares with specified redemption date and acquired three months before redemption date can qualify as cash equivalents. Note that what is important is the date of purchase which should be three months or less before maturity. Thus, a BSP Treasury bill that was purchased one year ago cannot qualify as cash equivalent even if the remaining maturity is three months or less. Measurement of cash Cash is measured at face value. Cash foreign currency is measured at the current exchanged rate. If a bank or financial institution holding the funds of an entity is in bankruptcy or financial difficulty, cash should be written down to estimated realizable value if the amount recoverable is estimated to be lower than the face value. Foreign Currency Cash in foreign currency should be translated to Philippine pesos using the current exchanged rate. Deposits in foreign countries which are not subject to any foreign exchange restriction are included in cash. Deposits in foreign bank which are subject to foreign exchange restriction, if material should be classified separately among noncurrent assets and the restriction clearly indicated.

Accounting for Cash Shortage 4|Page

Where the cash count shows cash which is less than the balance per book, there is a cash shortage .The entry to record the cash shortage is: Cash short or over Cash xx xx

The cash short or over account is only a temporary or suspense account. When financial statements are prepared the same should be adjusted. Hence, if the cashier or a cash custodian is held responsible for the cash shortage, the adjustment should be: Due from cashier Cash short or over xx xx

However, if reasonable efforts fail to disclose the cause of the shortage, the adjustment is: Loss from cash shortage Cash short or over If the amount of cash shortage is not material, the adjustment is: Miscellaneous Expense Cash short or over Lapping This is a practice used for concealing cash shortage. It consists of misappropriating a collection from one customer and concealing this defalcation by applying a subsequent collection from another customer. Lapping involves a series of postponements of the entries for the collection of receivables. This is possible when an entity has a poor internal control and especially when the bookkeeper and the cashier are one and the same person. xx xx xx xx

Kiting 5|Page

Kiting is another device used to conceal a cash shortage. This practice is possible when an entity maintains current accounts in different banks. Kiting is usually employed at the end of the month. Kiting is an irregularity whereby an overstatement of cash is created by a cash transfer between bank accounts. The deposit is recorded in cash receipts but the disbursement is not recorded in cash disbursements. Illustration: On 12/31, Aces bookkeeper writes a Php 1,000,000.00 check on the Land Bank and deposits the check in the Philippine National Bank (PNB) account. On 12/31, Aces bookkeeper writes a Php 1,000,000.00 check on the Land Bank and deposits the check in the Philippine National Bank (PNB) account. The bookkeeper records the deposit in the cash receipts journal but does not record the check in the cash payments journal. He also fails to list the check as outstanding on the National Bank reconciliation. On 12/31, Aces bookkeeper writes a Php 1,000,000 check on the Land Bank and deposits the check in the Philippine National Bank (PNB) account.

Land Bank will not be aware of the

Land Bank

check until notification from Philippine National Bank (PNB), probably during the first few days of January.

As a result of the deposit, Philippine National Bank (PNB) will increase As Aces account on 12/31. records will reflect a Php a consequence, the bank 1,000,000.00 cash overstatement for a few days until

PNB

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the check clears. December bank statements will also support this overstatement. Accounting for Cash Overage Where the cash count shows cash which is more than the balance per book, there is a cash overage. The entry to record the same is: Cash Cash short or over xx xx

Note that whether it is a cash shortage or cash overage, the offsetting account is cash short or over account. As stated earlier such account should be adjusted when statements are made. The cash overage is treated as miscellaneous income if there is no claim on the same. The entry then is: Cash short or over Miscellaneous Income xx xx

But where the cash overage is properly found to be the money of the cashier, the entry is: Cash short or over Payable to cashier Imprest System It is a system of control of cash which requires that all cash receipts should be deposited intact and all cash disbursements should be made by means of check. xx xx

Illustration: Transaction 7|Page

2012 Nov 10 The entity established an imprest fund of P10,000.

11-28 Petty cash disbursements amounted 29 Replenished the fund.

to P 8,000.

Dec 31 The fund was not replenished.

2013 Jan 1 The adjustment made on December 31, 2012 is

reversed.

Feb 22 The fund is replenished and increased to P 15,000.

Imprest Fund System

Petty cash fund Cash in bank

P 10,000 P 10,000

-Memorandum EntryThe petty cash items include the following: Currency and coin P 2,000 Supplies 5,000 Telephone 1,800 Postage 1,200

Supplies Telephone Postage Cash in bank

P 5,000 1,800 1,200 P 8,000

The fund is composed of the following: Currency and coin P 7,000 Supplies 1,500 Postage 500 8|Page

Miscellaneous Supplies Postage Miscellaneous Expense Petty cash fund

1,000 P 1,500 500 1,000 P 3,000

At the end of the accounting period, it is necessary to adjust the unreplenished expenses in order to state the correct petty cash balance as follows: Petty cash fund Supplies Postage Miscellaneous Expense P 3,000 P 1,500 500 1,000

Petty cash fund Supplies Postage Miscellaneous Expense Cash in bank

P 5,000 4,500 3,000 1,500 P 14,000 Fluctuating Fund System

Petty cash fund Cash in bank Expenses Petty cash fund Petty cash fund Cash in bank Expenses Petty cash fund

P 10,000 P 10,000 P 8,000 P 8,000 P 8,000 P 8,000 P 3,000 P 3,000

At the end of the accounting period, no adjustment is necessary because the petty cash expenses are recorded outright. Petty cash fund P 15,000 Cash in bank P 15,000 ACCOUNTS RECEIVABLES Definition of Receivables 9|Page

Receivables are financial assets that represent a contractual right to receive cash or another financial asset from another entity. For retailers or manufacturers, receivables are classified into trade receivables and nontrade receivables. Trade receivables refer to claims arising from sale of merchandise or services in the ordinary course of business. The usual types are accounts receivables and notes receivables. Accounts receivables are open account or those not supported by promissory notes. Other names of accounts receivables are customers accounts, trade debtors, and trade accounts receivables. Notes receivable are those supported by formal promises to pay in the form of notes. Nontrade receivables represent claims arising from sources other than the sale of merchandise or services in the ordinary course of business. For banks and other financial institution, receivables result primarily from loans to customers. The loans are made to heterogeneous customers and the repayment periods are frequently longer or over several years. Initial measurement of receivables PAS 39, paragraph 43, provides that a financial asset shall be recognized initial at fair value plus transaction costs that are directly attributable to the acquisition. The fair value of a financial asset is usually the transaction price, meaning, and the fair value of the consideration given. For short-term receivables, the fair value is equal to the face valueor original invoice amount. Cash flows relating to short-term receivables are not discounted because the effect of discounting is usually immaterial. Thus, accounts receivable shall be measured initially at face value. For long-term receivables that are interest-bearing, the fair value is equal to the face value. However, for long-term receivables that are noninterest-bearing, the fair value is equal to the present value of all future cash flows discounted using the prevailing market rate of interest for similar receivables. Thus, initially, long-term interest-bearing notes receivable shall be measured at face value and long-term noninterest-bearing notes receivable shall be measured at present value. Subsequent measurement

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Accounts receivable shall be measured at net realizable value, meaning the amount of cash expected to be collected or the estimated recoverable amount. The initial amount recognized for accounts receivable shall be reduced by adjustments which in the ordinary course of business will reduce the amount recoverable from the customer. This is based on the established basic principle thatassets shall not be carried at above their recoverable amount. Accordingly, in estimating the net realizable value of trade accounts receivable, the following deductions are made: a. b. c. d. Allowance for freight charge Allowance for sales return Allowance for sales discount Allowance for doubtful accounts

Presentation Trade receivables and nontrade receivables which are currently collectible shall be presented on the face of the statement of financial position as one line item called trade and other receivables. However, the details of the total trade and other receivables shall be disclosed in the notes to financial statement. For example, the disclosure may appear as follows: Accounts receivables Allowance for doubtful accounts Notes receivable Accrued interest on note receivable Advances to officers and employees Dividends receivable Total trade and other receivables Pxx xx xx xx xx xx Pxx

NOTES RECEIVABLES 11 | P a g e

Definition Notes receivable are claims supported by formal promises to pay usually in the form of notes. A negotiable promissory note is an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand or at a fixed determinable future time a sum certain in money to order or to bearer. Dishonored notes When a promissory note matures and is not paid, it is said to be dishonored. Theoretically, dishonored notes shall be removed from the notes receivable account and transferred to accounts receivable at an amount to include, if any, interest and other charges. The entry to record dishonored notes is as follows: Accounts Receivable Notes receivable Interest Income xx xx xx

Such approach is defended on the ground that the overdue note has lost part of its status as a negotiable instrument and really represents only an ordinary claim against the maker.

Initial measurement of notes receivables Conceptually, notes receivable shall be measured initially at present value. The present value is the sum of all future cash flows discounted using the prevailing market rate of interest for similar notes. The prevailing market rate of interest is actually the effective interest rate. However, short-term notes receivable are measured at face value. Cash flows relating to shortterm notes receivable are not discounted because the effect of discounting is usually not material. The initial measurement of long-term notes will depend on whether the notes are interestbearing or noninterest bearing. Interests bearing long-term notes are measured at face value which is actually the present value upon issuance. Noninterest-bearing long-term notes are measured at present value which is the discounted value of the future cash flows using the effective interest rate. Actually, the term noninterest-bearing is a misnomer because all notes implicitly contain interest.

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It is simply a case of the interest being included in the face value rather than being stated as a separate rate. Subsequent measurement Subsequent to initial recognition, long-term notes receivable shall be measured at amortized cost using the effective interest method. The amortized cost is the amount at which the note receivable is measured initially minus principal repayment, plus or minus the cumulative amortization of any difference between the initial carrying amount and the principal maturity amount minus reduction for impairment or uncollectibility. For long-term noninterest-bearing notes receivable, the amortized cost is the present value plus amortization of the discount, or the face value minus the unamortized unearned interest income. Accordingly, only long term notes receivable will be discussed in conjunction with the present value concept under the following situations: a. Interest bearing note b. Noninterest bearing note

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LOAN RECEIVABLE Definition: A loan receivable is a financial asset arising from a loan granted by a bank or other financial institution to a borrower or client. The term of the loan may be short-term but in most cases, the repayment periods cover several years. Initial measurement of loan receivables At initial recognition, an entity shall measure a loan receivable at fair value plus transaction costs that are directly attributable to the acquisition of the financial asset. The fair value of the loan receivable at initial recognition is normally the transaction price, meaning, the amount of the loan granted. Transaction costs that are directly attributable to the loan receivable include direct origination costs. Direct origination costs should be included in the initial measurement of the loan receivable; however, indirect origination costs should be treated as outright expense. Subsequent measurement of loan receivables PFRS 9 provides that if the business model in managing financial asset is to collect contractual cash flows on specified dates and the contractual cash flows are solely payments of principal and interest, the financial asset shall be measured at amortized cost. Accordingly, a loan receivable is measured at amortized cost using the effective interest method. The amortized cost is the amount at which the loan receivable is measured initially minus principal repayment, plus or minus the cumulative amortization of any difference between the initial amount recognized and the principal maturity amount, minus reduction for impairment or uncollectibility. In other words, if the initial amount recognized is lower than the principal amount, the amortization of the difference is added to the carrying amount. If the initial amount recognized is higher than the principal amount, the amortization of the difference is deducted from the carrying amount. Impairment of loan PAS 39, paragraph 58, provides that an entity shall assess at every end of reporting period whatever period whether there is objective evidence that a financial asset or group of financial asset is impaired. If such evidence exists, the entity shall determine and recognize the amount of any impairment loss.

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Objective evidence of impairment may result from the following loss events occurring after the initial recognition of the financial asset: 1. Significant financial difficulty of the issuer or obligor. 2. Breach of contract, such a default or delinquency in interest or principal payment. 3. Debt restructuring the lender, for economic or legal reasons relating to the borrowers financial difficulty, grants to the borrower concession that the lender would not otherwise consider. 4. Probability that the borrower will enter bankruptcy or other financial reorganization. 5. The disappearance of an active market for the financial asset because of financial difficulty. 6. Observable data indicating that there is a measurable decrease in the estimated future cash flows from a group of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial asset in the group. Measurement of impairment PAS 39, paragraph 63, provides that if there is evidence that an impairment loss on loan receivable carried at amortized cost has been incurred, the amount of the loss is measured as the difference between the carrying amount of the loan and the present value of estimated future cash flows discounted at the original effective rate of the loan. The carrying amount of the loan receivable shall be reduced either directly or through the use of an allowance account. The amount of the loss shall be recognized in profit or loss.

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BIOLOGICAL ASSETS AS 41 AGRICULTURE PAS 41 shall be applied to account for the following when they relate to agricultural activity: a. Biological Assets b. Agricultural Produce c. Government grant related to a biological asset Definition: Biological assets are living animals and living plants. Agricultural produce is the harvested product of an entitys biological assets. Harvest is the detachment of produce from a biological asset or the cessation of a biological assets life processes. Examples of biological assets The following table provides examples of biological assets,, agricultural produce and products that are the result of processing after harvest. Biological asset 1. 2. 3. 4. 5. 6. 7. 8. Sheep Trees in plantation forest Plant Dairy Cattle Pigs Bushes Vines Fruit trees Agricultural produce Wool Felled trees Harvested cane Milk Carcass Leaf Grapes Picked fruit Product after harvest Yarn, carpet Logs, lumber Sugar Cheese Sausage cured ham Tea, cured tobacco Wine Processed fruit

The measurement of biological assets and agricultural produce is covered by PAS 41 and the measurement of products after harvest is covered by PAS 2 on inventories. Recognition: An entity shall recognize a biological asset or agricultural produce when: a. The entity controls the asset as a result of past events. b. It is probable that future economic benefits associated with the asset will flow to the entity. c. The fair value or cost of the asset can be measured reliably.

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In agricultural activity, control may be evidenced by, for example, legal ownership of cattle and the branding or otherwise marking of the cattle on acquisition or birth. The future benefits are normally assessed by measuring the significant physical attributes. Measurement: A biological asset shall be measured on initial recognition and at the end of each reporting period at fair value less costs to sell. Agricultural produce shall be measured at fair value less costs to sell at the point of harvest. Cost to sell are the incremental costs directly attributable to the disposal of an asset. In other words, costs to sell include costs that are necessary for a sale to occur but that would not otherwise arise, such as commissions to brokers and dealers, levies by regulatory agencies and commodity exchanges and transfer taxes and duties. Under the Basis for Conclusions on PAS 41, costs to sell specifically exclude transport costs, finance costs and income taxes. Fair value of biological asset There is a presumption that fair value can be measured reliably for a biological asset. However, this presumption can be rebutted only on initial recognition for a biological asset for which market determined prices are not available or estimates of fair value are determined to be clearly unreliable. In such a case, the biological asset shall be measured at cost less accumulated depreciation and any accumulated impairment loss. However, once the fair value of such a biological asset becomes clearly measurable, the entity shall measure the biological asset at fair value less costs to sell. Fair value of agricultural produce In all cases, an entity shall measure agricultural produce at the point of harvest at fair value less costs to sell. PAS 41 reflect the view that the fair value of agricultural produce at the point of harvest can always be measured reliably. The fair value measurement of agricultural produce stops at the point of harvest. After that date, PAS 2 shall apply. This means that the inventory shall be measured at the lower of cost and net realizable value.

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Journal Entry Biological Asset Cash To record acquisition Biological Asset Gain from change in fair value To record change in fair value Disclosure General An entity shall disclose the aggregate gain or loss arising during the current period on initial recognition of biological assets and agricultural produce and from the change in fair value less costs to sell of biological assets. 41 An entity shall provide a description of each group of biological assets. 42 The disclosure required by paragraph 41 may take the form of a narrative or quantified description. 43 An entity is encouraged to provide a quantified description of each group of biological assets, distinguishing between consumable and bearer biological assets or between mature and immature biological assets, as appropriate. For example, an entity may disclose the carrying amounts of consumable biological assets and bearer biological assets by group. An entity may further divide those carrying amounts between mature and immature assets. These distinctions provide information that may be helpful in assessing the timing of future cash flows. An entity discloses the basis for making any such distinctions. 44 Consumable biological assets are those that are to be harvested as agricultural produce or sold as biological assets. Examples of consumable biological assets are livestock intended for the production of meat, livestock held for sale, fish in farms, crops such as maize and wheat, and trees being grown for lumber. Bearer biological assets are those other than consumable biological assets; for example, livestock from which milk is produced, grape vines, fruit trees, and trees from which firewood is harvested while the tree remains. Bearer biological assets are not agricultural produce but, rather, are self-regenerating. 45 Biological assets may be classified either as mature biological assets or immature biological assets. Mature biological assets are those that have attained harvestable specifications (for consumable biological assets) or are able to sustain regular harvests (for bearer biological assets). 46 If not disclosed elsewhere in information published with the financial statements, an entity shall describe: (a) The nature of its activities involving each group of biological assets; and (b) Non-financial measures or estimates of the physical quantities of: 22 | P a g e xx xx

xx xx

(i) Each group of the entitys biological assets at the end of the period; and (ii) Output of agricultural produce during the period. 47 An entity shall disclose the methods and significant assumptions applied in determining the fair value of each group of agricultural produce at the point of harvest and each group of biological assets. 48 An entity shall disclose the fair value less costs to sell of agricultural produce harvested during the period, determined at the point of harvest. 49 An entity shall disclose: (a) the existence and carrying amounts of biological assets whose title is restricted, and the carrying amounts of biological assets pledged as security for liabilities; (b) The amount of commitments for the development or acquisition of biological assets; and (c) Financial risk management strategies related to agricultural activity. 50 An entity shall present a reconciliation of changes in the carrying amount of biological assets between the beginning and the end of the current period. The reconciliation shall include: (a) The gain or loss arising from changes in fair value less costs to sell; (b) increases due to purchases; (c) Decreases attributable to sales and biological assets classified as held for sale (or included in a disposal group that is classified as held for sale) in accordance with IFRS 5; (d) Decreases due to harvest; (e) Increases resulting from business combinations; (f) Net exchange differences arising on the translation of financial statements into a different presentation currency, and on the translation of a foreign operation into the presentation currency of the reporting entity; and (g) Other changes. 51 The fair value less costs to sell of a biological asset can change due to both physical changes and price changes in the market. Separate disclosure of physical and price changes is useful in appraising current period performance and future prospects, particularly when there is a production cycle of more than one year. In such cases, an entity is encouraged to disclose, by group or otherwise, the amount of change in fair value less costs to sell included in profit or loss due to physical changes and due to price changes. This information is generally less useful when the production cycle is less than one year (for example, when raising chickens or growing cereal crops). 52 Biological transformation results in a number of types of physical changegrowth, degeneration, production, and procreation, each of which is observable and measurable. Each of those physical changes has a direct relationship to future economic benefits. A change in fair value of a biological asset due to harvesting is also a physical change.

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53 Agricultural activities are often exposed to climatic, disease and other natural risks. If an event occurs that gives rise to a material item of income or expense, the nature and amount of that item are disclosed in accordance with IAS 1 Presentation of Financial Statements. Examples of such an event include an outbreak of a virulent disease, a flood, a severe drought or frost, and a plague of insects. Additional disclosures for biological assets where fair value cannot be measured reliably 54 If an entity measures biological assets at their cost less any accumulated depreciation and any accumulated impairment losses (see paragraph 30) at the end of the period, the entity shall disclose for such biological assets: (a) A description of the biological assets; (b) An explanation of why fair value cannot be measured reliably; (c) If possible, the range of estimates within which fair value is highly likely to lie; (d) The depreciation method used; (e) The useful lives or the depreciation rates used; and (f) The gross carrying amount and the accumulated depreciation (aggregated with accumulated impairment losses) at the beginning and end of the period. 55 If, during the current period, an entity measures biological assets at their cost less any accumulated depreciation and any accumulated impairment losses (see paragraph 30), an entity shall disclose any gain or loss recognized on disposal of such biological assets and the reconciliation required by paragraph 50 shall disclose amounts related to such biological assets separately. In addition, the reconciliation shall include the following amounts included in profit or loss related to those biological assets: (a) Impairment losses; (b) Reversals of impairment losses; and (c) Depreciation. 56 If the fair value of biological assets previously measured at their cost less any accumulated depreciation and any accumulated impairment losses becomes reliably measurable during the current period, an entity shall disclose for those biological assets: (a) A description of the biological assets; (b) An explanation of why fair value has become reliably measurable; and (c) The effect of the change. Financial statement presentation In statement of financial position, the biological assets shall be measured at the fair value and classified as noncurrent asset.

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INVESTMENTS International Accounting Standards Board defines investments as follows: Investments are asset held by an entity for the accretion of wealth through distribution such as interest, royalties, dividends and rentals, for capital appreciation of for other benefits to the investing entity such as those obtained through trading relationships. Investments are held by entities for diverse reasons such as: a.) For accretion of wealth or regular income through interest, dividends, royalties and rentals. b.) For capital appreciation as in the case of investments in land and real estate held for appreciation and direct investment in gold, diamond and other precious commodities. c.) For ownership control as in the case of investments in subsidiaries and associates. d.) For meeting business requirements as in the case of sinking fund, preference share redemption fund, plant expansion fund and other noncurrent fund. e.) For protection as in the case of interest in life insurance contract in the form and other noncurrent fund. Examples of Investments 1. Trading securities 2. Investments in equity securities 3. Investment in associate 4. Investment property 5. Investment in fund 6. Investment in joint venture

Classification: 1. Current Investment Investments that are by their very nature readily realizable and ate intended to be held for not more than one year. 26 | P a g e

2. Noncurrent Investment Investment to be held for more than one year or are not expected to be realized within twelve months after the end of the reporting period. Financial Instruments PAS 32 defines a financial instrument as any contract that gives rise to a financial asset of one entity and a financial liability or an equity instrument of another equity. Characteristics: There must be a contract There are at least two parties to the contract. The contract shall give rise to a financial asset of one party and financial liability or equity instrument of another party. Disclosures The disclosures below make reference to disclosures for financial liabilities measured at fair value through profit or loss. Entities that have only basic financial instruments (and therefore do not apply Section 12) will not have any financial liabilities measured at fair value through profit or loss and hence willnot need to provide such disclosures.

Disclosure of accounting policies for financial instruments

In accordance with paragraph 8.5, an entity shall disclose, in the summary ofsignificant accounting policies, the measurement basis (or bases) used forfinancial instruments and the other accounting policies used for financialinstruments that are relevant to an understanding of the financial statements.

Common examples of Financial Instrument 1. Cash in the form of notes and coins This is a financial asset of the holder or bearer and a financial liability of the issuing government. 27 | P a g e

2. Cash in the form of checks This is a financial asset of the payee and a financial liability of the drawer or issuer. 3. Cash in bank This is a financial asset of the depositor and a financial liability of the depository bank 4. Trade Accounts This is a financial asset of the seller as accounts receivable and a financial liability of the customer or buyer as accounts payable. 5. Notes and Loans This is a financial asset of the lender or creditors as notes receivable or loans receivable and financial liability of the borrower or debtor as notes payable of loans payable. 6. Debt Securities This is a financial asset of the investor and a financial liability of the issuer. 7. Equity Securities This is a financial asset of the investor and equity of the issuer. Definition of Financial Asset A Financial Asset is any asset that is: a. Cash b. A contractual right to receive cash or another financial asset from another entity. c. A contractual right to exchange financial instrument with another entity under conditions that are potentially favourable. d. An equity instrument of another entity. Examples of Financial Asset Cash or currency Deposit of Cash

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Examples of Financial Asset representing contractual right to receive cash in the future are: Trade Account Receivable Notes Receivable Loans Receivable Bonds Receivable

Not Considered Financial Asset Physical Asset Prepaid expense Leased Asset

Definition of Financial Liability A Financial Liability is any liability that is a contractual obligations: a. To deliver cash or other financial asset to another entity b. To exchange financial instruments with another entity under conditions that ate potentially unfavourable. Examples of Financial Liability Trade Accounts Payable Notes Payable Loans Payable Bonds Payable

Not Considered Financial Liabilities Deferred revenue Warranty obligation Income taxes payable Constructive obligations

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Initial recognition of financial assets and liabilities An entity shall recognise a financial asset or a financial liability only when theentity becomes a party to the contractual provisions of the instrument.

Initial measurement

11.13 When a financial asset or financial liability is recognised initially, an entity shallmeasure it at the transaction price (including transaction costs except in theinitial measurement of financial assets and liabilities that are measured at fairvalue through profit or loss) unless the arrangement constitutes, in effect, afinancing transaction. A financing transaction may take place in connection withthe sale of goods or services, for example, if payment is deferred beyond normalbusiness terms or is financed at a rate of interest that is not a market rate. If thearrangement constitutes a financing transaction, the entity shall measure thefinancial asset or financial liability at the present value of the future payments discounted at a market rate of interest for a similar debt instrument.

Subsequent measurement At the end of each reporting period, an entity shall measure financialinstruments as follows, without any deduction for transaction costs the entitymay incur on sale or other disposal:

(a) Debt instruments that meet the conditions in paragraph 11.8(b) shall bemeasured at amortised cost using the effective interest method.Paragraphs 11.1511.20 provide guidance on determining amortised costusing the effective interest method. Debt instruments that are classified ascurrent assets or current liabilities shall be measured at the undiscountedamount of the cash or other consideration expected to be paid or received(ie net of impairmentsee paragraphs 11.2111.26) unless the

arrangementconstitutes, in effect, a financing transaction (see paragraph 11.13). If thearrangement constitutes a financing transaction, the entity shall measurethe debt

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instrument at the present value of the future payments discounted at a market rate of interest for a similar debt instrument.

(b) Commitments to receive a loan that meet the conditions in paragraph 11.8(c) shall be measured at cost (which sometimes is nil) lessimpairment.

(c) Investments in non-convertible preference shares and non-puttableordinary or preference shares that meet the conditions in paragraph 11.8(d)shall be measured as follows (paragraphs 11.2711.33 provide guidance onfair value):

(i) if the shares are publicly traded or their fair value can otherwise bemeasured reliably, the investment shall be measured at fair valuewith changes in fair value recognised in profit or loss. (ii) all other such investments shall be measured at cost less impairment.

Impairment or uncollectibility must be assessed for financial instrumentsin (a), (b) and (c)(ii) above. Paragraphs 11.2111.26 provide guidance.

Equity Instrument Any contract that evidences a residual interest in the asset of an entity after deducting all of its liabilities. It Includes a. Ordinary Share Capital b.Preference Share Capital c. Warrants or written call options that allow the holder to subscribe for or purchase a fixed number of ordinary shares of the issuing entity in exchange for a fixed amount of cash or another financial asset. Equity Securities Encompasses any instrument representing ownership shares and right, warrants or options to acquire or dispose of ownership shares at a fixed or determinable price.

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Ownership shares include ordinary share, preference share and other share capital. It does not , include redeemable share treasure share and convertible debt. Debt Securities Represents a creditor relationship with an entity. It usually has a maturity date and a maturity value. Examples: Corporate bonds BSP treasury bills Government securities Commercial papers Preference shares with mandatory redemption date or is redeemable at the option of the holder.

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FINANCIAL ASSET AT FAIRVALUE DEFINITION Financial assets at fair value include both equity and debt securities in accordance with PFRS 9, the following financial assets shall be measured at fair value through profit or loss. 1. Financial asset held for trading or popularly known as trading securities. These financial asset ate measured at fair value through profit or loss by requirement

2. Financial asset that are designated on initial recognition as at fair value through profit or loss. These financial asset are measured at fair value through profit or loss designation is in accordance with paragraph 4.5 of PFRS 9.

3. All other investment in quoted equity instruments These Financial assets are measure at fair value through profit or loss by consequence in accordance with application guidance B5.5 of PFRS 9.

INITIAL MEASUREMENT

Under the Application Guidance PFRS 9, paragraph B5.1 at initial recognition, an entity shall measure a financial asset at fair value plus, in the case of financial asset not at fair value through profit or loss, transaction costs that are directly attributable to acquisition of financial asset.

As a rule, transaction cost that are directly attributable to the acquisition cost of the financial asset shall be capitalized as cost of the financial asset.

However, if the financial asset is held for trading or if the financial asset is measured at fair value through profit or loss, transaction cost are expensed ougright.

Transaction cost include fees and commissions paid to agent, advisers, brokers and dealers, levies by regulatory agencies and securities and exchanges, and transfer taxes and duties. 33 | P a g e

JOURNAL ENTRY

Trading Securities Commission expense Cash

xxx xxx xxx

SUBSEQUENT MEASUREMENT

PFRS 9, paragraph 4.1 provides that after initial recognition an entity shall measure financial asset either at fair value or amortized cost.

An entity shall subsequently measure financial asset at fair value or amortized cost dpending on the entitys business model for managing financial asset.

The business model for managing financial assets may be: a. To hold investment in order to realize fair value changes b. To hold investments in order to collect contractual cash flows

The financial asset shall be measured at amortized cost when the business model is to collect contractual cash flow if the contractual flow are solely payment of principal and interest. The Financial asset shall be measured at fair value when the entitys business model is not to collect contractual cash flows or if the contractual cash flow are not solely payments of principal and interest.

JOURNAL ENTRY

Trading Securities Unrealized gain-TS

xxx xxx

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IMPAIRMENT FINANCIAL ASSET AT FAIR VALUE

For financial asset measured at fair value, all gains and losses are either presented in profit or loss or in other comprehensive income depending on whether the election to present gains and losses on equity investments in other comprehensive income is taken or not.

Therefore, it is not necessary to assess financial asset measured at fair value for impairment. IMPAIRMENT FINANCIAL ASSET AT AMORTIZED COST

Under PFRS 9, there is now only one impairment method for financial assets measured at amortized cost.

Paragraph 58 of PAS 39 as consequently amended by PFRS 9 provides that an entity shall assess at the end of each reporting period whether there is any objective evidence that a financial asset or group of financial assets measured a amortized cost I s impaired.

Paragraph 63 of PAS 39 further provides that if there is objective evidence that an impairment loss on financial assets measured at amortized cost has been incurred, the amount of the loss is measured as the difference between the carrying amount and the present value of estimated future cash flows discounted at the original effective interest rate.

The carrying amount of the asset shall be reduced either directly or through the use of an allowance account. The amount of the loss shall be recognized in profit or loss.

RECLASSIFICATION

PFRS 9, paragraph 5.3 provides that an entity shall reclassify financial assets only when it changes it business model for managing the financial assets.

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Where reclassification occurs, an entity shall apply the reclassification prospectivelyfrom the reclassification date. As defined in Appendix A of PFRS 9, the reclassification date is the first day of the reporting period following the change in business model that results in an entity reclassifying financial asset. The Application Guidance B5.9 of PFRS 9 makes it clear that changes in an entitys business model in managing its financial assets are expected to be frequent.

The Application Guidance B5.11 expressly states that the following would not result to a change in business model:

a. Change in intention related to particular financial asset.

The classification of financial asset as at fair value of amortized cost is no longer governed by management intent but by the entitys business model in managing financial assets.

b. A temporary disappearance of a particular market for a financial asset.

c. A transfer of financial asset between parts of the entity with different business models

RECLASSIFICATION FROM FAIR VALUE TO AMORTIZED COST

PFRS 9, paragraph 5.3, provides that when an entity reclassifies a financial asset at fair value to financial asset at amortized cost, the fair value at reclassification date becomes the new carrying amount of the financial asset at amortized cost.

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The difference between the new carrying amount of the financial asset at amortized cost and the face value of the financial asset shall be amortized through profit or loss over the remaining life of the financial asset using the effective interest method.

JOURNAL ENTRIES

Financial assets at fair value Cash / Accounts payable To record the acquisition.

xxx xxx

Unrealized loss Financial assets at fair value To record decrease in fair value.

xxx xxx

Investment in bonds Financial asset at fair value

xxx xxx

To record the reclassification of the bonds from financial asset at fair value to financial asset at amortized cost.

RECLASSIFICATION FROM AMORTIZED COST TO FAIR VALUE

PFRS 9, paragraph 5.3, provides that when an entity reclassifies a financial asset at amortized cost to financial asset at fair value, the fair value is determined at reclassification date. The difference between the previous carrying amount and fair value is recognized in profit or loss.

JOURNAL ENTRIES

Investment in bonds

xxx xxx 37 | P a g e

Cash / accounts payable

To record the acquisition.

Investment in bonds

xxx xxx

Gain on reclassification of financial asset To record increase in fair value.

Financial asset at fair value Investment in bonds

xxx xxx

To record the reclassification of the bonds from financial asset at amortized cost to financial asset at fair value.

PRIOR PERIOD ERRORS

PAS 8 that an entity shall correct material prior period errors retrospectively in the first set of financial statements authorized for issue after their discovery by:

a. Restating the comparative amounts for the prior period presented in which the error occurred.

b. Restating the opening balances of assets, liabilities and equity for the earliest prior period presented if the error occurred before the earliest period presented. In other words, a prior period error shall be corrected by retrospective restatement, meaning, if comparative statements are presented, the prior year statements are restated to correct the error.

The correction of a prior period error is excluded from profit or loss for the period in which the error is discovered but it is an adjustment of the beginning balance of retained earnings of the earliest period presented.

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JOURNAL ENTRY

Example of prior period error; notes receivable is debited instead of trading securities.

Trading securities Notes receivable

xxx xxx

ACCOUNTING CHANGES: CHANGE IN ACCOUNTING ESTIMATES PAS 8, defines a change in accounting estimate as an adjustment of the carrying amount of an asset or a liability, or the amount of the periodic consumption of an asset that results from the assessment of the present status of and expected future benefit and obligation associated with the asset and liability.

The effect of a change in accounting estimate shall be recognized currently and prospectively by including it in income or loss of:

a. The period of change if the change effects that period only. b. The period of change and future periods if the change affects both.

For example, a change in the fair value of the asset affects only the current period and therefore is recognized immediately.

ACCOUNTING CHANGES: CHANGE IN ACCOUNTING POLICIES

Once selected, accounting policies must be applied consistently for similar transactions and events.

A change in accounting policy shall be made only when:

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a. Required by an accounting standard or an interpretation of the standard.

b. The change will result in more relevant or reliable information about the financial position, financial performance and cash flows of the entity.

HYPERINFLATION

PAS 29, paragraph 8, provides that the financial statements of an entity that reports in the currency of a hyperinflation economy, whether they are based on historical cost approach or a current cost approach, shall be stated in terms of the measuring unit current at the end of reporting period. The restatement of financial statements of an entity that reports in the currency of a hyperinflation economy is accomplished by means of constant peso accounting and current cost accounting.

CONSTANT PESO ACCOUNTING Since financial asset at fair value is a nonmonetary item because their peso amounts reported in the financial statements differ from the amounts that are ultimately realizable or payable. This should be restated when preparing constant peso statement. The objective of constant peso accounting is to report elements of the financial statements in terms of peso that have the same purchasing power. The formula for restatement is: Index number on balance sheet date ------------------------------------------------------- x Historical cost Index number on acquisition date

PRESENTATION TO FINANCIAL STATEMENT

Financial asset at fair value should be presented in the Statement of Financial Position as current asset.

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INVESTMENT IN EQUITY SECURITIES

Investment in equity securities, as the title suggest, means the acquisition of equity securities for the purpose of accruing income through dividends and increase in market value, or controlling another entity.

Equity Securities represent ownership shares such as ordinary shares, preference shares and other share capital. They may also represent rights and options to acquire ownership shares. The owners of equity securities are legally known as shareholders.

A share is the ownership interest or right of a shareholder in an entity. This right pertains to the share in earnings, election of directors, subscription for additional shares and share in net assets upon liquidation. The share is evidenced by an instrument called share certificate.

INITIAL MEASUREMENT

The application Guidance of PFRS 9, provides that when a financial asset is recognized initially, an entity shall measure it at fair value plus transaction costs that are directly attributable to acquisition.

The fair value is usually the transaction price, meaning the fair value of the consideration given.

As a rule, transaction costs that are directly attributable to the acquisition of the financial asset shall be capitalized as cost of the financial asset.

However, transaction costs directly attributable to the acquisition of financial asset held for trading or financial asset at fair value through profit or loss shall be expensed immediately.

Investments in unquoted equity instruments are measured at cost.

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JOURNAL ENTRY

Investment in equity securities Cash To record acquisition.

xxx xxx

SALE OF EQUITY SECURITIES

PAS 39, paragraph 26, as amended by PFRS 9, provides that o derecognition of financial asset, the difference between the consideration received and the carrying amount of the financial asset shall be recognized in profit or loss.

When equity securities are of the same class acquired on different date at different costs, a problem will arise as to the determination of cost of securities sold when only a portion of the securities is subsequently sold.

In such a case, the entity shall determine the cost of the securities sold using either FIFO or average cost approach.

CASH DIVIDENDS PAS 18, paragraph 29, provides that dividends shall be recognized when the shareholders right to receive payment is established. Dividends shall be recognized as revenue on the date of declaration. a. When the dividends are earned but not received: Dividends receivable Dividend income xxx xxx

b. When the dividends earned are subsequently received: Cash Dividends receivable xxx xxx 42 | P a g e

PROPERTY DIVIDENDS

Property dividends or dividends in kind, are dividends in the form of property or noncash assets.

Property dividends are also considered as income and recorded at fair value as follows:

Noncash asset Dividend income

xxx xxx

LIQUIDATING DIVIDENDS

Liquidating dividends represent return of invested capital, and therefore, are not income. The payment may be in the form of cash or noncash assets.

Entry to record liquidating dividend is:

Cash or other appropriate amount Investment in equity securities

xxx xxx

Normally, liquidating dividends are paid when the corporation is dissolved and liquidated. However, in the case of wasting asset corporation or mining entity liquidating dividends maybe paid even before dissolution and liquidation.

Accordingly, when dividends are received from a wasting asset corporation, the dividends are designated as partly income and partly return of capital. That portion representing a liquidating dividend should be credited to the investment account.

The entry to record dividend partly income and partly return of capital: Cash xxx 43 | P a g e

Dividend income Investment in equity securities

xxx xxx

STOCK DIVIDENDS Stock dividends are in the form of the issuing entitys own shares. The IAS term of stock dividend is bonus issue. Shares of another entity declared as dividends are not stock dividends but property dividends.

The shareholder receives additional shares but still has the same proportionate equity interest in the entity. The shareholder may have more shares but at reduced market value.

JOURNAL ENTRIES

Receipt of Stock dividends. a. Stock dividends different from those held Investment in preference shares Investment in ordinary shares xxx xxx

b. Shares received in lieu of cash dividends Investment in preference shares Dividend income xxx xxx

c. Cash received in lieu of stock dividends Cash Investment in equity securities Gain on investment xxx xxx xxx

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STOCK RIGHT

When a corporation issues additional or new shares, shareholders of record are given the legal right to subscribe for the same before the new shares are offered for sale to the public.

Such legal right is called stock right. In law, stock right is known as preemptive right or right or pre-emption. The IAS term for stock right is right issue.

INITIAL MEASUREMENT

Accounted for separately

Under PFRS 9, a financial asset is recognized initially at fair value plus transaction costs directly attributable to the acquisition of the financial asset.

A portion of the carrying amount of the original investment in equity securities is allocated to the stock rights at an amount equal to the fair value of the stock rights at the time of acquisition.

JOURNAL ENTRIES Acquisition of original investment: Investment in equity securities Cash xxx xxx

Receipts of stock rights: Stock rights Investment in equity securities xxx xxx

Exercise of stock rights: Investment in equity securities Cash xxx xxx 45 | P a g e

Stock rights

xxx

Sale of stock rights: Cash Stock rights Gain on sale of stock rights xxx xxx xxx

Expiration of Stock rights: Loss on stock rights Stock rights xxx xxx

Not accounted for separately Stock rights are recognized as embedded derivative but not a stand-alone derivative. PAS 39, paragraph 10,as amended by PFRS 9, defines an embedded derivative as a component of a hybrid or combined contract (host contract) with the effect that some of the cash flows of the combined contract vary in a way similar to a stand-alone derivative.

Paragraph 11 of Pas 39 further provides that an embedded derivative shall be separated from the host contract and accounted for separately under certain conditions.

However, PFRS 9, paragraph 4.7, provided that if the host contract within the scope of PFRS 9, the classification requirements of PFRS 9 are applied to the combined host contract in its entirety.

Accordingly, the stock right as an embedded derivative is not accounted for separately because the host contract investment in equity instrument is a financial asset.

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JOURNAL ENTRIES

Acquisition of original investment: Investment in equity securities Cash xxx xxx

Receipts of stock rights: Memo entry

Exercise of stock rights: Investment in equity securities Cash xxx xxx

Sale of stock rights: Cash Stock rights xxx xxx

Expiration of Stock rights: Memo entry

PRIOR PERIOD ERRORS

PAS 8 that an entity shall correct material prior period errors retrospectively in the first set of financial statements authorized for issue after their discovery by:

a. Restating the comparative amounts for the prior period presented in which the error occurred.

b. Restating the opening balances of assets, liabilities and equity for the earliest prior period presented if the error occurred before the earliest period presented. 47 | P a g e

In other words, a prior period error shall be corrected by retrospective restatement, meaning, if comparative statements are presented, the prior year statements are restated to correct the error.

The correction of a prior period error is excluded from profit or loss for the period in which the error is discovered but it is an adjustment of the beginning balance of retained earnings of the earliest period presented.

ACCOUNTING CHANGES: CHANGE IN ACCOUNTING ESTIMATES PAS 8, defines a change in accounting estimate as an adjustment of the carrying amount of an asset or a liability, or the amount of the periodic consumption of an asset that results from the assessment of the present status of and expected future benefit and obligation associated with the asset and liability.

The effect of a change in accounting estimate shall be recognized currently and prospectively by including it in income or loss of:

a. The period of change if the change effects that period only. b. The period of change and future periods if the change affects both.

For example, a change in the fair value of the asset affects only the current period and therefore is recognized immediately.

ACCOUNTING CHANGES: CHANGE IN ACCOUNTING POLICIES

Once selected, accounting policies must be applied consistently for similar transactions and events.

A change in accounting policy shall be made only when: 48 | P a g e

a. Required by an accounting standard or an interpretation of the standard.

c. The change will result in more relevant or reliable information about the financial position, financial performance and cash flows of the entity.

HYPERINFLATION

PAS 29, paragraph 8, provides that the financial statements of an entity that reports in the currency of a hyperinflation economy, whether they are based on historical cost approach or a current cost approach, shall be stated in terms of the measuring unit current at the end of reporting period.

The restatement of financial statements of an entity that reports in the currency of a hyperinflation economy is accomplished by means of constant peso accounting and current cost accounting.

CONSTATNT PESO ACCOUNTING

Since investment in equity securities are nonmonetary item because their peso amounts reported in the financial statements differ from the amounts that are ultimately realizable or payable. This should be restated when preparing constant peso statement. The objective of constant peso accounting is to report elements of the financial statements in terms of peso that have the same purchasing power. The formula for restatement is: Index number on balance sheet date ------------------------------------------------------- x Historical cost Index number on acquisition date

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PRESENTATION TO FINANCIAL STATEMENT

Investment in Equity Securities should be presented in the Statement of Financial Position as current asset or noncurrent asset. Current investments are investment that are by their very nature readily realizable and are intended to be held for not more than one year. Noncurrent investments are intended to be held for more than one year is not expected to be realized with in twelve months after the end of the reporting period.

Definition

FULL PFRS Associate is an entity, including an unincorporated entity such as a partnership, over which the investor has significant influence and that is neither a subsidiary nor an interest in a joint venture. Significant Influence is the power to participate in the financial and operating policy decisions of the investee but not control or joint control over those policies. Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Subsidiary is an entity including an unintercorporated entity such as a partnership that is controlled by another entity known as the parent.

IFRS for SMEs

Same

Assessment of Significant Influence

PAS 28 % of the voting power of the investee that the investor holds directly or indirectly through subsidiary: 20% or more, has significant influence* Less than 20% does not have significant influence* 50 | P a g e

*unless it can be clearly demonstrated that this is not the case A substantial or majority ownership by another investor does not necessarily preclude an investor from having significant influence. Factors that evidence the existence of significant influence: a. Representation in the Board of Directors b. Participation in policy making process c. Material transactions between the investor and the investee d. Interchange of managerial personnel e. Provision of essential technical information

MeasurementAccounting Policy Election

An investor shall account for all of its investments in associates using one of the following: Cost Method Equity Method

Similar to FULL IFRS, however Fair Value Method is added.

Cost Method

This is applicable when the investor does not have significant influence over the investee.

Same

Same Initial measurement- At Cost Subsequent measurement- Cost Less Any Accumulated Impairment Losses This is applicable when the investor has significant influence over the investee. Initial measurement- At Cost Subsequent measurement- Cost Plus

Equity Method

Transaction price (including transaction cost) Same Similar to PFRS, however goodwill is included. 51 | P a g e

Goodwill and Fair

Value Adjustments:

Share in net income\Less Share in net income loss. Dividends are recorded as Return of Investment.

Same

The difference between the cost of acquisition and the investors share of the fair value of the net assets, the investor shall adjust its share of the associates profits or losses after acquisition to the account for additional depreciation or amortization of the associates depreciable or amortizable assets (not including goodwill).

Impairment loss shall be recognized to whenever the carrying amount of investment in associates exceeds the recoverable amount*. *Recoverable amount is the higher between the fair value less cost to sell the value in use. Investors Transaction with associates The investor shall eliminate unrealized profit or losses resulting from upstream and downstream transactions. Upstream transaction is sales of assets from associate to investor. Downstream transaction is sales In applying the equity method, the investor shall use the financial statements of the associate as of the same date as the financial statements of the investor unless it is impracticable to do so. If it is impracticable, the investor shall use the most recent available financial statements of the associate, with adjustments made for the effects of any significant transactions or events occurring between the accounting period ends. Same

Date of associates financial statements.

Same

Same When an investment in an associate is recognised initially, an investor shall 52 | P a g e

Discontinuing the equity method.

Fair value model

If an investor loses significant influence over an associate

measure it at the transaction price. Transaction price excludes transaction costs.

Not Applicable

Financial statement presentation Journal Entries Transaction Purchases

An investor shall classify investments in Same associates as non-current assets. Cost Method Invst.in Equity Securities-------XX Cash---------------XX No entry

Equity Method Investment in Associate----XX Cash-----------------------------XX Investment in Associate----XX Investment Income------------XX

Share in net income

Share in net loss Loss on Investment----------XX Investment in Associate------XX Cash Dividends Cash ---------------------------XX Investment in Associate------XX Amortization of excess cost attributable to undervaluation of depreciable assets inventory Excess of Net Fair Value as Investment Income Investment Income ------------XX Investment in Associate--------XX No entry Cash ------------XX Dividend Inc.--- XX

Investment in Associate----XX Investment Income------------XX

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Share in Revaluation Surplus

Investment in Associate----XX Revaluation Surplus-Investee--XX Cash--------------------XX Investment in Associate-X Gain on Sale of Investment----XX

Sale Investment in Associate---XX Gain from Remeasurement to Fair Value-----------XX Remeasure Retained Investment Loss from Remeasurement to Fair Value------------XX Investment in Associate--X Investment in Equity Securities-XX Investment in Associate-XX Invst. in Asso.--XX Invst.in E\S---XX Cash--------------XX Invst.in Eq. Sec-XX Gain on Sale----XX Investment in Equity Securities----------XX Unrealized GainXX

Reclassification of Investment

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FINANCIAL ASSET AT AMORTIZED COST

PFRS 9, Paragraph 4.2, provide that a financial asset shall be measured at amortized cost if both of the following conditions are met: a. The Business Model is to hold the Financial Asset in order to collect contractual cash flows on specified date. b. The contractual cash flows are solely payments of principal and Interest on the principal amount outstanding.

Financial Assets at Amortized Cost are classified as NON CURRENT ASSETS. Example: Investment in Bonds

Classification of Bond Investment Initial Measurement Subsequent Measurement

Financial Assets at Amortized Cost Fair value plus transaction cost Amortized cost using the effective interest method

Transaction cost include fees and commission paid to agents advisers, brokers & dealers, levies by regulatory authorities & securities exchanges & transfer taxes & duties.

Acquisition of Bond Investments Date of acquisition Initial Measurement On interest date Acquisition cost Between interest dates Purchase price (acquisition cost plus accrued interest)

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Investment in Bond at Amortized Cost Acquisition on Interest Date Purchase Investment in Bonds Cash Acquisition between Interest Dates Investment in Bonds Interest Income Cash Receipt of Interest Cash Interest Income Amortization of Discount Investment in Bonds Cash Interest Income Investment in Bonds

Interest Income Amortization of Premium Interest Income

Interest Income Interest Income

Investment in Bonds

Investment in Bonds

Sale Of Bonds: Cash Investment in Bonds Interest Income Gain on Sale of Bond Investment Kinds of Bonds:

Callable Bonds are those which may be called in or redeemed by the issuing entity prior to their date of maturity. Convertible Bonds are those which give the bondholders the right to exchange their bonds For share capital of the issuing entity at any time prior to maturity. Serial Bonds are those which have a series of maturity dates or those bonds which are 56 | P a g e

payable in installments. Term Bonds are bonds with single maturity date. Methods of Amortization: a. Straight Line Method Amortization of discount / premium per period is computed by dividing the total discount / premium by the life of the bonds.

b. Bond Outstanding Method Amortization is computed by creating first a fraction(coming the bond outstanding each period over the total bond outstanding through out the life of the bond) then multiply it to the amount of discount or premium. c. Effective Interest Method Given: Premium / Discount = P600, 000 Life of Bonds = 3 yrs

1. P 600, 000/ 3 = 200, 000 2. Given : Premium / Discount on Bonds = P 100, 000 Life of Bond = 3 yrs

Year 1 2 3

Bond Outstanding 3, 000, 000 2, 000 ,000 1 ,000 ,000 6, 000 ,000

Fraction 3/6 2/6 1/ 6

Premium /discount Amortization P 50, 000 33, 333 16 ,667 P 100 ,000

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3. Given : Face Value = P 1 ,000 ,000 Life of Bond = 3 Yrs Nominal rate = 12 % Effective rate = 10 % Cost of Bonds = P 1, 049, 740

Date 1/1/11 12/31/11 12/31/12 12/31/13

Interest received

Interest income

Premium amortization

Carrying amount 1, 049, 740

120,000 120,000 120,000

104, 974 103, 471 101, 815

15, 026 16, 529 18, 185

1, 034, 714 1, 018, 185 1,000,000

Investment Property Definition Full PFRS -Investment property is a property (land or building, or both) held by the owner or by lessee under a finance lease to earn rentals or for capital appreciation or both. -An investment is not held for use in the production or supply of goods or services or for administrative purposes and not held for sale in the ordinary course of business. -At cost plus transaction cost -If investment property was purchased cost is equal to purchase price plus any directly attributable costs such as professional fees taxes and other transaction cost. *Journal Entry Investment property 58 | P a g e IFRS for SMEs -Same as full PFRS

Initial measurement

-Same as full PFRS except for borrowing cost that are recognized as an expense.

xx Cash xx -If self-constructed, cost is its cost at the date when construction or development is complete. *Journal Entry Investment property xx Cash/Materials xx -If exchange for a nonmonetary asset or combination of monetary and nonmonetary asset, cost of such investment property is at fair value unless the transaction lacks commercial substance. *Journal Entry Investment property xx Exchange Asset xx Gain on Exchange xx -If fair value of neither asset received nor asset given up is reliably measurable, cost is equal to carrying amount of asset given up. *Journal Entry Investment property xx Exchange Asset xx -Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are required to be capitalized as part of the cost of 59 | P a g e

Subsequent measurement

Fair Value Model

Cost Model

that asset. -An entity shall choose as its accounting policy to carry all its investment properties at fair value model or at cost model. -However, when a property interest held by a lessee under an operating lease, the fair value model shall be applied for all its investment properties. -Gains and losses arising from changes in the fair value of investment property are recognized in profit or loss. *Journal Entry Investment property xx Gain from change in fair value xx Increase in fair value *Journal Entry Loss from change in fair value xx Investment property xx Decrease in fair value -The investment property is carried at cost less any accumulated impairment losses. Full PFRS refers to PAS 16, *Journal Entry Depreciation xx Accumulated Depreciation xx

-Investment property is carried at fair value model if its fair value can be measured reliably without undue cost or effort. Otherwise, the cost model is used and account for the item as Property, Plant and Equipment using Section 17. -Same as full PFRS

-Same as full PFRS. However, it refers to Section 17.

Inability to determine fair value reliably

-In exceptional cases, when an entity first acquires an investment property, or when an existing property becomes investment property because there has been a change of use, they may be clear evidence that the fair value at the investment property cannot be

-If a reliable measure of fair value is no longer available without undue cost or effort for an item of investment property measured using the fair value model, the entity shall thereafter account for that item as Property, Plant and 60 | P a g e

Partly investment and partly owneroccupied

Disclosure

Standard

determined reliably on a continuing basis. Under such exceptional cases, PAS 40 mandates that the entity shall measure such investment property using the cost method until the disposal of the investment property. -Some properties may include a portion that is held to earn rentals or for appreciation and another portion that is held for in the production or supply of goods or services or for administrative purposes. -If these portions could be sold or leased out separately, an entity shall account the portions separately as investment property and owner-occupied property. -If the portions could not be sold separately, the property is investment property if only an insignificant portion is held for manufacturing or administrative purposes, if theres significant component of the arrangement, the property is treated as owneroccupied. -When cost model is chosen as accounting policy, the fair value of investment property shall be disclose. -If fair value cannot be determined reliably, such fact shall be explained -PAS 40

Equipment using the cost method until reliable measure of fair value becomes available.

-Mixed used property shall be separated between investment property and Property, Plant and Equipment. However, if fair value of the investment property component cannot be measured reliably without undue cost or effort, the entire property shall be accounted as Property, Plant and Equipment.

-If the cost model is applied, SMEs are not required to provide any disclosure of fair value.

-Section 16

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DERIVATIVE Definition: financial instrument or other contract with all of the following characteristics: 1. The value of the derivative changes in response to the change in an underlying variable. 2. Requires either no initial investment or an initial net investment that is smaller than would be required for other contracts that have similar response to change in market factors. 3. Readily settled at a future date by a net cash payment. Is simply a financial instrument that derives its value from the movement in commodity price, foreign exchange rate and interest rate of an underlying asset or financial instrument. An executory contract, meaning, not a transaction but an exchange of promises about future action.

Purpose of the Derivative 1. To manage risk. 2. Reduction of financial loss Kinds of derivatives Stand-alone or free standing derivative Embedded Derivative is a component of hybrid or combined contract that also includes a none derivative host contract with the effect that some of the cash flows of the combined contract vary in a way similar to stand-alone contract. e.g: 1. Equity Conversion Option 2. Redemption Option Types of Financial Risk 1. Market Price Risk the uncertainty about future price of an asset. 2. Credit Risk the uncertainty over whether a counter party or the party on the other side of the contract will honor the terms of the contract. 3. Interest Rate Risk the uncertainty about future interest rates and their impact on cash flows and the fair value of the financial instruments. a. Variable rate debts expose the company to an interest rate risk by reason of the fluctuation of interest rate in the future. b. Fixed rate debts exposed the company to an interest rate risk because there is always the possibility that interest rate will decrease in the future. 62 | P a g e

4. Foreign Currency Risk the uncertainty about future Philippine Peso cash flows stemming from assets and liabilities denominated in foreign currency.

Hedging - designating one or more hedging instruments so that the change in fair value or cash flows is an offset in whole or in part to the change in fair value or cash flows of the hedged item. Hedging Instrument is the derivative whose fair value or cash flows would be expected to offset changes in the fair value or cash flows of the hedged item. Hedged Item is an asset, liability, firm commitment, highly probable forecast transaction or net investment in foreign operation that expose the entity to risk of changes in fair value or future cash flows. Hedging relationship Cash Flow Hedge is a derivative that offset in whole or in part the variability in cash flows from a probable forecast transaction. Fair Value Hedge is a derivative that offset in whole or in part the change in the fair value of an asset or liability. Hedge of a net investment in a foreign operation HEDGE ACCOUNTING IFRS for SMEs General An entity may designate a hedging relationship between a hedging instrument and a hedged item in such a way as to recognize gains and losses on a hedged item and a hedging instrument in profit or loss at the same time. In order to apply hedge accounting, management prepares documentation at the inception of the relationship. This documentation clearly identifies the risk being hedged, the hedging instrument, and the hedged item. Only certain risks and hedging instruments are permitted, as described in more detail below. In addition, management should expect the hedging instrument to be highly effective in offsetting the designated hedged risk in order to apply hedge accounting. Full IFRS An entity may designate a hedging relationship between a hedging instrument and a hedged item in such a way as to recognize gains and losses on a hedged item and a hedging instrument in profit or loss at the same time. IAS 39 also requires documentation of a hedging relationship at inception. This documentation includes the hedged item and hedging instrument similar to the IFRS for SMEs guidance. IAS 39 also requires an entity to document the risk management objective and strategy for undertaking the hedge. IAS 39 allows more risks and portions of hedged items to be designated than the SME guidance (see below). IAS 39 allows a broader array of hedging instruments 63 | P a g e

Criteria for hedge accounting

Risks for which hedge accounting is permitted

Hedge accounting is permitted for the risk hedged as: An interest rate risk of a debt instrument measured at amortized cost; A foreign exchange or interest rate risk in a firm commitment or a highly probable forecast transaction; A foreign exchange risk in a net investment in a foreign operation; or A price risk of a commodity.

Hedging instruments for which hedge accounting is permitted

A hedging instrument: Is an interest rate swap, a foreign currency swap, a foreign currency forward exchange contract, or a commodity forward exchange contract. Involves a party external to the reporting entity. Has a notional amount equal to the designated amount of principal or notional amount of the hedged item. Has a specified maturity date no later than the maturity of the hedged item, the expected settlement of the commodity purchase or sale commitment, or the occurrence of the

than the SME guidance. IAS 39 requires management to document a method of effectiveness testing and to perform a prospective effectiveness test at the inception of the hedge to demonstrate that the relationship will be highly effective during its life. IAS 39 permits three types of hedging relationship: Cash flow hedges. Fair value hedges. Hedges of a net investment in a foreign operation. IAS 39 restricts the risks or portions in a financial instrument that can be hedged based on a principal that those risks or portions must be separately identifiable components of the financial instrument, and changes in the cash flows or fair value of the entire financial instrument arising from changes in the designated risks and portions must be reliably measurable. A broader array of risks is therefore eligible for hedging under IAS 39 (for example, equity price risk and onesided risks). IAS 39 allows a group of similar items to be designated as a hedged item. IAS 39 permits hedging instruments to be: Derivatives that are not net written options. Non-derivative assets or liabilities used as a hedge of foreign currency risk. Management is permitted to separately designate the intrinsic value of an option or the spot component of a forward contract. IAS 39 therefore allows a broader array of hedging instruments to be used (for example, interest rate collars, purchased options and foreign currency borrowings). IAS 39 does not require the notional amount of the hedging instrument to 64 | P a g e

highly probable forecast transaction. Has no pre-payment, early termination or extension features.

Effectiveness testing

IFRS for SMEs does not require quantitative assessments of hedge effectiveness.

Hedges of variable interest rate risk, foreign exchange risk, commodity price risk and net investment in a foreign operation

Where an entity designates the hedging relationship and it complies with the conditions above, it recognizes in profit or loss any excess of the fair value of the hedging instrument over the change in the fair value of the expected cash flows (hedge ineffectiveness). The effective part is recognized in other comprehensive income. The amount recognized in other comprehensive income is recognized in profit or loss when the hedged item affects profit or loss or when the hedging relationship ends. Hedge accounting is discontinued when: The hedging instrument expires, is

be equal to the hedged item. IAS 39 does not require the hedging instrument to have a maturity corresponding to the hedged item as long as the entity can demonstrate that the hedging instrument would be highly effective. IAS 39 does not restrict pre-payment, early termination or extension features in hedging instruments only where they make the hedging instrument a net written option. However, such features may impact the effectiveness of the relationship. IAS 39 allows groups of derivatives or a non derivative and derivative to be designated as a combined hedging instrument in certain cases. IAS 39 allows a single hedging instrument to be designated as a hedge of multiple risks. The entity is required to perform quantitative retrospective and prospective effectiveness tests at least once per reporting period. A specific method for testing effectiveness is not defined, but the entity documents its chosen method as part of the hedging documentation. Similar to IFRS for SMEs, except that : IAS 39 specifies that the amounts recognized in other comprehensive income are based on cumulative changes in the fair value of the hedging instrument and hedged risk. IAS 39 contains a policy choice relating to the situation where the hedge of a forecast transaction results in recognition of a nonfinancial asset or liability.

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Hedge of a fixed interest rate risk or commodity price risk of a commodity held

sold or terminated. The hedge no longer meets the criteria for hedge accounting. The entity revokes the designation. The amounts deferred in other comprehensive income on discontinuance of the hedge are recognized in profit or loss as soon as the hedged item is derecognized or as soon as a forecast transaction is no longer expected to take place. For a hedge of fixed interest risk or of commodity price risk of a commodity held, the hedged item is adjusted for the gain or loss attributable to the hedged risk. That element is included in profit or loss to offset the impact of the hedging instrument. Hedging is discontinued when: The hedging instrument expires, is sold, or is terminated. The hedge no longer meets the conditions for hedge accounting. The entity revokes the designation. Upon discontinuance of the hedging relationship for a liability, the adjustment made to the hedged item is amortized to profit or loss using the effective interest method.

For a hedge of fixed interest risk or of commodity price risk of a commodity held, the hedged item is adjusted for the gain or loss attributable to the hedged risk. That element is included in profit or loss to offset the impact of the hedging instrument. Hedging is discontinued when: The hedging instrument expires, is sold, or is terminated. The hedge no longer meets the conditions for hedge accounting. The entity revokes the designation. Upon discontinuance of the hedging relationship for a liability, the adjustment made to the hedged item is amortized to profit or loss using the effective interest method.

Example of Derivative financial instrument

Definition A contract whereby two parties agree to exchange cash flows to future interest payments based on a contract of loan A commitment to purchase or sell a specified commodity on a future date at a

Hedged Item

Type of risk the entity is exposed to

Interest rate swap

Contract of Loan

Interest rate risk

Forward Contract

Highly probable forecast purchase or sale Purchase commitment

Market price risk Foreign currency exchange risk

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specified price. (not traded in a well established market) A commitment to purchase or sell a specified commodity on a future date at a specified price. (traded in a well established market) A contract that gives the holder the right to purchase or sell an asset at a specified price during a definite period at some future time

Futures contract

Option

supported by a contract other than the derivative contract Highly probable forecast purchase or sale Purchase commitment supported by a contract other than the derivative contract Highly probable forecast purchase or sale Contracts other than the derivative contract Assets and Liabilities denominated at foreign currencies Highly probable purchase or sale. Commitment or contract to purchase or sell assets to other country.

Market price risk Foreign currency exchange risk

Market price risk Foreign exchange risk Credit risk

Foreign Currency Forward Contract

A contract that gives one party the right to offset changes in foreign currency exchange rates to another party.

Foreign currency risk

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Derivative Financial Instrument

Journal Entries Designation Cases Important Entries Explanation The fair value is equal to the present value of the derivative. It is discounted from the time it will be receive from the speculator It is the maturity value amount due from the derivative speculator.

1. The interest rate Interest rate swap receivable is higher xxx than the Unrealized gain-interest underlying rate swap xxx

1.a. what is due from the speculator is collected

Cash xxx Interest rate swap receivable xxx Unrealized gain interest rate swap xxx Unrealized gain-interest rate swap xxx Interest expense xxx Unrealized Loss-interest rate swap xxx Interest rate swap payable xxx

Interest Rate Swap

Cash flow hedge (variable interest rate loan )

1.b. end of the contract. Derecognize the derivative 2. the interest rate is lower than the underlying

2.a. what is due to the speculator is paid

Interest rate swap payable xxx Unrealized loss-interest rate swap xxx Cash xxx Interest expense xxx Unrealized loss-interest rate swap xxx Loss on interest rate swap xxx Interest rate swap payable

The entry transfers the amount in Other Comprehensive Income to the Income Statement. The fair value is equal to the present value of the derivative. It is discounted from the time it will be receive from the speculator It is the maturity value amount due to the derivative speculator

Fair Value hedge

2.b. end of the contract. Derecognize the derivative 1.market rate is higher than fix rate

The entry transfers the amount in Other Comprehensive Income to the Income Statement. A change in fair value is immediately recognized in Profit 68 | P a g e

xxx

or Loss Statement.

Forward Contract

Cash Flow Hedge

1.a. payment Interest rate swap payable to the xxx speculator Cash xxx 2. market rate is lower Interest rate swap receivable than the xxx fixed rate. Gain on interest rate swap xxx 2.a Collection Cash from the xxx speculator Interest rate swap receivable xxx 1.Market price of the Forward Contract Receivable commodity xxx is higher Unrealized gain-forward than the contract xxx underlying price. 1.a the commodity Unrealized gain-forward is purchased contract xxx Gain on forward contract xxx

Payment of the amount due to the speculator A change in fair value is immediately recognized in Profit or Loss Statement. Collection of the amount due from the speculator When the market price is higher that the underlying the entity is expecting cash collection for the difference. When the commodity is purchased, the derivative is derecognized because the primary financial instrument is also derecognized. When the market price is higher that the underlying the entity is expecting cash collection for the difference. When the commodity is purchased, the derivative is derecognized 69 | P a g e

Futures Contract

Cash Flow Hedge

1.Market price of the commodity is higher than the underlying price. 1.a the commodity is purchased

Forward Contract Receivable xxx Unrealized gain-forward contract xxx

Unrealized gain-forward contract xxx Gain on forward contract xxx

1.initial investment

Call/put option xxx Cash xxx

Option

Cash Flow Hedge

2a.increase in price of the commodity 2b. decrease in price of the commodity

Call/put option xxx Unrealized gain-call option xxx Unrealized loss-call/put option xxx Call/put option xxx

because the primary financial instrument is also derecognized. Option requires initial small payment for the protection against unfavorable movement in price. Unrealized gain is a component of other comprehensive income. Unrealized loss is a component of other comprehensive income to the extent of the initial investment.

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PROPERTY, PLANT AND EQUIPMENT

RECOGNITION

Property, plant and equipment are tangible items that are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and are expected to be used during more than one period. IAS 16 states that the cost of an item of property, plant and equipment shall be recognized as an asset if, and only if:

it is probable that future economic benefits associated with the item will flow to the entity; and

the cost of the item can be measured reliably.

This recognition principle shall be applied to all costs at the time they are incurred, both incurred initially to acquire or construct an item of property, plant and equipment and incurred subsequently after recognition to add to, replace part of or service it. INITIAL COSTS Some items of property, plant and equipment might be necessary to acquire for safety or environmental reasons. Although they do not directly increase the future economic benefits, they might be inevitable to obtain future economic benefits from other assets and therefore, should be recognized as an asset. For example, water cleaning station might be necessary in order to proceed with some chemical processes within chemical manufacturer. SUBSEQUENT COSTS Day-to-day servicing of the item shall be recognized in profit or loss as incurred, because they just maintain (not enhance) items capacity to bring future economic benefits. However, some parts of the item of property, plant and equipment may require replacement at regular intervals, for example, aircraft interiors. In such a case, an entity derecognizes carrying

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amount of older part and recognizes the cost of new part into the carrying amount of the item. The same applies to major inspections for faults, overhauling and similar items. MEASUREMENT

INITIAL MEASUREMENT

An item of property, plant and equipment that qualifies for recognition as an asset shall be measured at its cost. The cost of an item of property, plant and equipment comprises: 1. its purchase price including import duties, non-refundable purchase taxes, after deducting trade discounts and rebates 2. any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. Examples of these costs are: costs of site preparation, professional fees, initial delivery and handling, installation and assembly, etc., 3. the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located. The cost of an item of property, plant and equipment is the cash price equivalent at the recognition date. If payment is deferred beyond normal credit terms, the difference between the cash price equivalent and the total payment is recognized as interest over the period of credit (unless such interest is capitalized in accordance with IAS 23). If an asset is acquired in exchange for another non-monetary asset, the cost will be measured at the fair value unless (a) the exchange transaction lacks commercial substance or (b) the fair value of neither the asset received nor the asset given up is reliably measurable. If the acquired item is not measured at fair value, its cost is measured at the carrying amount of the asset given up.

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SUBSEQUENT MEASUREMENT An entity may choose 2 accounting models for its property plant and equipment: 1. Cost model An entity shall carry an asset at its cost less any accumulated depreciation and any accumulated impairment losses. 2. Revaluation model An entity shall carry an asset at a revalued amount. Revalued amount is its fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. An entity shall revalue its assets with sufficient regularity so that the carrying amount does not differ materially from its fair value at the end of the reporting period. If an item of property, plant and equipment is revalued, the entire class of property, plant and equipment to which that asset belongs shall be revalued. The change of assets carrying amount as a result of revaluation shall be treated in the following way: Change in Carying Amount

Where Other comprehensive

Increase

income (heading Revolution surplus)

Profit or loss if reverses previous revaluation decrease of the same value Other comprehensive income if reduces

Decrease

Profit or loss

previously recognized revaluation surplus (heading Revaluation surplus)

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DEPRECIATION (BOTH MODELS)

Depreciation is defined as the systematic allocation of the depreciable amount of an asset over its useful life. The items of property, plant and equipment are usually depreciated in order to maintain matching principle as they are in operation for more than 1 year, they assist in producing the revenues in more than 1 year and therefore, their cost shall be spread among those years in order to match the revenue they help to produce. When dealing with the depreciation please do have 3 basic things in mind:

Depreciable amount Depreciable amount is simply HOW MUCH you are going to depreciate. It is the cost of an asset, or other amount substituted for cost, less its residual value.

Depreciation period Depreciation period is simply HOW LONG you are going to depreciate and it is basically assets useful life. Useful life is the period over which an asset is expected to be available for use by an entity; or the number of production or similar units expected to be obtained from the asset by an entity. IFRS 16 lists several factors that shall be considered when establishing items useful life: expected usage of the item, expected physical wear and tear, technical or commercial obsolescence of the item, and legal or other limits on the use of the asset. Useful life and assets residual value (input to depreciable amount) shall be reviewed at least at the end of each financial year. If there is a change in the expectations comparing to previous estimates, then change shall be accounted for as a change in an accounting estimate in line with IAS 8 (no restatement of previous periods).

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Depreciation method Depreciation method is simply HOW, IN WHAT MANNER you are going to depreciate. The depreciation method used shall reflect the pattern in which the assets future economic benefits are expected to be consumed by the entity. An entity may select from variety of depreciation methods, such as straight-line method, diminishing balance method and the units of production methods. Selected method shall be reviewed at least at the end of each financial year. If there is a change in the expected pattern of assets usage, then the depreciation method shall be changed and be accounted for as a change in an accounting estimate in line with IAS 8 (no restatement of previous periods). Depreciation shall be recognized in profit or loss unless it is capitalized into the carrying amount of another asset (for example, inventories, or another item of property, plant and equipment). Each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item shall be depreciated separately. For example, aircraft interior cost might be depreciated separately from the remaining airplane cost.

IMPAIRMENT Here, IAS 16 refers to another standard, IAS 36 Impairment of Assets that prescribes rules for reviewing the carrying amount of assets, determining their recoverable amount and impairment loss, recognizing and reversing impairment loss and more. IAS 16 states that compensation from third parties for items of property, plant and equipment that were impaired, lost or given up shall be included in profit or loss when the compensation becomes receivable. For example, claim for compensation of damage on insured property from insurance company is recognized to profit or loss when insurance company accepts claim, closes the case and agrees to compensate (or after whatever procedure is agreed in the insurance contract).

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DERECOGNITION IAS 16 prescribes that the carrying amount of an item of property, plant and equipment shall be derecognized on disposal; or when no future economic benefits are expected from its use or disposal. The gain (not classified as revenue!) or loss arising from the derecognition of an item of property, plant and equipment shall be included in profit or loss when the item is derecognized. The gain or loss from the derecognition is calculated as the net disposal proceeds (usually income from sale of item) less the carrying amount of the item. ASSET REVALUATION

International accounting and reporting standards include provisions that permit companies to revalue items of PP&E to fair value. When applied, all assets in the same class must be revalued annually. Such balance sheet adjustments are offset with a corresponding change in the entitys capital accounts. These revaluations pose additional complications because they result in continuous alterations of the amount of depreciation.

DISCLOSURE Disclosures with respect to each class of property, plant, and equipment are extensive and comprise:

Measurement bases for determining gross carrying amounts Depreciation methods Useful lives or depreciation rates used Gross carrying amount and accumulated depreciation (aggregated with accumulated impairment losses) at the beginning and end of the period

Additions Assets classified as held for sale Acquisitions through business combinations 76 | P a g e

Increases and decreases arising from revaluations and from impairment losses and reversals thereof

Depreciation Net exchange differences recognized under IAS 21 Other changes Existence and amounts of restrictions on ownership title Assets pledged as security for liabilities Assets in the course of construction Contractual commitments for the acquisition of property, plant, and equipment

Compensation for assets impaired, lost, or given up. If property, plant, and equipment are stated at revalued amounts, these items must be specified:

The effective date of the valuation Whether an independent valuer was involved Methods and significant assumptions used in assessing fair values The extent to which fair values were measured by reference to observable prices in an active market, recent market transactions on an arms-length basis, or were estimated using other techniques

For each class of asset revalued, the carrying amount that would have been recognized if the class had not been revalued

The revaluation surplus, indicating the change for the period and any restrictions on distributions to shareholders

JOURNAL ENTRIES Purchase of land will cause an increase in assets and the corresponding credit varies depending on the terms under which the purchase was made. The purchase may be on cash basis, on credit terms, on credit terms with down payment, or by signing a mortgage contract for the plant assets. Land is unique. Its cost is not depreciated/expensed overtime because its usefulness does not decrease like that of other assets. 77 | P a g e

Land Cash or Mortgage Payable Purchased land to be used in the business operation

xxxx xxxx

CASH PURCHASE OF PROPERTY, PLANT & EQUIPMENT

Illustration For example, Labrador Trading purchased one IBM computer for P40,000, cash basis. The entry to record the transaction is:

Office Equipment Cash Purchased one IBM computer. Purely credit without cash discount

40,000 40,000

Assuming the purchase made was purely on account basis without any discounts, this will cause an increase in asset and increase in liability.

Office equipment Accounts Payable Purchased IBM computer on account.

40,000 40,000

With downpayment without cash discount

Credit purchase with down payment but without any discounts given will be recorded by using the following entry:

Office equipment Accounts Payable Cash Purchased IBM computer. Terms: with 50% down, balance on account.

40,000 20,000 20,000

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Credit purchase with cash discount

When a credit purchase is with a cash discount, the property acquired must be recorded net of cash discount. To illustrate, Labrador Trading purchased a cash register from Omron Marketing for P30,000. Terms: 2/10, n/30. The entry to record the transaction is: Store Equipment Accounts Payable Purchased cash register. Terms: 2/10, n/30 29,400 29,400

COMPUTATION: Since there was a cash discount given by the seller, the applicable amount should be deducted from the liability to be recorded. Invoice Price Less: 2% cash discount(30,000*2%) Accounts Payable to be recorded P 30,000 600 P 29,400 ======= RECORDING INCIDENTAL CHARGES

Overview

The purchase of property, furniture, or equipment may involve additional expenditures for freight, insurance while asset is in transit, brokerage fees, arrastre, handling, storage, customs duties, test runs, installation costs, etc. These expenditures are usually paid by the buyer and are necessary in order to put the property in a place and condition ready for use. These expenditures become part of the cost of acquiring the property, furniture or equipment. In short, incidental charges are capitalized, i.e., debited to the asset account and not to an expense account

Illustration

Assume that on July 20, 20X1, Labrador Trading bought a delivery van from Toyota, Inc., Japan for P950,000. Terms: P300,000 down payment; balance, 2/10, n/30. F.O.B. shipping point, collect P3,000. The entries to record the transaction are:

July 20

Delivery Equipment

937,000 79 | P a g e

Cash Accounts Payable Purchased delivery van. Terms: with down, balance, 2/10, n/30

300,000 637,000

July 20

Delivery Equipment Cash Freight cost of the van purchased.

3,000 3,000

Assume further that Labrador Trading paid for the following incidental charges for the delivery van bought. Customs duties Insurance while in transit P 20,000 15,000

The entry to record this is: July 20 Delivery Equipment Cash Taxes and insurance paid for the van. Recording Sale of Property and Equipment Although property and equipment are not originally intended for sale, these Overview assets may eventually be sold when they become worn out or obsolete. The proceeds of the sale will be used to replace old units with new units. Disposal of property and equipment could be for an amount just sufficient to recover the book value of the asset at the date of sale or for an amount, which results in either a gain on the sale or a loss on the sale. A comparison is made between the selling price and the net book value of the asset sold. Net book value is the difference between the acquisition cost of the asset and any depreciation accumulated to date. 35,000 35,000

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Illustration

Assume that on July 25, Labrador Trading sold its old typewriter being used in the office. The said asset was acquired at P20,000 with an accumulated depreciation to date amounting to P12,000. Case 1: Assume that the typewriter was sold at P8,000. The entry to record the transaction is:

July 25

Cash Accumulated depreciation-Office Equipment Office Equipment Sold old typewriter.

8,000 12,000 20,000

COMPUTATION: Acquisition cost Less: Accumulated depreciation Net Book value Resale price No gain or loss P 20,000 12,000 8,000 8,000 ======= Case 2: Assume that the typewriter was sold at P10,000. The entry to record the transaction is:

Illustration, cont

Cash Accumulated depreciation-Office Equipment Office Equipment Gain on sale of Office Equipment Sold old typewriter.

10,000 12,000 20,000 2,000

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COMPUTATION: Resale Price Less: Net Book Value Acquisition Cost Less: Accumulated Depreciation Gain on sale of office equipment 20,000 12,000 8,000 P 2,000 ======= Case 3: Assume that the typewriter was sold at P7,000. The entry to record the transaction is: Cash Accumulated Depreciation-Office Equipment Loss on sale of Office Equipment Office Equipment Sold old typewriter COMPUTATION: Resale Price Less: Net Book Value Acquisition Cost Less: Accumulated Depreciation Loss on sale of office equipment 20,000 12,000 8,000 (P 1,000) ======== Reminder Any gain on the sale of property and equipment is classified as other income because it is an income from a source which is not from the ordinary course of business operations. Any loss on the sale is classified as other expense in the multiple step income statement. 7,000 7,000 12,000 1,000 20,000 10,000

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PROPERTY, PLANT AND EQUIPMENT IFRS for SMEs Section 17 Property, Plant and Equipment IFRS IAS 16 Property, Plant and Equipment Impact assessment

Scope This section applies to accounting for property, plant and equipment and investment property whose fair value cannot be measured reliably without undue cost or effort. Section 16 Investment Property applies to investment property for which fair value can be measured reliably without undue cost or effort. This standard must be applied in accounting for property, plant and equipment except when another standard requires or permits a different accounting treatment. There is no difference between IFRS for SMEs and IFRS.

Definition Property, plant and equipment are tangible assets that are: a) Held for use in the production or supply of goods or services, for rental to others, or for administrative purposes b) Expected to be used during more than one period.

Property, plant and equipment are tangible items that are: a) Held for use in the production or supply of goods or services, for rental to others, or for administrative purposes b) Expected to be used during more than one period. There is no difference between IFRS for SMEs and IFRS.

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Recognition An entity recognizes the cost of an item of property, plant and equipment as an asset if, and only if: a) It is probable that future economic benefits associated with the item will flow to the entity b) The cost of the item can be measured reliably.

The cost of an item of property, plant and equipment is recognized as an asset if, and only if: a) It is probable that future economic benefits associated with the item will flow to the entity b) The cost of the item can be measured reliably. There is no difference between IFRS for SMEs and IFRS.

Initial measurement An entity measures an item of property, plant and equipment

An item of property, plant and equipment that qualifies for recognition as an asset is

at initial recognition at its cost. measured at its cost. The cost Cost includes: a) Its purchase price b) Any costs directly attributable to bringing the asset to the location and comprises: a) Its purchase price b) Any costs directly attributable to bringing the asset to the location and There are no differences between IFRS and IFRS for SMEs, except for borrowing costs, which are capitalized under full IFRS if they are directly attributable to the acquisition, construction or production of a qualifying asset.

condition necessary for it to be condition necessary for it to be capable of operating in the manner intended by management c) The initial estimate of the costs of dismantling and removing the item and capable of operating in the manner intended by management c) The initial estimate of the costs of dismantling and removing the item and

restoring the site on which it is restoring the site on which it is located. Borrowing costs do not form part of the cost of an 84 | P a g e located.

item of property, plant and equipment

Property, plant and equipment may be valued using either: Subsequent measurement An entity must measure all items of property, plant and equipment after initial recognition at cost less any accumulated Depreciation and any accumulated impairment losses. a) The cost model (cost less accumulated amortization and impairment losses) or b) The revaluation model (revalued amount less accumulated amortization and impairment losses). An entity must apply that policy to an entire class of property, plant and equipment. IFRS for SMEs differs from IFRS in that it does not permit the application of the revaluation model to property, plant and equipment

Depreciable Amount The depreciable amount of an asset must be allocated on a systematic basis over its useful life.

The depreciable amount of an asset must be allocated on a systematic basis over its useful life.

There are no differences between IFRS and IFRS for SMEs.

Residual Value Factors such as a change in how an asset is used, significant unexpected wear and tear, technological advancement and changes in market prices may indicate that the residual value The residual value and the useful life of an asset must be reviewed at least at each financial year-end.

IFRS for SMEs states that the residual value should be reviewed only if there are indicators that it has changed since the most recent annual reporting date. Under full IFRS, the review should 85 | P a g e

or useful life of an asset has changed since the most recent annual reporting date. If such indicators are present, an entity must review its previous estimates and, if current expectations differ, amend the residual value, depreciation method or useful life.

be made at each financial year-end.

Each part of an item of If the major components of an item of property, plant and equipment have significantly different patterns of consumption of economic benefits, an entity must allocate the initial cost of the asset to its major components and depreciate each such component separately over its useful life. Other assets must be depreciated over their useful lives as a single asset. property, plant and equipment with a cost that is significant in relation to the total cost of the item must be depreciated separately. A significant part of an item of property, plant and equipment may have a useful life and a depreciation method that are the same as the useful life and the depreciation method of another significant part of that same item. Such parts may be grouped in determining the depreciation charge. There are no differences between IFRS and IFRS for SMEs.

Depreciation Method An entity must select a depreciation method that reflects the pattern in which it

The depreciation method used must reflect the pattern in which the assets future economic benefits are

There are no differences between IFRS and IFRS for SMEs, except that a review of the depreciation method for 86 | P a g e

expects to consume the assets future economic benefits. The possible depreciation methods include the straight line method, the diminishing balance method and a method based on usage such as the units of production method. If

expected to be Consumed by the entity. A variety of depreciation methods can be used such as the straight line method, the diminishing balance method and the units of production method. The depreciation method

IFRS for SMEs is only required if there is an indication that it has changed. Under IFRS, the depreciation method must be reviewed at least at each Financial yearend.

there is an indication that there applied to an asset must be has been a significant change since the last annual reporting date in the pattern of expected consumption, the entity must review its present depreciation method and, if current expectations differ, change the depreciation method to reflect the new pattern. reviewed at least at each financial year-end and, if there has been a significant change in the expected pattern of consumption, the method must be changed to reflect the changed pattern.

Derecognition An entity must derecognize an item of property, plant and equipment: a) On disposal or b) When no future economic benefits are expected from its

The carrying amount of an item of property, plant and equipment must be derecognized: a) On disposal or b) When no future economic benefits are expected from its IFRS contains some additional guidance on the gain or loss on disposal. However, the same result would be achieved when applying IFRS for SMEs

use or disposal. An entity must use or disposal. The gain or recognize the gain or loss on loss arising from the

the derecognition of an item of derecognition of an item of property, plant and equipment property, plant and equipment 87 | P a g e

in profit or loss when the item is derecognized. The entity must not classify such gains as revenue.

must be included in profit or loss when the item is derecognized. Gains must not be classified as revenue.

88 | P a g e

SPECIFIC INTANGIBLE ASSETS

PATENT: DEFINITION A patent is an exclusive right granted by the government to an inventor enabling him to control the manufacture, sale or other use of his invention for a specified period of time.

PATENT: AMORTIZATION

A. The original cost shall be amortized over the legal life or useful life, whichever is shorter. If the patent is acquired from an original patentee, the cost shall be amortized over the remaining legal life or useful life, whichever is shorter.

B. If a competitive patent is acquired to protect an original patent, the cost of competitive patent shall be amortized over the remaining life of old patent.

C. If a related patent is acquire in order to extend the life of the old patent, the cost of the related patent and any unamortized cost of the old patent shall be amortized over the extended life.

PATENT: INITIAL MEASUREMENT If the patent is acquired by purchase the cost includes the purchase price and any directly attributable expenditure necessary in preparing the asset for its intended use. Legal fees and other costs of successfully prosecuting or defending a patent shall be expensed. If the litigation is unsuccessful, the legal costs and the remaining cost of patent shall be written off as loss.

89 | P a g e

PATENT: REVALUATION After initial recognition, an intangible asset shall be carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated amortization and any subsequent accumulated impairment losses. For the purpose of revaluations under this Standard, fair value shall be determined by reference to an active market. Revaluations shall be made with such regularity that at the balance sheet date the carrying amount of the asset does not differ materially from its fair value. The revaluation model does not allow: a. The revaluation of intangible assets that have not previously been recognized as assets; or b. The initial recognition of intangible assets at amount other than cost. If an intangible asset in a class of revalued intangible assets cannot be revalued because there is no active market for this asset, the asset shall be carries at its cost less any accumulated amortization and impairment losses. If the fair value of revalued intangible asset can no longer be determined by reference to an active market, the carrying amount of the asset shall be its revalued amount at the date of the last revaluation by reference to the active market less any subsequent accumulated impairment loss. If an intangible assets carrying amount is increased as a result of revaluation the increase shall be credited directly to equity under the heading of revaluation surplus. However, the increase shall be recognized in profit or loss to the extent that it reverses a revaluation decrease of the same asset previously recognized in profit or loss. If an intangible assets carrying amount is decreased as a result of revaluation the decrease shall be recognized in profit or loss. However, the decrease shall be debited to equity under the heading of revaluation surplus to the extent of any credit balance in the revaluation surplus in respect of that asset. 90 | P a g e

PATENT: JOURNAL ENTRY

1. To record the development of the patent:

Research and Development Expense Cash 2. To record the cost of licensing of the patent:

xx xx

Patent Cash

xx xx

3. To record the amortization of the patent for 2010:

Amortization of Patent Patent

xx xx

4. To record the amortization of the patent for 2011:

Amortization of Patent Patent

xx xx

5. To record the cost of successful defense of the patent in 2012:

Legal Expense Cash

xx xx

6. To record the amortization of the patent for 2012:

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Amortization of Patent Patent

xx xx

7. To record the acquisition of a competing patent on January 1,2013:

Patent Cash

xx xx

8. To record the amortization of the patent for 2013:

Amortization of Patent Patent

xx xx

9. To write off the patent account on December 31, 2013:

Patent written off Patent

xx xx

10. To record the impairment loss:

Impairment Loss Patent

xx xx

GOODWILL: DEFINITION Goodwill is undeniably a unique asset presented in the financial statements. It is often referred to as the most intangible of all intangible assets. Goodwill is unique in the sense that goodwill standing alone cannot be bought and sold. The goodwill can only be identified with the entity as a whole.

92 | P a g e

Goodwill is an intangible asset that is not specifically identifiable has an indeterminate life, is inherent in a continuing business and relates to the entity as a whole.

GOODWILL: RECOGNITION Developed good or internal goodwill is that goodwill which is generated internally because of good name, capable staff and personnel, superior quality of products, favorable location and high credit standing. PAS 38 provides that internally generated goodwill shall not be recognized as an asset Purchased goodwill is the goodwill that has been paid for. Purchased goodwill arises when a business is purchased. When an entity acquires an existing business, it will have to pay not only for its net tangible and identifiable intangible assets but also the goodwill of the business. Purchased goodwill is recognized as an asset because it has been paid for. Thus, a goodwill is recorded only when an entity is purchased. The amount of goodwill cannot exceed the amount so paid.

GOODWILL: MEASUREMENT Two approaches may be followed in measuring goodwill, namely residual approach and direct approach. Under residual approach, goodwill is measured by comparing the purchase price for the entity with the net tangible and identifiable assets, meaning total assets excluding goodwill minus liabilities assumed. The excess of the purchase price over the net tangible and identifiable assets is considered as goodwill.

93 | P a g e

Goodwill s simply the residual after deducting the value of net tangible and identifiable assets from the purchase for the entity agreed upon between the buyer and the seller. Under the direct approach, goodwill is measured on the basis of the future earnings of the entity an attempt is made to value the anticipated excess earnings which are the essential component of goodwill. This approach seems to be a systematic and logical way of measuring goodwill because if future earnings exceed normal earnings, the excess earnings are indicative of the fact that there is an unidentifiable intangible asset that is causing the excess earnings. Such identifiable asset is called goodwill. Direct approach requires the following information:

a. A normal rate of return for representative entities in the industry. The normal rate of return is that rate of return which usually attracts investors in particular industry.

b. The fair value of tangible assets and any identifiable intangible assets. c. The estimated future normal earnings of the entity. d. The probable duration of any excess earnings attributable to goodwill.

GOODWILL: JOURNAL ENTRY

1. The entry to record the purchase. The estimated fair value associated with purchased-inprocess research and development projects is recognized as an expense in the period of acquisition, consistent with the treatment of other research and development expenditures.

Cash Receivables

xx xx 94 | P a g e

Inventory Land, Buildings & Equipment Patents Research and Dev. Exp. Goodwill Current Liabilities Long Term Debt Cash xx

xx xx

xx xx xx xx xx

COPYRIGHT: DEFINITION

A copyright is an exclusive right granted by the government to the author, composer, or artist enabling him to publish, sell or otherwise benefit from his literary, musical or artistic work.

COPYRIGHT: AMORTIZATION Theoretically, the cost of the copyright shall be amortized over the useful life. The useful life is that period in which benefits, sales and royalties are expected. The amortizable life may never exceed 40 years. In practice, it is often difficult to estimate the number of years in which benefits will be received. Thus, it is usually advisable to write off the cost of the copyright against the revenue of the first printing. The term of protection for copyright is during the life of the author and for so years after his death.

COPYRIGHT: INITIAL MEASUREMENT

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The cost assigned to copyright consists of all expenses incurred in the production of the work including those required to establish or obtain the right. The purchase price determines amortizable cost. Where copyright is purchased, the cost includes the cash paid, and directly attributable cost necessary for its intended use.

COPYRIGHT: JOURNAL ENTRY

1. To record the cost incurred in the production of the work (including those required to establish or obtain the right)

Copyright

xx xx

Cash (includes legal, accounting & other directly attributable cost)

2. To record the purchase of copyright:

Copyright Cash (purchase price

xx xx

& other directly attributable cost)

3. Amortization: In practice, it is often difficult to estimate the no. of years in which benefits will be received. Thus it is usually advisable to write off the cost of the copyright against the revenue of the first printing.

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FRANCHISE: DEFINITION If the franchise is between the government and a private entity or individual, the latter is permitted to use public property in performing its services. If the franchise is between private entities or individuals, the franchisee acquires the right to use trademark, patent and process of the franchisor. Under a franchise agreement, one party called the franchisor grants certain rights to another party called the franchisee.

FRANCHISE: AMORTIZATION If the franchise is granted for a definite period, the cost of franchise shall be amortized over the useful life or definite period whichever is shorter. If the franchise is granted indefinitely or perpetually, the cost of franchise shall not be amortized but tested for impairment of at least annually.

FRANCHISE: INITIAL MEASUREMENT The cost of the franchise includes the lump sum payment for the acquisition of the franchise and all legal fees and expenses incurred on connection with the acquisition of the right. The lump sum payment is known as the initial franchise fee and therefore the initial cost of the franchise. If the franchise agreement requires the franchisee to make periodic payment to the franchisor, such payment is considered as outright expense. This payment is known as the periodic franchise fee.

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FRANCHISE: JOURNAL ENTRY

1. To record the initial franchise fee:

Franchise Cash Note Payable

xx xx xx

2. To record the payment of the first installment:

Note Payable Interest Expense Cash

xx xx xx

3. To record the amortization of franchise:

Amortization of franchise Franchise

xx xx

TRADEMARK: DEFINITION A trademark is a symbol, sign, slogan, or name used to mark a product to distinguish it from other products. The terms trademark, tradename, and brandname are interchangeably used. It includes corporate logos, advertising jingles, and product names that have been registered with the government and serve to identify specific companies and products.

TRADEMARK: AMORTIZATION The legal life of trademark is 10 years and may be renewed for periods of 10 years each. 98 | P a g e

Considering the almost automatic renewal of a trademark an entity may properly classify a trademark as an intangible asset with an indefinite life. Accordingly, the cost of a trademark is not amortized but subject to test for impairment at least annually.

TRADEMARK: INITIAL MEASUREMENT When a trademark is purchased, the cost includes the purchase price plus costs directly attributable to the acquisition. When a trademark is internally developed, the cost includes expenditures required to established it, including filing fees, registry fees and other expenses incurred in securing the trademark such as design cost of trademark. If the trademark is successfully prosecuted or defended, the litigation cost is an outright expense because such cost is simply intended to maintain, rather than enhance or increase, the future economic benefits from the asset.

TRADEMARK: JOURNAL ENTRY

1. To record the purchase of the trademark:

Trademark

xx xx

Cash (purchase price plus costs directly attributable)

2. To record the development of the trademark:

Research and development expense

xx 99 | P a g e

Cash

xx

3. To record the cost of successful defense of the trademark:

Legal Expenses Cash

xx xx

4. To record the impairment loss:

Impairment Loss Trademark

xx xx

COMPUTER SOFTWARE: DEFINITION Cost incurred in creating a computer software product shall be charged to expensed when incurred until a technical feasibility has been established for the product. Actually, this is the research stage where there is so much uncertainty about the future economic benefits. Accordingly, all the research costs shall be expensed outright. As a minimum, technological feasibility is established when an entity has produced either a detailed program design of the software or a working model. After technological feasibility is established, capitalizable software costs include the cost of coding and testing and the cost to produce the product masters. The cost incurred is actually produce the software from masters and package the software for sale shall be charged as inventory.

COMPUTER SOFTWARE: AMORTIZATION

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Under PAS 38, the amortization method for computer software shall reflect the pattern in which the assets future economic benefits are expected to be consumed by entity. If such pattern cannot be determined reliably, the straight line method is used.

COMPUTER SOFTWARE: JOURNAL ENTRY

1. To record the amortization:

Amortization of Computer Software Computer Software

xx xx

ACQUIRED CUSTOMER LIST: DEFINITION

A list or database containing customer information such as name, address, past purchases, and so forth. Companies that originally develop such as list often sell or lease it to other companies unless prohibited by customer confidentiality agreements.

ACQUIRED CUSTOMER LIST: INITIAL MEASUREMENT

Purchase price when acquired from another company. Costs to internally develop a customer list are expensed incurred.

ACQUIRED CUSTOMER LIST: RECOGNITION An acquired customer list may be recognized as an intangible asset. The recognition of an acquired customer list as an intangible asset may be subject to question or debate.

ACQUIRED CUSTOMER LIST: AMORTIZATION 101 | P a g e

The acquired customer list amortized over its useful life. The acquired customer list amortized over the useful life of 3 years.

LEASEHOLD OR LEASE RIGHT: DEFINITION Leasehold is the right acquired by the lessee by virtue of a contract of lease to use the specific property owned by the lessor for a definite period of time in consideration for a certain sum of money in the form of rent. The leasehold account may be recorded on the books under the following circumstances:

a. Where the lessee is required to pay a certain lump sum at the first negotiation of the lease as a lease bonus in consideration for favorable lease terms the payment charged to the leasehold account.

b. When an amount is paid in obtaining an assignment of lease from the original lessee, the payment is charged to the leasehold account.

LEASEHOLD OR LEASE RIGHT: AMORTIZATION The cost of leasehold shall be amortized over the life of the lease. If the cost of the leasehold is not very substantial, it is charged outright to expense.

LEASEHOLD OR LEASE RIGHT: JOURNAL ENTRY

1. To record the payment for the lease right:

Leasehold Cash

xx xx 102 | P a g e

2. To record the construction of the building: Leasehold improvement-Building Cash xx xx

3. To record the annual rental:

Rental Expense Cash

xx xx

4. To record the amortization of the leasehold:

Amortization of leasehold Leasehold

xx xx

5. To record the depreciation of the leasehold improvement:

Depreciation

xx xx

Accumulated Depreciation

103 | P a g e

SPECIFIC INTANGIBLE ASSETS FULL IFRS A patent is an exclusive right granted by the government to an inventor enabling him to DEFINITION control the manufacture, sale or other use of his invention for a specified period of time. IFRS SME

PATENT:

D. The original cost shall be amortized over the legal life or useful life, whichever is shorter. If the patent is acquired from an original patentee, the cost shall be amortized over the remaining legal life or useful life, whichever is shorter.

E. If a competitive patent is acquired to protect an original patent, the cost of competitive patent shall be amortized AMORTIZATION over the remaining life of old patent.

F. If a related patent is acquire in order to extend the life of the old patent, the cost of the related patent and any unamortized cost of the old patent shall be amortized over the extended life.

If the patent is acquired by purchase the cost includes the purchase price and any directly attributable expenditure necessary in preparing INITIAL the asset for its intended use. 104 | P a g e

MEASUREMENT Legal fees and other costs of successfully prosecuting or defending a patent shall be expensed. If the litigation is unsuccessful, the legal costs and the remaining cost of patent shall be written off as loss. After initial recognition, an intangible asset shall be carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated amortization and any subsequent accumulated impairment losses. For the purpose of revaluations under this Standard, fair value shall be determined by reference to an active market. Revaluations shall be made with such regularity that at the balance sheet date the carrying amount of the asset does not differ materially from its fair value. REVALUATION The revaluation model does not allow: c. The revaluation of intangible assets that have not previously been recognized as assets; or d. The initial recognition of intangible assets at amount other than cost. If an intangible asset in a class of revalued intangible assets cannot be revalued because there is no active market for this asset, the asset shall be carries at its cost less any accumulated 105 | P a g e

amortization and impairment losses. If the fair value of revalued intangible asset can no longer be determined by reference to an active market, the carrying amount of the asset shall be its revalued amount at the date of the last revaluation by reference to the active market less any subsequent accumulated impairment loss. If an intangible assets carrying amount is increased as a result of revaluation the increase shall be credited directly to equity under the heading of revaluation surplus. However, the increase shall be recognized in profit or loss to the extent that it reverses a revaluation decrease of the same asset previously recognized in profit or loss. If an intangible assets carrying amount is decreased as a result of revaluation the decrease shall be recognized in profit or loss. However, the decrease shall be debited to equity under the heading of revaluation surplus to the extent of any credit balance in the revaluation surplus in respect of that asset. 11. To record the development of the patent:

Research& Development Expense Cash

xx xx

12. To record the cost of licensing of the patent: 106 | P a g e

Patent JOURNAL ENTRIES Cash

xx xx

13. To record the amortization of the patent for 2010:

Amortization of Patent Patent

xx xx

14. To record the amortization of the patent for 2011:

Amortization of Patent Patent

xx xx

15. To record the cost of successful defense of the patent in 2012:

Legal Expense Cash

xx xx

16. To record the amortization of the patent for 2012:

Amortization of Patent Patent

xx xx

17. To record the acquisition of a competing patent on January 1,2013:

107 | P a g e

Patent Cash

xx xx

18. To record the amortization of the patent for 2013:

Amortization of Patent Patent

xx xx

19. To write off the patent account on December 31, 2013:

Patent written off Patent

xx xx

20. To record the impairment loss: Impairment Loss Patent GOODWILL: xx xx IFRS SME

FULL IFRS Goodwill is undeniably a unique asset presented in the financial statements. It is often referred to as the most intangible of all intangible assets. Goodwill is unique in the sense that goodwill standing alone cannot be bought and sold. The

DEFINITION

goodwill can only be identified with the entity as a whole. Goodwill is an intangible asset that is not specifically identifiable has an indeterminate

108 | P a g e

life, is inherent in a continuing business and relates to the entity as a whole. Developed good or internal goodwill is that goodwill which is generated internally because of good name, capable staff and personnel, superior quality of products, favorable location and high credit standing. PAS 38 provides that internally generated goodwill shall not be recognized as an asset RECOGNITION Purchased goodwill is the goodwill that has been paid for. Purchased goodwill arises when a business is purchased. When an entity acquires an existing business, it will have to pay not only for its net tangible and identifiable intangible assets but also the goodwill of the business.

Purchased goodwill is recognized as an asset because it has been paid for. Thus, a goodwill is recorded only when an entity is purchased. The amount of goodwill cannot exceed the amount so paid. Two approaches may be followed in measuring goodwill, namely residual approach and direct approach.

109 | P a g e

Under

residual

approach,

goodwill

is

measured by comparing the purchase price for the entity with the net tangible and identifiable assets, meaning total assets excluding goodwill minus liabilities assumed. The excess of the purchase price over the net tangible and MEASUREMENT identifiable assets is considered as goodwill. Goodwill s simply the residual after deducting the value of net tangible and identifiable assets from the purchase for the entity agreed upon between the buyer and the seller. Under the direct approach, goodwill is measured on the basis of the future earnings of the entity an attempt is made to value the anticipated excess earnings which are the essential component of goodwill. This approach seems to be a systematic and logical way of measuring goodwill because if future earnings exceed normal earnings, the excess earnings are indicative of the fact that there is an

unidentifiable intangible asset that is causing the excess earnings. Such identifiable asset is called goodwill. Direct approach requires the following information:

e. A normal rate of return for representative 110 | P a g e

entities in the industry. The normal rate of return is that rate of return which usually attracts investors in particular industry.

f. The fair value of tangible assets and any identifiable intangible assets. g. The estimated future normal earnings of the entity. h. The probable duration of any excess earnings attributable to goodwill. 2. The entry to record the purchase. The estimated fair value associated with purchased-in-process research and

development projects is recognized as an expense in the period of acquisition, consistent with the treatment of other research and development expenditures. JOURNAL ENTRY

Cash Receivables Inventory Land, Buildings & Equipment Patents Research and Dev. Exp. Goodwill Current Liabilities Long Term Debt xx

xx xx xx xx

xx xx xx xx 111 | P a g e

Cash COPYRIGHT:

xx IFRS SME

FULL IFRS A copyright is an exclusive right granted by the government to the author, composer, or artist enabling him to publish, sell or otherwise benefit

DEFINITION

from his literary, musical or artistic work.

Theoretically, the cost of the copyright shall be amortized over the useful life. The useful life is that period in which benefits, sales and royalties are expected. The amortizable life may never exceed 40 years. In practice, it is often difficult to estimate the AMORTIZATION number of years in which benefits will be received. Thus, it is usually advisable to write off the cost of the copyright against the revenue of the first printing. The term of protection for copyright is during the life of the author and for so years after his death.

The cost assigned to copyright consists of all expenses incurred in the production of the work including those required to establish or obtain the right. INITIAL The purchase price determines amortizable 112 | P a g e

MEASUREMENT

cost. Where copyright is purchased, the cost includes the cash paid, and directly attributable cost necessary for its intended use.

4. To record the cost incurred in the production of the work (including those required to establish or obtain the right)

Copyright

xx xx

Cash (includes legal, accounting & other directly attributable cost) JOURNAL ENTRIES 5. To record the purchase of copyright:

Copyright Cash (purchase price

xx xx

& other directly attributable cost)

6. Amortization: In practice, it is often difficult to estimate the no. of years in which benefits will be received. Thus it is usually advisable to write off the cost of the copyright against the revenue of the first printing.

113 | P a g e

FRANCHISE:

FULL IFRS If the franchise is between the government and a private entity or individual, the latter is permitted to use public property in performing its services. If the franchise is between private entities or

IFRS SME

DEFINITION

individuals, the franchisee acquires the right to use trademark, patent and process of the franchisor. Under a franchise agreement, one party called the franchisor grants certain rights to another party called the franchisee. If the franchise is granted for a definite period, the cost of franchise shall be amortized over the useful life or definite period whichever

AMORTIZATION

is shorter. If the franchise is granted indefinitely or perpetually, the cost of franchise shall not be amortized but tested for impairment of at least annually. The cost of the franchise includes the lump sum payment for the acquisition of the franchise and all legal fees and expenses incurred on connection with the acquisition of the right.

INITIAL

114 | P a g e

MEASUREMENT

The lump sum payment is known as the initial franchise fee and therefore the initial cost of the franchise. If the franchise agreement requires the franchisee to make periodic payment to the franchisor, such payment is considered as outright expense. This payment is known as the periodic franchise fee. 4. To record the initial franchise fee: Franchise Cash Note Payable xx xx xx

5. To record the payment of the first installment: JOURNAL ENTRIES Note Payable Interest Expense Cash xx xx xx

6. To record the amortization of franchise:

Amortization of franchise Franchise

xx xx

115 | P a g e

TRADEMARK:

FULL IFRS A trademark is a symbol, sign, slogan, or name used to mark a product to distinguish it from other products. The terms trademark, tradename, and brandname are

IFRS SME

interchangeably used. DEFINITION It includes corporate logos, advertising jingles, and product names that have been registered with the government and serve to identify specific companies and products. The legal life of trademark is 10 years and may be renewed for periods of 10 years each. Considering the almost automatic renewal of a trademark an entity may properly classify a AMORTIZATION trademark as an intangible asset with an indefinite life. Accordingly, the cost of a trademark is not amortized but subject to test for impairment at least annually. When a trademark is purchased, the cost includes the purchase price plus costs directly attributable to the acquisition. When a trademark is internally developed, the cost includes expenditures required to

established it, including filing fees, registry fees INITIAL MEASUREMENT and other expenses incurred in securing the trademark such as design cost of trademark.

116 | P a g e

If the trademark is successfully prosecuted or defended, the litigation cost is an outright expense because such cost is simply intended to maintain, rather than enhance or increase, the future economic benefits from the asset. 5. To record the purchase of the trademark:

Trademark

xx xx

Cash (purchase price plus costs directly attributable)

6. To record the development of the trademark: JOURNAL ENTRIES Research development expense Cash xx xx

7. To record the cost of successful defense of the trademark:

Legal Expenses Cash

xx xx

8. To record the impairment loss:

Impairment Loss Trademark

xx xx

117 | P a g e

COMPUTER SOFTWARE:

FULL IFRS Software is a generic term for organized collections of computer data and instructions, often broken into two major categories: system

IFRS SME

DEFINITION

software that provides the basic non-taskspecific functions of the computer, and application software which is used by users to accomplish specific tasks. Cost incurred in creating a computer software product shall be charged to expensed when incurred until a technical feasibility has been established for the product. Actually, this is the research stage where there is so much

uncertainty about the future economic benefits. Accordingly, all the research costs shall be expensed outright. MEASUREMENT As a minimum, technological feasibility is established when an entity has produced either a detailed program design of the software or a working model. After technological feasibility is established, capitalizable software costs include the cost of coding and testing and the cost to produce the product masters. The cost incurred is actually produce the software from masters and package the software for sale shall be charged as inventory.

118 | P a g e

Under PAS 38, the amortization method for computer software shall reflect the pattern in AMORTIZATION which the assets future economic benefits are expected to be consumed by entity. If such pattern cannot be determined reliably, the straight line method is used.

2. To record the amortization:

JOURNAL ENTRY

Amortization of Computer Software xx Computer Software xx

ACQUIRED CUSTOMER LIST:

list

or

FULL IFRS database containing such and so as name, forth.

IFRS SME customer past that

information purchases,

address,

Companies

originally develop such as list often sell or lease it to other companies unless prohibited by DEFINITION customer confidentiality agreements.

Purchase price when acquired from another INITIAL MEASUREMENT company. Costs to internally develop a customer list are expensed incurred. An acquired customer list may be recognized as an intangible asset.

119 | P a g e

RECOGNITION

The recognition of an acquired customer list as an intangible asset may be subject to question or debate. The acquired customer list amortized over its useful life.

AMORTIZATION The acquired customer list amortized over the useful life of 3 years. LEASE RIGHT: FULL IFRS Leasehold is the right acquired by the lessee by virtue of a contract of lease to use the specific property owned by the lessor for a definite period of time in consideration for a certain sum of money in the form of rent. DEFINITION The leasehold account may be recorded on the books under the following circumstances: IFRS SME

c. Where the lessee is required to pay a certain lump sum at the first negotiation of the lease as a lease bonus in consideration for favorable lease terms the payment charged to the leasehold account.

d. When an amount is paid in obtaining an assignment of lease from the original lessee, the payment is charged to the leasehold account.

120 | P a g e

The cost of leasehold shall be amortized over AMORTIZATION the life of the lease. If the cost of the leasehold is not very substantial, it is charged outright to expense 6. To record the payment for the lease right: Leasehold Cash xx xx

JOURNAL ENTRIES

7. To record the construction of the building:

Leasehold improvement-Building Cash 8. To record the annual rental: Rental Expense Cash

xx xx

xx xx

9. To record the amortization of the leasehold: Amortization of leasehold Leasehold xx xx

10. To record the depreciation of the leasehold improvement: Depreciation xx xx

Accumulated Depreciation

121 | P a g e