BA 219 Week 4 Lecture Notes

Recap:
Definition of current and non-current assets or liabilities. (JFC page 24)

Receivables
JFC receivables Note 6 (pages 47 to 48) and Note 28 RPT (pages 77 to 89)
ALI receivables Note 6 (pages 314 to 316)
Note: Allowance for impairment losses is the same as allowance for doubtful accounts (contra-asset
account) while provision for impairment or bad debt expense is an expense account. (ALI pages 309-310
specify qualitative criteria for impairment of receivables)
1. Entry for credit sales
2. Entry for provision of impairment
3. Entry for write off of receivables
4. Entry to reinstate uncollectible receivables that have become collectible
5. Entry to record collection of #4

Exercise #2 and 3

Old impairment method = incurred loss approach; recognizes lifetime credit losses only when there is
objective evidence of impairment
New impairment method = expected credit loss (ECL) approach; which is forward looking
a) 12-month ECL - if the financial assets are not impaired
b) Lifetime ECL – if there is significant increase in credit risk

For receivables, the simplified approach is permitted, which requires the lifetime ECL to be recognized at
initial recognition. On page 28, it states that JFC does not tract the changes in credit risk but recognizes a
loss allowance based on lifetime ECL at the reporting date. It uses the provision matrix. (ALI page 311)

On page 28, JFC considers a financial asset in default when contractual payments are 30 days past due. In
the same paragraph, JFC states that it writes off a financial asset if there is no reasonable expectation of
recovering the contractual cash flows. (ALI page 277 – 90 days past due)

Where is provision for impairment included?

JFC Note 22 (page 67) as general and administrative expenses
ALI Note 21 (page 347) as other expenses

Inventories and Biological Assets

JFC Note 7 (page 48)
ALI Note 7 (pages 298; 316 to 317)
Century Pacific (pages 42 to 43); Note 11 (page 64)

Two types of inventory systems: periodic (no records) and perpetual (records maintained) system.

Different costing methods: specific identification; FIFO; moving average; weighted average.
LIFO is not acceptable method.

Differentiate provision for impairment (page 43); write off (page 43); loss on inventory write-down (page
64)

1
How are provisions for inventory losses done? Page 43 first paragraph states that the provisions for
inventory losses are established for slow moving, obsolete, defective and damaged inventories based on
physical inspection and management evaluation.

When are inventories written off? Page 43 Inventories are written off if they are obsolete and damaged.
Destruction of obsolete and damaged inventories is made in the presence of regulatory agencies.

1. Provision for Impairment (provision – matching principle)

Allowance for Impairment

2. Loss on Inventory Write-Down (cost < NRV)

Allowance for Impairment

3. Allowance for Impairment (Write off of obsolete and damaged inventories)

Inventories

Inventories sold are expensed = CGS (Note 23 page 81)

Skip this!
Century Pacific (pages 43 and 55); Note 14 (page 69)
How should biological assets be measured? (pages 43 and 55)
How does Century Pacific measure their biological assets? Cost less any impairment (Note 14 page 69) at
cost because fair value cannot be determined.
Why cannot FV be determined? Note 14 (page 69) there is no appropriate market index and…
Does the company recognize depreciation for its biological assets? No, because biological assets grow
and are used in production.
Why are inventories and biological assets presented separately in the financial statements? Because they
have different measurement methods.

Are inventories of ALI, though they are real estate units, depreciated? No. ALI Note 7 pages 316 to 317.

PPE (owner-occupied properties)

1. Refer to the statements of financial position of JFC Parent (page 8) and ALI Parent (page 269), do
JFC and ALI have PPE and investment properties?
Yes. Note the order of their presentation. In JFC, PPE comes first before investment properties but in
ALI investment properties comes first. Why?

Are these items presented separately in the financial statement?

PPE and investment properties are presented separately because they have different uses and are
measured differently. PPE are used for operations or in production while investment properties are
held for rental or capital appreciation or both.
JFC (page 35)
ALI (page 299)

How are these items classified in the statements of financial position – current or non-current assets?
Why are they classified as such? Non-current assets because they are used for more than 12 months.

2. As per the definition given in the notes to financial statements, how are inventories, PPE (owner-
occupied) and investment properties different from each other? Kindly refer to the notes of financial
statements of ALI (from pages 269 to 380) and Double Dragon for the answer to this question.

2
 ALI (page 297) defines inventories; (page 299) investment properties; (page 299) PPE. Page 310
provides distinction between inventories and investment properties.

Double Dragon (page 41) provides distinction between inventories and investment properties and
investment properties and PPE.

How are each item measured and presented in the financial statements?
a) Inventories – cost or NRV, whichever is lower.
b) PPE – cost or revaluation method; cost less depreciation and impairments (except for land,
which does not have depreciation); net book value or carrying value
c) Investment properties – cost or FV method; cost less depreciation and impairments.

3. For JFC, how are PPE reported and valued in the financial statements? What costs are capitalized as
cost of PPE and what costs are expensed? Is this the case for ALI Parent?
JFC (page 33) ALI (page 300)
 Costs incurred before intended use - capitalized
 Costs incurred after intended use – cost of servicing (expensed); cost that will extend life of
assets, improve efficiency (capitalized).

Two costing methods for PPE: cost method and revaluation method.

4. For JFC, what are the major items under PPE? Is this the same case for ALI?
JFC Note 11 (page 53) and ALI Note 12 (page 332)

5. How does JFC estimate the useful lives of depreciable PPE and investment properties?
JFC page 45 based on the period over which the assets are expected to be available for use and based
on the collective assessment of industry practice, internal technical evaluation and experience with
similar assets.

Once estimated useful lives are determined, does JFC periodically review the validity of the estimated
useful lives of these assets? How often does JFC review such? Is this the case for ALI Parent?
Yes, periodic review is required.
JFC (page 33 and 34)
ALI (page 300)

When does depreciation begin? ALI (page 300) once assets are available for use.

6. What depreciation method is used for PPE of JFC? Where is depreciation expense included in the
income statement? Is this the case for ALI Parent?
Straight-line method for both JFC and ALI.
JFC Notes 21 and 22 (pages 66 to 67) in cost of sales and general and administrative expenses
ALI Note 21 (pages 346) in cost of sales and general and administrative expenses

7. Is land depreciated?
Land is not depreciated but is assessed for impairment.

Is impairment the same as depreciation?

Impairment and depreciation are not the same.
Depreciation is due to physical wear and tear, technical or commercial obsolescence, legal and other
limits in the use of the assets. (JFC page 45);

3
 Impairment is assessed annually. There is impairment if carrying value (cost less acc. Depreciation) <
recoverable amount. Recoverable amount is the higher of fair value less cost of disposal and value in
use (estimated future cash flows are discounted to present value) (ALI page 300)

8. Are constructions-in-progress depreciated by JFC?

No. (JFC pages 34 and 54)

9. Are fully depreciated PPE taken out of the books of the company?
No. (JFC page 34)

Investment Properties – ALI and Double Dragon

1. Can investment properties be equipment?
No. Investment properties can only be land and/or buildings as per accounting standards.

2. How does ALI measure their investment properties? At cost. (page 299)

3. How does Double Dragon measure their investment properties? At fair value (page 44)

4. In the notes to financial statements, what is required to be disclosed regarding investment properties
aside from the method used in valuing and reporting this item? If cost method is used then the fair
value of the investment properties should be disclosed as well as the valuation method. (ALI Note 11
pages 329 to 331) If fair value method is used, then there is no need to disclose the cost (Double
Dragon Note 12 pages 57 to 58)
Other disclosures include: rental income and direct operating expenses related to investment
properties; depreciation; gain/loss from sale of investment properties. (ALI page 331 and Double
Dragon page 58)

5. How is fair value defined? There are three levels of fair value hierarchy. Describe each. What level
did Double Dragon used in measuring its investment properties? Is this the same case for ALI Parent?
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants. (ALI pages 287 to 288; FV hierarchy page 287)
Double Dragon Note 12 page 57 – Level 2
ALI Note 11 pages 330 to 331 – Level 3

6. Can you transfer investment property to PPE or inventories? Can you transfer PPE or inventories to
investment property? What conditions should be present to do the transfer?
Yes, if there is a change in use. (ALI page 299 and Double Dragon page 31)

7. Using the statements of financial position of ALI Parent (page 269) and Double Dragon (page 6),
observe and compare the amounts for inventories, PPE and investment properties. What observation/s
can you make? (Make sure you refer to 2017 amounts so that proper comparison can be made.)

ALI Double Dragon

Inventories 20.713 million 3.820 million
PPE 829 million 1.01 million
Investment Properties 86.651 million 46.424 million

Intangible Assets
1. Does JFC have intangible assets? How about ALI Parent (page 269) and Double Dragon?
Only JFC and Double Dragon have intangible assets.
Definition of intangible assets discussed on page 34 (JFC) and pages 29 to 30.

4
 Intangible assets are recorded initially at cost then at cost less amortization and impairment
subsequently. Assessed at individual level:
 Finite lives – amortization and impairment
 Indefinite lives – assessed for impairment annually or more frequently (Shakey’s page 33)

2. Complete the table below: Specify where in the notes to financial statements can each item be found
for each company. (Page reference can be helpful during discussion)
JFC ALI Parent Double Dragon
Definition of intangible Page 34 N/A Pages 29 to 30
assets
Breakdown of Note 12 page 55 Note 11 pages 30 to 31;
intangible assets 55 to 56
What are the intangible Computer software (10 Advertising production
assets specified and years); trademarks and cost (5 years);
how many years are patents (5 years) concession rights
they amortized? (JVA-25 years);
computer software (5
years); franchise rights;
goodwill (indefinite);
hotel 101 brand
(indefinite)

3. Intangible assets can be finite or indefinite lives. Amortization is computed for intangible assets with
finite or indefinite lives? Amortization is computed for intangible assets with finite lives only.

What method of amortization is used? Straight-line amortization for both JFC and Double Dragon.

4. For Double Dragon, what intangible assets have indefinite lives? Hotel 101 brand and goodwill

5. Goodwill results from business acquisition. Is goodwill amortized? If yes, for how long?
Goodwill is not amortized but assessed for impairment. Once impaired, no reversal can be made of
the impairment.

6. Refer to the statement of financial position of Shakey’s Pizza, are there intangible assets? If yes, what
are they?
Yes, goodwill and trademarks (Shakey’s page 10). Shakey’s Note 6 pages 45 to 47.

7. What observation/s can you make regarding Shakey’s intangible assets in relation to its total assets?
As per page 10, intangible assets (Php6.066 million) made up 63% of total assets. This is problematic
since goodwill is about 11% of total assets in 2018 and much higher in 2017 given that total assets
was lower.

8. Relate your observation/s in #7 with the independent auditor’s report key audit matters.
Page 6 states that intangible assets made up 63% of the company’s total assets. Audit response states
that auditor has done their independent testing by involving their internal specialist.
Trademarks should not be considered intangible assets with indefinite life.

9. For Shakey’s, how are intangible assets defined and how are amortization and impairment assessment
done?

5
 Pages 23 to 24 relate to goodwill and pages 33 to 34 relates to intangible assets. Shakey’s consider
trademarks as intangible assets with indefinite life.

10. Does Shakey’s provide the computation for goodwill and trademarks? Compare this with Double
Dragon.
Note 6 pages 45 to 47 (Shakey’s). Notes 11 and 28 pages 55 to 57; 81 to 83. Shakey’s breakdown is
clearer than that of Double Dragon for goodwill.

11. Is Shakey’s goodwill impaired in 2017 and 2018? Can impairment assessed of goodwill be reversed
in the future period?
No impairment on Shakey’s goodwill in 2017 and 2018. Impairment assessed on goodwill cannot be
reversed in the future.

Investments in Financial Assets

 Investments can be in debt instruments (corporate bonds) or equity instruments (stocks).
 Investments are classified depending on the business model of the company investing.
 Investments in debt instruments can be classified as amortized cost, FVTPL or FVTOCI.
o Amortized cost – if the investment will be held until maturity; objective of the investing
company is to collect interest until maturity.
o FVTPL – if the investment is for trading purposes.
o FVTOCI – if the investment is for the collection of interest as well as for sales when
required.
 Investments in equity instruments can be classified as FVTPL or FVTOCI for ownership of less
than 20% of the outstanding shares. Investments in equity instruments which exerts significant
influence (20% and more but less than 50%) or control (more than 50%) is usually classified as
non-current assets and measured/valued using the equity method.

1. Does JFC have investments in financial assets? If yes, how are they classified? What is the
breakdown of these investments?
FVTPL (Notes 9 and 31 pages 49 to 50; 99 to 100) – Level 2 and
Investments in subsidiaries, JV and associate (Note 10 pages 50 to 52)
Both investments are classified as non-current assets.

2. Does ALI Parent have investments in financial assets? If yes, how are they classified? What is the
breakdown of these investments?
FVTPL (Note 5 pages 313 to 314) – current assets; UITF; fair value increased; Level 2
FVTOCI (Note 9 pages 318 to 319) – non-current assets; investments in quoted and unquoted stocks;
quoted stocks – Level 1 and unquoted stocks – Level 3
Investments in subsidiaries, JV and associate (Note 10 pages 319 to 329) – non-current assets; take
note of the % ownership for subsidiaries, JVs and associates.

3. Does Double Dragon have investments in financial assets? If yes, how are they classified? What is the
breakdown of these investments?
Under other non-current asset is the investment in associate. Very minimal investments in financial
instruments.

4. Differentiate subsidiary, joint venture and associate.

Subsidiaries – more than 50% for control purpose; consolidated FS
JV – 50% ownership
Associates – 20% and more for significant influence; equity method

6
5. For investments using fair value, what fair value hierarchy does each company uses?
See answers in #1 and 2.