INTERMEDIATE ACCOUNTING III

CHAPTER 1: STATEMENT OF FINANCIAL POSITION

Statement of Financial Position – a formal statement showing three (3)

elements comprising it: A, L, E
- Use to evaluate factors as liquidity, solvency, and the need of the
entity for additional financing

Liquidity – ability to meet currently maturing obligations

Solvency – availability of cash over the longer term to meet maturing
obligations.
PAS 1, paragraph 60, provides that an entity shall present current and
non-current assets and liability as separate classifications in the
statement of financial position.

ASSETS
 Present economic resources controlled by the entity as a result of
past events
 Economic resources (right that has the potential to produce
economic benefits)
 Essentials characteristics:
o Controlled by the entity;
o Result of a past event;
o Has the potential to produce economic benefits.
 Current Assets
 Shall be classified as one when:

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  Cash/cash equivalent unless restricted to settle
liability for more than 12 months after the reporting
period
 Entity holds it for the purpose of trading
 Entity expects to realize within 12 months after
reporting period
 Entity expects to realize the asset/intends to
sell/consume it within the entity’s normal operating
cycle.
 Cash and Cash Equivalents
o Includes:
 Cash on hand
 Petty Cash Fund
 Cash in Bank
 Any cash equivalent
o Shall be unrestricted in use
o Cash equivalent
 Short-term, highly liquid investments that
are readily convertible into known amount of
cash and subject to insignificant risk of
change in value.
 Has a short maturity of three (3) months or
less from the date of acquisition.
Equity security cannot qualify as cash equivalents because shares do
not have a date of maturity.
However, preference shares with specified redemption date and
acquired three (3) months before redemption date can qualify as
cash equivalents.
o Held for trading
 Classified when:
 It is acquired principally for sale in near
term

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  On initial recognition, it is part of the
portfolio of the identified financial
instruments that are managed together
and for which there is evidence of a
recent actual pattern of short-term
profit taking.
 It is derivative, except for a derivative
that is a financial guarantee contract or
a designated and an effective hedging
instrument.
 Debt and equity securities purchased with the
intent of selling them in the ‘near term’ or
very soon to generate short-term
gains/profits.
o Short-term non-trade receivables
 Expected to be realized within 12 months
 Arising from the sources other than the sale
of merchandise or service in ordinary courses
 Classified as current if collectible within one
year from the end of reporting period
o Realized, sold or consumed
 Refers to trade receivables, inventories and
prepayments.

NOTE: Operating Cycle – time between the acquisition of assets for

processing and their realization in cash or cash equivalents.

- If not clearly identifiable, duration is assumed to be 12 months.

 Current assets are usually listed in the order of liquidity. The

following are minimum line item:
a. Cash and cash equivalents

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 b. Financial assets at FVPL, such as trading securities and other
investments in quoted equity instruments
c. Trade and other receivables
d. Inventories
e. Prepaid expenses

Non-current Assets

All other assets not classified as v=current. It includes the following:

o PPE
o Long-term investments
o Intangible assets
o Other non-current assets
o Deferred tax asset
PPE (property, Plant and Equipment)
o Tangible assets held for use in production or supply of goods
and services, for rental to others, or for administrative
purposes, and are expected to be used during more than one
period.
o Examples of PPE or fixed assets:
 Land
 Land Improvement
 Building
 Machinery
 Ship
 Aircraft
 Motor Vehicle
 Furniture and fixtures
 Office equipment
 Patterns, molds and dies
 Tools
 Bearer plants
Investment

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 o An asset held by an entity for the accretion of wealth through
a capital distribution, for capital appreciation, or for other
benefits such as those obtained through trading relationship.
o Current Investment
 By nature readily realizable and intended to be held for
not more than one year
o Non-current investment
 Other than a current investment/intended to be held for
more than one year.
o Examples of long-term investments:
 Investment in share and bonds
 Investment in subsidiaries
 Investment in associates
 Investment in funds such as sinking fund, plant and
expansion plant and preference share redemption fund
 Investment property
 Cash surrender value of life insurance policy
 Investment in joint venture
Intangible Assets
o Identifiable non-monetary asset without physical substance
o Must be controlled by the entity as a result of past event and
from which future economic benefits are expected to flow to
the entity.
o Expected to provide future economic benefits
o Identifiable when:
 It is separable or capable of being sold, transferred,
licensed, rented, or exchanged separate from the entity.
 It arises from contractual or other legal right.
o Include: (identifiable)
 Patent
 Franchise
 Copyright (unidentifiable)

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  Goodwill
 Trademark
 Computer software
Other Non-Current Assets
o Do not fit into the definition of the previously mentioned.
o Examples:
 Long-term advances to officers
 Directors (advances)
 Shareholders (advances)
 Employees (advances)
 Abandoned property
 Long-term refundable deposit
LIABILITIES
A present obligation to transfer an economic resource as a result of
past events
Essential characteristics:
o Entity has a present obligation
o Obligation is to transfer an economic resource
o Liability arises from past event
Current Liabilities
o Classify when:
 The entity expects to settle the liability within the entity’s
normal operating cycle
 The entity holds the liability primarily for the purpose of
trading
 The liability is due to be settled within 12 months after
the reporting period
 The entity does not have an unconditional right to defer
settlement of the liability for at least 12 months after the
reporting period.
o Long-term debt currently maturing

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  Classified as current, when if:
 The original term was for a period longer than 12
months
 An agreement to refinance or to reschedule
payment on a long-term basis is completed after
the end of reporting period and before the financial
statement are authorized for issue.
o Covenants
 Attached to borrowing agreements which represent
undertakings by the borrower.
 Under these covenants, if certain conditions relating to
the borrower’s financial situation are breached, the
liability becomes payable on demand.
 PAS 1, paragraph 74, states that such a liability is
classified as current even if the lender has agreed, after
the end of reporting period and before the statements
are authorized for issue, not to demand payment as a
consequence of the breach.
 However, paragraph 75 states that the liability is
classified as noncurrent if the lender has agreed on or
before the end of reporting period to provide a grace
period ending at least 12 months after the end of
reporting period.
 Grace Period – period in within which the borrower can
rectify the breach and during which the lender cannot
demand immediate payment.
Following line items for current liabilities:
o Trade and other payable
 Includes:
 Accounts Payable
 Notes Payable
 Accrued Interest on Notes Payable

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  Dividends Payable
 Accrued Expenses
 No objection can be raised if the trade accounts and
notes payable are separately presented.
o Current Provisions
o Short-term borrowing
o Current portion of long-term debt
o Current tax liability
Non-current Liabilities
o Not classified as current liabilities
o Examples:
 Non-current portion of long-term debt
 Lease liability
 Deferred tax liability
 Long-term obligations to entity officers
 Long-term deferred revenue

 Working capital – excess of current assets over current liabilities

 Working capital ratio – current assets divided by current liabilities

o Estimated Liabilities
 Obligations which exist at the end of reporting period
although the amount is not definite
 May be classified either as current or non-current
o Contingent Liability
 Possible obligation arises from past event whose
existence will be confirmed only be the occurrence or
non-occurrence of one or more uncertain future events
not wholly within the control of the entity.

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  A present obligation that arises from past event but is not
recognized because:
 It is not probable that an outflow of resources
embodying economic benefits will be required to
settle the obligation.
 The amount of the obligation cannot be measured
reliably.

RANGE OF OUTCOMES:

a. Probable – more than 50% likely to occur

b. Possible – occurrence is 50% or less
c. Remote – least likely or chance is very slightly; 10% or less

TREATMENT OF CONTINGENT LIABILITY

 It is not recognized on financial statement. It shall be disclosed only.

 The required disclosures are:
o Brief description of the nature of the contingent liability
o An estimate of the financial effects
o An indication of the uncertainties that exist
o Possibility of any reimbursement.
 If contingent liability is remote, no disclosure is necessary
 If probable and can be measured reliably, it is not a contingent
liability but shall be recognized as a provision.
 Thus, contingent liability is either probable or measurable but not
both.

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CONTINGENT ASSET

A possible asset arises from past event and whose existence be

confirmed only by the occurrence or non-occurrence of one or more
uncertain future events not wholly within the entity.
Usually arise from unplanned events the give rise to the possibility
of an inflow of economic benefits to the entity.

Treatment of Contingent Assets:

 Shall be recognized because this may result to recognition of income

that may never be realized.
 Outcome of a contingent asset is reported as follows:
 Recognized in the period when realized
 Only disclosed when it is probable
 If contingent asset is possible, no disclosure ids required
 If the contingent asset is remote, no disclosure is required

EQUITY

 A residual interest in the assets after deducting all the liabilities

 Net assets or total assets minus liabilities.

 Shareholder’s equity or stockholder’s equity

 Residual interest of owners in the net assets of a corporation

measured by the excess of assets over liabilities

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  Elements constituting shareholder’s equity:
Philippine Term IAS Term
Capital Stock Share Capital
Subscribed Capital Stock Subscribed Share Capital
Common Stock Ordinary Share Capital
Preferred Stock Preference Share Capital
Additional Paid-In Capital Share Premium
Retained Earnings (Deficit) Accumulated Profits
(Losses)
Retained Earnings Appropriation Reserves
Appropriated
Revaluation Surplus Revaluation Reserve
Treasury Stock Treasury Share

Share Capital – portion of the paid-in capital representing the total par or
stated value of the shares issued

Subscribed Share Capital – subscribed but not yet fully paid

Subscriptions Receivable – deduction from the related subscribed share
capital

Share Premium – capital contributed in excess of the par or stated value

Retained Earnings – cumulative balance of periodic net income/loss,
dividend distributions, prior period errors, changes in the accounting
policy and other capital adjustments.

Un-appropriated Retained earnings – free and can be declared as

dividends
Appropriated Retained Earnings – not available for any divided declaration

Deficit – debit balance in the retained earnings

- deduction from shareholder’s equity

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Revaluation Surplus – excess of sound value over carrying amount of the
revalued asset

Sound Value – FV or depreciated replacement cost

Depreciated Replacement Cost – replacement cost minus accumulated

depreciation

Carrying amount – historical cost minus accumulated depreciation on cost

Treasury Shares

 Entity’s own shares issued and then reacquired but not

cancelled
 Recorded as cost and not recognized as an asset
 When treasury shares are acquired, the retained earnings
must be appropriated to the extent of the cost of the treasury
shares
 Reported as a deduction from the shareholder’s equity

 Under International Accounting Standard (IAS), the use of equity

reserves is based on whether a reserve is part of distributable equity
or non-distributable equity

DISTRIBUTABLE EQUITY – can be distributed to shareholders as dividends

without impairing the legal capital of the entity

NON-DISTRIBUTABLE EQUITY – cannot be distributed in any form during

the lifetime of the entity.

--- items of the equity other than the

aggregate par or stated value of share capital and retained unappropriated.

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 PAS 1, paragraph 54, states that as a minimum, the statement of
financial position shall include the following line items:
1. Cash and cash equivalents
2. Financial assets (other than 1, 3 and 6)
3. Trade and other receivables
4. Inventories
5. PPE
6. Investment in associates using the equity method
7. Intangible assets
8. Investment property
9. Biological assets
10. Total of assets classified as held for sale and assets included
in disposal group classified as held for sale
11. Trade and other payables
12. Current tax asset and liability
13. Deferred tax asset and deferred tax liability
14. Provisions
15. Financial liabilities (other than 11 and 14)
16. Liabilities included in disposal group held for sale
17. Non-controlling interest
18. Share capital and reserves

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