Mark Anecito R.

Perlas, CPA
Quick Notes in Intermediate Accounting 2 (MIDTERMS 2021)
Financial asset at fair value

1. Investment are assets not directly identified with the operating activities of an
entity and occupy only an auxiliary relationship to the central revenue producing
activities of the entity.
2. Investments are held for (1) accretion of wealth (interest, rentals), (2) capital
appreciation, (3) ownership control, (4) meeting business requirement
(noncurrent fund), (5) protection (cash surrender value).
3. Characteristics of Financial instrument: (1) contract (2) at least two parties (3)
financial asset of 1 party and a financial liability or equity instrument of another
party.
4. Examples are cash in the form of notes and coins. Cash in the form of checks.
5. Gold is a commodity and therefore not a financial asset.
6. Financial asset: (1) cash (2) contractual right to receive cash or other financial
asset from other entity (3) contractual right to exchange financial instrument
with another entity under conditions that are potentially favorable (4) equity
instrument of another entity.
7. Stock option is an example of a favorable condition held by the holder to
purchase shares of another entity at less than market price.
8. Stock option is a financial liability of the issuer.
9. Delivery of goods or services in the future is not a financial liability. It must
involve cash or another financial asset and must be contractual to qualify so.
10.Constructive obligations do not arise from contracts.
11. Equity instruments: (1) OSC (2) PSC (3) Warrants or call options.
12. Mandatory redeemable preference share is a financial liability. Accordingly,
dividends paid to holders is an interest as component of finance cost.
13.Financial assets at fair value include both equity securities and debt securities
while financial assets at amortized cost include only debt securities.
14.Fair value through profit/loss:
a. Trading securities
b. Financial assets designated on initial recognition as at fair value through
profit/loss.
Like investment in bonds and other debt instruments
c. Investments in quoted equity instruments (by consequence).
15.In financial assets held for trading, transaction costs are expensed outright.
16. Transaction costs do not include debt premiums or discounts, financing costs
and internal and administrative or holding costs.
17. Financial assets held for trading are derivatives and not an effective hedging
instrument.
18.At initial recognition, an entity shall measure a financial asset at fair value plus,
in the case of financial asset not at fair value, transaction costs. In subsequent
measurement, an entity shall choose between fair value and amortized cost.

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Mark Anecito R. Perlas, CPA
Quick Notes in Intermediate Accounting 2 (MIDTERMS 2021)
19.Disclosure of the cost of security is necessary.
20.Notes to FS shall disclose the individual securities with their corresponding
carrying amount and market value.
21.Cumulative unrealized loss/gain is shown in the statement of changes in equity.
22. Unrealized loss/gain may be transferred to retained earnings but not
subsequently transferred to profit/loss.
23.The entity shall disclose the change in business model as this is a significant and
demonstrable event.
24.For financial assets measured at fair value, all gains and losses are either
presented in profit or loss or in other comprehensive income. It is not necessary
therefore to assess financial assets measured at fair value for impairment.
25.Only financial assets at amortized cost is tested for impairment.
26.IASB rejected totally the tainting provision in PAS 39.
27.PFRS 9 amended PAS 1 to require an entity to present as a separate line item in
the income statement all gains and losses from the derecognition of financial
assets measured at amortized cost.

Investment in Equity securities

1. Equity securities may also represent rights and options to acquire ownership
shares.
2. Cash 150,000
Investment in equity securities 100,000
Dividends income 5,000
Gain on sale of investment 45,000
3. Property dividends:
Investment in equity sec 50,000
Dividends income 50,000
*recorded at fair value.
4. Property dividends or dividends in kind are dividends in the form of property or
noncash assets.
Merchandise inventory
Dividend income
4. Liquidating dividend may be in the form of cash or noncash assets.
5. Wasting assets (partly income and return of capital):
Cash
Dividend income
Investment in ES
6. When liquidating dividends exceed the cost of investment, the difference is
credited to gain on investment. If the cost of investment is not fully recovered,
the balance is written off as a loss.

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 Mark Anecito R. Perlas, CPA
Quick Notes in Intermediate Accounting 2 (MIDTERMS 2021)
7. Stock dividends are in the form of the issuing entity’s own shares. The PAS term
for stock dividend is bonus issue. Property dividends are shares of another entity
declared as dividends.
8. Stock dividends- changing the legal capital by capitalizing RE. Not an income
since there is no distribution of assets.
9. Received 2,000 shares representing 20% stock dividend on 10,000 original
shares held. Shares now held, 12,000 shares.
10.Shareholders may receive a stock dividend which is different from the original
shares.
11. Investment in preference share 50,000
Investment in OS 50,000
• the allocated cost to OS is 750,000 based on its relative fair value. 50,000
to preference share. Total cost is 800,000
11.Shares received in lieu of cash dividend are income at fair value of the shares
received. Such shares are in effect property dividends.
12.If there is no market value, dividend income is recorded at cash dividend.
13.The “as if approach” is used when 150,000 cash is received in lieu of 1,000
stock dividends declared. It is then assumed that the shares are received and
subsequently sold at the cash received. the original cost of 1,100,000 will now
apply to 11,000 shares and so, the revised cost per share would then be 100.
Cash 150,000
Investment in ES 100,000
Gain on Investment 50,000

14.In BIR, all cash received is income. Thus, the above transaction is simply
recorded as:
Cash 150,000
Dividend income 150,000
15, In split up, outstanding shares are called in, and replaced by a
larger number, with the effect of increasing the no. of shares and decreasing the
par value per share.
16. Received 20,000 new shares as a result of 2-for-1 split of 10,000
original shares.
17. Special assessments are additional capital contribution of the
shareholders. On the part of the shareholders, special assessments are recorded as
additional cost of the investment and on the part of the entity as share premium.
Investment in ES
Cash
18.Stock right is inherent in every share. Its purpose is to give the shareholders the
chance to preserve their equity interest in the corporation.

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 Mark Anecito R. Perlas, CPA
Quick Notes in Intermediate Accounting 2 (MIDTERMS 2021)
19.If stock rights are accounted for separately, carrying amount of the original
investment in ES is allocated to the stock rights at an amount equal to the fair
value of the stock rights at the time of acquisition.
20.Under PAS 39, embedded derivative shall be separated from the host contract.
While under PFRS 9, if the host contract is a financial asset, the embedded
derivative is not separated.
21.The shares are selling right-on if it is between the date of declaration and date of
record. Same as in dividend-on. No accounting problem is encountered because
stock rights are not yet received.
22.If between record date and expiration date, the shares are selling ex-right so it
can now be sold separate from the right.
23. Accounted for separately:
Stock rights (at FV)
IES
*if stock rights do not have a fair value, the theoretical or parity value
of the stock rights is used in measuring the fair value of stock rights.
When stock rights are exercised, the cost of the new investment includes the
subscription price and the cost of the stock rights exercised.
IES
Cash
SR
24. If expired, Loss on stock rights
Stock rights

Right-on: Ex right:
210-150 210-150
5+1 5

Not accounted for separately:

Received 10,000 stock rights to subscribe for new shares at 100per share for every
5 rights held, or a total of 2,000 new shares.
Exercise of rights:
IES
Cash
• If stock rights are not exercised but sold: debit cash and credit the original
investment. No gain or loss from the sale. Cost recovery
• If the stock rights are not exercised but expired, only a memo entry is
necessary to record the expiration.
• Any subsequent transactions affecting the shares shall be accounted for
using either the FIFO or average method.

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Mark Anecito R. Perlas, CPA
Quick Notes in Intermediate Accounting 2 (MIDTERMS 2021)
Investment property

1. Only land and buildings can qualify as investment property. An equipment or

any movable property cannot.
2. An investment property is not held:
a. For use in the production or supply of goods or services or for
administrative purposes.
b. For sale in the ordinary course of the business
3. If the property is held by the owner or lessee under a finance lease for
administration, it is known as owner-occupied property.
4. Investment property generates cash flows that are largely independent of the
other assets of the entity. This is the characteristic that distinguishes investment
property from owner occupied. The generation of profit is not merely due to
administration but also to the other assets used in the production. The owner-
occupied indirectly help or is just necessary to produce profit. Not an
independent cash-generating unit.
5. Examples of investment property:
a. Long-term capital appreciation
b. Land held for a currently undetermined use.
c. Bldg. owned and leased out under an operating lease.
d. Building that is vacant but is held to be leased out under an operating
lease.
e. Property that is being constructed or developed for future use as an
investment property.

Not considered an investment property:

1. Owner-occupied
2. Property held for future use as owner-occupied
3. Property held for future development and subsequent use as owner-
occupied
4. Property occupied by employees, whether or not the employees pay
rent at market rate
5. Owner-occupied property awaiting disposal
6. Property held for sale in the ordinary course of business
7. Property being constructed or developed on behalf of third parties
8. Property that is leased to another entity under a finance lease.

6. Property interest that is held by a lessee under an operating lease may be

classified and accounted for as investment property provided:
a. Property meets the definition of investment property.
b. Operating lease is accounted for as if it were a finance lease.
c. The lessee uses the fair value model in measuring property interest.

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Mark Anecito R. Perlas, CPA
Quick Notes in Intermediate Accounting 2 (MIDTERMS 2021)
7. Where a property held under a lease is classified as an investment property, the
initial cost is the lower amount between fair value and the present value of the
minimum lease payments.
8. If in the property, portions could be sold or leased out separately, an entity shall
account the portions separately as investment property and owner-occupied. If
cannot be sold separately, property is investment property if only an
insignificant portion is held for manufacturing or admin.
9. Classification of property whether owner-occupied or investment property
depends upon the significance of service. Example is an entity owns and
manages hotel. The services provided to guests are a significant component of
the arrangement as a whole. Therefore, it is owner-occupied.
10.To identify what is significant or not, usually those below 10% as owner-
occupied is insignificant portion.
11.Property leased to an affiliate- from the perspective of the individual entity that
owns it, the property leased to subsidiary or parent is considered an investment
property. From the perspective of a group as a whole and for purposes of
consolidated FS, it is owner-occupied.
12.Investment property shall be measured initially at its cost. Transaction costs
shall be included in the initial measurement.
13. The cost of purchased investment property comprises its purchase price and
any directly attributable expenditure.
14. The cost of self-constructed investment property is its cost at the date when the
construction or development is complete.
15.If payment is deferred, its cost is the cash price equivalent. The difference
between this amount and total absolute payment is recognized an interest
expense over the credit period—amortized.
16.The cost of investment property acquired in exchange is measured at fair value
of the asset given up unless the exchange transaction lacks commercial
substance.
17.Entity shall choose between fair value and cost. If cost is chosen, it is carried at
cost less any accumulated depreciation and impairment. Fair value is disclosed.
However, when property interest held under operating lease and classified as an
investment property, the fair value model shall be applied.
18.fair value of investment property shall reflect market conditions at the end of
reporting period. Fair value is time specific as of a given date because market
conditions change. Valuation shall take place at every end of reporting period.
19.Equipment such as lift or air-conditioning is often an integral part of a building
and is generally included in the fair value of the investment property.
20.If an office is leased on a furnished basis, the fair value of office generally
includes the fair value of the furniture because the rental income relates to the
furnished office. Fair value excludes prepaid or accrued operating lease income.

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Mark Anecito R. Perlas, CPA
Quick Notes in Intermediate Accounting 2 (MIDTERMS 2021)
21.The best evidence of fair value of investment property is the current price in an
active market for similar property in the same location and condition and subject
to similar lease and another contract. In the absence of current price:
a. Current price in an active market for property of different nature,
condition and location adjusted to reflect those changes.
b. Recent price of similar property in less active market with adjustments to
reflect changes in economic conditions.
c. Discounted cash flow projection based on reliable estimate of future cash
flows supported by the terms of existing lease and other contract and by
external evidence such as current market rent for similar property in the
same location and condition.
22.If the fair value cannot be determined reliably on a continuing basis, cost
method is used, and the residual value of the investment property shall be
assumed to be zero
23.PAS 40 states that an entity that uses the fair value model shall continue to
measure its other investment property at fair value, notwithstanding the fact
that one investment property is carried using cost due to exceptional cases.
24.If fair value is used, no depreciation is recorded.
25.When entity uses the cost model, transfers between investment property,
owner-occupied and inventory shall be made at carrying amount.
26.A transfer from investment property at fair value to owner-occupied or
inventory, shall be accounted for at fair value which becomes the deemed cost
for subsequent accounting.
27.If owner-occupied is transferred to investment property that is to be carried at
fair value, the difference between fair value and the carrying amount of the
property shall be accounted for as revaluation of property, plant and equipment.
28.if an inventory is transferred to investment property that is to be carried at fair
value, the remeasurement to fair value shall be included in profit or loss.
29. When an investment property under construction is completed and to be carried
at fair value, the difference between fair value and carrying amount shall be
included in profit or loss.

An investment property shall be derecognized:

A. On disposal
B. When the investment property is permanently withdrawn from
use.
C. When no future economic benefits are expected from the
investment property

Gain or loss from the disposal of investment property shall be determined as the
difference between the net disposal proceeds and the carrying amount of the
asset and shall be derecognized in profit or loss.

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Mark Anecito R. Perlas, CPA
Quick Notes in Intermediate Accounting 2 (MIDTERMS 2021)

Compensation from third parties for investment property that was impaired, lost
or given up shall be derecognized in profit or loss when the compensation
becomes receivable.

General disclosures:
1. Whether the entity uses the cost model or fair value of measuring the
investment property
2. The amount of rental income for the period along with the related expense.
3. Restrictions on the investment property either through rental or sale
proceeds.
4. Contractual obligations to purchase or construct investment property

If the fair value is used:

1. Detailed reconciliation, showing all the movements between the carrying
amount of investment property at the beginning and end of the period.
2. The method of determining the fair value of investment property and
whether the valuation is carried out by an independent qualified valuer.
3. Net gains or losses from fair value adjustments
4. whether significant fixtures, such as lift and office furniture, within an
investment property, have been separately recognized.

When the cost model:

 The depreciation method or rate and the useful life.
 Detailed reconciliation of the gross cost of the investment property and the
related accumulated depreciation showing all the movements during the
year.
 fair value of the investment property where possible. If it is not possible,
such fact shall be explained.

Intangible Assets

1. Essential criteria for intangible assets: (1) Identifiability (separable, contractual)

(2) Control (competitive advantage) (3) future economic benefits (max. revenue
and min. cost).
2. The capacity of an entity to control future economic benefit would stem from
legal rights.
3. Skill of employees arising from training costs, market share, and customer
loyalty are not intangible assets since entity cannot control those.

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Mark Anecito R. Perlas, CPA
Quick Notes in Intermediate Accounting 2 (MIDTERMS 2021)
4. Cost of intangible assets are initially measured at cost and it depends on the ff:
a. Separate acquisition
b. Acquisition as part of business combination—Fair value at the date of
acquisition
c. Government grant—fair value or nominal amount or zero plus direct costs
d. Exchange—fair value of the asset given up. If it has no commercial
substance, at carrying amount of the asset given up.
5. Intangible asset can only be carried at revalued amount if there is an active
market for the asset because usually, fair value or residual value of intangibles
is presumed to be zero.

Specific Intangible assets

1. Legal life of patent is 20 years. It cannot be renewed but its life can be extended
beyond the legal life by a new patent for improvements and changes.
2. If patent is internally developed, it cost includes licensing and other related legal
fees in securing the patent rights.
3. Legal fees of successfully prosecuting or defending the patent shall be expensed
because the effect is maintenance. If it is unsuccessful, legal costs and the
remaining cost of the patent is written off as a loss.
4. Competitive patents protect the original patent and thus amortized over the
remaining life of the old patent
5. Related patent extends the life of the old patent. The patents shall then be
amortized over the extended life.
6. If there is no extension, they shall be amortized over their own life.
7. In practice, cost of copyright is written off against the revenue of the first
printing instead of theoretically amortizing it over the useful life.
8. The term of protection for copyright is during the life of the author and for 50
years after his death.
9. Franchise may be granted for a definite or indefinite period.
10.Periodic franchise fee which is usually based on the gross sales is normally
expensed, while initial franchise fee is capitalized—FRANCHISE.
11.Leasehold improvements are classified as PPE and legally revert to the lessor
upon termination of the lease.
12.If renewal option is highly probable, cost of the leasehold improvements is
spread over the extended period, assuming it is shorter than the life of the
improvement. If it is uncertain, it is generally amortized over the life of the
lease, assuming it is shorter than the life of the improvements.
13.Legal life of trademark is 10 years and may be renewed for periods of 10years
each. Considering the almost automatic renewal of trademark, it may properly
be classified as an intangible asset with indefinite life and thus, tested for
impairment annually.

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Mark Anecito R. Perlas, CPA
Quick Notes in Intermediate Accounting 2 (MIDTERMS 2021)
14.Goodwill has indeterminate life, inherent in a continuing business and relates to
the entity as a whole. It is created by a good relationship between an entity and
its customers.
15.Internally developed goodwill is not recognized because there is no cash or
objective transaction involved.
16.Measurement of goodwill acquired in business purchase may be accounted for in
residual or direct approach.
17.Negative goodwill term is abandoned and replaced as Gain on bargain purchase.
18.In computing for impairment of intangible asset with indefinite life, future cash
flows are divided by the discount rate to get the present value
19.Acquired in process R and D project separately or in business combination is
recognized as an asset at cost, even if a component is research.
20.USA GAAP says that expenditures for research and development which have
future alternative uses can be capitalized. Subsequent expenditures,
depreciation, amortization is charged to R and D expense.
21.Capitalizable software costs include the cost of coding and testing and the cost
to produce the product masters. Costs to actually produce the software from
masters and package the software for sale shall be charged as inventory.
22.A computer software purchased as an integral part of machine that cannot
operate without the specific software shall be treated as PPE. If it is not an
integral part of a related hardware, it is classified as intangible asset.
23.Web site development costs are expensed.
24.Service concession is an arrangement between concession operator and grantor
public sector whereby private sector shall provide services to the public for some
consideration. The scheme is to build, operate and transfer (BOT).
25.The infrastructure asset is not recognized as PPE because the grantor controls
the asset. It is either treated as financial asset if there is a contractual right to
receive payment from the grantor. It is intangible asset if the entity has no right
to receive cash but has the right to charge users toll fee as revenue.

Concepts in PPE that can still be applied in Intangibles and Investment

Property

Subsequent Expenditures

1. Revenue expenditure is an expenditure that benefits only the current period.

Therefore reported as an expense. If it benefits current and future periods, it is
a capital expenditure and reported as an asset.

2. Subsequent costs is capitalized when:

a. Expenditure extends the life of the property

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Mark Anecito R. Perlas, CPA
Quick Notes in Intermediate Accounting 2 (MIDTERMS 2021)
b. It increases the capacity of the property and quality of output(upgrading
machine parts)
c. Improves the efficiency and safety of the property by adopting a new
production processes leading to large reduction in operating cost.

3. The cost of addition which is a new unit is depreciated over its useful life. But
the cost of an expansion should be depreciated over its useful life or remaining
life of the asset of which it is part, whichever is shorter
4. Improvements or betterment may represent replacement of an asset or part
with one of a better quality or superior quality
5. Replacement also involve substitution but the new asset is not better than the
old asset when acquired.
6. Ordinary repairs are expensed. Extraordinary are capitalized
7. An entity does not include in the carrying amount of PPE the costs of day to day
servicing of the property
8. Rearrangement cost is capitalized and amortized over the remaining life of the
asset.
9. If the original part of an existing asset is separately identifiable, the major
replacement is debited to the asset account. The cost of the part eliminated and
the related accumulated depreciation are removed from the accounts and the
remaining carrying amount of the old part is treated as a loss. If it not
practicable for an entity to determine the carrying amount of the replaced part,
it may use the cost of the replacement cost as an indication of what the cost of
the replaced part was at the time it was acquired or constructed.

Revaluation

1. The frequency of revaluation depends upon the movement in the fair value of
the items of PPE being revalued. When a fair value of a revalued asset differs
materially from its carrying amount a further revaluation is necessary. Some
items of PPE may experience significant and volatile movements in fair value
thus necessitating annual revaluation.
2. Revaluation every 3-5 years may be sufficient for items of PPE with only
insignificant movements in fair value.
3. A class of PPE is a grouping of assets of a similar nature and use in an enterprise
operation. Examples of separate classes are land, buildings, machinery, ships,
motor vehicles, furniture and fixtures and office equipment.
4. Items within a class of PPE are revalued simultaneously in order to avoid
selective revaluation and the reporting of amounts which are a mixture of costs
and values at different dates.

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Mark Anecito R. Perlas, CPA
Quick Notes in Intermediate Accounting 2 (MIDTERMS 2021)
5. In the absence of fair value, depreciated replacement cost (sound value) is
used.
6. revaluation increment is equal to fair value or depreciated RC minus the carrying
amount of the asset.
7. Replacement cost is the current purchase price of a particular asset
8. Appreciation or revaluation increase is the excess of the revalued amount over
the historical cost. Appreciation minus the corresponding Acc depreciation equals
net appreciation or revaluation surplus.
9. 2 approaches in recording revaluation: proportional and elimination
10.Revaluation surplus is a component of OCI. It is transferred to RE when realized
over the remaining life of the asset or fully realized on disposal of asset.
11.The historical cost and the related accumulated depreciation shall be disclosed in
the notes.
12.Proportional approach is the preferable method because it preserves the gross
and net amounts after revaluation.

Impairment

1. Impairment is the fall in the market value of an asset so that its recoverable
amount is now less than its carrying amount.
2. The events and changes in circumstances that lead to an impairment of asset
may be classified as external or internal sources of information.
3. External sources: (1) decline in market value or a new competitor in the
industry (2) Significant change in the technological, market, legal or economic
environment of the business or change in customer taste (3) Decrease in value
in use due to increase in interest or discount rate.
4. Internal: (1) Obsolescence or physical damage (2) restructuring, held for sale or
idle. (3) economic performance of an asset will be worse than expected.
5. Recoverable amount is the higher between fair value less cost to sell and value
in use.
6. If there is binding sale agreement, fair value less cost to sell is the sales price
less costs to sell. If there is no binding sale agreement but is traded in an active
market, fair value less cost to sell is equal to the market price (current bid price,
sales price of recent transaction) less costs to sell. If there is no binding sale
agreement and the asset is not traded in an active market, it is equal to the best
estimate of knowledgeable and willing parties in an arm’s length transaction.
7. Cash flow projections shall be based on the most recent budgets on financial
forecasts, usually up to a maximum of 5 years, unless a longer period can be
justified.
8. Estimate of cash flows include inflows and outflows from continuing use of the
asset and net cash flows received or paid on the disposal of the asset at the end
of useful life in an arms-length transaction. It excludes restructuring to which

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Mark Anecito R. Perlas, CPA
Quick Notes in Intermediate Accounting 2 (MIDTERMS 2021)
the entity is not yet committed, inflows and outflows from enhancement of
asset, financing, and income tax.
9. Foreign currency future cash flows shall be forecast in the currency in which
they will be generated and will be discounted using a rate appropriate to that
currency and the resulting figure shall then be translated into the reporting
currency at the spot exchange rate at the date of value in use calculation.
10.Discount rate is the current pretax rate that reflects the current assessment of
the time value of money and the risks specific to the asset. It shall not reflect
risk for which the future cash flow estimates have already been adjusted.
11.As a basic rule, the recoverable amount of an asset shall be determined for the
asset individually. If it is not possible, the recoverable amount of the CGU to
which the asset belongs is determined.
12.CGU should be the smallest aggregation of assets for which cash flows can be
identified and which are independent of cash flows from other assets or group of
assets. If aggregation is done at the “entity level”, there would be no
impairment to be recognized. But if it is done at the department or product line
level, we could easily identify those loss-producing unit from cash generating
ones. Thus, impairment can be recognized.
13.Carrying amount of CGU does not include the carrying amount of any recognized
liability.
14.Corporate assets other than goodwill contribute to future cash flows of CGU. It is
divisional assets such as head office building, EDP, research center. It does not
generate independent cash flows thus recoverable amount of an individual
corporate asset cannot be determined unless management has decided to
dispose of the asset (fair value less cost to sell).
15.The increased carrying amount of an asset due to reversal of an impairment loss
shall not exceed the carrying amount that would have been recognized for the
asset in prior years.
16.Impairment Loss shall be recognized immediately in profit or loss and presented
separately.
17.PAS 36 does not specify whether the impairment shall be credited to the asset
directly or use accumulated depreciation or accumulated impairment loss.
18.If aggregation of assets for the purpose of determining the cash generating unit
is done at the “entity level”, there would be no impairment to be recognized
since those unprofitable assets would be concealed. Instead, it should be done
at the department or product line level so that those loss-producing assets
would be written down to recoverable amount.
19.Corporate assets are assets other than goodwill that contribute to the future
cash flows of both the cash generating unit under review and other cash
generating unit.

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