Financial Accounting and Reporting: Non-Financial Assets FAR EASTERN UNIVERSITY

FAR EASTERN UNIVERSITY

Institute of Accounts, Business and Finance
Morayta, Sampaloc, Manila City

TOPICS (NON-FINANCIAL ASSETS) – PART 2:

A. GOVERNMENT GRANTS
B. BORROWING COST
C. WASTING ASSETS
D. IMPAIRMENT OF ASSETS (PAS 36)
E. NON-CURRENT ASSET HELD FOR SALE
F. DISCONTINUED OPERATION

A. GOVERNMENT GRANTS

5.2 Non-Financial Assets (IAS 16, IAS 38, IAS 40, IAS 23, IAS 41, IAS 20, IAS 36, IAS 38, IFRS 5, IFRS 6)
5.2.2 Property, Plant and Equipment
5.2.2.1 Nature
5.2.2.2 Recognition principle
5.2.2.3 Initial recognition basis

Government Grants
Government grants are assistance by government in the form of transfers of resources to an entity in return
for past or future compliance with certain conditions relating to the operating activities of the entity. They
exclude those forms of government assistance which cannot reasonably have a value placed upon them and
transactions with government which cannot be distinguished from the normal trading transactions of the
entity.

Government assistance
Government assistance is action by government designed to provide an economic benefit specific to an
entity or range of entities qualifying under certain criteria.

Review Questions: Theory of Accounts

1. *It is assistance by government in the form of transfers of resources to an entity in return for past or
future compliance with certain conditions relating to the operating activities of the entity
a. Government warnings c. Income from government grants
b. Government assistance d. Government grants
2. Government grants do not include:
a. Grants whose value cannot be reasonably measured
b. Grants whose value needs to be measured by a technical expert
c. Grants whose value is less than P1,000
d. Grants whose value is less than one percent of the entity’s turnover
3. In relation to a benefit included in the term 'government assistance', which of the following statements
according to PAS20 Government grants and government assistance is true?
I. The provision of infrastructure in developing areas is a benefit.
II. The imposition of trading constraints on competitors is a benefit.
a. I only b. II only c. Both I and II d. Neither I nor II
4. Grants are to be accounted when:
a. The grant is declared
b. The grant is received
c. There is reasonable assurance that the conditions attached will be complied with
d. The grant is spent on the assets
5. In the case of a nonmonetary grant, which of the following accounting treatments is prescribed by PAS
20?
a. Record the asset at replacement cost and the grant at a nominal value.
b. Record the grant at a value estimated by management.
c. Record both the grant and the asset at fair value of the nonmonetary asset.
d. Record only the asset at fair value; do not recognize the fair value of the grant.
6. In the case of grants related to an asset, which of these accounting treatments (balance sheet
presentation) is prescribed by PAS 20?
a. Record the grant at a nominal value in the first year and write it off in the subsequent year.
b. Either set up the grant as deferred income or deduct it in arriving at the carrying amount of the
asset.
c. Record the grant at fair value in the first year and take it to income in the subsequent year.
d. Take it to the income statement and disclose it as an extraordinary gain.
7. In the case of grants related to income, which of these accounting treatments is prescribed by PAS 20?
a. Credit the grant to “general reserve” under shareholders’ equity.

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Financial Accounting and Reporting: Non-Financial Assets FAR EASTERN UNIVERSITY

b. Present the grant in the income statement as “other income”’ or as a separate line item, or deduct it
from the related expense.
c. Credit the grant to “retained earnings” on the balance sheet.
d. Credit the grant to sales or other revenue from operations in the income statement.
8. Government grants related to income are presented preferably as
a. Other income in the income statement
b. Deduction from the related expense
c. Addition to the beginning balance of retained earnings
d. Additional paid in capital
9. Government grants received for an expense incurred by the entity shall be recognized in the:
a. Statement of financial position c. Statement of cash flows
b. Notes to the financial statements d. Statement of comprehensive income
10. Government grants for expenses that are eligible to be recognized in the profit or loss should be
recognized:
a. When they are receivable
b. On a systematic basis over which the expense is recognized
c. When they are received
d. When the board approves the grant
11. Grants related to depreciable assets are recognized:
a. When they are receivable
b. When they are received
c. When the board approves the grant
d. On a systematic basis over which the depreciation is recognized
12. Even if a government grant does not have any conditions attached to it:
a. Such grants should not be accounted
b. Such grants should be accounted when they are received
c. Such grants should not be credited to equity
d. Such grants should be disclosed
13. Which of the following statements are correct according to PAS20 Government grants and government
assistance?
a. Any adjustment needed when a government grant becomes repayable is accounted for as a change
in accounting estimate
b. In respect of loans from the government at an interest rate of 0%, an imputed interest charge
should be made in profit or loss
c. Where conditions apply to a government grant, it should only be recognized when there is absolute
assurance that the conditions will be met
d. A government grant should not be recognized until it is received in cash

Straight Problems
1. On January 1, 2015, Pals Company received a grant of ₱60 million from the British government in order
to defray safety and environmental costs within the area where the enterprise is located. The safety and
environmental costs are expected to be incurred over four years, respectively, ₱4.8 million, ₱9.6 million,
₱14.4 million and ₱19.2 million.
How much income from the government grant should be recognized in 2015? ₱6M
2. On January 1, 2014, Mayumi Company received a grant of ₱75 million from the US government for the
construction of a laboratory and research facility with an estimated cost of ₱90 million and useful life of
25 years. The facility was completed in early 2015.
Mayumi Company should include in its 2015 income statement an income from the government at ₱3M
3. Enet Inc. was granted a parcel of land by a local government authority. The condition attached to this
grant was that Enet Inc. should clean up this land and lay roads by employing laborers from the village
in which the land is located. The entire operation will take three years and is estimated to cost ₱50
million. This amount will be spent in this way: ₱10 million each in the first and second years and ₱30
million in the third year. The fair value of this land is currently ₱60 million.
How much should be recognized as income from government grant at the end of the first year? ₱12M
4. Brena Inc. received a consolidated grant of ₱240 million. Three-fourths of the grant is to be utilized to
purchase a college building for students from underdeveloped or developing countries. The balance of
the grant is for subsidizing the tuition costs of those students for four years from the date of grant. The
college building, which costs ₱200 million, will be depreciated using the straight-line method over 10
years.
Assuming that the tuition subsidy will be offered evenly over the period of 4 years, the amount that
should be recognized as income at the end of year 1 is ₱33M
5. On January 1, 2015, Sadanga Company received a grant of ₱5M from the British government to
compensate for massive losses incurred because of typhoon Yolanda. The grant was made for the
purpose of giving immediate financial support to the entity. It will take Sadanga 2 years to reconstruct
assets destroyed by the typhoon. How much income from the government grant should be recognized by
Sadanga in 2015? ₱5M

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Financial Accounting and Reporting: Non-Financial Assets FAR EASTERN UNIVERSITY

FS Presentation: Grant related to asset

6. Kalinga Company purchased a machine for ₱6,000,000 on January 1, 2015 and received a government
grant of ₱1,000,000 toward capital cost. The machine is to be depreciated on a straight line basis over 5
years and estimated to have a residual value of ₱500,000 at the end of this period.
Case No. 1: The accounting policy of the company is to treat the grant as deferred income.
Case No. 2: The accounting policy of the company is to treat the grant as deduction of the related
asset.
Compute for the following:
For the year ended 2015 As of December 31, 2015
Depreciation Income from Carrying amount Deferred Income
expense government grant of asset
Case No. 1
Case No. 2
Grant related to asset that becomes repayable
7. Torta Company received a government grant of ₱2,000,000 related to a factory building that it bought in
January 2013. Torta Company acquired the building from an industrialist identified by the government. If
Torta Company did not purchase the building, which was located in the slums of the city, it would have
been repossessed by the government agency. Torta Company purchased the building for ₱12,000,000.
The useful life of the building is 10 years with no residual value. On January 1, 2015, the entire amount
of the government grant becomes repayable by reason of noncompliance with conditions attached to the
grant.
Case No. 1: The accounting policy of the company is to treat the grant as deferred income.
Case No. 2: The accounting policy of the company is to treat the grant as deduction of the related
asset.
Compute for the following:
Loss on repayment Depreciation for
of grant 2015
Case No. 1 400,000
Case No. 2

Grant related to income that becomes repayable

8. On January 1, 2013, Talong Company received a grant of ₱1,500,000 from the government to subsidize
tuition fees for a period of 5 years. On January 1, 2015, the entity violated certain conditions attached to
the grant, and therefore had to repay such grant to the government. What amount should be recognized
as loss resulting from the repayment of the grant in 2015? ₱600,000

“If you have discipline, you deserve to dream.”

“The best way to make your dreams come true is to wake up and act on them.” – Paul Valery.
“All our dreams can come true if we have the courage, discipline, and perseverance to pursue them.”
“Knowing where you’re going is the first step to getting there.” Ken Blanchard

B. BORROWING COSTS

8.0 Other Topics

8.1 Borrowing Costs (IAS 23)
8.1.1 Nature
8.1.2 Criteria for capitalizing borrowing costs

Borrowing Costs
Borrowing costs are directly attributable to the acquisition, construction or production of a qualifying asset
form part of the cost of the asset and may include:
1. Interest expense calculated using the effective interest method as described in IFRS 9;
2. Interest in respect of lease liabilities recognized in accordance with IFRS 16 Leases; and
3. Exchange differences arising from foreign currency borrowings to the extent that they are regarded as
an adjustment to interest costs.

Review Questions: Theoretical

1. Which of the following categories of assets are excluded from the scope of PAS 23:
a. Property that take substantial period to complete
b. Intangible assets that take a substantial period to complete
c. Manufacture of whisky in large quantities on a repetitive that takes a substantial period to get ready
for sale
d. Made to order inventories that takes a substantial period to get ready
2. A qualifying asset is an asset that takes a substantial period of time for:
a. Borrowing c. Designing
b. Borrowing and designing d. Getting ready
3. Which of the following may not be considered a “qualifying asset” under PAS 23?
a. A power generation plant that normally takes two years to construct.

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Financial Accounting and Reporting: Non-Financial Assets FAR EASTERN UNIVERSITY

b. An expensive private jet that can be purchased from a local vendor.

c. A toll bridge that usually takes more than a year to build.
d. A ship that normally takes one to two years to complete.
4. When computing the amount of interest cost to be capitalized, the concept of “avoidable interest” refers
to
a. The total interest cost actually incurred.
b. A cost of capital charge for stockholders’ equity.
c. That portion of total interest cost which would not have been incurred if expenditures for asset
construction had not been made.
d. That portion of average accumulated expenditures on which no interest cost was incurred.
5. Which of the following costs may not be eligible for capitalization as borrowing costs under PAS 23?
a. Interest on bonds issued to finance the construction of a qualifying asset.
b. Amortization of discounts or premiums relating to borrowings that qualifies for capitalization.
c. Imputed cost of equity.
d. Exchange differences arising from foreign currency borrowings to the extent they are regarded as an
adjustment to interest costs pertaining to a qualifying asset.
6. Borrowing costs can be capitalized as part of the asset when
a. The asset is a qualifying asset.
b. The asset is a qualifying asset but it is not probable that the borrowing costs will result in future
economic benefits to the entity.
c. The asset is a qualifying asset and the entity has opted for the allowed alternative treatment and it is
probable that the borrowing costs will result in future economic benefits to the entity, but the costs
cannot be measured reliably.
d. The asset is a qualifying asset and it is probable that the borrowing costs will result in future
economic benefits to the entity, and the costs can be measured reliably.
7. The period of time during which capitalization of interest begins and when capitalization of interest ends
is
a. From the time funds are borrowed until the asset is substantially complete and ready for its intended
use.
b. From the time the first expenditures are incurred until the asset is substantially complete and ready
for its intended use.
c. From the time the first expenditures are incurred until no further interest cost is being incurred
d. From the time the first expenditures are incurred until activities necessary to get the asset for its
intended use have begun.
8. On 1 March 2015 Good Looking Group took out a loan to finance the construction of a building for which
construction commenced on 1 June 2015. The construction was completed on 31 January 2016. The
building was brought to use on 1 June 2016. What is the period over which borrowing costs relating to
the project should be capitalized?
a. 1 March 2015 – 1 June 2016 c. 1 March 2015 – 31 January 2016
b. 1 June 2015 – 1 June 2016 d. 1 June 2015 – 31 January 2016
9. According to PAS23 Borrowing costs, which of the following statements about the capitalization of
borrowing costs as part of the cost of a qualifying asset is true?
a. If funds come from general borrowings, the amount to be capitalized is based on the weighted
average cost of borrowing
b. Capitalization always continues until the asset is brought into use
c. Capitalization always commences as soon as expenditure of the asset is incurred
d. Capitalization always commences as soon as interest on relevant borrowings is being incurred
10. An entity incurs ₱50,000 towards borrowing cost on a qualifying biological asset measured at fair value.
The asset cost is ₱500,000. Which of the following amounts are to be capitalized?
a. ₱500,000 b. ₱550,000 c. ₱0 d. ₱50,000
11. When funds borrowed, eligible for capitalization are invested temporarily, then income arising out of
such temporary investment should be:
a. Treated as other income c. Deducted from borrowing costs/cost of capitalization
b. Added to general reserve d. Treated as dividends
12. Capitalization of borrowing costs
a. Shall be suspended during temporary periods of delay.
b. May be suspended only during extended periods of delays in which active development is delayed.
c. Should never be suspended once capitalization commences.
d. Shall be suspended only during extended periods of delays in which active development is delayed.
13. Which of the following indicate that substantial activities necessary to prepare the asset for intended use
are complete:
a. Full funding has been received
b. Only minor modifications are remaining to be completed
c. All the accounting has been done
d. The board has approved the capitalization
14. Which of the following is not a disclosure requirement under PAS 23?
a. Accounting policy adopted for borrowing costs.
b. Amount of borrowing costs capitalized during the period.

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Financial Accounting and Reporting: Non-Financial Assets FAR EASTERN UNIVERSITY

c. Segregation of assets that are “qualifying assets” from other assets on the balance sheet or as a
disclosure in the footnotes to the financial statements.
d. Capitalization rate used to determine the amount of borrowing costs eligible for capitalization.

Straight Problems
Problem No. 1: Borrowing Cost: Specific Borrowings
UNICUSPID Company began construction of its administration building at an estimated cost of ₱10,000,000
on January 1, 2016. The construction is expected to be completed by December 31, 2019. To finance the
construction, UNICUSPID Company borrowed ₱10,000,000, 10%, 4-year note dated January 1, 2016, both
principal and interest are payable on December 31, 2019. In the first phase of the construction, there were
idle funds which the company invested for a period of 6 months. Income from this investment was ₱50,000.
Questions:
Based on the above data, answer the following questions (round off future and present value factors to four
decimal places):
1. Assume the use of simple interest, what is the capitalizable borrowing cost in 2016?
2. Assume instead that the interest is compounded quarterly in 2016, what is the capitalizable borrowing
cost in 2016?

Problem No. 2: Borrowing Cost: Asset financed with specific and general borrowings
On January 1, 2015, the NCPAR Company began construction of a building to be used as its office
headquarters. The building was completed on September 30, 2016.
Expenditures on the project were as follows:
January 2, 2015 ₱1,000,000
March 1, 2015 600,000
June 30, 2015 800,000
October 1, 2015 600,000
January 31, 2016 270,000
April 30, 2016 585,000
August 31, 2016 900,000
On January 2, 2015, NCPAR Company obtained a ₱1,000,000 construction loan with a 10% interest rate. The
loan was outstanding all of 2015 and 2016. The company’s other interest-bearing debt included two long
term notes of ₱4,000,000 and ₱6,000,000 with interest rates of 6% and 8% respectively. Both notes were
outstanding during all of 2015 and 2016. The company’s fiscal year-end is December 31.
Questions:
Based on the above data, answer the following questions:
1. How much is the avoidable interest for the year 2015?
2. How much is the interest expense for the year 2015?
3. How much is the avoidable interest for the year 2016?
4. How much is the interest expense for the year 2016?
5. How much is the total cost of the building upon completion?

“Ideals are like stars; you will not succeed in touching them with your hands. But like the seafaring man on
the dessert of waters, you choose them as your guides, and following them, you will reach your destiny.” –
Charles Schurz

C. WASTING ASSETS

5.2 Non-Financial Assets (IAS 16, IAS 38, IAS 40, IAS 23, IAS 41, IAS 20, IAS 36, IAS 38, IFRS 5, IFRS 6)
5.2.2 Property, Plant and Equipment
5.2.2.1 Nature
5.2.2.2 Recognition principle
5.2.2.3 Initial recognition basis

1. PFRS 6 applies to expenditures incurred

a. When searching for an area that may warrant detailed exploration, even though the entity has not
yet obtained the legal rights to explore a specific area.
b. When the legal rights to explore a specific area have been obtained, but the technical feasibility and
commercial viability of extracting a mineral resource is not yet demonstrable.
c. When a specific area is being developed and preparations for commercial extraction are being made.
d. In extracting mineral resources and processing the resource to make it marketable or transportable.
2. Does PFRS 6 require an entity to recognize exploration and evaluation expenditure as assets?
a. Yes, but only to the extent such expenditure is recoverable in future periods.
b. Yes, but only to the extent the technical feasibility and commercial viability of extracting the
associated mineral resource have been demonstrated.
c. Yes, but only to the extent required by the entity’s accounting policy for recognizing exploration and
evaluation assets.
d. No, such expenditure is always expensed in profit or loss as incurred.
3. What is an entity required to consider in developing accounting policies for exploration and evaluation
activities?

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Financial Accounting and Reporting: Non-Financial Assets FAR EASTERN UNIVERSITY

a. The requirements and guidance in Standards and Interpretations dealing with similar and related
issues.
b. The definitions, recognition criteria, and measurement concepts for assets, liabilities, income, and
expenses in the Framework.
c. Recent pronouncements of standard-setting bodies, accounting literature, and accepted industry
practices.
d. Whether the accounting policy results in information that is relevant and reliable.
4. Which of the following expenditures would never qualify as an exploration and evaluation asset?
a. Expenditure for acquisition of rights to explore.
b. Expenditure for exploratory drilling.
c. Expenditures related to the development of mineral resources.
d. Expenditure for activities in relation to evaluating the technical feasibility and commercial viability of
extracting a mineral resource.
5. Which measurement model applies to exploration and evaluation assets subsequent to initial
recognition?
a. The cost model.
b. The revaluation model.
c. Either the cost model or the revaluation model.
d. The recoverable amount model.
6. Which of the following depreciation methods most closely approximates the method used to deplete the
cost of natural resources?
a. Straight-line method c. Double-declining-balance method
b. Sum-of-the-years'-digits method d. Units-of-production method
7. The Harlech Company is involved in the exploration for mineral rights. Its policy is to recognize
exploration assets and measure them initially at cost. During 2016 Harlech incurs the following
expenditure:
Exploratory drilling for minerals on site and related activities ₱200,000
Roads and infrastructure to access exploration site ₱350,000
Expenditures relating to the subsequent development of
the resources ₱340,000
In accordance with PFRS6 Exploration for and evaluation of mineral resources, at what amount should
exploration assets be initially recognized at in the financial statements of Harlech? ICAEW

8. The Sandringham Company is involved in the exploration for mineral resources. Its policy is to recognize
exploration assets and measure them initially at cost. At the end of 2016 the following amounts were
extracted from Sandringham's financial statements: ICAEW
Trenching and sampling expenditure ₱100,000
Drilling rigs used for exploration, carrying amount ₱200,000
Drilling rigs used for exploration, depreciation expense ₱ 30,000
In accordance with PFRS6 Exploration for and evaluation of mineral resources, at what amount should
intangible exploration assets be initially recognized at in the financial statements of Sandringham?

9. Jizzelle Company acquired a tract of land containing an extractable natural resource. Jizzelle is required
by the purchase contract to restore the land to a condition suitable for recreational use after it has
extracted the natural resources. Geological survey indicated an estimate recoverable reserve of
2,500,000 tons and the extraction will be completed in 5 years. Jizzelle Company paid ₱9,000,000 for
the land and incurred exploration and development cost of ₱1,000,000. The expected cash flow for
restoration cost is ₱1,500,000. The credit adjusted risk-free interest rate is 10% and the PV of 1 at 10%
for 5 periods is 0.62. What would be the depletion rate per ton of extracted material?

10. Information on Wasted Years Co.’s mineral resource is shown below:

Purchase price of mineral rights ₱ 500,000
Exploration costs 500,000
Extraction costs during the period 2,000,000
Ore extracted during the period 500,000oz.
Ore sold during the period 300,000oz.
At the commencement of Wasted Years’ extraction activities, it was estimated that the mineral resource
has reserves of 2,000,000 ounces of ore. Wasted Years’s accounting policy is to capitalize exploration
costs and subsequently measure them using the cost model. There are no ores held in inventory at the
beginning of the current period.
Required: Compute for the following:
a. Depletion charge during the period. 250,000
b. Depletion recognized as expense during the period. 150,000
11. On July 1, 2016, Minero Co. acquired a mine for ₱13,200,000. After extraction, the land can be sold for
₱400,000. Estimated reserves were 1,600,000 tons. Minero expects to extract and sell 25,000 tons per
month. Minero purchased new equipment on July 1, 2016. The equipment cost ₱6,600,000 and had a
useful life of 8 years. However, after all the resource is removed, the equipment will be of no use and
will be sold for ₱200,000.
Required: Compute for the following:

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a. Depletion for the year ended December 31, 2016. 1,200,000

b. Depreciation for the year ended December 31, 2016. 600,000
12. Joane Company acquired property in early 2016 which is believed to include valuable mineral deposit;
the cost of the property was ₱9,000,000. Geological estimates indicate that approximately 10,000,000
tons of mineral may be economically extracted. It is further estimated that the property can be sold for
₱2,500,000 to be used for commercial development following mineral extraction. For ₱800,000, Joane is
legally required to restore the land to its original condition. After initial acquisition, the following cost
were incurred:
Exploration cost ₱3,500,000
Development cost related to drilling and development of wells 3,200,000
Development cost related to production equipment 4,600,000
The company extracted 3,500,000 tons of the minerals in 2016. What is the depletion for 2016?
13. On April 1, 2013, Wasted Asset Co. acquired a limestone quarry for ₱10,000,000. After the mineral
resources are extracted, the quarry can be sold for a scrap value of ₱3,000,000. Additional information
follows:
Estimated total reserves, tons 10,000,000
Tons quarried through 12/31/2015 4,000,000
Tons quarried in 2016 1,500,000
Sales 5,000,000
An engineering study performed in 2016 indicated that as of January 1, 2016, 7,500,000 tons of
limestone were available.
Required: How much is the depletion in 2016? 840,000
14. Assume the following balances at the end of the current year:
Capital Liquidated ₱1,800,000
Accumulated Depletion 2,500,000
Retained Earnings 1,500,000
Depletion based on 50,000 units extracted @₱20 per unit 1,000,000
Inventory of resource deposit 5,000 units
What is the maximum dividend that can be declared by the company?

D. PAS 36: IMPAIRMENT OF ASSETS

5.2 Non-Financial Assets (IAS 16, IAS 38, IAS 40, IAS 23, IAS 41, IAS 20, IAS 36, IAS 38, IFRS 5, IFRS 6)
5.2.2 Property, Plant and Equipment
5.2.2.5 Impairment

THEORIES
1. PAS36 Impairment of assets should be applied in accounting for the impairment of which of the following
types of asset?
a. Assets arising from construction contracts
b. Non-current assets held for sale
c. Investment properties measured at fair value
d. Non-current assets measured at cost
2. When is the assessment of impairment losses required:
a. Once every year c. Whenever the entity is audited
b. Once in a quarter d. At the end of each reporting period
3. An asset is impaired when
a. Its recoverable amount exceeds its carrying amount.
b. Its carrying amount exceeds its recoverable amount.
c. Its fair value less costs to sell is less than its value in use.
d. Its net selling price is less than its value in use.
4. According to PAS36 Impairment of assets, which of the following are relevant in determining a non-
current asset's 'value in use'?
I. The expected future cash flows from the asset
II. The carrying amount of the asset
III. The future annual depreciation expense in respect of the asset
IV. The time value of money
a. I and III b. II and III c. I and IV d. III and IV
5. When calculating the estimates of future cash flows, which of the following cash flows should not be
included?
a. Cash flows from disposal.
b. Income tax payments.
c. Cash flows from the sale of assets produced by the asset.
d. Cash outflows on the maintenance of the asset.
6. The discount rate used for discounting the cash flows should be the :

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a. Pre-tax rate that reflects the market assessment of time value of money and risks specific to the
asset
b. Post-tax rate that reflects the market assessment of time value of money and risks specific to the
asset
c. Pre-tax rate that reflects the market assessment of time value of money and risks specific to the
entity’s competitors
d. Pre-tax rate that reflects the entity’s assessment of time value of money and risks specific to the
asset
7. PAS 36 presumes that budgets and forecasts while arriving at cash flow projections should:
a. Be more than ten years c. Not be more than ten years
b. Not be more than five years d. Not be less than three years
8. Which statement is incorrect regarding fair value less costs to sell?
a. If there is a binding sale agreement, use the price under that agreement less costs of disposal.
b. If there is an active market for that type of asset, use market price less costs of disposal.
c. If there is no active market, use the best estimate of the asset's selling price less costs of disposal.
d. Costs of disposal are the direct added costs including existing costs and overhead.
9. If the fair value less costs to sell cannot be determined
a. The asset is not impaired.
b. The recoverable amount is the value-in-use.
c. The net realizable value is used.
d. The carrying value of the asset remains the same.
10. If assets are to be disposed of
a. The recoverable amount is the fair value less costs to sell.
b. The recoverable amount is the value-in-use.
c. The asset is not impaired.
d. The recoverable amount is the carrying value.
11. The following are external indicators of impairment, except
a. Market value declines.
b. Negative changes in technology, markets, economy, or laws.
c. Increases in market interest rates.
d. Worse economic performance than expected.
12. A cash generating unit is defined as:
a. The smallest identifiable group of assets that generates cash inflows that are largely independent
from the cash inflows of other assets.
b. The easiest identifiable group of assets that generates cash inflows that are largely independent from
the cash inflows of other assets.
c. The smallest identifiable group of assets that generates cash outflows that are largely independent
from the cash outflows of other assets.
d. The largest identifiable group of assets that generates cash inflows that is largely independent from
the cash inflows of other assets.
13. When impairment testing a cash-generating unit, any corporate assets, such as the head office business
or computer equipment should
a. Be allocated on a reasonable and consistent basis
b. Be separately impairment tested
c. Be included in the head office assets or parent’s assets and impairment tested along with that cash
generating unit.
d. Not be allocated to cash-generating units.
14. When allocating an impairment loss, such a loss should reduce the carrying amount of which asset first?
a. Intangible assets. c. Property, plant, and equipment.
b. Goodwill. d. Current assets.
15. An impairment loss that relates to an asset that has been revalued should be recognized in
a. Profit or loss
b. Revaluation reserve that relates to the revalued asset
c. Opening accumulated profits
d. Any reserve in shareholders’ equity
16. The Levis Company has carried out an impairment review in respect of a non-current asset measured
under PAS16 Property, plant and equipment's revaluation model. The carrying amount of the asset is
₱1.8 million and the amount held in the revaluation reserve in respect of this asset is ₱180,000. An
impairment loss of ₱300,000 is to be recognized. According to PAS36 Impairment of assets, how should
the impairment loss be recognized?
a. Loss of ₱180,000 recognized in profit or loss; and loss of ₱120,000 recognized in other
comprehensive income
b. Loss of ₱120,000 recognized in profit or loss; and loss of ₱180,000 recognized in other
comprehensive income
c. Loss of ₱300,000 recognized in profit or loss
d. Loss of ₱300,000 recognized in other comprehensive income
17. On January 1, 2010 Prosperous Company acquired a non-current asset with an estimated useful life of 8
years for ₱320,000. Non-current assets are accounted for under the cost model and depreciation is

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charged by the straight-line method. On January 1, 2015 an impairment review identified an impairment
loss of ₱10,000 and the remaining useful life was revised to four years. Which of the following
statements is/are true, according to PAS36 Impairment of assets?
I. Future depreciation expenses should be measured by reference to the carrying amount after
deducting the impairment loss.
II. Future depreciation expenses should be measured by reference to the new estimate of the remaining
useful life.
a. I only b. II only c. Both I and II d. Neither I nor II
18. Where part of the cash-generating unit is disposed of, the goodwill associated with the element disposed
of
a. Shall be written off to the income statement entirely.
b. Shall not be included in the calculation of gain or loss on disposal.
c. Shall be included in the calculation of gain or loss on disposal.
d. Shall be written off against retained profits.
19. Which of the following impairment losses should never be reversed?
a. Loss on goodwill. c. Loss on property, plant, and equipment.
b. Loss on a business segment. d. Loss on inventory.
20. When a reversal of an impairment loss occurs, which of the following adjustments are to be made:
a. Recognize in the balance sheet and adjust the depreciation for future periods
b. Recognize in the income statement without adjustment to the depreciation for future periods
c. Recognize in the statement of equity and adjust the depreciation for future periods
d. Recognize in the income statement and adjust the depreciation for future periods

PROBLEMS
1. During December 2015, Talisay Company determined that there had been a significant decrease in
market value of its equipment. At December 31, 2015, Talisay compiled the following information
concerning the equipment:
Original cost ₱ 20,000,000
Accumulated depreciation 12,000,000
Expected undiscounted net future cash inflows from the
continued use and eventual disposal 7,000,000
Expected discounted net future cash inflows from the
continued use and eventual disposal 5,000,000
Fair value less cost to sell 6,500,000
What is the impairment loss that should be reported in the 2015 income statement?
2. Tanauan Company has one division that performs machining operations on parts that are sold to
contractors. A group of machines have an aggregate cost and accumulated depreciation on December
31, 2015 as follows:
Machinery 90,000,000
Accumulated depreciation 30,000,000
The machines have an average remaining life of 4 years and it has been determined that this group of
machinery constitutes a cash generating unit. The fair value less cost to sell of this group of machines in
an active market is determined to be ₱45,000,000. Based on supportable and reasonable assumptions,
the financial forecast for this group of machines reveals the following cash inflows and cash outflows for
the next four years:
Cash inflows Cash outflows
2016 30,000,000 12,000,000
2017 32,000,000 17,000,000
2018 26,000,000 14,000,000
2019 16,000,000 6,000,000
It is believed that a discount rate of 8% is reflective of time value of money. The table of present value
shows that the present value of 1 at 8% is as follows:
Period Present value of 1
1 .93
2 .86
3 .79
4 .74
Tanauan Company should recognize an impairment loss in 2015 at
Impairment loss – Revaluation model
3. Information on Vince Co.’s impaired building is shown below:
Carrying amount 3,200,000
Revaluation surplus 320,000
Fair value less costs of disposal 2,800,000
Value in use 2,720,000
How much is the impairment loss?

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Impairment of Intangible Asset with Indefinite Useful Life

4. Zerah Mae Co. determined that its trademark is impaired. Zerah Mae cannot estimate reliably the
trademark’s fair value less costs of disposal. However, the following information has been determined:
Carrying amount ₱520,000
Annual future cash flows from the trademark 40,000
Discount rate 10%
How much is the impairment loss?
Impairment reversal – Cost model
Use the following information for the next two questions:
On January 1, 2007, Jasmine Co. acquired a building for ₱4,000,000. The asset is depreciated using the
straight line method over an estimated useful life of 10 years.
On January 1, 2012, the building was estimated to have a recoverable amount of ₱1,600,000.
Consequently, impairment loss was recognized on that date. There was no change in the estimated
useful life.
On January 1, 2015, the building was estimated to have a new recoverable amount of ₱2,400,000 and a
remaining useful life of 3 years. The building is measured under the cost model.
5. How much of the impairment reversal is recognized in profit or loss?
6. How much of the impairment reversal is recognized in equity?
Impairment reversal – Revaluation model
Use the following information for the next two questions:
On January 1, 2007, Desiree Co. acquired a building for ₱4,000,000. The asset is depreciated using the
straight line method over an estimated useful life of 10 years.
On January 1, 2012, the building was estimated to have a recoverable amount of ₱1,600,000.
Consequently, impairment loss was recognized on that date. There was no change in the estimated
useful life.
On January 1, 2015, the building was estimated to have a new recoverable amount of ₱2,400,000 and a
remaining useful life of 3 years. The building is measured under the revaluation model.
7. How much of the impairment reversal is recognized in profit or loss?
8. How much of the impairment reversal is recognized in equity?
Impairment of CGU
Use the following information for the next five questions:
XYZ Co. determined that one of its cash-generating unit is impaired. Information on the assets of the
CGU is shown below:
Carrying
Assets amount
Inventory ₱ 400,000
Investment property (at cost
model) 800,000
Building 1,200,000
Goodwill 600,000
Total ₱3,000,000
Additional information:
 It was estimated that the value in use of the CGU is ₱1,600,000 and its fair value less costs to sell is
₱1,800,000.
 The building’s fair value less cost to sell is ₱1,020,000.
 The inventories net realizable value is ₱300,000.
9. How much is the impairment loss of the cash generating unit?
10. How much impairment loss is allocated to goodwill?
11. How much impairment loss is allocated to the building?
12. How much impairment loss is allocated to investment property?
13. How much impairment loss is allocated to inventory?

“Continuous effort, not strength or intelligence, is the key to unlocking our potential.”

E. PFRS 05 Noncurrent Asset Held for Sale and Discontinued Operation

5.2.6 Non-Current Assets Held For Sale
5.2.6.1 Classification criteria
5.2.6.2 Initial and subsequent measurement principles

Held-for-sale classification
 In general, the following conditions must be met for an asset (or 'disposal group') to be classified as held
for sale:
a) management is committed to a plan to sell
b) the asset is available for immediate sale
c) an active program to locate a buyer is initiated

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d) the sale is highly probable, within 12 months of classification as held for sale (subject to limited
exceptions)
e) the asset is being actively marketed for sale at a sales price reasonable in relation to its fair value
f) actions required to complete the plan indicate that it is unlikely that plan will be significantly changed
or withdrawn
 The assets need to be disposed of through sale. Therefore, operations that are expected to be wound
down or abandoned would not meet the definition (but may be classified as discontinued once
abandoned).
 However, all classification, presentation and measurement requirements of PFRS 5 apply to a non-
current asset (or disposal group) that are classified as held for distribution to owners.

Classification as discontinuing
A discontinued operation is a component of an entity that either has been disposed of or is classified as held
for sale and
(a) represents either a separate major line of business or a geographical area of operations, and
(b) is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area
of operations, or
(c) is a subsidiary acquired exclusively with a view to resale and the disposal involves loss of control.

Review Questions: Theoretical

1. To which of the following types of asset do the measurement provisions of PFRS5 Non-current assets
held for sale and discontinued operations apply?
I. Financial assets III. Leasehold buildings
II. Intangible development assets IV. Deferred tax assets
a. I and III b. II and IV c. I and IV d. II and III
2. Which of the following conditions must be met for an asset to be classified as ‘held for sale’
a. It must be in good condition
b. The carrying amount of the asset should be insignificant
c. Management is committed to sell the asset and it is readily available for sale
d. There is a good demand for the asset in the open market
3. A disposal group is a group of:
a. Identical assets
b. Non-identical assets
c. Assets having no disposal cost
d. Assets which are intended to be disposed in one single transaction
4. Which of the following classes of assets do not qualify to be classified as ‘held for sale’
a. Assets belonging to an operation that is expected to be wound up
b. An asset for which the sale is highly probable within the next 12 months
c. An asset which the management has a strong intention to sell
d. An asset that is readily available for sale
5. PFRS 5 states that a noncurrent asset that is to be abandoned should not be classified as held for sale.
The reason for this is because
a. Its carrying amount will be recovered principally through continuing use.
b. It is difficult to value.
c. It is unlikely that the noncurrent asset will be sold within 12 months.
d. It is unlikely that there will be an active market for the noncurrent asset.
6. A discontinued operation is a component of an entity that either has been disposed of or is classified as
“held for sale” and
I. Represents a separate major line of business or geographical area of operations.
II. Is part of a single co-ordinated plan to dispose of a major line of business or geographical area of
operations.
III. Is a subsidiary acquired exclusively with a view to resale.
a. I only b. I and II only c. III only d. I, II and III
7. Which of the following criteria do not have to be met in order for an operation to be classified as
discontinued?
a. The operation should represent a separate line of business or geographical area.
b. The operation is part of a single plan to dispose of a separate major line of business or geographical
area.
c. The operation is a subsidiary acquired exclusively with a view to resale.
d. The operation must be sold within three months of the year-end.
8. Which of these statements is not true about the measurement of assets held for sale?
a. Assets held for sale are measured at the lower of their carrying amount or at their fair value less
costs to sell.
b. Any write-down after reclassification is treated as an impairment loss, and subsequent reversals (if
the fair value minus costs to sell increases) are limited to the loss previously recognized.
c. Non-current assets in the disposal group cease to be depreciated.
d. Assets held for sale cease to be depreciated unless they are still in use.
9. When assets are carried at fair value immediately before classification as ‘held for sale’ then the
difference on reclassification shall be:

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Financial Accounting and Reporting: Non-Financial Assets FAR EASTERN UNIVERSITY

a. Shown in statement of equity c. Charged to statement of profit or loss

b. Adjusted in retained earnings d. Added to cost of acquisition of the asset
10. Impairment losses on investments held for sale shall be recognized:
a. At the time of initial recognition
b. At the time of classification as ‘held for sale’
c. At the time of classification as ‘held for sale’ and subsequently
d. At the time of winding up the entity
11. Non-Current assets held for sale:
a. Are subject to depreciation c. Can be depreciated if the management intends doing so
b. Are not subject to deprecation d. Can be depreciated if there are adequate profits
12. An entity is planning to sell a building and has started getting quotes from prospective buyers. It is still
occupying the building, though another building is being constructed nearby for relocation. The entity will
relocate the staff only after the other building is completed. Which of the following treatments is
appropriate:
a. Classify this building as ‘Held for sale’ as per PFRS 5
b. Classify both the buildings as ‘held for sale’ as per PFRS 5
c. Disclose the intention to sell in the explanatory notes without classification as ‘held for sale’
d. Treat this operations as discontinued operations under PFRS 5
13. When presenting non-current assets held for sale in the cash flow statement:
a. They are shown separately c. They are clubbed with other current assets
b. They are ignored d. They are added to non-cash items
14. What is the appropriate presentation of a discontinued operation?
a. The amounts of revenue, expenses and pre-tax profit or loss from the activities attributable to the
discontinued operation during the current period, and the related income tax expense are presented
on the face of the income statement side by side with the continuing operation.
b. Net profit or loss from the activities of discontinued operation is treated as component of equity.
c. Net profit or loss from the activities of the discontinued operation is accounted for as a change in
accounting policy.
d. The results from the discontinued operation shall be presented as a single amount net of tax below
the income from continuing operations.
15. How should the income from discontinued operations be presented in the income statement?
a. The entity should disclose a single amount on the face of the income statement with analysis in the
notes or a section of the income statement separate from continuing operations.
b. The amounts from discontinued operations should be broken down over each category of revenue
and expense.
c. Discontinued operations should be shown as a movement on retained earnings.
d. Discontinued operations should be shown as a line item after gross profit with the taxation being
shown as part of income tax expense.
16. How should the assets and liabilities of a disposal group classified as held for sale be shown in the
statement of financial position?
a. The assets and liabilities should be offset and presented as a single amount.
b. The assets of the disposal group should be shown separately from other assets in the statement of
financial position, and the liabilities of the disposal group should be shown separately from other
liabilities in the statement of financial position.
c. The assets and liabilities should be presented as a single amount and as a deduction from equity.
d. There should be no separate disclosure of assets and liabilities that form part of a disposal group.
17. An entity acquires a subsidiary exclusively with a view to selling it. The subsidiary meets the criteria to
be classified as held for sale. At the reporting date, the subsidiary has not yet been sold, and six months
have passed since its acquisition. How will the subsidiary be valued in the statement of financial position
at the date of the first financial statements after acquisition?
a. At fair value.
b. At the lower of its cost and fair value less cost to sell.
c. At carrying value.
d. In accordance with applicable PFRS.
18. Any gain on a subsequent increase in the fair value less cost to sell of a noncurrent asset classified as
held for sale should be treated as follows:
a. The gain should be recognized in full.
b. The gain should not be recognized.
c. The gain should be recognized but not in excess of the cumulative impairment loss.
d. The gain should be recognized but only in retained earnings.
19. An entity has an asset that was classified as held for sale. However, the criteria for it to remain as held
forsale no longer apply. The entity should therefore
a. Leave the noncurrent asset in the financial statements at its current carrying value.
b. Remeasure the noncurrent asset at fair value.
c. Measure the noncurrent asset at the lower of its carrying amount before the asset was classified as
held for sale (as adjusted for subsequent depreciation, amortization, or revaluations) and its
recoverable amount at the date of the decision not to sell.
d. Recognize the noncurrent asset at its carrying amount prior to its classification as held for sale as
adjusted for subsequent depreciation, amortization, or revaluations.
Review Questions: Computational

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1. An entity is planning to dispose of a collection of assets. The entity designates these assets as a disposal
group. The carrying amount of these assets immediately before classification as held for sale was ₱20
million. Upon being classified as held for sale, the assets were revalued to ₱18 million. The entity feels
that it would cost ₱1 million to sell the disposal group. What would be the carrying amount of the
disposal group in the entity’s accounts after its classification as held for sale?
2. The Pangasinan Company accounts for non-current assets using the cost model. On April 25, 2016,
Pangasinan classified a non-current asset as held for sale in accordance with PFRS5 Non-current assets
held for sale and discontinued operations. At that date the asset's carrying amount was ₱320,000, its fair
value was estimated at ₱220,000 and the costs to sell at ₱32,000. On May 15, 2016 the asset was sold
for net proceeds of ₱184,000. In accordance with PFRS5, what amount should be included as an
impairment loss in Pangasinan's statement of comprehensive income for the year ended June 30, 2016?
3. The Alethe Company accounts for non-current assets using the cost model. On October 31, 2016 Alethe
classified a non-current asset as held for sale in accordance with PFRS5 Non-current assets held for sale
and discontinued operations. At that date the asset's carrying amount was ₱150,000, its fair value was
estimated at ₱110,000 and the costs to sell at ₱15,000. On November 20, 2016 the asset was sold for
net proceeds of ₱92,000. In accordance with PFRS5, what amount should be included as a loss on
disposal in Alethe's statement of comprehensive income for the year ended December 31, 2016?
4. The Tarlac Company accounts for non-current assets using the cost model. On July 20, 2016 Tarlac
classified a non-current asset as held for sale in accordance with PFRS5 Non-current assets held for sale
and discontinued operations. At that date the asset's carrying amount was ₱145,000, its fair value was
estimated at ₱215,000 and the costs to sell at ₱14,500. The asset was sold on October 18, 2016 for
₱212,000. In accordance with PFRS5, at what amount should the asset be stated in Tarlac's statement of
financial position at September 30, 2016?
5. The Bulacan Company accounts for non-current assets using the revaluation model. On October 30,
2016 Bulacan classified a freehold property as held for sale in accordance with PFRS5 Non-current assets
held for sale and discontinued operations. At that date the property's carrying amount was ₱220,000 and
the balance on the revaluation reserve was ₱120,000. At that date its fair value was estimated at
₱290,000 and the costs to sell at ₱22,000. The property was sold in 2017. In accordance with PFRS5, at
what amount should the revaluation reserve be stated at December 31, 2016?
6. The Pampanga Company accounts for non-current assets using the revaluation model. On June 30, 2016
Pampanga classified a freehold property as held for sale in accordance with PFRS5 Non-current assets
held for sale and discontinued operations. At that date the property's carrying amount was ₱290,000 and
the balance on the revaluation reserve was ₱20,000. At that date its fair value was estimated at
₱330,000 and the costs to sell at ₱20,000. At December 31, 2016 the property's fair value was
estimated at ₱325,000 and the costs to sell at ₱25,000. In accordance with PFRS5 the asset should be
carried in Pampanga's statement of financial position at December 31, 2016 at
7. The La Union Company has correctly classified its packaging operations as a disposal group held for sale
and as discontinued operations. In the year ended December 31, 2016 this disposal group incurred
trading losses after tax of ₱20 million and the loss on remeasuring it to fair value less costs to sell was
₱15 million. How should the disposal group's losses for the year ended December 31, 2016 be
presented, according to PFRS5 Non-current assets held for sale and discontinued operations?
In profit or loss In other comprehensive income
a. ₱35 million loss Nil
b. ₱20 million loss ₱15 million loss
c. Nil ₱35 million loss
d. ₱15 million loss ₱20 million loss
Discontinued Operation
8. Presented below are the condensed income statements of ANGEL CORPORATION for the years ended
December 31, 2016 and 2015.
2016 2015
Sales ₱5,000,000 ₱4,900,000
Less: Cost of goods sold 3,350,000 3,300,000
Gross income 1,650,000 1,600,000
Less: Operating expenses 675,000 650,000
Operating income 975,000 950,000
Add: Gain on sale of division 200,000  
Income before tax 1,175,000 950,000
Less: Income tax expense (30%) 352,500 285,000
Net income ₱ 822,500 ₱ 665,000

On October 10, 2016, Angel entered into an agreement to sell the assets of one of its geographical
segments. The geographical segment comprises operations and cash flows that can be clearly
distinguished, operationally and for financial reporting purposes, from the rest of the company. The
segment was sold on December 31, 2016, for ₱1,750,000. The book value of the segment’s assets was
₱1,550,000. The segment’s contribution to Angel’s operating income before tax for each year was as
follows:
201
6 ₱113,750 loss
201
5 81,250 income

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Questions:
Based on the above data, calculate the following:
a. Income from continuing operations in 2015
b. Income from continuing operations in 2016
c. Net income in 2015
d. Net income in 2016
e. Assume that by December 31, 2016, the segment had not yet been sold but was considered held for
sale. The fair value of the segment's assets on December 31 was ₱1,750,000. The post-tax income
(loss) from discontinued operations for 2016 should be
f. Assume that by December 31, 2016, the segment had not yet been sold but was considered held for
sale. The fair value of the segment's assets on December 31 was ₱1,250,000. The post-tax income
(loss) from discontinued operations for 2016 should be
“Great changes may not happen right away, but with efforts, even the difficult may become easy.”

 -- END OF HANDOUT -- 

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