Professional Documents
Culture Documents
that lead to the creation of a consistent set of rules and standards. Specifically, in
accounting, the rule and standards set the nature, function and limits of financial
accounting and financial statements. The main reasons for developing an agreed
accounting standards.
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CHAPTER 1: Overview of accounting ……………………………………………….. 8
• Definition of accounting…………………………………………………………… 8
• Measurement………………………………………………………………………. 9
• Common branches of accounting………………………………………………... 12
• Conceptual framework and accounting standards……………………………… 14
• Qualitative characteristics…………………………………………………………. 15
• Elements of financial statements…………………………………………………. 16
• PAS 1 – Presentation of financial statements…………………………………… 18
• Statement of financial position……………………………………………………. 19
• Presentation of deferred taxes……………………………………………………. 20
• Total comprehensive income……………………………………………………… 20
• PAS 2 – Inventories………………………………………………………………… 20
• Financial statement presentation…………………………………………………. 21
• Cost formulas………………………………………………………………………… 21
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• Recognition and measurement……………………………………………………… 111
• Encouraged disclosures……………………………………………………………… 111
• PFRS 1 – First time adoption of PFRS……………………………………………… 112
• Recognition and measurement………………………………………………………. 113
• Accounting policies……………………………………………………………………. 113
• PFRS 2 – Share based payments…………………………………………………… 114
• Measurement of compensation………………………………………………………. 116
• PFRS 3 – Business combinations……………………………………………………. 118
• Accounting for business combinations………………………………………………. 119
• Non-controlling interest………………………………………………………………… 120
CHAPTER 9: PFRS 5 – Non-current assets held for sale and discontinued operations
• Core principle of PFRS 5……………………………………………………………… 125
• Classification of non-current assets…………………………………………………. 125
• Discontinued operations………………………………………………………………. 126
• PFRS 6 – Exploration for and evaluation or mineral resources…………………… 127
• Measurement and recognition………………………………………………………… 128
• PFRS 7 – Financial instruments disclosure…………………………………………. 128
• PFRS 8 – Operating segments………………………………………………………. 130
• PFRS 9 – Financial instruments……………………………………………………… 131
• PFRS 10 – Consolidated financial statements……………………………………… 133
• PFRS 11 – Joints arrangements……………………………………………………… 134
• Types of joints arrangements…………………………………………………………. 135
4
Introduction to the Course
Course Description:
Learning Outcomes:
5
CHAPTER 1 – PRETEST
Read and understand each question carefully. This test consists of 10 items of Multiple
Choice. Good Luck.
1. It refers to the process of incorporating the effects of an accountable event in the statement
of financial position or the statement of profit or loss and other comprehensive income
through a journal entry.
a. realization
b. derecognition
c. posting
d. recognition
2. All of the following are events considered as exchange or reciprocal transfer, except
a. purchase of investment in equity securities
b. sale of equipment for non-interest bearing note
c. subscription of the entity’s own equity instrument (i.e., contributions by owners)
d. exchange of a note payable for an account payable
e. borrowing of money from a bank
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d. To provide quantitative financial information about economic activities intended to be
useful in making economic decisions.
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CHAPTER 1
OVERVIEW OF ACCOUNTING
Objectives:
1. Define the meaning of accounting
2. Identify and learn the PAS 1 to PAS 23
Definition of Accounting
8
Types of Events
Measurement
- historical cost,
- fair value,
- present value,
- present value,
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- Residual equity theory – this theory is applicable where there are
two classes of shares issued, ordinary and preferred. The
equation is “Assets – Liabilities – Preferred Shareholders’ Equity
= Ordinary Shareholders’ Equity.”
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1. Financial accounting - focuses on general purpose financial statements
The Conceptual Framework sets out the concepts that underlie the
preparation and presentation of financial statements for external users
Only the common needs of primary users are met by the financial
statements
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Qualitative Characteristics
1. Qualitative Characteristics
(1) Relevance
(a) Predictive value
(b) Feedback value
➢ Materiality – entity-specific aspect of relevance
(2) Faithful representation
(a) Completeness
(b) Neutrality
(c) Free from error
2. Enhancing qualitative characteristics
(3) Comparability
(4) Verifiability
(5) Timeliness
(6) Understandability
Elements of Financial Statements
Financial Position
1. Asset - resource controlled by the entity as a result of past events and
from which future economic benefits are expected to flow to the entity.
2. Liability - present obligation of the entity arising from past events, the
settlement of which is expected to result in an outflow from the entity
of resources embodying economic benefits.
Performance
General features
5. Offsetting - Assets and liabilities, and income and expenses, shall not
be offset unless required or permitted by a PFRS
Current Assets
Current Liabilities
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reporting period
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Total comprehensive income
Presentation of Expenses
PAS 2 Inventories
All items that meet the definition of inventory are presented on the
statement of financial position as one line item under the caption
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“Inventories.” The breakdown of this line item (as finished goods, WIP
and Raw materials) is disclosed in the notes
Measurement
Cost Formulas
Recognition as an expense
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expense (i.e., cost of sales) in the period in which the related revenue is
recognized. Likewise, the write-down of inventories to NRV and all
losses of inventories are recognized as expense in the period the write-
down or loss occurs
For further discussion please refer to the link provided: Overview of Accounting
https://www.youtube.com/watch?v=RlhHMzzMKwA
For further discussion please refer to the link provided: Conceptual Framework
https://www.youtube.com/watch?v=CaGife7RCnE
For further discussion please refer to the link provided : PAS 1 – Presentation of FS
https://www.youtube.com/watch?v=c54-lIDFqbk
Reference Book:
Conceptual Framework and Accounting Standards
By: Zeus Vernon B. Millan, 2019 Edition
1. What is the relevance of the Conceptual Framework and the PFRSs to your future career as a
business manager or an accountant?
Read and understand each question carefully. This test consists of 20 items Multiple Choice.
3. The two primary qualities that make accounting information useful for decision making are
a. comparability and consistency.
b. materiality and timeliness.
c. relevance and reliability.
d. faithful representation and relevance.
6. PAS 1 requires an assessment of the entity’s ability to continue as a going concern each
time financial statements are prepared. Who is responsible in making this assessment?
a. Accountant c. Management
b. Auditor d. Government regulatory body
7. These are the end product of the financial reporting process and the means by which
information gathered and processed is periodically communicated to users.
a. Financial reporting c. Financial products
b. Financial statements d. Accounting statements
8. Which of the following is not one of the general features of financial statements under PAS
1?
a. Fair presentation and compliance with PFRSs
b. Going Concern
c. Cash Basis
d. Materiality and aggregation
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9. Who is responsible for the preparation and the fair presentation of an entity’s financial
statements in accordance with the PFRSs?
a. Any accountant c. Auditor
b. Certified Public Accountant d. Management
10. This type of presentation of statement of financial position does not show distinctions
between current and noncurrent items.
a. Classified presentation c. Non-discriminating presentation
b. Unclassified presentation d. Awesome presentation
12. Which of the following financial statements would be dated as at a certain date?
a. Statement of financial position
b. Statement of profit or loss and other comprehensive income
c. Statement of cash flows
d. All of these
13. This comprises all “non-owner changes in equity.” It excludes owner changes in equity,
such as subscription, issuance, and reacquisition of share capital and declaration of
dividends.
a. Other comprehensive income
b. Changes in equity
c. Total comprehensive income
d. Profit or loss
15. Which of the following costs are included in the cost of inventories?
a. Transport costs for raw materials
b. Abnormal material usage
c. Storage costs relating to finished goods
d. Administrative and general overhead
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16. How should trade discounts be dealt with when valuing inventories at the lower of cost and
net realizable value (NRV) according to PAS 2?
a. Added to cost c. Deducted in arriving at NRV
b. Ignored d. Deducted from cost
20. Which of the following costs of conversion cannot be included in cost of inventory?
a. Cost of direct labor.
b. Factory rent and utilities.
c. Salaries of sales staff (sales department shares the building with factory supervisor).
d. Factory overheads based on normal capacity.
CHAPTER 2 - PRETEST
Read and understand each question carefully. This test consists of 10 Multiple Choice. Good
Luck.
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1. Entity A had the following balances at December 31, 20x1:
Cash in checking account 35,000
Cash in 90-day money market account 75,000
Treasury bill, purchased 12/1/x0, maturing 5/31/x2 150,000
Treasury bill, purchased 12/1/x1, maturing 2/28/x2 200,000
How much cash and cash equivalents is reported in Entity A’s December 31, 20x1 statement
of financial position?
a. 110,000 c. 310,000
b. 235,000 d. 460,000
2. Entity A acquires equipment by issuing shares of stocks. How should Entity A report the
transaction in the statement of cash flows?
a. Operating activities
b. Investing activities
c. Financing activities
d. Not reported
3. Entity A, a financial institution, received cash dividends from its investments in marketable
securities during the year. How will the dividends be presented in Entity A’s statement of
cash flows?
a. as investing activity c. as financing activity
b. as operating activity d. a or b
5. Which of the following is presented under the investing activities section of a statement of
cash flows?
a. Collection of accounts receivable
b. Cash purchases of inventories
c. Purchase of equipment through cash
d. Issuance of share capital through cash
6. According to PAS 8, these are the specific principles, bases, conventions, rules and
practices applied by an entity in preparing and presenting financial statements.
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a. Accounting policies c. Accounting standards
b. Accounting estimates d. Accounting assumptions
7. A change in the pattern of consumption of economic benefits from an asset is most likely a
a. change in accounting policy. c. error.
b. change in accounting estimate. d. any of these
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CHAPTER 2 STATEMENT OF CASH FLOWS
Objectives:
1. Define the statement of cash flows
2. Differentiate the accounting policies, changes in
accounting estimates and errors
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Reporting cash flows from operating activities
Direct method - shows each major class of gross cash receipts and
gross cash payments
Indirect method - adjusts accrual basis profit or loss for the effects of
changes in operating assets and liabilities and effects of non-cash items
c. Interpretations
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When it is difficult to distinguish a change in accounting policy
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from a change in accounting estimate, the change is treated as a
change in an accounting estimate
- is required by a PFRS
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- Change in estimated residual values of depreciable assets
Errors
- Mathematical mistakes
- Fraud
For further discussion please refer to the link provided: PAS 7 – Statement of Cash Flows
https://www.youtube.com/watch?v=lxeFyzC2u5I
For further discussion please refer to the link provided : PAS 8 – Accounting Policies
https://www.youtube.com/watch?v=BP49bwQcBvk
For further discussion please refer to the link provided: PAS 10 –Events After Reporting
Period
https://www.youtube.com/watch?v=f989U5Ju_iA
Reference Book:
Conceptual Framework and Accounting Standards
By: Zeus Vernon B. Millan, 2019 Edition
36
CHAPTER 2 ACTIVITY / ASSIGNMENT
1. The statement of cash flows present cash flows according to the following
classifications. Explain each classification.
d. Operating activities
e. Investing activities
f. Financing activities
Read and understand each question carefully. This test consists of 10 items Multiple Choice.
1. According to PAS 10, these are those events, favorable and unfavorable, that occur
between the end of the reporting period and the date when the financial statements are
authorized for issue.
a. Events after the reporting period c. Adjusting events
b. Non-adjusting events d. all of these
2. The Sarin Company's financial statements for the year ended 30 April 20X8 were approved
by its finance director on 7 July 20X8 and a public announcement of its profit for the year
was made on 10 July 20X8. The board of directors authorized the financial statements for
issue on 15 July 20X8 and they were approved by the shareholders on 20 July 20X8.
Under PAS 10, after what date should consideration no longer be given as to whether the
financial statements to 30 April 20X8 need to reflect adjusting and non-adjusting events?
a. 7 July 20X8
b. 10 July 20X8
c. 15 July 20X8
d. 20 July 20X8
4. One of Entity A’s delivery trucks had an accident on February 14, 20x2. The truck is totally
wrecked and is uninsured. Entity A’s December 31, 20x1 current-period financial
statements were authorized for issue on March 31, 20x2. Entity A asked you if it can write-
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off the carrying amount of the destroyed truck from its December 31, 20x1 statement of
financial position. What will you tell Entity A?
a. Yes, go ahead. Write-off the truck because the event is an adjusting event.
b. No. Don’t write-off the truck because the event is a non-adjusting event.
c. No. Don’t write-off the truck because the event is a non-adjusting event. You should,
however, disclose the event if you deem it to be material.
d. Yes, go ahead. I will support you.
How much cash and cash equivalents is reported in Entity A’s December 31, 20x1 statement
of financial position?
a. 110,000 b. 235,000 c. 310,000 d. 460,000
7. Entity A acquires equipment by issuing shares of stocks. How should Entity A report the
transaction in the statement of cash flows?
g. Operating activities b. Investing activities
h. Financing activities d. Not reported
8. Entity A, a financial institution, received cash dividends from its investments in marketable
securities during the year. How will the dividends be presented in Entity A’s statement of
cash flows?
a. as investing activity c. as operating activity
b. as financing activity d. a or b
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d. The statement of cash flows shows historical changes of cash and cash equivalents
during the period.
10. Which of the following is presented under the investing activities section of a statement of
cash flows?
a. Collection of accounts receivable
b. Cash purchases of inventories
c. Purchase of equipment through cash
d. Issuance of share capital through cash
11. According to PAS 8, these are the specific principles, bases, conventions, rules and
practices applied by an entity in preparing and presenting financial statements.
a. Accounting policies c. Accounting standards
b. Accounting estimates d. Accounting assumptions
12. A change in the pattern of consumption of economic benefits from an asset is most likely a
a. change in accounting policy. c. error.
b. change in accounting estimate. d. any of these
14. These arise from misapplication of accounting policies, mathematical mistakes, oversights
or misinterpretations of facts, or fraud.
a. Error
b. Change in accounting estimate
c. Change in accounting policy
d. Impracticable application
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CHAPTER 3 - PRETEST
Read and understand each question carefully. This test consists of 10 items of Multiple
Choice.
3. Deferred tax assets and deferred tax liabilities do not alter the tax to be paid in the current
period. However, they cause tax payments to either increase or decrease when they
reverse in a future period. The reversal of which of the following will cause an increase in
tax payment?
a. Deferred tax liability c. Deferred tax expense
b. Deferred tax asset d. Deferred tax benefit
4. During the period, deferred tax assets increase by ₱400 while deferred tax liabilities
increase by ₱500. The net change of ₱100 is a
a. deferred tax expense c. deferred tax liability
b. deferred tax income d. deferred tax asset
5. At the end of the period, Entity A has taxable temporary difference of ₱100,000. Entity A’s
income tax rate is 30%. Entity A’s statement of financial position would report which of the
following?
a. 30,000 deferred tax asset
b. 30,000 deferred tax liability
c. 30,000 deferred tax expense
d. 30,000 income tax expense
6. According to PAS 16, the selection of an appropriate depreciation method rests upon the
entity’s
a. management.
b. accountant.
c. regulator.
d. all of these
8. PAS 16 requires an entity to review the depreciation method and the estimates of useful life
and residual value at the end of each year-end. A change in any of these is accounted for
using
a. a specific transitional provision of a PFRS.
b. retrospective application.
c. prospective application.
d. any of these
9. If plotted on a graph (X-axis: time; Y-axis: ₱), the depreciation charges under the straight-
line method would show
a. a straight-line.
b. an upward line sloping to the right.
c. a downward line sloping to the left.
d. a curvilinear line sloping here and there.
10. Which of the following instances does not preclude an entity from recognizing depreciation
during a certain period?
a. The asset is fully depreciated.
b. The asset is being depreciated using the units of production method and there is no
production during the period.
c. The asset is classified as held for sale under PFRS 5.
d. The asset becomes idle or is taken out of active use.
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CHAPTER 3 INCOME TAXES
Objectives:
1. Identify the recognition of property, plant and equipment
2. Define the deferred taxes and current taxes
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Accounting profit vs. Taxable profit
Permanent differences
Permanent differences are those that do not have future tax consequences
Examples:
- Dividend income
Temporary differences
43
Temporary differences are either:
Deferred taxes
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PAS 16 Property, Plant and Equipment
Characteristics of PPE
Cost Model
Depreciation
Depreciation begins when the asset is available for use, i.e., when it
is in the location and condition necessary for it to be capable of operating in
the manner intended by management.
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classified as “held for sale” under PFRS 5, whichever comes earlier
Revaluation Model
Revaluation surplus
Fair value* xx
Less: Carrying amount (xx)
Revaluation surplus – gross of tax xx
Derecognition:
- on disposal
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PAS 19 Employee Benefits
48
result of either:
For further discussion please refer to the link provided: PAS 12 – Income Taxes
https://www.youtube.com/watch?v=puCzQ3duUhI
For further discussion please refer to the link provided : PAS 16 - PPE
https://www.youtube.com/watch?v=Z7SfSVmychY
For further discussion please refer to the link provided: PAS 19 – Employee Benefits
https://www.youtube.com/watch?v=2xTUfFcE6wE
Reference Book:
Conceptual Framework and Accounting Standards
By: Zeus Vernon B. Millan, 2019 Edition
49
CHAPTER 3 - POST TEST
Read and understand each question carefully. This test consists of 10 items Multiple Choice.
1. Imagine you are an employer (an awesome one). When should you recognize short-term
employee benefits?
a. Every 1st day of the month
b. Every 15th and 30th of the month.
c. When the employees have rendered service in exchange for the employee benefits.
d. Never!
2. You are the business owner of Entity A. You have 10 employees, each earning ₱20,000
per month. You pay salaries on a bi-monthly basis. During the month of April 20x1, none of
your employees were absent, late or have rendered overtime service. When will you
recognize the salaries expense (and at what amount) for the first payday in the month of
April 20x1?
Timing of recognition Amount recognized
a. April 1 20,000
b. April 15 20,000
c. April 1 100,000
d. April 15 100,000
3. Entity A has 20 employees who are each entitled to one day paid vacation leave for each
month of service rendered. Unused vacation leaves cannot be carried forward and are
forfeited when employees leave the entity. All the employees have rendered service
throughout the current year and have taken a total of 150 days of vacation leaves. The
average daily rate of the employees in the current period is ₱1,000. However, a 5%
increase in the rate is expected to take into effect in the following year. Based on Entity A’s
past experience, the average annual employee turnover rate is 20%. How much will Entity
A accrue at the end of the current year for unused entitlements?
a. 0 c. 90,000
b. 150,000 d. 94,500
4. Under a profit-sharing plan, Entity A agrees to pay its employees 5% of its annual profit.
The bonus shall be divided among the employees currently employed as at year-end.
Relevant information follows:
If the employee benefits remain unpaid, how much liability shall Entity A accrue at the end of
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the year?
a. 400,000 c. 200,000
b. 300,000 d. 0
5. You are employed as an accountant. Your company’s retirement plan states that, upon
retirement, an employee (not less than 60 years but not more than 65 years of age) is
entitled to a lump sum payment equal to the employee’s final monthly salary level multiplied
by the number of years in service (not less than 10 years). At the end of month following
the month of retirement and every month thereafter, the retired employee is entitled to a
monthly pension equal to one-eighth (1/8) of the final monthly salary level. The monthly
pensions cease upon death of the retired employee. However, if the employee has
immediate dependent(s) with age of less than 18 years, the dependent(s) will be entitled to
the monthly pensions, which will cease when the dependent(s) reaches 18 years of age.
What type of post-employment benefit plan does your company have?
a. Defined contribution plan
b. Defined benefits plan
c. Defined pension plan
d. Cannot be determined; insufficient information!
6. How much is the net defined benefit liability (asset) in Entity A’s December 31, 20x0
statement of financial position?
a. 588,000 liability
b. 588,000 asset
c. 360,000 liability
d. 360,000 asset
7. How much is the net defined benefit liability (asset) in Entity A’s December 31, 20x1
statement of financial position?
a. 588,000 liability
b. 588,000 asset
c. 360,000 liability
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d. 360,000 asset
9. How much is the component of the total defined benefit cost to be recognized in profit or
loss?
a. 390,000
b. 408,000
c. 348,000
d. 18,000
10. How much is the component of the total defined benefit cost to be recognized in other
comprehensive income?
a. 180,000
b. (60,000)
c. 60,000
d. (180,000)
11. How much is the net defined benefit liability (asset) in Entity A’s December 31, 20x0
statement of financial position?
f. 588,000 liability
g. 588,000 asset
h. 360,000 liability
i. 360,000 asset
12. How much is the net defined benefit liability (asset) in Entity A’s December 31, 20x1
statement of financial position?
a. 588,000 liability
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b. 588,000 asset
c. 360,000 liability
d. 360,000 asset
13. How much is the total defined benefit cost for 20x1?
a. 588,000
b. 468,000
c. 348,000
d. 228,000
14. How much is the component of the total defined benefit cost to be recognized in profit or
loss?
a. 390,000
b. 408,000
c. 348,000
d. 18,000
15. How much is the component of the total defined benefit cost to be recognized in other
comprehensive income?
a. 180,000
b. (60,000)
c. 60,000
d. (180,000)
CHAPTER 4 - PRETEST
Read and understand each question carefully. This test consists of 10 items of Multiple
Choice.
2. Which of the following is not considered a government grant under PAS 20?
a. Financial aid
b. Benefit of subsidized loans
c. Tax breaks
d. Forgivable loans
4. In 20x1, Entity A proposes an environmental clean-up project for a river. The government
supports this project and gives Entity A a ₱1M monetary grant conditioned that the money
will only be spent on the proposed project. The proposed project is expected to take about
2 years to complete. Entity A starts the clean-up project in 20x2. How should Entity A
recognize income from the government grant?
a. in full when Entity A receives the grant
b. over 2 years starting in 20x1
c. over the period of the project as expenses are incurred
d. the grant is not recognized as income
5. According to PAS 20, a government grant that becomes repayable is accounted for
a. retrospectively.
b. prospectively.
c. a or b
d. not accounted for
6. ABC Philippines Co. is required to file audited financial statements with the Philippine
Securities and Exchange Commission (SEC) and the Bureau of Internal Revenue (BIR).
What is the presentation currency for the financial statements to be filed with the said
government agencies?
a. Philippine peso
b. U.S. dollar
c. a or b
d. none of these
7. These are those which do not give rise to a right to receive (or an obligation to deliver) a
fixed or determinable amount of money.
a. Monetary items
b. Non-monetary items
c. Financial items
d. Non-financial items
8. On December 1, 20x1, you imported a machine from a foreign supplier for $100,000, due
for settlement on January 6, 20x2. Your functional currency is the Philippine peso. When
preparing the December 31, 20x1 statement of financial position, which of the following will
you translate to the closing rate?
a. machine
b. accounts payable
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c. a and b
d. none of these
9. Use the information in Problem #4 above. The relevant exchange rates are as follows:
Dec. 1, 20x1 Dec. 31, 20x1 Jan. 6, 20x2
₱50:$1 ₱52:$1 ₱47:$1
How much foreign exchange gain (loss) will you recognize on December 31, 20x1?
a. 200,000 c. 100,000
b. (200,000) d. (100,000)
10. 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 qualify 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
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CHAPTER 4
PAS 24 – ACCOUNTING FOR GOVERNMENT GRANTS
Objectives:
1. Explain the recognition of government grants
2. Identify the presentation of government grants in the
financial statements and the borrowing costs
56
4. Benefit of a government loan with below-market rate of
interest
The following are not government grants:
- Tax benefits
- Free technical or marketing advice
- Provision of guarantees
- Government procurement policy that is responsible for a
portion of the entity’s sales
- Public improvements that benefit the entire community
Recognition
Government grants are recognized if there is reasonable
assurance that:
the attached conditions will be complied with; and the grants will
be received
Classifications of government grants according to attached
condition
1. Grants related to assets - grants whose primary
condition is that an entity qualifying for them should
purchase, construct or otherwise acquire long-term
assets
2. Grants related to income – grants other than those
related to assets
Accounting for Gov’t. Grants
The main concept in accounting for gov’t. grants is the MATCHING
CONCEPT. This means that the gov’t. grant is recognized as income
as the entity recognizes as expense the related cost for which the grant
is intended to compensate.
Presentation of Government grants related to assets
Government grants related to assets are presented in the
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statement of financial position either by:
- Gross presentation –the grant is presented as deferred
income (liability)
- Net presentation – the grant is deducted when computing for
the carrying amount of the asset
Presentation of Government grants related to income
Grants related to income are sometimes presented in the income
statement either by:
- Gross presentation – the grant is presented separately or
under a general heading such as “Other income”, or
- Net presentation – the grant is deducted in reporting the
related expense
Repayment of Government Grants
A government grant that becomes repayable is accounted for as
a change in accounting estimate that is treated prospectively under
PAS 8.
58
Two ways of conducting foreign activities
1. Foreign currency transactions – individual entities
often enter into transactions in a foreign currency
2. Foreign operations – groups often include overseas
entities
Functional currency
- When preparing financial statements, a reporting entity must
identify its functional currency
- Functional currency is the currency of the primary economic
environment in which the entity operates
- The primary economic environment in which an entity
operates is normally the one in which it primarily generates
and expends cash
Foreign currency transactions
Initial recognition:
- The foreign currency amount is translated at the spot
exchange rate at the date of the transaction
Subsequent recognition: At the end of each reporting period:
- Foreign currency monetary items are re-translated using the
closing rate
- Non-monetary items that are measured at historical cost in a
foreign currency shall be translated using the exchange rate
at the date of the transaction
- Non-monetary items that are measured at fair value in a
foreign currency shall be translated using the exchange rates
at the date when the fair value was determined
Monetary items – are units of currency held and assets and liabilities to
be received or paid in a fixed or determinable number of units of
currency.
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A foreign operation is an entity that is a subsidiary, associate, joint
venture or branch of a reporting entity, the activities of which are based
or conducted in a country or currency other than those of the reporting
entity
For further discussion please refer to the link provided: PAS 20 - Government Grants
https://www.youtube.com/watch?v=TKZNC8KIBrk
For further discussion please refer to the link provided: PAS 21
https://www.youtube.com/watch?v=ingRv6iy4Us
For further discussion please refer to the link provided : PAS 23 – Borrowing Cost
https://www.youtube.com/watch?v=4j3d0QnZY4g
Reference Book:
Conceptual Framework and Accounting Standards
By: Zeus Vernon B. Millan, 2019 Edition
61
CHAPTER 4 - ACTIVITY / ASSIGNMENT
Read and understand each question carefully. This test consists of 10 items of Multiple
Choice
1. On January 1, 20x1, Entity A obtained a 10%, ₱5,000,000 loan, specifically to finance the
construction of a building. The proceeds of the loan were temporarily invested and earned
interest income of ₱180,000. The construction was completed on December 31, 20x1 for
total construction costs of ₱7,000,000. How much is the cost of the building on initial
recognition?
a. 7,320,000 c. 7,500,000
b. 7,000,000 d. 6,680,000
2. 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.
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.
3. An asset is being constructed for an enterprise's own use. The asset has been financed
with a specific new borrowing. The interest cost incurred during the construction period as a
result of expenditures for the asset is
a. a part of the historical cost of acquiring the asset to be written off over the estimated
useful life of the asset.
b. interest expense in the construction period.
c. recorded as a deferred charge and amortized over the term of the borrowing.
d. a part of the historical cost of acquiring the asset to be written off over the term of the
borrowing used to finance the construction of the asset.
4. 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 qualify for
capitalization.
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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. These are those which do not give rise to a right to receive (or an obligation to deliver) a
fixed or determinable amount of money.
a. Monetary items
b. on-monetary items
c. Financial items
d. Non-financial items
7. On December 1, 20x1, you imported a machine from a foreign supplier for $100,000, due
for settlement on January 6, 20x2. Your functional currency is the Philippine peso. When
preparing the December 31, 20x1 statement of financial position, which of the following will
you translate to the closing rate?
a. machine
b. accounts payable
c. a and b
d. none of these
9. Which of the following is not considered a government grant under PAS 20?
a. Financial aid
b. Benefit of subsidized loans
c. Tax breaks
d. Forgivable loans
10. The main concept used in recognizing income from government grants is
a. capital approach c. matching
b. historical cost d. materiality
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CHAPTER 5 – PRETEST
Read and understand each question carefully. This test consists of 10 items of Multiple
Choice. 2 points each.
1. PAS 24 requires the disclosure of key management personnel compensation. Which of the
following is not included in this disclosure?
a. short-term employee benefits
b. termination benefits
c. share-based payment
d. reimbursements of officers’ out-of-pocket expenses
5. These are those presented in addition to consolidated financial statements or the financial
statements of an entity with an investment in associate or joint venture that is accounted for
using equity method in accordance with PAS 28.
a. Individual financial statements
b. Separate financial statements
c. Consolidate financial statements
d. Equity financial statements
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CHAPTER 5
PAS 24 – RELATED PARTY DISCLOSURES
Objectives:
1. Enumerate examples of related parties
2. Describe the disclosure requirements for related parties
Related parties
A related party is “a person or entity that is related to the
reporting entity that is preparing its financial statements.” (PAS 24)
Examples of related parties:
1. Investor and investee relationship where control, joint
control or significant influence exists
2. Key management personnel
3. Close family member
4. Post-employment benefit plan
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Control – an investor controls an investee when the investor is
exposed, or has rights, to variable returns from its involvement with the
investee and has the ability to affect those returns through its power
over the investee.
Significant influence is the power to participate in the financial and
operating policy decisions of an entity, but is not control over those
policies. Significant influence may be gained by share ownership,
statute or agreement.
Joint control is the contractually agreed sharing of control over an
economic activity.
Key management personnel are those persons having authority and
responsibility for planning, directing and controlling the activities of the
entity, directly or indirectly, including any director (whether executive or
otherwise) of that entity
A related party transaction is a transfer of resources, services or
obligations between a reporting entity and a related party, regardless of
whether a price is charged
Disclosure:
- Parent-subsidiary relationship regardless of whether there
have been transactions between them
- Key management personnel compensation broken down into
the following categories SPOTS and loans to key
management personnel.
- Related party transactions - nature of transaction and
outstanding balances
Disclosures that related party transactions were made on terms
equivalent to those that prevail in arm’s length transactions are made
only if such terms can be substantiated.
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PAS 26 Accounting and Reporting by Retirement Benefit Plans
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PAS 27 Separate Financial Statements
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Discontinuance of the use of equity method
- An investor starts to apply the equity method on the date it
obtains significant influence and ceases to apply the equity
method on the date it loses significant influence
- On the loss of significant influence, the investor shall measure
at fair value any investment the investor retains in the former
associate. The investor shall recognize in profit or loss any
difference between:
1. The fair value of any retained investment and any
proceeds from disposing of the part interest in the
associate
2. The carrying amount of the investment at the date
when significant influence is lost
Reclassification of cumulative OCI
If an investor loses significant influence over an associate, all
amounts recognized in other comprehensive income in relation to the
associate shall be accounted on the same basis as would be required if
the associate had directly disposed of the related assets or liabilities.
Share in losses of associate
If an investor’s share of losses of an associate equals or exceeds
its interest in the associate, the investor discontinues recognizing its
share of further losses.
Interest in the associate includes the following:
a. Investment in associate measured under equity method
b. Investment in preference shares of the associate
c. Unsecured long-term receivables or loans
Interest in the associate does not include the following:
a. Trade receivables and payables
b. Secured long-term receivables or loans
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For further discussion please refer to the link provided: PAS 24 – Related Party Disclosure
https://www.youtube.com/watch?v=19mZWo-KFks
For further discussion please refer to the link provided : PAS 28 – Investment in
associates
https://www.youtube.com/watch?v=gGrPuR1MpJc
For further discussion please refer to the link provided: Joint Ventures
https://www.youtube.com/watch?v=tGQveH0148s
Reference Book:
Conceptual Framework and Accounting Standards
By: Zeus Vernon B. Millan, 2019 Edition
1. Which of the following best describes the term ‘significant influence’ as used under PAS
28?
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a. The holding of 20% interest in an investee.
b. The ability to control an investee’s relevant activities through holding of significant
portion of the investee’s voting rights.
c. The power to participate in the financial and operating policy decisions of an entity.
d. The contractually agreed sharing of profits and losses in an investee.
2. Entity A owns 25% of the voting rights in Entity B. However, Entity A has no representation
on the board of directors of Entity B. Which of the following statements is correct?
a. Entity A cannot be presumed to have significant influence over Entity B because Entity
A does not have board representation.
b. Entity A is presumed to have signification influence over Entity B because it holds 25%
or more of the voting rights in Entity B.
c. Entity A is presumed to have signification influence over Entity B because it holds 20%
or more of the voting rights in Entity B.
d. Representation on an investee’s board of directors is never considered when
determining the existence of significant influence.
3. On January 1, 20x1, Entity A acquires 25% interest in Entity B for ₱800,000. Entity B
reports profit of ₱1,000,000 and declares dividends of ₱100,000 in 20x1. How much is the
carrying amount of the investment in associate on December 31, 20x1?
a. 800,000
b. 1,250,000
c. 1,000,000
d. 1,025,000
4. The Hanwell Company acquired a 30% equity interest in The Northfield Company for
CU400,000 on 1 January 20X6. In the year to 31 December 20X6 Northfield earned profits
of CU80,000 and paid no dividend. In the year to 31 December 20X7 Northfield incurred
losses of CU32,000 and paid a dividend of CU10,000. In Hanwell's consolidated statement
of financial position at 31 December 20X7, what should be the carrying amount of its
interest in Northfield, according to IAS 28 Investments in associates?
a. CU438,000
b. CU411,400
c. CU414,400
d. CU400,000
5. These are those presented in addition to consolidated financial statements or the financial
statements of an entity with an investment in associate or joint venture that is accounted for
using equity method in accordance with PAS 28.
a. Individual financial statements
b. Separate financial statements
c. Consolidate financial statements
d. Equity financial statements
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6. Entity A acquired an investment in associate for ₱1M many years ago. At the end of the
current reporting period, the investment has a fair value of ₱2.9M. If the equity method is
used, the investment would have a current carrying amount of ₱2.6M. In Entity A’s
separate financial statements, the investment should be valued at
a. 1,000,000.
b. 2,600,000.
c. 2,900,000.
d. any of these, as a matter of an accounting policy choice
9. PAS 24 requires the disclosure of key management personnel compensation. Which of the
following is not included in this disclosure?
a. short-term employee benefits
b. termination benefits
c. share-based payment
d. reimbursements of officers’ out-of-pocket expenses
10. Which of the following is not required to be disclosed under PAS 24?
a. A parent-subsidiary relationship when there were transactions between them during the
period.
b. A parent-subsidiary relationship when there were no transactions between them during
the period.
c. Loans to officers
d. The name of the parent of the entity’s associate
CHAPTER 6 - PRETEST
Read and understand each question carefully. This test consists of 10 items of Multiple
Choice.
73
1. PAS 29 is generally not applied by entities unless their functional currency is that of a
hyperinflationary economy. This is because of which of the following basic accounting
concepts?
a. Going concern
b. Price level concept
c. Stable monetary assumption
d. Materiality
4. These are bonds that can be exchanged for shares of stocks of the issuer.
a. Exchangeable bonds
b. Callable bonds
c. Convertible bonds
d. Rock bonds
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d. PAS 34 encourages publicly listed entities to prepare at least three quarterly financial
reports to be issued not later than 45 days after the end of each interim period.
8. ________________ is “any contract that gives rise to a financial asset of one entity and a
financial liability or equity instrument of another entity.
9. ________________ is a computation made for ordinary shares. It is a form of profitability ratio
which represents how much was earned by each ordinary share during the period.
10. ________________is the amount of profit for the period per share, reflecting the maximum
dilutions that would have resulted from conversions, exercises, and other contingent issuances
that individually would have decreased earnings per share and in the aggregate would have
had a dilutive effect.
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CHAPTER 6
PAS 29 - Financial Reporting in Hyperinflationary Economies
Objectives:
1. Describe the restatement procedures under PAS 29
2. Explain the Hyperinflationary Economies
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purchasing power of money has increased – a condition known
as deflation
Indicators of hyperinflation
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monetary liabilities.
Examples of Monetary assets:
- Cash and cash equivalents
- Loans and receivables and their related allowances
- Financial assets at amortized cost (debt instruments)
- Finance lease receivables
- Cash surrender value
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customers, unearned rent, deferred revenues, and the like
- Warranty obligations to be settled by future delivery of services
(e.g., free repair service) or replacement with other non-
monetary items (e.g., free replacement of parts or replacement
of the good purchased)
Equity items such as share capital and share premium are also
nonmonetary items and thus restated.
Formula for restatement:
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d. A contractual right to exchange financial instruments with another entity
under conditions that are potentially favorable
e. A contract that will or may be settled in the entity’s own equity
instruments and is not classified as the entity’s own equity instrument
Financial liability – is any liability that is:
a. A contractual obligation to deliver cash or another financial asset to
another entity
b. A contractual obligation to exchange financial assets or financial
liabilities with another entity under conditions that are potentially
unfavorable to the entity
c. A contract that will or may be settled in the entity’s own equity
instruments and is not classified as the entity’s own equity instrument
Equity instrument – is “any contract that evidences a residual interest in
the assets of an entity after deducting all of its liabilities
Examples of financial assets:
- Cash and cash equivalents (e.g., cash on hand, in banks, short-
term money placements, and cash funds)
- Receivables such as accounts, notes, loans, and finance lease
receivables
- Investments in equity or debt instruments of other entities such
as held for trading securities, investments in subsidiaries,
associates, joint ventures, investments in bonds, and derivative
assets
- Sinking fund and other long-term funds composed of cash and
other financial assets
The following are not financial assets:
- Physical assets, such as inventories, biological assets, PPE and
investment property
- Intangible assets
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- Prepaid expenses and advances to suppliers
- The entity’s own equity instrument (e.g., treasury shares)
Examples of financial liabilities:
- Payables such as accounts, notes, loans and bonds payable
- Lease liabilities
- Held for trading liabilities and derivative liabilities
- Redeemable preference shares issued
- Security deposits and other returnable deposits
The following are not financial liabilities:
- Unearned revenues and warranty obligations that are to be
settled by future delivery of goods or provision of services
- Taxes, SSS, Philhealth, and Pag-IBIG payables
- Constructive obligations
Presentation
Treasury shares
- Treasury shares are an entity’s own shares that were previously
issued but were subsequently reacquired but not retired
- Treasury shares are treated as deduction from equity
- Treasury share transactions are recognized directly in equity.
Therefore, they do not result to gains or losses
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- Earnings per share (EPS) is a computation made for ordinary
shares. It is a form of profitability ratio which represents how
much was earned by each ordinary share during the period. No
EPS is presented for preference shares because these shares
have a fixed return represented by their dividend rates.
Types of Earnings per share
a. Basic earnings per share
b. Diluted earnings per share
Rights issue
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share and in the aggregate would have had a dilutive effect
- Only basic earnings per share is presented if an entity has no
dilutive potential ordinary shares (i.e., simple capital structure)
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- Relevance over Reliability – in the interest of timeliness and cost
considerations, less information may be provided at interim dates
- Materiality and Estimates – an entity may rely on estimates to a
greater extent when preparing interim financial reports
- Note disclosures – only selected explanatory notes are provided
in interim financial reports to avoid repetition
Recognition and measurement
a. Gains and losses arising in an interim period are recognized
immediately and are not deferred, e.g., inventory write-downs &
reversals; asset impairment losses & reversals; discontinued
operations; and fair value changes on assets measured at fair value
b. Costs and expenses (income) that benefit the entire year or are
incurred (earned) over the year are spread out over the interim periods,
e.g., depreciation, amortization; property taxes; insurance expense;
interest expense (income); 13th month pay and other year-end
bonuses.
c. Discretionary income are recognized immediately in the period the
income is earned, e.g., dividend income
d. Income tax expense in the interim periods is computed using the best
estimate of the weighted average annual income tax rate expected for
the full financial year.
For further discussion please refer to the link provided: PAS 29 – Inflationary Economics
https://www.youtube.com/watch?v=LZkRWT2qXvs
For further discussion please refer to the link provided : PAS 32 – Financial Instruments
https://www.youtube.com/watch?v=F9tasMC4yvw
For further discussion please refer to the link provided : PAS 33 – Earning Per Share
https://www.youtube.com/watch?v=l-Sg4Z1fX1M
Reference Book:
Conceptual Framework and Accounting Standards
By: Zeus Vernon B. Millan, 2019 Edition
86
CHAPTER 6 - ACTIVITY / ASSIGNMENT
1. Entity A had 100,000, ₱10 par, 10% cumulative preference shares outstanding all
throughout 20x1. Entity A reported profit after tax of ₱1,200,000 for the year ended
December 31, 20x1. The movements in the number of ordinary shares are as follows:
2. Entity A is computing for its basic earnings per share and has gathered the following
information:
Loss for the year (800,000)
Preferred dividends 50,000
Outstanding ordinary shares 100,000
There have been no changes in the number of outstanding ordinary shares during the period.
What is the basic earnings (loss) per share?
a. -7.50
b. 7.50
c. -8.50
d. 8.50
3. Entity A had 200,000 ordinary shares outstanding all throughout 20x1. In 20x2, share
issuances occurred:
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• On April 1, 20,000 shares were issued for cash.
• On September 30, a 10% bonus issue (share dividend) was declared.
• On November 1, a 2-for-1 share split was issued.
Entity A had the following profits: ₱1,200,000 in 20x2 and ₱900,000 in 20x1. What are the
earnings per share to be disclosed in Entity A’s 20x2 comparative financial statements?
20x2 20x1
a. 2.22 2.02
b. 2.54 2.05
c. 2.65 2.09
d. 2.78 2.12
4. Entity A has 200,000 ordinary shares outstanding on January 1, 20x1. Entity A offers rights
issue to its existing shareholders that enable them to acquire 1 ordinary share at a
subscription price of ₱120 for every 5 rights held. The rights are exercised on May 1, 20x1.
The market price of one ordinary share immediately before exercise is ₱180. Entity A
reported profit after tax of ₱2,700,000 in 20x1. What is the basic earnings per share in
20x1?
a. 12.58
b. 12.67
c. 11.71
d. 11.67
Profit for the year is ₱1,200,000. Entity A’s income tax rate is 30%.
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b. PAS 34 requires both publicly and non-publicly listed entities to prepare at least a semi-
annual financial report to be issued not later than 60 days after the end of the interim
period.
c. PAS 34 encourages publicly listed entities to prepare at least a semi-annual financial
report to be issued not later than 60 days after the end of the interim period.
d. PAS 34 encourages publicly listed entities to prepare at least three quarterly financial
reports to be issued not later than 45 days after the end of each interim period.
10. These are bonds that can be exchanged for shares of stocks of the issuer.
a. Exchangeable bonds
b. Callable bonds
c. Convertible bonds
d. Rock bonds
CHAPTER 7 - PRETEST
Read and understand each question carefully. This test consists of 10 items of Multiple choice.
89
2. According to PAS 36, when measuring an asset’s value in use, the discount rate to be used
in discounting the estimated cash flows should be the
a. pre-tax rate that reflects current assessments of the time value of money and risks.
b. post-tax rate that reflects current assessments of the time value of money and risks.
c. pre-tax rate that reflects current assessments of market-based risks for similar
replacement assets.
d. post-tax rate that reflects current assessments of market-based risks for similar
replacement assets.
3. According to PAS 36, if an asset’s fair value less disposal costs cannot be determined, its
recoverable amount would be its
a. carrying amount.
b. replacement cost.
c. value in use.
d. current cost.
6. According to PAS 37, a present obligation that is possible and can be measured reliably is
a. recognized.
b. recognized and disclosed.
c. disclosed only.
d. ignored.
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8. The essential elements of an intangible asset do not include
a. identifiability.
b. probable outflow of resources embodying economic benefits.
c. control.
d. future economic benefits.
9. According to PAS 38, which of the following may be recognized as cost of intangible asset?
a. Research costs incurred in self-generating an intangible asset
b. Costs of an internally generated customer lists
c. Purchase cost of an externally acquired publishing title
d. Abnormal amount of wasted labor in self-generating an intangible asset
10. On January 1, 20x1, Entity A registers a patent for a total registration and legal costs of
₱600,000. Entity A estimates that the patent has a remaining useful life of 25 years. How
much is the amortization expense for 20x1?
a. 30,000 c. 16,000
b. 24,000 d. 0
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CHAPTER 7
PAS 36 Impairment of Assets
Objectives:
1. Explain the account for the reversal of impairment
2. Discuss account for the impairment of individual
assets and cash-generating units
Core Principle
If the carrying amount of an asset is greater than its recoverable
amount, the asset is impaired. The excess is impairment loss
Computation of Impairment loss:
Recoverable amount xx
Less: Carrying amount (xx)
Impairment loss xx
Recoverable amount is the amount to be recovered through use or sale
of an asset. It is the higher of an asset’s:
a. Fair value less costs of disposal, and Value in use
Value in use is the present value of the future cash flows expected
to be derived from an asset or cash-generating unit.
Identifying an asset that may be impaired
- An entity shall assess at the end of each reporting period
whether there is any indication that an asset may be impaired.
If any such indication exists, the entity shall estimate the
recoverable amount of the as
- If there is no indication that an asset may be impaired, an
entity is not required to estimate the recoverable amount of
the asset
Required testing for impairment
The following assets are required to be tested for impairment at
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least annually, whether or not there are indications for
impairment:
a. Intangible asset with indefinite useful life
b. Intangible asset not yet available for use
c. Goodwill acquired in a business combination
Measuring recoverable amount
- Recoverable amount is the higher of the asset’s fair value less
costs of disposal and value in use
- However, if there is no reason to believe that an asset’s value
in use materially exceeds its fair value less costs of disposal,
the asset’s fair value less costs of disposal may be used as its
recoverable amount. This will often be the case for an asset
that is held for disposal
Value in use
- Value in use is the present value of the future cash flows
expected to be derived from an asset or cash-generating unit
- Any residual value of the asset and disposal costs should be
included in estimating future cash inflows and outflows
- Cash flow projections shall cover a maximum period of 5
years
- Projections beyond 5 years are extrapolated
Recognizing and measuring an impairment loss
Impairment loss is recognized in profit or loss, unless the asset is
carried at revalued amount, in which case revaluation surplus is
decreased first and any excess is recognized in profit or loss. The
decrease in the revaluation surplus is recognized in other
comprehensive income
Depreciation after impairment
After the recognition of an impairment loss, the depreciation
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(amortization) charge for the asset shall be adjusted in future periods to
allocate the asset’s revised carrying amount, less its residual value (if
any), on a systematic basis over its remaining useful life.
Cash-generating unit (CGU)
Cash-generating unit (CGU) is the smallest identifiable group of
assets that generates cash inflows that are largely independent of the
cash inflows from other assets or groups of assets.
Impairment of individual assets included in a CGU
- Assets whose recoverable amount can be determined reliably
are tested for impairment individually
- Assets whose recoverable amount cannot be determined
reliably (e.g., assets that do not generate their own cash
flows) are included in a CGU. The CGU is the one tested for
impairment
Allocating goodwill to CGU’s
For purposes of impairment testing, goodwill acquired in a
business combination shall be allocated to each of the acquirer’s CGU
in the year of business combination.
Impairment loss for a CGU
The impairment loss on a CGU shall be allocated:
1. First, to any goodwill allocated to the CGU
2. Then, to the other assets of the unit pro rata on the
basis of the carrying amount of each asset in the
unit.
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PAS 37 Provisions, Contingent Liabilities, and Contingent Assets
Provisions
- A provision is a liability of uncertain timing or amount
- Provisions differ from other liabilities because of the
uncertainty about the timing or amount of expenditure
required in settlement. Unlike for other liabilities, provisions
must be estimated. Although, some other liabilities are also
estimated, their uncertainty is generally much less than for
provisions.
- Other liabilities, such as accruals, are reported as part of
“Trade and other payables” whereas provisions are reported
separately
Provision vs. Contingent liability
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Recognition of provisions
A provision is recognized when all of the following conditions are
met:
1. The entity has a present obligation (legal or
constructive) as a result of a past event
2. It is probable that an outflow of resources embodying
economic benefits will be required to settle the
obligation
3. A reliable estimate can be made of the amount of the
obligation
Measurement
Present value
Where the effect of the time value of money is material, the
amount of a provision shall be the present value of the expenditures
expected to be required to settle the obligation
Expected disposal of assets
Gains from the expected disposal of assets shall not be taken
into account in measuring a provision. Gains shall be recognized only
when the assets are actually disposed of
Reimbursement
- Where some or all of the expenditure required in settling a
provision is expected to be reimbursed by another party, the
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reimbursement is recognized only when it is virtually certain
that reimbursement will be received if the entity settles the
obligation
- The reimbursement shall be treated as a separate asset
- In the statement of profit or loss and other comprehensive
income, the expense relating to a provision may be presented
net of the amount recognized for a reimbursement
Changes in provisions
- Provisions shall be reviewed at the end of each reporting
period and adjusted to reflect the current best estimate
- If it is no longer probable that an outflow of resources
embodying economic benefits will be required to settle the
obligation, the provision shall be reversed
Liability for premiums
- A customer option to acquire additional goods or services for
free or at a discount is accounted for under PFRS 15 if the
option provides the customer a material right that the
customer would not receive without entering into that contract
- A customer option that does not provide the customer with a
material right is not accounted for under PFRS 15; and
therefore, accounted for in accordance with PAS 37
Guarantee for indebtedness of others
A provision for the guarantee for indebtedness of others is
recognized when it becomes probable that the entity will be held liable
for the guarantee, such as when the original debtor defaults on the loan
Contingent assets
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PAS 38 Intangible Assets
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the use of the asset by the entity
Recognition
An intangible asset shall be recognized if management can
demonstrate that:
a. The item meets the definition of intangible asset
b. It is probable that the expected future economic benefits will flow to
the entity
c. The cost of the asset can be measured reliably
Initial measurement
An intangible asset shall be measured initially at cost.
Measurement of cost depends on how the intangible asset is acquired.
Intangible assets may be acquired through:
- Separate acquisition
- Acquisition as part of a business combination
- Acquisition by way of a government grant
- Exchanges of assets
- Internal generation
Acquisition by way of a government grant
Intangible assets acquired by way of government grant may be
recorded at either:
a. fair value
b. alternatively, at nominal amount or zero, plus direct costs incurred
in preparing the asset for its intended use
Internally generated intangible assets
The costs of self-creating an intangible asset are classified into:
1. Research costs – include costs of searching new knowledge and
identifying and selecting possible alternatives
2. Development costs – include costs of designing from selected
alternative and using knowledge gained from research
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If an entity cannot identify in which phase a cost is incurred, the cost is
regarded as incurred in research phase.
Items of PPE used in R&D activities
- If the item of PPE can be used in various R&D activities or
other purposes, the cost of the PPE is capitalized and
depreciated. The amount of depreciation is included as R&D
expense
- If the item of PPE is can only be used on one specific R&D
project, the cost of the PPE is expensed immediately in its
entirety as R&D expense
Items not recognized as intangible assets
The cost of internally generated brands, mastheads, publishing
titles, customer lists, goodwill and items similar in substance are
expensed when incurred
Subsequent expenditure
Subsequent expenditures on an intangible asset are generally
recognized as ex
Reinstatement of costs in subsequent period
Expenditure on an intangible item that was initially recognized as
an expense shall not be recognized as part of the cost of an intangible
asset at a later date
Amortization
- Intangible assets with finite useful life are amortized over the
shorter of the asset’s useful life and legal life
- Intangible assets with indefinite useful life are not amortized
but tested for impairment at least annually
- The default method of amortization is the straight line method
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PAS 40 Investment Property
101
c. A building owned by the entity (or held by the entity under a finance
lease) and leased out under one or more operating leases
d. A building that is vacant but is held to be leased out under one or
more operating leases
e. Property that is being constructed or developed for future use as
investment property
Ancillary services to occupants
When ancillary services are provided to the occupants of a
property held, the property is classified as investment property if the
services are insignificant to the arrangement as a whole
Measurement
a. Initial: Cost
b. Subsequent: Either the Cost model or Fair value model
Change in accounting policy
- A change from the cost model to the fair value is accounted
for prospectively
- A change from the fair value model to the cost model is not
permitted
Determining fair value
PAS 40 requires all entities to determine the fair value of
investment property whether it uses the cost model or fair value model.
Fair values determined are used for measurement and disclosure
purposes if the entity uses the fair value model and for disclosure
purposes only if the entity uses the cost model.
Fair value model
- After initial recognition, an entity that chooses the fair value
model shall measure all of its investment property at fair
value, except in cases where the exemptions under PAS 40
applies
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- Changes in fair values are recognized in profit or loss
- Depreciable assets classified as investment property
measured under fair value model are not depreciated
- If the fair value of an item of investment property cannot be
determined reliably on initial recognition, such item is
subsequently measured under the cost model
Cost model
After initial recognition, an entity that chooses the cost model
shall measure all of its investment property at cost less any
accumulated depreciation and impairment losses in accordance with
PAS 16 Property, plant, and equipment
Transfers
Transfers to, or from, investment property shall be made when,
and only when, there is a change in use, evidenced by:
a. Commencement of owner-occupation, for a transfer from
investment property to owner-occupied property
b. Commencement of development with a view to sale, for a
transfer from investment property to inventories
c. End of owner-occupation, for a transfer from owner-occupied
property to investment property
d. Commencement of an operating lease to another party, for a
transfer from inventories to investment property
For further discussion please refer to the link provided: PAS 36 – Impairment of Assets
https://www.youtube.com/watch?v=QDxjMZp8X4U
For further discussion please refer to the link provided : PAS 38 – Intangible Assets
https://www.youtube.com/watch?v=kOFkm5Kq7DE
For further discussion please refer to the link provided : PAS 40 Investment Property
https://www.youtube.com/watch?v=IIVfvsBq88Q
103
Reference Book:
Conceptual Framework and Accounting Standards
By: Zeus Vernon B. Millan, 2019 Edition
Read and understand each question carefully. This test consists of 10 items Multiple Choice.
2. The distinguishing characteristic that identifies an investment property from the other
assets of an entity is
a. changes in fair value of the asset is recognized in profit or loss.
b. the property does not derive cash flows separate from the other assets of the entity.
c. it generates separately identifiable cash flows from the other assets of the entity.
d. it earns rental as part of the ordinary operations of the entity.
The investment property is estimated to have a remaining useful life of 10 years and a
residual value equal to 5% of initial cost.
4. Entity A uses the straight line method of depreciation. How much is the carrying amount of
the investment property under the cost model after one year?
a. 914,850 c. 968,350
b. 923,100 d. 872,100
5. Entity A uses the straight line method of depreciation. The investment property has a fair
value of ₱980,000 at the end of Year 1. How much is the carrying amount of the investment
property under the fair value model after one year?
a. 980,000 c. 986,350
b. 973,200 d. 837,900
7. According to PAS 38, which of the following may be recognized as cost of intangible asset?
a. Research costs incurred in self-generating an intangible asset
b. Costs of an internally generated customer lists
c. Purchase cost of an externally acquired publishing title
d. Abnormal amount of wasted labor in self-generating an intangible asset
8. On January 1, 20x1, Entity A registers a patent for a total registration and legal costs of
₱600,000. Entity A estimates that the patent has a remaining useful life of 25 years. How
much is the amortization expense for 20x1?
a. 30,000 c. 16,000
b. 24,000 d. 0
9. According to PAS 37, a present obligation that is possible and can be measured reliably is
a. recognized.
b. recognized and disclosed.
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c. disclosed only.
d. ignored.
10. According to PAS 37, provisions are (choose the incorrect statement)
a. presented in the statement of financial position separately from other types of liabilities.
b. recognized and disclosed.
c. necessarily estimated because their settlement amount is not certain.
d. disclosed only, unless their expected occurrence is remote.
CHAPTER 8 – PRETEST
Read and understand each question carefully. This test consists of 10 items of Multiple
Choice.
1. An entity that presents its first PFRS financial statements is referred to under PFRS 1 as a
a. first-timer.
b. first-time adopter.
c. PFRS novice.
d. first-time PFRSer.
4. The statement of financial position of ABC Co. as of January 1, 20x4 included an allowance
for bad debts computed using the “aging of accounts receivable” method. The “over 120
days” category in the aging schedule included a ₱200,000 receivable which was actually
written off on January 5, 20x4 (the 20x3 financial statements were authorized for issue on
March 1, 20x4). ABC Co. could not have foreseen this event on December 31, 20x3. Does
ABC Co. need to revise its previous estimate of bad debts as of January 1, 20x4 (date of
transition) on December 31, 20x5 (end of first PFRS reporting period)?
a. No. The receipt of the information on January 5, 20x4 is accounted for prospectively as
a non-adjusting event after the reporting period.
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b. Yes. The receipt of the information on January 5, 20x4 is accounted for retrospectively
as an adjusting event after the reporting period.
c. No. The event should be ignored because it is within the scope of the previous GAAP
and not the PFRSs.
d. Yes. Although, PFRS 1 does not require the adjustment, other PFRSs do.
5. Under PFRS 1, the early application of PFRSs that have not yet become effective as of the
current reporting period
a. is required.
b. is permitted, but not required.
c. is required, but not permitted.
d. is prohibited.
6. PFRS 1 requires a first time adopter to do which of the following in the opening PFRS
statement of financial position?
a. Recognize all assets and liabilities whose recognition is required by PFRSs.
b. Not recognize items as assets or liabilities if PFRSs do not permit such recognition.
c. Reclassify items that it recognized in accordance with previous GAAP as one type of
asset, liability or component of equity, but are a different type of asset, liability or
component of equity in accordance with PFRSs.
d. Apply PFRSs in measuring all recognized assets and liabilities.
e. All of these
8. The “excess of the acquirer’s interest in the net fair value of acquiree’s identifiable assets,
liabilities, and contingent liabilities over cost” (formerly known as negative goodwill) should
be
a. Amortized over the life of the assets acquired.
b. Reassessed as to the accuracy of its measurement and then recognized immediately in
profit or loss.
c. Reassessed as to the accuracy of its measurement and then recognized in retained
earnings.
d. Carried as a capital reserve indefinitely
9. Many shares and most share options are not traded in an active market. Therefore, it is
often difficult to arrive at a fair value of the equity instruments being issued. Which of the
following option valuation techniques should not be used as a measure of fair value in the
first instance?
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a. Black-Scholes model.
b. Binomial model.
c. Monte-Carlo model.
d. Intrinsic value.
10. Elizabeth, a public limited company, has granted 100 share appreciation rights to each of
its 1,000 employees in January 20X4. The management feels that as of December 31,
20X4, 90% of the awards will vest on December 31, 20X6. The fair value of each share
appreciation right on December 31, 20X4, is P10. What is the fair value of the liability to be
recorded in the financial statements for the year ended December 31, 20X4?
a. P300,000
b. P10 million
c. P100,000
d. P90,000
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CHAPTER 8 AGRICULTURE
Objectives:
1. Differentiate the following: biological assets, bearer
plants, agricultural produce and inventory
2. Explain the initial and subsequent measurement of
biological assets and agricultural produce
PAS 41 Agriculture
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a. Consumable - those that are to be harvested as agricultural
produce or sold as biological assets. Ex. Timber
b. Bearer - those other than consumable biological assets. Ex. Fruit
tree.
PAS 41 applies to both consumable and bearer animals. However,
PAS 41 only to consumable plants but not to bearer plants.
Agricultural activity
- PAS 41 applies to biological assets, agricultural produce and
gov’t. grants only when they relate to agricultural activity
- Agricultural activity is the management by an entity of the
biological transformation of biological assets for sale, into
agricultural produce, or into additional biological assets
Common features of agricultural activity:
a. Capability to change – Living animals and plants are capable of
biological transformation
b. Management of change – Management facilitates biological
transformation by enhancing, or at least stabilizing, conditions
necessary for the process to take place
c. Measurement of change – The change in quality or quantity
brought about by biological transformation is measured and
monitored as a routine management function
Recognition
A biological asset or agricultural produce is recognized when:
a. the entity controls the asset as a result of past events
b. it is probable that future economic benefits associated with the
asset will flow to the entity
c. the fair value or cost of the asset can be measured reliably
Measurement
- A biological asset shall be measured on initial recognition and
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at the end of each reporting period at its fair value less costs
to sell
- Agricultural produce harvested from an entity’s biological
assets shall be measured at its fair value less costs to sell at
the point of harvest. Such measurement is the cost at that
date when applying PAS 2 Inventories or another applicable
standard
Definitions
- Fair value is the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between
market participants at the measurement date.
- Costs to sell are the incremental costs directly attributable to
the disposal of an asset, excluding finance costs and income
taxes (e.g., Commissions to brokers, Levies by regulatory
agencies and commodity exchanges, and Transfer taxes and
duties)
- Costs to sell do not include transport costs, advertising costs,
income taxes, and interest expense
- If location is a characteristic of the biological asset, the price
in the principal (or most advantageous) market shall be
adjusted for the transport costs.
Encouraged disclosures
Disclosure of the following information is encouraged but not
required:
1. Disclosure of consumable and bearer biological assets.
2. Disclosure of mature and immature biological assets.
a. Mature biological assets are those that have attained harvestable
specifications or are able to sustain regular harvests
b. Immature biological assets are those that have not yet attained
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harvestable specifications or are not yet able to sustain regular
harvests
3. Disclosure of breakdown of total “Gain (loss) from changes in
FVLCS” during the period attributable to price change and physical
change
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- The date to transition to PFRSs is the beginning of the earliest
period for which an entity presents full comparative
information under PFRSs in its first PFRS financial
statements. The application of the PFRSs starts on this date
Accounting policies
- The entity selects its accounting policies based on the latest
versions of PFRSs as at the current reporting date. The
selected polices are then applied to all financial statements
presented together with the first PFRS financial statements
Retrospective application
- In general (but subject to some exceptions which will be
discussed momentarily), PFRS 1 requires retrospective
application of the accounting policies selected by the first-time
adopter
PFRS 1 requires an entity to do the following in its opening PFRS
statement of financial position:
a. Recognize all assets and liabilities whose recognition is required by
PFRSs
b. Not recognize items as assets or liabilities if PFRSs do not permit
such recognition
c. Reclassify items recognized under previous GAAP that have
different classifications under PFRSs
d. Apply PFRSs in measuring all recognized assets and liabilities.
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past conditions after the outcome of a particular transaction is
already known.
Presentation and disclosure
- The first PFRS financial statements shall include at least one-
year comparative information
Scope of PFRS 2:
a. Equity-settled share-based payment transaction – is a
transaction whereby an entity acquires goods or services and
instead of paying in cash the entity issues its own shares of
stocks or share options
b. Cash-settled share-based payment transaction – is a
transaction whereby an entity acquires goods or services and
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incurs an obligation to pay cash at an amount that is based on
the fair value of equity instruments
c. Choice between equity-settled and cash-settled
Equity instrument is a contract that evidences a residual interest in the
assets of an entity after deducting all of its liabilities
Core principle
- An entity shall recognize in profit or loss and financial position
the effects of share-based payment transactions, including
expenses associated with transactions in which share options
are granted to employees
Recognition
- Goods and services received in share-based payment
transactions are recognized when the goods are received or
as the services are received. Goods or services received that
do not qualify as assets are recognized as expenses
- The entity shall recognize A corresponding increase in equity
if the goods or services were received in an equity-settled
share-based payment transaction, or a liability if the goods or
services were acquired in a cash-settled share-based
payment transaction
Equity-settled share-based payment transactions
Intrinsic value is the difference between the fair value of the shares to
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which the counterparty has the conditional or unconditional right to
subscribe or the right to receive and the subscription price (if any) that
the counterparty is required to pay for those shares
Employee share option plans equity settled
- Share option is a contract that gives the holder the right, but
not the obligation, to subscribe to the entity’s shares at a fixed
or determinable price for a specified period of time. Some
share options given to employees may not require any
subscription price, meaning shares will be issued to the
employees in consideration merely for services rendered
Measurement of compensation
Since employee share option plan is a transaction with an employee,
the following order of priority shall be used to measure the services
received (salaries expense):
a. Fair value of equity instruments granted at grant date
b. Intrinsic value
Cash-settled share-based payment transactions
- A cash-settled share-based payment transaction is one
whereby an entity acquires goods or services and incurs an
obligation to pay cash at an amount that is based on the fair
value of equity instruments
- The goods or services acquired and the liability incurred on
cash-settled share-based payment transactions are measured
at the fair value of the liability
- At the end of each reporting period and even on settlement
date, the liability shall be remeasured to fair value. Changes in
fair value are recognized in profit or loss
Employee share appreciation rights (SARs) – cash-settled
- A share appreciation right is a form of compensation given to
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an employee whereby the employee is entitled to future cash
payment (rather than an equity instrument), based on the
increase in the entity’s share price from a specified level over
a specified period of time
Measurement of compensation
- The liability for the future cash payment on share appreciation
rights shall be measured, initially and at the end of each
reporting period until settled, at the fair value of the share
appreciation rights. Changes in fair value are recognized in
profit or loss
Recognition of cash-settled share-based compensation plans
- If the share appreciation rights granted vest immediately, the
entity shall recognize the related compensation expense on
the services received in full with a corresponding increase in
liability at grant date
- If the share options granted do not vest until the employee
completes a specified period of service, the entity shall
recognize the services received, and a liability to pay for them,
as the employee renders service during that period
Share-based payment transactions with cash alternatives
- If the counterparty has the right to choose settlement between
cash (or other assets) or equity instruments, the entity has
granted a compound instrument
- For transactions with non-employees, the equity component is
computed as the difference between the fair value of goods or
services received and the fair value of the debt component at
the date the goods or services are received
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PFRS 3 BUSINESS COMBINATIONS
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Non-controlling interest (NCI)
- Non-controlling interest (NCI) is the equity in a subsidiary not
attributable, directly or indirectly, to a parent
- NCI is measured either at:
a. Fair value
b. The NCI’s proportionate share of the acquiree’s
identifiable net assets
Previously held equity interest in the acquire
- Previously held equity interest in the acquiree pertains to any
interest held by the acquirer before the business combination
Net identifiable assets acquired
- On acquisition date, the acquirer shall recognize, separately
from goodwill, the identifiable assets acquired, the liabilities
assumed and any non-controlling interest in the acquire
- Any unidentifiable asset of the acquiree (e.g., any recorded
goodwill by the acquiree) shall not be recognized
- The identifiable assets acquired and the liabilities assumed
are measured at their acquisition-date fair values
For further discussion please refer to the link provided: PAS 41 – Biological Assets
https://www.youtube.com/watch?v=isjs48id-g0
For further discussion please refer to the link provided: PFRS 1 – First Time Adoption
https://www.youtube.com/watch?v=72kjAoOxjvE
For further discussion please refer to the link provided: PFRS 3 – Business Combination
https://www.youtube.com/watch?v=4ztDhzUDwmg
Reference Book:
Conceptual Framework and Accounting Standards
By: Zeus Vernon B. Millan, 2019 Edition
120
CHAPTER 8 ACTIVITY / ASSIGNMENT
1. The “excess of the acquirer’s interest in the net fair value of acquiree’s identifiable assets,
liabilities, and contingent liabilities over cost” (formerly known as negative goodwill) should
be
a. Amortized over the life of the assets acquired.
b. Reassessed as to the accuracy of its measurement and then recognized
immediately in profit or loss.
c. Reassessed as to the accuracy of its measurement and then recognized in retained
earnings.
d. Carried as a capital reserve indefinitely.
3. On January 1, 20x1, ABC Co. acquired 60% interest in XYZ, Inc. for ₱2,000,000 cash. ABC
Co. incurred transaction costs of ₱100,000 in the business combination. ABC Co. elected
to measure NCI at the NCI’s proportionate share in XYZ, Inc.’s identifiable net assets. The
fair values of XYZ’s identifiable assets and liabilities at the acquisition date were
₱6,000,000 and ₱3,500,000, respectively. How much is the goodwill (gain on a bargain
purchase)?
a. 500,000
b. 478,000
c. (500,000)
d. (478,000)
121
4. Many shares and most share options are not traded in an active market. Therefore, it is
often difficult to arrive at a fair value of the equity instruments being issued. Which of the
following option valuation techniques should not be used as a measure of fair value in the
first instance?
a.Black-Scholes model.
b.Binomial model.
c.Monte-Carlo model.
d.Intrinsic value.
5. Elizabeth, a public limited company, has granted 100 share appreciation rights to each of
its 1,000 employees in January 20X4. The management feels that as of December 31,
20X4, 90% of the awards will vest on December 31, 20X6. The fair value of each share
appreciation right on December 31, 20X4, is P10. What is the fair value of the liability to be
recorded in the financial statements for the year ended December 31, 20X4?
a. P300,000
b. P10 million
c. P100,000
d. P90,000
10. Under PFRS 1, the early application of PFRSs that have not yet become effective as of the
current reporting period
a.is required.
b.is permitted, but not required.
c.is required, but not permitted.
d.is prohibited
CHAPTER 9 - PRETEST
Read and understand each question carefully. This test consists of 10 items of Multiple
Choice.
2. Assets that are classified as held for sale under PFRS 5 are
a. required under PAS 36 to be tested for impairment annually.
b. amortized over a period not exceeding 5 years.
c. depreciated.
d. not depreciated.
3. According to PFRS 5, gains and losses on remeasurement of assets held for sale are
a. recognized in profit or loss.
b. recognized in other comprehensive income.
c. recognized only for impairment losses.
d. not recognized.
4. Which of the following statements is true regarding the accounting treatment of costs to sell
under PFRS 5?
a. Costs to sell are added to the fair value when determining the measurement basis for
an asset held for sale.
b. Costs to sell are never discounted because held for sale assets should be sold within
one year.
c. Costs to sell are discounted if it is expected that the sale will be made beyond one year.
d. a and c
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5. According to PFRS 5, the assets and liabilities of a disposal group are presented
a. as one line item in either current assets or current liabilities.
b. as one line item in either noncurrent assets or noncurrent liabilities.
c. separately on the face of the statement of financial position.
d. a or b
7. Exploration and evaluation assets are exploration and evaluation expenditures recognized
as
a. assets in accordance with the entity’s accounting policy.
b. expenses in accordance with applicable PFRSs.
c. assets in accordance with (a) above, subject to the limitations provided under PAS 8
Accounting Policies, Changes in Accounting Estimates and Errors.
d. any of these
8. Mark Ngina’s Sari-sari Store has a sign that reads “Your credit is good but I need cash.”
What type of risk is Mr. Mark trying to avoid by putting up that sign?
a. credit risk
b. market risk
c. liquidity risk
d. store risk
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CHAPTER 9 PFRS 5 Non-current assets
Held for Sale and Discontinued Operations
Objectives:
3. Describe the criteria for held for sale classification
4. State the initial and subsequent measurement of
held for sale assets
Core Principle
A noncurrent asset is presented in the classified statement of
financial position as current asset only when it qualifies to be classified
as “held for sale” in accordance with PFRS 5.
Scope
PFRS 5 applies to the following non-current assets:
1. Property, plant and equipment
2. Investment property measured under the Cost model
3. Investments in associate or subsidiary or joint
venture
4. Intangible assets
Classification of non-current assets (or disposal groups) as Held for
Sale
A non-current asset (or disposal group) is classified as held for
sale or held for distribution to owners if its carrying amount will be
recovered principally through a sale transaction rather than through
continuing use
Exception to the one-year requirement
An extension of the period required to complete a sale does not
preclude an asset (or disposal group) from being classified as held for
sale if:
1. the delay is attributable to events or circumstances
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beyond the entity’s control
2. there is sufficient evidence that the entity remains
committed to its plan to sell the asset (or disposal
group)
Event after reporting period
If the criteria for classification as held for sale are met after the
reporting period, an entity shall not classify a non-current asset (or
disposal group) as held for sale in those financial statements when
issued
Non-current assets that are to be abandoned
- An entity shall not classify as held for sale a non-current asset
(or disposal group) that is to be abandoned since the asset’s
carrying amount will be recovered through continuing use
rather than principally through a sale
- An entity shall not account for a non-current asset that has
been temporarily taken out of use as if it had been abandoned
Discontinued operations
A discontinued operation is a component of an entity that either
has been disposed of or is classified as held for sale, and
1. Represents a major line of business or geographical
area of operations
2. Is part of a single coordinated plan to dispose of a
separate major line of business or geographical area
of operations
3. Is a subsidiary acquired exclusively with a view to
resale.
Component of an entity
A component of an entity comprises operations and cash flows
that can be clearly distinguished, operationally and for financial
126
reporting purposes, from the rest of the entity. It can be cash
generating unit or group of cash generating units
FS presentation
Non-current assets held for sale and assets and liabilities of
disposal groups are presented as current assets (current liabilities) but
separately from the other assets and liabilities in the statement of
financial position
An entity shall not offset the assets and liabilities of a disposal group
127
incurred by an entity in connection with the exploration for and
evaluation of mineral resources before the technical feasibility
and commercial viability of extracting a mineral resource are
demonstrable
Accounting for exploration and evaluation expenditures
- PFRS 6 permits entities to develop their own accounting
policy for exploration and evaluation assets which results in
relevant and reliable information based entirely on
management’s judgment and without the need to consider the
hierarchy of standards in PAS 8
- This means that the entity may recognize exploration and
evaluation expenditures either as expense or asset depending
on the entity’s own accounting policy
Measurement at recognition
- If the entity opts to capitalize exploration and evaluation
expenditures as assets, it shall measure them at cost
- Subsequent to recognition, the exploration and evaluation
assets shall be measured using the cost model or the
revaluation model
128
Significance of financial instruments
Statement of financial position
a. An entity is required to separately disclose the carrying amounts of
each of the categories of financial assets and financial liabilities under
PFRS 9
b. If an entity has reclassified financial assets, it shall disclose the date of
reclassification, an explanation of the change in business model, and
the amount reclassified between categories
c. If an entity has offset financial assets and financial liabilities, it shall
disclose the gross amounts of those assets and liabilities, the amounts
that were set-off, the net amounts presented in the statement of
financial position and a description of the related legal right of set-off
Statement of profit or loss and other comprehensive income
a. An entity is required to disclose separately the income, expense, gains
or losses arising from the different classifications of financial
instruments under PFRS 9
b. The entity shall disclose the fair value of each class of financial assets
and financial liabilities in a way that the fair value can be compared with
the carrying amount
Nature and extent of risks arising from financial instruments
a. Credit risk – is “the risk that one party to a financial instrument will
cause a financial loss for the other party by failing to discharge an
obligation.
b. Liquidity risk – is the risk that an entity will encounter difficulty in
meeting obligations associated with financial liabilities
c. Market risk – is “the risk that the fair value or future cash flows of a
financial instrument will fluctuate because of changes in market prices
Market risk comprises the following three types of risk:
i. Currency risk – the risk associated with fluctuations in foreign
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exchange rates
ii. Interest rate risk –the risk associated with changes in market
interest rates
iii. Other price risk – the risk associated with fluctuations in market
prices other than those arising from interest rate risk or currency
risk
Qualitative and Quantitative disclosures on risks
- The entity shall provide both qualitative and quantitative disclosures
for each type of the risks required by PFRS 7 to be disclosed
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allocated to the segment and assess its performance
- for which discrete financial information is available
A component of an entity comprises operations and cash flows that can be
clearly distinguished, operationally and for financial reporting purposes, from
the rest of the entity. It can be cash generating unit or group of cash
generating units
Reportable segments
An entity shall report separately information about each operating
segment that:
- Management uses in making decisions about operating matters or
those which results from aggregating two or more of those segments
- Qualify under the quantitative thresholds
Disclosure of Major customer
A major customer is a single external customer providing revenues of
10% or more of an entity’s revenues.
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b. a contractual obligation to exchange financial assets or financial
liabilities with another entity under conditions that are potentially
unfavorable to the entity
Initial recognition and Classification
- Financial assets are recognized only when the entity becomes a
party to the contractual provisions of the instrument
Basis of classification
- The entity’s business model for managing the financial assets; and
- The contractual cash flow characteristics of the financial asset
Business models
Reclassification
- After initial recognition, financial assets are reclassified only when
the entity changes its business model for managing financial assets
- Reclassification date is the first day of the first reporting period
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following the change in business model that results in an entity
reclassifying financial assets
Impairment
- The impairment requirements of PFRS 9 apply equally to debt-type
financial assets that are measured either at amortized cost or at
FVOCI
- Impairment gains or losses on debt instruments measured at FVOCI
are recognized in profit or loss. However, the loss allowance shall be
recognized in other comprehensive income and shall not reduce the
carrying amount of the financial asset in the statement of financial
position
Dividends
- Dividends received from equity securities measured at FVPL or
FVOCI (except share dividend) are recognized as dividend revenue
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being processed for such purpose)
c. The parent’s ultimate or any intermediate parent produces consolidated
financial statements that are available for public use and comply with PFRSs
Elements of Control
Control exists if the investor has all of the following:
a. Power over the investee
b. Exposure, or rights, to variable returns from its involvement with the
investee
c. The ability to use its power over the investee to affect the amount of
the investor’s returns
Elements of Control
Measurement
- Income and expenses of the subsidiary are based on the amounts of
the assets and liabilities recognized in the consolidated financial
statements at the acquisition date
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- PFRS 11 defines a joint arrangement as “an arrangement of which
two or more parties have joint control.”
Types of Joint Arrangements
a. Joint operation – is a joint arrangement whereby the parties that have joint
control of the arrangement have rights to the assets and obligations for the
liabilities, relating to the arrangement. Those parties are called joint
operators
b. Joint venture – is a joint arrangement whereby the parties that have joint
control of the arrangement have rights to the net assets of the
arrangement. Those parties are called joint venturers
Accounting for joint operation transactions
- Separate accounting records may or may not be required for the
joint operation itself and financial statements may or may not be
prepared for the joint operation. However, the joint operators may
prepare management accounts so that they may assess the
performance of the joint operation
135
For further discussion refer to the link provided: PFRS 8 - Operating Segments
https://www.youtube.com/watch?v=3SqJD7uJNUY
For further discussion refer to the link provided: PFRS 9 – Financial Instruments
https://www.youtube.com/watch?v=8kIKVoNdvoU
For further discussion refer to the link provided: PFRS 11 – Joints Arrangements
https://www.youtube.com/watch?v=sBPTFUX1ozI
Reference Book:
Conceptual Framework and Accounting Standards
By: Zeus Vernon B. Millan, 2019 Edition
136
CHAPTER 9 - ACTIVITY / ASSIGNMENT
Additional information:
• The carrying amounts of subsidiary’s net identifiable assets approximate their acquisition-
date fair values, except for the following:
- Inventory, ₱37,200
- Building, net, ₱57,600
Read and understand each question carefully. This test consists of 10 items Multiple choice.
3. If the entity’s business model’s objective is to hold assets in order to collect contractual
cash flows and cash flows are solely payments of principal and interest on the principal
amount outstanding, the financial asset is classified
a. according to management’s intention of holding the securities.
b. as financial asset measured at amortized cost.
c. as financial asset measured at fair value through other comprehensive income.
d. any of these
4. Tech Co. and Robotics Co. are joint venturers of Mecha Co., a producer of high tech
machinery. Tech and Robotics, each have a 50% interest in the net assets of Mecha Co.
During the year, Tech Co. earns revenue of ₱1,000,000 from its own operations while
Mecha Co. reports revenue of ₱400,000. How much total revenue shall be reported in Tech
Co.’s statement of profit or loss for the year?
a. ₱1,000,000
b. ₱1,200,000
c. ₱1,400,000
d. Either a or b
5. Entity A acquires 50% interest in a joint venture for ₱1M and appropriately records the
transaction under an investment account. At the end of the period, the joint venture reports
profit of ₱1M and makes a total distribution of ₱600,000 to the owners. How much is the
net effect of the transaction in Entity A’s profit or loss for the current year?
a. ₱.5M
b. ₱.3M
c. ₱.2M
d. 0
6. ABC Co. has identified the following five operating segments: “Credit,” “Hotel,”
“Transportation,” “Grocery,” and “Events planning.” ABC Co. treats the “Hotel” and “Events
planning” as a single segment for internal reporting purposes. Each of the “Events
planning” and “Transportation” segments does not qualify under any of the quantitative
thresholds of PFRS 8. How should ABC Co. disclose its reportable segments?
a. ABC Co. shall treat each of the “Hotel,” “Credit,” and “Grocery” as reportable segments.
The other segments should not be disclosed.
138
b. ABC Co. shall treat each of the “Hotel,” “Credit,” and “Grocery” as reportable segments.
The other segments should be combined and disclosed in the “All other segments”
category.
c. ABC Co. shall treat the “Hotel” and “Events planning” as a single reportable segment
and each of the “Credit” and “Grocery” segments also as reportable segments. The
“Transportation” segment shall be included in the “All other segments” category.
d. ABC Co. shall treat the “Hotel” and “Events planning” as a single reportable segment
and combine all the other segments and report them under the “All other segments”
category.
7. An entity recently has acquired a new brand from a competitor company. The brand
qualifies as a component of an entity and represents a major line of business for which
discrete financial information is available. This operating segment does not meet any of the
threshold criteria for a reportable segment. Furthermore, this segment is unique and does
not share similar characteristics with the other operating segments of the entity. Which of
the following statements is correct?
a. The entity can disclose this new segment separately if it is a distinguishable component
and is used by management in internal reporting even though it does not meet the
PFRS criteria.
b. The entity cannot voluntarily disclose this new segment separately because PFRS 8
discourages voluntary disclosure of operating segments. Operating segments are
reportable only if they either result from aggregation or qualify under any of the
quantitative thresholds.
c. The entity can disclose this new segment separately only if it can be aggregated with
another operating segment and the combined segment qualifies in all of the quantitative
thresholds.
d. The entity can disclose this new segment separately only if it can be aggregated with
another operating segment and the combined segment qualifies in any of the
quantitative thresholds.
9. Which of the following is not among the quantitative thresholds under PFRS 8?
a. at least 10% of total revenues (external and internal).
b. at least 10% of the higher of total profits of segments reporting profits and total losses of
segments reporting losses, in absolute amount.
c. at least 10% of total assets (inclusive of intersegment receivables).
d. at least 10% of total revenues (external only)
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10. According to PFRS 8, disclosures for major customer shall be provided if revenues from
transactions with a single external customer amount to
a. at least 75% of the entity’s external and internal revenues.
b. at least 75% of the entity’s external revenues.
c. 10% or more of the entity’s external revenues.
d. less than 10% of the entity’s external revenues
CHAPTER 10 - PRETEST
Read and understand each question carefully. This test consists of 10 items of Multiple
Choice.
1. PFRS 12 applies to
a. contracts relating to post-employment benefit plans.
b. interest in joint arrangements that does not give the entity joint control or significant
influence over the arrangement.
c. investments measured at fair value through other comprehensive income.
d. investments accounted for under the equity method.
4. There are multiple active markets for a financial asset with different observable market
prices:
Market Quoted Price Transaction Costs
A ₱76 ₱5
B ₱74 ₱2
There is no principal market for the financial asset. What is the fair value of the asset?
a. 71 b. 72 c. 74 d. 76
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5. According to PFRS 14, an entity presents regulatory deferral accounts in the statement of
financial position
a. showing those with debit balances separately from those with credit balances.
b. showing only the net debit or the net credit balance of the accounts.
c. a or b, as a matter of accounting policy choice
d. An entity shall not present regulatory deferral accounts in the statement of financial
position, but only disclose them in the notes.
6. Arrange the following steps of revenue recognition in accordance with PFRS 15.
I. Identify the performance obligations in the contract
II. Recognize revenue when (or as) the entity satisfies a performance obligation
III. Determine the transaction price
IV. Identify the contract with the customer
V. Allocate the transaction price to the performance obligations in the contract
a. IV, I, V, III, II c. III, IV, I, V, II
b. IV, I, III, V, II d. IV, III, I, V, II
7. Certain criteria must be met before a contract with a customer is accounted for under PFRS
15. Which of the following precludes a contract from being accounted for under PFRS 15?
a. The consideration is collected in advanced.
b. The contract is made orally.
c. The contract does not result to a change in the risk, timing or amount of the entity’s
future cash flows.
d. The contract is neither oral nor written but rather implied by the entity’s business
practices.
8. How does Entity B account for the insurance contract with Entity A?
a. General model
b. Premium Allocation Approach
c. a or b
d. Not accounted for under PFRS 17
9. How does Entity C account for the insurance contract ceded by Entity B?
a. General model
b. Premium Allocation Approach
c. a or b
d. Modification to general model for reinsurance contracts held
10. How does Entity B account for the insurance contract ceded to Entity C?
a. General model
b. Premium Allocation Approach
c. a or b
d. Modification to general model for reinsurance contracts held
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CHAPTER 10
PFRS 12 Disclosure of Interest in Other Entities
Objectives:
1. Describe the objective of PFRS 12
2. State the types of investments that are within the scope
of PFRS 12
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Scope
PFRS 12 applies to entities that have an interest in a(an):
a. Subsidiary
b. Joint arrangement (i.e., Joint operation or Joint venture);
c. Associate; or
d. Unconsolidated structured entity
PFRS 12 does not apply to an interest in another entity that is
accounted for in accordance with PFRS 9 Financial Instruments.
Minimum disclosures under PFRS 12
Significant judgments and assumptions in determining the
existence of control, joint control or significant influence over an
investee or the type of a joint arrangement
143
PFRS 14 Regulatory Deferral Accounts
Scope
a. PFRS 14 specifies the financial reporting requirements for
regulatory deferral account balances arising from the sale of
goods or services that are subject to rate regulation
b. PFRS 14 is an optional standard that is available only to first-time
adopters. Existing PFRS users are prohibited from using PFRS
14
Definition of Terms
- Regulatory deferral account balance – “the balance of any expense
(or income) account that would not be recognized as an asset or a
liability in accordance with other Standards, but that qualifies for
deferral because it is included, or is expected to be included, by the
rate regulator in establishing the rate(s) that can be charged to
customers.”
- Rate regulation – “a framework for establishing the prices that can
be charged to customers for goods or services and that framework
is subject to oversight and/or approval by a rate regulator.”
- Rate regulator – “an authorized body that is empowered by statute
or regulation to establish the rate or a range of rates that bind an
entity. The rate regulator may be a third-party body or a related party
of the entity, including the entity’s own governing board, if that body
144
is required by statute or regulation to set rates both in the interest of
the customers and to ensure the overall financial viability of the
entity.”
Principles under PFRS 14
a. A first-time adopter continues to apply its previous GAAP to the
recognition, measurement, impairment and derecognition of
regulatory deferral account balances, except for changes in
accounting policies and the presentation of regulatory deferral
accounts
b. An entity is prohibited from changing its accounting policy in
order to start recognizing regulatory deferral account balances.
Presentation
Statement of financial position
Separate line items are presented for the totals of:
a. regulatory deferral account debit balances; and
b. regulatory deferral account credit balances.
The regulatory deferral account balances are not presented as
current or noncurrent. Instead, they are presented separately
from the sub-totals of assets and liabilities that are presented in
accordance with other Standards
Statement of profit or loss and other comprehensive income
Separate line items are presented:
a. in other comprehensive income for the net movement of
regulatory deferral account balances that relate to items
recognized in OCI, showing distinctions between those that will
be and will not be reclassified to profit or loss; and
b. in profit or loss for the remaining net movement of regulatory
deferral account balances excluding movements that are not
reflected in profit or loss.
145
PFRS 15 Revenue from Contracts with Customers
146
accounted for under PFRS 15:
a. The contract must be approved and the contracting parties are
committed to it;
b. rights and payment terms are identifiable rights and payment
terms are identifiable
c. The contract has commercial substance; and
d. The consideration is probable of collection
2. Identify the performance obligations in the contract
Each promise in a contract to transfer a distinct good or
service is treated as a separate performance obligation
3. Determine the transaction price
The entity shall determine the transaction price because
this is the amount at which revenue will be measured
Transaction price is “the amount of consideration to which
an entity expects to be entitled in exchange for
transferring promised goods or services to a customer,
excluding amounts collected on behalf of third parties
(e.g., some sales taxes).” The consideration may include
fixed amounts, variable amounts, or both
4. Allocate the transaction price to the performance
obligations
The transaction price shall be allocated to each
performance obligation identified in a contract based on
the relative stand-alone prices of the distinct goods or
services promised to be transferred
5. Recognize revenue when (or as) the entity satisfies a
performance obligation
A performance obligation is satisfied when the control
over a promised good or service is transferred to the
147
customer
Revenue is measured at the amount of the transaction
price allocated to the satisfied performance obligation
PFRS 16 Leases
Identifying a lease
“A contract is, or contains, a lease if the contract conveys the
right to control the use of an identified asset for a period of time in
exchange for consideration.” (PFRS 16.9)
Right to Control
An entity has the right to control the use of an identified asset if it
has both of the following throughout the period of use:
1. the right to obtain substantially all of the economic
benefits from use of the identified asset; and
2. the right to direct the use of the identified asset
Identified asset
An asset can be identified by being explicitly stated in the
contract or by being implicitly specified at the time the asset is made
available for use by the customer
A portion of an asset can be identified if it is physically distinct
148
Right to direct the use
The customer has the right to direct how and for what purpose
the asset is used throughout the period of use
GENERAL RECOGNITION
149
Accounting for operating lease
The accounting for operating leases is straight-forward. The
lessor recognizes the lease payments as rent income on a straight line
basis over the lease term, unless another systematic basis is more
representative of the time pattern of user’s benefit
Scope
PFRS 17 prescribes the principles for the recognition,
measurement, presentation and disclosure of insurance contracts by an
insurer. PFRS 17 applies to:
a. insurance and reinsurance contracts issued by an insurer
b. reinsurance contracts held by an insurer; and
c. investment contracts with discretionary participation features issued
150
by an insurer.
Insurer (issuer of insurance contract) is the party that has an
obligation under an insurance contract to compensate a policyholder
if an insured event occurs (e.g., insurance company).
Insurance contract
An insurance contract is “a contract under which one party (the
issuer) accepts significant insurance risk from another party (the
policyholder) by agreeing to compensate the policyholder if a specified
uncertain future event (the insured event) adversely affects the
policyholder.” (PFRS 17 Appendix A)
Policyholder – “a party that has a right to compensation under an
insurance contract if an insured event occurs.”
Insured event – “an uncertain future event that is covered by an
insurance contract and creates insurance risk.”
Examples of insurance contracts
1. Insurance against theft or damage
2. Insurance against product liability, professional liability,
civil liability or legal expenses
3. Life insurance and prepaid funeral plans
4. Life-contingent annuities and pensions
5. Disability and medical cover
6. Surety bonds, fidelity bonds, performance bonds and bid
bonds.
7. Product warranties issued by another party for goods sold
by a manufacturer, dealer or retailer. Product warranties
issued directly by a manufacturer, dealer or retailer are
outside the scope of PFRS 17
8. Title insurance.
9. Travel insurance
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10. Insurance swaps and other contracts that require a
payment depending on changes in physical variables that
are specific to a party to the contract. (PFRS 17.B26)
Types of insurance contracts
Direct insurance contract – an insurance contract where the
insurer directly accepts risk from the insured and assumes the sole
obligation to compensate the insured in case of a loss event.
Reinsurance contract – an insurance contract issued by one insurer
(the reinsurer) to compensate another insurer (the cedant) for losses on
one or more contracts issued by the cedant.
Reinsurer – the party that has an obligation under a reinsurance
contract to compensate a cedant if an insured event occurs.
Cedant – the policyholder under a reinsurance contract.
Initial Measurement
A group of insurance contracts is initially measured at the total of:
a. the fulfillment cash flows, and
b. the contractual service-margin
Onerous contracts
An insurance contract is onerous if the total of its fulfillment cash
flows, any previously recognized acquisition cash flows and any cash
flows arising from the contract at initial recognition date is a net outflow.
The net outflow is recognized as a loss in profit or loss. This results to a
carrying amount of the liability for the group equal to the fulfilment cash
flows and a zero contractual service margin
152
On subsequent measurement, any excess net outflow for a group
of insurance contracts that becomes onerous or more onerous is
recognized in profit or loss
Derecognition
An insurance contract is derecognized when:
a. it is extinguished, i.e., when the obligation in the insurance
contract expires or is discharged or cancelled; or
b. the contract is modified and the modification meets any of the
conditions for derecognition
Presentation
Statement of financial position
The carrying amounts of the following groups are presented
separately in the statement of financial position:
a. insurance contracts issued that are assets;
b. insurance contracts issued that are liabilities;
c. reinsurance contracts held that are assets; and
d. reinsurance contracts held that are liabilities.
Statement(s) of financial performance
The amounts recognized in the statement(s) of profit or loss and
other comprehensive income are disaggregated into to the
following:
a. insurance service result, comprising insurance revenue and
insurance service expenses; and
b. insurance finance income or expenses
For further discussion please refer to the link provided: PFRS 15 – Revenue from Contracts
https://www.youtube.com/watch?v=2nDraDtK6Tc
For further discussion please refer to the link provided: PFRS 16 - Leases
https://www.youtube.com/watch?v=kXZJWRHnxPI
For further discussion please refer to the link provided: PFRS 17 – Insurance Contracts
https://www.youtube.com/watch?v=llxwapGnDkU
153
Reference Book:
Conceptual Framework and Accounting Standards
By: Zeus Vernon B. Millan, 2019 Edition
2. On January 1, 20x1, Entity X enters into a 3-year lease of equipment for an annual rent
of ₱100,000 payable at the end of each year. The equipment has a remaining useful life
of 10 years. The interest rate implicit in the lease is 10% while the lessee’s incremental
borrowing rate is 12%. Entity X uses the straight-line method of depreciation. The
relevant present value factors are as follows:
- PV of an ordinary annuity of ₱1 @10%, n=3………… 2.48685
- PV of an ordinary annuity of ₱1 @12%, n=3………… 2.40183
Read and understand each question carefully. This test consists of 10 items Multiple Choice.
1.On January 1, 20x1, Entity X enters into a 3-year lease of equipment for an annual rent of
₱100,000 payable at the end of each year. The equipment has a remaining useful life of 10
years. The interest rate implicit in the lease is 10% while the lessee’s incremental borrowing
rate is 12%. Entity X uses the straight-line method of depreciation. The relevant present value
factors are as follows:
- PV of an ordinary annuity of ₱1 @10%, n=3………… 2.48685
- PV of an ordinary annuity of ₱1 @12%, n=3………… 2.40183
154
How much is the lease liability to be recognized by Entity X on initial recognition?
a. 240,183 c. 252,314
b. 248,685 d. 0
2.Assume the lease in problem #1 above qualifies for accounting under the recognition
exemption under PFRS 16. Which of the following statements is correct?
a. Entity X recognizes annual depreciation of ₱80,061 on the right-of-use asset.
b. Entity X recognizes a lease liability of ₱252,314 at the lease commencement date.
c. Entity X recognizes a lease liability of ₱200,000 at the lease commencement date.
d. Entity X recognizes lease expense of ₱100,000 in the first year of the lease.
3.Use the information in problem #1 above. Assume the lease is a finance lease. The lessor
will recognize a net investment in the lease at the lease commencement equal to
a. 240,183. c. 252,314.
b. 248,685 . d. 0.
4.Use the information in problem #1 above. Assume the lease is an operating lease. The
lessor will recognize a net investment in the lease at the lease commencement equal to
a.240,183. c. 200,000.
b.248,685 . d. 0..
5.How does Entity B account for the insurance contract with Entity A?
a.General model
b.Premium Allocation Approach
c.a or b
d.Not accounted for under PFRS 17
6.How does Entity C account for the insurance contract ceded by Entity B?
a.General model
b.Premium Allocation Approach
c.a or b
d.Modification to general model for reinsurance contracts held
7.How does Entity B account for the insurance contract ceded to Entity C?
a.General model
b.Premium Allocation Approach
c.a or b
d.Modification to general model for reinsurance contracts held
8.The "premium allocation approach" cannot be applied to which of the following insurance
contracts?
a. insurance contracts issued
b. reinsurance contracts issued
155
c. reinsurance contacts held
d. insurance contracts with significant variability in their fulfillment cash flows.
9.The unearned profit from a group of insurance contracts is referred to under PFRS 17 as
a. fulfillment cash flows.
b. contractual service margin.
c. onerous contracts.
d. discretionary participation feature.
PRELIM EXAM
2. The accounting standards used in the Philippines are adapted from the standards issued
by the
a. Federal Accounting Standards Board (FASB).
b. International Accounting Standards Board (IASB).
c. Philippine Institute of Certified Public Accountants (PICPA).
d. Democratic People's Republic of Korea Accounting Standards Committee (DPKRASC).
156
3. Entity A appropriates ₱1M to fund employee benefits for the last quarter of the following
year. Entity A deposits the ₱1M fund in a payroll account. This economic activity is most
appropriately referred to as
a. production.
b. savings.
c. exchange.
d. investment.
4. It is the branch of accounting that focuses on the general purpose reports of financial
position and operating results known as financial statements.
a. Financial accounting
b. Auditing
c. Managerial accounting
d. Taxation
6. Entity A computes for its profit or loss periodically instead of waiting until the end of the life
of the business before doing so. This is an application of which of the following accounting
concepts?
a. historical cost
b. stable monetary unit
c. accrual basis
d. time period
7. This refers to the use of caution in the exercise of judgments needed in making estimates
required under conditions of uncertainty , such that assets or income are not overstated
and liabilities or expenses are not understated.
a. faithful representation
b. prudence
c. consistency
d. relevance
8. The bottom part of each of Entity A’s financial statements states the following “This
statement should be read in conjunction with the accompanying notes.” This is most likely
an application of which of the following accounting concepts?
a. articulation
b. consistency
c. accrual basis
157
d. time period
9. Entity A’s asset has a carrying amount of ₱1M. At year end, Entity A obtains information
that the asset became obsolete, and therefore its usefulness has declined. Entity A
estimates that the asset has a recoverable amount of only ₱800K. Entity A recognizes a
loss of ₱200K for the difference. Although this accounting treatment is required, it violates
which of the following concepts?
a. historical cost
b. stable monetary unit
c. accrual basis
d. time period
12. Financial statements are said to be a mixture of fact and opinion. Which of the following
items is factual?
a. cost of goods sold
b. discount on capital stock
c. retained earnings
d. patent amortization expense
14. This concept defines the area of interest of the accountant. It determines which
transactions are recognized in the books of accounts and which are not.
a. Articulation
b. Matching
158
c. Separate entity
d. Full disclosure
17. Which of the following statements about the Norwalk Agreement is correct?
a. The Norwalk Agreement requires all domestic companies in the U.S. to prepare
financial statements in accordance with the IFRSs.
b. The Norwalk Agreement is a short-term convergence between the FASB and the IASB
which has long-time been abolished.
c. The Norwalk Agreement is a convergence between the FASB and the IASB to make
their existing financial reporting standards compatible and coordinate their future work
programs to ensure that once achieved, compatibility is maintained.
d. The Norwalk Agreement does not affect the financial reporting standards in the
Philippines.
18. The process of identifying, measuring, analyzing, and communicating financial information
needed by management to plan, evaluate, and control an organization’s operations is
called
a. financial accounting.
b. tax accounting.
159
c. managerial accounting.
d. auditing.
20. It is the official accounting standard setting body in the Philippines. It is composed of a
chairperson and 14 members.
a. Financial Reporting Standards Committee (FRSC)
b. Financial Reporting Standards Council (FRSC)
c. Accounting Standards Committee (ASC)
d. Accounting Standards Council (ASC)
23. You are the accountant of ABC Co. During the period, your company purchased staplers
worth ₱1,500. Although the staplers have an estimated useful life of 10 years, you have
charged their cost as expense. Which of the following is most likely to be true?
a. You are applying the concept of matching.
b. You are applying the concepts of materiality and cost-benefit consideration.
c. You are applying the concept of verifiability.
d. You are just lazy to compute for the periodic depreciation.
160
25. Under the Conceptual Framework, qualitative characteristics are sub-classified into
a. primary and secondary qualitative characteristics
b. major and minor qualitative characteristics
c. fundamental and enhancing qualitative characteristics
d. not sub-classified
26. Under this qualitative characteristic, users are assumed to have a reasonable knowledge of
business and economic activities and accounting and a willingness to study the information
with reasonable diligence. However, information about complex matters that should be
included in the financial statements because of its relevance to the economic decision-
making needs of users should not be excluded merely on the grounds that it may be too
difficult for certain users to understand.
a. Relevance
b. Reliability
c. Understandability
d. Comparability
27. The Conceptual Framework sets out general recognition principles of financial statement
elements which include all of the following except
a. asset recognition
b. equity recognition
c. liability recognition
d. expense recognition
28. Which of the following is most likely expensed under the ‘immediate recognition’ principle?
a. cost of inventories
b. impairment loss
c. cost of equipment
d. rentals paid
161
31. The elements of faithful representation do not include
a. Comparability
b. Neutrality
c. Completeness
d. Free from error
32. The ability through consensus among measurers to ensure that information represents
what it purports to represent is an example of the concept of
a. Relevance
b. Comparability
c. Verifiability
d. Feedback value
33. According to the Conceptual Framework, it is a pervasive constraint on the information that
can be provided by financial reporting
a. materiality
b. historical
c. cost
d. going concern
37. “I say red, you say green.” The information lacks which of the following qualitative
characteristics?
a. Relevance
b. Verifiability
162
c. Timeliness
d. Colorfulness
38. Which of the following is not one of the decisions that primary users make?
a. deciding on how to run the day-to-day operations of the entity
b. deciding on whether to hold or sell investment in stocks
c. deciding on whether to buy investment in stocks
d. deciding on whether to extend loan to the reporting entity
39. Entity A is making a materiality judgment. Entity A considers an item to be material, and
therefore needs to be disclosed in the notes to the financial statements, if the item pertains
to a related party transaction. What type of materiality assessment is Entity A using?
a. quantitative
b. qualitative
c. faithful representation
d. relevance
40. Which of the following financial statements would not be dated as covering a certain
reporting period?
a. Statement of financial position
b. Statement of profit or loss and other comprehensive income
c. Statement of cash flows
d. Statement of changes in equity
43. Entity A needs guidance in accounting for its inventories. Entity A should refer to which of
the following?
a. PAS 1
b. PAS 2
c. PAS 7
d. PAS 8
163
44. Entity A needs guidance in preparing its statement of changes in equity. Entity A should
refer to which of the following?
a. PAS 1
b. PAS 2
c. PAS 7
d. PAS 8
45. Which of the following concepts is violated when measuring inventories at the lower of cost
and net realizable value?
a. The concept that assets shall not be carried at an amount in excess of its recoverable
amount.
b. Historical cost concept
c. Prudence or conservatism concept
d. Offsetting concept
46. At the end of the period, Entity A has deductible temporary difference of ₱100,000. Entity
A’s income tax rate is 30%. Entity A’s statement of financial position would report which of
the following?
a. 30,000 deferred tax asset
b. 30,000 deferred tax liability
c. 30,000 deferred tax expense
d. 30,000 income tax expense
47. You are a business manager. During the period, you have authorized the acquisition of a
machine that will be used in your company’s manufacturing activities in the next 5 years. In
your selection of an appropriate accounting policy for the recognition and measurement of
the machine, which of the following reporting standards is most relevant?
a. PAS 1
b. PAS 2
c. PAS 16
d. PAS 32
48. Which of the following is not one of the principal issues in the accounting for PPE?
a. Recognition.
b. Initial measurement as asset.
c. Allocation of carrying amount over the period of use.
d. Recognition of carrying amount as expense when the related revenue is recognized
49. On January 1, 20x1, Entity A started the construction of a qualifying asset. The qualifying
asset is financed through general borrowings. The average expenditures during the year
amounted to ₱9,500,000. The capitalization rate is 11%. The actual borrowing costs
164
incurred during the period were ₱1,990,000. How much are the borrowing costs eligible for
capitalization?
a. 1,990,000
b. 1,045,000
c. 1,090,000
d. 990,000
50. The transfer of resources from the government to an entity in exchange for past or future
compliance with certain conditions relating to the operating activities of the entity is called
a. Government grants.
b. Government assistance.
c. Government financial assistance.
d. Government asset transfers
MIDTERM EXAM
4. The qualitative characteristics that enhance the usefulness of financial information includes
all of the following, except
a. Comparability
b. Verifiability
c. Timeliness
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d. Materiality
6. Information has this quality when it influences the economic decisions of users by helping
them evaluate past, present or future events or confirming, or correcting, their past
evaluations.
a. Predictive Value
b. Reliability
c. Relevance
d. Understandability
9. These are events that result to a sudden or unanticipated loss from fortuitous events.
a. Internal Events
b. External Events Other Than Transfers
c. Non-reciprocal transfers
d. Casualty
10. The manner in which the accounting records are organized and employed within a
business is referred to as
a. Accounting system
b. Voucher system
c. Business document
d. Special journals
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11. The process of converting non-cash resources and rights into cash or equivalent claims to
cash is called
a. realization
b. recognition
c. allocation
d. disposition
12. A concept that states that all the components of a complete set of financial statement are
interrelated
a. Entity
b. Concept of Articulation
c. Accounting Process
d. Principle of Fair Presentation
15. What type of users’ needs is catered by general purpose financial statements?
a. common needs
b. specific needs
c. a and b
d. neither a nor b
16. The issuance of financial reporting standards in the Philippines is the responsibility of the
a. PICPA
b. FRSC
c. AASC
d. CPE Council
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17. Reporting entities commonly place the sentence “See notes to the financial statements” or
“See accompanying notes to the financial statements” or a similar sentence on the face of
the financial statements. This practice is most in keeping with what accounting concept?
a. Articulation
b. Materiality
c. Separate entity
d. Full disclosure
19. Which of the following is not included among the general features of financial statement
presentation?
a. Growing concern
b. Accrual basis
c. Frequency of reporting
d. Comparative information
20. A company is issuing its comparative financial statements for the years 20x1 and 20x2. If
the company is required to issue an additional statement of financial position, such
statement should be dated
a. as of Jan. 1, 20x1.
b. as of Jan. 1, 20x2.
c. as of Dec. 31, 20x2.
d. as of Dec. 31, 20x1.
22. This method of presenting cash flows from (used in) operating activities shows each major
class of gross cash receipts and gross cash payments..
a. Direct method
b. Inverse method
c. Indirect method
d. Straight method
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23. According to PAS 10, this is the date when management authorizes the financial
statements for issue regardless of whether such authorization is final or subject to further
approval.
a. Date of authorization of the financial statements
b. Date of declaration
c. Date of events after the reporting period
d. Adjustment date
24. Entity A’s inventories on December 31, 20x1 have a cost of ₱100,000 and a net realizable
value of ₱80,000. Accordingly, Entity A recognized a write-down of inventories of ₱20,000.
Shortly after December 31, 20x1, but before the financial statements were authorized for
issue, the inventories were sold for a net sale proceeds of ₱70,000. The correct amount of
inventory write-down to be reported in Entity A’s December 31, 20x1 financial statements is
a. 20,000
b. 0
c. 30,000
d. any of these
27. A change in depreciation method, estimate of useful life or residual value is accounted for
as a
a. change in accounting policy
b. correction or error
c. change in accounting estimate
d. any of these
28. On January 1, 20x1, Entity A obtained a 10%, ₱5,000,000 loan, specifically to finance the
construction of a building. The proceeds of the loan were temporarily invested and earned
interest income of ₱180,000. The construction was completed on December 31, 20x1 for a
total construction costs of ₱7,000,000. How much are the borrowing costs capitalized to
cost of the building?
a. 320,000
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b. 300,000
c. 500,000
d. 680,000
29. Entity B, a trustee, undertakes to manage the retirement benefit fund of Entity A for the
benefit of Entity A’s employees. When reporting to Entity A regarding the status and
performance of the fund, Entity B would most likely apply which of the following standards?
a. PAS 19
b. PAS 24
c. PAS 26
d. PFRS 6
30. According to PAS 27, investments in subsidiaries, associates or joint ventures are
accounted for in the separate financial statements
a. at cost.
b. at fair value in accordance with PFRS 9.
c. using the equity method under PAS 28.
d. any of these, as a matter of accounting policy choice.
31. On January 1, 20x1, Entity A acquires 30% interest in Entity B for ₱600,000. Entity B
reports profit of ₱200,000 and declares dividends of ₱50,000 in 20x1. How much is the
carrying amount of the investment in associate on December 31, 20x1?
a. 600,000
b. 660,000
c. 645,000
d. 630,000
32. Entity A issues convertible bonds with face amount of ₱2,000,000 for ₱2,600,000. Each
₱1,000 bond is convertible into 10 shares with par value of ₱60 per share. On issuance
date, the bonds are selling at 102 without the conversion option. What is the value
allocated to the equity component on initial recognition?
a. 2,040,000
b. 540,000
c. 560,000
d. 460,000
33. According to PAS 34, income tax expenses in interim periods are computed using
a. a weighted average annual income tax rate.
b. a substantially enacted future tax rate.
c. a uniform tax rate for all periods presented, including comparatives.
d. an imputed tax rate
34. If the carrying amount of an asset is less than its recoverable amount, the asset
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a. is impaired.
b. should be written-down.
c. is not impaired.
d. should be written-off in profit or loss.
35. Which of the following assets is not tested for impairment in accordance with PAS 36?
a. Property, plant and equipment
b. Inventory
c. Intangible assets
d. Goodwill
37. Which of the following assets can be measured using the revaluation model?
a. Property, plant and equipment
b. Investment property
c. Intangible assets
d. a and c
e. all of these
38. Entity A acquires a building for ₱1,000,000. The building is to be leased out under various
operating leases. The building has an estimated useful life of 10 years and zero residual
value. Entity A uses the cost model for its property, plant and equipment and the fair value
model for its investment property. At the end of Year 1, the building is assessed to have a
fair value of ₱1,080,000. How much should Entity A recognize in profit or loss in relation to
the building?
a. 80,000 gain on change in fair value
b. 100,000 depreciation
c. 180,000 gain on change in fair value
d. b and c
39. Which of the following is considered an agricultural activity under PAS 41?
a. fishing in the open seas
b. illegal logging
c. floriculture
d. farming in the computer or cellphone
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b. bearer animals
c. government grants related to biological assets measured at cost
d. plants used in landscaping
41. Prior to the full adoption of the IFRSs in 2005, the reporting standards used in the
Philippines were primarily based on
a. US GAAP (SFASs)
b. Japanese GAAP
c. Spaniard GAAP
d. combination of a, b and c
42. Which of the following assets of an acquiree may not be included when computing for the
goodwill arising from a business combination?
a. capitalized kitchen utensils and equipment
b. intangible assets not previously recorded
c. research and development costs charged as expenses
d. goodwill recorded by the acquiree prior to the business combination
43. Imagine you are an awesome auditor. Your “not-so-awesome” client does not know when
to classify assets and liabilities as current or non-current. Which of the following standards
would you suggest your client should refer to?
a. PAS 1
b. PAS 24
c. PAS 34
d. PFRS 1000
44. Imagine you are an awesome accountant. You client, Entity A which is engaged in farming
activities, asked you for an advice on how it will account for its agricultural land. Which of
the following standards would you advise Entity A should use?
a. PAS 7
b. PAS 16
c. PAS 40
d. PAS 41
45. Provisions, contingent liabilities and contingent assets are accounted for using
a. PAS 37
b. PFRS 6
c. PAS 29
d. PAS 8
46. To account for additions and disposals of items of property, plant and equipment, a CPA
would most likely refer to the accounting and disclosure requirements of
a. PAS 2
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b. PAS 40
c. PFRS 5
d. PAS 16
47. Entity X acquires 90% interest in Entity Y in a business combination. The most relevant
Standard to be applied to this transaction is
a. PAS 28
b. PAS 3
c. PFRS 5
d. PFRS 3
49. You are a member of the board of directors of ABC Co. Your company acquired a building
to be held solely for rentals. You are tasked in selecting an appropriate accounting policy
for the building. In this regard, you will most likely refer to which of the following standards?
a. PAS 17
b. PAS 39
c. PAS 40
d. PAS 41
50. You are the sole proprietor of Entity A. As a requisite to your business loan application, you
were required by the bank to submit audited financial statements. During the audit of your
financial statements, the auditor questioned the carrying amount of your land. The auditor
believes that the carrying amount is overstated and needs to be written down to its
recoverable amount. In your discussions with your auditor, the auditor would most likely
refer to this standard in her report?
a. PAS 36
b. PFRS 1
c. PAS 26
d. PAS 12
FINAL EXAM
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2. The PFRSs do not apply to
a. sole proprietorships.
b. partnerships.
c. cooperatives.
d. non-profit organizations.
e. The PFRSs apply to all of these entities.
4. This refers to financial statements that are intended to meet the needs of users who are not
in a position to require an entity to prepare reports tailored to their particular information
needs.
a. All-purpose financial statements
b. General purpose financial statements
c. Managerial reports
d. Unisex financial statements
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b. Weighted average
c. Specific identification
d. LIFO
9. Interest expense that is paid in cash is presented in the statement of cash flows under
a. operating activities.
b. investing activities
c. financing activities
d. a or c
10. When it is difficult to distinguish a change in accounting policy from a change in accounting
estimate, the change is treated as
a. a change in an accounting estimate.
b. a change in an accounting policy.
c. a correction of prior period error.
d. not accounted for.
11. ABC Co. completes the draft of its December 31, 20x1 year-end financial statements on
January 31, 20x2. On February 5, 20x2, the board of directors reviews the financial
statements and authorizes them for issue. The entity announces its profit and selected
other financial information on February 23, 20x2. The financial statements are made
available to shareholders and others on March 1, 20x2. The shareholders approve the
financial statements at their annual meeting on March 18, 20x2 and the approved financial
statements are then filed with a regulatory body on April 1, 20x2. Events after the reporting
period are those occurring
a. from December 31, 20x1 to February 5, 20x2.
b. from January 1, 20x2 to February 5, 20x2.
c. from January 1, 20x2 to February 23, 20x2.
d. from January 1, 20x2 to March 18, 20x2.
12. These are differences that do not have future tax consequences.
a. Permanent differences
b. Taxable differences
c. Temporary differences
d. Deductible differences
13. This type of difference will give rise to deferred tax asset.
a. Taxable temporary difference
b. Permanent difference
c. Deductible temporary difference
d. No difference
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a. the amount derived by dividing the cost of an asset over its useful life.
b. the amount derived by multiplying the cost of an asset by its useful life.
c. the systematic allocation of the depreciable amount of an asset over its useful life.
d. the decline the in the value of an asset during the period.
15. It is a type of retirement plan where the employer assures a definite amount of benefit to be
received by the employee. The risk that funds needed to pay the agreed benefits may be
insufficient is retained by the employer.
a. Defined contribution plan
b. Defined benefit plan
c. Leche plan
d. Plan vs. zombies
18. According to PAS 27, which of the following is required to present separate financial
statements?
a. A publicly-listed entity
b. A parent
c. An entity with an investment in associate
d. None of these
19. On January 1, 20x1, Entity A acquires 25% interest in Entity B for ₱800,000. Entity B
reports profit of ₱1,000,000 and declares dividends of ₱100,000 in 20x1. How much is the
carrying amount of the investment in associate on December 31, 20x1?
a. 800,000
b. 1,250,000
c. 1,000,000
d. 1,025,000
20. Entity A issues convertible bonds with face amount of ₱2,000,000 for ₱2,600,000. Each
₱1,000 bond is convertible into 10 shares with par value of ₱60 per share. On issuance
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date, the bonds are selling at 102 without the conversion option. What is value allocated to
the equity component on initial recognition?
a. 2,040,000
c. 540,000
d. 560,000
e. 460,000
21. Which of the following is correct regarding the provisions of PAS 34?
a. All entities should publish quarterly interim reports.
b. All publicly-listed entities should publish quarterly interim reports.
c. All publicly-listed entities should publish semi-annual interim reports.
d. PAS 34 does not require any entity to publish interim reports, and how often.
22. If a cash-generating unit (CGU) is impaired, the impairment loss is allocated first to
a. the goodwill in that CGU.
b. the noncurrent assets in that CGU.
c. the current assets in that CGU.
d. a and b
23. The amount at which an asset is recorded in the books of accounts minus any accumulated
depreciation and accumulated impairment losses is referred to as
a. fair value.
b. cost.
c. carrying amount.
d. amortized cost.
26. After recognition, exploration and evaluation assets are accounted for under the
a. cost model
b. fair value model
c. revaluation model
d. a or c
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27. Entity A acquires a legal right to search for mineral resources in a specific area. What
PFRS should Entity A apply in accounting for the costs it incurs on its exploration and
evaluation activities?
a. PAS 26
b. PFRS 4
c. PFRS 5
d. PFRS 6
29. Andrix Domingo’s Sari-sari Store has a sign that reads “Your credit is good but I need
cash.” What type of risk is Mr. Andrix trying to avoid by putting up that sign?
a. credit risk
b. market risk
c. liquidity risk
d. store risk
30. Rex Banggawan Co. acquires investment in stocks of Darrell Joe Asuncion. The
investment will be held for trading and it gives Rex neither significant influence nor control
over Darrell. Rex will most likely measure the investment
a. at fair value through profit or loss.
b. using the equity method.
c. at amortized cost.
d. at historical cost
31. According to PFRS 10, which of the following is not an element of control?
a. power
b. exposure, or rights, to variable returns
c. major holdings
d. ability to affect return.
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d. joint venture
33. This PFRS provides a single framework for measuring the fair value of an asset, liability or
equity when other PFRSs require or permit measurement at fair value or fair value less
costs to sell. It also prescribes the disclosures related to fair value measurement.
a. PFRS 3
b. PAS 1
c. PFRS 9
d. PFRS 13
34. The tenant (as opposed to the landlord) in a lease contract is referred to as the
a. Lessor
b. Lessee
c. Leasee
d. Tenor
38. You are the accountant of ABC Co. During the period, ABC Co. acquired short-term
investment in stocks, which of the following financial reporting standards would most likely
be relevant in accounting for the transaction?
a. PFRS 8
b. PFRS 9
c. PAS 28
d. b or c
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39. You are a CPA and were engaged to audit the annual financial statements of ABC Co., a
mining company. Which of the following standards is most likely relevant to ABC Co.?
a. PFRS 4
b. PAS 34
c. PAS 41
d. PFRS 6
40. You are the accountant of ABC Co. During the period, your company acquired majority
holdings in XYZ, Inc. This transaction gave rise to goodwill. Which of the following
standards will be referred to in your company’s notes to the financial statements under
summary of significant accounting policies?
a. PFRS 3
b. PFRS 10
c. PAS 36
d. All of these
41. You are the accountant of Entity X. The board of directors asked you for an advice because
they feel like the company’s financial statements do not properly reflect the company’s
financial position. The board noted out that the company’s properties (i.e., land) are
absurdly stated at their historical cost. The properties were acquired 50 years ago and the
market prices of the properties have more than tripled since then. In providing your
professional advice, you will most certainly quote the provisions of which of the following
standards?
a. PAS 7
b. PAS 33
c. PAS 16
d. All of these
42. When determining whether an investor controls an investee, the investor should refer to
a. PAS 21
b. PFRS 10
c. PAS 10
d. PAS 1
43. When measuring the fair value of an asset or a liability, an entity refers to
a. PFRS 13
b. PAS 28
c. PFRS 1
d. PFRS 7
44. Non-current assets held for sale and discontinued operations are accounted for under
a. PFRS 4
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b. PAS 41
c. PFRS 5
d. PFRS 8
46. The computation of employee retirement benefits expense is addressed in this standard.
a. PAS 17
b. PFRS 7
c. PAS 19
d. PFRS 9
47. This standard deals with the recognition and measurement of financial instruments.
a. PAS 32
b. PFRS 7
c. PFRS 9
d. PFRS 3
49. Entity A is preparing its first PFRS financial statements. Which of the following standards is
most relevant to Entity A?
a. PFRS 1
b. PAS 12
c. PAS 8
d. PFRS 9
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