MODULE 7: PAS 2 INVENTORIES CLASSES OF INVENTORIES
INVENTORIES - are assets: held for sale in the ordinary course of
business (finished goods); in the production for such sale (work in
process); in the form of materials or supplies to be consumed in the
production process or in the rendering of services (raw materials and
manufacturing supplies)
 purchase price (net of trade discount
and rebate)
 import duties and irrecoverable taxes
 freight/ handling
B. Cost of Conversion - cost necessary in converting raw
materials to finished goods; includes cost of direct labor
and production overhead
 Abnormal amounts of wasted materials, labor
and other production
 Storage costs (not necessary in the production
process)
COST FORMULAS - cost flow assumptions; deals with the
computation of cost of inventories that are charged as expense when
the related revenue is recognized
Examples: Cost of sales or COGS; Cost of unsold inventories or
Inventory, end
3 COST FORMULAS
1. Specific Identification – used for inventories that are not
ordinarily interchangeable (unique), segregated for specific
projects; Formula: Inv.,End x actual unit costs
2. First –in, First-out (FIFO) – inventories first purchased or
produced are the first to be sold; Formula: Inv.,End x
recent purchase
3. Weighted Average - Cost of Sales and ending inventory is
based on the weighted average of the cost of beg.
inventory and total cost of purchase
MEASUREMENT OF INVENTORY - at the lower of cost and net
realizable value known as LCNRV (pas 2 p9)
Net Realizable Value – estimated selling price in the ordinary cost of
business less: estimated cost of completion; and estimated cost of
disposal Inventories are usually written down to NRV on an item by
item or individual basis
UNRECOVERABLE COST OF INVENTORIES
 Inventory is damaged
 Inventory is obsolete
 Inventory selling price has declined
 Estimated cost of completion/disposal has increased
ACCOUNTING FOR WRITEDOWN - if the
1. Inventories of a trading concern
2. Inventories of a manufacturing concern
COST OF INVENTORIES
A. Cost of Purchase – include:
 other cost directly attributable to the
acquisition of finished goods,
 materials and services
C. OTHER COST - incurred in bringing inventories to their
present location and condition EXCEPT:
 Administrative overhead
 Distribution or selling cost
 COST < NRV then Inv. = COST
 COST > NRV then Inv. = NRV
Rules:
1. Compare item by item the Total Cost and NRV to get
LCNRV
2. Get the total of Cost, NRV and LCNRV
3. Compare NRV and LCNRV to get Inventory write down
ACCOUNTING FOR WRITEDOWN - write down of inventory to NRV
is accounted using the: allowance method or loss method
 Inventory end is recorded at cost
 “Loss on inventory write down” is debited
 “Allowance for inventory write down” is credited
- included in the computation of COGS
- presented as deduction from the Inv. End
DISCLOSURE - PAS 2, p 36 requires disclosure of the:
 amount of any inventory written down and
 the amount of reversal of the former if any
excluded from PAS 2
 inventories for agricultural, forest and mineral products
measured at NRV
 inventories of commodity broker- traders measured at NRV
 b. Debt financing – issuance of bond, notes, loans,
mortgage payables and other short term or long-term
borrowings

GENERAL CONCEPT – SCF

 include only transactions that affect cash

MODULE 8: PAS 7 STATEMENT OF CASH FLOWS STATEMENT  include only interest received and paid
OF CASH FLOWS
Operating Activity:
STATEMENT OF CASH FLOWS - provides information about the
 Interest income received & paid (PAS 7,p 33)
 inflow and outflow of cash and cash equivalents during the  Dividend income received
period or  Payment of Income Tax (separate disclosed)
 sources and uses of funds or
Financing Activity:
 cash receipts and cash payment
 Dividends paid to owners (PAS 7,p34)
DEFINITION OF TERMS
PRESENTATION OF THE CASH FLOWS
1. Cash - cash on hand and cash in bank
2. Cash equivalents - short term highly liquid investments that 1. Direct Method – shows each major class of Gross Cash
are readily convertible into cash (subject to significant risk Receipts and Gross cash payments. (encourage by PAS –
or changes) which includes: useful in estimating future Flow)
a. debt instruments acquired which are about to mature 2. Indirect Method – profit or loss is adjusted for the effects of
within 3 months or less non-cash items and changes in operating assets and
b. 90-day money market instrument liabilities
c. 90-day time-deposit
CHANGES IN OWNERSHIP INTEREST IN SUBSIDIARIES
CASH FLOWS - includes inflows (sources) and outflows (uses) of
cash and cash equivalents. The Statement of Cash Flows helps to Investing Activity
assess the:
 arising from acquisition or
 Ability of the entity to generate cash and cash equivalents  disposal of subsidiaries
 Timing and certainty of the generation of cash flows  business units resulting to loss
 Needs of the entity to utilize those Cash Flows
If not, then it is classified as Financing Activity
CLASSIFICATION OF CASH FLOWS
DISCLOSURE
1. Operating Activities - derived from the revenue producing
 Components of Cash and Cash equivalent
activities of the entity (revenue & exp.); affect profit or loss.
It includes:  Reconciliation of amounts in the SCF with the equivalent
items in the SCF
 Cash receipts from customers
 Cash and Cash equivalent held by the entity that are not
 Cash payments to suppliers
available for use of the group.
 Cash payments for operating expenses
 Cash receipts and payments for securities held
for trading
2. Investing Activities - derived from the acquisition and
disposal of long-term assets and other investments not
included in the equity. It includes:
Cash receipts from sale of PPE / Long-term assets and
intangibles
Cash payments to acquire PPE / Long-term assets and
intangibles
Cash advances/loans to other parties
Cash receipts from repayments of loans
3. Financing Activities - derived from equity capital and
borrowings of the entity. It includes cash receipts or cash
payments/repayments for:
a. Equity financing –issuance of shares, redemption

MODULE 9 PAS 8 ACCOUNTING POLICIES, CHANGES IN
ACCOUNTING ESTIMATES AND ERRORS
ACCOUNTING POLICIES - specific principles, bases, conventions,
rules and practices applied by an entity in preparing and presenting
the financial statements. In the selection and application of
accounting policies, the entity shall refer to the hierarchy guidance on
reporting standards:
1. PFRS
2. Judgement –requirements in other PFRS; Conceptual
Framework
The entity shall apply the same accounting policies each period:
 to achieve comparability of financial statements or
 identify trends in the financial position, performance and
cash flow of an entity
A change in accounting policy shall be made only when:
 required by the accounting standard
 change will result in a more relevant and faithfully
represented information
A change in accounting policy arises when an entity adopts a GAAP
which is different from the one previously used by the entity.
 Involuntary Change in accounting policy – If it is required
by the IFRS
 Voluntary Change in accounting policy – If management
assesses that the FS will be more relevant to the user
CHANGES IN ACCOUNTING POLICIES - change in measurement
basis
 Change in Cost formula for Inventories
 Change from Cost Model to fair value model of measuring
investment property
 Change from Cost Model to Revaluation model of
measuring PPE and Intangible Assets
 Change in business model for classifying assets
 Change in revenue recognition methods from long term to
construction contracts
 Change to a new policy resulting from the requirement of a
new PFRS
 Change in Financial reporting Framework
Reporting a Change in Accounting Policy
1. Change shall be applied in accordance with transitional
provisions
2. If no transitional provisions (change is voluntary), change
shall be applied:
Retrospectively – effect of adjustment is on the Beg.
balance of Retained Earnings; amount of adjustment is
determined on the year of change; if comparative
information is presented, FS of prior period is restated
Retrospective application - applying a new accounting
policy as if the policy had always been applied, in the
absence of a standard that specifically applies to a
transaction or event, judgement shall be used in selecting
an accounting policy that results to a more relevant and
faithfully represented information.
Hierarchy of guidance in selecting policies:
1. Requirement of current standards
2. Definition-recognition criteria and measurement concepts
for Assets, Liabilities and expenses in the CFW
3. More recent pronouncements of other standard setting
bodies
ERRORS - includes misapplication of accounting policies,
mathematical mistakes, oversight or misinterpretations of facts, and
fraud.
1. Material errors - cause the FS to be misstated
2. Intentional errors – fraud (does not matter is error is
material or immaterial)
3. Error of commission- mistake
4. Error of omission – failure to correct the mistake.
5. Errors according to period of occurrence - current and prior
Errors according to period
1. Prior Period Errors - omissions or misstatement in the FS
for one or more periods arising from a failure to use or
misuse of reliable information. It results from:
 a mathematical error
 mistake in applying an accounting policy
 misinterpretation of facts, fraud, oversight
Errors shall be corrected retrospectively, or on the beg.
balance of RE and affected assets and liabilities. If
comparative statement are presented, FS of prior periods
shall be restated, to reflect the retroactive application of the
prior period errors as retrospective restatement. If
impracticable, correction can be made prospectively from
the earliest date possible.
2. Current Period Errors - errors in the current period that
were discovered during the accounting period or after the
accounting period but before the authorized issuance of the
FS. These errors are simply corrected by correcting
entries.
 MODULE 12: PAS 16 PROPERTY, PLANT AND EQUIPMENT

MODULE 10: PAS 10 EVENTS AFTER THE REPORTING PERIOD PROPERTY, PLANT AND EQUIPMENT - are:

EVENTS AFTER THE REPORTING PERIOD - those events whether  tangible assets (physical substance)
favorable or unfavorable, that occur between the end of the reporting  used in business (used in the production or supply of gods
period and the date when the FS are authorized to issue (also known or services, for rental or for administrative purposes); and
as subsequent events); may require adjustment or disclosure  long-term in nature (expected to be used for more than one
period)
Date of authorization of the FS - date when management authorizes
the FS to issue (regardless if it is final or subject to approval) EXAMPLES OF PPE
2 TYPES OF EVENTS AFTER THE REPORTING PERIOD 1. Land
2. Land improvements
1. Adjusting Events - provide evidence of conditions that exist
3. Building
after the reporting period; required adjustments in the FS
4. Machinery
Example:
5. Ship
a. Settlement of a court case that the entity has a
6. Aircraft
present obligation
7. Motor vehicle
b. Bankruptcy of a customer
8. Furniture and fixture
c. Sale of inventories – evidence to the NRV
9. Office equipment
2. Non-Adjusting Events - indicative of conditions that arise
10. Patterns, molds and dies
after the end of the reporting period; needs no adjustment
11. Tool
but require disclosure if material
12. Bearer plants

RECOGNITION - if it is probable that future economic benefits will

PAS 10 prohibition - FS on a going concern basis shall not be flow to the entity; cost of the asset is measured reliably
prepared if management determines that after the reporting period
MEASUREMENT OF PPE - PPE shall be measured at cost
the entity intends to:
Cost – the amount of cash or cash equivalent paid and the fair value
 Liquidate the entity
of the other consideration given to acquire an asset at the time of
 Cease trading
acquisition or construction
 Has no realistic alternative but to do so
ELEMENTS OF COST

 Purchase price
 Cost of bringing the asset to its present location and
condition
 Initial estimate of the:
 cost of dismantling
 removing the item
 restoring the site on which it was located for
which an entity has a present obligation

Directly Attributable Costs

1. Cost of employee benefits arising from its construction

2. Cost of site preparation
3. Initial delivery and handling cost
4. Installation and assembly cost
5. Professional fee
6. Cost of testing (ensure functioning properly).

Expensed rather Cost of PPE

 1. Cost of opening a new facility Net disposal = Proceeds from sale less disposal cost
2. Cost of introducing a new product or service Carrying amount = Cost less accumulated depreciation
3. Cost of conducting business in a new location
4. Administration and general overhead cost Fully Depreciated Property
5. Break-in of the PPE  Carrying amount = Zero
6. Initial operating loss Cost = accumulated depreciation
7. Cost of operating/reorganizing entity’s operation Carrying amount = salvage /residual value
Measurement after recognition  If remaining in service shall not be removed from the
accounts (ordinarily) but if removed from accounts shall be
Cost Model = disclosed as FDP
Cost of Property xxx Concept of Depreciation
Less: Acc. Depreciation xxx  systematic allocation of the cost of the asset over its useful
life.
Impairment Loss xxx xxx
 objective is to have each period bear an equitable share of
Revaluation Model = the asset cost.
 it is an expense
FV at the date of revaluation xxx
 begins when asset is available for use
less: Subsq. Accum. depreciation xxx  ceases when asset is derecognized

Subsq. Impairment loss xxx xxx 3 FACTORS OF DEPRECIATION

MEASUREMENT OF COST 1. Depreciable amount - cost of the asset less residual

 Cash basis - cash price equivalent at recognition date.
 On Account - Invoice price less: discount (taken or not)
 Issuance of share capital
 FV of Consideration received
 FV of the share capital
 FV of stated value of the share capital
Exchange has commercial substance when/if/in:
 Event or transaction will the cash flow of the entity to
change significantly by reason of the exchange
 Cash flow of the asset received differ significantly from the
asset transferred
Construction –same as thru acquisition which includes:
1. Direct Materials
2. Direct labor
3. Indirect and incremental overhead
DERECOGNITION
 Cost of property and the corresponding accumulated
depreciation shall be removed from the account
 Carrying amount of an item of property, plant and
equipment shall be derecognized on:
1. Disposal
2. When no future economic benefits are expected from
the use or disposal
value
2. Residual value - estimated net amount currently
obtainable at the end of its useful life
3. Useful life - period over which the asset is expected to
be available for use by the entity; or no. of production
units expected to obtained from the entity
Factors in determining useful Life
 Expected usage of the asset
 Expected physical wear and tear
 Technical or commercial obsolescence
 Legal limits for the use of the asset
Depreciation Methods - shall be reviewed at least every year end. If
there has been a significant change in economic benefit, the method
shall be changed (change in accounting estimate).
1. Straight line method – constant charge over the useful life
of the asset
2. Production method – cost / output or cost/ no. of hours
work
3. Diminishing balance or accelerated methods – decreasing
depreciation over the useful life (sum of yrs. or double
declining)

Gain or Loss arising from the Derecognition - shall be included in

profit or loss

 Gains included as revenue under Other Income

 Difference between the net disposal proceeds and the
carrying amount of the item

MODULE 13: PAS 19 EMPLOYEE BENEFITS
EMPLOYEE BENEFIT - all forms of consideration given up by an
entity in exchange for services rendered by the employee or for
termination of employment; both for employees and management
Recognition: recognized as an expense when employees have
rendered service; recognized as liability if unpaid
KIND OF EMPLOYEE BENEFITS
1. SHORT TERM EMPLOYEE BENEFITS - employee benefits
(other than termination benefits) which are expected to be
settled within 12 months after the end of the annual reporting
period.
Includes:
 salaries, wages, ss Contributions
 Short term compensated or paid absences
 profit sharing and bonuses payable within 12 months
 non-monetary benefits, medical, housing, car and free
subsidized goods
Recognition and Measurement
 Recognized as an expense during the reporting
period; Any amount unpaid at the end of the
accounting period is recognized as an accrued liability
Categories of Paid Absences - absences such as vacation,
sickness, short term disability, maternity, paternity etc.
 Accumulating – can be carried to future periods
 Vesting – employees entitled to cash payment for
unused entitlement or leaving the entity
 Non-vesting – employees not entitled to a cash
payment for unused entitlement on leaving the
entity
 NONACCUMULATING - not carried forward to future
periods if not used and no cash payment upon leaving
the entity
 Contribution – expense
 Unpaid contribution- accrued
 Excess contribution – prepaid
 Defined Benefit Plan - entity has obligation to provide
agreed benefits to the employee. Employee is
guaranteed a specific or definite amount of benefit
based on salary and years of service. Entity assumes
investment risk.
Accounting: requires actuarial valuation
3. OTHER LONG-TERM BENEFITS - Examples:
 Long-term compensated absences
 Jubilee or other long service benefits
 Long term disability benefits
 Profit sharing and bonus
 Deferred compensation
4. TERMINATION BENEFITS - result of entity’s decision to
terminate the employee before normal retirement date.
Employees decision to accept employer’s offer of benefits in
exchange for termination. It is recognized as liability and
expense at the earlier of the following dates. Entity can no
longer withdraw the offer of those benefits. Entity recognizes
restructuring costs
MEASUREMENT - If termination benefits are:
 Payable within 12 mos., they are accounted for similar
to other long-term benefits
 Accounting is similar to Short term employee benefits
 Payable beyond 12 months
 Accounting similar to other long-term benefits

2. POST EMPLOYMENT BENEFITS - employee benefits (other

than termination and short-term benefits) which are payable
upon completion of employment; plans which are formal
arrangement between employer and employee and part of their
remuneration package
 Retirement benefits
 Post-employment life insurance
 Post-employment medical care

Classification of Post EB Plans

 Defined Contribution Plan - entity pays fixed

contribution into a separate entity known as a fund.
Contribution is definite but the benefit is indefinite.
[Note: Employee bears the risks.]
Accounting: